KIDPIK CORP. The following discussion should be read in conjunction with our audited financial statements and related notes thereto included at the end of this Annual Report. 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. 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 in the section titled "Risk Factors" included under Part I, Item 1A and elsewhere in this Annual Report. See also "Cautionary Note Regarding Forward-Looking Statements", above. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report. 55 The following discussion is based upon our financial statements included elsewhere in this Annual 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, realization of deferred tax asset, 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. The Company uses a 52-53-week fiscal year ending on the Saturday nearest toDecember 31 each year. The years endedDecember 31, 2022 andJanuary 1, 2022 were 52- and 52-week years, respectively. These years are referred to herein as "2022" and "2021", 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. Introduction
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
? Overview.
? Key Performance Indicators.
? Factors Affecting Our Future Performance.
? Components of Results of Operations.
? Results of Operations.
? Liquidity and Capital Resources.
? Critical Accounting Estimates.
Overview We began operations in 2016 as a subscription-based e-commerce company on the proposition of making shopping easy, convenient, and accessible for parents by delivering fashionable and customized kids' outfits in a box.Kidpik provides kids clothing subscription boxes for boys and girls (sizes 12M-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. 56 Staying ahead in an emerging industry requires constant innovation in products and services. After launching with our girls' subscription boxes for sizes 4-14 in 2016, we have continued to expand our product offering and marketing channels. We expanded into boys' clothing, added larger sizes for boys and girls (up to 16 for apparel and 6 youth for shoes), in the Spring of 2022, added toddler sizes down to 2T & 3T for apparel and 7 & 8 toddler shoes, and launched shop.kidpik.com, where we sell individual apparel items and shoes, curated outfits, pre-styled boxes and our 2 for basics. We also recently introduced sizes 12 months and 18 months apparel to our offerings. We have expanded our distribution by selling our branded products on Amazon.com, as Fulfilled by Amazon and Fulfilled by Merchant for pre-packs and individual items. During the fourth quarter of 2022 we started selling our branded products onWalmart.com as Fulfilled by Merchant.
We also introduced an "add-on" option for all members, whereby they can add additional items of their choosing to their next subscription box order. We plan to broaden the assortment of add-on items offered in an effort to increase the average box transaction size and gross margin. We have recently expanded our subscription box offerings, introducing a 12-item box option in addition to our traditional 8-item box, adding to the customer experience and providing an opportunity to drive additional revenue. We have also expanded our seasonal pre-styled fashion box and outfit assortment available on our e-commerce website, which provides an upsell opportunity for active members and additional variety for our e-commerce customers.
Currently, we provide e-commerce services throughout the 48 contiguous
We have expanded our offerings with the introduction of husky/plus and slim sizes to our assortment and launched a limited-edition NASA selection during the third quarter of 2022. We will continue to analyze the marketplace for interest in new products and may further invest in expanding our current lines. We have added new channels to our paid advertising strategy, includingTikTok , Tap Joy and new affiliate partnerships, with the goal of increasing new member growth. In addition, we have focused on other revenue share marketing opportunities, such as continuing to scale our influencer ambassador program, and launched a consumer-facing brand ambassador program. We are also pursuing new awareness strategies, such as cross-promotional opportunities with children's companies with brand synergies. InNovember 2021 , the Company completed an initial public offering (the "IPO"), in which the Company issued and sold 2,117,647 shares of its authorized common stock for$8.50 per share for net proceeds of$16.1 million , after deducting underwriting discounts and commissions, and offering costs. Key Performance Indicators Key performance indicators that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions include gross margin, shipped items, and average shipment keep rate, each described in greater detail below.
We also use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business:
Gross Margin
For the Years Ended
December 31, 2022 January 1, 2022
Gross margin 59.9 % 59.5 %
57
Gross profit is equal to our net sales less cost of goods sold. Gross profit as
a percentage of our net sales is referred to as gross margin. Cost of sales
consists of the purchase price of merchandise sold to customers and includes
import duties and other taxes, freight in, returns from customers, inventory
write-offs, and other miscellaneous shrinkage.
