PART I
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
This document includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to the Kaspien Holdings Inc.’s (“the Company’s”) future prospects, developments and business strategies. The statements contained in this document that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties.
We have used the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “mission”, “vision” and similar terms and phrases, including references to assumptions, in this document to identify forward-looking statements. These forward-looking statements are made based on management’s expectations and beliefs concerning future events and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control, that could cause actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause actual results to differ materially from the Company’s forward-looking statements.statements:
continued operating losses;
the ability of the Company to satisfy its liabilities and to continue as a going concern;
maintaining Kaspien’s relationship with Amazon;
continued revenue declines;
decline in the Company’s stock price;
the limited public float and trading volume for our Common Stock;
new product introductions;
advancements in technology;
dependence on key employees, the ability to hire new employees and pay competitive wages;
the Company’s level of debt and related restrictions and limitations;
future cash flows;
vendor terms;
interest rate fluctuations;
access to third party digital marketplaces;
adverse publicity;
product liability claims;
changes in laws and regulations;
breach of data security;
increase in Amazon Marketplace fulfillment and storage fees;
limitation on our acquisition and growth strategy as a result of our inability to raise necessary funding;
the Company’s ability to meet the continued listing standards of the NASDAQ; and
the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and other sections of this Annual Report on Form 10-K.
The reader should keep in mind that any forward-looking statement made by us in this document, or elsewhere, pertains only as of the date on which we make it. New risks and uncertainties come up from time-to-time and it is impossible for us to predict these events or how they may affect us. In light of these risks and uncertainties, you should keep in mind that any forward-looking statements made in this report or elsewhere might not occur.
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In addition, the preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions. These estimates and assumptions affect:
the reported amounts and timing of revenue and expenses,
the reported amounts and classification of assets and liabilities, and
the disclosure of contingent assets and liabilities.
Actual results may vary from our estimates and assumptions. These estimates and assumptions are based on historical results, assumptions that we make, as well as assumptions by third parties.
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| Item 1. | BUSINESS |
Company Background
Kaspien Holdings IncInc. (f/k/a Trans World Entertainment Corporation) (“Kaspien”), which, together with its consolidated subsidiaries, is referred to herein as the “Company”, “we”, “us” and “our”, was incorporated in New York in 1972. We own 100% of the outstanding Common Stock of Kaspien Inc. See below for additional information.
Five core principles guide us:
| • | 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. |
Business Overview
| • | Retail business model: We buy inventory and use our expertise, technology, and services to generate revenue through marketplace transactions. Kaspien provides account management, brand communication, listings management, data reporting, joint business planning, and comprehensive marketing support services. Our target partners are enterprise-level large growth brands that derive margins based on pricing. |
| • | Agency business model: We use our expertise, technology, and services to manage our partners’ marketplace presence through channel management with no inventory position. Kaspien provides support services for account management, media planning, media analytics, search strategy, business planning, and data reporting. Our target partners in this space range from medium size to enterprise-level brands. We derive margin based on a retainer plus a percentage of transactions and/or specific service fees. |
Kaspien provides all the software and services required to drive brand growth and achieve a brand’s online goals on Amazon.com, Walmart.com, and Target.com through multiple business models—namely, Retail and Agency services. We are a technology-enabled services company built to drive marketplace growth. A high-level overviewvisualization of the Kaspien platformour business model is shown in Figure 1 below:below.
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Partners
Kaspien views all brandour retail customers ofas our platform as partners and defines them under this nomenclature.partners. Our partners include brands, suppliers, distributors, liquidators, and affiliates such as venture capital firms and marketing agencies, as well as other industry brand aggregators.distributors. Our market sectorscategories of focus include but are not limited to: Pets/Baby, Pets & Sporting Goods, Tools/Office/Outdoors, and Health & Personal Care and Home/Kitchen/Grocery.Care. In fiscal 2020,2022, these top categories madeaccounted for approximately 68%83% of our total revenue. We organizeTo accelerate the growth of our operationsbusinesses, we have defined an operating model by category, developingsegmenting our businesses into teams, with a deep understandingsingle-threaded leader or “Partner Success Manager” runs. A cross-functional team, including a marketing specialist and subject matter expertise in these areas, powering our platform to drive better results across these category focal points.a buyer, supports each Partner Success Manager, collectively called a “business POD.”
Kaspien uses its proprietary data platformleading online tools to identify brands that would be good strategic fits for its services. We utilize content marketing to strengthen its visibility within the e-commerce industry. The Company’s public relations efforts consist of press releases, articles in industry publications, and articles on its website to build its brand. In addition, we regularly run advertisements on popular ad platforms such as Google, Facebook, TwitterKaspien also has an aggressive business development outreach program and LinkedIn to bring leads into its sales funnels.
attends several industry tradeshows annually.In addition, Kaspien recently adopted a brand acquisition strategy whereby we will deploy capital to acquire certain strategic brands, bring them onto our platform, increasing the scale of such brands.
The Kaspien platform can be leveraged and engaged in threevia two primary differentand distinct business models.
Retail-as-a-Service (“RaaS”):Retail Partnership:We own the inventory. We sell it.
Agency-as-a-Service(“AaaS”):Agency Partnership: Partner owns the inventory. We sell it.
Software-as-a-Service (“SaaS”): Partner owns inventoryPrimary Agency services include:In this model, Kaspien provides partners access to software through its platform of proprietary technology to empower partners to self-manage their marketplace channel. Kaspien charges a subscription feeCost recovery and receives a percentage of the transaction.case managementThe “Agency as a Service” and “Software as a Service” models are collectively called “Subscriptions.” The software products and tech-enabled services that form subscriptions are as follows:Inventory & supply chain management
While used for different models, the platform is designed to benefit from network effects. The more partners on our platform, the more data and insights it can collect. The more insights it gets, more products and services it can serve its partners and more marketplace integrations it can support. The more marketplace providers that can be integrated, the greater the number of possible partners to engage in our services.
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According to emarketer.com, worldwide e-commerce sales in 2020 were $4.3 trillion, up 27.6% from 2019. Total worldwide retail sales declined 3.0% to $23.9 trillion. Worldwide e-commerce growth is projected to increase 14.3% in 2021. Although the growth will slow, e-commerce penetration14.6% of total global retail continues to rise and is predicted to be 19.5% of total retail.sales, the same level as 2021.
Our focus on the platform and subscriptions services has fueled strong growth in our subscription services, growing our partner base by 214% from 42 to 132 partners within our subscription platform. Our annual recurring revenue (“ARR”) in our subscriptions business grew by 181% from $0.7 million to $1.8 million from fiscal year 2019 to fiscal year 2020.
Employee health and safety in the workplace is one of the Company’s core values. The COVID-19 pandemic has underscored the importance of keeping employees safe and healthy. In response to the COVID-19 pandemic, the Company has taken actions aligned with the World Health Organization and the Centers for Disease Control and Prevention in an effort to protect the Company’s workforce so they can more safely and effectively perform their work. These actions include shutting down its headquarters for some months during 2020, wearing facemasks in common areas in the office, and allowing employees to work from home.
In addition, Kaspien regularly runs advertisements on popular ad platforms such as Google, Facebook, Twitter and LinkedIn to bring leads into its sales funnels.
During the third quarter of 2019, based on recurring losses from operations, the Company pursued several strategic initiatives towards its strategy of shifting its focus solely to the operation of Kaspien, improving profitability and meeting future liquidity needs and capital requirements. The following initiatives were completed during the first quarter of 2020:
The sale of the For Your Entertainment (fye) business;
The establishment of a new secured $25 million revolving credit facility (the “New Credit Facility”) with Encina Business Credit, LLC (“Encina”);
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The execution of a separate subordinated loan agreement for Kaspien (the “Subordinated Loan”); and
The receipt by Kaspien of loan proceeds pursuant to the Paycheck Protection Plan (the “PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act.
Notwithstanding the foregoing, 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 Kaspien as a platform of software and services and the availability of future funding and overcoming the impact of the COVID-19 pandemic.funding.
7We have substantial indebtedness, which could adversely affect our business.
We have a significant amount of debt and we may continue to incur additional debt in the future. As of January 28, 2023, the Company had borrowings of $8.8 million under our credit facility with Eclipse. We also had borrowings of $5.3 million under our Subordinated Debt facility, with interest accruing at the rate of twelve percent (12%) per annum and compounded on the last day of each calendar quarter by becoming a part of the principal amount. In addition, we have $4.5 million under our Subordinated Debt Facility, with interest accruing at the rate of fifteen percent (15%) per annum and compounded on the last day of each calendar quarter by becoming a part of the principal amount. Substantially all of our assets, including the capital stock of Kaspien is pledged to secure our indebtedness. This leverage also exposes us to significant risk by limiting our flexibility in planning for, or reacting to, changes in our business (whether through competitive pressure or otherwise), our industry and the economy at large. In addition, our ability to make payments on, or repay or refinance, such debt, and to fund our operating and capital expenditures, depends largely upon our future operating performance. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.
As of January 30, 2021, the Company had borrowings of $6.3 million under its credit facility with Encina.
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The
If weWe do not currently meet the continued listing standards of the NASDAQ, and as a result our Common Stock could be delisted from trading, which could limit investors’ ability to make transactions in our Common Stock and subject us to additional trading restrictions.
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On August 4, 2020,The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company receivedhas been provided a letter from the Listing Qualifications staffperiod of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it was not in180 calendar days, or until June 12, 2023, to regain compliance. In order to regain compliance with the minimum stockholders’ equity requirement (the “Stockholders’ Equity Requirement”) for continued listing onclosing bid price rule, the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equityclosing bid price of the Company’s common stock must be at least $2.5 million and as$1.00 for a minimum of August 4, 2020, the Company did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.
On January 22, 2021, the Company received written notice from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) stating that the Company’s market value of listed securities was greater than $35 million for ten consecutive business days from January 4, 2021 to January 21, 2021. Accordingly,during the compliance period. If the Company does not regain compliance during the initial compliance period, the Company may be eligible for additional time to regain compliance. If the Company is not eligible, the Company expects that at that time the NASDAQ will provide written notice to the Company that the Company’s common stock will be subject to delisting.
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The COVID-19 pandemic has adversely affected and may continue to adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations. As a result, our ability to fund through public or private equity offerings, debt financings, and through other means at acceptable terms, if at all, may be disrupted, in the event our financing needs for the foreseeable future are not able to be met by our New Credit Facility, balances of cash, cash equivalents and cash generated from operations.
14In addition, the continuation of the COVID-19 pandemic and various governmental responses in the United States has adversely affected and may continue to adversely affect our business operations, including our ability to carry on business development activities, restrictions in business-related travel, delays or disruptions in our on-going projects, and unavailability of the employees of the Company or third parties with whom we conduct business, due to illness or quarantines, among others. Our business was negatively impacted by disruptions in our supply chain, which limited our ability to source merchandise, and limits on products fulfillment placed by Amazon. For example, we may be unable to launch new products, replenish inventory for existing products, ship into or receive inventory in our third-party warehouses in each case on a timely basis or at all. During the fourth quarter of 2020 and first quarter of 2021, we have experienced production and shipment delays for certain of our products that could result in stock outs on the Amazon marketplace resulting in a decrease of net revenue. The extent to which COVID-19 could impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, and will depend on many factors, including the duration of the outbreak, the effect of travel restrictions and social distancing efforts in the United States and other countries, the scope and length of business closures or business disruptions, and the actions taken by governments to contain and treat the disease. As such, we cannot presently predict the scope and extent of any potential business shutdowns or disruptions. Possible effects may include, but are not limited to, disruption to our customers and revenue, absenteeism in our labor workforce, unavailability of products and supplies used in our operations, shutdowns that may be mandated or requested by governmental authorities, and a decline in the value of our assets, including various long-lived assets.
Loyalty Memberships and Magazine Subscriptions Class ActionRetailer Agreement Dispute
In the event the Court of Appeals reinstates the case, the Company believes it has meritorious defenses to the plaintiffs’ claims and will vigorously defend the action.
Store Manager Class ActionsThere are two pending class actions. The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”). The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide. It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers (“SAMs”) nationwide, and that both SMs and SAMs worked “off-the-clock.” It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs. The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide misclassification claim on behalf of SMs. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.
The Company has reached a settlement with the plaintiffs for both store manager class actions, which has received approval from the court. The Company reserved $0.4 million for the settlement as of January 30, 2021. Notices of the settlement have been issued to class members, and the settlement claims process is currently ongoing.
On April 15, 2021, the reported sale priceThe notice has no immediate impact on the Common Stock onlisting of the NASDAQ Capital Market was $26.91. On August 15, 2019, the Company completed a 1-for-20 reverse stock split of outstanding Common Stock. All closing prices reflect the reverse stock split.
On March 18, 2021, the Company closed an underwritten offering of 416,600 shares ofCompany’s common stock, of the Company, at a pricewhich will continue to the public of $32.50 per share.trade on The gross proceeds of the offering were approximately $13.5 million, prior to deducting underwriting discounts and commissions and estimated offering expenses.Nasdaq Capital Market. The Company intends to usemonitor its closing bid price for its common stock between now and June 12, 2023 and will consider available options to resolve the net proceeds fromCompany’s noncompliance with 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.minimum bid price requirement, as may be necessary.
Not required under the requirements of a Smaller Reporting Company.
FYE Transaction
On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records.
Following the FYE Transaction, Kaspien is the Company’s only operating segment.
Impact of COVID-19
To date, as a direct result of COVID-19, most of our employees are working remotely. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, reserves and allowances, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international customers and markets, which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity.
In response to the rapidly evolving COVID-19 pandemic, we activated our business continuity program, led by our Executive Team in conjunction with Human Resources, to help us manage the situation. In mid-March of 2020, we transitioned our corporate office staff to work 100% remotely. This process was aided through the implementation of a flexible work from home policy rolled out to the organization in fiscal 2019, having a companywide communication platform for instant messaging and video conferencing, and cloud-based critical business applications. However, while our business is not dependent on physical office locations nor travel, having a 100% remote workforce does present increased operational risk. Our leadership team believes we have the necessary controls in place to mitigate these impacts and allow the team to continue to operate effectively remotely as long as required by State guidelines.
While e-commerce has largely benefited from the closure of brick-and-mortar locations as consumer spending has been pushed online to marketplaces such as Amazon and Walmart, the industry nor our organization has been immune to the impact to our supply chains. For instance, in March 2020, Amazon reduced replenishment in their fulfillment centers to essential items which limited a significant percentage of SKUs carried by Kaspien and a number of Kaspien’ partners shut their warehouses or suffered limited processing capacity due to COVID-19. While Amazon has since lifted restrictions and the leadership team executed contingency plans to mitigate the adverse impact from these restrictions, this highlights the fluid nature of COVID-19 across supply chains.
Additionally, since the beginning of the pandemic, tens of millions of Americans have lost their jobs, significantly increasing the risk of near-term economic contraction in the United States that may affect e-commerce sales. The risk of another wave or increased numbers of positive COVID-19 cases also presents further risk to supply chains. Leadership is actively monitoring the situation and potential impacts on its financial condition, liquidity, operations and workforce but the full extent of the impact is still highly uncertain.
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Selling,Selling, General and Administrative Expenses. The following table sets forth a year-over-year comparison of the Company’s SG&A expenses:
Asset Impairment Charges. During fiscal 2019, the Company fully impaired its vendor relationships, and the Company recognized an impairment loss of $0.8 million.
During fiscal 2020, based on the Company’s evaluation of new information that occurred in the current financial reporting period, the Company recorded an income tax benefit of $3.5 million related to the recognition of previously unrecognized income tax benefits pursuant to ASC 740-10-25, Accounting for Income Taxes – Recognition. Prior to the current financial reporting period, the Company had accrued the liabilities for unrecognized income tax benefits, including accrued interest and penalties related to tax positions created by the fye business. As a result of the FYE Transaction and a reorganization of the Company’s corporate structure, the Company will not utilize the tax attributes attributable to the tax positions and the corporate entities associated with the tax positions have been liquidated.
Loss From Discontinued Operations. For fiscal 2019, the Company recognized a loss from discontinued operations of $44.4 million related to the FYE Transaction.
See Note 2 to the Consolidated Financial Statements for more information on the loss from discontinued operations.
During the third quarter of fiscal 2019, in response to recurring losses from operations, the expectation of continuing operating losses, and uncertainty with respect to any available future funding, the Company pursued several strategic initiatives towards its strategy of shifting its focus solely to the operation of Kaspien, improving profitability and meeting future liquidity needs and capital requirements. Initiatives completed during the first quarter of fiscal 2020 include:
The sale of the For Your Entertainment (fye) business;The establishment of a new secured $25 million revolving credit facility with Encina:The execution of a separate subordinated loan agreement for Kaspien, Inc. (the “Subordinated Loan”); andThe receipt by Kaspien, Inc. of loan proceeds pursuant to the Paycheck Protection Plan under the Coronavirus Aid, Relief, and Economic Security Act.
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Off-Balance Sheet Arrangements. The Company has no off-balance sheet arrangements as defined by Item 303 (a) (4)used $6.3 million of Regulation S-K.the proceeds to pay down its Credit Facility.
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Contingent Value Rights Agreement (the “Second CVR Agreement”) pursuant to which Alimco received additional contingent value rights (“Additional CVRs”) 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 Kaspien; recapitalizations or financings of the Company or Kaspien (with appropriate carve out for trade financing in the ordinary course); repayment of intercompany indebtedness owing to the Company by Kaspien; or sale or transfer of any stock of the Company or Kaspien.
During fiscal 2019, the Company concluded, based on continued operating losses for the Kaspien that a triggering event had occurred, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the Kaspien fixed assets and intangible assets for impairment was required. For fiscal 2019, intangible assets related to vendor relationships were fully impaired resulting in the recognition of asset impairment charges of $0.8 million.
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Report of Independent Registered Public Accounting Firm
We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, and measurement of the inventory costs and reserves in considering applicable generally accepted accounting standards.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Kaspien Holdings Inc.
Opinion on the Consolidated Financial StatementsWe have audited, before the effects of the adjustments to retrospectively apply the changes in accounting described in Note 1 – Nature of Operations and Summary of Significant Accounting Policies (Segment Information) and Note 2 – Discontinued Operations, the consolidated balance sheet of Kaspien Holdings Inc. (f/k/a Trans World Entertainment Corporation) and subsidiaries (the Company) as of February 1, 2020, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the fiscal year ended February 1, 2020, and the related notes (collectively, the consolidated financial statements). The 2020 consolidated financial statements before the effects of the adjustments described in Note 1 – Nature of Operations and Summary of Significant Accounting Policies (Segment Information) and Note 2 – Discontinued Operations are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments to retrospectively apply the changes in accounting described in Note 1 – Nature of Operations and Summary of Significant Accounting Policies (Segment Information) and Note 2 – Discontinued Operations, present fairly, in all material respects, the financial position of the Company as of February 1, 2020, and the results of its operations and its cash flows for the fiscal year ended February 1, 2020, in conformity with U.S. generally accepted accounting principles.We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the changes in accounting described in Note 1 – Nature of Operations and Summary of Significant Accounting Policies (Segment Information) and Note 2 – Discontinued Operations and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.Going ConcernThe accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company continues to experience recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion./s/ KPMG LLP
We served as the Company’s auditor from 1994 to 2020.Albany, New York
June 15, 2020
Previously, the Company also operated fye, a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com. On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of 2428391 Ontario Inc. o/a Sunrise Records (“Sunrise Records”) pursuant to an Asset Purchase Agreement (as amended, the “Asset Purchase Agreement”) dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. (the “FYE Transaction”).
Effects of COVID-19: As reflected in the discussion below, the impact of the COVID-19 pandemic and actions taken in response to it had varying effects on our 2020 results of operations. Higher net sales reflect increased demand, particularly as people are staying at home, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints. Other effects include increased fulfillment costs and cost of sales as a percentage of net sales, primarily due to the impact of lower productivity and costs to maintain safe workplaces.
We expect the effects of fulfillment network capacity and supply chain constraints and increased fulfillment costs and cost of sales as a percentage of net sales to continue into all or portions of 2021. However, it is not possible to determine the duration and scope of the pandemic, including any recurrence, the actions taken in response to the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending patterns, or other impacts of the pandemic, and whether these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations.
Also, as a direct result of COVID-19, most of our employees are working remotely. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, reserves and allowances, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international customers and markets, which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity.
As of June 15, 2020, the issuance date of the Company’s consolidated financial statements for the fiscal year ended February 1, 2020, the Company had concluded there was substantial doubt about its ability to continue as a going concern. The completed initiatives and transactions as described below have alleviated the substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements for the fiscal year ended January 30, 202128, 2023 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities 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 strategic initiatives for Kaspien 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 consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.this uncertainty. New Credit Facility
The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.
As of January 30, 2021, the Company had borrowings of $6.3 million under the New Credit Facility. Peak borrowings under the New Credit Facility during fiscal 2020 were $12.4 million. As of January 30, 2021, the Company had no outstanding letters of credit. The Company had $5.0 million available for borrowing under the New Credit Facility as of January 30, 2021.
Previously, the Company had an amended and restated its revolving credit facility (“Credit Facility”) with Wells Fargo. As of February 1, 2020, the Company had borrowings of $13.1 million under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2019 were $35.9 million. As of February 1, 2020, the Company had no outstanding letters of credit. The Company had $12 million available for borrowing under the Credit Facility as of February 1, 2020.
