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Simply, Inc. – ‘10-K’ for 1/29/22

On:  Friday, 4/22/22, at 11:31am ET   ·   For:  1/29/22   ·   Accession #:  1564590-22-15188   ·   File #:  1-32217

Previous ‘10-K’:  ‘10-K’ on 4/30/21 for 1/30/21   ·   Latest ‘10-K’:  This Filing   ·   15 References:   To:  Simply, Inc. – ‘8-K’ on 10/22/21 for 10/21/21 To:  Simply, Inc. – ‘8-K’ on 10/20/21 for 10/14/21 To:  Simply, Inc. – ‘8-K’ on 8/11/21 for 8/5/21 To:  Simply, Inc. – ‘8-K’ on 7/9/21 for 7/6/21 To:  Simply, Inc. – ‘8-K’ on 3/17/21 for 3/10/21 To:  Simply, Inc. – ‘8-K’ on 10/27/20 for 10/21/20 To:  Simply, Inc. – ‘8-K’ on 10/15/20 for 10/9/20 To:  Simply, Inc. – ‘8-K’ on 4/22/20 for 4/16/20 To:  Simply, Inc. – ‘8-K’ on 3/17/20 for 3/11/20 To:  Simply, Inc. – ‘8-K/A’ on 12/13/19 for 7/25/17 To:  Simply, Inc. – ‘8-K’ on 6/14/18 for 6/8/18 To:  Simply, Inc. – ‘8-K’ on 3/12/18 for 3/8/18 To:  Simply, Inc. – ‘8-K’ on 10/11/17 for 10/10/17 To:  Simply, Inc. – ‘10-K’ on 3/11/16 for 12/31/15 To:  Simply, Inc. – ‘S-1’ on 1/30/04 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  i 10-K

(Mark one)

For the fiscal year ended  i January 29, 2022

or

Commission File No.  i 001-32217

 i Simply, Inc.

(Exact name of registrant as specified in its charter)

 i Miami,  i FL  i 33178

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: ( i 786)  i 254-6709

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ☐   Yes     ☒    i No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     ☐   Yes     ☒    i No

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.     ☒    i Yes     ☐   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files).     ☒    i 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.

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   i ☐

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing price of $2.44 of the shares of common stock on the OTCQX^® Best Market on July 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $ i 11,274,449.

As of April 22, 2022, there were  i 15,500,207 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  i None.

Auditor Firm Id:   i 137     Auditor Name:   i Kaufman, Rossin & Co., a Professional Association      Auditor Location:  i Miami, FL USA

Simply, Inc.

Form 10-K for the Fiscal Year Ended January 29, 2022

INDEX

i

Forward-Looking Statements

Certain statements in this annual report on Form 10-K constitute “forward-looking statements.” These forward-looking statements involve known or unknown risks, uncertainties and other factors that may or may not be outside our control and that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of competitors, suppliers, customers and the OTCQX^® Best Market (the “OTCQX”) are generally outside of our control. Our ability to execute our business plans and to increase revenues and operating income are each dependent upon our ability to continue to expand our current businesses and to enter new business areas, as well as upon general economic conditions and other factors, including some of the factors identified as “Risk Factors” in this annual report and from time to time in our other SEC filings. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues,” or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or continued market listing. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, unless required by law.

In this annual report on Form 10-K, “Simply,” “the Company,” “we,” “us” and “our” refer to Simply, Inc. and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides.

ii

PART I

Company Overview and Developments

Simply, Inc.’s business is currently centered on its wholly owned subsidiary, Simply Mac, Inc. (“Simply Mac”), and its relationship with Apple^® as an Apple Premier Partner authorized to operate retail consumer electronics stores that sell the entire line of Apple products and provide service by Apple-certified technicians.  As of January 29, 2022, Simply Mac had 53 retail stores across 17 states in the United States.

We incorporated under the laws of the State of California on February 7, 1994, under the name InfoSonics Corporation. On September 11, 2003, we reincorporated under the same name under the laws of and into the State of Maryland.  Our corporate headquarters are in Miami, Florida, with the administrative office of Simply Mac located in Salt Lake City, Utah.  On June 8, 2018, we changed our name to Cool Holdings, Inc., and on October 14, 2020, changed our name to Simply, Inc.

Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal year 2022 consisted of the 52 weeks ended on January 29, 2022. Fiscal year 2021 consisted of the 52 weeks ended on January 30, 2021.

We also formerly operated other businesses, which have since been sold or discontinued.  We had a wholly owned subsidiary that operated 7 retail consumer electronics stores as Apple Premier Partners under the OneClick name in the Dominican Republic that was sold on April 6, 2020.  It has been classified as a discontinued operation in our consolidated financial statements.  Cooltech Distribution, a subsidiary that formerly distributed various consumer electronics to resellers, retailers and small and medium-sized businesses, was wound down by August 1, 2020.

During March 2020, we restructured substantially all of our then remaining outstanding debt.  At February 1, 2020, the principal amount of our outstanding debt amounted to $16.4 million.  After the March restructuring, our 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.

On April 16, 2020, we received a $3.1 million loan 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”).  On October 19, 2020, we filed a forgiveness application in which we certified that 100% of the funds were spent on qualified payroll and related costs and requested that the entire principal balance be forgiven.  The application was approved by the lender and the SBA, and the loan and accrued interest were extinguished on August 17, 2021.

Effective October 14, 2020, we executed a one-for-ten reverse split of our issued and outstanding common stock.  All share and per share numbers in this annual report have been retroactively restated to account for the reverse split.

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.  In accordance with the applicable provisions of the CARES Act, on October 28, 2021, the Company filed its forgiveness application with the Lender.  The Company certified in the application that 100% of the loaned funds were utilized during the 22-week covered period commencing March 10, 2021 to pay for qualified payroll and payroll-related costs, and as such, requested that the entire principal balance be forgiven.  The application is subject to review by both the Lender and the SBA, after which the Company will be notified as to whether the application is approved.  If the application is denied or partially approved, the Company will be required to make equal monthly payments to fully amortize any remaining balance by March 10, 2026.

2

Between July and November 2021, the Company issued five individual six-month, 9%, unsecured convertible notes for an aggregate principal amount of $4,000,000 and warrants exercisable into an aggregate of 1,600,000 shares of common stock of the Company to SOL Global Investments Corp. (“SOL Global”).  SOL Global is an affiliate of the Company and owns more than 10% of its outstanding common stock.  The principal and unpaid accrued interest on the notes are convertible at the option of the holder at any time into shares of common stock of the Company at $2.50 per share and the warrants are exercisable beginning six months after the date of issuance and expire 42 months from the date of issuance at an exercise price of $2.75 per share.  Upon maturity of the first note on January 6, 2022, SOL Global converted the entire $1,000,000 principal amount of the note and accrued interest into 418,000 shares of common stock of the Company.  Subsequent to January 29, 2022, the remaining notes were each extended without interest for one year.

