UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended May 1, 2021

OR

For the transition period from _______ to __________

Commission File Number—001-32217

 

Simply, Inc.

(Exact name of registrant as specified in its charter)

 

2001 NW 84^th Avenue, Miami, FL 33122

(Address of principal executive offices including zip code)

(786) 254-6709

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒     No   ☐

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 was required to submit such files).    Yes   ☒     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐     No   ☒

As of June 15, 2021, the Registrant had 11,718,790 shares outstanding of its $0.001 par value common stock.

 

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Simply, Inc.

FORM 10-Q

For the 13 weeks ended May 1, 2021

Table of Contents

 

 

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Simply, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Amounts in thousands, except per share data)

(unaudited)

 

 

Accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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Simply, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

Accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Simply, Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

(Amounts in thousands)

(unaudited)

 

 

 

Accompanying notes are an integral part of these condensed consolidated financial statements.

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Simply, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(unaudited)

 

 

Accompanying notes are an integral part of these condensed consolidated financial statements.

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Simply, Inc.

Notes to Condensed Consolidated Financial Statements

May 1, 2021

(unaudited)

 

 

NOTE 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and these condensed notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from those estimates, but management does not believe such differences will materially affect the financial position or results of operations of Simply, Inc. (the “Company”), although they may. These unaudited consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes as of and for the 52 weeks ended January 30, 2021 included in the Company’s Annual Report on Form 10‑K for such year.

In early 2020, the Company sold both of its international subsidiaries in Latin America (see Note 17).  On January 31, 2020, the Company sold all of its ownership interest in OneClick Argentino S.R.L., the Company’s subsidiary that operated 6 retail electronics stores in Argentina.  On April 6, 2020, the Company sold all of its ownership interest in Verablue Caribbean Group, S.R.L. (“Verablue”), the Company’s subsidiary that operated 7 retail electronics stores in in the Dominican Republic.  Both entities have been classified as discontinued operations in the Company’s consolidated financial statements for all periods presented.

During March 2020, the Company restructured substantially all of its then outstanding debt of $16.4 million.  After the restructuring, the Company’s outstanding debt was reduced by $14.6 million through a combination of debt forgiveness and conversion into common stock, leaving $1.8 million outstanding with extended maturity dates.

Effective October 14, 2020, the Company changed its legal name from “Cool Holdings, Inc.” to “Simply, Inc.” and effected a one-for-ten reverse split of its issued and outstanding common stock.  All share and per share numbers in this report have been retroactively restated to account for the reverse split.  

The Company has determined that, under its current business structure, its management makes operating decisions and assesses performance of its business as a single segment.  The Company previously operated its Cooltech Distribution unit during the 13 weeks ended May 2, 2020, but it was completely phased out by August 1, 2020 and its operating results during the period were immaterial.

The Company’s fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January.  The Company’s consolidated financial statements include assets, liabilities and operating results of its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to fairly present the Company’s financial condition as of May 1, 2021, and the results of operations, financial position and cash flows for all periods presented. The results reported in these condensed consolidated financial statements for the 13 weeks ended May 1, 2021 are not necessarily indicative of the operating results, financial condition or cash flows that may be expected for the full year of Fiscal 2022 or for any future period. 

 

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NOTE 2. Going Concern Considerations

In accordance with the guidance issued by the Financial Accounting Standards Board (“FASB”) under ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, the Company is required to evaluate each reporting period whether there is substantial doubt about its ability to continue as a going concern.  In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements are issued. Management considered the Company’s current financial condition and liquidity sources, including current funds and available working capital, forecasted future cash flows and the Company’s conditional and unconditional obligations due within one year from the date of issuance of the financial statements.  Because the Company has sustained significant losses over the past two years, only recently completed the restructuring of its debt, and because of the uncertainty of the near term implications of the novel coronavirus (“COVID-19”) pandemic on its business, management has substantial doubt that the Company could remain independent and continue as a going concern for the required period of time if it were not able to raise additional capital to fund its working capital needs. These consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.

 

 

NOTE 3. Discontinued Operations

During the fourth quarter of 2018, the Company completed the closure of its verykool business segment.  Also, as discussed in Note 17, the Company sold OneClick Argentino, its business unit in Argentina, and Verablue Caribbean Group, its business unit in the Dominican Republic, which resulted in a loss on sale of $136,000 in the 13 weeks ended May 2, 2020.  Consequently, these business units, plus OneClick International, the wholly owned parent of the two business units, are also reported as discontinued operations in our consolidated financial statements for all periods presented.  There were no results of discontinued operations for the 13 weeks ended May 1, 2021.

The results of discontinued operations for the 13 weeks ended May 2, 2020 are as follows (in thousands):

 

 

 

NOTE 4. Stock-Based Compensation

The Company’s 2015 Equity Incentive Plan (the “Plan”) was approved by stockholders in June 2015. The Plan is an omnibus plan that allows for grants of stock options, stock appreciation rights, stock awards, restricted stock, stock units and performance units.  As of May 1, 2021, options to purchase 855,000 shares and 3,000 unvested restricted shares were outstanding under the 2015 Plan and 1,081,000 shares were available for future grant.

 

During the 13-week period ended May 2, 2020, the Company made grants of unregistered shares to advisors associated with the March 2020 debt restructuring in the aggregate amount of 300,000 shares, and a corresponding reduction of warrants on 300,000 shares previously issued to the advisors.  On a combined basis, the shares issued were valued at $216,000, and the warrant reductions were valued at $89,000, resulting in a net compensation expense of $127,000.  Additional expense for restricted shares vesting during the period amounted to $24,000, bringing total stock-based compensation to $151,000.

