SIMPLY, INC. Our management's discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying Consolidated Audited Financial Statements and related notes, as well as the "Risk Factors" and other information contained in this annual report. The discussion is based upon, among other things, our Consolidated Audited Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to, among other things, make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent liabilities at the financial statement dates and the reported amounts of revenues and expenses during the reporting periods. We review our estimates and assumptions on an ongoing basis. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they could. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in "Critical Accounting Policies." All references to results of operations in this discussion are references to results of continuing operations, unless otherwise noted.
Overview and Recent Developments
Our business is centered on our relationship with Apple® as an Apple Premier Partner authorized to operate retail consumer electronics stores that sell the entire line of Apple products and provide service by Apple-certified technicians. As ofJanuary 29, 2022 , we had 52 Simply Mac stores and 1 Simply EV store in operation across 17 states inthe United States . We previously operated another chain of 6 retail stores under the OneClick brand in theDominican Republic , as well as a distribution company called Cooltech Distribution, an authorized distributor to the OneClick stores and other resellers of Apple products and other high-profile consumer electronic brands. We sold theDominican Republic entity to an employee of the Company in a transaction that closed onApril 6, 2020 . As a consequence of the sale, it has been classified as a discontinued operation in our consolidated statement of operations for all periods presented. We phased out our Cooltech Distribution entity inAugust 2020 . InMarch 2020 , we restructured$14.1 million of our debt through a combination of debt forgiveness and conversions into common stock. OnMarch 11, 2020 , the Company and GameStop entered into an agreement to amend and restate the 12% secured promissory note issued inSeptember 2019 by the Company to GameStop in connection with the acquisition of Simply Mac. The amended promissory note reduced the principal balance of the note from$7,858,000 to$1,250,000 , bears interest at a rate of 6% per annum and has an extended maturity date ofFebruary 17, 2024 . Additionally, the amended note releases all prior security and collateral under the original note and is unsecured. The parties also entered into a Termination Agreement, whereby the Company agreed to pay GameStop an aggregate amount of$335,152 , payable in twelve equal monthly installments of$27,929 with the first installment due onApril 30, 2020 , in satisfaction of certain post-closing amounts owed to GameStop under the Stock Purchase Agreement and certain agreements related thereto, less amounts owed to the Company from GameStop under the Stock Purchase Agreement relating to the post-closing working capital adjustment thereunder. The Company also agreed to pay GameStop a onetime cash payment of$250,000 and release to GameStop$345,000 of funds held in escrow in connection with the Simply Mac acquisition. Then, onMarch 31, 2020 , we entered into conversion agreements with certain debt holders to convert the outstanding aggregate principal amount of the convertible notes held by such holders, including interest accrued thereon, into shares of our common stock of at a conversion price of$1.70 per share of common stock. These agreements also resulted in the cancellation of warrants, issued by the Company, to purchase 21,000 shares of common stock of the Company at a price of$42.50 per share, as well as cancellation of warrants to purchase an indeterminate number of shares of common stock of the Company which were exercisable by dividing the principal amount of the convertible notes by a price that is 30% below the twenty-day volume weighted average price of our shares of common stock immediately prior to the date we were to obtain shareholder and regulatory approval to permit the conversion of the convertible notes. The note holders entering into agreements to convert notes issued by us consisted of holders of: (i) a principal amount of$91,666 pursuant to a 0% senior convertible note issued onJanuary 19, 2018 ; (ii) a principal amount of$1,700,000 pursuant to 12.0% unsecured convertible notes issued onOctober 24, 2018 ; (iii) a principal amount of$400,000 pursuant to a convertible note issued onNovember 29, 2018 ; (iv) a principal amount of$1,500,000 pursuant to convertible notes issued onMay 16, 2019 ; (v) a principal amount of$175,000 pursuant to convertible notes issued onJuly 9, 2019 ; (vi) a principal amount of$175,000 pursuant to convertible notes issued onAugust 8, 2019 ; (vii) a principal amount of$3,450,500 pursuant to convertible notes issued on September, 11, 13, 20, 23 and 24, 2019. Altogether, such conversion agreements resulted in the conversion of an aggregate$8,183,180 of indebtedness, including$691,014 of accrued interest, into 4,813,635 shares of common stock of the Company, and the cancellation of an indeterminate amount of warrants to purchase shares of common stock of the Company. Also onMarch 31, 2020 , the Company entered into a settlement agreement and release of claims settling claims relating to (i) outstanding transaction fees related to a previous debenture financing, (ii) settlement of a disputed claim for royalties relating to a 10 -------------------------------------------------------------------------------- previous debenture financing, and (iii) settlement of offsetting charges related to a promotion and supply agreement. Pursuant to this settlement agreement, the Company issued an aggregate of 1,068,368 shares of common stock in full settlement of such claims. OnApril 16, 2020 , we received a$3.1 million loan pursuant to the PPP under the CARES Act. OnOctober 19, 2020 , we filed a forgiveness application in which we certified that 100% of the funds were spent on qualified payroll and related costs and requested that the entire principal balance be forgiven. The application was approved by the lender and the SBA, and the loan and accrued interest were extinguished onAugust 17, 2021 .
