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”, 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.
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. Considering these risks and uncertainties, you should keep in mind that any forward-looking statements made in this report or elsewhere might not occur.
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:
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.
Company Background
Kaspien Holdings Inc. (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.
Kaspien provides a platform of software and services to empower brands to grow their online distribution channels on digital marketplaces such as Amazon, Walmart and Target, among others. The
Company helps brands achieve their online retail goals through its innovative and proprietary technology, tailored strategies and mutually beneficial partnerships.
We are guided by 5 core principles:
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We are partner obsessed. Our customers are our partners. Every decision is focused on building mutually beneficial relationships that deliver results.
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We are insights driven. We make data actionable. Our curiosity drives us to discover opportunities early and often.
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We create simplicity. We challenge the status quo. We take the complicated and simplify it.
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We take ownership. We make things happen. We hold ourselves accountable and have a bias for action.
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We empower each other. We welcome and learn from diverse experiences. Our empathy ignites innovation and empowers meaningful change.
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Business Overview
Kaspien’s mission is to accelerate partner brand growth on today’s leading online marketplaces. Our vision is to become a global leader in the brand accelerator industry by improving partner
efficiency and profitability. Our marketplace as a service (“MaaS”) approach consists of delivering technology-enabled services to our partners, including software and associated support services. Our primary focus marketplaces are Amazon US,
Amazon CA, Amazon DE and Amazon EU (including UK), with additional service and support available for Target+ and Walmart marketplaces.
Kaspien leverages its 13 years of ecommerce and online brand management experience to provide tech-enabled, partner-specific recommendations—resulting in a clear plan of action, pricing, and
timeline. Our team of ecommerce experts use internal and external software to deliver insights and results in the areas of listing creation, content optimization, paid advertising, campaign management and supply chain / logistical support.
Our MaaS business delivers blended contribution margin across retail and agency models. This marketplace growth platform allows for a diversified go-to-market approach, enabling economies of
scale for multiple operations.
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Retail business model: We buy inventory and use our expertise, technology, and services to generate revenue through marketplace transactions. Kaspien provides account
management, brand communications, listings management, data reporting, joint business planning and comprehensive marketing support services. Our target partners are enterprise-level and other large growth brands, and derive margin based on
pricing.
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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 account management, media planning, media analytics, search strategy, business planning and data reporting support services. Our target partners in this space range from small, first-to-market brands to
full-scale, enterprise brands. We derive margin based on a percentage of ad spend, commissions, and/or specific service fees.
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Kaspien provides all the software and services required to drive brand growth and achieve a brand’s goals on Amazon, Walmart, and Target through multiple business models—namely, Retail and Agency
services. We are a technology enabled services company built for marketplace growth. A high-level visualization of our business model is shown in Figure 1 below.
Partners
Kaspien views all brand customers of our platform as 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. Our market sectors include but are not limited to: Pets & Sporting Goods, Baby, Tools/Office/Outdoors, and Health & Personal Care. In fiscal 2021, these top categories made
approximately 70% of our total revenue. To accelerate the growth of our businesses, we have defined an operating model by segmenting our businesses into a portfolio of brands by category, which is run by a single-threaded leader or Partner Success
Manager. Each Partner Success Manager is supported by a cross functional team, collectively called a “business POD”. We organize our operations by category, developing a deep understanding and subject matter expertise in these areas, powering our
platform to drive better results across these category focal points.
The Company uses its proprietary data platform to identify brands that would be good strategic fits for its services. We utilize content marketing to strengthen its visibility within the
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 publish eBooks, blog posts, case studies and webinars. Kaspien
also runs advertisements on popular ad platforms such as Google, Facebook, Twitter, and LinkedIn to bring leads into its sales funnels.
Partnership Models
The Kaspien platform can be leveraged and engaged via three primary and distinct business models.
Retail-as-a-Service (“RaaS”): We own inventory. We sell it.
In this model, Kaspien buys inventory and sells it on marketplaces such as Amazon, Walmart, and Target as a third-party seller. Additionally, Kaspien supports private label and dropship
integrations with various suppliers and distributors, as well as incubates its own brands. At the end of fiscal 2021, Kaspien had a total of four (4) incubated brands – Jumpoff Jo, Brilliant Bee, Big Betty, and Domestic Corner.
Agency-as-a-Service (“AaaS”): Partner owns inventory. We sell it.
In this model, Kaspien serves as an extension of a partner’s e-commerce team, providing full service in the areas of inventory management, marketing management, creative, brand control,
compliance and other marketplace growth services. Kaspien charges a subscription fee and receives a percentage of the revenue generated.
Managed Service (“MS”): Partner owns inventory and sells it.
In this model, Kaspien provides select AaaS services to its partner, such as FBA cost recovery or Amazon advertising management. Kaspien charges retainer and/or receives a percentage of the
transaction.
The “Agency as a Service” and “Managed Service” models are collectively called “Subscriptions.” The software products and tech-enabled services that form subscriptions are as follows:
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Brand protection and seller tracking
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Cost recovery and case management
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Inventory management & supply chain
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As of January 29, 2022, we had 925 total accounts across our portfolio of external brand partners, including over 600 active retail partners and 28 subscriptions partners.
Technology and Integrations
The Company’s marketplace platform is a one stop shop, insights driven platform built on top of more than a decade of marketplace selling data. The platform includes a variety of artificial intelligence powered
analysis solutions spanning across brand protection services, logistics and supply chain optimization, automated pricing, advertising marketing management, creative 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.