Adjusted EBITDA
In addition to our results calculated under generally accepted accounting
principles in the United States ("U.S. GAAP"), and to provide investors with
additional information regarding our financial results, we have disclosed in the
table below and elsewhere in this Report, Adjusted EBITDA, a non-U.S. GAAP
financial measure that we calculate as net loss before other expense, net,
interest, taxes, depreciation and amortization, adjusted to exclude the effects
of equity-based compensation expense, and certain non-routine items. We have
provided below a reconciliation of Adjusted EBITDA to net loss, the most
directly comparable U.S. GAAP financial measure.
We have included Adjusted EBITDA in this report because it is a key measure used
by our management and board of directors to evaluate our operating performance,
generate future operating plans and make strategic decisions regarding the
allocation of capital. In particular, the exclusion of certain expenses in
calculating Adjusted EBITDA facilitates operating performance comparisons on a
period-to-period basis and, in the case of exclusion of the impact of
equity-based compensation, excludes an item that we do not consider to be
indicative of our core operating performance. Accordingly, we believe that
Adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our
management and board of directors.
Adjusted EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under
? Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
? Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
? Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
? Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
? Adjusted EBITDA does not reflect certain non-routine items that may represent a reduction in cash available to us; and
? Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
loss and our other
Our financial results include certain items that we consider non-routine and not reflective of the underlying trends in our core business operations. Non-routine items in 2022 primarily related to settlement of insurance claim related to business interruption of damaged inventory and in 2021 primarily related to the forgiveness of a loan by theU.S. Small Business Association . Although we believe this income to be non-routine in nature, we cannot guarantee that this type of income will not be incurred again in the future. 58
A reconciliation of net loss to Adjusted EBITDA is as follows:
For the 52 weeks ended
December 31, 2022 January 1, 2022
Net loss $ (7,615,261 ) $ (5,947,547 )
Add (deduct)
Interest expense 78,646 711,974
Other income (286,794 ) (429,045 )
Provision for income taxes - 1,332
Depreciation and amortization 27,914 26,914
Equity-based compensation 1,651,048 328,515
Adjusted EBITDA $ (6,144,447 ) $ (5,307,857 )
Shipped Items
We define shipped items as the total number of items shipped in a given period
to our customers through our active subscription, 3rd party websites sales and
kidpik's online website sales.
For the Years Ended
(In thousands)
December 31, 2022 January 1, 2022
Shipped Items 1,457 2,157
We believe the decrease in subscription shipments for fiscal 2022 versus 2021,
as shown in the table above, was primarily driven by a decrease in subscription
boxes sales as a result of a lower number of new customers being acquired during
2022, in comparison to 2021.
Average Shipment Keep Rate
For the Years Ended
December 31, 2022 January 1, 2022
Average Shipment Keep Rate 68.3 % 69.0 %
Average shipment keep rate is calculated as the total number of items kept by our customers divided by total number of shipped items in a given period. Average shipment keep rate was fairly constant for fiscal 2022 and 2021.
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 titled "Risk Factors."
Overall Economic Trends The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending on our sites, while economic weakness, which generally results in a reduction of customer spending, may have a more pronounced negative effect on spending on our sites. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, high inflation, as is being currently experienced, business conditions, changes in the housing market, the availability of credit, increases in interest rates and fuel, energy costs raw material costs, and supply chain challenges. In addition, during periods of low unemployment, we generally experience higher labor costs. The COVID-19 pandemic has also had and may continue to have a materially adverse impact on the macroeconomic environment inthe United States and other markets. We are continuing to navigate the uncertainties presented by the current macroeconomic environment and remain focused on improving the conversion of new members and our overall client experience. 59
Growth in Brand Awareness and Site Visits
We intend to continue investing in our brand marketing efforts. Since 2016, we have made significant investments to strengthen the "kidpik" brand through expansion of our social media presence. If we fail to cost-effectively promote our brand or convert impressions into new customers, our net sales growth and profitability would be adversely affected.
