UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number:
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer ☐ | Accelerated Filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Number of shares of registrant’s common stock outstanding as of November 15, 2022: .
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of Kidpik Corp. (the “Company”) that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, including under, or incorporated by reference into, “Risk Factors”, which factors include:
| ● | our ability to obtain additional funding, the terms of such funding and potential dilution caused thereby; | |
| ● | the continuing effect of COVID-19 on our operations, sales, and market for our products; | |
| ● | our ability to build and maintain our brand; | |
| ● | cybersecurity, information systems and fraud risks and problems with our websites; | |
| ● | our ability to expand and grow our operations, and successfully market our products and services; | |
| ● | changes in, and our compliance with, rules and regulations affecting our operations, sales, the internet in general and/or our products; | |
| ● | shipping, production or manufacturing delays and/or tariffs on our products; | |
| ● | our ability to increase members and sales; | |
| ● | regulations we are required to comply with in connection with our operations, manufacturing, labeling and shipping; | |
| ● | competition from existing competitors or new competitors or products that may emerge; | |
| ● | rising interest rates and inflation and our ability to control our costs, including employee wages and benefits and other operating expenses; | |
| ● | our dependency on third-party manufacturers to supply or manufacture our products; | |
| ● | our business, including our costs and supply chain, which is subject to risks associated with rising inflation; | |
| ● | our ability to establish or maintain vendor and supplier relations and/or relationships with third-parties; | |
| ● | our ability and third parties’ abilities to protect intellectual property rights; | |
| ● | our ability to adequately support future growth; | |
| ● | our ability to attract and retain key personnel to manage our business effectively; and | |
| ● | other risk factors included under “Risk Factors” below. |
| 1 |
You should read the matters described in, and incorporated by reference in, “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. All forward-looking statements included herein speak only of the date of the filing of this Report. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Summary Risk Factors
Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended January 1, 2022, which was filed with the Securities and Exchange Commission on April 1, 2022 (the “2021 Annual Report”). Investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q, including our financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission. Our business operations could also be affected by factors that we currently consider to be immaterial or that are unknown to us at the present time. If any of these risks occur, our business, financial condition, and results of operations could be materially and adversely affected, and the trading price of our common stock could decline or our common stock could become worthless:
| ● | Our history of losses, our ability to achieve profitability, our need for additional funding and the availability and terms of such funding, as well as potential dilution caused thereby; | |
| ● | Our ability to execute our growth strategy and scale our operations and risks associated with such growth, our ability to maintain current members and customers and grow our members and customers; | |
| ● | Risks associated with the effect of the COVID-19 pandemic, and governmental responses thereto on our operations, those of our vendors, our customers and members and the economy in general; | |
| ● | Risks associated with our supply chain and third-party service providers, interruptions in the supply of raw materials and merchandise, increased costs of raw materials, products and shipping costs due to inflation, disruptions at our warehouse facility and/or of our data or information services, issues affecting our shipping providers, and disruptions to the internet, any of which may have a material adverse effect on our operations; | |
| ● | Risks of changes in consumer spending due to changes in interest rates, increased inflation, declines in economic activity or recessions; | |
| ● | Risks that effect our ability to successfully market our products to key demographics; | |
| ● | The effect of data security breaches, malicious code and/or hackers; | |
| ● | Increased competition and our ability to maintain and strengthen our brand name; | |
| ● | Changes in consumer tastes and preferences and changing fashion trends; | |
| ● | Material changes and/or terminations of our relationships with key vendors; | |
| ● | Significant product returns from customers, excess inventory and our ability to manage our inventory; | |
| ● | The effect of trade restrictions and tariffs, increased costs associated therewith and/or decreased availability of products; |
| 2 |
| ● | Our ability to innovate, expand our offerings and compete against competitors which may have greater resources; | |
| ● | Certain anti-dilutive, drag-along and tag-along rights which may be deemed to be held by a former minority stockholder; | |
| ● | Our significant reliance on related party transactions and loans; | |
| ● | The fact that our Chief Executive Officer, Ezra Dabah, has majority voting control over the Company; | |
| ● | If the use of “cookie” tracking technologies is further restricted, regulated, or blocked, or if changes in technology cause cookies to become less reliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of internet user information would decrease, which could harm our business and operating results; | |
| ● | Our ability to comply with the covenants of our loan and lending agreements and future loan covenants, and the fact that our lending facilities are secured by substantially all of our assets; | |
| ● | Our ability to prevent credit card and payment fraud; | |
| ● | The risk of unauthorized access to confidential information; |
| ● | Our ability to protect our intellectual property and trade secrets, claims from third-parties that we have violated their intellectual property or trade secrets and potential lawsuits in connection therewith; | |
| ● | Our ability to comply with changing regulations and laws, penalties associated with any non-compliance (inadvertent or otherwise), the effect of new laws or regulations, our ability to comply with such new laws or regulations, changes in tax rates; | |
| ● | Our reliance on our current management, who are not party to any employment agreements with us; | |
| ● | The outcome of future lawsuits, litigation, regulatory matters or claims; | |
| ● | Certain terms and provisions of our governing documents which may prevent a change of control, and which provide for indemnification of officers and directors, limit the liability of officers or directors, and provide for the board of director’s ability to issue blank check preferred stock; | |
| ● | The fact that we have a limited operating history; the effect of future acquisitions on our operations and expenses; | |
| ● | Our significant indebtedness; | |
| ● | The anticipated volatile nature of the trading prices of our common stock and dilution which may be caused by future sales of securities; and | |
| ● | Risks associated with our status as an “emerging growth company”. |
Additional Information
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “our company,” and “Kidpik” refer to Kidpik Corp. The Kidpik design logo, “kidpik,” and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Kidpik Corp. Other trade names, trademarks, and service marks used in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, we have omitted the ® and ™ designations, as applicable, for the trademarks we name in this Quarterly Report on Form 10-Q.
| 3 |
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
Kidpik Corp.
Condensed Interim Balance Sheets
| October 1, 2022 | January 1, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Leasehold improvements and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable, related party | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Advance payable | ||||||||
| Operating lease liabilities, current | ||||||||
| Short-term debt, related party | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, par value $, shares authorized, of which shares are issued and outstanding as of October 1, 2022 and January 1, 2022 | ||||||||
| Common stock, par value $, shares authorized, of which and shares are issued and outstanding as of October 1, 2022 and January 1, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-1 |
Kidpik Corp.
Condensed Interim Statements of Operations
(Unaudited)
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Shipping and handling | ||||||||||||||||
| Payroll and related costs | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expenses | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other (income) expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other (income) expenses | ( | ) | ( | ) | ||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders: | ||||||||||||||||
| Basic | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-2 |
Kidpik Corp.
Condensed Interim Statements of Changes in Stockholders’ Equity (Deficit)
For the 13 and 39 Weeks Ended October 1, 2022 and October 2, 2021
(Unaudited)
| Additional | Accumulated | |||||||||||||||||||||||||||
| Common Stock | Preferred Stock | paid-in | stockholders’ | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | Total | ||||||||||||||||||||||
| Balance, January 2, 2021 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, April 3, 2021 | - | - | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock | - | |||||||||||||||||||||||||||
| Conversion of debt | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, July 3, 2021 | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, October 2, 2021 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Balance, January 1, 2022 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, April 2, 2022 | - | ( | ) | |||||||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of common stock | - | ( | ) | |||||||||||||||||||||||||
| Cash used to settle net share equity awards | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, July 2, 2022 | - | ( | ) | |||||||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, October 1, 2022 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-3 |
Kidpik Corp.
Condensed Interim Statements of Cash Flows
(Unaudited)
| 39 Weeks Ended | ||||||||
| October 1, 2022 | October 2, 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Forgiveness of loan payable | ( | ) | ||||||
| Equity-based compensation | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Operating lease right-of-use assets and liabilities | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accounts payable, related parties | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of leasehold improvements and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of long-term debt from related party | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Cash used to settle net share equity awards | ( | ) | ||||||
| Net proceeds from line of credit | ||||||||
| Net proceeds (repayments) from advance payable | ( | ) | ||||||
| Net proceeds (repayments) from loan payable related party | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
| Reconciliation of cash and restricted cash: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| Supplemental disclosure of cash flow data: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| Supplemental disclosure of non-cash data: | ||||||||
| Record right-of use asset and operating lease liabilities | $ | $ | ||||||
| Conversion of shareholder debt | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-4 |
Kidpik Corp.
Notes to Condensed Interim Financial Statements
(Unaudited)
NOTE 1: NATURE OF BUSINESS
Kidpik Corp. (the “Company”, “we”, “our” or “us”) was incorporated on April 16, 2015 under the laws of Delaware. The Company is a subscription-based e-commerce business geared toward kid products for girls’ and boys’ apparel, footwear, and accessories. The Company serves its customers through the clothing subscription box business and its retail website, www.kidpik.com. The Company commenced operations in March 2016 and its executive office is located in New York.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting: The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and the rules and regulations of the SEC that apply to interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes normally included in financial statements prepared in conformity with U.S. GAAP. They should be read in conjunction with the financial statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on April 1, 2022 (the “Form 10-K”).
The accompanying condensed financial statements are unaudited and include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its condensed financial position and results of operations for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year.
Fiscal year: The Company uses a 52- or 53-week fiscal year ending on the Saturday nearest to December 31 each year. The quarters ended October 1, 2022 and October 2, 2021 consist of 13 weeks. These quarters are referred to herein as the third quarter of “2022” and “2021”, respectively.
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reporting values of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The more significant estimates and assumptions are those used in determining the inventory obsolescence, equity-based compensation, operating lease right-of-use assets and operating lease liabilities, bad debts, and the valuation of deferred tax assets. Accordingly, actual results could differ from those estimates.
