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 2, 2021 which are included in the prospectus datedNovember 10, 2021 , which we filed with theSecurities and Exchange Commission onNovember 15, 2021 (the "Prospectus") pursuant to Rule 424(b)(4). 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, particularly under "Risk Factors," 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. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q and in our other filings with theSEC . 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 years endedJanuary 2, 2021 andDecember 28, 2019 were 53- and 52-week years, respectively. These years are referred to herein as fiscal "2020" and "2019", respectively. The Company's fiscal quarters are generally 13 weeks in duration. When the Company's fiscal year is 53 weeks long, the corresponding fourth quarter is 14 weeks in duration. References to the third quarter of fiscal 2021 and the third quarter of fiscal 2020, refer to the 13 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Certain capitalized terms used below but not otherwise defined, are defined in, and shall be read along with the meanings given to such terms in, the notes to the unaudited financial statements of the Company for the 13 and 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , above.
References to our websites and those of third parties below are for informational purposes only and, except as expressly stated below, we do not intend to incorporate by reference in this report any information from 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” means individuals
boxes;
? “Boxes” means the boxes of clothing, footwear and subscription accessories of the Company;
? “Customers” means any person
subscription, direct or indirect sale of the Company;
? “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
? “Members” means the customers
? “NASDAQ” means the NASDAQ Capital Market;
? “SEC” or “Commission” refers to the
Commission; ? "Securities Act" refers to the Securities Act of 1933, as amended; and ? "Subscriptions" mean orders for recurring box shipments. 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 personalized outfits in a box, that their kids will love to wear. kidpik provides kids clothing subscription boxes for girls and boys (sizes 2T-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' clothes, added larger sizes up to 16 for apparel and 6 youth for shoes, added toddler sizes down to 2T and 3T for apparel and 7 and 8 toddler shoes, launched shop.kidpik.com, where we sell individual apparel items and shoes, pre-styled outfit gift boxes and gift cards, and expanded to sell on Amazon.com, as well as Fulfilled by Amazon (FBA) and Fulfilled by Merchant (FBM) for pre-packs and individual items. We launched our toddler collection in the first quarter of 2021, introducing sizes 2T and 3T apparel sizes, and added sizes 7 and 8 toddler shoes for boys and girls which we began to ship inApril 2021 . We also introduced an "add-on" for all members pursuant to which they can add additional pieces of their choosing to their next box order. We plan to increase the number of add-on item selections offered in an effort to increase the box transaction size and gross margin dollars per box.
We provide e-commerce services only within 48
Moving forward, funding permitting, we plan to research and start initiatives to expand our offerings into newborn sizes, husky and plus sizes, and tweens. Additionally, we may open up availability of our subscription boxes toCanada . We plan to continue to analyze the marketplace for interest in new products and may invest in expanding our current lines. Over the next 12 months, we plan to continue investing in our marketing by spending on our current marketing channels such as Facebook and Instagram Ads, Google Ads and YouTube Ads, as well as launching new channels such asTikTok and Connected TV and others with the goal of increasing new member growth. Initial Public Offering 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. 5 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 our business progress, make decisions about the allocation of capital, time and technology investments, and assess the short and long term performance of our business.
Gross Margin
Gross profit is equal to our net sales (revenues, net) 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, defective merchandise
returned from customers, receiving costs, inventory write-offs, and other
miscellaneous shrinkage.
For the 13 weeks ended For the 39 weeks ended
October 2, October 2,
2021 September 26, 2020 2021 September 26, 2020
Gross margin 58.2 % 59.3 % 59.8 % 58.9 %
Shipped Items
We define shipped items as the total number of items shipped in a given period
to our customers through our active subscription, Amazon and online website
sales.
For the 13 weeks ended For the 39 weeks ended
(In thousands) (In thousands)
October 2, October 2,
2021 September 26, 2020 2021 September 26, 2020
Shipped Items 559 470 1,680 1,139
Average retention rate of consignments
The average shipment retention rate is calculated as the total number of items retained by our customers divided by the total number of items shipped in a given time period.
For the 13 weeks ended For the 39 weeks ended
October 2, October 2,
2021 September 26, 2020 2021 September 26, 2020
Average Shipment Keep Rate 68.8 % 68.2 % 68.5 % 67.0 %
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 below and in the section of this Report titled "Risk Factors." 6 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, 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 is a key factor for our future growth. To date we have successfully acquired new subscriptions through marketing and the development of our brand. As a result, revenue has increased since our launch. 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.
