NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Description of the Company and Basis of Presentation
Tillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and we operated
222
stores, including
three
RSQ-branded pop-up stores, in
31
states as of
May 5, 2018
. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.
The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984 the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.
As used in these Notes to Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "World of Jeans and Tops", "WOJT", "we", "our", "us" and "Tillys" refer to WOJT before our initial public offering, and to Tilly's, Inc. and its subsidiary after our initial public offering.
We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"), for interim financial reporting. These consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q as is permitted by SEC rules and regulations.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the first quarters ended
May 5, 2018
and
April 29, 2017
are not necessarily indicative of results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended
February 3, 2018
("fiscal 2017").
Fiscal Periods
Our fiscal year ends on the Saturday closest to January 31. References to fiscal 2018 refer to the fiscal year ending February 2, 2019. References to the fiscal quarters ended
May 5, 2018
, and
April 29, 2017
, refer to the
first quarter ended
as of those dates.
Note 2: Summary of Significant Accounting Policies
Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended
February 3, 2018
.
Recently Adopted Accounting Standard
On February 4, 2018, we adopted Financial Accounting Standards Board (the "FASB") Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
("ASC 606") using the modified retrospective transition method, which under ASC 606, means the standard applies retrospectively with the cumulative effect recognized in the opening retained earnings balance in fiscal 2018. Comparative information for the prior year fiscal quarter has not been adjusted and continues to be reported under the previous standard ASC 605. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to our customers at an amount we expect to be entitled to in exchange for those goods or services. The adoption of this standard requires us to recognize gift card breakage income in proportion to redemptions as they occur. The new guidance also requires enhanced disclosures, such as disaggregation of revenues and revenue recognition policies that require significant judgment and identification of performance obligations to customers.
The adoption of ASC 606 resulted in a net cumulative effect adjustment that increased the opening balance of retained earnings by approximately
$1.4 million
, as well as the following impacts:
|
|
•
|
Breakage revenue is now recognized over time in proportion to actual customer redemptions. Breakage revenue was previously recognized two full fiscal years after the gift cards were activated when the probability of redemption was considered remote.
|
|
|
•
|
Revenue for merchandise shipped to the customer from a distribution center or store is now recognized at the shipping point, whereas it was previously recognized upon customer receipt.
|
The impact of the adoption of ASC 606 on the consolidated balance sheet as of May 5, 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Balances without adoption of ASC 606
|
|
Effect of Adoption
Increase (Decrease)
|
Merchandise inventories
|
$
|
56,837
|
|
|
$
|
57,266
|
|
|
$
|
(429
|
)
|
Other assets
|
3,277
|
|
|
3,813
|
|
|
(536
|
)
|
Accrued expenses
|
23,713
|
|
|
23,620
|
|
|
93
|
|
Deferred revenue
|
7,622
|
|
|
10,387
|
|
|
(2,765
|
)
|
Retained earnings
|
19,068
|
|
|
17,361
|
|
|
1,707
|
|
The impact of the adoption of ASC 606 on our consolidated statement of operations for the three months ended May 5, 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Balances without adoption of ASC 606
|
|
Effect of Adoption
Increase (Decrease)
|
Net sales
|
$
|
123,634
|
|
|
$
|
123,042
|
|
|
$
|
592
|
|
Cost of goods sold
|
88,657
|
|
|
88,418
|
|
|
239
|
|
Gross profit
|
34,977
|
|
|
34,624
|
|
|
353
|
|
Revenue Recognition
Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the accompanying Consolidated Statements of Operations.
The following table summarizes net sales from our retail stores compared to e-commerce (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
Retail stores
|
$
|
108,501
|
|
|
$
|
104,695
|
|
E-commerce
|
15,133
|
|
|
16,252
|
|
Total net sales
|
$
|
123,634
|
|
|
$
|
120,947
|
|
We accrue for estimated sales returns by customers based on historical sales return results. As of
May 5, 2018
, February 3, 2018 and April 29, 2017, our reserve for sales returns was
$1.6 million
,
$1.1 million
and
$1.4 million
, respectively.