During August and September 2021, the Company raised an aggregate of $2,000,000 in four private placements of the Company’s common stock of $500,000 each to SOL Verano Blocker 1 LLC, a wholly owned subsidiary of SOL Global.  The shares of the Company’s common stock were sold at the closing market price on the funding dates, and the Company sold an aggregate of 575,527 shares of its common stock at an average price of $3.48 per share in the private placements.

Reportable Segments and Geographic Areas

We currently operate our business in a single segment in the United States through our Simply Mac retail stores.  We previously operated a second segment through our Cooltech Distribution business, but this unit was wound down by August 1, 2020, and its results of operations were immaterial.

Store Operations, Merchandise and Seasonality

As an Apple Premier Partner, we work with Apple to develop our network of Simply Mac stores in locations and markets where Apple has limited or no presence.  Our stores are generally located in high-traffic or local neighborhood strip centers or shopping malls.  In our stores, we sell Apple and Apple-approved products and accessories, including accessories that we source from independent third parties.  We also provide repair service for Apple products performed by our Apple-certified employee technicians.  Retail customers may book a repair appointment at one of our SimplyMac stores either through our website or, alternatively, through the Apple website.  Our Simply Mac business, like that of many retailers, is seasonal, with a large portion of our sales and operating profit realized during the fourth calendar quarter of the year.

Purchasing and Suppliers

The majority of our product purchases are of Apple products, which we buy both directly from Apple as well as from a tier‑one distributor facilitated by our license agreement with Apple.  We also have direct relationships with certain accessory manufacturers and purchase other accessories from distributors.  We believe that maintaining and strengthening our relationships with Apple and our other vendors is essential to our operations and continued expansion.

Competition

The consumer electronics and accessory industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. We compete with mass merchants such as Best Buy, Costco, Wal-Mart and Target, and regional chains; specialty computer product and consumer electronics stores; and online retailers such as Amazon.  We also compete with Apple-owned stores and Apple’s online store.

Sustainability

We are committed to sustainability and to operating our business in a manner that results in a positive impact to the environment and our communities. Through our trade-in programs, we buy back or take in used consumer electronics that are otherwise destined for landfills and either refurbish them or recycle them. In addition, we continuously look for cost-effective ways to reduce our carbon emissions.

Employees

As of January 29, 2022, we had 352 full-time salaried employees. None of our employees are represented by a labor union or are members of a collective bargaining unit.

3

Available Information

Our website at www.simplyinc.com provides a link to the Securities and Exchange Commission’s (“SEC”) website where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports (as well as exhibits and supplementary schedules) filed with or furnished to the SEC can be accessed free of charge. Our website also provides links to the charters for our Audit, Compensation and Nominating & Governance Committees as well as our Code of Business Conduct and Ethics, which can be accessed free of charge at http://www.simplyinc.com/corporate-governance/.

The following risks and uncertainties, as well as other factors described elsewhere in this annual report or in other SEC filings by the Company, could adversely affect our business, financial condition and results of operations.

Risks Relating 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 29, 2022 and January 30, 2021, we reported operating losses of $12.5 million and $8.8 million, respectively. As of January 29, 2022, our balance of cash and restricted cash was $3.1 million, but we had negative net working capital of $8.2 million. In addition, at January 29, 2022, our total liabilities exceeded our total assets and we had an accumulated stockholders’ deficit of $6.0 million.  While we 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 3 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/or refinance or restructure our existing debt 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 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.  During 2021, customer traffic in our stores remained depressed compared to 2019 levels, and Apple supply chain shortages have continued into 2022 on certain Apple products.  The arrival of the Omicron variant in the United States in early December 2021 again impacted our operations as we had sporadic store closures resulting from staff members who became infected and were required to quarantine.  In summary, the COVID-19 outbreak has had a material adverse impact on our business, liquidity, financial condition, and results of operations, and continues to negatively affect us.  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.

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.

4

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

We depend on manufacturers, including 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 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.

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.

5

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 cloud-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 that would dilute the voting power of our current stockholders.

In order to raise capital to fund 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 our fiscal year ended January 29, 2022 fluctuated between $5.25 and $1.00.  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.

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 Venture Market (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,

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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.

Not Applicable.

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All our retail stores and other facilities are leased.  Our 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 two of our Florida stores have original lease terms of ten years.  We believe that, as current leases expire, we will be able to obtain either renewals at present locations or new leases for equivalent spaces in the same area.  The terms of our 53 leased stores in the United States that were open as of January 29, 2022 expire in our fiscal years ending on the Saturday closest to January 31 as follows:

The corporate office of Simply Mac is located in Salt Lake City, Utah  pursuant to an operating lease.  The term of the lease is from April 2020 to August 2025.  The approximate monthly rent for this office amounts to $15,280.  We believe that these facilities are adequate for our current requirements and that suitable alternative or additional space will be available as needed to accommodate future expansion of our operations.

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

Not Applicable.

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PART II

Our Common Stock was traded on The NASDAQ Capital Market under the symbol “AWSM” until November 8, 2019.  Thereafter, our Common Stock was quoted on the OTCQB under the same symbol until October 14, 2020, at which time our symbol was changed to “SIMP.”  Effective October 14, 2020, we effected a one-for-ten reverse split of our common stock.  Beginning February 8, 2021, our Common Stock was upgraded and commenced quotation on the OTCQX  under the same “SIMP” symbol.   The following table sets forth, for the periods indicated, the high and low trading prices of our common stock as reported by the respective markets and as adjusted for the reverse split noted above:

The over-the-counter quotations on the OTCQB and OTCQX Markets reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  As of April 19, 2022, the closing price of our common stock on OTCQX was $2.18, and there were approximately 81 active stockholders of record.

We have not paid any cash dividends and do not expect to pay any cash dividends in the foreseeable future.

The information regarding equity compensation plans is incorporated by reference into Item 12 of this Form 10-K.

Unregistered Issuances.

None for applicable period.

Issuer Repurchases of Equity Securities.

None for applicable period.

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Our management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying Consolidated Audited Financial Statements and related notes, as well as the “Risk Factors” and other information contained in this annual report. The discussion is based upon, among other things, our Consolidated Audited 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 at the financial statement dates 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 those 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 could. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in “Critical Accounting Policies.” All references to results of operations in this discussion are references to results of continuing operations, unless otherwise noted.

