Note 7. Depreciation and Amortization
Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the thirteen weeks ended October 31, 2020 and November 2, 2019 was $0.5 million for both periods.
Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the thirty-nine weeks ended October 31, 2020 and November 2, 2019 was $1.5 million and $1.3 million, respectively.
Note 8. Restricted Cash
As a result of the death of its former Chairman, the Company holds $5.0 million in a rabbi trust, of which $1.0 million is classified as restricted cash in current assets and $4.0 million is classified as restricted cash in other assets on the accompanying interim condensed consolidated balance sheet as of October 31, 2020.
A summary of cash, cash equivalents and restricted cash is as follows (amounts in thousands):
| | | October 31, 2020 | | | February 1, 2020 | | | November 2, 2019 | |
| Cash and cash equivalents | | $ | 2,396 | | | $ | 2,977 | | | $ | 3,073 | |
| Restricted cash | | | 5,032 | | | | 5,875 | | | | 6,089 | |
| Total cash, cash equivalents and restricted cash | | $ | 7,428 | | | $ | 8,852 | | | $ | 9,162 | |
Note 9. Debt
Credit Facility
In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provided for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed.
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 Kaspien credit facility, as further discussed below. Accordingly, the Credit Facility is no longer available to the Company.
As of November 2, 2019, borrowings under the Credit Facility were $27.8 million.
New Credit Facility
On February 20, 2020, Kaspien Inc. entered into a Loan Agreement with Encina, as administrative agent, under which the lenders party thereto committed to the New Credit Facility. Concurrent with the sale of the fye business, the Company borrowed $3.3 million under the New Credit Facility to satisfy the remaining obligations of the Company under the aforementioned 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.
Interest under the New Credit Facility accrues, subject to certain terms and conditions under the Loan Agreement, at a LIBOR Rate or Base Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Loan Agreement, with the Applicable Margin for LIBOR Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%.
The New Credit Facility is secured by a first priority security interest in substantially all of the assets of Kaspien, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors under the New Credit Facility (collectively, the “Credit Facility Parties”) and by a first priority pledge by the Company of its equity interests in Kaspien. The Company will provide a limited guarantee of Kaspien’s obligations under the New Credit Facility.
Among other things, the Loan Agreement limits 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 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 Credit Facility Parties taken as a whole, the occurrence of an uninsured loss to a material portion of collateral and failure of the obligations under the New Credit Facility to constitute senior indebtedness under any applicable subordination or intercreditor agreements.
On March 30, 2020, the Company and Kaspien (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.
As of October 31, 2020, borrowings under the New Credit Facility were $8.5 million. The Company had $3.8 million available for borrowing as of October 31, 2020. As of October 31, 2020, unamortized debt issuance costs of $0.9 million related to the New Credit Facility are included in Other Current Liabilities on the unaudited condensed consolidated balance sheet.
The Company records short term borrowings at cost, in which the carrying value approximates fair value due to its short-term maturity.
Subordinated Loan Agreement
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 with a scheduled maturity date of May 22, 2023.
Interest on the Subordinated Loan accrues, subject to certain terms and conditions under the Subordinated Loan Agreement, at the rate of twelve percent (12.0%) per annum, compounded on the last day of each calendar quarter by becoming a part of the principal amount of the Subordinated Loan.
The Subordinated Loan is 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 (collectively, the “Second Lien Credit Facility Parties”). The Company will provide a limited guarantee of Kaspien’s obligations under the 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 Second Lien Credit Facility Parties 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 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. The value of the warrants of $0.8 million was allocated against the principal proceeds of the Subordinated Debt Agreement. On November 6, 2020, RJHDC exercised 80,000 warrants.
Paycheck Protection Program
On April 17, 2020, Kaspien received the PPP Loan pursuant to CARES Act. The PPP Loan, which was in the form of a promissory note (the “Note”), dated April 10, 2020, between Kaspien and First Interstate Bank, as 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 commencing on November 10, 2020. While under the terms of the PPP, some or all of the PPP Loan amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and the Note, such as payroll costs, benefits, rent, and utilities, there is no assurance that the Company will be successful in qualifying for and receiving 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. As of December 15, 2020, the Company has not received a decision on its PPP loan forgiveness request.