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 kids' 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. 7
Components of the 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 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. Going forward we will refer to 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. Shipping and Handling
Shipping and handling includes the costs of shipping the goods to our customers and back to us, as well as the costs of completing and processing returns, and the materials used for packaging.
Payroll and Related Costs
Payroll and related costs represent employee salaries, taxes, benefits and charges from our payroll provider.
General and administrative expenses
General and administrative expenses mainly include marketing, Amazon selling expenses, bad debts, credit card fees, and business expenses, among others.
Depreciation and amortization
Depreciation charges consist of depreciation charges for leasehold improvements and equipment.
Interest Expense
Interest expense is primarily comprised of interest expense related to our lines of credit, outstanding notes payable and amortization of deferred charges related to our line of credit.
Other Non-Operating Income
Other non-operating income related to the cancellation of the previous paycheck protection loan.
8 Provision for Income Taxes
Our provision for income taxes is an estimate of federal and state income taxes based on prevailing federal and state tax rates, adjusted for qualifying credits, deductions, uncertain tax positions, and changes in l ” valuation of our assets net of federal and state deferred taxes.
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. TheU.S. has recently seen decreases in total new COVID-19 infections; however, those numbers are currently trending back up and it is unknown whether such decreases will continue in the future, new strains of the virus will cause numbers to increase, currently projected vaccine efficacy numbers will hold, boosters will continue to be widely available and/or whether individuals will continue to take booster shots, or whether new strains of the virus will become dominate in the future (which may be more infectious or cause greater health issues), and/or whether jurisdictions in which we operate, will issue new or expanded stay-at-home orders, mask 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. Since the start of the pandemic, we have taken steps to prioritize the health and safety of our employees. Most 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 through funds raised in the IPO, 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, during March andApril 2020 , our warehouse was shut down. 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 boosters, and the willingness of individuals to take such vaccines and boosters, all of which are uncertain and cannot be predicted. We have, however, recently 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. 9 RESULTS OF OPERATIONS
Comparison of the thirteen and thirty-nine weeks completed
Revenue
Our income for the 13 completed weeks
13 weeks ended
13 weeks ended September 26,
October 2, 2021 2020 Change ($) Change (%)
Revenue by channel
Subscription boxes $ 4,745,933 $ 4,016,696 $ 729,237 18.2 %
Amazon sales 568,947 485,599 83,348 17.2 %
Online website sales 259,219 132,234 126,985 96.0 %
Total revenue $ 5,574,099 $ 4,634,529 $ 939,570 20.3 %
Our income for the 39 completed weeks
39 weeks ended
39 weeks ended September 26,
October 2, 2021 2020 Change ($) Change (%)
Revenue by channel
Subscription boxes $ 14,163,217 $ 9,712,382 $ 4,450,835 45.8 %
Amazon sales 1,893,814 1,064,678 829,136 77.9 %
Online website sales 505,548 298,950 206,598 69.1 %
Total revenue $ 16,562,579 $ 11,076,010 $ 5,486,569 49.5 %