Overview and Recent Developments

Our business is centered on our relationship with Apple^® as an Apple Premier Partner authorized to operate retail consumer electronics stores that sell the entire line of Apple products and provide service by Apple-certified technicians.  As of January 29, 2022, we had 52 Simply Mac stores and 1 Simply EV store in operation across 17 states in the United States.  We previously operated another chain of 6 retail stores under the OneClick brand in the Dominican Republic, as well as a distribution company called Cooltech Distribution, an authorized distributor to the OneClick stores and other resellers of Apple products and other high-profile consumer electronic brands.  We sold the Dominican Republic entity to an employee of the Company in a transaction that closed on April 6, 2020.  As a consequence of the sale, it has been classified as a discontinued operation in our consolidated statement of operations for all periods presented.  We phased out our Cooltech Distribution entity in August 2020.

In March 2020, we restructured $14.1 million of our debt through a combination of debt forgiveness and conversions into common stock.  On March 11, 2020, the Company and GameStop entered into an agreement to amend and restate the 12% secured promissory note issued in September 2019 by the Company to GameStop in connection with the acquisition of Simply Mac.  The amended promissory note reduced the principal balance of the note from $7,858,000 to $1,250,000, bears interest at a rate of 6% per annum and has an extended maturity date of February 17, 2024.  Additionally, the amended note releases 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 on 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 agreed to pay GameStop a onetime cash payment of $250,000 and release to GameStop $345,000 of funds held in escrow in connection with the Simply Mac acquisition.

Then, on March 31, 2020, we entered into conversion agreements with certain debt holders to convert the outstanding aggregate principal amount of the convertible notes held by such holders, including interest accrued thereon, into shares of our common stock of at a conversion price of $1.70 per share of common stock.  These agreements also resulted in the cancellation of warrants, issued by the Company, to purchase 21,000 shares of common stock of the Company at a price of $42.50 per share, as well as cancellation of warrants to purchase an indeterminate number of shares of common stock of the Company which were exercisable by dividing the principal amount of the convertible notes by a price that is 30% below the twenty-day volume weighted average price of our shares of common stock immediately prior to the date we were to obtain shareholder and regulatory approval to permit the conversion of the convertible notes.  The note holders entering into agreements to convert notes issued by us consisted of holders of: (i) a principal amount of $91,666 pursuant to a 0% senior convertible note issued on January 19, 2018; (ii) a principal amount of $1,700,000 pursuant to 12.0% unsecured convertible notes issued on October 24, 2018; (iii) a principal amount of $400,000 pursuant to a convertible note issued on November 29, 2018; (iv) a principal amount of $1,500,000 pursuant to convertible notes issued on May 16, 2019; (v) a principal amount of $175,000 pursuant to convertible notes issued on July 9, 2019; (vi) a principal amount of $175,000 pursuant to convertible notes issued on August 8, 2019; (vii) a principal amount of $3,450,500 pursuant to convertible notes issued on September, 11, 13, 20, 23 and 24, 2019. Altogether, such conversion agreements resulted in the conversion of an aggregate $8,183,180 of indebtedness, including $691,014 of accrued interest, into 4,813,635 shares of common stock of the Company, and the cancellation of an indeterminate amount of warrants to purchase shares of common stock of the Company.

Also on March 31, 2020, the Company entered into a settlement agreement and release of claims settling claims relating to (i) outstanding transaction fees related to a previous debenture financing, (ii) settlement of a disputed claim for royalties relating to a

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previous debenture financing, and (iii) settlement of offsetting charges related to a promotion and supply agreement.  Pursuant to this settlement agreement, the Company issued an aggregate of 1,068,368 shares of common stock in full settlement of such claims.

On April 16, 2020, we received a $3.1 million loan pursuant to the PPP under the CARES Act.  On October 19, 2020, we filed a forgiveness application in which we certified that 100% of the funds were spent on qualified payroll and related costs and requested that the entire principal balance be forgiven.  The application was approved by the lender and the SBA, and the loan and accrued interest were extinguished on August 17, 2021.

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

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.  In accordance with the applicable provisions of the CARES Act, on October 28, 2021, the Company filed its forgiveness application with the Lender.  The Company certified in the application that 100% of the loaned funds were utilized during the 22-week covered period commencing March 10, 2021 to pay for qualified payroll and payroll related costs, and as such, requested that the entire principal balance be forgiven.  The application is subject to review by both the Lender and the SBA, after which the Company will be notified as to whether the application is approved.  If the application is denied or partially approved, the Company will be required to make equal monthly payments to fully amortize any remaining balance by March 10, 2026.

Between July and November 2021, the Company issued five individual six-month, 9%, unsecured convertible notes aggregating $4,000,000 in principal and warrants exercisable into an aggregate of 1,600,000 shares of common stock of the Company to SOL Global.  SOL Global is an affiliate of the Company and owns greater than 10% of its outstanding common stock.  The principal and unpaid accrued interest on the notes are convertible at the option of the holder at any time into shares of common stock of the Company at $2.50 per share and the warrants are exercisable beginning six months after the date of issuance and expire 42 months from the date of issuance at an exercise price of $2.75 per share.  Upon maturity of the first note on January 6, 2022, SOL Global converted the entire $1,000,000 principal amount of the note and accrued interest into 418,000 shares of common stock of the Company.

During August and September 2021, the Company raised $2,000,000 in four private placements of the shares of the Company’s common stock of $500,000 each to SOL Verano Blocker 1 LLC, a wholly owned subsidiary of SOL Global.  The shares were sold at the closing market price on the funding dates and the Company sold an aggregate of 575,527 shares of the Company’s common stock at an average price of $3.48 per share in the private placements.

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Critical Accounting Policies and Estimates

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition and results of operations. The notes to our Consolidated Audited Financial Statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the condition and results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain. There is a likelihood that materially different amounts would be reported under different conditions or using different assumptions.  Our critical accounting policies and estimates and assumptions that require the most significant judgment are discussed further below.

Valuation of Merchandise Inventories

Our inventory is carried at the lower of cost or net realizable value using the first-in first-out method for cost.  In valuing inventory, we are required to make assumptions regarding write-downs required to properly value obsolete or over-valued items at the lower of cost or net realizable value.  In order to do this we consider a number of factors including quantities on hand, sales history, age of the product, new model introductions, vendor price protections and return policies, etc.

