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Note 1. Description of Business and Summary of Significant Accounting Policies
On November 27, 2013, Vince Holding Corp. (“VHC” or the “Company”), previously known as Apparel Holding Corp., closed an initial public offering (“IPO”) of its common stock and completed a series of restructuring transactions (the “Restructuring Transactions”) through which Kellwood Holding, LLC acquired the non-Vince businesses, which included Kellwood Company, LLC (“Kellwood Company” or Kellwood”), from the Company. The Company owns and operates the Vince business, which includes Vince, LLC.
Prior to the IPO and the Restructuring Transactions, VHC was a diversified apparel company operating a broad portfolio of fashion brands, which included the Vince business. As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business, and the stockholders immediately prior to the consummation of the Restructuring Transactions (the “Pre-IPO Stockholders”) (through their ownership of Kellwood Holding, LLC) retained the full ownership and control of the non-Vince businesses. The Vince business is now the sole operating business of VHC.
On November 18, 2016, Kellwood Intermediate Holding, LLC and Kellwood Company, LLC entered into a Unit Purchase Agreement with Sino Acquisition, LLC (the “Kellwood Purchaser”) whereby the Kellwood Purchaser agreed to purchase all of the outstanding equity interests of Kellwood Company, LLC. Prior to the closing, Kellwood Intermediate Holding, LLC and Kellwood Company, LLC conducted a pre-closing reorganization pursuant to which certain assets of Kellwood Company, LLC were distributed to a newly formed subsidiary of Kellwood Intermediate Holding, LLC, St. Louis Transition, LLC (“St. Louis, LLC”). The transaction closed on December 21, 2016 (the “Kellwood Sale”). St. Louis, LLC is anticipated to be wound down by or around December 2017.
(A) Description of Business: Established in 2002, Vince is a global luxury brand best known for utilizing luxe fabrications and innovative techniques to create a product assortment that combines urban utility and modern effortless style. From its edited core collection of ultra-soft cashmere knits and cotton tees, Vince has evolved into a global lifestyle brand and destination for both women’s and men’s apparel and accessories. The Company reaches its customers through a variety of channels, specifically through major wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through the Company’s branded retail locations and the Company’s website. The Company designs products in the U.S. and sources the vast majority of products from contract manufacturers outside the U.S., primarily in Asia. Products are manufactured to meet the Company’s product specifications and labor standards.
(B) Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
The consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading.
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation. The reclassification had no impact on previously reported net income or stockholders’ equity.
(C) Fiscal Year: The Company operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52 or 53-week period ending on the Saturday closest to January 31.
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References to “fiscal year 2016” or “fiscal 2016” refer to the fiscal year ended January 28, 2017; |
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References to “fiscal year 2015” or “fiscal 2015” refer to the fiscal year ended January 30, 2016; and |
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References to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015. |
Fiscal years 2016, 2015 and 2014 consisted of a 52-week period.
(D) Sources and Uses of Liquidity: The Company’s sources of liquidity are cash and cash equivalents, cash flows from operations, if any, borrowings available under the Revolving Credit Facility and the Company’s ability to access capital markets. The Company’s primary cash needs are capital expenditures for new stores and related leasehold improvements, meeting debt service requirements, paying amounts due under the Tax Receivable Agreement and funding working capital requirements.
During fiscal 2015 and fiscal 2016, the Company has made significant strategic decisions and investments to reset and support the future growth of the Vince brand. Management believes these significant investments are essential to the commitment to developing a strong foundation from which the Company can drive consistent profitable growth for the long term. In order to enhance the Company’s liquidity position in support of these investments, the Company performed the following actions:
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During the three months ended April 30, 2016, the Company completed a rights offering and related Investment Agreement transactions, issuing an aggregate of 11,818,181 shares of its common stock for total gross proceeds of $65,000. See Note 12 “Related Party Transactions” for additional details. The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,262 (see Note 12 “Related Party Transactions” for additional details), and (2) repay all then outstanding indebtedness, totaling $20,000, under the Revolving Credit Facility, allowing full borrowing capacity under this facility at that time. |
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To provide the Company with greater flexibility on certain debt covenants while it was executing brand reset strategies, the Company retained approximately $21,000 of proceeds from the rights offering discussed above at Vince Holding Corp. to be utilized in the event a Specified Equity Contribution (as defined under the Term Loan Facility) was required under the Term Loan Facility. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. Any amounts contributed from Vince Holding Corp. as a Specified Equity Contribution can then be utilized for normal operating needs. During April 2017, the Company utilized $6,241 of the funds held by Vince Holding Corp. to make a Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00. As of April 28, 2017, Vince Holding Corp. retains $15,196 of funds and management anticipates it will be necessary to make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of April 29, 2017, utilizing a portion of this retained cash. |
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In order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with Bank of America, as administrative agent and collateral agent under the Revolving Credit Facility to temporarily modify certain covenants. On April 14, 2017, the Letter was amended and restated to further increase borrowing flexibility through July 31, 2017 and allow the Company to borrow against a portion of the cash retained at Vince Holding Corp. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. |
In accordance with the new accounting guidance that became effective for the Company’s fiscal year ended January 28, 2017 (see (T) Recent Accounting Pronouncements below for further details), management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation does not initially consider the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. In performing this initial evaluation, management concluded that the following conditions raise substantial doubt about the Company’s ability to meet its financial obligations, specifically its ability to comply with the Consolidated Net Total Leverage Ratio under the Term Loan Facility. Since fiscal 2015, the Company has undertaken the task to reset the brand during a challenging retail environment, making strategic decisions and investments which had a cost to the short-term results but were necessary for the long-term sustainability of the Vince brand. The Company raised $65,000 under the Rights Offering, which was completed in anticipation of the difficulty of these undertakings. During fiscal 2016, the Company’s sales results did not meet expectations. Management’s future projections consider the uncertainty of trends in the retail environment in which the Company operates and anticipate that the Company will make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility for the first fiscal quarter of 2017. Beyond the first fiscal quarter, scenarios, including those beyond our control, could develop that include unanticipated declines in sales and operating results requiring additional Specified Equity Contributions. Although the Company would have cash retained by Vince Holding Corp. to make additional contributions, there are limits on the number of contributions that can be made in any four fiscal quarter period and there is a limit on the amount of cash that has been retained for the purpose of making Specified Equity Contributions.
Understanding the difficulties to project the current retail environment, the historical sales performance of the Company and as management’s plans to mitigate the substantial doubt have not been fully executed, management has therefore concluded there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management cannot predict with certainty the impact of various factors, including a challenging retail environment, on the Company’s business operations and financial results. Such impact could give rise to unanticipated capital needs that we may not be able to meet and/or result in our inability to service our existing debt or comply with the covenants therein. Our inability to comply with such covenants could result in the amounts outstanding under our debt to become immediately due and we might not be able to meet such payment obligations.
As mitigating plans, management has had discussions with lenders and with the Company’s majority shareholder on additional financing options and actions to improve the capital structure of the Company. In addition, management believes it has the ability to pursue cost reduction initiatives in order to further improve the Company’s financial performance and benefit the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility. While management believes that each of these actions is reasonably possible of occurring if necessary and could alleviate the substantial doubt, none of these actions has been executed at the time of the filing of the Company’s financial statements and therefore cannot be considered as mitigating events under the accounting guidance.
(E) Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates and assumptions may affect many items in the financial statements. Actual results could differ from estimates and assumptions in amounts that may be material to the consolidated financial statements.
Significant estimates inherent in the preparation of the consolidated financial statements include accounts receivable allowances, customer returns, the realizability of inventory, reserves for contingencies, useful lives and impairments of long-lived tangible and intangible assets, and accounting for income taxes and related uncertain tax positions, among others.
(F) Cash and cash equivalents: All demand deposits and highly liquid short-term deposits with original maturities of three months or less are considered cash equivalents.
(G) Accounts Receivable and Concentration of Credit Risk: The Company maintains an allowance for accounts receivable estimated to be uncollectible. The provision for bad debts is included in selling, general and administrative expense. Substantially all of the Company’s trade receivables are derived from sales to retailers and are recorded at the invoiced amount and do not bear interest. The Company performs ongoing credit evaluations of its wholesale partners’ financial condition and requires collateral as deemed necessary. The past due status of a receivable is based on its contractual terms. Account balances are charged off against the allowance when it is probable the receivable will not be collected.
Accounts receivable are recorded net of allowances including expected future chargebacks from wholesale partners and estimated margin support. It is the nature of the apparel and fashion industry that suppliers similar to the Company face significant pressure from customers in the retail industry to provide allowances to compensate for wholesale partner margin shortfalls. This pressure often takes the form of customers requiring the Company to provide price concessions on prior shipments as a prerequisite for obtaining future orders. Pressure for these concessions is largely determined by overall retail sales performance and, more specifically, the performance of the Company’s products at retail. To the extent the Company’s wholesale partners have more of the Company’s goods on hand at the end of the season, there will be greater pressure for the Company to grant markdown concessions on prior shipments. Accounts receivable balances are reported net of expected allowances for these matters based on the historical level of concessions required and estimates of the level of markdowns and allowances that will be required in the coming season. The Company evaluates the allowance balances on a continual basis and adjusts them as necessary to reflect changes in anticipated allowance activity. The Company also provides an allowance for sales returns based on known trends and historical return rates.
In fiscal 2016, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 19.6%, 14.4% and 10.8% of fiscal 2016 net sales. In fiscal 2015, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 18.3%, 13.8% and 10.8% of fiscal 2015 net sales. In fiscal 2014, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 23.2%, 13.2% and 12.3% of fiscal 2014 net sales.
Three wholesale partners each represented greater than ten percent of the Company’s gross accounts receivable balance as of January 28, 2017, with a corresponding aggregate total of 57.5% of such balance. Three wholesale partners each represented greater than ten percent of the Company’s gross accounts receivable as of January 30, 2016, with a corresponding aggregate total of 51.8% of such balance.
(H) Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. The cost of inventory includes purchase cost as well as sourcing, transportation, duty and other processing costs associated with acquiring, importing and preparing inventory for sale. Inventory costs are included in cost of products sold at the time of their sale. Product development costs are expensed in selling, general and administrative expense when incurred. Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost.
Inventories consisted of the following:
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January 28, |
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January 30, |
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(in thousands) |
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2017 |
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2016 |
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Finished goods |
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$ |
40,771 |
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$ |
49,837 |
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Less: reserves |
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(2,242 |
) |
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(13,261 |
) |
Total inventories, net |
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$ |
38,529 |
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$ |
36,576 |
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As of January 30, 2016, the reserve included a provision to reduce the carrying value of certain excess inventory and aged product to estimated net realizable value, as during fiscal 2015 the Company recorded a net charge of $10,300 associated with inventory that no longer supported the Company's prospective brand positioning strategy.
(I) Property and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line method over estimated useful lives of three to seven years for furniture, fixtures, and computer equipment. Leasehold improvements are depreciated on the straight-line basis over the shorter of their estimated useful lives or the lease term, excluding renewal terms. Capitalized software is depreciated on the straight-line basis over the estimated economic useful life of the software, generally three to seven years. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings. Property and equipment consisted of the following:
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January 28, |
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January 30, |
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(in thousands) |
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2017 |
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2016 |
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Leasehold improvements |
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$ |
41,214 |
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$ |
38,452 |
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Furniture, fixtures and equipment |
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12,267 |
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8,236 |
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Capitalized software |
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10,862 |
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1,764 |
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Construction in process |
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236 |
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4,716 |
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Total property and equipment |
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64,579 |
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53,168 |
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Less: accumulated depreciation |
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(21,634 |
) |
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(15,399 |
) |
Property and equipment, net |
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$ |
42,945 |
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$ |
37,769 |
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Depreciation expense was $7,070, $6,426 and $3,381 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
(J) Impairment of Long-lived Assets: The Company reviews long-lived assets with a finite life for existence of facts and circumstances which indicate that the useful life is shorter than previously estimated or that the carrying amount of such assets may not be recoverable from future operations based on undiscounted expected future cash flows. Impairment losses are then recognized in operating results to the extent discounted expected future cash flows are less than the carrying value of the asset. During fiscal 2016, the Company recorded non-cash asset impairment charges of $2,082 within Selling, general and administrative expenses in the Consolidated Statements of Operations, related to the impairment of certain retail stores with asset carrying values that were determined not to be recoverable and exceeded fair value. There were no significant impairment charges related to long-lived assets recorded in fiscal 2015 and fiscal 2014.
(K) Goodwill and Other Intangible Assets: Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. The Company completed its annual impairment testing on its goodwill and indefinite-lived intangible asset during the fourth quarters of fiscal 2016, fiscal 2015 and fiscal 2014. Goodwill is not allocated to the Company’s operating segments in the measure of segment assets regularly reported to and used by management, however goodwill is allocated to operating segments (goodwill reporting units) for the purpose of the annual impairment test for goodwill.
Goodwill represents the excess of the cost of acquired businesses over the fair market value of the identifiable net assets. The indefinite-lived intangible asset is the Vince tradename.
An entity may elect to perform a qualitative impairment assessment for goodwill and indefinite-lived intangible assets. If adverse qualitative trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, a quantitative impairment test is required. “Step one” of the quantitative impairment test for goodwill requires an entity to determine the fair value of each reporting unit and compare such fair value to the respective carrying amount. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying amount of the reporting unit exceeds its estimated fair value, “step two” of the impairment test is performed in order to determine the amount of the impairment loss. “Step two” of the goodwill impairment test includes valuing the tangible and intangible assets of the impaired reporting unit based on the fair value determined in “step one” and calculating the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities. The goodwill impairment test is dependent on a number of factors, including estimates of future growth, profitability and cash flows, discount rates and other variables. The Company bases its estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
The Company estimates the fair value of the tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology. This methodology assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. The relief from royalty approach is dependent on a number of factors, including estimates of future growth, royalty rates in the category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the tradename intangible asset is less than the carrying value.
