KASPIEN HOLDINGS INC. AND SUBSIDIARIES
KASPIEN HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations: Kaspien Holdings Inc. and subsidiaries (“the Company”) operates in a single reportable segment: Kaspien is a digital marketplace retailer and generates
substantially all of its revenue through Amazon Marketplace.
Previously, the Company also operated fye, a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com. On February 20, 2020, the Company consummated the sale of substantially all
of the assets and certain of the liabilities relating to fye to a subsidiary of 2428391 Ontario Inc. o/a Sunrise Records (“Sunrise Records”) pursuant to an Asset Purchase Agreement (as amended, the “Asset Purchase Agreement”) dated January 23, 2020,
by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. (the “FYE Transaction”).
Effects of COVID-19: As reflected in the discussion below, the impact of the COVID-19 pandemic and actions taken in response to it had varying effects on our 2020 results of
operations. Higher net sales reflect increased demand, particularly as people are staying at home, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints.
Other effects include increased fulfillment costs and cost of sales as a percentage of net sales, primarily due to the impact of lower productivity and costs to maintain safe workplaces.
We expect the effects of fulfillment network capacity and supply chain constraints and increased fulfillment costs and cost of sales as a percentage of net sales to continue into all or portions of 2021. However, it is
not possible to determine the duration and scope of the pandemic, including any recurrence, the actions taken in response to the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending
patterns, or other impacts of the pandemic, and whether these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations.
Also, as a direct result of COVID-19, most of our employees are working remotely. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial
condition, including expenses, reserves and allowances, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to
contain or treat it, as well as the economic impact on local, regional, national and international customers and markets, which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the
possible effects on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the effects of the COVID-19
outbreak to our results of operations, financial condition, or liquidity.
Liquidity: The Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, and
to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and the purchase of inventory and capital expenditures. Our
ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of
working capital needs; successful implementation of our strategy and planned activities; and our ability to overcome the impact of the COVID-19 pandemic. There can be no assurance that we will be successful in further implementing our business
strategy or that the strategy, including the completed initiatives, will be successful in sustaining acceptable levels of sales growth and profitability. The consolidated financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
The Company incurred net losses of $3.9 million and $58.8 million for the years ended January 30, 2021 and February 1, 2020, respectively, and has an accumulated deficit of $112.9 million as of January 30, 2021.
The Company experienced negative cash flows from operations during fiscal 2020 and fiscal 2019 and we expect to incur net losses in 2021. As of January 30, 2021, we had cash and cash equivalents of $1.8 million, net
working capital of $10.8 million, and outstanding borrowings of $6.3 million on our revolving credit facility, as further discussed below. This compares to $3.0 million in cash and cash equivalents and net working capital of $9.0 million and
borrowings of $13.1 million on our revolving credit facility as of February 1, 2020.
As of June 15, 2020, the issuance date of the Company’s consolidated financial statements for the fiscal year ended February 1, 2020, the Company had concluded there was substantial doubt about its ability to
continue as a going concern. The completed initiatives and transactions as described below have alleviated the substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements for the fiscal year
ended January 30, 2021 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities
and to continue as a going concern is dependent on improved profitability, the strategic initiatives for Kaspien and the availability of future funding. The consolidated financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
New Credit Facility
On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as administrative agent, under which the lenders party thereto committed
to provide up to $25 million in loans under a three-year, secured revolving credit facility (the “ New Credit Facility”). Concurrent with the FYE Transaction, the Company borrowed $3.3 million under the New Credit Facility in order to satisfy the
remaining obligations of the Company under the previous credit facility.
The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.
As of January 30, 2021, the Company had borrowings of $6.3 million under the New Credit Facility. Peak borrowings under the New Credit Facility during fiscal 2020 were $12.4 million. As of January 30, 2021, the
Company had no outstanding letters of credit. The Company had $5.0 million available for borrowing under the New Credit Facility as of January 30, 2021.
Previously, the Company had an amended and restated its revolving credit facility (“Credit Facility”) with Wells Fargo. As of February 1, 2020, the Company had borrowings of $13.1 million under the Credit Facility.
Peak borrowings under the Credit Facility during fiscal 2019 were $35.9 million. As of February 1, 2020, the Company had no outstanding letters of credit. The Company had $12 million available for borrowing under the Credit Facility as of February
1, 2020.
On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the
New Credit Facility, as further discussed above, and the Credit Facility is no longer available to the Company.
Subordinated Debt Agreement
On March 30, 2020, the Company and Kaspien (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent”
under the Amended Loan Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and
(iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make
investments, make restricted payments or specified payments and merge or acquire assets.
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and
TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien with a scheduled maturity date of May 22, 2023. As of
January 30, 2021, unamortized debt issuance costs of $0.2 million are included in “Long-Term Debt” on the consolidated balance sheet.
Directors Jonathan Marcus, Thomas Simpson, and Michael Reickert are the chief executive officer of Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III, LLC and Kick-Start IV, LLC
(“Kick-Start”), and a trustee of the Robert J. Higgins TWMC Trust (the “Trust”), an affiliate of RJHDC, LLC (“RJHDC” and together with Alimco and Kick-Start, “Related Party Entities”), respectively. The Related Party Entities are parties to the
Subordinated Loan Agreement.
Paycheck Protection Program
On April 17, 2020, Kaspien received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”). The PPP Loan, which was in the form of a promissory note (the “Note”), dated April 10, 2020, between Kaspien and First Interstate Bank, as the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is
payable in monthly installments of $112,976. While under the terms of the PPP, some or all of the PPP Loan amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and the Note, such as payroll
costs, benefits, rent, and utilities, there is no assurance that the Company will be successful in qualifying for and receiving forgiveness on the PPP Loan amount. On August 20, 2020, the Company submitted an application for forgiveness to the SBA.
On October 30, 2020, the Company received a follow up letter requesting additional information related to its forgiveness application. The Company submitted the requested information on November 9, 2020. On January 4, 2021, the Company received
another request for additional information. The Company submitted the requested information on January 14, 2021. On April 14, 2021, the Company received another request for additional information. The Company submitted the requested information on
April 26, 2021. As of April 30, the Company has not received a decision on its PPP Loan forgiveness request.
In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well continuing our efforts to
generate additional sales and increase margins. If the Company is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely
affected. Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such
additional funds.
