UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required
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Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer ☐ | Accelerated Filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Number of shares of registrant’s common stock outstanding as of November 15, 2022: .
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of Kidpik Corp. (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. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, including under, or incorporated by reference into, “Risk Factors”, which factors include:
| ● | our ability to obtain additional funding, the terms of such funding and potential dilution caused thereby; | |
| ● | the continuing effect of COVID-19 on our operations, sales, and market for our products; | |
| ● | our ability to build and maintain our brand; | |
| ● | cybersecurity, information systems and fraud risks and problems with our websites; | |
| ● | our ability to expand and grow our operations, and successfully market our products and services; | |
| ● | changes in, and our compliance with, rules and regulations affecting our operations, sales, the internet in general and/or our products; | |
| ● | shipping, production or manufacturing delays and/or tariffs on our products; | |
| ● | our ability to increase members and sales; | |
| ● | regulations we are required to comply with in connection with our operations, manufacturing, labeling and shipping; | |
| ● | competition from existing competitors or new competitors or products that may emerge; | |
| ● | rising interest rates and inflation and our ability to control our costs, including employee wages and benefits and other operating expenses; | |
| ● | our dependency on third-party manufacturers to supply or manufacture our products; | |
| ● | our business, including our costs and supply chain, which is subject to risks associated with rising inflation; | |
| ● | our ability to establish or maintain vendor and supplier relations and/or relationships with third-parties; | |
| ● | our ability and third parties’ abilities to protect intellectual property rights; | |
| ● | our ability to adequately support future growth; | |
| ● | our ability to attract and retain key personnel to manage our business effectively; and | |
| ● | other risk factors included under “Risk Factors” below. |
| 1 |
You should read the matters described in, and incorporated by reference in, “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. All forward-looking statements included herein speak only of the date of the filing of this Report. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Summary Risk Factors
Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended January 1, 2022, which was filed with the Securities and Exchange Commission on April 1, 2022 (the “2021 Annual Report”). Investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q, including our financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission. Our business operations could also be affected by factors that we currently consider to be immaterial or that are unknown to us at the present time. If any of these risks occur, our business, financial condition, and results of operations could be materially and adversely affected, and the trading price of our common stock could decline or our common stock could become worthless:
| ● | Our history of losses, our ability to achieve profitability, our need for additional funding and the availability and terms of such funding, as well as potential dilution caused thereby; | |
| ● | Our ability to execute our growth strategy and scale our operations and risks associated with such growth, our ability to maintain current members and customers and grow our members and customers; | |
| ● | Risks associated with the effect of the COVID-19 pandemic, and governmental responses thereto on our operations, those of our vendors, our customers and members and the economy in general; | |
| ● | Risks associated with our supply chain and third-party service providers, interruptions in the supply of raw materials and merchandise, increased costs of raw materials, products and shipping costs due to inflation, disruptions at our warehouse facility and/or of our data or information services, issues affecting our shipping providers, and disruptions to the internet, any of which may have a material adverse effect on our operations; | |
| ● | Risks of changes in consumer spending due to changes in interest rates, increased inflation, declines in economic activity or recessions; | |
| ● | Risks that effect our ability to successfully market our products to key demographics; | |
| ● | The effect of data security breaches, malicious code and/or hackers; | |
| ● | Increased competition and our ability to maintain and strengthen our brand name; | |
| ● | Changes in consumer tastes and preferences and changing fashion trends; | |
| ● | Material changes and/or terminations of our relationships with key vendors; | |
| ● | Significant product returns from customers, excess inventory and our ability to manage our inventory; | |
| ● | The effect of trade restrictions and tariffs, increased costs associated therewith and/or decreased availability of products; |
| 2 |
| ● | Our ability to innovate, expand our offerings and compete against competitors which may have greater resources; | |