Emerging growth company: The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
| F-5 |
Recently adopted accounting pronouncements: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than twelve (12) months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will continue to primarily depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, this standard requires both types of leases to be recognized on the balance sheet. The standard also requires disclosures about the amount, timing and uncertainty of the cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For emerging growth companies, this standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021, with early adoption permitted. Refer to Note 7, “Leases” for information regarding our adoption of this guidance effective January 2, 2022 and a discussion of the impact to information presented herein, as well as additional required disclosures under the new guidance.
Accounting standards issued but not yet adopted: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which replaces the incurred loss impairment methodology for financial instruments in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB has issued ASU 2019-10 which has resulted in the postponement of the effective date of the new guidance for eligible smaller reporting companies to the fiscal year beginning January 1, 2023. The guidance must be adopted using a modified retrospective approach and a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of the guidance on its financial statements. The Company does not believe that the adoption of this standard would have a material impact on the Company’s financial statements.
Concentration of credit risk: Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash, restricted cash and accounts receivable. We maintain our cash and restricted cash with high-quality financial institutions with investment-grade ratings. Although the Company’s cash balance held with a U.S. bank may exceed the amount of federal insurance provided on such deposits, the Company has not experienced any losses in such accounts. The Company is exposed to credit risk in the event of a default by the financial institution holding its cash for the amount reflected on the condensed interim balance sheets.
Revenue recognition: The Company recognizes revenue from three sources: its subscription box sales, Amazon business, and online website sales. Revenue is gross billings net of promotional discounts, actual customer credits and refunds as well as customer credits and refunds expected to be issued, and sales tax. Customers are charged for subscription merchandise which is not returned, or which is accepted, and are charged for general merchandise (non-subscription) when they purchase such merchandise. Customers can receive a refund on returned merchandise for which return shipping is a cost to the Company.
Revenue for subscription box sales is recognized when control of the promised goods is transferred and accepted by the subscriber. Subscribers have a maximum of 10 days from the date the product is delivered to return any items in the delivery. Control is transferred either when a subscriber checks out or automatically 10 days after the goods are delivered, whichever occurs first. Upon checkout or the 10-day period, the amount of the order not returned is recognized as revenue. Payment is due upon checkout or the end of the 10-day period after the goods are delivered, whichever occurs first. Starting on August 24, 2021 and ending January 6, 2022, we charged new subscribers an up-front styling fee before the box is shipped that is credited toward items purchased. The styling fees are included in deferred revenue until the time of client checkout or when the option to purchase the item expires.
| F-6 |
Revenue from online website sales, which includes sales from our websites and Amazon online websites, are recognized when control of the promised goods are transferred to the Company’s customers, in an amount that depicts the consideration the Company expects to be entitled to in exchange for those goods. Control is transferred at the time of shipment. Upon shipment, the total amount of the order is recognized as revenue. Payment for online website sales is due at the time of order.
The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns.
Estimates of discretionary authorized returns for sales other than subscription sales, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected, but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly greater or lower than reserves established, a reduction or increase to net revenue would be recorded in the period in which such determination was made.
Shipping and handling costs associated with outbound freight fulfillment before control over a product has transferred to a customer are accounted for as a shipping and handling cost in the condensed interim statements of operations.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue producing transaction and are collected by the Company from a customer are excluded from revenue and cost of goods sold in the condensed interim statements of operations.
Restricted cash: Restricted cash balance consists of cash advances received by the Company from the cash advance agreement described in Note 9. The cash advances can only be used for purchases of products and marketing related services necessary to operate the Company, as defined by the agreement.
Inventory: Inventory, consisting primarily of finished goods, is valued at the lower of cost or net realizable value using the weighted average cost method. In addition, the Company capitalizes freight, duty and other supply chain costs in inventory. These costs are included in the cost of sales as inventory is sold.
Leasehold improvements and equipment: Leasehold improvements and equipment are recorded at cost. Depreciation for equipment is computed using the straight-line method over the estimated useful life of the assets ranging from three to five years. Leasehold improvements are amortized over the shorter of the term of the lease or the life of the improvement on a straight-line method. Expenditures that extend the useful lives of the equipment are capitalized. Expenditure for the repairs and maintenance are charged to expense as incurred. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in operations.
Impairment of long-lived assets: The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted pre-tax cash flows. If it is determined that impairment has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between the assets’ carrying value and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. As a result of its review, the Company does not believe that any material impairment currently exists related to its long-lived assets.
Deferred financing costs: Deferred financing costs, net of accumulated amortization, are reported as a direct deduction from the face amount of the line of credit to which such costs relate. Amortization of debt issuance costs is reported as a component of interest expenses and is computed using the straight-line method over the term of the agreement, which approximates the effective interest method.
| F-7 |
Income taxes: The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized with respect to the future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. 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 rate is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company applies U.S. GAAP accounting for uncertainty in income taxes. If the Company considers that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming the tax position is examined by the appropriate taxing authority that has full knowledge of relevant information.
The Company has no unrecognized tax benefits at October 1, 2022 and January 1, 2022. The Company’s federal, state and local income tax returns prior to fiscal years 2017 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
The Company recognizes interest and penalties associated with tax matters, if any, as part of operating expenses and includes accrued interest and penalties with accrued expenses in the condensed interim balance sheets.
Advertising
costs: Direct advertising and promotion costs are expensed as incurred. Advertising and promotion
expenses totaled $
Bad debt expense: Bad debt expense is recognized when a receivable is no longer collectible after a customer is unable to fulfill their obligation to pay an outstanding balance.
Equity-based compensation: We measure equity-based compensation expense associated with the awards granted based on their estimated fair values at the grant date. For awards with service condition only, equity-based compensation expense is recognized over the requisite service period using the straight-line method. The grant-date fair value of stock options is estimated using the Black-Scholes option pricing model. Forfeitures are recorded as they occur. See Note 16, Equity-based compensation, for additional details.
Segment information: The Company has one operating segment and one reportable segment as its chief operating decision maker, who is its Chief Executive Officer, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. All long-lived assets are located in the United States.
NOTE 3: LIQUIDITY
The
Company has sustained losses from operations since inception, negative operating cash flows and an accumulated deficit of $
To support the Company’s existing operations or any future expansion of business, including the ability to execute the Company’s growth strategy, the Company must have sufficient capital to continue to make investments and fund operations. Management has plans to pursue an aggressive growth strategy for the expansion of operations through increased marketing to attract new members and refine the marketing strategy to strategically prioritize customer acquisition channels that management believes will be more successful at attracting new customers and members.
| F-8 |
The Company’s ability to continue its operations is dependent upon obtaining new financing for its ongoing operations and on the Company’s plans to reduce the inventory level. To manage operating cash flows in the near term, the Company plans to significantly reduce purchases of new inventory and if available, may enter into cash advance or other financing arrangement. Future financing options available to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or other strategic transactions to fund existing operations and execute management’s growth strategy. Equity financings may include sales of common stock. Such financing may not be available on terms favorable to the Company or at all. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders and may cause significant dilution to existing stockholders. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continued operations, if at all, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed financial statements are issued. The accompanying condensed interim financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
NOTE 4: INVENTORY
Inventory consists of the following:
| October 1, 2022 | January 1,2022 | |||||||
| (unaudited) | ||||||||
| Finished goods | $ | $ | ||||||
| Goods in transit | ||||||||
| Total | $ | $ | ||||||
NOTE 5: INTANGIBLE ASSETS
Intangible assets consist of the following:
| October 1, 2022 | January 1,2022 | |||||||
| (unaudited) | ||||||||
| Website development | $ | $ | ||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
There
was
NOTE 6: LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of the following:
| October 1, 2022 | January 1, 2022 | |||||||
| (unaudited) | ||||||||
| Computer equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Machinery and equipment | ||||||||
| Total cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Leasehold improvements and equipment, net | $ | $ | ||||||
Depreciation
expense amounted to $
Depreciation
expense amounted to $
| F-9 |
NOTE 7: LEASES
The Company adopted the ASC 842 guidance on January 2, 2022, using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following: an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease; an entity may elect not to reassess the lease classification for expired or existing leases; and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. The Company has elected not to utilize the hindsight expedient in determining the lease term, and to not record leases with an initial term of 12 months or less on our balance sheet. Additionally, the Company has elected to account for lease components and non-lease components as a single lease component for all asset classes. Lease expense is recognized over the expected term on a straight-line basis. The adoption did not have a material impact on the Company’s condensed interim statements of operations or cash flows.
The
Company entered into a sub-lease agreement for warehouse space from a related party on April 1, 2021. The Company pays
On
June 27, 2022, the Company together with a related party, entered into a new agreement to extend the lease agreement with a third party
for the office space. The Company will pay
The
discount rate used in the calculation of the lease liability ranged from
The amortization expense associated with
the operating lease right-of-use of assets as for the 13 and 39 weeks ended October 1, 2022, amounted to $
The table below includes the balances of operating lease right-of-use assets and operating lease liabilities as of October 1, 2022:
| October 1, 2022 | ||||
| Assets | ||||
| Operating lease right-of-use assets, net | $ | |||
| Liabilities | ||||
| Operating lease liabilities – current | $ | |||
| Operating lease liabilities – non-current | ||||
| Total Lease Liabilities | $ | |||
The maturities of our operating lease liabilities as of October 1, 2022, are as follows:
| Maturity of Operating Lease Liabilities | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| F-10 |
NOTE 8: RELATED PARTY TRANSACTIONS
In
the normal course of business, the Company made purchases from related parties for merchandise
and shared services which amounted to $
A
related party performs certain management services for the Company pursuant to a management services agreement. For these services, the
Company pays a monthly management fee equal to
In
addition, the Company is using a related party to run its Amazon Marketplace site. The consulting fees for this service amounted to $
The
Company entered into a new revocable monthly sub-lease agreement for office space from a related party on January 1, 2021. The Company
will pay
The
Company entered into a new sub-lease agreement for warehouse space from a related party on April 1, 2021. The Company will pay
As
of October 1, 2022 and January 1, 2022, there was $
See Note 11 for a description of short-term debt from affiliated entities under common control and from stockholders.
