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BOOT BARN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Company and Basis of Presentation
Boot Barn Holdings, Inc., formerly known as WW Top Investment Corporation (the “Company”), was formed on November 17, 2011, and is incorporated in the State of Delaware. As of June 8, 2014, the Company held all of the outstanding shares of common stock of WW Holding Corporation, which held 95.0% of the outstanding shares of common stock of Boot Barn Holding Corporation. On June 9, 2014, WW Holding Corporation was merged with and into the Company and then Boot Barn Holding Corporation was merged with and into the Company (“Reorganization”). As a result of this Reorganization, Boot Barn, Inc. became a direct wholly owned subsidiary of the Company. On June 10, 2014, the legal name of the Company was changed from WW Top Investment Corporation to Boot Barn Holdings, Inc. The equity of the Company consists of 100,000,000 authorized shares and 26,556,712 issued and 26,544,712 outstanding shares of common stock as of December 24, 2016. The shares of common stock have voting rights of one vote per share.
The Company operates specialty retail stores that sell western and work boots and related apparel and accessories. The Company operates retail locations throughout the U.S. and sells its merchandise via the internet. The Company operated a total of 219 stores in 31 states as of December 24, 2016 and 208 stores in 29 states as of March 26, 2016. As of December 24, 2016, all stores operate under the Boot Barn name, with the exception of two stores which operate under the “American Worker” name.
Basis of Presentation
The Company’s condensed consolidated financial statements as of and for the thirteen and thirty-nine weeks ended December 24, 2016 and December 26, 2015 are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), and include the accounts of the Company and each of its subsidiaries, including Boot Barn, Inc., RCC Western Stores, Inc. (“RCC”), Baskins Acquisition Holdings, LLC (“Baskins”), Sheplers Inc. and Sheplers Holding Corporation (collectively with Sheplers, Inc., “Sheplers”) and Boot Barn International (Hong Kong) Limited (“Hong Kong”). All intercompany accounts and transactions among the Company and its subsidiaries have been eliminated in consolidation. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted.
In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company’s financial position and results of operations and cash flows in all material respects as of the dates and for the periods presented. The results of operations presented in the interim condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the fiscal year ending April 1, 2017.
Fiscal Periods
The Company reports its results of operations and cash flows on a 52- or 53-week basis ending on the last Saturday of March unless April 1st is a Saturday, in which case the fiscal year ends on April 1st. In a 52-week year, each quarter includes thirteen weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include thirteen weeks of operations and the fourth quarter includes fourteen weeks of operations. The fiscal year ending on April 1, 2017 (“fiscal 2017”) will consist of 53 weeks; whereas, the fiscal year ended on March 26, 2016 (“fiscal 2016”) consisted of 52 weeks.
|
|||
2. Summary of Significant Accounting Policies
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 3, 2016. Presented below in the following notes is supplemental information that should be read in conjunction with those consolidated financial statements.
Comprehensive Income
The Company does not have any components of other comprehensive income recorded within its consolidated financial statements and, therefore, does not separately present a statement of comprehensive income in its consolidated financial statements.
Segment Reporting
GAAP has established guidance for reporting information about a company’s operating segments, including disclosures related to a company’s products and services, geographic areas and major customers. The Company operates in a single operating segment, which includes net sales generated from its retail stores and e-commerce websites. The vast majority of the Company’s identifiable assets are in the U.S.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to 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 and the reported amounts of revenue and expenses during the reporting period. Among the significant estimates affecting the Company’s consolidated financial statements are those relating to revenue recognition, inventories, goodwill, intangible and long-lived assets, stock-based compensation and income taxes. Management regularly evaluates its estimates and assumptions based upon historical experience and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, the Company’s future results of operations may be affected.
Inventories
Inventory consists primarily of purchased merchandise and is valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis and includes the cost of merchandise and import related costs, including freight, duty and agent commissions. The Company assesses the recoverability of inventory through a periodic review of historical usage and present demand. When the inventory on hand exceeds the foreseeable demand, the value of inventory that, at the time of the review, is not expected to be sold is written down to its estimated net realizable value.
The Company recorded a fair value adjustment of $0.2 million and $0.5 million in the thirteen and thirty-nine weeks ended December 26, 2015, respectively, to reflect the acquired cost of inventory related to its acquisition of Sheplers. The amount was amortized over the period that the related inventory was sold. The amortization of inventory costs was zero for the thirteen and thirty-nine weeks ended December 24, 2016.
Fair Value of Certain Financial Assets and Liabilities
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which requires disclosure of the estimated fair value of certain assets and liabilities defined by the guidance as financial instruments. The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and debt. ASC 820 defines the fair value of financial instruments as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
|
· |
Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. |
|
· |
Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. |
|
· |
Level 3 uses one or more significant inputs that are unobservable and supported by little or no market activity, and reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. The Company’s Level 3 assets include certain acquired businesses. |
Cash and cash equivalents, accounts receivable and accounts payable are valued at fair value and are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified as Level 2 or Level 3 even though there may be certain significant inputs that are readily observable. The Company believes that the recorded value of its financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or duration.
Although market quotes for the fair value of the outstanding debt arrangements discussed in Note 5, “Revolving Credit Facilities and Long-Term Debt” are not readily available, the Company believes its carrying value approximates fair value due to the variable interest rates, which are Level 2 inputs. There were no financial assets or liabilities requiring fair value measurements on a recurring basis as of December 24, 2016.
Recent Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standards Update (“ASU”) No. 2014‑09, Revenue From Contracts with Customers, that will supersede nearly all existing revenue recognition guidance under GAAP. The revenue recognition standard will allow for the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. On August 8, 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 by one year, and permits early adoption as long as the adoption date is not before the original public entity effective date. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Previous guidance required inventory to be measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). This update is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company adopted this new standard beginning in the thirteen weeks ended December 24, 2016. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 eliminates the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. ASU No. 2015-17 is effective for public entities in annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The amendments for ASU No. 2015-17 can be applied retrospectively or prospectively and early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
|
|||
3. Business Combinations
On June 29, 2015, the Company completed the acquisition of Sheplers, a western lifestyle company with 25 retail locations across the United States and an e-commerce business, for a purchase price of $147.0 million (which included assumption of certain indebtedness), subject to customary adjustments (the “Sheplers Acquisition”). The primary reason for the Sheplers Acquisition was to expand the Company’s retail operations into new and existing markets and grow the Company’s e-commerce business.
