KIDPIK CORP. 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 endedJanuary 1, 2022 , which were included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onApril 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 theSEC . 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 withU.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 52-53-week fiscal year ending on the Saturday nearest toDecember 31 each year. The year endedDecember 31, 2022 is a 52-week year and referred to herein as fiscal "2022". The years endedJanuary 1, 2022 andJanuary 2, 2021 were 52- and 53-week years, respectively. These years are referred to herein as fiscal "2021" and "2020", 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 first quarter of fiscal 2022 and the first quarter of fiscal 2021, refer to the 13 weeks endedApril 2, 2022 andApril 3, 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 weeks endedApril 2, 2022 andApril 3, 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 incorporation 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 toKidpik Corp. 4 In addition:
? "Active subscriptions" mean individuals
boxes;
? "Boxes" mean the Company's subscription clothing, shoe and accessories boxes;
? "Customers" means anyone
subscription, direct or indirect sale from the Company;
? "Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
? "Members" means customers
? "NASDAQ" means the NASDAQ Capital Market;
? "SEC" or the "Commission" refers to the
Commission;
? "Securities Act" refers to the Securities Act of 1933, as amended; and
? "Subscriptions" mean 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, theSEC . OurSEC filings are also available to the public at theSEC'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 and 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 outfits in a box, for kids.Kidpik provides kids clothing subscription boxes for boys and girls (sizes 2-16) 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. Staying ahead in an emerging industry requires constant innovation in product and services. After launching with our girls' subscription box 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-added toddler sizes down to 2T & 3T for apparel and 7 & 8 toddler shoes, launched shop.kidpik.com, where we sell individual apparel items and shoes, introduced gift.kidpik.com, where we sell gift boxes featuring pre-styled outfits and gift cards. We also 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. 5 We launched our debut toddler collection in the first quarter of 2021, introducing sizes 2T and 3T apparel, and size 7 and 8 toddler shoes for boys and girls, which we began to ship inApril 2021 . We also introduced an "add-on" option for all members pursuant to which 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 box transaction size and gross margin per box. We have recently expanded our subscription box offerings, introducing a 12-piece box option, adding to the customer experience, and providing an opportunity to drive additional revenue. We have also expanded our seasonal pre-styled fashion box assortment available on our e-commerce website, which provides an upsell opportunity for existing members and additional variety for our e-commerce customers.
As of the date of this Report, we provide e-commerce services only throughout
the 48 contiguous
We have started initiatives to expand our offerings into newborn sizes, including 12 and 18 months, as well as husky/plus and slim sizes. We currently anticipate launching husky/plus, slim and newborn sizes during Q3 of 2022. We plan to 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, includingTikTok , 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 scaling our influencer ambassador program and soft launching 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. InNovember 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
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, returned from customers, inventory
write-offs, and other miscellaneous shrinkage.
For the 13 weeks ended
April 2, 2022 April 3, 2021
Gross margin 59.9 % 60.9 %
Adjusted EBITDA
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 generally accepted accounting principles, or U.S. GAAP,financial measure. 6
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
? 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
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
April 2, 2022 April 3, 2021
Net loss $ (1,810,675 ) $ (1,497,986 )
Add (deduct):
Interest expense 21,674 160,627
Other (income) expense, net (286,794 ) 316
Provision for income taxes - 507
Depreciation and amortization 5,665 9,721
Equity-based compensation 617,164 -
Adjusted EBITDA $ (1,452,966 ) $ (1,326,815 )
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
(In thousands)
April 2, 2022 April 3, 2021
Shipped Items 371 543
7
Average Shipment Keep Rate
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.
For the 13 weeks ended
April 2, 2022 April 3, 2021
Average Shipment Keep Rate 70.4 % 67.7 %
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.
Retention of Existing Subscribers
Our ability to retain subscribers is a also 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 classification 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. Customerswho 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 Costs
Payroll and related costs 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 prior Paycheck Protection 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)
InDecember 2019 , a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported inWuhan, China . TheWorld Health Organization declared COVID-19 a "Public Health Emergency of International Concern" onJanuary 30, 2020 and a global pandemic onMarch 11, 2020 . In March andApril 2020 , manyU.S. states and local jurisdictions began issuing 'stay-at-home' orders, which have mainly since expired. TheU.S. has recently seen decreases in total new COVID-19 infections; 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 dominate 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 andApril 2020 , we closed ourCalifornia warehouse due to stay-at-home orders which were issued in theState of California . We resumed shippingApril 17, 2020 , following safety protocols andCenters for Disease Control and Prevention (CDC ) guidelines, which we strictly adhered to. On 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 andApril 2020 , our new member acquisitions were reduced dramatically. Beginning in earlyMay 2020 , through the month ofJune 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. 10 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. Currently we believe that we have sufficient cash on hand, and will generate sufficient cash through operations, to support our operations for the near term; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the ongoing pandemic. Although COVID-19 has had a major impact on businesses around the world, to date, other than in March andApril 2020 , during which period, as described above, our warehouse was shut down, the pandemic has not had a significant negative impact on our business. Since then, our warehouse returned to working at full capacity; however, the full extent to which COVID-19 will ultimately impact us depends on future unknowable developments, including the duration and spread of the virus, as well as potential new seasonal outbreaks, virus mutations, the efficacy of vaccines, and the willingness of individuals to take such vaccines, all of which are uncertain and cannot be predicted. We have, however, experienced shipping delays to and from our customers as a result of our shipping vendors' challenges fulfilling higher eCommerce 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-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.