NOTE 9: ADVANCE PAYABLE
From time to time, we have been party to cash advance agreements with financial institutions whereby such institutions purchased receivables or advanced cash for us to purchase inventory or to pay marketing costs. Those include the following transactions:
On
February 1, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
March 10, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
March 10, 2021, the Company also entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
| F-11 |
On
May 7, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
June 4, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
June 4, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
July 9, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
August 10, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
August 10, 2021, the Company also entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the
financial institution purchased $
On
October 22, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
October 27, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
| F-12 |
On
November 2, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
As
of October 1, 2022 and January 1, 2022, the cash advance outstanding, including interest, amounted to
NOTE 10: LOAN PAYABLE
As
a response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES
Act, to aid businesses through the current economic conditions. The CARES Act provided businesses with loans from the Small Business
Administration (“SBA”) based on a calculation provided by the SBA. In 2020, the Company received $
NOTE 11: SHORT-TERM DEBT
In
April and June 2021, the Company entered into various short-term, unsecured promissory notes with an affiliated entity under common control
in the amount of $
On June 28, 2021, the Company entered into four unsecured convertible promissory notes with stockholders in the aggregate amount of $. .
On August 13, 2021, the Company entered into two unsecured convertible promissory notes with stockholders in the aggregate amount of $. .
In
September, October and November 2021, the Company borrowed $ from a stockholder. The notes are unsecured, noninterest-bearing
and the principal was due on January 15, 2022, or was due at the rate of % of such note amount upon a sale of the Company (including
a change of % or more of the voting shares). On December 27, 2021, the Company paid $
| F-13 |
NOTE 12: LINE OF CREDIT
In
September 2017, the Company entered into a loan and security agreement with a lender for an initial term of
As
of October 1, 2022 and January 1, 2022, there was no outstanding advance amounts related to the line of credit. Interest expense amounted
to
As
of October 1, 2022 and January 1, 2022, deferred financing costs, net of accumulated amortization, totaled
NOTE 13: LONG-TERM DEBT
In
January, February, and March 2021, the Company entered into various unsecured convertible promissory notes with stockholders in the aggregate
amount of $
The computation of basic net loss per share is based on the weighted average number of common shares outstanding for the 13 and 39 weeks ended October 1, 2022 and October 2, 2021. Diluted net loss per share gives effect to stock options and restricted stock units using the treasury stock method, unless the impact is anti-dilutive. Diluted net loss per share for the 13 and 39 weeks ended October 1, 2022 does not include stock options to purchase shares of common stock and restricted stock units as their effect was anti-dilutive.
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares – basic | ||||||||||||||||
| Dilutive effect of stock options and restricted stock units | ||||||||||||||||
| Weighted average shares – diluted | ||||||||||||||||
| Basic net loss per share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Diluted net loss per share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| F-14 |
NOTE 15: STOCKHOLDERS’ EQUITY
On May 10, 2021, the Company filed an amended and restated Certificate of Incorporation which authorized shares of Common Stock having a par value of $ per share and shares of Preferred Stock having a par value of $ per share. All shares of Common Stock shall be of the same class and have equal rights, powers and privileges. The Preferred Stock may be issued from time to time in one or more series and each issued series may have full or limited designations, preferences, participating, special rights and limitation as adopted by the Board of Directors. In conjunction with this amendment, the Company completed a forward split of existing Common Stock whereby each one share of Common Stock was automatically split up and converted into shares of Common Stock. The condensed interim statements of changes in stockholders’ equity were restated to retroactively incorporate this stock split.
On
May 11, 2021, the Company converted stockholder notes in the amount of $
On
May 11, 2021, the Company entered into an investment agreement with related parties. Pursuant to the investment agreement, the related
parties purchased shares of common stock for $
Also
on May 11, 2021, the Company entered into an investment agreement with an investment firm owned by a related party. Pursuant to the investment
agreement, the firm purchased shares of common stock for $
The Investment Agreement provided preemptive rights for converting note holders, for so long as they hold not less than 5% of the Company’s outstanding common stock, to acquire additional shares of common stock to maintain their then current percentage ownership in the Company, on the same terms offered to any other party which triggered such preemptive rights, subject to certain exceptions, and drag-along rights (providing for rights to be dragged along in any transaction relating to the sale of a majority of the Company’s outstanding shares or assets, or certain similar transactions, on the same terms, and subject to the same conditions, as other sellers). The agreement also provided anti-dilution rights such that if the Company, after the date of the closing of the transactions contemplated by the Conversion Agreement, issued shares of common stock, or common stock equivalents (options, warrants or convertible securities), if the price per share is less than the conversion price of the converted notes, then we are required to issue additional shares of common stock equal to the difference between the number of shares issued to each purchaser in such anti-dilutive transaction and the aggregate amount of each converted note, divided by such lower dilutive price.
On
May 12, 2021, the Company and each then stockholder of the Company, other than one minority stockholder holding shares or
On May 9, 2021, the Board of Directors and majority stockholders adopted an Equity Incentive Plan which provides an opportunity for any employee, officer, director or consultant of the Company to receive incentive stock options, nonqualified stock options, restricted stock, stock awards, shares in performance of services or any combination of the foregoing.
On September 30, 2021, the Board of Directors and majority stockholders of the Company amended and restated its 2021 Equity Incentive Plan (as amended and restated, the “2021 Plan”). The 2021 Plan provides for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Internal Revenue Code, to our employees, and for the grant of non-statutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards (RSU awards), performance awards and other forms of awards to our employees, directors and consultants and any of our affiliates’ employees and consultants. A total of shares of the Company’s common stock were initially reserved for issuance under the 2021 Plan.
| F-15 |
On November 10, 2021, prior to the pricing of the IPO, the Company granted (a) options to purchase an aggregate of shares of our common stock at an exercise price of $per share, to certain employees and consultants of the Company in consideration for services rendered and to be rendered through May 2024; (b) restricted stock units, to certain executive officers; and (c) restricted stock units to a board of director member. Such options and restricted stock units vested 1/3 on May 15, 2022 (six months from the closing of the Company’s IPO); and continue to vest (to the extent not forfeited) (i) 1/3 on May 15, 2023 (18 months from the closing of the IPO); and (ii) 1/3 on May 15, 2024 (30 months from the closing date of the IPO). The options each have a term of . On May 15, 2022, restricted stock units were vested of which common stocks were issued and were forfeited and cancelled to settle tax liability on the vested shares.
In determining the fair value of the stock-based awards, we used the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment. Expected Term – The expected term represents the period that our stock options are expected to be outstanding and is determined using the simplified method (generally calculated as the mid-point between the vesting date and the end of the contractual term). Expected Volatility – The expected volatility was estimated based on the average volatility for publicly traded companies that we considered comparable, over a period equal to the expected term of the stock option grants. Risk-Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury zero coupon notes in effect at the time of grant for periods corresponding with the expected term of the option. Expected Dividend – We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock; therefore, we use an expected dividend yield of zero.
The fair value of each option we issued on November 10, 2021 was $. The weighted average assumptions used included a risk-free interest rate of %, an expected stock price volatility factor of % and a dividend rate of %. The fair value of each restricted stock unit (“RSU”) we issued on November 10, 2021 was $.
Number of Options | Weighted Average Exercise Price | |||||||
| Balance as of January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Repurchased | ( | ) | ||||||
| Balance as of October 1, 2022 | $ | |||||||
| Vested as of October 1, 2022 | ||||||||
As of October 1, 2022, there was $ million of total unrecognized compensation cost related to unvested options and RSUs granted under the 2021 Plan, which is expected to be recognized over a weighted average service period of years. The Company records the impact of any forfeitures of options as they occur.
Amortization of this charge, which is included in non-cash compensation expense, for the 13 and 39 weeks ended October 1, 2022 were $ and $, respectively. The non-cash compensation expense is included as part of payroll expense.
| F-16 |
NOTE 17: RISK CONCENTRATION AND UNCERTAINTIES
The
Company uses various vendors for purchases of inventory. For the 13 weeks ended October 1, 2022, three vendors accounted for approximately
Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base. In addition, the Company reviews receivables and recognizes bad debt on a monthly basis for accounts that are deemed uncollectible.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic, which continues to spread throughout the world affecting the United States and global economies. The potential impact and the duration of the COVID-19 pandemic is difficult to assess or predict. The COVID-19 pandemic has interrupted the global supply chain which has impacted purchases and timing of inventory. As the COVID-19 situation is unprecedented and ever evolving, future events and effects related to the pandemic cannot be determined with precision, and actual results could significantly differ from estimates or forecasts. The extent and duration of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict.
NOTE 18: REVENUE, NET DISCLOSURES
The Company’s revenue, net is disaggregated based on the following categories:
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Subscription boxes | $ | $ | $ | $ | ||||||||||||
| Amazon sales | ||||||||||||||||
| Online website sales | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| F-17 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
You should read the following discussion and analysis of our financial condition and results of operations together with the condensed interim financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the notes to those financial statements for the fiscal year ended January 1, 2022, which were included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 1, 2022. The following discussion contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. See also “Cautionary Statement Regarding Forward-Looking Information”, above. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Quarterly Report and in other reports we file with the SEC. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason, except as otherwise provided by law.