Acquisition of New Subscriptions
Our ability to attract new subscriptions through marketing and the development of our brand is a key factor for our future growth. If we are unable to acquire sufficient new subscriptions in the future, our revenue might continue to decline. New subscriptions could be negatively impacted if our marketing efforts are less effective in the future. Increases in advertising rates could also negatively impact our ability to acquire new subscriptions cost effectively. Consumer tastes, preferences, and sentiment for our brand may also change and result in decreased demand for our products and services. Laws and regulations relating to privacy, data protection, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices and procedures. Social networks are important as a source of new clients and as a means by which to connect with current clients, and their importance may be increasing. We may be unable to effectively maintain a presence within these networks, which could lead to lower than anticipated brand affinity and awareness, and in turn could adversely affect our operating results. Further, mobile operating system and web browser providers, such as Apple and
Retention of Existing Subscribers
Our ability to retain subscribers is also a key factor in our ability to generate revenue growth. Most of our current subscribers purchase products through subscription-based plans, where subscribers are billed and sent products on a recurring basis. The recurring nature of this revenue provides us with a certain amount of predictability for future revenue. If customer behavior changes, and customer retention decreases in the future, then future revenue will be negatively impacted. Inventory Management To ensure sufficient availability of merchandise, we generally enter into purchase orders well in advance and frequently before apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. We incur inventory write-offs and changes in inventory reserves that impact our gross margins. Because our merchandise assortment directly correlates to client success, we may at times optimize our inventory to prioritize long-term client success over short-term gross margin impact. Moreover, our inventory investments will fluctuate with the needs of our business. For example, entering new categories or adding new fulfillment centers will require additional investments in inventory. Investments in Growth We expect to continue to focus on long-term growth through investments in product offerings and the kids and parent experience. We expect to make significant investments in marketing to acquire new subscribers and customers. Additionally, we intend to continue to invest in our fulfillment and operating capabilities. In the short term, we expect these investments to increase our operating expenses in the future and cannot be certain that these efforts will grow our customer base or be cost-effective; however, in the long term, we anticipate that these investments will positively impact our results of operations. 60
Components of Results of Operations
Note that our classification of the various items making up cost of goods sold, shipping and handling, payroll and related costs, equity-based compensation and general and administrative costs may vary from other companies in our industry, and as such, may not be comparable to a competitor's. Revenue We generate revenue in two categories: 1) the sale items in our subscription boxes, and 2) the sale of one-time purchases via shop.kidpik.com, and other marketplaces. We refer to these revenue classifications 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. Customers who 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 merchandise to our customers, and back to us, as well as the cost of fulfillment and return processing, and the materials used for packing.
Payroll and Related Expenses
Payroll and related expenses represent employee salaries, taxes, benefits and fees to our payroll provider.
General and Administrative Expenses
General and administrative expenses consist primarily of marketing, professional fees, 3rd party seller fees, rent, bad debt expense and credit card fees, among others.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation expense for leasehold improvements and equipment.
Interest Expense
Interest expense consists primarily of interest expense associated with our lines of credit, outstanding notes payable, and amortization of deferred expense related to our line of credit.
61 Other Non-Operating Income
Other non-operating income in fiscal year 2022 mainly related to settlement of insurance claim related to business interruption of damaged inventory. Other non-operating income in fiscal year 2021 relates to the forgiveness of a prior Paycheck Protection Program Loan. Provision for Income Taxes
Our provision for income taxes consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation allowance of our net federal and state deferred tax assets.
Results of Operations RESULTS OF OPERATIONS
Year ended
FYE 2022 FYE 2021 Change ($) Change (%)
Revenue, net $ 16,477,984 $ 21,834,518 $ (5,356,534 ) (24.5 )%Cost of goods sold 6,600,007 8,836,884 (2,236,877 )
(25.3 )% Gross profit$ 9,877,977 $ 12,997,634 $ (3,119,657 ) (24.0 )%
Revenue in the fiscal year 2022 decreased by
Gross margin for the fiscal year 2022, increased by 40 basis points compared with the fiscal year 2021. The increase was primarily attributable to an increase in sales price per item sold offset by an increase in inventory charges for transportation costs.