Goodwill and Intangible Assets

Goodwill results from acquisitions and represents the excess purchase price over the net identifiable assets acquired.  We are required to evaluate our goodwill for impairment at least annually, or whenever indicators of impairment are present. Considerable management judgment is necessary to estimate the fair value of our reporting units. The discounted cash flows analyses utilize a five- to seven-year cash flow projection with a terminal value, which are discounted using a risk-adjusted weighted-average cost of capital. The projected cash flows include numerous assumptions such as, among others, future sales trends, operating margins, store count and capital expenditures, all of which are derived from our long-term financial forecasts. We may also use other market valuation methodologies including comparable market transaction comparisons and individual asset valuations, which also require the use of significant management judgment.

Our definite-lived intangible assets consist primarily of trade names recorded as a result of business acquisitions. The estimated useful life and amortization methodology of intangible assets are determined based on the period in which they are expected to contribute directly to cash flows. Intangible assets that are determined to have a definite life are amortized over that period.

Impairment of Long-lived Assets

Long-lived assets, including intangible assets, right-of-use assets and property and equipment are reviewed for impairment when circumstances indicate that the carrying amount of these assets may be impaired. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value. No impairment was recorded during Fiscal 2022 or Fiscal 2021.

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Results of Operations:

The following table sets forth our consolidated statement of operations for the fiscal years ended January 29, 2022 and January 30, 2021, and the change between the two years ($ in thousands): 

Fiscal Year Ended January 29, 2022 Compared With Year Ended January 30, 2021

Net Sales

For the fiscal year ended January 30, 2022 (“Fiscal 2022”), our total net sales of $79.1 million represented an increase of $11.1 million, or 16%, compared to net sales of $68.0 million in the fiscal year ended January 30, 2021 (“Fiscal 2021”).  The increase in sales between the periods is primarily the result of our expansion program by which we grew our store count from 43 stores at the end of Fiscal 2021 to 53 stores at the end of Fiscal 2022.  Although sales in both years were affected by the COVID‑19 pandemic, Fiscal 2021 was more adversely affected than Fiscal 2022.

At the outset of Fiscal 2021, all of our retail stores were open.  However, in mid-March 2020, the COVID‑19 pandemic resulted in the closure of 12 locations.  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 able to begin reopening stores and expanding hours beginning May 4, 2020 through June 22, 2020.  By August 1, 2020, only 1 store remained closed, which was reopened soon thereafter.  During the entire second half of Fiscal 2021, our retail stores continued to be adversely affected by COVID-19.  Hours of operation at all stores were curtailed by remaining closed on Sundays and most stores operated on shortened hours during the other days of the week.  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.

During Fiscal 2022, first the outbreak of the Delta variant of COVID-19 and then the Omicron variant continued to negatively impact our sales.  As certain geographic areas experienced hyperlocal outbreaks resulting in infections of customers and store employees, we were periodically forced to close stores for short periods of time.  We were particularly impacted by the Omicron variant during the important holiday selling season from late November through early January.  Further exacerbating the situation, after Apple’s announcement in mid-October 2021 of the new MacBook Pro and other products, we experienced severe shortages of new Apple products which dampened our holiday sales.

Cost of Sales, Gross Profit and Gross Margin 

Our cost of sales in Fiscal 2022 was $61.6 million, 77.9% of net sales, our gross profit was $17.5 million and our gross margin was 22.1%.   For Fiscal 2021, cost of sales was $49.7 million, 73.0% of net sales, gross profit was $18.4 million and our gross margin was 27.0%.  The significant decline in our gross margin resulted primarily from a combination of competitive pressures that forced us

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to reduce sales prices during the holiday selling season, as well as a reduced mix of service business.  Service is our most profitable business category, and service fell from 22.6% of total revenues in Fiscal 2021 to 19.0% in Fiscal 2022.  In addition, our eCommerce business is our lowest gross margin category, and eCommerce sales rose from 16.1% of total revenues in Fiscal 2021 to 18.8% in Fiscal 2022

Operating Expenses

For Fiscal 2022, operating expenses of $30.0 million increased by $2.8 million, or 10.4%, from $27.2 million in Fiscal 2021.  The increase resulted primarily from the store expansion, with the largest increase in store payroll to staff the new stores.  Despite the increase of 10 stores during Fiscal 2022, rent expense declined 2.5% from Fiscal 2021.  The COVID-19 pandemic created a renter’s market and we were able to open new stores, and replace stores with expiring leases, at significantly lower rental rates compared to pre-pandemic rates.  Other store expenses grew as a result of the expansion, including systems, travel, marketing and depreciation.  Total store expenses increased $3.9 million, or 18.1%, from $21.4 million in Fiscal 2021 to $25.3 million in Fiscal 2022.  These increases were partially offset by a $1.1 million, or 18.2%, decline in corporate level expenses, primarily reduced legal fees.

Other Income (Expense)

For Fiscal 2022, interest expense amounted to $2.7 million, an increase of $1.7 million, or 158%, compared to $1.0 million in Fiscal 2021.  The increase resulted from interest on $4.0 million of convertible notes and warrants that were issued during Fiscal 2022, as well as interest on $7.4 million of additional borrowing during the holiday fourth fiscal quarter.   We also recorded a $3.1 million gain on extinguishment of the first PPP loan we received when the loan was forgiven by the SBA, and $968,000 of other income, comprised primarily of insurance recoveries.

In Fiscal 2021, we recorded a $13.6 million gain on extinguishment of debt that resulted from the debt restructuring in March 2020, a $543,000 gain from the decrease in value of financial derivatives that arose in connection with the 2019 issuance of convertible debt and warrants, and $160,000 in other income comprised of $215,000 in gains from settlements with vendors of outstanding payable balances generated in the prior year, partially offset by $55,000 in impairments of right-of-use leased assets and other items.

Net Income (Loss)

For Fiscal 2022, our net loss was $11.1 million after a nominal tax provision that consists primarily of minimum taxes assessed in states where our Simply Mac stores are located.  Because of our prior operating losses and lack of carry-back ability, absent isolated events, our provision for income taxes is generally nominal.  For Fiscal 2021, our net income was $4.3 million.