| ● | Certain anti-dilutive, drag-along and tag-along rights which may be deemed to be held by a former minority stockholder; | |
| ● | Our significant reliance on related party transactions and loans; | |
| ● | The fact that our Chief Executive Officer, Ezra Dabah, has majority voting control over the Company; | |
| ● | If the use of “cookie” tracking technologies is further restricted, regulated, or blocked, or if changes in technology cause cookies to become less reliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of internet user information would decrease, which could harm our business and operating results; | |
| ● | Our ability to comply with the covenants of our loan and lending agreements and future loan covenants, and the fact that our lending facilities are secured by substantially all of our assets; | |
| ● | Our ability to prevent credit card and payment fraud; | |
| ● | The risk of unauthorized access to confidential information; |
| ● | Our ability to protect our intellectual property and trade secrets, claims from third-parties that we have violated their intellectual property or trade secrets and potential lawsuits in connection therewith; | |
| ● | Our ability to comply with changing regulations and laws, penalties associated with any non-compliance (inadvertent or otherwise), the effect of new laws or regulations, our ability to comply with such new laws or regulations, changes in tax rates; | |
| ● | Our reliance on our current management, who are not party to any employment agreements with us; | |
| ● | The outcome of future lawsuits, litigation, regulatory matters or claims; | |
| ● | Certain terms and provisions of our governing documents which may prevent a change of control, and which provide for indemnification of officers and directors, limit the liability of officers or directors, and provide for the board of director’s ability to issue blank check preferred stock; | |
| ● | The fact that we have a limited operating history; the effect of future acquisitions on our operations and expenses; | |
| ● | Our significant indebtedness; | |
| ● | The anticipated volatile nature of the trading prices of our common stock and dilution which may be caused by future sales of securities; and | |
| ● | Risks associated with our status as an “emerging growth company”. |
Additional Information
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “our company,” and “Kidpik” refer to Kidpik Corp. The Kidpik design logo, “kidpik,” and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Kidpik Corp. Other trade names, trademarks, and service marks used in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, we have omitted the ® and ™ designations, as applicable, for the trademarks we name in this Quarterly Report on Form 10-Q.
| 3 |
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
Kidpik Corp.
Condensed Interim Balance Sheets
| October 1, 2022 | January 1, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Leasehold improvements and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable, related party | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Advance payable | ||||||||
| Operating lease liabilities, current | ||||||||
| Short-term debt, related party | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, par value $, shares authorized, of which shares are issued and outstanding as of October 1, 2022 and January 1, 2022 | ||||||||
| Common stock, par value $, shares authorized, of which and shares are issued and outstanding as of October 1, 2022 and January 1, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-1 |
Kidpik Corp.
Condensed Interim Statements of Operations
(Unaudited)
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Shipping and handling | ||||||||||||||||
| Payroll and related costs | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expenses | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other (income) expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other (income) expenses | ( | ) | ( | ) | ||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders: | ||||||||||||||||
| Basic | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-2 |
Kidpik Corp.
Condensed Interim Statements of Changes in Stockholders’ Equity (Deficit)
For the 13 and 39 Weeks Ended October 1, 2022 and October 2, 2021
(Unaudited)
| Additional | Accumulated | |||||||||||||||||||||||||||
| Common Stock | Preferred Stock | paid-in | stockholders’ | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | Total | ||||||||||||||||||||||
| Balance, January 2, 2021 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, April 3, 2021 | - | - | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock | - | |||||||||||||||||||||||||||
| Conversion of debt | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, July 3, 2021 | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, October 2, 2021 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Balance, January 1, 2022 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, April 2, 2022 | - | ( | ) | |||||||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of common stock | - | ( | ) | |||||||||||||||||||||||||
| Cash used to settle net share equity awards | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, July 2, 2022 | - | ( | ) | |||||||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, October 1, 2022 | $ | - | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-3 |
Kidpik Corp.