We expanded our assortment during the fiscal year 2022, to include sizes 12 months and 18 months apparel, expanded our subscription box offerings, with a 12-piece box option as well as introduced a limited offering of the husky/plus and slim sizes, and started selling our branded products onWalmart.com , during the fourth quarter of 2022. In fiscal year 2021, we launched our toddler collection in the first quarter of 2021, introducing sizes 2T and 3T apparel sizes, and added size 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. Revenue Our revenue for the year endedDecember 31, 2022 , decreased by 24.5% to$16,477,984 , compared to$21,834,518 for the year endedJanuary 1, 2022 , a decrease of$5,356,534 from the prior period. The revenue breakdown by sales channel for the fiscal year 2022 and 2021, is summarized in the table below: FYE 2022 FYE 2021 Change ($) Change (%) Revenue by channel Subscription boxes$ 12,861,293 $ 18,427,057 $ (5,565,764 ) (30.2 )% 3rd party websites sales 2,170,858 2,622,884 (452,026 ) (17.2 )% Online website sales 1,445,833 784,577 661,256 84.3 % Total revenue$ 16,477,984 $ 21,834,518 $ (5,356,534 ) (24.5 )% 62 The revenue from subscription boxes for the years endedDecember 31, 2022 andJanuary 1, 2022 , was generated from active subscriptions recurring boxes and new subscriptions first box revenue, is summarized in the tables below: FYE 2022 FYE 2021 Change ($) Change (%) Subscription boxes revenue from Active subscriptions - recurring boxes$ 11,007,517 $ 15,565,533 $ (4,558,016 ) (29.3 )% New subscriptions - first box 1,853,776 2,861,524 (1,007,748 ) (35.2 )% Total Subscription boxes revenue$ 12,861,293 $ 18,427,057 $ (5,565,764 ) (30.2 )% The decrease in revenue was primarily driven by a decrease in our subscription box sales, as a result of a lower number of new customers being acquired during fiscal year 2022 in comparison to fiscal year 2021, mainly due to the ongoing effects of Apple's iOS privacy changes. The revenue breakdown by product line for the year endedDecember 31, 2022 , compared to the year endedJanuary 1, 2022 , is summarized in the tables below: FYE 2022 FYE 2021 Change ($) Change (%) Revenue by product line Girls' apparel$ 12,211,914 $ 16,663,366 $ (4,451,452 ) (26.7 )% Boys' apparel 3,437,117 4,352,523 (915,406 ) (21.0 )% Toddlers' apparel 828,953 818,629 10,324 1.3 % Total revenue$ 16,477,984 $ 21,834,518 $ (5,356,534 ) (24.5 )% The number of items shipped to our customers decreased by 32.4%, from approximately 2,157,000 for the fiscal year 2021, to approximately 1,457,000 for the fiscal year 2022, for the same reasons discussed above. The average shipment keep rate was relatively flat at 68.3% in the fiscal year 2022, compared to 69.0% in the fiscal year 2021. During the fiscal year 2022, we experienced a decline in net revenue year-over-year. The decrease in revenue was primarily driven by a decrease in our subscription box sales, as a result of a lower number of new customers being acquired during fiscal year 2022 in comparison to fiscal year 2021, mainly due to the ongoing effects of Apple's iOS privacy changes. We also believe that revenue for 2022 was negatively affected by changing consumer spending habits impacted by worsening economic conditions, including increases in inflation and interest rates and declines in market activity. Cost of Goods Sold
Cost of goods sold decreased by
Gross Profit and Gross Profit as a Percentage of Revenue
Our gross profit was$9.9 million for the year endedDecember 31, 2022 , compared to gross profit of$13.0 million for the year endedJanuary 1, 2022 . The decrease in gross profit for the fiscal year 2022, compared to the fiscal year 2021, was primarily attributable to the decrease in our subscription box sales for the same reasons discussed above. 63
Our gross profit as a percentage of revenue was 59.9% for the year ended