Liquidity and Capital Resources

During Fiscal 2021, we restructured the majority of our debt through conversions into equity or modification of repayment terms.  In April 2020 we secured a $3.1 million PPP loan that was forgiven by the SBA in August 2021.  In March 2021 we secured a second PPP loan for $2.0 million, for which we are awaiting response from the SBA on our forgiveness application.  Between July and November 2021 we raised $6.0 million through the sale of $4.0 million of convertible notes and warrants and $2.0 million of common stock.  Also in November 2021, we entered into a loan and security agreement with a finance company pursuant to which we borrowed $7.4 million, which balance was paid down to $3.7 million on January 29, 2022.   At January 29, 2022 we had negative working capital of $8.2 million and negative stockholders’ equity of $6.0 million.  We expect that we will need additional debt and or equity financing in the coming fiscal year, but we cannot predict whether additional liquidity will be available on acceptable terms, or at all, in the foreseeable future.

Operating Activities

Net cash used in continuing operating activities for Fiscal 2022 amounted to $8.4 million compared to $1.6 million for Fiscal 2021. The $6.8 million increase in cash used was due to an increase of $3.4 million in the net loss after adjustment for non-cash items, plus a $3.3 million increase in working capital required to support the new Simply Mac retail stores.  

Investing Activities

Net cash used in Fiscal 2022 to purchase property and equipment for new Simply Mac stores amounted to $2.9 million, compared to $1.0 million in Fiscal 2021.

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Financing Activities

During Fiscal 2022, net cash provided by financing activities amounted to $11.7 million.  This was comprised primarily of $13.4 million of borrowings from notes payable, $2.1 million from the sale of common stock and warrant exercises, less $4.1 million of repayments on notes payable.  In Fiscal 2021, net cash provided by financing activities amounted to $2.9 million.  Borrowings from notes payable amounted to $3.5 million, and repayments of notes payable amounted to $825,000.  We also received $226,000 from the sale of stock upon warrant exercises.

Contractual Obligations

We lease all our retail store and administrative office facilities and certain equipment under non-cancelable operating leases. Rent expense under these leases was approximately $4,878,000 and $4,547,000 for the fiscal years ended January 29, 2022 and January 30, 2021, respectively.

The following is a schedule of aggregate future minimum payments required by the above obligations (in thousands):

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” for us refers to the risk of loss arising from adverse changes in interest rates and various foreign currencies. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible areas of loss. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.

Interest Rates

None of our outstanding debt bears interest at rates that are variable, and consequently we have minimal exposure to fluctuations in market interest rates.

Foreign Exchange and Other Risks

We translate the financial statements of our foreign subsidiaries into United States dollars at the end of each reporting period. Translation adjustments are dollar changes that result from the translation process, and these adjustments are included in the cumulative translation account that is a component of other comprehensive income in stockholders’ equity on our balance sheet.  We formerly had subsidiaries in Argentina, the Dominican Republic and Mexico, but they have all been sold or discontinued and our foreign currency exposure has been substantially eliminated.  At January 29, 2022, foreign currency cash accounts in Mexican Pesos amounted to $10,000, which amount is included in assets of discontinued operations on our consolidated balance sheet at that date.  At January 29, 2022, our accumulated comprehensive loss amounted to $8,000.

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The information required by this item is included below in “Item 15. Exhibits and Financial Statement Schedules” and incorporated by reference herein.

None.

(i) Disclosure Controls and Procedures

An evaluation was performed pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s 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 annual report. These disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits 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, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.

(ii) Internal Control Over Financial Reporting.

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 29, 2022 as required by the Exchange Act Rule 13a-15(c). In making this assessment, we used the criteria set forth in the guidance for small and mid-size entities put forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 29, 2022.

It should be noted that while the Company’s CEO and CFO believe that the Company’s internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that the Company’s internal controls over financial reporting will prevent all errors and fraud.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to law, rules and regulations that permit us to provide only management’s report in this annual report.

(iii) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth fiscal quarter ended January 29, 2022, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

None.

Not Applicable.

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PART III

Directors

Information with respect to the Company’s current directors is set forth below.

Biographical Information

Reinier Voigt, Director, President and Chief Executive Officer. Mr. Voigt has served as a Director and the President and Chief Executive Officer of Simply, Inc. since June 2019.  Prior to that, he served as the Chief Operating Officer of the Company.  From May 2015 until August 2016, Mr. Voigt was the President and Chief Operating Officer of TEReI International, a merchant bank focused on debt and equity opportunities in the small to mid-cap markets in North and South America, and from September 2006 until April 2015 he was the Chief Operation Officer of Facey Telecom. Mr. Voigt has more than twenty years of experience in business operations which includes a focus on profit and loss optimization, strategic planning, finance and financial reporting. Mr. Voigt received the equivalent of a Master in Business Administration from Anton De Kom University of Suriname.

Kevin Taylor, Director. Mr. Taylor has served as a Director of Simply, Inc. since June 2019.  Mr. Taylor is a seasoned executive with 30 years of operating experience in Fortune 500 companies throughout North and South America.  For the past 8 years, he has been the President and CEO of TEREI International Limited, a merchant bank focused on debt and equity opportunities in the small to mid-cap markets in North and South America. From January 2009 to December 2012, Mr. Taylor was the President of Facey Telecom, a wholly-owned subsidiary of Facey Commodity Company, a billion-dollar conglomerate operating in the Caribbean and South America. He received a Bachelor of Engineering Science from the University of Western Ontario in 1994 and completed The General Managers Program at the Harvard Business School in 2001.

Michael Galloro, Director. Mr. Galloro has served as a Director of Simply, Inc. since June 2018.  Since 2014, Mr. Galloro has been a principal of ALOE Finance Inc., a private boutique firm specializing in transaction advisory, senior level finance solutions and management consulting.  In his advisory capacity, he has served as a director, CEO or CFO at a number of Canadian-based companies listed on the Canadian Securities Exchange and the TSX Venture Exchange, and is currently a Director of Simply Better Brands Corp., a public company focused on the emerging plant-based and holistic wellness consumer product categories based in Vancouver, Canada.  He is also a Director at Fountain Asset Corp., AF2 Capital Corp., World-Class Extractions Inc. and 1169071 BC Ltd., all Canadian-based companies.  Mr. Galloro’s extensive finance and accounting experience, as well as his depth of Director experience, provides the Board with a strong audit committee chair and strengthens its commitment to good governance.