Note 10. Stock Based Compensation
The Company has outstanding awards under three 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 “New Plan”). Collectively, these plans are referred to herein as the Stock Award Plans. Additionally, the Company had a stock award plan for non-employee directors (the “1990 Plan”). The Company no longer issues stock options under the Old Plans or the 1990 Plan.
The FYE Transaction in February 2020 constituted a change of control and vesting on all unvested options was accelerated. As a result, unrecognized compensation expense of $0.2 million was recognized in the first quarter of fiscal 2020. Total compensation expense recognized in the thirty-nine weeks ended October 31, 2020 was $0.2 million.
Equity awards authorized for issuance under the New Plan total 250,000. As of October 31, 2020, of the awards authorized for issuance under the Stock Award Plans, 130,574 options were granted and are outstanding, 46,900 of which were vested and exercisable. Shares available for future grants of options and other share-based awards under the New Plan as of October 31, 2020 were 155,075.
The following table summarizes stock award activity during the thirteen weeks ended October 31, 2020:
| | | Employee and Director Stock Award Plans | |
| | | Number of Shares Subject To Option | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term | | | Other Share Awards (1) | | | Weighted Average Grant Fair Value | |
| Balance February 1, 2020 | | | 129,196 | | | $ | 52.11 | | | | 5.8 | | | | 9,945 | | | $ | 36.75 | |
| Granted | | | 90,402 | | | | 7.04 | | | | 9.9 | | | | - | | | | - | |
| Canceled | | | (89,024 | ) | | | 51.31 | | | | - | | | | - | | | | - | |
| Exercised | | | - | | | | - | | | | - | | | | (9,945 | ) | | | 36.75 | |
| Balance October 31, 2020 | | | 130,574 | | | $ | 21.46 | | | | 7.0 | | | | - | | | $ | - | |
| Exercisable October 31, 2020 | | | 46,900 | | | $ | 47.18 | | | | 3.0 | | | | - | | | $ | - | |
| (1) | Other Share Awards include deferred shares granted to Directors and restricted share units granted to executive officers. |
As of October 31, 2020, the intrinsic value of stock awards outstanding was $0.4 million and the intrinsic value of stock awards exercisable was $38,700.
Note 11. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss that the Company reports in the interim condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan. Comprehensive loss consists of net loss and the amortization of pension gains associated with Company’s defined benefit plan for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019.
Note 12. Defined Benefit Plan
The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. During the thirteen weeks ended October 31, 2020, the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.2 million in benefits relating to the SERP during fiscal 2020.
The measurement date for the SERP is the fiscal year end, using actuarial techniques which reflect estimates for mortality, turnover and expected retirement. In addition, management makes assumptions concerning future salary increases. Discount rates are generally established as of the measurement date using theoretical bond models that select high-grade corporate bonds with maturities or coupons that correlate to the expected payouts of the applicable liabilities.
The following represents the components of the net periodic pension cost related to the Company’s SERP for the respective periods:
| | | Thirteen Weeks Ended | | | Thirty-nine Weeks Ended | |
| (amounts in thousands) | | October 31, 2020 | | | November 2, 2019 | | | October 31, 2020 | | | November 2, 2019 | |
| | | | | | | |
| Service cost | | $ | - | | | $ | 14 | | | $ | - | | | $ | 42 | |
| Interest cost | | | 89 | | | | 142 | | | | 267 | | | | 426 | |
Amortization of net gain(1) | | | (3 | ) | | | (5 | ) | | | (9 | ) | �� | | (30 | ) |
| Net periodic pension cost | | $ | 86 | | | $ | 151 | | | $ | 258 | | | $ | 438 | |
| (1) | The amortization of net gain is related to a director retirement plan previously provided by the Company. |
Note 13. 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 exercised or converted into Common Stock or resulted in the issuance of Common Stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is computed by dividing net loss by the sum of the weighted average shares outstanding and additional Common Shares that would have been outstanding if the dilutive potential common shares had been issued for the Company’s Common Stock awards from the Company’s Stock Award Plans.
