ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis of financial condition and results of operations is qualified by reference to and should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this annual report.
Cautionary Statement Concerning Forward-Looking Statements
This annual report on Form 10-K, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward-looking. We often use words such as anticipates, believes, estimates, expects, intends, predicts, hopes, should, plans, will and similar expressions to identify forward-looking statements. These statements are based on management’s current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): variability in consumer preferences, shopping behaviors, spending and debt levels; the general economic and credit environment; interest rates; seasonal variations in consumer purchasing activities; the ability to achieve the most effective product category mixes to maximize sales and margin objectives; competitive pressures on sales and sales promotions; pricing and gross sales margins; the level of cable and satellite distribution for our programming and the associated fees or estimated cost savings from contract renegotiations; our ability to establish and maintain acceptable commercial terms with third-party vendors and other third parties with whom we have contractual relationships, and to successfully manage key vendor and shipping relationships and develop key partnerships and proprietary and exclusive brands; our ability to manage our operating expenses successfully and our working capital levels; our ability to remain compliant with our credit facilities covenants; customer acceptance of our branding strategy and our repositioning as a video commerce company; our ability to respond to changes in consumer shopping patterns and preferences, and changes in technology and consumer viewing patterns; changes to our management and information systems infrastructure; challenges to our data and information security; changes in governmental or regulatory requirements, including without limitation, regulations of the Federal Communications Commission and Federal Trade Commission, and adverse outcomes from regulatory proceedings; litigation or governmental proceedings affecting our operations; significant events (including disasters, weather events or events attracting significant television-coverage) that either cause an interruption of television coverage or that divert viewership from our programming; disruptions in our distribution of our network broadcast to our customers; our ability to protect our intellectual property rights; our ability to obtain and retain key executives and employees; our ability to attract new customers and retain existing customers; changes in shipping costs; expenses relating to the actions of activist or hostile shareholders; our ability to offer new or innovative products and customer acceptance of the same; changes in customer viewing habits of television programming; and the risks identified under Item 1A (Risk Factors) in this annual report on Form 10-K. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are under no obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements whether as a result of new information, future events or otherwise.
Overview
Our Company
We are a multiplatform interactive digital commerce company that offers a mix of proprietary, exclusive and name-brands directly to consumers in an engaging and informative shopping experience through TV, online and mobile devices. We operate a 24-hour television shopping network, Evine, which is distributed primarily on cable and satellite systems, through which we offer proprietary, exclusive and name-brand merchandise in the categories of jewelry & watches; home & consumer electronics; beauty; and fashion & accessories. We also operate evine.com, a comprehensive digital commerce platform that sells products which appear on our television shopping network as well as an extended assortment of online-only merchandise. Our programming and products are also marketed via mobile devices, including smartphones and tablets, and through the leading social media channels.
Products and Customers
Products sold on our digital commerce platforms include jewelry & watches, home & consumer electronics, beauty and fashion & accessories. Historically jewelry & watches has been our largest merchandise category. While changes in our product mix have occurred as a result of customer demand and other factors including our efforts to diversify our offerings within our major merchandise categories, jewelry & watches remained our largest merchandise category in
fiscal 2017
. We are focused on diversifying our merchandise assortment within our existing product categories as well as by offering potential new product categories, including proprietary, exclusive and name-brands, in an effort to increase revenues, gross profits and to grow our new and active customer base. The following table shows our merchandise mix as a percentage of total digital commerce net merchandise sales for the years indicated by product category group.
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|
|
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|
|
For the Years Ended
|
|
|
February 3,
2018
|
|
January 28,
2017
|
|
January 30,
2016
|
Net Merchandise Sales by Category
|
|
|
|
|
|
|
Jewelry & Watches
|
|
39%
|
|
41%
|
|
39%
|
Home & Consumer Electronics
|
|
27%
|
|
25%
|
|
31%
|
Beauty
|
|
16%
|
|
16%
|
|
14%
|
Fashion & Accessories
|
|
18%
|
|
18%
|
|
16%
|
Our product strategy is to continue to develop and expand new product offerings across multiple merchandise categories based on customer demand, as well as to offer competitive pricing and special values in order to drive new customers and maximize margin dollars per minute. Our core digital commerce customers — those who interact with our network and transact through television, online and mobile devices — are primarily women between the ages of 45 and 70. We also have a strong presence of male customers of similar age. We believe our customers make purchases based on our unique products, quality merchandise and value.
Company Strategy
As a multiplatform interactive digital commerce company, our strategy includes offering an exciting assortment of proprietary, exclusive (i.e., products that are not readily available elsewhere) and name-brand products using our video commerce infrastructure, which includes television access to more than
87 million
homes in the United States, primarily on cable and satellite systems. We are also focused on growing our high lifetime value customer file and growing our revenues, through social, mobile, online, and over-the-top platforms.
Our merchandising plan is focused on delivering a balanced assortment of profitable proprietary, exclusive and name-brand products presented in an engaging, entertaining, shopping-centric format. To enhance the shopping experience for our customers, we will continue to work hard to engage our customers intelligently by leveraging the use of predictive analytics and interactive marketing to drive personalization and relevancy to each experience. In addition, we will continue to find new methods, territories, technologies and channels to distribute our video commerce programming beyond the television screen, including "live on location" entertainment and enhancing our social advertising. We believe these initiatives will position us as a multiplatform interactive digital commerce company that delivers a more engaging and enjoyable customer experience with sales and service that exceed customer expectations.
Our Competition
The digital commerce retail business is highly competitive and we are in direct competition with numerous retailers, including online retailers, many of whom are larger, better financed and have a broader customer base than we do. In our television shopping and digital commerce operations, we compete for customers with other television shopping and e-commerce retailers, infomercial companies, other types of consumer retail businesses, including traditional "brick and mortar" department stores, discount stores, warehouse stores and specialty stores; catalog and mail order retailers and other direct sellers.
Our direct competitors within the television shopping industry include QVC, Inc. and HSN, Inc. QVC, Inc. is owned by Liberty Interactive Corporation (to be renamed Qurate Retail Group, Inc.), which recently completed the purchase of the remaining 62% of HSN, Inc. to increase its holdings in HSN, Inc. to 100%. Both QVC, Inc. and HSN, Inc. are substantially larger than we are in terms of annual revenues and customers, and the programming of each is carried more broadly to U.S. households, including high definition bands and multi-channel carriage, than our programming. Multimedia Commerce Group, Inc., which operates Jewelry Television, also competes with us for customers in the jewelry category. In addition, there are a number of smaller niche retailers and startups in the television shopping arena who compete with us. We believe that our major competitors incur cable and satellite distribution fees representing a significantly lower percentage of their sales attributable to their television programming than we do, and that their fee arrangements are substantially on a commission basis (in some cases with minimum guarantees)
rather than on the predominantly fixed-cost basis that we currently have. At our current sales level, our distribution costs as a percentage of total consolidated net sales are higher than those of our competition. However, we have the ability to leverage this fixed expense with sales growth to accelerate improvement in our profitability.
We anticipate continued competition for viewers and customers, for experienced television shopping and e-commerce personnel, for distribution agreements with cable and satellite systems and for vendors and suppliers - not only from television shopping companies, but also from other companies that seek to enter the television shopping and online retail industries, including telecommunications and cable companies, television networks, and other established retailers. We believe that our ability to be successful in the video commerce industry will be dependent on a number of key factors, including continuing to expand our digital footprint to meet our customers' needs, increasing the lifetime value of our customer base by a combination of growing the number of customers who purchase products from us and maximizing the dollar value of sales profitability per customer.
Results for
Fiscal 2017, 2016 and 2015
Consolidated net sales during the 53-week
fiscal 2017
were
$648.2 million
compared to
$666.2 million
during the 52-week
fiscal 2016
, a
3%
decrease
. Consolidated net sales in
fiscal 2016
were
$666.2 million
compared to
$693.3 million
in the 52-week
fiscal 2015
, a
4%
decrease
. We reported operating income of
$3.2 million
and net income of
$143,000
for
fiscal 2017
. The operating and net income for
fiscal 2017
include executive and management transition costs of
$2.1 million
and a gain of
$551,000
related to the sale of our Boston television station. The net income for
fiscal 2017
also included a loss on debt extinguishment of
$1.5 million
and an income tax benefit of
$3.4 million
, which primarily resulted from the reversal of our long-term deferred tax liability in connection with our television station sale. We reported an operating loss of
$2.0 million
and a net loss of
$8.7 million
for
fiscal 2016
. Results of operations for
fiscal 2016
include executive and management transition costs of
$4.4 million
and distribution facility consolidation and technology upgrade costs of
$677,000
. We reported an operating loss of
$8.7 million
and a net loss of
$12.3 million
for
fiscal 2015
. Results of operations for
fiscal 2015
include executive and management transition costs of
$3.5 million
and distribution facility consolidation and technology upgrade costs of
$1.3 million
.
Sale of Boston Television Station, WWDP
On August 28, 2017, we entered into a channel sharing and facilities agreement (the “Channel Sharing Agreement”) with NRJ Boston OpCo, LLC and NRJ TV Boston License Co., LLC (collectively, “NRJ”) to allow NRJ to operate its local Boston television station on one-third of the spectrum used in the operation of our television broadcast station, WWDP(TV), Norwell, Massachusetts (the “Station”), in perpetuity. The total consideration payable to us under the Channel Sharing Agreement was
$3,500,000
, of which
$2,500,000
was received in October 2017 upon the grant of a required construction permit by the FCC and
$1.0 million
was received in December 2017 upon the closing of the sale of substantially all of the remaining television station assets.
On August 28, 2017, we also entered into an asset purchase agreement to sell substantially all of the assets primarily related to the Station to affiliates of WRNN-TV Associates Limited Partnership (“Buyers”). The purchase price for the Station's assets was
$10,000,000
in cash, subject to an escrow holdback amount of
$1,000,000
, which is payable to us when the Station is being carried by certain designated carriers at or following the closing of the transaction. The escrow holdback is payable back to the Buyers in monthly installments beginning approximately
14 months
after the closing if the station is not being carried by certain designated carriers. The asset purchase agreement includes customary representations, warranties, covenants and indemnification obligations of the parties. The sale of assets pursuant to the purchase agreement closed during the fourth quarter of fiscal 2017 and
$9,333,000
of the purchase price was received, which included
$333,000
of the escrow holdback amount. We used the proceeds received from the transaction to pay off the remaining amounts due under our term loan with GACP Finance Co., LLC ("GACP"), with the remaining proceeds used for general working capital purposes.
We recorded a pre-tax operating gain on the television station sale of
$551,000
during the fourth quarter of fiscal 2017 upon the closing of the transaction. As of
February 3, 2018
,
$667,000
of the sales price remained in escrow pending the Station being carried by certain designated carriers. We have not recorded any additional gain relating to the remaining escrow amount and will not record the remaining gain until the contingency is resolved.
Prepayment on GACP Term Loan
During fiscal 2017, we fully retired our term loan with GACP Finance Co., LLC ("GACP"), with voluntary principal prepayments of
$9.5 million
,
$2.5 million
and
$3.5 million
on March 21, 2017, October 18, 2017 and December 6, 2017. The principal payments were funded through cash on hand, an increase in our term loan under the PNC Credit Agreement, proceeds from the Channel Sharing Agreement and the sale of our Boston television station, WWDP, as discussed in
Note 4
- "
Intangible Assets
" in the notes to our consolidated financial statements. We recorded losses on each partial and final extinguishment of
$913,000
,
$221,000
and
$323,000
for the payments made on March 21, 2017, October 18, 2017 and December 6, 2017.
Registered Direct Offering
On May 30, 2017, we sold
4,008,273
shares of common stock in a registered direct offering to certain accredited investors. The shares were sold at a price of
$1.12
per share, except for shares purchased by our directors or executive officers, which were sold at a price of
$1.15
per share. We received gross proceeds of approximately
$4.5 million
and incurred approximately
$323,000
of issuance costs. We have used the proceeds for general working capital purposes.
Executive & Management Transition Costs
On March 23, 2017, we announced the elimination of the position of Senior Vice President of Sales & Product Planning. In conjunction with this executive change as well as other executive and management terminations made during fiscal 2017, we recorded charges to income of
$2.1 million
, which relate primarily to severance payments to be made as a result of the executive officer and other management terminations and other direct costs associated with the Company's 2017 executive and management transition.
On February 8, 2016, we announced the resignation and departure of Mark Bozek, our Chief Executive Officer, and of our Executive Vice President - Chief Strategy Officer and Interim General Counsel. On August 18, 2016, we announced that Robert Rosenblatt, was appointed permanent Chief Executive Officer, effective immediately, and entered into an executive employment agreement with Mr. Rosenblatt. In conjunction with these executive changes as well as other executive and management terminations made during fiscal 2016, we recorded charges to income of
$4.4 million
, which relate primarily to severance payments to be made as a result of the executive officer terminations and other direct costs associated with our 2016 executive and management transition.
On March 26, 2015, we announced the termination and departure of three executive officers, namely our Chief Financial Officer, our Senior Vice President and General Counsel, and President. In addition, during the first quarter of fiscal 2015, we also announced the hiring of a new Chief Financial Officer and a new Chief Merchandising Officer. In conjunction with these executive changes as well as other management terminations made during fiscal 2015, we recorded charges to income of
$3.5 million
, which relate primarily to severance payments made as a result of the executive officer terminations and other direct costs associated with our 2015 executive and management transition.
Results of Operations
The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales.
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Year Ended (a)
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February 3,
2018
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|
January 28,
2017
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|
January 30,
2016
|
Net sales
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100.0
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%
|
|
100.0
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%
|
|
100.0
|
%
|
Gross margin
|
|
36.3
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%
|
|
36.3
|
%
|
|
34.4
|
%
|
Operating expenses:
|
|
|
|
|
|
|
Distribution and selling
|
|
30.8
|
%
|
|
31.1
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%
|
|
30.3
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%
|
General and administrative
|
|
3.8
|
%
|
|
3.5
|
%
|
|
3.5
|
%
|
Depreciation and amortization
|
|
1.0
|
%
|
|
1.2
|
%
|
|
1.2
|
%
|
Executive and management transition costs
|
|
0.3
|
%
|
|
0.7
|
%
|
|
0.5
|
%
|
Distribution facility consolidation and technology upgrade costs
|
|
—
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%
|
|
0.1
|
%
|
|
0.2
|
%
|
Gain on sale of television station
|
|
(0.1
|
)%
|
|
—
|
%
|
|
—
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%
|
Total operating expenses
|
|
35.8
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%
|
|
36.6
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%
|
|
35.7
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%
|
Operating income (loss)
|
|
0.5
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%
|
|
(0.3
|
)%
|
|
(1.3
|
)%
|
Interest expense, net
|
|
(0.8
|
)%
|
|
(0.9
|
)%
|
|
(0.4
|
)%
|
Loss on debt extinguishment
|
|
(0.2
|
)%
|
|
—
|
%
|
|
—
|
%
|
Loss before income taxes
|
|
(0.5
|
)%
|
|
(1.2
|
)%
|
|
(1.7
|
)%
|
Income tax benefit (provision)
|
|
0.5
|
%
|
|
(0.1
|
)%
|
|
(0.1
|
)%
|
Net income (loss)
|
|
0.0
|
%
|
|
(1.3
|
)%
|
|
(1.8
|
)%
|
Key Operating Metrics
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Year Ended (a)
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|
February 3, 2018
|
|
Change
|
|
January 28, 2017
|
|
Change
|
|
January 30, 2016
|
Merchandise Metrics
|
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|
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|
Gross margin %
|
|
36.3%
|
|
—
|
|
36.3%
|
|
190 bps
|
|
34.4%
|
Net shipped units (000's)
|
|
10,397
|
|
1%
|
|
10,263
|
|
4%
|
|
9,853
|
Average selling price
|
|
$56
|
|
(2)%
|
|
$57
|
|
(11)%
|
|
$64
|
Return rate
|
|
19.0%
|
|
(40) bps
|
|
19.4%
|
|
(40) bps
|
|
19.8%
|
Digital net sales % (b)
|
|
51.9%
|
|
240 bps
|
|
49.5%
|
|
260 bps
|
|
46.9%
|
Total Customers - 12 Month Rolling (000's)
|
|
1,295
|
|
(9)%
|
|
1,429
|
|
(0)%
|
|
1,436
|
(a) The Company’s most recently completed fiscal year,
fiscal 2017
, ended on
February 3, 2018
, and consisted of
53
weeks.
Fiscal 2016
ended on
January 28, 2017
and consisted of
52
weeks.
Fiscal 2015
ended on
January 30, 2016
and consisted of
52
weeks.
(b) Digital net sales percentage is calculated based on net sales that are generated from our evine.com website and mobile platforms, which are primarily ordered directly online.
Impact of 53rd Week in Fiscal 2017
Because we follow a 4-5-4 retail calendar, every five or six years we have an extra week of operations within our fiscal year, and this occurred in fiscal 2017. Therefore, operations for our fourth quarter and full year fiscal 2017 have 14 and 53 weeks, as compared to operations for fourth quarter and full year fiscal 2016 which have 13 and 52 weeks. To facilitate a comparison with fiscal 2016 results, we calculated the fiscal 2017 fourth quarter results on a 13-week basis by excluding discrete items and then dividing actual Q4 2017 results by 14 and multiplying the quotients by 13. Fiscal 2017 results on a 52-week basis were calculated by adding our fourth quarter 13-week basis calculation to previously reported fiscal year-to-date third quarter results of operations. Using this calculation, fiscal 2017 net sales decreased
4.8%
from fiscal 2016. Fiscal 2017 net income per common share, basic and diluted, were not impacted as a result of the calculation.
Program Distribution
Our 24-hour television shopping networks, Evine and Evine Too, which are distributed primarily on cable and satellite systems, reached more than
87 million
homes during
fiscal 2017, fiscal 2016 and fiscal 2015
. Our television home shopping programming is also simulcast 24 hours a day, 7 days a week on our online website, evine.com, broadcast over-the-air in certain markets and is also available on all mobile channels and on various video streaming applications, such as Roku and Apple TV. This multiplatform distribution approach, complemented by our strong mobile and online efforts, will ensure that Evine is available wherever and whenever our customers choose to shop.
In addition to our total homes reached, we continue to increase the number of channels on existing distribution platforms, alternative distribution methods and part-time carriage in strategic markets, including securing a deal in the second quarter of fiscal 2017 to launch our network in more than 10 million high definition ("HD") television homes during the second half of 2017. We believe that our distribution strategy of pursuing additional channels in productive homes already receiving our programming is a more balanced approach to growing our business than merely adding new television homes in untested areas. We also invested in HD equipment and, starting in the third quarter of fiscal 2017, transitioned to a full HD signal. We believe that having an HD feed of our service allows us to attract new viewers and customers.
Cable and Satellite Distribution Agreements
We have entered into distribution agreements with cable operators, direct-to-home satellite providers and telecommunications companies to distribute our television programming over their systems. The terms of the distribution agreements typically range from
one
to
five
years. During the fiscal year, certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the cable operators or we may cancel the agreements prior to their expiration. Additionally, we may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. If the operator drops our service or if either we or the operator fails to reach mutually agreeable business terms concerning the distribution of our service so that the agreements are terminated, our business may be materially adversely affected. Failure to maintain our distribution agreements covering a material portion of our existing households on acceptable financial and other terms could materially and adversely affect our future growth, sales revenues and earnings unless we are able to arrange for alternative means of broadly distributing our television programming.
Net Shipped Units
The number of net shipped units (shipped units less returned units) during
fiscal 2017
increase
d
1%
from
fiscal 2016
to
10.4 million
from
10.3 million
. The number of net shipped units during
fiscal 2016
increase
d
4%
from
fiscal 2015
to
10.3 million
from
9.9 million
. We believe the
increase
in net units shipped during
fiscal 2017
was driven primarily from a decline in our average selling price (as discussed below) and the effect of the sales attributable to the 53rd week of fiscal 2017.