An entity may pass on performing the qualitative assessment for a reporting unit or indefinite-lived intangible asset and directly perform the quantitative assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods.
In fiscal 2016, a quantitative impairment test on goodwill determined that the fair value of its Direct-to-consumer reporting unit was below its carrying value. During fiscal 2016, the sales results within the Direct-to-consumer reporting unit were impacted by continued declines in average order values as well as declines in the number of transactions due to lower conversion rates and reduced traffic and as a result, the Direct-to-consumer reporting unit has not met expectations resulting in lower current and expected future cash flows. The Company estimated the fair value of its Direct-to-consumer reporting unit using both the income and market valuation approaches, with a weighting of 80% and 20%, respectively. “Step one” of the assessment determined that the fair value of the Direct-to-consumer reporting unit was below the carrying amount by approximately 40%. Accordingly, “step two” of the assessment was performed, which compared the implied fair value of the goodwill to the carrying value of such goodwill. Based on the results from “step two,” the Company recorded a goodwill impairment charge of $22,311, to write-off all of the goodwill in the Direct-to-consumer reporting unit. The charge was recorded in Impairment of goodwill and indefinite-lived intangible asset in the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016. Additionally, the results of “step one” of the assessment determined that the fair value of the Wholesale reporting unit exceeded its fair value by approximately 40% and therefore did not result in any impairment of goodwill. However, further declines in the net sales or operating results of the Wholesale reporting unit may result in a partial or full impairment of its goodwill, which amounted to $41,435 as of January 28, 2017. Significant assumptions utilized in the discounted cash flow analysis included a discount rate of 16.0%. Significant assumptions utilized in a market-based approach were market multiples ranging from 0.50x to 0.90x for the Company’s reporting units.
In fiscal 2015, the Company elected to perform a quantitative impairment test on goodwill. The results of the quantitative test did not result in any impairment of goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. As such, the Company was not required to perform “step two” of the impairment test. In fiscal 2014, the Company elected to perform a qualitative assessment on goodwill and determined that it was not more likely than not that the carrying value of the reporting unit was greater than the fair value. As such, the Company was not required to perform “step two” of the impairment test.
In fiscal 2016, a quantitative assessment of the Company’s indefinite-lived intangible asset, which consists of the Vince tradename, determined that the fair value of its tradename intangible asset was below its carrying value. During fiscal 2016, the Company’s sales results have not met expectations resulting in lower current and expected future cash flows. The Company estimated the fair value of its tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology and determined that the fair value of the tradename intangible asset was below the carrying amount by approximately 30%. Accordingly, the Company recorded an impairment charge for its tradename intangible asset of $30,750, which was recorded in Impairment of goodwill and indefinite-lived intangible asset in the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016.
In fiscal 2015, the Company elected to perform a quantitative assessment on its tradename intangible assets. The results of the quantitative test did not result in any impairment because the fair value of the Company’s tradename intangible asset exceeded its carrying value. In fiscal 2014, the Company elected to perform a qualitative assessment on its tradename intangible assets and determined that it was not more likely than not that the carrying value of the assets exceeded the fair value.
Determining the fair value of goodwill and other intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is possible that estimates of future operating results could change adversely and impact the evaluation of the recoverability of the carrying value of goodwill and intangible assets and that the effect of such changes could be material.
Definite-lived intangible assets are comprised of customer relationships and are being amortized on a straight-line basis over their useful lives of 20 years.
See Note 2 “Goodwill and Intangible Assets” for more information on the details surrounding goodwill and intangible assets.
(L) Deferred Financing Costs: Deferred financing costs, such as underwriting, financial advisory, professional fees, and other similar fees are capitalized and recognized in interest expense over the contractual life of the related debt instrument using the straight-line method, as this method results in recognition of interest expense that is materially consistent with that of the effective interest method.
(M) Deferred Rent and Deferred Lease Incentives: The Company leases various office spaces, showrooms and retail stores. Many of these operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amount charged to operations and amounts paid as deferred rent. Certain of the Company’s retail store leases contain provisions for contingent rent, typically a percentage of retail sales once a predetermined threshold has been met. These amounts are expensed as incurred. Additionally, the Company receives lease incentives in certain leases. These allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense.
(N) Revenue Recognition: Sales are recognized when goods are shipped in accordance with customer orders for the Company’s wholesale business, upon receipt by the customer for the Company’s e-commerce business, and at the time of sale to the consumer for the Company’s retail business. Revenue associated with gift cards is recognized upon redemption. For the Company’s wholesale business, amounts billed to customers for shipping and handling costs are not significant. There is no stated obligation to customers after shipment, other than specifically set forth allowances or discounts that are accrued at the time of sale. The rights of inspection or acceptance contained in certain sales agreements are limited to whether the goods received by the Company’s wholesale partners are in conformance with the order specifications.
Estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known. Accrued discounts, returns and allowances are included as an offset to accounts receivable in the Consolidated Balance Sheets for the Company’s wholesale business.
(O) Cost of Products Sold: The Company’s cost of products sold and gross margins may not necessarily be comparable to that of other entities as a result of different practices in categorizing costs. The primary components of the Company’s cost of products sold are as follows:
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the cost of purchased merchandise, including raw materials; |
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the cost of inbound transportation, including freight; |
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the cost of the Company’s production and sourcing departments; |
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other processing costs associated with acquiring and preparing the inventory for sale; and |
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shrink and valuation reserves. |
(P) Marketing and Advertising: The Company provides cooperative advertising allowances to certain of its customers. These allowances are accounted for as reductions in sales as discussed in “Revenue Recognition” above. Production expense related to company-directed advertising is deferred until the first time at which the advertisement runs. All other expenses related to company-directed advertising are expensed as incurred. Marketing and advertising expense recorded in selling, general and administrative expenses was $8,156, $9,177 and $7,427 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. At January 28, 2017 and January 30, 2016, deferred production expenses associated with company-directed advertising were $182 and $416, respectively.
(Q) Share-Based Compensation: New, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock units, are measured at fair value and recognized as compensation expense, net of estimated forfeitures, over the requisite service period and is included as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations. Additionally, share-based awards granted to non-employees are expensed over the period in which the related services are rendered at their fair value, using the Black Scholes Pricing Model to determine fair value.
(R) Income Taxes: The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. The Company assesses the likelihood of the realization of deferred tax assets and adjusts the carrying amount of these deferred tax assets by a valuation allowance to the extent the Company believes it more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. The Company recognizes tax positions in the Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Accrued interest and penalties related to unrecognized tax benefits are included in income taxes in the Consolidated Statements of Operations.
(S) Earnings Per Share: Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Except when the effect would be anti-dilutive, diluted earnings (loss) per share is calculated based on the weighted average number of shares of common stock outstanding plus the dilutive effect of share-based awards calculated under the treasury stock method.
(T) Recent Accounting Pronouncements: In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance to simplify the accounting for goodwill impairment. The guidance removes “step two” of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for interim and annual impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company intends to early adopt this guidance on January 29, 2017.
In November 2016, the FASB issued guidance that requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017 using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. This new guidance is not expected to have a material impact on the Company’s Consolidated Statement of Cash Flows.
In August 2016, the FASB issued guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017 and must be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact of adopting this guidance on its Consolidated Statement of Cash Flows.
In March 2016, the FASB issued guidance regarding share-based compensation, to simplify the accounting for share-based payment transactions, including accounting for forfeitures, income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2016. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize right-of-use lease assets and lease liabilities on the balance sheet for those leases currently classified as operating leases. The guidance is required to be adopted retrospectively by restating all years presented in the Company’s financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
In November 2015, the FASB issued new guidance on the balance sheet classification of deferred taxes, which requires entities to classify deferred tax assets and liabilities as noncurrent in the consolidated balance sheet. Currently, deferred tax assets and liabilities must be classified as current or noncurrent amounts in the consolidated balance sheet. This guidance is effective for financial statements issued for interim and annual periods beginning after December 15, 2016. The guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company will reclassify deferred tax balances, as required.
In July 2015, the FASB issued new guidance on accounting for inventory, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued new guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This guidance became effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. The Company adopted this accounting guidance for any contracts entered into or materially modified after January 30, 2016. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In August 2014, the FASB issued new guidance which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company’s annual period ended January 28, 2017.
In May 2014, the FASB issued new guidance on revenue recognition accounting, which requires entities to recognize revenue when promised goods or services are transferred to customers and in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since its issuance, the FASB has amended several aspects of the new guidance. In August 2015, the FASB elected to defer the effective dates for this guidance, which is now effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of the new guidance on its consolidated financial statements.
|
Note 2. Goodwill and Intangible Assets
Net goodwill balances and changes therein by segment were as follows:
(in thousands) |
|
Wholesale |
|
|
Direct-to-consumer |
|
|
Total Net Goodwill |
|
|||
Balance as of January 31, 2015 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 30, 2016 |
|
|
41,435 |
|
|
|
22,311 |
|
|
|
63,746 |
|
Impairment charge |
|
|
— |
|
|
|
(22,311 |
) |
|
|
(22,311 |
) |
Balance as of January 28, 2017 |
|
$ |
41,435 |
|
|
$ |
— |
|
|
$ |
41,435 |
|
The total carrying amount of goodwill was net of accumulated impairments of $69,253, $46,942 and $46,942 as of January 28, 2017, January 30, 2016 and January 31, 2015, respectively. During the fourth quarter of fiscal 2016, the Company recorded a $22,311 goodwill impairment charge as a result of the Company’s annual goodwill impairment test. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (K) Goodwill and Other Intangible Assets” for additional details. There were no impairments recorded as a result of the Company’s annual goodwill impairment test performed during fiscal 2015 and fiscal 2014.
The following tables present a summary of identifiable intangible assets:
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Impairment Charge |
|
|
Net Book Value |
|
||||
Balance as of January 28, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(5,372 |
) |
|
$ |
— |
|
|
$ |
6,598 |
|
Indefinite-lived intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
|
101,850 |
|
|
|
— |
|
|
|
(30,750 |
) |
|
|
71,100 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(5,372 |
) |
|
$ |
(30,750 |
) |
|
$ |
77,698 |
|
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(4,774 |
) |
|
$ |
7,196 |
|
Indefinite-lived intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,774 |
) |
|
$ |
109,046 |
|
During the fourth quarter of fiscal 2016, the Company recorded a $30,750 impairment charge as a result of the Company’s quantitative assessment on its tradename intangible asset. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (K) Goodwill and Other Intangible Assets” for additional details. No impairments of the Vince tradename were recorded as a result of the Company’s annual asset impairment tests performed during fiscal 2015 and fiscal 2014.
Amortization of identifiable intangible assets was $598, $598 and $599 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively, which is included in Selling, general and administrative expenses on the Consolidated Statements of Operations. Amortization expense for each of the fiscal years 2017 to 2021 is expected to be as follows:
|
|
Future |
|
|
(in thousands) |
|
Amortization |
|
|
2017 |
|
$ |
598 |
|
2018 |
|
|
598 |
|
2019 |
|
|
598 |
|
2020 |
|
|
598 |
|
2021 |
|
|
598 |
|
Total next 5 fiscal years |
|
$ |
2,990 |
|
|
Note 3. Fair Value Measurements
Accounting Standards Codification (“ASC”) Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance outlines a valuation framework, creates a fair value hierarchy to increase the consistency and comparability of fair value measurements and details the disclosures that are required for items measured at fair value. Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy as follows:
|
Level 1— |
|
quoted market prices in active markets for identical assets or liabilities |
|
|
|
|
|
Level 2— |
|
observable market-based inputs (quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active) or inputs that are corroborated by observable market data |
|
|
|
|
|
Level 3— |
|
significant unobservable inputs that reflect the Company’s assumptions and are not substantially supported by market data |
The Company did not have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at January 28, 2017 or January 30, 2016. At January 28, 2017 and January 30, 2016, the Company believes that the carrying values of cash and cash equivalents, receivables and accounts payable approximate fair value, due to the short-term maturity of these instruments and would be measured using Level 1 inputs. The Company’s debt obligations as of January 28, 2017 are at variable interest rates and management estimates that the fair value of the Company’s outstanding debt obligations was approximately $48,000 based upon quoted prices in markets that are not active, which is considered a Level 2 input.
The Company’s non-financial assets, which primarily consist of goodwill, intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at their carrying values. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and intangible assets), non-financial assets are assessed for impairment, and if applicable, written down to (and recorded at) fair value.
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in fiscal 2016, based on such fair value hierarchy:
|
|
Net Carrying Value as of |
|
|
Fair Value Measured and Recorded at Reporting Date Using: |
|
|
Total Losses - Year Ended |
|
|
|||||||||||
(in thousands) |
|
January 28, 2017 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
January 28, 2017 |
|
|
|||||
Property and equipment |
|
$ |
1,042 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,042 |
|
|
$ |
2,082 |
|
(1) |
Goodwill |
|
|
41,435 |
|
|
|
— |
|
|
|
— |
|
|
|
41,435 |
|
|
|
22,311 |
|
(2) |
Tradename |
|
|
71,100 |
|
|
|
— |
|
|
|
— |
|
|
|
71,100 |
|
|
|
30,750 |
|
(2) |
(1) Recorded within Selling, general and administrative expenses on the Consolidated Statements of Operations. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (I) Property and Equipment” for additional information.