For the thirteen-week periods ended October 31, 2020 the dilutive effect of employee stock options was 3,425 shares.
For the thirteen-week period November 2, 2019 and thirty-nine week periods ended October 31, 2020 and November 2, 2019, the impact of all outstanding stock awards was not considered because the Company reported net losses and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share was the same. Total anti-dilutive stock awards for the thirteen weeks ended November 2, 2019 were approximately 126,446 shares, respectively. Total anti-dilutive stock awards for the thirty-nine weeks ended October 31, 2020 and November 2, 2019 were approximately 83,718 and 148,433, respectively.
The following represents basic and diluted loss per share for continuing operations, loss from discontinued operations and net loss for the respective periods:
| | | Thirteen Weeks Ended | | | Thirty-nine Weeks Ended | |
| (in thousands, except per share amounts) | | October 31, 2020 | | | November 2, 2019 | | | October 31, 2020 | | | November 2, 2019 | |
| | | | | | | |
| Income (loss) from continuing operations | | $ | 2,552 | | | $ | (3,094 | ) | | $ | (3,753 | ) | | $ | (11,198 | ) |
| | | | | | | | | | | | | | | | | |
| Basic income (loss) per common share from continuing operations | | $ | 1.40 | | | $ | (1.70 | ) | | $ | (2.06 | ) | | $ | (6.16 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted income (loss) per common share from continuing operations | | $ | 1.39 | | | $ | (1.70 | ) | | $ | (2.06 | ) | | $ | (6.16 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | - | | | $ | (20,061 | ) | | $ | - | | | $ | (27,887 | ) |
| Basic and diluted loss per common share from discontinued operations | | $ | - | | | $ | (11.03 | ) | | $ | - | | | $ | (15.35 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 2,552 | | | $ | (23,155 | ) | | $ | (3,753 | ) | | $ | (39,085 | ) |
| | | | | | | | | | | | | | | | | |
| Basic income (loss) per common share | | $ | 1.40 | | | $ | (12.73 | ) | | $ | (2.06 | ) | | $ | (21.51 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding – basic | | | 1,825 | | | | 1,819 | | | | 1,823 | | | | 1,817 | |
| | | | | | | | | | | | | | | | | |
| Diluted income (loss) per common share | | $ | 1.39 | | | $ | (12.73 | ) | | $ | (2.06 | ) | | $ | (21.51 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding – diluted | | | 1,829 | | | | 1,819 | | | | 1,823 | | | | 1,817 | |
Note 14. Income Taxes
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 on 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 available objective evidence, management concluded that a full valuation allowance should continue to be recorded against the Company's tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable income in its conclusion of the need for a full valuation allowance. Any reversal of the Company’s valuation allowance will favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future. The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending February 1, 2020. The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of February 1, 2020, the Company had a net operating loss carry forward of $288.1 million for federal income tax purposes and approximately $280.2 million for state income tax purposes that expire at various times through 2039 and are subject to certain limitations and statutory expiration periods. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.
During the thirteen weeks ended October 31, 2020, the Company recorded an income tax benefit of $3.5 million related to the reversal of liabilities accrued per ASC 740-10 Accounting for Uncertain Tax Positions.
Note 15. 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. As a result, the liability for the cases listed below is remote.
Loyalty Memberships and Magazine Subscriptions Class Action
On November 14, 2018, three consumers filed a punitive class action complaint against the Company and Synapse Group, Inc. in the United States District Court for the District of Massachusetts, Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions. The complaint alleged, among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without obtaining the consumers’ consent. The complaint sought to represent a nationwide class of “all persons in the United States” who were enrolled in and/or charged for Backstage Pass VIP memberships and/or magazine subscriptions, and to obtain statutory and actual damages on their behalf.
On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit. On May 8, 2019, two of the plaintiffs from the dismissed lawsuit filed a similar punitive class action in Massachusetts state court (Civ. Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based on 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 believes it has meritorious defenses to the plaintiffs’ claims and, if the new case is not dismissed in full, the Company intends to vigorously defend the action.