Condensed Interim Statements of Cash Flows
(Unaudited)
| 39 Weeks Ended | ||||||||
| October 1, 2022 | October 2, 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Forgiveness of loan payable | ( | ) | ||||||
| Equity-based compensation | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Operating lease right-of-use assets and liabilities | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accounts payable, related parties | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of leasehold improvements and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of long-term debt from related party | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Cash used to settle net share equity awards | ( | ) | ||||||
| Net proceeds from line of credit | ||||||||
| Net proceeds (repayments) from advance payable | ( | ) | ||||||
| Net proceeds (repayments) from loan payable related party | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
| Reconciliation of cash and restricted cash: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| Supplemental disclosure of cash flow data: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| Supplemental disclosure of non-cash data: | ||||||||
| Record right-of use asset and operating lease liabilities | $ | $ | ||||||
| Conversion of shareholder debt | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-4 |
Kidpik Corp.
Notes to Condensed Interim Financial Statements
(Unaudited)
NOTE 1: NATURE OF BUSINESS
Kidpik Corp. (the “Company”, “we”, “our” or “us”) was incorporated on April 16, 2015 under the laws of Delaware. The Company is a subscription-based e-commerce business geared toward kid products for girls’ and boys’ apparel, footwear, and accessories. The Company serves its customers through the clothing subscription box business and its retail website, www.kidpik.com. The Company commenced operations in March 2016 and its executive office is located in New York.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting: The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and the rules and regulations of the SEC that apply to interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes normally included in financial statements prepared in conformity with U.S. GAAP. They should be read in conjunction with the financial statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on April 1, 2022 (the “Form 10-K”).
The accompanying condensed financial statements are unaudited and include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its condensed financial position and results of operations for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year.
Fiscal year: The Company uses a 52- or 53-week fiscal year ending on the Saturday nearest to December 31 each year. The quarters ended October 1, 2022 and October 2, 2021 consist of 13 weeks. These quarters are referred to herein as the third quarter of “2022” and “2021”, respectively.
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP 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 inventory obsolescence, equity-based compensation, operating lease right-of-use assets and operating lease liabilities, bad debts, and the valuation of deferred tax assets. Accordingly, actual results could differ from those estimates.
Emerging growth company: The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
| F-5 |
Recently adopted accounting pronouncements: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than twelve (12) months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will continue to primarily depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, this standard requires both types of leases to be recognized on the balance sheet. The standard also requires disclosures about the amount, timing and uncertainty of the cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For emerging growth companies, this standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021, with early adoption permitted. Refer to Note 7, “Leases” for information regarding our adoption of this guidance effective January 2, 2022 and a discussion of the impact to information presented herein, as well as additional required disclosures under the new guidance.
Accounting standards issued but not yet adopted: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which replaces the incurred loss impairment methodology for financial instruments in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB has issued ASU 2019-10 which has resulted in the postponement of the effective date of the new guidance for eligible smaller reporting companies to the fiscal year beginning January 1, 2023. The guidance must be adopted using a modified retrospective approach and a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of the guidance on its financial statements. The Company does not believe that the adoption of this standard would have a material impact on the Company’s financial statements.
Concentration of credit risk: Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash, restricted cash and accounts receivable. We maintain our cash and restricted cash with high-quality financial institutions with investment-grade ratings. Although the Company’s cash balance held with a U.S. bank may exceed the amount of federal insurance provided on such deposits, the Company has not experienced any losses in such accounts. The Company is exposed to credit risk in the event of a default by the financial institution holding its cash for the amount reflected on the condensed interim balance sheets.
Revenue recognition: The Company recognizes revenue from three sources: its subscription box sales, Amazon business, and online website sales. Revenue is gross billings net of promotional discounts, actual customer credits and refunds as well as customer credits and refunds expected to be issued, and sales tax. 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. Customers can receive a refund on returned merchandise for which return shipping is a cost to the Company.
