Item 1. FINANCIAL STATEMENTS
EVINE Live Inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
May 5,
2018
|
|
February 3,
2018
|
|
(In thousands, except share and per share data)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
30,077
|
|
|
$
|
23,940
|
|
Restricted cash equivalents
|
450
|
|
|
450
|
|
Accounts receivable, net
|
85,060
|
|
|
96,559
|
|
Inventories
|
73,058
|
|
|
68,811
|
|
Prepaid expenses and other
|
9,142
|
|
|
5,344
|
|
Total current assets
|
197,787
|
|
|
195,104
|
|
Property and equipment, net
|
51,434
|
|
|
52,048
|
|
Other assets
|
2,027
|
|
|
2,106
|
|
TOTAL ASSETS
|
$
|
251,248
|
|
|
$
|
249,258
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
59,067
|
|
|
$
|
55,614
|
|
Accrued liabilities
|
39,827
|
|
|
35,646
|
|
Current portion of long term credit facilities
|
2,326
|
|
|
2,326
|
|
Deferred revenue
|
35
|
|
|
35
|
|
Total current liabilities
|
101,255
|
|
|
93,621
|
|
Other long term liabilities
|
59
|
|
|
68
|
|
Long term credit facilities
|
68,204
|
|
|
71,573
|
|
Total liabilities
|
169,518
|
|
|
165,262
|
|
Commitments and contingencies
|
|
|
|
Shareholders' equity:
|
|
|
|
Preferred stock, $0.01 per share par value, 400,000 shares authorized; zero shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 per share par value, 99,600,000 shares authorized; 65,588,337 and 65,290,458 shares issued and outstanding
|
656
|
|
|
653
|
|
Additional paid-in capital
|
439,828
|
|
|
439,111
|
|
Accumulated deficit
|
(358,754
|
)
|
|
(355,768
|
)
|
Total shareholders' equity
|
81,730
|
|
|
83,996
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
251,248
|
|
|
$
|
249,258
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
For the Three-Month
|
|
Periods Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
|
(In thousands, except share and per share data)
|
Net sales
|
$
|
156,505
|
|
|
$
|
156,343
|
|
Cost of sales
|
100,250
|
|
|
100,057
|
|
Gross profit
|
56,255
|
|
|
56,286
|
|
Operating expense:
|
|
|
|
Distribution and selling
|
48,887
|
|
|
48,730
|
|
General and administrative
|
6,719
|
|
|
5,995
|
|
Depreciation and amortization
|
1,572
|
|
|
1,636
|
|
Executive and management transition costs
|
1,024
|
|
|
506
|
|
Total operating expense
|
58,202
|
|
|
56,867
|
|
Operating loss
|
(1,947
|
)
|
|
(581
|
)
|
Other income (expense):
|
|
|
|
Interest income
|
7
|
|
|
2
|
|
Interest expense
|
(1,026
|
)
|
|
(1,495
|
)
|
Loss on debt extinguishment
|
—
|
|
|
(913
|
)
|
Total other expense, net
|
(1,019
|
)
|
|
(2,406
|
)
|
Loss before income taxes
|
(2,966
|
)
|
|
(2,987
|
)
|
Income tax provision
|
(20
|
)
|
|
(209
|
)
|
Net loss
|
$
|
(2,986
|
)
|
|
$
|
(3,196
|
)
|
Net loss per common share
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Net loss per common share — assuming dilution
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic
|
65,360,951
|
|
|
60,918,508
|
|
Diluted
|
65,360,951
|
|
|
60,918,508
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE
THREE-MONTH
PERIOD ENDED
MAY 5, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Additional
Paid-In
Capital
|
|
|
|
Total
Shareholders'
Equity
|
|
Number
of Shares
|
|
Par
Value
|
|
|
Accumulated
Deficit
|
|
|
(In thousands, except share data)
|
BALANCE, February 3, 2018
|
65,290,458
|
|
|
$
|
653
|
|
|
$
|
439,111
|
|
|
$
|
(355,768
|
)
|
|
$
|
83,996
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,986
|
)
|
|
(2,986
|
)
|
Common stock issuances pursuant to equity compensation plans
|
297,879
|
|
|
3
|
|
|
(103
|
)
|
|
—
|
|
|
(100
|
)
|
Share-based payment compensation
|
—
|
|
|
—
|
|
|
820
|
|
|
—
|
|
|
820
|
|
BALANCE, May 5, 2018
|
65,588,337
|
|
|
$
|
656
|
|
|
$
|
439,828
|
|
|
$
|
(358,754
|
)
|
|
$
|
81,730
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
For the Three-Month
|
|
Periods Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
|
(in thousands)
|
OPERATING ACTIVITIES:
|
|
|
|
Net loss
|
$
|
(2,986
|
)
|
|
$
|
(3,196
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
2,620
|
|
|
2,604
|
|
Share-based payment compensation
|
820
|
|
|
521
|
|
Amortization of deferred revenue
|
(9
|
)
|
|
(21
|
)
|
Amortization of deferred financing costs
|
52
|
|
|
127
|
|
Loss on debt extinguishment
|
—
|
|
|
913
|
|
Deferred income taxes
|
—
|
|
|
197
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable, net
|
11,499
|
|
|
13,524
|
|
Inventories
|
(4,247
|
)
|
|
(5,457
|
)
|
Prepaid expenses and other
|
(3,798
|
)
|
|
(274
|
)
|
Accounts payable and accrued liabilities
|
7,745
|
|
|
(2,095
|
)
|
Net cash provided by operating activities
|
11,696
|
|
|
6,843
|
|
INVESTING ACTIVITIES:
|
|
|
|
Property and equipment additions
|
(2,078
|
)
|
|
(3,867
|
)
|
Net cash used for investing activities
|
(2,078
|
)
|
|
(3,867
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
Proceeds from issuance of revolving loan
|
50,500
|
|
|
—
|
|
Proceeds of term loans
|
—
|
|
|
6,000
|
|
Proceeds from issuance of common stock and warrants
|
—
|
|
|
132
|
|
Proceeds from exercise of stock options
|
—
|
|
|
29
|
|
Payments on revolving loan
|
(53,300
|
)
|
|
—
|
|
Payments on term loans
|
(581
|
)
|
|
(10,263
|
)
|
Payments for repurchases of common stock
|
—
|
|
|
(5,055
|
)
|
Payments for common stock issuance costs
|
—
|
|
|
(80
|
)
|
Payments for deferred financing costs
|
—
|
|
|
(215
|
)
|
Payments for debt extinguishment costs
|
—
|
|
|
(199
|
)
|
Payments for restricted stock issuance
|
(100
|
)
|
|
(34
|
)
|
Net cash used for financing activities
|
(3,481
|
)
|
|
(9,685
|
)
|
Net increase (decrease) in cash and restricted cash equivalents
|
6,137
|
|
|
(6,709
|
)
|
BEGINNING CASH AND RESTRICTED CASH EQUIVALENTS
|
24,390
|
|
|
33,097
|
|
ENDING CASH AND RESTRICTED CASH EQUIVALENTS
|
$
|
30,527
|
|
|
$
|
26,388
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
Interest paid
|
$
|
912
|
|
|
$
|
1,400
|
|
Income taxes paid
|
$
|
—
|
|
|
$
|
—
|
|
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Property and equipment purchases included in accounts payable
|
$
|
101
|
|
|
$
|
713
|
|
Common stock issuance costs included in accrued liabilities
|
$
|
—
|
|
|
$
|
58
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 5, 2018
(Unaudited)
(1)
General
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 & wellness, 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 through cable and satellite distribution agreements, agreements with telecommunications companies and over-the-air broadcast television stations. The network is also streamed live online at evine.com and is available on mobile channels and over-the-top platforms.
