Item 1. FINANCIAL STATEMENTS
EVINE Live Inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
May 4,
2019
|
|
February 2,
2019
|
|
(In thousands, except share and per share data)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
28,739
|
|
|
$
|
20,485
|
|
Restricted cash equivalents
|
450
|
|
|
450
|
|
Accounts receivable, net
|
72,181
|
|
|
81,763
|
|
Inventories
|
57,168
|
|
|
65,272
|
|
Prepaid expenses and other
|
8,112
|
|
|
9,053
|
|
Total current assets
|
166,650
|
|
|
177,023
|
|
Property and equipment, net
|
49,950
|
|
|
51,118
|
|
Other assets
|
3,179
|
|
|
1,846
|
|
TOTAL ASSETS
|
$
|
219,779
|
|
|
$
|
229,987
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
59,875
|
|
|
$
|
56,157
|
|
Accrued liabilities
|
36,981
|
|
|
37,374
|
|
Current portion of long term credit facility
|
2,714
|
|
|
2,488
|
|
Current portion of operating lease liabilities
|
824
|
|
|
—
|
|
Deferred revenue
|
35
|
|
|
35
|
|
Total current liabilities
|
100,429
|
|
|
96,054
|
|
Other long term liabilities
|
376
|
|
|
50
|
|
Long term credit facility
|
68,037
|
|
|
68,932
|
|
Total liabilities
|
168,842
|
|
|
165,036
|
|
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; 76,230,985 and 67,919,349 shares issued and outstanding
|
762
|
|
|
679
|
|
Additional paid-in capital
|
449,090
|
|
|
442,197
|
|
Accumulated deficit
|
(398,915
|
)
|
|
(377,925
|
)
|
Total shareholders' equity
|
50,937
|
|
|
64,951
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
219,779
|
|
|
$
|
229,987
|
|
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 4,
2019
|
|
May 5,
2018
|
|
(In thousands, except share and per share data)
|
Net sales
|
$
|
131,521
|
|
|
$
|
156,505
|
|
Cost of sales
|
94,228
|
|
|
100,250
|
|
Gross profit
|
37,293
|
|
|
56,255
|
|
Operating expense:
|
|
|
|
Distribution and selling
|
46,864
|
|
|
48,887
|
|
General and administrative
|
6,869
|
|
|
6,719
|
|
Depreciation and amortization
|
1,679
|
|
|
1,572
|
|
Executive and management transition costs
|
2,031
|
|
|
1,024
|
|
Total operating expense
|
57,443
|
|
|
58,202
|
|
Operating loss
|
(20,150
|
)
|
|
(1,947
|
)
|
Other income (expense):
|
|
|
|
Interest income
|
5
|
|
|
7
|
|
Interest expense
|
(830
|
)
|
|
(1,026
|
)
|
Total other expense, net
|
(825
|
)
|
|
(1,019
|
)
|
Loss before income taxes
|
(20,975
|
)
|
|
(2,966
|
)
|
Income tax provision
|
(15
|
)
|
|
(20
|
)
|
Net loss
|
$
|
(20,990
|
)
|
|
$
|
(2,986
|
)
|
Net loss per common share
|
$
|
(0.31
|
)
|
|
$
|
(0.05
|
)
|
Net loss per common share — assuming dilution
|
$
|
(0.31
|
)
|
|
$
|
(0.05
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic
|
67,318,462
|
|
|
65,360,951
|
|
Diluted
|
67,318,462
|
|
|
65,360,951
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE
THREE-MONTH
PERIODS ENDED
MAY 4, 2019
AND
MAY 5, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
|
|
Total
Shareholders'
Equity
|
|
Number
of Shares
|
|
Par
Value
|
|
|
Accumulated
Deficit
|
|
For the Three Months Ended May 4, 2019
|
(In thousands, except share data)
|
BALANCE, February 2, 2019
|
67,919,349
|
|
|
$
|
679
|
|
|
$
|
442,197
|
|
|
$
|
(377,925
|
)
|
|
$
|
64,951
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,990
|
)
|
|
(20,990
|
)
|
Common stock issuances pursuant to equity compensation awards
|
311,636
|
|
|
3
|
|
|
(11
|
)
|
|
—
|
|
|
(8
|
)
|
Share-based payment compensation
|
—
|
|
|
—
|
|
|
966
|
|
|
—
|
|
|
966
|
|
Common stock and warrant issuance
|
8,000,000
|
|
|
80
|
|
|
5,938
|
|
|
—
|
|
|
6,018
|
|
BALANCE, May 4, 2019
|
76,230,985
|
|
|
$
|
762
|
|
|
$
|
449,090
|
|
|
$
|
(398,915
|
)
|
|
$
|
50,937
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
|
|
Total
Shareholders'
Equity
|
|
Number
of Shares
|
|
Par
Value
|
|
|
Accumulated
Deficit
|
|
For the Three Months Ended May 5, 2018
|
(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 awards
|
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 4,
2019
|
|
May 5,
2018
|
|
(in thousands)
|
OPERATING ACTIVITIES:
|
|
|
|
Net loss
|
$
|
(20,990
|
)
|
|
$
|
(2,986
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
2,629
|
|
|
2,620
|
|
Share-based payment compensation
|
966
|
|
|
820
|
|
Inventory impairment write-down
|
6,050
|
|
|
—
|
|
Amortization of deferred revenue
|
(8
|
)
|
|
(9
|
)
|
Amortization of deferred financing costs
|
55
|
|
|
52
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable, net
|
9,582
|
|
|
11,499
|
|
Inventories
|
2,054
|
|
|
(4,247
|
)
|
Prepaid expenses and other
|
874
|
|
|
(3,798
|
)
|
Accounts payable and accrued liabilities
|
3,533
|
|
|
7,745
|
|
Net cash provided by operating activities
|
4,745
|
|
|
11,696
|
|
INVESTING ACTIVITIES:
|
|
|
|
Property and equipment additions
|
(1,802
|
)
|
|
(2,078
|
)
|
Net cash used for investing activities
|
(1,802
|
)
|
|
(2,078
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
Proceeds from issuance of revolving loan
|
58,300
|
|
|
50,500
|
|
Proceeds from issuance of common stock and warrants
|
6,000
|
|
|
—
|
|
Payments on revolving loan
|
(58,300
|
)
|
|
(53,300
|
)
|
Payments on term loan
|
(678
|
)
|
|
(581
|
)
|
Payments for restricted stock issuance
|
(8
|
)
|
|
(100
|
)
|
Payments on finance leases
|
(3
|
)
|
|
—
|
|
Net cash provided by (used for) financing activities
|
5,311
|
|
|
(3,481
|
)
|
Net increase in cash and restricted cash equivalents
|
8,254
|
|
|
6,137
|
|
BEGINNING CASH AND RESTRICTED CASH EQUIVALENTS
|
20,935
|
|
|
24,390
|
|
ENDING CASH AND RESTRICTED CASH EQUIVALENTS
|
$
|
29,189
|
|
|
$
|
30,527
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
Interest paid
|
$
|
495
|
|
|
$
|
912
|
|
Income taxes paid
|
$
|
—
|
|
|
$
|
—
|
|
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
Property and equipment purchases included in accounts payable
|
$
|
91
|
|
|
$
|
101
|
|
Common stock issuance costs included in accrued liabilities
|
$
|
175
|
|
|
$
|
—
|
|
Issuance of warrants
|
$
|
193
|
|
|
$
|
—
|
|
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 4, 2019
(Unaudited)
(1)
General
EVINE Live Inc. and its subsidiaries ("we," "our," "us," or the "Company") are collectively an
interactive media 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 programming is distributed in more than
87 million
homes through cable and satellite distribution agreements, agreements with telecommunications companies and arrangements with over-the-air broadcast television stations. Evine programming is also streamed live online at 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, and is available on mobile channels and over-the-top platforms. Our 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 2, 2019
has been derived from the Company's audited financial statements for the fiscal year ended
February 2, 2019
. 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 2, 2019
. Operating results for the
three-month period
ended
May 4, 2019
are not necessarily indicative of the results that may be expected for the fiscal year ending
February 1, 2020
.
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 2018
, ended on
February 2, 2019
, and consisted of
52
weeks.
Fiscal 2019
will end
February 1, 2020
and will contain
52
weeks. The
three-month period
s ended
May 4, 2019
and
May 5, 2018
each consisted of 13 weeks.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") 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 are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company adopted this standard in the first quarter of fiscal 2019 using a modified retrospective transition approach to leases existing at, or entered into after, February 3, 2019. See
Note 3
- "
Leases
" for information on the impact of adopting ASU 2016-02 on the Company's condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued Intangibles—Goodwill and Other—Internal-Use Software, Subtopic 350-40 (ASU 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The new standard can be applied retrospectively or prospectively to all implementation costs incurred after the date
of adoption. The Company is currently assessing the impact that adopting the new accounting standard will have on its consolidated financial statements.