On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the New Credit Facility, as further discussed above, and the Credit Facility is no longer available to the Company.
Subordinated Debt Agreement
During fiscal 2019, the Company concluded, based on continued operating losses that a triggering event had occurred, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the Company’s fixed assets and intangible assets for impairment was required. For fiscal 2019, intangible assets related to vendor relationships were fully impaired resulting in the recognition of asset impairment charges of $0.8 million
RetailAgency as a service revenue is primarily commission fees for services paid on a periodic basis with an additional fee based on percentage of gross merchandise value generated. The commissions earned from these arrangements are recognized when the services are rendered on a periodic basis with additional fees recognized as revenue is generated.
Software as a serviceSoftware as a service revenue primarily includes a subscription fee with an additional fee based on a percentage of gross merchandise value generated. The subscription fee earned from these arrangements are recognized when the services are rendered on a periodic basis with additional fees recognized as revenue is generated.
Change in Reportable Segments
As a result of the sale of the fye business on February 20, 2020, further disclosed in Note 2, the Company’s previously reported fye segment is no longer in operation, and theThe Company now operates as a single reporting segment. The impact of the sale of the fye business on the Company’s operating segments, and reportable segments was reflected in the Company’s consolidated financial statements as of February 1, 2020. Prior year segment information was reclassified to conform to the reporting structure change.Note 2. Discontinued Operations
On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records.
The results for fye were previously reported in the fye segment. Certain corporate overhead costs and segment costs previously allocated to fye for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.
The following table summarizes the major line items for fye that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income:
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. The following table summarizes the cash flows for discontinued operations that are included in the Consolidated Statements of Cash Flows:
Note 3. Sale of fye business
On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. The following table reconciles the assets sold to and liabilities assumed by Sunrise to cash proceeds received:
The Company did not recognize a gain/loss upon the sale of the fye business as the assets of fye were impaired to the fair value of the assets as of February 1, 2020.
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework— Changes to the Disclosure Requirements for Defined Benefit Plans”, which removes certain disclosures that are no longer cost beneficial and also includes additional disclosures to improve the overall usefulness of the disclosure requirements to financial statement users. This standard will be effective for public entities for fiscal years beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the enacted changes in tax laws or rates. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.
DeterminingThe determination of the fair value of intangible assets acquired in a reporting unit requiresbusiness acquisition, including the useCompany’s acquisition of significantKaspien in 2016, is subject to many estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Other long-livedassumptions. Our identifiable intangible assets are reviewed for impairment if circumstances indicate that the carrying amount may not be recoverable.
During fiscal 2019, the Company fully impaired its vendor relationships and the Company recognized an impairment lossresulted from our acquisition of $0.8 million.
The Company continues to amortizeKaspien consist of technology and trade names and trademarks that have finite lives.
Identifiabletradenames. As of October 30, 2021, the intangible assets as of January 30, 2021 consisted of the following:were fully amortized.
The changes in net intangibles from February 2, 2019 to February 1, 2020 were as follows:
The remaining amortization expense will be recognized in fiscal 2021, at which time all of the other intangible assets will be fully amortized.
New Credit Facility
The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.
As of January 30, 2021, the Company had borrowings of $6.3 million under the New Credit Facility. Peak borrowings under the New Credit Facility during fiscal 2020 were $12.4 million. As of January 30, 2021, the Company had no outstanding letters of credit. The Company had $5.0 million available for borrowing under the New Credit Facility as of January 30, 2021.
Previously, the Company had an amended and restated its revolving credit facility (“Credit Facility”) with Wells Fargo. As of February 1, 2020, the Company had borrowings of $13.1 million under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2019 were $35.9 million. As of February 1, 2020, the Company had no outstanding letters of credit. The Company had $12 million available for borrowing under the Credit Facility as of February 1, 2020.
On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the New Credit Facility, as further discussed above, and the Credit Facility is no longer available to the Company.
Subordinated Debt Agreement
The following table summarizes the warrant activity:
During fiscal 2019, the Company recognized approximately $40,000 in expenses for deferred shares issued to non-employee directors. There were no exercises of non-restricted stock options during fiscal 2020 and fiscal 2019.
Prior to June 1, 2003, the Company had provided the Board of Directors with a noncontributory, unfunded retirement plan (“Director Retirement Plan”) that paid retired directors an annual retirement benefit. The final payments due under the director retirement plan were made in fiscal 2020.
(1) Amount adjusted to reflect impact of discontinued operations.
(1) Amount adjusted to reflect impact of discontinued operations.
The Tax Cuts and Jobs Act also repeals the Corporation Alternative Minimum Tax (“AMT”) for tax years beginning after December 31, 2017. Any AMT carryover credits became refundable starting in the 2018 tax year, and any remaining credit will be fully refundable in 2021.
Prior to the consummation of the FYE Transaction, the Company leased its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest Loss from fye business in the Statement of Operations. On February 20, 2020, as part of the FYE Transaction, the Company assigned the rights and obligations of the lease to the acquiror.
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Common Stock Purchase Warrant (“Alimco Warrant”), pursuant to which the Company issued warrants to purchase up to 320,000 shares of Common Stock to Alimco, subject to adjustment in accordance with the terms of the Alimco Warrant, at an exercise price of $0.01 per share. All such warrants were outstanding as of April 28, 2023;
On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit. On May 8, 2019, twoall of the plaintiffs from the dismissed lawsuitparties’ claims is scheduled for September 18, 2023.
proceeds (10.35% for Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien. The Company does not anticipate these contingencies being met in Fiscal 2022.Store Manager Class Actions
There are two pending class actions. The first, Spack v. Trans World Entertainment Corp. was originally filedOn March 2, 2022, the Company entered into a Contingent Value Rights Agreement (the “Second CVR Agreement”) with the Tranche B Lender under the Subordinated Loan Agreement, pursuant to which the Tranche B Lender received contingent value rights (“Second CVRs”) representing the contractual right to receive cash payments from the Company in an amount equal, in the Districtaggregate, to 9.0% of New Jersey, April 2017 (the “Spack Action”). The Spack Action alleges thatthe proceeds received by the Company misclassified Store Managers (“SMs”) as exempt nationwide. It also alleges thatin respect of certain distributions by the Company improperly calculated overtime for Senior Assistant Managers (“SAMs”) nationwide, and that both SMs and SAMs worked “off-the-clock.” It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs. The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide misclassification claim on behalf of SMs. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.
The Company has reached a settlement with the plaintiffs for both store manager class actions, which has received preliminary approval from the court. The Company reserved $0.4 million for the settlement as of February 1, 2020. Notices of the settlement have been issued to class members, and the settlement claims process is currently ongoing. A final settlement approval hearing has been set by the court for April 14, 2021.
Note 15. Basic and Diluted Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercisedKaspien; recapitalizations or converted into Common Stock or resulted in the issuance of Common Stock (net of any assumed repurchases) that then shared in the earningsfinancings of the Company or Kaspien (with appropriate carve out for trade financing in the ordinary course); repayment of intercompany indebtedness owing to the Company by Kaspien; or sale or transfer of any stock of the Company or Kaspien.
The following represents basic and diluted loss per share for continuing operations, loss from discontinued operations and net loss for the respective periods:
Note 17. Subsequent Events
On March 18, 2021 the Company completed the closing of 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 intends to use the net proceeds from this 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.
*101.INS XBRL Instance Document
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attends several industry tradeshows annually.
Partnership Models
In this model, Kaspien buys inventory and sells itinventory on marketplaces such as Amazon, Walmart, Target,Amazon.com, Walmart.com and eBayTarget.com as a third-party seller. Additionally, Kaspien supports private label “dropship”and dropship integrations with various suppliers and distributors as well as incubates its own brands. At the end of fiscal 2019,distributors. Kaspien had a total of six (6)has also developed four incubated brands – Jumpoff Jo, Brilliant Bee, Big Betty, and Domestic Corner, Coy Beauty, Max Threads and Keto. In RaaS, our business model is the same as that of a wholesale retailer. During fiscal 2020, revenue per partner increased 40% to $237,000 from $169,000 in fiscal 2019.
Corner.
Corner.
In this model, Kaspien serves as an extension of aour partner’s e-commerce team, providing full service and managed services in the areas of inventory management, marketing management, creative services, content optimization, brand control, tax,protection, compliance protection, fee recovery, and other marketplace growth services. Kaspien charges a subscription feeretainer and receives a small percentage of the revenue generated.
Ad management
Brand protection and sells it.seller tracking
Dropship automation
Creative services
As of January 30, 2021,28, 2023, we had 825 partners across our portfolio of external brand partners, including nearly 693over 100 active retail partners and 13212 subscriptions partners. The Company’s subscriptions partner base increased 207% compared to fiscal year 2019.
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Technology and Integrations
The Company’s marketplace platformknowledge and expertise is a one stop shop insights driven platform built upon over a decadeon fifteen years of selling data and constantly evolving marketplace selling data.experience. The platform includescompany utilizes a variety of automated and artificial intelligent, data scienceintelligence powered solutions spanning acrosssupporting brand protection services, logistics and supply chain optimization, automated pricing, advertising marketing management, creativebudget forecasting, campaign bid automation, dayparting, and content services, tax and compliance services, among others. This is all accessible through the Kaspien platform and can be leveraged through a managed service or a software as a service model.much more.
The platformCompany uses an insight driveninsight-driven approach to digital marketplace retailing using both proprietary and licensed software. Using data collected from marketplaces, optimal inventory thresholds and purchasing trends are calculated within its advanced inventory management software developed in-house. Kaspien also has proprietaryleverages best in class software related to automate pricing, advertisement management, marketplace seller tracking, and channel auditing.
Additionally, the Kaspien platform can be extended to our business and servicepartners with enterprise-level software providers that are synergistic to Kaspien. This enables a network of partner integrations that can be extended and expanded upon. The Kaspien platform has formed strategic relationships and partnerships with these other listed marketplace service providers, including Deliverr andNetSuite to power our ERP, MyFBAPrep in thefor their logistics and fulfillment space, TaxCloud, a tax services provider, VantageBP, anetwork, IPSecure for brand protection, agency, Levin Consulting, an electronics specialty retailer,Seller Investigators and Charge Guard for fee recovery services, Helium10 for keyword research, Vantage for content optimization, and many others.
Business Environment
Digital marketplaces allow consumers to shop from a variety ofvarious merchants in one place and have become an integral part of many brand manufacturers’ businesses.
According to the U.S. Census Bureau, total U.S. e-commerce sales in 20202022 were $792$1.0 billion, up 32.4%7.7% from 2019 as the coronavirus pandemic and nationwide lockdowns pushed shoppers to rely on internet retailers for their consumer needs. Total retail sales in 2020 increased 3.4% from the prior year. As a result,2021. e-commerce sales ended the year accounting for 14% of all U.S. retail sales, up from 11% in 2019.
In the United States, we sell on marketplaces that represent greater than 50% of national e-commerce visits and sales (Amazon.com,including Amazon.com US, Amazon.com CA, Walmart.com, eBay.com, Target.com, Google.com, Sears.com, jet.com, Pricefalls.com, Overstock.com, Wish.com). Internationally, we sell on marketplaces in the U.K. (Amazon.uk), Germany (Amazon.de), Canada (Amazon.ca) and India (Amazon.in). In 2021, Kaspien intends to begin selling its services in Japan and Mexico.Target.com.
Competition and Strategic Positioning
Kaspien operates in a category within e-commerce called “Marketplace Growth Software and Services”. Businesses in this category provide services to brands and other sellers to facilitate growth on marketplaces. The market is very fragmented, and most providers are focusedfocus on only a few focus areas where sellers have support needs.need support. Subcategories in this market include:include Account and Marketing Services, Supply Chain and Logistics Providers, Manufacturers and Product Suppliers, Legal Services and Accounting, Tax and Financial Services. In theThe Account and Marketing Services subcategory divides services are further divided into retail services,and agency services and software services. This is analogous to our business models – Retail as a Service, Agency as a Service and Software as a Service.Agency.
Kaspien positions itself asis a comprehensive and fully customizable platformoffering of software and services tailored towardstoward online marketplace growth. KaspienKaspien’s core focus is on the Account and Marketing Services subcategory, andwhich competes in this subcategory with Software Providers, Agencies, and Retailers.
Revenue Distribution
Kaspien’s primary source of revenue is through its “Retail as a Service”Retail business, specifically as a third-party seller on the Amazon US marketplace. Retail revenues represented 98.6% of total revenue in fiscal 2022, the same level as fiscal 2021. In fiscal 2020,2022, the share of our retail revenues generated from our Amazon US business was 86%94.8%, as compared to 91%93.3% in fiscal 2019.2021. Our international retail business grew from 3.2%represented 2.5% of retail sales in fiscal 2022 compared to 3.9% in fiscal year 2019 to 4.8% in fiscal year 2020.2021. The remaining retail revenue is generated from other marketplaces, including Amazon International, Walmart, eBayAmazon.com CA, Walmart.com, eBay.com, and Target+.Target.com.
Kaspien focuses on a broad array ofvarious categories, including pet supplies,pets and sporting goods, tools/office/outdoors,baby, tools / office / outdoor, health & personal care, and home/kitchen/grocery.home / kitchen. In fiscal year 2020,2022, these categories represented approximately 68%83% of our total revenue. Kaspien organizesanalyzes our operations by category, developing a deep understanding and subject matter expertise in these areas, enabling us to drive better results across these categories.
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Human Capital
As of January 30, 2021,28, 2023, the Company employed approximately 136 people, of whom approximately 130 were employed on a80 full-time basis.people. At the end of fiscal 2020,2022, the Company had department heads in the areas of marketing, supply chain, private label, business development, account management, human resources, accounting, FP&A, warehouse operations, compliance, product management, data, and engineering. technology. Employee levels are managed to align with the pace of business, and management believes it has sufficient human capital to operate its business successfullysuccessfully.
The Company believes that its success depends on the ability to attract, develop, retainattracting, developing, retaining, and incentivize ourincentivizing new and existing and new employees, consultants, and key personnel.employees. It also believes that theits employees' skills, experience, and industry knowledge of its key personnel significantly benefits its operationsbenefit the operation, performance, and performance.competitiveness within the industry. The principal purposes of equity and cash incentive plans are to attract, retain, and reward personnel through theby granting of stock-based and cash-based compensation awards,awards. This results in order to increasea best-in-class employee experience, which ultimately increases shareholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.
Customer Acquisition
Kaspien engages its partners through a combination of brand building, inbound digital marketing, and outbound sales as well as usingtechniques, and its proprietary data platform to identify brands that would be a strategic fit for its services. Kaspien utilizes tradeshows and content marketing to strengthen its visibility within the industry. Kaspien’s public relations efforts consist of press releases, articles in industry publications, and articles on its website to build its brand.
Trademarks
The trademark Kaspien is registered with the U.S. Patent and Trademark Office and is owned by Kaspien. We believe that our rights to this trademark is adequately protected. We hold no material patents, licenses, franchises, or concessions; however, our established trademark is essential to maintaining our competitive position.
Available Information
The Company’s headquarters are located at 2818 N. Sullivan Road, Suite 130, Spokane Valley, WA 99216, and its telephone number is (855)-300-2710. The Company’s corporate website address is www.kaspien.com. The Company makes available, free of charge, its Exchange Act Reports (Forms 10-K, 10-Q, 8-K and any amendments thereto) on its web site as soon as practical after the reports are filed with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. This information can be obtained from the site http://www.sec.gov. The Company’s Common Stock, $0.01 par value, is listed on the NASDAQ Capital Market under the trading symbol “KSPN”.
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| Item 1A. | RISK FACTORS |
The following is a discussion of certain factors, which could affect the financial results of the Company.
Risks Related to Our Business
If we cannot successfully implement our business strategy our growth and profitability could be adversely impacted.
Our future results will depend, among other things, on our success in implementing our business strategy.
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. In addition,Based on recurring losses from operations, negative cash flows from operations, the proceedsexpectation 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 PPP Loan are subject to audit and there is a riskoutcome of repayment.this uncertainty.
Continued increases in Amazon Marketplace fulfillment and storage fees could have an adverse impact on our profit margin and results of operations.
The Company utilizes Amazon’s Freight by Amazon (“FBA”) platform to store their products at the Amazon fulfillment center and to pack and distribute these products to customers. If Amazon continues to increase its FBA fees, our profit margin could be adversely affected.
Our business depends on our ability to build and maintain strong product listings on e-commerce platforms. We may not be able to maintain and enhance our product listings if we receive unfavorable customer complaints, negative publicity, or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, results of operations and growth prospects.
Maintaining and enhancing our product listings is critical in expanding and growing our business. However, a significant portion of our perceived performance to the customer depends on third parties outside of our control, including suppliers and third-party delivery agents as well as online retailers such as Amazon and Walmart. Because our agreements with our online retail partners are generally terminable at will, we may be unable to maintain these relationships, and our results of operations could fluctuate significantly from period to period. Because we rely on third parties to deliver our products, we are subject to shipping delays or disruptions caused by inclement weather, natural disasters, labor activism, health epidemics or bioterrorism. We may also experience shipping delays or disruptions due to other carrier-related issues relating to their own internal operational capabilities. Further, we rely on the business continuity plans of these third parties to operate during pandemics, like the COVID-19 pandemic, and we have limited ability to influence their plans, prevent delays, and/or cost increases due to reduced availability and capacity and increased required safety measures.
Customer complaints or negative publicity about our products, delivery times, or marketing strategies, even if not accurate, especially on blogs, social media websites and third-party market sites, could rapidly and severely diminish consumer view of our product listings and result in harm to our brands. Customers may also make safety-related claims regarding products sold through our online retail partners, such as Amazon, which may result in an online retail partner removing the product from its marketplace. We have from time to time experienced such removals and such removals may materially impact our financial results depending on the product that is removed and length of time that it is removed. We also use and rely on other services from third parties, such as our telecommunications services, and those services may be subject to outages and interruptions that are not within our control.
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A change in one or more of the Company’s partners’ policies or the Company’s relationship with those partners could adversely affect the Company’s results of operations.
The Company is dependent on its partners to supply merchandise in a timely and efficient manner. If a partner fails to deliver on its commitments, whether due to financial difficulties or other reasons, the Company could experience merchandise shortages that could lead to lost sales.
Historically, the Company has not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply. No individualThe Company had one partner exceeded 10%that represented 20.4% of purchasesnet revenue in fiscal 2020.2022.
Our revenue is dependent upon maintaining our relationship with Amazon and failure to do so, or any restrictions on our ability to offer products on the Amazon Marketplace, could have an adverse impact on our business, financial condition and results of operations.
The Company generates substantially all of its revenue through the Amazon Marketplace. Therefore, we depend in large part on our relationship with Amazon for growth. In particular, we depend on our ability to offer products on the Amazon Marketplace. We also depend on Amazon for the timely delivery of products to customers. Any adverse change in our relationship with Amazon, including restrictions on the ability to offer products or termination of the relationship, could adversely affect our continued growth and financial condition and results of operations.
We have a significant amount of debt and we may continue to incur additional debt in the future. As of January 28, 2023, the Company had borrowings of $8.8 million under our credit facility with Eclipse. We also had borrowings of $5.3 million under our Subordinated Debt facility, with interest accruing at the rate of twelve percent (12%) per annum and compounded on the last day of each calendar quarter by becoming a part of the principal amount. In addition, we have $4.5 million under our Subordinated Debt Facility, with interest accruing at the rate of fifteen percent (15%) per annum and compounded on the last day of each calendar quarter by becoming a part of the principal amount. Substantially all of our assets, including the capital stock of Kaspien is pledged to secure our indebtedness. This leverage also exposes us to significant risk by limiting our flexibility in planning for, or reacting to, changes in our business (whether through competitive pressure or otherwise), our industry and the economy at large. In addition, our ability to make payments on, or repay or refinance, such debt, and to fund our operating and capital expenditures, depends largely upon our future operating performance. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.
The terms of our asset-based revolving credit agreement and subordinated debt agreement impose certain restrictions on us that may impair our ability to respond to changing business and economic conditions, which could have a significant adverse impact on our business. Additionally, our business could suffer if our ability to acquire financing is reduced or eliminated.
On February 20, 2020, Kaspien entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina,Eclipse, as administrative agent, under which the lenders committed to provide up to $25 million in loans under a three-year,four-year, secured revolving credit facility (the “New Credit“Credit Facility”). On March 30, 2020, we entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien. We subsequently amended the Subordinated Loan to add an additional $5.0 million secured term loan.
Among other things, the Loan Agreement limitsand Subordinated Loan Agreement limit Kaspien’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets. The Loan Agreement also requires Kaspien to comply with a financial maintenance covenant.
The Loan Agreement and Subordinated Loan Agreement contains customary events (including our Subordinated Debt) of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the borrowers and guarantors under the New Credit Facility taken as a whole, the occurrence of an uninsured loss to a material portion of collateral and, in the case of the Credit Facility, failure of the obligations under the New Credit Facility to constitute senior indebtedness under any applicable subordination or intercreditor agreements, including our Subordinated Debt.
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Risks Related to Information Technology and Intellectual Property
Breach of data security could harm our business and standing with our customers.