The following discussion is based upon our financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. On an on-going basis, we evaluate our estimates, including those related to sales returns, allowance for doubtful accounts, impairment of long-term assets, especially goodwill and intangible assets, assumptions used in the valuation of stock-based compensation, and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Kidpik Corp. (the “Company”) uses a 52– or 53-week fiscal year ending on the Saturday nearest to December 31 each year. The year ended December 31, 2022 is a 52-week year and referred to herein as fiscal “2022”. The years ended January 1, 2022 and January 2, 2021 were 52- and 53-week years, respectively. These years are referred to herein as fiscal “2022” and “2021”, respectively. The Company’s fiscal quarters are generally 13 weeks in duration. When the Company’s fiscal year is 53 weeks long, the corresponding fourth quarter is 14 weeks in duration. References to the third quarter of fiscal 2022 and the third quarter of fiscal 2021, refer to the 13 weeks ended October 1, 2022 and October 2, 2021, respectively.
Certain capitalized terms used below but not otherwise defined, are defined in, and shall be read along with the meanings given to such terms in, the notes to the unaudited financial statements of the Company for the 13 and 39 weeks ended October 1, 2022 and October 2, 2021, above.
References to our websites and those of third parties below are for information purposes only and, unless expressly stated below, we do not desire to incorporate by reference into this Report information in such websites.
Unless the context otherwise requires, references in this Report to “we,” “us,” “our,” the “Registrant”, the “Company,” “kidpik” and “Kidpik Corp.” refer to Kidpik Corp.
| 4 |
In addition:
| ● | “Active subscriptions” means individuals who are scheduled to receive future boxes; | |
| ● | “Boxes” means the Company’s subscription clothing, shoe and accessories boxes; | |
| ● | “Customers” means anyone who has received at least one shipment through subscription, direct or indirect sale from the Company; | |
| ● | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; | |
| ● | “Members” means customers who registered at least one subscription; | |
| ● | “NASDAQ” means the NASDAQ Capital Market; | |
| ● | “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; | |
| ● | “Securities Act” refers to the Securities Act of 1933, as amended; and | |
| ● | “Subscriptions” means orders for recurring box shipments. |
Available Information
The Company makes available free of charge through its internet website, https://investor.kidpik.com/sec-filings, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Our SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this Report. Further, the Company’s references to website URLs are intended to be inactive textual references only.
Introduction
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
| ● | Overview. | |
| ● | Key Performance Indicators. | |
| ● | Factors Affecting Our Future Performance. | |
| ● | Components of Results of Operations. | |
| ● | Results of Operations. | |
| ● | Liquidity and Capital Resources. | |
| ● | Critical Accounting Estimates. |
Overview
We began operations in 2016 as a subscription-based e-commerce company on the proposition of making shopping easy, convenient, and accessible for parents by delivering fashionable and customized kids’ outfits in a box. Kidpik provides kids clothing subscription boxes for boys and girls (sizes 12M-16) that include mix-&-match, coordinated outfits that are personalized based on each member’s style preferences. We focus on providing entire outfits from head-to-toe (including shoes) by designing each seasonal collection in-house from concept to box.
| 5 |
Staying ahead in an emerging industry requires constant innovation in product and services. After launching with our girls’ subscription boxes for sizes 4-14 in 2016, we have continued to expand our product offering and marketing channels. We expanded into boys’ clothing, added larger sizes for boys and girls (up to 16 for apparel and 6 youth for shoes), in the Spring of 2022, added toddler sizes down to 2T & 3T for apparel and 7 & 8 toddler shoes, and launched shop.kidpik.com, where we sell individual apparel items and shoes, curated outfits, pre-styled boxes and our 2 for basics. We also recently introduced sizes 12 months and 18 months apparel to our offerings. We have expanded our distribution by selling our branded products on Amazon.com, as well as Fulfilled by Amazon (FBA) and Fulfilled by Merchant (FBM) for pre-packs and individual items.
We also introduced an “add-on” option for all members, whereby they can add additional items of their choosing to their next subscription box order. We plan to broaden the assortment of add-on items offered in an effort to increase the average box transaction size and gross margin. We have recently expanded our subscription box offerings, introducing a 12-piece box option in addition to our traditional 8-piece box, adding to the customer experience and providing an opportunity to drive additional revenue. We have also expanded our seasonal pre-styled fashion box and outfit assortment available on our e-commerce website, which provides an upsell opportunity for active members and additional variety for our e-commerce customers.
As of November 15, 2022, we provide e-commerce services only throughout the 48 contiguous U.S. states and Army Post Offices (APOs) and Fleet Post Offices (FPOs).
We have expanded our offerings with the introduction of husky/plus and slim sizes to our assortment and launched a limited-edition NASA selection during the third quarter of 2022. We will continue to analyze the marketplace for interest in new products and may further invest in expanding our current lines.
We have added new channels to our paid advertising strategy, including TikTok, Tap Joy and new affiliate partnerships, with the goal of increasing new member growth. In addition, we have focused on other revenue share marketing opportunities, such as continuing to scale our influencer ambassador program, and launched a consumer-facing brand ambassador program. We are also pursuing new awareness strategies, such as cross-promotional opportunities with children’s companies with brand synergies.
In November 2021, the Company completed an initial public offering (the “IPO”), in which the Company issued and sold 2,117,647 shares of its authorized common stock for $8.50 per share for net proceeds of $16.1 million, after deducting underwriting discounts and commissions, and offering costs.
Key Performance Indicators
Key performance indicators that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions include gross margin, shipped items, and average shipment keep rate, each described in greater detail below.
We also use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business.
Gross Margin
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Gross margin | 60.3 | % | 58.2 | % | 60.4 | % | 59.8 | % | ||||||||
Gross profit is equal to our net sales less cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of sales consists of the purchase price of merchandise sold to customers and includes import duties and other taxes, freight in, returns from customers, inventory write-offs, and other miscellaneous shrinkage.
| 6 |
In addition to our results calculated under generally accepted accounting principles in the United States (“U.S. GAAP”), and to provide investors with additional information regarding our financial results, we have disclosed in the table below and elsewhere in this Report, Adjusted EBITDA, a non-U.S. GAAP financial measure that we calculate as net loss before other expense, net, interest, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain non-routine items. We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable U.S. GAAP financial measure.
We have included Adjusted EBITDA in this report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of equity-based compensation, excludes an item that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
● Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
● Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
● Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
● Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
● Adjusted EBITDA does not reflect certain non-routine items that may represent a reduction in cash available to us; and
● Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other U.S. GAAP results.
Our financial results include certain items that we consider non-routine and not reflective of the underlying trends in our core business operations.
A reconciliation of net loss to Adjusted EBITDA is as follows:
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Net loss | $ | (2,438,330 | ) | $ | (1,189,356 | ) | $ | (5,821,071 | ) | $ | (4,090,058 | ) | ||||
| Add (deduct) | ||||||||||||||||
| Interest expense | 21,885 | 229,657 | 51,485 | 584,466 | ||||||||||||
| Other (income)/expense | - | (442,352 | ) | (286,795 | ) | (429,045 | ) | |||||||||
| Provision for income taxes | - | - | - | 1,332 | ||||||||||||
| Depreciation and amortization | 7,670 | 5,226 | 19,989 | 21,355 | ||||||||||||
| Equity-based compensation | 303,980 | - | 1,355,068 | - | ||||||||||||
| Adjusted EBITDA | $ | (2,104,795 | ) | $ | (1,396,825 | ) | $ | (4,681,324 | ) | $ | (3,911,950 | ) | ||||
Shipped Items
We define shipped items as the total number of items shipped in a given period to our customers through our active subscription, Amazon and online website sales.
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Shipped items (in thousands) | 358 | 559 | 1,083 | 1,680 | ||||||||||||
| 7 |
The decrease in shipped items for the 13 and 39 weeks ended October 1, 2022, was primarily driven by a decrease in subscription boxes sales.
Average Shipment Keep Rate
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||||||
| Average shipment keep rate | 68.5 | % | 68.8 | % | 69.4 | % | 68.5 | % | ||||||||
Average shipment keep rate is calculated as the total number of items kept by our customers divided by total number of shipped items in a given period.
Factors Affecting Our Future Performance
We believe that our performance and future success depend on several factors that present significant opportunities for us, but also pose risks and challenges, including those discussed and in the section titled “Risk Factors.”
Overall Economic Trends
The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending on our sites, while economic weakness, which generally results in a reduction of customer spending, may have a more pronounced negative effect on spending on our sites. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, inflation, business conditions, changes in the housing market, the availability of credit, interest rates and fuel and energy costs. In addition, during periods of low unemployment, we generally experience higher labor costs.
Growth in Brand Awareness and Site Visits
We intend to continue investing in our brand marketing efforts. Since 2016 we have made significant investments to strengthen the “kidpik” brand through expansion of our social media presence. If we fail to cost-effectively promote our brand or convert impressions into new customers, our net sales growth and profitability would be adversely affected.
Acquisition of New Subscriptions
Our ability to attract new subscriptions through marketing and the development of our brand is a key factor for our future growth. If we are unable to acquire sufficient new subscriptions in the future, our revenue might decline. New subscriptions could be negatively impacted if our marketing efforts are less effective in the future. Increases in advertising rates could also negatively impact our ability to acquire new subscriptions cost effectively. Consumer tastes, preferences, and sentiment for our brand may also change and result in decreased demand for our products and services. Laws and regulations relating to privacy, data protection, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices and procedures.