The platform uses an insight 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 leverages a combination of proprietary and licensed software related to pricing, advertisement management, marketplace seller tracking and channel
auditing.
Additionally, the Kaspien platform can be extended to our business and service 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 and MyFBAPrep in the logistics and fulfillment space, TaxCloud, a tax services provider, VantageBP, a
brand protection agency, Levin Consulting, an electronics specialty retailer, and others.
Business Environment
Digital marketplaces allow consumers to shop from a variety of 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 2021 were $870.8 billion, up +14.2% from 2020. While shoppers returned to physical stores in the back half of 2021 as COVID
restrictions eased in various parts of the United States, many shoppers continued to rely on internet retailers for their consumer needs. As a result, e-commerce sales ended the year accounting 13.2% of total sales as compared to 13.6% of total in
2020.
In the United States, we sell on marketplaces that represent greater than 50% of national e-commerce visits and sales (including Amazon.com, Walmart.com, Target.com, Google.com, Sears.com,
jet.com, Pricefalls.com, Overstock.com, and Wish.com). Internationally, we sell on marketplaces in the U.K. (Amazon.uk), Germany (Amazon.de), Canada (Amazon.ca).
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 focused on a few focus areas where sellers have support needs. Subcategories in this market include Account and Marketing Services, Supply Chain and Logistics Providers,
Manufacturers and Product Suppliers, Legal Services and Accounting, Tax and Financial Services. In the Account and Marketing Services subcategory, services are further divided into retail services and agency services. This is analogous to our
business models – Retail as a Service, Agency as a Service and Managed Services.
Kaspien positions itself as a comprehensive and fully customizable offering of software and services tailored towards online marketplace growth. Kaspien’s core focus is on the Account and
Marketing Services subcategory and 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” business, specifically as a third-party seller on the Amazon US marketplace. Retail revenues represented 98.7% of total
revenue in fiscal 2021 as compared to 99.2% in fiscal 2020. In fiscal 2021, the share of our retail revenues generated from our Amazon US business was 94.4%, as compared to 94.6% in fiscal 2020. Our international retail business represented 3.9% of
retail sales in fiscal 2021 compared to 4.9% in fiscal year 2020. The remaining retail revenue is generated from other marketplaces including Amazon International, Walmart, eBay and Target+.
Kaspien focuses on a broad array of categories, including pets and sporting goods, baby, tools / office / outdoor, health & personal care, and home / kitchen. In fiscal year 2021, these
categories represented approximately 81% of our total revenue. Kaspien organizes our operations by category, developing a deep understanding and subject matter expertise in these areas, enabling us to drive better results across these categories.
Human Capital
As of January 29, 2022, the Company employed approximately 141 full-time people. At the end of fiscal 2021, 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, and technology. Employee levels are managed to align with the pace of business and management believes it has sufficient human capital to
operate its business successfully.
The Company believes that its success depends on the ability to attract, develop, retain and incentivize our existing and new employees, consultants, and key personnel. It also believes that the skills, experience
and industry knowledge of its key personnel significantly benefits its operations and performance. The principal purposes of equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and
cash-based compensation awards, in order to offer a 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 using its proprietary data platform to identify brands that would be a strategic fit for
its services. Kaspien utilizes 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.
In addition, Kaspien regularly runs advertisements on popular ad platforms such as Google, Facebook, Twitter and LinkedIn to bring leads into its sales funnels.
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”.
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. 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 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. Based on recurring losses from operations, negative cash flows from operations, the expectation of continuing operating losses for the foreseeable future, negative cash flows for operations 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.
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.
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. The Company had one
vendor that represented 11.0% of net revenue in fiscal 2021.
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 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 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 29, 2022, the Company had borrowings of $10.0 million under our
credit facility with Eclipse. We also had borrowings of $4.4 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. On March 2, 2022, we incurred an additional $5.0 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 Eclipse, as administrative agent, under which the lenders committed to provide up to $25 million in loans under a
four-year, secured revolving credit facility (the “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 and 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 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 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 to constitute senior indebtedness under any applicable subordination or
intercreditor agreements, including our Subordinated Debt.
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.
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, overall unemployment levels, and increased costs associated with
complying with regulations relating to COVID-19. 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 shareholders and may have competing interests.
The Robert J. Higgins TWMC Trust (the “Trust”) owns approximately 28.8% of the outstanding Common Stock and Neil Subin owns approximately 18.1% 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 51.6% of the outstanding Common Stock, and as a result can control the outcome of most actions requiring shareholder approval.
If all of the outstanding warrants described in “Related Party Transactions” were exercised, Neil Subin and his affiliated entities would own approximately 27.4% of the outstanding Common Stock, and as a result each
can significantly 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 57.0% of the outstanding Common Stock, and as a result can control the outcome of nearly all actions requiring shareholder approval,
These shareholders 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.
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 325,126 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.
If we do not meet the continued listing standards of the NASDAQ, 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.
Our common stock is listed on NASDAQ, which imposes continued listing requirements with respect to listed shares. If we fail to maintain compliance with the continued listing requirements in the future and NASDAQ
determines to delist our Common Stock, the delisting could adversely affect the market price and liquidity of our Common 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 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 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.
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 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.
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.
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, negative cash flows from operations 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.
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.
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 Credit Facility, balances of cash, cash equivalents and cash generated from operations.
In 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 fiscal 2021, we experienced production and shipment
delays for certain of our products that resulted in stock outs on the Amazon marketplace resulting in a decrease of net revenue. During 2021, the global shipping disruption led to substantial increases in supply chain costs and reduced the
reliability and timely delivery of our shipping containers. 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.