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Executive Officers

Information for our other current executive officers not otherwise discussed above as of January 29, 2022 is as follows:

Vernon A. LoForti, Senior Vice President, Chief Financial Officer and Corporate Secretary, 68 years old. Mr. LoForti has served as Senior Vice President, Chief Financial Officer and Secretary of Simply, Inc. since June 2019.  Prior to that, he served the Company as its Vice President and Secretary, beginning after the merger with Cooltech Holding in March 2018.  Mr. LoForti previously served as the Vice President and Chief Financial Officer of InfoSonics from July 2010 through the date of the merger.  Prior to InfoSonics, Mr. LoForti served in a number of executive positions at Overland Storage, Inc., a global supplier of data protection appliances. Mr. LoForti joined Overland in 1995 and served as the company’s Vice President, Chief Financial Officer and Secretary from 1995 to August 2007, including leading its initial public offering in 1997. From August 2007 to January 2009, LoForti served as President, Chief Executive Officer and a member of Overland’s Board of Directors. From February 2009 to September 2009, he served as Overland’s President. From August 1992 to December 1995, Mr. LoForti was the Chief Financial Officer for Priority Pharmacy, a privately-held pharmacy company. From 1981 to 1992, Mr. LoForti was Vice President of Finance for Intermark, Inc., a publicly-held conglomerate. Mr. LoForti began his career in public accounting with Price Waterhouse and holds a Bachelor of Science in Accounting from Brigham Young University.

Director Compensation

The following table sets forth information regarding the compensation of Simply, Inc.’s nonemployee directors for the fiscal year ended January 29, 2022. The nonemployee director compensation program is more particularly described below.

Nonemployee Director Compensation Program for Fiscal 2022.   Nonemployee directors were compensated by an annual cash retainer fee of $40,000.  The Chairman of the Board and the Chairman of the Audit Committee each received an additional annual cash retainer of $20,000.  Board members are also reimbursed for out-of-pocket costs related to their attendance at Board and Committee meetings.

Board Committees and Meetings

The Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The Board of Directors annually reviews the OTC Market Rules’ definitions of independence for members of each of the committees and has determined that members of each of the committees are independent pursuant to applicable rules of the OTC Market Rules and the SEC. Copies of our committee charters may be viewed at the Company’s website at http://www.simplyinc.com/corporate-governance/.

Directors currently serving on our committees are set forth below:  

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Audit Committee

Our Audit Committee performs, among other things, the following functions:

Mr. Galloro and Mr. Taylor serve on our Audit Committee.  Mr. Galloro is currently the Chairman of the Audit Committee. Our Board of Directors has determined that he is an independent director and an audit committee financial expert.

Compensation Committee

Our Compensation Committee performs, among other things, the following functions:

Mr. Taylor is currently the Chairman of our Compensation Committee.

The Compensation Committee may invite to its meetings any member of management, including the Chief Executive Officer, and such other persons as it deems appropriate to carry out its duties and responsibilities. Our management assists the Compensation Committee by providing various support, including:

In addition, the Compensation Committee may from time to time engage an outside compensation consultant to:

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The Compensation Committee did not use the services of a compensation consultant during Fiscal 2022.

Nominating and Corporate Governance Committee

We also have a Nominating and Corporate Governance Committee, which, pursuant to its written charter, is responsible for recommending potential directors, for considering nominations for potential directors submitted by our stockholders and for certain matters related to corporate governance. Mr. Taylor and Mr. Galloro serve on this committee, which does not have a chairman.

There have been no material changes to the procedures (as described below) by which security holders may recommend nominees to our Board of Directors in the last fiscal year.

Director Candidates

The Nominating and Corporate Governance Committee believes that candidates for director should have certain minimum qualifications and have a high standard of personal and professional ethics, integrity and values. Candidates for director nominees are reviewed in the context of the current composition of our Board of Directors, our operating requirements and the long-term interests of our stockholders. In conducting this assessment, the Nominating and Corporate Governance Committee considers independence, professional background and experience, other board experience, industry knowledge, skills and expertise, and such other factors as it deems appropriate given the current needs of the Board and Simply, Inc., to maintain a balance of knowledge, experience and capabilities. Other factors considered may include diversity (including age, geography, professional and other experience), although the Company does not have a formal policy regarding diversity.

In the case of incumbent directors, the Nominating and Corporate Governance Committee reviews such directors’ overall service to us during their term, including the number of meetings attended, level of participation, quality of performance, and any other relevant considerations. In the case of new director candidates, the Nominating and Corporate Governance Committee also determines whether the nominee must be independent for regulatory purposes, which determination is based upon applicable exchange listing standards, applicable SEC rules and regulations, and the advice of counsel, if necessary.

The Nominating and Corporate Governance Committee uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Nominating and Corporate Governance Committee conducts appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of our Board of Directors. The Nominating and Corporate Governance Committee meets to discuss and consider such candidates’ qualifications and then selects nominees for recommendation to the Board by majority vote.

The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders. The Nominating and Corporate Governance Committee does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether or not the candidate was recommended by a stockholder or not. Stockholders who wish to recommend individuals for consideration by the Nominating and Corporate Governance Committee to become nominees for election to the Board at an annual meeting of stockholders must do so by delivering, at least 120 days prior to the anniversary date of the mailing of the proxy statement for our last annual meeting of stockholders, a written recommendation to the Nominating and Corporate Governance Committee at the following address: c/o Corporate Secretary, 155 North 400 West, Suite 170, Salt Lake City, Utah 84103.  Each submission must set forth, among other things: the name and address of the stockholder on whose behalf the submission is made; the number of our shares that are owned beneficially by such stockholder as of the date of the submission; the full name of the proposed candidate; a description of the proposed candidate’s business experience for at least the previous five years; complete biographical information for the proposed candidate; and a description of the proposed candidate’s qualifications as a director. For additional information, see our Director Selection Guidelines attached as Exhibit A to the Nominating and Corporate Governance Committee’s Charter, which can be found on our website at http://www.simplyinc.com/corporate-governance/.

Meetings of the Board of Directors and Committee Member Attendance

During fiscal year 2022, our Board of Directors met 13 times, our Audit Committee met 5 times and our Compensation Committee met 3 times. All directors attended at least 75% of the meetings of the Board and of the committees on which they served in fiscal year 2022 that were held while they were a director or committee member.

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Board Leadership Structure and Role in Risk Oversight

At the present time, the Company has two vacancies on its Board that it is working to fill.  It currently has three Board members consisting of Reinier Voigt, the Company’s Chief Executive Officer, Kevin Taylor, an independent director and Chairman of the Board and of the Compensation Committee, and Michael Galloro, an independent director and Chairman of the Audit Committee.

The Board of Directors has historically performed an important role in the review and oversight of risks, and generally oversees the Company’s risk management practices and processes, including entity level and financial controls. In its risk oversight role, the Board has the responsibility to satisfy itself that the risk management processes designed and implemented by the Company’s management are adequate and functioning as designed. The Board also oversees organizational structure, policies and procedures, such as the Code of Conduct and the Code of Ethics and other internal policies and guidelines designed to support the Company’s corporate governance and to comply with the laws, rules and regulations that apply to the Company’s business operations.