(2) Recorded within Impairment of goodwill and indefinite-lived intangible asset on the Consolidated Statements of Operations. See Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for additional details.
|
Note 4. Long-Term Debt and Financing Arrangements
Long-term debt consisted of the following:
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Term Loan Facility |
|
$ |
45,000 |
|
|
$ |
45,000 |
|
Revolving Credit Facility |
|
|
5,200 |
|
|
|
15,000 |
|
Total long-term debt principal |
|
|
50,200 |
|
|
|
60,000 |
|
Less: Deferred financing costs |
|
|
1,902 |
|
|
|
2,385 |
|
Total long-term debt |
|
$ |
48,298 |
|
|
$ |
57,615 |
|
Term Loan Facility
On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, Vince, LLC and Vince Intermediate Holding, LLC, a direct subsidiary of VHC and the direct parent company of Vince, LLC (“Vince Intermediate”), entered into a $175,000 senior secured term loan facility (as amended from time to time, the “Term Loan Facility”) with the lenders party thereto, Bank of America, N.A. (“BofA”) as administrative agent, JP Morgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and Cantor Fitzgerald as documentation agent. The Term Loan Facility will mature on November 27, 2019. Vince, LLC and Vince Intermediate are borrowers and VHC is a guarantor under the Term Loan Facility.
The Term Loan Facility also provides for an incremental facility of up to the greater of $50,000 and an amount that would result in the consolidated net total secured leverage ratio not exceeding 3.00 to 1.00, in addition to certain other rights to refinance or repurchase portions of the term loan. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the Term Loan Facility (adjusted to reflect any prepayments), with the balance payable at final maturity. Interest is payable on loans under the Term Loan Facility at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00% based on a consolidated net total leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a consolidated net total leverage ratio. During the continuance of a payment or bankruptcy event of default, interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the non-default interest rate then applicable to base rate loans. The Term Loan Facility requires Vince, LLC and Vince Intermediate to make mandatory prepayments upon the occurrence of certain events, including additional debt issuances, common and preferred stock issuances, certain asset sales, and annual payments of 50% of excess cash flow, subject to reductions to 25% and 0% if Vince, LLC and Vince Intermediate maintain a Consolidated Net Total Leverage Ratio of 2.50 to 1.00 and 2.00 to 1.00, respectively, and subject to reductions for voluntary prepayments made during such fiscal year.
The Term Loan Facility contains a requirement that Vince, LLC and Vince Intermediate maintain a “Consolidated Net Total Leverage Ratio” as of the last day of any period of four fiscal quarters not to exceed 3.25 to 1.00. The Term Loan Facility permits Vince Holding Corp. to make a Specified Equity Contribution, as defined under the Agreement, to the Borrowers in order to increase, dollar for dollar, Consolidated EBITDA for such fiscal quarter for the purposes of determining compliance with this covenant at the end of such fiscal quarter and applicable subsequent periods provided that (a) in each four fiscal quarter period there shall be at least two fiscal quarters in which no Specified Equity Contribution is made; (b) no more than five Specified Equity Contributions shall be made in the aggregate during the term of the Agreement; and (c) the amount of any Specified Equity Contribution shall be no greater than the amount required to cause the Company to be in compliance with this covenant.
In addition, the Term Loan Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of the Company’s business or its fiscal year, and distributions and dividends. The Term Loan Facility generally permits dividends to the extent that no default or event of default is continuing or would result from the contemplated dividend and the pro forma Consolidated Net Total Leverage Ratio after giving effect to such contemplated dividend is at least 0.25 lower than the maximum Consolidated Net Total Leverage Ratio for such quarter in an amount not to exceed the excess available amount, as defined in the loan agreement. All obligations under the Term Loan Facility are guaranteed by VHC and any future material domestic restricted subsidiaries of Vince, LLC and secured by a lien on substantially all of the assets of VHC, Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries. As of January 28, 2017, the Company was in compliance with applicable financial covenants. During April 2017, the Company utilized $6,241 of the funds held by VHC to make a Specified Equity Contribution, as defined under the Term Loan Facility, in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00.
Through January 28, 2017, on an inception to date basis, the Company has made voluntary prepayments totaling $130,000 in the aggregate on the original $175,000 Term Loan Facility entered into on November 27, 2013, with no such prepayments made during fiscal 2016. As of January 28, 2017, the Company had $45,000 of debt outstanding under the Term Loan Facility.
Revolving Credit Facility
On November 27, 2013, Vince, LLC entered into a $50,000 senior secured revolving credit facility (as amended from time to time, the “Revolving Credit Facility”) with BofA as administrative agent. Vince, LLC is the borrower and VHC and Vince Intermediate are the guarantors under the Revolving Credit Facility. On June 3, 2015, Vince LLC entered into a first amendment to the Revolving Credit Facility, that among other things, increased the aggregate commitments under the facility from $50,000 to $80,000, subject to a loan cap which is the lesser of (i) the Borrowing Base, as defined in the loan agreement, (ii) the aggregate commitments, or (iii) $70,000 until debt obligations under the Company’s term loan facility have been paid in full, and extended the maturity date from November 27, 2018 to June 3, 2020. The Revolving Credit Facility also provides for a letter of credit sublimit of $25,000 (plus any increase in aggregate commitments) and an accordion option that allows for an increase in aggregate commitments up to $20,000. Interest is payable on the loans under the Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, plus an applicable margin of 1.25% to 1.75% for LIBOR loans or 0.25% to 0.75% for Base Rate loans, and in each case subject to a pricing grid based on an average daily excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0%. During the continuance of an event of default and at the election of the required lender, interest will accrue at a rate of 2% in excess of the applicable non-default rate.
The Revolving Credit Facility contains a covenant that, at any point when “Excess Availability” is less than the greater of (i) 15% of an adjusted loan cap (without giving effect to item (iii) of the loan cap described above) or (ii) $10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, Vince, LLC must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000 measured at the end of each applicable fiscal month for the trailing twelve-month period. As of January 28, 2017, the Company was not subject to this covenant as Excess Availability was greater than the required minimum. Additionally, in order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with BofA, as administrative agent and collateral agent under the Revolving Credit Facility which temporarily modified the covenant discussed above. The Letter provided that during the period from March 6, 2017 until and through April 30, 2017, the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” under the Revolving Credit Facility were temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety (the “Amended Letter”). The Amended Letter provides that during the period from April 13, 2017 until and through July 31, 2017 (the “Letter Period”), the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” in the Revolving Credit Facility continue to be temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. The Amended Letter further provides that during the Letter Period, so long as the Company’s cash is held in a deposit account of the Company maintained with BofA (the “BofA Account”), the Company may include in the Borrowing Base (i) up to $10,000 of such cash after April 13, 2017 through May 31, 2017 and (ii) up to $5,000 of such cash after May 31, 2017 through July 31, 2017. During the Letter Period, to the extent that the cash and cash equivalents held by the Loan Parties at the close of business on any given day exceeds $1,000 (excluding amounts in the BofA Account and certain other excluded accounts, as well as amounts equal to all undrawn checks and ACH issued in the ordinary course of business for payroll, rent and other accounts payable needs), Vince shall use any such cash in excess of $1,000 to repay the loans under the Revolving Credit Facility.
The Revolving Credit Facility contains representations and warranties, other covenants and events of default that are customary for this type of financing, including limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of the Company’s business or its fiscal year. The Revolving Credit Facility generally permits dividends in the absence of any event of default (including any event of default arising from the contemplated dividend), so long as (i) after giving pro forma effect to the contemplated dividend, for the following six months Excess Availability will be at least the greater of 20% of the adjusted loan cap and $10,000 and (ii) after giving pro forma effect to the contemplated dividend, the “Consolidated Fixed Charge Coverage Ratio” for the 12 months preceding such dividend shall be greater than or equal to 1.0 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.0 to 1.0 if, after giving pro forma effect to the contemplated dividend, Excess Availability for the six fiscal months following the dividend is at least the greater of 35% of the adjusted loan cap and $15,000). As of January 28, 2017, the Company was in compliance with applicable financial covenants.
As of January 28, 2017, $27,157 was available under the Revolving Credit Facility, net of the amended loan cap, and there were $5,200 of borrowings outstanding and $7,474 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 28, 2017 was 4.3%.
As of January 30, 2016, $28,127 was available under the Revolving Credit Facility, net of the amended loan cap, and there were $15,000 of borrowings outstanding and $7,522 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 30, 2016 was 2.1%.
|
Note 5. Commitments and Contingencies
Leases
The Company leases its office, showroom space and retail stores under operating leases which have remaining terms up to ten years, excluding renewal terms. Most of the Company’s real estate leases contain covenants that require the Company to pay real estate taxes, insurance, and other executory costs. Certain of these leases require contingent rent payments or contain kick-out clauses and/or opt-out clauses, based on the operating results of the retail operations utilizing the leased premises. Rent under leases with scheduled rent changes or lease concessions are recorded on a straight-line basis over the lease term. Rent expense under all operating leases was $23,545, $20,015 and $16,161 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively, the majority of which is recorded within selling, general and administrative expenses.
The future minimum lease payments under operating leases at January 28, 2017 were as follows:
|
|
Minimum Lease |
|
|
(in thousands) |
|
Payments |
|
|
Fiscal 2017 |
|
$ |
21,096 |
|
Fiscal 2018 |
|
|
20,918 |
|
Fiscal 2019 |
|
|
20,877 |
|
Fiscal 2020 |
|
|
19,792 |
|
Fiscal 2021 |
|
|
17,355 |
|
Thereafter |
|
|
50,753 |
|
Total minimum lease payments |
|
$ |
150,791 |
|
Other Contractual Cash Obligations
At January 28, 2017, the Company’s other contractual cash obligations of $42,294 consisted primarily of inventory purchase obligations and service contracts.
Restructuring Charges
In the second quarter of fiscal 2015, a number of senior management departures occurred. In connection with these departures, the Company had certain obligations under existing employment arrangements with respect to severance and employee related benefits. As a result, the Company recognized a charge of $3,394 for these departures within Selling, general, and administrative expenses on the Consolidated Statements of Operations during fiscal 2015. This net charge was reflected within “unallocated corporate expenses” for segment disclosures. These amounts are being paid over a period of six to eighteen months, which began in the third quarter of fiscal 2015.
The following is a reconciliation of the accrued severance and employee related benefits associated with the above charge included within total current liabilities on the Consolidated Balance Sheet:
(in thousands) |
|
|
|
|
Balance at August 1, 2015 |
|
$ |
3,717 |
|
Cash payments |
|
|
(1,557 |
) |
Non-cash recovery |
|
|
(323 |
) |
Balance at January 30, 2016 |
|
|
1,837 |
|
Cash payments |
|
|
(1,719 |
) |
Balance at January 28, 2017 |
|
$ |
118 |
|
Litigation
The Company is a party to legal proceedings, compliance matters and environmental claims that arise in the ordinary course of its business. Although the outcome of such items cannot be determined with certainty, management believes that the ultimate outcome of these items, individually and in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.
|
Note 7. Defined Contribution Plan
On May 1, 2015, the Company adopted the Vince Holding Corp. 401(k) Plan (“401k Plan”), which is a defined contribution plan covering all U.S.-based employees. Employees who meet certain eligibility requirements may participate in this program by contributing between 1% and 100% of annual compensation to the 401k Plan, subject to IRS limitations. The Company may make matching contributions in an amount equal to 50% of employee contributions up to 3% of eligible compensation. Prior to the adoption of the 401k Plan, employees of the Company participated in the Kellwood Company Retirement Savings Plan administered by Kellwood Holding, LLC. The annual expense incurred by the Company for defined contribution plans was $405, $426 and $344 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
|
Note 8. Stockholders’ Equity
Common Stock
The Company currently has authorized for issuance 100,000,000 shares of its Voting Common Stock, par value of $0.01 per share. As of January 28, 2017 and January 30, 2016, the Company had 49,427,606 and 36,779,417 shares issued and outstanding, respectively.
Rights Offering
On April 22, 2016, the Company issued an aggregate of 11,818,181 shares in conjunction with the completed Rights Offering and Investment Agreement. See Note 1 “Description of Business and Summary of Significant Accounting Policies” for additional information.
Secondary Offering of Common Stock
In July 2014, certain selling stockholders of VHC, including affiliates of Sun Capital (the “Selling Stockholders”), sold 4,975,254 shares of VHC’s common stock at a public offering price of $34.50 per share in a secondary public offering (the “Secondary Offering”). The total shares sold included 648,946 shares sold by the Selling Stockholders pursuant to the exercise by the underwriters of their option to purchase additional shares. The Company did not receive any proceeds from the Secondary Offering. Immediately following the Secondary Offering, affiliates of Sun Capital beneficially owned 54.6% of VHC’s issued and outstanding common stock. The Company incurred approximately $571 of expenses in connection with the Secondary Offering during fiscal 2014.
Dividends
The Company has not paid dividends, and the Company’s current ability to pay such dividends is restricted by the terms of its debt agreements. The Company’s future dividend policy will be determined on a yearly basis and will depend on earnings, financial condition, capital requirements, and certain other factors. The Company does not expect to declare dividends with respect to its common stock in the foreseeable future.
|
Note 10. Income Taxes
The provision for income taxes consisted of the following:
|
Fiscal Year |
|
|||||||||
(in thousands) |
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
— |
|
|
$ |
(53 |
) |
|
$ |
759 |
|
State |
|
207 |
|
|
|
522 |
|
|
|
344 |
|
Foreign |
|
75 |
|
|
|
— |
|
|
|
— |
|
Total current |
|
282 |
|
|
|
469 |
|
|
|
1,103 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
83,323 |
|
|
|
2,994 |
|
|
|
20,416 |
|
State |
|
10,121 |
|
|
|
(249 |
) |
|
|
2,475 |
|
Total deferred |
|
93,444 |
|
|
|
2,745 |
|
|
|
22,891 |
|
Total provision for income taxes |
$ |
93,726 |
|
|
$ |
3,214 |
|
|
$ |
23,994 |
|
The sources of income (loss) before provision for income taxes are from the United States and the Company’s French branch. The Company files U.S. federal income tax returns and income tax returns in various state and local jurisdictions.
Current income taxes are the amounts payable under the respective tax laws and regulations on each year’s earnings. Deferred income tax assets and liabilities represent the tax effects of revenues, costs and expenses, which are recognized for tax purposes in different periods from those used for financial statement purposes.