The protection of our partner, employee and business data is critical to us. Our business, like that of most companies, involves confidential information about our employees, our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of all such data, including confidential information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means, including deceiving our employees or third-party service providers. The methods used to obtain unauthorized access, disable or degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect. We have implemented and regularly review and update our control systems, processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any security breach involving the misappropriation, loss or other unauthorized disclosure of customer payment card or personal information or employee personal or confidential information, whether by us or our vendors, could damage our reputation, expose us to risk of litigation and liability, disrupt our operations, harm our business and have an adverse impact upon our net sales and profitability. As the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business, compliance with those requirements could also result in additional costs. Further, if we are unable to comply with the security standards established by banks and the credit card industry, we may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect our retail operations.
Our hardware and software systems are vulnerable to damage, theft or intrusion that could harm our business.
Any failure of our computer hardware or software systems that causes an interruption in our operations or a decrease in inventory tracking could result in reduced net sales and profitability. Additionally, if any data intrusion, security breach, misappropriation or theft were to occur, we could incur significant costs in responding to such event, including responding to any resulting claims, litigation or investigations, which could harm our operating results.
Our inability or failure to protect our intellectual property rights, or any claimed infringement by us of third-party intellectual rights, could have a negative impact on our operating results.
Our trademark, trade secrets and other intellectual property, including proprietary software, are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could cause a decline in our revenue. In addition, any infringement or other intellectual property claim made against us could be time-consuming to address, result in costly litigation, cause product delays, require us to enter into royalty or licensing agreements or result in our loss of ownership or use of the intellectual property.
Risks Related to Human Capital
Loss of key personnel or the inability to attract, train and retain qualified employees could adversely affect the Company’s results of operations.
The Company believes that its future prospects depend, to a significant extent, on the services of its executive officers. Our future success will also depend on our ability to attract and retain qualified key personnel. The loss of the services of certain of the Company’s executive officers and other key management personnel could adversely affect the Company’s results of operations.
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In addition to our executive officers, the Company’s business is dependent on our ability to attract, train and retain qualified team members. Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, health care costs and changing demographics. If we are unable to attract and retain adequate numbers of qualified team members, our operations and support functions could suffer. Those factors, together with increased wage and benefit costs, could adversely affect our results of operations.
We may face difficulties in meeting our labor needs to effectively operate our business.
We are heavily dependent upon our labor workforce. Our compensation packages are designed to provide benefits commensurate with our level of expected service. However, we face the challenge of filling many positions at wage scales that are appropriate to the industry and competitive factors. We also face other risks in meeting our labor needs, including competition for qualified personnel and overall unemployment levels, and increased costs associated with complying with regulations relating to COVID-19.levels. Changes in any of these factors, including a shortage of available workforce, could interfere with our ability to adequately service our customers and could result in increasing labor costs.
Our business could be adversely affected by increased labor costs, including costs related to an increase in minimum wage and health care.
Labor is one of the primary components in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, health care, or other employee benefits costs may adversely impact our operating expenses. Additionally, there is no assurance that future health care legislation will not adversely impact our results or operations.
Risks Related to Ownership of Our Common Stock.
The ownership of our Common Stock is concentrated, and entities affiliated with members of our Board of Directors have significant influence and control over the outcome of any vote of the Company’s Shareholdersshareholders and may have competing interests.
The Robert J. Higgins TWMC Trust (the “Trust”) owns approximately 28.8%14.4% of the outstanding Common Stock and Neil Subin owns approximately 12.1%9.1% of the outstanding Common Stock, and as a result each can significantly influence the outcome of most actions requiring shareholder approval. In addition, entities affiliated with each of the Trust and Mr. Subin, as well as one of our directors, Mr. Simpson, and certain of his affiliated entities, collectively hold approximately 50%25.3% of the outstanding Common Stock, and as a result can controlinfluence the outcome of most actions requiring shareholder approval.
If all of the outstanding warrants described in “Related Party Transactions” were exercised, the Trust would own approximately 13.5% of the outstanding Common Stock and Neil Subin and his affiliated entities would own approximately 14.6% of the outstanding Common Stock, and as a result each can influence the outcome of most actions requiring shareholder approval. If all of the outstanding warrants described in “Related Party Transactions” were exercised, entities affiliated with each of the Trust, Mr. Subin, as well as one of our directors, Mr. Simpson, and certain of his affiliated entities, would collectively hold approximately 29.8% of the outstanding Common Stock, and as a result can significantly influence the outcome of nearly all actions requiring shareholder approval,
These Shareholdersshareholders entered into a voting agreement (as described in “Related Party Transactions”) and agreed to how their respective shares of the Company’s Common Stock held by the parties will be voted with respect to the designation, election, removal, and replacement of members of the Board. Pursuant to the voting agreement, Messrs. Marcus and Simpson were appointed as directors of the Company, and Mr. Reickert, a trustee of the Trust, remained as a director of the Company. Mr. Subin was also granted board observer rights.
Entities affiliated with the Trust and Messrs. Marcus and Simpson are also lenders under our subordinated loan and security agreement, have received warrants to purchase shares of the Company’s Common Stock and 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 received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien, each as described in “Related Party Transactions”. In addition, entities affiliated with Mr. Marcus received an additional CVR representing the contractual right to receive cash payments from the Company in an amount equal to 9.0% of the proceeds received by the Company in respect of certain distributions by the Company or Kaspien; recapitalizations or financings of the Company or Kaspien (with appropriate carve out for trade financing in the ordinary course); repayment of intercompany indebtedness owing to the Company by Kaspien; or sale or transfer of any stock of the Company or Kaspien, as described in “Related Party Transactions”. As a result, there may be instances in which the interest of Mr. Reickert, the Trust and its affiliated entities, Messrs. Marcus and Subin and their respective affiliated entities, and Mr. Simpson and his affiliated entities may conflict or be perceived as being in conflict with the interest of a holder of our securities or the interest of the Company.
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The holders of our common stock could suffer substantial dilution due to our corporate financing practices.
The holders of our common stock could suffer substantial dilution due to our corporate financing practices, which, in the past few years, have included a registered direct offering, the issuance of warrants and the issuance of contingent value rights.
If all of the outstanding warrants were exercised, an additional 2,782,286 shares of common stock would be issued and outstanding. This additional issuance of shares of common stock would cause immediate and substantial dilution to our existing shareholders and could cause a significant reduction in the market price of our common stock.
Additionally, lenders under our subordinated loan and security agreement, have 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 received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien, each as described in “Related Party Transactions”. In addition, certain lenders received an additional CVR representing the contractual right to receive cash payments from the Company in an amount equal to 9.0% of the proceeds received by the Company in respect of certain distributions by the Company or Kaspien; recapitalizations or financings of the Company or Kaspien (with appropriate carve out for trade financing in the ordinary course); repayment of intercompany indebtedness owing to the Company by Kaspien; or sale or transfer of any stock of the Company or Kaspien, as described in “Related Party Transactions”. If events triggering these payments occur, the amount of consideration received by the Company will be reduced, thereby reducing any amounts distributable or attributable to shareholders or their shares.
The issuance of any securities for acquisition or financing efforts, upon exercise of warrants, pursuant to our equity compensation plans, or otherwise may result in a reduction of the market price of the outstanding shares of our common stock. If we issue any such additional securities, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change in control of our Company.
The Company’s stock price has experienced and could continue to experience volatility and could decline, resulting in a substantial loss on your investment.
Our stock price has experienced, and could continue to experience in the future, substantial volatility as a result of many factors, including global economic conditions, broad market fluctuations and public perception of the prospects for the industries in which we operate and the value of our assets. We are reliant on the performance of Kaspien, and a failure to meet market expectations, particularly with respect to net revenues, operating margins and earnings per share, would likely result in a further decline in the market price of our stock.
Our common stock is listed on The NASDAQ Stock Market LLC (“the NASDAQ”), which imposes continued listing requirements with respect to listed shares. On August 15, 2019,December 14, 2022, we received written notice from the NASDAQ that the closing bid price for our common stock had been below $1.00 for the previous 30 consecutive business days, and that the Company effected a reverse stock split of its outstanding shares of Common Stock at a ratio of one-for-twenty pursuant to a Certificate of Amendment to the Company’s Certificate of Incorporation filedtherefore was not in compliance with the Secretary of State of the State of New York. The reverse stock split was reflected on NASDAQ beginning with the opening of trading on August 15, 2019. The primary purpose of the reverse stock split, which was approved by the Company’s shareholders at the Company’s Annual Stockholders Meeting on June 27, 2019, was to enable the Company to comply with the $1.00 minimum bid price requirement for continued listing on NASDAQ.
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The notice has regainedno immediate impact on the listing of the Company’s common stock, which will continue to trade on The Nasdaq Capital Market. The Company intends to monitor its closing bid price for its common stock between now and June 12, 2023 and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary. There can be no assurance, however, that we will be able to regain compliance or that we will otherwise be in compliance with the alternative requirement set forth under Nasdaq Listing Rule 5550(b)(2) and the matter is now closed.
other NASDAQ listing criteria. If we fail to regain and maintain compliance with the minimum bid requirement or to meet the other applicable continued listing requirements in the future and NASDAQ determines to delist our Common Stock,common stock, the delisting could adversely affect the market price and liquidity of our Common Stockcommon stock, and reduce our ability to raise additional capital.
The limited public float and trading volume for our Common Stock may have an adverse impact and cause significant fluctuation of market price.
Historically, ownership of a significant portion of our outstanding shares of Common Stock has been concentrated in a small number of stockholders.shareholders. Consequently, our Common Stock has a relatively small float and low average daily trading volume, which could affect a shareholder’s ability to sell our stock or the price at which it can be sold. In addition, future sales of substantial amounts of our Common Stock in the public market by those larger stockholders,shareholders, or the perception that these sales could occur, may adversely impact the market price of the stock and our stock could be difficult for a shareholder to liquidate.
Failure to remediate a material weakness related to our ability to perform adequate independent reviews and maintain effective controls related to account analyses, account summaries and account reconciliations, could result in material misstatements in our financial statements.
Our management has identified a material weakness related to our ability to perform adequate independent reviews and maintain effective controls related to account analyses, account summaries and account reconciliations and has concluded that, due to such material weakness, each of our disclosure controls and procedures and internal control over financial reporting were not effective as of January 28, 2023. While remediation is in process, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements, and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
General Risk Factors
The Company’s business is influenced by general economic conditions.
The Company’s performance is subject to general economic conditions and their impact on levels of discretionary consumer spending. General economic conditions impacting discretionary consumer spending include, among others, wages and employment, consumer debt, reductions in net worth, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors.
Consumer purchases of discretionary items generally decline during recessionary periods and other periods where disposable income is adversely affected. A downturn in the economy affects retailers disproportionately, as consumers may prioritize reductions in discretionary spending, which could have a direct impact on purchases of our products and services and adversely impact our results of operations. In addition, reduced consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have a negative impact on gross profit.
Disruption of global capital and credit markets may have a material adverse effect on the Company’s liquidity and capital resources.
Distress in the financial markets has in the past and can in the future result in extreme volatility in security prices, diminished liquidity and credit availability. There can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy or that our capital resources will at all times be sufficient to satisfy our liquidity needs.
Because of our floating rate credit facility, we may be adversely affected by interest rate changes.
Our financial position may be affected by fluctuations in interest rates, as the New Credit Facility is subject to floating interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. As we borrow against our credit facility, a significant increase in interest rates could have an adverse effect on our financial position and results of operations.
The Company is dependent upon access to capital, including bank credit facilities and short-term vendor financing, for its liquidity needs.
The Company must have sufficient sources of liquidity to fund its working capital requirements and indebtedness. The future availability of financing will depend on a variety of factors, such as economic and market conditions, permissibility under our existing financing arrangements, the availability of credit and the Company’s credit rating, as well as the Company’s reputation with potential lenders. These factors could materially adversely affect the Company’s ability to fund its working capital requirements, costs of borrowing, and the Company’s financial position and results of operations would be adversely impacted.
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We may complete a future significant strategic transaction that may not achieve intended results or could increase the number of our outstanding shares or amount of outstanding debt or result in a change of control.
We will evaluate and may in the future enter into strategic transactions. Any such transaction could happen at any time following the closing of the merger, could be material to our business and could take any number of forms, including, for example, an acquisition, merger or a sale of all or substantially all of our assets.
Evaluating potential transactions and integrating completed ones may divert the attention of our management from ordinary operating matters. The success of these potential transactions will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies through the successful integration of the businesses we acquire with our existing business. Even if we are successful in integrating the acquired businesses, we cannot assure you that these integrations will result in the realization of the full benefit of any anticipated growth opportunities or cost synergies or that these benefits will be realized within the expected time frames. In addition, acquired businesses may have unanticipated liabilities or contingencies.
If we complete an acquisition, investment or other strategic transaction, we may require additional financing that could result in an increase in the number of our outstanding shares or the aggregate principal amount of our debt. A strategic transaction may result in a change in control of our company or otherwise materially and adversely affect our business.
Historically, we have experienced declines, and we may continue to experience fluctuation in our level of sales and results from operations.
A variety of factors has historically affected, and will continue to affect, our sales results and profit margins. These factors include general economic conditions; competition; actions taken by our competitors; consumer trends and preferences; access to third party marketplaces; and new product introductions and changes in our product mix.
There is no assurance that we will achieve positive levels of sales and earnings growth, and any decline in our future growth or performance could have a material adverse effect on our business and results of operations.
The ability of the Company to satisfy its liabilities and to continue as a going concern will continue to be dependent on the implementation of several items, the success of which is not certain.
The Company has suffered recurring losses from operations and the Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, all of which are limited. Therefore, the ability of the Company to meet its liabilities and to continue as a going concern is dependent on, among other things, improved profitability, the continued implementation of the strategic initiative to reposition Kaspien as a platform of software and services, the availability of future funding, implementation of one or more corporate initiatives to reduce costs at the parent company level and other strategic alternatives, including selling all or part of the remaining business or assets of the Company, and overcoming the impact of the COVID-19 pandemic.Company.
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.
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Parties with whom the Company does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.
The Company is a party to contracts, transactions and business relationships with various third parties, including partners, vendors, suppliers, service providers and lenders, pursuant to which such third parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties to provide essential products, services or other benefits, including with respect to merchandise, advertising, software development and support, logistics, other agreements for goods and services in order to operate the Company’s business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Economic, industry and market conditions including as a result of the COVID-19 pandemic, could result in increased risks to the Company associated with the potential financial distress or insolvency of such third parties. The Company is not currently able to accurately determine the extent and scope of the impact of the COVID-19 pandemic on such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of operations.
Failure to comply with legal and regulatory requirements could adversely affect the Company’s results of operations.
The Company’s business is subject to a wide array of laws and regulations. Significant legislative changes that impact our relationship with our workforce (none of which is represented by unions) could increase our expenses and adversely affect our operations. Examples of possible legislative changes impacting our relationship with our workforce include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining units are negotiated or imposed, minimum wage requirements, health care mandates, and changes in overtime regulations.
Our policies, procedures and internal controls are designed to comply with all applicable laws and regulations, including those imposed by the Securities and Exchange Commission and the NASDAQ Capital Market, as well as applicable employment laws. Additional legal and regulatory requirements increase the complexity of the regulatory environment in which we operate and the related cost of compliance. Failure to comply with such laws and regulations may result in damage to our reputation, financial condition and market price of our stock.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation by employees, consumers, partners, suppliers, competitors, stockholders, government agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. We may incur losses relating to these claims, and in addition, these proceedings could cause us to incur costs and may require us to devote resources to defend against these claims that could adversely affect our results of operations. For a description of current legal proceedings, see “Part I, Item 3, Legal Proceedings.”
The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect our business.
Natural disasters, including earthquakes, hurricanes, floods, and tornadoes may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from suppliers for sale to our customers. Public health issues, such as flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or customer demand. Our ability to mitigate the adverse effect of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster. We may be required to suspend operations in some or all our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.
A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect our business.
Our business, results of operations, and financial condition may be materially adversely impacted if a public health outbreak, including the recent COVID-19 pandemic, interferes with our ability, or the ability of our employees, contractors, suppliers, and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business.
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| Item 1B. | UNRESOLVED SEC COMMENTS |
None.
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| Item 2. | PROPERTIES |
Corporate Offices and Distribution Center Facility
As of January 30, 2021,28, 2023, we leased the following office and distribution facilities:
| Location | Square Footage | Owned or Leased | Use | |||
| Spokane, WA | 30,700 | Leased | Office administration | |||
| Spokane, WA | 32,000 | Leased | Distribution center |
The distribution center supports the distribution to outside distribution facilities for sale on third-party marketplaces for Kaspien.
| Item 3. | LEGAL PROCEEDINGS |
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company.
On November 14, 2018, three consumersJune 18, 2021, Vijuve Inc. filed a punitive class action complaintlawsuit against the Company and Synapse Group,Kaspien Inc. in the United States District Court for the Eastern District of Massachusetts, Boston DivisionWashington (Case No.1:18-cv-12377-DPW)No. 2:21-cv-00192-SAB) concerning enrollmenta Retailer Agreement that the parties entered into in the Company’s Backstage Pass VIP loyalty programSeptember of 2020. Vijuve manufactures skin care products and associated magazine subscriptions.face massagers. The parties agreed that Kaspien would sell Vijuve’s products on Amazon. The complaint alleged among other things, that Kaspien breached the Company’s “negative option marketing” misled consumers into enrollingRetailer Agreement when it declined to acquiesce to Vijuve’s demand that Kaspien purchase over $700,000 of products. In total, Vijuve appears to be seeking more than $1,000,000 in damages. Kaspien denies that it breached the agreement and denies that it has any liability to Vijuve. Moreover, on July 19, 2021, Kaspien filed counterclaims and alleged that Vijuve breached the contract, including by refusing to buy back inventory from Kaspien upon termination of the Retailer Agreement. On July 18, 2022, Kaspien filed additional counterclaims against VIjuve for membershipfraud and subscriptions without obtaining the consumers’ consent. The complaint sought to represent a nationwide classnegligent misrepresentation. Kaspien is seeking at least $229,000 from Vijuve for breach of “all persons in the United States” who were enrolled incontract and/or chargedspecific performance, as well as fraud and negligent misrepresentation. A trial on all of the parties’ claims is scheduled for Backstage Pass VIP memberships and/or magazine subscriptions, and to obtain statutory and actual damages on their behalf.September 18, 2023.
On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit. On May 8, 2019, two of the plaintiffs from the dismissed lawsuitFebruary 17, 2022, CA Washington, LLC (“CA”) filed a similar putative class actionlawsuit against Kaspien Inc. in Massachusetts state court (Civ.Wake County, North Carolina Superior Court (court file 22 CVS 2051). CA claims that Kaspien Inc. breached the contract between the parties by using CA’s technology platform to facilitate sales by third parties and by using CA’s technology to develop a competing platform. The lawsuit also includes an alternative claim for unjust enrichment and a claim for breach of North Carolina’s Unfair and Deceptive Trade Practices Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based onCA seeks an unspecified amount of damages. Kaspien removed the same allegations, but this time seeking to represent only a class of “FYE customers in Massachusetts” who were charged for VIP Backstage Pass Memberships and/or magazine subscriptions. The Company removed that lawsuit back to federal court on June 12, 2019,in the Eastern District of North Carolina (case number 5:22-cv-00111), filed an Answer denying CA’s claims, and then filedasserted a motion to dismiss and/or strikecounterclaim against CA for breach of contract and breach of the plaintiff’s class action allegations on June 28, 2019. On February 2, 2021covenant of good faith and fair dealing. There is no determination of outcome, thus no contingencies are recognized as of the court granted the Company’s motion, struck the class action allegations, and dismissed the individual plaintiffs’ claims for lack of jurisdiction. Plaintiffs appealed the court’s decision on February 24, 2021. The parties participated in a mandatory court-annexed mediation session on April 8, 2021.reporting date. The parties have agreed on terms to resolve the matter fullylawsuit and finally, andare finalizing the appeal will be dismissed without material impact on the financial results of the Company.necessary settlement documents.
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information: The Company’s Common Stock trades on the NASDAQ Capital Market under the symbol “KSPN.” As of April 15, 2021,2023, there were 29677 shareholders of record.
On December 14, 2022, we received written notice from the NASDAQ that the closing bid price for our common stock had been below $1.00 for the previous 30 consecutive business days, and that the Company therefore was not in compliance with the minimum bid price requirement for continued listing on The following table sets forth high and low last reported sale pricesNasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until June 12, 2023, to regain compliance. In order to regain compliance with the minimum closing bid price rule, the closing bid price of the Company’s common stock must be at least $1.00 for each fiscal quartera minimum of ten consecutive business days during the compliance period. If the Company does not regain compliance during the initial compliance period, from February 3, 2019 through April 25, 2021.the Company may be eligible for additional time to regain compliance. If the Company is not eligible, the Company expects that at that time the NASDAQ will provide written notice to the Company that the Company’s common stock will be subject to delisting.
| Closing Sales Prices | ||||||||
| High | Low | |||||||
| 2019 | ||||||||
1st Quarter | $ | 12.48 | $ | 5.77 | ||||
2nd Quarter | $ | 8.01 | $ | 5.00 | ||||
3d Quarter | $ | 6.08 | $ | 2.74 | ||||
4th Quarter | $ | 6.98 | $ | 1.92 | ||||
| 2020 | ||||||||
1st Quarter | $ | 5.35 | $ | 2.39 | ||||
2nd Quarter | $ | 8.14 | $ | 3.62 | ||||
3d Quarter | $ | 12.38 | $ | 6.51 | ||||
4th Quarter | $ | 52.15 | $ | 10.00 | ||||
| 2021 | ||||||||
1st Quarter (through April 15, 2021) | $ | 46.00 | $ | 21.50 | ||||
Dividend Policy: The Company did not pay cash dividends in fiscal 20202022 and fiscal 2019. 2021. The declaration and payment of any dividends is at the sole discretion of the board of directors and is not guaranteed.
