VINCE HOLDING CORP., 10-K filed on 4/28/2017
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Jan. 28, 2017
Mar. 31, 2017
Jul. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 28, 2017 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
VNCE 
 
 
Entity Registrant Name
VINCE HOLDING CORP. 
 
 
Entity Central Index Key
0001579157 
 
 
Current Fiscal Year End Date
--01-28 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
49,427,606 
 
Entity Public Float
 
 
$ 102.4 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jan. 28, 2017
Jan. 30, 2016
Current assets:
 
 
Cash and cash equivalents
$ 20,978 
$ 6,230 
Trade receivables, net
10,336 
9,400 
Inventories, net
38,529 
36,576 
Prepaid expenses and other current assets
4,768 
8,027 
Total current assets
74,611 
60,233 
Property and equipment, net
42,945 
37,769 
Intangible assets, net
77,698 
109,046 
Goodwill
41,435 
63,746 
Deferred income taxes
 
89,280 
Other assets
2,791 
3,494 
Total assets
239,480 
363,568 
Current liabilities:
 
 
Accounts payable
37,022 
28,719 
Accrued salaries and employee benefits
3,427 
5,755 
Other accrued expenses
9,992 
37,174 
Total current liabilities
50,441 
71,648 
Long-term debt
48,298 
57,615 
Deferred rent
16,892 
14,965 
Other liabilities
137,830 
140,838 
Commitments and contingencies (Note 5)
   
   
Common stock at $0.01 par value (100,000,000 shares authorized, 49,427,606 and 36,779,417 shares issued and outstanding at January 28, 2017 and January 30, 2016, respectively)
494 
368 
Stockholders' (deficit) equity:
 
 
Additional paid-in capital
1,082,727 
1,012,677 
Accumulated deficit
(1,097,137)
(934,478)
Accumulated other comprehensive loss
(65)
(65)
Total stockholders' (deficit) equity
(13,981)
78,502 
Total liabilities and stockholders' (deficit) equity
$ 239,480 
$ 363,568 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jan. 28, 2017
Jan. 30, 2016
Statement Of Financial Position [Abstract]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
49,427,606 
36,779,417 
Common stock, shares outstanding
49,427,606 
36,779,417 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Income Statement [Abstract]
 
 
 
Net sales
$ 268,199 
$ 302,457 
$ 340,396 
Cost of products sold
145,380 
169,941 
173,567 
Gross profit
122,819 
132,516 
166,829 
Impairment of goodwill and indefinite-lived intangible asset
53,061 
 
 
Selling, general and administrative expenses
134,430 
116,790 
96,579 
(Loss) income from operations
(64,672)
15,726 
70,250 
Interest expense, net
3,932 
5,680 
9,698 
Other expense, net
329 
1,733 
835 
(Loss) income before income taxes
(68,933)
8,313 
59,717 
Provision for income taxes
93,726 
3,214 
23,994 
Net (loss) income
$ (162,659)
$ 5,099 
$ 35,723 
(Loss) earnings per share:
 
 
 
Basic (loss) earnings per share
$ (3.50)
$ 0.14 
$ 0.97 
Diluted (loss) earnings per share
$ (3.50)
$ 0.14 
$ 0.93 
Weighted average shares outstanding:
 
 
 
Basic
46,420,533 
36,770,430 
36,730,490 
Diluted
46,420,533 
37,529,227 
38,244,906 
Consolidated Statements of Comprehensive (Loss) Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net (loss) income
$ (162,659)
$ 5,099 
$ 35,723 
Comprehensive (loss) income
$ (162,659)
$ 5,099 
$ 35,723 
Consolidated Statements of Stockholders' (Deficit) Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Loss [Member]
Beginning Balance at Feb. 01, 2014
$ 33,551 
$ 367 
$ 1,008,549 
$ (975,300)
$ (65)
Beginning Balance, shares at Feb. 01, 2014
 
36,723,727 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
Net (loss) income
35,723 
 
 
35,723 
 
Share-based compensation expense
1,896 
 
1,896 
 
 
Exercise of stock options
175 
 
175 
 
 
Exercise of stock options, shares
 
22,018 
 
 
 
Restricted stock unit vestings
Restricted stock unit vestings, shares
 
2,500 
 
 
 
Tax receivable agreement obligation adjustment
624 
 
624 
 
 
Ending Balance at Jan. 31, 2015
71,969 
367 
1,011,244 
(939,577)
(65)
Ending Balance, shares at Jan. 31, 2015
 
36,748,245 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
Net (loss) income
5,099 
 
 
5,099 
 
Share-based compensation expense
1,259 
 
1,259 
 
 
Exercise of stock options
175 
174 
 
 
Exercise of stock options, shares
 
26,209 
 
 
 