RESULTS OF OPERATIONS
Comparison of the thirteen weeks ended
Revenue
Our revenue for the 13 weeks ended
13 weeks ended 13 weeks ended Change Change
April 2, 2022 April 3, 2021 ($) (%)
Revenue by channel
Subscription boxes $ 3,483,851 $ 4,584,612 $ (1,100,761 ) (24.0 )%
Amazon sales 549,500 608,250 (58,750 ) (9.7 )%
Online website sales 292,646 127,671 164,975 129.2 %
Total revenue $ 4,325,997 $ 5,320,533 $ (994,536 ) (18.7 )%
The revenue from subscription boxes for the 13 weeks ended April 2, 2022 and
April 3, 2021 , was generated from active subscriptions recurring boxes revenue
and new subscriptions first box revenue, as summarized in the tables below:
13 weeks ended 13 weeks ended Change Change
April 2, 2022 April 3, 2021 ($) (%)
Subscription boxes
revenue from
Active subscriptions -
recurring boxes $ 3,136,569 3,733,722 (597,153 ) (16.0 )%
New subscriptions -
first box 347,282 $ 850,890 $ (503,608 ) (59.2 )%
Total subscription boxes
revenue $ 3,483,851 $ 4,584,612 $ (1,100,761 ) (24.0 )%
11
The decrease in revenue was primarily driven by a decrease in subscription boxes sales. The revenue breakdown by product line for the 13 weeks endedApril 2, 2022 andApril 3, 2021 is summarized in the tables below: 13 weeks ended 13 weeks ended Change Change April 2, 2022 April 3, 2021 ($) (%) Revenue by product line Girls' apparel$ 3,256,893 $ 4,182,652 $ (925,761 ) (22.1 )% Boys' apparel 867,794 1,130,474 (262,680 ) (23.2 )% Toddlers' apparel 201,310 7,407 193,903 2,618 % Total revenue$ 4,325,997 $ 5,320,533 $ (994,536 ) (18.7 )% The number of items shipped to our customers decreased by 31.7%, from approximately 543,000 for the 13 weeks endedApril 3, 2021 , to approximately 371,000 for the 13 weeks endedApril 2,2022 . The average shipment keep rate increased to 70.4% in the 13 weeks endedApril 2, 2022 , compared to 67.7% in the 13 weeks endedApril 3, 2021 . Cost of Goods Sold Our cost of goods sold decreased by 16.7% to$1,733,914 for the 13 weeks endedApril 2, 2022 , compared to$2,082,202 for the 13 weeks endedApril 3, 2021 , a decrease of$348,288 .
The decrease in cost of goods sold for the 13 weeks ended
Gross Profit and Gross Profit as a Percentage of Revenue
Our gross profit was$2,592,083 for the 13 weeks endedApril 2, 2022 , compared to gross profit of$3,238,331 for the 13 weeks endedApril 3, 2021 . The decrease in gross profit for the 13 weeks endedApril 2, 2022 , compared to the same period in fiscal 2021, was primarily attributable to the decrease in our subscription box sales.
Gross profit as a percentage of revenue was 59.9% for the 13 weeks ended
Operating Expenses
Our operating expenses for the 13 weeks ended
13 weeks ended 13 weeks ended Change Change
April 2, 2022 April 3, 2021 ($) (%)
Expenses
Shipping and handling $ 1,132,084 $ 1,534,454 $ (402,370 ) (26.2 )%
Payroll, related costs
and equity-based
compensation 1,599,236 958,639 640,597 66.8 %
General and
administrative 1,930,893 2,072,053 (141,160 ) (6.8 )%
Depreciation and
amortization 5,665 9,721 (4,056 ) (41.7 )%
Total expenses $ 4,667,878 $ 4,574,867 $ 93,011 2.0 %
12
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 April 2, 2022 ,
increased by $93,011 or 2.0% to $4,667,878 , compared to $4,574,867 for the 13
weeks ended April 3, 2021 . This increase was mainly a result of (i) an increase
in payroll and related costs of $640,597 , mainly due to non-cash, equity-based
compensation of $617,164 recorded in the first quarter of 2022, (ii) offset by a
decrease in shipping and handling of $402,370 , which was due to lower
subscription box sales - our shipping and handling expenses were 23.9% of total
revenue in the current period, compared to 28.8% of total revenue in the
previous period and (iii) a $141,160 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.