Store Manager Class Actions
There 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, August 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. The Company reserved $425,000 for the settlement as of October 31, 2020.
Contingent Value Rights
On March 30, 2020, the Company 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 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 2020.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
October 31, 2020 and November 2, 2019
Overview
Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships, general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the fiscal year ended February 1, 2020.
The Company operates Kaspien, which provides a platform of software and services to grow a brand’s online distribution channel on digital marketplaces such as Amazon, Walmart, and eBay, among others. Kaspien empowers brands to achieve their online retail goals through its innovative, proprietary technology, tailored strategies, and mutually beneficial partnerships.
Kaspien is positioning itself to be a brand’s ultimate online growth partner and is guided by seven core principles:
| • | Partner Obsession | • | Results |
| • | Insights Driven | • | Ownership |
| • | Simplicity | • | Diversity and Teamwork |
| • | Innovation | | |
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 Sunrise Records pursuant to 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 Company’s results have been, and will continue to be, contingent upon management’s ability to understand industry trends and to manage the business in response to those trends and general economic trends. Management monitors several key performance indicators to evaluate its performance, including:
Net Revenue: The Company measures total year over year sales growth. The Company measures its sales performance through several key performance indicators including number of partners 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, distribution costs and Amazon commissions and fulfillment fees.
Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges.
Balance Sheet and Ratios: The Company views cash and working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Cash Flows section for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen Weeks and Thirty-nine Weeks Ended October 31, 2020
Compared to the Thirteen and Thirty-nine Weeks Ended November 2, 2019
Net revenue and Gross profit. The following table sets forth a year-over-year comparison of the Company’s Net revenue and Gross profit:
| | | Thirteen Weeks Ended | | | Change | | | Thirty-nine Weeks Ended | | | Change | |
| (amounts in thousands) | | October 31, 2020 | | | November 2, 2019 | | | $ | | |
| % | | | October 31, 2020 | | | November 2, 2019 | | | $ | | |
| % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Revenue | | $ | 38,913 | | | $ | 28,616 | | | $ | 10,297 | | | | 36.0 | % | | $ | 112,799 | | | $ | 98,008 | | | $ | 14,791 | | | | 15.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 3,891 | | | | 2,720 | | | | 1,171 | | | | 43.1 | % | | | 11,626 | | | | 8,584 | | | | 3,042 | | | | 35.4 | % |
| % to sales | | | 10.0 | % | | | 9.5 | % | | | | | | | | | | | 10.3 | % | | | 8.8 | % | | | | | | | | |
Net Revenue. Net revenue was $38.9 million for the thirteen weeks ended October 31, 2020, a 36.0% increase from the comparable prior year period. The increase in net revenue was primarily attributable to increased velocity and improved average sales price for merchandise sold on the Fulfilled By Amazon US marketplace (“FBA US”).
Net revenue was $112.8 million for the thirty-nine weeks ended October 31, 2020 a 15.1% increase from the comparable prior year period. The increase in net revenue was primarily attributable to strength on the Amazon US marketplace.
The primary source of revenue is the Retail as a Service (“RaaS”) model, which represented 99% of net revenue in the thirteen weeks ended October 31, 2020. As part of the Company’s diversification strategic initiative, net revenue from non-Amazon US marketplaces increased to 5.8% of net revenue from 3.5% 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 1.0% of net revenue in the period during the thirteen weeks ended October 31, 2020. 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. The following table sets forth net revenue by marketplace as a percentage of total net revenue:
| | | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | |
| | | October 31, 2020 | | | November 2, 2019 | | | Change | | | October 31, 2020 | | | November 2, 2019 | | | Change | |
| Amazon US | | | 93.2 | % | | | 96.1 | % | | | -2.9 | % | | | 94.3 | % | | | 96.0 | % | | | -1.7 | % |
| Amazon International | | | 5.3 | % | | | 3.3 | % | | | 2.0 | % | | | 4.5 | % | | | 3.3 | % | | | 1.2 | % |
| Walmart & Other Marketplaces | | | 0.5 | % | | | 0.2 | % | | | 0.3 | % | | | 0.5 | % | | | 0.3 | % | | | 0.2 | % |
| Subtotal Retail | | | 99.0 | % | | | 99.6 | % | | | -0.6 | % | | | 99.3 | % | | | 99.6 | % | | | -0.4 | % |
| Subscriptions & Other | | | 1.0 | % | | | 0.4 | % | | | 0.6 | % | | | 0.7 | % | | | 0.4 | % | | | 0.4 | % |
| Total | | | 100.0 | % | | | 100.0 | % | | | | | | | 100.0 | % | | | 100.0 | % | | | | |
Gross Profit. Gross profit increased to $3.9 million, or 10% of net revenue for the thirteen weeks ended October 31, 2020, as compared to $2.7 million, or 9.5% of net revenue for the comparable prior year period. The increased profit was primarily attributable to a reduction in the cost of sales on the Amazon US Platform and operational efficiencies.