(3)
Leases
Adoption of Leases, Topic 842
On February 3, 2019, the Company adopted ASU No. 2016-02, "Leases", and all related amendments using the modified retrospective method transition approach to leases existing at, or entered into after, February 3, 2019. Under this transition method, comparative prior periods, including disclosures, were not restated. The Company elected the transition package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification. The Company chose not to elect the hindsight practical expedient. The adoption of the standard did not have an impact on the Company's condensed consolidated statements of operations and there was
no
adjustment to its retained earnings opening balance sheet. 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 most significant impact of the new leases standard was the recognition of right-of-use assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged. On February 3, 2019, the adoption of the new standard resulted in the recognition of a right-of-use asset of
$1,474,000
and a lease liability of
$1,407,000
, and a reduction to prepaid expenses and other of
$67,000
.
The Company leases certain property and equipment, such as offices at subsidiary locations, transmission and production equipment, satellite transponder and office equipment. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Some of the Company's leases include options to extend the term, which is only included in the lease liability and right-of-use assets calculation when it is reasonably certain the Company will exercise that option. As of
May 4, 2019
, the lease liability and right-of-use assets did
no
t include any lease extension options.
The Company has lease agreements with lease and non-lease components, and has elected to account for these as a single lease component. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
For the Three-Month Period Ended
May 4, 2019
|
Operating lease cost
|
|
$
|
265,000
|
|
Short-term lease cost
|
|
62,000
|
|
Variable lease cost (a)
|
|
20,000
|
|
(a) Includes variable costs of finance leases.
Finance lease costs included amortization of right-of-use assets of
$3,000
and interest on lease liabilities of
$1,000
for the
three-month period
ended
May 4, 2019
.
The Company did
no
t obtain any right-of-use assets in exchange for operating and finance leases during the
three-month period
ended
May 4, 2019
. Supplemental cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
For the Three-Month Period Ended
May 4, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
264,000
|
|
Operating cash flows from finance leases
|
|
1,000
|
|
Financing cash flows from finance leases
|
|
3,000
|
|
The weighted average remaining lease term and weighted average discount rates related to leases were as follows:
|
|
|
|
|
|
May 4, 2019
|
Weighted average remaining lease term:
|
|
|
Operating leases
|
|
1.4 years
|
Finance leases
|
|
2.6 years
|
Weighted average discount rate:
|
|
|
Operating leases
|
|
5.5%
|
Finance leases
|
|
5.8%
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
May 4, 2019
|
Assets
|
|
|
|
|
Operating lease right-of-use assets
|
|
Other assets
|
|
$
|
1,227,000
|
|
Finance lease right-of-use assets
|
|
Property and equipment, net
|
|
25,000
|
|
Total lease right-of-use assets
|
|
|
|
$
|
1,252,000
|
|
Operating lease liabilities
|
|
|
|
|
Current portion of operating lease liabilities
|
|
Current portion of operating lease liabilities
|
|
$
|
824,000
|
|
Operating lease liabilities, excluding current portion
|
|
Other long term liabilities
|
|
337,000
|
|
Total operating lease liabilities
|
|
|
|
1,161,000
|
|
Finance lease liabilities
|
|
|
|
|
Current portion of finance lease liabilities
|
|
Current liabilities: Accrued liabilities
|
|
10,000
|
|
Finance lease liabilities, excluding current portion
|
|
Other long term liabilities
|
|
16,000
|
|
Total finance lease liabilities
|
|
|
|
26,000
|
|
Total lease liabilities
|
|
|
|
$
|
1,187,000
|
|
Future maturities of lease liabilities as of May 4, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2019
|
|
$
|
665,000
|
|
|
$
|
10,000
|
|
|
$
|
675,000
|
|
2020
|
|
542,000
|
|
|
8,000
|
|
|
550,000
|
|
2021
|
|
—
|
|
|
8,000
|
|
|
8,000
|
|
2022
|
|
—
|
|
|
2,000
|
|
|
2,000
|
|
2023
|
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
—
|
|
Total lease payments
|
|
1,207,000
|
|
|
28,000
|
|
|
1,235,000
|
|
Less imputed interest
|
|
(46,000
|
)
|
|
(2,000
|
)
|
|
(48,000
|
)
|
Total lease liabilities
|
|
$
|
1,161,000
|
|
|
$
|
26,000
|
|
|
$
|
1,187,000
|
|
As of May 4, 2019, the Company had
no
operating and finance leases that had not yet commenced.
Disclosures Related to Periods Prior to Adoption of Leases, Topic 842
Future minimum lease payments for assets under capital and operating leases at
February 2, 2019
are as follows:
|
|
|
|
|
|
|
|
|
Future Minimum Lease Payments:
|
Capital Leases
|
|
Operating Leases
|
|
|
|
|
2019
|
$
|
13,000
|
|
|
$
|
1,005,000
|
|
2020
|
8,000
|
|
|
604,000
|
|
2021
|
8,000
|
|
|
—
|
|
2022
|
2,000
|
|
|
—
|
|
2023 and thereafter
|
—
|
|
|
—
|
|
Total minimum lease payments
|
31,000
|
|
|
$
|
1,609,000
|
|
Less: Amounts representing interest
|
(2,000
|
)
|
|
|
|
29,000
|
|
|
|
Less: Current portion
|
(12,000
|
)
|
|
|
Long-term capital lease obligation
|
$
|
17,000
|
|
|
|
(4)
Revenue
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, which is 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. As of
May 4, 2019
and
February 2, 2019
, the Company recorded a merchandise return liability of
$7,528,000
and
$8,097,000
, included in accrued liabilities, and a right of return asset of
$3,997,000
and
$4,410,000
, included in other current assets.
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 Accounting Standards Codification ("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, 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 10
- "
Business Segments and Sales by Product Group
."
As of
May 4, 2019
, approximately
$59,000
is expected to be recognized from remaining performance obligations within the next
two 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
$8,000
and
$9,000
for the
three-month periods
ended
May 4, 2019
and
May 5, 2018
.
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 4, 2019
and
February 2, 2019
, the Company had approximately
$64,656,000
and
$74,787,000
of net receivables due from customers under the ValuePay installment program and total reserves for estimated uncollectible amounts of
$7,579,000
and
$8,533,000
.
(5)
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 4, 2019
and
February 2, 2019
, 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 4, 2019
and
February 2, 2019
, the Company also had a long-term variable rate PNC Credit Facility (as defined below), classified as Level 2, with carrying values of
$70,751,000
and
$71,420,000
. As of
May 4, 2019
and
February 2, 2019
,
$2,714,000
and
$2,488,000
of the long-term variable rate PNC Credit Facility was classified as current. The fair value of the PNC Credit Facility approximates, and is based on, its carrying value due to the variable rate nature of the financial instrument. The Company has
no
Level 3 investments that use significant unobservable inputs.
(6)
Intangible Assets
Intangible assets in the accompanying condensed consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
(In Years)
|
|
May 4, 2019
|
|
February 2, 2019
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Finite-lived intangible assets
|
|
5-15
|
|
$
|
1,979,000
|
|
|
$
|
(543,000
|
)
|
|
$
|
1,786,000
|
|
|
$
|
(502,000
|
)
|
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, a vendor exclusivity agreement (as further described below), 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 4, 2019
and
May 5, 2018
. Estimated amortization expense is
$194,000
for
fiscal 2019
,
$204,000
for fiscal 2020,
$195,000
for fiscal 2021, and
$134,000
for fiscal 2022 and fiscal 2023.
On May 2, 2019, we entered into a
five
-year vendor exclusivity agreement with Sterling Time, LLC ("Sterling Time") and Invicta Watch Company of America, Inc. ("IWCA") in connection with the closing under the private placement securities purchase agreement described in
Note 8
below. The vendor exclusivity agreement grants the Company the exclusive right in television shopping to market, promote and sell the products from IWCA. The Company issued
five
-year warrants to purchase
3,500,000
shares of our common stock in connection with and as consideration for primarily entering into a vendor exclusivity agreement with the Company, which represented an aggregate value of
$193,000
. The vendor exclusivity agreement is being amortized as cost of sales over the
five
year agreement term. See
Note 8
- "
Shareholders' Equity
" for additional information.
(7)
Credit Agreements
The Company's long-term credit facility consists of:
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2019
|
|
February 2, 2019
|
PNC revolving loan due July 27, 2023, principal amount
|
|
$
|
53,900,000
|
|
|
$
|
53,900,000
|
|
PNC term loan due July 27, 2023, principal amount
|
|
16,964,000
|
|
|
17,643,000
|
|
Less unamortized debt issuance costs
|
|
(113,000
|
)
|
|
(123,000
|
)
|
PNC term loan due July 27, 2023, carrying amount
|
|
16,851,000
|
|
|
17,520,000
|
|
Total long-term credit facility
|
|
70,751,000
|
|
|
71,420,000
|
|
Less current portion of long-term credit facility
|
|
(2,714,000
|
)
|
|
(2,488,000
|
)
|
Long-term credit facility, excluding current portion
|
|
$
|
68,037,000
|
|
|
$
|
68,932,000
|
|
PNC Credit Facility
On February 9, 2012, the Company entered into a credit and security agreement (as amended through July 27, 2018, 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 previously outstanding term loan with GACP Finance Co., LLC. 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
July 27, 2023
. 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 either a Base Rate or LIBOR plus a margin consisting of between
1%
and
2%
on Base Rate advances and
2%
and
3%
on LIBOR advances based on the Company's trailing twelve-month reported leverage ratio (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
2%
and
3%
on Base Rate term loans and
3%
to
4%
on LIBOR Rate term loans based on the Company’s leverage ratio measured annually as demonstrated in its audited financial statements.