The Company funded the Sheplers Acquisition by refinancing approximately $172.0 million of its and Sheplers’ existing indebtedness in part with an initial borrowing of $57.0 million under a $125.0 million syndicated senior secured asset-based revolving credit facility for which Wells Fargo Bank, National Association (“June 2015 Wells Fargo Revolver”), is agent, and a $200.0 million syndicated senior secured term loan for which GCI Capital Markets LLC (“2015 Golub Term Loan”) is agent. Borrowings under the credit agreements were initially used to pay costs and expenses related to the Sheplers Acquisition and the closing of the credit agreements, and may be used for working capital and other general corporate purposes.
The acquisition-date fair value of the consideration transferred totaled $149.3 million, which consisted of $147.0 million in cash and $2.3 million of a working capital adjustment, cash acquired and other adjustments. The total fair value of consideration transferred for the acquisition was allocated to the net tangible and intangible assets based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. The goodwill and intangible assets are not deductible for income tax purposes. Such estimated fair values require management to make estimates and judgments, especially with respect to intangible assets.
The fair value of each intangible and fixed asset acquired through the Sheplers Acquisition was measured in accordance with ASC 820. Customer lists, furniture, fixtures, office equipment, leasehold improvements, computer equipment and warehouse equipment were all valued using the cost approach. The trade name was valued under the royalty savings income approach method and inventory was valued under the comparative sales method. All operating leases, below-market leases, capital leases and financing obligations were valued under either the cost or income approach. Such fair values were determined using Level 3 inputs.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
|
|
|
At June 29, 2015 |
|
|
|
|
|
(in thousands) |
|
|
|
Assets acquired: |
|
|
|
|
|
Cash |
|
$ |
2,762 |
|
|
Accounts receivable |
|
|
1,792 |
|
|
Inventory |
|
|
30,436 |
|
|
Prepaid expenses and other current assets |
|
|
17,711 |
|
|
Property and equipment |
|
|
10,744 |
|
|
Properties under capital lease and financing transactions |
|
|
10,528 |
|
|
Intangible - below-market leases |
|
|
500 |
|
|
Intangible - trade name |
|
|
9,200 |
|
|
Intangible - customer lists |
|
|
488 |
|
|
Goodwill |
|
|
99,998 |
|
|
Other assets |
|
|
128 |
|
|
Total assets acquired |
|
$ |
184,287 |
|
|
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
|
|
Accounts payable |
|
$ |
14,554 |
|
|
Accrued liabilities and other payables |
|
|
5,065 |
|
|
Accrued customer liabilities |
|
|
1,318 |
|
|
Deferred tax liability |
|
|
1,226 |
|
|
Capital lease and financing transactions |
|
|
8,853 |
|
|
Other liabilities |
|
|
3,968 |
|
|
Total liabilities assumed |
|
|
34,984 |
|
|
Net Assets acquired |
|
$ |
149,303 |
|
Definite-lived intangible assets are recorded at their fair value as of the acquisition date with amortization computed utilizing the straight-line method over the assets’ estimated useful lives. The period of amortization for these below-market leases is 8 to 12 years and for customer lists is three years. The trade name is an indefinite-lived intangible asset and is not amortized but instead is measured for impairment at least annually, or when events indicate that impairment may exist.
The Company incurred $0.9 million of acquisition-related costs in fiscal 2016 related to the acquisition of Sheplers, which are recorded in “Acquisition-related expenses” in the condensed consolidated statements of operations for the thirty-nine weeks ended December 26, 2015.
Supplemental Pro Forma Data
The as adjusted net sales and net income below give effect to the Sheplers Acquisition as if it had been consummated on March 30, 2014, the first day of the Company’s 2015 fiscal year. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Sheplers to reflect the effects of amortization of purchased intangible assets and acquired inventory valuation step-down, refinanced debt and capital lease and financing transactions as of March 30, 2014 in order to complete the acquisition, and income tax expense. The adjustments are based upon currently available information and certain assumptions that the Company believes are reasonable under the circumstances. Pre-acquisition net sales and net income numbers for Sheplers are derived from their books and records prepared prior to the acquisition and are not verified by the Company. This as adjusted data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place as of the date noted above.
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
||
|
|
|
|
|
December 26, |
|
||
|
|
|
|
|
2015 |
|
||
|
(in thousands) |
|
|
|
|
|
|
|
|
As adjusted net sales |
|
|
|
|
$ |
452,486 |
|
|
As adjusted net income |
|
|
|
|
$ |
5,414 |
|
|
|||
4. Intangible Assets, Net
Net intangible assets as of December 24, 2016 and March 26, 2016 consisted of the following:
|
|
|
December 24, 2016 |
|
|||||||||
|
|
|
Gross |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
Average |
|
||
|
|
|
Amount |
|
Amortization |
|
Net |
|
Useful Life |
|
|||
|
|
|
(in thousands, except for weighted average useful life) |
|
|||||||||
|
Customer lists |
|
$ |
7,788 |
|
$ |
(7,180) |
|
$ |
608 |
|
4.9 |
|
|
Non-compete agreements |
|
|
1,290 |
|
|
(1,163) |
|
|
127 |
|
4.9 |
|
|
Below-market leases |
|
|
5,248 |
|
|
(2,114) |
|
|
3,134 |
|
9.0 |
|
|
Total definite lived |
|
|
14,326 |
|
|
(10,457) |
|
|
3,869 |
|
|
|
|
Trademarks—indefinite lived |
|
|
59,377 |
|
|
— |
|
|
59,377 |
|
|
|
|
Total intangible assets |
|
$ |
73,703 |
|
$ |
(10,457) |
|
$ |
63,246 |
|
|
|
|
|
|
March 26, 2016 |
|
|||||||||
|
|
|
Gross |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
Average |
|
||
|
|
|
Amount |
|
Amortization |
|
Net |
|
Useful Life |
|
|||
|
|
|
(in thousands, except for weighted average useful life) |
|
|||||||||
|
Customer lists |
|
$ |
7,788 |
|
$ |
(6,172) |
|
$ |
1,616 |
|
4.9 |
|
|
Non-compete agreements |
|
|
1,290 |
|
|
(968) |
|
|
322 |
|
4.9 |
|
|
Below-market leases |
|
|
5,248 |
|
|
(1,702) |
|
|
3,546 |
|
9.4 |
|
|
Total definite lived |
|
|
14,326 |
|
|
(8,842) |
|
|
5,484 |
|
|
|
|
Trademarks—indefinite lived |
|
|
59,377 |
|
|
— |
|
|
59,377 |
|
|
|
|
Total intangible assets |
|
$ |
73,703 |
|
$ |
(8,842) |
|
$ |
64,861 |
|
|
|
Amortization expense for intangible assets totaled $0.5 million for the thirteen weeks ended December 24, 2016 and $0.6 million for the thirteen weeks ended December 26, 2015, and is included in selling, general and administrative expenses.
