PART I
Cautionary Statement for Purposes of the “Safe Harbor” Provisions
of the Private Securities Litigation Reform Act of 1995
This document includes
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate
to analyses and other information that are based on forecasts of
future results and estimates of amounts not yet determinable. These
statements also relate to the Kaspien Holdings Inc.’s (“the
Company’s”) future prospects, developments and business strategies.
The statements contained in this document that are not statements
of historical fact may include forward-looking statements that
involve a number of risks and uncertainties.
We have used the words
“anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”,
“may”, “plan”, “predict”, “project”, 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.
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• continued
operating losses;
• impact of
the novel coronavirus identified as “COVID-19” on our business and
operating results;
• the ability
of the Company to satisfy its liabilities and to continue as a
going concern;
•
maintaining Kaspien’s relationship with Amazon;
•
continued revenue declines;
• decline in the Company’s
stock price;
• the
limited public float and trading volume for our Common Stock;
• new product
introductions;
• advancements
in technology;
• dependence
on key employees, the ability to hire new employees and pay
competitive wages;
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• the
Company’s level of debt and related restrictions and
limitations;
• future
cash flows;
• vendor
terms;
•
interest rate fluctuations;
• access
to third party digital marketplaces;
•
adverse publicity;
•
product liability claims;
•
changes in laws and regulations;
• breach
of data security;
• increase in
Amazon Marketplace fulfillment and storage fees;
•
limitation on our acquisition and growth strategy as a result of
our inability to raise necessary funding;
• the other
matters set forth under Item 1A “Risk Factors,” Item 7
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations”, and other sections of this Annual Report on
Form 10-K
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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:
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the reported amounts and timing
of revenue and expenses,
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the reported amounts and
classification of assets and liabilities, and
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the disclosure of contingent
assets and liabilities.
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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.
|
Item 1B. |
UNRESOLVED SEC
COMMENTS
|
None.
Corporate Offices and Distribution
Center Facility
As of January 29, 2022, we leased
the following office and distribution facilities:
|
Location
|
|
Square
Footage
|
|
Owned
or
Leased
|
|
Use
|
|
Spokane, WA
|
|
30,700
|
|
Leased
|
|
Office administration
|
|
Spokane, WA
|
|
32,000
|
|
Leased
|
|
Distribution center
|
The distribution center supports
the distribution to outside distribution facilities for sale on
third-party marketplaces for Kaspien.
|
Item 3. |
LEGAL
PROCEEDINGS
|
The Company is subject to legal
proceedings and claims that have arisen in the ordinary course of
its business and have not been finally adjudicated. Although there
can be no assurance as to the ultimate disposition of these
matters, it is management’s opinion, based upon the information
available at this time, that the expected outcome of these matters,
individually and in the aggregate, will not have a material adverse
effect on the results of operations and financial condition of the
Company.
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 putative 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 removed that lawsuit back to federal
court on June 12, 2019, and then filed a motion to dismiss and/or
strike the plaintiff’s class action allegations on June 28, 2019.
On February 2, 2021, the court granted the Company’s motion, struck
the class action allegations, and dismissed the individual
plaintiffs’ claims for lack of jurisdiction. Plaintiffs appealed
the court’s decision on February 24, 2021. The parties participated
in a mandatory court-annexed mediation session on April 8, 2021.
The parties agreed on terms to resolve the matter fully and
finally, and the appeal was dismissed without material impact on
the financial results of the Company.
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, May 2017 (the “Roper
Action”). The Roper Action also asserts a nationwide
misclassification claim on behalf of SMs. Both actions were
consolidated into the Northern District of New York, with the Spack
Action being the lead case.
The Company has reached a settlement with the plaintiffs for both
store manager class actions, which has received approval from the
court. The Company reserved $0.4 million for the settlement as of
January 30, 2021. During the second quarter of fiscal 2021, the
Company paid the final settlement and the matter is fully
resolved.
Retailer
Agreement Dispute
On June 18, 2021, Vijuve Inc.
filed a lawsuit against Kaspien Inc. in the United States District
Court for the Eastern District of Washington (Case No.
2:21-cv-00192-SAB) concerning a Retailer Agreement that the parties
entered into in September of 2020. Vijuve manufactures skin care
products and face massagers. The parties agreed that Kaspien would
sell Vijuve’s products on Amazon. The complaint alleged that
Kaspien breached the Retailer Agreement when it declined to
acquiesce to Vijuve’s demand that Kaspien purchase over $700,000 of
products. In total, Vijuve is seeking $774,000 in damages. Kaspien
denies that it breached the agreement. Moreover, on July 19, 2021,
Kaspien filed counterclaims and alleged that Vijuve breached the
contract, including by refusing to buy back inventory from Kaspien
upon termination of the Retailer Agreement. Kaspien is seeking at
least $229,000 from Vijuve for breach of contract and/or specific
performance. A trial on all of the parties’ claims is scheduled for
February 21, 2023.
|
Item 4. |
MINE SAFETY
DISCLOSURES
|
Not applicable.
PART II
|
Item 5. |
MARKET FOR THE
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market Information: The Company’s
Common Stock trades on the NASDAQ Capital Market under the symbol
“KSPN.” As of April 15, 2022, there were 296 shareholders of
record.
On March 18, 2021, the Company
closed an underwritten offering of 416,600 shares of common stock
of the Company, at a price to the public of $32.50 per share. The
gross proceeds of the offering were approximately $13.5 million,
prior to deducting underwriting discounts and commissions and
estimated offering expenses. The Company used the net proceeds from
the offering for general corporate purposes, including working
capital to implement its strategic plans focused on brand
acquisition, investments in technology to enhance its scalable
platform and its core retail business.
On March 2, 2022, the Company
issued warrants to purchase up to 320,000 shares of Common Stock to
Alimco, subject to adjustment in accordance with the terms of the
Warrant, at an exercise price of $0.01 per share. See “Related
Party Transactions”.
Dividend Policy: The Company did not
pay cash dividends in fiscal 2021 and fiscal 2020. The declaration
and payment of any dividends is at the sole discretion of the board
of directors and is not guaranteed.
Issuer
Purchases of Equity Securities during the Quarter Ended January 29,
2022
During the three-month period
ended January 29, 2022, the Company did not repurchase any shares
under a share repurchase program.
|
Item 7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Management’s Discussion and
Analysis of Financial Condition and Results of Operations provide
information that the Company’s management believes necessary to
achieve an understanding of its financial condition and results of
operations. To the extent that such analysis contains statements
which are not of a historical nature, such statements are
forward-looking statements, which involve risks and uncertainties.
These risks include, but are not limited to, changes in the
competitive environment for the Company’s products and services;
general economic factors in markets where the Company’s products
and services are sold; and other factors including, but not limited
to: cost of goods, consumer disposable income, consumer debt levels
and buying patterns, consumer credit availability, interest rates,
customer preferences, unemployment, labor costs, inflation, fuel
and energy prices, weather patterns, climate change, catastrophic
events, competitive pressures and insurance costs discussed in the
Company’s filings with the Securities and Exchange
Commission.
FYE
Transaction
Previously, the Company also operated fye, a
chain of retail entertainment stores and e-commerce sites,
www.fye.com and www.secondspin.com. On February 20, 2020, the Company
consummated the sale of substantially all of the assets and certain
of the liabilities relating to fye to a subsidiary of 2428391
Ontario Inc. o/a Sunrise Records (“Sunrise Records”) pursuant to an
Asset Purchase Agreement dated January 23, 2020, by and among the
Company, Record Town, Inc., Record Town USA LLC, Record Town Utah
LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc.,
and Sunrise Records (the “FYE Transaction”).
Following the FYE Transaction,
Kaspien is the Company’s only operating segment.
Impact of COVID-19
To date, as
a direct result of COVID-19, most of our employees are working
remotely. The full extent to which the COVID-19 pandemic will
directly or indirectly impact our business, results of operations
and financial condition, including expenses, reserves and
allowances, and employee-related amounts, will depend on future
developments that are highly uncertain, including as a result of
new information that may emerge concerning COVID-19 and the actions
taken to contain or treat it, as well as the economic impact on
local, regional, national and international customers and markets,
which are highly uncertain and cannot be predicted at this time.
Management is actively monitoring this situation and the possible
effects on its financial condition, liquidity, operations,
industry, and workforce. Given the daily evolution of the COVID-19
outbreak and the response to curb its spread, currently we are not
able to estimate the effects of the COVID-19 outbreak to our
results of operations, financial condition, or liquidity.
In response to the rapidly
evolving COVID-19 pandemic, we activated our business continuity
program, led by our Executive Team in conjunction with Human
Resources, to help us manage the situation. In mid-March of 2020,
we transitioned our corporate office staff to work 100% remotely.
This process was aided through the implementation of a flexible
work from home policy rolled out to the organization in fiscal
2019, having a companywide communication platform for instant
messaging and video conferencing, and cloud-based critical business
applications. However, while our business is not dependent on
physical office locations nor travel, having a 100% remote
workforce does present increased operational risk. Our leadership
team believes we have the necessary controls in place to mitigate
these impacts and allow the team to continue to operate effectively
remotely as long as required by State guidelines.
While e-commerce has largely
benefited from the closure of brick-and-mortar locations as
consumer spending has been pushed online to marketplaces such as
Amazon and Walmart, the industry nor our organization has been
immune to the impact to our supply chains. During 2021, we have
been impacted by COVID-19 pandemic and related global shipping
disruption. Together these have led to substantial increases in
supply chain costs and has reduced the reliability and timely
delivery of such shipping containers. Further, this global shipping
disruption is forcing us to increase our inventory on-hand
including advance ordering and taking possession of inventory
earlier than expected impacting its working capital.
COVID-19 continues to bring
uncertainty to consumer demand as price increases related to raw
materials, the importing of goods, including tariffs, and the cost
of delivering goods to consumers has led to inflation across the
U.S. Coupled with continued changes in governmental restrictions
and requirements, which continued to vary across the majority of
the country, the Company has noticed changes to consumer buying
habits, which may have reduced demand for its products. Further, we
have increased the sale prices for our products to offset the
increased supply chain costs, which has also led to reduced demand
for our goods. Reduced demand for our products and increased prices
affecting consumer demand generally have also made forecasting more
difficult.
The risk of another wave or
increased numbers of positive COVID-19 cases also presents further
risk to supply chains. Leadership is actively monitoring the
situation and potential impacts on its financial condition,
liquidity, operations and workforce but the full extent of the
impact is still highly uncertain.
Key
Performance Indicators
Management
monitors a number of key performance indicators to evaluate its
performance, including:
Net Revenue: The Company measures total
year over year sales growth. Net sales performance is measured
through several key performance indicators including number of
partners and active product listings and sales per listing.
Cost of Sales and Gross Profit:
Gross profit is calculated based on the cost of product in relation
to its retail selling value. Changes in gross profit are impacted
primarily by net sales levels, mix of products sold, obsolescence
and distribution costs. Distribution expenses include those costs
associated with receiving, inspecting & warehousing
merchandise, Amazon fulfillment fees, and costs associated with
product returns to vendors.
Selling, General and Administrative
(“SG&A”) Expenses: Included in SG&A expenses are
payroll and related costs, general operating and overhead expenses
and depreciation charges. SG&A expenses also include
miscellaneous income and expense items, other than interest.
Balance
Sheet and Ratios:
The Company views cash, merchandise inventory, accounts payable
leverage, and working capital as key indicators of its financial
position. See “Liquidity and Capital Resources” for further
discussion of these items.
Gross Merchandise Value (“GMV”): The
total value of merchandise sold over a given time period through a
customer-to-customer exchange site. It is the measurement of
merchandise value sold across all channels and partners within our
platform.
Fiscal Year Ended January 29, 2022 (“fiscal 2021”)
Compared to Fiscal Year Ended January 30, 2021 (“fiscal
2020”)
The
Company’s fiscal year is a 52 or 53-week period ending the Saturday
nearest to January 31. Fiscal 2021 and fiscal 2020 ended January
29, 2022 and January 30, 2021, respectively. Both fiscal 2021 and
fiscal 2020 had 52 weeks.
Net Revenue. Net revenue decreased 9.2%
to $143.7 million compared to $158.3 million in fiscal 2020. The
primary source of revenue is the Retail as a Service (“RaaS”)
model, which represented 99% of net revenue. Net revenue from
Walmart, Target and Other Marketplaces increased to 1.5% in fiscal
2021 from 0.6% in fiscal 2020. Subscriptions and Other share of net
revenue increased to 1.3% of net revenue from 0.8% of net revenue
in the comparable period from the prior year. The increase was
attributable an increase in the number of partners and higher gross
merchandise value (“GMV”) of partner revenue flowing through the
platform Amazon Marketplace. The following table sets forth net
revenue by marketplace as a percentage of total net revenue:
|
|
|
January 31,
2022
|
|
|
%
to
Total
|
|
|
January 30,
2021
|
|
|
% to
Total
|
|
|
Change
|
|
|
Amazon US
|
|
$
|
134,125
|
|
|
|
93.3
|
%
|
|
$
|
148,526
|
|
|
|
93.8
|
%
|
|
$
|
(14,401
|
)
|
|
Amazon International
|
|
|
5,576
|
|
|
|
3.9
|
%
|
|
|
7,646
|
|
|
|
4.8
|
%
|
|
|
(2,070
|
)
|
|
Walmart, Target & Other Marketplaces
|
|
|
2,172
|
|
|
|
1.5
|
%
|
|
|
884
|
|
|
|
0.6
|
%
|
|
|
1,288
|
|
|
Subtotal Retail
|
|
|
141,873
|
|
|
|
98.7
|
%
|
|
|
157,056
|
|
|
|
99.2
|
%
|
|
|
(15,183
|
)
|
|
Subscriptions & Other
|
|
|
1,840
|
|
|
|
1.3
|
%
|
|
|
1,289
|
|
|
|
0.8
|
%
|
|
|
551
|
|
|
Total
|
|
$
|
143,713
|
|
|
|
100.0
|
%
|
|
$
|
158,345
|
|
|
|
100.0
|
%
|
|
$
|
(14,632
|
)
|
The Company generates revenue
across a broad array of product lines primarily through the Amazon
Marketplace. Categories include apparel, baby, beauty, electronics,
health & personal care, home/kitchen/grocery, pets, sporting
goods, toys & art.
Annual platform GMV for fiscal
year 2021 was $271 million as compared to $248 for fiscal 2020.
Subscription GMV increased 45% to $120 million or 44.3% of total
GMV, compared to $83 million or 33.5% of total GMV in fiscal
2020.
Gross Profit. Gross profit as a
percentage of revenue was 22.8% in fiscal 2021 as compared to 24.9%
in fiscal 2020. The decrease in the gross profit rate was primarily
due to a decrease in merchandise margin to 44.8% in fiscal 2021 as
compared to 46.4% in fiscal 2020 and a $2.0 million increase in
warehousing and freight expenses. The following table sets forth a
year-over-year comparison of the Company’s gross profit:
|
|
|
|
|
|
Change
|
|
|
(amounts in thousands)
|
|
January 29, 2022
|
|
|
January 30, 2021
|
|
|
$ |
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise margin
|
|
$
|
64,410
|
|
|
$
|
73,448
|
|
|
$
|
(9,038
|
)
|
|
|
(12.3
|
)%
|
|
%
of net revenue
|
|
|
44.8
|
%
|
|
|
46.4
|
%
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment fees
|
|
|
(21,655
|
)
|
|
|
(26,046
|
)
|
|
|
4,391
|
|
|
|
16.9
|
%
|
|
Warehousing and freight
|
|
|
(9,982
|
)
|
|
|
(7,986
|
)
|
|
|
(1,996
|
)
|
|
|
(24.9
|
)%
|
|
Gross profit
|
|
$
|
32,773
|
|
|
$
|
39,416
|
|
|
|
(6,643
|
)
|
|
|
(16.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue
|
|
|
22.8
|
%
|
|
|
24.9
|
%
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses. The following table sets forth a
year-over-year comparison of the Company’s SG&A
expenses:
|
|
|
|
|
|
Change
|
|
|
(amounts in thousands)
|
|
January 29, 2022
|
|
|
January 30,
2021
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
$
|
20,794
|
|
|
$
|
23,112
|
|
|
$
|
(2,318
|
)
|
|
|
(10.0
|
)%
|
|
General and administrative expenses
|
|
|
19,501
|
|
|
|
19,890
|
|
|
|
(389
|
)
|
|
|
(2.0
|
)%
|
|
Depreciation and amortization expenses
|
|
|
2,096
|
|
|
|
2,139
|
|
|
|
(43
|
)
|
|
|
(2.0
|
)%
|
|
Total SG&A expenses
|
|
$
|
42,391
|
|
|
$
|
45,141
|
|
|
$
|
(2,750
|
)
|
|
|
(6.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total revenue
|
|
|
29.5
|
%
|
|
|
28.5
|
%
|
|
|
|
|
|
|
|
|
SG&A expenses decreased $2.8
million, or 6.1%, primarily due to a 10.0% reduction in in Selling
expenses. The decline in Selling expenses was attributable to the
decline in Net revenue. General and administrative expenses
decreased $0.4 million.
SG&A expenses as a percentage
of net revenue increased to 29.5% as compared to 28.5% in fiscal
2020. The increase in the rate as a percentage of net revenue was
primarily due to lost leverage on the general and administrative
expenses.
Depreciation and amortization expense.
Consolidated depreciation and amortization expense for fiscal 2021
was $2.1 million, the same level as fiscal 2020.
Interest Expense. Interest expense in
fiscal 2021 was $1.9 million, compared to interest expense of $1.7
million in fiscal 2020.
Income Tax (Benefit) expense. The
following table sets forth a year-over-year comparison of the
Company’s income tax expense:
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
January 29,
2022
|
|
|
January 30,
2021
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
27
|
|
|
$
|
(3,542
|
)
|
|
$
|
3,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.3
|
%
|
|
|
(47.6
|
)%
|
|
|
47.9
|
%
|
The fiscal 2021 income tax
expense includes state taxes.