As of
May 4, 2019
, the Company had borrowings of
$53.9 million
under its revolving credit facility. Remaining available capacity under the revolving credit facility as of
May 4, 2019
was approximately
$5.7 million
, which provided liquidity for working capital and general corporate purposes. The PNC Credit Facility also provides for a term loan on which the Company had originally drawn to fund an expansion and improvements at the Company's distribution facility in Bowling Green, Kentucky and subsequently to partially pay down the Company's GACP Term Loan and reduce its revolving credit facility borrowings. As of
May 4, 2019
, there was approximately
$17.0 million
outstanding under the PNC Credit Facility term loan of which
$2.7 million
was classified as current in the accompanying balance sheet.
Principal borrowings under the term loan are to be payable in monthly installments over an
84
-month amortization period commencing on September 1, 2018 and are also subject to mandatory prepayment in certain circumstances, including, but not limited to, upon receipt of certain proceeds from dispositions of collateral. Borrowings under the term loan are also subject to mandatory prepayment in an amount equal to fifty percent (
50%
) of excess cash flow for such fiscal year, with any such payment not to exceed
$2.0 million
in any such fiscal year. The PNC Credit Facility is also subject to other mandatory prepayment in certain circumstances. In addition, if the total PNC Credit Facility is terminated prior to maturity, the Company would be required to pay an early termination fee of
3.0%
if terminated on or before July 27, 2019,
1.0%
if terminated on or before July 27, 2020,
0.5%
if terminated on or before July 27, 2021, and
no
fee if terminated after July 27, 2021. As of
May 4, 2019
, the imputed effective interest rate on the PNC term loan was
6.2%
.
Interest expense recorded under the PNC Credit Facility was
$829,000
and
$1,024,000
for the
three-month periods
ended
May 4, 2019
and
May 5, 2018
.
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
. As of
May 4, 2019
, the Company's unrestricted cash plus unused line availability was
$34.4 million
and the Company was in compliance with applicable financial covenants of the PNC Credit Facility and expects to be in compliance with applicable financial covenants over the next twelve months. In addition, the PNC Credit Facility places restrictions on the Company’s ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
Deferred financing costs, net of amortization, relating to the revolving line of credit was
$516,000
and
$561,000
as of
May 4, 2019
and
February 2, 2019
and are included within other assets within the accompanying balance sheet. These costs are being expensed as additional interest over the
five
-year term of the PNC Credit Facility.
The aggregate maturities of the Company's long-term credit facility as of
May 4, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PNC Credit Facility
|
|
|
Fiscal year
|
|
Term loan
|
|
Revolving loan
|
|
Total
|
2019
|
|
$
|
1,809,000
|
|
|
$
|
—
|
|
|
$
|
1,809,000
|
|
2020
|
|
2,714,000
|
|
|
—
|
|
|
2,714,000
|
|
2021
|
|
2,714,000
|
|
|
—
|
|
|
2,714,000
|
|
2022
|
|
2,714,000
|
|
|
—
|
|
|
2,714,000
|
|
2023
|
|
7,013,000
|
|
|
53,900,000
|
|
|
60,913,000
|
|
|
|
$
|
16,964,000
|
|
|
$
|
53,900,000
|
|
|
$
|
70,864,000
|
|
(8)
Shareholders' Equity
Private Placement Securities Purchase Agreement
On May 2, 2019, the Company entered into a private placement securities purchase agreement ("Purchase Agreement") with certain accredited investors pursuant to which the Company: (a) sold, in the aggregate,
8,000,000
shares of the Company's common stock at a price of
$0.75
per share and (b) issued
five
-year warrants ("
5
-year Warrants") to purchase
3,500,000
shares of the Company's common stock at an exercise price of
$1.50
per share. The
5
-year Warrants are exercisable in whole or in part from time to time through the expiration date of
May 2, 2024
. The purchasers included Invicta Media Investments, LLC, Michael and Leah Friedman, Timothy Peterman and certain other private investors. Invicta Media Investments, LLC is owned by IWCA, which is the designer and manufacturer of Invicta-branded watches and watch accessories, one of the Company’s largest and longest tenured brands. Michael and Leah Friedman are owners and officers of Sterling Time, which is the exclusive distributor of IWCA’s watches and watch accessories for television home shopping and our long-time vendor. A description of the relationship between the Company, ICWA and Sterling Time is contained in
Note 15
- “
Related Party Transactions
”. Under the Purchase Agreement, the purchasers agreed to customary standstill provisions related to the Company for a period of
two
years, as well as to vote their shares in favor of matters recommended by the Company’s board of directors for approval by our shareholders. In addition, the Company agreed in the Purchase Agreement to appoint Eyal Lalo, an owner of IWCA, as vice chair of the Company’s board of directors, Michael Friedman to the Company’s board of directors and Timothy Peterman as the Company’s chief executive officer.
In connection with the closing under the Purchase Agreement, the Company entered into certain other agreements with IWCA, Sterling Time and the purchasers, including a
five
-year vendor exclusivity agreement with Sterling Time and IWCA. The vendor exclusivity agreement grants the Company the exclusive right in television shopping to market, promote and sell the products from IWCA.
The Company received gross proceeds of
$6.0 million
and incurred approximately
$175,000
of issuance costs. The Company allocated the proceeds of the stock offering to the shares of common stock issued. The par value of the shares issued was recorded within common stock, with the remainder of the proceeds, less issuance costs, recorded as additional paid in capital in the Company's balance sheet. The Company plans to use the proceeds for general working capital purposes. The
5
-year Warrants were issued primarily as consideration for a
five
-year vendor exclusivity agreement with IWCA and Sterling Time. The aggregate market value of the
5
-year Warrants on the grant date was
$193,000
, which was recorded as an intangible asset and is being amortized as cost of sales over the agreement term. The
5
-year Warrants are indexed to the Company's publicly traded stock and were classified as equity. As a result, the fair value of the
5
-year Warrants was recorded as an increase to additional paid-in capital.
Warrants
As of
May 4, 2019
, the Company had outstanding warrants to purchase
8,849,365
shares of the Company’s common stock, of which
7,474,365
are fully exercisable. The warrants expire
five
to
seven years
from the date of grant. The following table summarizes information regarding warrants outstanding at
May 4, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Exercise Price
(Per Share)
|
|
Expiration Date
|
September 19, 2016
|
|
2,976,190
|
|
|
2,976,190
|
|
|
$2.90
|
|
September 19, 2021
|
November 10, 2016
|
|
333,873
|
|
|
333,873
|
|
|
$3.00
|
|
November 10, 2021
|
January 23, 2017
|
|
489,302
|
|
|
489,302
|
|
|
$1.76
|
|
January 23, 2022
|
March 16, 2017
|
|
50,000
|
|
|
50,000
|
|
|
$1.92
|
|
March 16, 2022
|
November 27, 2018
|
|
500,000
|
|
|
125,000
|
|
|
$1.05
|
|
November 27, 2025
|
November 27, 2018
|
|
1,000,000
|
|
|
—
|
|
|
$3.00
|
|
November 27, 2025
|
May 2, 2019
|
|
3,500,000
|
|
|
3,500,000
|
|
|
$1.50
|
|
May 2, 2024
|
On November 27, 2018, the Company issued warrants to Fonda, Inc. for
1,500,000
shares of our common stock in connection with and as consideration for entering into a services and trademark licensing agreement between the companies. Under the agreement, the parties plan to develop and market one or more lines of products, including a fitness and wellness lifestyle brand. Additionally, the agreement identifies Jane Fonda as the primary spokesperson for the brand on our television network. The parties also plan to partner with key retailers to offer a brick & mortar version of the brand. Of the warrant shares issued,
500,000
have an exercise price of
$1.05
per share representing the closing price of the Company's stock on the date the agreement was signed. The warrants vested as to
125,000
warrant shares on the date of grant and
125,000
of the warrant shares will vest on each of the first, second and third anniversaries of the date of grant. Of the warrant shares issued,
1,000,000
have an exercise price of
$3.00
per share. These will vest in full on the date when the dollar volume-weighted average price of our common stock equals or exceeds
$3.00
for
30
trading days. The aggregate market value on the date of the award was
$441,000
and is being amortized as cost of sales over the
three
year services and trademark licensing agreement term. Compensation expense relating to the warrant issuance was
$37,000
for the
first
quarter of
fiscal 2019
. As of
May 4, 2019
, there was
$378,000
of total unrecognized compensation cost related to warrant issuances which is expected to be recognized over a weighted average period of
2.6
years.