Average Selling Price
The average selling price, or ASP, per net unit was
$56
in
fiscal 2017
, a
2%
decrease
from
fiscal 2016
. The
decrease
in the ASP during
fiscal 2017
was primarily driven by a sales mix shift out of our jewelry & watches product category, which typically have a higher average selling price. The
decrease
was partially offset by an ASP increase in our jewelry and home & consumer electronics product categories. These ASP decreases contributed to our increase in net shipped units of
1%
. For
fiscal 2016
, the ASP was
$57
, an
11%
decrease
from
fiscal 2015
. The
decrease
in ASP during
fiscal 2016
was primarily driven by a sales mix shift into fashion & accessories and beauty product categories, which typically have lower average selling prices, and out of our home & consumer electronics product category as well as broad based ASP decreases within most product categories. These ASP decreases contributed to our increase in net shipped units of
4%
during
fiscal 2016
.
Return Rates
Our return rate was
19.0%
in
fiscal 2017
as compared to
19.4%
in
fiscal 2016
, a
40
basis point ("bps")
decrease
. The
decrease
in the return rate was driven primarily by rate improvements in our watches and beauty product categories. We believe that the decreases in the category return rates were driven by improvements in our product assortment. We continue to monitor our return rates in an effort to keep our overall return rates commensurate with our current product mix and our average selling price levels. Our return rate was
19.4%
in
fiscal 2016
compared to
19.8%
in
fiscal 2015
, a
40
bps
decrease
. The
decrease
in the
fiscal 2016
return rate was primarily driven by rate improvements in our fashion & accessories, beauty and home & consumer electronics categories. We believe that the decreases in the category return rates were driven by the decreases in ASP as described above, improved quality of merchandise and improvements in the execution of our returns policy, partially offset by an increase in our jewelry sales mix, which typically has a higher return rate.
Total Customers
Total customers purchasing over the last twelve months, as of
February 3, 2018
,
decrease
d
9%
over prior year to
1,295,000
. The decrease was driven by a reduction in new customers over the prior year, partially offset by improvements achieved in our customer retention. As a result of our efforts during fiscal 2016 and 2017 to re-balance our merchandising mix, including the reduction of our offering of consumer electronic products, we believe our twelve-month customer file is now comprised of customers who have a significantly higher purchase frequency and lifetime value. Total customers purchasing over the last twelve months, as of
January 28, 2017
, was relatively flat over the prior year at
1,429,000
. Our customer file experienced growth in our wearables categories compared to customers within our consumer electronics customer file, which decreased in fiscal 2016.
Net Sales
Consolidated net sales, inclusive of shipping and handling revenue, for
fiscal 2017
were
$648.2 million
, a
2.7%
decrease
over consolidated net sales of
$666.2 million
for
fiscal 2016
. As noted above, fiscal 2017 had 53 weeks compared to 52 weeks for fiscal 2016, and consolidated net sales for fiscal 2017 on a calculated 52-week basis
decrease
d
4.8%
over consolidated net sales for fiscal 2016. The
decrease
in consolidated net sales was driven primarily by decreases in our jewelry & watches product category and a decrease in shipping and handling revenue, partially offset by an increase in our home & consumer electronics product category. The decrease in watches was a result of a shift in airtime from our watches category into the fashion & accessories and home categories and testing of some lower watch price point offerings designed to grow our customers with a high lifetime value. The increase in the home product category was a result of a shift in airtime described above and an increase in consumer electronics sales productivity per minute. Our digital sales penetration, or, the percentage of net sales that are generated from our evine.com website and mobile platforms, which are primarily ordered directly online, was
51.9%
in
fiscal 2017
as compared to
49.5%
in
fiscal 2016
. Overall, we continue to deliver strong digital sales penetration. We believe the increase in penetration during the period was driven by our improved digital marketing initiatives and an enhanced responsive customer experience on mobile devices. Our mobile penetration increased to
49.9%
of total online sales during
fiscal 2017
versus
45.4%
of total online sales during
fiscal 2016
.
Consolidated net sales, inclusive of shipping and handling revenue, for
fiscal 2016
were
$666.2 million
, a
4%
decrease
over consolidated net sales of
$693.3 million
for
fiscal 2015
. The
decrease
in consolidated net sales was driven primarily by a 53% decrease in our consumer electronics category as part of our strategy to proactively eliminate low contribution margin consumer electronics merchandise, such as the hoverboard, as we shift our airtime and product mix to higher margin product categories. These decreases were offset by growth in our wearable categories, which include jewelry & watches, beauty and fashion &
accessories product categories. In addition, we also experienced an increase in shipping and handling revenue as a result of more disciplined shipping promotions during the year. Our digital sales penetration, or the percentage of net sales that are generated from our evine.com website and mobile platforms, which are primarily ordered directly online, was
49.5%
in
fiscal 2016
as compared to
46.9%
in
fiscal 2015
. We believe the
increase
in penetration during
fiscal 2016
was driven by our digital marketing initiatives and strong performance of online promotions. Our mobile penetration increased to
45.4%
of total online sales during
fiscal 2016
versus
42.3%
of total online sales during
fiscal 2015
.
Gross Profit
Gross profit for
fiscal 2017
was
$235.1 million
, a
decrease
of
3%
, compared to
$241.5 million
for
fiscal 2016
. The
decrease
in gross profit experienced during
fiscal 2017
was primarily driven by a
3%
decrease in consolidated net sales (as discussed above). Gross profit for
fiscal 2016
was
$241.5 million
, an
increase
of
1%
, compared to
$238.5 million
for
fiscal 2015
. The
increase
in the gross profit experienced during
fiscal 2016
was driven by higher gross margin percentages experienced, offset by a
4%
decrease
in consolidated net sales. Gross margin percentages for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
were
36.3%
,
36.3%
and
34.4%
, representing a
0 bps
change from
fiscal 2016
to
fiscal 2017
, and a
190
bps
increase
from
fiscal 2015
to
fiscal 2016
. The consistency in the gross margin percentage experienced in fiscal 2017 reflects the following: a 20 basis point basis point margin increase attributable to increased gross profit rates across all product categories, offset by a 15 basis point decrease attributable to increased fulfillment depreciation as a result of upgrades made to our Bowling Green facility and a 5 basis point decrease due to lower shipping and handling margins. The increase in the gross margin percentage experienced in fiscal 2016, compared to fiscal 2015, reflects the following: a 150 basis point increase due to a shift in product mix from consumer electronics to beauty and fashion & accessories, which typically have higher margins; a 70 basis point increase due to higher shipping and handling margins achieved as a result of more disciplined shipping promotions, partially offset by a 20 basis point decrease attributable to increased fulfillment depreciation as a result of upgrades made to our Bowling Green facility.
Operating Expenses
Total operating expenses were
$231.9 million
,
$243.5 million
and
$247.2 million
for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
, representing a
decrease
of
$11.7 million
or
5%
from
fiscal 2016
to
fiscal 2017
, and a
decrease
of
$3.7 million
, or
1%
from
fiscal 2015
to
fiscal 2016
. Total operating expenses as a percentage of net sales were
35.8%
,
36.6%
and
35.7%
for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
. Total operating expense for
fiscal 2017
includes executive and management transition costs of
$2.1 million
and a gain of
$551,000
from the sale of our Boston television station. Total operating expenses for
fiscal 2016
includes executive and management transition costs of
$4.4 million
and distribution facility consolidation and technology upgrade costs of
$677,000
. Total operating expenses for
fiscal 2015
includes executive and management transition costs of
$3.5 million
and distribution facility consolidation and technology upgrade costs of
$1.3 million
. Excluding executive and management transition costs, the gain on sale of television station, and distribution facility consolidation and technology upgrade costs, total operating expenses as a percentage of net sales were
35.6%
,
35.8%
and
35.0%
for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
.
Distribution and selling expense for
fiscal 2017
decrease
d
$7.5 million
, or
4%
, to
$199.5 million
or
30.8%
of net sales compared to
$207.0 million
or
31.1%
of net sales in
fiscal 2016
. Distribution and selling expense
decrease
d during
fiscal 2017
due to decreased program distribution expense of
$6.7 million
relating to contract negotiations and channel positioning, partially offset by an increase in HD distribution, over-the-air and other forms of distribution. The decrease over the comparable period was also due to decreased variable expenses of
$5.3 million
and decreased software service fees of
$472,000
, partially offset by increased salaries and wages of
$4.0 million
and increased online selling and search fees of
$767,000
. The decrease in variable costs was primarily driven by decreased variable credit card processing fees and bad debt credit expense of
$2.8 million
, decreased variable fulfillment and customer service salaries and wages of
$2.4 million
and decreased Bowling Green rent expense of
$416,000
, partially offset by increased customer services telecommunications expense of
$290,000
. Total variable expenses during
fiscal 2017
were approximately
9.3%
of total net sales versus
9.9%
of total net sales for the prior year comparable period. The
decrease
in variable expenses as a percentage of net sales was primarily due to improved efficiencies at our fulfillment center.
Distribution and selling expense for
fiscal 2016
decrease
d
$2.3 million
, or
1%
, to
$207.0 million
, or
31.1%
of net sales compared to
$209.3 million
or
30.3%
of net sales in
fiscal 2015
. Distribution and selling expense
decrease
d during
fiscal 2016
due to decreased program distribution expense of
$2.6 million
relating to contract negotiations and channel positioning, partially offset by the launch of Evine Too and broadened HD carriage. The decrease over the comparable period was also due to a decreased salaries and wages of
$1.2 million
, decreased rebranding expense of
$260,000
, decreased production expenses of
$256,000
and decreased accrued incentive compensation of
$169,000
, offset by an increase in variable expense of
$1.9 million
and increased online selling and search fees of
$444,000
. The increase in variable costs was primarily driven by increased variable fulfillment and customer service salaries and wages of
$2.7 million
and increased variable credit card processing fees and credit expenses of
$567,000
, partially offset by decreased customer services telecommunications service expense of
$1.1 million
and decreased Bowling Green rent expense of
$221,000
. Total variable expenses in
fiscal 2016
were approximately
9.9%
of total net sales versus approximately
9.2%
of total net sales in
fiscal 2015
. The
increase
in variable expense as a percentage of net sales was primarily
due to a
4%
increase
in net shipped units compared with a
4%
decrease
in consolidated net sales and the
11%
decline in our average selling price during
fiscal 2016
.
To the extent that our average selling price continues to decline, our variable expense as a percentage of net sales could increase as the number of our shipped units increase. Program distribution expense is primarily a fixed cost per household, however, this expense may be impacted by changes in the number of average homes or channels reached or by rate changes associated with changes in our channel position with carriers.
General and administrative expense for
fiscal 2017
increase
d
$1.1 million
, or
5%
, to
$24.4 million
, or
3.8%
of net sales compared to
$23.4 million
or
3.5%
of net sales in
fiscal 2016
. General and administrative expense
increase
d during
fiscal 2017
primarily as a result of increased salaries and wages of
$1.7 million
and increased share-based compensation expense of
$816,000
, partially offset by a decrease in software maintenance and services fees of $1.1 million and legal settlement receipts of
$564,000
.
General and administrative expense for
fiscal 2016
decrease
d
$1.1 million
, or
5%
, to
$23.4 million
or
3.5%
of net sales compared to
$24.5 million
or
3.5%
of net sales in
fiscal 2015
. General and administrative expense
decrease
d from
fiscal 2015
primarily as a result of a decrease in costs incurred for the implementation of our Shareholder Rights Plan of
$446,000
, decreased share-based compensation expense of
$324,000
, decreased professional fees of
$260,000
and decreased rebranding expense of
$115,000
.
Depreciation and amortization expense was
$6.4 million
,
$8.0 million
and
$8.5 million
for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
, representing a
decrease
of
$1.7 million
, or
21%
from
fiscal 2016
to
fiscal 2017
and a
decrease
of
$433,000
, or
5%
from
fiscal 2015
to
fiscal 2016
. Depreciation and amortization expense as a percentage of net sales was
1.0%
for
fiscal 2017
,
1.2%
for
fiscal 2016
and
1.2%
for
fiscal 2015
. The
decrease
in depreciation and amortization expense of
$1.7 million
during
fiscal 2017
was primarily due to decreased depreciation expense of
$1.7 million
as a result of a reduction in our non-fulfillment depreciable asset base year over year, partially offset by increased amortization expense of
$74,000
. The
decrease
in depreciation and amortization expense of
$433,000
during
fiscal 2016
was primarily due to decreased depreciation expense of
$464,000
as a result of a reduction in our non-fulfillment depreciable asset base year over year, partially offset by increased amortization expense of
$30,000
.
Operating Income (Loss)
We reported operating income of
$3.2 million
in
fiscal 2017
compared to an operating loss of
$2.0 million
for
fiscal 2016
, representing a
$5.2 million
improvement. Our operating income
increase
d during
fiscal 2017
primarily as a result of a decrease in distribution and selling, a decrease in executive and management transition costs, a decrease in depreciation and amortization expense, a decrease in distribution facility consolidation and technology upgrade costs, and a gain on sale of television station, offset by decreased gross profit and an increase in general and administrative expense.
We reported an operating loss of
$2.0 million
for
fiscal 2016
compared to an operating loss of
$8.7 million
for
fiscal 2015
, representing a
$6.7 million
improvement. Our operating results
increase
d during
fiscal 2016
primarily as a result of increased gross profit, a decrease in distribution and selling, a decrease in general and administrative, a decrease in distribution facility consolidation and technology upgrade costs, and a decrease in depreciation and amortization expense, offset by an increase in executive and management transition costs.
Income Taxes
For
fiscal 2017
, net income reflects an income tax benefit of
$3.4 million
. The
fiscal 2017
tax benefit includes a non-cash charge of approximately
$643,000
relating to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. The
fiscal 2017
tax benefit also includes a non-cash tax benefit of approximately
$4.1 million
generated by a reversal of our long-term deferred tax liability related to the sale of the FCC license (discussed further in
Note 4
- “
Intangible Assets
” in the notes to our consolidated financial statements). We recognized a tax gain in conjunction with this transaction which will be largely offset with our available NOLs, creating an income tax benefit attributable to the reversal of the related long-term deferred tax liability. The
fiscal 2017
income tax benefit was partially offset by state income taxes payable on certain income for which there is no loss carryforward benefit available.
The Tax Cuts and Jobs Act was signed into law on December 22, 2017. The tax reform legislation (discussed further in
Note 12
- “
Income Taxes
” in the notes to our consolidated financial statements), which included a reduction in the corporate tax rate to 21% from 35%, did not have an impact on our tax provision for fiscal 2017 due to the full valuation allowance against our deferred tax assets. We remeasured our net deferred tax assets and valuation allowance to reflect the lower corporate tax rate.
For
fiscal 2016
, net loss reflects an income tax provision of
$801,000
. The
fiscal 2016
tax provision includes a non-cash charge of approximately
$788,000
relating to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. The remaining
fiscal 2016
income tax provision relates to state income taxes payable on
certain income for which there is no loss carryforward benefit available. For
fiscal 2015
, net loss reflects an income tax provision of
$834,000
. The
fiscal 2015
tax provision includes a non-cash charge of approximately
$788,000
relating to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. The remaining
fiscal 2015
income tax provision relates to state income taxes payable on certain income for which there is no loss carryforward benefit available.
We have not recorded any income tax benefit on the losses recorded during
fiscal 2016
and
fiscal 2015
due to the uncertainty of realizing income tax benefits in the future as indicated by our recording of an income tax valuation allowance. Based on our recent history of losses, a full valuation allowance has been recorded and was calculated in accordance with GAAP, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. We will continue to maintain a valuation allowance against our net deferred tax assets, including those related to net operating loss carryforwards, until we believe it is more likely than not that these assets will be realized in the future.
Net Income (Loss)
For
fiscal 2017
, we reported net income of
$143,000
or
$0.00
per basic and dilutive share, on
63,870,046
weighted average common shares outstanding (
63,968,299
diluted shares). For
fiscal 2016
we reported a net loss of
$8.7 million
or
$0.15
per basic and dilutive share, on
59,784,594
weighted average common shares outstanding. For
fiscal 2015
, we reported a net loss of
$12.3 million
, or
$0.22
per basic and dilutive share, on
57,004,321
weighted average common shares outstanding. Fiscal 2017 net income per common share, basic and diluted, were not impacted as a result of the 53rd week. Net income for
fiscal 2017
includes executive and management transition costs of
$2.1 million
, loss on debt extinguishment of
$1.5 million
, a gain on the sale of our Boston television station of
$551,000
, and interest expense of
$5.1 million
, relating primarily to interest on our credit facilities. Net loss for
fiscal 2016
includes executive and management transition costs of
$4.4 million
, distribution facility consolidation and technology upgrade costs of
$677,000
and interest expense of
$5.9 million
, relating primarily to interest on our credit facilities. Net loss for
fiscal 2015
includes executive and management transition costs of
$3.5 million
, distribution facility consolidation and technology upgrade costs of
$1.3 million
and interest expense of
$2.7 million
, relating primarily to interest on outstanding advances under the PNC Credit Facility and the amortization of fees paid to obtain the PNC Credit Facility.
Financial Condition, Liquidity and Capital Resources
As of
February 3, 2018
, we had cash of
$23.9 million
and had restricted cash and investments of
$450,000
. Our restricted cash and investments are generally restricted for a period ranging from 30-60 days. In addition, under the PNC Credit Facility, we are required to maintain a minimum of
$10 million
of unrestricted cash plus facility availability at all times. As our unused line availability is greater than
$10 million
at
February 3, 2018
, no additional cash is required to be restricted. As of
January 28, 2017
, we had cash of
$32.6 million
and had restricted cash and investments of
$450,000
. During
fiscal 2017
, working capital increased
$603,000
to
$101.5 million
compared to working capital of
$100.9 million
for
fiscal 2016
. The current ratio (our total current assets over total current liabilities) was
2.1
at
February 3, 2018
and
1.9
at
January 28, 2017
.
Sources of Liquidity
Our principal source of liquidity is our available cash of
$23.9 million
as of
February 3, 2018
, which was held in bank depository accounts primarily for the preservation of cash liquidity.
PNC Credit Facility
On February 9, 2012, we entered into a credit and security agreement (as amended through September 25, 2017, the "PNC Credit Facility") with PNC Bank, N.A. ("PNC"), a member of The PNC Financial Services Group, Inc., as lender and agent. The PNC Credit Facility, which includes CIBC Bank USA (formerly known as The Private Bank) as part of the facility, provides a revolving line of credit of
$90.0 million
and provides for a term loan on which we had originally drawn to fund improvements at our distribution facility in Bowling Green, Kentucky and to partially pay down our GACP Term Loan (as defined below). The PNC Credit Facility also provides for an accordion feature that would allow us to expand the size of the revolving line of credit by an additional
$25.0 million
at the discretion of the lenders and upon certain conditions being met. On March 21, 2017, we entered into the Eighth Amendment to the PNC Credit Facility, which among other things, increased the term loan by
$6,000,000
, extended the term of the PNC Credit Facility from
May 1, 2020
to
March 21, 2022
, and authorized the proceeds from the term loan to be used for a voluntary prepayment of
$9,500,000
on our GACP Term Loan.
All borrowings under the PNC Credit Facility mature and are payable on
March 21, 2022
. Subject to certain conditions, the PNC Credit Facility also provides for the issuance of letters of credit in an aggregate amount up to
$6.0 million
which, upon issuance, would be deemed advances under the PNC Credit Facility. Maximum borrowings and available capacity under the
revolving line of credit under the PNC Credit Facility are equal to the lesser of
$90.0 million
or a calculated borrowing base comprised of eligible accounts receivable and eligible inventory.