Gross profit increased to $11.6 million, or 10.3% of net revenue for the thirty-nine weeks ended October 31, 2020, as compared to $8.6 million, or 8.8% of net revenue for the comparable prior year period. The increased profit was primarily attributable to operational efficiencies and improved inventory management.
SG&A Expenses. The following table sets forth a period over period comparison of the Company’s SG&A expenses:
| | | Thirteen Weeks Ended | | | Change | | | Thirty-nine Weeks Ended | | | Change | |
| (amounts in thousands) | | October 31, 2020 | | | November 2, 2019 | | | $ | | |
| % | | | October 31, 2020 | | | November 2, 2019 | | | $ | | |
| % | |
| | | | | | | | | | | | | | | | | | | | | |
| Kaspien SG&A | | $ | 4,123 | | | $ | 4,139 | | | $ | (16 | ) | | | (0.4 | )% | | $ | 12,320 | | | $ | 12,223 | | | $ | 97 | | | | 0.1 | % |
| Corporate SG&A expenses | | | 380 | | | | 1,465 | | | | (1,085 | ) | | | (74.1 | )% | | | 5,589 | | | | 7,025 | | | | (1,436 | ) | | | (20.4 | )% |
| Total SG&A expenses | | $ | 4,503 | | | $ | 5,604 | | | $ | (1,101 | ) | | | (19.6 | )% | | $ | 17,909 | | | $ | 19,248 | | | $ | (1,339 | ) | | | (7.0 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As a % of total revenue | | | 11.6 | % | | | 19.6 | % | | | | | | | | | | | 15.9 | % | | | 19.6 | % | | | | | | | | |
For the thirteen weeks ended October 31, 2020, SG&A expenses decreased $1.1 million or 19.6%. The decrease in SG&A expenses was due to a $1.1 million in decrease in corporate SG&A expenses.
Kaspien SG&A expenses decreased $16,000 for the thirteen weeks ended October 31, 2020 as compared to the comparable prior year period.
Consolidated depreciation and amortization expense for the thirteen weeks ended October 31, 2020 was $0.5 million as compared to $0.4 million for the comparable prior year period.
For the thirty-nine weeks ended October 31, 2020, SG&A expenses decreased $1.3 million or 7.0%.
Kaspien SG&A expenses increased $97,000 for the thirty-nine weeks ended October 31, 2020 as compared to the comparable prior year period.
Consolidated depreciation and amortization expense for the thirty-nine weeks ended October 31, 2020 was $1.6 million as compared to $1.3 million for the comparable prior year period.
Interest Expense. Interest expense was $0.4 million for the thirteen weeks ended October 31, 2020, as compared to $0.2 million for the thirteen weeks ended November 2, 2019.
Interest expense was $1.0 million for the thirty-nine weeks ended October 31, 2020 compared to $0.5 million for the thirty-nine weeks ended November 2, 2019. The increase in interest expense was due to increased long-term borrowings. See Note 9 to the Condensed Consolidated Financial Statements for further detail on the Company’s debt.