Basis of Presentation: The consolidated financial statements consist of Kaspien Holdings Inc., its wholly owned subsidiaries, Kaspien NY, LLC (f/k/a Trans
World NY Sub, Inc. (f/k/a Record Town, Inc.) and its subsidiaries, and Kaspien, Inc. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions, including those related to merchandise inventory; valuation of long-lived assets, income taxes, accounting, retirement plan obligation, and
other long-term liabilities that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Items Affecting Comparability: The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2020 and fiscal 2019
ended January 30, 2021 and February 1, 2020, respectively. Both fiscal years were 52-week periods.
Concentration of Business Risks: The Company purchases various inventory from numerous suppliers and does not have material long-term purchase contracts; rather, it purchases
products from its suppliers on an order-by-order basis. Historically, Kaspien has not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply.
The Company generates substantially all its revenue through the Amazon Marketplace. Therefore, the Company depends in large part on its relationship with Amazon for its continued growth. In particular, the Company
depends on its ability to offer products on the Amazon Marketplace and on its timely delivery of products to customers.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents.
Restricted Cash: Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in
Restricted Cash on the Company’s consolidated balance sheet.
Accounts Receivable: Accounts receivable are comprised of receivables due from Amazon. Included in the balance is
an allowance of $0.1 million for doubtful accounts.
Merchandise Inventory and Return Costs: Merchandise inventory is stated at the lower of cost or net realizable value under the average cost method. Inventory valuation requires
significant judgment and estimates, including obsolescence, and any adjustments to net realizable value, if market value is lower than cost. The Company records obsolescence and any adjustments to net realizable value (if lower than cost) based on
current and anticipated demand, customer preferences and market conditions. As of January 30, 2021, the Company recorded an obsolescence reserve of $0.8 million. The cost of inventory also includes certain costs associated with the preparation of
inventory for resale, including distribution center costs and freight. As of January 30, 2021, the Company had recorded capitalized freight of $1.3 million.
Fixed Assets and Depreciation: Fixed assets are recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method. The
estimated useful lives are as follows:
Fixtures and equipment
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7 years
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Leasehold improvements
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7 years
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Technology
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1-5 years
|
Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs are expensed as incurred.
Long-Lived Assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally measured based on discounted
estimated future cash flows. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less disposition costs. For the purposes of the asset impairment
test, Kaspien has one asset grouping, which is the same as the Kaspien reporting unit level.
During fiscal 2019, the Company concluded, based on continued operating losses that a triggering event had occurred, and pursuant to FASB ASC 360, Property,
Plant, and Equipment, an evaluation of the Company’s fixed assets and intangible assets for impairment was required. For fiscal 2019, intangible assets related to vendor relationships were fully impaired resulting in the recognition of
asset impairment charges of $0.8 million
Commitments and Contingencies: The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business. Although there can be no
assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse
effect on the results of operations and financial condition of the Company. During the fourth quarter of fiscal 2019, the Company recognized a charge of $0.4 million related to litigation (see Note 14).
Revenue Recognition:
Retail Sales
Retail revenue is primarily related to the sale of goods to customers. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon shipment to the customer. Additionally,
estimated sales returns are calculated based on expected returns.
Agency as a service
Retail as a service revenue is primarily commission fees for services paid on a periodic basis with an additional fee based on percentage of gross merchandise value generated. The commissions earned from these
arrangements are recognized when the services are rendered on a periodic basis with additional fees recognized as revenue is generated.
Software as a service
Software as a service revenue primarily includes a subscription fee with an additional fee based on a percentage of gross merchandise value generated. The subscription fee earned from these arrangements are recognized
when the services are rendered on a periodic basis with additional fees recognized as revenue is generated.
Cost of Sales: In addition to the cost of product, the Company includes in cost of sales those costs associated with purchasing, receiving, shipping, online
marketplace fulfillment fees and commissions, and inspecting and warehousing product. Cost of sales further includes the cost of obsolescence.
Selling, General and Administrative Expenses (SG&A): Included in SG&A expenses are payroll and related costs, professional fees, general operating and overhead expenses
and depreciation and amortization charges. Selling, general and administrative expenses also include miscellaneous income and expense items, other than interest.
Lease Accounting: Operating lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases.
Related operating ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by contributions from landlords, plus any prepaid rent and direct costs from executing the leases. ROU assets are tested for
impairment in the same manner as long-lived assets. Lease terms include the non-cancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods, termination options and
purchase options. Lease agreements with lease and non-lease components are combined as a single lease component for all classes of underlying asset
Advertising Costs: Advertising and sales promotion costs are charged to operations, offset by direct vendor reimbursements, as incurred. Advertising costs primarily consist of Amazon marketing expenses which were $1.4 million and $0.9 million in
fiscal 2020 and fiscal 2019, respectively.
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount
that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. It is the Company’s practice to recognize interest and penalties related to income tax
matters in income tax expense (benefit) in the Consolidated Statements of Operations.
Comprehensive Loss: Comprehensive loss consists of net loss and a pension actuarial loss adjustment that
is recognized in other comprehensive loss (see Note 9).
Stock-Based Compensation: Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The Company
measures stock-based compensation cost at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis (net of estimated forfeitures) over the option’s requisite service period. The Company
recognizes compensation expense based on estimated grant date fair value using the Black‑Scholes option‑pricing model. Tax benefits, if any, resulting from tax deductions in excess of the compensation cost recognized for those options are to be
classified and reported as both an operating cash outflow and financing cash inflow.
Loss Per Share: Basic and diluted loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. During
fiscal 2020 and fiscal 2019, the impact of all outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share for fiscal 2020 and fiscal 2019
was the same. Total anti-dilutive stock awards for each of fiscal 2020 and fiscal 2019 were approximately were 130,000 and 100,000, respectively.
Fair Value of Financial Instruments: Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:
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•
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Level 1 — Quoted prices in active markets for identical assets or liabilities.
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|
•
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Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are
not active; or other inputs that are observable or can be corroborated by observable market data.
|
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•
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Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
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The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying value of life insurance policies included in other assets approximates fair value based on estimates received from insurance companies and are classified as Level 2 measurements within
the hierarchy as defined by applicable accounting standards. The Company had no Level 3 financial assets or liabilities as of January 30, 2021 or as of February 1, 2020.
Segment Information:
Change in Reportable Segments
As a result of the sale of the fye business on February 20, 2020, further disclosed in Note 2, the Company’s previously reported fye segment is no longer in operation, and the Company now
operates as a single reporting segment.