The revolving line of credit under the PNC Credit Facility bears interest at LIBOR plus a margin of between
3%
and
4.5%
based on our trailing twelve-month reported EBITDA (as defined in the Credit Facility) measured quarterly in
fiscal 2017
and semi-annually thereafter as demonstrated in its financial statements. The term loan bears interest at either a Base Rate or LIBOR plus a margin consisting of between
4%
and
5%
on Base Rate term loans and
5%
to
6%
on LIBOR term loans based on our leverage ratio as demonstrated in our audited financial statements.
As of
February 3, 2018
, we had borrowings of
$59.9 million
under our revolving line of credit. As of
February 3, 2018
, the term loan under the PNC Credit Facility had
$14.1 million
outstanding, of which
$2.3 million
was classified as current in the accompanying balance sheet, and was used to fund our expansion initiative and to partially pay down our GACP Term Loan. Remaining available capacity under the revolving credit facility as of
February 3, 2018
was approximately
$18.4 million
, and provides liquidity for working capital and general corporate purposes. In addition, as of
February 3, 2018
, our unrestricted cash plus unused line availability was
$42.4 million
and we were in compliance with applicable financial covenants of the PNC Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months.
Principal borrowings under the term loan are to be payable in monthly installments over an
84
-month amortization period commencing on April 1, 2017 and are also subject to mandatory prepayment in certain circumstances, including, but not limited to, upon receipt of certain proceeds from dispositions of collateral. Borrowings under the term loan are also subject to mandatory prepayment in an amount equal to fifty percent (
50%
) of excess cash flow for such fiscal year, with any such payment not to exceed
$2.0 million
in any such fiscal year.
The PNC Credit Facility contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus facility availability of
$10.0 million
at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of
1.1 to 1.0
, become applicable only if unrestricted cash plus facility availability falls below
$10.8 million
. In addition, the PNC Credit Facility places restrictions on our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
GACP Term Loan
On March 10, 2016, we entered into a term loan credit and security agreement (as amended through September 25, 2017, the "GACP Credit Agreement") with GACP Finance Co., LLC ("GACP") for a term loan of
$17 million
which was fully paid off during fiscal 2017 (as described below). Proceeds from the GACP Term Loan were used to provide for working capital and general corporate purposes and to help strengthen our total liquidity position. The term loan under the GACP Credit Agreement (the "GACP Term Loan") was secured on a first lien priority basis by the proceeds of any sale of our Boston television station FCC license and on a second lien priority basis by our accounts receivable, equipment, inventory and certain real estate as well as other assets as described in the GACP Credit Agreement. The Company had also pledged the stock of certain subsidiaries to secure such obligations on a second lien priority basis.
On March 21, 2017, we made a voluntary principal prepayment of
$9.5 million
on our GACP Credit Agreement. The principal payment was funded by a combination of cash on hand and
$6.0 million
from our lower interest PNC Credit Facility term loan. We recorded a loss on extinguishment of debt totaling
$913,000
in connection with the principal prepayment, which includes early termination and lender fees of
$199,000
and a write-off of unamortized debt issuance costs of
$714,000
, which represents the proportionate amount of unamortized debt issuance costs attributable to the settled debt.
On October 18, 2017, we made a voluntary principal prepayment of
$2.5 million
on our GACP Term Loan. The principal payment was funded by proceeds received under the Channel Sharing Agreement. We recorded a loss on extinguishment of debt totaling
$221,000
in connection with the principal prepayment, which includes early termination and lender fees of
$50,000
and unamortized debt issuance costs of
$171,000
, which represents the proportionate amount of unamortized debt issuance costs attributable to the settled debt.
On
December 6, 2017
, we made a voluntary principal prepayment of
$3.5 million
to fully retire our GACP Term Loan. The principal payment was funded by proceeds received upon the sale of the Boston television station, WWDP, as discussed in
Note 4
- "
Intangible Assets
" in the notes to our consolidated financial statements. The Company recorded a loss on extinguishment of debt totaling
$323,000
in connection with the principal prepayment, which includes early termination and lender fees of
$85,000
and unamortized debt issuance costs of
$238,000
, which represents the remaining amount of unamortized debt issuance costs attributable to the GACP Term Loan.
The GACP Term Loan bore interest at either i) a fixed rate based on the greater of LIBOR for interest periods of one, two or three months or 1% plus a margin of 11.0%, or (ii) a daily floating Alternate Base Rate plus a margin of 10.0%. Principal
borrowings under the GACP Term Loan were payable in consecutive monthly installments of $70,833 each, commencing on April 1, 2016, with a final installment due at the end of the five-year term equal to the aggregate principal amount of all loans outstanding on such date.
Registered Direct Offering
On May 23, 2017, we entered into Common Stock Purchase Agreements (the “Purchase Agreements”) with certain accredited investors to which we sold, in the aggregate,
4,008,273
shares of common stock in a registered direct offering pursuant to a shelf registration statement on Form S-3 (File No. 333-203209), filed with the SEC on May 13, 2015. The shares were sold at a price of
$1.12
per share, except for shares purchased by investors who are directors or executive officers of the Company, which were sold at a price of
$1.15
per share. The closing of this sale occurred on May 30, 2017 and we received gross proceeds of approximately
$4.5 million
and incurred approximately
$323,000
of issuance costs. We have used the proceeds for general working capital purposes.
Sale of Boston Television Station, WWDP
During fiscal 2017, we sold the Boston television station, WWDP, including our FCC broadcast license, for an aggregate of $13.5 million. We still have the opportunity to receive additional consideration of
$667,000
, which is subject to an escrow holdback and is payable to us when the station is being carried by designated carriers. See
Note 4
- "
Intangible Assets
" in the notes to our consolidated financial statements for additional information. We used the proceeds received from the transaction to pay in full the remaining amounts due under our term loan with GACP, with the remaining proceeds used for general working capital purposes.
Private Placement Securities Purchase Agreements
On September 14, 2016, we entered into private placement securities purchase agreements with certain accredited investors to which we: (a) sold, in the aggregate,
5,952,381
shares of our common stock at a price of
$1.68
per share; (b) Warrants to purchase
2,976,190
shares of our common stock at an exercise price of
$2.90
per share, and (c) issued Options.
We received gross proceeds of
$10.0 million
and incurred approximately
$852,000
of issuance costs. The Warrants will expire on
September 19, 2021
and were not exercisable until
March 19, 2017
. The term of each option is
six months
and expire on March 19, 2017, provided, however, that an option may not be exercised for the first
30 days
following issuance. Each option may only be exercised once, in whole or in part, and the future potential investment offering will have a price equal to the
five
-day volume weighted average price per share of our common stock as of the day immediately prior to exercise. Upon exercise of the Options, two-thirds of the option securities will be issued in the form of common stock, and one-third will be issued as Option Warrants. These Option Warrants will have an exercise price at a
50%
premium to our closing stock price one-day prior to the option exercise and will expire
five years
after issuance. If all of the Warrants, Options and Option Warrants issued by us are all exercised, the total shares of common stock issued in connection with this offering will not be more than approximately 19.99% of our total issued and outstanding shares following such exercises.
During the fourth quarter of fiscal 2016, three investors exercised their Options. These exercises resulted in our issuance, in the aggregate, of (a)
1,646,350
shares of our common stock at a price ranging from
$1.20 - $1.94
per share, resulting in aggregate proceeds of
$2.5 million
; and (b) five-year warrants to purchase an additional
823,175
shares of our common stock at an exercise price ranging from
$1.76 - $3.00
per share and expire between
November 10, 2021
and
January 23, 2022
. The Company incurred, in the aggregate, approximately
$49,000
of issuance costs related to the Options exercised during the fourth quarter of fiscal 2016.
Other
Our ValuePay program is an installment payment program which allows customers to pay by credit card for certain merchandise in two or more equal monthly installments. Another potential source of near-term liquidity is our ability to increase our cash flow resources by reducing the percentage of our sales offered under our ValuePay installment program or by decreasing the length of time we extend credit to our customers under this installment program. However, any such change to the terms of our ValuePay installment program could impact future sales, particularly for products sold with higher price points. Please see "Cash Requirements" below for a discussion of our ValuePay installment program.
Cash Requirements
Currently, our principal cash requirements are to fund our business operations, which consist primarily of purchasing inventory for resale, funding accounts receivable, funding our basic operating expenses, particularly our contractual commitments for cable and satellite programming distribution, and the funding of necessary capital expenditures. We closely manage our cash resources and our working capital. We attempt to manage our inventory receipts and reorders in order to ensure our inventory investment levels remain commensurate with our current sales trends. We also monitor the collection of our credit card and ValuePay installment receivables and manage our vendor payment terms in order to more effectively manage our working capital which includes matching cash receipts from our customers, to the extent possible, with related cash payments to our vendors. ValuePay remains a cost
effective promotional tool for us. We continue to make strategic use of our ValuePay program in an effort to increase sales and to respond to similar competitive programs.
We also have significant future commitments for our cash, primarily payments for cable and satellite program distribution obligations and the eventual repayment of our credit facilities. We believe that our existing cash balances, together with our availability under the PNC Credit Facility, will be sufficient to fund our normal business operations over the next twelve months. We currently have total contractual cash obligations and commitments primarily with respect to our cable and satellite agreements, credit facility, and operating leases totaling approximately
$315.0 million
over the next five fiscal years.
For
fiscal 2017
, net cash provided by operating activities totaled
$3.3 million
compared to net cash provided by operating activities of
$7.3 million
in
fiscal 2016
and net cash used for operating activities of
$9.4 million
in
fiscal 2015
. Net cash provided by operating activities for
fiscal 2017
reflects net income, as adjusted for depreciation and amortization, share-based payment compensation, gain from disposal of assets, loss on debt extinguishment, long-term deferred income taxes and the amortization of deferred revenue and deferred financing costs. In addition, net cash provided by operating activities for
fiscal 2017
reflects a decrease in accounts receivable, inventories and prepaid expenses; partially offset by a decrease in accounts payable and accrued liabilities. Accounts receivable decreased primarily due to lower sales levels, as well as a slight decrease in the utilization of our ValuePay installment program. Inventories decreased primarily as a result of disciplined management of overall working capital components commensurate with sales. Accounts payable and accrued liabilities decreased during fiscal 2017 primarily due to a decrease in inventory accounts payable as a result of the timing of inventory receipts at the end of fiscal 2017 compared to the end of fiscal 2016, a decrease in freight payables and a decrease in accrued salaries due to timing of payments.
Net cash provided by operating activities for fiscal 2016 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, long-term deferred income taxes and the amortization of deferred revenue and deferred financing costs. In addition, net cash provided by operating activities for fiscal 2016 reflects a decrease in accounts receivable and prepaid expenses; partially offset by a decrease in accounts payable and accrued liabilities and an increase in inventory. Accounts receivable decreased primarily due to lower sales levels, as well as a slight decrease in the utilization of our ValuePay installment program. Inventory increased as a result of our decrease in sales, particularly in the consumer electronics category, which is primarily drop-shipped from our vendors. This product category shift away from consumer electronics required the need to carry additional inventory on-hand to service expected demand. Accounts payable and accrued liabilities decreased during fiscal 2016 primarily due to a decrease in inventory accounts payable as a result of the timing of inventory receipts at the end of fiscal 2016 compared to the end of fiscal 2015, offset by an increase in accrued cable distribution fees due to the timing of payments.
Net cash used for operating activities for fiscal 2015 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, long-term deferred income taxes and the amortization of deferred revenue and other financing costs. In addition, net cash used for operating activities for fiscal 2015 reflects an increase in accounts receivable, inventories and prepaid expenses and a decrease in accounts payable and accrued liabilities. Accounts receivable increased due to increased sales levels, primarily in the fourth quarter. Inventory increased as a result of planned purchases in support of higher sales levels and in preparation for fiscal 2016 sales growth initiatives. Accounts payable and accrued liabilities decreased during fiscal 2015 primarily due to a decrease in accounts payables related to customer shipments made directly by vendors in the fourth quarter which had shorter payment terms, a decrease in accrued incentive compensation and accrued severance.
Net cash provided by investing activities totaled
$2.2 million
for
fiscal 2017
compared to net cash used for investing activities of
$10.8 million
and
$20.4 million
for
fiscal 2016
and
fiscal 2015
. Expenditures for property and equipment were
$10.5 million
in
fiscal 2017
compared to
$10.3 million
in
fiscal 2016
and
$22.0 million
in
fiscal 2015
. The decrease in capital expenditures in fiscal 2016 primarily relates to expenditures made in connection with our distribution facility expansion, which totaled $10.1 million during
fiscal 2015
. Additional capital expenditures made during the periods presented relate primarily to expenditures made for the development, upgrade and replacement of computer software, order management, merchandising and warehouse management systems, related computer equipment, digital broadcasting equipment, including high definition equipment, and other office equipment, warehouse equipment and production equipment. Principal future capital expenditures are expected to include: the development, upgrade and replacement of various enterprise software systems; equipment improvements and technology upgrades at our distribution facility in Bowling Green, Kentucky; security upgrades to our information technology; upgrades in our customer service call routing technology; the upgrade of television production and transmission equipment; and related computer equipment associated with the expansion of our television shopping business and digital commerce initiatives. During
fiscal 2017
, we received
$12.7 million
relating to the sale of the Boston television station, WWDP. During fiscal 2016, we paid
$508,000
for the acquisition of an online watch retailer. During fiscal 2015, we decreased our restricted cash and investment collateral balance by
$1.7 million
.
Net cash used for financing activities totaled
$14.2 million
in
fiscal 2017
and related primarily to principal payments on PNC revolving loan of
$96.8 million
, principal payments on the term loans of
$18.8 million
, payments for the repurchases of common stock of
$5.1 million
, payments for common stock issuance costs of
$452,000
, payments for debt extinguishment costs of
$334,000
, payments for deferred financing costs of
$265,000
and payments for restricted stock issuance of
$45,000
, partially
offset by proceeds from the PNC revolving loan of
$96.8 million
, proceeds from the PNC term loan of
$6.0 million
, proceeds from the issuance of common stock and warrants of
$4.6 million
and proceeds from the exercise of stock options of
$79,000
. Net cash provided by financing activities totaled
$24.2 million
in
fiscal 2016
and related primarily to proceeds from the GACP term loan of
$17.0 million
and proceeds from the issuance of common stock and warrants of
$12.5 million
, partially offset by principal payments on the term loans of
$2.9 million
, payments for deferred financing costs of
$1.5 million
, payments for common stock issuance costs of
$786,000
, payments for restricted stock issuance of
$46,000
and capital lease payments of
$39,000
. Net cash provided by financing activities totaled
$21.8 million
in
fiscal 2015
and related primarily to proceeds from the revolving loan under the PNC Credit Facility of
$19.2 million
, proceeds from the term loan under the PNC Credit Facility of
$2.8 million
and proceeds from the exercise of stock option of
$2.5 million
, partially offset by payments on the term loan of
$2.1 million
, payments for deferred financing costs of
$537,000
and capital lease payments of
$52,000
.
Financial Covenants
The PNC Credit Facility contain
s
customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus facility availability of
$10.0 million
at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of 1.1 to 1.0, become applicable only if unrestricted cash plus facility availability falls below
$10.8 million
or upon an event of default. As of
February 3, 2018
, our unrestricted cash plus unused line availability was
$42.4 million
, and we were in compliance with applicable financial covenants of the PNC Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not party to any derivative contracts or synthetic leases.
Contractual Cash Obligations and Commitments
The following table summarizes our obligations and commitments as of
February 3, 2018
, and the effect these obligations and commitments are expected to have on our liquidity and cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
|
|
(In thousands)
|
Cable and satellite agreements (a)
|
|
$
|
143,636
|
|
|
$
|
64,758
|
|
|
$
|
77,515
|
|
|
$
|
1,363
|
|
|
$
|
—
|
|
Long term credit facilities (b)
|
|
77,067
|
|
|
3,320
|
|
|
5,926
|
|
|
67,821
|
|
|
—
|
|
Operating leases
|
|
2,611
|
|
|
1,159
|
|
|
1,452
|
|
|
—
|
|
|
—
|
|
Employment agreements
|
|
2,271
|
|
|
2,268
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Purchase order obligations
|
|
89,405
|
|
|
89,405
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
314,990
|
|
|
$
|
160,910
|
|
|
$
|
84,896
|
|
|
$
|
69,184
|
|
|
$
|
—
|
|
_______________________________________
|
|
(a)
|
Future cable and satellite payment commitments are based on subscriber levels as of
February 3, 2018
and commitments entered into as of the date of this report. Future payment commitment amounts could increase or decrease as the number of cable and satellite subscribers increase or decrease, or with changes in channel position. Under certain circumstances, operators or we may cancel the agreements prior to expiration.
|
|
|
(b)
|
Includes interest on variable rate debt estimated using the rate in effect as of
February 3, 2018
.
|
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for each of the fiscal years in the three-year period ended
February 3, 2018
. We cannot assure you that inflation will not have an adverse impact on our operating results and financial condition in future periods.
Recently Issued Accounting Pronouncements
See
Note 2
- "
Summary of Significant Accounting Policies
" in the notes to our consolidated financial statements for a discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and assumptions, including those related to the realizability of accounts receivable, inventory and product returns. Management bases its estimates and assumptions on historical experience and on various other factors that are believed 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. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect the more significant assumptions and estimates used in the preparation of the consolidated financial statements:
|
|
•
|
Accounts receivable.
We utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two or more equal monthly credit card installments in which we bear the risk of collection. The percentage of our net sales generated utilizing our ValuePay payment program over the past three fiscal years ranged from
68% to 72%
. As of
February 3, 2018
and
January 28, 2017
, we had approximately
$88.5 million
and
$91.8 million
due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimates are used in determining the provision for doubtful accounts and are based on historical rates of actual write offs and delinquency rates, historical collection experience, credit policy, current trends in the credit quality of our customer base, average length of ValuePay offers, average selling prices, our sales mix and accounts receivable aging. The provision for doubtful accounts receivable, which is primarily related to our ValuePay program, for
fiscal 2017, fiscal 2016 and fiscal 2015
was
$9.9 million
,
$11.9 million
and
$11.8 million
. Based on our
fiscal 2017
bad debt experience, a one-half point increase or decrease in our bad debt experience as a percentage of total net sales would have an impact of approximately
$3.2 million
on consolidated distribution and selling expense.
|
|
|
•
|
Inventory.
We value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or net realizable value. As of
February 3, 2018
and
January 28, 2017
, we had inventory balances of
$68.8 million
and
$70.2 million
. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on the following factors: age of the inventory, estimated required sell-through time, stage of product life cycle and whether items are selling below cost. In determining appropriate reserve percentages, we look at our historical write off experience, the specific merchandise categories affected, our historic recovery percentages on various methods of liquidations, forecasts of future product airings and current markdown processes. Provision for excess and obsolete inventory for
fiscal 2017, fiscal 2016 and fiscal 2015
was
$3.8 million
,
$5.6 million
and
$7.2 million
. Based on our
fiscal 2017
inventory write down experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately
$376,000
on consolidated gross profit.
|
|
|
•
|
Product returns.
We record a reserve as a reduction of gross sales for anticipated product returns at each month-end and must make estimates of potential future product returns related to current period product revenue. Our return rates on our total net sales were
19.0%
in
fiscal 2017
,
19.4%
in
fiscal 2016
, and
19.8%
in
fiscal 2015
. We estimate and evaluate the adequacy of our returns reserve by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the sales returns reserve in any accounting period. Reserves for future product returns, included in accrued liabilities in the accompanying balance sheets at the end of
fiscal 2017
and
fiscal 2016
were
$3.5 million
and
$3.7 million
. Based on our
fiscal 2017
sales returns, a one-point increase or decrease in our returns rate would have had an impact of approximately
$3.1 million
on gross profit.
|
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF EVINE Live Inc.
AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
EVINE Live Inc. and Subsidiaries
Eden Prairie, Minnesota
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of EVINE Live Inc. and subsidiaries (the "Company") as of
February 3, 2018
and
January 28, 2017
, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended
February 3, 2018
, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
February 3, 2018
and
January 28, 2017
, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 3, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
April 9, 2018
, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 9, 2018
We have served as the Company's auditor since 2002.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
2018
|
|
January 28,
2017
|
|
|
(In thousands, except share and per share data)
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
23,940
|
|
|
$
|
32,647
|
|
Restricted cash and investments
|
|
450
|
|
|
450
|
|
Accounts receivable, net
|
|
96,559
|
|
|
99,062
|
|
Inventories
|
|
68,811
|
|
|
70,192
|
|
Prepaid expenses and other
|
|
5,344
|
|
|
5,510
|
|
Total current assets
|
|
195,104
|
|
|
207,861
|
|
Property & equipment, net
|
|
52,048
|
|
|
52,715
|
|
FCC broadcasting license
|
|
—
|
|
|
12,000
|
|
Other assets
|
|
2,106
|
|
|
2,204
|
|
TOTAL ASSETS
|
|
$
|
249,258
|
|
|
$
|
274,780
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
55,614
|
|
|
$
|
65,796
|
|
Accrued liabilities
|
|
35,646
|
|
|
37,858
|
|
Current portion of long term credit facilities
|
|
2,326
|
|
|
3,242
|
|
Deferred revenue
|
|
35
|
|
|
85
|
|
Total current liabilities
|
|
93,621
|
|
|
106,981
|
|
Other long term liabilities
|
|
68
|
|
|
428
|
|
Deferred tax liability
|
|
—
|
|
|
3,522
|
|
Long term credit facilities
|
|
71,573
|
|
|
82,146
|
|
Total liabilities
|
|
165,262
|
|
|
193,077
|
|
Commitments and contingencies
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
Preferred stock, $.01 per share par value, 400,000 shares authorized; zero shares issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $.01 per share par value, 99,600,000 shares authorized; 65,290,458 and 65,192,314 shares issued and outstanding
|
|
653
|
|
|
652
|
|
Additional paid-in capital
|
|
439,111
|
|
|
436,962
|
|
Accumulated deficit
|
|
(355,768
|
)
|
|
(355,911
|
)
|
Total shareholders’ equity
|
|
83,996
|
|
|
81,703
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
249,258
|
|
|
$
|
274,780
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
February 3,
2018
|
|
January 28,
2017
|
|
January 30,
2016
|
|
|
|
(In thousands, except share and per share data)
|
Net sales
|
|
|
$
|
648,220
|
|
|
$
|
666,213
|
|
|
$
|
693,312
|
|
Cost of sales
|
|
|
413,108
|
|
|
424,686
|
|
|
454,832
|
|
Gross profit
|
|
|
235,112
|
|
|
241,527
|
|
|
238,480
|
|
Operating expense:
|
|
|
|
|
|
|
|
Distribution and selling
|
|
|
199,484
|
|
|
207,030
|
|
|
209,328
|
|
General and administrative
|
|
|
24,442
|
|
|
23,386
|
|
|
24,520
|
|
Depreciation and amortization
|
|
|
6,370
|
|
|
8,041
|
|
|
8,474
|
|
Executive and management transition costs
|
|
|
2,145
|
|
|
4,411
|
|
|
3,549
|
|
Distribution facility consolidation and technology upgrade costs
|
|
|
—
|
|
|
677
|
|
|
1,347
|
|
Gain on sale of television station
|
|
|
(551
|
)
|
|
—
|
|
|
—
|
|
Total operating expense
|
|
|
231,890
|
|
|
243,545
|
|
|
247,218
|
|
Operating income (loss)
|
|
|
3,222
|
|
|
(2,018
|
)
|
|
(8,738
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest income
|
|
|
17
|
|
|
11
|
|
|
8
|
|
Interest expense
|
|
|
(5,084
|
)
|
|
(5,937
|
)
|
|
(2,720
|
)
|
Loss on debt extinguishment
|
|
|
(1,457
|
)
|
|
—
|
|
|
—
|
|
Total other expense, net
|
|
|
(6,524
|
)
|
|
(5,926
|
)
|
|
(2,712
|
)
|
Loss before income taxes
|
|
|
(3,302
|
)
|
|
(7,944
|
)
|
|
(11,450
|
)
|
Income tax benefit (provision)
|
|
|
3,445
|
|
|
(801
|
)
|
|
(834
|
)
|
Net income (loss)
|
|
|
$
|
143
|
|
|
$
|
(8,745
|
)
|
|
$
|
(12,284
|
)
|
Net income (loss) per common share
|
|
|
$
|
0.00
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
Net income (loss) per common share — assuming dilution
|
|
|
$
|
0.00
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
63,870,046
|
|
|
59,784,594
|
|
|
57,004,321
|
|
Diluted
|
|
|
63,968,299
|
|
|
59,784,594
|
|
|
57,004,321
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Years Ended
February 3, 2018
,
January 28, 2017
and
January 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
|
|
Total Shareholders'
Equity
|
|
Number
of Shares
|
|
Par
Value
|
|
|
Accumulated
Deficit
|
|
|
(In thousands, except share data)
|
BALANCE, January 31, 2015
|
56,448,663
|
|
|
$
|
564
|
|
|
$
|
418,846
|
|
|
$
|
(334,882
|
)
|
|
$
|
84,528
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,284
|
)
|
|
(12,284
|
)
|
Common stock issuances pursuant to equity compensation plans
|
721,582
|
|
|
7
|
|
|
2,453
|
|
|
—
|
|
|
2,460
|
|
Share-based payment compensation
|
—
|
|
|
—
|
|
|
2,275
|
|
|
—
|
|
|
2,275
|
|
BALANCE, January 30, 2016
|
57,170,245
|
|
|
571
|
|
|
423,574
|
|
|
(347,166
|
)
|
|
76,979
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,745
|
)
|
|
(8,745
|
)
|
Common stock issuances pursuant to equity compensation plans
|
423,338
|
|
|
5
|
|
|
(51
|
)
|
|
—
|
|
|
(46
|
)
|
Share-based payment compensation
|
—
|
|
|
—
|
|
|
1,946
|
|
|
—
|
|
|
1,946
|
|
Common stock and warrant issuance
|
7,598,731
|
|
|
76
|
|
|
11,493
|
|
|
—
|
|
|
11,569
|
|
BALANCE, January 28, 2017
|
65,192,314
|
|
|
652
|
|
|
436,962
|
|
|
(355,911
|
)
|
|
81,703
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
143
|
|
|
143
|
|
Repurchases of common stock
|
(4,400,000
|
)
|
|
(44
|
)
|
|
(5,011
|
)
|
|
—
|
|
|
(5,055
|
)
|
Common stock issuances pursuant to equity compensation plans
|
389,871
|
|
|
4
|
|
|
30
|
|
|
—
|
|
|
34
|
|
Share-based payment compensation
|
—
|
|
|
—
|
|
|
2,888
|
|
|
—
|
|
|
2,888
|
|
Common stock and warrant issuance
|
4,108,273
|
|
|
41
|
|
|
4,242
|
|
|
—
|
|
|
4,283
|
|
BALANCE, February 3, 2018
|
65,290,458
|
|
|
$
|
653
|
|
|
$
|
439,111
|
|
|
$
|
(355,768
|
)
|
|
$
|
83,996
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
February 3,
2018
|
|
January 28,
2017
|
|
January 30,
2016
|
|
|
(in thousands)
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
143
|
|
|
$
|
(8,745
|
)
|
|
$
|
(12,284
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,307
|
|
|
11,209
|
|
|
10,327
|
|
Share-based payment compensation
|
|
2,888
|
|
|
1,946
|
|
|
2,275
|
|
Gain on sale of television station
|
|
(551
|
)
|
|
—
|
|
|
—
|
|
Amortization of deferred revenue
|
|
(60
|
)
|
|
(86
|
)
|
|
(85
|
)
|
Amortization of deferred financing costs
|
|
366
|
|
|
558
|
|
|
271
|
|
Loss on debt extinguishment
|
|
1,457
|
|
|
—
|
|
|
—
|
|
Deferred income taxes
|
|
(3,522
|
)
|
|
788
|
|
|
788
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
2,503
|
|
|
15,978
|
|
|
(2,674
|
)
|
Inventories
|
|
1,381
|
|
|
(3,181
|
)
|
|
(4,384
|
)
|
Prepaid expenses and other
|
|
166
|
|
|
423
|
|
|
(565
|
)
|
Accounts payable and accrued liabilities
|
|
(11,800
|
)
|
|
(11,606
|
)
|
|
(3,080
|
)
|
Net cash provided by (used for) operating activities
|
|
3,278
|
|
|
7,284
|
|
|
(9,411
|
)
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Property and equipment additions
|
|
(10,499
|
)
|
|
(10,261
|
)
|
|
(22,014
|
)
|
Proceeds from the sale of assets
|
|
12,738
|
|
|
—
|
|
|
—
|
|
Cash paid for acquisition
|
|
—
|
|
|
(508
|
)
|
|
—
|
|
Change in restricted cash and investments
|
|
—
|
|
|
—
|
|
|
1,650
|
|
Net cash provided by (used for) investing activities
|
|
2,239
|
|
|
(10,769
|
)
|
|
(20,364
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from issuance of revolving loan
|
|
96,800
|
|
|
—
|
|
|
19,200
|
|
Proceeds of term loans
|
|
6,000
|
|
|
17,000
|
|
|
2,849
|
|
Proceeds from issuance of common stock and warrants
|
|
4,628
|
|
|
12,470
|
|
|
—
|
|
Proceeds from exercise of stock options
|
|
79
|
|
|
—
|
|
|
2,460
|
|
Payments on revolving loan
|
|
(96,800
|
)
|
|
—
|
|
|
—
|
|
Payments on term loans
|
|
(18,780
|
)
|
|
(2,852
|
)
|
|
(2,076
|
)
|
Payments for repurchases of common stock
|
|
(5,055
|
)
|
|
—
|
|
|
—
|
|
Payments for common stock issuance costs
|
|
(452
|
)
|
|
(786
|
)
|
|
—
|
|
Payments for debt extinguishment costs
|
|
(334
|
)
|
|
—
|
|
|
—
|
|
Payments for deferred financing costs
|
|
(265
|
)
|
|
(1,512
|
)
|
|
(537
|
)
|
Payments for restricted stock issuance
|
|
(45
|
)
|
|
(46
|
)
|
|
—
|
|
Payments on capital leases
|
|
—
|
|
|
(39
|
)
|
|
(52
|
)
|
Net cash provided by (used for) financing activities
|
|
(14,224
|
)
|
|
24,235
|
|
|
21,844
|
|
Net increase (decrease) in cash
|
|
(8,707
|
)
|
|
20,750
|
|
|
(7,931
|
)
|
BEGINNING CASH
|
|
32,647
|
|
|
11,897
|
|
|
19,828
|
|
ENDING CASH
|
|
$
|
23,940
|
|
|
$
|
32,647
|
|
|
$
|
11,897
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended
February 3, 2018
,
January 28, 2017
and
January 30, 2016
(1)
The Company
EVINE Live Inc. and its subsidiaries ("we," "our," "us," or the "Company") are collectively a multiplatform interactive digital commerce company that offers a mix of proprietary, exclusive and name-brand merchandise in the categories of jewelry & watches, home & consumer electronics, beauty, and fashion & accessories directly to consumers 24 hours a day in an engaging and informative shopping experience via television, online and mobile devices. Evine is distributed in more than
87 million
homes, primarily through cable and satellite distribution agreements and agreements with telecommunications companies. The network is also streamed live online at evine.com, is available on mobile channels and over-the-top platforms and is also distributed through a full-power television station in Boston.
The Company also operates evine.com, a comprehensive digital commerce platform that sells products which appear on its television shopping network as well as an extended assortment of online-only merchandise. The live programming and products are also marketed via mobile devices, including smartphones and tablets, and through the leading social media channels.
(2)
Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 31 and results in either a 52-week or 53-week fiscal year. References to years in this report relate to fiscal years, rather than to calendar years. The Company’s most recently completed fiscal year,
fiscal 2017
, ended on
February 3, 2018
, and consisted of
53
weeks.
Fiscal 2016
ended on
January 28, 2017
and consisted of
52
weeks.
Fiscal 2015
ended on
January 30, 2016
and consisted of
52
weeks.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition and Accounts Receivable
Revenue is recognized at the time merchandise is shipped or when services are provided. Shipping and handling fees charged to customers are recognized as merchandise is shipped and are classified as revenue in the accompanying statements of operations in accordance with generally accepted accounting principles ("GAAP"). The Company classifies shipping and handling costs in the accompanying statements of operations as a component of cost of sales. Revenue is reported net of estimated sales returns and excludes sales taxes. Sales returns are estimated and provided for at the time of sale based on historical experience.
Accounts receivable consist primarily of amounts due from customers for merchandise sales and from credit card companies, and are reflected net of reserves for estimated uncollectible amounts of
$6,008,000
at
February 3, 2018
and
$6,022,000
at
January 28, 2017
. The Company utilizes an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two or more equal monthly credit card installments. As of
February 3, 2018
and
January 28, 2017
, the Company had approximately
$88,452,000
and
$91,839,000
of net receivables due from customers under the ValuePay installment program. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Provision for doubtful accounts receivable primarily related to the Company’s ValuePay program were
$9,852,000
,
$11,949,000
and
$11,795,000
for
fiscal 2017, fiscal 2016 and fiscal 2015
.
Cost of Sales and Other Operating Expenses
Cost of sales includes primarily the cost of merchandise sold, shipping and handling costs, inbound freight costs, excess and obsolete inventory charges, distribution facility depreciation and customer courtesy credits. Purchasing and receiving costs, including costs of inspection, are included as a component of distribution and selling expense and were approximately
$10,660,000
,
$9,557,000
and
$10,730,000
for
fiscal 2017, fiscal 2016 and fiscal 2015
. Distribution and selling expense consists primarily of cable and satellite access fees, credit card fees, bad debt expense and costs associated with purchasing and receiving, inspection, marketing and advertising, show production, website marketing and merchandising, telemarketing, customer service, warehousing and fulfillment. General and administrative expense consists primarily of costs associated with executive, legal, accounting and
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
finance, information systems and human resources departments, software and system maintenance contracts, insurance, investor and public relations and director fees.
Cash
Cash consists of cash on deposit. The Company maintains its cash balances at financial institutions in demand deposit accounts that are federally insured. The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk on its cash.
Restricted Cash and Investments
The Company had restricted cash and investments of
$450,000
for both
fiscal 2017
and
fiscal 2016
. The Company’s restricted cash and investments consist of certificates of deposit. Interest income is recognized when earned.
Inventories
Inventories, which consists of consumer merchandise held for resale, are stated at the lower of average cost or net realizable value, giving consideration to obsolescence provision write downs of
$3,757,000
,
$5,589,000
and
$7,172,000
for
fiscal 2017, fiscal 2016 and fiscal 2015
.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred and consist primarily of contractual marketing fees paid to certain cable operators for cross channel promotions and online advertising, including amounts paid to online search engine operators and customer mailings. Total marketing and advertising costs and online search marketing fees totaled
$4,530,000
,
$3,723,000
and
$3,300,000
for
fiscal 2017, fiscal 2016 and fiscal 2015
. The Company includes advertising costs as a component of distribution and selling expense in the Company’s consolidated statement of operations.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Improvements and renewals that extend the life of an asset are capitalized and depreciated. Repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are removed from the related accounts, and any residual values are charged or credited to operations. Depreciation and amortization for financial reporting purposes are provided on a straight-line method based upon estimated useful lives. Costs incurred to develop software for internal use and for the Company’s websites are capitalized and amortized over the estimated useful life of the software. Costs related to maintenance of internal-use software and for the Company’s website are expensed as incurred.
Intangible Assets
The Company’s primary identifiable intangible assets include the Evine trademark and brand name; and an acquired online watch retailer customer list and trade name. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount.
Stock-Based Compensation
Compensation is recognized for all stock-based compensation arrangements by the Company, including employee and non-employee stock option and restricted stock unit grants. The estimated grant date fair value of each stock-based award is recognized as compensation over the requisite service period, which is generally the vesting period. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model for time-based vesting awards and a Monte Carlo valuation model for market-based vesting awards. The estimated fair value of restricted stock grants is based on the grant date closing price of the Company's stock for time-based vesting awards and a Monte Carlo valuation model for market-based vesting awards.
Income Taxes
The Company accounts for income taxes under the liability method of accounting whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of such laws. The Company assesses the recoverability of its deferred tax assets in accordance with GAAP.
The Company recognizes interest and penalties related to uncertain tax positions within income tax expense.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net Income (Loss) Per Common Share
Basic income (loss) per share is computed by dividing reported income (loss) by the weighted average number of common shares outstanding for the reported period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods.
A reconciliation of net income (loss) per share calculations and the number of shares used in the calculation of basic net income (loss) per share and diluted net income (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
February 3,
2018
|
|
January 28,
2017
|
|
January 30,
2016
|
Net income (loss) (a)
|
|
$
|
143,000
|
|
|
$
|
(8,745,000
|
)
|
|
$
|
(12,284,000
|
)
|
Weighted average number of common shares outstanding — Basic
|
|
63,870,046
|
|
|
59,784,594
|
|
|
57,004,321
|
|
Dilutive effect of stock options, non-vested shares and warrants (b)
|
|
98,253
|
|
|
—
|
|
|
—
|
|
Weighted average number of common shares outstanding — Diluted
|
|
63,968,299
|
|
|
59,784,594
|
|
|
57,004,321
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
0.00
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
Net income (loss) per common share — assuming dilution
|
|
$
|
0.00
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
(a) The net income (loss) for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
includes executive and management transition costs of
$2,145,000
,
$4,411,000
and
$3,549,000
. The net income for
fiscal 2017
includes a loss on debt extinguishment of
$1,457,000
and a gain on the sale of television station of
$551,000
. In addition,
fiscal 2016
and
fiscal 2015
net losses include distribution facility consolidation and technology upgrade costs of
$677,000
and
$1,347,000
.
(b) For
fiscal 2016
and
fiscal 2015
, approximately
119,000
and -
0
- incremental in-the-money potentially dilutive common share stock options and, with respect to fiscal 2016, warrants have been excluded from the computation of diluted earnings per share, as the effect of their inclusion would be anti-dilutive.
Fair Value of Financial Instruments
GAAP requires disclosures of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. GAAP excludes certain financial instruments and all non-financial instruments from its disclosure requirements.
The Company used the following methods and assumptions in estimating its fair values for financial instruments. The carrying amounts reported in the accompanying consolidated balance sheets approximate the fair value for cash, short-term investments, accounts receivable, trade payables and accrued liabilities, due to the short maturities of those instruments. The fair value of the Company’s
$74 million
PNC Credit Facility is estimated based on rates available to the Company for issuance of debt. As of
February 3, 2018
and
January 28, 2017
, the Company's Credit Facilities had a carrying amount and an estimated fair value of
$74 million
and
$85 million
.