Effective
OnMarch 10, 2021 , the Company secured a second-draw,$2,000,000 , 1.0%, 5-year loan from the Lender pursuant to the PPP. No payments are due on this loan until the earlier of: (a) the date on which the amount of loan forgiveness determined under the CARES Act is remitted to the Lender by the SBA, (b) the date that the SBA advises Lender that all or part of the loan has not been forgiven, provided that the Company has applied for forgiveness within 10 months of the end of the forgiveness period of the loan or (c) if the Borrower fails to apply for forgiveness by the end of the forgiveness period, a date that is not earlier than the date that is 10 months after the last day of the forgiveness period. In accordance with the applicable provisions of the CARES Act, onOctober 28, 2021 , the Company filed its forgiveness application with the Lender. The Company certified in the application that 100% of the loaned funds were utilized during the 22-week covered period commencingMarch 10, 2021 to pay for qualified payroll and payroll related costs, and as such, requested that the entire principal balance be forgiven. The application is subject to review by both the Lender and the SBA, after which the Company will be notified as to whether the application is approved. If the application is denied or partially approved, the Company will be required to make equal monthly payments to fully amortize any remaining balance byMarch 10, 2026 . Between July andNovember 2021 , the Company issued five individual six-month, 9%, unsecured convertible notes aggregating$4,000,000 in principal and warrants exercisable into an aggregate of 1,600,000 shares of common stock of the Company to SOL Global. SOL Global is an affiliate of the Company and owns greater than 10% of its outstanding common stock. The principal and unpaid accrued interest on the notes are convertible at the option of the holder at any time into shares of common stock of the Company at$2.50 per share and the warrants are exercisable beginning six months after the date of issuance and expire 42 months from the date of issuance at an exercise price of$2.75 per share. Upon maturity of the first note onJanuary 6, 2022 , SOL Global converted the entire$1,000,000 principal amount of the note and accrued interest into 418,000 shares of common stock of the Company. During August andSeptember 2021 , the Company raised$2,000,000 in four private placements of the shares of the Company's common stock of$500,000 each to SOL Verano Blocker 1 LLC, a wholly owned subsidiary of SOL Global. The shares were sold at the closing market price on the funding dates and the Company sold an aggregate of 575,527 shares of the Company's common stock at an average price of$3.48 per share in the private placements. 11 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. The notes to our Consolidated Audited Financial Statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the condition and results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain. There is a likelihood that materially different amounts would be reported under different conditions or using different assumptions. Our critical accounting policies and estimates and assumptions that require the most significant judgment are discussed further below.
Valuation of Merchandise Inventories
Our inventory is carried at the lower of cost or net realizable value using the first-in first-out method for cost. In valuing inventory, we are required to make assumptions regarding write-downs required to properly value obsolete or over-valued items at the lower of cost or net realizable value. In order to do this we consider a number of factors including quantities on hand, sales history, age of the product, new model introductions, vendor price protections and return policies, etc.
Goodwill results from acquisitions and represents the excess purchase price over the net identifiable assets acquired. We are required to evaluate our goodwill for impairment at least annually, or whenever indicators of impairment are present. Considerable management judgment is necessary to estimate the fair value of our reporting units. The discounted cash flows analyses utilize a five- to seven-year cash flow projection with a terminal value, which are discounted using a risk-adjusted weighted-average cost of capital. The projected cash flows include numerous assumptions such as, among others, future sales trends, operating margins, store count and capital expenditures, all of which are derived from our long-term financial forecasts. We may also use other market valuation methodologies including comparable market transaction comparisons and individual asset valuations, which also require the use of significant management judgment. Our definite-lived intangible assets consist primarily of trade names recorded as a result of business acquisitions. The estimated useful life and amortization methodology of intangible assets are determined based on the period in which they are expected to contribute directly to cash flows. Intangible assets that are determined to have a definite life are amortized over that period.