Operating Expenses
FYE 2022 FYE 2021 Change ($) Change (%)
Expenses
Shipping and handling $ 4,334,928 $ 6,087,283 $ (1,752,355 ) (28.8 )%
Payroll and, related costs
and equity-based
compensation 5,276,719 4,258,604 1,018,115 23.9 %
General and administrative 8,061,825 8,288,117 (226,292 ) (2.7 )%
Depreciation and
amortization 27,914 26,916 998 3.7 %
Total expenses $ 17,701,386 $ 18,660,920 $ (959,534 ) (5.1 )%
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 fiscal year 2022 decreased by
$959,534 or 5.1% to $17,701,386 , compared to $18,660,920 for the fiscal year
2021. This decrease was mainly a result of (i) a decrease in shipping and
handling expenses of $1,752,355 , which was due to lower subscription box sales,
for the same reasons discussed above; our shipping and handling expenses were
26.3% of total revenue in the fiscal year 2022, compared to 27.9% of total
revenue in fiscal year 2021, and (ii) a decrease of $226,292 or 2.7% in general
and administrative expenses, mainly due to an decrease in third-party seller and
credit card fees due to the decrease in sales, offset by an increase in
insurance costs; within selling, general and administrative expenses, our
marketing expense as a percentage of revenue increased by 4.2% of revenue for
the 2022 fiscal year to 18.6% compared to 14.4% in the fiscal year 2021, as we
experienced weaker-than-expected conversion of new costumers mainly due to the
ongoing effects of Apple's iOS privacy changes; offset by (i) an increase in
payroll and, related costs and equity-based compensation of $1,080,115 , mainly
due to non-cash, equity-based compensation of $1,651,048 recorded in the fiscal
year 2022 compared to $328,515 in the fiscal year 2021, offset by a lower
headcount and reduction in healthcare insurance cost during fiscal year 2022
compared to fiscal year 2021; our payroll and, related costs and equity-based
compensation were 32.0% of total revenue in the fiscal year 2022, compared to
19.5% of total revenue in fiscal year 2021.
Loss from Operations
Loss from operations increased to $7,823,409 for the year ended December 31,
2022 , compared to $5,663,286 for the year ended January 1, 2022 . The increase in
loss from operations was largely due to a decrease in revenues as discussed
above.
Other (Income)/Expenses
FYE 2022 FYE 2021 Change ($) Change (%)
Other expenses
Interest expense $ 78,646 $ 711,974 $ (633,328 ) (89.0 )%
Other (income)/expense (286,794 ) (429,045 ) 142,251 (33.2 )%
Total other (income)/expenses $ (208,148 ) $ 282,929 $ (483,077 ) (173.6 )%
Other (income)/expenses for the years ended December 31, 2022 and January 1,
2022 changed by $491,077 due to a reduction of interest expense by $633,328 and
a decrease of other income by $150,251 . The other income in fiscal year 2022 was
mainly related to settlement of insurance claim related to business interruption
of damaged inventory. The other income in fiscal year 2021 related to
forgiveness of the paycheck protection loan. Interest expense as a percentage of
revenue decreased by 2.8% from 3.3% of sales to 0.5% of revenue.
64
Provision for Income Taxes
FYE 2022 FYE 2021 Change ($) Change (%)
Loss before income taxes $ (7,615,261 ) $ (5,946,215 ) $ 1,669,046 28.1 %
Provision for income taxes - 1,332 (1,332 ) n/a
Net loss $ (7,615,261 ) $ (5,947,547 ) $ 1,667,714 28.0 %
We had a nominal provision for income taxes during the year ended
Net Loss We had a net loss of$7,615,261 for the year endedDecember 31, 2022 , compared to a net loss of$5,947,547 for the year endedJanuary 1, 2022 , an increase of$1,667,714 or 28.0%. The increase in net loss was mainly due to decrease in revenues for fiscal year 2022 and an increase in non-cash equity-based compensation of$1,322,533 ; offset by a decrease in shipping and handling and interest expenses, each as discussed in greater detail above.