Restricted stock unit vestings
Restricted stock unit vestings, shares
 
4,963 
 
 
 
Ending Balance at Jan. 30, 2016
78,502 
368 
1,012,677 
(934,478)
(65)
Ending Balance, shares at Jan. 30, 2016
36,779,417 
36,779,417 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
Net (loss) income
(162,659)
 
 
(162,659)
 
Common stock issuance, net of certain costs
64,110 
118 
63,992 
 
 
Common stock issuance, net of certain costs, shares
 
11,818,181 
 
 
 
Share-based compensation expense
1,344 
 
1,344 
 
 
Exercise of stock options, shares
807,545 
 
 
 
 
Exercise of stock options and issuance of common stock under employee stock purchase plan
4,722 
4,714 
 
 
Exercise of stock options and issuance of common stock under employee stock purchase plan, shares
 
815,428 
 
 
 
Restricted stock unit vestings
Restricted stock unit vestings, shares
 
14,580 
 
 
 
Ending Balance at Jan. 28, 2017
$ (13,981)
$ 494 
$ 1,082,727 
$ (1,097,137)
$ (65)
Ending Balance, shares at Jan. 28, 2017
49,427,606 
49,427,606 
 
 
 
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Operating activities
 
 
 
Net (loss) income
$ (162,659,000)
$ 5,099,000 
$ 35,723,000 
Add (deduct) items not affecting operating cash flows:
 
 
 
Impairment of goodwill and indefinite-lived intangible asset
53,061,000 
 
 
Depreciation and amortization
8,684,000 
8,350,000 
5,267,000 
Impairment of property and equipment
2,082,000 
Provision for inventories
839,000 
16,263,000 
3,719,000 
Deferred rent
413,000 
1,723,000 
3,045,000 
Deferred income taxes
93,444,000 
2,745,000 
23,248,000 
Share-based compensation expense
1,344,000 
1,259,000 
1,896,000 
Other
701,000 
1,634,000 
1,532,000 
Changes in assets and liabilities:
 
 
 
Receivables, net
(936,000)
24,397,000 
6,401,000 
Inventories
(2,792,000)
(15,420,000)
(7,182,000)
Prepaid expenses and other current assets
598,000 
3,441,000 
2,809,000 
Accounts payable and accrued expenses
(24,414,000)
1,044,000 
3,066,000 
Other assets and liabilities
(25,000)
1,093,000 
742,000 
Net cash (used in) provided by operating activities
(29,660,000)
51,628,000 
80,266,000 
Investing activities
 
 
 
Payments for capital expenditures
(14,287,000)
(17,591,000)
(19,699,000)
Net cash used in investing activities
(14,287,000)
(17,591,000)
(19,699,000)
Financing activities
 
 
 
Proceeds from borrowings under the Revolving Credit Facility
181,367,000 
115,127,000 
50,500,000 
Repayment of borrowings under the Revolving Credit Facility
(191,167,000)
(123,127,000)
(27,500,000)
Repayment of borrowings under the Term Loan Facility
 
(20,000,000)
(105,000,000)
Proceeds from common stock issuance, net of transaction costs
63,773,000 
 
 
Proceeds from stock option exercises and issuance of common stock under employee stock purchase plan
4,722,000 
175,000 
175,000 
Fees paid for Term Loan Facility and Revolving Credit Facility
 
(94,000)
(114,000)
Net cash provided by (used in) financing activities
58,695,000 
(27,919,000)
(81,939,000)
Increase (decrease) in cash and cash equivalents
14,748,000 
6,118,000 
(21,372,000)
Cash and cash equivalents, beginning of period
6,230,000 
112,000 
21,484,000 
Cash and cash equivalents, end of period
20,978,000 
6,230,000 
112,000 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash payments on TRA obligation
29,700,000 
 
3,199,000 
Cash payments for interest
2,952,000 
3,838,000 
8,737,000 
Cash payments for income taxes, net of refunds
330,000 
1,491,000 
88,000 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
 
 
 
Capital expenditures in accounts payable and accrued liabilities
$ 1,054,000 
$ 309,000 
$ 452,000 
Description of Business and Summary of Significant Accounting Policies
Description of Business and Summary of Significant Accounting Policies

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.

 

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.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

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

 

 

Fair Value Measurements
Fair Value Measurements

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.

Long-Term Debt and Financing Arrangements
Long-Term Debt and Financing Arrangements

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%.

Commitments and Contingencies
Commitments and Contingencies

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.