The impact of the sale of the fye business on the Company’s operating segments, and reportable segments was reflected in the Company’s consolidated financial statements as of February 1, 2020.
Prior year segment information was reclassified to conform to the reporting structure change.
Note 2. Discontinued Operations
On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset
Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records.
The results for fye were previously reported in the fye segment. Certain corporate overhead costs and segment costs previously allocated to fye for segment reporting purposes did not qualify for
classification within discontinued operations and have been reallocated to continuing operations.
The following table summarizes the major line items for fye that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income:
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|
Fifty-two Weeks Ended
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|
(In thousands)
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January 30,
2021
|
|
|
February 1,
2020
|
|
Net revenue
|
|
$
|
—
|
|
|
$
|
192,719
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
127,013
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|
Selling, general and administrative expenses
|
|
|
—
|
|
|
|
84,667
|
|
Impairment of long-lived assets
|
|
|
—
|
|
|
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23,218
|
|
Interest expense
|
|
|
—
|
|
|
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1,531
|
|
Other expense
|
|
|
—
|
|
|
|
364
|
|
Loss from discontinued operations before income taxes
|
|
|
—
|
|
|
|
(44,074
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
277
|
|
Loss from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
(44,351
|
)
|
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
(In thousands)
|
|
January 30,
2021
|
|
|
February 1, 2020
|
|
Cash
|
|
$
|
—
|
|
|
$
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—
|
|
Accounts receivable, net
|
|
|
—
|
|
|
|
62
|
|
Inventories
|
|
|
—
|
|
|
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50,122
|
|
Other current assets
|
|
|
—
|
|
|
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1,005
|
|
Property, plant and equipment, net
|
|
|
—
|
|
|
|
—
|
|
Operating lease right-to-use asset
|
|
|
—
|
|
|
|
—
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|
Other assets
|
|
|
—
|
|
|
|
—
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Total assets of discontinued operations
|
|
$
|
—
|
|
|
$
|
51,189
|
|
|
|
|
|
|
|
|
|
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Accounts payable
|
|
$
|
—
|
|
|
$
|
9,769
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|
Accrued liabilities
|
|
|
—
|
|
|
|
779
|
|
Deferred revenue
|
|
|
—
|
|
|
|
6,764
|
|
Current portion of lease liabilities
|
|
|
—
|
|
|
|
8,976
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|
Operating lease liabilities
|
|
|
—
|
|
|
|
11,059
|
|
Other liabilities
|
|
|
—
|
|
|
|
2,063
|
|
Total liabilities of discontinued operations
|
|
$
|
—
|
|
|
$
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39,410
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|
The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. The following table summarizes the cash flows for
discontinued operations that are included in the Consolidated Statements of Cash Flows:
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|
Fifty-two Weeks Ended
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(In thousands)
|
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January 30,
2021
|
|
|
February 1,
2020
|
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Net cash used in operating activities
|
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$
|
—
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|
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$
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(12,849
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)
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Net cash used in investing activities
|
|
|
—
|
|
|
|
(1,171
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)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
2,674
|
|
Purchases of fixed assets
|
|
|
—
|
|
|
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1,171
|
|
Note 3. Sale of fye business
On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset
Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. The following table reconciles the
assets sold to and liabilities assumed by Sunrise to cash proceeds received:
Assets sold
|
|
|
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Inventory
|
|
$
|
50,122
|
|
Accounts receivable
|
|
|
62
|
|
Other current assets
|
|
|
1,005
|
|
fye business assets sold
|
|
$
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51,189
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|
|
|
|
|
|
|
|
|
|
|
Less liabilities assumed:
|
|
|
|
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Accounts payable
|
|
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(9,769
|
)
|
Deferred revenue
|
|
|
(6,764
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)
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Accrued expenses and other current liabilities
|
|
|
(779
|
)
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Other long-term liabilities
|
|
|
(2,063
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)
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Operating lease liabilities
|
|
|
(20,035
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)
|
fye business liabilities assumed
|
|
$
|
39,410
|
|
|
|
|
|
|
Net proceeds
|
|
$
|
11,779
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|
The Company did not recognize a gain/loss upon the sale of the fye business as the assets of fye were impaired to the fair value of the assets as of February 1, 2020.
Note 4. Recently Adopted and Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduced an expected credit loss
model for the impairment of financial assets measured at amortized cost. The model replaces the probable, incurred loss model for those assets and instead, broadens the information an entity must consider in developing its expected credit loss
estimate for assets measured at amortized cost. This standard will be effective for smaller reporting companies for fiscal years beginning after December 15, 2022, however early adoption is permitted. We are currently evaluating the impact of this
new standard on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework— Changes to the Disclosure Requirements for
Defined Benefit Plans”, which removes certain disclosures that are no longer cost beneficial and also includes additional disclosures to improve the overall usefulness of the disclosure requirements to financial statement users. This standard will be
effective for public entities for fiscal years beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740), which simplifies the accounting for income taxes by eliminating certain exceptions to the
guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies
aspects of the enacted changes in tax laws or rates. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, however early adoption is permitted. We are
currently evaluating the impact of this new standard on the consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04
provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides,
among other things, guidance that modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; modifications of contracts within the scope of Topic 840, Leases, should
be accounted for as a continuation of the existing contract; and, changes in the critical terms of hedging relationships, caused by reference rate reform, should not result in the de-designation of the instrument, provided certain criteria are met.
The Company’s exposure to LIBOR rates includes its credit facility. The amendments are effective as of March 12, 2020 through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact this update will have
on its Condensed Consolidated Financial Statements.
Recent accounting pronouncements pending adoption not discussed above are either not applicable or are not expected to have a material impact on our consolidated financial condition, results of
operations, or cash flows.
Note 5. Other Intangible Assets
Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market
conditions, among others. Other long-lived assets are reviewed for impairment if circumstances indicate that the carrying amount may not be recoverable.
During fiscal 2019, the Company fully impaired its vendor relationships and the Company recognized an impairment loss of $0.8 million.
The Company continues to amortize technology, and trade names and trademarks that have finite lives.