Impairment of Long-lived Assets
Long-lived assets, including intangible assets, right-of-use assets and property
and equipment are reviewed for impairment when circumstances indicate that the
carrying amount of these assets may be impaired. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized to the extent the carrying amount of the asset
exceeds its fair value. No impairment was recorded during Fiscal 2022 or Fiscal
2021.
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--------------------------------------------------------------------------------Results of Operations:
The following table sets forth our consolidated statement of operations for the fiscal years endedJanuary 29, 2022 andJanuary 30, 2021 , and the change between the two years ($ in thousands): Change FYE 1/29/22 FYE 1/30/21 $ % Net sales$ 79,111 $ 68,024 $ 11,087 16.3 % Cost of sales 61,588 49,672 11,916 24.0 % Gross profit 17,523 18,352 (829 ) -4.5 % Selling, general and administrative expenses 30,014 27,197 2,817 10.4 % Operating loss (12,491 ) (8,845 ) (3,646 ) -14.9 % Other income (expense): Interest expense (2,709 ) (1,048 ) (1,661 ) 158.5 % Gain (loss) on early extinguishment of debt 3,139 13,642 (10,503 ) -77.0 % Decrease in fair value of financial derivative liability - 543 (543 ) -100.0 % Other income (expense), net 968 160 808 505.0 % Income (loss) from continuing operations before provision for income taxes (11,093 ) 4,452 (15,545 ) -349.2 % Provision for income taxes 28 51 (23 ) -45.1 % Income (loss) from continuing operations (11,121 ) 4,401 (15,522 ) -352.7 % Loss from discontinued operations - (124 ) 124 -100.0 % Net income (loss)$ (11,121 ) $ 4,277 $ (15,398 ) -360.0 %
Fiscal Year Ended
For the fiscal year endedJanuary 30, 2022 ("Fiscal 2022"), our total net sales of$79.1 million represented an increase of$11.1 million , or 16%, compared to net sales of$68.0 million in the fiscal year endedJanuary 30, 2021 ("Fiscal 2021"). The increase in sales between the periods is primarily the result of our expansion program by which we grew our store count from 43 stores at the end of Fiscal 2021 to 53 stores at the end of Fiscal 2022. Although sales in both years were affected by the COVID19 pandemic, Fiscal 2021 was more adversely affected than Fiscal 2022. At the outset of Fiscal 2021, all of our retail stores were open. However, inmid-March 2020 , the COVID19 pandemic resulted in the closure of 12 locations. In addition, at the remaining locations which stayed open, we cut back store hours from 7 days per week and up to 11 hours per day, to 5 days per week and only 8 hours per day so we could run the stores on a single shift. In many locations, our business was deemed to be "essential" as we provide products and repair services for adults working remotely and students attending school virtually. We were able to begin reopening stores and expanding hours beginningMay 4, 2020 throughJune 22, 2020 . ByAugust 1, 2020 , only 1 store remained closed, which was reopened soon thereafter. During the entire second half of Fiscal 2021, our retail stores continued to be adversely affected by COVID-19. Hours of operation at all stores were curtailed by remaining closed on Sundays and most stores operated on shortened hours during the other days of the week. In addition, we believe COVID-19 adversely impacted our supply chain, resulting in severe shortages of Apple products that depressed sales both in our retail stores and on our eCommerce website. During Fiscal 2022, first the outbreak of the Delta variant of COVID-19 and then the Omicron variant continued to negatively impact our sales. As certain geographic areas experienced hyperlocal outbreaks resulting in infections of customers and store employees, we were periodically forced to close stores for short periods of time. We were particularly impacted by the Omicron variant during the important holiday selling season from late November through early January. Further exacerbating the situation, after Apple's announcement inmid-October 2021 of the new MacBook Pro and other products, we experienced severe shortages of new Apple products which dampened our holiday sales.
Cost of Sales, Gross Profit and Gross Margin
Our cost of sales in Fiscal 2022 was$61.6 million , 77.9% of net sales, our gross profit was$17.5 million and our gross margin was 22.1%. For Fiscal 2021, cost of sales was$49.7 million , 73.0% of net sales, gross profit was$18.4 million and our gross margin was 27.0%. The significant decline in our gross margin resulted primarily from a combination of competitive pressures that forced us 13 -------------------------------------------------------------------------------- to reduce sales prices during the holiday selling season, as well as a reduced mix of service business. Service is our most profitable business category, and service fell from 22.6% of total revenues in Fiscal 2021 to 19.0% in Fiscal 2022. In addition, our eCommerce business is our lowest gross margin category, and eCommerce sales rose from 16.1% of total revenues in Fiscal 2021 to 18.8% in Fiscal 2022 Operating Expenses For Fiscal 2022, operating expenses of$30.0 million increased by$2.8 million , or 10.4%, from$27.2 million in Fiscal 2021. The increase resulted primarily from the store expansion, with the largest increase in store payroll to staff the new stores. Despite the increase of 10 stores during Fiscal 2022, rent expense declined 2.5% from Fiscal 2021. The COVID-19 pandemic created a renter's market and we were able to open new stores, and replace stores with expiring leases, at significantly lower rental rates compared to pre-pandemic rates. Other store expenses grew as a result of the expansion, including systems, travel, marketing and depreciation. Total store expenses increased$3.9 million , or 18.1%, from$21.4 million in Fiscal 2021 to$25.3 million in Fiscal 2022. These increases were partially offset by a$1.1 million , or 18.2%, decline in corporate level expenses, primarily reduced legal fees.