Amortization expense for intangible assets totaled $1.6 million for the thirty-nine weeks ended December 24, 2016 and $1.9 million for the thirty-nine weeks ended December 26, 2015, and is included in selling, general and administrative expenses.
As of December 24, 2016, estimated future amortization of intangible assets was as follows:
|
Fiscal Year |
|
(in thousands) |
|
|
|
2017 |
|
$ |
409 |
|
|
2018 |
|
|
966 |
|
|
2019 |
|
|
500 |
|
|
2020 |
|
|
388 |
|
|
2021 |
|
|
314 |
|
|
Thereafter |
|
|
1,292 |
|
|
Total |
|
$ |
3,869 |
|
The Company performs its annual goodwill impairment assessment on the first day of the fourth fiscal quarter, or more frequently if it believes that indicators of impairment exist. As of December 24, 2016, the Company had identified no indicators of impairment with respect to its goodwill, intangible and long-lived asset balances.
|
|||
5. Revolving Credit Facilities and Long-Term Debt
On June 29, 2015, the Company, as guarantor, and its wholly-owned primary operating subsidiary, Boot Barn, Inc., refinanced the $150.0 million credit facility with Wells Fargo Bank, N.A. (“February 2015 Wells Fargo Credit Facility”) with the $125.0 million June 2015 Wells Fargo Revolver and the $200.0 million 2015 Golub Term Loan. The borrowing base of the June 2015 Wells Fargo Revolver is calculated on a monthly basis and is based on the amount of eligible credit card receivables, commercial accounts, inventory, and available reserves. Borrowings under the credit agreements were initially used to pay costs and expenses related to the Sheplers Acquisition and the closing of such credit agreements, and may be used for working capital and other general corporate purposes.
Borrowings under the June 2015 Wells Fargo Revolver bear interest at per annum rates equal to, at the Company’s option, either (i) London Interbank Offered Rate (“LIBOR”) plus an applicable margin for LIBOR loans, or (ii) the base rate plus an applicable margin for base rate loans. The base rate is calculated as the highest of (a) the federal funds rate plus 0.5%, (b) the Wells Fargo prime rate and (c) one-month LIBOR plus 1.0%. The applicable margin is calculated based on a pricing grid that in each case is linked to quarterly average excess availability. For LIBOR Loans, the applicable margin ranges from 1.00% to 1.25%, and for base rate loans it ranges from 0.00% to 0.25%. The Company also pays a commitment fee of 0.25% per annum of the actual daily amount of the unutilized revolving loans. The interest on the June 2015 Wells Fargo Revolver is payable in quarterly installments ending on June 29, 2020, the maturity date. The amount outstanding under the June 2015 Wells Fargo Revolver as of December 24, 2016 and March 26, 2016 was $23.0 million and $48.8 million, respectively. Total interest expense incurred in the thirteen and thirty-nine weeks ended December 24, 2016 on the June 2015 Wells Fargo Revolver was $0.4 million and $1.1 million, respectively, and the weighted average interest rate for the thirteen weeks ended December 24, 2016 was 2.0%.
Borrowings under the 2015 Golub Term Loan bear interest at per annum rates equal to, at the Company’s option, either (a) LIBOR plus an applicable margin for LIBOR loans with a LIBOR floor of 1.0%, or (b) the base rate plus an applicable margin for base rate loans. The base rate is calculated as the greater of (i) the higher of (x) the prime rate and (y) the federal funds rate plus 0.5% and (ii) the sum of one-month LIBOR plus 1.0%. The applicable margin is 4.5% for LIBOR Loans and 3.5% for base rate loans. The principal and interest on the 2015 Golub Term Loan is payable in quarterly installments ending on June 29, 2021, the maturity date. Quarterly principal payments of $500,000 are due each quarter. Total interest expense incurred in the thirteen and thirty-nine weeks ended December 24, 2016 on the 2015 Golub Term Loan was $2.7 million and $8.2 million, respectively, and the weighted average interest rate for the thirteen weeks ended December 24, 2016 was 5.5%.
All obligations under each of the 2015 Golub Term Loan and the June 2015 Wells Fargo Revolver are unconditionally guaranteed by the Company and each of its direct and indirect domestic subsidiaries (other than certain immaterial subsidiaries) which are not named as borrowers under the 2015 Golub Term Loan or the June 2015 Wells Fargo Revolver, as applicable.
The priority with respect to collateral under each of the 2015 Golub Term Loan and the June 2015 Wells Fargo Revolver is subject to the terms of an intercreditor agreement among the lenders under the 2015 Golub Term Loan and the June 2015 Wells Fargo Revolver.
Each of the June 2015 Wells Fargo Revolver and the 2015 Golub Term Loan contains customary provisions relating to mandatory prepayments, restricted payments, voluntary payments, affirmative and negative covenants, and events of default. In addition, the terms of the June 2015 Wells Fargo Revolver require the Company to maintain, on a consolidated basis, a Consolidated Fixed Charge Coverage Ratio of at least 1.00:1.00 during such times as a covenant trigger event shall exist. The terms of the 2015 Golub Term Loan require the Company to maintain, on a consolidated basis, a maximum Consolidated Total Net Leverage Ratio as of December 24, 2016 of 4.50:1.00. As provided for in the 2015 Golub Term Loan, this ratio steps down to 4.25:1.00 as of April 1, 2017 and 4.00:1:00 as of September 30, 2017 and for all subsequent periods. As of December 24, 2016, the Company was in compliance with the June 2015 Wells Fargo Revolver and the 2015 Golub Term Loan debt covenants. The June 2015 Wells Fargo Revolver and 2015 Golub Term Loan also require the Company to pay additional interest of 2.0% per annum upon triggering certain specified events of default set forth therein. For financial accounting purposes, the requirement for the Company to pay a higher interest rate upon an event of default is an embedded derivative. As of December 24, 2016, the fair value of these embedded derivatives was estimated and was not significant.
$150 Million Credit Facility (Wells Fargo Bank, N.A.)
On February 23, 2015, the Company and Boot Barn, Inc., the Company’s wholly-owned primary operating subsidiary, entered into the February 2015 Wells Fargo Credit Facility, which consisted of a $75.0 million revolving credit facility, including a $5.0 million sub-limit for letters of credit, and a $75.0 million term loan, and also provided the Company with the ability to incur additional incremental term loans of up to $50.0 million, provided that certain conditions were met, including compliance with certain covenants. On June 29, 2015, the Company repaid all outstanding borrowings under the February 2015 Wells Fargo Credit Facility and terminated such facility in connection with the refinancing discussed above.