Revenue for subscription box sales is recognized when control of the promised goods is transferred and accepted by the subscriber. Subscribers have a maximum of 10 days from the date the product is delivered to return any items in the delivery. Control is transferred either when a subscriber checks out or automatically 10 days after the goods are delivered, whichever occurs first. Upon checkout or the 10-day period, the amount of the order not returned is recognized as revenue. Payment is due upon checkout or the end of the 10-day period after the goods are delivered, whichever occurs first. Starting on August 24, 2021 and ending January 6, 2022, we charged new subscribers an up-front styling fee before the box is shipped that is credited toward items purchased. The styling fees are included in deferred revenue until the time of client checkout or when the option to purchase the item expires.
| F-6 |
Revenue from online website sales, which includes sales from our websites and Amazon online websites, are recognized when control of the promised goods are transferred to the Company’s customers, in an amount that depicts the consideration the Company expects to be entitled to in exchange for those goods. Control is transferred at the time of shipment. Upon shipment, the total amount of the order is recognized as revenue. Payment for online website sales is due at the time of order.
The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns.
Estimates of discretionary authorized returns for sales other than subscription sales, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected, but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly greater or lower than reserves established, a reduction or increase to net revenue would be recorded in the period in which such determination was made.
Shipping and handling costs associated with outbound freight fulfillment before control over a product has transferred to a customer are accounted for as a shipping and handling cost in the condensed interim statements of operations.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue producing transaction and are collected by the Company from a customer are excluded from revenue and cost of goods sold in the condensed interim statements of operations.
Restricted cash: Restricted cash balance consists of cash advances received by the Company from the cash advance agreement described in Note 9. The cash advances can only be used for purchases of products and marketing related services necessary to operate the Company, as defined by the agreement.
Inventory: Inventory, consisting primarily of finished goods, is valued at the lower of cost or net realizable value using the weighted average cost method. In addition, the Company capitalizes freight, duty and other supply chain costs in inventory. These costs are included in the cost of sales as inventory is sold.
Leasehold improvements and equipment: Leasehold improvements and equipment are recorded at cost. Depreciation for equipment is computed using the straight-line method over the estimated useful life of the assets ranging from three to five years. Leasehold improvements are amortized over the shorter of the term of the lease or the life of the improvement on a straight-line method. Expenditures that extend the useful lives of the equipment are capitalized. Expenditure for the repairs and maintenance are charged to expense as incurred. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in operations.
Impairment of long-lived assets: The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted pre-tax cash flows. If it is determined that impairment has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between the assets’ carrying value and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. As a result of its review, the Company does not believe that any material impairment currently exists related to its long-lived assets.
Deferred financing costs: Deferred financing costs, net of accumulated amortization, are reported as a direct deduction from the face amount of the line of credit to which such costs relate. Amortization of debt issuance costs is reported as a component of interest expenses and is computed using the straight-line method over the term of the agreement, which approximates the effective interest method.
| F-7 |
Income taxes: The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized with respect to the future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company applies U.S. GAAP accounting for uncertainty in income taxes. If the Company considers that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming the tax position is examined by the appropriate taxing authority that has full knowledge of relevant information.
The Company has no unrecognized tax benefits at October 1, 2022 and January 1, 2022. The Company’s federal, state and local income tax returns prior to fiscal years 2017 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
The Company recognizes interest and penalties associated with tax matters, if any, as part of operating expenses and includes accrued interest and penalties with accrued expenses in the condensed interim balance sheets.
Advertising
costs: Direct advertising and promotion costs are expensed as incurred. Advertising and promotion
expenses totaled $
Bad debt expense: Bad debt expense is recognized when a receivable is no longer collectible after a customer is unable to fulfill their obligation to pay an outstanding balance.
Equity-based compensation: We measure equity-based compensation expense associated with the awards granted based on their estimated fair values at the grant date. For awards with service condition only, equity-based compensation expense is recognized over the requisite service period using the straight-line method. The grant-date fair value of stock options is estimated using the Black-Scholes option pricing model. Forfeitures are recorded as they occur. See Note 16, Equity-based compensation, for additional details.
Segment information: The Company has one operating segment and one reportable segment as its chief operating decision maker, who is its Chief Executive Officer, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. All long-lived assets are located in the United States.