A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
|
Fiscal Year |
|
|||||||||
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Statutory federal rate |
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes, net of federal benefit |
|
5.5 |
% |
|
|
6.5 |
% |
|
|
5.7 |
% |
Nondeductible Tax Receivable Agreement adjustment |
|
0.4 |
% |
|
|
4.1 |
% |
|
—% |
|
|
Valuation allowance |
|
(176.8 |
)% |
|
|
(0.5 |
)% |
|
|
(0.7 |
)% |
Return to provision adjustment |
|
(0.1 |
)% |
|
|
(2.4 |
)% |
|
—% |
|
|
Changes in tax law |
—% |
|
|
|
(3.2 |
)% |
|
—% |
|
||
Other |
—% |
|
|
|
(0.8 |
)% |
|
|
0.2 |
% |
|
Total |
|
(136.0 |
)% |
|
|
38.7 |
% |
|
|
40.2 |
% |
Deferred income tax assets and liabilities consisted of the following:
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
2017 |
|
|
2016 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
Depreciation and amortization |
$ |
28,353 |
|
|
$ |
17,071 |
|
Employee related costs |
|
2,361 |
|
|
|
2,163 |
|
Allowance for asset valuations |
|
4,817 |
|
|
|
2,551 |
|
Accrued expenses |
|
7,349 |
|
|
|
6,088 |
|
Net operating losses |
|
83,670 |
|
|
|
72,465 |
|
Tax credits |
|
812 |
|
|
|
812 |
|
Other |
|
489 |
|
|
|
457 |
|
Total deferred tax assets |
|
127,851 |
|
|
|
101,607 |
|
Less: valuation allowances |
|
(122,860 |
) |
|
|
(1,024 |
) |
Net deferred tax assets |
|
4,991 |
|
|
|
100,583 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Cancellation of debt income |
|
(4,607 |
) |
|
|
(6,657 |
) |
Other |
|
(384 |
) |
|
|
(482 |
) |
Total deferred tax liabilities |
|
(4,991 |
) |
|
|
(7,139 |
) |
Net deferred tax assets |
$ |
— |
|
|
$ |
93,444 |
|
Included in: |
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
$ |
— |
|
|
$ |
4,164 |
|
Deferred income taxes |
|
— |
|
|
|
89,280 |
|
Net deferred tax assets |
$ |
— |
|
|
$ |
93,444 |
|
Net operating losses as of January 28, 2017 presented above do not include prior deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes, since they have not yet reduced income taxes payable. The excess deduction will reduce income taxes payable and increase additional paid in capital by $2,350 when ultimately deducted in a future year. Net operating losses as of January 30, 2016 presented above do not include prior deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes since they have not yet reduced income taxes payable. The excess deduction that would reduce income taxes payable and increase additional paid in capital was $2,732 as of January 30, 2016.
As of January 28, 2017, the Company had a net operating loss of $224,519 (federal tax effected amount of $78,582) for federal income tax purposes that may be used to reduce future federal taxable income. As of January 28, 2017, the cumulative amount of tax deductions related to shared-based compensation and the corresponding compensation expense adjustment for financial reporting was $5,876 (federal and state tax effected amount of $2,350). The net operating losses for federal income tax purposes will expire between 2030 and 2037.
As of January 28, 2017, the Company recorded a $9,777 deferred tax asset related to net operating loss carryforwards for state income tax purposes that may be used to reduce future state taxable income. The net operating loss carryforwards for state income tax purposes expire between 2022 and 2037.
As of January 28, 2017, the Company had total deferred tax assets related to net operating loss carryforwards, reduced for excess stock deductions and uncertain tax positions, of $83,670, of which $74,752 and $8,918 were attributable to federal and domestic state and local jurisdictions, respectively.
The valuation allowance for deferred tax assets was $122,860 at January 28, 2017, increasing $121,836 from the valuation allowance for deferred tax assets of $1,024 at January 30, 2016. During fiscal 2016, the Company recorded additional valuation allowances in the amount of $121,836 due to the combination of (i) a current year pre-tax loss, including goodwill and tradename impairment charges; (ii) levels of projected pre-tax income; and (iii) the Company’s ability to carry forward or carry back tax losses. The valuation allowance of $1,024 at January 30, 2016, reflected management’s assessment, based on available information, that it was more likely than not that a portion of the deferred tax assets would not be realized due to the inability to generate sufficient state taxable income. The total valuation allowance on deferred tax assets decreased on a net basis by $50 in the fiscal year ended January 30, 2016. Adjustments to the valuation allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:
|
Fiscal Year |
|
|||||||||
(in thousands) |
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Beginning balance |
$ |
2,127 |
|
|
$ |
4,487 |
|
|
$ |
3,693 |
|
Increases for tax positions in current year |
|
208 |
|
|
|
72 |
|
|
|
2,397 |
|
Increases for tax positions in prior years |
|
4 |
|
|
|
27 |
|
|
|
135 |
|
Decreases for tax positions in prior years |
|
— |
|
|
|
(2,459 |
) |
|
|
(1,738 |
) |
Ending balance |
$ |
2,339 |
|
|
$ |
2,127 |
|
|
$ |
4,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 28, 2017 and January 30, 2016 , unrecognized tax benefits in the amount of $0 and $2,161 (net of tax), respectively, would impact the Company’s effective tax rate if recognized. It is reasonably possible that within the next 12 months certain temporary unrecognized tax benefits could fully reverse. Should this occur, the Company’s unrecognized tax benefits could be reduced by up to $2,339.
The Company includes accrued interest and penalties on underpayments of income taxes in its income tax provision. As of January 28, 2017 and January 30, 2016, the Company did not have any interest and penalties accrued on its Consolidated Balance Sheets and no related provision or benefit was recognized in each of the Company’s Consolidated Statements of Operations for the years ended January 28, 2017, January 30, 2016 and January 31, 2015. Interest is computed on the difference between the tax position recognized net of any unrecognized tax benefits and the amount previously taken or expected to be taken in the Company’s tax returns.
With limited exceptions, the Company is no longer subject to examination for U.S. federal and state income tax for 2007 and prior.
|
Note 11. Segment and Geographical Financial Information
The Company operates and manages its business by distribution channel and has identified two reportable segments, as further described below. Management considered both similar and dissimilar economic characteristics, internal reporting and management structures, as well as products, customers, and supply chain logistics to identify the following reportable segments:
|
• |
Wholesale segment—consists of the Company’s operations to distribute products to major department stores and specialty stores in the United States and select international markets; and |
|
• |
Direct-to-consumer segment—consists of the Company’s operations to distribute products directly to the consumer through its branded full-price specialty retail stores, outlet stores, and e-commerce platform. |
The accounting policies of the Company’s reportable segments are consistent with those described in Note 1 “Description of Business and Summary of Significant Accounting Policies.” Unallocated corporate expenses are comprised of selling, general and administrative expenses attributable to corporate and administrative activities (such as marketing, design, finance, information technology, legal and human resources departments), and other charges that are not directly attributable to the Company’s reportable segments. Unallocated corporate assets are comprised of the carrying values of the Company’s goodwill and tradename, deferred tax assets, and other assets that will be utilized to generate revenue for both of the Company’s reportable segments. As the Company’s goodwill and tradename are not allocated to the Company’s reportable segments in the measure of segment assets regularly reported to and used by management, the corresponding impairment charges associated with the goodwill and tradename are not reflected in the operating results of the Company’s reportable segments.
Summary information for the Company’s reportable segments is presented below.
|
|
Fiscal Year |
|
|||||||||
(in thousands) |
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
170,053 |
|
|
$ |
201,182 |
|
|
$ |
259,418 |
|
Direct-to-consumer |
|
|
98,146 |
|
|
|
101,275 |
|
|
|
80,978 |
|
Total net sales |
|
$ |
268,199 |
|
|
$ |
302,457 |
|
|
$ |
340,396 |
|
Operating (Loss) Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
47,098 |
|
|
$ |
61,571 |
|
|
$ |
100,623 |
|
Direct-to-consumer (1) |
|
|
1,216 |
|
|
|
7,839 |
|
|
|
14,556 |
|
Subtotal |
|
|
48,314 |
|
|
|
69,410 |
|
|
|
115,179 |
|
Unallocated corporate expenses |
|
|
(59,925 |
) |
|
|
(53,684 |
) |
|
|
(44,929 |
) |
Impairment of goodwill and indefinite-lived intangible asset |
|
|
(53,061 |
) |
|
|
— |
|
|
|
— |
|
Total operating (loss) income |
|
$ |
(64,672 |
) |
|
$ |
15,726 |
|
|
$ |
70,250 |
|
Depreciation & Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
1,754 |
|
|
$ |
2,058 |
|
|
$ |
1,962 |
|
Direct-to-consumer |
|
|
4,611 |
|
|
|
4,498 |
|
|
|
2,950 |
|
Unallocated corporate |
|
|
2,319 |
|
|
|
1,794 |
|
|
|
355 |
|
Total depreciation & amortization |
|
$ |
8,684 |
|
|
$ |
8,350 |
|
|
$ |
5,267 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
650 |
|
|
$ |
1,629 |
|
|
$ |
2,076 |
|
Direct-to-consumer |
|
|
9,559 |
|
|
|
9,442 |
|
|
|
8,117 |
|
Unallocated corporate |
|
|
4,078 |
|
|
|
6,520 |
|
|
|
9,506 |
|
Total capital expenditures |
|
$ |
14,287 |
|
|
$ |
17,591 |
|
|
$ |
19,699 |
|
(1) Includes non-cash impairment charges totaling $2,082 related to property and equipment. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (I) Property and Equipment” for additional information.
Impairment of goodwill and indefinite-lived intangible asset in Fiscal 2016 includes pre-tax impairment charges of $53,061 related to the Company’s goodwill and tradename intangible asset. See Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for further details.
Assets for each of the Company’s reportable segments are presented below.
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Total Assets: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
44,442 |
|
|
$ |
47,757 |
|
Direct-to-consumer |
|
|
45,038 |
|
|
|
35,433 |
|
Unallocated corporate |
|
|
150,000 |
|
|
|
280,378 |
|
Total assets |
|
$ |
239,480 |
|
|
$ |
363,568 |
|
The Company is domiciled in the U.S. and as of January 28, 2017, had no active international subsidiaries. Although the Company maintains a showroom in Paris through a local branch, substantially all marketing, sales, order management and customer service functions are performed in the U.S. and therefore substantially all of the Company’s sales originate in the U.S. As a result, net sales by destination are no longer provided. Additionally, substantially all long-lived assets, including property and equipment and fixtures installed at the Company’s retailer sites, are located in the U.S.
|
Note 12. Related Party Transactions
Shared Services Agreement
In connection with the consummation of the Company’s IPO on November 27, 2013, Vince, LLC entered into a Shared Services Agreement with Kellwood (the “Shared Services Agreement”), pursuant to which Kellwood would provide support services in various areas including, among other things, certain accounting functions, tax, e-commerce operations, distribution, logistics, information technology, accounts payable, credit and collections and payroll and benefits administration. Since the IPO, the Company had been in the process of transitioning certain functions performed by Kellwood under the Shared Services Agreement and as of the end of fiscal 2016, the Company has completed the transition of all such functions and systems from Kellwood to the Company’s own systems or processes as well as to third-party service providers. Functions that transitioned to the Company, including its third-party service providers, include accounting related functions, tax, accounts payable, credit and collections, e-commerce customer service, distribution and logistics, payroll and benefits administration, and information technology support. Additionally, the Company has completed the implementation of its own enterprise resource planning (“ERP”) and supporting systems, point-of-sale system, third-party e-commerce platform, human resource payroll and recruitment systems, distribution applications, and network infrastructure.
In connection with the Kellwood Sale, the Shared Services Agreement was contributed to St. Louis, LLC. St. Louis, LLC continues to provide minor transitional services relating to historical records and legacy functions, which the Company is in the process of winding down. The Shared Services Agreement will terminate automatically upon the termination of all services provided thereunder. After termination of the agreement, St. Louis, LLC will have no obligation to provide any services to the Company.
The fees for all services received by Vince, LLC under the Shared Services Agreement are at cost. Such costs are the full amount of any and all actual and direct out-of-pocket expenses (including base salary and wages but without providing for any margin of profit or allocation of depreciation or amortization expense) incurred by the service provider or its affiliates in connection with the provision of the services.
The Company is invoiced monthly for the services provided under the Shared Services Agreement and generally is required to pay within 15 business days of receiving such invoice. The payments can be trued-up and can be disputed once each fiscal quarter. For the years ended January 28, 2017, January 30, 2016 and January 31, 2015, the Company recognized $4,256, $9,357 and $11,436, respectively, of expense within the Consolidated Statements of Operations for services provided under the Shared Services Agreement. As of January 28, 2017 and January 30, 2016, the Company has recorded $37 and $858, respectively, in Other accrued expenses to recognize amounts payable under the Shared Services Agreement.
Tax Receivable Agreement
VHC entered into a Tax Receivable Agreement with the Pre-IPO Stockholders on November 27, 2013. The Company and its former subsidiaries generated certain tax benefits (including NOLs and tax credits) prior to the Restructuring Transactions consummated in connection with the Company’s IPO and will generate certain section 197 intangible deductions (the “Pre-IPO Tax Benefits”), which would reduce the actual liability for taxes that the Company might otherwise be required to pay. The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by the Company and its subsidiaries from the utilization of the Pre-IPO Tax Benefits (the “Net Tax Benefit”).
For purposes of the Tax Receivable Agreement, the Net Tax Benefit equals (i) with respect to a taxable year, the excess, if any, of (A) the Company’s liability for taxes using the same methods, elections, conventions and similar practices used on the relevant company return assuming there were no Pre-IPO Tax Benefits over (B) the Company’s actual liability for taxes for such taxable year (the “Realized Tax Benefit”), plus (ii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on an amended schedule applicable to such prior taxable year over the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year, minus (iii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year over the Realized Tax Benefit reflected on the amended schedule for such prior taxable year; provided, however, that to extent any of the adjustments described in clauses (ii) and (iii) were reflected in the calculation of the tax benefit payment for any subsequent taxable year, such adjustments shall not be taken into account in determining the Net Tax Benefit for any subsequent taxable year.