No grants of options or shares were made during the 13-week period ended May 1, 2021.  Stock-based compensation expense for the period for vesting of stock options and restricted stock amounted to $37,000.

A summary of option activity under the 2015 Plan as of May 1, 2021 and changes during the 13 weeks then ended are presented in the table below (shares in thousands):

 

 

 

NOTE 5. Earnings Per Share

Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued as determined by using the treasury stock method. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of convertible preferred stock, stock options and warrants.

Common shares from the potential exercise of certain options and warrants are excluded from the computation of diluted earnings (loss) per share if their exercise prices are greater than the Company’s average stock price for the period.  For both the 13‑week periods ended May 1, 2021 and May 2, 2020, the number of such shares excluded was  2,113,000.  For the 13-week period ended May 2, 2020, the dilutive effect of in-the-money warrants amounted to 19,000 shares.  For the 13-week period ended May 1, 2021, the number of in-the-money options and preferred shares excluded from the computation of net loss per share amounted to 857,000.  

 

 

NOTE 6. Income Taxes

The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with applicable standards of the FASB. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions, and there has been no cumulative effect on retained deficit.

The Company is subject to U.S. federal income tax as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years 2016 through 2020 remain open to examination or re-examination. As of May 2, 2021, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

The Company recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the Company’s financial position or results of operations.

 

 

NOTE 7. Inventory

Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists primarily of consumer electronics and accessories. The Company writes down its inventory to net realizable value when it is estimated to be slow-moving or obsolete. There were no inventory write-downs for the 13 weeks ended May 1, 2021.  For the 13 weeks ended May 2, 2020, inventory write-downs amounted to $47,000.

 

 

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NOTE 8. Property and Equipment

Property and equipment, all located in the United States, consisted of the following as of the dates presented (in thousands): 

 

 

Depreciation and amortization expense of property and equipment for the 13 weeks ended May 1, 2021 and May 2, 2020 was $153,000 and $145,000, respectively.  

 

 

NOTE 9. Intangible Asset and Goodwill

The Company’s goodwill and definite-lived intangible asset arose primarily from the acquisition of Simply Mac on September 25, 2019.  The intangible asset is comprised of the Simply Mac tradename, that is being amortized over 15 years, and the simplyinc.com domain name, that is being amortized over 5 years.  The carrying value of the intangible assets consisted of the following as of the dates presented (in thousands):

 

 

Amortization expense for the 13 weeks ended May 1, 2021 and May 2, 2020 was $35,000 and $35,000, respectively.  

The carrying amount of goodwill at January 30, 2021 and May 1, 2021 amounted to $699,000.  The Company performs an impairment test of goodwill on an annual basis during the fourth quarter, and performs an impairment test of goodwill, intangibles and other long-lived assets when circumstances indicate that the carrying value of these assets might be impaired.  No impairment charges were recorded for the 13 weeks ended May 1, 2021 and May 2, 2020.

 

 

NOTE 10. Accrued Expenses

Accrued expenses consisted of the following as of the dates presented (in thousands):

 

 

 

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NOTE 11. Notes Payable

Notes payable consisted of the following as of the dates presented (in thousands):

 

 

On September 25, 2019, in connection with the acquisition of Simply Mac, the Company issued a $7,858,000 secured promissory note to GameStop.  The note bore interest at a rate equal to 12% per annum and called for the Company to make four equal installment payments of $1,965,000, plus accrued interest, on each 3-month anniversary of the note.  The note was secured by, among other things, the Simply Mac inventory and accounts receivable.  The first installment payment was due on December 25, 2019, but the Company was unable to make the payment.  Consequently, at December 31, 2019, the note was in default, and GameStop provided the Company with an official Notice of Default on January 15, 2020.  On March 11, 2020, the Company and GameStop entered into an agreement to amend and restate the promissory note.  The amended promissory note reduced the principal balance of the note from $7,858,000 to $1,250,000, reduced the interest rate to 6% per annum and extended the maturity date to February 17, 2024.  Additionally, the amended note released all prior security and collateral under the original note and is unsecured.  The parties also entered into a Termination Agreement, whereby the Company agreed to pay GameStop an aggregate amount of $335,152, payable in twelve equal monthly installments of $27,929 with the first installment due April 30, 2020, in satisfaction of certain post-closing amounts owed to GameStop under the Stock Purchase Agreement and certain agreements related thereto, less amounts owed to the Company from GameStop under the Stock Purchase Agreement relating to the post-closing working capital adjustment thereunder.  The Company also made a onetime cash payment of $250,000 to GameStop and released to GameStop $345,000 of funds held in escrow in connection with the Simply Mac acquisition.  As a result of these agreements, the Company recorded a gain of $6,961,000 on the extinguishment of debt.  All installment payments were fully made by the Company on a timely basis.

 

On April 16, 2020, the Company secured a $3,098,000, 2-year loan from a regional bank (the “Lender”) pursuant to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) under Title I of the Coronavirus Aid, Relief, and Economic Security Act passed by Congress and signed into law on March 27, 2020 (“CARES Act”).  The note bears interest at 1.0% per annum and no payments were due for the first six months.  In accordance with the applicable provisions of the CARES Act, on October 19, 2020, the Company filed its forgiveness application (the “Application”) with the Lender.  The Company certified in the Application that 100% of the loaned funds were utilized during the 24-week covered period commencing April 16, 2020 to pay for qualified payroll and payroll related costs, and as such, requested that the entire principal balance be forgiven.  The Application has been approved by the lender, and the Company is awaiting SBA approval and funding to extinguish the loan. 

