SIMPLY, INC. Forward-Looking Statements, Safe Harbor Statement and Other General Information
This discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and condensed notes thereto and other information included in this report and our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 , filed with theSEC onApril 30, 2021 (including our audited consolidated financial statements for the fiscal year endedJanuary 30, 2021 and the transition period fromJanuary 1, 2020 toFebruary 1, 2020 , and related notes thereto and other information)("2021 Annual Report"). Our discussion and analysis of financial condition and results of operations are based upon, among other things, our unaudited condensed consolidated 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 as of the date of our most recent balance sheet, 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 these 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 may. Our critical accounting policies, which we believe are the most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined in "Critical Accounting Policies" in our 2021 Annual Report, as may be updated in our subsequent Quarterly Reports on Form 10-Q. All references to results of operations in this discussion generally are related to results from continuing operations, unless otherwise noted. This report contains "forward-looking statements," including, without limitation, statements about trading of our securities on the Over-the-Counter market, sales levels, cost reductions, operating efficiencies, currency-related matters, profitability and adequacy of working capital, which are based on, among other things, current management knowledge and expectations and involve certain risks and uncertainties. These risks and uncertainties, in whole or in part, could cause expectations to fail to be achieved and could have a material adverse effect on our business, financial condition and results of operations, and include, without limitation: (1) the potential impact on our store operations as a result of the COVID-19 pandemic including mandated store closings, limited customer traffic, etc.; (2) our ability to have access to adequate capital to fund both operations and our expansion plans and to service or refinance our remaining outstanding debt; (3) a deterioration in our relationship with Apple that could negatively affect both our supply of products and our ability to conduct business as a licensee; (4) an interruption or failure of our information systems or subversion of access or other system controls, including private information, may result in a significant loss of business, assets, or competitive information; (5) significant changes in supplier terms and relationships or shortages in product supply; (6) rapid product improvement and technological change resulting in inventory obsolescence; (7) the loss of a key executive officer or other key employees and the integration of new employees; (8) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; and (9) the resolution of any litigation for or against the Company. These forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new or changing information, events or circumstances after the date of this release. We continue to institute changes to our strategies, operations and processes to address risks and uncertainties and to mitigate their impacts on our business, results of operations and financial condition. However, no assurances can be given that we will be successful in these efforts. For a further discussion of significant risk factors to consider, see "Risk Factors" below in this report and in "Item 1A. Risk Factors" in our 2021 Annual Report. In addition, other risks or uncertainties may be detailed from time to time in our futureSEC filings.
Business Overview and Strategy
As ofJuly 31,2021 , our business was comprised of 49 Simply Mac retail consumer electronics stores in 17 states across theU.S. authorized under the Apple® Premier Partner program. In our retail stores, we market and distribute a variety of mobility, computing, audio/video, and other technology products supplied primarily by Apple including laptops, tablets, cell phones, drones, smart watches, gaming consoles, accessories and audio devices. Simply Mac also sells products online through its eCommerce site. We work with Apple to develop our network of Simply Mac stores in locations and markets where Apple has limited or no presence. In our stores, we sell Apple and other third-party products and accessories. We also provide repair service for Apple products using our Apple-certified repair technicians. Retail customers may book a repair appointment at one of our Simply Mac stores either through our website or through the Apple website. Our current strategy is to focus on refining and improving the profitability of our Simply Mac retail stores inNorth America and on expanding the number of stores. We expect this expansion will come primarily from organic growth through the opening of new stores, but may also include selected acquisitions. We currently rank as the largest Apple Premier Partner inNorth America . 18
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Results of Operations