Social networks are important as a source of new clients and as a means by which to connect with current clients, and their importance may be increasing. We may be unable to effectively maintain a presence within these networks, which could lead to lower than anticipated brand affinity and awareness, and in turn could adversely affect our operating results. Further, mobile operating system and web browser providers, such as Apple and Google, have implemented product changes to limit the ability of advertisers to collect and use data to target and measure advertising. For example, Apple made a change in iOS 14 that required apps to get a user’s opt-in permission before tracking or sharing the user’s data across apps or websites owned by companies other than the app’s owner. Google intends to further restrict the use of third-party cookies in its Chrome browser in 2023, consistent with similar actions taken by the owners of other browsers, such as Apple in its Safari browser, and Mozilla in its Firefox browser. These changes have reduced and will continue to reduce our ability to efficiently target and measure advertising, in particular through online social networks, making our advertising less cost effective and successful. We expect to continue to be impacted by these changes.
| 8 |
Retention of Existing Subscribers
Our ability to retain subscribers is also a key factor in our ability to generate revenue growth. Most of our current subscribers purchase products through subscription-based plans, where subscribers are billed and sent products on a recurring basis. The recurring nature of this revenue provides us with a certain amount of predictability for future revenue. If customer behavior changes, and customer retention decreases in the future, then future revenue will be negatively impacted.
Inventory Management
To ensure sufficient availability of merchandise, we generally enter into purchase orders well in advance and frequently before apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. We incur inventory write-offs and changes in inventory reserves that impact our gross margins. Because our merchandise assortment directly correlates to client success, we may at times optimize our inventory to prioritize long-term client success over short-term gross margin impact. Moreover, our inventory investments will fluctuate with the needs of our business. For example, entering new categories or adding new fulfillment centers will require additional investments in inventory.
Investments in Growth
We expect to continue to focus on long-term growth through investments in product offerings and the kids and parent experience. We expect to make significant investments in marketing to acquire new subscribers and customers. Additionally, we intend to continue to invest in our fulfillment and operating capabilities. In the short term, we expect these investments to increase our operating expenses in the future and cannot be certain that these efforts will grow our customer base or be cost-effective; however, in the long term, we anticipate that these investments will positively impact our results of operations.
Components of Results of Operations
Note that our classification of the various items making up cost of goods sold, shipping and handling, payroll and related costs and equity-based compensation and general and administrative costs may vary from other companies in our industry, and as such, may not be comparable to a competitor’s.
Revenue
We generate revenue in two categories: 1) the sale items in our subscription boxes, and 2) the sale of one-time purchases via shop.kidpik.com, and other marketplaces. We refer to these revenue classifications as “Subscription boxes” and “one-time purchases”, respectively. Net revenue is revenue less promotional discounts, actual customer credits and refunds as well as customer credits and refunds expected to be issued, and sales tax. When we use the term revenue in this Report, we are referring to net revenue, unless otherwise stated. We also recognize revenue resulting upon the use of gift cards. Customers who decide to return some or all of the merchandise they receive in each kidpik box, may return such items within 10 days of receipt of the box. Customers are charged for subscription merchandise which is not returned, or which is accepted and are charged for general merchandise (non-subscription) when they purchase such merchandise; however, they are able to receive a refund on returned merchandise.
Cost of Goods Sold
Cost of goods sold consists of the costs of manufacturing merchandise and the expenses of shipping and importing (duty payments) such merchandise to our warehouse for distribution, and inventory write-offs, offset by the recoverable cost of merchandise estimated to be returned.
| 9 |
Shipping and Handling
Shipping and handling includes the costs of shipping merchandise to our customers, and back to us, as well as the cost of fulfillment and return processing, and the materials used for packing.
Payroll and Related Expenses
Payroll and related expenses represent employee salaries, taxes, benefits and fees to our payroll provider.
General and Administrative Expenses
General and administrative expenses consist primarily of marketing, professional fees, Amazon seller fees, bad debt expense and credit card fees, among others.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation expense for leasehold improvements and equipment.
Interest Expense
Interest expense consists primarily of interest expense associated with our lines of credit, outstanding notes payable, and amortization of deferred expense related to our line of credit.
Other Non-Operating Income
Other non-operating income related to the forgiveness of a prior Paycheck Protection Program Loan.
Provision for Income Taxes
Our provision for income taxes consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation allowance of our net federal and state deferred tax assets.
Results of Operations
Novel Coronavirus (COVID-19)
The U.S. has recently seen decreases in total new COVID-19 infections and deaths; however, it is unknown whether such decreases will continue, new strains of the virus will cause numbers to increase, currently projected vaccine efficacy numbers will hold, or new strains of the virus will become dominant in the future, and/or whether jurisdictions in which we operate, will issue new or expanded stay-at-home orders, or how those orders, or others, may affect our operations. During the majority of March and April 2020, we closed our California warehouse due to stay-at-home orders which were issued in the State of California. We resumed shipping April 17, 2020, following safety protocols and Centers for Disease Control and Prevention (CDC) guidelines, which we strictly adhered to. On an aggregate basis we lost about two weeks of potential revenue during this period where we were unable to ship products. For the months of March and April 2020, our new member acquisitions were reduced dramatically. Beginning in early May 2020, through the month of June 2020, our new member acquisitions grew significantly, most likely due to stay-at-home orders when consumers shifted to shopping online, before leveling off to expected growth numbers. The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic.
Other than the temporary closure of our warehouse as discussed above, we have experienced shipping delays to and from our customers as a result of our shipping vendors’ challenges fulfilling higher e-commerce shipping demand, which may negatively impact our results of operations. We also have been affected by, and expect to continue to be affected by, COVID-19-related freight delays and difficulties sourcing materials. Additionally, we may be negatively impacted if consumers shift back to traditional brick-and-mortar apparel retailers following the pandemic.
| 10 |
Although COVID-19 has had a major impact on businesses around the world, to date, other than as described above, the pandemic has not had a significant negative impact on our business, except as discussed below. Since the start of the pandemic, we have taken steps to prioritize the health and safety of our employees. Some of our employees continue to work remotely as a result of the COVID-19 pandemic.
RESULTS OF OPERATIONS
Comparison of the 13 and 39 weeks ended October 1, 2022 and October 2, 2021
Revenue
Our revenue for the 13 weeks ended October 1, 2022, decreased by 34.8% to $3,633,467, compared to $5,574,099 for the 13 weeks ended October 2, 2021, a decrease of $1,940,632 from the prior period. The revenue breakdown by sales channel for the 13 weeks ended October 1, 2022, and October 2, 2021, is summarized in the table below:
13 weeks ended October 1, 2022 | 13 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Revenue by channel | ||||||||||||||||
| Subscription boxes | $ | 2,867,930 | $ | 4,745,932 | $ | (1,878,002 | ) | (39.6 | )% | |||||||
| Amazon sales | 468,835 | 568,948 | (100,113 | ) | (17.6 | )% | ||||||||||
| Online website sales | 296,702 | 259,219 | 37,483 | 14.5 | % | |||||||||||
| Total revenue | $ | 3,633,467 | $ | 5,574,099 | $ | (1,940,632 | ) | (34.8 | )% | |||||||
Our revenue for the 39 weeks ended October 1, 2022, decreased by 29.2% to $11,734,132, compared to $16,562,579 for the 39 weeks ended October 2, 2021, a decrease of $4,828,447 from the prior period. The revenue breakdown by sales channel for the 39 weeks ended October 1, 2022, and October 2, 2021, is summarized in the table below:
39 weeks ended October 1, 2022 | 39 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Revenue by channel | ||||||||||||||||
| Subscription boxes | $ | 9,326,331 | $ | 14,163,217 | $ | (4,836,886 | ) | (34.2 | )% | |||||||
| Amazon sales | 1,577,412 | 1,893,814 | (316,402 | ) | (16.7 | )% | ||||||||||
| Online website sales | 830,389 | 505,548 | 324,841 | 64.3 | % | |||||||||||
| Total revenue | $ | 11,734,132 | $ | 16,562,579 | $ | (4,828,447 | ) | (29.2 | )% | |||||||
| 11 |
The revenue from subscription boxes for the 13 weeks ended October 1, 2022 and October 2, 2021, was generated from active subscriptions recurring boxes revenue and new subscriptions first box revenue, as summarized in the table below:
13 weeks ended October 1, 2022 | 13 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Subscription boxes revenue from | ||||||||||||||||
| Active subscriptions – recurring boxes | $ | 2,297,212 | $ | 3,865,550 | $ | (1,568,338 | ) | (40.6 | )% | |||||||
| New subscriptions - first box | 570,718 | 880,382 | (309,664 | ) | (35.2 | )% | ||||||||||
| Total subscription boxes revenue | $ | 2,867,930 | $ | 4,745,932 | $ | (1,878,002 | ) | (39.6 | )% | |||||||
The revenue from subscription boxes for the 39 weeks ended October 1, 2022 and October 2, 2021, was generated from active subscriptions recurring boxes revenue and new subscriptions first box revenue, as summarized in the table below:
39 weeks ended October 1, 2022 | 39 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Subscription boxes revenue from | ||||||||||||||||
| Active subscriptions – recurring boxes | $ | 8,084,104 | $ | 11,474,502 | $ | (3,390,398 | ) | (29.5 | )% | |||||||
| New subscriptions - first box | 1,242,227 | 2,688,715 | (1,446,488 | ) | (53.8 | )% | ||||||||||
| Total subscription boxes revenue | $ | 9,326,331 | $ | 14,163,217 | $ | (4,836,886 | ) | (34.2 | )% | |||||||
The decrease in revenue for the 13 weeks ended October 1, 2022 was primarily driven by a decrease in subscription boxes sales. The revenue breakdown by product line for the 13 weeks ended October 1, 2022 and October 2, 2021 is summarized in the table below:
13 weeks ended October 1, 2022 | 13 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Revenue by product line | ||||||||||||||||
| Girls’ apparel | $ | 2,692,466 | $ | 4,189,538 | $ | (1,497,072 | ) | (35.7 | )% | |||||||
| Boys’ apparel | 758,733 | 1,111,509 | (352,776 | ) | (31.7 | )% | ||||||||||
| Toddlers’ apparel | 182,268 | 273,052 | (90,784 | ) | (33.2 | )% | ||||||||||
| Total revenue | $ | 3,633,467 | $ | 5,574,099 | $ | (1,940,632 | ) | (34.8 | )% | |||||||
The decrease in revenue for the 39 weeks ended October 1, 2022 was primarily driven by a decrease in subscription boxes sales. The revenue breakdown by product line for the 39 weeks ended October 1, 2022 and October 2, 2021 is summarized in the tables below:
39 weeks ended October 1, 2022 | 39 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Revenue by product line | ||||||||||||||||
| Girls’ apparel | $ | 8,712,027 | $ | 12,647,081 | $ | (3,935,054 | ) | (31.1 | )% | |||||||
| Boys’ apparel | 2,448,178 | 3,341,419 | (893,241 | ) | (26.7 | )% | ||||||||||
| Toddlers’ apparel | 573,927 | 574,079 | (152 | ) | - | |||||||||||
| Total revenue | $ | 11,734,132 | $ | 16,562,579 | $ | (4,828,447 | ) | (29.2 | )% | |||||||
The number of items shipped to our customers decreased by 35.9%, from approximately 559,000 for the 13 weeks ended October 2, 2021, to approximately 358,000 for the 13 weeks ended October 1, 2022. The average shipment keep rate was 68.5% in the 13 weeks ended October 1, 2022, compared to 68.8% in the 13 weeks ended October 2, 2021.