Issuer Purchases of Equity Securities during the Quarter Ended January 30, 202128, 2023
During the three-month period ended January 30, 2021,28, 2023, the Company did not repurchase any shares under a share repurchase program.
| Item 6. |
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 the Securities 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 30, 202128, 2023 (“fiscal 2020”2022”)
Compared to Fiscal Year Ended February 1, 2020January 29, 2022 (“fiscal 2019”2021”)
The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 20202022 and fiscal 20192021 ended January 30, 202128, 2023 and February 1, 2020,January 29, 2022, respectively. Both fiscal 20202022 and fiscal 20192021 had 52 weeks.
Net Revenue. Net revenue increased 18.8%decreased 10.8% to $158.3$128.2 million compared to $133.2$143.7 million in fiscal 2019.2021. The primary source of revenue is the Retail as a Service (“RaaS”) model, which represented 99%98.7% of net revenue. As partNet 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 the Company’s diversification strategic initiative, net revenue from non-Amazon US marketplaces increased to 5.4%1.4% of net revenue from 3.4%1.3% of net revenue in the comparable period from the prior year. The increase was attributable to Amazon International, Walmart and Other Marketplaces. Subscriptions and Other share of net revenue increased to 0.8% of net revenue from 0.4% of net revenue in the comparable period from the prior year. The increase was attributable an increase in the number of partners and higher gross merchandise value (“GMV”) of partner revenue flowing through the platform Amazon Marketplace.year The following table sets forth net revenue by marketplace as a percentage of total net revenue:
January 30, 2021 | February 1, 2020 | Change | January 28, 2023 | % to Total | January 29, 2022 | % to Total | Change | |||||||||||||||||||||||||
| Amazon US | $ | 148,526 | $ | 128,114 | $ | 20,412 | $ | 121,561 | 94.8 | % | $ | 134,125 | 93.3 | % | $ | (12,564 | ) | |||||||||||||||
| Amazon International | 7,646 | 4,201 | 3,445 | 3,241 | 2.5 | % | 5,576 | 3.9 | % | (2,335 | ) | |||||||||||||||||||||
| Walmart & Other Marketplaces | 884 | 362 | 522 | |||||||||||||||||||||||||||||
| Walmart, Target & Other Marketplaces | 1,645 | 1.3 | % | 2,172 | 1.5 | % | (527 | ) | ||||||||||||||||||||||||
| Subtotal Retail | 157,056 | 132,677 | 24,379 | 126,447 | 98.6 | % | 141,873 | 98.7 | % | (15,426 | ) | |||||||||||||||||||||
| Subscriptions & Other | 1,289 | 539 | 750 | 1,781 | 1.4 | % | 1,840 | 1.3 | % | (59 | ) | |||||||||||||||||||||
| Total | $ | 158,345 | $ | 133,216 | $ | 25,129 | $ | 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 20202022 was $246 million. Fourth quarter 2020$271.0 million, the same level as fiscal 2021. Retail GMV increased 86%decreased 9.2% to $73.9$137.1 million or 50.6% of total GMV, compared to $39.7$151.0 million or 55.7% of total GMV in the comparable year-ago period.fiscal 2021. Subscription GMV increased 886%15.7% to $26.9$133.9 million (36.3%or 49.4% of total GMV),GMV, compared to $2.7$120.0 million (6.9%%or 44.3% of total GMV)GMV in the same year-ago period.fiscal 2021.
Gross Profit. Gross profit as a percentage of revenue was 10.3%19.0% in fiscal 20202022 as compared to 8.1%22.8% in fiscal 2019.2021. The increasedecrease in the gross profit rate was primarily due to an increasea decrease in merchandise margin to 46.4%41.2% in fiscal 20202022 as compared to 46.1%44.8% in fiscal 20192021 and the leveraging of fulfillment fees and commissions anda $0.6 million increase in warehousing and freight expenses on the higher sales.expenses. The following table sets forth a year-over-year comparison of the Company’s gross profit:
| Change | Change | |||||||||||||||||||||||||||||||
| (amounts in thousands) | January 30, 2021 | February 1, 2020 | $ | % | January 28, 2023 | January 29, 2022 | $ | % | ||||||||||||||||||||||||
| Merchandise margin | $ | 73,448 | $ | 61,379 | $ | 12,069 | 19.7 | % | $ | 52,893 | $ | 64,410 | (11,517 | ) | (17.9 | )% | ||||||||||||||||
| % of net revenue | 46.4 | % | 46.1 | % | 0.3 | % | 41.2 | % | 44.8 | % | (3.6 | )% | ||||||||||||||||||||
| Fulfillment fees and commissions | (49,158 | ) | (42,530 | ) | (6,628 | ) | 15.6 | % | ||||||||||||||||||||||||
| Fulfillment fees | (17,940 | ) | (21,655 | ) | 3,715 | 17.2 | % | |||||||||||||||||||||||||
| Warehousing and freight | (7,986 | ) | (7,998 | ) | 12 | 0.2 | % | (10,563 | ) | (9,982 | ) | (581 | ) | (5.8 | )% | |||||||||||||||||
| Gross profit | $ | 16,304 | $ | 10,851 | $ | 5,453 | 50.3 | % | $ | 24,390 | $ | 32,773 | (8,383 | ) | (25.6 | )% | ||||||||||||||||
| % of net revenue | 10.3 | % | 8.1 | % | 19.0 | % | 22.8 | % | ||||||||||||||||||||||||
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| Change | Change | |||||||||||||||||||||||||||||||
| (amounts in thousands) | January 30, 2021 | February 1, 2020 | $ | % | January 28, 2023 | January 29, 2022 | $ | % | ||||||||||||||||||||||||
| Kaspien SG&A expenses | $ | 16,540 | $ | 16,491 | $ | 49 | 0.3 | % | ||||||||||||||||||||||||
| Corporate SG&A expenses | 5,489 | 8,591 | (3,102 | ) | (36.1 | %) | ||||||||||||||||||||||||||
| 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 | $ | 22,029 | $ | 25,082 | $ | (3,053 | ) | (12.2 | %) | $ | 39,814 | $ | 42,391 | $ | (2,577 | ) | (8.0 | )% | ||||||||||||||
| As a % of total revenue | 13.9 | % | 18.8 | % | 31.0 | % | 29.5 | % | ||||||||||||||||||||||||
SG&A expenses decreased $3.1$2.6 million, or 12.2%6.1%, primarily due to a 36%an 11.3% reduction in in Corporate SG&ASelling expenses. SG&AThe decline in Selling expenses for Kaspienwas attributable to the decline in Net revenue. General and administrative expenses increased $49,000.$0.7 million.
SG&A expenses as a percentage of net revenue decreasedincreased to 13.9%30.4% as compared to 18.8%29.5% in fiscal 2019.2021. The decreaseincrease in the rate as a percentage of net revenue was primarily due to the decline in Corporate SG&A expenses and the leveraging of Kaspien SG&A expenseslost leverage on the higher sales.general and administrative expenses.
Depreciation and amortization expense. Consolidated depreciation and amortization expense increased $0.3 million.for fiscal 2022 was $1.2 million as compared to $2.1 million in fiscal 2021.
Interest Expense. Interest expense in fiscal 20202022 was $1.7$3.6 million, compared to interest incomeexpense of $0.7$1.9 million in fiscal 2019.2021. The increase in interest expense was attributable to higher average borrowings on the Credit Facility and the Additional Subordinated Debt.
Income Tax (Benefit) expense. Expense. The following table sets forth a year-over-year comparison of the Company’s income tax expense:
| (amounts in thousands) | Change | |||||||||||
January 28, 2023 | January 29, 2022 | $ | ||||||||||
| Income tax expense | $ | 43 | $ | 27 | $ | 16 | ||||||
| Effective tax rate | 0.2 | % | 0.3 | % | - | % | ||||||
| (amounts in thousands) | Change | |||||||||||
January 30, 2021 | February 1, 2020 | $ | ||||||||||
| Income tax (benefit) expense | $ | (3,542 | ) | $ | 44 | $ | (3,586 | ) | ||||
| Effective tax rate | (47.6 | %) | 0.3 | % | (47.9 | %) | ||||||
The fiscal 20192022 and fiscal 2021 income tax expense includes state taxes and the accrual of interest on the reserve for uncertain tax positions.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 | Change | ||||||||||||||||||||||
January 30, 2021 | February 1, 2020 | $ | January 28, 2023 | January 29, 2022 | $ | |||||||||||||||||||
| Net loss | $ | (3,892 | ) | $ | (58,744 | ) | $ | 54,852 | $ | (19,044 | ) | $ | (8,031 | ) | $ | (11,013 | ) | |||||||
| Net loss as a percentage of Net revenue | (2.5 | %) | (44.1 | %) | (14.9 | )% | (5.6 | )% | (9.3 | )% | ||||||||||||||
Net loss was $3.9$19.0 million for fiscal 2020,2022, compared to $58.7$8.0 million for fiscal 2019. Included in the results for fiscal 2019 is a loss from the fye business of $44.4 million.2021. The decreaseincrease in net loss was primarily due to improved loss from operationslower net revenue and the elimination of the loss from fye business.a lower gross margin rate.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash Flows:
The consolidated financial statements for the year ended January 30, 202128, 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 and overcoming the impact of the COVID-19 pandemic.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 $3.9$19.0 million and $58.7$8.0 million for the fiscal 20202022 and fiscal 2019,2021, respectively, and has an accumulated deficit of $112.9$139.9 million as of January 30, 2021.28, 2023. In addition, net cash used in operating activities during fiscal 20202022 was $13.6$11.3 million. Net cash used in operating activities during fiscal 20192021 was $15.8$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. In addition,Based on recurring losses from operations, negative cash flows from operations, the proceedsexpectation 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 PPP Loan are subject to audit and there is a riskoutcome of repayment.this uncertainty.
The Company’s primary sources of liquidity are its borrowing capacity under its New 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 operate Kaspien, 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; and our ability to overcome the impact of the COVID-19 pandemic.activities.
On March 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 intends to useused 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.
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On March 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 of March 31, 2024, which is the same maturity date as the existing loans under the Subordinated Loan Agreement.
On July 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 $0.001.
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 on July 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.
On July 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:
| (amounts in thousands) | 2020 | 2019 | 2020 vs. 2019 | 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||||
| Operating Cash Flows | $ | (13,391 | ) | $ | (15,827 | ) | $ | 2,436 | $ | (11,282 | ) | $ | (14,534 | ) | $ | 3,252 | ||||||||||
| Investing Cash Flows | 10,589 | (2,696 | ) | 13,285 | (898 | ) | (1,431 | ) | 533 | |||||||||||||||||
| Financing Cash Flows | 505 | 13,149 | (12,644 | ) | 10,983 | 14,233 | (3,250 | ) | ||||||||||||||||||
| Capital Expenditures | (1,190 | ) | (2,823 | ) | 1,633 | (898 | ) | (1,431 | ) | 533 | ||||||||||||||||
| End of Period Balances: | ||||||||||||||||||||||||||
| Cash, Cash Equivalents, and Restricted Cash | (1) | 6,555 | 8,852 | (2,297 | ) | (1) | 3,626 | 4,823 | (1,197 | ) | ||||||||||||||||
| Merchandise Inventory | 24,515 | 17,836 | 6,679 | 26,704 | 29,277 | (2,573 | ) | |||||||||||||||||||
| Working Capital | 10,762 | 9,004 | 1,758 | 12,533 | 16,334 | (3,801 | ) | |||||||||||||||||||
(1) | Cash and cash equivalents per Consolidated Balance Sheets | $ | 1,809 | $ | 2,977 | (1,168 | ) | ||||||
| Add: Restricted cash | 4,746 | 5,875 | (1,129 | ) | |||||||||
| Cash, cash equivalents, and restricted cash | $ | 6,555 | $ | 8,852 | (2,297 | ) |
(1) | Cash and cash equivalents per Consolidated Balance Sheets | $ | 1,130 | $ | 1,218 | (88 | ) | ||||||
| Add: Restricted cash | 2,496 | 3,605 | (1,109 | ) | |||||||||
| Cash, cash equivalents, and restricted cash | $ | 3,626 | $ | 4,823 | (1,197 | ) |
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During fiscal 2020,2022, cash used in operations was $13.4$11.3 million compared to $15.8$14.5 million in fiscal 2019.2021. During 2020,2022, cash used in operations consisted primarily of a net loss of $3.9$18.8 million, an increase of $6.7 million in inventory and the payment of $5.5 million in accounts payable partially offset by a decrease$2.6 million reduction in prepaid expensesinventory and a $0.8 million increase in accounts receivables.payable. During 2019,2021, cash used in operations consisted primarily of a net loss of $58.7$8.0 million, offset by non-cash charges, including the $24.0 million impairmentan increase of long-lived assets, a $12.7 inventory net realizable adjustment and $11.5$4.8 million in depreciationinventory and amortization and changesthe payment of $2.6 million in operating assets and liabilities of $6.5 million.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 20202022 and in fiscal 20192021 was 4.03.7 and 3.3,4.0, 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 36.3%26.4% as of January 30, 202128, 2023 compared with 29.2%20.7% as of February 1, 2020.January 29, 2022.
Cash provided by investing activities was $10.6 million in fiscal 2020, compared to cash used in investing activities of $2.7was $0.9 million in fiscal 2019.2022, compared to $1.4 million in fiscal 2021. During fiscal 2020, cash provided by investing activities consisted proceeds from the sale of the fye business of $11.8 million, partially offset by capital expenditures of $1.2 million. During2022 and fiscal 2019,2021, cash used in investing activities consisted entirely of $2.8 million in capital expenditures partially offset by a $127,000 capital distribution from a joint venture.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 $1.7$1.0 million in fiscal 2021.2023.
Cash provided by financing activities was $505,000 in fiscal 2020, compared to $13.1$11.0 million in fiscal 2019.2022, compared to $14.2 million in fiscal 2021. In fiscal 2020,2022, the primary source of cash providedwas $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 financing activities consistedthe payment of $6.3short-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, $5.1 million in proceeds from long term borrowings, $2.0 million in proceeds from a PPP loan, partially offset by $13.1 million in payment of short-term borrowings. In fiscal 2019, cash provided by financing activities was primarily comprised of net short-term borrowings.
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 $5.2 million secured term loan ($2.7 million from Alimco, $0.5 million from Kick-Start, and $2.0 million from RJHDC) to Kaspien with a scheduled maturity date of May 22, 2023,March 31, 2024, interest accruing at the rate 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 and Kaspien;
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 Alimco, 23,401 shares for Kick-Start, and 93,923 shares for RJHDC), subject to adjustment in accordance with the terms of the Warrants, at an exercise price of $0.01 per share. As of April 15, 2021,28, 2023, 236,993 warrants wereof the Warrants had been exercised by the Related Party Entities and 7,5395,126 warrants remained outstanding;
23
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 Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien; and
Voting Agreement (the “Voting Agreement”), pursuant to which the Related Party Entities, the Trust, Mr. Simpson and their respective related entities agreed 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. PursuantBoard of Directors of the Company. On August 2, 2022, the parties entered into Amendment No. 1 to the Voting Agreement Messrs. Marcussetting forth their agreements and Simpson were appointed asunderstandings 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 March 2, 2022, the Company entered into the following agreements with certain of the Related Parties:
An amendment to the Subordinated Loan and Security Agreement, pursuant to which Alimco made an additional $5,000,000.00 secured term loan (the “Additional Subordinated Loan”) with a scheduled maturity date of March 31, 2024, interest 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 Mr. Reickert, a trusteeKaspien;
Common Stock Purchase Warrant (“Alimco Warrant”), pursuant to which the Company issued warrants to purchase up to 320,000 shares of Common Stock to Alimco, subject to adjustment in accordance with the terms of the Trust, remainedAlimco Warrant, at an exercise price of $0.01 per share. All such warrants were outstanding as a directorof April 28, 2023;
Registration Rights Agreement, pursuant to which Alimco has been granted customary demand and piggyback registration rights with respect to the Warrant Shares issued upon exercise of the Company. Mr. Subin was also granted board observer rights.Alimco Warrant; and
Contingent Value Rights Agreement (the “Second CVR Agreement”) pursuant to which Alimco received additional contingent value rights (“Additional CVRs”) 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 Kaspien; recapitalizations or financings of the Company or Kaspien (with appropriate carve out for trade financing in the ordinary course); repayment of intercompany indebtedness owing to the Company by Kaspien; or sale or transfer of any stock of the Company or Kaspien.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the 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 than Goodwill: 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 of January 30, 2020,28, 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 4.2.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required under the requirements of a Smaller Reporting Company.
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Exhibits and financial statement schedules to the Company’s Consolidated Financial Statements isare included in Item 15, and the Consolidated Financial Statements follow the signature page to this report and are incorporated herein by reference.
The quarterly results of operations are included herein in Note 1613 of Notes to the Consolidated Financial Statements in this report.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| Item 9A. | CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures:Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that the Company’s disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives andnot effective as of January 28, 2023, due to a material weakness in internal control over financial reporting, as discussed below under Management’s Report on Internal Control Over Financial Reporting.
Notwithstanding the endmaterial weakness described under Management’s Report on Internal Control Over Financial Reporting, our management has concluded that our consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position, results of operations and cash flows for each of the period covered by this annual report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit, under the Exchange Act, is recorded, processed, summarized, as appropriate, to allow timely decisions regarding required disclosure and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management including the principal executive officer and principal financial officer.periods presented herein.
Management’s Report on Internal Control Over Financial Reporting:Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d – 15(f) under the Exchange Act, as amended). Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on our evaluation under the framework in Internal Control-Integrated Framework (2013), our management concluded that our internal control over financial reporting was not effective as of January 30, 2021.28, 2023 because of the material weakness described below.
During the year ended January 28, 2023, the Company did not perform adequate independent reviews and maintain effective controls related to account analyses, account summaries and account reconciliations prepared in the areas of inventory and related inventory reserves, cost of sales and certain other accounts.
During 2023, we will improve the preparation and review of account reconciliations by developing specific procedures to monitor and evaluate key accounts. Additionally, we will provide additional training to our personnel to strengthen their GAAP knowledge and ability to identify potential errors in the underlying business processes. To address inventory valuation, we are in the process of (i) hiring and training additional experienced accounting resources, (ii) enhancing reporting capabilities, and (iii) continuing to review and assess all inventory-related internal controls. We are committed to remediating the material weakness and anticipate that the material weakness will be remediated by the end of 2023. We do not anticipate incurring substantial costs in connection with these remediation efforts.
25
Changes in Controls and Procedures: AsInternal Control Over Financial Reporting: Aside from the material weakness described above under Management’s Report on Internal Control Over Financial Reporting, as of January 30, 2021,28, 2023, there have been no changes in the Company’s internal controlscontrol over financial reporting that occurred during fiscal 20202022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controlscontrol over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
| Item 9B. | OTHER INFORMATION |
No events have occurred which would require disclosure under this Item 9B.
| Item 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
PART III
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 20212023 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 30, 2021,within 120 days after the fiscal year ended January 28, 2023, which information is incorporated by reference.
| Item 11. | EXECUTIVE COMPENSATION |
Information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 20212023 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 30, 2021,within 120 days after the fiscal year ended January 28, 2023, which information is incorporated by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
Certain information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 20212023 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 30, 2021,within 120 days after the fiscal year ended January 28, 2023, which information is incorporated by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 20212023 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 30, 2021,within 120 days after the fiscal year ended January 28, 2023, which information is incorporated by reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 20212023 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 30, 2021,within 120 days after the fiscal year ended January 28, 2023, which information is incorporated by reference.
PART IV
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
15(a) (1) Financial Statements
The Consolidated Financial Statements and Notes are listed in the Consolidated Financial Statements on page F-1 of this report.
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15(a) (2) Financial Statement Schedules
Consolidated Financial Statement Schedules not filed herein have been omitted as they are not applicable or the required information or equivalent information has been included in the Consolidated Financial Statements or the notes thereto.
15(a) (3) Exhibits
Exhibits are as set forth in the “ Index“Index to Exhibits” which follows the Notes to the Consolidated Financial Statements and immediately precedes the exhibits filed.
| Item 16. | Form 10-K Summary |
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KASPIEN HOLDINGS INC. | |
| Date: April | By: /s/ |
Principal Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date |
| April | ||
| Principal Executive Officer | ||
/s/ Edwin Sapienza | Chief Financial Officer | April |
| (Edwin Sapienza) | (Principal Financial and Chief Accounting Officer) | |
/s/ | ||
| Director | April | |
| (Mark Holliday) | ||
/s/ Jonathan Marcus | ||
| Director | April | |
/s/ Michael Reickert | ||
| Director | April 28, 2023 | |
| /s/ Tom Simpson | ||
| (Tom Simpson) | Director | April |
28
KASPIEN HOLDINGS INC.