Loss from Operations
Loss from operations increased from$1,336,536 for the 13 weeks endedApril 3, 2021 , to$2,075,795 for the 13 weeks endedApril 2, 2022 . The increase in loss from operations was largely due to non-cash compensation of$617,164 and decrease in sales.
Other Expenses
Total other (income)/expenses were ($265,120 ) and$160,943 for the 13 weeks endedApril 2, 2022 andApril 3, 2021 , respectively. The decrease in interest expense was due to the decrease in our debt balances, and increase in other income for the 13 weeks endedApril 2, 2022 was due to settlement of insurance claim related to business interruption of damaged inventory.
Provision for Income Taxes
We had a nominal or no provision for income taxes during both the 13 weeks ended
Net Loss
We had a net loss of$1,810,675 for the 13 weeks endedApril 2, 2022 , compared to a net loss of$1,497,986 for the 13 weeks endedApril 3, 2021 , an increase in net loss of$312,689 or 20.9%. The increase in net loss was primarily due to an increase in non-cash, equity-based compensation expense of$617,164 and decrease in revenue, offset by a decrease in general and administrative expenses of$141,160 and a decrease in interest expenses of$138,953 , each as discussed in greater detail above.
LIQUIDITY AND CAPITAL RESOURCES
April 2, 2022 January 1, 2022 Change ($) Change (%)
Cash $ 5,430,075 $ 8,415,797 $ (2,985,722 ) (35.5 )%
Working Capital $ 13,261,930 $ 14,700,691 $ (1,438,761 ) (9.8 )%
Short-term debt, related party
-
On
13 As ofApril 2, 2022 , the Company had total current liabilities of$6,269,878 , consisting mainly of accounts payable of$2,588,643 , accounts payable to related party of$719,566 , accrued expenses of$328,847 , advance payable of$197,029 (discussed below), operating lease liability of$235,793 and short-term debt from related party of$2,200,000 (discussed below).
As of
ThroughNovember 10, 2021 , we mainly relied on loans fromEzra Dabah , our Chief Executive Officer and Chairman, and his family (which have all, other than$2,200,000 , been converted into equity as ofMay 11, 2021 ), notes payable (including fromNina Footwear Corp. which is 86.36% owned byEzra Dabah and his family, includingMoshe Dabah , and which entityEzra 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 ofJanuary 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 inNovember 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 ofMarch 2021 . We have plans to make husky/plus and slim sizes available for the fall 2022 season and also increase our size assortment to include sizes 12 months and 18 months. We also have plans to increase efficiency in distribution and fulfillment capabilities to reduce costs associated with subscription box sales. InNovember 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. We have used the net proceeds from the IPO to repay debt, and plan to continue to use such net proceeds to increase our capitalization and financial flexibility, and create a public market for our common stock, and facilitate our future access to the capital markets. We also plan to continue to use a portion of the net proceeds for marketing expenses and for working capital. We used a portion of the net proceeds from the offering to pay all or a portion of our debt outstanding as ofOctober 28, 2021 , which included (i) the repayment of amounts owed to Crossroads totaling approximately$3.2 million (which amount was repaid in full, together with accrued interest and a termination fee in the amount of$24,498 , onNovember 15, 2021 ); (ii) amounts owed under a short-term, unsecured promissory note, with Nina Footwear in the amount of$0.4 million , which is noninterest-bearing and due onDecember 31, 2021 (of which$0.4 million was paid onNovember 16, 2021 ); (iii) amounts owed to related party in the amount of$1.3 million (which do not have a stated maturity date and which do not accrue interest) (of which$0.8 million was paid as ofApril 2, 2022 ); (iv) amounts owed in connection with vendor payables of approximately$1.2 million (of which$0.5 million was settled as ofApril 2, 2022 ); and (v) amounts due under unsecured promissory notes withEzra Dabah , our Chief Executive Officer and other related party stockholders, which are trusts controlled by family members ofEzra Dabah in the amount of$2.8 million (of which$0.6 million was paid as ofApril 2, 2022 ), which do not accrue interest. 14
We expect to continue to generate net losses for the foreseeable future as we
make investments to grow our business. We believe that the existing balances of
cash and cash equivalents following the IPO will be sufficient to meet our
anticipated cash requirements for at least twelve months from the date that
these financial statements are issued. However, should our current cash and cash
equivalents not be sufficient to support the development of our business to the
point at which it has positive cash flows from operations, we plan to meet our
future needs for additional capital through equity financings, debt financings
or other capital sources, including collaborations with other companies or other
strategic transactions. Equity financings may include sales of common stock.