Fair Value Measurements on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to the Company's tangible fixed assets and intangible FCC broadcasting license asset,
which was sold during the fourth quarter of fiscal 2017 as discussed further in
Note 4
- "
Intangible Assets
". These assets and liabilities are remeasured when estimated fair value is below carrying value on the consolidated balance sheets. For these assets, the Company does not periodically adjust its carrying value to fair value except in the event of impairment. If the Company determines that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded as a loss within operating income in the consolidated statement of operations. The Company had no remeasurements of such assets or liabilities to fair value during
fiscal 2017, fiscal 2016 and fiscal 2015
.
Use of Estimates
The preparation of financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during reporting periods.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
These estimates relate primarily to the carrying amounts of accounts receivable and inventories, the realizability of certain long-term assets and the recorded balances of certain accrued liabilities and reserves. Ultimate results could differ from these estimates.
Recently Adopted Accounting Standards
In July 2015, the Financial Accounting Standards Board issued Simplifying the Measurement of Inventory, Topic 330 (ASU No 2015-11). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost or net realizable value. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016. The Company adopted this standard in the first quarter of fiscal 2017, applying it prospectively. The adoption of ASU 2015-11 did not have a material impact on the Company's consolidated financial statements.
In March 2016, the Financial Accounting Standards Board issued Compensation-Stock Compensation, Topic 718 (ASU No. 2016-09). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. In addition, the ASU also clarifies the statement of cash flows presentation for certain components of share-based awards. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017 and has elected to continue estimating forfeitures each period. Prospectively, beginning January 29, 2017, excess tax benefits/deficiencies, along with the full valuation allowance, have been reflected as income tax benefit/expense in the statement of operations resulting in no impact on the tax provision in fiscal 2017. Additionally, the statement of cash flows classification of prior periods has not changed as a result of adoption.
In August 2016, the Financial Accounting Standards Board issued Statement of Cash Flows, Topic 230 (ASU No. 2016-15). This amendment provides guidance on the presentation and classification of specific cash flow items to improve consistency in practice. The standard provides guidance in a number of situations including, among others, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and debt prepayment or extinguishment costs. The new standard is effective retrospectively for the Company for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The Company elected to early adopt this standard in the first quarter of fiscal 2017, applying it retrospectively. The adoption of ASU 2016-15 had no impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. The guidance also includes additional disclosure requirements regarding revenue, cash flows and obligations related to contracts with customers. In July 2015, the Financial Accounting Standards Board approved a one year deferral of the effective date of ASU 2014-09. The standard will now become effective for interim and annual reporting periods beginning after December 15, 2017.
The Company will adopt the accounting guidance in the first quarter of fiscal 2018. The Company has completed its evaluation of the impact of ASU 2014-09, including related amendments and interpretive guidance, on the Company's consolidated financial statements, financial systems and controls. The Company has concluded that it will recognize revenue at the time merchandise is shipped, which is consistent with current practice. The Company has also concluded that it will continue to act as principal in certain vendor arrangements. The Company will make certain changes to its accounting policies, including the presentation of estimated merchandise returns as both an asset (equal to the inventory value expected to be returned) and a corresponding return liability, compared to the current practice of recording an estimated net return liability. In addition, the Company will elect the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component when its payment terms are less than one year, as well as the practical expedient to exclude from the measurement of the transaction price sales taxes collected from customers. The Company will apply the modified retrospective method of transition, which will not have a material cumulative adjustment to retained earnings.
In February 2016, the Financial Accounting Standards Board issued Leases, Topic 842 (ASU No 2016-02). ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on the Company's consolidated financial statements.
(3)
Property and Equipment
Property and equipment in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life (In Years)
|
|
February 3, 2018
|
|
January 28, 2017
|
Land and improvements
|
|
—
|
|
$
|
3,236,000
|
|
|
$
|
3,394,000
|
|
Buildings and improvements
|
|
5-40
|
|
39,087,000
|
|
|
38,358,000
|
|
Transmission and production equipment
|
|
5-10
|
|
6,918,000
|
|
|
7,308,000
|
|
Office and warehouse equipment
|
|
3-15
|
|
18,827,000
|
|
|
18,942,000
|
|
Computer hardware, software and telephone equipment
|
|
3-10
|
|
86,421,000
|
|
|
88,478,000
|
|
Leasehold improvements
|
|
3-5
|
|
2,637,000
|
|
|
2,681,000
|
|
|
|
|
|
157,126,000
|
|
|
159,161,000
|
|
Less — Accumulated depreciation
|
|
|
|
(105,078,000
|
)
|
|
(106,446,000
|
)
|
|
|
|
|
$
|
52,048,000
|
|
|
$
|
52,715,000
|
|
Depreciation expense in
fiscal 2017, fiscal 2016 and fiscal 2015
was
$10,141,000
,
$11,118,000
and
$10,266,000
.
(4)
Intangible Assets
Intangible assets in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
(In Years)
|
|
February 3, 2018
|
|
January 28, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Finite-lived intangible assets
|
|
5-15
|
|
$
|
1,786,000
|
|
|
$
|
(336,000
|
)
|
|
$
|
1,786,000
|
|
|
$
|
(171,000
|
)
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
FCC broadcast license
|
|
|
|
$
|
—
|
|
|
|
|
$
|
12,000,000
|
|
|
|
Finite-lived Intangible Assets
The finite-lived intangible assets are included in Other Assets in the accompanying balance sheets and consist of the Evine trademark and the Princeton Watches trade name and customer list (as further described below). Amortization expense related to the finite-lived intangible assets was
$165,000
,
$91,000
and
$62,000
for
fiscal 2017, fiscal 2016 and fiscal 2015
. Estimated amortization expense is
$165,000
for each fiscal year through fiscal 2020,
$157,000
for fiscal 2021 and
$96,000
for fiscal 2022.
On December 16, 2016, the Company completed the acquisition of Princeton Enterprises, LTD (dba Princeton Watches, "Princeton Watches"), an online retail enterprise engaged in the sale of watches, clocks and related accessories. The Company acquired substantially all of Princeton's assets and select liabilities. The assets acquired include the
Princeton Watches trade name
and
Princeton Watches customer list
valued at
$336,000
and
$347,000
and are being amortized over their estimated useful lives of
15
and
five
years. The acquisition of Princeton was intended to help expand on the Company's strong watch and clock offerings as well as to broaden the Company's online distribution channels. See
Note 11
- "
Business Acquisition
" for additional information.
FCC Broadcast License and Sale of Boston Television Station, WWDP
As of
January 28, 2017
, the Company had an intangible FCC broadcasting license with a carrying value of
$12,000,000
and an estimated fair value of
$13,400,000
. On August 28, 2017, the Company entered into two agreements with unrelated parties to sell its Boston television station, WWDP, including the Company's FCC broadcast license, for an aggregate of
$13,500,000
.
On August 28, 2017, the Company entered into a channel sharing and facilities agreement (the “Channel Sharing Agreement”) with NRJ Boston OpCo, LLC and NRJ TV Boston License Co., LLC (collectively, “NRJ”) to allow NRJ to operate its local Boston television station on one-third of the spectrum used in the operation of the Company's television broadcast station, WWDP(TV), Norwell, Massachusetts (the “Station”), in perpetuity. The total consideration payable to the Company under the Channel Sharing Agreement was
$3,500,000
, of which
$2,500,000
was received in October 2017 upon the grant of a required construction permit by the FCC and
$1,000,000
was received in December 2017 upon the closing of the sale of substantially all of the remaining television station assets.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On August 28, 2017, the Company also entered into an asset purchase agreement to sell substantially all of the assets primarily related to the Station to affiliates of WRNN-TV Associates Limited Partnership (“Buyers”). The purchase price for the Station's assets was
$10,000,000
in cash, subject to an escrow holdback amount of
$1,000,000
, which is payable to the Company when the Station is being carried by certain designated carriers at or following the closing of the transaction. The escrow holdback is payable back to the Buyers in monthly installments beginning approximately
14 months
after the closing if the station is not being carried by certain designated carriers. The asset purchase agreement includes customary representations, warranties, covenants and indemnification obligations of the parties. The sale of assets pursuant to the purchase agreement closed during the fourth quarter of fiscal 2017 and
$9,333,000
of the purchase price was received, which included
$333,000
of the escrow holdback amount. The Company used the proceeds received from the transaction to pay off the remaining amounts due under the Company's term loan with GACP Finance Co., LLC, with the remaining proceeds used for general working capital purposes.
The Company recorded a pre-tax operating gain on the television station sale of
$551,000
during the fourth quarter of fiscal 2017 upon the closing of the transaction. As of
February 3, 2018
,
$667,000
of the sales price remained in escrow pending the Station being carried by certain designated carriers. The Company has not recorded any additional gain relating to the remaining escrow amount and will not record the remaining gain until the contingency is resolved.
(5)
Accrued Liabilities
Accrued liabilities in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
Accrued cable access fees
|
|
$
|
22,120,000
|
|
|
$
|
19,480,000
|
|
Accrued salaries and related
|
|
2,105,000
|
|
|
4,406,000
|
|
Reserve for product returns
|
|
3,544,000
|
|
|
3,723,000
|
|
Other
|
|
7,877,000
|
|
|
10,249,000
|
|
|
|
$
|
35,646,000
|
|
|
$
|
37,858,000
|
|
(6)
Evine Private Label Consumer Credit Card Program
The Company has a private label consumer credit card program (the "Program"). The Program is made available to all qualified consumers to finance Evine purchases and provides benefits including instant purchase credits, free or reduced shipping promotions throughout the year and promotional low-interest financing on qualifying purchases. Use of the Evine credit card enhances customer loyalty, reduces total credit card expense and reduces the Company’s overall bad debt exposure since the credit card issuing bank bears the risk of loss on Evine credit card transactions except those in the Company's ValuePay installment payment program. In July 2017, the Company extended the Program through 2020 by entering into a Private Label Consumer Credit Card Program Agreement Amendment with Synchrony Financial, the issuing bank for the Program.
Synchrony Financial was previously indirectly majority-owned by the General Electric Company ("GE"), which is also the parent company of GE Equity. Prior to the sale of Evine common stock to ASF Radio on April 29, 2016, GE Equity had a beneficial ownership in Evine and had certain rights as further described in
Note 18
- "
Related Party Transactions
".
(7)
Fair Value Measurements
GAAP utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
As of
February 3, 2018
and
January 28, 2017
the Company had
$450,000
in Level 2 investments in the form of bank certificates of deposit. The Company's investments in certificates of deposits were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2 investments. As of
February 3, 2018
and
January 28, 2017
the Company also had long-term variable rate Credit Facilities, classified as Level 2, with carrying values of
$73,899,000
and
$85,388,000
. As of
February 3, 2018
and
January 28, 2017
,
$2,326,000
and
$3,242,000
was classified as current. The fair value of the variable rate Credit Facilities approximates and is based on its carrying value. The Company has
no
Level 3 investments that use significant unobservable inputs.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Non Financial Assets Measured at Fair Value - Nonrecurring Basis
As of
January 28, 2017
the Company had an intangible FCC broadcasting license asset with a carrying value of
$12,000,000
. The intangible FCC broadcasting license, which was included in the Boston television station sale, WWDP, was sold during the fourth quarter of fiscal 2017. See
Note 4
- "
Intangible Assets
" for additional information. Prior to such sale, the Company estimated the fair value of its FCC television broadcast license asset primarily by using income-based discounted cash flow models. In determining fair value, the Company considered, among other factors, the advice of an independent outside fair value consultant. The discounted cash flow models utilized a range of assumptions including revenues, operating profit margin, projected capital expenditures and an unobservable input discount rate of
10.0%
. The Company concluded that the inputs used in its intangible FCC broadcasting license asset valuation were Level 3 inputs.
The following table provides a reconciliation of the beginning and ending balances of non-financial assets measured at fair value on a nonrecurring basis that use significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
2018
|
|
January 28,
2017
|
Intangible FCC Broadcasting License Asset:
|
|
|
|
|
Beginning balance
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Losses included in earnings (asset impairment)
|
|
—
|
|
|
—
|
|
Net gain recognized in earnings upon sale
|
|
551,000
|
|
|
—
|
|
Sale
|
|
(12,551,000
|
)
|
|
—
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
12,000,000
|
|
(8)
Credit Agreements
The Company's long-term credit facilities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
PNC Credit Facility
|
|
|
|
|
PNC revolving loan due March 21, 2022, principal amount
|
|
$
|
59,900,000
|
|
|
$
|
59,900,000
|
|
|
|
|
|
|
PNC term loan due March 21, 2022, principal amount
|
|
14,148,000
|
|
|
10,637,000
|
|
Less unamortized debt issuance costs
|
|
(149,000
|
)
|
|
(181,000
|
)
|
PNC term loan due March 21, 2022, carrying amount
|
|
13,999,000
|
|
|
10,456,000
|
|
|
|
|
|
|
GACP Credit Agreement
|
|
|
|
|
GACP term loan due March 9, 2021, principal amount
|
|
—
|
|
|
16,292,000
|
|
Less unamortized debt issuance costs
|
|
—
|
|
|
(1,260,000
|
)
|
GACP term loan due March 9, 2021, carrying amount
|
|
—
|
|
|
15,032,000
|
|
|
|
|
|
|
Total long-term credit facilities
|
|
73,899,000
|
|
|
85,388,000
|
|
Less current portion of long-term credit facilities
|
|
(2,326,000
|
)
|
|
(3,242,000
|
)
|
Long-term credit facilities, excluding current portion
|
|
$
|
71,573,000
|
|
|
$
|
82,146,000
|
|
PNC Credit Facility
On February 9, 2012, the Company entered into a credit and security agreement (as amended through September 25, 2017, the "PNC Credit Facility") with PNC Bank, N.A. ("PNC"), a member of The PNC Financial Services Group, Inc., as lender and agent. The PNC Credit Facility, which includes CIBC Bank USA (formerly known as The Private Bank) as part of the facility, provides a revolving line of credit of
$90.0 million
and provides for a term loan on which the Company had originally drawn to fund improvements at the Company's distribution facility in Bowling Green, Kentucky and subsequently to pay down the Company's GACP Term Loan (as defined below). The PNC Credit Facility also provides an accordion feature that would allow the Company to expand the size of the revolving line of credit by another
$25.0 million
at the discretion of the lenders and upon certain conditions being met. On March 21, 2017, the Company entered into the Eighth Amendment to the PNC Credit Facility, which among other
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
things, increased the term loan by
$6,000,000
, extended the term of the PNC Credit Facility from
May 1, 2020
to
March 21, 2022
, and authorized the proceeds from the term loan to be used as part of a voluntary prepayment on its GACP Term Loan.
All borrowings under the PNC Credit Facility mature and are payable on
March 21, 2022
. Subject to certain conditions, the PNC Credit Facility also provides for the issuance of letters of credit in an aggregate amount up to
$6.0 million
which, upon issuance, would be deemed advances under the PNC Credit Facility. Maximum borrowings and available capacity under the revolving line of credit under the PNC Credit Facility are equal to the lesser of
$90.0 million
or a calculated borrowing base comprised of eligible accounts receivable and eligible inventory. The PNC Credit Facility is secured by a first security interest in substantially all of the Company’s personal property, as well as the Company’s real properties located in Eden Prairie, Minnesota and Bowling Green, Kentucky. Under certain circumstances, the borrowing base may be adjusted if there were to be a significant deterioration in value of the Company’s accounts receivable and inventory.
The revolving line of credit under the PNC Credit Facility bears interest at LIBOR plus a margin of between
3%
and
4.5%
based on the Company's trailing twelve-month reported EBITDA (as defined in the PNC Credit Facility) measured quarterly in fiscal 2016 and semi-annually thereafter as demonstrated in its financial statements. The term loan bears interest at either a Base Rate or LIBOR plus a margin consisting of between
4%
and
5%
on Base Rate term loans and
5%
to
6%
on LIBOR Rate term loans based on the Company’s leverage ratio as demonstrated in its audited financial statements.
As of
February 3, 2018
, the Company had borrowings of
$59.9 million
under its revolving credit facility. Remaining available capacity under the revolving credit facility as of
February 3, 2018
is approximately
$18.4 million
, and provides liquidity for working capital and general corporate purposes. The PNC Credit Facility also provides for a term loan on which the Company has drawn to fund an expansion and improvements at the Company's distribution facility in Bowling Green, Kentucky and to partially pay down the Company's GACP Term Loan. As of
February 3, 2018
, there was approximately
$14.1 million
outstanding under the PNC Credit Facility term loan of which
$2.3 million
was classified as current in the accompanying balance sheet.
Principal borrowings under the term loan are to be payable in monthly installments over an
84
-month amortization period commencing on April 1, 2017 and are also subject to mandatory prepayment in certain circumstances, including, but not limited to, upon receipt of certain proceeds from dispositions of collateral. Borrowings under the term loan are also subject to mandatory prepayment in an amount equal to fifty percent (
50%
) of excess cash flow for such fiscal year, with any such payment not to exceed
$2.0 million
in any such fiscal year. The PNC Credit Facility is also subject to other mandatory prepayment in certain circumstances. In addition, if the total PNC Credit Facility is terminated prior to maturity, the Company would be required to pay an early termination fee of
3.0%
if terminated on or before March 21, 2018,
1.0%
if terminated on or before March 21, 2019,
0.5%
if terminated on or before March 21, 2020; and
no
fee if terminated after March 21, 2020. As of
February 3, 2018
, the imputed effective interest rate on the PNC term loan was
8.0%
.
Interest expense recorded under the PNC Credit Facility was
$4,128,000
,
$3,819,000
and $
2,702,000
for
fiscal 2017
,
fiscal 2016
and
fiscal 2015
.
The PNC Credit Facility contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus unused line availability of
$10.0 million
at all times and limiting annual capital expenditures. As the Company's unused line availability was greater than
$10.0 million
at
February 3, 2018
, no additional cash was required to be restricted. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of
1.1 to 1.0
, become applicable only if unrestricted cash plus unused line availability falls below
$10.8 million
. As of
February 3, 2018
, the Company's unrestricted cash plus unused line availability was
$42.4 million
and the Company was in compliance with applicable financial covenants of the PNC Credit Facility and expects to be in compliance with applicable financial covenants over the next twelve months. In addition, the PNC Credit Facility places restrictions on the Company’s ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
Costs incurred to obtain amendments to the PNC Credit Facility totaling
$1,406,000
and unamortized costs incurred to obtain the original PNC Credit Facility totaling
$466,000
have been deferred and are being expensed as additional interest over the
five
-year term of the PNC Credit Facility. Deferred financing costs, net of amortization, related to the revolving line of credit are included within other assets within the Company's balance sheet.
Great American Capital Partners Credit Agreement
On March 10, 2016, the Company entered into a term loan credit and security agreement (as amended through September 25, 2017, the "GACP Credit Agreement") with GACP Finance Co., LLC ("GACP") for a term loan of
$17.0 million
which was fully paid off during fiscal 2017 (as described below). Proceeds from the GACP Term Loan were used to provide for working capital and general corporate purposes and to help strengthen the Company's total liquidity position. The term loan under the GACP Credit Agreement (the "GACP Term Loan") was secured on a first lien priority basis by the proceeds of any sale of the
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company's Boston television station FCC license and on a second lien priority basis by the Company's accounts receivable, equipment, inventory and certain real estate as well as other assets as described in the GACP Credit Agreement. The Company had also pledged the stock of certain subsidiaries to secure such obligations on a second lien priority basis.
On March 21, 2017, the Company made a voluntary principal prepayment of
$9,500,000
on its GACP Term Loan. The principal payment was funded by a combination of cash on hand and
$6,000,000
from the Company’s lower interest PNC Credit Facility term loan. The Company recorded a loss on extinguishment of debt totaling
$913,000
in connection with the principal prepayment, which includes early termination and lender fees of
$199,000
and unamortized debt issuance costs of
$714,000
, which represents the proportionate amount of unamortized debt issuance costs attributable to the extinguished debt.