LIQUIDITY AND CAPITAL RESOURCES
December 31,
2022 January 1, 2022 Change ($) Change (%)
Cash and restricted cash $ 605,213 $ 8,420,500 $ (7,815,287 ) (92.8 )%
Working capital $ 8,273,601 $ 14,700,691 $
(6,427,090 ) (43.7 )%
Short-term debt, related party
(6.8 )%
On
As of
As ofDecember 31, 2022 , we had total current liabilities of$6,337,123 , consisting mainly of accounts payable of$2,153,389 , and related party payables of$1,107,665 (owed toNina Footwear ), accrued expenses of$587,112 , current portion of operating lease liabilities of$438,957 and short-term debt from related party of$2,050,000 (discussed below). From inception throughNovember 10, 2021 , we mainly relied on equity and loans fromEzra Dabah , our Chief Executive Officer and Chairman, and his family (which loans have all, other than$2,200,000 , been converted into equity as ofMay 11, 2021 ), notes payable including fromNina Footwear Corp. which is 86.36% owned byEzra Dabah and his family, includingMoshe Dabah , for which entityEzra Dabah serves as Chief Executive Officer and member of the Board of Directors of "Nina Footwear", a related party, and a line of credit (repaid as ofJanuary 1, 2022 ), and Cash Advance Agreements (each discussed below), as well as revenue generated through our operations, to support our operations since inception. We have primarily used our available cash to pay operating expenses (salaries and other expenses), and for merchandise inventory costs, shipping costs and marketing expenditures. We do not have any material commitments for capital expenditures. Following the closing of the IPO inNovember 2021 , we also relied on the funds raised in the IPO to support our operations. 65 We have experienced recurring net losses since inception and negative operating cash flows. We believe that we will continue to incur substantial operating expenses in the foreseeable future as we continue to invest to attract new customers, expand the product offerings and enhance technology and infrastructure. These efforts may prove more expensive than we anticipate, and we may not succeed in increasing the net revenue and margins sufficiently to offset these expenses. Accordingly, we may not be able to achieve profitability, and we may incur significant losses for the foreseeable future. To support our existing operations or any future expansion of business, including the ability to execute our growth strategy, we must have sufficient capital to continue to make investments and fund operations. We have plans to pursue a growth strategy for the expansion of operations through increased marketing to attract new members and refine the marketing strategy to strategically prioritize customer acquisition channels that we believe will be more successful at attracting new customers and members. We plan to launch new divisions and product lines to help attract new members and retain existing members. We expect to continue to generate net losses for the foreseeable future as we make investments to grow our business. 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 arrangements. 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 and may cause significant dilution to existing stockholders. The terms of any financing may adversely affect the holdings or rights of the Company's 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 financial statements are issued. The accompanying annual 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. OnMarch 22, 2023 , we received written notice (the "Notification Letter") from the Listing Qualifications Department ofThe Nasdaq Stock Market LLC ("Nasdaq") notifying the Company that it is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of$1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of thirty (30) consecutive business days. Based on the closing bid price of the Company's common stock for the thirty (30) consecutive business days fromFebruary 7, 2023 toMarch 21, 2023 , the Company no longer meets the minimum bid price requirement. The Notification Letter does not impact the Company's listing of its common stock on the Nasdaq Capital Market at this time. The Notification Letter states that the Company has 180 calendar days or untilSeptember 18, 2023 , to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the bid price of the Company's common stock must have a closing bid price of at least$1.00 per share for a minimum of 10 consecutive business days. If the Company does not regain compliance bySeptember 18, 2023 , an additional 180 days may be granted to regain compliance, so long as the Company meetsThe Nasdaq Capital Market initial listing criteria (except for the bid price requirement) and notifies Nasdaq in writing of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company does not qualify for the second compliance period, fails to regain compliance during the second 180-day period, or if it appears to Nasdaq that the Company will not be able to cure the deficiency, the Company's common stock will be subject to delisting, at which point the Company would have an opportunity to appeal the delisting determination to aHearings Panel .
We intends to monitor the closing bid price of its common stock and may, if appropriate, consider implementing available options to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules.