NOTE 3: LIQUIDITY
The
Company has sustained losses from operations since inception, negative operating cash flows and an accumulated deficit of $
To support the Company’s existing operations or any future expansion of business, including the ability to execute the Company’s growth strategy, the Company must have sufficient capital to continue to make investments and fund operations. Management has 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 management believes will be more successful at attracting new customers and members.
| F-8 |
The Company’s ability to continue its operations is dependent upon obtaining new financing for its ongoing operations and on the Company’s plans to reduce the inventory level. To manage operating cash flows in the near term, the Company plans to significantly reduce purchases of new inventory and if available, may enter into cash advance or other financing arrangement. Future financing options available to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or other strategic transactions to fund existing operations and execute management’s growth strategy. Equity financings may include sales of common stock. Such financing may not be available on terms favorable to the Company or at all. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders and may cause significant dilution to existing stockholders. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continued operations, if at all, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed financial statements are issued. The accompanying condensed interim financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
NOTE 4: INVENTORY
Inventory consists of the following:
| October 1, 2022 | January 1,2022 | |||||||
| (unaudited) | ||||||||
| Finished goods | $ | $ | ||||||
| Goods in transit | ||||||||
| Total | $ | $ | ||||||
NOTE 5: INTANGIBLE ASSETS
Intangible assets consist of the following:
| October 1, 2022 | January 1,2022 | |||||||
| (unaudited) | ||||||||
| Website development | $ | $ | ||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
There
was
NOTE 6: LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of the following:
| October 1, 2022 | January 1, 2022 | |||||||
| (unaudited) | ||||||||
| Computer equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Machinery and equipment | ||||||||
| Total cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Leasehold improvements and equipment, net | $ | $ | ||||||
Depreciation
expense amounted to $
Depreciation
expense amounted to $
| F-9 |
NOTE 7: LEASES
The Company adopted the ASC 842 guidance on January 2, 2022, using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following: an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease; an entity may elect not to reassess the lease classification for expired or existing leases; and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. The Company has elected not to utilize the hindsight expedient in determining the lease term, and to not record leases with an initial term of 12 months or less on our balance sheet. Additionally, the Company has elected to account for lease components and non-lease components as a single lease component for all asset classes. Lease expense is recognized over the expected term on a straight-line basis. The adoption did not have a material impact on the Company’s condensed interim statements of operations or cash flows.
The
Company entered into a sub-lease agreement for warehouse space from a related party on April 1, 2021. The Company pays
On
June 27, 2022, the Company together with a related party, entered into a new agreement to extend the lease agreement with a third party
for the office space. The Company will pay
The
discount rate used in the calculation of the lease liability ranged from
The amortization expense associated with
the operating lease right-of-use of assets as for the 13 and 39 weeks ended October 1, 2022, amounted to $
The table below includes the balances of operating lease right-of-use assets and operating lease liabilities as of October 1, 2022:
| October 1, 2022 | ||||
| Assets | ||||
| Operating lease right-of-use assets, net | $ | |||
| Liabilities | ||||
| Operating lease liabilities – current | $ | |||
| Operating lease liabilities – non-current | ||||
| Total Lease Liabilities | $ | |||
The maturities of our operating lease liabilities as of October 1, 2022, are as follows:
| Maturity of Operating Lease Liabilities | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| F-10 |
NOTE 8: RELATED PARTY TRANSACTIONS
In
the normal course of business, the Company made purchases from related parties for merchandise
and shared services which amounted to $
A
related party performs certain management services for the Company pursuant to a management services agreement. For these services, the
Company pays a monthly management fee equal to
In
addition, the Company is using a related party to run its Amazon Marketplace site. The consulting fees for this service amounted to $
The
Company entered into a new revocable monthly sub-lease agreement for office space from a related party on January 1, 2021. The Company
will pay
The
Company entered into a new sub-lease agreement for warehouse space from a related party on April 1, 2021. The Company will pay
As
of October 1, 2022 and January 1, 2022, there was $
See Note 11 for a description of short-term debt from affiliated entities under common control and from stockholders.