Form 10-K Page No. | |
30 | |
| Consolidated Financial Statements | |
32 | |
33 | |
34 | |
35 | |
36 | |
To the Board of Directors and StockholdersShareholders of Kaspien Holdings, Inc. (f/k/a Trans World Entertainment Corporation)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Kaspien Holdings, Inc. and subsidiaries (“the Company”) as of January 30, 2021,28, 2023 and January 29, 2022, respectively, and the related consolidated statements of operations, comprehensive loss, shareholders’changes in stockholders’ equity (deficit), and cash flows for the fiscal yearyears ended January 30, 2021,28, 2023 and January 29, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021,28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the fiscal yearyears then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced negative cash flows from operations and expects continued losses into 2023. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of inventory costsInventory Costs and reserves
Reserves
Description of the Critical Audit Matter
As discussed in Note 1 to the financial statements, the Company periodically assess and estimates its allowances and reserves for stagnant, unfulfillable, or obsolete inventory based on current and anticipated demand, customer preference, or market conditions. AlsoAs also discussed in Note 1 to the financial statements, the cost of inventory includes certain costs associated with preparation of inventory for resale, including inbound freight and handling costs. The recognition and evaluation of inventory costs and reserves involves significant complexity and judgment in applying the relevant accounting standards when auditing management’s estimates and conclusions onwith regard to inventory transactions.balances.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management’s calculation of capitalized inventory costs and reserves included, among other procedures, the following:
| • | We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, and measurement of the inventory costs and reserves in considering applicable generally accepted accounting principles, including the completeness and accuracy of underlying data used in developing those assumptions. |
We tested the significant inputs, sampled underlying transactions, and analyzed historical trends and timing of receipts associated with management’s reserve estimates and recognition of inbound costs.costs and inventory in-transit.
We evaluated whether management had appropriately considered new information that could significantly change the measurement or disclosure of the inventory valuation, and evaluated the disclosures related to the financial statement impacts of thethose transactions.
/s/ Fruci & Associates II, PLLC
We have served as the Company’s auditor since 2020.
Spokane, Washington
April 30, 2021
28, 2023KASPIEN HOLDINGS INC. AND SUBSIDIARIES
(in thousands, except per share and share amounts)
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| ASSETS | ||||||||||||||||
| CURRENT ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | 1,809 | $ | 2,977 | $ | 1,130 | $ | 1,218 | ||||||||
| Restricted cash | 1,184 | 950 | 1,158 | 1,158 | ||||||||||||
| Accounts receivable | 2,718 | 4,139 | 1,169 | 2,335 | ||||||||||||
| Merchandise inventory | 24,515 | 17,836 | 26,704 | 29,277 | ||||||||||||
| Prepaid expenses and other current assets | 564 | 2,974 | 1,799 | 649 | ||||||||||||
| Assets held for discontinued operations | - | 51,189 | ||||||||||||||
| Total current assets | 30,790 | 80,065 | 31,960 | 34,637 | ||||||||||||
| Restricted cash | 3,562 | 4,925 | 1,338 | 2,447 | ||||||||||||
| Fixed assets, net | 2,268 | 2,190 | 1,999 | 2,335 | ||||||||||||
| Operating lease right-of-use assets | 2,742 | 3,311 | 1,505 | 2,144 | ||||||||||||
| Intangible assets, net | 732 | 1,760 | ||||||||||||||
| Cash surrender value | 3,856 | 3,353 | 3,371 | 4,154 | ||||||||||||
| Other assets | 1,342 | 2,202 | 566 | 965 | ||||||||||||
| TOTAL ASSETS | $ | 45,292 | $ | 97,806 | $ | 40,739 | $ | 46,682 | ||||||||
| LIABILITIES | ||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||
| Accounts payable | $ | 8,894 | $ | 14,447 | $ | 7,044 | $ | 6,271 | ||||||||
| Short-term borrowings | 6,339 | 13,149 | 8,812 | 9,966 | ||||||||||||
| Accrued expenses and other current liabilities | 2,512 | 3,521 | 2,876 | 2,362 | ||||||||||||
| Current portion of operating lease liabilities | 596 | 534 | 695 | 649 | ||||||||||||
| Current portion of PPP loan | 1,687 | - | ||||||||||||||
| Liabilities held for discontinued operations | - | 39,410 | ||||||||||||||
| Total current liabilities | 20,028 | 71,061 | 19,427 | 19,248 | ||||||||||||
| Operating lease liabilities | 2,258 | 2,204 | 1,019 | 1,608 | ||||||||||||
| PPP loan | 330 | - | ||||||||||||||
| Long-term debt | 5,000 | - | 9,790 | 4,356 | ||||||||||||
| Other long-term liabilities | 16,187 | 20,026 | 11,604 | 14,185 | ||||||||||||
| TOTAL LIABILITIES | 43,803 | 93,291 | 41,840 | 39,397 | ||||||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||||||
| Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) | - | - | ||||||||||||||
| Common stock ($0.01 par value; 200,000,000 shares authorized; 3,336,576 shares and 3,225,627 shares issued, respectively) | 33 | 32 | ||||||||||||||
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) | - | - | ||||||||||||||
Common stock ($0.01 par value; 200,000,000 shares authorized; 5,432,072 shares and 3,902,985 shares issued, respectively) | 54 | 39 | ||||||||||||||
| Additional paid-in capital | 346,495 | 345,102 | 214,029 | 359,220 | ||||||||||||
| Treasury stock at cost (1,410,378 shares and 1,409,316 shares, respectively) | (230,169 | ) | (230,169 | ) | ||||||||||||
| Accumulated other comprehensive loss | (2,007 | ) | (1,479 | ) | ||||||||||||
Treasury stock at cost (467,069 shares and 1,410,417 shares, respectively) | (76,132 | ) | (230,170 | ) | ||||||||||||
| Accumulated other comprehensive gain (loss) | 886 | (910 | ) | |||||||||||||
| Accumulated deficit | (112,863 | ) | (108,971 | ) | (139,938 | ) | (120,894 | ) | ||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 1,489 | 4,515 | ||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 45,292 | $ | 97,806 | ||||||||||||
| TOTAL SHAREHOLDERS’ EQUITY (DEFICIT) | (1,101 | ) | 7,285 | |||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | $ | 40,739 | $ | 46,682 | ||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
(in thousands, except per share amounts)
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| Net revenue | $ | 158,345 | $ | 133,216 | $ | 128,228 | $ | 143,713 | ||||||||
| Cost of sales | 142,041 | 122,365 | 103,838 | 110,940 | ||||||||||||
| Gross profit | 16,304 | 10,851 | 24,390 | 32,773 | ||||||||||||
| Selling, general and administrative expenses | 22,029 | 25,082 | 39,814 | 42,391 | ||||||||||||
| Asset impairment charge | - | 765 | ||||||||||||||
| Loss from continuing operations | (5,725 | ) | (14,996 | ) | (15,424 | ) | (9,618 | ) | ||||||||
| Interest (income) expense | 1,709 | (647 | ) | |||||||||||||
| Loss from continuing operations before income tax benefit | (7,434 | ) | (14,349 | ) | ||||||||||||
| Income tax (benefit) expense | (3,542 | ) | 44 | |||||||||||||
| Loss from continuing operations | (3,892 | ) | (14,393 | ) | ||||||||||||
| Loss from fye business, net of tax | - | (44,351 | ) | |||||||||||||
| Interest expense | 3,577 | 1,867 | ||||||||||||||
| Other income | - | (3,481 | ) | |||||||||||||
| Loss from operations before income tax | (19,001 | ) | (8,004 | ) | ||||||||||||
| Income tax expense | 43 | 27 | ||||||||||||||
| Net loss | $ | (3,892 | ) | $ | (58,744 | ) | $ | (19,044 | ) | $ | (8,031 | ) | ||||
| Basic and diluted loss per share | $ | (2.10 | ) | $ | (32.35 | ) | $ | (5.47 | ) | $ | (3.28 | ) | ||||
| Weighted average number of shares outstanding - basic and diluted | 1,849 | 1,816 | 3,482 | 2,448 | ||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
(in thousands)
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| Net loss | $ | (3,892 | ) | $ | (58,744 | ) | $ | (19,044 | ) | $ | (8,031 | ) | ||||
| Pension actuarial loss adjustment | (528 | ) | (744 | ) | ||||||||||||
| Pension actuarial gain adjustment | 1,796 | 1,097 | ||||||||||||||
| Comprehensive loss | $ | (4,420 | ) | $ | (59,488 | ) | $ | (17,248 | ) | $ | (6,934 | ) | ||||
See Accompanying Notes to Consolidated Financial Statements.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
(dollars and shares in thousands)
Common Shares | Treasury Shares | Common Stock | Additional Paid-in Capital | Treasury Stock At Cost | Accumulated Other Comprehensive Loss | Retained Earnings (Accumulated Deficit) | Shareholders’ Equity | Common Shares | Treasury Shares | Common Stock | Additional Paid-in Capital | Treasury Stock At Cost | Accumulated Other Comprehensive Gain (Loss) | Retained Earnings (Accumulated Deficit) | Shareholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of February 3, 2019 | 3,222 | (1,409 | ) | $ | 32 | $ | 344,826 | $ | (230,166 | ) | $ | (735 | ) | $ | (50,227 | ) | $ | 63,730 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 30, 2021 | 3,337 | (1,410 | ) | $ | 33 | $ | 346,495 | $ | (230,169 | ) | $ | (2,007 | ) | $ | (112,863 | ) | $ | 1,489 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | (58,744 | ) | (58,744 | ) | - | - | - | - | - | - | (8,031 | ) | (8,031 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Pension actuarial loss adjustment | - | - | - | - | - | (744 | ) | - | (744 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension actuarial gain adjustment | - | - | - | - | - | 1,097 | - | 1,097 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | 138 | - | 2 | - | (1 | ) | - | - | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued- Director grants | 9 | - | - | 184 | - | - | - | 184 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 2 | - | - | 51 | - | - | - | 51 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned compensation/restricted stock amortization | - | - | - | 263 | - | - | - | 263 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of expense | 417 | - | 4 | 12,227 | - | - | - | 12,231 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 29, 2022 | 3,903 | (1,410 | ) | $ | 39 | $ | 359,220 | $ | (230,170 | ) | $ | (910 | ) | $ | (120,894 | ) | $ | 7,285 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | (19,044 | ) | (19,044 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension actuarial gain adjustment | - | - | - | - | - | 1,796 | - | 1,796 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | 1,512 | 305 | 15 | (49,789 | ) | 49,774 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued- Director grants | 9 | - | - | 41 | - | - | - | 41 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants | - | - | - | 1,518 | - | - | - | 1,518 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned compensation/restricted stock amortization | - | - | - | 165 | - | - | - | 165 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted shares | 4 | - | - | 3 | (3 | ) | - | - | - | 8 | - | - | 1 | - | - | - | 1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned compensation/restricted stock amortization | - | - | - | 273 | - | - | - | 273 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of February 1, 2020 | 3,226 | (1,409 | ) | $ | 32 | $ | 345,102 | $ | (230,169 | ) | $ | (1,479 | ) | $ | (108,971 | ) | $ | 4,515 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | (3,892 | ) | (3,892 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension actuarial loss adjustment | - | - | - | - | - | (528 | ) | - | (528 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants | - | - | - | 836 | - | - | - | 836 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted shares | 4 | (1 | ) | - | (9 | ) | - | - | - | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued- Director grants | 6 | - | - | 243 | - | - | - | 243 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | 101 | - | 1 | - | - | - | - | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned compensation/restricted stock amortization | - | - | - | 323 | - | - | - | 323 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 30, 2021 | 3,337 | (1,410 | ) | $ | 33 | 346,495 | $ | (230,169 | ) | $ | (2,007 | ) | $ | (112,863 | ) | $ | 1,489 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of expense | - | 638 | - | (97,127 | ) | 104,264 | - | - | 7,137 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 28, 2023 | 5,432 | (467 | ) | $ | 54 | $ | 214,029 | $ | (76,132 | ) | $ | 886 | $ | (139,938 | ) | $ | (1,101 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
(in thousands)
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (3,892 | ) | $ | (58,744 | ) | $ | (19,044 | ) | $ | (8,031 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation of fixed assets | 1,111 | 3,330 | 1,234 | 1,364 | ||||||||||||
| Amortization of intangible assets | 1,028 | 1,143 | - | 732 | ||||||||||||
| Amortization of right-of-use asset | 569 | 6,990 | 639 | 598 | ||||||||||||
| Stock based compensation | 323 | 276 | 206 | 447 | ||||||||||||
| Write down of investment | - | 500 | ||||||||||||||
| Warrant proceeds amortization to interest | 232 | - | 1,028 | 232 | ||||||||||||
| Interest on long term debt | 542 | - | 1,215 | 722 | ||||||||||||
| Treasury stock received for payment of withholding tax on exercises of RSUs | - | (3 | ) | |||||||||||||
| Reversal of ASC 740 liability | (3,545 | ) | - | |||||||||||||
| Loss on disposal of fixed assets | - | 125 | ||||||||||||||
| Inventory net realizable value adjustment | - | 12,701 | ||||||||||||||
| Loss on impairment of long-lived assets | - | 23,983 | ||||||||||||||
Forgiveness of PPP loan | - | (1,963 | ) | |||||||||||||
| Change in cash surrender value | (503 | ) | (329 | ) | 783 | (298 | ) | |||||||||
| Changes in operating assets and liabilities that provide (use) cash: | ||||||||||||||||
| Accounts receivable | 1,423 | 1,182 | 581 | 382 | ||||||||||||
| Merchandise inventory | (6,679 | ) | 14,183 | 2,574 | (4,762 | ) | ||||||||||
| Prepaid expenses and other current assets | 2,761 | 1,931 | (565 | ) | (84 | ) | ||||||||||
| Other long-term assets | 571 | (913 | ) | 399 | 376 | |||||||||||
| Accounts payable | (5,458 | ) | (10,209 | ) | 774 | (2,622 | ) | |||||||||
| Accrued expenses and other current liabilities | (1,107 | ) | (1,888 | ) | 269 | (74 | ) | |||||||||
| Deferred revenue | - | (274 | ) | |||||||||||||
| Other long-term liabilities | (767 | ) | (9,811 | ) | (1,375 | ) | (1,553 | ) | ||||||||
| Net cash used in operating activities | (13,391 | ) | (15,827 | ) | (11,282 | ) | (14,534 | ) | ||||||||
| INVESTING ACTIVITIES: | ||||||||||||||||
| Purchases of fixed assets | (1,190 | ) | (2,823 | ) | (898 | ) | (1,431 | ) | ||||||||
| Proceeds from sale of fye business | 11,779 | - | ||||||||||||||
| Capital distributions from joint venture | - | 127 | ||||||||||||||
| Net cash provided by (used in) investing activities | 10,589 | (2,696 | ) | (898 | ) | (1,431 | ) | |||||||||
| FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from long term borrowings | 5,063 | - | ||||||||||||||
| Proceeds from PPP Loan | 2,018 | - | ||||||||||||||
| Issuance of director deferred shares and RSUs | 234 | - | ||||||||||||||
| Payments of (proceeds from) long term borrowings | 5,000 | (1,600 | ) | |||||||||||||
| Payments of (proceeds from) PPP Loan | - | (76 | ) | |||||||||||||
| Proceeds from short term borrowings | 6,339 | 35,851 | - | 9,966 | ||||||||||||
| Payments of short-term borrowings | (13,149 | ) | (22,702 | ) | (1,154 | ) | (6,339 | ) | ||||||||
Proceeds from stock offering | 7,137 | 12,231 | ||||||||||||||
Exercise of stock options | - | 51 | ||||||||||||||
| Net cash provided by financing activities | 505 | 13,149 | 10,983 | 14,233 | ||||||||||||
| Net decrease in cash, cash equivalents, and restricted cash | (2,297 | ) | (5,374 | ) | (1,197 | ) | (1,732 | ) | ||||||||
| Cash, cash equivalents, and restricted cash, beginning of year | 8,852 | 14,226 | 4,823 | 6,555 | ||||||||||||
| Cash, cash equivalents, and restricted cash, end of year | $ | 6,555 | $ | 8,852 | $ | 3,626 | $ | 4,823 | ||||||||
| Supplemental disclosures and non-cash investing and financing activities: | ||||||||||||||||
| Interest paid | $ | 463 | $ | 838 | $ | 772 | $ | 480 | ||||||||
| Warrants issued with debt | $ | 1,633 | $ | - | ||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
Index to Notes to Consolidated Financial Statements
Note Number and Description
| Note No. | Pages No | Pages No | ||
| 1. | Nature of Operations and Summary of Significant Accounting Policies | 33 | Nature of Operations and Summary of Significant Accounting Policies | 38 |
| 2. | Discontinued Operations | 37 | Recently Adopted and Issued Accounting Pronouncements | 43 |
| 3. | Sale of fye Business | 38 | Other Intangible Assets | 44 |
| 4. | Recently Adopted and Issued Accounting Pronouncements | 39 | Fixed Assets | 45 |
| 5. | Other Intangible Assets | 40 | Restricted Cash | 45 |
| 6. | Fixed Assets | 41 | Debt | 46 |
| 7. | Restricted Cash | 41 | Leases | 48 |
| 8. | Debt | 41 | Shareholders’ Equity | 48 |
| 9. | Leases | 42 | Benefit Plans | 49 |
| 10. | Shareholders’ Equity | 43 | Income Taxes | 54 |
| 11. | Benefit Plans | 43 | Related Party Transactions | 55 |
| 12. | Income Taxes | 46 | Commitments and Contingencies | 56 |
| 13. | Related Party Transactions | 48 | Quarterly Financial Information (Unaudited) | 58 |
| 14. | Commitments and Contingencies | 49 | ||
| 15. | Basic and Diluted Loss Per Share | 49 | ||
| 16. | Quarterly Financial Information (Unaudited) | 50 | ||
| 17. | Subsequent Events | 50 | ||
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations: Kaspien Holdings Inc. and subsidiaries (“the Company”) operates in a single reportable segment: Kaspien is a digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace.
Liquidity:The Company’s primary sources of liquidity are borrowing capacity under its revolving 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 operate and grow our business, including funding operating expenses and 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; and our ability to overcome the impact of the COVID-19 pandemic.activities. 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 consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company incurred net losses of $3.9$19.0 million and $58.8$8.0 million for the years ended January 30, 202128, 2023 and February 1, 2020,January 29, 2022, respectively, and has an accumulated deficit of $112.9$139.9 million as of January 30, 2021.
28, 2023.
28, 2023.
The Company experienced negative cash flows from operations during fiscal 20202022 and fiscal 20192021 and we expect to incur net losses in 2021.2023. As of January 30, 2021,28, 2023, we had cash and cash equivalents of $1.8$1.1 million, net working capital of $10.8$12.8 million, and outstanding borrowings of $6.3$8.8 million on our revolving credit facility, as further discussed below. This compares to $3.0$1.2 million in cash and cash equivalents and net working capital of $9.0$16.3 million and borrowings of $13.1$10.0 million on our revolving credit facility as of February 1, 2020.January 29, 2022.
On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (the(as subsequently amended, the “Loan Agreement”) with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLCLLC) (“Encina”Eclipse”), as administrative agent, under which the lenders party thereto committed to provide up to $25 million in loans under a three-year,four-year, secured revolving credit facility (the “ New Credit“Credit Facility”). Concurrent with the FYE Transaction, the Company borrowed $3.3 million under the New Credit Facility in order to satisfy the remaining obligations of the Company under the previous credit facility.
On March 30, 2020, the Company and Kaspien Inc. (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.
On April 7, 2021, the Loan Parties entered into Amendment No. 2 to the Loan Agreement (the “Second Amendment”. Pursuant to the Second Amendment, the In-Transit Inventory Sublimit (as defined in the Loan Agreement) was increased from $2,000,000 to $2,500,000.
On September 17, 2021, the Loan Parties entered into Amendment No. 3 to the Loan Agreement (the “Third Amendment”). Pursuant to the Third Amendment, among other things, (i) the maturity of the Credit Facility has been extended to February 20, 2024, and the early termination fees have been accordingly reset; (ii) the LIBOR floor has been reduced to 1.00%; (iii) up to $4,000,000 of acquisitions are now allowed without Eclipse’s consent, subject to satisfaction of various conditions, including the Company having a trailing twelve month fixed charge coverage ratio of 1.20x and Excess Availability greater than the greater of (x) 20% of the average Borrowing Base for each 30 day period immediately prior to, and pro forma for, the purchase and (y) $1,500,000.
On March 2, 2022, the Loan Parties entered into Amendment No. 4 to the Loan Agreement (the “Fourth Amendment”). Pursuant to the Fourth Amendment, among other things, the Credit Facility was amended to permit the incurrence of the Additional Subordinated Loan (as defined below) under the Subordinated Loan Agreement (as defined below).
The commitments by the lenders under the Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the Credit Facility may be used for the making of swing line loans.
As of January 28, 2023, the Company had borrowings of $8.8 million under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2022 were $12.0 million. As of January 28, 2023, the Company had no outstanding letters of credit. The Company had $3.6 million available for borrowing under the Credit Facility as of January 28, 2023.
Subordinated Debt Agreement and Amendment
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien withKaspien. Pursuant to an amendment to the Subordinated Loan Agreement, there is a scheduled maturity date of May 22, 2023.March 31, 2024. As of January 30, 2021,28, 2023, unamortized debt issuance costs of $0.2$0.1 million are included in “Long-Term Debt” on the consolidated balance sheet.
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 Subordinated Loan Agreement.