Restricted Stock Award
On November 23, 2018, the Company entered into a restricted stock award agreement with Flageoli Classic Limited, LLC (“FCL”) granting FCL
1,500,000
restricted shares of the Company's common stock in connection with and as consideration for entering into a vendor exclusivity agreement with the Company. The vendor exclusivity agreement grants us the exclusive right in television shopping to market, promote and sell products under the trademark of Serious Skincare, a successful skin-care brand with a loyal customer base that launched on the Company's television network on January 3, 2019. Additionally, the agreement identifies Jennifer Flavin-Stallone as the primary spokesperson for the brand on the Company's television network. The restricted shares will vest in three tranches. Of the restricted shares granted,
500,000
vested on January 4, 2019, which was the first business day following the initial appearance of the Serious Skincare brand on the Company's television network. The remaining restricted shares will vest in equal amounts on January 4, 2020 and January 4, 2021. The aggregate market value on the date of the award was
$1,408,000
and is being amortized as cost of sales over the
three
year vendor exclusivity agreement term. The estimated fair value of the restricted stock is based on the grant date closing price of the Company's stock for time-based vesting awards.
Compensation expense relating to the restricted stock award was
$117,000
for the
first
quarter of
fiscal 2019
. As of
May 4, 2019
, there was
$1,202,000
of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted average period of
2.6
years.
A summary of the status of the Company’s non-vested restricted stock award activity as of
May 4, 2019
and changes during the
three months
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested outstanding, February 2, 2019
|
|
1,000,000
|
|
|
$
|
0.94
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
—
|
|
|
$
|
—
|
|
Non-vested outstanding, May 4, 2019
|
|
1,000,000
|
|
|
$
|
0.94
|
|
Stock-Based Compensation - Stock Options
Compensation is recognized for all stock-based compensation arrangements by the Company. Stock-based compensation expense related to stock option awards was
$374,000
and
$305,000
for the
first
quarters of
fiscal 2019
and
fiscal 2018
. 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 4, 2019
, 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
13,000,000
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. Except for market-based options, options granted generally vest over
three
years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and have contractual terms of
10 years
from the date of grant.
The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company uses the simplified method in estimating its expected option term because it believes that historical exercise data cannot be accurately relied upon at this time to provide a reasonable basis for estimating an expected term due to the extreme volatility of its stock price and the resulting unpredictability of its stock option exercises. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
Fiscal 2018
|
Expected volatility:
|
82%
|
|
72%
|
Expected term (in years):
|
6 years
|
|
6 years
|
Risk-free interest rate:
|
2.3%
|
-
|
2.6%
|
|
2.8%
|
A summary of the status of the Company’s stock option activity as of
May 4, 2019
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 2, 2019
|
4,759,000
|
|
|
$
|
1.36
|
|
|
107,000
|
|
|
$
|
4.87
|
|
Granted
|
80,000
|
|
|
$
|
0.48
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited or canceled
|
(3,000
|
)
|
|
$
|
1.24
|
|
|
(10,000
|
)
|
|
$
|
1.47
|
|
Balance outstanding, May 4, 2019
|
4,836,000
|
|
|
$
|
1.35
|
|
|
97,000
|
|
|
$
|
5.22
|
|
Options exercisable at May 4, 2019
|
2,749,000
|
|
|
$
|
1.52
|
|
|
97,000
|
|
|
$
|
5.22
|
|
The following table summarizes information regarding stock options outstanding at
May 4, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
4,836,000
|
|
|
$
|
1.35
|
|
|
8.0
|
|
$
|
11,000
|
|
|
4,620,000
|
|
|
$
|
1.36
|
|
|
8.0
|
|
$
|
10,000
|
|
2004 Incentive:
|
97,000
|
|
|
$
|
5.22
|
|
|
5.0
|
|
$
|
—
|
|
|
97,000
|
|
|
$
|
5.22
|
|
|
5.0
|
|
$
|
—
|
|
The weighted average grant-date fair value of options granted in the first
three-months
of
fiscal 2019
and
fiscal 2018
was
$0.34
and
$0.65
. The total intrinsic value of options exercised during the first
three-months
of
fiscal 2019
and
fiscal 2018
was
$0
. As of
May 4, 2019
, total unrecognized compensation cost related to stock options was
$1,146,000
and is expected to be recognized over a weighted average period of approximately
1.6 years
.
Stock-Based Compensation - Restricted Stock Units
Compensation expense relating to restricted stock unit grants was
$438,000
and
$515,000
for the
first
quarters of
fiscal 2019
and
fiscal 2018
. As of
May 4, 2019
, there was
$2,251,000
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
2.0 years
. The total fair value of restricted stock units vested during the first
three months
of
fiscal 2019
and
fiscal 2018
was
$139,000
and
$410,000
. 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.
The Company has granted time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock generally vests in
three
equal annual installments beginning one year from the grant date and is being amortized as compensation expense over the
three
-year vesting period. The Company has also granted restricted stock units to non-employee directors as part of the Company's annual director compensation program. Each restricted stock grant vests or vested on the day immediately preceding the next annual meeting of shareholders following the date of grant. The grants are amortized as director compensation expense over the
twelve
-month vesting period.
The Company granted
765,000
and
489,000
market-based restricted stock performance units to executives as part of the Company's long-term incentive program during the
first
quarters of
fiscal 2019
and
fiscal 2018
. 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 2019
|
|
Fiscal 2018
|
Total grant date fair value
|
$393,000
|
|
$523,000
|
Total grant date fair value per share
|
$0.51
|
|
$1.07
|
Expected volatility
|
74%
|
|
73%
|
Weighted average expected life (in years)
|
3 years
|
|
3 years
|
Risk-free interest rate
|
2.3%
|
|
2.4%
|
The percent of the target market-based performance restricted stock unit award that will be earned based on the Company's TSR relative to the peer group is as follows:
|
|
|
|
Percentile Rank
|
|
Percentage of
Units Vested
|
< 33%
|
|
0%
|
33%
|
|
50%
|
50%
|
|
100%
|
100%
|
|
150%
|
On May 2, 2019, Timothy A. Peterman was appointed as Chief Executive Officer and entered into an executive employment agreement. In conjunction with the employment agreement, the Company granted
680,000
restricted stock units to Mr. Peterman. The restricted stock units vest in
three
tranches, each tranche consisting of one-third of the units subject to the award. Tranche 1 will vest upon the
one year
anniversary of the grant date. Tranche 2 will vest on the date the Company's average closing stock
price for
20
consecutive trading days equals or exceeds
$2.00
per share and the executive has been continuously employed at least
one
year. Tranche 3 will vest on the date the Company's average closing stock price for
20
consecutive trading days equals or exceeds
$4.00
per share and the executive has been continuously employed at least
two
years. The vesting of the second and third tranches can occur any time on or before
May 1, 2029
. The total grant date fair value was estimated to be
$220,000
and is being amortized over the derived service periods for each tranche.
Grant date fair values and derived service periods for each tranche were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
2.5%
, a weighted average expected life of
2.9 years
and an implied volatility of
80%
and were as follows for each tranche:
|
|
|
|
|
|
|
|
Fair Value (Per Share)
|
|
Derived Service Period
|
Tranche 1 (one year)
|
|
$0.37
|
|
1.00 Year
|
Tranche 2 ($2.00/share)
|
|
$0.32
|
|
3.27 Years
|
Tranche 3 ($4.00/share)
|
|
$0.29
|
|
4.53 Years
|
A summary of the status of the Company’s non-vested restricted stock unit activity as of
May 4, 2019
and changes during the
three-month period
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Market-Based Units
|
|
Time-Based Units
|
|
Total
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested outstanding, February 2, 2019
|
1,629,000
|
|
|
$
|
1.35
|
|
|
1,807,000
|
|
|
$
|
1.04
|
|
|
3,436,000
|
|
|
$
|
1.18
|
|
Granted
|
1,219,000
|
|
|
$
|
0.44
|
|
|
1,228,000
|
|
|
$
|
0.44
|
|
|
2,447,000
|
|
|
$
|
0.44
|
|
Vested
|
—
|
|
|
$
|
—
|
|
|
(330,000
|
)
|
|
$
|
1.08
|
|
|
(330,000
|
)
|
|
$
|
1.08
|
|
Forfeited
|
(417,000
|
)
|
|
$
|
1.50
|
|
|
(7,000
|
)
|
|
$
|
0.60
|
|
|
(424,000
|
)
|
|
$
|
1.48
|
|
Non-vested outstanding, May 4, 2019
|
2,431,000
|
|
|
$
|
0.86
|
|
|
2,698,000
|
|
|
$
|
0.76
|
|
|
5,129,000
|
|
|
$
|
0.81
|
|
(9)
Net Loss Per Common Share
During the fourth quarter of fiscal 2018, the Company issued a restricted stock award that meets the criteria of a participating security. Accordingly, basic income (loss) per share is computed using the two-class method under which earnings are allocated to both common shares and participating securities. Undistributed net losses are allocated entirely to common shareholders since the participating security has no contractual obligation to share in the losses. All shares of restricted stock are deducted from weighted-average number of common shares outstanding – basic. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods and is calculated using the treasury method.