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)
Basis of Financial Statement Presentation
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America have been condensed or omitted in accordance with these rules and regulations. The accompanying condensed consolidated balance sheet as of
February 3, 2018
has been derived from the Company's audited financial statements for the fiscal year ended
February 3, 2018
. The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of these financial statements. Although management believes the disclosures and information presented are adequate, these interim condensed consolidated financial statements should be read in conjunction with the Company’s most recent audited financial statements and notes thereto included in its annual report on Form 10-K for the fiscal year ended
February 3, 2018
. Operating results for the
three-month period
ended
May 5, 2018
are not necessarily indicative of the results that may be expected for the fiscal year ending
February 2, 2019
.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
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 2018
will end on
February 2, 2019
, and will contain
52
weeks. The quarters ended
May 5, 2018
and
April 29, 2017
each consisted of 13 weeks.
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board issued Revenue from Contracts with Customers, Topic 606 (ASU 2014-09), which provides a framework for the recognition of revenue, with the objective that recognized revenues reflect amounts an entity expects to receive in exchange for goods and services. The guidance also includes additional disclosure requirements regarding revenue, timing of cash flows and obligations related to contracts with customers. The Company adopted this standard in the first quarter of fiscal 2018, using the modified retrospective transition method. See
Note 3
- "
Revenue
" for information on the impact of adopting ASU 2014-09 and all related amendments on the Company's condensed consolidated financial statements.
In November 2016, the Financial Accounting Standards Board issued Statement of Cash Flows, Topic 230: Restricted Cash (ASU 2016-18), which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of fiscal 2018 and has revised the condensed consolidated statements of cash flows for the
three-month period
ended
April 29, 2017
to reflect total cash and restricted cash equivalents for each period presented.
The following table provides a reconciliation of cash and restricted cash equivalents reported with the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
|
February 3, 2018
|
|
April 29, 2017
|
|
January 28, 2017
|
Cash
|
$
|
30,077,000
|
|
|
$
|
23,940,000
|
|
|
$
|
25,938,000
|
|
|
$
|
32,647,000
|
|
Restricted cash equivalents
|
450,000
|
|
|
450,000
|
|
|
450,000
|
|
|
450,000
|
|
Total cash and restricted cash equivalents
|
$
|
30,527,000
|
|
|
$
|
24,390,000
|
|
|
$
|
26,388,000
|
|
|
$
|
33,097,000
|
|
The Company's restricted cash equivalents consist of certificates of deposit with original maturities of three months or less and are generally restricted for a period ranging from 30-60 days.
In May 2017, the Financial Accounting Standards Board issued Compensation—Stock Compensation, Topic 718 (ASU 2017-09), which provides clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. The Company adopted this standard in the first quarter of fiscal 2018 and there was no impact on the Company's condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued Leases, Topic 842 (ASU 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 continuing to evaluate the impact of adopting ASU 2016-02 on the Company's consolidated financial statements.
(3)
Revenue
Adoption of Revenue from Contracts with Customers, Topic 606
On February 4, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers", and all related amendments using the modified retrospective method applied to contracts that were not completed as of February 4, 2018. The comparative prior period information has not been restated and continues to be reported under the accounting standards in effect during those periods. The adoption did not have a material impact on the Company's revenue recognition and there was no adjustment to its retained earnings opening balance. The Company does not expect the adoption of the new standard to have a material impact on the Company's operating results on an ongoing basis.
The impact of the new revenue standard adoption on our condensed consolidated statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended May 5, 2018
|
|
|
As Reported
|
|
Balance without adoption of ASC 606
|
|
Effect of Change
|
Net sales
|
|
$
|
156,505
|
|
|
$
|
156,546
|
|
|
$
|
(41
|
)
|
Cost of sales
|
|
100,250
|
|
|
100,269
|
|
|
(19
|
)
|
Operating expense:
|
|
|
|
|
|
|
Distribution and selling
|
|
48,887
|
|
|
48,808
|
|
|
79
|
|
Net loss
|
|
(2,986
|
)
|
|
(2,885
|
)
|
|
(101
|
)
|
As of
May 5, 2018
, the Company recorded a merchandise return liability of
$7,280,000
, included in accrued liabilities, and a right of return asset of
$3,762,000
, included in other current assets. As of February 3, 2018, the Company had approximately
$3,544,000
reserved for future merchandise returns included in accrued liabilities, which represents the net margin obligation recorded under the previous revenue guidance.
Revenue Recognition
Revenue is recognized when control of the promised merchandise is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for the merchandise. The Company recognizes revenue upon shipment. Revenue is reported net of estimated sales returns, credits and incentives, and excludes sales taxes. Sales returns are estimated and provided for at the time of sale based on historical experience.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Substantially all of the Company's sales are single performance obligation arrangements for transferring control of merchandise to customers.
In accordance with ASC 606-10-50, the Company disaggregates revenue from contracts with customers by significant product groups and timing of when the performance obligations are satisfied. A reconciliation of disaggregated revenue by significant product group is provided in
Note 9
- "
Business Segments and Sales by Product Group
".
As of
May 5, 2018
, approximately
$94,000
is expected to be recognized from remaining performance obligations within the next
3 years
. The Company has applied the practical expedient to exclude the value of remaining performance obligations for contracts with an original expected term of one year or less. Revenue recognized over time was
$9,000
and
$21,000
for the
three-month periods
ended
May 5, 2018
and
April 29, 2017
.
Merchandise Returns
The Company records a merchandise return liability as a reduction of gross sales for anticipated merchandise returns at each reporting period and must make estimates of potential future merchandise returns related to current period product revenue. The Company estimates and evaluates the adequacy of its merchandise return liability 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 merchandise return liability in any accounting period.