Amendment No. 2 to Subordinated Loan and Security Agreement
On March 2, 2022, the Loan Parties entered into that certain Amendment No. 2 to Subordinated Loan and Security Agreement (“Amendment No. 2”) with the “Lenders and the Collateral Agent. Pursuant to Amendment No. 2, among other things, Alimco Re Ltd. (the “Tranche B Lender”) made an additional $5,000,000 secured term loan (the “Additional Subordinated Loan”) with a scheduled maturity date of March 31, 2024, which is the same maturity date as the existing loans under the Subordinated Loan Agreement.
Interest on the Additional Subordinated Loan accrues, subject to certain terms and conditions under the Subordinated Loan Agreement, at the rate of 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.
The Additional Subordinated Loan is also secured by a second priority security interest in substantially all of the assets of the Loan Parties, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors under the Subordinated Loan Agreement. The Company will provide a limited guarantee of Kaspien’s obligations under the Additional Subordinated Loan.
Among other things, the Subordinated Loan Agreement limits the Loan Parties’ ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.
The Subordinated Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the borrowers and guarantors thereunder taken as a whole and the occurrence of an uninsured loss to a material portion of collateral.
The Loan Parties paid certain customary fees and expenses in connection with the Additional Subordinated Loan and Amendment No. 2.
Paycheck Protection Program
On April 17, 2020, Kaspien received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan, which was inOn June 15, 2021, the form of a promissory note (the “Note”Small Business Administration (“SBA”), dated April 10, 2020, between Kaspien and First Interstate Bank, as approved the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is payable in monthly installments of $112,976. While under the termsCompany’s application for forgiveness of the PPP some or allLoan. The amount of the PPP Loanforgiveness was $1.9 million in principal and interest, which was the amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as describedrequested in the CARES Actforgiveness application and was less than the Note, such as payroll costs, benefits, rent, and utilities, there is no assurance thatoriginal principal balance due. Following the Company will be successful in qualifying for and receivinggrant of forgiveness, on the PPP Loan amount. On August 20, 2020, the Company submitted an application for forgiveness to the SBA. On October 30, 2020, the Company received a follow up letter requesting additional information related to its forgiveness application. The Company submitted the requested information on November 9, 2020. On January 4, 2021, the Company received another request for additional information. The Company submitted the requested information on January 14,outstanding balance of $76,452 was paid during fiscal 2021. On April 14, 2021, the Company received another request for additional information. The Company submitted the requested information on April 26, 2021. As of April 30, the Company has not received a decision on its PPP Loan forgiveness request.
In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well continuing our efforts to generate additional sales and increase margins. If the Company is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely affected. Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional funds.
Basis of Presentation: The consolidated financial statements consist of Kaspien Holdings Inc., its wholly owned subsidiaries, Kaspien NY, LLC (f/k/a Trans World NY Sub, Inc. (f/k/a Record Town, Inc.) and its subsidiaries, and Kaspien Inc. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including those related to merchandise inventory; valuation of long-lived assets, income taxes, accounting, retirement plan obligation, and other long-term liabilities that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Items Affecting Comparability: The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 20202022 and fiscal 20192021 ended January 30, 202128, 2023 and February 1, 2020, respectively. Both fiscal yearsJanuary 29, 2022 were 52-week periods.
Concentration of Business Risks: The Company purchases various inventory from numerous suppliers and does not have material long-term purchase contracts; rather, it purchases products from its suppliers on an order-by-order basis. Historically, Kaspien has not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply. The Company had one partner that represented 20.4% of net revenue in fiscal 2022.
The Company generates substantially all its revenue through the Amazon Marketplace. Therefore, the Company depends in large part on its relationship with Amazon for its continued growth. In particular, the Company depends on its ability to offer products on the Amazon Marketplace and on its timely delivery of products to customers.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash: Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in Restricted Cash on the Company’s consolidated balance sheet.
Accounts Receivable: Accounts receivable are primarily comprised of receivables due from Amazon. Included in the balance is an allowance of $0.1$0.4 million for doubtful accounts.
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 market value is lower than cost. 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. As of January 30, 2021,28, 2023, the Company recorded an obsolescence reserve of $0.8$1.2 million. The cost of inventory also includes certain costs associated with the preparation of inventory for resale, including distribution center costs and freight. As of January 30, 2021,28, 2023, the Company had recorded capitalized freight of $1.3$1.6 million.
Fixed Assets and Depreciation: Fixed assets are recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method. The estimated useful lives are as follows:
| Fixtures and equipment | 7 years |
| Leasehold improvements | 7 years |
| Technology | 1-5 years |
Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs are expensed as incurred.
Long-Lived Assets: 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. For the purposes of the asset impairment test, Kaspien has one asset grouping, which is the same as the Kaspien reporting unit level.
Commitments and Contingencies: The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company. During the fourth quarter of fiscal 2019, the Company recognized a charge of $0.4 million related to litigation (see Note 14)12).
Revenue Recognition:We recognize revenue under ASC 606, “Revenue from Contracts with Customers,” the core principle of which is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue recognition principles, an entity is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue as the performance obligations are satisfied (i.e., either over time or at a point in time). ASC 606 further requires that companies disclose sufficient information to enable readers of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Retail Sales
Retail revenue is primarily related to the sale of goods to customers. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon shipment to the customer. Additionally, estimated sales returns are calculated based on expected returns.
Agency as a service
41
Cost of Sales: In addition to the cost of product, the Company includes in cost of sales those costs associated with purchasing, receiving, shipping, online marketplace fulfillment fees, and commissions, and inspecting and warehousing product. Cost of sales further includes the cost of obsolescence.
Selling, General and Administrative Expenses (SG&A): Included in SG&A expenses are commissions, payroll and related costs, professional fees, general operating and overhead expenses and depreciation and amortization charges. Selling, general and administrative expenses also include miscellaneous income and expense items, other than interest.
Lease Accounting:Operating lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company'sCompany’s incremental borrowing rates for its population of leases. Related operating ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by contributions from landlords, plus any prepaid rent and direct costs from executing the leases. ROU assets are tested for impairment in the same manner as long-lived assets. Lease terms include the non-cancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods, termination options and purchase options. Lease agreements with lease and non-lease components are combined as a single lease component for all classes of underlying assetasset.
Advertising Costs: Advertising and sales promotion costs are charged to operations, offset by direct vendor reimbursements, as incurred. Advertising costs primarily consist of Amazon marketing expenses which were $1.4$2.3 million and $0.9$2.2 million in fiscal 20202022 and fiscal 2019,2021, respectively.
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense (benefit) in the Consolidated Statements of Operations.
Comprehensive Loss:Comprehensive loss consists of net loss and a pension actuarial loss adjustment that is recognized in other comprehensive loss (see Note 9).
Stock-Based Compensation: Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The Company measures stock-based compensation cost at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis (net of estimated forfeitures) over the option’s requisite service period. The Company recognizes compensation expense based on estimated grant date fair value using the Black‑Scholes option‑pricing model. Tax benefits, if any, resulting from tax deductions in excess of the compensation cost recognized for those options are to be classified and reported as both an operating cash outflow and financing cash inflow.
Loss Per Share: Basic and diluted loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. During fiscal 20202022 and fiscal 2019,2021, the impact of all outstanding stock awards was not considered because the Company reported a net loss, and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share for fiscal 20202022 and fiscal 20192021 was the same. Total anti-dilutive stock awards for each of fiscal 20202022 and fiscal 20192021 were approximately were 130,000124,000 and 100,000,86,000, respectively.
Fair Value of Financial Instruments: Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying value of life insurance policies included in other assets approximates fair value based on estimates received from insurance companies and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards. The Company had no Level 3 financial assets or liabilities as of January 30, 202128, 2023 or as of February 1, 2020.January 29, 2022.
Segment Information:
| Fifty-two Weeks Ended | ||||||||
| (In thousands) | January 30, 2021 | February 1, 2020 | ||||||
| Net revenue | $ | — | $ | 192,719 | ||||
| Cost of goods sold | — | 127,013 | ||||||
| Selling, general and administrative expenses | — | 84,667 | ||||||
| Impairment of long-lived assets | — | 23,218 | ||||||
| Interest expense | — | 1,531 | ||||||
| Other expense | — | 364 | ||||||
| Loss from discontinued operations before income taxes | — | (44,074 | ) | |||||
| Income tax expense | — | 277 | ||||||
| Loss from discontinued operations, net of tax | $ | — | $ | (44,351 | ) | |||
| (In thousands) | January 30, 2021 | February 1, 2020 | ||||||
| Cash | $ | — | $ | — | ||||
| Accounts receivable, net | — | 62 | ||||||
| Inventories | — | 50,122 | ||||||
| Other current assets | — | 1,005 | ||||||
| Property, plant and equipment, net | — | — | ||||||
| Operating lease right-to-use asset | — | — | ||||||
| Other assets | — | — | ||||||
| Total assets of discontinued operations | $ | — | $ | 51,189 | ||||
| Accounts payable | $ | — | $ | 9,769 | ||||
| Accrued liabilities | — | 779 | ||||||
| Deferred revenue | — | 6,764 | ||||||
| Current portion of lease liabilities | — | 8,976 | ||||||
| Operating lease liabilities | — | 11,059 | ||||||
| Other liabilities | — | 2,063 | ||||||
| Total liabilities of discontinued operations | $ | — | $ | 39,410 | ||||
| Fifty-two Weeks Ended | ||||||||
| (In thousands) | January 30, 2021 | February 1, 2020 | ||||||
| Net cash used in operating activities | $ | — | $ | (12,849 | ) | |||
| Net cash used in investing activities | — | (1,171 | ) | |||||
| Depreciation and amortization | — | 2,674 | ||||||
| Purchases of fixed assets | — | 1,171 | ||||||
| Assets sold | ||||
| Inventory | $ | 50,122 | ||
| Accounts receivable | 62 | |||
| Other current assets | 1,005 | |||
| fye business assets sold | $ | 51,189 | ||
| Less liabilities assumed: | ||||
| Accounts payable | (9,769 | ) | ||
| Deferred revenue | (6,764 | ) | ||
| Accrued expenses and other current liabilities | (779 | ) | ||
| Other long-term liabilities | (2,063 | ) | ||
| Operating lease liabilities | (20,035 | ) | ||
| fye business liabilities assumed | $ | 39,410 | ||
| Net proceeds | $ | 11,779 | ||
Note 4.2. Recently Adopted and Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost. The model replaces the probable, incurred loss model for those assets and instead, broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost. This standard will be effective for smaller reporting companies for fiscal years beginning after December 15, 2022, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides, among other things, guidance that modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; modifications of contracts within the scope of Topic 840, Leases, should be accounted for as a continuation of the existing contract; and, changes in the critical terms of hedging relationships, caused by reference rate reform, should not result in the de-designation of the instrument, provided certain criteria are met. The Company’s exposure to LIBOR rates includes its credit facility. The amendments are effective as of March 12, 2020 through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating theOur adoption of ASU 2020-04 did not have a material impact this update will have on its Condensed Consolidated Financial Statements.our consolidated financial statements and related disclosures.
Recent accounting pronouncements pending adoption not discussed above are either not applicable or are not expected to have a material impact on our consolidated financial condition, results of operations, or cash flows.
Note 5.3. Other Intangible Assets
| (amounts in thousands) | January 30, 2021 | |||||||||||||||||||
Weighted Average Amortization Period (in months) | Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | ||||||||||||||||
| Technology | 60 | 6,700 | 3,854 | 2,587 | 259 | |||||||||||||||
| Trade names and trademarks | 60 | 3,200 | 2,727 | - | 473 | |||||||||||||||
| $ | 9,900 | $ | 6,581 | $ | 2,587 | $ | 732 | |||||||||||||
The changes in net intangibles from February 1, 2020January 30, 2021 to January 30, 202129, 2022 were as follows:
| (amounts in thousands) | February 1, 2020 | Amortization | January 30, 2021 | January 30, 2021 | Amortization | January 29, 2022 | ||||||||||||||||||
| Amortized intangible assets: | ||||||||||||||||||||||||
| Technology | 647 | 388 | 259 | $ | 259 | $ | 259 | $ | - | |||||||||||||||
| Trade names and trademarks | 1,113 | 640 | 473 | 473 | 473 | - | ||||||||||||||||||
| Net amortized intangible assets | $ | 1,760 | $ | 1,028 | $ | 732 | $ | 732 | $ | 732 | $ | - | ||||||||||||
| (amounts in thousands) | February 2, 2019 | Amortization | Impairment | February 1, 2020 | ||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Vendor relationships | $ | 880 | $ | 115 | $ | 765 | $ | - | ||||||||
| Technology | 1,035 | 388 | - | 647 | ||||||||||||
| Trade names and trademarks | 1,753 | 640 | - | 1,113 | ||||||||||||
| Net amortized intangible assets | $ | 3,668 | $ | 1,143 | $ | 765 | $ | 1,760 | ||||||||
Note 6.4. Fixed Assets
Fixed assets consist of the following:
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Capitalized software | $ | 3,721 | $ | 2,388 | $ | 5,576 | $ | 4,601 | ||||||||
| Fixtures and equipment | 395 | 538 | 838 | 946 | ||||||||||||
| Leasehold improvements | 45 | 45 | 45 | 45 | ||||||||||||
| Total fixed assets | 4,161 | 2,971 | 6,459 | 5,592 | ||||||||||||
| Allowances for depreciation and amortization | (1,893 | ) | (781 | ) | (4,460 | ) | (3,257 | ) | ||||||||
| Fixed assets, net | $ | 2,268 | $ | 2,190 | $ | 1,999 | $ | 2,335 | ||||||||
Depreciation expense included in fiscal 20202022 and fiscal 20192021 SG&A expenses within the Consolidated Statements of Operations were $1.1$1.2 million and $1.8$1.4 million, respectively.
Note 7.5. Restricted Cash
As of January 30, 202128, 2023 and February 1, 2020,January 29, 2022, the Company had restricted cash of $4.7$3.6 million and $5.9$4.8 million, respectively.
Restricted cash balance at the end of fiscal 20202022 consisted of a $4.7$2.5 million rabbi trust that resulted from the death of the Company’s former Chairman, of which $1.2 million was classified as restricted cash in current assets and $3.5$1.3 million was classified as restricted cash as a long-term asset.
Restricted cash balance at the end of fiscal 20192021 consisted of a $5.9$3.6 million rabbi trust, that resulted from the death of the Company’s former Chairman, of which $1.0$1.2 million was classified as restricted cash in current assets and $4.9$2.4 million was classified as restricted cash as a long-term asset.
A summary of cash, cash equivalents and restricted cash is as follows (amounts in thousands):
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| Cash and cash equivalents | $ | 1,809 | $ | 2,977 | $ | 1,130 | $ | 1,218 | ||||||||
| Restricted cash | 4,746 | 5,875 | 2,496 | 3,605 | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 6,555 | $ | 8,852 | $ | 3,626 | $ | 4,823 | ||||||||
Note 8.6. Debt
On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (the(as subsequently amended, the “Loan Agreement”) with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLCLLC) (“Encina”Eclipse”), as administrative agent, under which the lenders party thereto committed to provide up to $25 million in loans under a three-year,four-year, secured revolving credit facility (the “New Credit“Credit Facility”). Concurrent with the FYE Transaction, the Company borrowed $3.3 million under the New Credit Facility in order to satisfy the remaining obligations of the Company under its previous credit facility.
On March 30, 2020, the Company and Kaspien Inc. (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.
On April 7, 2021, the Loan Parties entered into Amendment No. 2 to the Loan Agreement (the “Second Amendment”. Pursuant to the Second Amendment, the In-Transit Inventory Sublimit (as defined in the Loan Agreement) was increased from $2,000,000 to $2,500,000.
On September 17, 2021, the Loan Parties entered into Amendment No. 3 to the Loan Agreement (the “Third Amendment”). Pursuant to the Third Amendment, among other things, (i) the maturity of the Credit Facility has been extended to February 20, 2024, and the early termination fees have been accordingly reset; (ii) the LIBOR floor has been reduced to 1.00%; (iii) up to $4,000,000 of acquisitions are now allowed without Eclipse’s consent, subject to satisfaction of various conditions, including the Company having a trailing twelve month fixed charge coverage ratio of 1.20x and Excess Availability greater than the greater of (x) 20% of the average Borrowing Base for each 30 day period immediately prior to, and pro forma for, the purchase and (y) $1,500,000.
On March 2, 2022, the Loan Parties entered into Amendment No. 4 to the Loan Agreement (the “Fourth Amendment”). Pursuant to the Fourth Amendment, among other things, the Credit Facility was amended to permit the incurrence of the Additional Subordinated Loan (as defined below) under the Subordinated Loan Agreement (as defined below).
The commitments by the lenders under the Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the Credit Facility may be used for the making of swing line loans.
As of January 28, 2023, the Company had borrowings of $8.8 million under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2022 were $12.0 million. As of January 28, 2023, the Company had no outstanding letters of credit. The Company had $3.6 million available for borrowing under the Credit Facility as of January 28, 2023.
Subordinated Debt Agreement and Amendment
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien withKaspien. Pursuant to an amendment to the Subordinated Loan Agreement, there is a scheduled maturity date of May 22, 2023.March 31, 2024. As of January 30, 2021,28, 2023, unamortized debt issuance costs of $0.2$0.1 million are included in “Long-term“Long-Term Debt” on the unaudited condensed consolidated balance sheet.
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 Subordinated Loan Agreement.
In conjunction with the Subordinated LoanDebt Agreement, the Company issued warrants to purchase up to 244,532 shares of Common Stock to the Related Party Entities (127,208 shares for Alimco, 23,401 shares for Kick-Start, and 93,923 shares for RJHDC), subject to adjustment in accordance with the terms of the Warrants, at an aggregate grant date fairexercise price of $0.01 per share. As of January 28, 2023, 5,126 warrants remain outstanding. The value of the warrants of $0.8 million recorded as a discount towas allocated against the principal proceeds of the Subordinated LoanDebt Agreement, $0.6$0.2 million of which was unamortized as of January 30, 2021.28, 2023.
Amendment No. 2 to Subordinated Loan and Security Agreement
On March 2, 2022, the Loan Parties entered into that certain Amendment No. 2 to Subordinated Loan and Security Agreement (“Amendment No. 2”) the “Lenders and Collateral Agent. Pursuant to Amendment No. 2, among other things, Alimco Re Ltd. (the “Tranche B Lender”) made an additional $5,000,000 secured term loan (the “Additional Subordinated Loan”) with a scheduled maturity date of March 31, 2024, which is the same maturity date as the existing loans under the Subordinated Loan Agreement.
Interest on the Additional Subordinated Loan accrues, subject to certain terms and conditions under the Subordinated Loan Agreement, at the rate of 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.
The Additional Subordinated Loan is also secured by a second priority security interest in substantially all of the assets of the Loan Parties, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors under the Subordinated Loan Agreement. The Company will provide a limited guarantee of Kaspien’s obligations under the Additional Subordinated Loan.
Among other things, the Subordinated Loan Agreement limits the Loan Parties’ ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.
The Subordinated Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the borrowers and guarantors thereunder taken as a whole and the occurrence of an uninsured loss to a material portion of collateral.
In conjunction with the Subordinated Debt Agreement, the Company issued warrants to purchase up to warrants to purchase up to 320,000 shares of common stock of the Company (subject to adjustment in accordance with the terms of the Warrants, the “Warrant Shares”) at an exercise price of $0.01 per share. The Warrants are exercisable during the period commencing on March 2, 2022 and ending on the earlier of (a) 5:00 p.m. Eastern Standard Time on the five (5)-year anniversary thereof, or if such day is not a business day on the next succeeding business day, or (b) the occurrence of certain consolidations, mergers or similar extraordinary events involving the Company. As of January 28, 2023, all of the warrants remain outstanding. The value of the warrants of $1.6 million was allocated against the principal proceeds of the Subordinated Debt Agreement, of which $1.0 million was unamortized as of January 28, 2023. The value of the warrants was recognized as a discount based on the relative fair value of the consideration received, as an offset to APIC, which will be amortized over the life of the loan.
Paycheck Protection Program
On April 17, 2020, Kaspien received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan, which was inOn June 15, 2021, the form of a promissory note (the “Note”Small Business Administration (“SBA”), dated April 10, 2020, between Kaspien and First Interstate Bank, as approved the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is payable in monthly installments of $112,976. While under the termsCompany’s application for forgiveness of the PPP some or allLoan. The amount of the PPP Loanforgiveness was $1.9 million in principal and interest, which was the amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as describedrequested in the CARES Actforgiveness application and was less than the Note, such as payroll costs, benefits, rent, and utilities, there is no assurance thatoriginal principal balance due of $2.0 million. Following the Company will be successful in qualifying for and receivinggrant of forgiveness, on the PPP Loan amount. On August 20, 2020, the Company submitted an application for forgiveness to the SBA. On October 30, 2020, the Company received a follow up letter requesting additional information related to its forgiveness application. The Company submitted the requested information on November 9, 2020. On January 4, 2021, the Company received another request for additional information. The Company submitted the requested information on January 14,outstanding balance of $76,452 was paid during fiscal 2021. On April 14, 2021, the Company received another request for additional information. The Company submitted the requested information on April 26, 2021. As of April 30, the Company has not received a decision on its PPP Loan forgiveness request.
Note 9.7. Leases
The Company currently leases its administrative offices and distribution center. During fiscal 20202022 and fiscal 2019,2021, the Company recorded net lease costs of $0.8 million, and did not record any contingent rentals.