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 4, 2019
|
|
May 5, 2018
|
Numerator:
|
|
|
|
|
Net loss (a)
|
|
$
|
(20,990,000
|
)
|
|
$
|
(2,986,000
|
)
|
Earnings allocated to participating share awards (b)
|
|
—
|
|
|
—
|
|
Net loss attributable to common shares — Basic and diluted
|
|
$
|
(20,990,000
|
)
|
|
$
|
(2,986,000
|
)
|
Denominator:
|
|
|
|
|
Weighted average number of common shares outstanding — Basic
|
|
67,318,462
|
|
|
65,360,951
|
|
Dilutive effect of stock options, non-vested shares and warrants (c)
|
|
—
|
|
|
—
|
|
Weighted average number of common shares outstanding — Diluted
|
|
67,318,462
|
|
|
65,360,951
|
|
Net loss per common share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.05
|
)
|
Net loss per common share — assuming dilution
|
|
$
|
(0.31
|
)
|
|
$
|
(0.05
|
)
|
(a) The net loss for the
three-month period
ended
May 4, 2019
includes costs related to executive and management transition of
$2,031,000
and an inventory impairment write-down of
$6,050,000
. 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
.
(b) During the fourth quarter of fiscal 2018, the Company issued a restricted stock award that is a participating security. For the
three-month period
ended
May 4, 2019
, the entire undistributed loss is allocated to common shareholders.
(c) For the
three-month period
s ended
May 4, 2019
and
May 5, 2018
, there were
173,000
and -
0
- incremental in-the-money potentially dilutive common shares outstanding. The incremental in-the-money potentially dilutive common stock shares are excluded from the computation of diluted earnings per share, as the effect of their inclusion would be anti-dilutive.
(10)
Business Segments and Sales by Product Group
The Company has
one
reporting segment, which encompasses its
interactive video and digital commerce
retailing. The Company markets, sells and distributes its products to consumers primarily through its video commerce television, online website, evine.com, and mobile platforms. The Company's television shopping, online and mobile platforms have similar economic characteristics with respect to products, product sourcing, vendors, marketing and promotions, gross margins, customers, and methods of distribution. In addition, the Company believes that its television shopping program is a key driver of traffic to both the evine.com website and mobile applications whereby many of the online sales originate from customers viewing the Company's television program and then placing their orders online or through mobile devices. All of the Company's sales are made to customers residing in the United States. The chief operating decision maker is the Chief Executive Officer of the Company.
Information on net sales by significant product groups are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended
|
|
|
May 4,
2019
|
|
May 5,
2018
|
Jewelry & Watches
|
|
$
|
52,143
|
|
|
$
|
56,793
|
|
Home & Consumer Electronics
|
|
24,027
|
|
|
31,042
|
|
Beauty & Wellness
|
|
21,981
|
|
|
27,022
|
|
Fashion & Accessories
|
|
22,354
|
|
|
26,572
|
|
All other (primarily shipping & handling revenue)
|
|
11,016
|
|
|
15,076
|
|
Total
|
|
$
|
131,521
|
|
|
$
|
156,505
|
|
(11)
Income Taxes
At
February 2, 2019
, the Company had federal net operating loss carryforwards (“NOLs”) of approximately
$338 million
which may be available to offset future taxable income. The Company's federal NOLs generated prior to 2018 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. The Company's federal NOLs generated in 2018 and after can be carried forward indefinitely.
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.
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. The Rights Plan will expire as of July 12, 2019 if the Company's shareholders do not re-approve the Rights Plan at the 2019 annual meeting of shareholders ("2019 Annual Meeting"). If the Company's shareholders re-approve the Rights Plan, the Rights Plan will expire on the close of business on the date of the third annual meeting of shareholders following the 2019 Annual Meeting, unless the Rights Plan is re-approved by shareholders prior to expiration.
(12)
Restricted Cash Equivalents
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 4, 2019
|
|
February 2, 2019
|
Cash
|
$
|
28,739,000
|
|
|
$
|
20,485,000
|
|
Restricted cash equivalents
|
450,000
|
|
|
450,000
|
|
Total cash and restricted cash equivalents
|
$
|
29,189,000
|
|
|
$
|
20,935,000
|
|
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
to
60
days.
(13)
Inventory Impairment Write-down
On May 2, 2019, Timothy A. Peterman was appointed Chief Executive Officer of the Company (See
Note 16
- “
Executive and Management Transition Costs
”) and implemented a new merchandise strategy to shift airtime and merchandise by increasing higher contribution margin categories, such as jewelry & watches and beauty & wellness and decreasing home and fashion & accessories. This change of strategy resulted in the need to liquidate excess inventory in the fashion & accessories and home product categories as a result of the reduced airtime being allocated to those categories. As a result, the Company recorded a non-cash inventory write-down of
$6,050,000
during the first quarter of fiscal 2019.
(14)
Litigation
The Company is involved from time to time in various claims and lawsuits in the ordinary course of business, including claims related to products, product warranties, 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.
(15)
Related Party Transactions
Director Relationships
On May 2, 2019, in accordance with the Purchase Agreement described in
Note 8
- "
Shareholders' Equity
", the Company's Board of directors elected Michael Friedman and Eyal Lalo to the board for a term expiring at our 2019 annual meeting of shareholders, and appointed Mr. Lalo as the vice chair of the board. Mr. Lalo reestablished Invicta, the flagship brand of the Invicta Watch Group and one of the Company's largest brands, in 1994, and has served as its chief executive officer since its inception. Mr. Friedman has served as chief executive officer of Sterling Time, which is the exclusive distributor of IWCA’s watches and watch accessories for television home shopping and our long-time vendor, since 2005 and served as a vendor to the Company for over
20
years. Under the Purchase Agreement, the Company agreed to recommend that our shareholders vote to re-elect each of Eyal Lalo and Michael Friedman as a director of the Company at the 2019 annual meeting of shareholders for a term of office expiring at the 2020 annual meeting of shareholders, and to reflect such recommendation in the proxy statement for the 2019 annual meeting and solicit proxies in favor thereof. For their service as non-employee members of the board of directors, Messrs. Friedman and Lalo will receive compensation under the Company's non-employee director compensation policy. Each director receives
$65,000
in a cash retainer annually for service on our board. In addition, the Company's non-employee directors receive a restricted stock unit award equal to
$65,000
divided by the closing price on the date of grant that vest on the day immediately prior to the next annual meeting of shareholders. These amounts will be prorated for the partial year, resulting in an award of
20,436
restricted stock units on May 2, 2019.
Mr. Lalo is the owner of IWCA, which is the sole owner of Invicta Media Investments, LLC. Mr. Friedman is an owner of Sterling Time. Pursuant to the Purchase Agreement, Invicta Media Investments, LLC purchased
4,000,000
shares of the Company's common stock and a warrant to purchase
2,526,562
shares of the Company's common stock for an aggregate purchase price of
$3,000,000
. Pursuant to the Purchase Agreement, Michael and Leah Friedman purchased
1,800,000
shares of the Company's common stock and a warrant to purchase
842,188
shares of the Company's common stock for an aggregate purchase price of
$1,350,000
.
In the
first
quarter of
fiscal 2019
and
fiscal 2018
, the Company purchased products from Sterling Time, an affiliate of Mr. Friedman, in the aggregate amount of
$15.4 million
and
$12.3 million
. The Company purchased goods from Sterling Time on standard commercial terms. In the
first
quarter of
fiscal 2019
, the Company subsidized the cost of a promotional cruise for Invicta branded and other vendors’ products.
(16)
Executive and Management Transition Costs
On May 2, 2019, Robert J. Rosenblatt, the Company's Chief Executive Officer, was terminated from his position as an officer and employee of the Company and will receive the payments set forth in his existing employment agreement. The Company recorded charges to income totaling
$1,922,000
as a result. Mr. Rosenblatt remained a member of the Company's board of directors. On May 2, 2019, in accordance with the Purchase Agreement, the Company's board of directors appointed Timothy A. Peterman to serve as Chief Executive Officer, effective immediately and entered into an employment agreement with Mr. Peterman. In conjunction with these executive changes as well as other executive and management terminations made during the first
three months
of fiscal 2019, the Company recorded charges to income totaling
$2,031,000
for the
three-months
ended
May 4, 2019
, which relate primarily to severance payments to be made as a result of the chief executive officer and other management terminations and other direct costs associated with the Company's 2019 executive and management transition.