Shipping and Handling
The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the merchandise. Shipping and handling fees charged to customers are recognized when the customer obtains control of the merchandise, which is upon shipment. The Company accrues costs for shipping and handling activities, which occur subsequent to transfer of control to the customer, and are recorded as cost of sales in the accompanying statements of operations.
Sales Taxes
The Company has elected to exclude from revenue the sales taxes imposed on its sales and collected from customers.
Accounts Receivable
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. The Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component when the payment terms are less than one year. 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. As of
May 5, 2018
and
February 3, 2018
, the Company had approximately
$76,620,000
and
$88,452,000
of net receivables due from customers under the ValuePay installment program and total reserves for estimated uncollectible amounts of
$7,471,000
and
$6,008,000
.
Judgments
The Company's merchandise is generally sold with a right of return for up to a certain number of days after the merchandise is shipped and the Company may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Merchandise returns and other credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.
The Company evaluated whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) in certain vendor arrangements where the merchandise is shipped directly from the vendor to the Company's customer and the purchase and sale of inventory is virtually simultaneous. Generally, the Company is the principal and reports revenues from such vendor arrangements on a gross basis, as it controls the merchandise before it is transferred to the customer.
(4)
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
May 5, 2018
and
February 3, 2018
the Company had
$450,000
in Level 2 investments in the form of bank certificates of deposit, which are included in restricted cash equivalents in the condensed consolidated balance sheets. 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
May 5, 2018
and
February 3, 2018
the Company also had a long-term variable rate PNC Credit Facility, classified as Level 2, with carrying values of
$70,530,000
and
$73,899,000
. As of
May 5, 2018
and
February 3, 2018
,
$2,326,000
was classified as current. The fair value of the variable rate PNC Credit Facility approximates and is based on its carrying value. The Company has
no
Level 3 investments that use significant unobservable inputs.
(5)
Intangible Assets
Intangible assets in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
(In Years)
|
|
May 5, 2018
|
|
February 3, 2018
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Finite-lived intangible assets
|
|
5-15
|
|
$
|
1,786,000
|
|
|
$
|
(377,000
|
)
|
|
$
|
1,786,000
|
|
|
$
|
(336,000
|
)
|
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. Amortization expense related to the finite-lived intangible assets was
$41,000
for the three-month periods ended
May 5, 2018
and
April 29, 2017
. Estimated amortization expense is
$165,000
for
fiscal 2018
and each fiscal year through fiscal 2020,
$157,000
for fiscal 2021 and
$96,000
for fiscal 2022.
Sale of Boston Television Station, WWDP and FCC Broadcast License
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
. During the fiscal 2017 fourth quarter, the Company closed on the asset purchase agreement to sell substantially all of the assets primarily related to our television broadcast station, WWDP(TV), Norwell, Massachusetts (the “Station”), which included an intangible FCC broadcasting license asset. As of
May 5, 2018
,
$667,000
of the sales price remained in escrow pending the Station being carried by certain distribution 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.
(6)
Credit Agreements
The Company's long-term credit facilities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
|
February 3, 2018
|
PNC Credit Facility
|
|
|
|
|
PNC revolving loan due March 21, 2022, principal amount
|
|
$
|
57,100,000
|
|
|
$
|
59,900,000
|
|
|
|
|
|
|
PNC term loan due March 21, 2022, principal amount
|
|
13,567,000
|
|
|
14,148,000
|
|
Less unamortized debt issuance costs
|
|
(137,000
|
)
|
|
(149,000
|
)
|
PNC term loan due March 21, 2022, carrying amount
|
|
13,430,000
|
|
|
13,999,000
|
|
|
|
|
|
|
Total long-term credit facilities
|
|
70,530,000
|
|
|
73,899,000
|
|
Less current portion of long-term credit facilities
|
|
(2,326,000
|
)
|
|
(2,326,000
|
)
|
Long-term credit facilities, excluding current portion
|
|
$
|
68,204,000
|
|
|
$
|
71,573,000
|
|
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.
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 semi-annually 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
May 5, 2018
, the Company had borrowings of
$57.1 million
under its revolving credit facility. Remaining available capacity under the revolving credit facility as of
May 5, 2018
is approximately
$14.2 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
May 5, 2018
, there was approximately
$13.6 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 that commenced 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
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
May 5, 2018
, the imputed effective interest rate on the PNC term loan was
8.3%
.
Interest expense recorded under the PNC Credit Facility for the
three-month periods
ended
May 5, 2018
and
April 29, 2017
was
$1,024,000
and
$1,062,000
.
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
May 5, 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
May 5, 2018
, the Company's unrestricted cash plus unused line availability was
$44.3 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 accompanying balance sheet.
Prepayment on Great American Capital Partners Term Loan
During fiscal 2017, the Company retired our term loan (the "GACP Term Loan") under a credit and security agreement 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. During the first quarter of fiscal 2017, the Company recorded a loss on debt extinguishment of
$913,000
for the portion of debt extinguished on March 21, 2017. The
fiscal 2017
first
quarter loss on extinguishment of debt 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. Interest expense recorded under the GACP Credit Agreement for the
three-month period
ended
April 29, 2017
was
$429,000
.