While the Tax Receivable Agreement is designed with the objective of causing the Company’s annual cash costs attributable to federal, state and local income taxes (without regard to the Company’s continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as that which the Company would have paid had the Company not had the Pre-IPO Tax Benefits available to offset its federal, state and local taxable income, there are circumstances in which this may not be the case. In particular, the Tax Receivable Agreement provides that any payments by the Company thereunder shall not be refundable. In that regard, the payment obligations under the Tax Receivable Agreement differ from a payment of a federal income tax liability in that a tax refund would not be available to the Company under the Tax Receivable Agreement even if the Company were to incur a net operating loss for federal income tax purposes in a future tax year. Similarly, the Pre-IPO Stockholders will not reimburse the Company for any payments previously made if any tax benefits relating to such payments are subsequently disallowed, although the amount of any such tax benefits subsequently disallowed will reduce future payments (if any) otherwise owed to such Pre-IPO Stockholders. In addition, depending on the amount and timing of the Company’s future earnings (if any) and on other factors including the effect of any limitations imposed on the Company’s ability to use the Pre-IPO Tax Benefits, it is possible that all payments required under the Tax Receivable Agreement could become due within a relatively short period of time following consummation of the Company’s IPO.
If the Company had not entered into the Tax Receivable Agreement, the Company would be entitled to realize the full economic benefit of the Pre-IPO Tax Benefits to the extent allowed by federal, state and local law. The Tax Receivable Agreement is designed with the objective of causing the Company’s annual cash costs attributable to federal, state and local income taxes (without regard to the Company’s continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as the Company would have paid had the Company not had the Pre-IPO Tax Benefits available to offset its federal, state and local taxable income. As a result, stockholders who purchased shares in the IPO are not entitled to the economic benefit of the Pre-IPO Tax Benefits that would have been available if the Tax Receivable Agreement were not in effect, except to the extent of the Company’s continuing 15% interest in the Pre-IPO Benefits.
Additionally, the payments the Company makes to the Pre-IPO Stockholders under the Tax Receivable Agreement are not expected to give rise to any incidental tax benefits to the Company, such as deductions or an adjustment to the basis of the Company’s assets.
An affiliate of Sun Capital may elect to terminate the Tax Receivable Agreement upon the occurrence of a Change of Control (as defined below). In connection with any such termination, the Company is obligated to pay the present value (calculated at a rate per annum equal to LIBOR plus 200 basis points as of such date) of all remaining Net Tax Benefit payments that would be required to be paid to the Pre-IPO Stockholders from such termination date, applying the valuation assumptions set forth in the Tax Receivable Agreement (the “Early Termination Period”). “Change of control,” as defined in the Tax Receivable Agreement shall mean an event or series of events by which (i) VHC shall cease directly or indirectly to own 100% of the capital stock of Vince, LLC; (ii) any “person” or “group” (as such terms are used in Section 13(d) and 14(d) of the Exchange Act), other than one or more permitted investors, shall be the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of capital stock having more, directly or indirectly, than 35% of the total voting power of all outstanding capital stock of Vince Holding Corp. in the election of directors, unless at such time the permitted investors are direct or indirect “beneficial owners” (as so defined) of capital stock of Vince Holding Corp. having a greater percentage of the total voting power of all outstanding capital stock of VHC in the election of directors than that owned by each other “person” or “group” described above; (iii) for any reason whatsoever, a majority of the board of directors of VHC shall not be continuing directors; or (iv) a “Change of Control” (or comparable term) shall occur under (x) any term loan or revolving credit facility of VHC or its subsidiaries or (y) any unsecured, senior, senior subordinated or subordinated indebtedness of VHC or its subsidiaries, if, in each case, the outstanding principal amount thereof is in excess of $15,000. The Company may also terminate the Tax Receivable Agreement by paying the Early Termination Payment to the Pre-IPO Stockholders. Additionally, the Tax Receivable Agreement provides that in the event that the Company breaches any material obligations under the Tax Receivable Agreement by operation of law as a result of the rejection of the Tax Receivable Agreement in a case commenced under the Bankruptcy Code, then the Early Termination Payment plus other outstanding amounts under the Tax Receivable Agreement shall become due and payable.
The Tax Receivable Agreement will terminate upon the earlier of (i) the date all such tax benefits have been utilized or expired, (ii) the last day of the tax year including the tenth anniversary of the IPO Restructuring Transactions and (iii) the mutual agreement of the parties thereto, unless earlier terminated in accordance with the terms thereof.
The Company had expected to make a required payment under the Tax Receivable Agreement in the fourth quarter of fiscal 2015. As a result of lower than expected cash from operations due to weaker than projected performance, and the level of projected availability under the Company’s Revolving Credit Facility, management concluded that the Company would not be able to fund the payment when due. Accordingly, on September 1, 2015, the Company entered into an amendment to the Tax Receivable Agreement with Sun Cardinal, LLC, an affiliate of Sun Capital Partners, Inc., for itself and as a representative of the other stockholders parties thereto. Pursuant to this amendment, Sun Cardinal agreed to postpone payment of the tax benefit with respect to the 2014 taxable year, estimated at $21,762 plus accrued interest, to September 15, 2016. The amendment to the Tax Receivable Agreement also waived the application of a default interest rate at LIBOR plus 500 basis points per annum on the postponed payment. The interest rate on the postponed payment remained at LIBOR plus 200 basis points per annum. As a condition of the Investment Agreement, the Company repaid its obligation, including accrued interest, totaling $22,262, with respect to the 2014 taxable year under the Tax Receivable Agreement upon the closing of the Rights Offering.
As of January 28, 2017, the Company’s total obligation under the Tax Receivable Agreement is estimated to be $140,618, of which $2,788 is included as a component of Other accrued expenses and $137,830 is included as Other liabilities on the Consolidated Balance Sheet. The tax benefit payment of $7,438, including accrued interest, with respect to the 2015 taxable year was paid in the fourth quarter of fiscal 2016. The Tax Receivable Agreement expires on December 31, 2023. The obligation was originally recorded in connection with the IPO as an adjustment to additional paid-in capital on the Company’s Consolidated Balance Sheet. During fiscal 2016, the obligation under the Tax Receivable Agreement was adjusted primarily as a result of changes in tax laws that impacted the net operating loss deferred tax assets. The adjustment resulted in a net decrease of $209 to the liability under the Tax Receivable Agreement with the corresponding adjustment accounted for as a decrease to Other expense, net on the Consolidated Statements of Operations. During fiscal 2015, the Company adjusted the obligation under the Tax Receivable Agreement in connection with the filing of its 2014 income tax returns and as a result of changes in tax laws that impacted the net operating loss deferred tax assets. These adjustments resulted in a net increase of $1,154 to the pre-IPO deferred tax assets and a net increase of $981 to the liability under the Tax Receivable Agreement with the corresponding net increase accounted for as an adjustment to other expense, net on the consolidated statements of operations. During fiscal year 2014, the Company adjusted the obligation under the Tax Receivable Agreement in connection with the filing of its 2013 income tax returns. The return to provision adjustment resulted in a net reduction of $818 to the pre-IPO deferred tax assets and a net reduction of $1,442 to the liability under the Tax Receivable Agreement with the corresponding net increase of $624 accounted for as an adjustment to additional paid in-capital. In addition, the Company made its first tax benefit payment with respect to the 2013 taxable year of $3,199 including accrued interest which was paid during the fourth quarter of fiscal 2014.
Investment Agreement and Rights Offering
On March 15, 2016, the Company entered into an Investment Agreement with the Investors pursuant to which Sun Cardinal and SCSF Cardinal agreed to backstop the Rights Offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription.
On March 29, 2016, the Company commenced a Rights Offering, whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holders”) received one non-transferrable right to purchase 0.3191 shares for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercised their subscription rights were entitled to subscribe for additional shares that remained unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allowed a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights could only be exercised for whole numbers of shares; no fractional shares of common stock were issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors fully subscribed in the Rights Offering and exercised their oversubscription right. The Company received subscriptions and oversubscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, resulting in aggregate gross proceeds of approximately $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of gross proceeds from the related Investment Agreement and issued to the Investors 195,663 shares of its common stock in connection therewith. In total, the Company received total gross proceeds of $65,000 as a result of the Rights Offering and related Investment Agreement transactions and recorded increases of $118 within Common Stock and $63,992 within Additional paid-in capital on the consolidated balance sheet. Upon the completion of these transactions, affiliates of Sun Capital owned 58% of the Company’s outstanding common stock.
The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement (as discussed above) with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,262, and (2) repay all then outstanding indebtedness, totaling $20,000, under the Company’s Revolving Credit Facility. The Company intends to use the remaining net proceeds, which funds are held by VHC until needed by its operating subsidiary, for additional strategic investments and general corporate purposes, which may include future amounts owed by the Company under the Tax Receivable Agreement. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (D) Sources and Uses of Liquidity” for additional details regarding the Company’s ability to utilize the remaining net proceeds.
Management Services Agreement
In connection with the acquisition of Kellwood Company by affiliates of Sun Capital in 2008, Sun Capital Partners Management V, LLC, an affiliate of Sun Capital, entered into the Management Services Agreement (the “Management Services Agreement”) with Kellwood Company. Under this agreement, Sun Capital Management provided Kellwood Company with consulting and advisory services, including services relating to financing alternatives, financial reporting, accounting and management information systems. In exchange, Kellwood Company reimbursed Sun Capital Management for reasonable out-of-pocket expenses incurred in connection with providing consulting and advisory services, additional and customary and reasonable fees for management consulting services provided in connection with corporate events, and also paid an annual management fee equal to $2,200 which was prepaid in equal quarterly installments, a portion of which was charged to the Vince business. The Company reported $0, $0 and $79 for management fees to Sun Capital in Other expense, net, in the Consolidated Statements of Operations for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
Upon the consummation of certain corporate events involving Kellwood Company or its direct or indirect subsidiaries, Kellwood Company was required to pay Sun Capital Management a transaction fee in an amount equal to 1% of the aggregate consideration paid to or by Kellwood Company and any of its direct or indirect subsidiaries or stockholders. The Company incurred no material transaction fees payable to Sun Capital Management during all periods presented on the consolidated statement of operations.
On November 27, 2013, in connection with the closing of the Company’s IPO and Restructuring Transactions, VHC was released from the terms of the Management Services Agreement between Kellwood Company and Sun Capital Management.
Sun Capital Consulting Agreement
On November 27, 2013, the Company entered into an agreement with Sun Capital Management to (i) reimburse Sun Capital Management Corp. (“Sun Capital Management”) or any of its affiliates providing consulting services under the agreement for out-of-pocket expenses incurred in providing consulting services to the Company and (ii) provide Sun Capital Management with customary indemnification for any such services.
The agreement is scheduled to terminate on November 27, 2023, the tenth anniversary of the Company’s IPO. Under the consulting agreement, the Company has no obligation to pay Sun Capital Management or any of its affiliates any consulting fees other than those which are approved by a majority of the Company’s directors that are not affiliated with Sun Capital. To the extent such fees are approved in the future, the Company will be obligated to pay such fees in addition to reimbursing Sun Capital Management or any of its affiliates that provide the Company services under the consulting agreement for all reasonable out-of-pocket fees and expenses incurred by such party in connection with the provision of consulting services under the consulting agreement and any related matters. Reimbursement of such expenses shall not be conditioned upon the approval of a majority of the Company’s directors that are not affiliated with Sun Capital Management, and shall be payable in addition to any fees that such directors may approve.
Neither Sun Capital Management nor any of its affiliates are liable to the Company or the Company’s affiliates, security holders or creditors for (1) any liabilities arising out of, related to, caused by, based upon or in connection with the performance of services under the consulting agreement, unless such liability is proven to have resulted directly and primarily from the willful misconduct or gross negligence of such person or (2) pursuing any outside activities or opportunities that may conflict with the Company’s best interests, which outside activities the Company consents to and approves under the consulting agreement, and which opportunities neither Sun Capital Management nor any of its affiliates will have any duty to inform the Company of. In no event will the aggregate of any liabilities of Sun Capital Management or any of its affiliates exceed the aggregate of any fees paid under the consulting agreement.
In addition, the Company is required to indemnify Sun Capital Management, its affiliates and any successor by operation of law against any and all liabilities, whether or not arising out of or related to such party’s performance of services under the consulting agreement, except to the extent proven to result directly and primarily from such person’s willful misconduct or gross negligence. The Company is also required to defend such parties in any lawsuits which may be brought against such parties and advance expenses in connection therewith. In the case of affiliates of Sun Capital Management that have rights to indemnification and advancement from affiliates of Sun Capital, the Company agrees to be the indemnitor of first resort, to be liable for the full amounts of payments of indemnification required by any organizational document of such entity or any agreement to which such entity is a party, and that the Company will not make any claims against any affiliates of Sun Capital Partners for contribution, subrogation, exoneration or reimbursement for which they are liable under any organizational documents or agreement. Sun Capital Management may, in its sole discretion, elect to terminate the consulting agreement at any time. The Company may elect to terminate the consulting agreement if SCSF Cardinal, Sun Cardinal or any of their respective affiliates’ aggregate ownership of the Company’s equity securities falls below 30%.
During fiscal 2016, fiscal 2015 and fiscal 2014, the Company incurred expenses of $121, $114 and $76, respectively, under the Sun Capital Consulting Agreement.
Indemnification Agreements
The Company has entered into indemnification agreements with each of its executive officers and directors. The indemnification agreements provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under the DGCL.