The number of items shipped to our customers decreased by 35.6%, from approximately 1,680,000 for the 39 weeks ended October 2, 2021, to approximately 1,083,000 for the 39 weeks ended October 1, 2022. The average shipment keep rate increased to 69.4% in the 39 weeks ended October 1, 2022, compared to 68.5% in the 39 weeks ended October 2, 2021.
| 12 |
Cost of Goods Sold
Our cost of goods sold decreased by 38.0% to $1,442,258 for the 13 weeks ended October 1, 2022, compared to $2,327,335 for the 13 weeks ended October 2, 2021, a decrease of $885,077.
Our cost of goods sold decreased by 30.2% to $4,649,552 for the 39 weeks ended October 1, 2022, compared to $6,659,012 for the 39 weeks ended October 2, 2021, a decrease of $2,009,460.
The decrease in cost of goods sold for the 13 and 39 weeks ended October 1, 2022, compared to the same periods in fiscal 2021, was primarily attributable to the decrease in our subscription box sales as discussed above.
Gross Profit and Gross Profit as a Percentage of Revenue
Our gross profit was $2,191,209 for the 13 weeks ended October 1, 2022, compared to gross profit of $3,246,764 for the 13 weeks ended October 2, 2021. The decrease in gross profit for the 13 weeks ended October 1, 2022, compared to the same period in fiscal 2021, was primarily attributable to the decrease in our subscription box sales.
Gross profit as a percentage of revenue was 60.3% for the 13 weeks ended October 1, 2022, compared to 58.2% for the 13 weeks ended October 2, 2021.
Our gross profit was $7,084,580 for the 39 weeks ended October 1, 2022, compared to gross profit of $9,903,567 for the 39 weeks ended October 2, 2021. The decrease in gross profit for the 39 weeks ended October 1, 2022, compared to the same period in fiscal 2021, was primarily attributable to the decrease in our subscription box sales.
Gross profit as a percentage of revenue was 60.4% for the 39 weeks ended October 1, 2022, compared to 59.8% for the 39 weeks ended October 2, 2021.
Operating Expenses
Our operating expenses for the 39 weeks ended October 1, 2022 and October 1, 2021, are summarized in the table below:
13 weeks ended October 1, 2022 | 13 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Expenses | ||||||||||||||||
| Shipping and handling | $ | 1,042,186 | $ | 1,451,065 | $ | (408,879 | ) | (28.2 | )% | |||||||
| Payroll, related costs and equity-based compensation | 1,191,515 | 1,023,241 | 168,274 | 16.4 | % | |||||||||||
| General and administrative | 2,366,283 | 2,169,283 | 197,000 | 9.1 | % | |||||||||||
| Depreciation and amortization | 7,670 | 5,226 | 2,444 | 46.7 | % | |||||||||||
| Total expenses | $ | 4,607,654 | $ | 4,648,815 | $ | (41,161 | ) | (1.0 | )% | |||||||
Our operating expenses include general and administrative expenses, salaries and benefits, shipping and handling, and depreciation and amortization, as shown in the tables above. Our operating expenses for the 13 weeks ended October 1, 2022, decreased by $41,161 or 1.0% to $4,607,654, compared to $4,648,815 for the 13 weeks ended October 2, 2021. This decrease was mainly a result of a decrease in shipping and handling expenses of $408,879, which was due to lower subscription box sales — our shipping and handling expenses were 28.7% of total revenue in the current period, compared to 26.0% of total revenue in the previous period, offset by (i) an increase in payroll and related costs of $168,274, mainly due to non-cash, equity-based compensation of $303,980 recorded in the third quarter of 2022, and (ii) a $197,000 increase in general and administrative expenses, mainly due to an increase in insurance and professional fees, offset by a decrease in third-party fees due to the decrease in sales.
| 13 |
Our operating expenses for the 39 weeks ended October 1, 2022 and October 2, 2021, are summarized in the table below:
39 weeks ended October 1, 2022 | 39 weeks ended October 2, 2021 | Change ($) | Change (%) | |||||||||||||
| Expenses | ||||||||||||||||
| Shipping and handling | $ | 3,133,411 | $ | 4,543,341 | $ | (1,409,930 | ) | (31.0 | )% | |||||||
| Payroll, related costs and equity-based compensation | 4,137,495 | 2,953,993 | 1,183,502 | 40.1 | % | |||||||||||
| General and administrative | 5,850,066 | 6,318,183 | (468,117 | ) | (7.4 | )% | ||||||||||
| Depreciation and amortization | 19,989 | 21,355 | (1,366 | ) | (6.4 | )% | ||||||||||
| Total expenses | $ | 13,140,961 | $ | 13,836,872 | $ | (695,911 | ) | (5.0 | )% | |||||||
Our operating expenses include general and administrative expenses, salaries and benefits, shipping and handling, and depreciation and amortization, as shown in the tables above. Our operating expenses for the 39 weeks ended October 1, 2022, decreased by $695,911 or 5.0% to $13,140,961, compared to $13,836,872 for the 39 weeks ended October 2, 2021. This decrease was mainly a result of (i) a decrease in shipping and handling of $1,409,930, which was due to lower subscription box sales — our shipping and handling expenses were 26.7% of total revenue in the current period, compared to 27.4% of total revenue in the previous period and (ii) a $468,117 decrease in general and administrative expenses, mainly due to a decrease in marketing expenses and a decrease in third-party fees due to the decrease in sales; offset by an increase in payroll and related costs of $1,183,502, mainly due to non-cash, equity-based compensation of $1,355,068 recorded during the 39 weeks ended October 1, 2022.
Loss from Operations
Loss from operations increased from $1,402,051 for the 13 weeks ended October 2, 2021, to $2,416,445 for the 13 weeks ended October 1, 2022. The increase in loss from operations was largely due to the decrease in sales.
Loss from operations increased from $3,933,305 for the 39 weeks ended October 2, 2021, to $6,056,381 for the 39 weeks ended October 1, 2022. The increase in loss from operations was largely due to decrease in sales and non-cash compensation of $1,355,068 recorded during the 39 weeks ended on October 1, 2022, as discussed above.
Other Expenses
For the 13 weeks ended October 1, 2022 and October 2, 2021, total other expenses were $21,885 compared to total other income of $212,695, respectively. The other expenses in 2022 related to $21,885 of interest expense. The other income in 2021 included $442,352 of forgiveness of debt relating to the forgiveness of our prior Paycheck Protection Loan in the amount of $442,352, offset by interest expense of $229,657.
For the 39 weeks ended October 1, 2022 and October 2, 2021, the total other income was $235,310 compared to total expenses of $155,421, respectively. The other income in 2022 related to settlement of insurance claim related to business interruption of damaged inventory, offset by interest expenses. The other expenses in 2021 related to interest expense of $584,466, offset by income from forgiveness of debt.
Provision for Income Taxes
We had a nominal provision for income taxes during the 39 weeks ended October 1, 2021.
Net Loss
We had a net loss of $2,438,330 for the 13 weeks ended October 1, 2022, compared to a net loss of $1,189,356 for the 13 weeks ended October 2, 2021, an increase in net loss of $1,248,974 or 105.0%. The increase in net loss was primarily due to the decrease in revenue and decrease in other income, offset by a decrease in interest expenses, each as discussed in greater detail above.
We had a net loss of $5,821,071 for the 39 weeks ended October 1, 2022, compared to a net loss of $4,090,058 for the 39 weeks ended October 2, 2021, an increase in net loss of $1,731,013 or 42.3%. The increase in net loss was primarily due to an increase in non-cash, equity-based compensation expense of $1,355,068 and decrease in revenue, offset by a decrease in interest expenses and increase in other income, each as discussed in greater detail above.
| 14 |
Liquidity and Capital Resources
October 1, 2022 | January 1, 2022 | Change ($) | Change (%) | |||||||||||||
| Cash and restricted cash | $ | 221,170 | $ | 8,420,500 | $ | (8,199,330 | ) | (97.4 | )% | |||||||
| Working capital | $ | 9,701,238 | $ | 14,700,691 | $ | (4,999,453 | ) | (34.0 | )% | |||||||
| Short-term debt, related party | $ | 2,050,000 | $ | 2,200,000 | $ | (150,000 | ) | (6.8 | )% | |||||||
On October 1, 2022, we had $221,170 of cash and restricted cash on hand compared to $8,420,500 of cash on hand at January 1, 2022.