Identifiable intangible assets as of January 30, 2021 consisted of the following:
(amounts in thousands)
|
|
January 30, 2021
|
|
|
|
Weighted Average
Amortization
Period
(in months)
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
|
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
60
|
|
|
|
6,700
|
|
|
|
3,854
|
|
|
|
2,587
|
|
|
|
259
|
|
Trade names and trademarks
|
|
|
60
|
|
|
|
3,200
|
|
|
|
2,727
|
|
|
|
-
|
|
|
|
473
|
|
|
|
|
|
|
|
$
|
9,900
|
|
|
$
|
6,581
|
|
|
$
|
2,587
|
|
|
$
|
732
|
|
The changes in net intangibles from February 1, 2020 to January 30, 2021 were as follows:
(amounts in thousands)
|
|
February 1,
2020
|
|
|
Amortization
|
|
|
January 30,
2021
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
647
|
|
|
|
388
|
|
|
|
259
|
|
Trade names and trademarks
|
|
|
1,113
|
|
|
|
640
|
|
|
|
473
|
|
Net amortized intangible assets
|
|
$
|
1,760
|
|
|
$
|
1,028
|
|
|
$
|
732
|
|
The changes in net intangibles from February 2, 2019 to February 1, 2020 were as follows:
(amounts in thousands)
|
|
February 2,
2019
|
|
|
Amortization
|
|
|
Impairment
|
|
|
February 1,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
$
|
880
|
|
|
$
|
115
|
|
|
$
|
765
|
|
|
$
|
-
|
|
Technology
|
|
|
1,035
|
|
|
|
388
|
|
|
|
-
|
|
|
|
647
|
|
Trade names and trademarks
|
|
|
1,753
|
|
|
|
640
|
|
|
|
-
|
|
|
|
1,113
|
|
Net amortized intangible assets
|
|
$
|
3,668
|
|
|
$
|
1,143
|
|
|
$
|
765
|
|
|
$
|
1,760
|
|
The remaining amortization expense will be recognized in fiscal 2021, at which time all of the other intangible assets will be fully amortized.
Note 6. Fixed Assets
Fixed assets consist of the following:
|
|
January 30,
2021
|
|
|
February 1,
2020
|
|
(amounts in thousands)
|
|
|
|
|
|
|
Capitalized software
|
|
$
|
3,721
|
|
|
$
|
2,388
|
|
Fixtures and equipment
|
|
|
395
|
|
|
|
538
|
|
Leasehold improvements
|
|
|
45
|
|
|
|
45
|
|
Total fixed assets
|
|
|
4,161
|
|
|
|
2,971
|
|
Allowances for depreciation and amortization
|
|
|
(1,893
|
)
|
|
|
(781
|
)
|
Fixed assets, net
|
|
$
|
2,268
|
|
|
$
|
2,190
|
|
Depreciation expense included in fiscal 2020 and fiscal 2019 SG&A expenses within the Consolidated Statements of Operations were $1.1 million and $1.8 million, respectively.
Note 7. Restricted Cash
As of January 30, 2021 and February 1, 2020, the Company had restricted cash of $4.7 million and $5.9 million, respectively.
Restricted cash balance at the end of fiscal 2020 consisted of a $4.7 million rabbi trust that resulted from the death of the Company’s former Chairman, of which $1.2 million was classified as restricted cash in
current assets and $3.5 million was classified as restricted cash as a long-term asset.
Restricted cash balance at the end of fiscal 2019 consisted of a $5.9 million rabbi trust, that resulted from the death of the Company’s former Chairman, of which $1.0 million was classified as restricted cash in
current assets and $4.9 million was classified as restricted cash as a long-term asset.
A summary of cash, cash equivalents and restricted cash is as follows (amounts in thousands):
|
|
January 30,
2021
|
|
|
February 1,
2020
|
|
Cash and cash equivalents
|
|
$
|
1,809
|
|
|
$
|
2,977
|
|
Restricted cash
|
|
|
4,746
|
|
|
|
5,875
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
6,555
|
|
|
$
|
8,852
|
|
Note 8. Debt
New Credit Facility
On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as administrative agent, under which the lenders party thereto committed
to provide up to $25 million in loans under a three-year, secured revolving credit facility (the “New Credit Facility”). Concurrent with the FYE Transaction, the Company borrowed $3.3 million under the New Credit Facility in order to satisfy the
remaining obligations of the Company under its previous credit facility.
The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.
As of January 30, 2021, the Company had borrowings of $6.3 million under the New Credit Facility. Peak borrowings under the New Credit Facility during fiscal 2020 were $12.4 million. As of January 30, 2021, the
Company had no outstanding letters of credit. The Company had $5.0 million available for borrowing under the New Credit Facility as of January 30, 2021.
Previously, the Company had an amended and restated its revolving credit facility (“Credit Facility”) with Wells Fargo. As of February 1, 2020, the Company had borrowings of $13.1 million under the Credit Facility.
Peak borrowings under the Credit Facility during fiscal 2019 were $35.9 million. As of February 1, 2020, the Company had no outstanding letters of credit. The Company had $12 million available for borrowing under the Credit Facility as of February
1, 2020.
On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the
New Credit Facility, as further discussed above, and the Credit Facility is no longer available to the Company.
Subordinated Debt Agreement
On March 30, 2020, the Company and Kaspien (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent”
under the Amended Loan Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and
(iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make
investments, make restricted payments or specified payments and merge or acquire assets.
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and
TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien with a scheduled maturity date of May 22, 2023. As of
January 30, 2021, unamortized debt issuance costs of $0.2 million are included in “Long-term Debt” on the unaudited condensed consolidated balance sheet.
Directors Jonathan Marcus, Thomas Simpson, and Michael Reickert are the chief executive officer of Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III, LLC and Kick-Start IV, LLC
(“Kick-Start”), and a trustee of the Robert J. Higgins TWMC Trust (the “Trust”), an affiliate of RJHDC, LLC (“RJHDC” and together with Alimco and Kick-Start, “Related Party Entities”), respectively. The Related Party Entities are parties to the
Subordinated Loan Agreement.
On March 30, 2020, in conjunction with the Subordinated Loan Agreement, the Company issued warrants to purchase up to 244,532 shares of Common Stock with an aggregate grant date fair value of
$0.8 million recorded as a discount to the Subordinated Loan Agreement, $0.6 million of which was unamortized as of January 30, 2021.
Paycheck Protection Program
On April 17, 2020, Kaspien received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”). The PPP Loan, which was in the form of a promissory note (the “Note”), dated April 10, 2020, between Kaspien and First Interstate Bank, as the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is
payable in monthly installments of $112,976. While under the terms of the PPP, some or all of the PPP Loan amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and the Note, such as payroll
costs, benefits, rent, and utilities, there is no assurance that the Company will be successful in qualifying for and receiving forgiveness on the PPP Loan amount. On August 20, 2020, the Company submitted an application for forgiveness to the SBA.