The revenue from subscription boxes for the 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , was generated from active subscriptions recurring boxes revenue and new subscriptions first box revenue, as summarized in the tables below: 39 weeks ended 39 weeks ended September 26, October 2, 2021 2020 Change ($) Change (%) Subscription boxes revenue from Active subscriptions - recurring boxes$ 11,474,502 $ 7,371,851 $ 4,102,652 55.7 % New subscriptions - first box 2,688,715 2,340,531 348,183 14.9 % Total subscription boxes revenue$ 14,163,217 $ 9,712,382 $ 4,450,835 45.8 % The increase in revenue was primarily driven by an increase in sales of girls' apparel and new merchandise offering of (a) boys' clothing beginning inJune 2020 , and (b) toddler collections, beginning inMarch 2021 . The revenue breakdown by product line for the 13 and 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , are summarized in the tables below: 13 weeks ended 13 weeks ended September 26, October 2, 2021 2020 Change ($) Change (%) Revenue by product line Girls' apparel$ 4,189,538 $ 3,941,463 $ 248,075 6.3 % Boys' apparel 1,111,509 693,066 418,443 60.4 % Toddlers' apparel 273,052 -
273,052 n/a % Total revenue$ 5,574,099 $ 4,634,529 $ 939,570 20.3 % 10
The number of items shipped to our customers increased by 18.9% from approximately 470,000 for the 13 weeks completed
39 weeks ended
39 weeks ended September 26,
October 2, 2021 2020 Change ($) Change (%)
Revenue by product line
Girls' apparel $ 12,647,081 $ 10,374,374 $ 2,272,707 21.9 %
Boys' apparel 3,341,419 701,636 2,639,783 376.2 %
Toddlers' apparel 574,079 - 574,079 n/a %
Total revenue $ 16,562,579 $ 11,076,010 $ 5,486,569 49.5 %
The number of items shipped to our customers increased by 47.7% from approximately 1,139,000 for the 39 completed weeks
Cost of Goods Sold Our cost of goods sold increased by 23.5% to$2,327,335 for the 13 weeks endedOctober 2, 2021 , compared to$1,884,898 for the 13 weeks endedSeptember 26, 2020 , an increase of$442,437 . Our cost of goods sold increased by 46.2% to$6,659,012 for the 39 weeks endedOctober 2, 2021 , compared to$4,553,832 for the 39 weeks endedSeptember 26, 2020 , an increase of$2,105,180 . The increase in cost of goods sold for the 13 and 39 weeks endedOctober 2, 2021 , compared to the same periods in fiscal 2020, was primarily attributable to the increase in the volume of goods purchased associated with the increase in our subscription box Amazon sales, and online website sales as discussed above.
Gross profit and gross profit as a percentage of income
Our gross profit was
Our gross profit was
The increase in gross margin for 13 and 39 weeks has ended
Gross margin as a percentage of sales was 58.2% for the 13 weeks ended
Gross margin as a percentage of sales was 59.8% for the 39 completed weeks
11 Operating Expenses
Our operating expenses for the 13 and 39 weeks ended
13 weeks ended
13 weeks ended September 26,
October 2, 2021 2020 Change ($) Change (%)
Expenses
Shipping and handling$ 1,451,065 $ 1,047,097 $ 403,968 38.6 % Payroll and related costs 1,023,241 753,222 270,019 35.8 % General and administrative 2,169,283 1,790,401 378,882 21.2 % Depreciation and amortization 5,226 13,770
(8,544 ) (62.0 )% Total expenses$ 4,648,815 $ 3,604,490 $ 1,044,325 29.0 % 39 weeks ended 39 weeks ended September 26, October 2, 2021 2020 Change ($) Change (%) Expenses
Shipping and handling$ 4,543,341 $ 2,693,062 $ 1,850,279 68.7 % Payroll and related costs 2,953,993 2,045,415 908,578 44.4 % General and administrative 6,318,183 4,301,533 2,016,650 46.9 % Depreciation and amortization 21,355 58,063
(36,708 ) (63.2 )% Total expenses$ 13,836,872 $ 9,098,073 $ 4,738,799 52.1 % 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 endedOctober 2, 2021 , increased by$1,044,325 or 29.0% to$4,648,815 , compared to$3,604,490 for the 13 weeks endedSeptember 26, 2020 . This increase was mainly a result of (i) an increase in shipping and handling of$403,968 , which increase was due to a FedEx surcharge and minimum hourly rate increase in ourCalifornia warehouse - our shipping and handling expenses were 26.0% of total revenue in the current period, compared to 22.6% of total revenue in the previous period, (ii) an increase in payroll and related costs of$270,019 , mainly due to new hires as a result of our organic growth, and increases in salaries, and (iii) a$378,882 increase in general and administrative expenses, mainly due to an increase in marketing expenses and an increase in third party fees due to increased sales. Our operating expenses for the 39 weeks endedOctober 2, 2021 , increased by$4,738,799 or 52.1% to$13,836,872 , compared to$9,098,073 for the 39 weeks endedSeptember 26, 2020 . This increase was mainly a result of (i) an increase in shipping