As of October 1, 2022, the Company had total current liabilities of $6,088,707, consisting mainly of accounts payable of $2,057,194, accounts payable to related party of $979,652, accrued expenses of $509,418, operating lease liability of $492,443 and short-term debt from related party of $2,050,000 (discussed below).
As of October 1, 2022, we had $15,789,945 in total current assets, $6,088,707 in total current liabilities, working capital of $9,701,238 and a total accumulated deficit of $39,740,255.
Through November 10, 2021, we mainly relied on loans from Ezra Dabah, our Chief Executive Officer and Chairman, and his family (which have all, other than $2,200,000, been converted into equity as of May 11, 2021), notes payable including from Nina Footwear Corp. which is 86.36% owned by Ezra Dabah and his family, including Moshe Dabah, for which entity Ezra Dabah serves as Chief Executive Officer and member of the Board of Directors of “Nina Footwear”, a related party, and our line of credit (repaid as of January 1, 2022), and Cash Advance Agreements (each discussed below), as well as revenue generated through our operations, to support our operations since inception. We have primarily used our available cash to pay operating expenses (salaries and other expenses), and for merchandise inventory costs, shipping costs and marketing expenditures. We do not have any material commitments for capital expenditures. Following the closing of the IPO in November 2021, we have also relied on the funds raised in the IPO to support our operations.
We have experienced recurring net losses since inception and negative operating cash flows. We believe that we will continue to incur substantial operating expenses in the foreseeable future as we continue to invest to attract new customers, expand the product offerings and enhance technology and infrastructure. These efforts may prove more expensive than we anticipate, and we may not succeed in increasing the net revenue and margins sufficiently to offset these expenses. Accordingly, we may not be able to achieve profitability, and we may incur significant losses for the foreseeable future.
To support our existing operations or any future expansion of business, including the ability to execute our growth strategy, we must have sufficient capital to continue to make investments and fund operations. We have plans to pursue a growth strategy for the expansion of operations through increased marketing to attract new members and refine the marketing strategy to strategically prioritize customer acquisition channels that we believe will be more successful at attracting new customers and members. We plan to launch new divisions and product lines to help attract new members and retain existing members. We launched a new boys’ apparel division in the summer of 2020 and a toddler division at the end of March 2021. We recently increased our size assortment to include sizes 12 months and 18 months. We have expanded our offering with the introduction of husky/plus and slim sizes to our selections during the third quarter of 2022.
In November 2021, we completed our IPO in which we issued and sold 2,117,647 shares of authorized common stock for $8.50 per share, for net proceeds of $16.1 million, after deducting underwriting discounts and commissions, and offering costs. There has been no material change in the planned use of proceeds from the IPO from that described in the Final Prospectus.
| 15 |
We expect to continue to generate net losses for the foreseeable future as we make investments to grow our business. The Company’s ability to continue its operations is dependent upon obtaining new financing for its ongoing operations and on the Company’s plans to reduce the inventory level. To manage operating cash flows in the near term, the Company plans to significantly reduce purchases of new inventory and if available, may enter into cash advance or other financing arrangement. Future financing options available to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or other strategic transactions to fund existing operations and execute management’s growth strategy. Equity financings may include sales of common stock. Such financing may not be available on terms favorable to the Company or at all and may cause significant dilution to existing stockholders. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continued operations, if at all, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed financial statements are issued. The accompanying condensed interim financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Cash Flows
39 weeks ended October 1, 2022 | 39 weeks ended October 2, 2021 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (7,040,580 | ) | $ | (5,637,368 | ) | ||
| Investing activities | (42,903 | ) | - | |||||
| Financing activities | (1,115,847 | ) | 5,306,217 | |||||
| Net decrease in cash | $ | (8,199,330 | ) | $ | (331,151 | ) | ||
Net cash used in operating activities increased to $7,040,580 for the 39 weeks ended October 1, 2022, compared to $5,637,368 of cash used in operating activities during the 39 weeks ended October 2, 2021. The increase in our cash used in operating activities of approximately $1.4 million was primarily due to an increase in net loss in the amount of approximately $1.7 million and the negative impact from changes in operating assets and liabilities in the amount of approximately $1.3 million, offset by adjustments for non-cash items totaling $1.6 million, as discussed in greater detail above.
Net cash used in investing activities during the 39 weeks ended October 1, 2022 was $42,903, which was related to purchases of equipment, compared to no cash used in investing activities during the 39 weeks ended October 2, 2021.
Net cash used in financing activities was $1,115,847 for the 39 weeks ended October 1, 2022, mainly related to repayment of advances payable of $0.9 million and repayment from loan payable related party of $0.2 million, compared to net cash provided by financing activities of $5,306,217 for the 39 weeks ended October 2, 2021, mainly as a result of $2.0 million in convertible notes sold during the period, proceeds from loan payable related party of $1.3 million, proceeds from issuance of common stock of $0.5 million, an increase in line of credit of $1.1 million and an increase in advance payable in amount of $0.4 million.
Line of Credit
On September 5, 2017, we entered into a Loan and Security Agreement (as amended, the “Loan Agreement”) with Crossroads Financial Group, LLC (“Crossroads”), which is described in greater detail under “Note 12: Line of Credit” to our unaudited financial statements included in this Quarterly Report on Form 10-Q. On November 15, 2021, we paid off the loan and security agreement in the amount of $3,200,000 and related outstanding interest and facility fee in amount of $24,498, with funds raised through the IPO.
Interest expense on the line of credit amounted to zero and $136,317 for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively. Interest expense amounted to zero and $326,656 for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
| 16 |
As of October 1, 2022 and October 2, 2021, deferred financing costs, net of accumulated amortization, totaled zero for both periods. Amortization of these costs amounted to zero and $41,426 for the 13 weeks ended October 1, 2022 and October 2,2021, respectively. Amortization of these costs amounted to zero and $70,803 for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
Cash Advance Agreements
From time to time, we have been party to cash advance agreements with financial institutions whereby such institutions purchased receivables or advanced cash for us to purchase inventory, which are described in greater detail under “Note 9: Advance Payable” to our unaudited financial statements included in this Quarterly Report on Form 10-Q.
During the second quarter of 2022, the Company satisfied its obligations under the October 27, 2021 and November 2, 2021 cash advance agreements in full.
As of October 1, 2022 and January 1, 2022, the cash advance outstanding, including interest, amounted to zero and $932,155, respectively. For the 13 weeks ended October 1, 2022 and October 2, 2021, interest expense related to the advances totaled zero and $18,574, respectively. For the 39 weeks ended October 1, 2022 and October 2, 2021, interest expense related to the advances totaled zero and $121,411, respectively.
SBA Loan
As a response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to aid businesses through the current economic conditions. The CARES Act provided businesses with loans from the Small Business Administration (“SBA”) based on a calculation provided by the SBA. In 2020, the Company received $442,352 in funding from these loans. The CARES Act provides a provision allowing all or a portion of the loan to be forgiven by the SBA based on certain criteria. Any unforgiven portion will be repaid over a two-year period with a 10-month deferral on payments yielding 1% interest. The Company applied for forgiveness and on August 2, 2021, we received notification and confirmation that our loan, including related accrued interest, was forgiven in its entirety by the SBA. The forgiveness amount was recorded in other income.
Related Party Convertible Notes and Loans
In January, February, and March 2021, the Company entered into various unsecured convertible promissory notes with stockholders in the aggregate amount of $2,000,000. Each of the convertible notes were payable on January 15, 2022 and were automatically convertible into shares of the Company’s common stock at a conversion price equal to the per share price of the next equity funding completed by the Company in an amount of at least $2,000,000 and required the repayment of 110% of such convertible note amount upon a sale of the Company (including a change of 50% or more of the voting shares). In May 2021, prior to the maturity, the notes in the amount of $2,000,000 were converted to equity.
In April and June 2021, the Company entered into various short-term, unsecured promissory notes with an affiliated entity under common control in the amount of $400,000. The notes are noninterest-bearing and due on December 31, 2021. On November 16, 2021, the Company paid in full the outstanding loan amounts of $400,000.
On June 28, 2021, the Company entered into four unsecured convertible promissory notes with stockholders in the aggregate amount of $100,000. Each of the convertible notes were payable on January 15, 2022 and were automatically convertible into shares of the Company’s common stock at a conversion price equal to the per share price of the next equity funding completed by the Company in an amount of at least $2,000,000 and required the repayment of 110% of such convertible note amount upon a sale of the Company (including a change of 50% or more of the voting shares). On August 25, 2021, the parties agreed to amend the previously convertible notes to remove the conversion rights provided for therein and clarify that no interest accrues on the convertible notes. On December 27, 2021, the Company paid in full the outstanding loan amounts of $100,000.
| 17 |
On August 13, 2021, the Company entered into two unsecured convertible promissory notes with stockholders in the aggregate amount of $200,000. Each of the convertible notes were payable on January 15, 2022 and were automatically convertible into shares of the Company’s common stock at a conversion price equal to the per share price of the next equity funding completed by the Company in an amount of at least $2,000,000 and requires the repayment of 110% of such convertible note amount upon a sale of the Company (including a change of 50% or more of the voting shares). On August 25, 2021, the parties agreed to amend the previously convertible notes to remove the conversion rights provided for therein and clarify that no interest accrues on the convertible notes. On March 31, 2022, and effective on January 15, 2022, the parties amended the notes to be payable on demand.