Loss From Discontinued Operations. For the thirteen-weeks ended November 2, 2019, the Company recognized a loss from discontinued operations of $20.1 million related to the fye transaction. For the thirty-nine weeks ended November 2, 2019, the Company recognized a loss from continuing operations of $27.9 million related to the fye transaction.
See Note 3 to the Condensed Consolidated Financial Statements for more information on the loss from discontinued operations.
Income Tax Benefit (Expense). During the thirteen and thirty-nine weeks ended October 31, 2020, based on the Company’s on an 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.
Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the Company's deferred tax assets As a result, there were insignificant tax expense amounts recorded during the thirteen weeks ended November 2, 2019 and the thirty-nine weeks ended November 2, 2019.
Net Income (Loss). Net income for the thirteen weeks ended October 31, 2020 was $2.6 million as compared to a net loss of $23.2 million for the comparable prior year period.
The net loss for the thirty-nine weeks ended October 31, 2020 was $3.8 million as compared to $39.1 million for the comparable prior year period.
LIQUIDITY
Liquidity and Cash Flows:
The Company’s primary sources of liquidity are its borrowing capacity under its 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. 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 net revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; successful implementation of our strategy and planned activities; and our ability to overcome the impact of the COVID-19 pandemic.
As disclosed in the Company's Annual Report on Form 10-K filed June 15, 2020, The Company experienced negative cash flows from operations during fiscal 2019 and 2018 and we expect to incur net losses in 2020.
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, the availability of future funding, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment 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.
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, the proceeds from the PPP Loan are subject to audit and there is a risk of repayment. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
On August 4, 2020, the Company received a letter from the Listing Qualifications staff of the Nasdaq notifying the Company that it is no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2,500,000 and as 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.
The notification letter has no immediate effect on the Company’s listing on the Nasdaq Capital Market. On September 18, 2020, the Company submitted to Nasdaq the Compliance Plan. On September 30, 2020, the Company received another notice from Nasdaq that it had approved the Compliance Plan and granted the Company an extension period to February 1, 2021 to regain compliance with the Stockholders’ Equity Requirement. If the Company does not regain compliance in the timeframe required by Nasdaq, the Nasdaq staff could provide notice that the Company’s Common Stock is subject to delisting.
The unaudited condensed consolidated financial statements for the thirteen weeks ended October 31, 2020 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 continued improved profitability and the other factors set forth in the preceding paragraph. For the next 12 months, management believes that the Company’s existing liquidity will be adequate to fund its working capital needs. Management anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed in note 9 in the interim condensed consolidated financial statements.
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. Similarly, if our Common Stock is delisted from the Nasdaq Capital Market, it may also limit our ability to raise additional funds.
The following table sets forth a summary of key components of cash flow and working capital:
| | | | | As of or for the Thirty-nine Weeks Ended | | | Change | |
| | (amounts in thousands) | | | October 31, 2020 | | | November 2, 2019 | | |
| $ | |
| | Operating Cash Flows | | | $ | (15,272 | ) | | $ | (39,085 | ) | | $ | 23,813 | |
| | Investing Cash Flows | | | | 10,884 | | | | (2,013 | ) | | | 12,897 | |
| | Financing Cash Flows | | | | 3,004 | | | | 27,771 | | | | (24,767 | ) |
| | | | | | | | | | | | | | | |
| | Capital Expenditures | (1) | | | (935 | ) | | | (2,128 | ) | | | 1,193 | |
| | | | | | | | | | | | | | | |
| | Cash, Cash Equivalents, and Restricted Cash | (2) | | | 7,428 | | | | 9,162 | | | | (1,734 | ) |
| | Merchandise Inventory | | | | 27,204 | | | | 22,522 | | | | 4,682 | |
| | | | | | | | | | | | | | | |
(1) | Included in Investing Cash Flows | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(2) | Cash and cash equivalents per condensed consolidated balance sheets | | | $ | 2,396 | | | $ | 3,073 | | | | (677 | ) |
| | Add: restricted cash | | | | 5,032 | | | | 6,089 | | | | (1,057 | ) |
| | Cash, cash equivalents, and restricted cash | | | $ | 7,428 | | | $ | 9,162 | | | $ | (1,734 | ) |
Cash used in operations was $15.3 million primarily due to net loss of $3.8 million, a $5.3 million decrease in accrued expenses and a $9.4 million increase in inventory partially offset by a $1.7 million decrease in accounts receivable, and a $2.5 million decrease in prepaid expenses and other current assets. The decrease in accrued expenses is primarily attributable to the payment of obligations related to the fye business.