and handling of$1,850,279 , which increase was due to increased sales and a FedEx surcharge and minimum hourly rate increase in ourCalifornia warehouse - our shipping and handling expenses were 27.4% of total revenue compared to 24.3% of total revenue in the previous period, (ii) an increase in payroll and related costs of$908,578 , mainly due to new hires as a result of our organic growth, and increases in salaries, and (iii) a$2,016,650 increase in general and administrative expenses, mainly due to an increase in marketing expenses and an increase in third-party fees due to increased sales. Loss from Operations Loss from operations increased from$854,859 for the 13 weeks endedSeptember 26, 2020 , to$1,402,051 for the 13 weeks endedOctober 2, 2021 . The increase in loss from operations was largely due to the increase of$378,882 in general and administrative expenses, the increase of$403,968 in shipping and handling costs, the increase of$270,019 in payroll and related cost, and the increase in cost of goods sold of$442,437 , partially offset by the$939,570 increase in net sales, each as discussed above. Loss from operations increased from$2,575,895 for the 39 weeks endedSeptember 26, 2020 , to$3,933,305 for the 39 weeks endedOctober 2, 2021 . The increase in loss from operations was largely due to the increase of$2,016,650 in general and administrative expenses, the increase of$1,850,279 in shipping and handling costs, the increase of$908,578 in payroll and related cost, and the$2,105,180 increase in cost of goods sold, partially offset by the$5,486,569 increase in net sales, each as discussed above. 12 Other Expenses Total other expenses were ($212,695 ) and$122,567 for the 13 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively, and$155,421 and$318,153 for the 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively. The decrease in other expenses for the 13 and 39 weeks endedOctober 2, 2021 , compared to the same periods in fiscal 2020, was related to the forgiveness of debt relating to the forgiveness of our prior Paycheck Protection Loan in the amount of$442,352 , offset by interest expense, which increased by$107,090 and$276,313 , for the 13 and 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively. The increase in interest expense was due to the increase in our debt balance and related increases in interest expense associated therewith. Provision for Income Taxes
We had minimal or no provision for income taxes during the 13 and 39 weeks ended
Net Loss We had a net loss of$1,189,356 for the 13 weeks endedOctober 2, 2021 , compared to a net loss of$978,251 for the 13 weeks endedSeptember 26, 2020 , an increase in net loss of$211,105 or 21.6%. The increase in net loss was primarily due to the increase of$378,284 in general and administrative expenses, the increase of$403,968 in shipping and handling costs, the increase of$270,019 in payroll and related cost, and the$442,437 increase in cost of goods sold, partially offset by the$939,570 increase in net sales, each as discussed in greater detail above. We had a net loss of$4,090,058 for the 39 weeks endedOctober 2, 2021 , compared to a net loss of$2,895,170 for the 39 weeks endedSeptember 26, 2020 , an increase in net loss of$1,194,888 . The increase in net loss was primarily due to the increase of$2,016,052 in general and administrative expenses, the increase of$1,850,279 in shipping and handling costs, the increase of$908,578 in payroll and related cost, and the$2,105,180 increase in cost of goods sold, partially offset by the$5,486,569 increase in net sales, each as discussed
in greater detail above.
LIQUIDITY AND CAPITAL RESOURCES
October 2, 2021 January 2, 2021 Change ($) Change (%)
Cash $ 204,877 $ 133,484 $ 71,393 53.5 %
Working Capital $ 185,644 $ 2,105,270 $ (1,919,626 ) (91.2 )%
Debt* $ 3,200,000 $ 2,474,470 $ 725,530 29.3 %
* Line of credit, loan payable and long-term debt.
At
As ofOctober 2, 2021 , the Company had total current liabilities of$10,260,840 , consisting mainly of accounts payable of$2,837,075 , accounts payable to related party of$1,219,038 , accrued expenses of$507,985 , advance payable of$1,196,742 (discussed below), short-term debt from related party of$1,300,000 and line of credit of$3,200,000 (discussed below).