In September, October and November 2021, the Company borrowed an aggregate of $2,500,000 from Ezra Dabah, who is our Chief Executive Officer and Chairman. The notes are unsecured, noninterest-bearing and the principal is fully due on January 15, 2022, at the rate of 110% of such note amount upon a sale of the Company (including a change of 50% or more of the voting shares). On December 27, 2021, the Company paid $500,000 of the outstanding loan amounts. On March 31, 2022, and effective on January 15, 2022, the parties amended the notes to be payable on demand. On June 2, 2022, Company paid $150,000 of the outstanding loan amounts.
As of October 1, 2022 and January 1, 2022, there was $979,652 and $913,708 due to related party, respectively.
Need for Future Funding
The Company’s ability to continue its operations is dependent upon obtaining new financing for its ongoing operations and on the Company’s plans to reduce the inventory level. To manage operating cash flows in the near term, the Company plans to significantly reduce purchases of new inventory and may enter into cash advance or other financing arrangement. Future financing options available to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or other strategic transactions to fund existing operations and execute management’s growth strategy. Equity financings may include sales of common stock. Such financing may not be available on terms favorable to the Company or at all. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders and may cause significant dilution to existing stockholders. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continued operations, if at all, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed financial statements are issued. The accompanying financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Estimates
Our financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reporting values of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The more significant estimates and assumptions are those used in determining the recoverability of long-lived assets and inventory obsolescence. Accordingly, actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in the 2021 Annual Report and the notes to the audited financial statements appearing elsewhere in the Annual Report. During the 13 weeks ended October 1, 2022, there were no material changes to our critical accounting policies from those discussed in our 2021 Annual Report.
| 18 |
JOBS Act and Recent Accounting Pronouncements
The JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act.
We have implemented all new accounting pronouncements that are in effect and may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
Recent Accounting Pronouncements
Refer to “Note 2: Summary of Significant Accounting Policies” to our unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of October 1, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the 13 weeks ended October 1, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
| 19 |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not party to any material legal proceedings at this time. From time to time, we may become involved in various legal proceedings that arise in the ordinary course of business, principally personal injury and property casualty claims. Those claims, even if lacking merit, could result in the expenditure by us of significant financial and managerial resources. We may become involved in material legal proceedings in the future.
Item 1A. Risk Factors
Reference is made to Part I, Item 1A, “Risk Factors” included in our 2021 Annual Report for information concerning risk factors, which should be read in conjunction with the factors set forth in “Cautionary Statement Regarding Forward-Looking Information” of this Report. Except as set forth below, there have been no material changes with respect to the risk factors disclosed in our 2021 Form 10-K, which are incorporated herein by reference. You should carefully consider such factors and those below, which could materially affect our business, financial condition or future results. The risks described in the 2021 Form 10-K and below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
There is substantial doubt about our ability to continue as a going concern.
The Company’s ability to continue its operations is dependent upon obtaining new financing for its ongoing operations and on the Company’s plans to reduce the inventory level. To manage operating cash flows in the near term, the Company plans to significantly reduce purchases of new inventory and if available, may enter into cash advance or other financing arrangement. Future financing options available to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or other strategic transactions to fund existing operations and execute management’s growth strategy. Equity financings may include sales of common stock. Such financing may not be available on terms favorable to the Company or at all. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders and may cause significant dilution to existing stockholders. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continued operations, if at all, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed financial statements are issued. The accompanying financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. The doubt regarding our potential ability to continue as a going concern may adversely affect our ability to obtain new financing on reasonable terms or at all. Additionally, if we are unable to continue as a going concern, our stockholders may lose some or all of their investment in the Company.
Economic uncertainty may affect consumer purchases of discretionary items, which has affected and may continue to adversely affect demand for our products.
Our products may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions and other factors such as consumer confidence in future economic conditions, fears of recession and trade wars, the price of energy, fluctuating interest rates, the availability and cost of consumer credit, the availability and timing of government stimulus programs, levels of unemployment, inflation, and tax rates. Adverse economic conditions, such as a recession, in the United States, or protracted periods of high inflation or high energy prices may contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and declining consumer confidence and demand, any of which poses a risk to our business. Any sustained economic downturn in the United States may cause significant readjustments in both the volume and mix of our product sales and level of members, which could materially and adversely affect our business, operating results and financial condition. Additionally, disruptions in the credit and other financial markets and economic conditions could, among other things, impair the financial condition of one or more of the Company’s vendors, which could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows. If we are unable to successfully navigate adverse economic conditions, including offsetting the impact of high inflation and high energy prices on our business, our business, financial condition, and results of operations may be adversely affected. Additionally, unfavorable economic conditions have led and in the future may lead, consumers to delay or reduce purchases of our products. Consumer demand for our products may decline as a result of an economic downturn, recession, or economic uncertainty in the United States. Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our business, results of operations, and financial condition.
| 20 |
Economic uncertainty may affect our access to capital and/or increase the costs of such capital.
Global economic conditions continue to be volatile and uncertain due to, among other things, consumer confidence in future economic conditions, fears of recession and trade wars, the price of energy, fluctuating interest rates, the availability and cost of consumer credit, the availability and timing of government stimulus programs, levels of unemployment, increased inflation, tax rates and the ongoing conflict between the Ukraine and Russia. These conditions remain unpredictable and create uncertainties about our ability to raise capital in the future. In the event required capital becomes unavailable in the future, or more costly, it could have a material adverse effect on our business, results of operations, and financial condition.
Our industry and the broader US economy have experienced higher than expected inflationary pressures in the first three quarters of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist, our business, results of operations and cash flows could be materially and adversely affected.
The first three quarters of 2022 have seen significant increases in the costs of labor and certain materials and equipment, and longer lead times for such materials and equipment, as a result of availability constraints, supply chain disruption, increased demand, labor shortages associated with a fully employed US labor force, high inflation and other factors. Supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. Recent supply chain constraints and inflationary pressures have in the past, and may in the future, adversely impact our operating costs, as a result, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
The termination of, or material changes to, our relationships with key vendors could materially adversely affect our business, financial condition and operating results, which could be exacerbated due to our reliance on a small number of vendors for a significant portion of our inventory.
We contract to manufacture with vendors for the products we sell. For the year ended January 1, 2022, three vendors accounted for approximately 49% of inventory purchases. For the year ended January 2, 2021, four vendors accounted for approximately 60% of inventory purchases. For the 13 weeks ended October 1, 2022, three vendors accounted for approximately 55.4% of inventory purchases. For the 13 weeks ended October 2, 2021, three vendors accounted for approximately 53.2% of inventory purchases. For the 39 weeks ended October 1, 2022, two vendors accounted for approximately 48.5% of inventory purchases. For the 39 weeks ended October 2, 2021, three vendors accounted for approximately 53.7% of inventory purchases. In the event these vendors decide to terminate their relationships with us or cease supplying products, such vendors may be difficult to replace and/or the products they supply us may be more expensive or of lesser quality. It can take a significant amount of time and resources to identify, develop and maintain relationships with vendors. The termination of, or material changes to, arrangements with key vendors, disagreements with key vendors as to payment or other terms, or the failure of a key supplier or vendor to meet its contractual obligations to us may require us to contract with alternative vendors. If we have to replace key vendors, we may be subject to pricing or other terms less favorable than those we currently enjoy, and it may be difficult to identify and secure relationships with alternative vendors that are able to meet our volume requirements and quality or other standards. If we cannot replace or engage vendors who meet our specifications and standards in a short period of time, we could encounter increased expenses, shortages of items, disruptions or delays in customer shipments. Such affects could be further exacerbated due to our reliance on a small number of vendors for the majority of our inventory purchases. If any of the above were to occur, we could experience delays in shipments, cancellations and a reduction in sales revenue, any of which could materially adversely affect our business, financial condition and operating results.
| 21 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Initial Public Offering
On November 15, 2021, we completed our IPO, in which we sold 2,117,647 shares of common stock at a price to the public of $8.50 per share. In connection with the IPO, the Company also granted the representative of the underwriters a 45-day option to purchase up to an additional 317,647 shares of its common stock. All the shares issued and sold in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-260101) filed by the Company with the SEC under the Securities Act on October 6, 2021, as amended and the Company’s registration statement on Form S-1MEF (File No. 333-260986) filed by the Company with the SEC under the Securities Act on November 10, 2021, each of which became effective on November 10, 2021. We received aggregate net proceeds of approximately $16.1 million, after deducting underwriting discounts and commissions, and offering costs. There has been no material change in the planned use of proceeds from the IPO from that described in the Final Prospectus.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
| 22 |
Item 6. Exhibits
The following exhibits are filed herewith or incorporated by reference herein:
| Exhibit | Incorporated by Reference | Filed/ Furnished | ||||||||||
| Number | Exhibit Description | Form | File No. | Date | Exhibit | Herewith | ||||||
| 31.1* | Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a) | X | ||||||||||
| 31.2* | Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a) | X | ||||||||||
| 32.1** | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 | X | ||||||||||
| 32.2** | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 | X | ||||||||||
| 101.INS | Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||
| 104 | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set | X | ||||||||||
* Filed herewith.
**The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, are not deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
| 23 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Kidpik Corp. | ||
| Date: November 15, 2022 | By: | /s/ Ezra Dabah |
| Ezra Dabah | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Kidpik Corp. | ||
| Date: November 15, 2022 | By: | /s/ Adir Katzav |
| Adir Katzav | ||
| Executive Vice President, Chief Financial Officer, and Treasurer | ||
| (Principal Financial and Accounting Officer) | ||
| 24 |