The aggregate maturities of the Company's long-term credit facilities as of
May 5, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PNC Credit Facility
|
|
|
Fiscal year
|
|
Term loan
|
|
Revolving loan
|
|
Total
|
2018
|
|
$
|
1,745,000
|
|
|
$
|
—
|
|
|
$
|
1,745,000
|
|
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
|
|
|
57,100,000
|
|
|
62,138,000
|
|
|
|
$
|
13,567,000
|
|
|
$
|
57,100,000
|
|
|
$
|
70,667,000
|
|
(7)
Shareholders' Equity
Warrants
As of
May 5, 2018
, the Company had outstanding warrants to purchase
3,849,365
shares of the Company’s common stock ("Warrants"). The Warrants are fully exercisable and expire
five years
from the date of grant. The Warrants were issued in connection with private placement securities purchase agreements ("Purchase Agreements"), including the related option exercises, which the Company entered into with certain accredited investors on September 14, 2016. The following table summarizes information regarding Warrants outstanding at
May 5, 2018
:
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Shares of common stock purchasable
|
|
Exercise Price
(Per Share)
|
|
Expiration Date
|
September 19, 2016
|
|
2,976,190
|
|
|
$2.90
|
|
September 19, 2021
|
November 10, 2016
|
|
333,873
|
|
|
$3.00
|
|
November 10, 2021
|
January 23, 2017
|
|
489,302
|
|
|
$1.76
|
|
January 23, 2022
|
March 16, 2017
|
|
50,000
|
|
|
$1.92
|
|
March 16, 2022
|
Stock-Based Compensation - Stock Options
Compensation is recognized for all stock-based compensation arrangements by the Company. Stock-based compensation expense for the
first
quarters of
fiscal 2018
and
fiscal 2017
related to stock option awards was
$305,000
and
$203,000
. 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
May 5, 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 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, and a Monte Carlo valuation model is used for market-based vesting awards. 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 2018
|
|
Fiscal 2017
|
Expected volatility:
|
72%
|
|
81%
|
Expected term (in years):
|
6 years
|
|
6 years
|
Risk-free interest rate:
|
2.8%
|
|
2.2%
|
A summary of the status of the Company’s stock option activity as of
May 5, 2018
and changes during the
three months
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
|
2004
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
Balance outstanding, February 3, 2018
|
3,384,000
|
|
|
$
|
1.64
|
|
|
112,000
|
|
|
$
|
4.86
|
|
Granted
|
953,000
|
|
|
$
|
0.99
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited or canceled
|
(25,000
|
)
|
|
$
|
3.08
|
|
|
(5,000
|
)
|
|
$
|
4.62
|
|
Balance outstanding, May 5, 2018
|
4,312,000
|
|
|
$
|
1.49
|
|
|
107,000
|
|
|
$
|
4.87
|
|
Options exercisable at May 5, 2018
|
1,553,000
|
|
|
$
|
1.94
|
|
|
107,000
|
|
|
$
|
4.87
|
|
The following table summarizes information regarding stock options outstanding at
May 5, 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:
|
4,312,000
|
|
|
$
|
1.49
|
|
|
8.6
|
|
$
|
255,000
|
|
|
3,929,000
|
|
|
$
|
1.52
|
|
|
8.5
|
|
$
|
215,000
|
|
2004 Incentive:
|
107,000
|
|
|
$
|
4.87
|
|
|
5.5
|
|
$
|
—
|
|
|
107,000
|
|
|
$
|
4.87
|
|
|
5.5
|
|
$
|
—
|
|
The weighted average grant-date fair value of options granted in the first
three-months
of
fiscal 2018
and
fiscal 2017
was
$0.65
and
$0.93
. The total intrinsic value of options exercised during the first
three-months
of
fiscal 2018
and
fiscal 2017
was
$0
and
$9,000
. As of
May 5, 2018
, total unrecognized compensation cost related to stock options was
$1,745,000
and is expected to be recognized over a weighted average period of approximately
2.0 years
.
Stock-Based Compensation - Restricted Stock Units
Compensation expense recorded for the
first
quarters of
fiscal 2018
and
fiscal 2017
relating to restricted stock unit grants was
$515,000
and
$318,000
. As of
May 5, 2018
, there was
$1,799,000
of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted average expected life of
1.9 years
. The total fair value of restricted stock units vested during the first
three months
of
fiscal 2018
and
fiscal 2017
was
$410,000
and
$98,000
. The estimated fair value of restricted stock units 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.
During the first quarters of
fiscal 2018
and
fiscal 2017
, the Company granted a total of
140,000
and
317,219
time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock units vest in
three
equal annual installments beginning one year from the grant date. The aggregate market value of the restricted stock units at the date of grant was
$145,000
and
$422,000
for the first quarters of
fiscal 2018
and
fiscal 2017
. 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
time-based restricted stock units to employees as part of the Company's annual merit process. The restricted stock units vested
one
year after the date of the grant on April 24, 2018. The aggregate market value of the restricted stock units at the date of the award was
$446,000
and was amortized as compensation expense over the
one
-year vesting period.
During the first quarters of fiscal 2018 and fiscal 2017, the Company also granted a total of
14,930
and
7,096
restricted stock units to newly appointed board members as part of the Company's annual director compensation program. Each restricted stock unit 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 units at the date of the award was
$15,000
and
$9,000
for the first quarters of fiscal 2018 and fiscal 2017. The grants are amortized as director compensation expense over the vesting period.
During the first quarters of
fiscal 2018
and
fiscal 2017
, the Company granted a total of
488,960
and
561,981
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 2018
|
|
Fiscal 2017
|
Total grant date fair value
|
$523,000
|
|
$860,000
|
Total grant date fair value per share
|
$1.07
|
|
$1.53
|
Expected volatility
|
73%
|
|
75%
|
Weighted average expected life (in years)
|
3 years
|
|
3 years
|
Risk-free interest rate
|
2.4%
|
|
1.5%
|
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 unit activity as of
May 5, 2018
and changes during the
three-month period
then ended is as follows:
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested outstanding, February 3, 2018
|
2,829,000
|
|
|
$1.40
|
Granted
|
644,000
|
|
|
$1.06
|
Vested
|
(393,000
|
)
|
|
$1.40
|
Forfeited
|
(11,000
|
)
|
|
$1.36
|
Non-vested outstanding, May 5, 2018
|
3,069,000
|
|
|
$1.33
|
Stock Awards Contingent on Shareholder Approval
On March 26, 2018, the human resources and compensation committee of the board of directors approved certain equity awards under the 2011 Plan which are subject to shareholder approval of the proposed increase in authorized shares under the 2011 Plan. If the shareholders do not approve the increase in authorized shares under the 2011 Plan, these awards will be canceled with no further force or effect. The shareholders of the Company vote on this proposal at the 2018 Annual Meeting of Shareholders on June 13, 2018. The following table summarizes information regarding the contingent stock awards outstanding at
May 5, 2018
:
|
|
|
|
|
|
|
Number of Awards
|
Stock options (a)
|
1,125,652
|
|
Restricted stock units (b)
|
527,938
|
|
Market-based restricted stock performance units (c)
|
258,606
|
|
________________
|
|
(a)
|
The stock options will have an exercise price of
$1.00
per share.
|
|
|
(b)
|
The restricted stock units will vest in
three
equal annual installments beginning on March 26, 2019.
|
|
|
(c)
|
The number of restricted stock units earned will be based on the Company's TSR relative to a group of industry peers over a
three
-year performance measurement period.
|
(8)
Net Loss Per Common Share
Basic net loss per share is computed by dividing reported loss by the weighted average number of shares of common stock outstanding for the reported period. Diluted net income 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 loss per share calculations and the number of shares used in the calculation of basic loss per share and diluted loss per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended
|
|
|
May 5,
2018
|
|
April 29,
2017
|
Net loss (a)
|
|
$
|
(2,986,000
|
)
|
|
$
|
(3,196,000
|
)
|
Weighted average number of shares of common stock outstanding — Basic
|
|
65,360,951
|
|
|
60,918,508
|
|
Dilutive effect of stock options, non-vested shares and warrants (b)
|
|
—
|
|
|
—
|
|
Weighted average number of shares of common stock outstanding — Diluted
|
|
65,360,951
|
|
|
60,918,508
|
|
Net loss per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Net loss per common share — assuming dilution
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
(a) The net loss for the
three-month period
ended
May 5, 2018
includes costs related to executive and management transition of
$1,024,000
and contract termination costs of
$753,000
. The net loss for the
three-month period
ended
April 29, 2017
includes costs related to executive and management transition of
$506,000
and a loss on debt extinguishment of
$913,000
.