Although the Board of Directors is ultimately responsible for risk oversight at the Company, it has delegated primary oversight of the management of (i) financial reporting, internal controls, accounting and compliance risks to the Audit Committee, (ii) compensation risk to the Compensation Committee, and (iii) corporate governance risk to the Nominating and Corporate Governance Committee. Each of these committees routinely reports to the Board on the management of these specific risk areas.

To permit the Board of Directors and its committees to perform their respective risk oversight roles, members of management report directly to the Board or the relevant committee of the Board responsible for overseeing the management of specific risks, as applicable. The Chief Executive Officer reports directly to the Board. The Chief Financial Officer reports to the Chief Executive Officer, the Board and the Audit Committee. Members of the management team have a high degree of access and communication with the independent directors of the Board and the various Board committees. Members of the Company’s management regularly attend Board and committee meetings and are available to address any questions or concerns raised on matters related to risk management. The Company believes that a risk oversight structure with a Board consisting of a majority of independent directors is important for quality corporate governance.

Additional Corporate Governance Information

Stockholder Communications

Stockholders wishing to send communications to the Board may contact Vernon A. LoForti, our Chief Financial Officer and Corporate Secretary, at the Company’s Simply Mac administrative office located at 155 North 400 West, Suite 170, Salt Lake City, Utah 84103. All such communications will be shared with the members of the Board, or if applicable, a specified committee or director.

Code of Business Conduct and Ethics and Reporting of Accounting Concerns

We have adopted a Code of Business Conduct and Ethics (the “Code of Conduct”). We require all employees to adhere to the Code of Conduct in addressing legal and ethical issues encountered in conducting their work. The Code of Conduct requires that our employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest.

We have also adopted a Code of Ethics (the “Code of Ethics”) for our Chief Executive Officer and our Chief Financial Officer. The Code of Ethics supplements our Code of Conduct and is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. The Code of Conduct and Code of Ethics can be found on our website at http://www.simplyinc.com/corporate-goverance/.

We have established “whistle-blower procedures” that provide a process for the confidential and anonymous submission, receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters. These procedures provide protections to employees who report company misconduct.

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Section 16(A) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3, 4 and 5 furnished to us, we are not aware of any person who at any time during the fiscal year ended January 29, 2022, was a director, officer or beneficial owner of more than ten percent of our common stock, who failed to file, on a timely basis, reports required by Section 16(a) of the Securities Exchange Act for transactions occurring during such fiscal year.

Summary Compensation Table

The following table sets forth for our Chief Executive Officer and our Chief Financial Officer (each of these persons is referred to as a Named Executive Officer) information regarding salary, bonus and other compensation for the fiscal years ended January 29, 2022 and January 30, 2021.

Employment Agreements

Employment Agreements with each of our Named Executive Officers are summarized below.

Reinier Voigt.  The employment agreement with Mr. Voigt was effective June 8, 2020 and has an indefinite term.  The agreement provides Mr. Voigt with an annual base salary of $240,000 and he is eligible to receive an annual performance-based bonus of up to 100% of his base salary based on achievement of objectives established by the Compensation Committee.  If, as defined in the agreement, Mr. Voigt’s employment is terminated without “cause” or if he resigns for “good reason,” he will be entitled to a severance payment equal to two years of base salary. If the Company undergoes a “change of control,” he will be entitled to a change of control payment equal to two years of base salary plus 2 times the average bonus paid to him in the two most recently completed years.  Mr. Voigt is also subject to confidentiality, non-competition and non-solicitation restrictions in favor of the Company.

Vernon A. LoForti.  The employment agreement with Mr. LoForti was effective March 13, 2018, following the Cooltech Merger, and has an indefinite term.  The agreement provides for an annual base salary of $205,000 and an annual bonus to be determined by the Compensation Committee.  Mr. LoForti’s employment is at-will, however, in the event he is terminated at any time without cause, or resigns for good reason, he will receive severance pay equal to 12 months of salary.  This severance is inclusive of the 9 months of severance pay Mr. LoForti was already entitled to as a result of his termination on March 12, 2018 as a condition to closing the Cooltech Merger.

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Grants of Plan-Based Awards in Fiscal 2022

On November 1, 2021, the Company made plan-based grants to its Named Executive Officers of stock and stock options under its amended and restated 2015 equity incentive plan (the “2015 Equity Incentive Plan”).  Mr. Voigt received a grant of 300,000 shares of restricted common stock that vest one-third on each of the three, six and nine month anniversaries of the grant.  Mr. LoForti received a stock option grant on 175,000 shares with an exercise price of $2.53 per share and a 5-year life, 43,750 shares of which vested immediately, with the remainder vesting 43,750 shares on each three-month anniversary thereafter.

Outstanding Equity Awards at 2021 Fiscal Year-End

The following table provides information regarding outstanding stock options and restricted stock awards held by the Named Executive Officers at January 29, 2022. 

Change in Control Provisions Under 2015 Equity Incentive Plan

Under the 2015 Equity Incentive Plan, unless otherwise provided in the instrument evidencing an award or in a written employment, services or other agreement or policy between a participant and us, in the event of a change in control:

Under the 2015 Equity Incentive Plan “change in control” generally means the occurrence of any of the following events:

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Equity Compensation Plan Information

The following table provides information as of January 29, 2022 with respect to our 2015 Equity Incentive Plan as described below.

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Security Ownership of Certain Beneficial Owners and Management

As of April 22, 2022, there were 15,500,207 shares of common stock issued and outstanding. The following table sets forth certain information as of that date with respect to the beneficial ownership of common stock by each (i) Named Executive Officer listed in the Summary Compensation Table above, (ii) director and nominee for director, (iii) all current executive officers and directors as a group, and (iv) other persons known by us to be the beneficial owners of more than 5% of our outstanding shares of common stock.

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Director Independence

OTCQX Listing Rules require that our Board of Directors include at least two “independent” directors as defined by such rules. The standards relied upon by our Board of Directors in determining whether a director is “independent” consist of the independence standards of the OTCQX Listing Rules.