We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. The customer liability balance was
$6.3 million
,
$9.2 million
and
$6.3 million
as of
May 5, 2018
, February 3, 2018 and April 29, 2017, respectively, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Revenue recognized from gift cards was
$3.7 million
and
$4.3 million
for the first quarters ended
May 5, 2018
and April 29, 2017, respectively.
We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns awards that may be redeemed for merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. We expire unredeemed awards after
45 days
from date of issuance and accumulated partial points
365 days
after the last purchase activity. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was
$1.3 million
,
$1.2 million
and
$0.7 million
as of May 5, 2018, February 3, 2018 and April 29, 2017, respectively. Revenue recognized from our loyalty program was
$0.3 million
and
$0.1 million
for the first quarters ended
May 5, 2018
and April 29, 2017, respectively.
Income taxes
The Securities and Exchange Commission has issued interpretive guidance under Staff Accounting Bulletin No. 118 ("SAB 118") that allows for a measurement period up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We have not made any provision adjustments during the first quarter ended May 5, 2018. We are continuing to assess the final impact of the guidance which we expect to complete within the one-year time frame provided by SAB 118.
New Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Accounting Standards Codification 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. ASU 2016-02, which will become effective for us in the first quarter of fiscal 2019, with early adoption permitted, must be adopted using the modified retrospective method. The new standard is expected to impact our consolidated financial statements as we conduct all of our retail sales and corporate operations in leased facilities. We are in the process of evaluating the impact of adopting the new standard on our consolidated financial statements.
Note 3: Marketable Securities
Marketable securities as of
May 5, 2018
consisted of commercial paper, classified as available-for-sale, and fixed income securities, are classified as held-to-maturity as we have the intent and ability to hold them to maturity. Our investments in commercial paper and fixed income securities are recorded at fair value and amortized cost, which approximates fair value, respectively. All of our marketable securities are less than one year from maturity.
The following table summarizes our investments in marketable securities at
May 5, 2018
,
February 3, 2018
and
April 29, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Holding Gains
|
|
Estimated
Fair Value
|
Commercial paper
|
$
|
49,548
|
|
|
$
|
152
|
|
|
$
|
49,700
|
|
Fixed income securities
|
14,099
|
|
|
—
|
|
|
14,099
|
|
|
$
|
63,647
|
|
|
$
|
152
|
|
|
$
|
63,799
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Holding Gains
|
|
Estimated
Fair Value
|
Commercial paper
|
$
|
59,566
|
|
|
$
|
23
|
|
|
$
|
59,589
|
|
Fixed income securities
|
23,119
|
|
|
42
|
|
|
23,161
|
|
|
$
|
82,685
|
|
|
$
|
65
|
|
|
$
|
82,750
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Holding Gains
|
|
Estimated
Fair Value
|
Commercial paper
|
$
|
44,735
|
|
|
$
|
72
|
|
|
$
|
44,807
|
|
Fixed income securities
|
8,000
|
|
|
26
|
|
|
8,026
|
|
|
$
|
52,735
|
|
|
$
|
98
|
|
|
$
|
52,833
|
|
We recognized gains on investments for commercial paper that matured during the three months ended
May 5, 2018
and
April 29, 2017
. Upon recognition of the gains, we reclassified these amounts out of accumulated other comprehensive income (loss) and into “Other income, net” on the Consolidated Statements of Operations.