Total interest expense incurred in the thirty-nine weeks ended December 26, 2015 on the February 2015 Wells Fargo Credit Facility was $0.8 million.
Debt Issuance Costs and Debt Discount
The Company paid $1.4 million of transaction fees in connection with the February 2015 Wells Fargo Credit Facility. These transaction fees were paid to both Wells Fargo and other advisors via a reduction in the proceeds from the February 2015 Wells Fargo Credit Facility and were accounted for as debt issuance costs and a debt discount at March 28, 2015. On June 29, 2015, the February 2015 Wells Fargo Credit Facility was repaid when the new financing was obtained, and the $1.4 million remaining debt issuance costs and debt discounts were written off to interest expense.
Debt issuance costs totaling $0.9 million were incurred under the June 2015 Wells Fargo Revolver and are included as assets on the condensed consolidated balance sheets in prepaid expenses and other current assets. Total debt issuance costs were $0.6 million and $0.8 million as of December 24, 2016 and March 26, 2016, respectively. These amounts are being amortized to interest expense over the term of the June 2015 Wells Fargo Revolver.
Debt issuance costs and debt discount totaling $5.6 million were incurred under the 2015 Golub Term Loan and are included as a reduction of the current and non-current note payable on the condensed consolidated balance sheets. Total debt issuance costs and debt discount were $4.2 million and $4.9 million as of December 24, 2016 and March 26, 2016, respectively. These amounts are being amortized to interest expense over the term of the 2015 Golub Term Loan.
The following sets forth the balance sheet information related to the term loan:
|
|
|
December 24, |
|
March 26, |
|
||
|
(in thousands) |
|
2016 |
|
2016 |
|
||
|
Term Loan |
|
$ |
197,000 |
|
$ |
198,500 |
|
|
Unamortized value of the debt issuance costs and debt discount |
|
|
(4,175) |
|
|
(4,886) |
|
|
Net carrying value |
|
$ |
192,825 |
|
$ |
193,614 |
|
Total amortization expense of $0.3 million and $0.8 million related to the June 2015 Wells Fargo Revolver and 2015 Golub Term Loan is included as a component of interest expense in the thirteen and thirty-nine weeks ended December 24, 2016, respectively.
Total amortization expense of $0.3 million and $0.6 million related to the June 2015 Wells Fargo Revolver and 2015 Golub Term Loan is included as a component of interest expense in the thirteen and thirty-nine weeks ended December 26, 2015, respectively.
Aggregate Contractual Maturities
Aggregate contractual maturities for the Company’s long-term debt as of December 24, 2016 are as follows:
|
Fiscal Year |
|
|
(in thousands) |
|
|
2017 |
|
$ |
500 |
|
|
2018 |
|
|
2,000 |
|
|
2019 |
|
|
2,000 |
|
|
2020 |
|
|
2,000 |
|
|
2021 |
|
|
2,000 |
|
|
Thereafter |
|
|
188,500 |
|
|
Total |
|
$ |
197,000 |
|
|
|||
6. Stock-Based Compensation
Equity Incentive Plans
On January 27, 2012, the Company approved the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan authorized the Company to issue options to employees, consultants and directors exercisable for up to a total of 3,750,000 shares of common stock. As of December 24, 2016, all awards granted by the Company under the 2011 Plan have been nonqualified stock options. Options granted under the 2011 Plan have a life of 10 years and vest over service periods of five years or in connection with certain events as defined by the 2011 Plan.
On October 19, 2014, the Company approved the 2014 Equity Incentive Plan, which was amended as of August 24, 2016 (as amended, the “2014 Plan”). The 2014 Plan authorizes the Company to issue awards to employees, consultants and directors for up to a total of 3,600,000 shares of common stock. As of December 24, 2016, all awards granted by the Company under the 2014 Plan to date have been nonqualified stock options, restricted stock awards or restricted stock units. Options granted under the 2014 Plan have a life of eight years and vest over service periods of five years or in connection with certain events as defined by the 2014 Plan. Restricted stock awards granted vest over one or four years, as determined by the Compensation Committee of the Board of Directors. Restricted stock units vest over service periods of one or five years, as determined by the Compensation Committee of the Board of Directors.
Non-Qualified Stock Options
During the thirteen weeks ended December 24, 2016, the Company did not grant options to purchase shares under the 2014 Plan.
During the thirty-nine weeks ended December 24, 2016, the Company granted certain members of management options to purchase a total of 560,892 shares under the 2014 Plan. The total grant date fair value of stock options granted during the thirty-nine weeks ended December 24, 2016 was $1.5 million, with grant date fair values ranging from $2.50 to $2.95 per share. The Company is recognizing the expense relating to these stock options on a straight-line basis over the five-year service period of the awards. The exercise prices of these awards range between $7.11 and $8.38 per share.
During the thirteen weeks ended December 26, 2015, the Company did not grant options to purchase shares under the 2014 Plan.
During the thirty-nine weeks ended December 26, 2015, the Company granted certain members of management options to purchase a total of 294,153 shares under the 2014 Plan. The total grant date fair value of stock options granted during the thirty-nine weeks ended December 26, 2015 was $2.7 million, with grant date fair values ranging from $7.48 to $11.52 per share. The Company is recognizing the expense relating to these stock options on a straight-line basis over the five-year service period of the awards. The exercise prices of these awards range between $22.31 and $32.02 per share.
On October 29, 2014, the Company granted its Chief Executive Officer (“CEO”) options to purchase 99,650 shares of common stock under the 2014 Plan. These options contain both service and market conditions. Vesting of the options occurs if the market price of the Company’s stock achieves stated targets through the third anniversary of the date of grant. As of March 26, 2016, the market price targets were achieved, and the options will vest in equal amounts on the third, fourth and fifth anniversaries of the grant date. The fair value of the options was estimated using a Monte Carlo simulation model. The following significant assumptions were used as of October 29, 2014:
|
Stock price |
|
$ |
16.00 |
|
|
Exercise price |
|
$ |
16.00 |
|
|
Expected option term |
|
|
6.0 |
years |
|
Expected volatility |
|
|
55.0 |
% |
|
Risk-free interest rate |
|
|
1.8 |
% |
|
Expected annual dividend yield |
|
|
0 |
% |
The stock option awards discussed above, with the exception of options awarded to the Company’s CEO on October 29, 2014, were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of the Company’s stock price over the option’s expected term, the risk-free interest rate over the option’s expected term and the Company’s expected annual dividend yield, if any. The Company’s estimate of pre-vesting forfeitures, or forfeiture rate, was based on its internal analysis, which included the award recipients’ positions within the Company and the vesting period of the awards. The Company will issue shares of common stock when the options are exercised.
