Business Overview and History

Kidpik Corp. (NASDAQ:PIK) is an online clothing subscription-based e-commerce company that focuses on providing fashionable and customized kids’ outfits in a box. The company was founded in 2015 and has since grown to serve customers across the 48 contiguous U.S. states and Army Post Offices (APOs) and Fleet Post Offices (FPOs).

Kidpik Corp. was incorporated on April 16, 2015, under the laws of Delaware. The company began operations in March 2016 as a subscription-based e-commerce business focused on providing kids clothing subscription boxes for boys and girls. Kidpik’s initial offering was its girls clothing subscription boxes for sizes 4-14, which it launched in 2016.

In the spring of 2022, Kidpik expanded its product offerings by adding boys clothing, as well as larger sizes for both boys and girls up to size 16 in apparel and size 6 youth in shoes. The company also introduced toddler sizes down to 2T-3T for apparel and 7-8 toddler shoes during the second quarter of 2022. Additionally, Kidpik began selling its branded products on third-party websites like Amazon and Walmart to expand its distribution.

Throughout its history, Kidpik has relied on various funding sources, including equity and loans from its CEO Ezra Dabah and his family, notes payable including from the related party Nina Footwear Corp., and a line of credit that was repaid as of January 1, 2022. Following Kidpik’s initial public offering in November 2021, the company has continued to utilize the funds raised, as well as revenue from operations and additional loans, to support its ongoing business.

Financial Performance and Liquidity

Financials

Kidpik has experienced significant growth since its inception, with total revenue increasing from $16.94 million in 2020 to $21.83 million in 2021. However, the company has faced challenges in recent years, with revenue declining to $14.24 million in 2023. The company has also sustained net losses, with a net loss of $4.19 million in 2020, $5.95 million in 2021, and $9.91 million in 2023.

For the most recent fiscal year (2023), Kidpik reported: – Revenue: $14.24 million – Net Income: -$9.91 million – Operating Cash Flow (OCF): -$322.33 thousand – Free Cash Flow (FCF): -$399.63 thousand

In the most recent quarter (Q3 2024), the company’s financial performance continued to decline: – Revenue: $1.04 million – Net Income: -$887.94 thousand – Operating Cash Flow (OCF): -$241.62 thousand – Free Cash Flow (FCF): -$241.62 thousand

Year-over-year growth for Q3 2024 showed a significant decrease in revenue, with a 69.2% decline compared to Q3 2023. This decrease was primarily driven by a 68.8% decrease in subscription box sales, as the company eliminated marketing spend to acquire new subscribers and had a lower starting subscriber base compared to the prior year period. Online website sales and third-party website sales also decreased by 49.7% and 90.1% respectively, as the company focused on selling through existing inventory rather than purchasing new merchandise.

Liquidity

As of September 28, 2024, Kidpik had $7.82 thousand in cash and restricted cash, a working capital deficit of $2.84 million, and a total accumulated deficit of $55.40 million. The company’s liquidity position has been a concern, with management pursuing various financing options, including equity financings, debt financings, and borrowings from related parties, to support its ongoing operations.

Key liquidity metrics as of September 28, 2024: – Debt/Equity Ratio: -0.0009488626279538487 – Cash: $3.21 thousand – Restricted Cash: $4.62 thousand – Current Ratio: 0.594 – Quick Ratio: 0.9885

The company does not currently have any available credit lines, which further limits its financial flexibility.

Operational Challenges and Warehouse Transition

Kidpik has faced several operational challenges in recent years, including the impact of the COVID-19 pandemic on consumer spending and the company’s decision to move its warehouse from California to Texas. The warehouse transition, which occurred in March 2024, resulted in significant business disruption, as the company was unable to ship products or process returns for the second half of March and the majority of April.

The warehouse move was costly, required significant management resources, and negatively impacted Kidpik’s sales and margins during the transition period. The company also faced the challenge of training new employees at the Texas facility, which may have led to decreased productivity and higher expenses.

Nasdaq Compliance and Merger with Nina Footwear

In April 2024, Kidpik received a letter from Nasdaq notifying the company that its stockholders’ equity did not meet the minimum requirement for continued listing on the Nasdaq Capital Market. Kidpik submitted a plan to regain compliance, which it expected to achieve through the closing of a merger with Nina Footwear Corp., a brand specializing in women’s special occasion shoes, bridal shoes, bags, and kids’ shoes.

However, due to unforeseen delays in completing the required Nina Footwear financial statements and pro forma information, Kidpik was delayed in filing the necessary proxy statement to seek stockholder approval for the merger. As a result, on October 2, 2024, Nasdaq determined that Kidpik did not provide a definitive plan to regain compliance and issued a delist determination letter.

Kidpik has since submitted a hearing request to the Nasdaq Hearings Panel, which has stayed any delisting action pending the outcome of the hearing process. The company remains committed to completing the merger with Nina Footwear, which it believes will strengthen its balance sheet and allow it to meet the Nasdaq Equity Rule requirements upon closing.

Convertible Debenture and Financing Challenges

In May 2024, Kidpik entered into a Securities Purchase Agreement with EF Hutton YA Fund, LP, under which the company agreed to sell the investor three tranches of convertible debentures totaling $2 million. The company received $450,000 in gross proceeds from the initial tranche of $500,000 in convertible debentures.

However, Kidpik was unable to meet the filing deadline for the registration statement required to register the resale of the shares of common stock issuable upon conversion of the initial convertible debenture. As a result, an event of default has occurred under the convertible debenture, though the investor has not yet provided notice of acceleration of the amounts due.

Kidpik does not currently have sufficient cash on hand to pay the amounts due under the convertible debenture, and if the investor were to demand immediate repayment, the company would need to raise additional funding through the sale of debt or equity, which may not be available on favorable terms, if at all. This situation raises substantial doubt about Kidpik’s ability to continue as a going concern.

Merger with Nina Footwear

On March 29, 2024, Kidpik entered into an Agreement and Plan of Merger and Reorganization with Nina Footwear Corp. Under the terms of the agreement, upon the closing of the merger, the stockholders of Nina Footwear are expected to collectively own approximately 80% of Kidpik’s outstanding shares of common stock, with Kidpik’s current stockholders owning the remaining 20%.

The merger is subject to several conditions, including the preparation and mailing of a proxy statement by Kidpik, the receipt of required stockholder approvals from both Kidpik and Nina Footwear, and the waiver or termination of certain change-of-control and related triggering events held by certain Nina Footwear stockholders. The closing of the merger is currently anticipated to occur in the first quarter of 2025.

The merger with Nina Footwear is expected to strengthen Kidpik’s balance sheet and provide additional cash from operations to support the combined company’s operations. However, the successful completion of the merger is not guaranteed, and the failure to do so could have a material adverse effect on Kidpik’s business, financial condition, and results of operations.

Product Segments and Revenue Breakdown

Kidpik operates primarily in the children’s apparel and accessories market through its subscription-based e-commerce business model. The company’s main product segments are:

Subscription Boxes Kidpik’s core business is its subscription box service, which provides personalized children’s apparel, footwear, and accessories on a recurring basis. For the 13 weeks ended September 28, 2024, subscription box revenue was $757.70 thousand, accounting for 72.8% of total revenue. For the 39 weeks ended September 28, 2024, subscription box revenue was $3.08 million, or 69.8% of total revenue.

Online Website Sales Kidpik generates revenue from direct-to-consumer sales through its own online website, shop.kidpik.com. For the 13 weeks ended September 28, 2024, online website sales were $236.34 thousand, or 22.7% of total revenue. For the 39 weeks ended September 28, 2024, online website sales were $990.76 thousand, or 22.5% of total revenue.

Third-Party Website Sales The company also sells products through third-party online marketplaces such as Amazon and Walmart. For the 13 weeks ended September 28, 2024, third-party website sales were $48.62 thousand, or 4.7% of total revenue. For the 39 weeks ended September 28, 2024, third-party website sales were $340.32 thousand, or 7.7% of total revenue.

In terms of product lines, Kidpik offers apparel, footwear, and accessories for girls, boys, and toddlers. For the 13 weeks ended September 28, 2024: – Girls apparel accounted for $773.03 thousand or 74.3% of revenue – Boys apparel accounted for $231.36 thousand or 22.2% of revenue – Toddlers apparel accounted for $38.26 thousand or 3.7% of revenue

For the 39 weeks ended September 28, 2024: – Girls apparel was $3.30 million or 74.8% of revenue – Boys apparel was $952.04 thousand or 21.6% of revenue – Toddlers apparel was $154.70 thousand or 3.5% of revenue

The company has seen significant declines in revenue across all product segments and sales channels compared to the prior year periods. This was primarily due to the company’s decision to eliminate marketing expenditures to acquire new subscribers, resulting in a lower subscriber base, as well as the disruption caused by the relocation of the company’s warehouse from California to Texas. Gross margin for the 13 and 39 week periods ended September 28, 2024 was 68.6% and 68.7% respectively, which benefited from a prior inventory write-down.

Outlook and Conclusion

Kidpik’s path forward remains challenging, with the company facing significant liquidity concerns, operational disruptions, and the uncertainty surrounding the completion of the merger with Nina Footwear. The company’s ability to regain compliance with Nasdaq’s minimum stockholders’ equity requirement and secure additional financing will be crucial in determining its long-term viability.

While Kidpik’s subscription-based business model and product innovation efforts have shown promise, the company must navigate its current obstacles effectively to position itself for sustainable growth and profitability in the future. The significant decline in revenue across all product segments and sales channels, coupled with ongoing financial challenges, underscores the need for a robust turnaround strategy.

The proposed merger with Nina Footwear represents a potential opportunity for Kidpik to strengthen its balance sheet and expand its product offerings. However, the successful completion of the merger is not guaranteed, and the company must also address its immediate liquidity concerns and operational inefficiencies.

Investors should closely monitor the company’s progress in addressing its financing, operational, and regulatory challenges, as well as the outcome of the proposed merger with Nina Footwear, to assess the overall investment risk and potential. The coming months will be critical for Kidpik as it works to stabilize its financial position, regain Nasdaq compliance, and chart a path towards sustainable growth in the competitive children’s apparel market.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.