On March 10, 2021, the Company secured a second-draw, $2,000,000, 1.0%, 5-year loan from the Lender pursuant to the PPP.  No payments are due on this loan until the earlier of: (a) the date on which the amount of loan forgiveness determined under the CARES Act is remitted to the Lender by the SBA, (b) the date that the SBA advises Lender that all or part of the loan has not been forgiven, provided that the Company has applied for forgiveness within 10 months of the end of the forgiveness period of the loan or (c) if the Borrower fails to apply for forgiveness by the end of the forgiveness period, a date that is not earlier than the date that is 10 months after the last day of the forgiveness period.  The forgiveness period is defined as the period beginning on March 12, 2021 (the “Disbursement Date”), and ending on any date selected by the Company that is no earlier than the date 8 weeks from the Disbursement Date and no later than the date 24 weeks from the Disbursement Date.  In the event any amounts remain unforgiven after this deferral period, the Company will be required to make equal monthly payments to fully amortize the balance by March 10, 2026.

Interest expense for notes payable for the 13 weeks ended May 1, 2021 and May 2, 2020 was $29,000 and $256,000, respectively.      

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Derivative Liability: As discussed in Note 13, during March 2020 the Company completed a debt restructuring that resulted in the conversion of then outstanding convertible notes and warrants into common stock.  Because the conversion features and warrants did not have fixed conversion or exercise prices, they were recorded as derivative liabilities.  The derivative liabilities were marked-to-market at March 31, 2020, the date the underlying notes were exchanged.  The exchange resulted in a decrease in value of $543,000 at March 31, 2020 that was recorded as other income for the 13 weeks ended May 2, 2020.

NOTE 12. Notes Payable to Related Party

On January 21, 2021, the Company’s Simply Mac subsidiary issued a $400,000 unsecured short-term promissory note to Taylor Capital LLC that was outstanding at January 30, 2021.  The note was scheduled to mature, and become due and payable in full, on April 21, 2021 together with a one-time fee of $20,000 plus accrued interest at the rate of 18% per annum compounded monthly.  Taylor Capital is wholly owned by Kevin Taylor, the chairman of the Company’s Board of Directors.  In March 2021, the note and all accrued interest and fees were repaid in advance of its maturity.  Interest expense on the note for the 13 weeks ended May 2, 2021 was $9,000.

NOTE 13. Capital Stock 

During March 2020, the Company completed the exchange of two outstanding convertible notes with a principal amount of $434,000 and related accrued interest of $8,000 into 86,800 shares of common stock at $5.10 per share in accordance with exchange agreements entered into in October 2019.  The value of the stock issued in the exchange was $35,000, and the Company recorded a gain on extinguishment of debt of $204,000.

Also during March 2020, the Company entered into an additional debt restructuring that resulted in the conversion of debt with an aggregate principal amount of $7,492,000 and accrued interest of $691,000 into common stock of the Company.  The carrying value of the debt and related derivative liability at the time of extinguishment amounted to $8,341,000.  The aggregate total of $8,183,000 was converted into 4,814,000 shares of common stock at $1.70 per share.  The combined value of the stock issued in the conversion was $1,869,000, and the Company recorded a gain on extinguishment of debt of $6,472,000.  The restructuring also included the settlement of other outstanding claims, that resulted in the issuance of an additional 1,068,000 common shares, of which 1,040,000 shares were attributable to a royalty claim in connection with the September 2019 acquisition of Simply Mac.  The $415,000 value of the 1,040,000 shares was recorded as an accrued liability at December 31, 2019.

On October 14, 2020, the Company executed a 1-for-10 reverse stock split and issued 2,000 shares of common stock in lieu of fractional shares.  All references to shares and per-share amounts have been restated to give effect to this reverse split.  

During April 2021, holders of warrants on 246,672 shares of the Company’s common stock exercised the warrants at the strike price of $0.50 per share, which resulted in aggregate cash proceeds to the Company of $124,000

 

NOTE 14. Recent Accounting Pronouncements

Recently Adopted:

 In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new standard on January 1, 2020, which adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. ASU 2018-13 removes the following disclosure requirements: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and (ii) the entity’s valuation processes for Level 3 fair value measurements. ASU 2018-13 adds the following disclosure requirements: (i) provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future, (ii) disclose changes in unrealized gains and losses related to Level 3 measurements for the period included in other comprehensive income, and (iii) disclose for Level 3 measurements the range and weighted average of the significant unobservable inputs and the way it is calculated. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the

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new standard on January 1, 2020, which adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.

Other Accounting Standards Updates not effective until after May 1, 2021 are not expected to have a material effect on the Company’s financial position or results of operations.

 

 

 

NOTE 15. Commitments and Contingencies

Leases:

The Company leases its retail stores, distribution center and corporate and administrative office facilities under operating lease agreements which expire through June 2027. Stores range in size from small stores of only 1,000 sq.ft. to larger stores of up to 5,200 sq.ft.  Store leases typically provide for an initial lease term of three to five years, while certain leases have terms of up to seven years. Certain leases have provisions calling for percentage rent, in addition to base rent, once sales exceed a minimum threshold.  However, the Company believes that the minimum thresholds in such leases exceed the level of sales expected to be generated by the stores during the term of the lease.  Certain leases also contain renewal options, but such options are not recognized by the Company as part of its right-of-use assets or lease liabilities because the Company does not believe it is reasonably certain it will exercise such options, due to the uncertainty of future store financial performance or the ability of the property to generate sufficient customer traffic.  Operating lease expense for the 13 weeks ended May 1, 2021 and May 2, 2020 was $1,176,000 and $1,253,000, respectively.  