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 May 29, 2019, subsequent to the fiscal 2019 first quarter, the Company announced the completion of a cost optimization event which is expected to eliminate approximately
$15 million
in annual overhead costs. The event included a
20%
reduction to the Company's non-variable workforce. In connection with the cost optimization event, the Company's (a) Executive Vice President, Chief Financial Officer, (b) Senior Vice President, Chief Accounting Officer, (c) Executive Vice President, General Counsel & Corporate Secretary, and (d) Executive Vice President, Managing Director of Brand Development ceased serving in such roles effective May 28, 2019. The Company expects to record charges of approximately
$4.0 million
to
$4.5 million
for severance
payments and other termination costs. On May 29, 2019, the Company announced the appointment of a new Chief Financial Officer, who was promoted from the previous position as Vice President, Finance and Investor Relations.
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 2, 2019
.
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 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 facility 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 most 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 an
interactive media 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 programming 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. Our programming 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 website address is www.evine.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy and information statements, and amendments to these reports if applicable, are available, without charge, on our investor relations website at investors.evine.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies also are available, without charge, by contacting the General Counsel, EVINE Live Inc., 6740 Shady Oak Road, Eden Prairie, Minnesota 55344-3433. Our goal is to maintain the investor relations website as a way for investors to easily find information about us, including press releases, announcements of investor conferences, investor and analyst presentations and corporate governance. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically.
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 2019
. We are focused on diversifying our merchandise assortment within our existing product categories as well as 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.
|
|
|
|
|
|
|
|
For the Three-Month
|
|
|
Periods Ended
|
|
|
May 4,
2019
|
|
May 5,
2018
|
Net Merchandise Sales by Category
|
|
|
|
|
Jewelry & Watches
|
|
43%
|
|
40%
|
Home & Consumer Electronics
|
|
20%
|
|
22%
|
Beauty & Wellness
|
|
18%
|
|
19%
|
Fashion & Accessories
|
|
19%
|
|
19%
|
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. During the first quarter of fiscal 2019, we started implementing a new strategy to shift airtime and merchandise mix into higher contribution margin categories, such as jewelry & watches and beauty & wellness to drive better customer engagement, and improve our merchandising margin and shipping margin. We also expect this changed mix will lower our variable costs as a percentage of revenue. 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 an interactive media company, our strategy includes developing and growing multiple monetization models, including TV retailing, eCommerce, advertising and service fees to grow our business. We expect that these initiatives build upon our core strengths and provide us an advantage in the marketplace. We will be changing our corporate name to iMedia Brands, Inc. to reflect our broader portfolio of media brands.
Our strategy includes offering our curated assortment of proprietary, exclusive (i.e., products that are not readily available elsewhere), emerging and name-brand products. Our programming 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 as well as over-the-air broadcast and over-the-top platforms. Our merchandising plan is focused on delivering a balanced assortment of profitable products presented in an engaging, entertaining, shopping-centric format using our unique expertise in storytelling and “live on location” broadcasting. 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, as well as leveraging our capacity, system capability and expertise in distribution and product development to generate new business relationships. We believe these initiatives will position us to deliver a more engaging and enjoyable customer experience with product offerings and service that exceed customer expectations. We are planning to change the name of the Evine network back to ShopHQ, which was the name of the network in 2014. ShopHQ is
easier to recognize for existing television retailing customers and we believe this more intuitive and recognizable name will allow us to better promote our network and build our customer file again.
Our growth strategy also includes building profitable niche interactive media networks and services, such as Shop Bulldog and LaVenta. We plan to rebrand our existing Evine Too channel into a new omni-channel, television shopping brand that will sell and advertise men's merchandise and services, and the aspirational lifestyles associated with its brands and personalities. In addition, in 2020, we expect to launch a new omni-channel, Spanish language, television shopping brand centered on the Latin culture to sell and advertise merchandise, services and personalities, celebrating aspirational lifestyles. To grow our service revenue, we recently launched our first customer with our new third party logistics services. We plan to expand our service offering to provide a “one-stop commerce services offering” targeting brands interested in propelling their growth using our unique combination of assets in television, web and third party logistics services.
Program Distribution
Our 24-hour television shopping programs, 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 4, 2019
and
May 5, 2018
. Our television home shopping programming is also simulcast 24 hours a day, 7 days a week on our 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, ensures that our programming 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 reaching deals to launch our programming on high definition ("HD") channels. 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, in fiscal 2017, transitioned to a full HD signal. We believe that having an HD feed of our service allows us to attract new viewers and customers.
Cable and Satellite Distribution Agreements
We have entered into distribution agreements with cable operators, direct-to-home satellite providers and telecommunications companies to distribute our television programming over their systems. The terms of the distribution agreements typically range from
one
to
five
years. During the fiscal year, certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the cable operators or we may cancel the agreements prior to their expiration. Additionally, we may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. If the operator drops our service or if either we or the operator fails to reach mutually agreeable business terms concerning the distribution of our service so that the agreements are terminated, our business may be materially adversely affected. Failure to maintain our distribution agreements covering a material portion of our existing households on acceptable financial and other terms could materially and adversely affect our future growth, sales and earnings unless we are able to arrange for alternative means of broadly distributing our television programming.
Our Competition
The
video and 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 commerce 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 and digital 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 and profitability per customer.
Summary Results for the
First
Quarter of
Fiscal 2019
Consolidated net sales for our
fiscal 2019
first
quarter were
$131.5 million
compared to
$156.5 million
for our
fiscal 2018
first
quarter, which represents a
16%
decrease
. We reported an operating loss of
$20.2 million
and a net loss of
$21.0 million
for our
fiscal 2019
first
quarter. The operating and net loss for the
fiscal 2019
first
quarter included an inventory impairment write-down of
$6.1 million
and charges relating to executive and management transition costs totaling
$2.0 million
. We had 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
.
Private Placement Securities Purchase Agreement
On May 2, 2019, we entered into a private placement securities purchase agreement ("Purchase Agreement") with certain accredited investors pursuant to which we: (a) sold, in the aggregate,
8,000,000
shares of our common stock at a price of
$0.75
per share and (b) issued five-year warrants ("5-year Warrants") to purchase
3,500,000
shares of our common stock at an exercise price of
$1.50
per share. The 5-year Warrants are exercisable in whole or in part from time to time through the expiration date of
May 2, 2024
. The purchasers included Invicta Media Investments, LLC, Michael and Leah Friedman, Timothy Peterman and certain other private investors. Invicta Media Investments, LLC is owned by Invicta Watch Company of America, Inc. (“IWCA”), which is the designer and manufacturer of Invicta-branded watches and watch accessories, one of our largest and longest tenured brands. Michael and Leah Friedman are owners and officers of Sterling Time, LLC (“Sterling Time”), which is the exclusive distributor of IWCA’s watches and watch accessories for television home shopping and our long-time vendor. A description of the relationship between our company, ICWA and Sterling Time is contained in
Note 15
- “
Related Party Transactions
” in the notes to our condensed consolidated financial statements. Under the Purchase Agreement, the purchasers agreed to customary standstill provisions related to our company for a period of
two
years, as well as to vote their shares in favor of matters recommended by our board of directors for approval by our shareholders. In addition, we agreed in the Purchase Agreement to appoint Eyal Lalo, an owner of IWCA, as vice chair of our board of directors, Michael Friedman to our board of directors and Timothy Peterman as our chief executive officer.
In connection with the closing under the Purchase Agreement, we entered into certain other agreements with IWCA, Sterling Time and the purchasers, including a
5
-year vendor exclusivity agreement with Sterling Time and IWCA. The vendor exclusivity agreement grants us the exclusive right in television shopping to market, promote and sell the products from IWCA.
The Company received gross proceeds of
$6.0 million
and incurred approximately
$175,000
of issuance costs. We plan to use the proceeds for general working capital purposes. The
5
-year Warrants were issued primarily as consideration for a
five
-year vendor exclusivity agreement with IWCA and Sterling Time. The aggregate market value of the
5
-year Warrants on the grant date was
$193,000
, which was recorded as an intangible asset and is being amortized as cost of sales over the agreement term.
Inventory Impairment Write-down
On May 2, 2019, Timothy A. Peterman was appointed Chief Executive Officer of the Company (see
Note 16
- “
Executive and Management Transition Costs
” in the notes to our condensed consolidated financial statements) and implemented a new merchandise strategy to shift airtime and merchandise by increasing higher contribution margin categories, such as jewelry & watches and beauty & wellness and decreasing home and fashion & accessories. This change of strategy resulted in the need to liquidate excess inventory in the fashion & accessories and home product categories as a result of the reduced airtime being allocated to those categories. As a result, we recorded a non-cash inventory write-down of
$6.1 million
during the first quarter of fiscal 2019.