The first table below sets forth our condensed consolidated statements of operations for the 13 weeks endedJuly 31, 2021 andAugust 1, 2020 , and the change between the periods ($ in thousands). The second table sets forth our condensed consolidated statements of operations for the 26 weeks endedJuly 31, 2021 andAugust 1, 2020 , and the change between the periods. 13 Weeks Ended Change July 31, 2021 August 1, 2020 $ % Net sales$ 19,305 $ 17,650 $ 1,655 9.4 % Cost of sales 14,621 13,121 1,500 11.4 % Gross profit 4,684 4,529 155 3.4 % Selling, general and administrative expenses 6,816 6,451 365 5.7 % Operating loss (2,132 ) (1,922 ) (210 ) 10.9 % Other income (expense): Interest (141 ) (36 ) (105 ) 291.7 % Decrease in fair value of derivative liability - - - 0.0 % Gain on extinguishment of debt - - - 0.0 % Other income (expense), net 175 (2 ) 177 -8850.0 % Income (loss) from continuing operations before provision for income taxes (2,098 ) (1,960 ) (138 ) 7.0 % Provision for income taxes 9 17 (8 ) -47.1 % Income (loss) from continuing operations (2,107 ) (1,977 ) (130 ) 6.6 % Loss from discontinued operations - - - 0.0 % Net income (loss)$ (2,107 ) $ (1,977 ) $ (130 ) 6.6 % 26 Weeks Ended Change July 31, 2021 August 1, 2020 $ % Net sales$ 37,323 $ 31,593 $ 5,730 18.1 % Cost of sales 28,044 22,569 5,475 24.3 % Gross profit 9,279 9,024 255 2.8 % Selling, general and administrative expenses 13,652 13,577 75 0.6 % Operating loss (4,373 ) (4,553 ) 180 -4.0 % Other income (expense): Interest expense (180 ) (960 ) 780 -81.3 % Decrease in fair value of derivative liability - 543 (543 ) -100.0 % Gain (loss) on extinguishment of debt - 13,642 (13,642 ) -100.0 % Other income (expense), net 824 (58 ) 882 -1520.7 % Income (loss) from continuing operations before provision for income taxes (3,729 ) 8,614 (12,343 ) -143.3 % Provision for income taxes 30 17 13 76.5 % Income (loss) from continuing operations (3,759 ) 8,597 (12,356 ) -143.7 % Loss from discontinued operations - (236 ) 236 -100.0 % Net income (loss)$ (3,759 ) $ 8,361$ (12,120 ) -145.0 % 19
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The following table sets forth our condensed consolidated statements of
operations as a percentage of net sales for the 13 and 26 weeks ended
13 Weeks Ended 26 Weeks Ended
July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 75.7 % 74.3 % 75.1 % 71.4 %
Gross profit 24.3 % 25.7 % 24.9 % 28.6 %
Selling, general and administrative
expenses 35.3 % 36.5 % 36.6 % 43.0 %
Operating loss (11.0 %) (10.9 %) (11.7 %) (14.4 %)
Other income (expense):
Interest expense (0.7 %) (0.2 %) (0.5 %) (3.0 %)
Decrease in fair value of
derivative liability 0.0 % 0.0 % 0.0 % 1.7 %
Gain on extinguishment of debt 0.0 % 0.0 % 0.0 % 43.2 %
Other income (expense), net 0.9 % (0.0 %) 2.2 % (0.2 %)
Income (loss) from continuing
operations before provision for
income taxes (10.9 %) (11.1 %) (10.0 %) 27.3 %
Provision for income taxes 0.0 % 0.1 % 0.1 % 0.1 %
Income (loss) from continuing
operations (10.9 %) (11.2 %) (10.1 %) 27.2 %
Loss from discontinued operations 0.0 % 0.0 % 0.0 % (0.7 %)
Net income (loss) (10.9 %) (11.2 %) (10.1 %) 26.5 %
13 weeks ended
For the 13 weeks endedJuly 31, 2021 , our net sales amounted to$19,305,000 , an increase of$1,655,000 , or 9.4%, from$17,650,000 in the 13 weeks endedAugust 1, 2020 . Approximately$1,218,000 of the sales increase came from higher eCommerce sales, which had been constrained during the prior year's quarter by lack of product availability arising from supply chain issues. The remainder of the increase was attributable to a number of factors. As a result of our store expansion strategy, we had 7 new Simply Mac retail stores open by the end of the current year's quarter compared to the prior year. However, sales in the current quarter of certified pre-owned products were constrained by lack of supply in the market compared to the prior year's quarter. The COVID-19 pandemic affected both quarters. Gross Profit and Gross Margin For the 13 weeks endedJuly 31, 2021 , our gross profit amounted to$4,684,000 , up 3.4% compared to$4,529,000 in the 13 weeks endedAugust 1, 2020 . Our gross profit margin for the 13 weeks endedJuly 31, 2021 , however, fell to 24.3% compared to 25.7% in the 13 weeks endedAugust 1, 2020 . The reduced gross margin percentage resulted primarily from the following: (1) a higher mix of eCommerce sales because gross margins on eCommerce sales are significantly lower than margins on in-store sales, (2) a lower mix of service and certified pre-owned sales, which typically have higher margins than sales of Apple Hero products, and (3) reduced sales pricing required to match the competition.
Operating Expenses
For the 13 weeks endedJuly 31, 2021 , total operating expenses amounted to$6,816,000 , an increase of$365,000 , or 6%, from$6,451,000 in the 13 weeks endedAugust 1, 2020 . Store operating expenses for the current quarter rose$969,000 over the prior year quarter, due primarily to higher payroll costs for increased staffing and to staff and outfit new stores. Partially offsetting this increase was a$604,000 decrease in corporate level expenses, primarily related to reduced stock-based compensation and professional fees. 20
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Other Income (Expense)
Interest expense for the 13 weeks endedJuly 31, 2021 amounted to$141,000 , a significant increase of$105,000 compared to$36,000 in the 13 weeks endedAugust 1, 2020 . The increase is attributable to stated interest and discount accretion on the$1 million convertible note entered into inJuly 2021 . Other income of$175,000 in the current quarter is comprised primarily of an insurance recovery. Other income in the prior year's quarter was nominal.
Provision for Income Taxes
The provision for income taxes of$9,000 recorded for the 13 weeks endedJuly 31, 2021 represents minimum taxes assessed in states where the Simply Mac stores are located, and represented a decrease from$17,000 recorded during the prior year's quarter.
26 weeks ended
For the 26 weeks endedJuly 31, 2021 , our net sales amounted to$37,323,000 , an increase of$5,730,000 , or 18.1%, from$31,593,000 in the 26 weeks endedAugust 1, 2020 . The principal reason for the increase was that sales in the first quarter of the prior year's period were depressed as a result of the COVID-19 pandemic and recovered in the first quarter of the current year. In addition, store sales rose as a result of newly opened stores, and eCommerce sales during the current year period grew 64% over the prior year.
Gross Profit and Gross Margin
For the 26 weeks endedJuly 31, 2021 , our gross profit amounted to$9,279,000 , an increase of$255,000 , or 2.8%, from$9,024,000 in the 26 weeks endedAugust 1, 2020 . Our gross profit margin for the 26 weeks endedJuly 31, 2021 was 24.9%, compared to 28.6% in the 26 weeks endedAugust 1, 2020 . The reduced gross margin percentage resulted primarily from: (1) a higher mix of eCommerce sales because gross margins on eCommerce sales are significantly lower than margins on in-store sales, (2) a lower mix of service and certified pre-owned sales, which typically have higher margins than sales of Apple Hero products, (3) reduced sales pricing required to match the competition, and (4) a loss sustained on the bulk sale of discontinued and end-of-life inventory.
Operating Expenses
For the 26 weeks endedJuly 31, 2021 , total operating expenses amounted to$13,652,000 , a small increase of$75,000 , or less than 1%, from$13,577,000 in the 26 weeks endedAugust 1, 2020 . An increase in store operating expenses due primarily to higher payroll costs for increased staffing and to staff and outfit new stores, was almost completely offset by a reduction in corporate expenses, primarily reductions in stock-based compensation, legal and audit fees.
Other Income (Expense)
Interest expense for the 26 weeks endedJuly 31, 2021 amounted to$180,000 , a significant decrease of$780,000 , or 81%, compared to$960,000 in the 26 weeks endedAugust 1, 2020 . The decrease is attributable to the restructuring and elimination of a substantial portion of the Company's outstanding debt duringMarch 2020 . In the 26 weeks endedAugust 1, 2020 , we also recorded a$543,000 gain from the decrease in value of financial derivatives that arose in connection with the issuance of convertible debt and warrants, as well as a$13,642,000 gain on extinguishment of debt that resulted from the debt restructuring. In the 26 weeks endedJuly 31, 2021 , other income of$824,000 was comprised primarily of insurance recoveries.
Provision for Income Taxes
The provision for income taxes of$30,000 recorded for the 26 weeks endedJuly 31, 2021 , as well as the$17,000 provision for the 26 weeks endedAugust 1, 2020 , represents minimum taxes assessed in states where the Simply Mac stores are located.
Liquidity and Capital Resources
Although we had hoped that the effects of the COVID-19 pandemic would be behind us, customer traffic in our stores during the 26 weeks endedJuly 31, 2021 was still significantly below pre-pandemic levels and we continue to sustain operating losses. We have received funding from PPP loans and sales of convertible notes, but we do not currently have a bank line of credit, and are reliant on our primary distribution partners to provide us with open credit lines. We expect that we will need to raise additional capital in the near future through the issuance of debt and equity securities. Our ability to execute our strategy depends upon our future operating performance and on the availability of vendor credit, equity and debt financing, all of which may be affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot predict whether additional liquidity will be available on acceptable terms, or at all, in the foreseeable future. 21
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Operating Activities
Net cash used by continuing operating activities during the 26 weeks endedJuly 31, 2021 amounted to$1,436,000 compared to$397,000 for the 26 weeks endedAugust 1, 2020 . The$1,039,000 increase in cash used was due primarily to increased working capital needed during the current period, primarily inventory for new stores and seasonal needs.
Investing Activities
During the 26 weeks endedJuly 31, 2021 , purchases of property and equipment amounted to$1,505,000 , that related primarily to tenant improvements, fixtures and equipment needed to outfit newly opened stores during the period. Purchases of fixed assets during the 26 weeks endedAugust 1, 2020 amounted to$72,000 .
Financing Activities
During the 26 weeks endedJuly 31, 2021 , net cash provided by financing activities amounted to$2,763,000 . We received proceeds of$2,000,000 from a second round COVID-19 PPP loan,$1,000,000 from issuance of a convertible note and warrant,$123,000 from warrant exercises and$40,000 from a disgorgement of short-swing profits from a shareholder. We used$400,000 in cash to pay down a promissory note payable to a related party. During the 26 weeks endedAugust 1, 2020 , net cash provided by financing activities amounted to$2,773,000 . We received proceeds of$3,098,000 from our first round COVID-19 PPP loan and used$325,000 in cash to pay down promissory notes.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and
estimates affecting the application of those accounting policies since our
Annual Report on Form 10-K for the fiscal year ended
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