Supplemental lease information as of May 1, 2021 is as follows ($ in thousands):

 

 

As of May 1, 2021, maturities of lease liabilities are as follows (in thousands):

 

Security Agreement:

On October 2, 2020, the Company entered into a security agreement with its primary inventory supplier of Apple products that are sold in the Company’s Simply Mac retail electronics stores and on the Simply Mac eCommerce site.  Under the agreement, the Company granted the supplier a security interest in collateral comprised of substantially all of the Company’s assets including inventory, accounts receivable, fixed assets and other items.  In exchange for entering into the agreement, the supplier increased the Company’s line of credit from $3 million to $6.6 million.  At May 1, 2021 and January 30, 2021, the Company’s outstanding payable with this vendor amounted to $6,933,000 and $6,016,000, respectively.

 

Litigation:

The Company has in the past and may in the future become involved in certain legal proceedings and claims which arise in the normal course of business.  As of the filing date of this report, the Company did not have any significant litigation outstanding.

 

 

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NOTE 16. Fair Value of Financial Instruments

The Company measures its financial instruments in its financial statements at fair value or amounts that approximate fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure.”  ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels are described below: 

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;

 

Level 2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;

 

Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.

The Company seeks to measure fair value based upon the lowest level of available input in the fair value hierarchy.  When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters. If market observable inputs for model-based valuation techniques are not available, the Company makes judgments about assumptions market participants would use in estimating the fair value of the financial instrument.

Carrying values of the Company’s short-term notes payable approximate their fair values due to the short-term nature and liquidity of these financial instruments.  The Company estimates that the fair value of its notes payable approximates its carrying value based on significant level 2 observable inputs.

In connection with the issuance by the Company during 2019 of certain convertible notes and warrants, as well as the conversion of certain notes into common stock and warrants, the conversion features and warrants were deemed to qualify as derivatives to be separately accounted for in accordance with ASC 815.  The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods presented (in thousands):

 

NOTE 17.  Sale of Latin American Subsidiaries

On January 31, 2020, the Company entered into a definitive agreement with two employees of the Company to sell all of its ownership interest in OneClick Argentino S.R.L., the Company’s subsidiary that operated 6 retail electronics stores in Argentina.  The purchase price to the buyers was the assumption of all liabilities of the Argentinian subsidiary, including $321,000 of debt owed to two major distribution suppliers.  OneClick Argentino S.R.L. has been classified as a discontinued operation in the Company’s consolidated financial statements for all periods presented.

On April 6, 2020, the Company entered into a definitive agreement with an employee of the Company to sell all of its ownership interest in Verablue Caribbean Group, S.R.L. (“Verablue”), the Company’s subsidiary that operated 7 retail electronics stores in in the Dominican Republic.  The buyers assumed all liabilities of Verablue, and agreed to pay the Company $100,000 in additional consideration, evidenced by a 6-month installment promissory note.  Verablue has been classified as a discontinued operation in the Company’s consolidated financial statements for all periods presented.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements, Safe Harbor Statement and Other General Information

This discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and condensed notes thereto and other information included in this report and our Annual Report on Form 10-K for the fiscal year ended January 30, 2021, filed with the SEC on April 30, 2021 (including our audited consolidated financial statements for the fiscal year ended January 30, 2021 and the transition period from January 1, 2020 to February 1, 2020, and related notes thereto and other information)(“2021 Annual Report”). Our discussion and analysis of financial condition and results of operations are based upon, among other things, our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to, among other things, make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent liabilities as of the date of our most recent balance sheet, and the reported amounts of revenues and expenses during the reporting periods. We review our estimates and assumptions on an ongoing basis. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from these estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they may. Our critical accounting policies, which we believe are the most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined in “Critical Accounting Policies” in our 2021 Annual Report, as may be updated in our subsequent Quarterly Reports on Form 10-Q. All references to results of operations in this discussion generally are related to results from continuing operations, unless otherwise noted.

This report contains “forward-looking statements,” including, without limitation, statements about trading of our securities on the Over-the-Counter market, sales levels, cost reductions, operating efficiencies, currency-related matters, profitability and adequacy of working capital, which are based on, among other things, current management knowledge and expectations and involve certain risks and uncertainties. These risks and uncertainties, in whole or in part, could cause expectations to fail to be achieved and could have a material adverse effect on our business, financial condition and results of operations, and include, without limitation: (1) the potential impact on our store operations as a result of the COVID-19 pandemic including mandated store closings, limited customer traffic, etc.; (2) our ability to have access to adequate capital to fund both operations and our expansion plans and to service or refinance our remaining outstanding debt; (3) a deterioration in our relationship with Apple that could negatively affect both our supply of products and our ability to conduct business as a licensee; (4) an interruption or failure of our information systems or subversion of access or other system controls, including private information, may result in a significant loss of business, assets, or competitive information; (5) significant changes in supplier terms and relationships or shortages in product supply; (6) rapid product improvement and technological change resulting in inventory obsolescence; (7) the loss of a key executive officer or other key employees and the integration of new employees; (8) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; and (9) the resolution of any litigation for or against the Company. These forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new or changing information, events or circumstances after the date of this release. We continue to institute changes to our strategies, operations and processes to address risks and uncertainties and to mitigate their impacts on our business, results of operations and financial condition. However, no assurances can be given that we will be successful in these efforts. For a further discussion of significant risk factors to consider, see “Risk Factors” below in this report and in “Item 1A. Risk Factors” in our 2021 Annual Report. In addition, other risks or uncertainties may be detailed from time to time in our future SEC filings.