On October 18, 2017, the Company made a voluntary principal prepayment of
$2,500,000
on its GACP Term Loan. The principal payment was funded by proceeds received by the Company under the Channel Sharing Agreement, as discussed in
Note 4
- "
Intangible Assets
". The Company recorded a loss on extinguishment of debt totaling
$221,000
in connection with the principal prepayment, which includes early termination and lender fees of
$50,000
and unamortized debt issuance costs of
$171,000
, which represents the proportionate amount of unamortized debt issuance costs attributable to the extinguished debt.
On
December 6, 2017
, the Company made a voluntary principal prepayment of
$3,513,000
to fully retire its GACP Term Loan. The principal payment was funded by proceeds received upon the sale of the Boston television station, WWDP, as discussed in
Note 4
- "
Intangible Assets
". The Company recorded a loss on extinguishment of debt totaling
$323,000
in connection with the principal prepayment, which includes early termination and lender fees of
$85,000
and unamortized debt issuance costs of
$238,000
, which represents the remaining amount of unamortized debt issuance costs attributable to the GACP Term Loan.
The GACP Term Loan bore interest at either (i) a fixed rate based on the greater of LIBOR for interest periods of
one
,
two
or
three
months or
1%
plus a margin of
11.0%
, or (ii) a daily floating Alternate Base Rate plus a margin of
10.0%
. Principal borrowings under the GACP Term Loan were payable in consecutive monthly installments of
$70,833
each, commencing on April 1, 2016, with a final installment due at the end of the
five
- year term equal to the aggregate principal amount of all loans outstanding on such date. The GACP Term Loan could be prepaid voluntarily at any time and, if terminated prior to maturity, the Company would be required to pay an early termination fee of
2.0%
if terminated on or before March 10, 2018;
1.0%
if terminated on or before March 10, 2019; and
no
fee if terminated after March 10, 2019. Interest expense recorded under the GACP Credit Agreement was
$940,000
and
$2,099,000
for
fiscal 2017
and
fiscal 2016
.
Costs incurred to obtain the GACP Credit Agreement totaled
$1,565,000
, which were deferred and expensed as additional interest over the original
five
-year term of the GACP Credit Agreement, less costs written-off for the March 21, 2017 and October 18, 2017 partial debt extinguishments totaling
$885,000
. The remaining
$238,000
of deferred costs were written-off as a loss on debt extinguishment in December 2017, when the remaining principal was paid in full.
The aggregate maturities of the Company's long-term credit facilities as of
February 3, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PNC Credit Facility
|
|
|
Fiscal year
|
|
Term loan
|
|
Revolving loan
|
|
Total
|
2018
|
|
$
|
2,326,000
|
|
|
$
|
—
|
|
|
$
|
2,326,000
|
|
2019
|
|
2,132,000
|
|
|
—
|
|
|
2,132,000
|
|
2020
|
|
2,326,000
|
|
|
—
|
|
|
2,326,000
|
|
2021
|
|
2,326,000
|
|
|
—
|
|
|
2,326,000
|
|
2022
|
|
5,038,000
|
|
|
59,900,000
|
|
|
64,938,000
|
|
|
|
$
|
14,148,000
|
|
|
$
|
59,900,000
|
|
|
$
|
74,048,000
|
|
(9)
Shareholders' Equity
Common Stock
The Company currently has authorized
99,600,000
shares of undesignated capital stock, of which
65,290,458
shares were issued and outstanding as common stock as of
February 3, 2018
. The board of directors may establish new classes and series of capital stock by resolution without shareholder approval; however, in certain circumstances the Company is required to obtain approval under our PNC Credit Facility.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Preferred Stock
The Company authorized
400,000
Series A Junior Participating Cumulative Preferred Stock,
$0.01
par value, during fiscal 2015 as part of the Shareholder Rights Plan. As of
February 3, 2018
, there were
zero
shares issued and outstanding. See
Note 12
- "
Income Taxes
" for additional information.
Dividends
The Company has never declared or paid any dividends with respect to its capital stock. The Company is restricted from paying dividends on its stock by its PNC Credit Facility.
Registered Direct Offering
On May 23, 2017, the Company entered into Common Stock Purchase Agreements with certain accredited investors to which the Company sold, in the aggregate,
4,008,273
shares of common stock in a registered direct offering pursuant to a shelf registration statement on Form S-3 (File No. 333-203209), filed with the SEC on May 13, 2015. The shares were sold at a price of
$1.12
per share, except for shares purchased by investors who are directors or executive officers of the Company, which were sold at a price of
$1.15
per share. The closing of this sale occurred on May 30, 2017 and the Company received gross proceeds of approximately
$4.5 million
and incurred approximately
$323,000
of issuance costs. The Company has used the proceeds for general working capital purposes.
Private Placement Securities Purchase Agreements
On September 14, 2016, the Company entered into private placement securities purchase agreements ("Purchase Agreements") with certain accredited investors to which the Company: (a) sold, in the aggregate,
5,952,381
shares of the Company's common stock at a price of
$1.68
per share; (b) issued
five
-year warrants ("Warrants") to purchase
2,976,190
shares of the Company's common stock at an exercise price of
$2.90
per share, and (c) issued an option by which certain investors may purchase additional shares of Company's common stock and additional warrants to purchase shares of common stock ("Options").
The Company received gross proceeds of
$10.0 million
and incurred approximately
$852,000
of issuance costs. The Warrants will expire on
September 19, 2021
and were not exercisable until
March 19, 2017
. Except as noted below, the term of each option was
six months
and expired on March 19, 2017. The option exercise price was equal to the
five
-day volume weighted average price per share of the Company's common stock as of the day immediately prior to exercise. Upon exercise of the Options, two-thirds of the option securities would be issued in the form of common stock, and one-third would be issued in the form of warrants ("Option Warrants"). These Option Warrants have an exercise price at a
50%
premium to the Company's closing stock price one-day prior to the option exercise and will expire
five years
after issuance. If all of the Warrants, Options and Option Warrants issued by the Company are all exercised, the total shares of common stock issued in connection with this offering cannot be more than approximately
19.99%
of the Company's total issued and outstanding shares following such exercises.
The Company allocated the
$10 million
proceeds of the stock offering to each of the issued freestanding financial instruments based on their fair value at the time of issuance. The Warrants are indexed to the Company's publicly traded stock and were classified as equity. As a result, the portion of the proceeds allocated to the fair value of the Warrants was recorded as an increase to additional paid-in capital. The fair value of the Options was determined to be nominal. The par value of the shares issued was recorded within common stock, with the remainder of the proceeds, less offering costs, recorded as additional paid in capital in the Company's balance sheet. The Company has used the proceeds for general working capital purposes.
As part of the Purchase Agreements, the Company agreed to register the shares of common stock sold in the private placement and the shares of common stock issuable upon exercise of the Warrants, Options and certain of the Option Warrants. The Company has filed registration statements on Form S-3 to register the common stock sold in the private placement and issuable upon exercise of the Warrants, Options and the outstanding Option Warrants. The Company agreed to keep the shelf registration statement effective until the earlier of the second anniversary of the closing or such time as all registrable securities may be sold pursuant to Rule 144 under the Securities Act of 1933, without the need for current public information or other restriction.
During the fourth quarter of fiscal 2016,
three
investors exercised their Options. These exercises resulted in the Company's issuance, in the aggregate, of (a)
1,646,350
shares of the Company's common stock at a price ranging from
$1.20
-
$1.94
per share, resulting in aggregate proceeds of
$2.5 million
; and (b)
five
-year Option Warrants to purchase an additional
823,175
shares of the Company's common stock at an exercise price ranging from
$1.76
-
$3.00
per share and expire between
November 10, 2021
and
January 23, 2022
. The Company incurred, in the aggregate, approximately
$49,000
of issuance costs related to the Options exercised during the fourth quarter of fiscal 2016.
On March 16, 2017, the Company entered into the First Amendment and Restated Option (the "Amended Option") with TH Media Partners, LLC, one of the September 14, 2016 Securities Purchase Agreement investors. Under the terms of the Amended Option, the investor has the right to exercise its Option in two tranches. The first tranche reflects rights to purchase
150,000
shares
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of the Company’s common stock, which were issuable in the form of
100,000
common shares and a warrant to purchase an additional
50,000
common shares and was exercised on
March 16, 2017
. The exercise resulted in the issuance of (a)
100,000
shares of the Company's common stock at a price of
$1.33
per share, resulting in aggregate proceeds of
$133,000
; and (b) a
five
-year Option Warrant to purchase an additional
50,000
shares of the Company's common stock at an exercise price of
$1.92
per share and expiring on
March 16, 2022
. The second tranche reflected the right to purchase up to
1,073,945
shares of the Company’s common stock issuable in the form of
715,963
common shares and an Option Warrant to purchase an additional
357,982
common shares. The second tranche expired unexercised on
September 19, 2017
. The exercise price of the Option and Option Warrants for the first and second tranches were not modified by the Amended Option. The Company incurred, in the aggregate, approximately
$23,000
of issuance costs related to the Options exercised during the first quarter of fiscal 2017.
Stock Purchase from NBCU
On January 31, 2017, the Company purchased from NBCUniversal Media, LLC (“NBCU”)
4,400,000
shares of the Company's common stock for approximately
$5 million
or
$1.12
per share pursuant to the Repurchase Letter Agreement. Immediately following the Company's share purchase, the direct equity ownership of NBCU in the Company consisted of
2,741,849
shares of common stock, or
4.5%
of the Company's outstanding common stock. Upon the settlement, the NBCU Shareholder Agreement was terminated pursuant to the Repurchase Letter Agreement. As of February 3, 2018, the Company believes that NBCU sold its remaining shares of the Company's common stock. See
Note 18
- "
Related Party Transactions
" for additional information.
Stock-Based Compensation - Stock Options
Compensation is recognized for all stock-based compensation arrangements by the Company. Stock-based compensation expense for
fiscal 2017, fiscal 2016 and fiscal 2015
related to stock option awards was
$915,000
,
$522,000
and
$611,000
. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future.
As of
February 3, 2018
, the Company had
one
omnibus stock plan for which stock awards can be currently granted: the 2011 Omnibus Incentive Plan that provides for the issuance of up to
9,500,000
shares of the Company's stock. The 2004 Omnibus Stock Plan expired on June 22, 2014. No further awards may be made under the 2004 Omnibus Plan, but any award granted under the 2004 Omnibus Plan and outstanding on June 22, 2014 will remain outstanding in accordance with its terms. The 2001 Omnibus Stock Plan expired on June 21, 2011 and as of
February 3, 2018
, there were no stock awards outstanding under the 2001 Omnibus Plan. The 2011 plan is administered by the human resources and compensation committee of the board of directors and provides for awards for employees, directors and consultants. All employees and directors of the Company and its affiliates are eligible to receive awards under the plan. The types of awards that may be granted under this plan include restricted and unrestricted stock, restricted stock units, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the human resources and compensation committee may determine but not less than
100%
of the fair market value of the underlying stock as of the date of grant. No incentive stock option may be granted more than
10
years after the effective date of the respective plan's inception or be exercisable more than
10 years
after the date of grant. Options granted to outside directors are nonstatutory stock options with an exercise price equal to
100%
of the fair market value of the underlying stock as of the date of grant. With the exception of market-based options, options granted generally vest over
three
years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and have contractual terms of
10 years
from the date of grant.
The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company uses the simplified method in estimating its expected option term because it believes that historical exercise data cannot be accurately relied upon at this time to provide a reasonable basis for estimating an expected term due to the extreme volatility of its stock price and the resulting unpredictability of its stock option exercises. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Expected volatility
|
81%
|
|
81
|
%
|
-
|
84%
|
|
75
|
%
|
-
|
82%
|
Expected term (in years)
|
6 years
|
|
6 years
|
|
6 years
|
Risk-free interest rate
|
2.0
|
%
|
-
|
2.2%
|
|
1.4
|
%
|
-
|
2.2%
|
|
1.7
|
%
|
-
|
1.9%
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the status of the Company’s stock option activity as of
February 3, 2018
and changes during the year then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
|
2004
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
|
2001
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
Balance outstanding, January 28, 2017
|
|
2,543,000
|
|
|
$
|
2.19
|
|
|
301,000
|
|
|
$
|
5.41
|
|
|
77,000
|
|
|
$
|
10.73
|
|
Granted
|
|
1,627,000
|
|
|
$
|
1.31
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
(72,000
|
)
|
|
$
|
1.08
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited or canceled
|
|
(714,000
|
)
|
|
$
|
2.90
|
|
|
(189,000
|
)
|
|
$
|
5.73
|
|
|
(77,000
|
)
|
|
$
|
10.73
|
|
Balance outstanding, February 3, 2018
|
|
3,384,000
|
|
|
$
|
1.64
|
|
|
112,000
|
|
|
$
|
4.86
|
|
|
—
|
|
|
$
|
—
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
927,000
|
|
|
$
|
2.35
|
|
|
112,000
|
|
|
$
|
4.86
|
|
|
—
|
|
|
$
|
—
|
|
January 28, 2017
|
|
648,000
|
|
|
$
|
3.53
|
|
|
292,000
|
|
|
$
|
5.43
|
|
|
77,000
|
|
|
$
|
10.73
|
|
January 30, 2016
|
|
995,000
|
|
|
$
|
3.97
|
|
|
652,000
|
|
|
$
|
6.22
|
|
|
399,000
|
|
|
$
|
7.78
|
|
The following table summarizes information regarding stock options outstanding at
February 3, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Vested or Expected to Vest
|
Option Type
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
2011 Incentive:
|
|
3,384,000
|
|
|
$
|
1.64
|
|
|
8.4
|
|
$
|
58,000
|
|
|
3,078,000
|
|
|
$
|
1.67
|
|
|
8.2
|
|
$
|
55,000
|
|
2004 Incentive:
|
|
112,000
|
|
|
$
|
4.86
|
|
|
5.8
|
|
$
|
—
|
|
|
112,000
|
|
|
$
|
4.86
|
|
|
5.8
|
|
$
|
—
|
|
2001 Incentive:
|
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
The weighted average grant-date fair value of options granted in
fiscal 2017, fiscal 2016 and fiscal 2015
was
$0.91
,
$0.96
and
$3.95
. The total intrinsic value of options exercised during
fiscal 2017, fiscal 2016 and fiscal 2015
was
$15,000
,
$0
and
$1,441,000
. As of
February 3, 2018
, total unrecognized compensation cost related to stock options was
$1,454,000
and is expected to be recognized over a weighted average period of approximately
1.9
years.
Stock Option Tax Benefit
The exercise of certain stock options granted under the Company’s stock option plans give rise to compensation, which is included in the taxable income of the applicable employees and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of the Company’s common stock subsequent to the date of grant of the applicable exercised stock options and these increases are not recognized as an expense for financial accounting purposes, as the options were originally granted at the fair market value of the Company’s common stock on the date of grant. The related tax benefits will be recorded if and when realized, and totaled
$6,000
,
$0
and
$526,000
in
fiscal 2017, fiscal 2016 and fiscal 2015
. The Company has not recorded any income tax benefit from the exercise of stock options in these fiscal years, due to the uncertainty of realizing income tax benefits in the future.
Stock-Based Compensation - Restricted Stock
Compensation expense recorded in
fiscal 2017, fiscal 2016 and fiscal 2015
relating to restricted stock grants was
$1,973,000
,
$1,424,000
and
$1,664,000
. As of
February 3, 2018
, there was
$1,700,000
of total unrecognized compensation cost related to non-vested restricted stock grants. That cost is expected to be recognized over a weighted average period of
1.5
years. The total fair value of restricted stock vested during
fiscal 2017, fiscal 2016 and fiscal 2015
was
$409,000
,
$761,000
and
$378,000
.
During the fourth quarters of fiscal 2017, fiscal 2016 and fiscal 2015, the Company granted a total of
20,000
,
10,000
and
37,000
shares of time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock vests in
three
equal annual installments beginning one year from the grant date. The aggregate market value of the restricted stock at the date of grant was
$28,000
,
$21,000
and
$86,360
for the fourth quarters of fiscal 2017, fiscal 2016 and fiscal 2015. The grants are being amortized as compensation expense over the
three
-year vesting period. During the fourth quarter
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of fiscal 2016, the Company also granted a total of
20,045
shares of restricted stock units to a new board member as part of the Company's annual director compensation program. The restricted stock vested on June 13, 2017, the day immediately preceding the Company's 2017 annual meeting of shareholders. The aggregate market value of the restricted stock at the date of grant was
$40,000
and was amortized as director compensation expense over the vesting period.
During the third quarters of fiscal 2017, fiscal 2016 and fiscal 2015, the Company granted a total of
3,000
,
34,563
and
32,000
shares of time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock vests in
three
equal annual installments beginning one year from the grant date. The aggregate market value of the restricted stock at the date of grant was
$3,000
,
$57,000
and
$80,640
for the third quarters of fiscal 2017, fiscal 2016 and fiscal 2015. The awards are being amortized as compensation expense over the
three
-year vesting period. During the third quarter of fiscal 2016, the Company also granted a total of
28,119
shares of restricted stock units to a board member as part of the Company's annual director compensation program. The restricted stock vested on June 13, 2017, the day immediately preceding the Company's 2017 annual meeting of shareholders. The aggregate market value of the restricted stock at the date of grant was
$51,000
and was amortized as director compensation expense over the vesting period.
During the third quarter of fiscal 2016, Robert Rosenblatt was appointed as permanent Chief Executive Officer and entered into an executive employment agreement. In conjunction with the employment agreement, the Company granted to Mr. Rosenblatt
231,799
shares of market-based restricted stock performance units as part of the Company's long-term incentive program. The number of restricted stock units earned is based on the Company's total shareholder return ("TSR") relative to a group of industry peers over a three-year performance measurement period. The total grant date fair value was estimated to be
$422,000
, or
$1.82
per share and is being amortized over the
three
-year performance period. Grant date fair values were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
0.76%
, a weighted average expected life of
three
years and an implied volatility of
77%
. The percent of the target market-based performance vested restricted stock unit award that will be earned based on the Company's TSR relative to the peer group is as follows:
|
|
|
|
Percentile Rank
|
|
Percentage of
Units Vested
|
< 33%
|
|
0%
|
33%
|
|
50%
|
50%
|
|
100%
|
100%
|
|
150%
|
On August 18, 2016 the Company granted an additional
625,000
shares of restricted stock in conjunction with Mr. Rosenblatt's employment agreement. The restricted stock vests in three tranches. Tranche 1 (one-third of the shares subject to the award) vested on the date of grant. Tranche 2 (one-third) will vest on the date the Company's average closing stock price for
20
consecutive trading days equals or exceeds
$4.00
per share and the executive has been continuously employed at least
one
year. Tranche 3 (one-third) will vest on the date the Company's average closing stock price for
20
consecutive trading days equals or exceeds
$6.00
per share and the executive has been continuously employed at least
two
years. The vesting of the second and third tranches can occur any time on or before the
ten
th anniversary of the grant date. The total grant date fair value was estimated to be
$958,000
and is being amortized over the derived service periods for each tranche.