The following table summarizes our gains on investments for commercial paper (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
Gains on investments
|
$
|
195
|
|
|
$
|
152
|
|
Note 4: Line of Credit
Our amended and restated credit agreement with Wells Fargo Bank, N.A. (the "Bank") provides for a
$25.0 million
revolving line of credit with a maturity date of
June 26, 2020
. The interest rate charged on borrowings is selected at our discretion at the time of draw between the London Interbank Offered Rate, plus
0.75%
, or at the Bank’s prime rate. The agreement allows for the declaration and payment of dividends or distributions to stockholders, subject to certain limitations. On February 20, 2018 and February 24, 2017, we paid a special cash dividend of
$1.00
per share and
$0.70
per share, respectively, to all holders of record of issued and outstanding shares of both our Class A and Class B common stock. The line of credit is secured by substantially all of our assets. As a sub-feature under the credit agreement, the Bank may also issue stand-by and/or commercial letters of credit up to
$15.0 million
.
We are required to maintain certain financial and non-financial covenants in accordance with the line of credit. The financial covenants require certain levels of leverage and profitability, such as (i) income before income taxes not to be less than
$1.0 million
(calculated at the end of each fiscal quarter on a trailing 12-month basis), (ii) a maximum ratio of
4.00
to 1.00 as of each quarter end for “Funded Debt to EBITDAR”, defined as the sum of total debt, capital leases and annual rent expense multiplied by
six
divided by the sum of net income, interest expense, taxes, depreciation, amortization and annual rent expense on a trailing 12-month basis, and (iii) requires minimum eligible inventory, cash, cash equivalents and marketable securities totaling
$50.0 million
as of the end of each quarter. In addition, maximum investment in fixed assets in any fiscal year of
$50.0 million
.
In September 2016, we established a
$750,000
standby letter of credit as security against insurance claims as required by our workers compensation insurance policy. There has been
no
activity under this letter of credit since its inception.
As of
May 5, 2018
,
we were in compliance with all of our covenants and had no outstanding borrowings under the revolving credit facility.
Note 5: Commitments and Contingencies
From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We have established loss provisions of approximately
$6.3 million
for matters in which losses are probable and can be reasonably estimated. For some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.
Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. 30-2017-00948710-CU-OE-CXC.
In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act (PAGA) against us seeking penalties on behalf of himself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We have requested the plaintiff to dismiss the class action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. If plaintiff refuses to dismiss the class claims from the class action, we will seek to enforce the class action waiver. We intend to defend this case vigorously.
Lauren Minniti, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., United States District Court, Southern District of Florida, Case No. 0:17-cv-60237-FAM
. On January 30, 2017, the plaintiff filed a putative class action lawsuit against us, alleging violations of the Telephone Consumer Protection Act of 1991 (the “TCPA”). Specifically, the complaint asserts a violation of the TCPA for allegedly sending unsolicited automated messages to the cellular telephones of the plaintiff and others. The complaint seeks class certification and damages of
$500
per violation plus treble damages under the TCPA. In March 2017, we filed our initial response to this matter with the court. In March 2018, the parties executed a settlement agreement, which remains subject to final court approval. In April 2018, the court preliminarily approved the settlement agreement and certified a class for settlement purposes. In May 2018, the class members were sent notice of the settlement, and the court has scheduled a hearing for final approval of the settlement on August 2, 2018.
Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405.
In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hour laws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court granted our demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against Tilly's and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative class members did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written order sustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed an appeal of the order to the California Court of Appeal. In October 2017, the plaintiff filed her opening appellate brief, and our responding appellate brief was filed in December 2017. In May 2018, the plaintiff filed her reply appellate brief. Later in May 2018, an amicus brief was filed by Abercrombie & Fitch Stores, Inc., in support of Tilly’s position in this appeal. We have defended this case vigorously, and will continue to do so.
In June 2015, we and one of our vendors entered into a settlement arrangement with a plaintiff who filed a copyright infringement lawsuit against the vendor and us related to certain vendor products we sell. The settlement required that the vendor pay
$2.0 million
to the plaintiff over
three years
, and we agreed to guarantee such payments in exchange for a security interest in the vendor's intellectual property. We concluded this matter with the final settlement payment on June 5, 2018. The total settlement amount paid by us was not materially different from the amount previously accrued.