Business Overview and Strategy

Currently, our business is comprised of 46 Simply Mac retail consumer electronics stores in 16 states across the U.S. authorized under the Apple^® Premier Partner program. In our retail stores, we market and distribute a variety of mobility, computing, audio/video, and other technology products supplied primarily by Apple including laptops, tablets, cell phones, drones, smart watches, gaming consoles, accessories and audio devices.  Simply Mac also sells products online through its eCommerce site.

We work with Apple to develop our network of Simply Mac stores in locations and markets where Apple has limited or no presence.  In our stores, we sell Apple and other third-party products and accessories.  We also provide repair service for Apple products using our Apple-certified repair technicians.  Retail customers may book a repair appointment at one of our Simply Mac stores either through our website or through the Apple website.

Our current strategy is to focus on refining and improving the profitability of our Simply Mac retail stores in North America and on expanding the number of stores.  We expect this expansion will come primarily from organic growth through the opening of new stores, but may also include selected acquisitions.  We currently rank as the largest Apple Premier Partner in North America.

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Results of Operations

The table below sets forth our condensed consolidated statements of operations for the 13 weeks ended May 1, 2021 and May 2, 2020, and the change between the periods ($ in thousands).  

 

 

 

The following table sets forth our condensed consolidated statements of operations as a percentage of net sales for the 13 weeks ended May 1, 2021 and May 2, 2020:

 

 

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13 weeks ended May 1, 2021 compared to the 13 weeks ended May 2, 2020

Net Sales

For the 13 weeks ended May 1, 2021, our net sales amounted to $18,018,000, an increase of $4,075,000, or 29%, from $13,943,000 in the 13 weeks ended May 2, 2020.  The principal reason for the increase was that sales in the prior year period were depressed as a result of the COVID-19 pandemic.  At the outset of the 13 weeks ended May 2, 2020, all 45 of our retail stores were open.  However, in mid-March, the COVID-19 pandemic resulted in the closure of 12 stores.  In addition, at the remaining locations which stayed open, we cut back store hours from 7 days per week and up to 11 hours per day, to 5 days per week and only 8 hours per day so we could run the stores on a single shift.  In many locations, our business was deemed to be “essential” as we provide products and repair services for adults working remotely and students attending school virtually.  We were not able to begin reopening stores or expanding hours until May 4, 2020, subsequent to the period end.  In addition, we believe COVID-19 adversely impacted our supply chain, resulting in severe shortages of Apple products that depressed sales both in our retail stores and on our eCommerce website.

In the 13 weeks ended May 1, 2021, although all our stores were open during the entire period, customer traffic in the stores was still significantly depressed compared to customer traffic prior to the COVID-19 outbreak.  The supply chain issues experienced during 2020 were mostly resolved.  In comparison to the prior year period, sales in our stores rose almost 25% and eCommerce sales rose 63%.

Gross Profit and Gross Margin

For the 13 weeks ended May 1, 2021, our gross profit amounted to $4,595,000, an increase of $100,000, or 2%, from $4,495,000 in the 13 weeks ended May 2, 2020.  Our gross profit margin for the 13 weeks ended May 1, 2021 was 25.5%, compared to 32.2% in the 13 weeks ended May 2, 2020.  The reduced gross margin percentage resulted primarily from the following: (1) reduced sales pricing required to match the competition, (2) a higher mix of eCommerce sales because gross margins on eCommerce sales are typically about 70% lower than margins on in-store sales, and (3) a loss sustained on the bulk sale of discontinued and end-of-life inventory.  

Operating Expenses

For the 13 weeks ended May 1, 2021, total operating expenses amounted to $6,836,000, a decrease of $290,000, or 4%, from $7,126,000 in the 13 weeks ended May 2, 2020.  The decrease in operating expenses is comprised of a $675,000 decrease in management and corporate expenses, partially offset by a $375,000 increase in store level expenses.  The decrease in corporate expenses is comprised of reduced legal fees, audit fees and stock-based compensation.  The increase in store level expenses is comprised of increased payroll, systems and marketing expenses, partially offset by reduced rent expense.

Other Income (Expense)

Interest expense for the 13 weeks ended May 1, 2021 amounted to $39,000, a significant decrease of $885,000, or 96%, compared to $924,000 in the 13 weeks ended May 2, 2020.  The decrease is attributable to the restructuring and elimination of a substantial portion of the Company’s outstanding debt during March 2020.  In the 13 weeks ended May 2, 2020, we also recorded a $543,000 gain from the decrease in value of financial derivatives that arose in connection with the issuance of convertible debt and warrants.  In the 13 weeks ended May 2, 2020, we also recorded a $13,642,000 gain on extinguishment of debt that resulted from the debt restructuring.  In the 13 weeks ended May 1, 2021, other income of $649,000 was comprised primarily of an insurance recovery.

Provision for Income Taxes

The provision for income taxes of $21,000 recorded for the 13 weeks ended May 1, 2021 represents minimum taxes assessed in states where the Simply Mac stores are located.

Liquidity and Capital Resources

Our first quarter is seasonally our slowest quarter of the fiscal year, and is challenging from a liquidity perspective.  Although we had hoped that the effects of the COVID-19 pandemic would be behind us, we were disappointed that customer traffic in our stores during the 13 weeks ended May 1, 2021 was still significantly below non-pandemic levels.  We were pleased to receive a $2.0 million second-round PPP2 loan on March 10, 2021, and are examining ways to increase store traffic and reduce operating expenses in the event customer traffic continues to be depressed.  At May 1, 2021, we had negative stockholders’ equity of $4.3 million.  We expect stockholders’ equity to benefit in the near future from the complete forgiveness of our $3.1 million PPP1 loan, and ultimately from forgiveness of our $2.0 million PPP2 loan.  