Executive and Management Transition Costs
On May 2, 2019, Robert J. Rosenblatt, our Chief Executive Officer, was terminated from his position as an officer and employee of our company and will receive the payments set forth in his existing employment agreement. Mr. Rosenblatt remained a member of our board of directors. On May 2, 2019, in accordance with the Purchase Agreement, our board of directors appointed Timothy A. Peterman to serve as Chief Executive Officer, effective immediately and entered into an employment agreement with
Mr. Peterman. In conjunction with these executive changes as well as other executive and management terminations made during the first
three months
of fiscal 2019, we recorded charges to income totaling
$2.0 million
for the
three-months
ended
May 4, 2019
, 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 2019 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 4,
2019
|
|
May 5,
2018
|
Net sales
|
|
100.0%
|
|
100.0%
|
|
|
|
|
|
Gross margin
|
|
28.4%
|
|
35.9%
|
Operating expenses:
|
|
|
|
|
Distribution and selling
|
|
35.6%
|
|
31.2%
|
General and administrative
|
|
5.2%
|
|
4.3%
|
Depreciation and amortization
|
|
1.3%
|
|
1.0%
|
Executive and management transition costs
|
|
1.6%
|
|
0.7%
|
|
|
43.7%
|
|
37.2%
|
Operating loss
|
|
(15.3)%
|
|
(1.3)%
|
Key Performance Metrics
|
|
|
|
|
|
|
|
For the Three-Month
|
|
Periods Ended
|
|
May 4,
2019
|
|
May 5,
2018
|
|
Change
|
Merchandise Metrics
|
|
|
|
|
|
Gross margin %
|
28.4%
|
|
35.9%
|
|
(750) bps
|
Net shipped units (in thousands)
|
1,899
|
|
2,472
|
|
(23)%
|
Average selling price
|
$63
|
|
$57
|
|
11%
|
Return rate
|
20.2%
|
|
18.9%
|
|
130 bps
|
Digital net sales % (a)
|
52.8%
|
|
53.0%
|
|
(20) bps
|
Total Customers - 12 Month Rolling (in thousands)
|
1,179
|
|
1,269
|
|
(7)%
|
(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 2019
first
quarter
decrease
d
23%
from the prior year comparable quarter to approximately
1.9 million
. The
decrease
in net shipped units during the
first
quarter of
fiscal 2019
was driven primarily by a decrease in consolidated net sales and by offering a higher average selling price assortment in our jewelry & watches and beauty & wellness product categories.
Average Selling Price
The average selling price ("ASP") per net unit was
$63
in the
first
quarter of
fiscal 2019
, an
11%
increase
from the prior year quarter. The
increase
in the
first
quarter ASP was primarily driven by ASP increases in our jewelry & watches and beauty & wellness product categories, combined with a mix shift into jewelry & watches.
Return Rates
For the three months ended
May 4, 2019
, our return rate was
20.2%
compared to
18.9%
for the comparable prior year quarter, a
130
basis point
increase
. The
increase
in the return rates was driven primarily by a sales mix shift out of the home & consumer electronics category and into our jewelry & watches category, which has a higher return rate. The
increase
was additionally driven by return rate increases in our jewelry & watches and beauty & wellness product categories commensurate with the ASP increases in these categories. We continue to monitor our return rates in an effort to keep our overall return rates commensurate with our current product mix and our ASP levels.
Total Customers
Total customers who have purchased over the last twelve months
decrease
d
7%
over the prior year to approximately
1.2 million
. The
decrease
was driven primarily by a reduction in new customers as compared to the prior year.
Net Sales
Consolidated net sales, inclusive of shipping and handling revenue, for the
fiscal 2019
first
quarter were
$131.5 million
, a
16%
decrease
from consolidated net sales of
$156.5 million
for the comparable prior year quarter. The
decrease
in quarterly consolidated net sales was driven by decreases in all product categories. During the
first
quarter of fiscal 2019, net sales from home & consumer electronics and fashion & accessories decreased as a result of reduced airtime and productivity. Net sales from beauty & wellness and jewelry & watches decreased as a result of reduced 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
52.8%
for the
first
quarter of
fiscal 2019
compared to
53.0%
in the comparable prior year period. Overall, we continue to deliver strong digital sales penetration. Our mobile penetration
increase
d to
58.7%
of total digital orders in the
first
quarter of
fiscal 2019
versus
49.4%
of total digital orders for the comparable prior year period.
Gross Profit
Gross profit for the
first
quarter of
fiscal 2019
was
$37.3 million
, a
decrease
of
$19.0 million
, or
34%
, compared to the
first
quarter of
fiscal 2018
. The
decrease
in gross profit during the
first
quarter of
fiscal 2019
was primarily driven by the decrease in net sales, a non-cash inventory impairment write-down of
$6.1 million
, and lower gross profit percentages experienced in most product categories. The non-cash inventory impairment write-down was the result of the new planned shift in our airtime and merchandise mix into higher margin categories, such as jewelry & watches and beauty & wellness and out of home and fashion & accessories and to liquidate excess inventory in the fashion and home product categories. Gross margin percentages for the
first
quarters of
fiscal 2019
and
fiscal 2018
were
28.4%
and
35.9%
, which represent a
750
basis point
decrease
. The
decrease
in the gross margin percentage reflects the inventory write-down and decreased margin rates, primarily in our beauty & wellness and fashion & accessories categories. The decrease in beauty & wellness reflects a mix shift within the product category to brands with lower margins, while the decrease in fashion & accessories reflects margin rate pressure resulting from softer than expected sales.
Operating Expenses
Total operating expenses for the
fiscal 2019
first
quarter were approximately
$57.4 million
compared to
$58.2 million
for the comparable prior year period, a
decrease
of
1.3%
. Total operating expenses as a percentage of net sales were
43.7%
and
37.2%
during the
first
quarters of
fiscal 2019
and
fiscal 2018
. Total operating expenses for the
fiscal 2019
first
quarter included executive and management transition costs of
$2.0 million
, while total operating expenses for the
fiscal 2018
first
quarter included executive and management transition costs of
$1.0 million
. Excluding executive and management transition costs, total operating expenses as a percentage of net sales for the
first
quarters of
fiscal 2019
and
fiscal 2018
were
42.1%
and
36.5%
.
Distribution and selling expense
decrease
d
$2.0 million
, or
4%
, to
$46.9 million
, or
35.6%
of net sales during the
fiscal 2019
first
quarter compared to
$48.9 million
, or
31.2%
of net sales for the comparable prior year fiscal quarter. Distribution and selling expense
decrease
d during the quarter due to decreased variable costs of
$1.6 million
, decreased program distribution expense of
$314,000
and decreased software service fees of
$132,000
. The decrease in variable costs was primarily driven by decreased variable credit card processing fees and bad debt credit expense of
$1.1 million
and decreased variable fulfillment and customer service salaries and wages of
$440,000
. Total variable expenses during the
first
quarter of
fiscal 2019
were approximately
9.8%
of total net sales versus
9.3%
of total net sales for the prior year comparable period. Variable expense dollars for the quarter
declined as a result of decreases in net sales and net shipped units, as well as we continue to find efficiencies through process and technology. Variable expense as a percentage of net sales was
9.8%
or
50
basis points higher than last year, reflecting the deleveraging of our fulfillment, credit, and customer solution expense categories.
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 change. 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 2019
first
quarter
increase
d
$150,000
, or
2%
, to
$6.9 million
or
5.2%
of net sales, compared to
$6.7 million
or
4.3%
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 professional fees of
$172,000
and increased salaries of
$124,000
, partially offset by decreased software maintenance and services fees of
$73,000
and decreased telecommunications expense of
$59,000
.
Depreciation and amortization expense for the
fiscal 2019
first
quarter
increase
d
$107,000
, or
7%
, to
$1.7 million
compared to
$1.6 million
for the comparable prior year period. Depreciation and amortization expense as a percentage of net sales for the three-month periods ended
May 4, 2019
and
May 5, 2018
was
1.3%
and
1.0%
. The
increase
in the quarterly depreciation and amortization expense was primarily due to an average net increase in our non-fulfillment depreciable asset base year over year.
Operating Loss
For the
fiscal 2019
first
quarter, we reported an operating loss of approximately
$20.2 million
compared to an operating loss of
$1.9 million
for the
fiscal 2018
first
quarter. For the
first
quarter of
fiscal 2019
, our operating loss increased primarily as a result of a decrease in gross profit driven by a decrease in consolidated net sales, a decrease in margin rates, a non-cash inventory write-down of
$6.1 million
, and increases in executive and management transition costs, general and administrative expense, and depreciation and amortization expense. The increase in our operating loss was partially offset by a decrease in distribution and selling expense.
Net Loss
For the
fiscal 2019
first
quarter, we reported a net loss of
$21.0 million
or
$0.31
per share on
67,318,462
weighted average basic common shares outstanding compared with a net loss of
$3.0 million
or
$0.05
per share on
65,360,951
weighted average basic common shares outstanding in the
fiscal 2018
first
quarter. The net loss for the
first
quarter of
fiscal 2019
includes a non-cash inventory write-down of
$6.1 million
, executive and management transition costs of
$2.0 million
and interest expense of
$830,000
. The net loss for the
first
quarter of
fiscal 2018
included executive and management transition costs of
$1.0 million
, contract termination costs of
$753,000
and interest expense of
$1.0 million
.