(b) For the
three-month period
s ended
May 5, 2018
and
April 29, 2017
, there were
no
incremental in-the-money potentially dilutive common stock options excluded from the computation of diluted earnings per share, as the effect of their inclusion would be anti-dilutive.
(9)
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. Certain fiscal 2017 product category amounts in the accompanying table have been reclassified to conform to our fiscal 2018 product group groupings.
Information on net sales by significant product groups are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended
|
|
|
May 5,
2018
|
|
April 29,
2017
|
Jewelry & Watches
|
|
$
|
56,793
|
|
|
$
|
58,036
|
|
Home & Consumer Electronics
|
|
31,042
|
|
|
29,415
|
|
Beauty & Wellness
|
|
27,022
|
|
|
23,033
|
|
Fashion & Accessories
|
|
26,572
|
|
|
29,795
|
|
All other (primarily shipping & handling revenue)
|
|
15,076
|
|
|
16,064
|
|
Total
|
|
$
|
156,505
|
|
|
$
|
156,343
|
|
(10)
Income Taxes
At
February 3, 2018
, the Company had 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 Capital Equity Investments, Inc. (“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. The Company currently has recorded a full valuation allowance for its net deferred tax assets. The ultimate realization of these deferred tax assets and related limitations depend on the ability of the Company to generate sufficient taxable income in the future, as well as the timing of such income.
For the
first
quarters of fiscal 2018 and
fiscal 2017
, the income tax provision included a non-cash tax charge of approximately
$0
and
$197,000
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. During the fourth quarter of fiscal 2017, the Company sold its indefinite-lived intangible FCC license asset in connection with the sale of the Company's television broadcast station, WWDP(TV).
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 income tax effects of the Tax Act required the remeasurement of the Company's deferred tax assets and liabilities in accordance with ASC Topic 740. The Company remeasured its net deferred tax assets and related valuation allowance to reflect the lower corporate tax rate at the end of fiscal 2017. 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. As reflected in the Company's fiscal 2017 financial statements, the Tax Act did not have an impact on the Company's tax expense or benefit due to the full valuation allowance against the Company's deferred tax assets.
Shareholder Rights Plan
The Company has 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-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.
(11)
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, contracts, employment, intellectual property, consumer protection and regulatory 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.
(12)
Executive and Management Transition Costs
On April 11, 2018, the Company entered into a transition and separation agreement with its Executive Vice President, Chief Operating Officer/Chief Financial Officer, under which his position terminated on April 16, 2018 and he served as a non-officer employee until June 1, 2018. On April 11, 2018, the Company announced the appointment of a new Chief Financial Officer, effective as of April 16, 2018. In conjunction with this executive change as well as other executive and management terminations made during the first
three months
of fiscal 2018, the Company recorded charges to income totaling
$1,024,000
for the
three-months
ended
May 5, 2018
, 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 2018 executive and management transition.
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 the first
three
months of fiscal 2017, the Company recorded charges to income totaling
$506,000
for the
three-months
ended
April 29, 2017
, 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 accompanying unaudited condensed consolidated financial statements and notes included herein and the audited consolidated financial statements and notes included in our annual report on Form 10-K for the fiscal year ended
February 3, 2018
.
Cautionary Statement Concerning Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with the Securities and Exchange Commission (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 “Risk Factors” in our recently filed Form 10-K and any additional risk factors identified in our periodic reports since the date of such report. More detailed information about those factors is set forth in our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-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-brand merchandise in the categories of jewelry & watches, home & consumer electronics, beauty & wellness, and fashion & accessories directly to consumers 24 hours a day in an engaging and informative shopping experience. Evine is distributed in more than
87 million
homes through cable and satellite distribution agreements, agreements with telecommunications companies and over-the-air broadcast television stations. The network is also streamed live online at evine.com and is available on mobile channels and over-the-top platforms. 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.
Our investor relations website address is http://investors.evine.com/overview/default.aspx. Our goal is to maintain the investor relations website as a way for investors to find information about us easily, including press releases, announcements of
investor conferences, investor and analyst presentations and corporate governance. We also make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to these filings as soon as practicable after that material is electronically filed with or furnished to the SEC. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.
Products and Customers
Products sold on our digital commerce platforms include jewelry & watches, home & consumer electronics, beauty & wellness, 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 during the first
three months
of
fiscal 2018
. 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
three
-month periods indicated by product category group. Certain fiscal 2017 product category percentages in the accompanying table have been reclassified to conform to our fiscal 2018 product group groupings.
|
|
|
|
|
|
|
|
For the Three-Month
|
|
|
Periods Ended
|
|
|
May 5,
2018
|
|
April 29,
2017
|
Net Merchandise Sales by Category
|
|
|
|
|
Jewelry & Watches
|
|
40%
|
|
41%
|
Home & Consumer Electronics
|
|
22%
|
|
21%
|
Beauty & Wellness
|
|
19%
|
|
16%
|
Fashion & Accessories
|
|
19%
|
|
22%
|
Total
|
|
100%
|
|
100%
|
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 our curated assortment of proprietary, exclusive (i.e., products that are not readily available elsewhere), emerging and name-brand products. The Evine network is distributed through 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, emerging and name-brand products presented in an engaging, entertaining, shopping-centric format using our unique expertise in story telling. 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.
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 the
three
months ended
May 5, 2018
and
April 29, 2017
. 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 and alternative distribution methods, including securing a deal in the second quarter of fiscal 2017 to launch our network on a high definition ("HD") channel in more than 10 million 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 provides a better customer experience and 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 affiliation 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.
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., which are owned by Qurate Retail, Inc. 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.
Summary Results for the
First
Quarter of
Fiscal 2018
Consolidated net sales for our
fiscal 2018
first
quarter were approximately
$156.5 million
compared to
$156.3 million
for our
fiscal 2017
first
quarter, which represents a
0.1%
increase
. We reported an operating loss of
$1.9 million
and a net loss of
$3.0 million
for our
fiscal 2018
first
quarter. The operating and net loss for the
fiscal 2018
first
quarter included charges relating to executive and management transition costs totaling
$1.0 million
and contract termination costs of
$753,000
. We had an operating loss of
$581,000
and a net loss of
$3.2 million
for our
fiscal 2017
first
quarter. The operating and net loss for the
fiscal 2017
first
quarter included charges relating to executive and management transition costs totaling
$506,000
. The net loss for the
fiscal 2017
first
quarter also included a loss on debt extinguishment of
$913,000
.
Executive & Management Transition Costs
On April 11, 2018, we entered into a transition and separation agreement with our Executive Vice President, Chief Operating Officer/Chief Financial Officer, under which his position terminated on April 16, 2018 and he served as a non-officer employee until June 1, 2018. On April 11, 2018, we announced the appointment of a new Chief Financial Officer, effective as of April 16, 2018. In conjunction with this executive change as well as other executive and management terminations made during the first
three months
of fiscal 2018, we recorded charges to income totaling
$1.0 million
for the
three-months
ended
May 5, 2018
, 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 our 2018 executive and management transition.
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 the first
three months
of fiscal 2017, we recorded charges to income totaling
$506,000
for the
three-months
ended
April 29, 2017
, 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 our 2017 executive and management transition.
Results of Operations
Selected Condensed Consolidated Financial Data
Operations
|
|
|
|
|
|
|
|
Dollar Amount as a
Percentage of Net Sales for the
|
|
|
Three-Month Periods Ended
|
|
|
May 5,
2018
|
|
April 29,
2017
|
Net sales
|
|
100.0%
|
|
100.0%
|
|
|
|
|
|
Gross margin
|
|
35.9%
|
|
36.0%
|
Operating expenses:
|
|
|
|
|
Distribution and selling
|
|
31.2%
|
|
31.2%
|
General and administrative
|
|
4.3%
|
|
3.8%
|
Depreciation and amortization
|
|
1.0%
|
|
1.1%
|
Executive and management transition costs
|
|
0.7%
|
|
0.3%
|
|
|
37.2%
|
|
36.4%
|
Operating loss
|
|
(1.3)%
|
|
(0.4)%
|
Key Performance Metrics
|
|
|
|
|
|
|
|
For the Three-Month
|
|
Periods Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
|
Change
|
Merchandise Metrics
|
|
|
|
|
|
Gross margin %
|
35.9%
|
|
36.0%
|
|
(10) bps
|
Net shipped units (in thousands)
|
2,472
|
|
2,580
|
|
(4)%
|
Average selling price
|
$57
|
|
$54
|
|
6%
|
Return rate
|
18.9%
|
|
18.8%
|
|
10 bps
|
Digital net sales % (a)
|
53.0%
|
|
50.6%
|
|
240 bps
|
Total Customers - 12 Month Rolling (in thousands)
|
1,269
|
|
1,409
|
|
(10)%
|
(a) 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.
Net Shipped Units
The number of net shipped units (shipped units less units returned) during the
fiscal 2018
first
quarter
decrease
d
4%
from the prior year comparable quarter to approximately
2.5 million
. The
decrease
in net shipped units during the
first
quarter of
fiscal 2018
was driven primarily by mixing into a higher ASP assortment in our jewelry & watches and home & consumer electronics categories.
Average Selling Price
The average selling price ("ASP") per net unit was
$57
in the
fiscal 2018
first
quarter, a
6%
increase
from the prior year quarter. The
increase
in the ASP was primarily driven by ASP increases in our jewelry & watches and home & consumer electronics product categories.
Return Rates
For the three months ended
May 5, 2018
, our return rate was
18.9%
compared to
18.8%
for the comparable prior year quarter, a
10
basis point
increase
. The
increase
in the return rate was driven primarily by a higher return rate experienced in our jewelry product category as a result of ASP increases. 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.
Total Customers
Total customers who have purchased over the last twelve months
decrease
d
10%
over prior year to approximately
1.3 million
. The
decrease
was driven by a reduction in new customers over the prior year. Our loyal customer group remains strong and is driving growth in purchase frequency, average spend and lifetime value. Additionally, momentum grew throughout the quarter, as our total customer count for the month of April was flat to last year.
Net Sales
Consolidated net sales, inclusive of shipping and handling revenue, for the
fiscal 2018
first
quarter were approximately
$156.5 million
as compared with
$156.3 million
for the comparable prior year quarter, a
0.1%
increase
. The
increase
in quarterly consolidated net sales was driven primarily by increases in our beauty & wellness and home & consumer electronics categories, partially offset by decreases in our fashion & accessories and jewelry & watches categories and a decrease in shipping and handling revenue. Beauty & wellness increased during the first quarter as a result of increased productivity and airtime. The increase in home & consumer electronics resulted from increased productivity. Watches decreased during the
first
quarter as a result of a shift in airtime from our watches category into our beauty & wellness and fashion & accessories categories. The decrease in fashion & accessories category was primarily driven by decreased productivity. 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
53.0%
for the
first
quarter of
fiscal 2018
compared to
50.6%
for the prior year quarter. Overall, we continue to deliver strong digital sales penetration. We believe the increase in penetration during the periods was driven by our improved digital marketing initiatives and an enhanced responsive customer experience on mobile devices. Our mobile penetration increased to
49.4%
of total digital orders in the
first
quarter of
fiscal 2018
versus
48.0%
of total digital orders for the comparable prior year period.
Gross Profit
Gross profit for the
first
quarter of
fiscal 2018
was
$56.3 million
, a
decrease
of
$31,000
, or
0.1%
, compared to the
first
quarter of
fiscal 2017
. The
decrease
in gross profits experienced during the
first
quarter was primarily driven by costs incurred during the quarter for contract termination costs of
$753,000
, partially offset by higher gross profit percentages experienced. Gross margin percentages for the
first
quarters of
fiscal 2018
and
fiscal 2017
were
35.9%
and
36.0%
, a
10
basis point
decrease
. The
decrease
in the gross margin percentage reflects the contract termination costs, partially offset by increased margin rates, specifically in our home & consumer electronics, fashion & accessories and beauty & wellness product categories.
Operating Expenses
Total operating expenses for the
fiscal 2018
first
quarter were approximately
$58.2 million
compared to
$56.9 million
for the comparable prior year period, an
increase
of
2.3%
. Total operating expenses as a percentage of net sales were
37.2%
and
36.4%
during the
first
quarters of
fiscal 2018
and
fiscal 2017
. Total operating expenses for the
fiscal 2018
first
quarter include executive and management transition costs of
$1.0 million
, while total operating expenses for the
fiscal 2017
first
quarter include executive and management transition costs of
$506,000
. Excluding executive and management transition costs, total operating expenses as a percentage of net sales were
36.5%
and
36.1%
for the
first
quarters of
fiscal 2018
and
fiscal 2017
.
Distribution and selling expense
increase
d
$157,000
, or
0.3%
, to
$48.9 million
, or
31.2%
of net sales during the
fiscal 2018
first
quarter compared to
$48.7 million
, or
31.2%
of net sales for the comparable prior year fiscal quarter. Distribution and selling
expense
increase
d during the quarter due in part to increased salaries and benefits of
$388,000
and increased accrued incentive compensation of
$316,000
, partially offset by decreased variable costs of
$453,000
. The decrease in variable costs was primarily driven by decreased variable fulfillment and customer service salaries and wages of
$277,000
and decreased variable credit card processing fees and bad debt credit expense of
$258,000
. Total variable expenses during the
first
quarter of
fiscal 2018
were approximately
9.3%
of total net sales versus
9.6%
of total net sales for the prior year comparable period. The
decrease
in variable expenses as a percentage of net sales during the
first
quarter of
fiscal 2018
is primarily due to an increase in our ASP and improved efficiencies at our fulfillment center.
To the extent that our ASP changes, our variable expense as a percentage of net sales could be impacted as the number of our shipped units changes. 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 the
fiscal 2018
first
quarter
increase
d
$724,000
, or
12%
, to
$6.7 million
or
4.3%
of net sales, compared to
$6.0 million
or
3.8%
of net sales for the comparable prior year fiscal quarter. General and administrative expense
increase
d during the
first
quarter primarily as a result of increased salaries and accrued incentive compensation of
$242,000
, increased share-based compensation expense of
$193,000
, increased professional fees of
$133,000
and increased telecommunications expense of
$100,000
.
Depreciation and amortization expense for the
fiscal 2018
first
quarter
decrease
d
$64,000
, or
4%
, to
$1,572,000
compared to
$1,636,000
for the comparable prior year period. Depreciation and amortization expense as a percentage of net sales for the three-month periods ended
May 5, 2018
and
April 29, 2017
was
1.0%
and
1.1%
. The
decrease
in the quarterly depreciation and amortization expense was primarily due to decreased depreciation expense of
$64,000
as a result of a reduction in our non-fulfillment depreciable asset base year over year.
Operating Loss
For the
fiscal 2018
first
quarter, we reported an operating loss of approximately
$1.9 million
compared to an operating loss of
$581,000
for the
fiscal 2017
first
quarter, representing a
$1.4 million
increase
. For the
first
quarter of
fiscal 2018
, our operating loss
increase
d primarily as a result of an increase in general and administrative expense, an increase in executive and management transition costs, an increase in distribution and selling and a decrease in gross profit, which included contract termination costs of
$753,000
, offset by a decrease in depreciation and amortization.
Net Loss
For the
fiscal 2018
first
quarter, we reported a net loss of approximately
$3.0 million
or
$0.05
per share on
65,360,951
weighted average basic common shares outstanding compared with a net loss of
$3.2 million
or
$0.05
per share on
60,918,508
weighted average basic common shares outstanding in the
fiscal 2017
first
quarter. Net loss for the
first
quarter of
fiscal 2018
includes executive and management transition costs of
$1.0 million
, contract termination costs of
$753,000
and interest expense of
$1.0 million
. Net loss for the
first
quarter of
fiscal 2017
includes executive and management transition costs of
$506,000
, interest expense of
$1.5 million
and a loss on debt extinguishment of
$913,000
.
For the
first
quarters of
fiscal 2018
and
fiscal 2017
, net loss reflects an income tax provision of
$20,000
and
$209,000
. The income tax provision included a non-cash tax charge of
$0
and
$197,000
for the
first
quarters of
fiscal 2018
and
fiscal 2017
, relating to changes in our long-term deferred tax liability related to the tax amortization of our previously owned indefinite-lived intangible FCC license asset that was not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. The remaining income tax provision for both quarters relates to state income taxes payable on certain income for which there is no loss carryforward benefit available. During the fourth quarter of fiscal 2017, we sold our indefinite-lived intangible FCC license asset in connection with the sale of our television broadcast station, WWDP(TV).
We have not recorded any income tax benefit on previously recorded net losses 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.
Adjusted EBITDA Reconciliation
Adjusted EBITDA (as defined below) for the
fiscal 2018
first
quarter was
$3.3 million
compared with Adjusted EBITDA of
$3.1 million
for the
fiscal 2017
first
quarter.
A reconciliation of the comparable GAAP measure, net loss, to Adjusted EBITDA follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month
|
|
|
Periods Ended
|
|
|
May 5,
2018
|
|
April 29,
2017
|
Net loss
|
|
$
|
(2,986
|
)
|
|
$
|
(3,196
|
)
|
Adjustments:
|
|
|
|
|
Depreciation and amortization
|
|
2,620
|
|
|
2,604
|
|
Interest income
|
|
(7
|
)
|
|
(2
|
)
|
Interest expense
|
|
1,026
|
|
|
1,495
|
|
Income taxes
|
|
20
|
|
|
209
|
|
EBITDA (as defined)
|
|
$
|
673
|
|
|
$
|
1,110
|
|
|
|
|
|
|
A reconciliation of EBITDA to Adjusted EBITDA is as follows:
|
|
|
|
|
EBITDA (as defined)
|
|
$
|
673
|
|
|
$
|
1,110
|
|
Adjustments:
|
|
|
|
|
Executive and management transition costs
|
|
1,024
|
|
|
506
|
|
Contract termination costs
|
|
753
|
|
|
—
|
|
Loss on debt extinguishment
|
|
—
|
|
|
913
|
|
Non-cash share-based compensation expense
|
|
820
|
|
|
521
|
|
Adjusted EBITDA (a)
|
|
$
|
3,270
|
|
|
$
|
3,050
|
|
(a) EBITDA as defined for this statistical presentation represents net loss for the respective periods excluding depreciation and amortization expense, interest income (expense) and income taxes. We define Adjusted EBITDA as EBITDA excluding non-operating gains (losses), executive and management transition costs, contract termination costs, loss on debt extinguishment and non-cash share-based compensation expense.
We have included the term "Adjusted EBITDA" in our EBITDA reconciliation in order to adequately assess the operating performance of our video and digital businesses and in order to maintain comparability to our analyst’s coverage and financial guidance, when given. Management believes that Adjusted EBITDA allows investors to make a meaningful comparison between our core business operating results over different periods of time with those of other similar companies. In addition, management uses Adjusted EBITDA as a metric measure to evaluate operating performance under our management and executive incentive compensation programs. Adjusted EBITDA should not be construed as an alternative to operating income (loss), net income (loss) or to cash flows from operating activities as determined in accordance with GAAP and should not be construed as a measure of liquidity. Adjusted EBITDA may not be comparable to similarly entitled measures reported by other companies.