During
fiscal 2020, based on the Company’s evaluation of new information
that occurred in the current financial reporting period, the
Company recorded an income tax benefit of $3.5 million related to
the recognition of previously unrecognized income tax benefits
pursuant to ASC 740-10-25, Accounting for Income Taxes –
Recognition. Prior to the current financial reporting period, the
Company had accrued the liabilities for unrecognized income tax
benefits, including accrued interest and penalties related to tax
positions created by the fye business. As a result of the FYE
Transaction and a reorganization of the Company’s corporate
structure, the Company will not utilize the tax attributes
attributable to the tax positions and the corporate entities
associated with the tax positions have been liquidated.
Net Loss. The following table sets
forth a year-over-year comparison of the Company’s net loss:
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
January 29,
2022
|
|
|
January 31,
2020
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,031
|
)
|
|
$
|
(3,892
|
)
|
|
$
|
(4,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss as a percentage of Net revenue
|
|
|
(5.6
|
)%
|
|
|
(2.5
|
)%
|
|
|
(3.1
|
)%
|
Net loss was
$8.0 million for fiscal 2021, compared to $3.9 million for fiscal
2020. The increase in net loss was primarily due to lower net
revenue and a lower gross margin rate.
LIQUIDITY AND
CAPITAL RESOURCES
Liquidity and Cash Flows:
The consolidated financial
statements for the year ended January 29, 2022 were prepared on the
basis of a going concern which contemplates that the Company will
be able to realize assets and satisfy liabilities and commitments
in the normal course of business. The ability of the Company to
meet its liabilities and to continue as a going concern is
dependent on improved profitability, the continued implementation
of the strategic initiative to reposition the Company as a platform
of software and services, the availability of future funding and
overcoming the impact of the COVID-19 pandemic.
The audited consolidated
financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The Company incurred net losses
of $8.0 million and $3.9 million for the fiscal 2021 and fiscal
2020, respectively, and has an accumulated deficit of $120.9
million as of January 29, 2022. In addition, net cash used in
operating activities during fiscal 2021 was $14.5 million. Net cash
used in operating activities during fiscal 2020 was $13.4
million.
There can be no assurance that we
will be successful in further implementing our business strategy or
that the strategy, including the completed initiatives, will be
successful in sustaining acceptable levels of sales growth and
profitability. Based on recurring losses from operations, negative
cash flows from operations, the expectation of continuing operating
losses for the foreseeable future, 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.
The Company’s primary sources of
liquidity are its borrowing capacity under its Credit Facility,
available cash and cash equivalents, and to a lesser extent, cash
generated from operations. Our cash requirements relate primarily
to working capital needed to operate Kaspien, including funding
operating expenses, the purchase of inventory and capital
expenditures. Our ability to achieve profitability and meet future
liquidity needs and capital requirements will depend upon numerous
factors, including the timing and amount of our revenue; the timing
and amount of our operating expenses; the timing and costs of
working capital needs; successful implementation of our strategy
and planned activities; and our ability to overcome the impact of
the COVID-19 pandemic.
On March 18, 2021, the Company
closed an underwritten offering of 416,600 shares of common stock
of the Company, at a price to the public of $32.50 per share. The
gross proceeds of the offering were approximately $13.5 million,
prior to deducting underwriting discounts and commissions and
estimated offering expenses. The Company intends to use the net
proceeds from the offering for general corporate purposes,
including working capital to implement its strategic plans focused
on brand acquisition, investments in technology to enhance its
scalable platform and its core retail business.
On March 2, 2022, the Company amended its subordinated loan
pursuant to which the lenders made an additional $5.0 million
secured term loan with a scheduled maturity date of March 31, 2024,
which is the same maturity date as the existing loans under the
Subordinated Loan Agreement.
In addition to the aforementioned
current sources of existing working capital, the Company is
continuing its efforts to generate additional sales and increase
margins. There can be no assurance that any of the initiatives or
strategic alternatives will be implemented, successful or
consummated.
The following table sets forth a
two-year summary of key components of cash flow and working
capital:
|
(amounts in thousands)
|
|
|
2021
|
|
|
2020
|
|
|
2021
vs.