From
in total current liabilities, working capital of
ThroughOctober 2, 2021 , we have mainly relied on loans fromEzra Dabah , our Chief Executive Officer and Chairman, and his family (which have all, other than$900,000 , been converted into equity onMay 11, 2021 ), notes payable (including fromNina Footwear Corp. which is 86.36% owned byEzra Dabah and his family includingMoshe Dabah , and which entityMr. Dabah serves as Chief Executive Officer and member of the Board of Directors of ("Nina Footwear", a related party) and our line of credit 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. 13 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. Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of, and for the year ended,January 2, 2021 , describing the existence of substantial doubt about our ability to continue as a going concern as ofMay 17, 2021 , the date of their report. 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 an aggressive growth strategy for the expansion of operations through increased marketing to attract new members and refine the marketing strategy to strategically prioritize customer acquisition channels that 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 retaining existing members. We launched a new boys' apparel division in the summer of 2020 and a toddler division at the end ofMarch 2021 . We also have plans to increase efficiency in distribution and fulfillment capabilities to reduce costs associated with subscription box sales. Our founding and majority stockholder,Ezra Dabah , our Chief Executive Officer and Chairman, has provided his written intent to provide continued financial support to the Company for at least one year and a day fromSeptember 3, 2021 , the terms of which indicate that funding is expected to be in similar form as to the funding previously provided byMr. Dabah , provided thatMr. Dabah is under no contractual or other obligation to provide such funding and the ultimate terms of such funding are unknown. 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 intend to use the net proceeds from this offering to repay debt, 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 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 no accrue interest); (iv) amounts owed in connection with vendors payable of approximately$1.2 million ; 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$2.6 million , which are due onJanuary 15, 2022 , and which do not accrue interest. We expect to continue to generate net losses for the foreseeable future as we make investments to grow our business. We believe that the existing balances of cash and cash equivalents following the IPO will be sufficient to meet our anticipated cash requirements for at least twelve months from the date that these financial statements are issued. However, should our current cash and cash equivalents not be sufficient to support the development of our business to the point at which it has positive cash flows from operations, we plan to meet our future needs for additional capital through equity financings, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. Equity financings may include sales of common stock. Such financing may not be available on terms favorable to us or at all. The terms of any financing may adversely affect the holdings or rights of our stockholders. If we unable to obtain adequate financing or financing on terms satisfactory to it when required, our ability to continue to support our business growth, scale its infrastructure, and to respond to business challenges could be significantly impaired. 14 Cash Flows 39 weeks ended 39 weeks ended October 2, 2021 September 26, 2020 Cash provided by (used in): Operating activities$ (5,637,368 ) $ (2,385,563 ) Investing activities - (7,683 ) Financing activities 5,306,217 1,914,613 Net decrease in cash$ (331,151 ) $ (478,633 ) Net cash used in operating activities increased to$5,637,368 for the 39 weeks endedOctober 2, 2021 , compared to$2,385,563 of cash used in operating activities during the 39 weeks endedSeptember 26, 2020 . The increase in our cash used in operating activities of approximately$3.3 million was primarily due to an increase in the net loss in the amount of approximately$1.2 million , as discussed in greater detail above, adjusted for non-cash items totaling$0.2 million , and the negative impact from changes in operating assets and liabilities in the amount of approximately$1.9 million . The negative change in our net operating assets and liabilities was mainly driven by the change in inventories of$0.6 million , due to increases in the boys' apparel division, the change in accounts payable of$0.8 million , and the change in accounts receivable of$0.4 million , for the 39 weeks endedOctober 2, 2021 , compared to the 39 weeks endedSeptember 26, 2020 . There was no net cash used in investing activities during the 39 weeks endedOctober 2, 2021 , compared to$7,683 of cash used in investing activities during the 39 weeks endedSeptember 26, 2020 , which was related to purchases of leasehold improvements and equipment. Net cash provided by financing activities increased to$5,306,217 for the 39 weeks endedOctober 2, 2021 , compared to net cash provided by financing activities of$1,914,613 for the 39 weeks endedSeptember 26, 2020 , mainly as a result of$2.0 million in convertible notes sold during the current period compared with$1.0 million in the comparable period, proceeds from issuance of common stock of$0.5 million , an increase in line of credit of$1.2 million and the increase in advance payable in amount of$0.3 million , compared to a decrease in advance payable of$0.3 million in the prior period, relating to our financing transactions. Line of Credit OnSeptember 5, 2017 , we entered into a Loan and Security Agreement (as amended, the "Loan Agreement") withCrossroads Financial Group, LLC ("Crossroads"). The Loan Agreement had an initial term of two years, and renews thereafter for additional one-year periods automatically, unless Crossroads has provided the Company at least 30 days' notice of its intent to not renew prior to such applicable automatic renewal date. The Loan Agreement allows the Company to request advances from Crossroads up to$3,200,000 . The advances are limited to the lower of (i) 70% of the Company's inventory cost at the time of request, or (ii) 75% of net orderly liquidation value, when applied to eligible inventory. The advances bear interest at a rate of 1.42% per month (17.04% per annum) and mature onNovember 20, 2021 . The amounts owed under the Loan Agreement are personally guaranteed byEzra Dabah , our Chief Executive Officer, President and Chairman, and his wife Renee. The amounts owed to Crossroads are also secured by a security interest in substantially all of our assets. The Loan Agreement includes an early termination fee equal to 5% of the maximum amount available if the agreement is terminated during the first year of the agreement and 3% thereafter, provided that such fee is waived if we sell equity in order to repay amounts owed under the Loan Agreement. The Loan Agreement includes customary covenants and events of default, including ifEzra Dabah , our Chief Executive Officer and Chairman, and his family cease being the direct or indirect beneficial owner of more than 50% of our voting stock, or if any other person or entity shall become the direct or indirect owner of over 45% of our voting stock or ifMr. Dabah orAdir Katzav our Executive Vice President and Chief Financial Officer cease to be employed by the Company. OnNovember 15, 2021 , we terminated the loan and security agreement, and paid in full the outstanding loan amount of$3,200,000 and related outstanding interest and fee in amount of$24,498 , with funds raised through the IPO. 15 As ofOctober 2, 2021 , outstanding advances amounted to$3,200,000 . Interest expense amounted to$326,656 and$231,359 for the 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Interest expense amounted to$136,317 and$76,836 for the 13 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively.