Share-Based Compensation
Share-Based Compensation

Note 6. Share-Based Compensation

In connection with the IPO, which closed on November 27, 2013, and the separation of the Vince and non-Vince businesses, VHC assumed Kellwood Company’s remaining obligations under the 2010 Stock Option Plan of Kellwood Company (the “2010 Option Plan”) and all Kellwood Company stock options previously issued to Vince employees under such plan became options to acquire shares of VHC common stock. Additionally, VHC assumed Kellwood Company’s obligations with respect to the vested Kellwood Company stock options previously issued to Kellwood Company employees, which options were cancelled in exchange for shares of VHC common stock. Accordingly, option information presented below for previously issued Kellwood Company stock options under the 2010 Option Plan has been adjusted to account for the split of the Company’s common stock and applicable conversion to options to acquire shares of VHC common stock.

Employee Stock Plans

2010 Option Plan

On June 30, 2010, the board of directors approved the 2010 Stock Option Plan. On November 21, 2013 and as discussed above, VHC assumed Kellwood Company’s remaining obligations under the 2010 Option Plan; provided, that none of the issued and outstanding options (after giving effect to such assumption and the stock split effected as part of the Restructuring Transactions) were exercisable until the consummation of the IPO. Additionally, prior to the consummation of the IPO and after giving effect to the assumption described in this paragraph, VHC and the Vince employees to whom options had been previously granted under the 2010 Option Plan, amended the related grant agreements to eliminate, effective as of the consummation of the IPO, restrictions on the exercisability of the subject employees vested options.

Prior to the IPO, the 2010 Option Plan, as amended, provided for the grant of options to acquire up to 2,752,155 shares of Kellwood Company common stock. The options granted pursuant to the 2010 Option Plan (i) vested in five equal installments on the first, second, third, fourth, and fifth anniversaries of the grant date, subject to the employee’s continued employment and, (ii) expired on the earlier of the tenth anniversary of the grant date or upon termination of employment. The Company will not grant any future awards under the 2010 Option Plan. Future awards will be granted under the Vince 2013 Incentive Plan described further below. As of January 28, 2017, there are no options outstanding under the 2010 Stock Option Plan.

Vince 2013 Incentive Plan

In connection with the IPO, the Company adopted the Vince 2013 Incentive Plan, which provides for grants of stock options, stock appreciation rights, restricted stock and other stock-based awards. The aggregate number of shares of common stock which may be issued or used for reference purposes under the Vince 2013 Incentive Plan or with respect to which awards may be granted may not exceed 3,400,000 shares. The shares available for issuance under the Vince 2013 Incentive Plan may be, in whole or in part, either authorized and unissued shares of the Company’s common stock or shares of common stock held in or acquired for the Company’s treasury. In general, if awards under the Vince 2013 Incentive Plan are cancelled for any reason, or expire or terminate unexercised, the shares covered by such award may again be available for the grant of awards under the Vince 2013 Incentive Plan. As of January 28, 2017, there were 1,010,308 shares under the Vince 2013 Incentive Plan available for future grants. Options granted pursuant to the Vince 2013 Incentive Plan (i) vest in equal installments over two, three or four years or at 33 1/3% per year beginning in year two, over four years, subject to the employees’ continued employment and (ii) expire on the earlier of the tenth anniversary of the grant date or upon termination as outlined in the Vince 2013 Incentive Plan. Options granted to non-employee consultants vest 50% after one year, 25% after 18 months and 25% after two years and expire on the earlier of the tenth anniversary of the grant date or upon termination as outlined in their grant agreements pursuant to the Vince 2013 Incentive Plan. Restricted stock units granted vest in equal installments over a three year period or vest in equal installments over four years, subject to the employee’s continued employment.

Employee Stock Purchase Plan

The Company maintains an employee stock purchase plan (“ESPP”) for its employees. Under the ESPP, all eligible employees may contribute up to 10% of their base compensation, up to a maximum contribution of $10 per year. The purchase price of the stock is 90% of the fair market value, with purchases executed on a quarterly basis. The plan is defined as compensatory, and accordingly, a charge for compensation expense is recorded to Selling, general and administrative expense for the difference between the fair market value and the discounted purchase price of the Company’s Stock. As of January 28, 2017, 7,883 shares of common stock have been issued under the ESPP.

Stock Options

A summary of stock option activity for both employees and non-employees for fiscal 2016 is as follows:

 

 

 

Stock Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term (years)

 

 

Aggregate Intrinsic Value

(in thousands)

 

Outstanding at January 30, 2016

 

 

2,879,735

 

 

$

4.61

 

 

 

8.7

 

 

$

2,402

 

Granted

 

 

725,451

 

 

$

5.77

 

 

 

 

 

 

 

 

 

Exercised

 

 

(807,545

)

 

$

5.79

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(538,854

)

 

$

4.75

 

 

 

 

 

 

 

 

 

Outstanding at January 28, 2017

 

 

2,258,787

 

 

$

4.53

 

 

 

8.9

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable at January 28, 2017

 

 

605,937

 

 

$

4.24

 

 

 

8.8

 

 

$

 

 

Of the above outstanding shares, 1,414,972 are vested or expected to vest.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2016 and the exercise price, multiplied by the number of such in-the-money options) that would have been received by the option holders had all options holders exercised their options on January 28, 2017. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised during fiscal 2016, fiscal 2015 and fiscal 2014 (based on the differences between the Company’s stock price on the respective exercise date and the respective exercise price, multiplied by the number of respective options exercised) was $640, $316 and $620, respectively.