Other Income (Expense)
For Fiscal 2022, interest expense amounted to$2.7 million , an increase of$1.7 million , or 158%, compared to$1.0 million in Fiscal 2021. The increase resulted from interest on$4.0 million of convertible notes and warrants that were issued during Fiscal 2022, as well as interest on$7.4 million of additional borrowing during the holiday fourth fiscal quarter. We also recorded a$3.1 million gain on extinguishment of the first PPP loan we received when the loan was forgiven by the SBA, and$968,000 of other income, comprised primarily of insurance recoveries. In Fiscal 2021, we recorded a$13.6 million gain on extinguishment of debt that resulted from the debt restructuring inMarch 2020 , a$543,000 gain from the decrease in value of financial derivatives that arose in connection with the 2019 issuance of convertible debt and warrants, and$160,000 in other income comprised of$215,000 in gains from settlements with vendors of outstanding payable balances generated in the prior year, partially offset by$55,000 in impairments of right-of-use leased assets and other items.
Net Income (Loss)
For Fiscal 2022, our net loss was$11.1 million after a nominal tax provision that consists primarily of minimum taxes assessed in states where our Simply Mac stores are located. Because of our prior operating losses and lack of carry-back ability, absent isolated events, our provision for income taxes is generally nominal. For Fiscal 2021, our net income was$4.3 million .
Liquidity and Capital Resources
During Fiscal 2021, we restructured the majority of our debt through conversions into equity or modification of repayment terms. InApril 2020 we secured a$3.1 million PPP loan that was forgiven by the SBA inAugust 2021 . InMarch 2021 we secured a second PPP loan for$2.0 million , for which we are awaiting response from the SBA on our forgiveness application. Between July andNovember 2021 we raised$6.0 million through the sale of$4.0 million of convertible notes and warrants and$2.0 million of common stock. Also inNovember 2021 , we entered into a loan and security agreement with a finance company pursuant to which we borrowed$7.4 million , which balance was paid down to$3.7 million onJanuary 29, 2022 . AtJanuary 29, 2022 we had negative working capital of$8.2 million and negative stockholders' equity of$6.0 million . We expect that we will need additional debt and or equity financing in the coming fiscal year, but we cannot predict whether additional liquidity will be available on acceptable terms, or at all, in the foreseeable future.
Operating Activities
Net cash used in continuing operating activities for Fiscal 2022 amounted to$8.4 million compared to$1.6 million for Fiscal 2021. The$6.8 million increase in cash used was due to an increase of$3.4 million in the net loss after adjustment for non-cash items, plus a$3.3 million increase in working capital required to support the new Simply Mac retail stores.
Investing Activities
Net cash used in Fiscal 2022 to purchase property and equipment for new Simply
Mac stores amounted to
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--------------------------------------------------------------------------------Financing Activities
During Fiscal 2022, net cash provided by financing activities amounted to$11.7 million . This was comprised primarily of$13.4 million of borrowings from notes payable,$2.1 million from the sale of common stock and warrant exercises, less$4.1 million of repayments on notes payable. In Fiscal 2021, net cash provided by financing activities amounted to$2.9 million . Borrowings from notes payable amounted to$3.5 million , and repayments of notes payable amounted to$825,000 . We also received$226,000 from the sale of stock upon warrant exercises.
Contractual Obligations
We lease all our retail store and administrative office facilities and certain equipment under non-cancelable operating leases. Rent expense under these leases was approximately$4,878,000 and$4,547,000 for the fiscal years endedJanuary 29, 2022 andJanuary 30, 2021 , respectively.
The following is a schedule of aggregate future minimum payments required by the above obligations (in thousands):
Payments due by period
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
Operating Lease Obligations $ 15,834 $ 3,836 $ 6,911 4,029 1,058
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