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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 inventory. Those include the following transactions: OnFebruary 1, 2021 , the Company entered into a new cash advance agreement with a financial institution and was advanced cash totaling$360,000 to be used for the purchase of inventory. In accordance with the agreement, the Company agreed to repay$381,600 , plus interest, by depositing future receivables with the lender. The cash advance bears interest at a rate of 7% per annum for the first 121 days and 12% per annum thereafter until the advance is fully repaid. OnMarch 10, 2021 , the Company entered into a new cash advance agreement with a financial institution and was advanced cash totaling$100,000 to be used for the purchase of inventory. In accordance with the agreement, the Company agreed to repay the advanced cash plus$311,953 previously owed to the financial institution (totaling$411,953 ), plus interest, by depositing future receivables with the lender in total amount of$417,954 . The cash advance bears interest at a rate of 7% per annum for the first 121 days and 12.50% per annum thereafter until the advance is fully repaid. OnMarch 10, 2021 , the Company also entered into a new cash advance agreement with a financial institution. Pursuant to the agreement, the financial institution purchased$1,137,666 of receivables from the Company for$1,062,666 , which included$437,666 owed under the previous agreement. The Company will deliver 12.5% of the future collections of receivables to the financial institution until$1,137,666 has been paid. In the event no event of default has occurred under the agreement and the Company remains in compliance with its terms, the financial institution will provide a 6% discount on the receivables purchased.
OnMay 7, 2021 , the Company also entered into a new cash advance agreement with a financial institution. Pursuant to the agreement, the financial institution purchased$461,316 of receivables from the Company for$446,316 , which included$196,316 owed under the previous agreement. In accordance with the agreement, the Company agreed to repay$461,316 , plus interest, by depositing future receivables with the lender. The cash advance bears interest at a rate of 7.5% per annum for the first 121 days and 12% per annum thereafter until the advance is fully repaid.