Cash provided by investing activities was $10.9 million for the thirty-nine weeks ended October 31, 2020, which primarily consisted proceeds from the sale of the fye business, partially offset by capital expenditures of $0.9 million. Cash used in investing activities was $2.0 million for the thirty-nine weeks ended November 2, 2019, which primarily consisted of capital expenditures.
Cash provided by financing activities was $30 million for the thirty-nine weeks ended October 31, 2020. The primary source of cash was borrowings from the New Credit Facility of $8.5 million, the Subordinated Loan Agreement of $5.2 million and borrowings from the PPP of $2.0 million partially offset by the payoff of the Credit Facility of $13.1 million. Cash used in financing activities was $27.8 million for the thirty-nine weeks ended November 2, 2019, which was comprised entirely of proceeds from short term borrowings.
Capital Expenditures. During the thirty-nine weeks ended October 31, 2020, the Company made capital expenditures of $0.9 million. The Company currently plans to spend approximately $1.5 million for capital expenditures during fiscal 2020
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 continually evaluates its estimates and judgments including those related to merchandise inventory and return costs and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K as of and for the year ended February 1, 2020 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements. There have been no material changes or modifications to the policies since February 1, 2020.
Recent Accounting Pronouncements:
The information set forth under Note 2, Recently Adopted Accounting Pronouncements section contained in Item 1, “Notes to Interim Condensed Consolidated Financial Statements”, is incorporated herein by reference.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company does not hold any financial instruments that expose it to significant market risk and does not engage in hedging activities. To the extent the Company borrows under its revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its credit facility can be variable. If interest rates on the Company’s revolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, interest expense would be increased by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended February 1, 2020.
Item 4 – Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company’s Principal Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of October 31, 2020, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls. There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 –
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. As a result, the liability for the cases listed below is remote.
Loyalty Memberships and Magazine Subscriptions Class Action
On November 14, 2018, three consumers filed a punitive class action complaint against the Company and Synapse Group, Inc. in the United States District Court for the District of Massachusetts, Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions. The complaint alleged, among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without obtaining the consumers’ consent. The complaint sought to represent a nationwide class of “all persons in the United States” who were enrolled in and/or charged for Backstage Pass VIP memberships and/or magazine subscriptions, and to obtain statutory and actual damages on their behalf.
On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit. On May 8, 2019, two of the plaintiffs from the dismissed lawsuit filed a similar punitive class action in Massachusetts state court (Civ. Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based on 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 believes it has meritorious defenses to the plaintiffs’ claims and, if the new case is not dismissed in full, the Company intends to vigorously defend the action.
Store Manager Class Actions
There 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, August 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. The Company reserved $425,000 for the settlement as of February 2, 2020.
Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the fiscal year ended February 1, 2020.
Item 2 –
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 –
Defaults Upon Senior Securities
None.
Item 4 –
Mine Safety Disclosure
Not Applicable.
Item 5 –
Other Information
None.
| (A) Exhibits - | |
Exhibit No. | Description |
| 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. |
| | |
| 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. |
| | |
| Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 101.INS | XBRL Instance Document (furnished herewith) |
| | |
| 101.SCH | XBRL Taxonomy Extension Schema (furnished herewith) |
| | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
| | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
| | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
| | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
Pursuant to the requirements of the Securities and 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.
| December 15, 2020 | | By: /s/ Kunal Chopra | |
| | Kunal Chopra |
| | Principal Executive Officer |
| | (Principal Executive Officer) |
| December 15, 2020 | | By: /s/ Edwin Sapienza | |
| | Edwin Sapienza |
| | Chief Financial Officer |
| | (Principal and Chief Accounting Officer) |