The fair values of stock options granted during the thirteen and thirty-nine weeks ended December 24, 2016 and December 26, 2015 were estimated on the grant dates using the following assumptions:
|
|
|
Thirteen Weeks Ended |
|
Thirty-Nine Weeks Ended |
|
|||||||||||||||||||||
|
|
|
December 24, |
|
December 26, |
|
December 24, |
|
December 26, |
|
|||||||||||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
|||||||||||||||||
|
Expected option term(1) |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
|
|
|
5.5 |
years |
|
|
|
|
5.5 |
years |
|
|
|
Expected volatility factor(2) |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
35.8 |
% |
- |
36.0 |
% |
|
33.3 |
% |
- |
37.1 |
% |
|
|
|
Risk-free interest rate(3) |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
1.38 |
% |
- |
1.43 |
% |
|
1.6 |
% |
- |
2.0 |
% |
|
|
|
Expected annual dividend yield |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
|
|
|
0 |
% |
|
|
|
|
0 |
% |
|
|
|
(1) |
The Company has limited historical information regarding expected option term. Accordingly, the Company determined the expected life of the options using the simplified method. |
|
(2) |
Stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s competitors’ common stock over the most recent period equal to the expected option term of the Company’s awards. |
|
(3) |
The risk-free interest rate is determined using the rate on treasury securities with the same term. |
Intrinsic value for stock options is defined as the difference between the market price of the Company’s common stock on the last business day of the fiscal quarter and the weighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period.
The following table summarizes the stock award activity for the thirty-nine weeks ended December 24, 2016:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Grant Date |
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Aggregate |
|
||
|
|
|
Stock |
|
Average |
|
Contractual |
|
Intrinsic |
|
||
|
|
|
Options |
|
Exercise Price |
|
Life (in Years) |
|
Value |
|
||
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
Outstanding at March 26, 2016 |
|
2,447,133 |
|
$ |
9.87 |
|
|
|
|
|
|
|
Granted |
|
560,892 |
|
$ |
7.38 |
|
|
|
|
|
|
|
Exercised |
|
(194,677) |
|
$ |
6.06 |
|
|
|
$ |
1,133 |
|
|
Cancelled, forfeited or expired |
|
(252,994) |
|
$ |
13.23 |
|
|
|
|
|
|
|
Outstanding at December 24, 2016 |
|
2,560,354 |
|
$ |
9.28 |
|
6.2 |
|
$ |
12,288 |
|
|
Vested and expected to vest after December 24, 2016 |
|
2,560,354 |
|
$ |
9.28 |
|
6.2 |
|
$ |
12,288 |
|
|
Exercisable at December 24, 2016 |
|
1,206,524 |
|
$ |
7.85 |
|
5.7 |
|
$ |
6,483 |
|
A summary of the status of non-vested stock options as of December 24, 2016 including changes during the thirty-nine weeks ended December 24, 2016 is presented below:
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
Shares |
|
Fair Value |
|
|
|
Nonvested at March 26, 2016 |
|
1,335,103 |
|
$ |
5.82 |
|
|
Granted |
|
560,892 |
|
$ |
2.60 |
|
|
Vested |
|
(330,369) |
|
$ |
5.46 |
|
|
Nonvested shares forfeited |
|
(211,796) |
|
$ |
6.17 |
|
|
Nonvested at December 24, 2016 |
|
1,353,830 |
|
$ |
4.52 |
|
Restricted Stock
During the thirteen weeks ended December 24, 2016, the Company did not grant any restricted stock units. During the thirty-nine weeks ended December 24, 2016, the Company granted 136,732 restricted stock units to various directors and employees under the 2014 Plan. The shares granted to employees vest in five equal annual installments beginning on the grant date, provided that the respective award recipient continues to be employed by the Company through each of those dates. The shares granted to the Company’s directors vest on the first anniversary of the date of grant. The grant date fair value of these awards for the thirty-nine weeks ended December 24, 2016 totaled $1.1 million. The Company is recognizing the expense relating to these awards on a straight-line basis over the service period of each award, commencing on the date of grant.
During the thirteen and thirty-nine weeks ended December 26, 2015, the Company granted 25,329 and 71,530 restricted stock units, respectively, to various employees under the 2014 Plan. The shares granted to employees vest in five equal annual installments beginning on the grant date, provided that the respective award recipient continues to be employed by the Company through each of those dates. The grant date fair value of these awards for the thirteen and thirty-nine weeks ended December 26, 2015 totaled $0.3 million and $1.6 million, respectively. The Company is recognizing the expense relating to these awards on a straight-line basis over the service period of each award, commencing on the date of grant.
Stock-Based Compensation Expense
Stock-based compensation expense was $0.8 million for both the thirteen weeks ended December 24, 2016 and December 26, 2015. Stock-based compensation expense was $2.3 million and $2.1 million for the thirty-nine weeks ended December 24, 2016 and December 26, 2015, respectively. Stock-based compensation expense of $0.1 million was recorded in cost of goods sold in the condensed consolidated statements of operations for each of the thirteen weeks ended December 24, 2016 and December 26, 2015, respectively. Stock-based compensation expense of $0.4 million and $0.3 million was recorded in cost of goods sold in the condensed consolidated statements of operations for each of the thirty-nine weeks ended December 24, 2016 and December 26, 2015, respectively. All other stock-based compensation expense is included in selling, general and administrative expenses in the condensed consolidated statements of operations.
As of December 24, 2016, there was $4.7 million of total unrecognized stock-based compensation expense related to unvested stock options, with a weighted-average remaining recognition period of 2.93 years. As of December 24, 2016, there was $2.0 million of total unrecognized stock-based compensation expense related to restricted stock, with a weighted-average remaining recognition period of 3.73 years.
|
|||
7. Commitments and Contingencies
The Company is involved, from time to time, in litigation that is incidental to its business. The Company has reviewed these matters to determine if reserves are required for losses that are probable and reasonable to estimate in accordance with FASB ASC Topic 450, Contingencies. The Company evaluates such reserves, if any, based upon several criteria, including the merits of each claim, settlement discussions and advice from outside legal counsel, as well as indemnification of amounts expended by the Company’s insurers or others pursuant to indemnification policies or agreements, if any.
On April 28, 2016, two employees, on behalf of themselves and all other similarly situated employees, filed a wage-and-hour class action, which includes claims for penalties under California’s Private Attorney General Act, in the Fresno County Superior Court, Case No. 16 CE CG 01330, alleging violations of California’s wage and hour, overtime, meal break and statement of wages rules and regulations among other things. The complaint seeks an unspecified amount of damages and penalties. The Company intends to defend this claim vigorously. At present, the Company cannot reasonably estimate the loss that may arise from this matter, but has recorded as of December 24, 2016 an amount for the estimated probable loss, which is not material to the condensed consolidated financial statements. Depending on the actual outcome of pending litigation, charges in excess of such recorded amount could be recorded in the future, which may have a material adverse effect on the Company’s financial position, results of operations or liquidity.
The Company is also subject to certain other pending or threatened litigation matters incidental to its business. In management's opinion, none of these legal matters, individually or in the aggregate, will have a material effect on the Company's financial position, results of operations, or liquidity.
During the normal course of its business, the Company has made certain indemnifications and commitments under which the Company may be required to make payments for certain transactions. These indemnifications include those given to various lessors in connection with facility leases for certain claims arising from such facility leases, and indemnifications to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The majority of these indemnifications and commitments do not provide for any limitation of the maximum potential future payments the Company could be obligated to make, and their duration may be indefinite. The Company has not recorded any liability for these indemnifications and commitments in the condensed consolidated balance sheets as the impact is expected to be immaterial.
|
|||
8. Capital Leases and Financing Transactions
As of December 24, 2016, the Company had non-cancelable capital leases for property and equipment rentals with principal and interest payments due monthly. The liability under capital lease arrangements as of December 24, 2016 totals $0.9 million.
During fiscal 2016, the Company acquired leases related to two retail stores, two office buildings, one distribution center facility and land as part of the Sheplers Acquisition. On July 30, 2007, Sheplers sold these properties to an unrelated third-party real estate company and simultaneously entered into an arrangement with the third-party real estate company to lease back these properties. Sheplers maintained continuing involvement in these properties such that this sale did not qualify for sale-leaseback accounting treatment. This transaction is recorded as a financing transaction with the assets and related financing obligation recorded on the balance sheet. The lease has a 20-year term expiring in 2027 and includes renewal options and certain default provisions requiring the Company to perform repairs and maintenance, make timely rent payments and insure the buildings and equipment. The liability under the financing transaction as of December 24, 2016 totals $7.5 million.
The total liability under capital lease and financing transactions as of December 24, 2016 is $8.4 million and is included as capital lease obligations in the condensed consolidated balance sheet. The current portion of the capital lease arrangements is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. The interest rates range from 6.1% to 11.1%.
The net property and equipment involved in the Company’s capital leases and financing transaction are included in property and equipment as follows:
|
|
|
December 24, |
|
March 26, |
|
||
|
(in thousands) |
|
2016 |
|
2016 |
|
||
|
Buildings |
|
$ |
7,588 |
|
$ |
7,588 |
|
|
Land |
|
|
2,530 |
|
|
2,530 |
|
|
Site improvements |
|
|
410 |
|
|
410 |
|
|
Equipment |
|
|
63 |
|
|
63 |
|
|
Property and equipment, gross |
|
|
10,591 |
|
|
10,591 |
|
|
Less: accumulated depreciation |
|
|
(1,088) |
|
|
(551) |
|
|
Property and equipment, net |
|
$ |
9,503 |
|
$ |
10,040 |
|
As of December 24, 2016, future minimum capital lease and financing transaction payments are as follows:
|
Fiscal Year |
|
(in thousands) |
|
|
|
2017 |
|
|
319 |
|
|
2018 |
|
|
1,273 |
|
|
2019 |
|
|
1,296 |
|
|
2020 |
|
|
1,307 |
|
|
2021 |
|
|
1,331 |
|
|
Thereafter |
|
|
8,213 |
|
|
Total |
|
|
13,739 |
|
|
Less: Imputed interest |
|
|
(5,378) |
|
|
Present value of capital leases and financing transaction |
|
|
8,361 |
|
|
Less: Current capital leases and financing transaction |
|
|
(420) |
|
|
Noncurrent capital leases and financing transaction |
|
$ |
7,941 |
|
|
|||
9. Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). In accordance with ASC 740, the Company recognizes deferred tax assets and liabilities based on the liability method, which requires an adjustment to the deferred tax asset or liability to reflect income tax rates currently in effect. When income tax rates increase or decrease, a corresponding adjustment to income tax expense is recorded by applying the rate change to the cumulative temporary differences. ASC 740 prescribes the recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. ASC 740 requires the Company to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recognized. Additionally, ASC 740 provides guidance on recognition measurement, derecognition, classification, related interest and penalties, accounting in interim periods, disclosure and transition.
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for discrete events occurring in a particular period. The income tax rate was 39.0% and 40.3% for the thirteen weeks ended December 24, 2016 and December 26, 2015, respectively, and 38.6% and 42.0% for the thirty-nine weeks ended December 24, 2016 and December 26, 2015, respectively. The effective tax rate for the thirteen and thirty-nine weeks ended December 24, 2016 is lower than the comparable periods in fiscal 2016 due to discrete items recognized during the periods presented. Because management believes that it is more likely than not that the Company will realize the full amount of the net deferred tax assets, the Company has not recorded any valuation allowance for the deferred tax assets.
The Company’s policy is to accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 24, 2016 and March 26, 2016, the Company had no accrued liability for penalties and interest.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. At December 24, 2016, the Company is not aware of tax examinations (current or potential) in any tax jurisdictions.
|
|||
10. Related Party Transactions
During the thirteen and thirty-nine weeks ended December 24, 2016, the Company had capital expenditures with a specialty retail vendor in the flooring market that as of December 24, 2016 is 30.3% owned by Freeman Spogli, our majority stockholder. These capital expenditures amounted to less than $0.1 million and $0.2 million in the thirteen and thirty-nine weeks ended December 24, 2016, respectively, and were recorded as property and equipment, net on the condensed consolidated balance sheet. There were no costs incurred with this vendor in the prior year period.
|
|||
Comprehensive Income
The Company does not have any components of other comprehensive income recorded within its consolidated financial statements and, therefore, does not separately present a statement of comprehensive income in its consolidated financial statements.
Segment Reporting
GAAP has established guidance for reporting information about a company’s operating segments, including disclosures related to a company’s products and services, geographic areas and major customers. The Company operates in a single operating segment, which includes net sales generated from its retail stores and e-commerce websites. The vast majority of the Company’s identifiable assets are in the U.S.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to 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 and the reported amounts of revenue and expenses during the reporting period. Among the significant estimates affecting the Company’s consolidated financial statements are those relating to revenue recognition, inventories, goodwill, intangible and long-lived assets, stock-based compensation and income taxes. Management regularly evaluates its estimates and assumptions based upon historical experience and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, the Company’s future results of operations may be affected.
Inventories
Inventory consists primarily of purchased merchandise and is valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis and includes the cost of merchandise and import related costs, including freight, duty and agent commissions. The Company assesses the recoverability of inventory through a periodic review of historical usage and present demand. When the inventory on hand exceeds the foreseeable demand, the value of inventory that, at the time of the review, is not expected to be sold is written down to its estimated net realizable value.
The Company recorded a fair value adjustment of $0.2 million and $0.5 million in the thirteen and thirty-nine weeks ended December 26, 2015, respectively, to reflect the acquired cost of inventory related to its acquisition of Sheplers. The amount was amortized over the period that the related inventory was sold. The amortization of inventory costs was zero for the thirteen and thirty-nine weeks ended December 24, 2016.
Fair Value of Certain Financial Assets and Liabilities
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which requires disclosure of the estimated fair value of certain assets and liabilities defined by the guidance as financial instruments. The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and debt. ASC 820 defines the fair value of financial instruments as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
|
· |
Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. |
|
· |
Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. |
|
· |
Level 3 uses one or more significant inputs that are unobservable and supported by little or no market activity, and reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. The Company’s Level 3 assets include certain acquired businesses. |
Cash and cash equivalents, accounts receivable and accounts payable are valued at fair value and are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified as Level 2 or Level 3 even though there may be certain significant inputs that are readily observable. The Company believes that the recorded value of its financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or duration.
Although market quotes for the fair value of the outstanding debt arrangements discussed in Note 5, “Revolving Credit Facilities and Long-Term Debt” are not readily available, the Company believes its carrying value approximates fair value due to the variable interest rates, which are Level 2 inputs. There were no financial assets or liabilities requiring fair value measurements on a recurring basis as of December 24, 2016.
Recent Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standards Update (“ASU”) No. 2014‑09, Revenue From Contracts with Customers, that will supersede nearly all existing revenue recognition guidance under GAAP. The revenue recognition standard will allow for the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. On August 8, 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 by one year, and permits early adoption as long as the adoption date is not before the original public entity effective date. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Previous guidance required inventory to be measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). This update is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company adopted this new standard beginning in the thirteen weeks ended December 24, 2016. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 eliminates the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. ASU No. 2015-17 is effective for public entities in annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The amendments for ASU No. 2015-17 can be applied retrospectively or prospectively and early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
|
|||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
|
|
|
At June 29, 2015 |
|
|
|
|
|
(in thousands) |
|
|
|
Assets acquired: |
|
|
|
|
|
Cash |
|
$ |
2,762 |
|
|
Accounts receivable |
|
|
1,792 |
|
|
Inventory |
|
|
30,436 |
|
|
Prepaid expenses and other current assets |
|
|
17,711 |
|
|
Property and equipment |
|
|
10,744 |
|
|
Properties under capital lease and financing transactions |
|
|
10,528 |
|
|
Intangible - below-market leases |
|
|
500 |
|
|
Intangible - trade name |
|
|
9,200 |
|
|
Intangible - customer lists |
|
|
488 |
|
|
Goodwill |
|
|
99,998 |
|
|
Other assets |
|
|
128 |
|
|
Total assets acquired |
|
$ |
184,287 |
|
|
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
|
|
Accounts payable |
|
$ |
14,554 |
|
|
Accrued liabilities and other payables |
|
|
5,065 |
|
|
Accrued customer liabilities |
|
|
1,318 |
|
|
Deferred tax liability |
|
|
1,226 |
|
|
Capital lease and financing transactions |
|
|
8,853 |
|
|
Other liabilities |
|
|
3,968 |
|
|
Total liabilities assumed |
|
|
34,984 |
|
|
Net Assets acquired |
|
$ |
149,303 |
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
||
|
|
|
|
|
December 26, |
|
||
|
|
|
|
|
2015 |
|
||
|
(in thousands) |
|
|
|
|
|
|
|
|
As adjusted net sales |
|
|
|
|
$ |
452,486 |
|
|
As adjusted net income |
|
|
|
|
$ |
5,414 |
|
|
|||
Net intangible assets as of December 24, 2016 and March 26, 2016 consisted of the following:
|
|
|
December 24, 2016 |
|
|||||||||
|
|
|
Gross |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
Average |
|
||
|
|
|
Amount |
|
Amortization |
|
Net |
|
Useful Life |
|
|||
|
|
|
(in thousands, except for weighted average useful life) |
|
|||||||||
|
Customer lists |
|
$ |
7,788 |
|
$ |
(7,180) |
|
$ |
608 |
|
4.9 |
|
|
Non-compete agreements |
|
|
1,290 |
|
|
(1,163) |
|
|
127 |
|
4.9 |
|
|
Below-market leases |
|
|
5,248 |
|
|
(2,114) |
|
|
3,134 |
|
9.0 |
|
|
Total definite lived |
|
|
14,326 |
|
|
(10,457) |
|
|
3,869 |
|
|
|
|
Trademarks—indefinite lived |
|
|
59,377 |
|
|
— |
|
|
59,377 |
|
|
|
|
Total intangible assets |
|
$ |
73,703 |
|
$ |
(10,457) |
|
$ |
63,246 |
|
|
|
|
|
|
March 26, 2016 |
|
|||||||||
|
|
|
Gross |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
Average |
|
||
|
|
|
Amount |
|
Amortization |
|
Net |
|
Useful Life |
|
|||
|