Amended and Restated Certificate of Incorporation
The Company’s amended and restated certificate of incorporation provides that for so long as affiliates of Sun Capital own 30% or more of the Company’s outstanding shares of common stock, Sun Cardinal, a Sun Capital affiliate, has the right to designate a majority of the Company’s board of directors. For so long as Sun Cardinal has the right to designate a majority of the Company’s board of directors, the directors designated by Sun Cardinal are expected to constitute a majority of each committee of the Company’s board of directors (other than the Audit Committee), and the chairman of each of the committees (other than the Audit Committee) is expected to be a director serving on the committee who is selected by affiliates of Sun Capital, provided that, at such time as the Company is not a “controlled company” under the NYSE corporate governance standards, the Company’s committee membership will comply with all applicable requirements of those standards and a majority of the Company’s board of directors will be “independent directors,” as defined under the rules of the NYSE, subject to any applicable phase in requirements.
|
Note 13. Quarterly Financial Information (unaudited)
Summarized quarterly financial results for fiscal 2016 and fiscal 2015 are as follows:
(in thousands, expect per share data) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter (1) |
|
||||
Fiscal 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
67,645 |
|
|
$ |
60,702 |
|
|
$ |
75,973 |
|
|
$ |
63,879 |
|
Gross profit |
|
|
28,258 |
|
|
|
27,387 |
|
|
|
37,958 |
|
|
|
29,216 |
|
Net (loss) income |
|
|
(1,924 |
) |
|
|
(1,967 |
) |
|
|
3,380 |
|
|
|
(162,148 |
) |
Basic (loss) earnings per share (2) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.07 |
|
|
$ |
(3.28 |
) |
Diluted (loss) earnings per share (2) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.07 |
|
|
$ |
(3.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, expect per share data) |
|
First Quarter |
|
|
Second Quarter (3) |
|
|
Third Quarter (4) |
|
|
Fourth Quarter (5) |
|
||||
Fiscal 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
59,842 |
|
|
$ |
79,993 |
|
|
$ |
80,859 |
|
|
$ |
81,763 |
|
Gross profit |
|
|
30,741 |
|
|
|
20,789 |
|
|
|
40,005 |
|
|
|
40,981 |
|
Net income (loss) |
|
|
2,454 |
|
|
|
(5,026 |
) |
|
|
5,893 |
|
|
|
1,778 |
|
Basic earnings (loss) per share (2) |
|
$ |
0.07 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
Diluted earnings (loss) per share (2) |
|
$ |
0.06 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
(1) |
Net loss, basic loss per share and diluted loss per share include the impact of (i) $53,061 of non-cash pre-tax impairment charges related to goodwill and the tradename intangible asset (see Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for additional details); (ii) a $2,082 non-cash pre-tax impairment charge related to property and equipment (see Note 1 “Description of Business and Summary of Significant Accounting Policies (J) Impairment of Long-lived Assets” for additional details); and (iii) a $121,836 valuation allowance against the Company’s deferred tax assets (see Note 10 “Income Taxes”) for additional details. |
(2) |
The sum of the quarterly earnings per share may not equal the full-year amount as the computation of the weighted-average number of shares outstanding for each quarter and the full-year are performed independently. |
(3) |
Includes the impact of $14,447 of pre-tax expense within cost of products sold associated with inventory write-downs primarily related to excess out of season and current inventory and $2,861 of pre-tax expense within selling, general and administrative expenses associated with executive severance costs partly offset by the favorable impact of executive stock option forfeitures. |
(4) |
Includes the impact of $1,986 of pre-tax income within Cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter of 2015 and $164 pre-tax expense within Selling, general and administrative expenses associated with executive search costs, partly offset by the favorable impact of executive stock option forfeitures. |
(5) |
Includes the impact of $2,161 of pre-tax income within Cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter of 2015 and $323 pre-tax income within Selling, general and administrative expenses associated with the favorable adjustment to management transition costs taken in the second quarter. Additionally, gross profit, net income (loss) and diluted earnings (loss) per share in the fourth quarter were overstated by $530, $313 and $0.01, respectively, as a result of an immaterial error in inventory valuation during the third quarter. |
|
Note 14. Subsequent Event
In order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into the Letter with BofA, as administrative agent and collateral agent under the Revolving Credit Facility, to temporarily modify a covenant. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details.
|
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
|
Beginning of Period |
|
|
Expense Charges, net of Reversals |
|
|
Deductions and Write-offs, net of Recoveries |
|
|
End of Period |
|
||||
Sales Allowances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 |
|
$ |
(12,846 |
) |
|
$ |
(59,078 |
) |
|
$ |
52,213 |
|
|
$ |
(19,711 |
) |
Fiscal 2015 |
|
|
(16,098 |
) |
|
|
(55,656 |
) |
|
|
58,908 |
|
|
|
(12,846 |
) |
Fiscal 2014 |
|
|
(9,265 |
) |
|
|
(54,467 |
) |
|
|
47,634 |
|
|
|
(16,098 |
) |
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 |
|
|
(188 |
) |
|
|
(192 |
) |
|
|
105 |
|
|
|
(275 |
) |
Fiscal 2015 |
|
|
(379 |
) |
|
|
34 |
|
|
|
157 |
|
|
|
(188 |
) |
Fiscal 2014 |
|
|
(353 |
) |
|
|
(168 |
) |
|
|
142 |
|
|
|
(379 |
) |
Provision for Inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 |
|
|
(13,248 |
) |
|
|
1,864 |
|
|
|
9,322 |
|
|
|
(2,062 |
) |
Fiscal 2015 |
|
|
(6,464 |
) |
|
|
(16,263 |
) |
|
|
9,479 |
|
|
|
(13,248 |
) |
Fiscal 2014 |
|
|
(3,868 |
) |
|
|
(3,719 |
) |
|
|
1,123 |
|
|
|
(6,464 |
) |
Valuation Allowances on Deferred Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 |
|
|
(1,024 |
) |
|
|
(121,836 |
) |
|
|
— |
|
|
|
(122,860 |
) |
Fiscal 2015 |
|
|
(1,074 |
) |
|
|
— |
|
|
|
50 |
|
|
|
(1,024 |
) |
Fiscal 2014 |
|
|
(1,843 |
) |
|
|
— |
|
|
|
769 |
|
|
|
(1,074 |
) |
|
(A) Description of Business: Established in 2002, Vince is a global luxury brand best known for utilizing luxe fabrications and innovative techniques to create a product assortment that combines urban utility and modern effortless style. From its edited core collection of ultra-soft cashmere knits and cotton tees, Vince has evolved into a global lifestyle brand and destination for both women’s and men’s apparel and accessories. The Company reaches its customers through a variety of channels, specifically through major wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through the Company’s branded retail locations and the Company’s website. The Company designs products in the U.S. and sources the vast majority of products from contract manufacturers outside the U.S., primarily in Asia. Products are manufactured to meet the Company’s product specifications and labor standards.
(B) Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
The consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading.
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation. The reclassification had no impact on previously reported net income or stockholders’ equity.
(C) Fiscal Year: The Company operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52 or 53-week period ending on the Saturday closest to January 31.
|
• |
References to “fiscal year 2016” or “fiscal 2016” refer to the fiscal year ended January 28, 2017; |
|
• |
References to “fiscal year 2015” or “fiscal 2015” refer to the fiscal year ended January 30, 2016; and |
|
• |
References to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015. |
Fiscal years 2016, 2015 and 2014 consisted of a 52-week period.
(D) Sources and Uses of Liquidity: The Company’s sources of liquidity are cash and cash equivalents, cash flows from operations, if any, borrowings available under the Revolving Credit Facility and the Company’s ability to access capital markets. The Company’s primary cash needs are capital expenditures for new stores and related leasehold improvements, meeting debt service requirements, paying amounts due under the Tax Receivable Agreement and funding working capital requirements.
During fiscal 2015 and fiscal 2016, the Company has made significant strategic decisions and investments to reset and support the future growth of the Vince brand. Management believes these significant investments are essential to the commitment to developing a strong foundation from which the Company can drive consistent profitable growth for the long term. In order to enhance the Company’s liquidity position in support of these investments, the Company performed the following actions:
|
• |
During the three months ended April 30, 2016, the Company completed a rights offering and related Investment Agreement transactions, issuing an aggregate of 11,818,181 shares of its common stock for total gross proceeds of $65,000. See Note 12 “Related Party Transactions” for additional details. The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,262 (see Note 12 “Related Party Transactions” for additional details), and (2) repay all then outstanding indebtedness, totaling $20,000, under the Revolving Credit Facility, allowing full borrowing capacity under this facility at that time. |
|
• |
To provide the Company with greater flexibility on certain debt covenants while it was executing brand reset strategies, the Company retained approximately $21,000 of proceeds from the rights offering discussed above at Vince Holding Corp. to be utilized in the event a Specified Equity Contribution (as defined under the Term Loan Facility) was required under the Term Loan Facility. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. Any amounts contributed from Vince Holding Corp. as a Specified Equity Contribution can then be utilized for normal operating needs. During April 2017, the Company utilized $6,241 of the funds held by Vince Holding Corp. to make a Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00. As of April 28, 2017, Vince Holding Corp. retains $15,196 of funds and management anticipates it will be necessary to make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of April 29, 2017, utilizing a portion of this retained cash. |
|
• |
In order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with Bank of America, as administrative agent and collateral agent under the Revolving Credit Facility to temporarily modify certain covenants. On April 14, 2017, the Letter was amended and restated to further increase borrowing flexibility through July 31, 2017 and allow the Company to borrow against a portion of the cash retained at Vince Holding Corp. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. |
In accordance with the new accounting guidance that became effective for the Company’s fiscal year ended January 28, 2017 (see (T) Recent Accounting Pronouncements below for further details), management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation does not initially consider the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. In performing this initial evaluation, management concluded that the following conditions raise substantial doubt about the Company’s ability to meet its financial obligations, specifically its ability to comply with the Consolidated Net Total Leverage Ratio under the Term Loan Facility. Since fiscal 2015, the Company has undertaken the task to reset the brand during a challenging retail environment, making strategic decisions and investments which had a cost to the short-term results but were necessary for the long-term sustainability of the Vince brand. The Company raised $65,000 under the Rights Offering, which was completed in anticipation of the difficulty of these undertakings. During fiscal 2016, the Company’s sales results did not meet expectations. Management’s future projections consider the uncertainty of trends in the retail environment in which the Company operates and anticipate that the Company will make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility for the first fiscal quarter of 2017. Beyond the first fiscal quarter, scenarios, including those beyond our control, could develop that include unanticipated declines in sales and operating results requiring additional Specified Equity Contributions. Although the Company would have cash retained by Vince Holding Corp. to make additional contributions, there are limits on the number of contributions that can be made in any four fiscal quarter period and there is a limit on the amount of cash that has been retained for the purpose of making Specified Equity Contributions.
Understanding the difficulties to project the current retail environment, the historical sales performance of the Company and as management’s plans to mitigate the substantial doubt have not been fully executed, management has therefore concluded there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management cannot predict with certainty the impact of various factors, including a challenging retail environment, on the Company’s business operations and financial results. Such impact could give rise to unanticipated capital needs that we may not be able to meet and/or result in our inability to service our existing debt or comply with the covenants therein. Our inability to comply with such covenants could result in the amounts outstanding under our debt to become immediately due and we might not be able to meet such payment obligations.
As mitigating plans, management has had discussions with lenders and with the Company’s majority shareholder on additional financing options and actions to improve the capital structure of the Company. In addition, management believes it has the ability to pursue cost reduction initiatives in order to further improve the Company’s financial performance and benefit the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility. While management believes that each of these actions is reasonably possible of occurring if necessary and could alleviate the substantial doubt, none of these actions has been executed at the time of the filing of the Company’s financial statements and therefore cannot be considered as mitigating events under the accounting guidance.
(E) Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates and assumptions may affect many items in the financial statements. Actual results could differ from estimates and assumptions in amounts that may be material to the consolidated financial statements.
Significant estimates inherent in the preparation of the consolidated financial statements include accounts receivable allowances, customer returns, the realizability of inventory, reserves for contingencies, useful lives and impairments of long-lived tangible and intangible assets, and accounting for income taxes and related uncertain tax positions, among others.
(F) Cash and cash equivalents: All demand deposits and highly liquid short-term deposits with original maturities of three months or less are considered cash equivalents.
(G) Accounts Receivable and Concentration of Credit Risk: The Company maintains an allowance for accounts receivable estimated to be uncollectible. The provision for bad debts is included in selling, general and administrative expense. Substantially all of the Company’s trade receivables are derived from sales to retailers and are recorded at the invoiced amount and do not bear interest. The Company performs ongoing credit evaluations of its wholesale partners’ financial condition and requires collateral as deemed necessary. The past due status of a receivable is based on its contractual terms. Account balances are charged off against the allowance when it is probable the receivable will not be collected.
Accounts receivable are recorded net of allowances including expected future chargebacks from wholesale partners and estimated margin support. It is the nature of the apparel and fashion industry that suppliers similar to the Company face significant pressure from customers in the retail industry to provide allowances to compensate for wholesale partner margin shortfalls. This pressure often takes the form of customers requiring the Company to provide price concessions on prior shipments as a prerequisite for obtaining future orders. Pressure for these concessions is largely determined by overall retail sales performance and, more specifically, the performance of the Company’s products at retail. To the extent the Company’s wholesale partners have more of the Company’s goods on hand at the end of the season, there will be greater pressure for the Company to grant markdown concessions on prior shipments. Accounts receivable balances are reported net of expected allowances for these matters based on the historical level of concessions required and estimates of the level of markdowns and allowances that will be required in the coming season. The Company evaluates the allowance balances on a continual basis and adjusts them as necessary to reflect changes in anticipated allowance activity. The Company also provides an allowance for sales returns based on known trends and historical return rates.
In fiscal 2016, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 19.6%, 14.4% and 10.8% of fiscal 2016 net sales. In fiscal 2015, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 18.3%, 13.8% and 10.8% of fiscal 2015 net sales. In fiscal 2014, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 23.2%, 13.2% and 12.3% of fiscal 2014 net sales.
Three wholesale partners each represented greater than ten percent of the Company’s gross accounts receivable balance as of January 28, 2017, with a corresponding aggregate total of 57.5% of such balance. Three wholesale partners each represented greater than ten percent of the Company’s gross accounts receivable as of January 30, 2016, with a corresponding aggregate total of 51.8% of such balance.
(H) Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. The cost of inventory includes purchase cost as well as sourcing, transportation, duty and other processing costs associated with acquiring, importing and preparing inventory for sale. Inventory costs are included in cost of products sold at the time of their sale. Product development costs are expensed in selling, general and administrative expense when incurred. Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost.
Inventories consisted of the following:
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Finished goods |
|
$ |
40,771 |
|
|
$ |
49,837 |
|
Less: reserves |
|
|
(2,242 |
) |
|
|
(13,261 |
) |
Total inventories, net |
|
$ |
38,529 |
|
|
$ |
36,576 |
|
As of January 30, 2016, the reserve included a provision to reduce the carrying value of certain excess inventory and aged product to estimated net realizable value, as during fiscal 2015 the Company recorded a net charge of $10,300 associated with inventory that no longer supported the Company's prospective brand positioning strategy.
(I) Property and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line method over estimated useful lives of three to seven years for furniture, fixtures, and computer equipment. Leasehold improvements are depreciated on the straight-line basis over the shorter of their estimated useful lives or the lease term, excluding renewal terms. Capitalized software is depreciated on the straight-line basis over the estimated economic useful life of the software, generally three to seven years. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings. Property and equipment consisted of the following:
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Leasehold improvements |
|
$ |
41,214 |
|
|
$ |
38,452 |
|
Furniture, fixtures and equipment |
|
|
12,267 |
|
|
|
8,236 |
|
Capitalized software |
|
|
10,862 |
|
|
|
1,764 |
|
Construction in process |
|
|
236 |
|
|
|
4,716 |
|
Total property and equipment |
|
|
64,579 |
|
|
|
53,168 |
|
Less: accumulated depreciation |
|
|
(21,634 |
) |
|
|
(15,399 |
) |
Property and equipment, net |
|
$ |
42,945 |
|
|
$ |
37,769 |
|
Depreciation expense was $7,070, $6,426 and $3,381 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
(J) Impairment of Long-lived Assets: The Company reviews long-lived assets with a finite life for existence of facts and circumstances which indicate that the useful life is shorter than previously estimated or that the carrying amount of such assets may not be recoverable from future operations based on undiscounted expected future cash flows. Impairment losses are then recognized in operating results to the extent discounted expected future cash flows are less than the carrying value of the asset. During fiscal 2016, the Company recorded non-cash asset impairment charges of $2,082 within Selling, general and administrative expenses in the Consolidated Statements of Operations, related to the impairment of certain retail stores with asset carrying values that were determined not to be recoverable and exceeded fair value. There were no significant impairment charges related to long-lived assets recorded in fiscal 2015 and fiscal 2014.
(K) Goodwill and Other Intangible Assets: Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. The Company completed its annual impairment testing on its goodwill and indefinite-lived intangible asset during the fourth quarters of fiscal 2016, fiscal 2015 and fiscal 2014. Goodwill is not allocated to the Company’s operating segments in the measure of segment assets regularly reported to and used by management, however goodwill is allocated to operating segments (goodwill reporting units) for the purpose of the annual impairment test for goodwill.
Goodwill represents the excess of the cost of acquired businesses over the fair market value of the identifiable net assets. The indefinite-lived intangible asset is the Vince tradename.
An entity may elect to perform a qualitative impairment assessment for goodwill and indefinite-lived intangible assets. If adverse qualitative trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, a quantitative impairment test is required. “Step one” of the quantitative impairment test for goodwill requires an entity to determine the fair value of each reporting unit and compare such fair value to the respective carrying amount. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying amount of the reporting unit exceeds its estimated fair value, “step two” of the impairment test is performed in order to determine the amount of the impairment loss. “Step two” of the goodwill impairment test includes valuing the tangible and intangible assets of the impaired reporting unit based on the fair value determined in “step one” and calculating the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities. The goodwill impairment test is dependent on a number of factors, including estimates of future growth, profitability and cash flows, discount rates and other variables. The Company bases its estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
The Company estimates the fair value of the tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology. This methodology assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. The relief from royalty approach is dependent on a number of factors, including estimates of future growth, royalty rates in the category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the tradename intangible asset is less than the carrying value.
An entity may pass on performing the qualitative assessment for a reporting unit or indefinite-lived intangible asset and directly perform the quantitative assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods.
In fiscal 2016, a quantitative impairment test on goodwill determined that the fair value of its Direct-to-consumer reporting unit was below its carrying value. During fiscal 2016, the sales results within the Direct-to-consumer reporting unit were impacted by continued declines in average order values as well as declines in the number of transactions due to lower conversion rates and reduced traffic and as a result, the Direct-to-consumer reporting unit has not met expectations resulting in lower current and expected future cash flows. The Company estimated the fair value of its Direct-to-consumer reporting unit using both the income and market valuation approaches, with a weighting of 80% and 20%, respectively. “Step one” of the assessment determined that the fair value of the Direct-to-consumer reporting unit was below the carrying amount by approximately 40%. Accordingly, “step two” of the assessment was performed, which compared the implied fair value of the goodwill to the carrying value of such goodwill. Based on the results from “step two,” the Company recorded a goodwill impairment charge of $22,311, to write-off all of the goodwill in the Direct-to-consumer reporting unit. The charge was recorded in Impairment of goodwill and indefinite-lived intangible asset in the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016. Additionally, the results of “step one” of the assessment determined that the fair value of the Wholesale reporting unit exceeded its fair value by approximately 40% and therefore did not result in any impairment of goodwill. However, further declines in the net sales or operating results of the Wholesale reporting unit may result in a partial or full impairment of its goodwill, which amounted to $41,435 as of January 28, 2017. Significant assumptions utilized in the discounted cash flow analysis included a discount rate of 16.0%. Significant assumptions utilized in a market-based approach were market multiples ranging from 0.50x to 0.90x for the Company’s reporting units.
In fiscal 2015, the Company elected to perform a quantitative impairment test on goodwill. The results of the quantitative test did not result in any impairment of goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. As such, the Company was not required to perform “step two” of the impairment test. In fiscal 2014, the Company elected to perform a qualitative assessment on goodwill and determined that it was not more likely than not that the carrying value of the reporting unit was greater than the fair value. As such, the Company was not required to perform “step two” of the impairment test.
In fiscal 2016, a quantitative assessment of the Company’s indefinite-lived intangible asset, which consists of the Vince tradename, determined that the fair value of its tradename intangible asset was below its carrying value. During fiscal 2016, the Company’s sales results have not met expectations resulting in lower current and expected future cash flows. The Company estimated the fair value of its tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology and determined that the fair value of the tradename intangible asset was below the carrying amount by approximately 30%. Accordingly, the Company recorded an impairment charge for its tradename intangible asset of $30,750, which was recorded in Impairment of goodwill and indefinite-lived intangible asset in the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016.
In fiscal 2015, the Company elected to perform a quantitative assessment on its tradename intangible assets. The results of the quantitative test did not result in any impairment because the fair value of the Company’s tradename intangible asset exceeded its carrying value. In fiscal 2014, the Company elected to perform a qualitative assessment on its tradename intangible assets and determined that it was not more likely than not that the carrying value of the assets exceeded the fair value.
Determining the fair value of goodwill and other intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is possible that estimates of future operating results could change adversely and impact the evaluation of the recoverability of the carrying value of goodwill and intangible assets and that the effect of such changes could be material.
Definite-lived intangible assets are comprised of customer relationships and are being amortized on a straight-line basis over their useful lives of 20 years.
See Note 2 “Goodwill and Intangible Assets” for more information on the details surrounding goodwill and intangible assets.
(L) Deferred Financing Costs: Deferred financing costs, such as underwriting, financial advisory, professional fees, and other similar fees are capitalized and recognized in interest expense over the contractual life of the related debt instrument using the straight-line method, as this method results in recognition of interest expense that is materially consistent with that of the effective interest method.
(M) Deferred Rent and Deferred Lease Incentives: The Company leases various office spaces, showrooms and retail stores. Many of these operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amount charged to operations and amounts paid as deferred rent. Certain of the Company’s retail store leases contain provisions for contingent rent, typically a percentage of retail sales once a predetermined threshold has been met. These amounts are expensed as incurred. Additionally, the Company receives lease incentives in certain leases. These allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense.
(N) Revenue Recognition: Sales are recognized when goods are shipped in accordance with customer orders for the Company’s wholesale business, upon receipt by the customer for the Company’s e-commerce business, and at the time of sale to the consumer for the Company’s retail business. Revenue associated with gift cards is recognized upon redemption. For the Company’s wholesale business, amounts billed to customers for shipping and handling costs are not significant. There is no stated obligation to customers after shipment, other than specifically set forth allowances or discounts that are accrued at the time of sale. The rights of inspection or acceptance contained in certain sales agreements are limited to whether the goods received by the Company’s wholesale partners are in conformance with the order specifications.
Estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known. Accrued discounts, returns and allowances are included as an offset to accounts receivable in the Consolidated Balance Sheets for the Company’s wholesale business.
(O) Cost of Products Sold: The Company’s cost of products sold and gross margins may not necessarily be comparable to that of other entities as a result of different practices in categorizing costs. The primary components of the Company’s cost of products sold are as follows:
|
• |
the cost of purchased merchandise, including raw materials; |
|
• |
the cost of inbound transportation, including freight; |
|
• |
the cost of the Company’s production and sourcing departments; |
|
• |
other processing costs associated with acquiring and preparing the inventory for sale; and |
|
• |
shrink and valuation reserves. |
(P) Marketing and Advertising: The Company provides cooperative advertising allowances to certain of its customers. These allowances are accounted for as reductions in sales as discussed in “Revenue Recognition” above. Production expense related to company-directed advertising is deferred until the first time at which the advertisement runs. All other expenses related to company-directed advertising are expensed as incurred. Marketing and advertising expense recorded in selling, general and administrative expenses was $8,156, $9,177 and $7,427 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. At January 28, 2017 and January 30, 2016, deferred production expenses associated with company-directed advertising were $182 and $416, respectively.
(Q) Share-Based Compensation: New, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock units, are measured at fair value and recognized as compensation expense, net of estimated forfeitures, over the requisite service period and is included as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations. Additionally, share-based awards granted to non-employees are expensed over the period in which the related services are rendered at their fair value, using the Black Scholes Pricing Model to determine fair value.
(R) Income Taxes: The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. The Company assesses the likelihood of the realization of deferred tax assets and adjusts the carrying amount of these deferred tax assets by a valuation allowance to the extent the Company believes it more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. The Company recognizes tax positions in the Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Accrued interest and penalties related to unrecognized tax benefits are included in income taxes in the Consolidated Statements of Operations.
(S) Earnings Per Share: Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Except when the effect would be anti-dilutive, diluted earnings (loss) per share is calculated based on the weighted average number of shares of common stock outstanding plus the dilutive effect of share-based awards calculated under the treasury stock method.
(T) Recent Accounting Pronouncements: In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance to simplify the accounting for goodwill impairment. The guidance removes “step two” of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for interim and annual impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company intends to early adopt this guidance on January 29, 2017.
In November 2016, the FASB issued guidance that requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017 using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. This new guidance is not expected to have a material impact on the Company’s Consolidated Statement of Cash Flows.
In August 2016, the FASB issued guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017 and must be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact of adopting this guidance on its Consolidated Statement of Cash Flows.
In March 2016, the FASB issued guidance regarding share-based compensation, to simplify the accounting for share-based payment transactions, including accounting for forfeitures, income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2016. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize right-of-use lease assets and lease liabilities on the balance sheet for those leases currently classified as operating leases. The guidance is required to be adopted retrospectively by restating all years presented in the Company’s financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
In November 2015, the FASB issued new guidance on the balance sheet classification of deferred taxes, which requires entities to classify deferred tax assets and liabilities as noncurrent in the consolidated balance sheet. Currently, deferred tax assets and liabilities must be classified as current or noncurrent amounts in the consolidated balance sheet. This guidance is effective for financial statements issued for interim and annual periods beginning after December 15, 2016. The guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company will reclassify deferred tax balances, as required.
In July 2015, the FASB issued new guidance on accounting for inventory, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued new guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This guidance became effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. The Company adopted this accounting guidance for any contracts entered into or materially modified after January 30, 2016. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In August 2014, the FASB issued new guidance which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company’s annual period ended January 28, 2017.