As of January 30, 2021,28, 2023, the maturity of lease liabilities is as follows:
| Operating Leases | Operating Leases | |||||||
| (amounts in thousands) | ||||||||
| 2021 | 726 | |||||||
| 2022 | 748 | |||||||
| 2023 | 767 | $ | 767 | |||||
| 2024 | 652 | 652 | ||||||
| 2025 | 296 | 441 | ||||||
| Thereafter | - | - | ||||||
| Total lease payments | 3,189 | 1,860 | ||||||
| Less: amounts representing interest | (335 | ) | (146 | ) | ||||
| Present value of lease liabilities | $ | 2,854 | $ | 1,714 | ||||
Lease term and discount rate are as follows:
| As of January | |||||
| Weighted-average remaining lease term (years) | |||||
| Operating leases | |||||
| Weighted-average discount rate Operating leases | 5 | % | |||
Other information:
| Fiscal 2020 | Fiscal 2022 | |||||||
| (amounts in thousands) | ||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | 695 | $ | 603 | ||||
Future minimum rental payments required under the remaining leases for the administrative office and distribution center in Spokane, Washington as of January 30, 2021,28, 2023, are as follows (amounts in thousands):
| (amounts in thousands) | Operating Leases | Operating Leases | ||||||
| 2021 | $ | 726 | ||||||
| 2022 | 748 | |||||||
| 2023 | 767 | $ | 767 | |||||
| 2024 | 652 | 652 | ||||||
| 2025 | 296 | 441 | ||||||
| Thereafter | - | - | ||||||
| Total minimum lease payments | $ | 3,189 | $ | 1,860 | ||||
Note 10.8. Shareholders’ Equity
The Company classifies repurchased shares as treasury stock on the Company’s Consolidated Balance Sheet. There were no treasury stock repurchases during fiscal 20202022 and fiscal 2019.2021.
During fiscal 2020, 9,9492022 and fiscal 2021, 16,750 and 9,000 shares were issued to Directors and employees. Of the shares issued, 1,062 were returnedemployees, respectively. During fiscal 2021, 138,418 warrants related to the company to satisfy withholding requirementsSubordinated Loan and retired to treasury shares. During fiscal 2020, 100,988 warrantsSecurity Agreement were exercised for proceeds of $1,010.
$1,384.
$1,384.
On August 15, 2019, we completedMarch 18, 2021, the Company closed an underwritten offering of 416,600 shares of common stock of the Company, at a 1-for-20 reverseprice 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.
On July 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 split(the “Common Stock”) or pre-funded warrants, with each pre-funded warrant exercisable for one share of our outstandingCommon 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. As a resultEach share of this stock split, our issued and outstanding Common Stock decreased from 36,291,620 to 1,814,581 shares. Accordingly, all share and accompanying Investor Warrant was sold together at a combined offering price of $3.30 per share.
As of January 28, 2023, the Pre-Funded Warrants were exercised in full.
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.
On July 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”).
Net proceeds from the Private Placement and the Offering, after deducting placement agent fees and other estimated offering expenses payable by the Company of $0.9 million, were approximately $7.1 million. The Company used the net proceeds for working capital and other general corporate purposes.
The following table summarizes information contained in this report has been restatedwith respect to retroactively showoutstanding warrants to purchase common stock of the effectCompany, all of this stock split.which were exercisable, as of January 23, 2023:
| Exercise | Number | |||||
| Price | Outstanding | |||||
| $ | 0.01 | 325,126 | ||||
| $ | 3.13 | 2,457,160 | ||||
| 2,782,286 | ||||||
The following table summarizes the warrant activity:
Number of Shares Subject To Warrant | Warrant Exercise Price Range Per Share | Weighted Average Exercise Price | ||||||||||
| Balance January 30, 2021 | 143,544 | $ | 0.01 | $ | 0.01 | |||||||
| Granted | - | $ | - | - | ||||||||
| Exercised | (138,418 | ) | $ | 0.01 | 0.01 | |||||||
| Balance January 29, 2022 | 5,126 | $ | 0.01 | $ | 0.01 | |||||||
| Granted | 5,133,400 | $ | 0.01-$3.30 | 3.00 | ||||||||
| Exercised | (2,356,240 | ) | $ | 3.13-$3.30 | 3.26 | |||||||
| Balance January 28, 2023 | 2,782,286 | $ | 0.01-$3.13 | $ | 2.77 | |||||||
No cash dividends were paid in fiscal 20202022 and fiscal 2019.
2021.
2021.
Note 11.9. Benefit Plans
401(k) Savings Plan
Kaspien offers a 401(k) plan, the Kaspien Inc. 401(K) Plan, which permits participants to contribute up to the maximum allowable by IRS regulations. The Company matches 100% of the first 6% of employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of three years of service. All participant forfeitures of non-vested benefits are used to reduce the Company’s contributions or fees in future years.
Total expense related to the matching contributions was approximately $266,000$342,000 and $303,000$324,000 in fiscal 20202022 and fiscal 2019,2021, respectively.
Stock Award Plans
As of January 30, 2021,28, 2023, there was approximately $0.4$0.2 million of unrecognized compensation cost related to stock option awards expected to be recognized as expense over a weighted average period of 3.5 years. The FYE Transaction in February 2020 constituted a change2.9 years and $0.3 million of control and vesting on all unvested options was accelerated. As a result, unrecognized compensation cost related to restricted share awards expected to be recognized as expense over a weighted average period of $0.2 million was recognized in fiscal 2020.1.5 years. Total compensation expense related to stock awards recognized in fiscal 20202022 was $0.3$0.2 million. Total compensation expense related to stock awards recognized in fiscal 2021 was $0.4 million.
The Company has outstanding awards under threefour employee stock award plans, the 2005 Long Term Incentive and Share Award Plan, the Amended and Restated 2005 Long Term Incentive and Share Award Plan, (the “Old Plans”); and the 2005 Long Term Incentive and Share Award Plan (as amended and restated April 5, 2017 (the“Old Plans”); and Kaspien Holdings Inc. 2005 Long Term Incentive and Share Award Plan (as amended and restated on August 2, 2022) (the “New Plan”). Collectively, these plans are referred to herein as the Stock Award Plans. The Company no longer issues stock options under the Old Plans.
Equity awards authorized for issuance under the New Plan total 250,000.500,000. As of January 30, 2021,28, 2023, of the awards authorized for issuance under the Stock Award Plans, approximately 133,356143,142 were granted and are outstanding, 45,02526,696 of which were vested and exercisable. Shares available for future grants of options and other share-based awards under the New Plan as of January 30, 202128, 2023 were 145,419.443,000.
The fair values of the options granted have been estimated at the date of grant using the Black - Scholes option pricing model with the following assumptions:
| 2020 | 2019 | 2022 | 2021 | |||||||||||||
| Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Expected stock price volatility | 88.0-105.5 | % | 63.7-70.1 | % | 98.6%-140.2 | % | 100.6%-115.6 | % | ||||||||
| Risk-free interest rate | 0.28%-0.56 | % | 1.35%-1.62 | % | 2.73-4.36 | % | 1.29%-1.46 | % | ||||||||
| Expected award life ( in years) | 4.93-7.12 | 5.64-6.98 | ||||||||||||||
| Expected award life (in years) | 4.93-7.12 | 4.93-6.98 | ||||||||||||||
| Weighted average fair value per share of awards granted during the year | $ | 5.81 | $ | 4.46 | $ | 2.09 | $ | 20.58 | ||||||||
The following table summarizes stock option activity under the Stock Award Plans:
| Employee and Director Stock Award Plans | Employee and Director Stock Award Plans | |||||||||||||||||||||||||||||||||||||||
Number of Shares Subject To Option | Stock Award Exercise Price Range Per Share | Weighted Average Exercise Price | Other Share Awards (1) | Weighted Average Grant Fair Value/ Exercise Price | Number of Shares Subject To Option | Stock Award Exercise Price Range Per Share | Weighted Average Exercise Price | Other Share Awards (1) | Weighted Average Grant Fair Value/ Exercise Price | |||||||||||||||||||||||||||||||
| Balance February 2, 2019 | 138,921 | $ | 19.60-$97.40 | $ | 55.00 | 13,571 | $ | 33.60 | ||||||||||||||||||||||||||||||||
Balance January 30, 2021 | 133,356 | $ | 3.51-$97.40 | $ | 20.41 | - | $ | - | ||||||||||||||||||||||||||||||||
| Granted | 5,750 | $ | 3.51-$5.40 | 3.76 | - | - | 6,637 | $ | 20.41-$32.54 | 25.69 | 111,500 | 16.09 | ||||||||||||||||||||||||||||
| Cancelled/Forfeited | (15,475 | ) | $ | 34.60-$95.40 | 57.68 | - | - | (51,625 | ) | $ | 7.12-$36.00 | 33.36 | (12,500 | ) | (18.07 | ) | ||||||||||||||||||||||||
| Exercised | - | - | - | (3,626 | ) | 5.66 | (2,403 | ) | $ | 7.12 | 7.12 | (9,000 | ) | (20.41 | ) | |||||||||||||||||||||||||
| Balance February 1, 2020 | 129,196 | $ | 3.51-$97.40 | $ | 52.11 | 9,945 | $ | 36.75 | ||||||||||||||||||||||||||||||||
Balance January 29, 2022 | 85,965 | $ | 3.51-$97.40 | $ | 13.41 | 90,000 | $ | 15.39 | ||||||||||||||||||||||||||||||||
| Granted | 98,898 | $ | 3.68 -$10.75 | 7.36 | - | - | 82,500 | $ | 0.85-$6.55 | 2.09 | 9,000 | 4.59 | ||||||||||||||||||||||||||||
| Cancelled/Forfeited | (94,738 | ) | $ | 7.12 -$97.40 | 51.84 | - | - | (44,823 | ) | $ | 0.85-$50.60 | 10.47 | (62,750 | ) | (14.11 | ) | ||||||||||||||||||||||||
| Exercised | - | - | - | (9,945 | ) | (36.75 | ) | - | $ | - | - | (16,750 | ) | (10.92 | ) | |||||||||||||||||||||||||
| Balance January 30, 2021 | 133,356 | $ | 3.51-$97.40 | $ | 20.41 | - | $ | - | ||||||||||||||||||||||||||||||||
Balance January 28, 2023 | 123,642 | $ | 0.85-$97.40 | $ | 6.00 | 19,500 | $ | 18.35 | ||||||||||||||||||||||||||||||||
(1) Other Share Awards include deferred shares granted to executives and directors.
As of January 30, 2021,28, 2023, the aggregate intrinsic value of all outstanding and vested awards based on the Company’s closing common stock price of $38.56$0.87 as of January 30, 202128, 2023 was $3.3 million$1,065 and $0.4 million,$0, respectively. The aggregate intrinsic value represents the value which would have been received by the award holders had all award holders under the Stock Award Plans exercised their awards as of that date.
Defined Benefit Plans
The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain Executive Officers of the Company. The SERP, which is unfunded, provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. The annual benefit amount is based on salary and bonus at the time of retirement and number of years of service.
For each of fiscal 20202022 and 2019,2021, net periodic benefit cost recognized under both plansthe SERP totaled approximately $0.3$0.4 million and $0.6$0.3 million, respectively. The accrued pension liability for both plans was approximately $17.4$12.8 million and $17.5$15.3 million as of January 30, 202128, 2023 and February 1, 2020,January 29, 2022, respectively, and is recorded within other long-term liabilities on the Consolidated Balance Sheets. The accumulated benefit obligation for both plans was $17.4$14.8 million and $17.7$15.4 million as of the fiscal years ended January 30, 202128, 2023 and February 1, 2020,January 29, 2022, respectively.
The following is a summary of the Company’s defined benefit pension plans as of each fiscal year-end:
Obligation and Funded Status:
| (amounts in thousands) | January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | ||||||||||||
| Change in Projected Benefit Obligation: | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 17,673 | $ | 17,476 | $ | 15,343 | $ | 17,371 | ||||||||
| Service cost | - | 55 | - | - | ||||||||||||
| Interest cost | 355 | 568 | 556 | 252 | ||||||||||||
| Actuarial loss | 535 | 773 | ||||||||||||||
| Actuarial gain | (1,996 | ) | (1,096 | ) | ||||||||||||
| Benefits paid | (1,192 | ) | (1,199 | ) | (1,150 | ) | (1,184 | ) | ||||||||
| Benefit obligation at end of year | $ | 17,371 | $ | 17,673 | $ | 12,753 | $ | 15,343 | ||||||||
| Fair value of plan assets at end of year | $ | - | $ | - | $ | - | $ | - | ||||||||
| Funded status | $ | (17,371 | ) | $ | (17,673 | ) | $ | (12,753 | ) | $ | (15,343 | ) | ||||
| Unrecognized net actuarial loss | 1,077 | 529 | (2,015 | ) | (19 | ) | ||||||||||
| Accrued benefit cost | $ | (16,294 | ) | $ | (17,144 | ) | $ | (14,768 | ) | $ | (15,362 | ) | ||||
Amounts recognized in the Consolidated Balance Sheets consist of:
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Current liability | $ | (1,184 | ) | $ | (1,199 | ) | $ | (1,158 | ) | $ | (1,158 | ) | ||||
| Long term liability | (16,722 | ) | (17,247 | ) | (11,604 | ) | (14,185 | ) | ||||||||
| Accumulated other comprehensive loss | 535 | 773 | (2,006 | ) | (12 | ) | ||||||||||
| Net amount recognized | $ | (17,371 | ) | $ | (17,673 | ) | $ | (14,768 | ) | $ | (15,355 | ) | ||||
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss:
Net Periodic Benefit Cost:
| Fiscal Year | Fiscal Year | |||||||||||||||
| 2020 | 2019 | 2022 | 2021 | |||||||||||||
| Service cost | $ | - | $ | 55 | $ | - | $ | - | ||||||||
| Interest cost | 355 | 568 | 556 | 252 | ||||||||||||
| Amortization of actuarial net gain | - | (20 | ) | - | - | |||||||||||
| Net periodic benefit cost | $ | 355 | $ | 603 | $ | 556 | $ | 252 | ||||||||
Other Changes in Benefit Obligations Recognized in Other Comprehensive Loss:
| 2020 | 2019 | 2022 | 2021 | |||||||||||||
| Net prior service cost recognized as a component of net periodic benefit cost | $ | - | $ | - | $ | - | $ | - | ||||||||
| Net actuarial loss arising during the period | 528 | 744 | ||||||||||||||
| Net actuarial (gain) loss arising during the period | (1,796 | ) | (1,097 | ) | ||||||||||||
| 528 | 744 | (1,796 | ) | (1,097 | ) | |||||||||||
| Income tax effect | - | - | - | - | ||||||||||||
| Total recognized in other comprehensive loss | $ | 528 | $ | 744 | $ | (1,796 | ) | $ | (1,097 | ) | ||||||
| Total recognized in net periodic benefit cost and other comprehensive loss | $ | 883 | $ | 1,341 | $ | (1,240 | ) | $ | (844 | ) | ||||||
| (amounts in thousands) | January 28, | January 29, | ||||||
| 2023 | 2022 | |||||||
| Net unrecognized actuarial loss | $ | (1,796 | ) | $ | (1,097 | ) | ||
| Other actuarial adjustments | (190 | ) | 907 | |||||
| Accumulated other comprehensive loss | $ | (1,986 | ) | $ | (190 | ) | ||
| Tax expense | 1,100 | 1,100 | ||||||
| Accumulated other comprehensive loss | $ | (886 | ) | $ | 910 | |||
The pre-tax components of accumulated other comprehensive loss, which have not yet been recognized as components of net periodic benefit cost as of January 30, 202128, 2023 and February 1, 2020January 29, 2022 and the tax effect are summarized below.
| (amounts in thousands) | January 30, | February 1, | ||||||
| 2021 | 2020 | |||||||
| Net unrecognized actuarial loss | $ | 528 | $ | 744 | ||||
| Other actuarial adjustments | 379 | (365 | ) | |||||
| Accumulated other comprehensive loss | $ | 907 | $ | 379 | ||||
| Tax expense | 1,100 | 1,100 | ||||||
| Accumulated other comprehensive loss | $ | 2,007 | $ | 1,479 | ||||
| 2022 | 2021 | |||||||
| Weighted-average assumptions used to determine benefit obligation: | ||||||||
| Discount rate | 4.40 | % | 2.58 | % | ||||
| Salary increase rate | 0.00 | % | 0.00 | % | ||||
| Measurement date | Jan 31, 2023 | Jan 31, 2022 | ||||||
| Fiscal Year | Fiscal Year | |||||||||||||||
| 2020 | 2019 | 2022 | 2021 | |||||||||||||
| Weighted-average assumptions used to determine benefit obligation: | ||||||||||||||||
| Weighted-average assumptions used to determine net periodic benefit cost: | ||||||||||||||||
| Discount rate | 1.94 | % | 2.31 | % | 4.40 | % | 2.58 | % | ||||||||
| Salary increase rate | 0.00 | % | 0.00 | % | N/A | N/A | ||||||||||
| Measurement date | Jan 31, 2021 | Jan 31, 2020 | ||||||||||||||
| Fiscal Year | ||||||||
| 2020 | 2019 | |||||||
| Weighted-average assumptions used to determine net periodic benefit cost: | ||||||||
| Discount rate | 1.94 | % | 2.31 | % | ||||
| Salary increase rate | N/A | N/A | ||||||
The discount rate is based on the rates implicit in high-quality fixed-income investments currently available as of the measurement date. The Citigroup Pension Discount Curve (CPDC) rates are intended to represent the spot rates implied by the high-quality corporate bond market in the U.S. The projected benefit payments attributed to the projected benefit obligation have been discounted using the CPDC mid-year rates and the discount rate is the single constant rate that produces the same total present value.
The following benefit payments over the next ten years are expected to be paid:
| Year | Pension Benefits | Pension Benefits | ||||||
(amounts in thousands) | ||||||||
| 2021 | 1,184 | |||||||
| 2022 | 1,149 | |||||||
| 2023 | 1,149 | 1,149 | ||||||
| 2024 | 1,149 | 1,149 | ||||||
| 2025 | 1,269 | 1,269 | ||||||
| 2026 – 2030 | 6,511 | |||||||
2026 | 1,309 | |||||||
2027 | 1,309 | |||||||
| 2028 – 2032 | 6,376 | |||||||
Note 12.10. Income Taxes
Income tax expense consists of the following:
| Fiscal Year | Fiscal Year | |||||||||||||||
| 2020 | 2019(1) | 2022 | 2021 | |||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Federal - current | $ | (3,542 | ) | $ | - | $ | - | $ | - | |||||||
| State - current | - | 44 | 43 | 27 | ||||||||||||
| Deferred | - | - | - | - | ||||||||||||
| Income tax (benefit) expense | $ | (3,542 | ) | $ | 44 | $ | 43 | $ | 27 | |||||||
A reconciliation of the Company’s effective income tax rate with the federal statutory rate is as follows:
| Fiscal Year | Fiscal Year | |||||||||||||||
| 2020 | 2019(1) | 2022 | 2021 | |||||||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||
| State income taxes, net of federal tax effect | 0.0 | % | 0.3 | % | (0.2 | %) | (0.3 | %) | ||||||||
| Change in Valuation Allowance | (27.7 | %) | (21.0 | %) | (22.4 | %) | (30.9 | %) | ||||||||
| Cash surrender value - insurance / benefit program | 6.8 | % | 0.1 | % | (0.5 | %) | 0.8 | % | ||||||||
| Uncertain tax position | 47.6 | % | --- | % | ||||||||||||
| Other | (0.19 | %) | (0.1 | %) | 1.8 | % | 9.1 | % | ||||||||
| Effective tax rate | (47.6 | %) | 0.3 | % | (0.3 | %) | (0.3 | %) | ||||||||
The Other category is comprised of various items, including the impacts of non-deductible entertainment, penalties and parking benefits and the refundable portion of the federal alternative minimum tax carryover credit.
