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Nature of Operations (Policies)

9 Months Ended

Oct. 28, 2023

Kaspien Holdings Inc., which, together with its consolidated subsidiaries, is referred to herein as “Kaspien”, “the Company”, “we”, “us” and “our”, was incorporated in New York in 1972. We own 100% of the outstanding common stock of Kaspien Inc, through which our principal operations are conducted. Kaspien is a third-party marketplace retailer. The Company leverages in-house expertise, technology, and services to generate revenue through marketplace transactions. Kaspien provides account management, brand development, listings management, data reporting, joint business planning, and comprehensive marketing support services to our vendor partners. Our target partners are enterprise-level large growth brands that derive margins based on pricing.

Liquidity and Cash Flows

Liquidity and Cash Flows:

The Company’s primary sources of liquidity are its borrowing capacity under its Credit Facility and available cash and cash equivalents. The Company incurred a net loss of $5.1 million and $12.4 million for the thirty-nine weeks ended October 28, 2023 and October 29, 2022, respectively. The decrease in the net loss was primarily attributable to an increase gross margin and a decrease in selling, general and administrative Expenses. In addition, the Company has an accumulated deficit of $145.0 million as of October 28, 2023 and net cash used in operating activities for the thirty-nine weeks ended October 28, 2023 was $0.9 million. Net cash used in operating activities for the thirty-nine weeks ended October 29, 2022 was $12.2 million.

As disclosed in the Company's Annual Report on Form 10-K filed April 28, 2023, the Company experienced negative cash flows from operations during fiscal 2022 and 2021 and we expect to incur net losses in fiscal 2023.

Subsequent to the balance sheet date, after an assessment of its current cash and liquidity position and near-term debt maturities, the Company has initiated a plan to wind down the Company’s operations in an orderly fashion (the “Plan”), which is expected to be substantially complete by May 1, 2024. The Plan includes the following:

•

The sell through of current on hand inventory through the current channels;

•

the collection of outstanding receivables due to the Company;

•

a reduction in force of substantially all of our employees other than a core group of employees. We expect to substantially complete the workforce reduction prior to the end of January 2024;

•

marketing for sale of unrecognized assets including private label brands, trademarks and other intangible assets; and

•

the settlement of all liabilities of the Company.

During the duration of the Plan, the Board may authorize the Company to pay all costs and expenses, including without limitation, retention and severance expenses, professional and other fees and expenses of persons rendering services, including legal counsel, accountants and tax advisors, to the Company in connection with the collection, sale, exchange or other disposition of the Company's property and assets and the implementation of the plan. The Company intends to wind down its operations in an orderly manner without the need for a bankruptcy filing.

As a result of the approval of the Plan, the Company adopted the Liquidation Basis of Accounting. This basis of accounting is considered appropriate when, among other things, liquidation of the Company is imminent, as defined in ASC 205-30 “Presentation of Financial Statements – Liquidation Basis of Accounting”. Under the Liquidation Basis of Accounting the following financial statements are no longer presented (except for periods prior to the adoption of the Liquidation Basis of Accounting): a consolidated condensed balance sheet, a consolidated condensed statement of operations and comprehensive loss and a consolidated condensed statement of cash flows. The consolidated condensed statement of net assets and the consolidated condensed statement of changes in net assets are the principal financial statements presented under the Liquidation Basis of Accounting.

Under the Liquidation Basis of Accounting, all of the Company’s assets have been stated at their estimated net realizable value and are based on current contracts, estimates and other indications of sales value net of estimated selling costs. These amounts are presented in the accompanying consolidated condensed statement of net assets. These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or amount of future distributions or our actual dissolution. The valuation of assets at their net realizable value and liabilities at their anticipated settlement amount represent estimates, based on present facts and circumstances, of the net realizable value of the assets and the costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan are expected to differ from amounts reflected in the accompanying financial statements because of the plan’s inherent uncertainty. These differences may be material. In particular, the estimates of our costs will vary with the length of time necessary to complete the Plan.

The table below represents a Consolidated Condensed Statement of Net Assets presented on a liquidation basis:

CONSOLIDATED CONDENSED STATEMENT OF NET ASSETS

(Liquidation Basis)

(in thousands, except per share and share amounts)

(unaudited)

	As of October 28, 2023
	(unaudited)
Cash and cash equivalents and restricted cash	$	6,668
Accounts receivable		1,017
Inventory		17,497
Prepaid expenses and other		20
Other assets		9
Accounts payable, trade and other		(5,704	)
Short-term borrowings		(8,874	)
Short-term debt		(11,748	)
Accrued liquidation and other expenses		(5,067	)
Other long-term liabilities		(11,158	)
Operating lease liabilities		(1,240	)
NET ASSETS IN LIQUIDATION	$	(18,580	)

The table below presents the Consolidated Condensed Statement of Changes in Net Assets as of October 28, 2023:

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN NET ASSETS

(Liquidation Basis)

(in thousands, except per share and share amounts)

(unaudited)

STOCKHOLDERS' DEFICIT AT OCTOBER 28, 2023 ON A GOING CONCERN BASIS	$	(5,998	)

Effects of adopting the liquidation basis of accounting:
Change in net realizable value of prepaid expenses		(399	)
Change in net realizable value of inventory		(6,547	)
Change in net realizable value of fixed assets		(1,637	)
Change in net realizable value of other assets		(557	)
Change in net realizable value of right of use assets		(1,015	)
Change in net realizable value of accounts receivable		(554	)
Accrued liquidation costs		(1,873	)
Total effects of adopting the liquidation basis of accounting		(12,582	)
NET ASSETS IN LIQUIDATION - OCTOBER 28, 2023	$	(18,580	)

Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and successful implementation of our strategy and planned activities. There can be no assurance that we will be successful in further implementing our business strategy or that the strategy, including the completed initiatives, will be successful in sustaining acceptable levels of sales growth and profitability. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The unaudited condensed consolidated financial statements for the thirty-nine weeks ended October 28, 2023 were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these unaudited condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for the fair presentation of such financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the strategic initiatives for Kaspien and the availability of future funding. Based on recurring losses from operations, negative cash flows from operations, the expectation of continuing operating losses for the foreseeable future, and uncertainty with respect to any available future funding, the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As of October 28, 2023, we had cash and cash equivalents of $0.4 million, a net working deficit of $2.6 million, and $8.9 in borrowings on our revolving credit facility, as further discussed below.

As of January 28, 2023, the Company had borrowings of $8.8 million under the Credit Facility. As of October 28, 2023 and October 29, 2022, the Company had no outstanding letters of credit. The Company had $2.1 million and $7.7 million available for borrowing under the Credit Facility as of October 28, 2023 and October 29, 2022, respectively.

Credit Facility

On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (as subsequently amended, the “Loan Agreement”) with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLC) (“Eclipse”), as administrative agent, under which the lenders party thereto committed to provide up to $25 million in loans under a four-year, secured revolving credit facility (the “Credit Facility”).

On March 30, 2020, the Company and Kaspien Inc. (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.

On April 7, 2021, the Loan Parties entered into Amendment No. 2 to the Loan Agreement (the “Second Amendment”. Pursuant to the Second Amendment, the In-Transit Inventory Sublimit (as defined in the Loan Agreement) was increased from $2,000,000 to $2,500,000.

On September 17, 2021, the Loan Parties entered into Amendment No. 3 to the Loan Agreement (the “Third Amendment”). Pursuant to the Third Amendment, among other things, (i) the maturity of the Credit Facility was extended to February 20, 2024, and the early termination fees were accordingly reset; (ii) the LIBOR floor was reduced to 1.00%; (iii) up to $4,000,000 of acquisitions are now allowed without Eclipse’s consent, subject to satisfaction of various conditions, including the Company having a trailing twelve month fixed charge coverage ratio of 1.20x and Excess Availability greater than the greater of (x) 20% of the average Borrowing Base for each 30 day period immediately prior to, and pro forma for, the purchase and (y) $1,500,000.

On March 2, 2022, the Loan Parties entered into Amendment No. 4 to the Loan Agreement (the “Fourth Amendment”). Pursuant to the Fourth Amendment, among other things, the Credit Facility was amended to permit the incurrence of the Additional Subordinated Loan (as defined below) under the Subordinated Loan Agreement (as defined below).

On November 1, 2022, the Loan Parties entered into Amendment No. 5 to the loan agreement (the “Fifth Amendment”). Pursuant to the Fifth Amendment, the Credit Facility was amended to replace LIBOR with the Secured Overnight Funding Rate (“SOFR”).

As of October 28, 2023 and October 29, 2022, the Company had borrowings of $8.9 and $9.5 million under the Credit Facility, respectively.

Subordinated Debt Agreement

On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (the “Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien with a scheduled maturity date of May 22, 2023. As of October 28, 2023, unamortized debt issuance costs of $0.1 million are included in “Long Term Debt” on the unaudited condensed consolidated balance sheet.

Directors Jonathan Marcus, Thomas Simpson, and Michael Reickert are the chief executive officer of Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III, LLC and Kick-Start IV, LLC (“Kick-Start”), and a trustee of the Robert J. Higgins TWMC Trust (the “Trust”), an affiliate of RJHDC, LLC (“RJHDC” and together with Alimco and Kick-Start, “Related Party Entities”), respectively. The Related Party Entities are parties to the Subordinated Loan Agreement.

Amendment No. 2 to Subordinated Loan and Security Agreement

On March 2, 2022, the Loan Parties entered into that certain Amendment No. 2 to Subordinated Loan and Security Agreement (“Amendment No. 2”) with the “Lenders and the Collateral Agent. Pursuant to Amendment No. 2, among other things, Alimco Re Ltd. (the “Tranche B Lender”) made an additional $5,000,000 secured term loan (the “Additional Subordinated Loan”) with a scheduled maturity date of March 31, 2024, which is the same maturity date as the existing loans under the Subordinated Loan Agreement.

Interest on the Additional Subordinated Loan accrues, subject to certain terms and conditions under the Subordinated Loan Agreement, at the rate of fifteen percent (15.0%) per annum, compounded on the last day of each calendar quarter by becoming a part of the principal amount of the Additional Subordinated Loan.

The Additional Subordinated Loan is also secured by a second priority security interest in substantially all of the assets of the Loan Parties, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors under the Subordinated Loan Agreement. The Company will provide a limited guarantee of Kaspien’s obligations under the Additional Subordinated Loan.

Among other things, the Subordinated Loan Agreement limits the Loan Parties’ ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.

The Subordinated Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the borrowers and guarantors thereunder taken as a whole and the occurrence of an uninsured loss to a material portion of collateral.

The Loan Parties paid certain customary fees and expenses in connection with the Additional Subordinated Loan and Amendment No. 2.

In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well continuing our efforts to generate additional sales and increase margins. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should we require such additional funds. If the Company is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely affected.

Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional funds.