In accordance with the OTCQX Listing Rules, for a director to be considered “independent,” the Board of Directors must affirmatively determine that he or she is not an executive officer or employee of the Company or an individual that has a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Additionally, the following persons are not considered by the Board to be “independent”:

(a) a director who is or at any time during the past three years was employed by Simply, Inc. or its subsidiaries;

(b) a director who accepted or has a family member who accepted any compensation from Simply, Inc. in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than the following:

(i) compensation for board or board committee service;

(ii) compensation paid to a family member who is an employee (other than an executive officer) of Simply, Inc.; or

(iii) benefits under a tax-qualified retirement plan or non-discretionary compensation;

(c) a director who is a family member of an individual who is or at any time during the past three years was employed by Simply, Inc. as an executive officer;

(d) a director who is, or has a family member who is a partner in or a controlling stockholder or an executive officer of, any organization to which Simply, Inc. has made, or from which Simply, Inc. received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than the following:

(i) payments arising solely from investments in Simply, Inc. securities; or

(ii) payments under non-discretionary, charitable contribution matching programs;

(e) a director of Simply, Inc. who is, or has a family member who is employed as an executive officer of another entity where at any time during the past three years any of the executive officers of Simply, Inc. serve on the compensation committee of such other entity; or

(f) a director who is or has a family member who is a current partner of Simply, Inc.’s outside auditor or was a partner or employee of Simply, Inc.’s outside auditor who worked on the Simply, Inc. audit at any time during any of the past three years.

The Board of Directors has reviewed its director independence based on the foregoing standards and considered, among other things, transactions and relationships between each director or any member of his or her immediate family and Simply, Inc. and its subsidiaries and affiliates or any entity of which a director or an immediate family member is or was, as applicable, an executive officer, general partner or significant equity holder. As provided in the Director Qualification Standards of the Nominating and Corporate Governance Committee Charter, the purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the director is independent.

As a result of this review, the Board of Directors affirmatively determined that the following directors were independent of Simply, Inc. within the meaning of the OTCQX Listing Rules and the applicable rules promulgated by the SEC:

Kevin Taylor

Michael Galloro

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Conflicts of Interest Policies

Our Audit Committee reviews and oversees all related-party transactions for potential conflicts of interest on an ongoing basis. Our Board of Directors and our officers also are subject to certain provisions of Maryland law that are designed to eliminate or minimize the effects of certain potential conflicts of interest. Pursuant to these provisions of Maryland law and our articles of incorporation, any transaction between us and an interested party will not be invalidated because it is an interested-party transaction if it is fully disclosed to our Board of Directors, and a majority of the directors not otherwise interested in the transaction (including a majority of independent directors) make a determination that the transaction is fair, competitive and commercially reasonable and on terms and conditions not less favorable to us than those available from unaffiliated third parties. During Fiscal 2022, such related party transactions included the issuance of five 9% unsecured convertible notes and warrants issued to SOL Global Investments Corp. (“SOL Global”) in which the Company raised an aggregate of $4.0 million, as well as the private placement of an aggregate of 576,000 shares of the Company’s common stock valued at $2.0 million to a subsidiary of SOL Global.  In addition, during Fiscal 2022, the Company entered into licensing, supply and lease agreements with entities that are indirectly partially owned by SOL Global to operate a retail store under the SimplyEV brand and to sell scooters and other all-electric products and accessories.

All future transactions between us and any of our officers, directors or 5% stockholders are expected to be on terms no less favorable than could be obtained from independent third parties and to be approved by a majority of our independent, disinterested directors. We believe that by following these procedures, we will be able to mitigate the possible effects of any conflicts of interest.

Our independent registered public accounting firm is Kaufman Rossin & Co., Miami, Florida, PCAOB ID: 137 (“KR”).  The Audit Committee reviews and determines whether specific projects or expenditures with our registered public accounting firm potentially affect its independence. The Audit Committee’s policy requires that all services the independent registered public accounting firm may provide to Simply, Inc., including audit services and permitted audit-related services, be pre-approved in advance by the Audit Committee. In the event that an audit or non-audit service requires approval prior to the next scheduled meeting of the Audit Committee, the auditor must contact the Chairman of the Audit Committee (who has been delegated by the Audit Committee the authority to act in such circumstances) to obtain such approval. The approval will be reported to the Audit Committee at its next scheduled meeting. All audit and non-audit services provided by KR during 2021 and Fiscal 2022 were pre-approved by the Audit Committee.

The following sets forth the aggregate fees billed to us by KR for the years ended January 30, 2021 and January 29, 2022.

Audit Fees

The aggregate fees billed for professional services rendered by KR for its audit of our financial statements included in Form 10‑K and its review of our financial statements included in Forms 10-Q in Fiscal 2021 and Fiscal 2022 and related SEC reporting work were $510,000 and $515,000, respectively.

Tax Fees

There were no fees billed by KR in Fiscal 2021 and Fiscal 2022 for professional services for tax compliance, tax advice or tax planning.

Audit-Related Fees

There were no audit-related fees billed by KR in Fiscal 2021 and Fiscal 2022.

All Other Fees

There were no fees billed by KR in Fiscal 2021 and Fiscal 2022 for professional services other than the services described above.

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PART IV

(a) The following documents included elsewhere in this annual report on Form 10-K (see F-pages herein regarding financial statement information) are incorporated herein by reference and filed as part of this annual report:

(1) Financial statements:

The consolidated balance sheets as of January 29, 2022 and January 30, 2020, and the consolidated statements of operations and comprehensive loss, stockholders’ deficit and cash flows for the fiscal years ended January 29, 2022 and the January 30, 2021, together with notes thereto.

(2) Financial statement schedule: None

(3) Exhibits required by Item 601 of Regulation S-K:

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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SIMPLY, INC.

Consolidated Financial Statements

For the fiscal years ended January 29, 2022 and January 30, 2021

Table of Contents

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Simply, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Simply, Inc. (the “Company”) as of January 29, 2022 and January 30, 2021, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ deficit, and cash flows for each of the years in the two-year period ended January 29, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended January 29, 2022, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the consolidated financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern.  Management’s evaluation of the events and conditions and management’s plans regarding those matters are also described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Excess, Slow Moving and Obsolete Inventory

As described in Note 2 to the consolidated financial statements, the Company’s inventories are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company writes down its inventory to net realizable value when it is estimated to be slow-moving or obsolete by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand, which are affected by changes in the Company’s strategic direction, discontinuance of a product or introduction of newer versions of a product, declines in the sales of or forecasted demand for certain products, and general market conditions.  

F-2

We identified the evaluation of inventory net realizable value adjustments related to excess, slow-moving and obsolete inventory as a critical audit matter due to the amount of judgment required by the Company in making such estimates. As a result, there was a high degree of subjective auditor judgment in assessing such estimates, specifically as it related to the future salability of inventories.

Our principal audit procedures to evaluate management’s estimates included the following, among others: