Form 10-Q Destination Maternity For: May 04

June 12, 2019 4:09 PM

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 04, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-21196

 

Destination Maternity Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3045573

(State or other jurisdiction

of incorporation or organization)

(IRS Employer

Identification No.)

232 Strawbridge Drive

Moorestown, New Jersey

08057

(Address of principal executive offices)

(Zip code)

(856) 291-9700

(Registrant’s telephone number, including area code)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

DEST

NASDAQ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act    

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value — 14,339,786 shares outstanding as of June 3, 2019

 

 

 

 


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

  

3

 

 

 

 

 

 

 

Consolidated Balance Sheets

  

3

 

 

 

 

 

 

 

Consolidated Statements of Operations

  

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

  

5

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity

  

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

  

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

  

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

25

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

26

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

27

 

 

 

 

 

Item 1A.

 

Risk Factors

  

27

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

27

 

 

 

 

 

Item 6.

 

Exhibits

  

28

 

 

 

Signatures

 

29

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

               (unaudited)

 

 

May 4, 2019

 

 

February 2, 2019

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,193

 

 

$

1,154

 

Trade receivables, net

 

 

8,807

 

 

 

7,945

 

Inventories

 

 

72,133

 

 

 

70,872

 

Prepaid expenses and other current assets

 

 

9,855

 

 

 

9,407

 

Total current assets

 

 

91,988

 

 

 

89,378

 

Property and equipment, net of accumulated depreciation and amortization of

   $108,556 and $106,479

 

 

50,510

 

 

 

51,483

 

Operating lease assets

 

 

128,065

 

 

 

 

Deferred income taxes

 

 

3,314

 

 

 

2,671

 

Other non-current assets

 

 

1,918

 

 

 

2,642

 

Total assets

 

$

275,795

 

 

$

146,174

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Line of credit borrowings

 

$

26,200

 

 

$

20,400

 

Current portion of long-term debt

 

 

4,257

 

 

 

4,372

 

Accounts payable

 

 

21,355

 

 

 

21,854

 

Operating lease liabilities

 

 

32,327

 

 

 

 

Accrued expenses and other current liabilities

 

 

24,608

 

 

 

31,056

 

Total current liabilities

 

 

108,747

 

 

 

77,682

 

Long-term debt

 

 

22,294

 

 

 

21,784

 

Operating lease and other non-current liabilities

 

 

119,938

 

 

 

19,557

 

Total liabilities

 

 

250,979

 

 

 

119,023

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, 1,656,381 shares authorized, none outstanding

 

 

 

 

 

 

Common stock, $.01 par value; 20,000,000 shares authorized, 14,375,658 and

   14,416,500 shares issued and outstanding

 

 

144

 

 

 

144

 

Additional paid-in capital

 

 

107,785

 

 

 

107,675

 

Accumulated deficit

 

 

(83,039

)

 

 

(80,594

)

Accumulated other comprehensive loss

 

 

(74

)

 

 

(74

)

Total stockholders’ equity

 

 

24,816

 

 

 

27,151

 

Total liabilities and stockholders’ equity

 

$

275,795

 

 

$

146,174

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

May 4, 2019

 

 

May 5, 2018

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

94,213

 

 

$

103,227

 

Cost of goods sold

 

 

42,616

 

 

 

47,824

 

Gross profit

 

 

51,597

 

 

 

55,403

 

Selling, general and administrative expenses

 

 

48,490

 

 

 

51,857

 

Store closing, asset impairment and asset disposal expenses

 

 

869

 

 

 

969

 

Other charges

 

 

662

 

 

 

1,150

 

Operating income

 

 

1,576

 

 

 

1,427

 

Interest expense, net

 

 

1,415

 

 

 

1,157

 

Income before income taxes

 

 

161

 

 

 

270

 

Income tax provision

 

 

31

 

 

 

56

 

Net income

 

$

130

 

 

$

214

 

Net income per share— Basic

 

$

0.01

 

 

$

0.02

 

Average shares outstanding— Basic

 

 

13,825

 

 

 

13,839

 

Net income per share— Diluted

 

$

0.01

 

 

$

0.02

 

Average shares outstanding— Diluted

 

 

13,901

 

 

 

13,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

May 4, 2019

 

 

May 5, 2018

 

 

 

 

 

 

 

 

 

 

Net income

 

$

130

 

 

$

214

 

Foreign currency translation adjustments

 

 

 

 

 

 

Comprehensive income

 

$

130

 

 

$

214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number

of

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Other

Comprehensive

Loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of February 2, 2019

 

 

14,417

 

 

$

144

 

 

$

107,675

 

 

$

(80,594

)

 

$

(74

)

 

$

27,151

 

Adoption of ASC 842 - Leases

 

 

 

 

 

 

 

 

 

 

 

(2,576

)

 

 

 

 

 

(2,576

)

Net income

 

 

 

 

 

 

 

 

 

 

 

130

 

 

 

 

 

 

130

 

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

75

 

 

 

1

 

 

 

143

 

 

 

 

 

 

 

 

 

144

 

Repurchase and retirement of common stock

 

 

(116

)

 

 

(1

)

 

 

(33

)

 

 

 

 

 

 

 

 

(34

)

Balance as of May 4, 2019

 

 

14,376

 

 

$

144

 

 

$

107,785

 

 

$

(83,039

)

 

$

(74

)

 

$

24,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of February 3, 2018

 

 

14,684

 

 

$

147

 

 

$

106,865

 

 

$

(66,274

)

 

$

(70

)

 

$

40,668

 

Net income

 

 

 

 

 

 

 

 

 

 

 

214

 

 

 

 

 

 

214

 

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

383

 

 

 

4

 

 

 

324

 

 

 

 

 

 

 

 

 

328

 

Repurchase and retirement of common stock

 

 

(62

)

 

 

(1

)

 

 

(18

)

 

 

 

 

 

 

 

 

(19

)

Balance as of May 5, 2018

 

 

15,005

 

 

$

150

 

 

$

107,171

 

 

$

(66,059

)

 

$

(70

)

 

$

41,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

May 4, 2019

 

 

May 5, 2018

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

130

 

 

$

214

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,553

 

 

 

4,050

 

Stock-based compensation expense

 

 

144

 

 

 

328

 

Loss on impairment of long-lived assets

 

 

562

 

 

 

887

 

Loss on disposal of assets

 

 

188

 

 

 

13

 

Grow NJ award benefit

 

 

(643

)

 

 

(707

)

Amortization of deferred financing costs

 

 

177

 

 

 

165

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(862

)

 

 

(2,197

)

Inventories

 

 

(1,261

)

 

 

4,837

 

Prepaid expenses and other current assets

 

 

(448

)

 

 

(252

)

Operating leases and other non-current assets

 

 

6,317

 

 

 

(14

)

Decrease in:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses, operating leases and other current liabilities

 

 

(4,931

)

 

 

(9,031

)

Operating leases and other non-current liabilities

 

 

(7,522

)

 

 

(752

)

Net cash used in operating activities

 

 

(4,596

)

 

 

(2,459

)

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,478

)

 

 

(1,141

)

Net cash used in investing activities

 

 

(2,478

)

 

 

(1,141

)

Financing Activities

 

 

 

 

 

 

 

 

Decrease in cash overdraft

 

 

1,106

 

 

 

(1,980

)

Increase in line of credit borrowings

 

 

5,800

 

 

 

7,200

 

Proceeds from long-term debt

 

 

1,802

 

 

 

 

Repayment of long-term debt

 

 

(1,562

)

 

 

(1,151

)

Deferred financing costs paid

 

 

 

 

 

(80

)

Withholding taxes on stock-based compensation paid in connection

   with repurchase of common stock

 

 

(33

)

 

 

(19

)

Net cash provided by financing activities

 

 

7,113

 

 

 

3,970

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

 

39

 

 

 

370

 

Cash and Cash Equivalents, Beginning of Period

 

 

1,154

 

 

 

1,635

 

Cash and Cash Equivalents, End of Period

 

$

1,193

 

 

$

2,005

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,218

 

 

$

968

 

Cash received for income taxes

 

$

(198

)

 

$

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements for the three months ended May 4, 2019 and May 5, 2018 have been prepared in accordance with the requirements for Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures have been condensed or omitted. See the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019 for Destination Maternity Corporation and subsidiaries (the “Company” or “Destination Maternity”) as filed with the Securities and Exchange Commission (“SEC”) for additional disclosures, including a summary of the Company’s accounting policies.

In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. Since the Company’s operations are seasonal, the interim operating results of the Company may not be indicative of operating results for the full year. Certain prior year amounts have been reclassified to conform to current year presentation.

The Company operates on a 52/53-week fiscal year ending on the Saturday nearest January 31 of each year. References to the Company’s fiscal 2019 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 3, 2019 and will end February 1, 2020. References to the Company’s fiscal 2018 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 4, 2018 and ended February 2, 2019.

  

 

2.

EARNINGS PER SHARE (“EPS”)  

Basic net income per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding, excluding restricted stock awards for which the restrictions have not lapsed. Diluted net income per share (“Diluted EPS”) is computed by dividing net income by the weighted average number of common shares outstanding, after giving effect to the potential dilution, if applicable, from the assumed lapse of restrictions on restricted stock and restricted stock unit (“RSU”) awards, and from shares of common stock resulting from the assumed exercise of outstanding stock options. Common shares issuable in connection with the award of performance-based restricted stock units (“PRSUs”) are excluded from the calculation of EPS until the PRSUs’ performance conditions are achieved and the shares in respect of the PRSUs become issuable (see Note 14).

The following tables summarize the Basic EPS and Diluted EPS calculations (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

May 4, 2019

 

 

May 5, 2018

 

 

 

Net Income

 

 

Shares

 

 

EPS

 

 

Net Income

 

 

Shares

 

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

130

 

 

 

13,825

 

 

$

0.01

 

 

$

214

 

 

 

13,839

 

 

$

0.02

 

Incremental shares from the assumed exercise of outstanding stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares from the assumed lapse of restrictions on restricted stock and RSU awards

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

124

 

 

 

 

Diluted EPS

 

$

130

 

 

 

13,901

 

 

$

0.01

 

 

$

214

 

 

 

13,963

 

 

$

0.02

 

 

 

  Stock options and unvested restricted stock totaling 959,000 shares of the Company’s common stock were outstanding as of May 4, 2019, of which 610,000 shares were excluded from the calculation of Diluted EPS as the effect would have been antidilutive.   

8


 

 

 

 

3.

TRADE RECEIVABLES

Trade receivables are recorded based on revenue recognized for sales of the Company’s merchandise and for other revenue earned by the Company through its marketing partnership programs and international franchise agreements, and are non-interest bearing. The Company evaluates the collectability of trade receivables based on a combination of factors, including aging of trade receivables, write-off experience, analysis of historical trends and expectations of future performance. An allowance for doubtful accounts is recorded for the amount of trade receivables that are considered unlikely to be collected. When the Company’s collection efforts are unsuccessful, uncollectible trade receivables are charged against the allowance for doubtful accounts. As of May 4, 2019 and February 2, 2019, the Company’s trade receivables were net of allowance for doubtful accounts of $166,000 and $166,000, respectively.

 

 

4.

INVENTORIES

Inventories were comprised of the following (in thousands):

 

 

 

May 4, 2019

 

 

February 2, 2019

 

 

 

 

 

 

 

 

 

 

Finished goods

 

$

71,992

 

 

$

70,660

 

Work-in-progress

 

 

46

 

 

 

148

 

Raw materials

 

 

95

 

 

 

64

 

   Total

 

$

72,133

 

 

$

70,872

 

 

 

5.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities were comprised of the following (in thousands):

 

 

 

May 4, 2019

 

 

February 2, 2019

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

4,376

 

 

$

6,741

 

Insurance, primarily self-insurance reserves

 

 

3,125

 

 

 

3,049

 

Sales and use taxes

 

 

3,086

 

 

 

2,737

 

Accrued expenses

 

 

3,073

 

 

 

4,561

 

Gift certificates and store credits

 

 

2,915

 

 

 

3,464

 

Product return reserve

 

 

2,530

 

 

 

2,078

 

Deferred revenue

 

 

1,713

 

 

 

2,435

 

Audit and legal

 

 

1,463

 

 

 

1,341

 

Deferred rent

 

 

 

 

 

3,101

 

Other

 

 

2,327

 

 

 

1,549

 

   Total

 

$

24,608

 

 

$

31,056

 

 

 

 

6.

LINE OF CREDIT

After completion of a debt refinancing on February 1, 2018, the Company has in place a $50,000,000 senior secured revolving credit facility (the “Credit Facility”), which was entered into in conjunction with the issuance of the Company’s $25,000,000 Term Loan (as defined below) (see Note 7). Proceeds from advances under the Credit Facility, subject to certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, and other general corporate purposes.

9


 

The Credit Facility, which matures on January 31, 2023, contains various affirmative and negative covenants and representations and warranties, including the requirement that the Company maintain Excess Availability (as defined in the related Credit Agreement) of more than the greater of 10% of the Combined Loan Caps (as defined in the related Credit Agreement) and $7,000,000. In the event that the outstanding balance of the Term Loan exceeds the Term Loan Borrowing Base (as defined in the related Term Loan Agreement), then a reserve will be imposed against availability under the Credit Facility. The Credit Facility is secured by a security interest in the Company’s trade receivables, inventory, letter of credit rights, cash, intangibles and certain other assets. The interest rate on outstanding borrowings is equal to, at the Company’s election, either 1) the lender’s base rate plus 0.50% or 2) a LIBOR rate plus 1.0%. The Company also pays an unused line fee under the Credit Facility of 0.25% per annum.

Any amounts outstanding under the Credit Facility may be accelerated and become due and payable immediately and all loan and letter of credit commitments thereunder may be terminated upon an event of default and expiration of any applicable cure period. Events of default include: 1) nonpayment of obligations due under the subject loan agreement and related loan documents, 2) cross-defaults to other indebtedness and documents, 3) failure to perform any covenant or agreement contained in the subject loan agreement, 4) material misrepresentations, 5) failure to pay, or certain other defaults under, other material indebtedness of the Company, 6) certain bankruptcy or insolvency events, 7) a change of control, 8) indictments of the Company or senior management in a material forfeiture action, 9) default under certain material contracts to the extent such termination or default has or could reasonably be expected to have a material adverse effect, and 10) customary ERISA defaults, among others.

In connection with the original execution and subsequent amendments of the Credit Facility, the Company has incurred deferred financing costs of $1,281,000.  These deferred financing costs are being amortized over the term of the Credit Facility agreement and are included in “interest expense, net” in the consolidated statements of operations.

As of May 4, 2019, the Company had $26,200,000 in outstanding borrowings under the Credit Facility, $6,297,000 in letters of credit and $10,128,000 of availability based on the Company’s Borrowing Base formula and availability reserve requirements. As of May 5, 2018, the Company had $15,200,000 in outstanding borrowings under the Credit Facility, $7,327,000 in letters of credit and $20,223,000 of availability. For the three months ended May 4, 2019 and May 5, 2018 borrowings had a weighted interest rate of 4.53% and 3.60% per annum, respectively.  During the three months ended May 4, 2019 and May 5, 2018 the Company’s average levels of direct borrowings were $27,509,000 and $19,436,000, respectively, and the Company’s maximum borrowings were $32,300,000 and $27,400,000, respectively.    

 

7.

LONG-TERM DEBT

 

On February 1, 2018 (the “Closing Date”), the Company has entered into a Term Loan Credit Agreement (the “Term Loan Agreement”) which provides for a term loan of up to $25,000,000 and matures on January 31, 2023 (the “Term Loan”).  On the Closing Date, the Company borrowed $22,500,000.   The Term Loan provided for an additional loan of $2,500,000, which could be borrowed at the Company’s discretion within a period of 45 days after delivery to the lender of the Company’s first quarter fiscal 2018 financial statements and satisfaction of certain other requirements. The Company met these requirements and borrowed the additional $2,500,000 on July 16, 2018.      

 

The interest rate on the Term Loan is equal to a LIBOR rate plus 9.0%. The Company is required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $312,500 which commenced on July 31, 2018, with the remaining outstanding balance payable on the maturity date. There is a minimum excess availability requirement of the greater of 10% of the Combined Loan Cap, as defined in the Term Loan Agreement, or $7,000,000. Additionally, the Term Loan can be prepaid at the Company’s option subject to certain restrictions and subject to a prepayment premium as follows: 1) if the prepayment occurs on or prior to the second anniversary of the Closing Date, the greater of  a) interest on the prepayment that would otherwise have been paid with the 24 month period following the Closing Date minus actual interest payments made through the prepayment date and b) 2% of the prepayment and 2) 2% of the prepayment amount, if paid between the second and third anniversary of the Closing Date.

10


 

The Term Loan is secured by a security interest in substantially all of the assets of the Company, including accounts receivable, inventory, equipment, letter of credit rights, cash, intellectual property and other intangibles, and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the Credit Facility Lender. The Term Loan Agreement prohibits the payment of dividends or share repurchases by the Company for three years and imposes certain restrictions on the Companys ability to, among other things, incur additional indebtedness and enter into other various types of transactions.

     

        There were $2,455,000 of deferred financing costs incurred in connection with the Term Loan. These deferred financing costs are reflected as a direct deduction from the Term Loan liability in the consolidated balance sheets and are being amortized over the term of the Term Loan Agreement. The amortization is included in “interest expense, net” in the consolidated statements of operations.

As of May 4, 2019 and May 5, 2018, there was $23,750,000 and $22,500,000, respectively, of principal outstanding under the Term Loan.

On February 22, 2019, the Company entered into a 24-month, $1,802,000 software development financing arrangement. The note has monthly payments of $81,648 with an interest rate of 8.16%. As of May 4, 2019, there was $1,593,000 of principal outstanding.

As of May 4, 2019 and May 5, 2018, there was $2,149,000 and $5,284,000, respectively, outstanding under a five-year equipment financing arrangement with the Company’s Credit Facility bank. The equipment note bears annual interest at 3.38%, with payments of $272,000 (including interest) due monthly through December 2019. The equipment note is collateralized by substantially all of the material handling equipment at the Company’s distribution facility in Florence, New Jersey. Any amounts outstanding under the equipment note may be accelerated and become due and payable immediately upon an event of default and expiration of any applicable cure period. The specified events of default are substantially the same as those in the Credit Facility agreement (see Note 6).

On June 6, 2017, the Company received $3,401,000 in proceeds from a three-year financing arrangement in the form of a sale and leaseback for certain furniture, fixtures and software. Monthly payments under the leaseback arrangement are $123,000 for the first 24 months and $48,000 for months 25 to 36. At the end of the leaseback term, the Company has the option to extend the lease for an additional year or to repurchase the financed property for a price to be agreed upon. As of May 4, 2019, and May 5, 2018, there was $1,114,000 and $2,287,000 of principal outstanding under this financing arrangement.

 

8.

LEASES

 

The Company has entered into operating leases for all of its retail locations, distribution center and corporate office. Many of these leases include one or more renewal options which can extend the lease for up to an additional 15 years.  In the event we are reasonably certain that an option to extend a lease will be exercised, we use the expected expiration date to determine the operating lease right-of-use asset and lease liability. We also have short-term leases that can be terminated by the Company or by the landlord with notification periods as short as 30 days, which are excluded from the operating lease liability. Some of our leases provide for rental payments based solely on a percent of retail sales which are treated as variable lease expenses and not included as part of the operating lease liability.  Most leases include payments for lease components such as minimum rent, non-lease components such as common area maintenance and not-lease components such as real estate taxes and insurance.  Finance leases were not material as of May 4, 2019 and the three-month period then ended.  

For the three months ended May 4, 2019, the components of lease expense were as follows (in thousands):

 

 

 

 

 

Fixed operating lease expense (1)

 

$

8,743

 

Variable operating lease expense

 

 

3,893

 

Total operating lease expense

 

$

12,636

 

(1) Includes short-term leases.

 

 

 

 

For the three months ended May 5, 2018, rent expense, including related occupancy costs such as insurance and maintenance paid to landlords, for non-cancellable operating leases amounted to $12.8 million.

 

The following table presents the operating lease balances within the Consolidated Balance Sheet, weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of May 4, 2019 ($ in thousands):

11


 

 

Lease Assets and Liabilities

Classification

 

 

 

Assets:

 

 

 

 

Operating lease ROU assets

Operating lease assets

$

128,065

 

 

 

 

 

 

Liabilities:

 

 

 

 

Current:

 

 

 

 

Operating lease liabilities

Operating lease liabilities

$

32,327

 

Long-term:

 

 

 

 

Operating lease liabilities

Operating lease and other non-current liabilities

 

119,636

 

Total undiscounted operating lease liabilities

 

$

151,963

 

 

 

 

 

 

Weighted average remaining lease term

 

6.4 years

 

Weighted average discount rate

 

 

7.40

%

The following table presents the maturity of the Company’s operating lease liabilities as of May 4, 2019 (in thousands):

 

Remainder of Fiscal 2019

 

$

32,864

 

2020

 

 

34,750

 

2021

 

 

28,555

 

2022

 

 

24,128

 

2023

 

 

20,969

 

Thereafter

 

 

53,693

 

Total operating lease payments

 

 

194,959

 

Less: Imputed interest

 

 

42,996

 

Total operating lease liabilities

 

$

151,963

 

 

 

 

 

 

 

The following table presents future minimum lease payments as previously disclosed in our 2018 Annual Report on Form 10-K  determined using the previous lease accounting standard.

 

2019

 

$

36,417

 

2020

 

 

29,682

 

2021

 

 

21,142

 

2022

 

 

21,698

 

2023

 

 

15,995

 

Thereafter

 

 

48,462

 

Total operating lease liabilities

 

$

173,396

 

Supplemental cash flow information related to the Company’s operating leases for the three months ended May 4, 2019 (in thousands):

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

11,994

 

ROU assets obtained in exchange for operating lease liability

 

 

1,829

 

 

9.

FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements 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. The standard establishes a framework for measuring fair value focused on exit price and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements as follows:

 

Level 1 – Quoted market prices in active markets for identical assets or liabilities

 

Level 2 – Observable market-based inputs or inputs that are corroborated by observable market data

 

Level 3 – Unobservable inputs that are not corroborated by market data

12


 

At both May 4, 2019 and February 2, 2019, the Company had cash equivalents of $4,000. The Company’s cash equivalents consist of investments in money market funds for which the carrying value approximates fair value (based on Level 1 inputs) due to the short-term nature of those instruments. The carrying values of trade receivables and accounts payable approximate fair value due to the short-term nature of those instruments.

The Company’s Credit Facility has variable interest rates that are tied to market indices. As of May 4, 2019 and February 2, 2019, the Company had $26,200,000 and $20,400,000 respectively, of direct borrowings outstanding under the Credit Facility. The carrying value of the Company’s Credit Facility borrowings approximates fair value as the variable interest rates approximate current market rates, which the Company considers to be Level 2 inputs.

The Company’s Term Loan, which represents a significant majority of the Company’s long-term debt, bears interest at variable rates, which adjust based on market conditions with a minimum annual rate of 9.00%. The carrying value of the Company’s Term Loan approximates fair value as the variable interest rates approximate current market rates for similar instruments available to companies with comparable credit quality, which the Company considers to be Level 2 inputs. The fair value of the Company’s fixed-rate equipment notes were determined using a discounted cash flow analysis based on interest rates currently available to the Company, which the Company considers to be Level 2 inputs. The difference between the carrying value and fair value of long-term debt held by the Company with a fixed rate of interest is not material.

 

 

10.

NET SALES

 

The following disaggregates the Company’s net sales by major source (in thousands):

 

 

Three Months Ended

 

 

May 4, 2019

 

 

May 5, 2018

 

 

 

 

 

 

 

 

 

Retail stores

$

56,464

 

 

$

62,987

 

Leased departments

 

9,348

 

 

 

9,989

 

Total retail locations

 

65,812

 

 

 

72,976

 

E-commerce

 

22,672

 

 

 

25,482

 

Marketing partnerships

 

4,580

 

 

 

3,935

 

Wholesale and franchise

 

1,150

 

 

 

834

 

Total net sales

$

94,213

 

 

$

103,227

 

 

 

11.

OTHER CHARGES

 

Over the last several years the Company has engaged in a series of management and organizational changes and, in connection therewith, retained consulting firms to review its costs and business strategy associated with such management and organizational changes.  The Company’s Board of Directors authorized changes to the Company’s chief executive function, including, most recently, the May 23, 2018 appointment of Marla Ryan as Chief Executive Officer, who replaced Melissa Payner-Gregor who had served as interim Chief Executive Officer since January 2, 2018. Ronald Masciantonio, the Company’s Chief Administrative Officer, resigned from his position on June 4, 2018.  David Stern, the Company’s former Chief Financial Officer, departed the Company effective at the close of business on August 10, 2018. On January 19, 2019, Dave J. Helkey was appointed Chief Operating Officer and Chief Financial Officer. The Company also paid one-time retention bonuses with service conditions to certain key management personnel which are being recorded over the service period, while reducing its overall headcount to create a more efficient and effective operating structure. During the three months ended May 4, 2019 and May 5, 2018, the Company incurred $662,000 and $264,000, respectively, of charges related to these management and organizational changes.

 

In the first quarter of fiscal 2018, the Company received notification from a stockholder group of their intent to nominate a slate of alternative nominees for election to the Company’s Board of Directors at the Annual Meeting of Stockholders that was held on May 23, 2018 (the “Proxy Solicitation”).  At the 2018 Annual Meeting of Stockholders the Company’s stockholders replaced the incumbent board in its entirety and elected Holly N. Alden, Christopher B. Morgan, Marla A Ryan and Anne-Charlotte Windal as the Company’s new Board of Directors. During the three months ended May 5, 2018, the Company incurred $886,000 of charges related to the Proxy Solicitation. 

 

A summary of charges incurred in connection with management and organizational changes and the proxy solicitation is as follows (in thousands):

 

13


 

 

 

Three Months Ended

 

 

 

May 4, 2019

 

 

May 5, 2018

 

 

 

 

 

 

 

 

 

 

Management and organizational changes

 

$

662

 

 

$

264

 

Proxy solicitation

 

 

 

 

 

886

 

Total other charges

 

$

662

 

 

$

1,150

 

 

12.

GOVERNMENT INCENTIVES

 

In fiscal 2015, the Company completed the relocation of its corporate headquarters and distribution operations from Philadelphia, Pennsylvania to southern New Jersey. To partially offset the costs of these relocations, the Board of the New Jersey Economic Development Authority (“NJEDA”) approved the Company for an incentive package of up to $40,000,000 in benefits under the Grow New Jersey Assistance Program (“Grow NJ”) in the form of transferrable income tax credits over a ten-year period from the State of New Jersey. The award provides annually over a ten-year period up to $7,000 per eligible new full-time job, as defined under Grow NJ, with a requirement that at least 100 eligible jobs be created and subject to an annual award limit of $4,000,000.

The Grow NJ award requires an annual compliance report that includes certification of average annual employment figures after the end of each fiscal year. After the end of the ten-year Grow NJ award earnings period there is a five-year compliance period during which the Company must maintain the average of its annual eligible jobs certified during the preceding ten years or a pro-rata amount up to one-tenth of the previously awarded income tax credits would be subject to recapture and repayment to the State of New Jersey annually during the five-year compliance period. The Company believes the likelihood of any recapture and repayment is remote.

 

The annual benefit from the Grow NJ award available to the Company is expected to significantly exceed the Company’s annual income tax liability to the State of New Jersey. In order to maximize the realizable value of the incentive package, the Company entered into an agreement with a third party to sell up to 100% of the annual income tax credits awarded to the Company. The Company recognizes its Grow NJ award on an annual basis for each fiscal year based on the realizable value of the award earned and expected to be received, primarily from the sale of the income tax credits, net of any associated costs. The Grow NJ award is reflected in the Company’s consolidated financial statements as a reduction to the costs incurred by the Company in connection with the relocations. The expected realizable amount of the Grow NJ award is included in the consolidated balance sheet in deferred income taxes. As of May 4, 2019, the Company had recorded a deferred tax asset of $3,314,000 related to the NJ Grow award. Of this amount, $2,671,000 relates to the annual award earned in fiscal 2018, the cash proceeds of which are expected to be received during fiscal 2019. In December 2018, the Company received $2,829,000 cash proceeds, net of costs, from the receipt and subsequent sale of the  tax credit certificate earned for fiscal 2017. During the three months ended May 4, 2019, the Company recognized a cost reduction related to the Grow NJ award in the amount of $617,000, as compared to the three months ended May 5, 2018 in which the Company recognized $710,000.  

 

 

13.

INCOME TAXES

 Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, requires that a valuation allowance be recorded to reduce deferred tax assets when it is more likely than not that the tax benefit of the deferred tax assets will not be realized. In situations where a three-year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets.  In fiscal 2016 the Company’s financial results reflected a three-year cumulative loss and consequently, in fiscal 2016 the Company recorded a non-cash charge as a valuation allowance against substantially all of its deferred tax assets.  Three-year cumulative losses have continued since fiscal 2016, and the Company continues to record a valuation allowance against its deferred tax assets.