For the
first
quarters of
fiscal 2019
and
fiscal 2018
, the net loss reflects an income tax provision of
$15,000
and
$20,000
. The income tax provision for both quarters relates to state income taxes payable on certain income for which there is no loss carryforward benefit available. We have not recorded any income tax benefit on 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 2019
first
quarter was
$(8.5) million
compared with Adjusted EBITDA of
$3.3 million
for the
fiscal 2018
first
quarter.
A reconciliation of the comparable GAAP measure, net loss, to Adjusted EBITDA follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month
|
|
|
Periods Ended
|
|
|
May 4,
2019
|
|
May 5,
2018
|
Net loss
|
|
$
|
(20,990
|
)
|
|
$
|
(2,986
|
)
|
Adjustments:
|
|
|
|
|
Depreciation and amortization
|
|
2,629
|
|
|
2,620
|
|
Interest income
|
|
(5
|
)
|
|
(7
|
)
|
Interest expense
|
|
830
|
|
|
1,026
|
|
Income taxes
|
|
15
|
|
|
20
|
|
EBITDA (a)
|
|
$
|
(17,521
|
)
|
|
$
|
673
|
|
|
|
|
|
|
A reconciliation of EBITDA to Adjusted EBITDA is as follows:
|
|
|
|
|
EBITDA (a)
|
|
$
|
(17,521
|
)
|
|
$
|
673
|
|
Adjustments:
|
|
|
|
|
Executive and management transition costs
|
|
2,031
|
|
|
1,024
|
|
Inventory impairment write-down
|
|
6,050
|
|
|
—
|
|
Contract termination costs
|
|
—
|
|
|
753
|
|
Non-cash share-based compensation expense
|
|
966
|
|
|
820
|
|
Adjusted EBITDA (a)
|
|
$
|
(8,474
|
)
|
|
$
|
3,270
|
|
(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, non-cash impairment charges and write downs, contract termination costs 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 2018
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 4, 2019
, we had cash of
$28.7 million
and had restricted cash equivalents of
$450,000
. Our restricted cash equivalents are generally restricted for a period ranging from 30 to 60 days. In addition, under the PNC Credit Facility (as defined below), we are required to maintain a minimum of
$10 million
of unrestricted cash plus unused line availability at all times. As of
February 2, 2019
, we had cash of
$20.5 million
and had restricted cash equivalents of
$450,000
. For the first
three
months of
fiscal 2019
, working capital
decrease
d
$14.7 million
to
$66.2 million
(see "Cash Requirements" below for additional information on changes in working capital accounts). The current ratio (our total current assets over total current liabilities) was
1.7
at
May 4, 2019
and
1.8
at
February 2, 2019
.
Sources of Liquidity
Our principal source of liquidity is our available cash and our additional borrowing capacity under our revolving credit facility with PNC Bank, N.A. ("PNC"), a member of The PNC Financial Services Group, Inc. As of
May 4, 2019
, we had cash of
$28.7 million
and additional borrowing capacity of
$5.7 million
. Our cash 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 July 27, 2018, the "PNC Credit Facility") with PNC, 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 previously outstanding term loan with GACP Finance Co., LLC. 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.
All borrowings under the PNC Credit Facility mature and are payable on
July 27, 2023
. 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 either a Base Rate or LIBOR plus a margin consisting of between
1%
and
2%
on Base Rate advances and
2%
and
3%
on LIBOR advances based on our trailing twelve-month reported leverage ratio (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
2%
and
3%
on Base Rate term loans and
3%
to
4%
on LIBOR Rate term loans based on our leverage ratio measured annually as demonstrated in our audited financial statements.
As of
May 4, 2019
, we had borrowings of
$53.9 million
under our revolving line of credit. As of
May 4, 2019
, the term loan under the PNC Credit Facility had
$17.0 million
outstanding, of which
$2.7 million
was classified as current in the accompanying balance sheet. Remaining available capacity under the revolving credit facility as of
May 4, 2019
was approximately
$5.7 million
, which provides liquidity for working capital and general corporate purposes. In addition, as of
May 4, 2019
, our unrestricted cash plus unused line availability was
$34.4 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 modified term loan are to be payable in monthly installments over an
84
-month amortization period commencing on September 1, 2018 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.
Private Placement Securities Purchase Agreement
On May 2, 2019, we entered into a Purchase Agreement with certain accredited investors to which we: (a) sold, in the aggregate,
8,000,000
shares of our common stock at a price of
$0.75
per share and (b) issued 5-year Warrants to purchase
3,500,000
shares of our common stock at an exercise price of
$1.50
per share. The 5-year Warrants are exercisable in whole or in part from time to time through the expiration date of
May 2, 2024
. The Company received gross proceeds of
$6.0 million
and incurred approximately
$175,000
of issuance costs. We plan to use the proceeds for general working capital purposes.
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 facility. As of February 2, 2019, we had contractual cash obligations and commitments, primarily with respect to our cable and satellite agreements, credit facility, operating leases, and finance leases totaling approximately $240.7 million over the next five fiscal years. During fiscal 2018 and fiscal 2019, we experienced a decline in customers and lost a significant brand which contributed to a decrease in our consolidated net sales and corresponding decrease in profitability. Additionally, our stock price has declined and is currently trading below $1.00 and as a result, we have received a notification that we are out of compliance with Nasdaq listing requirements. We have taken, or are taking the following steps to enhance our operations and liquidity position: entered into a private placement securities purchase agreement in which we received gross proceeds of
$6.0 million
during the first quarter of fiscal 2019, implemented a cost reduction in overhead costs with $15 million in expected annualized savings, primarily driven by a 20% reduction in our non-variable work force; planned a reduction in capital expenditures compared to prior years; managed our inventory levels commensurable with our sales; launched a new marquee beauty brand in January 2019; and partnering with well-known personalities to develop and market exclusive lifestyle brands. Our ability to fund operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations, maintain or improve margins, decrease the rate of decline in our sales and to use available funds from our PNC Credit Facility. Our ability to borrow funds is dependent on our ability to maintain an adequate borrowing base and our ability to meet our credit facility's covenants, which requires, among other things, maintaining a minimum of
$10 million
of unrestricted cash plus facility availability at all times. Accordingly, if we do not generate sufficient cash flow from operations to fund our working capital needs and planned capital expenditures, and our cash reserves are depleted, we may need to take further actions, such as reducing or delaying capital investments, strategic investments or other actions. 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 from the issuance of this report. However, there can be no assurance that we will be able to achieve our strategic initiatives or obtain additional funding on favorable terms in the future which could have a significant adverse effect on our operations.
For the
three months
ended
May 4, 2019
, net cash provided by operating activities totaled
$4.7 million
compared to net cash provided by operating activities of approximately
$11.7 million
for the comparable
fiscal 2018
period. Net cash provided by operating activities for the
fiscal 2019 and 2018
periods reflects the net loss, as adjusted for depreciation and amortization, share-based payment compensation, inventory impairment write-down, amortization of deferred revenue and amortization of deferred financing costs. In addition, net cash provided by operating activities for the
three months
ended
May 4, 2019
reflects a decrease in accounts receivable, inventory, and prepaid expenses and other and an increase in accounts payable and accrued liabilities.
Accounts receivable primarily decreased during the first
three months
of
fiscal 2019
as a result of collections made on outstanding receivables balances resulting from our seasonal high fourth quarter and a decrease in sales. Inventories decreased as a result of managing our inventory levels commensurable with our sales. Accounts payable and accrued liabilities increased during the first
three months
of
fiscal 2019
primarily due to an increase in inventory payables as a result of the timing of payments made to vendors, an increase in accrued severance resulting from our 2019 executive and management transition, an increase in accrued cable distribution fees due to timing of payments and an increase in accrued salaries due to timing of payments. The increase in accounts payable and accrued liabilities was partially offset by a decrease in our merchandise return liability.
Net cash used for investing activities totaled
$1.8 million
for the first
three months
of
fiscal 2019
compared to net cash used for investing activities of
$2.1 million
for the comparable
fiscal 2018
period. For the
three months
ended
May 4, 2019
and
May 5, 2018
, expenditures for property and equipment were approximately
$1.8 million
and
$2.1 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, 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 provided by financing activities totaled
$5.3 million
for the
three months
ended
May 4, 2019
and related primarily to proceeds from the PNC revolving loan of
$58.3 million
and proceeds from the issuance of common stock and warrants of
$6.0 million
, offset by principal payments on the PNC revolving loan of
$58.3 million
, principal payments on our PNC term loan of
$678,000
, tax payments for restricted stock unit issuances of
$8,000
and finance lease payments of
$3,000
. 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 tax payments for restricted stock unit issuances of
$100,000
, partially offset by proceeds from the PNC revolving loan of
$50.5 million
.