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Our near-term plans to achieve bottom line profitability on a consolidated basis are based on a combination of reducing occupancy costs in our stores to take advantage of reduced lease rates owing to the COVID-19 pandemic and smaller stores, as well as expanding the number of Simply Mac stores in the chain.  We believe we can organically expand our store base with minimal capital expenditures using tenant improvement allowances provided by landlords.  However, we will require additional working capital to supply the new stores with inventory.  We do not currently have a bank line of credit, and are reliant on our primary distribution partners to provide us with open credit lines.  Our ability to execute our strategy depends upon our future operating performance and on the availability of vendor credit, equity and debt financing, all of which may be affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot predict whether additional liquidity will be available on acceptable terms, or at all, in the foreseeable future.

Operating Activities

Net cash used by continuing operating activities during the 13 weeks ended May 1, 2021 amounted to $470,000 compared to $1,020,000 for the 13 weeks ended May 2, 2020.  The $550,000 decrease in cash used was due primarily to a $918,000 reduction of operating losses during the current period compared to the prior year period, partially offset by a reduction in working capital during the current period that was $368,000 less than the prior year period.

Investing Activities

During the 13 weeks ended May 1, 2021, purchases of property and equipment amounted to $470,000, that related primarily to tenant improvements, fixtures and equipment needed to outfit newly opened stores during the period.  Purchases of fixed assets during the 13 weeks ended May 2, 2020 were nominal.

Financing Activities

During the 13 weeks ended May 1, 2021, net cash provided by financing activities amounted to $1,723,000.  We received proceeds of $2,000,000 from a 2^nd round COVID-19 PPP2 loan and $123,000 from warrant exercises.  We used $400,000 in cash to pay down a promissory note payable to a related party.  During the 13 weeks ended May 2, 2020, net cash provided by financing activities amounted to $2,848,000.  We received proceeds of $3,098,000 from our 1^st round COVID-19 PPP1 loan and used $250,000 in cash to pay down a promissory note.  

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

 

 

 

 

Item 4. Controls and Procedures

Disclosure Controls

An evaluation was performed pursuant to Rule 13a-15(b) of Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this quarterly report. These disclosure controls and procedures are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our 13-week period ended May 1, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company has in the past and may in the future become involved in certain legal proceedings and claims which arise in the normal course of business.  As of the filing date of this report, the Company did not have any significant litigation outstanding.

Item 1A. Risk Factors

In addition to the risk factors included below and other information set forth in this report, you should carefully consider the factors discussed in “Part I. Item 1A. Risk Factors” in, as well as other sections of, our 2021 Annual Report, which factors and information could materially affect our business, financial condition or operating results. The risk factors and uncertainties described in our 2021 Annual Report on Form 10-K, and in this report are not the only risks and uncertainties facing our business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition or operating results. Except as set forth below, we do not believe there have been material changes to the risk factors included in our 2021 Annual Report.

Risks Related To Our Business

We sustained significant operating losses in the last two years. If we are unable to achieve sustained profitability, our business may not be financially viable.

For the fiscal years ended January 30, 2021 and December 31, 2019, we reported operating losses of $8.8 million and $13.2 million, respectively. As of May 1, 2021, our balance of cash and restricted cash was $3.6 million, but we had negative net working capital of $7.3 million.  In addition, at May 1, 2021, our total liabilities exceeded our total assets and we had an accumulated stockholders’ deficit of $4.3 million.  While we restructured most of our debt in March 2020, reported $4.3 million in net income in fiscal 2021, and have plans designed to attain and maintain profitability, if we do not succeed, our business might continue to experience losses and may not be sustainable in the future.  Consequently, as discussed in Note 2 to our consolidated financial statements, we have substantial doubt that we could remain independent and continue as a going concern if we are not able to raise additional capital and achieve positive cash flows from operations.

The coronavirus outbreak has had, and may continue to have, a material adverse impact on our business, liquidity, financial condition and results of operations.

In March 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak a pandemic which spread throughout North America and worldwide. The health and safety of our customers and employees remain our top priority as we continue to make decisions during this rapidly evolving situation. We have taken decisive actions across our businesses to help protect employees, customers and others in the communities we serve. Beginning March 18, 2020, we were forced to close 12 of our 44 Simply Mac stores, primarily due to forced closures by mall operators where our stores were located.  Although our remaining stores were allowed to stay open under local or state definitions of “essential businesses” providing products and repair services enabling remote workforces and student education, sales at those stores were significantly curtailed.  We imposed store directives including cleanliness and mask requirements, as well as maximum customer limitations to facilitate social distancing.  Store and eCommerce sales were also negatively impacted by intermittent shortages in the supply chain of Apple products from our primary distributor.  As a consequence of all these conditions, we took immediate action to reduce our store operations from 7 days per week to 5 days and from 11 hours per day to 8 hours.  In concert with this action, we were forced to reduce our store workforce by approximately 50%.

Starting in May 2020, we gradually began reopening stores, and by December 2020 all of our stores were open.  Store hours were also gradually increased, but remain stunted compared to pre-COVID-19 operations.  Customer traffic in our stores also remains depressed compared to 2019 levels, and Apple supply chain shortages remain an issue on certain Apple products.  The COVID-19 outbreak and resulting store closures and limited operations had a material adverse impact on our business, liquidity, financial condition, and results of operations, and continue to negatively affect us.