Note 6: Fair Value Measurements
We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:
•
Level 1
– Quoted prices in active markets for identical assets and liabilities.
•
Level 2
– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3
– Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as either available-for-sale or held-to-maturity securities, and certain cash equivalents, specifically money market securities, commercial paper and bonds. The money market accounts are valued based on quoted market prices in active markets. The marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party entities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for impairment using Company specific assumptions which would fall within Level 3 of the fair value hierarchy.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During the three months ended
May 5, 2018
and
April 29, 2017
, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of
May 5, 2018
,
February 3, 2018
and
April 29, 2017
, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Financial Assets
We have categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
|
February 3, 2018
|
|
April 29, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash equivalents
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities
|
$
|
26,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,441
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed income securities
|
—
|
|
|
5,023
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
—
|
|
|
$
|
49,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59,589
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,807
|
|
|
$
|
—
|
|
Fixed income securities
|
—
|
|
|
14,099
|
|
|
—
|
|
|
—
|
|
|
23,161
|
|
|
—
|
|
|
—
|
|
|
8,026
|
|
|
—
|
|
(1)
Excluding cash.
Impairment of Long-Lived Assets
An impairment is recorded on a long-lived asset used in operations whenever events or changes in circumstances indicate that the net carrying amounts for such asset may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in our business strategies. An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates our weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.
On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. During the first quarter ended
May 5, 2018
, based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that
one
of our stores would not be able to generate sufficient cash flows over the remaining term of the related lease to recover our investment in the respective store. As a result, we recorded non-cash impairment charges during the three months ended May 5, 2018 of approximately
$0.1 million
, to write-down the
carrying value of certain long-lived store assets. We did not incur non-cash impairment charges during the first quarter ended April 29, 2017.
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
|
($ in thousands)
|
Carrying value of assets with impairment
|
$145
|
|
NA
|
Fair value of assets impaired
|
$—
|
|
NA
|
Number of stores tested for impairment
|
4
|
|
7
|
Number of stores with impairment
|
1
|
|
—
|
NA - Not applicable.
Note 7: Share-Based Compensation
The Tilly's, Inc. 2012 Amended and Restated Equity and Incentive Plan, as amended in June 2014 (the "2012 Plan"), authorizes up to
4,413,900
shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of
May 5, 2018
, there were
1,497,281
shares still available for future issuance under the 2012 Plan.
Stock Options
We grant stock options to certain employees that give them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The nonqualified options vest at a rate of
25%
on each of the first
four
anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire
ten
years from the date of grant.
The following table summarizes the stock option activity for the
first quarter ended
May 5, 2018
(aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Grant Date
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Aggregate
Intrinsic
Value (1)
|
Outstanding at February 3, 2018
|
1,851,250
|
|
|
$
|
9.50
|
|
|
|
|
|
Granted
|
301,625
|
|
|
$
|
11.33
|
|
|
|
|
|
Exercised
|
(11,125
|
)
|
|
$
|
7.59
|
|
|
|
|
|
Forfeited
|
(18,500
|
)
|
|
$
|
8.62
|
|
|
|
|
|
Expired
|
(2,000
|
)
|
|
$
|
12.62
|
|
|
|
|
|
Outstanding at May 5, 2018
|
2,121,250
|
|
|
$
|
9.78
|
|
|
7.3
|
|
$
|
4,853
|
|
Vested and expected to vest at May 5, 2018
|
2,121,250
|
|
|
$
|
9.78
|
|
|
7.3
|
|
$
|
4,853
|
|
Exercisable at May 5, 2018
|
1,080,375
|
|
|
$
|
11.10
|
|
|
5.8
|
|
$
|
1,978
|
|
|
|
(1)
|
Intrinsic value for stock options is defined as the difference between the market price of our Class A common stock on the last business day of the fiscal quarter and the weighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period. The market value per share was
$11.17
at
May 5, 2018
.
|
The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We account for forfeitures as they occur. We will issue shares of Class A common stock when the options are exercised.