 

14.

EQUITY AWARD PLANS

In January 2006, the stockholders of the Company approved the adoption of the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”) and, subsequently, have approved amendments to increase the number of issuable shares under the 2005 Plan. Under the 2005 Plan, employees, directors, consultants and other individuals who provide services to the Company may be granted awards in the form of stock options, stock appreciation rights, restricted stock, RSUs or deferred stock units. Up to 3,550,000 shares of the Company’s common stock may be issued in respect of awards under the 2005 Plan, as amended, with no more than 2,250,000 of those shares permitted to be issued in respect of restricted stock, RSUs, or deferred stock units granted under the 2005 Plan. Awards of stock options to purchase the Company’s common stock will have exercise prices as determined by the Compensation Committee of the Board of Directors but such exercise prices may not be lower than the fair market value of the stock on the date of grant.

 

No stock options have been granted by the Company with an exercise price less than the fair market value of the Company’s common stock on the date of grant for any of the periods presented. The majority of the stock options issued under the 2005 Plan vest

14


 

ratably over four-year periods and generally expire ten years from the date of grant, and restricted stock and time-based RSU awards issued under the 2005 Plan generally have restrictions that lapse ratably over periods ranging from one to four years however, awards with respect to up to 177,500 shares of our common stock may be granted under the 2005 Plan with a vesting period of less than one year. Performance-based awards issued under the 2005 Plan generally vest based upon the achievement of pre-established performance goals over a specified three-year period. The number of shares of our common stock that may be earned in respect of performance-based awards may be greater or less than the target number of shares granted based on the actual performance achieved. The non-executive chairman of the Company’s Board of Directors is granted 6,000 shares of restricted stock on an annual basis and each non-employee director, other than the non-executive chairman, and Christopher B. Morgan, of the Company’s Board of Directors is eligible for a grant of 4,000 shares of restricted stock on an annual basis, in each case that will generally vest one year from the date of grant. The Company issues new shares of common stock upon exercise of vested stock options. As of May 4, 2019, there were 834,231 shares of the Company’s common stock available for grants of awards under the 2005 Plan.  

 

Stock option activity for all plans was as follows:

 

 

 

Outstanding Stock Options (in thousands)

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Life

 

 

Aggregate Intrinsic Value (in thousands)

 

Balance as of February 2, 2019

 

439

 

 

$

6.06

 

 

 

 

 

 

 

 

 

Granted

 

45

 

 

2.33

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(41

)

 

4.17

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of May 4, 2019

 

 

443

 

 

$

5.85

 

 

8.3

 

 

 

 

Exercisable as of May 4, 2019

 

161

 

 

$

9.75

 

 

 

6.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes information about stock options outstanding as of May 4, 2019:

 

 

 

Stock Options Outstanding

 

 

Stock Options Exercisable

 

Range of Exercise Prices

 

Number Outstanding (in thousands)

 

Weighted Average Remaining Life

 

 

Weighted Average Exercise Price

 

 

Number Exercisable (in thousands)

 

 

Weighted Average Exercise Price

 

$ 2.33 to $  5.00

 

237

 

 

9.2

 

 

$

2.63

 

 

 

43

 

 

$

2.65

 

   5.01 to   10.00

 

134

 

 

8.3

 

 

 

6.32

 

 

48

 

 

 

7.49

 

10.01 to   31.38

 

72

 

 

5.2

 

 

 

15.53

 

 

70

 

 

 

15.69

 

$ 2.33 to $31.38

 

443

 

 

8.3

 

 

$

5.85

 

 

 

161

 

 

$

9.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes information about restricted stock and RSU activity for the 2005 Plan and includes grants of 113,326 PRSUs which is the number of shares of common stock that would be delivered upon vesting assuming that the target level of performance is achieved.  If performance was achieved at the maximum level, 226,652 shares of common stock would be delivered in respect of such PRSU’s.  

 

 

 

Outstanding Restricted Shares (in thousands)

 

 

Weighted Average Grant Date Fair Value

 

Unvested as of February 2, 2019

 

 

606

 

 

$

3.34

 

Granted

 

 

75

 

 

 

2.45

 

Vested

 

 

(64

)

 

 

2.72

 

Forfeited

 

 

(100

)

 

 

2.68