On April 16, 2020, we secured a $3.1 million, 2-year loan from a regional bank pursuant to the U.S. Small Business Administration Paycheck Protection Program under Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by Congress and signed into law on March 27, 2020.  On October 19, 2020, we filed our application for forgiveness of this loan and certified that 100% of the loaned funds were used to pay for qualified payroll and related costs.  The forgiveness application has been approved by the lender, and we are awaiting SBA approval and funding to extinguish the loan.  On January 20, 2021, we filed an application for an additional $2 million dollar loan pursuant to the PPP Second Draw Program, which application was approved on March 10, 2021.  It is unclear whether this additional funding will be adequate to support our operations or if we will need to seek additional funding in the future.  In addition, we cannot foresee whether the outbreak of COVID‑19 will be effectively contained, nor can we predict the severity and duration of its impact. As such, the ultimate impact of the pandemic to our businesses remains highly uncertain and we continue to monitor its financial impact.

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Our business is highly dependent on a single supplier and a loss of that supplier or a deterioration of our relationship with them could significantly reduce our sales and profitability and jeopardize our business model.

Our business is highly dependent upon Apple as a supplier of Apple products that are sold in our Simply Mac stores.  In addition, the growth of our business is highly dependent upon our relationship with Apple in providing us with the approvals necessary to open new stores in the future.  Apple has very strict performance standards and guidelines that we must achieve and adhere to in order to be successful and continue to receive their support.  Consequently, any deterioration of our performance or failure to adhere to their guidelines could jeopardize our strategy and adversely affect our financial performance.

We depend on the timely delivery of new and innovative products from our vendors.

We depend on manufacturers, primarily Apple, to deliver our products in quantities sufficient to meet customer demand. In addition, we depend on these manufacturers to introduce new and innovative products to drive industry sales. Any material delay in the introduction or delivery, or limited allocations, of our products could result in reduced sales.

If our vendors fail to provide marketing and merchandising support at historical levels, our sales and earnings could be negatively impacted.

The manufacturers of our products have typically provided retailers with significant marketing and merchandising support for their products. As part of this support, we receive cooperative advertising and market development payments from our vendors, which enables us to actively promote and merchandise the products we sell and drive sales at our stores and on our websites. We cannot assure you that vendors will continue to provide this support at historical levels. If they fail to do so, our business and results of operations may be negatively impacted.

We have made and may make investments and acquisitions which could negatively impact our business if we fail to successfully complete and integrate them, or if they fail to perform in accordance with our expectations.

To enhance our efforts to grow and compete, we have made and may again make acquisitions.  Our plans to pursue future transactions are subject to our ability to identify potential candidates and negotiate favorable terms for these transactions. Accordingly, we cannot make assurances that future investments or acquisitions will be completed. In addition, to facilitate future transactions, we may take actions that could dilute the equity interests of our stockholders, increase our debt, or cause us to assume contingent liabilities, all of which may have a detrimental effect on the price of our common stock. Also, companies that we have acquired, and that we may acquire in the future, could have products that are in development, and there is no assurance that these products will be successfully developed. Finally, if any acquisitions are not successfully integrated with our business, or fail to perform in accordance with our expectations, our ongoing operations could be adversely affected.

Failure to effectively manage our new store openings could lower our sales and profitability.

Our sales and profitability depend in part upon opening new stores and operating them profitably. Our ability to open new stores and operate them profitably depends on a number of factors, some of which may be beyond our control. These factors include the ability to:

If we fail to manage new store openings in a timely and cost-efficient manner, our growth or profits may decrease.

If we are unable to renew or enter into new leases on favorable terms, our revenue may be adversely affected.

All of our retail stores are located on leased premises. If the cost of leasing existing stores increases, we cannot assure that we will be able to maintain our existing store locations as leases expire. In addition, we may not be able to enter into new leases on favorable terms or at all, or we may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner. Our revenues and earnings may decline if we fail to maintain existing store locations, enter into new leases, locate alternative sites, or find additional sites for new store expansion

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If our management information systems fail to perform or are inadequate, our ability to manage our business could be disrupted.

We rely on computerized inventory and management systems to coordinate and manage the activities in our distribution center, point-of-sales systems to manage retail operations in our stores, and accounting systems to manage our finance activities. We rely upon these systems to replenish our store inventories on a weekly basis to keep them stocked at optimum levels and to manage our business finances and timely report our financial results.  Our systems are subject to damage or interruption from power outages, telecommunications failures, cyber-attacks, security breaches, and catastrophic events. If our inventory or management information systems fail to adequately perform their functions, our business could be adversely affected. In addition, if operations in any of our distribution centers were to shut down or be disrupted or if these centers were unable to accommodate stores in a particular region, our business and results of operations may be negatively impacted. With regard to our accounting systems, we intend to upgrade portions of our current system, and any failure in those systems could negatively impact our ability to timely report our financial results.

If we are unable to safeguard against security breaches with respect to our information technology systems, our business and our reputation may be adversely affected.  

During the course of business, we receive, process, transmit and store confidential customer, employee, vendor and Company information through our information technology systems and those of our third-party payment processors. The protection of this information is critical, and the regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. Although we have implemented systems and procedures (including credit card encryption between terminals and payment processors, Advance Malware Protection built into firewalls, POS stations on separate VLANS, and encrypted could hosted storage) that are designed to protect customer, employee, vendor and Company information, prevent data loss and other security breaches, and otherwise identify, assess, and analyze cybersecurity risks, these measures may not be effective.  Cyber-security risks such as malicious software and attempts to gain unauthorized access to data are rapidly evolving and becoming increasingly more sophisticated. Techniques or software used to gain unauthorized access, and/or disable, degrade or harm our systems may be difficult to detect for prolonged periods of time, and we may be unable to anticipate these techniques or put in place protective or preventive measures. These attempts to gain unauthorized access could lead to disruptions in our systems, unauthorized release of confidential or otherwise protected information or corruption of data. If individuals are successful in infiltrating, breaking into, disrupting, damaging or otherwise stealing from the computer systems of the Company or its third-party providers, we may have to make a significant investment to fix or replace them, and may suffer interruptions in our operations in the interim, including interruptions in our ability to accept payment from customers.  While, to the best of our knowledge, we have not experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a security breach or cyber-attack that could materially increase financial risk to the Company or our customers, such a security breach or cyber-attack could adversely affect our business and operations, including by damaging our reputation and our relationships with our customers, employees, suppliers and investors, exposing us to litigation, fines and penalties.

As a seller of certain consumer products, we are subject to various federal, state, local, and international laws and regulations relating to product safety and consumer protection.

While we take steps to comply with these laws, there can be no assurance that we will be in compliance, and failure to comply with these laws could result in litigation, regulatory action, and penalties which could have a negative impact on our business, financial condition, and results of operations. In addition, our suppliers might not adhere to product safety requirements and the Company and those suppliers may therefore be subject to involuntary or voluntary product recalls or product liability lawsuits. Direct costs, lost sales, and reputational damage associated with product recalls, government enforcement actions, or product liability lawsuits, individually or in the aggregate, could have a negative impact on future revenues and results of operations.

Risks Related To Our Common Stock

We may issue additional stock to raise capital to fund our expansion plans and/or restructure outstanding debt that would dilute substantially the voting power of our current stockholders.

In order to raise capital to fund the expansion of our Simply Mac stores, we may issue additional shares of the Company’s stock that would dilute the voting power of our current stockholders.

The market for our common stock is volatile and our stock price could decline.

The price of our common stock, as well as the stock market in general, has been highly volatile. The market price of our common stock during the period from January 31, 2020 through June 11, 2021 has fluctuated between $0.30 and $5.20.  We expect that our stock price is likely to remain volatile. Investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects, resulting in a substantial (potentially total) loss on their investment. In addition, an active trading market for our common stock may not be sustained, which could affect the ability of our stockholders to sell their shares and could depress the market price of their shares.

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Our common stock was delisted from The Nasdaq Capital Market, which could make trading in our common stock more difficult for investors, potentially leading to declines in our share price and liquidity and could limit our ability to raise additional capital.

Effective at the open of business on November 8, 2019, our common stock was suspended and effectively delisted from The Nasdaq Capital Market and began trading on the Over-the-Counter OTCQB Venture Market (the “OTCQB”). The delisting was the result of our non-compliance with Nasdaq Listing Rule 5550(b). Effective February 8, 2021, our OTC listing was upgraded to the OTCQX^® Best Market (the “OTCQX”).  Our delisting from The Nasdaq Capital Market could make trading in our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. Without The Nasdaq Capital Market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock will likely be made more difficult and the trading volume and liquidity of our stock could decline. Our delisting from The Nasdaq Capital Market could also result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely impact the acceptance of our common stock as currency or the value accorded by other parties. Further, following our delisting, we will also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.

If we fail to meet the eligibility requirements of OTCQX, we could be removed from the OTCQX which would limit the ability of broker-dealers to sell our securities in the secondary market.

The companies whose securities are quoted on the OTCQX must maintain certain eligibility criteria, including having a minimum bid price for of $0.25 per share and a market capitalization of at least $10 million to continue to be quoted on the OTCQX.  There is no guarantee that we will continue to meet OTCQX criteria to continue to have our common stock quoted thereon. As a result, failure to be quoted on the OTCQX would cause the Company’s common stock to be quoted on the OTCQB or the Pink Open Market, which may severely adversely affect the market liquidity for our shares by limiting the ability of broker-dealers to sell such shares, and the ability of stockholders to sell their shares in the secondary market. In addition, if we are no longer quoted on the OTCQX, there can be no assurance that will meet the eligibility criteria and requalify for quotation on the OTCQX.

If we fail to file periodic reports with the United States Securities and Exchange Commission, our common stock will not be able to be quoted on the OTCQX

Although our common stock is quoted on the OTCQX, a regular trading market for our common stock may not be sustained in the future. OTC Markets limits quotation on the OTCQX to securities of issuers that are current in their reports filed with the United States Securities and Exchange Commission (the “SEC”). If we fail to remain current in the filing of our reports with the SEC, our common stock will not be able to be quoted on the OTCQX.

Broker-dealers may be discouraged from effecting transactions in our common stock because it is considered a penny stock and is subject to the penny stock rules.

Our common stock currently constitutes “penny stock.” Subject to certain exceptions, for the purposes relevant to us, “penny stock” includes any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share. Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934, as amended, impose sales practice and disclosure requirements on certain brokers-dealers who engage in certain transactions involving a “penny stock.” In particular, a broker-dealer selling penny stock to anyone other than an established customer or “accredited investor”, must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks. The additional sales practice and disclosure requirements imposed upon broker-dealers may discourage broker-dealers from effecting transactions in our shares of common stock, which could severely limit the market liquidity of our common stock and impede the sale of our common stock in the secondary market.

As an issuer of “penny stock” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.

Although the federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, so long as our common stock constitutes a “penny stock”, we will not have the benefit of this particular safe harbor protection in the event of any claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.

 

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Item 6. Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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