NOTE 9: ADVANCE PAYABLE
From time to time, we have been party to cash advance agreements with financial institutions whereby such institutions purchased receivables or advanced cash for us to purchase inventory or to pay marketing costs. Those include the following transactions:
On
February 1, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
March 10, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
March 10, 2021, the Company also entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
| F-11 |
On
May 7, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
June 4, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
June 4, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
July 9, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
August 10, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
On
August 10, 2021, the Company also entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the
financial institution purchased $
On
October 22, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
On
October 27, 2021, the Company entered into a cash advance agreement with a financial institution and was advanced cash totaling $
| F-12 |
On
November 2, 2021, the Company entered into a cash advance agreement with a financial institution. Pursuant to the agreement, the financial
institution purchased $
As
of October 1, 2022 and January 1, 2022, the cash advance outstanding, including interest, amounted to
NOTE 10: LOAN PAYABLE
As
a response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES
Act, to aid businesses through the current economic conditions. The CARES Act provided businesses with loans from the Small Business
Administration (“SBA”) based on a calculation provided by the SBA. In 2020, the Company received $
NOTE 11: SHORT-TERM DEBT
In
April and June 2021, the Company entered into various short-term, unsecured promissory notes with an affiliated entity under common control
in the amount of $
On June 28, 2021, the Company entered into four unsecured convertible promissory notes with stockholders in the aggregate amount of $. .
On August 13, 2021, the Company entered into two unsecured convertible promissory notes with stockholders in the aggregate amount of $. .
In
September, October and November 2021, the Company borrowed $ from a stockholder. The notes are unsecured, noninterest-bearing
and the principal was due on January 15, 2022, or was due at the rate of % of such note amount upon a sale of the Company (including
a change of % or more of the voting shares). On December 27, 2021, the Company paid $
| F-13 |
NOTE 12: LINE OF CREDIT
In
September 2017, the Company entered into a loan and security agreement with a lender for an initial term of
As
of October 1, 2022 and January 1, 2022, there was no outstanding advance amounts related to the line of credit. Interest expense amounted
to
As
of October 1, 2022 and January 1, 2022, deferred financing costs, net of accumulated amortization, totaled
NOTE 13: LONG-TERM DEBT
In
January, February, and March 2021, the Company entered into various unsecured convertible promissory notes with stockholders in the aggregate
amount of $
The computation of basic net loss per share is based on the weighted average number of common shares outstanding for the 13 and 39 weeks ended October 1, 2022 and October 2, 2021. Diluted net loss per share gives effect to stock options and restricted stock units using the treasury stock method, unless the impact is anti-dilutive. Diluted net loss per share for the 13 and 39 weeks ended October 1, 2022 does not include stock options to purchase shares of common stock and restricted stock units as their effect was anti-dilutive.
| For the 13 weeks ended | For the 39 weeks ended | |||||||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares – basic | ||||||||||||||||
| Dilutive effect of stock options and restricted stock units | ||||||||||||||||
| Weighted average shares – diluted | ||||||||||||||||
| Basic net loss per share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Diluted net loss per share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| F-14 |
NOTE 15: STOCKHOLDERS’ EQUITY
On May 10, 2021, the Company filed an amended and restated Certificate of Incorporation which authorized shares of Common Stock having a par value of $ per share and shares of Preferred Stock having a par value of $ per share. All shares of Common Stock shall be of the same class and have equal rights, powers and privileges. The Preferred Stock may be issued from time to time in one or more series and each issued series may have full or limited designations, preferences, participating, special rights and limitation as adopted by the Board of Directors. In conjunction with this amendment, the Company completed a forward split of existing Common Stock whereby each one share of Common Stock was automatically split up and converted into shares of Common Stock. The condensed interim statements of changes in stockholders’ equity were restated to retroactively incorporate this stock split.