Cash Flows
Year ended
December 31, Year ended
2022 January 1, 2022
Cash provided by (used in):
Operating activities $ (6,650,537 ) $ (11,015,868 )
Investing activities (48,903 ) (45,394 )
Financing activities (1,115,847 ) 18,796,466Net (decrease)/increase in cash$ (7,815,287 ) $
7,735,204
Net cash used in operating activities decreased to$6,650,537 for the year endedDecember 31, 2022 , compared to$11,015,868 for the year endedJanuary 1, 2022 . The decrease in our cash used in operating activities of approximately$4.4 million was primarily due to a decrease in operating assets and liabilities in the amount of approximately$4.5 million , offset by an increase in net loss in the amount of approximately$1.8 million adjusted for the non-cash items totaling$1.3 million and the forgiveness in loan payable of approximately$0.4 million , as discussed in greater detail above. Net cash used in investing activities during the year endedDecember 31, 2022 was$48,903 , which was related to purchases of equipment, compared to$45,394 during the year endedJanuary 1, 2022 , which was related to purchases of equipment. Net cash used in financing activities was$1,115,847 for the year endedDecember 31, 2022 , mainly related to repayment of advances payable of$0.9 million and repayment from loan payable related party of$0.2 million , compared to net cash provided by financing activities of$18,796,466 for the year endedJanuary 1, 2022 , mainly as a result of funds raised in the IPO, net of offering costs,
of$16.1 million . 66 Line of Credit OnSeptember 5, 2017 , we entered into a Loan and Security Agreement (as amended, the "Loan Agreement") withCrossroads Financial Group, LLC ("Crossroads"), which is described in greater detail under "Note 11: Line of Credit" to our financial statements included at the end of this Annual Report on Form 10-K. OnNovember 15, 2021 , we paid off the loan and security agreement in the amount of$3,200,000 and related outstanding interest and facility fee in the amount of$24,498 , with funds raised through the IPO.
Interest expense on the line of credit amounted to zero and
Deferred financing cost, net of accumulated amortization, totaled zero for the years endedDecember 31, 2022 andJanuary 1, 2022 . Amortization of these costs amounted to zero and$58,397 for the years endedDecember 31, 2022 andJanuary 1, 2022 , respectively. Cash Advance Agreements From time to time, we have been party to cash advance agreements with financial institutions whereby such institutions purchased receivables or advanced cash for us to purchase inventory, which are described in greater detail under "Note 8: Advance Payable" to our financial statements included in this Annual Report on Form 10-K.
During the second quarter of 2022, the Company satisfied its obligations under
the
As ofDecember 31, 2022 andJanuary 1, 2022 , the cash advance outstanding, including interest, amounted to zero and$932,155 , respectively. For the fiscal years 2022 and 2021, interest expense related to the advances totaled zero
and$81,193 , respectively. SBA Loan As a response to the COVID-19 pandemic,Congress passed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") to aid businesses through the current economic conditions. The CARES Act provided businesses with loans from theSmall Business Administration ("SBA") based on a calculation provided by the SBA. In the fiscal year 2020, the Company received$442,352 in funding from these loans. The CARES Act provides a provision allowing all or a portion of the loan to be forgiven by the SBA based on certain criteria. Any unforgiven portion will be repaid over a two-year period with a 10-month deferral on payments yielding 1% interest. The Company applied for forgiveness and onAugust 2, 2021 , we received notification and confirmation that our loan, including related accrued interest, was forgiven in its entirety by the SBA. The forgiveness amount was recorded in other income.