In May 2014, the FASB issued new guidance on revenue recognition accounting, which requires entities to recognize revenue when promised goods or services are transferred to customers and in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since its issuance, the FASB has amended several aspects of the new guidance. In August 2015, the FASB elected to defer the effective dates for this guidance, which is now effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of the new guidance on its consolidated financial statements.
|
Inventories consisted of the following:
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Finished goods |
|
$ |
40,771 |
|
|
$ |
49,837 |
|
Less: reserves |
|
|
(2,242 |
) |
|
|
(13,261 |
) |
Total inventories, net |
|
$ |
38,529 |
|
|
$ |
36,576 |
|
Property and equipment consisted of the following:
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Leasehold improvements |
|
$ |
41,214 |
|
|
$ |
38,452 |
|
Furniture, fixtures and equipment |
|
|
12,267 |
|
|
|
8,236 |
|
Capitalized software |
|
|
10,862 |
|
|
|
1,764 |
|
Construction in process |
|
|
236 |
|
|
|
4,716 |
|
Total property and equipment |
|
|
64,579 |
|
|
|
53,168 |
|
Less: accumulated depreciation |
|
|
(21,634 |
) |
|
|
(15,399 |
) |
Property and equipment, net |
|
$ |
42,945 |
|
|
$ |
37,769 |
|
|
Net goodwill balances and changes therein by segment were as follows:
(in thousands) |
|
Wholesale |
|
|
Direct-to-consumer |
|
|
Total Net Goodwill |
|
|||
Balance as of January 31, 2015 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 30, 2016 |
|
|
41,435 |
|
|
|
22,311 |
|
|
|
63,746 |
|
Impairment charge |
|
|
— |
|
|
|
(22,311 |
) |
|
|
(22,311 |
) |
Balance as of January 28, 2017 |
|
$ |
41,435 |
|
|
$ |
— |
|
|
$ |
41,435 |
|
The following tables present a summary of identifiable intangible assets:
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Impairment Charge |
|
|
Net Book Value |
|
||||
Balance as of January 28, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(5,372 |
) |
|
$ |
— |
|
|
$ |
6,598 |
|
Indefinite-lived intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
|
101,850 |
|
|
|
— |
|
|
|
(30,750 |
) |
|
|
71,100 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(5,372 |
) |
|
$ |
(30,750 |
) |
|
$ |
77,698 |
|
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(4,774 |
) |
|
$ |
7,196 |
|
Indefinite-lived intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,774 |
) |
|
$ |
109,046 |
|
Amortization of identifiable intangible assets was $598, $598 and $599 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively, which is included in Selling, general and administrative expenses on the Consolidated Statements of Operations. Amortization expense for each of the fiscal years 2017 to 2021 is expected to be as follows:
|
|
Future |
|
|
(in thousands) |
|
Amortization |
|
|
2017 |
|
$ |
598 |
|
2018 |
|
|
598 |
|
2019 |
|
|
598 |
|
2020 |
|
|
598 |
|
2021 |
|
|
598 |
|
Total next 5 fiscal years |
|
$ |
2,990 |
|
|
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in fiscal 2016, based on such fair value hierarchy:
|
|
Net Carrying Value as of |
|
|
Fair Value Measured and Recorded at Reporting Date Using: |
|
|
Total Losses - Year Ended |
|
|
|||||||||||
(in thousands) |
|
January 28, 2017 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
January 28, 2017 |
|
|
|||||
Property and equipment |
|
$ |
1,042 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,042 |
|
|
$ |
2,082 |
|
(1) |
Goodwill |
|
|
41,435 |
|
|
|
— |
|
|
|
— |
|
|
|
41,435 |
|
|
|
22,311 |
|
(2) |
Tradename |
|
|
71,100 |
|
|
|
— |
|
|
|
— |
|
|
|
71,100 |
|
|
|
30,750 |
|
(2) |
(1) Recorded within Selling, general and administrative expenses on the Consolidated Statements of Operations. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (I) Property and Equipment” for additional information.
(2) Recorded within Impairment of goodwill and indefinite-lived intangible asset on the Consolidated Statements of Operations. See Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for additional details.
|
Long-term debt consisted of the following:
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Term Loan Facility |
|
$ |
45,000 |
|
|
$ |
45,000 |
|
Revolving Credit Facility |
|
|
5,200 |
|
|
|
15,000 |
|
Total long-term debt principal |
|
|
50,200 |
|
|
|
60,000 |
|
Less: Deferred financing costs |
|
|
1,902 |
|
|
|
2,385 |
|
Total long-term debt |
|
$ |
48,298 |
|
|
$ |
57,615 |
|
|
The future minimum lease payments under operating leases at January 28, 2017 were as follows:
|
|
Minimum Lease |
|
|
(in thousands) |
|
Payments |
|
|
Fiscal 2017 |
|
$ |
21,096 |
|
Fiscal 2018 |
|
|
20,918 |
|
Fiscal 2019 |
|
|
20,877 |
|
Fiscal 2020 |
|
|
19,792 |
|
Fiscal 2021 |
|
|
17,355 |
|
Thereafter |
|
|
50,753 |
|
Total minimum lease payments |
|
$ |
150,791 |
|
The following is a reconciliation of the accrued severance and employee related benefits associated with the above charge included within total current liabilities on the Consolidated Balance Sheet:
(in thousands) |
|
|
|
|
Balance at August 1, 2015 |
|
$ |
3,717 |
|
Cash payments |
|
|
(1,557 |
) |
Non-cash recovery |
|
|
(323 |
) |
Balance at January 30, 2016 |
|
|
1,837 |
|
Cash payments |
|
|
(1,719 |
) |
Balance at January 28, 2017 |
|
$ |
118 |
|
|
The provision for income taxes consisted of the following:
|
Fiscal Year |
|
|||||||||
(in thousands) |
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
— |
|
|
$ |
(53 |
) |
|
$ |
759 |
|
State |
|
207 |
|
|
|
522 |
|
|
|
344 |
|
Foreign |
|
75 |
|
|
|
— |
|
|
|
— |
|
Total current |
|
282 |
|
|
|
469 |
|
|
|
1,103 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
83,323 |
|
|
|
2,994 |
|
|
|
20,416 |
|
State |
|
10,121 |
|
|
|
(249 |
) |
|
|
2,475 |
|
Total deferred |
|
93,444 |
|
|
|
2,745 |
|
|
|
22,891 |
|
Total provision for income taxes |
$ |
93,726 |
|
|
$ |
3,214 |
|
|
$ |
23,994 |
|
A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
|
Fiscal Year |
|
|||||||||
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Statutory federal rate |
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes, net of federal benefit |
|
5.5 |
% |
|
|
6.5 |
% |
|
|
5.7 |
% |
Nondeductible Tax Receivable Agreement adjustment |
|
0.4 |
% |
|
|
4.1 |
% |
|
—% |
|
|
Valuation allowance |
|
(176.8 |
)% |
|
|
(0.5 |
)% |
|
|
(0.7 |
)% |
Return to provision adjustment |
|
(0.1 |
)% |
|
|
(2.4 |
)% |
|
—% |
|
|
Changes in tax law |
—% |
|
|
|
(3.2 |
)% |
|
—% |
|
||
Other |
—% |
|
|
|
(0.8 |
)% |
|
|
0.2 |
% |
|
Total |
|
(136.0 |
)% |
|
|
38.7 |
% |
|
|
40.2 |
% |
Deferred income tax assets and liabilities consisted of the following:
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
2017 |
|
|
2016 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
Depreciation and amortization |
$ |
28,353 |
|
|
$ |
17,071 |
|
Employee related costs |
|
2,361 |
|
|
|
2,163 |
|
Allowance for asset valuations |
|
4,817 |
|
|
|
2,551 |
|
Accrued expenses |
|
7,349 |
|
|
|
6,088 |
|
Net operating losses |
|
83,670 |
|
|
|
72,465 |
|
Tax credits |
|
812 |
|
|
|
812 |
|
Other |
|
489 |
|
|
|
457 |
|
Total deferred tax assets |
|
127,851 |
|
|
|
101,607 |
|
Less: valuation allowances |
|
(122,860 |
) |
|
|
(1,024 |
) |
Net deferred tax assets |
|
4,991 |
|
|
|
100,583 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Cancellation of debt income |
|
(4,607 |
) |
|
|
(6,657 |
) |
Other |
|
(384 |
) |
|
|
(482 |
) |
Total deferred tax liabilities |
|
(4,991 |
) |
|
|
(7,139 |
) |
Net deferred tax assets |
$ |
— |
|
|
$ |
93,444 |
|
Included in: |
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
$ |
— |
|
|
$ |
4,164 |
|
Deferred income taxes |
|
— |
|
|
|
89,280 |
|
Net deferred tax assets |
$ |
— |
|
|
$ |
93,444 |
|
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:
|
Fiscal Year |
|
|||||||||
(in thousands) |
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Beginning balance |
$ |
2,127 |
|
|
$ |
4,487 |
|
|
$ |
3,693 |
|
Increases for tax positions in current year |
|
208 |
|
|
|
72 |
|
|
|
2,397 |
|
Increases for tax positions in prior years |
|
4 |
|
|
|
27 |
|
|
|
135 |
|
Decreases for tax positions in prior years |
|
— |
|
|
|
(2,459 |
) |
|
|
(1,738 |
) |
Ending balance |
$ |
2,339 |
|
|
$ |
2,127 |
|
|
$ |
4,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary information for the Company’s reportable segments is presented below.
|
|
Fiscal Year |
|
|||||||||
(in thousands) |
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
170,053 |
|
|
$ |
201,182 |
|
|
$ |
259,418 |
|
Direct-to-consumer |
|
|
98,146 |
|
|
|
101,275 |
|
|
|
80,978 |
|
Total net sales |
|
$ |
268,199 |
|
|
$ |
302,457 |
|
|
$ |
340,396 |
|
Operating (Loss) Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
47,098 |
|
|
$ |
61,571 |
|
|
$ |
100,623 |
|
Direct-to-consumer (1) |
|
|
1,216 |
|
|
|
7,839 |
|
|
|
14,556 |
|
Subtotal |
|
|
48,314 |
|
|
|
69,410 |
|
|
|
115,179 |
|
Unallocated corporate expenses |
|
|
(59,925 |
) |
|
|
(53,684 |
) |
|
|
(44,929 |
) |
Impairment of goodwill and indefinite-lived intangible asset |
|
|
(53,061 |
) |
|
|
— |
|
|
|
— |
|
Total operating (loss) income |
|
$ |
(64,672 |
) |
|
$ |
15,726 |
|
|
$ |
70,250 |
|
Depreciation & Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
1,754 |
|
|
$ |
2,058 |
|
|
$ |
1,962 |
|
Direct-to-consumer |
|
|
4,611 |
|
|
|
4,498 |
|
|
|
2,950 |
|
Unallocated corporate |
|
|
2,319 |
|
|
|
1,794 |
|
|
|
355 |
|
Total depreciation & amortization |
|
$ |
8,684 |
|
|
$ |
8,350 |
|
|
$ |
5,267 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
650 |
|
|
$ |
1,629 |
|
|
$ |
2,076 |
|
Direct-to-consumer |
|
|
9,559 |
|
|
|
9,442 |
|
|
|
8,117 |
|
Unallocated corporate |
|
|
4,078 |
|
|
|
6,520 |
|
|
|
9,506 |
|
Total capital expenditures |
|
$ |
14,287 |
|
|
$ |
17,591 |
|
|
$ |
19,699 |
|
(1) Includes non-cash impairment charges totaling $2,082 related to property and equipment. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (I) Property and Equipment” for additional information.
Assets for each of the Company’s reportable segments are presented below.
|
|
January 28, |
|
|
January 30, |
|
||
(in thousands) |
|
2017 |
|
|
2016 |
|
||
Total Assets: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
44,442 |
|
|
$ |
47,757 |
|
Direct-to-consumer |
|
|
45,038 |
|
|
|
35,433 |
|
Unallocated corporate |
|
|
150,000 |
|
|
|
280,378 |
|
Total assets |
|
$ |
239,480 |
|
|
$ |
363,568 |
|
|
Summarized quarterly financial results for fiscal 2016 and fiscal 2015 are as follows:
(in thousands, expect per share data) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter (1) |
|
||||
Fiscal 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
67,645 |
|
|
$ |
60,702 |
|
|
$ |
75,973 |
|
|
$ |
63,879 |
|
Gross profit |
|
|
28,258 |
|
|
|
27,387 |
|
|
|
37,958 |
|
|
|
29,216 |
|
Net (loss) income |
|
|
(1,924 |
) |
|
|
(1,967 |
) |
|
|
3,380 |
|
|
|
(162,148 |
) |
Basic (loss) earnings per share (2) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.07 |
|
|
$ |
(3.28 |
) |
Diluted (loss) earnings per share (2) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.07 |
|
|
$ |
(3.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, expect per share data) |
|
First Quarter |
|
|
Second Quarter (3) |
|
|
Third Quarter (4) |
|
|
Fourth Quarter (5) |
|
||||
Fiscal 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
59,842 |
|
|
$ |
79,993 |
|
|
$ |
80,859 |
|
|
$ |
81,763 |
|
Gross profit |
|
|
30,741 |
|
|
|
20,789 |
|
|
|
40,005 |
|
|
|
40,981 |
|
Net income (loss) |
|
|
2,454 |
|
|
|
(5,026 |
) |
|
|
5,893 |
|
|
|
1,778 |
|
Basic earnings (loss) per share (2) |
|
$ |
0.07 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
Diluted earnings (loss) per share (2) |
|
$ |
0.06 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
(1) |
Net loss, basic loss per share and diluted loss per share include the impact of (i) $53,061 of non-cash pre-tax impairment charges related to goodwill and the tradename intangible asset (see Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for additional details); (ii) a $2,082 non-cash pre-tax impairment charge related to property and equipment (see Note 1 “Description of Business and Summary of Significant Accounting Policies (J) Impairment of Long-lived Assets” for additional details); and (iii) a $121,836 valuation allowance against the Company’s deferred tax assets (see Note 10 “Income Taxes”) for additional details. |
(2) |
The sum of the quarterly earnings per share may not equal the full-year amount as the computation of the weighted-average number of shares outstanding for each quarter and the full-year are performed independently. |
(3) |
Includes the impact of $14,447 of pre-tax expense within cost of products sold associated with inventory write-downs primarily related to excess out of season and current inventory and $2,861 of pre-tax expense within selling, general and administrative expenses associated with executive severance costs partly offset by the favorable impact of executive stock option forfeitures. |
(4) |
Includes the impact of $1,986 of pre-tax income within Cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter of 2015 and $164 pre-tax expense within Selling, general and administrative expenses associated with executive search costs, partly offset by the favorable impact of executive stock option forfeitures. |
(5) |
Includes the impact of $2,161 of pre-tax income within Cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter of 2015 and $323 pre-tax income within Selling, general and administrative expenses associated with the favorable adjustment to management transition costs taken in the second quarter. Additionally, gross profit, net income (loss) and diluted earnings (loss) per share in the fourth quarter were overstated by $530, $313 and $0.01, respectively, as a result of an immaterial error in inventory valuation during the third quarter. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|