Grant date fair values and derived service periods for each tranche were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
1.5%
, a weighted average expected life of
1.2 years
and an implied volatility of
86%
and were as follows for each tranche:
|
|
|
|
|
|
|
|
Fair Value (Per Share)
|
|
Derived Service Period
|
Tranche 1 (immediate)
|
|
$1.60
|
|
0 Years
|
Tranche 2 ($4.00/share)
|
|
$1.52
|
|
1.46 Years
|
Tranche 3 ($6.00/share)
|
|
$1.48
|
|
2.22 Years
|
During the second quarters of fiscal 2017, fiscal 2016 and fiscal 2015, the Company granted a total of
472,720
,
167,142
and
182,334
shares of restricted stock units to non-employee directors as part of the Company's annual director compensation program. Each restricted stock grant vests or vested on the day immediately preceding the next annual meeting of shareholders following the date of grant. The aggregate market value of the restricted stock at the date of grant was
$520,000
,
$292,000
and
$520,000
for the second quarters of fiscal 2017, fiscal 2016 and fiscal 2015. The grants are amortized as director compensation expense over the
twelve
-month vesting period. During the second quarters of fiscal 2017, fiscal 2016 and fiscal 2015, the Company also granted a total of
318,360
,
60,916
and
26,810
shares of time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock vests in
three
equal annual installments beginning one year from the grant date. The aggregate market value of the restricted stock at the date of grant was
$395,000
,
$78,000
and
$158,000
for the
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
second quarters of fiscal 2017, fiscal 2016 and fiscal 2015. The grants are being amortized as compensation expense over the
three
-year vesting period.
During the first quarters of fiscal 2017, fiscal 2016 and fiscal 2015, the Company granted a total of
317,219
,
188,991
and
67,786
shares of time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock vests in
three
equal annual installments beginning one year from the grant date. The aggregate market value of the restricted stock at the date of grant was
$422,000
,
$187,000
and
$417,593
for the first quarters of
fiscal 2017
,
fiscal 2016
and fiscal 2015. The grants are being amortized as compensation expense over the
three
-year vesting period. During the first quarter of fiscal 2017, the Company also granted a total of
327,738
shares of time-based restricted stock units to employees as part of the Company's annual merit process. The restricted stock vests
one
year after the date of the grant on April 24, 2018. The aggregate market value of the restricted stock at the date of grant was
$446,000
and is being amortized as compensation expense over the
one
-year vesting period.
During the first quarter of fiscal 2017, the Company also granted a total of
7,096
shares of restricted stock units to a newly appointed board member as part of the Company's annual director compensation program. The restricted stock vested on June 13, 2017, the day immediately preceding the Company's 2017 annual meeting of shareholders. The aggregate market value of the restricted stock at the date of grant was
$9,000
and was amortized as director compensation expense over the vesting period.
During the first quarters of fiscal 2017, fiscal 2016 and fiscal 2015, the Company granted a total of
561,981
,
179,156
and
106,963
shares of market-based restricted stock performance units to certain executives as part of the Company's long-term incentive program. The number of restricted stock units earned is based on the Company's total shareholder return ("TSR") relative to a group of industry peers over a
three
-year performance measurement period. Grant date fair values were determined using a Monte Carlo valuation model based on assumptions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Total grant date fair value
|
$860,000
|
|
$224,000
|
|
$777,000
|
Total grant date fair value per share
|
$1.53
|
|
$0.98
|
-
|
$1.72
|
|
$7.26
|
Expected volatility
|
75%
|
|
71
|
%
|
-
|
73%
|
|
54
|
%
|
-
|
55%
|
Weighted average expected life (in years)
|
3 years
|
|
3 years
|
|
3 years
|
Risk-free interest rate
|
1.5%
|
|
0.9
|
%
|
-
|
1.0%
|
|
0.9%
|
The percent of the target market-based performance vested restricted stock unit award that will be earned based on the Company's TSR relative to the peer group is as follows:
|
|
|
|
Percentile Rank
|
|
Percentage of
Units Vested
|
< 33%
|
|
0%
|
33%
|
|
50%
|
50%
|
|
100%
|
100%
|
|
150%
|
A summary of the status of the Company’s non-vested restricted stock activity as of
February 3, 2018
and changes during the twelve-month period then ended is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested outstanding, January 28, 2017
|
|
1,620,000
|
|
|
$2.00
|
Granted
|
|
2,028,000
|
|
|
$1.32
|
Vested
|
|
(352,000
|
)
|
|
$1.95
|
Forfeited
|
|
(467,000
|
)
|
|
$2.72
|
Non-vested outstanding, February 3, 2018
|
|
2,829,000
|
|
|
$1.40
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10)
Business Segments and Sales by Product Group
The Company has
one
reporting segment, which encompasses its interactive digital commerce retailing. The Company markets, sells and distributes its products to consumers primarily through its video commerce television, online website, evine.com and mobile platforms. The Company's television shopping, online and mobile platforms have similar economic characteristics with respect to products, product sourcing, vendors, marketing and promotions, gross margins, customers, and methods of distribution. In addition, the Company believes that its television shopping program is a key driver of traffic to both the evine.com website and mobile applications whereby many of the online sales originate from customers viewing the Company's television program and then placing their orders online or through mobile devices. All of the Company's sales are made to customers residing in the United States. The chief operating decision maker is the Chief Executive Officer of the Company.
Information on net sales by significant product groups are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
February 3,
2018
|
|
January 28,
2017
|
|
January 30,
2016
|
Jewelry & Watches
|
|
|
$
|
230,376
|
|
|
$
|
245,202
|
|
|
$
|
248,951
|
|
Home & Consumer Electronics
|
|
|
155,619
|
|
|
151,313
|
|
|
193,931
|
|
Beauty
|
|
|
92,979
|
|
|
94,451
|
|
|
87,184
|
|
Fashion & Accessories
|
|
|
108,409
|
|
|
109,615
|
|
|
105,616
|
|
All other (primarily shipping & handling revenue)
|
|
|
60,837
|
|
|
65,632
|
|
|
57,630
|
|
Total
|
|
|
$
|
648,220
|
|
|
$
|
666,213
|
|
|
$
|
693,312
|
|
(11)
Business Acquisition
On December 16, 2016, Evine entered into an asset purchase agreement and acquired substantially all the assets and select liabilities of Princeton Enterprises, LTD (dba Princeton Watches, "Princeton"), an online retail enterprise engaged in the sale of watches, clocks and related accessories. The acquisition of Princeton will help expand on the Company's strong watch and clock offerings as well as broaden the Company's online distribution channels.
The acquisition has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the identifiable assets and liabilities assumed pursuant to the asset purchase agreement based on fair values at the acquisition date. The operating results of Princeton have been included in the consolidated financial statements of the Company since December 16, 2016, the date of acquisition. The supplementary proforma information, assuming this acquisition occurred as of the beginning of the prior period, and the operations of Princeton for the period from the December 16, 2016 acquisition date through the end of fiscal 2016 were immaterial.
The terms of the asset purchase agreement included an upfront cash payment of
$508,000
, a working capital holdback of
$67,000
together with earn-out payments. The earn-out payments are scheduled to be paid in
two
annual installments based on Princeton's EBITDA for each of two years after the closing date.
The following table summarizes the fair value of consideration transferred as of the acquisition date:
|
|
|
|
|
|
Cash consideration
|
|
$
|
575,000
|
|
Fair value of contingent consideration
|
|
600,000
|
|
|
|
$
|
1,175,000
|
|
The following table summarizes our allocation of the Princeton purchase consideration:
|
|
|
|
|
|
Inventories
|
|
$
|
1,171,000
|
|
Identifiable intangible assets acquired:
|
|
|
|
Existing customer list
|
|
347,000
|
|
Trade Names
|
|
336,000
|
|
Accounts payable
|
|
(796,000
|
)
|
All other net tangible assets and liabilities
|
|
117,000
|
|
|
|
$
|
1,175,000
|
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate rate of return.
The Company incurred
$22,000
of acquisition-related costs and are included in general and administrative expense in the accompanying fiscal 2016 consolidated statement of operations.
(12)
Income Taxes
The Company records deferred taxes for differences between the financial reporting and income tax bases of assets and liabilities, computed in accordance with tax laws in effect at that time. The deferred taxes related to such differences as of
February 3, 2018
and
January 28, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
Accruals and reserves not currently deductible for tax purposes
|
|
$
|
4,220
|
|
|
$
|
6,632
|
|
Inventory capitalization
|
|
1,354
|
|
|
2,207
|
|
Differences in depreciation lives and methods
|
|
(475
|
)
|
|
1,151
|
|
Differences in basis of intangible assets
|
|
23
|
|
|
(3,522
|
)
|
Differences in investments and other items
|
|
629
|
|
|
447
|
|
Net operating loss carryforwards
|
|
80,880
|
|
|
125,279
|
|
Valuation allowance
|
|
(86,631
|
)
|
|
(135,716
|
)
|
Net deferred tax liability
|
|
$
|
—
|
|
|
$
|
(3,522
|
)
|
The income tax benefit (provision) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
January 30, 2016
|
Current
|
|
$
|
(60
|
)
|
|
$
|
(13
|
)
|
|
$
|
(46
|
)
|
Deferred
|
|
3,505
|
|
|
(788
|
)
|
|
(788
|
)
|
|
|
$
|
3,445
|
|
|
$
|
(801
|
)
|
|
$
|
(834
|
)
|
A reconciliation of the statutory tax rates to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
January 30, 2016
|
Taxes at federal statutory rates
|
|
33.8
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
40.4
|
|
|
11.9
|
|
|
(0.6
|
)
|
Reestablishment of state net operating losses
|
|
—
|
|
|
—
|
|
|
6.0
|
|
Provision to return true-up
|
|
(41.6
|
)
|
|
18.1
|
|
|
—
|
|
Non-cash stock option vesting expense
|
|
(12.2
|
)
|
|
(2.3
|
)
|
|
(1.9
|
)
|
FCC license deferred tax liability impact on valuation allowance
|
|
100.4
|
|
|
(9.4
|
)
|
|
(6.5
|
)
|
Impact of Tax Act on deferred tax valuation
|
|
(1,382.3
|
)
|
|
—
|
|
|
—
|
|
Valuation allowance and NOL carryforward benefits
|
|
1,365.3
|
|
|
(60.9
|
)
|
|
(44.2
|
)
|
Other
|
|
0.5
|
|
|
(2.5
|
)
|
|
4.9
|
|
Effective tax rate
|
|
104.3
|
%
|
|
(10.1
|
)%
|
|
(7.3
|
)%
|
Based on the Company’s recent history of losses, the Company has recorded a full valuation allowance for its net deferred tax assets as of
February 3, 2018
and
January 28, 2017
in accordance with GAAP, which places primary importance on the Company’s most recent operating results when assessing the need for a valuation allowance. The ultimate realization of these deferred tax assets depends on the ability of the Company to generate sufficient taxable income in the future, as well as the timing of such income. The Company intends to maintain a full valuation allowance for its net deferred tax assets until sufficient positive
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
evidence exists to support reversal of the allowance. As of
February 3, 2018
, the Company has federal net operating loss carryforwards (NOLs) of approximately
$321 million
and state NOLs of approximately
$260 million
which are available to offset future taxable income. The Company's federal NOLs expire in varying amounts each year from
2023
through
2037
in accordance with applicable federal tax regulations and the timing of when the NOLs were incurred.
In the first quarter of fiscal 2011, the Company had a change in ownership (as defined in Section 382 of the Internal Revenue Code) as a result of the issuance of common stock coupled with the redemption of all the Series B preferred stock held by GE Equity. Sections 382 and 383 limit the annual utilization of certain tax attributes, including NOL carryforwards, incurred prior to a change in ownership. Currently, the limitations imposed by Sections 382 and 383 are not expected to impair the Company's ability to fully realize its NOLs; however, the annual usage of NOLs incurred prior to the change in ownership is limited. In addition, if the Company were to experience another ownership change, as defined by Sections 382 and 383, its ability to utilize its NOLs could be further substantially limited and depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant amount of its accumulated NOLs.
For the year ended
February 3, 2018
, the income tax benefit included a non-cash tax charge of approximately
$643,000
relating to changes in the Company's long-term deferred tax liability related to the tax amortization of the Company's indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to the Company's income tax valuation allowance. The income tax benefit also included a net, non-cash benefit of approximately
$4,147,000
generated by the reversal of the Company’s long-term deferred tax liability relating to the Company's FCC license asset. This deferred tax reversal was the result of the payments received during fiscal 2017 in connection with the sale of the Company's television broadcast station, WWDP(TV), discussed further in
Note 4
- "
Intangible Assets
". The Company recognized a tax gain in conjunction with this transaction which will be largely offset with the Company’s available NOLs.
For the years ended
January 28, 2017
and
January 30, 2016
, the income tax provision included a non-cash tax charge of approximately
$788,000
, for each fiscal year, relating to changes in the Company's long-term deferred tax liability related to the tax amortization of the Company's indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to the Company's income tax valuation allowance.
As of
February 3, 2018
and
January 28, 2017
, there were
no
unrecognized tax benefits for uncertain tax positions. Accordingly, a tabular reconciliation from beginning to ending periods is not provided. Further, to date, there have been
no
interest or penalties charged or accrued in relation to unrecognized tax benefits. The Company will classify any future interest and penalties as a component of income tax expense if incurred. The Company does not anticipate that the amount of unrecognized tax benefits will change significantly in the next twelve months.
The Company is subject to U.S. federal income taxation and the taxing authorities of various states. The Company’s tax years for 2014, 2015, and 2016 are currently subject to examination by taxing authorities. With limited exceptions, the Company is no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2014.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revised U.S. corporate tax law by, among other things, (i) reducing the corporate tax rate to
21%
from
35%
, (ii) a repeal of the corporate alternative minimum tax (AMT), (iii) changes to tax depreciation for first-year property, (iv) a partial limitation on the deductibility of business interest expense and (v) for losses incurred in tax years beginning after December 31, 2017 the NOL deduction is limited to
80%
of taxable income with an indefinite carry forward.
The phase-in of the lower corporate tax rate has resulted in a blended rate of
33.8%
for fiscal 2017, as compared to the previous
35%
. The income tax effects of the Tax Act required the remeasurement of our deferred tax assets and liabilities in accordance ASC Topic 740. The Securities and Exchange Commission ('SEC') staff issued Staff Accounting Bulletin No. 118 ('SAB 118') that allows companies to record provisional estimates of the impacts of the Tax Act during a measurement period of up to one year from the enactment which is similar to the measurement period used when accounting for business combinations. The Company has estimated the effects of the Tax Act, which have been reflected in our fiscal 2017 financial statements. The Tax Act did not have an impact on the Company's tax benefit for fiscal 2017 due to the full valuation allowance against the Company's deferred tax assets.
Shareholder Rights Plan
During the second quarter of fiscal 2015, the Company adopted a Shareholder Rights Plan to preserve the value of certain deferred tax benefits, including those generated by net operating losses. On July 10, 2015, the Company declared a dividend distribution of one purchase right (a “Right”) for each outstanding share of the Company’s common stock to shareholders of record as of the close of business on July 23, 2015 and issuable as of that date. On July 13, 2015, the Company entered into a Shareholder Rights Plan (the “Rights Plan”) with Wells Fargo Bank, N.A., a national banking association, with respect to the Rights. Except in certain circumstances set forth in the Rights Plan, each Right entitles the holder to purchase from the Company one one-
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
thousandth of a share of Series A Junior Participating Cumulative Preferred Stock,
$0.01
par value, of the Company (“Preferred Stock” and each one one-thousandth of a share of Preferred Stock, a “Unit”) at a price of
$9.00
per Unit.
The Rights initially trade together with the common stock and are not exercisable. Subject to certain exceptions specified in the Rights Plan, the Rights will separate from the common stock and become exercisable following (i) the tenth calendar day after a public announcement or filing that a person or group has become an “Acquiring Person,” which is defined as a person who has acquired, or obtained the right to acquire, beneficial ownership of
4.99%
or more of the common stock then outstanding, subject to certain exceptions, or (ii) the tenth calendar day (or such later date as may be determined by the board of directors) after any person or group commences a tender or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. If a person or group becomes an Acquiring Person, each Right will entitle its holders (other than such Acquiring Person) to purchase one Unit at a price of
$9.00
per Unit. A Unit is intended to give the shareholder approximately the same dividend, voting and liquidation rights as would one share of Common Stock, and should approximate the value of one share of Common Stock. At any time after a person becomes an Acquiring Person, the board of directors may exchange all or part of the outstanding Rights (other than those held by an Acquiring Person) for shares of common stock at an exchange rate of one share of common stock (and, in certain circumstances, a Unit) for each Right. The Company will promptly give public notice of any exchange (although failure to give notice will not affect the validity of the exchange).
The Rights will expire upon certain events described in the Rights Plan, including the close of business on the date of the third annual meeting of shareholders following the last annual meeting of shareholders of the Company at which the Rights Plan was most recently approved by shareholders, unless the Rights Plan is re-approved by shareholders at that third annual meeting of shareholders. However, in no event will the Rights Plan expire later than the close of business on July 13, 2025. The Rights Plan was approved by the Company’s shareholders at the 2016 annual meeting of shareholders.
Until the close of business on the tenth calendar day after the day a public announcement or a filing is made indicating that a person or group has become an Acquiring Person, the Company may in its sole and absolute discretion amend the Rights or the Rights Plan agreement without the approval of any holders of the Rights or shares of common stock in any manner, including without limitation, amendments that increase or decrease the purchase price or redemption price or accelerate or extend the final expiration date or the period in which the Rights may be redeemed. The Company may also amend the Rights Plan after the close of business on the tenth calendar day after the day such public announcement or filing is made to cure ambiguities, to correct defective or inconsistent provisions, to shorten or lengthen time periods under the Rights Plan or in any other manner that does not adversely affect the interests of holders of the Rights. No amendment of the Rights Plan may extend its expiration date.
In connection with the issuance, administration and monitoring of the Plan, the Company incurred
$446,000
of professional fees, included within general and administrative expense, during fiscal 2015.
(13)
Commitments and Contingencies
Cable and Satellite Distribution Agreements
As of
February 3, 2018
, the Company has entered into distribution agreements with cable operators, direct-to-home satellite providers, telecommunications companies and broadcast television stations to distribute our television network over their systems. The terms of the distribution agreements typically range from
one
to
five
years. During the fiscal year, certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the television operators or the Company may cancel the agreements prior to their expiration. Additionally, the Company may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. The distribution agreements generally provide that the Company will pay each operator a monthly access fee and in some cases a marketing support payment based on the number of homes receiving the Company's programming. For
fiscal 2017, fiscal 2016 and fiscal 2015
the Company expensed approximately
$91,270,000
,
$98,317,000
and
$100,830,000
under these distribution agreements.
Over the past years, each of the material cable and satellite distribution agreements up for renewal have been renegotiated and renewed. Failure to maintain the cable agreements covering a material portion of the Company’s existing cable households on acceptable financial and other terms could adversely affect future growth, revenues and earnings unless the Company is able to arrange for alternative means of broadly distributing its television programming. Cable operators serving a large majority of cable households offer cable programming on a digital basis. The use of digital compression technology provides cable companies with greater channel capacity. While greater channel capacity increases the opportunity for distribution and, in some cases, reduces access fees paid by us, it also may adversely impact the Company's ability to compete for television viewers to the extent it results in less desirable channel positioning for us, placement of the Company's programming in separate programming tiers, the broadcast of additional competitive channels or viewer fragmentation due to a greater number of programming alternatives.
The Company has entered into, and will continue to enter into, distribution agreements with other television operators providing for full- or part-time carriage of the Company’s television shopping programming.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future cable and satellite distribution cash commitments at
February 3, 2018
are as follows:
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
|
2018
|
$
|
64,758,000
|
|
2019
|
39,774,000
|
|
2020
|
37,741,000
|
|
2021
|
1,363,000
|
|
2022 and thereafter
|
—
|
|
Employment Agreements
The Company has entered into employment agreements with some of its on-air hosts with original terms of
12 months
with automatic annual one-year renewals and with the chief executive officer of the Company with an original term of
24 months
followed by automatic one-year renewals. These agreements specify, among other things, the term and duties of employment, compensation and benefits, termination of employment (including for cause, which would reduce the Company’s total obligation under these agreements), severance payments and non-disclosure and non-compete restrictions. The aggregate commitment for future base compensation related to these agreements at
February 3, 2018
was approximately
$2,271,000
.