Related Party Convertible Notes and Loans
In January, February, andMarch 2021 , the Company entered into various unsecured convertible promissory notes with stockholders in the aggregate amount of$2,000,000 . Each of the convertible notes were payable onJanuary 15, 2022 and were automatically convertible into shares of the Company's common stock at a conversion price equal to the per share price of the next equity funding completed by the Company in an amount of at least$2,000,000 and required the repayment of 110% of such convertible note amount upon a sale of the Company (including a change of 50% or more of the voting shares). InMay 2021 , prior to the maturity, the notes in the amount of$2,000,000 were converted to equity. In April andJune 2021 , the Company entered into various short-term, unsecured promissory notes with an affiliated entity under common control in the amount of$400,000 . The notes are noninterest-bearing and due onDecember 31, 2021 . OnNovember 16, 2021 , the Company paid in full the outstanding loan amounts of
$400,000 . 67 OnJune 28, 2021 , the Company entered into four unsecured convertible promissory notes with stockholders in the aggregate amount of$100,000 . Each of the convertible notes were payable onJanuary 15, 2022 and were automatically convertible into shares of the Company's common stock at a conversion price equal to the per share price of the next equity funding completed by the Company in an amount of at least$2,000,000 and required the repayment of 110% of such convertible note amount upon a sale of the Company (including a change of 50% or more of the voting shares). OnAugust 25, 2021 , the parties agreed to amend the previously convertible notes to remove the conversion rights provided for therein and clarify that no interest accrues on the convertible notes. OnDecember 27, 2021 , the Company paid in full the outstanding loan amounts of$100,000 . OnAugust 13, 2021 , the Company entered into two unsecured convertible promissory notes with stockholders in the aggregate amount of$200,000 . Each of the convertible notes were payable onJanuary 15, 2022 and were automatically convertible into shares of the Company's common stock at a conversion price equal to the per share price of the next equity funding completed by the Company in an amount of at least$2,000,000 and requires the repayment of 110% of such convertible note amount upon a sale of the Company (including a change of 50% or more of the voting shares). OnAugust 25, 2021 , the parties agreed to amend the previously convertible notes to remove the conversion rights provided for therein and clarify that no interest accrues on the convertible notes. OnMarch 31, 2022 , and effective onJanuary 15, 2022 , the parties amended the notes
to be payable on demand.
In September, October andNovember 2021 , the Company borrowed an aggregate of$2,500,000 fromEzra Dabah , who is our Chief Executive Officer and Chairman. The notes are unsecured, noninterest-bearing and the principal is fully due onJanuary 15, 2022 , at the rate of 110% of such note amount upon a sale of the Company (including a change of 50% or more of the voting shares). OnDecember 27, 2021 , the Company paid$500,000 of the outstanding loan amounts. OnMarch 31, 2022 , and effective onJanuary 15, 2022 , the parties amended the notes to be payable on demand. OnJune 2, 2022 , Company paid$150,000 of the outstanding loan amounts.
As of
Need for Future Funding 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 may enter into cash advance or other financing arrangements. 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 financial statements are issued. The accompanying 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. 68
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Estimates
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America 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.
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 aU.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 balance sheets. A majority of the cash balances are withU.S. banks and are insured to the extent defined by theFederal Deposit Insurance Corporation ("FDIC"). Net loss per common share: The Company complies with the accounting and disclosure requirements ofFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") Topic 260, Earnings Per Share. Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Revenue recognition: The Company recognizes revenue from three sources; its subscription box sales, 3rd party websites sales and kidpik's 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 pre-paid delivery bag. Control is transferred either when a subscriber checks out or automatically ten 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 onAugust 24, 2021 and endingJanuary 6, 2022 , we charged new subscribers an upfront 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. Revenue from online website sales, which includes sales from our and 3rd party's websites (including Amazon and Walmart), 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 upon 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. 69
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 statement 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 statement of operations.
Restricted cash: Restricted cash balance consists of cash advanced received by the Company from the cash advance agreement described in Note 8 to the audited financial statements included at the end of this Annual Report. The cash advances can only be used for purchases of products and 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. 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 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 appliesU.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. 70 The Company has no unrecognized tax benefits atDecember 31, 2022 andJanuary 1, 2022 . The Company's federal, state and local income tax returns prior to fiscal years 2018 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 balance sheet.
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 15, Equity-based compensation" to our audited financial statements included in this Annual Report on Form 10-K, 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 inthe United States .
JOBS Act and Recent Accounting Pronouncements
The JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act. We have implemented all new accounting pronouncements that are in effect and may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
Recent Accounting Pronouncements
Refer to "Note 2: Summary of Significant Accounting Policies" to our audited financial statements included in this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements not yet adopted.
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