The fair values of stock options granted during the
first quarter ended
May 5, 2018
and
April 29, 2017
were estimated on the grant date using the following assumptions:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
Weighted average grant-date fair value per option granted
|
$5.35
|
|
$4.01
|
Expected option term (1)
|
5.0 years
|
|
|
5.0 years
|
|
Weighted average expected volatility factor (2)
|
51.6
|
%
|
|
51.4
|
%
|
Weighted average risk-free interest rate (3)
|
2.6
|
%
|
|
1.9
|
%
|
Expected annual dividend yield
|
—
|
%
|
|
—
|
%
|
|
|
(1)
|
We have limited historical information regarding expected option term. Accordingly, we determine the expected option term of the awards using the latest historical data available from comparable public companies and management’s expectation of exercise behavior.
|
|
|
(2)
|
Stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock over the most recent period equal to the expected option term of the awards.
|
|
|
(3)
|
The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.
|
Restricted Stock
Restricted stock awards ("RSAs") represent restricted shares of our common stock issued upon the date of grant in which the recipient's rights in the stock are restricted until the shares are vested, and restricted stock units ("RSUs") represent a commitment to issue shares of our common stock in the future upon vesting. Under the 2012 Plan, we may grant RSAs to independent members of our Board of Directors and RSUs to certain employees. RSAs granted to our Board of Directors vest at a rate of
50%
on each of the first two anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vesting dates. RSUs granted to certain employees vest at a rate of
25%
on each of the first
four
anniversaries of the grant date provided that the respective recipient continues to be employed by us through each of those vesting dates. We determine the fair value of restricted stock underlying the RSAs and RSUs based upon the closing price of our Class A common stock on the date of grant.
A summary of the status of non-vested restricted stock changes during the
first quarter ended
May 5, 2018
are presented below:
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
Weighted
Average
Grant-Date
Fair Value
|
Nonvested at February 3, 2018
|
109,532
|
|
|
$
|
12.24
|
|
Vested
|
(27,750
|
)
|
|
$
|
16.07
|
|
Forfeited
|
(875
|
)
|
|
$
|
16.07
|
|
Nonvested at May 5, 2018
|
80,907
|
|
|
$
|
10.89
|
|
Stock-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the requisite service period. The following table summarizes stock-based compensation recorded in the Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
Cost of goods sold
|
$
|
140
|
|
|
$
|
141
|
|
Selling, general and administrative expenses
|
440
|
|
|
436
|
|
Stock-based compensation
|
$
|
580
|
|
|
$
|
577
|
|
At
May 5, 2018
, there was
$4.5 million
of total unrecognized stock-based compensation expense related to unvested stock options and restricted stock. This cost has a weighted average remaining recognition of
2.7 years
.
Note 8: Income (Loss) Per Share
Income (loss) per share is computed under the provisions of ASC 260,
Earnings Per Share
. Basic income (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method, whereby proceeds from such exercise, unamortized compensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by us to purchase the common shares at the average market price during the period. Potentially dilutive shares of common stock represent outstanding stock options and RSAs.
The components of basic and diluted income (loss) per share are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
Net income (loss)
|
$
|
1,223
|
|
|
$
|
(161
|
)
|
Weighted average basic shares outstanding
|
29,080
|
|
|
28,705
|
|
Dilutive effect of stock options and restricted stock
|
358
|
|
|
—
|
|
Weighted average shares for diluted income per share
|
29,438
|
|
|
28,705
|
|
Basic income (loss) per share of Class A and Class B common stock
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
Diluted income (loss) per share of Class A and Class B common stock
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
The following stock options and restricted stock have been excluded from the calculation of diluted income (loss) per share as the effect of including these stock options and restricted stock would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 5,
2018
|
|
April 29,
2017
|
Stock options
|
797
|
|
|
1,341
|
|
Restricted stock
|
—
|
|
|
57
|
|
Total
|
797
|
|
|
1,398
|
|