OnJune 4, 2021 , the Company entered into a new cash advance agreement with a financial institution and was advanced cash totaling$125,000 to be used for the purchase of inventory. In accordance with the agreement, the Company agreed to repay the advanced cash plus$355,598 previously owed to the financial institution (totaling$480,598 ), plus interest, by depositing future receivables with the lender in total amount of$488,098 . The cash advance bears interest at a rate of 7.5% per annum for the first 121 days and 12.50% per annum thereafter until the advance is fully repaid. OnJune 4, 2021 , the Company also entered into a new cash advance agreement with a financial institution. Pursuant to the agreement, the financial institution purchased$1,196,055 of receivables from the Company for$1,124,055 , which included$524,055 owed under the previous agreement. The Company will deliver 12.5% of the future collections of receivables to the financial institution until$1,196,055 has been paid. In the event no event of default has occurred under the agreement and the Company remains in compliance with its terms, the financial institution will provide a 6% discount on the receivables purchased. 16
OnJuly 9, 2021 , the Company entered into a new cash advance agreement with a financial institution. Pursuant to the agreement, the financial institution purchased$495,902 of receivables from the Company for$488,402 , which included advanced cash totaling$125,000 to be used for the purchase of inventory and$363,402 owed under the previous agreement. In accordance with the agreement, the Company agreed to repay$495,902 , plus interest, by depositing future receivables with the lender. The cash advance bears interest at a rate of 7.5% per annum for the first 121 days and 12.5% per annum thereafter until the advance is fully repaid. OnAugust 10, 2021 , the Company entered into a new cash advance agreement with a financial institution and was advanced cash totaling$185,000 to be used for the purchase of inventory. In accordance with the agreement, the Company agreed to repay the advanced cash plus$390,169 previously owed to the financial institution (totaling$575,169 ), plus interest, by depositing future receivables with the lender in the total amount of$586,269 . The cash advance bears interest at a rate of 7.5% per annum for the first 121 days and 12.50% per annum thereafter until the advance is fully repaid. OnAugust 10, 2021 , the Company also entered into a new cash advance agreement with a financial institution. Pursuant to the agreement, the financial institution purchased$1,182,318 of receivables from the Company for$1,136,718 , which included$756,718 owed under the previous agreement. The Company will deliver 12.5% of the future collections of receivables to the financial institution until$1,182,318 has been paid. In the event no event of default has occurred under the agreement and the Company remains in compliance with its terms, the financial institution will provide a 6% discount on the receivables purchased. As ofOctober 2, 2021 andJanuary 2, 2021 , the cash advance outstanding, including interest, amounted to$1,196,742 and$829,030 , respectively. For the 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , interest expense related to the advances totaled$121,411 and$18,626 , respectively. For the 13 weeks endedOctober 2, 2021 andSeptember 26, 2020 , interest expense related to the advances totaled$18,574 and$23,925 , respectively.
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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.
Convertible bonds and related party loans
In 2020 and 2019, the Company entered into unsecured convertible promissory notes with related party stockholders in the amount of$1,770,000 and$3,300,000 , respectively. These notes were noninterest bearing. Prior to the maturity, the notes were converted to equity at a value of 125% of the trailing 12 months of net sales. In January, February andMarch 2021 , the Company entered into unsecured convertible promissory notes with related party stockholders in the amount of$2,000,000 . InMay 2021 , prior to the maturity, the notes in the amount of$2,000,000 were converted into an aggregate of 339,526 shares of the Company (valued at$5.89 per share). Subsequently, the Company borrowed an additional$300,000 from related party stockholders and entered into unsecured convertible promissory notes with such related party stockholders in the amount of$300,000 to evidence such loans. The convertible promissory notes are due onJanuary 15, 2022 , and were to convert automatically into equity securities offered by the Company in a future fund raising, provided that onAugust 25, 2021 , the parties agreed to amend the terms of the previously convertible notes, to remove the conversion rights provided for therein and clarify that no interest accrues
on the convertible notes. 17 In April andJune 2021 , the Company entered into various short-term, unsecured promissory notes with Nina Footwear in the amount of$400,000 . The notes are noninterest-bearing and due onDecember 31, 2021 . OnNovember 16, 2021 we paid in full the outstanding loans amount of$400,000 . In September, 2021, the Company borrowed$600,000 fromEzra Dabah ,who is our Chief Executive Officer and Chairman. The notes are unsecured, noninterest-bearing and the principal is fully due and payable onJanuary 15, 2022 or earlier, 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).
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In October andNovember 2021 , the Company borrowed$1,900,000 fromEzra Dabah , our Chief Executive Officer and Chairman. The notes are unsecured, noninterest-bearing and the principal is fully due and payable onJanuary 15, 2022 or earlier, 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). Subsequent toOctober 2, 2021 , we have entered into additional related party loans, as described in greater detail to "Note 16: Subsequent Events", to the notes to the unaudited financial statements included above. Need for Future Funding As discussed above, our current capital resources, combined with the net proceeds from the IPO, are expected to be sufficient for us to fund operations for the next 12 months. 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 provisions
We have not entered into any off-balance sheet arrangements and do not hold any interests in variable interest entities.
Critical accounting conventions and estimates
Our financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with 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 Prospectus and the notes to the audited financial statements appearing elsewhere in the Prospectus. During the 13 weeks endedOctober 2, 2021 , there were no material changes to our critical accounting policies from those discussed in our Prospectus. 18
JOBS Act and recent accounting statements
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 positions
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 and not yet adopted accounting pronouncements.
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