On October 30, 2020, the Company received a follow up letter requesting additional information related to its forgiveness application. The Company submitted the requested information on November 9, 2020. On January 4, 2021, the Company received
another request for additional information. The Company submitted the requested information on January 14, 2021. On April 14, 2021, the Company received another request for additional information. The Company submitted the requested information on
April 26, 2021. As of April 30, the Company has not received a decision on its PPP Loan forgiveness request.
Note 9. Leases
The Company currently leases its administrative offices and distribution center. During fiscal 2020 and fiscal 2019, the Company recorded net lease costs of $0.8 million, and did not record any
contingent rentals.
As of January 30, 2021, the maturity of lease liabilities is as follows:
|
|
Operating Leases
|
|
(amounts in thousands)
|
|
|
|
2021
|
|
|
726
|
|
2022
|
|
|
748
|
|
2023
|
|
|
767
|
|
2024
|
|
|
652
|
|
2025
|
|
|
296
|
|
Thereafter
|
|
|
-
|
|
Total lease payments
|
|
|
3,189
|
|
Less: amounts representing interest
|
|
|
(335
|
)
|
Present value of lease liabilities
|
|
$
|
2,854
|
|
Lease term and discount rate are as follows:
|
|
As of January 30, 2021
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
4.3
|
|
|
|
|
|
|
Weighted-average discount rate Operating leases
|
|
|
5
|
%
|
Other information:
|
|
Fiscal 2020
|
|
(amounts in thousands)
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
695
|
|
Future minimum rental payments required under the remaining leases for the administrative office and distribution center in Spokane, Washington as of January 30, 2021, are as follows (amounts in
thousands):
(amounts in thousands)
|
|
Operating Leases
|
|
2021
|
|
$
|
726
|
|
2022
|
|
|
748
|
|
2023
|
|
|
767
|
|
2024
|
|
|
652
|
|
2025
|
|
|
296
|
|
Thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
3,189
|
|
Note 10. Shareholders’ Equity
The Company classifies repurchased shares as treasury stock on the Company’s Consolidated Balance Sheet. There were no treasury stock repurchases during fiscal 2020 and fiscal 2019.
During fiscal 2020, 9,949 shares were issued to Directors and employees. Of the shares issued, 1,062 were returned to the company to satisfy withholding requirements and retired to treasury shares. During fiscal 2020, 100,988 warrants were
exercised for proceeds of $1,010.
On August 15, 2019, we completed a 1-for-20 reverse stock split of our outstanding Common Stock. As a result of this stock split, our issued and outstanding Common Stock decreased from 36,291,620
to 1,814,581 shares. Accordingly, all share and per share information contained in this report has been restated to retroactively show the effect of this stock split.
No cash dividends were paid in fiscal 2020 and fiscal 2019.
Note 11. Benefit Plans
401(k) Savings Plan
Kaspien offers a 401(k) plan, the Kaspien Inc. 401(K) Plan, which permits participants to contribute up to the maximum allowable by IRS regulations. The Company matches 100% of the first 6% of
employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of
service completed by the participant. Participants are fully vested upon the completion of three years of service. All participant forfeitures of non-vested benefits are used to reduce the Company’s contributions or fees in future years.
Total expense related to the matching contributions was approximately $266,000 and $303,000 in fiscal 2020 and fiscal 2019, respectively.
Stock Award Plans
As of January 30, 2021, there was approximately $0.4 million of unrecognized compensation cost related to stock option awards expected to be recognized as expense over a weighted average period of
3.5 years. The FYE Transaction in February 2020 constituted a change of control and vesting on all unvested options was accelerated. As a result, unrecognized compensation expense of $0.2 million was recognized in fiscal 2020. Total compensation
expense related to stock awards recognized in fiscal 2020 was $0.3 million.
The Company has outstanding awards under three employee stock award plans, the 2005 Long Term Incentive and Share Award Plan, the Amended and Restated 2005 Long Term Incentive and Share Award Plan
(the “Old Plans”); and the 2005 Long Term Incentive and Share Award Plan (as amended and restated April 5, 2017 (the “New Plan”). Collectively, these plans are referred to herein as the Stock Award Plans. The Company no longer issues stock options
under the Old Plans.
Equity awards authorized for issuance under the New Plan total 250,000. As of January 30, 2021, of the awards authorized for issuance under the Stock Award Plans, approximately 133,356 were granted and are
outstanding, 45,025 of which were vested and exercisable. Shares available for future grants of options and other share-based awards under the New Plan as of January 30, 2021 were 145,419.
The fair values of the options granted have been estimated at the date of grant using the Black - Scholes option pricing model with the following assumptions:
|
|
2020
|
|
|
2019
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
88.0-105.5
|
%
|
|
|
63.7-70.1
|
%
|
Risk-free interest rate
|
|
|
0.28%-0.56
|
%
|
|
|
1.35%-1.62
|
%
|
Expected award life ( in years)
|
|
|
4.93-7.12
|
|
|
|
5.64-6.98
|
|
Weighted average fair value per share of awards granted during the year
|
|
$
|
5.81
|
|
|
$
|
4.46
|
|
The following table summarizes stock option activity under the Stock Award Plans:
|
|
Employee and Director Stock Award Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Subject To
Option
|
|
|
Stock Award
Exercise Price
Range Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Other
Share
Awards (1)
|
|
|
Weighted
Average Grant
Fair Value/
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance February 2, 2019
|
|
|
138,921
|
|
|
$
|
19.60-$97.40
|
|
|
$
|
55.00
|
|
|
|
13,571
|
|
|
$
|
33.60
|
|
Granted
|
|
|
5,750
|
|
|
$
|
3.51-$5.40
|
|
|
|
3.76
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
(15,475
|
)
|
|
$
|
34.60-$95.40
|
|
|
|
57.68
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,626
|
)
|
|
|
5.66
|
|
Balance February 1, 2020
|
|
|
129,196
|
|
|
$
|
3.51-$97.40
|
|
|
$
|
52.11
|
|
|
|
9,945
|
|
|
$
|
36.75
|
|
Granted
|
|
|
98,898
|
|
|
$
|
3.68 -$10.75
|
|
|
|
7.36
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
(94,738
|
)
|
|
$
|
7.12 -$97.40
|
|
|
|
51.84
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,945
|
)
|
|
|
(36.75
|
)
|
Balance January 30, 2021
|
|
|
133,356
|
|
|
$
|
3.51-$97.40
|
|
|
$
|
20.41
|
|
|
|
-
|
|
|
$
|
-
|
|
(1) Other Share Awards include deferred shares granted to executives and directors.
As of January 30, 2021, the aggregate intrinsic value of all outstanding and vested awards based on the Company’s closing common stock price of $38.56 as of January 30, 2021 was $3.3 million and
$0.4 million, respectively. The aggregate intrinsic value represents the value which would have been received by the award holders had all award holders under the Stock Award Plans exercised their awards as of that date.
During fiscal 2019, the Company recognized approximately $40,000 in expenses for deferred shares issued to non-employee directors. There were no exercises of non-restricted stock options during
fiscal 2020 and fiscal 2019.
Defined Benefit Plans
The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain Executive Officers of the Company. The SERP, which is unfunded, provides eligible executives
defined pension benefits that supplement benefits under other retirement arrangements. The annual benefit amount is based on salary and bonus at the time of retirement and number of years of service.
Prior to June 1, 2003, the Company had provided the Board of Directors with a noncontributory, unfunded retirement plan (“Director Retirement Plan”) that paid retired directors an annual retirement
benefit. The final payments due under the director retirement plan were made in fiscal 2020.
For fiscal 2020 and 2019, net periodic benefit cost recognized under both plans totaled approximately $0.3 million and $0.6 million, respectively. The accrued pension liability for both plans was approximately $17.4
million and $17.5 million as of January 30, 2021 and February 1, 2020, respectively, and is recorded within other long-term liabilities on the Consolidated Balance Sheets. The accumulated benefit obligation for both plans was $17.4 million and
$17.7 million as of the fiscal years ended January 30, 2021 and February 1, 2020, respectively.
The following is a summary of the Company’s defined benefit pension plans as of each fiscal year-end:
Obligation and Funded Status:
(amounts in thousands)
|
|
January 30,
2021
|
|
|
February 1,
2020
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
17,673
|
|
|
$
|
17,476
|
|
Service cost
|
|
|
-
|
|
|
|
55
|
|
Interest cost
|
|
|
355
|
|
|
|
568
|
|
Actuarial loss
|
|
|
535
|
|
|
|
773
|
|
Benefits paid
|
|
|
(1,192
|
)
|
|
|
(1,199
|
)
|
Benefit obligation at end of year
|
|
$
|
17,371
|
|
|
$
|
17,673
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(17,371
|
)
|
|
$
|
(17,673
|
)
|
Unrecognized net actuarial loss
|
|
|
1,077
|
|
|
|
529
|
|
Accrued benefit cost
|
|
$
|
(16,294
|
)
|
|
$
|
(17,144
|
)
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
January 30,
2021
|
|
|
February 1,
2020
|
|
(amounts in thousands)
|
|
|
|
|
|
|
Current liability
|
|
$
|
(1,184
|
)
|
|
$
|
(1,199
|
)
|
Long term liability
|
|
|
(16,722
|
)
|
|
|
(17,247
|
)
|
Accumulated other comprehensive loss
|
|
|
535
|
|
|
|
773
|
|
Net amount recognized
|
|
$
|
(17,371
|
)
|
|
$
|
(17,673
|
)
|
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss:
Net Periodic Benefit Cost:
|
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
55
|
|
Interest cost
|
|
|
355
|
|
|
|
568
|
|
Amortization of actuarial net gain
|
|
|
-
|
|
|
|
(20
|
)
|
Net periodic benefit cost
|
|
$
|
355
|
|
|
$
|
603
|
|
Other Changes in Benefit Obligations Recognized in Other Comprehensive Loss:
|
|
2020
|
|
|
2019
|
|
Net prior service cost recognized as a component of net periodic benefit cost
|
|
$
|
-
|
|
|
$
|
-
|
|
Net actuarial loss arising during the period
|
|
|
528
|
|
|
|
744
|
|
|
|
|
528
|
|
|
|
744
|
|
Income tax effect
|
|
|
-
|
|
|
|
-
|
|
Total recognized in other comprehensive loss
|
|
$
|
528
|
|
|
$
|
744
|
|
Total recognized in net periodic benefit cost and other comprehensive loss
|
|
$
|
883
|
|
|
$
|
1,341
|
|
The pre-tax components of accumulated other comprehensive loss, which have not yet been recognized as components of net periodic benefit cost as of January 30, 2021 and February 1, 2020 and the tax effect are
summarized below.
(amounts in thousands)
|
|
January 30,
|
|
|
February 1,
|
|
|
|
2021
|
|
|
2020
|
|
Net unrecognized actuarial loss
|
|
$
|
528
|
|
|
$
|
744
|
|
Other actuarial adjustments
|
|
|
379
|
|
|
|
(365
|
)
|
Accumulated other comprehensive loss
|
|
$
|
907
|
|
|
$
|
379
|
|
Tax expense
|
|
|
1,100
|
|
|
|
1,100
|
|
Accumulated other comprehensive loss
|
|
$
|
2,007
|
|
|
$
|
1,479
|
|
|
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average assumptions used to determine benefit obligation:
|
|
|
|
|
|
|
Discount rate
|
|
|
1.94
|
%
|
|
|
2.31
|
%
|
Salary increase rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Measurement date
|
|
Jan 31, 2021
|
|
|
Jan 31, 2020
|
|
|
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
Discount rate
|
|
|
1.94
|
%
|
|
|
2.31
|
%
|
Salary increase rate
|
|
|
N/A
|
|
|
|
N/A
|
|
The discount rate is based on the rates implicit in high-quality fixed-income investments currently available as of the measurement date. The Citigroup Pension Discount Curve (CPDC) rates are
intended to represent the spot rates implied by the high-quality corporate bond market in the U.S. The projected benefit payments attributed to the projected benefit obligation have been discounted using the CPDC mid-year rates and the discount rate
is the single constant rate that produces the same total present value.
The following benefit payments over the next ten years are expected to be paid:
Year
|
|
Pension Benefits
|
|
(amounts in thousands)
|
|
|
|
|
2021
|
|
|
1,184
|
|
2022
|
|
|
1,149
|
|
2023
|
|
|
1,149
|
|
2024
|
|
|
1,149
|
|
2025
|
|
|
1,269
|
|
2026 – 2030
|
|
|
6,511
|
|
Note 12. Income Taxes
Income tax expense consists of the following:
|
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019(1)
|
|
(amounts in thousands)
|
|
|
|
Federal - current
|
|
$
|
(3,542
|
)
|
|
$
|
-
|
|
State - current
|
|
|
-
|
|
|
|
44
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Income tax (benefit) expense
|
|
$
|
(3,542
|
)
|
|
$
|
44
|
|
(1) Amount adjusted to reflect impact of discontinued operations.
A reconciliation of the Company’s effective income tax rate with the federal statutory rate is as follows:
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019(1)
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income taxes, net of federal tax effect
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
Change in Valuation Allowance
|
|
|
(27.7
|
%)
|
|
|
(21.0
|
%)
|
Cash surrender value - insurance / benefit program
|
|
|
6.8
|
%
|
|
|
0.1
|
%
|
Uncertain tax position
|
|
|
47.6
|
%
|
|
|
---
|
%
|
Other
|
|
|
(0.19
|
%)
|
|
|
(0.1
|
%)
|
Effective tax rate
|
|
|
(47.6
|
%)
|
|
|
0.3
|
%
|
(1) Amount adjusted to reflect impact of discontinued operations.
The Other category is comprised of various items, including the impacts of non-deductible entertainment, penalties and parking benefits and the refundable portion of the federal alternative minimum
tax carryover credit.
Significant components of the Company’s deferred tax assets are as follows:
|
|
January 30,
2021
|
|
|
February 1,
2020
|
|
(amounts in thousands)
|
|
|
|
DEFERRED TAX ASSETS
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
71
|
|
|
$
|
1,783
|
|
Inventory
|
|
|
215
|
|
|
|
32
|
|
Retirement and compensation related accruals
|
|
|
3,981
|
|
|
|
5,888
|
|
Fixed assets
|
|
|
218
|
|
|
|
6,470
|
|
Federal and state net operating loss and credit carry forwards
|
|
|
90,206
|
|
|
|
83,562
|
|
Real estate leases, included deferred rent
|
|
|
-
|
|
|
|
5,712
|
|
Losses on investment
|
|
|
853
|
|
|
|
896
|
|
Others
|
|
|
107
|
|
|
|
549
|
|
Gross deferred tax assets before valuation allowance
|
|
|
95,651
|
|
|
|
104,892
|
|
Less: valuation allowance
|
|
|
(95,022
|
)
|
|
|
(104,556
|
)
|
Total deferred tax assets
|
|
$
|
629
|
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAX LIABILITIES
|
|
|
|
|
|
|
|
|
Intangibles
|
|
$
|
(629
|
)
|
|
$
|
(336
|
)
|
Inventory
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax liabilities
|
|
$
|
(629
|
)
|
|
$
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
NET DEFERRED TAX ASSET
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company, at the end of fiscal 2020, has a net operating loss carryforward of $346.7 million for federal income tax purposes which will expire at various times throughout 2040 with a portion
being available indefinitely. The Company has approximately $219.5 million of net operating loss carryforward for state income tax purposes as of the end of fiscal 2020 that expire at various times through 2040 and are subject to certain limitations
and statutory expiration periods. The reduction in state net operating loss carryforward is due to the FYE Transaction, as the Company will not utilize those losses. The state net operating loss carryforwards are subject to various business
apportionment factors and multiple jurisdictional requirements when utilized. The Company has federal tax credit carryforwards of $0.5 million which will expire in 2026. The Company has state tax credit carryforwards of $0.2 million.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in
making this assessment. Based on the available objective evidence, management concluded that a full valuation allowance should be recorded against its deferred tax assets. As of January 30, 2021, the valuation allowance decreased to $95.0 million
from $104.6 million as of February 1, 2020. Management will continue to assess the valuation allowance against the gross deferred assets.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the respective years is provided below. Amounts presented excluded interest and penalties, where applicable, on unrecognized tax
benefits:
|
|
Fiscal Year
|
|
|
|
2020
|
|
|
2019
|
|
(amounts in thousands)
|
|
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
1,930
|
|
|
$
|
1,930
|
|
Increases in tax positions from prior years
|
|
|
-
|
|
|
|
-
|
|
Decreases in tax positions from prior years
|
|
|
(1,517
|
)
|
|
|
-
|
|
Increases in tax positions for current years
|
|
|
-
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
Lapse of applicable statute of limitations
|
|
|
-
|
|
|
|
-
|
|
Unrecognized tax benefits at end of year
|
|
$
|
413
|
|
|
$
|
1,930
|
|
As of January 30, 2021, the Company had $1.9 million of gross unrecognized tax benefits, $1.5 million of which would affect the Company’s tax rate if recognized. While it is reasonably possible that the amount of
unrecognized tax benefits will increase or decrease within the next twelve months, the Company does not expect the change to have a significant impact on its results of operations or financial position. The Company is subject to U.S. federal income
tax as well as income tax of multiple state jurisdictions. The Company has substantially concluded all federal income tax matters and all material state and local income tax matters through fiscal 2013.
The Company’s practice is to recognize interest and penalties associated with its unrecognized tax benefits as a component of income tax expense in the Company’s Consolidated Statements of
Operations. During fiscal 2020, the Company accrued a provision for interest expense of $0.2 million. As of January 30, 2021, the liability for uncertain tax positions reflected in the Company’s Consolidated Balance Sheets was $3.5 million,
including accrued interest and penalties of $2.7 million.
The Tax Cuts and Jobs Act also repeals the Corporation Alternative Minimum Tax (“AMT”) for tax years beginning after December 31, 2017. Any AMT carryover credits became refundable starting in the
2018 tax year, and any remaining credit will be fully refundable in 2021.
Note 13. Related Party Transactions
Prior to the consummation of the FYE Transaction, the Company leased its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its
former Chairman and largest Loss from fye business in the Statement of Operations. On February 20, 2020, as part of the FYE Transaction, the Company assigned the rights and obligations of the lease to the acquiror.
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, pursuant to which the Related Party Entities made a $5.2 million secured term loan ($2.7 million from Alimco, $0.5 million from Kick-Start, and $2.0 million from RJHDC)
to Kaspien with a scheduled maturity date of May 22, 2023, interest accruing at the rate of twelve percent (12%) per annum and compounded on the last day of each calendar quarter by becoming a part of the principal amount, and secured by a
second priority security interest in substantially all of the assets of the Company and Kaspien;
|
|
•
|
Common Stock Purchase Warrants (“Warrants”), pursuant to which the Company issued warrants to purchase up to 244,532 shares of Common Stock to the Related Party Entities (127,208 shares for Alimco, 23,401
shares for Kick-Start, and 93,923 shares for RJHDC), subject to adjustment in accordance with the terms of the Warrants, at an exercise price of $0.01 per share. As of April 15, 2021, 236,993 of the Warrants had been exercised by the Related
Party Entities and 7,539 warrants remained outstanding;
|
|
•
|
Contingent Value Rights Agreement (the “CVR Agreement”), pursuant to which the Related Party Entities received contingent value rights (“CVRs”) representing the contractual right to receive cash payments from
the Company in an amount equal, in the aggregate, to 19.9% of the proceeds (10.35% for Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or
its equity interest in Kaspien; and
|
|
•
|
Voting Agreement (the “Voting Agreement”), pursuant to which the Related Party Entities, the Trust, Mr. Simpson and their respective related entities agreed to how their respective shares of the Company’s
capital stock held by the parties will be voted with respect to the designation, election, removal, and replacement of members of the Board of Directors of the Company.
|
Note 14. Commitments and Contingencies
Legal Proceedings
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the
ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the
results of operations and financial condition of the Company.
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 have agreed on terms to resolve the matter fully and finally, and the appeal will be 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 the Company improperly calculated overtime for Senior Assistant Managers (“SAMs”) nationwide, and that both SMs and SAMs worked “off-the-clock.” It also
alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs. The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The
Roper Action also asserts a nationwide misclassification claim on behalf of SMs. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.
The Company has reached a settlement with the plaintiffs for both store manager class actions, which has received preliminary approval from the court. The Company reserved $0.4 million for the settlement as of
February 1, 2020. Notices of the settlement have been issued to class members, and the settlement claims process is currently ongoing. A final settlement approval hearing has been set by the court for April 14, 2021.
Note 15. Basic and Diluted Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is computed by
dividing net loss by the sum of the weighted average shares outstanding and additional Common Shares that would have been outstanding if the dilutive potential common shares had been issued for the Company’s Common Stock awards from the Company’s
Stock Award Plans.
The following represents basic and diluted loss per share for continuing operations, loss from discontinued operations and net loss for the respective periods:
|
|
Fifty-two Weeks Ended
|
|
(in thousands, except per share amounts)
|
|
January 30,
2021
|
|
|
February 1,
2020
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,892
|
)
|
|
$
|
(14,393
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share from continuing operations
|
|
$
|
(2.10
|
)
|
|
$
|
(7.93
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(44,351
|
)
|
Basic and diluted loss per common share from discontinued operations
|
|
$
|
-
|
|
|
$
|
(24.42
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,892
|
)
|
|
$
|
(58,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(2.10
|
)
|
|
$
|
(32.35
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
1,849
|
|
|
|
1,816
|
|
Note 16. Quarterly Financial Information (Unaudited)
|
|
|
|
|
Fiscal 2020 Quarter Ended
|
|
|
|
Fiscal
2020
|
|
|
January 30,
2021
|
|
|
October 31,
2020(2)
|
|
|
August 1,
2020
|
|
|
May 2,
2020
|
|
|
|
|
|
Total Revenue
|
|
$
|
158,345
|
|
|
$
|
45,547
|
|
|
$
|
38,913
|
|
|
$
|
42,296
|
|
|
$
|
31,589
|
|
Gross profit
|
|
|
16,304
|
|
|
|
4,678
|
|
|
|
3,891
|
|
|
|
4,423
|
|
|
|
3,312
|
|
Income (loss) from continuing operations
|
|
|
|
)
|
|
|
|
)
|
|
|
|
|
|
|
|
)
|
|
|
|
)
|
Net income (loss)
|
|
$
|
(3,892
|
)
|
|
$
|
(139
|
)
|
|
$
|
2,552
|
|
|
$
|
(899
|
)
|
|
$
|
(5,406
|
)
|
Diluted income (loss) per share (3)
|
|
$
|
(2.10
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
1.39
|
|
|
$
|
(0.49
|
)
|
|
$
|
(2.97
|
)
|
|
|
|
|
|
Fiscal 2019 Quarter Ended
|
|
|
|
Fiscal
2019
|
|
|
February 1,
2020(1)
|
|
|
November 2,
2019
|
|
|
August 3,
2019
|
|
|
May 4,
2019
|
|
|
|
|
|
Total Revenue
|
|
$
|
133,216
|
|
|
$
|
35,208
|
|
|
$
|
28,616
|
|
|
$
|
34,260
|
|
|
$
|
35,132
|
|
Gross profit
|
|
|
10,851
|
|
|
|
2,267
|
|
|
|
2,720
|
|
|
|
3,087
|
|
|
|
2,777
|
|
Loss from continuing operations
|
|
|
(14,393
|
)
|
|
|
(3,195
|
)
|
|
|
(3,094
|
)
|
|
|
(3,758
|
)
|
|
|
(4,346
|
)
|
Net loss
|
|
$
|
(58,744
|
)
|
|
$
|
(19,659
|
)
|
|
$
|
(23,155
|
)
|
|
$
|
(8,128
|
)
|
|
$
|
(7,802
|
)
|
Basic and diluted loss per share(3)
|
|
$
|
(32.35
|
)
|
|
$
|
(10.81
|
)
|
|
$
|
(12.73
|
)
|
|
$
|
(4.48
|
)
|
|
$
|
(4.20
|
)
|
1.
|
Includes $0.8 million impairment of fixed assets and intangibles.
|
2.
|
Includes an income tax benefit of $3.5 million related to the reversal of liabilities accrued pursuant to ASC 740-10, Accounting for Uncertain Tax Positions
|
3.
|
Per share amounts reflect the 1-for- 20 stock split during fiscal 2019.
|
Note 17. Subsequent Events
On March 18, 2021 the Company completed the closing of an underwritten offering of 416,600 shares of common stock of the Company, at a price to the public of $32.50 per share. The gross proceeds of
the offering were approximately $13.5 million, prior to deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds from this offering for general corporate purposes, including working
capital to implement its strategic plans focused on brand acquisition, investments in technology to enhance its scalable platform and its core retail business.