Significant components of the Company’s deferred tax assets are as follows:
January 30, 2021 | February 1, 2020 | January 28, 2023 | January 29, 2022 | |||||||||||||
| (amounts in thousands) | ||||||||||||||||
| DEFERRED TAX ASSETS | ||||||||||||||||
| Accrued Expenses | $ | 71 | $ | 1,783 | $ | 191 | $ | 159 | ||||||||
| Inventory | 215 | 32 | 252 | 219 | ||||||||||||
| Retirement and compensation related accruals | 3,981 | 5,888 | 3,622 | 3,769 | ||||||||||||
| Fixed assets | 218 | 6,470 | ||||||||||||||
| Federal and state net operating loss and credit carry forwards | 90,206 | 83,562 | 96,589 | 91,468 | ||||||||||||
| Real estate leases, included deferred rent | - | 5,712 | ||||||||||||||
| Losses on investment | 853 | 896 | 853 | 853 | ||||||||||||
| Others | 107 | 549 | 107 | 107 | ||||||||||||
| Gross deferred tax assets before valuation allowance | 95,651 | 104,892 | 101,614 | 96,575 | ||||||||||||
| Less: valuation allowance | (95,022 | ) | (104,556 | ) | (101,403 | ) | (96,331 | ) | ||||||||
| Total deferred tax assets | $ | 629 | $ | 336 | $ | 211 | $ | 244 | ||||||||
| DEFERRED TAX LIABILITIES | ||||||||||||||||
| Intangibles | $ | (629 | ) | $ | (336 | ) | ||||||||||
| Inventory | - | - | ||||||||||||||
| Fixed assets | (211 | ) | (244 | ) | ||||||||||||
| Total deferred tax liabilities | $ | (629 | ) | $ | (336 | ) | $ | (211 | ) | $ | (244 | ) | ||||
| NET DEFERRED TAX ASSET | $ | - | $ | - | $ | - | $ | - | ||||||||
The Company, at the end of fiscal 2020,2022, has a net operating loss carryforward of $346.7$369.1 million for federal income tax purposes which will expire at various times throughout 2040 with a portion being available indefinitely. The Company has approximately $219.5$224.4 million of net operating loss carryforward for state income tax purposes as of the end of fiscal 20202022 that expire at various times through 2040 and are subject to certain limitations and statutory expiration periods. The reduction in state net operating loss carryforward is due to the FYE Transaction, as the Company will not utilize those losses. The state net operating loss carryforwards are subject to various business apportionment factors and multiple jurisdictional requirements when utilized. The Company has federal tax credit carryforwards of $0.5 million which will expire in 2026. The Company has state tax credit carryforwards of $0.2 million.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based on the available objective evidence, management concluded that a full valuation allowance should be recorded against its deferred tax assets. As of January 30, 2021,28, 2023, the valuation allowance decreasedincreased to $95.0$101.4 million from $104.6$96.3 million as of February 1, 2020.January 29, 2022. Management will continue to assess the valuation allowance against the gross deferred assets.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the respective years is provided below. Amounts presented excluded interest and penalties, where applicable, on unrecognized tax benefits:
| Fiscal Year | Fiscal Year | |||||||||||||||
| 2020 | 2019 | 2022 | 2021 | |||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Unrecognized tax benefits at beginning of year | $ | 1,930 | $ | 1,930 | $ | 413 | $ | 413 | ||||||||
| Increases in tax positions from prior years | - | - | ||||||||||||||
| Decreases in tax positions from prior years | (1,517 | ) | - | - | - | |||||||||||
| Increases in tax positions for current years | - | - | ||||||||||||||
| Settlements | - | - | ||||||||||||||
| Lapse of applicable statute of limitations | - | - | ||||||||||||||
| Unrecognized tax benefits at end of year | $ | 413 | $ | 1,930 | $ | 413 | $ | 413 | ||||||||
As of January 30, 2021,28, 2023, the Company had $1.9$0.4 million of gross unrecognized tax benefits, $1.5 million of which would affectimpact the Company’s effective tax rate if recognized. While it is reasonably possible that the amount of unrecognized tax benefits will increase or decrease within the next twelve months, the Company does not expect the change to have a significant impact on its results of operations or financial position. The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has substantially concluded all federal income tax matters and all material state and local income tax matters through fiscal 2013.
The Company’s practice is to recognize interest and penalties associated with its unrecognized tax benefits as a component of income tax expense in the Company’s Consolidated Statements of Operations. During fiscal 2020, the Company accrued a provision for interest expense of $0.2 million. As of January 30, 2021,28, 2023, the liability for uncertainCompany did not have any unrecognized tax positions reflected in the Company’s Consolidated Balance Sheets was $3.5 million, including accrued interest and penalties of $2.7 million.benefits.
Note 13.11. 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 $5.2 million secured term loan ($2.7 million from Alimco, $0.5 million from Kick-Start, and $2.0 million from RJHDC) to Kaspien with a scheduled maturity date of May 22, 2023,March 31, 2024, interest accruing at the rate 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 and Kaspien;
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 Alimco, 23,401 shares for Kick-Start, and 93,923 shares for RJHDC), subject to adjustment in accordance with the terms of the Warrants, at an exercise price of $0.01 per share. As of April 15, 2021,28, 2023, 236,993 of the Warrants had been exercised by the Related Party Entities and 7,5395,126 warrants remained outstanding;
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 Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien; and
Voting Agreement (the “Voting Agreement”), pursuant to which the Related Party Entities, the Trust, Mr. Simpson and their respective related entities agreed 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 August 2, 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 March 2, 2022, the Company entered into the following agreements with certain of the Related Parties:
An amendment to the Subordinated Loan and Security Agreement, pursuant to which Alimco made an additional $5,000,000.00 secured term loan (the “Additional Subordinated Loan”) with a scheduled maturity date of March 31, 2024, interest 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 Kaspien;
Registration Rights Agreement, pursuant to which Alimco has been granted 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 Alimco received additional contingent value rights (“Additional CVRs”) 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 Kaspien; recapitalizations or financings of the Company or Kaspien (with appropriate carve out for trade financing in the ordinary course); repayment of intercompany indebtedness owing to the Company by Kaspien; or sale or transfer of any stock of the Company or Kaspien.
Note 14.12. Commitments and Contingencies
Legal Proceedings
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company.
On November 14, 2018, three consumersJune 18, 2021, Vijuve Inc. filed a punitive class action complaintlawsuit against the Company and Synapse Group,Kaspien Inc. in the United States District Court for the Eastern District of Massachusetts, Boston DivisionWashington (Case No.1:18-cv-12377-DPW)No. 2:21-cv-00192-SAB) concerning enrollmenta Retailer Agreement that the parties entered into in the Company’s Backstage Pass VIP loyalty programSeptember of 2020. Vijuve manufactures skin care products and associated magazine subscriptions.face massagers. The parties agreed that Kaspien would sell Vijuve’s products on Amazon. The complaint alleged among other things, that Kaspien breached the Company’s “negative option marketing” misled consumers into enrollingRetailer Agreement when it declined to acquiesce to Vijuve’s demand that Kaspien purchase over $700,000 of products. In total, Vijuve appears to be seeking more than $1,000,000 in damages. Kaspien denies that it breached the agreement and denies that it has any liability to Vijuve. Moreover, on July 19, 2021, Kaspien filed counterclaims and alleged that Vijuve breached the contract, including by refusing to buy back inventory from Kaspien upon termination of the Retailer Agreement. On July 18, 2022, Kaspien filed additional counterclaims against Vijuve for membershipfraud and subscriptions without obtaining the consumers’ consent. The complaint sought to represent a nationwide classnegligent misrepresentation. Kaspien is seeking at least $229,000 from Vijuve for breach of “all persons in the United States” who were enrolled incontract and/or charged for Backstage Pass VIP memberships and/or magazine subscriptions,specific performance, as well as fraud and to obtain statutory and actual damagesnegligent misrepresentation. A trial on their behalf.
On February 17, 2022, CA Washington, LLC (“CA”) filed a similar putative class actionlawsuit against Kaspien Inc. in Massachusetts state court (Civ.Wake County, North Carolina Superior Court (court file 22 CVS 2051). CA claims that Kaspien Inc. breached the contract between the parties by using CA’s technology platform to facilitate sales by third parties and by using CA’s technology to develop a competing platform. The lawsuit also includes an alternative claim for unjust enrichment and a claim for breach of North Carolina’s Unfair and Deceptive Trade Practices Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based onCA seeks an unspecified amount of damages. Kaspien removed the same allegations, but this time seeking to represent only a class of “FYE customers in Massachusetts” who were charged for VIP Backstage Pass Memberships and/or magazine subscriptions. The Company removed that lawsuit back to federal court on June 12, 2019,in the Eastern District of North Carolina (case number 5:22-cv-00111), filed an Answer denying CA’s claims, and then filedasserted a motion to dismiss and/or strikecounterclaim against CA for breach of contract and breach of the plaintiff’s class action allegations on June 28, 2019. On February 2, 2021covenant of good faith and fair dealing. There is no determination of outcome, thus no contingencies are recognized as of the court granted the Company’s motion, struck the class action allegations, and dismissed the individual plaintiffs’ claims for lack of jurisdiction. Plaintiffs appealed the court’s decision on February 24, 2021. The parties participated in a mandatory court-annexed mediation session on April 8, 2021.reporting date. The parties have agreed on terms to resolve the matter fullylawsuit and finally, andare finalizing the appeal will be dismissed without material impact onnecessary settlement documents.
Contingent Value Rights
On March 30, 2020, the financial resultsCompany entered into the 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 Company.
proceeds (10.35% for Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien. The Company does not anticipate these contingencies being met in Fiscal 2022.
The CVRs terminate upon the earlier to occur of (i) certain consolidations, mergers or similar extraordinary events involving Kaspien (and, if any. It is computed by dividing net lossapplicable, the making of a cash payment by the sumCompany to the Lenders pursuant to the CVR Agreement in connection therewith) and (ii) March 2, 2032.
The right to the contingent payments contemplated by the CVR Agreement is a contractual right only and will not be transferable except in the limited circumstances specified in the CVR Agreement. The CVRs will not be evidenced by certificates or any other instruments and will not be registered with the Securities and Exchange Commission. The CVRs will not have any voting or dividend rights and will not represent any equity or ownership interest in the Company. No interest will accrue on any amounts payable in respect of the weighted average shares outstanding and additional Common Shares that would have been outstanding ifCVRs. The CVR will constitute a liability of the dilutive potential common shares had been issued forCompany or Kaspien, as applicable, to the Company’s Common Stock awards fromTranche B Lender, payable prior to any dividends, liquidation preferences or other amounts owing to any stockholder of the Company’s Stock Award Plans.Company or Kaspien, respectively.
| Fifty-two Weeks Ended | ||||||||
| (in thousands, except per share amounts) | January 30, 2021 | February 1, 2020 | ||||||
| Loss from continuing operations | $ | (3,892 | ) | $ | (14,393 | ) | ||
| Basic and diluted loss per common share from continuing operations | $ | (2.10 | ) | $ | (7.93 | ) | ||
| Loss from discontinued operations | $ | - | $ | (44,351 | ) | |||
| Basic and diluted loss per common share from discontinued operations | $ | - | $ | (24.42 | ) | |||
| Net loss | $ | (3,892 | ) | $ | (58,744 | ) | ||
| Basic and diluted loss per common share | $ | (2.10 | ) | $ | (32.35 | ) | ||
| Weighted average number of common shares outstanding – basic and diluted | 1,849 | 1,816 | ||||||
Note 16.13. Quarterly Financial Information (Unaudited)
| Fiscal 2020 Quarter Ended | ||||||||||||||||||||
Fiscal 2020 | January 30, 2021 | October 31, 2020(2) | August 1, 2020 | May 2, 2020 | ||||||||||||||||
| Total Revenue | $ | 158,345 | $ | 45,547 | $ | 38,913 | $ | 42,296 | $ | 31,589 | ||||||||||
| Gross profit | 16,304 | 4,678 | 3,891 | 4,423 | 3,312 | |||||||||||||||
| Income (loss) from continuing operations | (3,892 | ) | (139 | ) | 2,552 | (899 | ) | (5,406 | ) | |||||||||||
| Net income (loss) | $ | (3,892 | ) | $ | (139 | ) | $ | 2,552 | $ | (899 | ) | $ | (5,406 | ) | ||||||
Diluted income (loss) per share (3) | $ | (2.10 | ) | $ | (0.03 | ) | $ | 1.39 | $ | (0.49 | ) | $ | (2.97 | ) | ||||||
Fiscal 2022 Quarter Ended | ||||||||||||||||||||
Fiscal 2022 | January 28, 2023 | October 29, 2022 | July 30, 2022 | April 30, 2022 | ||||||||||||||||
| Net Revenue | $ | 128,228 | $ | 33,385 | $ | 29,145 | $ | 33,907 | $ | 31,791 | ||||||||||
| Gross profit | 24,390 | 4,235 | 6,575 | 6,729 | 6,851 | |||||||||||||||
| Net loss | $ | (19,044 | ) | $ | (6,639 | ) | $ | (3,561 | ) | $ | (4,416 | ) | $ | (4,428 | ) | |||||
Basic and diluted loss per share | $ | (5.47 | ) | $ | (1.34 | ) | $ | (0.92 | ) | $ | (1.69 | ) | $ | (1.78 | ) | |||||
| Fiscal 2019 Quarter Ended | ||||||||||||||||||||
Fiscal 2019 | February 1, 2020(1) | November 2, 2019 | August 3, 2019 | May 4, 2019 | ||||||||||||||||
| Total Revenue | $ | 133,216 | $ | 35,208 | $ | 28,616 | $ | 34,260 | $ | 35,132 | ||||||||||
| Gross profit | 10,851 | 2,267 | 2,720 | 3,087 | 2,777 | |||||||||||||||
| Loss from continuing operations | (14,393 | ) | (3,195 | ) | (3,094 | ) | (3,758 | ) | (4,346 | ) | ||||||||||
| Net loss | $ | (58,744 | ) | $ | (19,659 | ) | $ | (23,155 | ) | $ | (8,128 | ) | $ | (7,802 | ) | |||||
Basic and diluted loss per share(3) | $ | (32.35 | ) | $ | (10.81 | ) | $ | (12.73 | ) | $ | (4.48 | ) | $ | (4.20 | ) | |||||
Fiscal 2021 Quarter Ended | ||||||||||||||||||||
Fiscal 2021 | January 29, 2022 | October 30, 2021(1) | July 31, 2021(2) | May 1, 2021 | ||||||||||||||||
| Net Revenue | $ | 143,713 | $ | 36,034 | $ | 32,172 | $ | 34,890 | $ | 40,617 | ||||||||||
| Gross profit | 32,773 | 6,138 | 8,004 | 8,835 | 9,796 | |||||||||||||||
| Net income (loss) | $ | (8,031 | ) | $ | (5,811 | ) | $ | (886 | ) | $ | 82 | $ | (1,416 | ) | ||||||
| Diluted income (loss) per share | $ | (3.28 | ) | $ | (2.33 | ) | $ | (0.36 | ) | $ | 0.03 | $ | (0.61 | ) | ||||||
| 1. | Includes |
| 2. | Includes the PPP Loan. |
Index to Exhibits
Document Number and Description
Exhibit No.
Underwriting Agreement, dated March 16, 2021, by and between Kaspien Holdings Inc. and Aegis Capital Corp. - incorporated herein by reference to Exhibit 1.1 to the Company’s Form 8-K filed on March 16, 2021. Commission File No. 0-14818. | |
| Asset Purchase Agreement by and among Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, Kaspien Holdings Inc., 2428392 Inc., and 2428391 Ontario Inc, o/a Sunrise Records, dated as of January 23, 2020 – incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed on January 23, 2020. Commission File No. 0-14818. | |
| Amendment No. 1 to Asset Purchase Agreement by and among Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, Kaspien Holdings Inc., 2428392 Inc., and 2428391 Ontario Inc, o/a Sunrise Records, dated as of February 20, 2020 – incorporated herein by reference to Exhibit | |
| 3.1 | Restated Certificate of Incorporation – incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended January 29, 1994. Commission File No. 0-14818. |
| Certificate of Amendment to the Certificate of Incorporation — incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818. | |
| Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended January 31, 1998. Commission File No. 0-14818. | |
| Form of Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S-4, No. 333-75231. | |
| Form of Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S-4, No. 333-75231. | |
| Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed August 15, 2000. Commission File No. 0-14818. | |
| Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 2 to the Company’s Current Report on Form 8-A filed August 15, 2000. Commission File No. 0-14818. | |
| Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed July 16, 2019. Commission File No. 0-14818. |
Certificate of Amendment of Certificate of Incorporation of Trans World Entertainment Corporation, dated September 3, 2020 – incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on September 3, 2020. Commission File No. 0-14818. | |
| Certificate of Amendment of Certificate of Incorporation of Kaspien Holdings Inc., dated March 8, 2022 – incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on March 8, 2022. Commission File No. 0-14818. |
| Certificate of Amendment of Certificate of Incorporation of Kaspien Holdings Inc. – incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on August 2, 2022. Commission File No. 0-14818. | |
| Amended By-Laws – incorporated herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended January 29, 2000. Commission File No. 0-14818. |
| Amendment No. 1 to By-Laws – incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 31, 2020. Commission File No. 0-14818. | |
| Amendment No. 2 to Bylaws of Kaspien Holdings Inc., dated September 3, 2020 – incorporated herein by reference to Exhibit 3.2 to the Company’s Form 8-K filed on September 3, 2020. Commission File No. 0-14818. | |
| Amendment No. 3 to Bylaws of Kaspien Holdings Inc., dated March 8, 2022 – incorporated herein by reference to Exhibit 3.2 to the Company’s Form 8-K filed on March 8, 2022. Commission File No. 0-14818. | |
| Amendment No. 4 to Bylaws of Kaspien Holdings Inc. – incorporated herein by reference to Exhibit 3.2 to the Company’s Form 8-K filed on August 2, 2022. Commission File No. 0-14818. | |
| Specimen of Kaspien Holdings Inc. Stock Certificate – incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended | |
| Description of Kaspien Holdings Inc. Capital Stock. |
| 4.3 | Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K dated March 8, 2022). Commission File No. 0-14818. |
| Amended and Restated Common Stock Purchase Warrant, dated as of April 4, 2022 – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 5, 2022. Commission File No. 0-14818. | |
| Loan and Security Agreement by and among Kaspien Inc. and Encina Business Credit, LLC, dated as of February 20, 2020 – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 20, 2020. Commission File No. 0-14818. |
| Amendment No. 1 to Loan and Security Agreement by and among Kaspien Inc. and Encina Business Credit, LLC, dated as of March 30, 2020 – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 31, 2020. Commission File No. 0-14818. | |
Amendment No. 2 to Loan and Security Agreement by and among Kaspien Inc. and Encina Business Credit, LLC, dated as of March 30, 2020 – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 8, 2021. Commission File No. 0-14818. | |
| Amendment No. 3 to Loan and Security Agreement dated September 17, 2021 – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed September 20, 2021. Commission File No. 0-14818. | |
| Amendment No. 4 to Loan and Security Agreement – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 8, 2022. Commission File No. 0-14818. | |
| Amendment No. 5 to Loan and Security Agreement | |
| Subordinated Loan and Security Agreement dated as of March 30, 2020 – incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed March 31, 2020. Commission File No. 0-14818. |
| Amendment No. 1 to Subordinated Loan and Security Agreement dated September 17, 2021 – incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed September 20, 2021. Commission File No. 0-14818. | |
| Amendment No. 2 to Subordinated Loan and Security Agreement – incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed March 8, 2022. Commission File No. 0-14818. | |
| Contingent Value Rights Agreement, dated as of March 30, 2020 – incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed March 31, 2020. Commission File No. 0-14818. | |
| Contingent Values Rights Agreement – incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed March 8, 2022. Commission File No. 0-14818. | |
| Common Stock Purchase Warrants, dated as of March 30, 2020 – incorporated herein by reference to Exhibit 4.1 to the Company’s Form 8-K filed March 31, 2020. Commission File No. 0-14818. | |
| Voting Agreement, dated as of March 30, 2020 – incorporated herein by reference to Exhibit 4.2 to the Company’s Form 8-K filed March 31, 2020. Commission File No. 0-14818. | |
| Form of Indemnification Agreement dated May 1, 1995 between the Company and its officers and directors – incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995. Commission File No. 0-14818. | |
| Kaspien Holdings Inc. Supplemental Executive Retirement Plan, as amended – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 16, 2012. Commission File No. 0-14818. | |
| Kaspien Holdings Inc. Bonus Plan – incorporated herein by reference to Appendix A to Kaspien Holdings Inc.’s Definitive Proxy Statement on Form 14A filed as of May 30, 2014. Commission File No. 0-14818. | |
| Kaspien Holdings Inc. | |
| Severance, Retention and Restrictive Covenant Agreement between the Company and Edwin J. Sapienza, dated February 26, 2019 – incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 4, 2019. Commission File No. 0-14818. | |
| Brock Kowalchuk Offer Letter dated as of March 28, 2022 – incorporated herein by | |
| Brock Kowalchuk Severance Agreement dated as of July |
| Amendment No. 1 to Voting Agreement – incorporated herein by reference to Exhibit 10.1 to the Company’s Form | |
| Securities Purchase Agreement (PIPE), dated July 12, 2022, by and | |
| Securities Purchase Agreement (Registered Offering), dated July | |
| Form of Investor Warrant (PIPE) – incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed July 14, 2022. Commission File No. 0-14818. | |
| Form of Pre-Funded Warrant (PIPE) – incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K filed July 14, 2022. Commission File No. 0-14818. | |
| Form of Pre-Funded Warrant (Registered Offering) – incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K filed July 14, 2022. Commission File No. 0-14818. | |
| Registration Rights Agreement, dated July 12, 2022, by and among the Company and the purchasers party thereto – incorporated herein by reference to Exhibit 10.7 to the Company’s Form 8-K filed July 14, 2022. Commission File No. 0-14818. | |
| Form of Lockup Agreement – incorporated herein by reference to Exhibit 10.8 to the Company’s Form 8-K filed July 14, 2022. Commission File No. 0-14818. | |
| Significant Subsidiaries of the Registrant. | |
| Consent of Fruci & Associates II, PLLC. | |
| Certification of Chief Executive Officer dated April | |
| Certification of Chief Financial Officer dated April |
| Certification of Chief Executive Officer and Chief Financial Officer of Registrant, dated April |
*101.INS XBRL Instance Document
*101.SCH XBRL Taxonomy Extension Schema
*101.CAL XBRL Taxonomy Extension Calculation Linkbase
*101.DEF XBRL Taxonomy Extension Definition Linkbase
*101.LAB XBRL Taxonomy Extension Label Linkbase
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*104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith
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