On
May 11, 2021, the Company converted stockholder notes in the amount of $
On
May 11, 2021, the Company entered into an investment agreement with related parties. Pursuant to the investment agreement, the related
parties purchased shares of common stock for $
Also
on May 11, 2021, the Company entered into an investment agreement with an investment firm owned by a related party. Pursuant to the investment
agreement, the firm purchased shares of common stock for $
The Investment Agreement provided preemptive rights for converting note holders, for so long as they hold not less than 5% of the Company’s outstanding common stock, to acquire additional shares of common stock to maintain their then current percentage ownership in the Company, on the same terms offered to any other party which triggered such preemptive rights, subject to certain exceptions, and drag-along rights (providing for rights to be dragged along in any transaction relating to the sale of a majority of the Company’s outstanding shares or assets, or certain similar transactions, on the same terms, and subject to the same conditions, as other sellers). The agreement also provided anti-dilution rights such that if the Company, after the date of the closing of the transactions contemplated by the Conversion Agreement, issued shares of common stock, or common stock equivalents (options, warrants or convertible securities), if the price per share is less than the conversion price of the converted notes, then we are required to issue additional shares of common stock equal to the difference between the number of shares issued to each purchaser in such anti-dilutive transaction and the aggregate amount of each converted note, divided by such lower dilutive price.
On
May 12, 2021, the Company and each then stockholder of the Company, other than one minority stockholder holding shares or
On May 9, 2021, the Board of Directors and majority stockholders adopted an Equity Incentive Plan which provides an opportunity for any employee, officer, director or consultant of the Company to receive incentive stock options, nonqualified stock options, restricted stock, stock awards, shares in performance of services or any combination of the foregoing.
On September 30, 2021, the Board of Directors and majority stockholders of the Company amended and restated its 2021 Equity Incentive Plan (as amended and restated, the “2021 Plan”). The 2021 Plan provides for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Internal Revenue Code, to our employees, and for the grant of non-statutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards (RSU awards), performance awards and other forms of awards to our employees, directors and consultants and any of our affiliates’ employees and consultants. A total of shares of the Company’s common stock were initially reserved for issuance under the 2021 Plan.
| F-15 |
On November 10, 2021, prior to the pricing of the IPO, the Company granted (a) options to purchase an aggregate of shares of our common stock at an exercise price of $per share, to certain employees and consultants of the Company in consideration for services rendered and to be rendered through May 2024; (b) restricted stock units, to certain executive officers; and (c) restricted stock units to a board of director member. Such options and restricted stock units vested 1/3 on May 15, 2022 (six months from the closing of the Company’s IPO); and continue to vest (to the extent not forfeited) (i) 1/3 on May 15, 2023 (18 months from the closing of the IPO); and (ii) 1/3 on May 15, 2024 (30 months from the closing date of the IPO). The options each have a term of . On May 15, 2022, restricted stock units were vested of which common stocks were issued and were forfeited and cancelled to settle tax liability on the vested shares.
In determining the fair value of the stock-based awards, we used the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment. Expected Term – The expected term represents the period that our stock options are expected to be outstanding and is determined using the simplified method (generally calculated as the mid-point between the vesting date and the end of the contractual term). Expected Volatility – The expected volatility was estimated based on the average volatility for publicly traded companies that we considered comparable, over a period equal to the expected term of the stock option grants. Risk-Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury zero coupon notes in effect at the time of grant for periods corresponding with the expected term of the option. Expected Dividend – We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock; therefore, we use an expected dividend yield of zero.
The fair value of each option we issued on November 10, 2021 was $. The weighted average assumptions used included a risk-free interest rate of %, an expected stock price volatility factor of % and a dividend rate of %. The fair value of each restricted stock unit (“RSU”) we issued on November 10, 2021 was $.
Number of Options | Weighted Average Exercise Price | |||||||
| Balance as of January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Repurchased | ( | ) | ||||||
| Balance as of October 1, 2022 | $ | |||||||