Such financing may not be available on terms favorable to us or at all. The
terms of any financing may adversely affect the holdings or rights of our
stockholders. If we are unable to obtain adequate financing or financing on
terms satisfactory to us when required, our ability to continue to support our
business growth, scale our infrastructure, and to respond to business challenges
could be significantly impaired.
Cash Flows
13 weeks ended 13 weeks ended
April 2, 2022 April 3, 2021
Cash provided by (used in):
Operating activities $ (2,233,663 ) $ (2,687,144 )
Investing activities (17,018 ) -
Financing activities (735,126 ) 2,614,361
Net decrease in cash $ (2,985,807 ) $ (72,783 )
Net cash used in operating activities decreased to $2,233,663 for the 13 weeks
ended April 2, 2022 , compared to $2,687,144 of cash used in operating activities
during the 13 weeks ended April 3, 2021 . The decrease in our cash used in
operating activities of approximately $0.45 million was primarily due to
adjustments for non-cash items totaling $0.53 million , and the positive impact
from changes in operating assets and liabilities in the amount of approximately
$0.24 million , offset by an increase in the net loss in the amount of
approximately $0.31 million , as discussed in greater detail above.
Net cash used in investing activities during the 13 weeks ended April 2, 2022
was $17,018 , which was related to purchases of equipment, compared to no cash
used in investing activities during the 13 weeks ended April 3, 2021 .
Net cash used in financing activities was $735,126 for the 13 weeks ended April
2, 2022 , related to repayment of advances payable, compared to net cash provided
by financing activities of $2,614,361 for the 13 weeks ended April 3, 2021 ,
mainly as a result of $2.1 million in convertible notes sold during the prior
period, which have since been converted into common stock, and an increase in
advance payable in amount of $0.4 million .
Line of Credit
OnSeptember 5, 2017 , we entered into a Loan and Security Agreement (as amended, the "Loan Agreement") withCrossroads 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. OnNovember 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 amounted to zero and$89,655 for the 13 weeks endedApril 2, 2022 andApril 3, 2021 , respectively, on such Loan Agreement. As ofApril 2, 2022 andApril 3, 2021 , deferred financing costs, net of accumulated amortization, totaled zero and$20,906 , respectively. Amortization of these costs amounted to zero and$12,544 for the 13 weeks endedApril 2, 2022 andApril 3, 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. 15 As ofApril 2, 2022 andJanuary 1, 2022 , the cash advance outstanding, including interest, amounted to$197,029 and$932,155 , respectively. For the 13 weeks endedApril 2, 2022 andApril 3, 2021 , interest expense related to the advances totaled zero and$59,149 , 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 theSmall 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 onAugust 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, andMarch 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 onJanuary 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). InMay 2021 , prior to the maturity, the notes in the amount of$2,000,000 were converted to equity. In April andJune 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 onDecember 31, 2021 . OnNovember 16, 2021 , the Company paid in full the outstanding loan amounts of$400,000 . OnJune 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 onJanuary 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). OnAugust 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. OnDecember 27, 2021 , the Company paid in full the outstanding loan amounts of$100,000 . OnAugust 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 onJanuary 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). OnAugust 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. OnMarch 31, 2022 , and effective onJanuary 15, 2022 , the parties amended the notes to be payable on demand. In September, October andNovember 2021 , the Company borrowed an aggregate of$2,500,000 fromEzra Dabah ,who is our Chief Executive Officer and Chairman. The notes are unsecured, noninterest-bearing and the principal is fully due onJanuary 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). OnDecember 27, 2021 , the Company paid$500,000 of the outstanding loan amounts. OnMarch 31, 2022 , and effective onJanuary 15, 2022 , the parties amended the notes to be payable on demand.
As of
16 Need for Future Funding As discussed above, our current capital resources, combined with the remaining amount of net proceeds from the IPO, are expected to be sufficient for us to fund operations for the next 12 months from the date these financial statements were issued. We may need funding in addition to the funding raised in this offering, to support our operations in the future. We may also seek to acquire additional businesses or assets in the future, which may require us to raise funding. We currently anticipate such funding, if required, being raised through the offering of debt or equity. Such additional financing, if required, may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the terms of such financing. If equity financing is available and obtained it may result in our stockholders experiencing significant dilution. If such financing is unavailable, we may be forced to curtail our business plan, which may cause the value of our securities to decline in value.
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 Policies and Estimates
Our financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance withU.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 endedApril 2, 2022 , there were no material changes to our critical accounting policies from those discussed in our 2021 Annual Report.
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.
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