|
|
(in thousands, except for weighted average useful life) |
|
|||||||||
|
Customer lists |
|
$ |
7,788 |
|
$ |
(6,172) |
|
$ |
1,616 |
|
4.9 |
|
|
Non-compete agreements |
|
|
1,290 |
|
|
(968) |
|
|
322 |
|
4.9 |
|
|
Below-market leases |
|
|
5,248 |
|
|
(1,702) |
|
|
3,546 |
|
9.4 |
|
|
Total definite lived |
|
|
14,326 |
|
|
(8,842) |
|
|
5,484 |
|
|
|
|
Trademarks—indefinite lived |
|
|
59,377 |
|
|
— |
|
|
59,377 |
|
|
|
|
Total intangible assets |
|
$ |
73,703 |
|
$ |
(8,842) |
|
$ |
64,861 |
|
|
|
As of December 24, 2016, estimated future amortization of intangible assets was as follows:
|
Fiscal Year |
|
(in thousands) |
|
|
|
2017 |
|
$ |
409 |
|
|
2018 |
|
|
966 |
|
|
2019 |
|
|
500 |
|
|
2020 |
|
|
388 |
|
|
2021 |
|
|
314 |
|
|
Thereafter |
|
|
1,292 |
|
|
Total |
|
$ |
3,869 |
|
|
|||
The following sets forth the balance sheet information related to the term loan:
|
|
|
December 24, |
|
March 26, |
|
||
|
(in thousands) |
|
2016 |
|
2016 |
|
||
|
Term Loan |
|
$ |
197,000 |
|
$ |
198,500 |
|
|
Unamortized value of the debt issuance costs and debt discount |
|
|
(4,175) |
|
|
(4,886) |
|
|
Net carrying value |
|
$ |
192,825 |
|
$ |
193,614 |
|
Aggregate contractual maturities for the Company’s long-term debt as of December 24, 2016 are as follows:
|
Fiscal Year |
|
|
(in thousands) |
|
|
2017 |
|
$ |
500 |
|
|
2018 |
|
|
2,000 |
|
|
2019 |
|
|
2,000 |
|
|
2020 |
|
|
2,000 |
|
|
2021 |
|
|
2,000 |
|
|
Thereafter |
|
|
188,500 |
|
|
Total |
|
$ |
197,000 |
|
|
|||
The fair values of stock options granted during the thirteen and thirty-nine weeks ended December 24, 2016 and December 26, 2015 were estimated on the grant dates using the following assumptions:
|
|
|
Thirteen Weeks Ended |
|
Thirty-Nine Weeks Ended |
|
|||||||||||||||||||||
|
|
|
December 24, |
|
December 26, |
|
December 24, |
|
December 26, |
|
|||||||||||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
|||||||||||||||||
|
Expected option term(1) |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
|
|
|
5.5 |
years |
|
|
|
|
5.5 |
years |
|
|
|
Expected volatility factor(2) |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
35.8 |
% |
- |
36.0 |
% |
|
33.3 |
% |
- |
37.1 |
% |
|
|
|
Risk-free interest rate(3) |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
1.38 |
% |
- |
1.43 |
% |
|
1.6 |
% |
- |
2.0 |
% |
|
|
|
Expected annual dividend yield |
|
|
|
|
N/A |
|
|
|
|
|
N/A |
|
|
|
|
|
0 |
% |
|
|
|
|
0 |
% |
|
|
|
(1) |
The Company has limited historical information regarding expected option term. Accordingly, the Company determined the expected life of the options using the simplified method. |
|
(2) |
Stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s competitors’ common stock over the most recent period equal to the expected option term of the Company’s awards. |
|
(3) |
The risk-free interest rate is determined using the rate on treasury securities with the same term. |
The following table summarizes the stock award activity for the thirty-nine weeks ended December 24, 2016:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Grant Date |
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Aggregate |
|
||
|
|
|
Stock |
|
Average |
|
Contractual |
|
Intrinsic |
|
||
|
|
|
Options |
|
Exercise Price |
|
Life (in Years) |
|
Value |
|
||
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
Outstanding at March 26, 2016 |
|
2,447,133 |
|
$ |
9.87 |
|
|
|
|
|
|
|
Granted |
|
560,892 |
|
$ |
7.38 |
|
|
|
|
|
|
|
Exercised |
|
(194,677) |
|
$ |
6.06 |
|
|
|
$ |
1,133 |
|
|
Cancelled, forfeited or expired |
|
(252,994) |
|
$ |
13.23 |
|
|
|
|
|
|
|
Outstanding at December 24, 2016 |
|
2,560,354 |
|
$ |
9.28 |
|
6.2 |
|
$ |
12,288 |
|
|
Vested and expected to vest after December 24, 2016 |
|
2,560,354 |
|
$ |
9.28 |
|
6.2 |
|
$ |
12,288 |
|
|
Exercisable at December 24, 2016 |
|
1,206,524 |
|
$ |
7.85 |
|
5.7 |
|
$ |
6,483 |
|
A summary of the status of non-vested stock options as of December 24, 2016 including changes during the thirty-nine weeks ended December 24, 2016 is presented below:
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
Shares |
|
Fair Value |
|
|
|
Nonvested at March 26, 2016 |
|
1,335,103 |
|
$ |
5.82 |
|
|
Granted |
|
560,892 |
|
$ |
2.60 |
|
|
Vested |
|
(330,369) |
|
$ |
5.46 |
|
|
Nonvested shares forfeited |
|
(211,796) |
|
$ |
6.17 |
|
|
Nonvested at December 24, 2016 |
|
1,353,830 |
|
$ |
4.52 |
|
The following significant assumptions were used as of October 29, 2014:
|
Stock price |
|
$ |
16.00 |
|
|
Exercise price |
|
$ |
16.00 |
|
|
Expected option term |
|
|
6.0 |
years |
|
Expected volatility |
|
|
55.0 |
% |
|
Risk-free interest rate |
|
|
1.8 |
% |
|
Expected annual dividend yield |
|
|
0 |
% |
|
|||
The net property and equipment involved in the Company’s capital leases and financing transaction are included in property and equipment as follows:
|
|
|
December 24, |
|
March 26, |
|
||
|
(in thousands) |
|
2016 |
|
2016 |
|
||
|
Buildings |
|
$ |
7,588 |
|
$ |
7,588 |
|
|
Land |
|
|
2,530 |
|
|
2,530 |
|
|
Site improvements |
|
|
410 |
|
|
410 |
|
|
Equipment |
|
|
63 |
|
|
63 |
|
|
Property and equipment, gross |
|
|
10,591 |
|
|
10,591 |
|
|
Less: accumulated depreciation |
|
|
(1,088) |
|
|
(551) |
|
|
Property and equipment, net |
|
$ |
9,503 |
|
$ |
10,040 |
|
As of December 24, 2016, future minimum capital lease and financing transaction payments are as follows:
|
Fiscal Year |
|
(in thousands) |
|
|
|
2017 |
|
|
319 |
|
|
2018 |
|
|
1,273 |
|
|
2019 |
|
|
1,296 |
|
|
2020 |
|
|
1,307 |
|
|
2021 |
|
|
1,331 |
|
|
Thereafter |
|
|
8,213 |
|
|
Total |
|
|
13,739 |
|
|
Less: Imputed interest |
|
|
(5,378) |
|
|
Present value of capital leases and financing transaction |
|
|
8,361 |
|
|
Less: Current capital leases and financing transaction |
|
|
(420) |
|
|
Noncurrent capital leases and financing transaction |
|
$ |
7,941 |
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
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|
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|
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|