The Company’s weighted average assumptions used to estimate the fair value of stock options granted during fiscal 2016, fiscal 2015 and fiscal 2014 were estimated using a Black-Scholes option valuation model. Due to the limited trading history of the Company’s common stock, the volatility and expected term assumptions used were based on averages from a peer group of publicly traded retailers. The risk-free interest rate was based upon the U.S. Treasury yield curve in effect at the grant date.

 

 

 

Fiscal Year

 

 

 

2016

 

 

2015

 

 

2014

 

Weighted-average expected volatility

 

 

42.6

%

 

 

46.0

%

 

 

51.1

%

Expected term (in years)

 

4.2 years

 

 

4.5 years

 

 

4.5 years

 

Risk-free interest rate

 

 

1.1

%

 

 

1.4

%

 

 

1.4

%

Expected dividend yield

 

%

 

 

%

 

 

%

 

 

Based on these assumptions used, the weighted average grant date fair value for options granted to employees during fiscal 2016, fiscal 2015 and fiscal 2014 was $1.22 per share, $1.75 per share and $14.13 per share, respectively. The weighted average grant date fair value for options granted to non-employees in fiscal 2015 was $1.45 per share.

At January 28, 2017, there was $2,396 of unrecognized compensation costs related to stock options granted to employees and non-employees that will be recognized over a remaining weighted average period of 1.8 years.

Restricted Stock Units

A summary of restricted stock unit activity for fiscal 2016 is as follows:

 

 

 

Restricted Stock Units

 

 

Weighted Average Grant Date Fair Value

 

Nonvested restricted stock units at January 30, 2016

 

 

29,532

 

 

$

12.22

 

Granted

 

 

99,478

 

 

$

5.80

 

Vested

 

 

(14,580

)

 

$

13.11

 

Forfeited

 

 

(6,618

)

 

$

5.98

 

Nonvested restricted stock units at January 28, 2017

 

 

107,812

 

 

$

6.56

 

 

The weighted average grant date fair value for restricted stock units granted during fiscal 2015 and fiscal 2014 was $7.27 and $30.47, respectively. The total fair value of restricted stock units vested during fiscal 2016, fiscal 2015 and fiscal 2014 was $191, $125 and $50, respectively.

At January 28, 2017, there was $553 of unrecognized compensation costs related to restricted stock units that will be recognized over a remaining weighted average period of 1.7 years.

Share-Based Compensation Expense

During fiscal 2016, the Company recognized share-based compensation expense of $1,344, including $348 of expense related to non-employees, and a related tax benefit of $0. During fiscal 2015, the Company recognized share-based compensation expense of $1,259, including $160 of expense related to non-employees, and a related tax benefit of $504, including $64 of tax benefit related to non-employees. During fiscal 2014, the Company recognized share-based compensation expense of $1,896 and a related tax benefit of $758.

Defined Contribution Plan
Defined Contribution Plan

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.

Stockholders' Equity
Stockholders' Equity

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.

Earnings Per Share
Earnings Per Share

Note 9. Earnings Per Share

All share information presented below and herein has been adjusted to reflect the stock split approved by VHC’s board of directors as of November 27, 2013.

The following is a reconciliation of weighted average basic shares to weighted average diluted shares outstanding:

 

 

 

Fiscal Year

 

 

 

2016

 

 

2015

 

 

2014

 

Weighted-average shares—basic

 

 

46,420,533

 

 

 

36,770,430

 

 

 

36,730,490

 

Effect of dilutive equity securities

 

 

 

 

 

758,797

 

 

 

1,514,416

 

Weighted-average shares—diluted

 

 

46,420,533

 

 

 

37,529,227

 

 

 

38,244,906

 

 

Because the Company incurred a net loss for the fiscal year ended January 28, 2017, weighted-average basic shares and weighted-average diluted shares outstanding are equal for this period.

For the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015, 1,719,135, 732,303 and 123,959 options to purchase common stock, respectively, were excluded from the computation of weighted average shares for diluted earnings per share since the related exercise prices exceeded the average market price of the Company’s common stock and such inclusion would be anti-dilutive.

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 “Basis of Presentation and Summary of Significant Accounting Policies” for additional information.

Income Taxes
Income Taxes

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.

Segment and Geographical Financial Information
Segment and Geographical Financial Information

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