On August 18, 2016, the Company entered into an executive employment agreement with Mr. Rosenblatt, the Company's Chief Executive Officer. Among other things, the employment agreement provides for a
two
-year initial term, followed by automatic one-year renewals, an initial base salary of
$750,000
, annual bonus stipulations, a temporary living expense allowance and participation in the Company's executive relocation program. In conjunction with the employment agreement, the Company granted Mr. Rosenblatt an award of restricted stock units, performance restricted stock units and incentive stock options under the Company's 2011 Omnibus Incentive Plan with an aggregate fair value of
$1.8 million
. The chief executive officer’s employment agreement also provides for severance in the event of employment termination of (i)
1.5
times the amount of his base salary, plus (ii)
one
times his target bonus. In the event of a change of control, as defined in the agreement, the severance shall be
two
times his base salary and
two
times his target bonus.
The Company has established guidelines regarding severance for its senior executive officers. If a senior executive officer's employment terminates for reasons other than change of control, whereby, up to
15 months
of the executive's highest annual rate of base salary for those serving as Executive Vice President and up to
12 months
of the executive's highest annual rate of base salary for those serving as Senior Vice President may become payable. If an Executive Vice President's employment terminates within a
one
-year period commencing on the date of a change in control or within
six months
preceding the date of a change in control, up to
18 months
of the executive's highest annual rate of base salary, plus
1.5
times the target annual incentive bonus determined from such base salary may become payable. If a Senior Vice President's employment terminates within a
one
-year period commencing on the date of a change in control or within
six months
preceding the date of a change in control, up to
15 months
of the executive's highest annual rate of base salary, plus
1.25
times the target annual incentive bonus determined from such base salary may become payable.
Operating Lease Commitments
The Company leases certain property and equipment under non-cancelable operating lease agreements. Property and equipment covered by such operating lease agreements include offices at subsidiary locations, satellite transponder and office equipment.
Future minimum lease payments at
February 3, 2018
are as follows:
|
|
|
|
|
Future Minimum Lease Payments:
|
Amount
|
|
|
2018
|
$
|
1,159,000
|
|
2019
|
893,000
|
|
2020
|
559,000
|
|
2021
|
—
|
|
2022 and thereafter
|
—
|
|
Total rent expense under such agreements was approximately
$1,408,000
in
fiscal 2017
,
$1,898,000
in
fiscal 2016
and
$1,853,000
in
fiscal 2015
.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Retirement Savings Plan
The Company maintains a qualified 401(k) retirement savings plan covering substantially all employees. The plan allows the Company’s employees to make voluntary contributions to the plan. Beginning in fiscal 2016, matching contributions were contributed to the plan on a per pay period basis. In fiscal 2015, matching contributions were contributed annually to the plan in February of the following fiscal year. The Company currently provides a contribution match of
$0.50
for every
$1.00
contributed by eligible participants up to a maximum of
6%
of eligible compensation. Company plan contributions expense totaled approximately
$1,268,000
,
$1,321,000
and
$1,156,000
for
fiscal 2017, fiscal 2016 and fiscal 2015
, of which
$0
,
$0
and
$1,156,000
were accrued and outstanding at
February 3, 2018
,
January 28, 2017
and
January 30, 2016
.
(14)
Litigation
The Company is involved from time to time in various claims and lawsuits in the ordinary course of business, including claims related to products, product warranties, employment, intellectual property and consumer protection matters. In the opinion of management, none of the claims and suits, either individually or in the aggregate will have a material adverse effect on the Company's operations or consolidated financial statements.
(15)
Supplemental Cash Flow Information
Supplemental cash flow information and noncash investing and financing activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
January 30, 2016
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4,818,000
|
|
|
$
|
5,061,000
|
|
|
$
|
2,353,000
|
|
Income taxes paid
|
|
$
|
36,000
|
|
|
$
|
51,000
|
|
|
$
|
33,000
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment purchases included in accounts payable
|
|
$
|
213,000
|
|
|
$
|
1,060,000
|
|
|
$
|
138,000
|
|
Common stock issuance costs included in accrued liabilities
|
|
$
|
—
|
|
|
$
|
115,000
|
|
|
$
|
—
|
|
Deferred financing costs included in accrued liabilities
|
|
$
|
—
|
|
|
$
|
14,000
|
|
|
$
|
—
|
|
(16)
Distribution Facility Expansion, Consolidation & Technology Upgrade
During fiscal 2014, the Company began a significant operational expansion initiative with respect to overall warehousing capacity and new equipment and system technology upgrades at the Company's Bowling Green, Kentucky distribution facility. During fiscal 2015, the Company expanded its
262,000
square foot facility to an approximately
600,000
square foot facility and moved out of the Company's leased satellite warehouse space. The updated facilities and technology upgrade includes a new high-speed parcel shipping and item sortation system coupled with a new warehouse management system to support the Company's increased level of shipments and a new call center facility to better serve our customers. The new sortation and warehouse management system were phased into production through fiscal 2016. Total cost of the physical building expansion, new sortation equipment and call center facility was approximately
$25 million
and was financed with our expanded PNC revolving line of credit and a
$15 million
PNC term loan.
As a result of the Company's distribution facility expansion, consolidation and technology upgrade initiative, the Company incurred approximately
$0
,
$677,000
and
$1,347,000
in incremental expenses during
fiscal 2017
,
fiscal 2016
and
fiscal 2015
. In
fiscal 2016
, the expenses related primarily to increased labor and training costs associated with the Company's warehouse management system migration. For
fiscal 2015
, the expenses related primarily to increased labor, inventory and other warehousing transportation costs, training costs and increased equipment rental costs associated with: the move into the new expanded warehouse building, the move out of previously leased warehouse space and the preparation of our expanded facility for the new high-speed parcel shipping and item sortation system and upgraded warehouse management system.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(17)
Executive and Management Transition Costs
On March 23, 2017, the Company announced the elimination of the position of Senior Vice President of Sales & Product Planning. In conjunction with this executive change as well as other executive and management terminations made during fiscal 2017, the Company recorded charges to income totaling
$2,145,000
, which relate primarily to severance payments made as a result of the executive officer and other management terminations and other direct costs associated with the Company's 2017 executive and management transition.
On February 8, 2016, the Company announced the resignation and departure of Mark Bozek, its Chief Executive Officer, and of its Executive Vice President - Chief Strategy Officer & Interim General Counsel. On August 18, 2016, the Company announced that Robert Rosenblatt, was appointed permanent Chief Executive Officer, effective immediately and entered into an executive employment agreement with Mr. Rosenblatt. Among other things, the employment agreement provides for a
two
-year initial term, followed by automatic one-year renewals, an initial base salary of
$750,000
, annual bonus stipulations, a temporary living expense allowance and participation in the Company's executive relocation program. In conjunction with the employment agreement, the Company granted Mr. Rosenblatt an award of restricted stock units, performance restricted stock units and incentive stock options under the Company's 2011 Omnibus Incentive Plan with an aggregate fair value of
$1.8 million
. The chief executive officer’s employment agreement also provides for severance in the event of employment termination of (i)
1.5
times the amount of his base salary, plus (ii)
one
times his target bonus. In the event of a change of control, as defined in the agreement, the severance shall be
two
times his base salary and
two
times his target bonus.
In conjunction with these executive changes as well as other executive and management terminations made during fiscal 2016, the Company recorded charges to income totaling
$4,411,000
, which relate primarily to severance payments to be made as a result of the executive officer terminations and other direct costs associated with the Company's 2016 executive and management transition.
On March 26, 2015, the Company announced the termination and departure of three executive officers, namely its Chief Financial Officer, its Senior Vice President and General Counsel, and President. In addition, during the first quarter of fiscal 2015, the Company also announced the hiring of a new Chief Financial Officer and a new Chief Merchandising Officer. In conjunction with these executive changes as well as other management terminations made during fiscal 2015, the Company recorded charges to income of
$3,549,000
, which relate primarily to severance payments made as a result of the executive officer terminations and other direct costs associated with the Company's 2015 executive and management transition.
(18)
Related Party Transactions
Relationship with GE Equity, Comcast and NBCU
Until April 29, 2016, the Company was a party to an amended and restated shareholder agreement, dated February 25, 2009 (the “GE/NBCU Shareholder Agreement”), with GE Equity and NBCU, which provided for certain corporate governance and standstill matters. The Company has a significant cable distribution agreement with Comcast, of which NBCU is an indirect subsidiary, and believes that the terms of the agreement are comparable to those with other cable system operators. During the third quarter of fiscal 2016, the Company received a
$500,000
cash payment from a wholly owned subsidiary of NBCU for the right to use a specified channel in the Boston, Massachusetts' designated market area.
In an SEC filing made on August 18, 2015, GE Equity disclosed that on August 14, 2015, GE Equity and ASF Radio, L.P. (“ASF Radio”), who was an independent third party to Evine as of that time, entered into a Stock Purchase Agreement pursuant to which GE Equity agreed to sell
3,545,049
shares of the Company’s common stock, which was all of the shares GE Equity had then owned, to ASF Radio for
$2.15
per share. According to the SEC filing, ASF Radio is an affiliate of Ardian, an independent private equity investment company. The closing of this sale (the “GE/ASF Radio Sale”) occurred on April 29, 2016. In connection with the GE/ASF Radio Sale, the GE/NBCU Shareholder Agreement was terminated and the Company entered into a new Shareholder Agreement (the “NBCU Shareholder Agreement”) with NBCU described below.
Stock Purchase from NBCU
On January 31, 2017, the Company purchased from NBCU
4,400,000
shares of the Company's common stock, representing approximately
6.7%
of shares then outstanding, for approximately
$5 million
or
$1.12
per share, pursuant to a Repurchase Letter Agreement between the Company and NBCU. Following the Company's share purchase, NBCU's direct equity ownership of the Company consisted of
2,741,849
shares of common stock, or
4.5%
of the Company's outstanding common stock. As of February 3, 2018, the Company believes that NBCU sold its remaining shares of the Company's common stock. The NBCU Shareholder Agreement was terminated pursuant to the Repurchase Letter Agreement.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NBCU Shareholder Agreement
The Company was a party to the NBCU Shareholder Agreement until it was terminated pursuant to the Repurchase Letter Agreement on January 31, 2017. The NBCU Shareholder Agreement replaced the GE/NBCU Shareholder Agreement. The NBCU Shareholder Agreement provided that as long as NBCU or its affiliates beneficially own at least
5%
of the Company's outstanding common stock, NBCU was entitled to designate
one
individual to be nominated to the Company’s Board of Directors. In addition, the NBCU Shareholder Agreement provided that NBCU was able to designate its director designee to be an observer of the audit, human resources and compensation, and corporate governance and nominating committees of the Company's Board of Directors. In addition, the NBCU Shareholder Agreement required the Company to obtain the consent of NBCU prior to the Company's adoption or amendment of any shareholder’s rights plan or certain other actions that would impede or restrict the ability of NBCU to acquire the Company's voting stock or the Company taking any action that would result in NBCU being deemed to be in violation of the Federal Communications Commission multiple ownership regulations.
The NBCU Shareholder Agreement also provided that unless NBCU beneficially owned less than
5%
or more than
90%
of the adjusted outstanding shares of common stock, NBCU could not sell, transfer or otherwise dispose of any securities of the Company subject to limited exceptions for (i) transfers to affiliates, (ii) third party tender offers, (iii) mergers, consolidations and reorganizations and (iv) transfers pursuant to underwritten public offerings or transfers exempt from registration under the Securities Act (provided, in the case of (iv), such transfers would not result in the transferee acquiring beneficial ownership in excess of
20%
).
Registration Rights Agreement
On February 25, 2009, the Company entered into an amended and restated registration rights agreement that, as further amended, provided GE Equity, NBCU and their affiliates and any transferees and assigns, an aggregate of
five
demand registrations and unlimited piggy-back registration rights. In connection with the GE/ASF Radio Sale, an amendment to the Amended and Restated Registration Rights Agreement was entered into removing GE Equity as a party and adding ASF Radio as a party.
2015 Letter Agreement with GE Equity
On July 9, 2015, the Company entered into a letter agreement with GE Equity (the “GE Letter Agreement”) pursuant to which GE Equity consented to the Company's adoption of a Shareholder Rights Plan in consideration for the Company's agreement to provide GE Equity, NBCU and certain of their respective affiliates with exemptions from the Shareholder Rights Plan. GE Equity’s consent was required pursuant to the terms of the GE/NBCU Shareholder Agreement. This discussion is a summary of the terms of the letter agreement. In the GE Letter Agreement, the Company agreed that if any of GE Equity, NBCU or any of their respective affiliates that holds shares of the Company's common stock from time to time (each a “Grandfathered Investor”) sells or otherwise transfers shares of the Company's common stock currently owned by such Grandfathered Investor to any third party identified to us in writing (any such third party, an “Exempt Purchaser”), the Company will take all actions necessary under the Shareholder Rights Plan so that such third party will not be deemed an Acquiring Person (as defined in the Shareholder Rights Plan) by virtue of the acquisition of such shares. The Company further agreed that, subject to certain limitations, upon request of any Grandfathered Investor or Exempt Purchaser, and in connection with a transfer by such Grandfathered Investor or Exempt Purchaser of shares of the Company's common stock to an Exempt Purchaser, the Company will enter into an agreement with the acquiring Exempt Purchaser granting such acquiring Exempt Purchaser substantially the same rights as set forth above with respect to any sale of the Company's outstanding shares of common stock to any other third party. Additionally, the Company agreed that without the consent of any Grandfathered Investor that is an affiliate of GE Equity and any Grandfathered Investor that is an affiliate of NBCU, the Company will not (i) amend the Shareholder Rights Plan in any material respect, other than to accelerate the Expiration Date (as defined in the Shareholder Rights Plan) or the Final Expiration Date (as defined in the Shareholder Rights Plan), (ii) adopt another shareholders' rights plan or (iii) amend the letter agreement.
Director Relationships
The Company entered into a service agreement with Newgistics, Inc. ("Newgistics") in fiscal 2004. Newgistics provides offsite customer returns consolidation and delivery services to the Company. The Company's Chief Executive Officer, Robert Rosenblatt, was a member of Newgistics Board of Directors until October 2017, when Newgistics was acquired by a third party. The Company made payments to Newgistics totaling approximately
$4,474,000
,
$4,910,000
and
$4,517,000
during
fiscal 2017, fiscal 2016 and fiscal 2015
.
One of the Company's directors, Thomas Beers, has a minority interest in one of the Company's on air food suppliers. The Company made inventory payments to this supplier totaling approximately
$1,156,000
,
$1,866,000
and
$3,467,000
during
fiscal 2017
,
fiscal 2016
and
fiscal 2015
.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(19)
Quarterly Results (Unaudited)
The following summarized unaudited results of operations for the quarters in
fiscal 2017
and
fiscal 2016
have been prepared on the same basis as the annual financial statements and reflect normal recurring adjustments that we consider necessary for a fair presentation of results of operations for the periods presented. Our results of operations have varied and may continue to fluctuate significantly from quarter to quarter due to seasonality and the timing of operating expenses. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter (a)
|
|
Total
|
|
|
(In thousands, except percentages and per share amounts)
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
156,343
|
|
|
$
|
148,949
|
|
|
$
|
150,212
|
|
|
$
|
192,716
|
|
|
$
|
648,220
|
|
Gross profit
|
|
56,286
|
|
|
56,480
|
|
|
57,294
|
|
|
65,052
|
|
|
235,112
|
|
Gross profit margin
|
|
36.0
|
%
|
|
37.9
|
%
|
|
38.1
|
%
|
|
33.8
|
%
|
|
36.3
|
%
|
Operating expenses
|
|
56,867
|
|
|
56,951
|
|
|
57,648
|
|
|
60,424
|
|
|
231,890
|
|
Operating income (loss) (b)
|
|
(581
|
)
|
|
(471
|
)
|
|
(354
|
)
|
|
4,628
|
|
|
3,222
|
|
Other expense, net
|
|
(2,406
|
)
|
|
(1,311
|
)
|
|
(1,373
|
)
|
|
(1,434
|
)
|
|
(6,524
|
)
|
Income tax (provision) benefit
|
|
(209
|
)
|
|
(209
|
)
|
|
624
|
|
|
3,239
|
|
|
3,445
|
|
Net income (loss) (b)
|
|
$
|
(3,196
|
)
|
|
$
|
(1,991
|
)
|
|
$
|
(1,103
|
)
|
|
$
|
6,433
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.10
|
|
|
$
|
0.00
|
|
Net income (loss) per share — assuming dilution
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.10
|
|
|
$
|
0.00
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
60,919
|
|
|
64,091
|
|
|
65,191
|
|
|
65,279
|
|
|
63,870
|
|
Diluted
|
|
60,919
|
|
|
64,091
|
|
|
65,191
|
|
|
65,672
|
|
|
63,968
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
166,920
|
|
|
$
|
157,139
|
|
|
$
|
151,636
|
|
|
$
|
190,518
|
|
|
$
|
666,213
|
|
Gross profit
|
|
61,448
|
|
|
59,828
|
|
|
55,431
|
|
|
64,820
|
|
|
241,527
|
|
Gross profit margin
|
|
36.8
|
%
|
|
38.1
|
%
|
|
36.6
|
%
|
|
34.0
|
%
|
|
36.3
|
%
|
Operating expenses
|
|
64,982
|
|
|
60,002
|
|
|
57,510
|
|
|
61,051
|
|
|
243,545
|
|
Operating income (loss) (c)
|
|
(3,534
|
)
|
|
(174
|
)
|
|
(2,079
|
)
|
|
3,769
|
|
|
(2,018
|
)
|
Other expense, net
|
|
(1,203
|
)
|
|
(1,604
|
)
|
|
(1,583
|
)
|
|
(1,536
|
)
|
|
(5,926
|
)
|
Income tax provision
|
|
(205
|
)
|
|
(205
|
)
|
|
(205
|
)
|
|
(186
|
)
|
|
(801
|
)
|
Net income (loss) (c)
|
|
$
|
(4,942
|
)
|
|
$
|
(1,983
|
)
|
|
$
|
(3,867
|
)
|
|
$
|
2,047
|
|
|
$
|
(8,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.15
|
)
|
Net income (loss) per share — assuming dilution
|
|
$
|
(0.09
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.15
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
57,181
|
|
|
57,259
|
|
|
60,513
|
|
|
64,185
|
|
|
59,785
|
|
Diluted
|
|
57,181
|
|
|
57,259
|
|
|
60,513
|
|
|
64,492
|
|
|
59,785
|
|
|
|
(a)
|
As a result of the Company's retail calendar, the fourth quarter of fiscal 2017 includes 14 weeks of operations as compared to 13 weeks in the fourth quarter of fiscal 2016.
|
|
|
(b)
|
Net income (loss) and operating income (loss) for the first, second, third and fourth quarters of
fiscal 2017
includes executive and management transition costs of
$506,000
,
$572,000
,
$893,000
and
$174,000
. In addition, net income (loss) for the first, third and fourth quarters of
fiscal 2017
includes loss on debt extinguishment of
$913,000
,
$221,000
and
$323,000
. Net income for the fourth quarter of
fiscal 2017
also includes a
$551,000
gain on the television station sale.
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(c) Net income (loss) and operating income (loss) for the first, second, third and fourth quarters of
fiscal 2016
includes distribution facility consolidation and technology upgrade costs of approximately
$80,000
,
$300,000
,
$150,000
and
$147,000
. In addition, net loss and operating loss for the first, second and third quarters of
fiscal 2016
includes executive and management transition costs of
$3,601,000
,
$242,000
and
$568,000
.