2020
|
|
|
Operating Cash Flows
|
|
|
$
|
(14,534
|
)
|
|
$
|
(13,391
|
)
|
|
$
|
(1,143
|
)
|
|
Investing Cash Flows
|
|
|
|
(1,431
|
)
|
|
|
10,589
|
|
|
|
(12,018
|
)
|
|
Financing Cash Flows
|
|
|
|
14,233
|
|
|
|
505
|
|
|
|
13,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
(1,431
|
)
|
|
|
(1,190
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
(1)
|
|
|
4,823
|
|
|
|
6,555
|
|
|
|
(1,732
|
)
|
|
Merchandise Inventory
|
|
|
|
30,222
|
|
|
|
24,515
|
|
|
|
5,707
|
|
|
Working Capital
|
|
|
|
16,334
|
|
|
|
10,762
|
|
|
|
5,572
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents per Consolidated Balance Sheets
|
|
$
|
1,218
|
|
|
$
|
1,809
|
|
|
|
(591
|
)
|
|
|
Add: Restricted cash
|
|
|
3,605
|
|
|
|
4,746
|
|
|
|
(1,141
|
)
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
4,823
|
|
|
$
|
6,555
|
|
|
|
(1,732
|
)
|
During fiscal 2021, cash used in
operations was $14.5 million compared to $13.4 million in fiscal
2020. During 2021, cash used in operations consisted primarily of a
net loss of $8.0 million, an increase of $4.8 million in inventory
and the payment of $2.6 million in accounts payable. During 2020,
cash used in operations consisted primarily of a net loss of $3.9
million, an increase of $6.7 million in inventory and the payment
of $5.5 million in accounts payable partially offset by a decrease
in prepaid expenses and accounts receivables. See the Consolidated
Statement of Cash Flows for further detail.
The Company monitors various
statistics to measure its management of inventory, including
inventory turnover (annual cost of sales divided by average
merchandise inventory balances), and accounts payable leverage
(accounts payable divided by merchandise inventory). Inventory
turnover measures the Company’s ability to sell merchandise and how
many times it is replaced in a year. This ratio is important in
determining the need for markdowns and planning future inventory
levels and assessing customer response to our merchandise.
Inventory turnover in fiscal 2021 and in fiscal 2020 was 4.0 and
5.6, respectively. Accounts payable leverage measures the
percentage of inventory being funded by the Company’s product
vendors. The percentage is important in determining the Company’s
ability to fund its business. Accounts payable leverage on
inventory for Kaspien was 20.7% as of January 29, 2022, compared
with 36.3% as of January 30, 2021.
Cash used in investing activities
was $1.4 million in fiscal 2021, compared to cash provided by
investing activities of $10.6 million in fiscal 2020. During fiscal
2021, cash used in investing activities consisted of $1.4 million
in capital expenditures. During fiscal 2020, cash provided by
investing activities consisted of proceeds from the sale of the fye
business of $11.8 million, partially offset by capital expenditures
of $1.2 million.
The Company has historically
financed its capital expenditures through borrowings under its
revolving credit facility and cash flow from operations. The
Company anticipates capital spending of approximately $1.5 million
in fiscal 2022.
Cash provided by financing
activities was $14.2 million in fiscal 2021, compared to $505,000
in fiscal 2020. In fiscal 2021, the primary source of cash was an
underwritten offering of 416,600 shares of common stock of the
Company, at a price to the public of $32.50 per share. The net
proceeds of the offering were approximately $12.2 million.
Additional sources of cash included the $10.0 million in proceeds
from short term borrowings. The Company used $6.3 million of the
proceeds to pay down its Credit Facility. In fiscal 2020, cash
provided by financing activities consisted of $6.3 million in
proceeds from short term borrowings, $5.1 million in proceeds from
long term borrowings, $2.0 million in proceeds from a PPP loan,
partially offset by $13.1 million in payment of short-term
borrowings
Related Party
Transactions.
Directors Jonathan Marcus, Thomas
Simpson, and Michael Reickert are the chief executive officer of
Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III,
LLC and Kick-Start IV, LLC (“Kick-Start”), and a trustee of the
Robert J. Higgins TWMC Trust (the “Trust”), an affiliate of RJHDC,
LLC (“RJHDC” and together with Alimco and Kick-Start, “Related
Party Entities”), respectively. The Related Party Entities
are parties to the following agreements with the Company entered
into on March 30, 2020:
|
• |
Subordinated Loan and Security
Agreement (as amended), pursuant to which the Related Party
Entities made a $5.2 million secured term loan ($2.7 million from
Alimco, $0.5 million from Kick-Start, and $2.0 million from RJHDC)
to Kaspien with a scheduled maturity date of March 31, 2024,
interest accruing at the rate of twelve percent (12%) per annum and
compounded on the last day of each calendar quarter by becoming a
part of the principal amount, and secured by a second priority
security interest in substantially all of the assets of the Company
and Kaspien;
|
|
• |
Common Stock Purchase Warrants
(“Warrants”), pursuant to which the Company issued warrants to
purchase up to 244,532 shares of Common Stock to the Related Party
Entities (127,208 shares for Alimco, 23,401 shares for Kick-Start,
and 93,923 shares for RJHDC), subject to adjustment in accordance
with the terms of the Warrants, at an exercise price of $0.01 per
share. As of April 15, 2022, 238,763 warrants were exercised by the
Related Party Entities and 5,769 remained outstanding;
|
|
• |
Contingent Value Rights Agreement
(the “CVR Agreement”), pursuant to which the Related Party Entities
received contingent value rights (“CVRs”) representing the
contractual right to receive cash payments from the Company in an
amount equal, in the aggregate, to 19.9% of the proceeds (10.35%
for Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by
the Company in respect of certain intercompany indebtedness owing
to it by Kaspien and/or its equity interest in Kaspien; and
|
|
• |
Voting Agreement (the “Voting
Agreement”), pursuant to which the Related Party Entities, the
Trust, Mr. Simpson and their respective related entities agreed to
how their respective shares of the Company’s capital stock held by
the parties will be voted with respect to the designation,
election, removal, and replacement of members of the Board.
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.
|
On March 2, 2022, the Company
entered into the following agreements with certain of the Related
Parties:
|
• |
An amendment to the Subordinated
Loan and Security Agreement, pursuant to which Alimco made an
additional $5,000,000.00 secured term loan (the “Additional
Subordinated Loan”) with a scheduled maturity date of March 31,
2024, interest accruing at the rate fifteen percent (15.0%) per
annum, compounded on the last day of each calendar quarter by
becoming a part of the principal amount of the Additional
Subordinated Loan, and secured by a second priority security
interest in substantially all of the assets of the Company and
Kaspien;
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|
• |
Common Stock Purchase Warrant
(“Alimco Warrant”), pursuant to which the Company issued warrants
to purchase up to 320,000 shares of Common Stock to Alimco, subject
to adjustment in accordance with the terms of the Alimco Warrant,
at an exercise price of $0.01 per share;
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|
• |
Registration Rights Agreement,
pursuant to which Alimco has been granted customary demand and
piggyback registration rights with respect to the Warrant Shares
issued upon exercise of the Alimco Warrant; and
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|
• |
Contingent Value Rights Agreement
(the “Second CVR Agreement”) pursuant to which Alimco received
additional contingent value rights (“Additional CVRs”) representing
the contractual right to receive cash payments from the Company in
an amount equal, in the aggregate, to 9.0% of the proceeds received
by the Company in respect of certain distributions by the Company
or Kaspien; recapitalizations or financings of the Company or
Kaspien (with appropriate carve out for trade financing in the
ordinary course); repayment of intercompany indebtedness owing to
the Company by Kaspien; or sale or transfer of any stock of the
Company or Kaspien.
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CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial
statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires that
management apply accounting policies and make estimates and
assumptions that affect results of operations and the reported
amounts of assets and liabilities in the financial statements.
Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Note 1 of the
Notes to the Consolidated Financial Statements in this report
includes a summary of the significant accounting policies and
methods used by the Company in the preparation of its consolidated
financial statements. Management believes that of the Company’s
significant accounting policies and estimates, the following
involve a higher degree of judgment or complexity:
Merchandise Inventory and Return Costs.
Merchandise inventory is stated at the lower of cost or net
realizable value under the average cost method. Inventory valuation
requires significant judgment and estimates, including obsolescence
and any adjustments to net realizable value, if net realizable
value is lower than cost. For all merchandise categories, the
Company records obsolescence and any adjustments to net realizable
value (if lower than cost) based on current and anticipated demand,
customer preferences, and market conditions.
Long-Lived Assets other than Goodwill:
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to undiscounted future net cash flows expected to be
generated by the asset over its remaining useful life. If the
carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Fair value is generally measured based on discounted
estimated future cash flows. Assets to be disposed of would be
separately presented in the Consolidated Balance Sheets and
reported at the lower of the carrying amount or fair value less
disposition costs. As of January 29, 2022, for the purposes of the
asset impairment test, the Company has one asset grouping.
Recently
Issued Accounting Pronouncements.
The information set forth above
may be found under Notes to Consolidated Statements, Note 2.
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Item 7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not required under the
requirements of a Smaller Reporting Company.
|
Item 8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The Exhibits and financial
statement schedules to the Company’s Consolidated Financial
Statements are included in Item 15, and the Consolidated Financial
Statements follow the signature page to this report and are
incorporated herein by reference.
The quarterly results of
operations are included herein in Note 13 of Notes to the
Consolidated Financial Statements in this report.
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Item 9. |
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
Item 9A. |
CONTROLS AND
PROCEDURES
|
Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures: Under the
supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Based on this evaluation, our
principal executive officer and our principal financial officer
concluded that the Company’s disclosure controls and procedures
were designed to provide reasonable assurance of achieving their
objectives and as of the end of the period covered by this annual
report. Changes in personnel and a shortage of staff did result in
inadequate oversight over the performance of certain controls and
our control activities. However, our disclosure controls and
procedures were effective overall, in that they provide reasonable
assurance that information required to be disclosed by us in the
reports we file or submit, under the Exchange Act, is recorded,
processed, summarized, as appropriate, to allow timely decisions
regarding required disclosure and reported within the time period
specified in the Securities and Exchange Commission’s rules and
forms and that such information is accumulated and communicated to
management including the principal executive officer and principal
financial officer.
Management’s Report on Internal Control Over
Financial Reporting: Management is responsible for
establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d – 15(f)
under the Exchange Act, as amended). Under the supervision and with
the participation of the Company’s management, including our
principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework set forth
by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal
Control-Integrated Framework (2013). Based on our evaluation
under the framework in Internal
Control-Integrated Framework (2013), our management
concluded that our internal control over financial reporting was
effective as of January 29, 2022.
Changes in Controls and Procedures: As
of January 29, 2022, there have been no changes in the Company’s
internal controls over financial reporting that occurred during
fiscal 2021 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal controls over
financial reporting. We are continually monitoring and assessing
the COVID-19 situation on our internal controls to minimize the
impact on their design and operating effectiveness.
|
Item 9B. |
OTHER
INFORMATION
|
No events have occurred which
would require disclosure under this Item 9B.
|
Item 9C. |
DISCLOSURE
REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
|
Not applicable.
PART III
|
Item 10. |
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information
required by this item is incorporated by reference from the
information to be included in the Proxy Statement for our 2022
Annual Meeting of Shareholders to be filed pursuant to Regulation
14A with the SEC on or about May 30, 2022, which information is
incorporated by reference.
|
Item 11. |
EXECUTIVE
COMPENSATION
|
Information
required by this item is incorporated by reference from the
information to be included in the Proxy Statement for our 2022
Annual Meeting of Shareholders to be filed pursuant to Regulation
14A with the SEC on or about May 30, 2022, which information is
incorporated by reference.
|
Item 12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
|
Certain
information required by this item is incorporated by reference from
the information to be included in the Proxy Statement for our 2022
Annual Meeting of Shareholders to be filed pursuant to Regulation
14A with the SEC on or about May 30, 2022, which information is
incorporated by reference.
|
Item 13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
required by this item is incorporated by reference from the
information to be included in the Proxy Statement for our 2022
Annual Meeting of Shareholders to be filed pursuant to Regulation
14A with the SEC on or about May 30, 2022, which information is
incorporated by reference.
|
Item 14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information
required by this item is incorporated by reference from the
information to be included in the Proxy Statement for our 2022
Annual Meeting of Shareholders to be filed pursuant to Regulation
14A with the SEC on or about May 30, 2022, which information is
incorporated by reference.
PART IV
|
Item 15. |
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
15(a) (1) Financial
Statements
The
Consolidated Financial Statements and Notes are listed in the
Consolidated Financial Statements on page F-1 of this report.
15(a) (2) Financial Statement
Schedules
Consolidated Financial Statement
Schedules not filed herein have been omitted as they are not
applicable or the required information or equivalent information
has been included in the Consolidated Financial Statements or the
notes thereto.
15(a) (3) Exhibits
Exhibits are
as set forth in the “Index to Exhibits” which follows the Notes to
the Consolidated Financial Statements and immediately precedes the
exhibits filed.
|
Item 16. |
Form 10-K
Summary
|
None.
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
| |
KASPIEN HOLDINGS INC.
|
|
Date: April 29,
2022
|
By:
|
/s/ Brock Kowalchuk |
| |
Brock Kowalchuk
|
|
|
Principal
Executive Officer |
Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
/s/ Brock Kowalchuk
|
|
April 29, 2022
|
|
(Brock Kowalchuk)
|
Principal Executive Officer
|
|
| |
|
|
|
/s/ Edwin Sapienza
|
Chief Financial Officer
|
April 29, 2022
|
|
(Edwin Sapienza)
|
(Principal Financial and Chief
Accounting Officer)
|
|
| |
|
|
|
/s/ Jonathan Marcus
|
|
|
|
(Jonathan Marcus)
|
Director
|
April 29, 2022
|
| |
|
|
|
/s/ Michael Reickert
|
|
|
|
(Michael Reickert)
|
Director
|
April 29, 2022
|
| |
|
|
|
/s/ Tom Simpson
|
|
|
|
(Tom Simpson)
|
Director
|
April 29, 2022
|