Seasonality
Our business is subject to seasonal fluctuation, with the highest sales activity normally occurring during our fourth fiscal quarter of the year, namely November through January. Our business is also sensitive to general economic conditions and business conditions affecting consumer spending. Additionally, our television audience (and therefore sales revenue) can be significantly impacted by major world or domestic television-covering events which attract television viewership and divert audience attention away from our programming.
Critical Accounting Policies and Estimates
A discussion of the critical accounting policies related to accounting estimates and assumptions are discussed in detail in our
fiscal 2017
annual report on Form 10-K under the caption entitled "Critical Accounting Policies and Estimates."
Recently Issued Accounting Pronouncements
See
Note 2
- “
Basis of Financial Statement Presentation
” in the notes to our condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Financial Condition, Liquidity and Capital Resources
As of
May 5, 2018
, we had cash of
$30.1 million
and had restricted cash and cash equivalents of
$450,000
. Our restricted cash equivalents 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 unused line availability at all times. As our unused line availability is greater than
$10 million
at
May 5, 2018
, no additional cash is required to be restricted. As of
February 3, 2018
, we had cash of
$23.9 million
and had restricted cash and cash equivalents of
$450,000
. For the first
three
months of
fiscal 2018
, working capital
decrease
d
$5.0 million
to
$96.5 million
. The current ratio (our total current assets over total current liabilities) was
2.0
at
May 5, 2018
and
2.1
at
February 3, 2018
.
Sources of Liquidity
Our principal source of liquidity is our available cash of
$30.1 million
as of
May 5, 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 PNC Credit Facility) measured semi-annually as demonstrated in our 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 our leverage ratio as demonstrated in our audited financial statements.
As of
May 5, 2018
, we had borrowings of
$57.1 million
under our revolving line of credit. As of
May 5, 2018
, the term loan under the PNC Credit Facility had
$13.6 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
May 5, 2018
is approximately
$14.2 million
, and provides liquidity for working capital and general corporate purposes. In addition, as of
May 5, 2018
, our unrestricted cash plus unused line availability was
$44.3 million
, 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 that commenced 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 unused line 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 unused line 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
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. We recorded a loss on debt extinguishment of
$913,000
during the
fiscal 2017
first
quarter for the portion of debt extinguished on March 21, 2017. The
fiscal 2017
first
quarter loss on extinguishment of debt 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.
Sale of Boston Television Station, WWDP
On August 28, 2017, we entered into two agreements with unrelated parties to sell our Boston television station, WWDP, including our FCC broadcast license, for an aggregate of
$13.5 million
. During the fiscal 2017 fourth quarter, we closed on an asset purchase agreement to sell substantially all of the assets primarily related to our television broadcast station, WWDP(TV), Norwell, Massachusetts. We used the proceeds received from the transaction to pay off the remaining amounts due under the GACP Term Loan, with the remaining proceeds used for general working capital purposes. As of
May 5, 2018
,
$667,000
of the sales price remained in escrow pending WWDP(TV) being carried by certain distribution 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.
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 further 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. As of February 3, 2018 we had contractual cash obligations and commitments, primarily with respect to our cable and satellite agreements and payments required under our PNC Credit Facility and operating leases, totaling approximately $315.0 million over the next five fiscal years.
For the
three months
ended
May 5, 2018
, net cash provided by operating activities totaled
$11.7 million
compared to net cash provided by operating activities of approximately
$6.8 million
for the comparable
fiscal 2017
period. Net cash provided by operating activities for the
fiscal 2018 and 2017
periods reflects net loss, as adjusted for depreciation and amortization, share-based payment compensation, amortization of deferred revenue, amortization of deferred financing costs, loss on debt extinguishment and long-term deferred income taxes. In addition, net cash provided by operating activities for the
three months
ended
May 5, 2018
reflects a decrease in accounts receivable and an increase in accounts payable and accrued liabilities, partially offset by increases in inventory and prepaid expenses and other.
Accounts receivable decreased during the first
three months
of
fiscal 2018
as a result of collections made on outstanding receivables balances resulting from our seasonal high fourth quarter. Accounts payable and accrued liabilities increased during the first
three months
of
fiscal 2018
primarily due to an increase in accrued inventory as a result of the timing of payments made to vendors, an increase in accrued salaries due to timing of payments and an increase in accrued severance resulting from our 2018
executive and management transition. Accounts payable and accrued liabilities also increased due to an increase in our merchandise return reserve, which resulted from the adoption of Revenue from Contracts with Customers, Topic 606 (ASU 2014-09), whereby estimated merchandise returns are presented as both an asset (equal to the inventory value expected to be returned) and a corresponding return liability (equal to the full amount expected to be refunded). Under legacy accounting practice, the estimated merchandise returns liability was presented on a net basis. The increase in accounts payable and accrued liabilities was partially offset by a decrease in accrued cable distribution fees due to timing of payments. Inventories increased as a result of planned purchases in our beauty & wellness and fashion & accessories categories in an effort to broaden our merchandise assortment for the spring season. Prepaid expenses and other increased primarily as a result of the adoption of ASU 2014-09 (as described above), whereby an asset is now presented for the estimated inventory fair value expected to be returned.
Net cash used for investing activities totaled
$2.1 million
for the first
three months
of
fiscal 2018
compared to net cash used for investing activities of
$3.9 million
for the comparable
fiscal 2017
period. For the
three months
ended
May 5, 2018
and
April 29, 2017
, expenditures for property and equipment were approximately
$2.1 million
and
$3.9 million
. Capital expenditures made during the periods presented relate primarily to expenditures made for the upgrades in our customer service call routing technology, 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; 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.
Net cash used for financing activities totaled
$3.5 million
for the
three months
ended
May 5, 2018
and related primarily to principal payments on the PNC revolving loan of
$53.3 million
, principal payments on our PNC term loan of
$581,000
and payments for restricted stock issuances of
$100,000
, partially offset by proceeds from the PNC revolving loan of
$50.5 million
. Net cash used for financing activities totaled
$9.7 million
for the
three months
ended
April 29, 2017
and related primarily to principal payments on term loans of
$10.3 million
, payments for the repurchase of common stock of
$5.1 million
, payments for deferred financing costs of
$215,000
, payments for debt extinguishment costs of
$199,000
, payments for common stock issuance costs of
$80,000
and payments for restricted stock issuance of
$34,000
, partially offset by proceeds from the PNC term loan of
$6.0 million
, proceeds from the issuance of common stock and warrants of
$132,000
and proceeds from the exercise of stock options of
$29,000
.