Item 1. Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management of Destination XL Group, Inc., a Delaware corporation (collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited Consolidated Financial Statements for the fiscal year ended February 1, 2020 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 19, 2020.
The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2020 and fiscal 2019 are 52-week periods ending on January 30, 2021 and February 1, 2020, respectively.
Impact of COVID-19 Pandemic on Business
On March 11, 2020, the World Health Organization declared the current outbreak of a novel coronavirus disease (“COVID-19”) as a global pandemic. The COVID-19 pandemic has had an adverse effect on the Company’s operations, employees, distribution and logistics, its vendors and customers. All of the Company’s store locations were closed temporarily on March 17, 2020. The Company began reopening stores in late April and by the end of June 2020 all retail stores had been reopened. While all of our stores are open, they are operating with reduced operating hours and it has been and may continue to be necessary to close and re-open stores in response to any ongoing COVID concerns.
In response to the uncertainty that exists relating to the COVID-19 pandemic, the Company has taken significant precautionary measures to reduce expenses, preserve liquidity, and mitigate the adverse impact of the pandemic to the Company. The majority of the Company’s workforce was furloughed in March 2020 and 34 employees were laid-off in May 2020. As store locations were reopened, employees were gradually brought back, however, due to the reduced store traffic and sales, 430 store associates were laid-off in July. For the safety of its employees, employees at the Company’s headquarters will continue to work from home, where possible, until at least January 2021. For store personnel and roles that require employees to be on-site, such as its distribution center, the Company is providing protective equipment, practicing social distancing and has increased sanitizing standards. The management team (director-level and above) took a temporary salary reduction ranging from 10%-20% during the period April 5, 2020 through August 2, 2020 and the Company’s non-employee directors suspended their second quarter fiscal 2020 compensation.
In March 2020, as a proactive measure, the Company drew $30.0 million under its revolving facility in order to increase the Company’s cash position and preserve financial flexibility. In addition, in April 2020 the Company entered into an amendment to its credit facility to, among other things, increase its borrowing base availability and permit the Company the ability to enter into promissory notes with its merchandise vendors. See Note 3, Debt, for a discussion of the amendment. During the second quarter of fiscal 2020, the Company entered into rent concessions with the majority of its landlords, in the form of rent abatements, rent deferments and, to a lesser extent, lease term extensions. See Note 4, Leases, for more discussion. Further, since early March, the Company has taken proactive steps to manage cash by substantially eliminating capital spend, negotiating deferred payment terms with vendors and, in limited cases, entering into short term notes, reducing operating expenses and cancelling purchase orders for merchandise, where possible. The Company intends to proceed cautiously and continue to take proactive steps to manage its liquidity.
Segment Information
The Company has three principal operating segments: its stores, direct and wholesales businesses. The Company considers its stores and direct operating segments to be similar in terms of economic characteristics, production processes and operations, and has therefore aggregated them into one reportable segment, retail segment, consistent with its omni-channel business approach. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results are aggregated with the retail segment for both periods.
8
Intangibles
In fiscal 2018, the Company purchased the rights to the domain name “dxl.com.” The domain name has a carrying value of $1.2 million and is considered an indefinite-lived asset. Due to the significant impact of the COVID-19 pandemic on the Company’s business during the first six months of fiscal 2020, the Company performed a qualitative review of the domain name as of May 2, 2020 and August 1, 2020, and concluded that it was more likely than not that the intangible asset was not impaired and therefore no quantitative assessment was required. As a result of the ongoing uncertainty surrounding the impact of the COVID-19 pandemic on the Company’s operations, it may be necessary to perform similar qualitative reviews at various points throughout the remainder of fiscal 2020.
Accounts Payable
During the first six months of fiscal 2020, the Company received extended payment terms with certain of its merchandise vendors, by entering into short-term notes. The short-term notes, totaling $3.5 million, have terms of less than one-year and accrue interest at an annual rate of 4.0%, with payments due monthly. At August 1, 2020, the outstanding balance of the notes was $2.0 million and is included in Accounts Payable on the Consolidated Balance Sheet.
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or 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 related assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At August 1, 2020, the fair value approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.
The fair value of the “dxl.com” domain name, an indefinite-lived asset, is measured on a non-recurring basis in connection with the Company’s annual impairment test and is classified within Level 3 of the valuation hierarchy. See Intangibles above.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.
9
Accumulated Other Comprehensive Income (Loss) - (“AOCI”)
Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income (loss) and reclassifications from AOCI for the three and six months ended August 1, 2020 and August 3, 2019, respectively, were as follows:
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
For the three months ended:
|
|
(in thousands)
|
|
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
|
Balance at beginning of the quarter
|
|
$
|
(6,236
|
)
|
|
$
|
13
|
|
|
$
|
(6,223
|
)
|
|
$
|
(5,371
|
)
|
|
$
|
(686
|
)
|
|
$
|
(6,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications, net of taxes
|
|
|
77
|
|
|
|
(5
|
)
|
|
|
72
|
|
|
|
27
|
|
|
|
(40
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other
comprehensive income, net of taxes (1)
|
|
|
176
|
|
|
|
—
|
|
|
|
176
|
|
|
|
115
|
|
|
|
—
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period
|
|
|
253
|
|
|
|
(5
|
)
|
|
|
248
|
|
|
|
142
|
|
|
|
(40
|
)
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of quarter
|
|
$
|
(5,983
|
)
|
|
$
|
8
|
|
|
$
|
(5,975
|
)
|
|
$
|
(5,229
|
)
|
|
$
|
(726
|
)
|
|
$
|
(5,955
|
)
|
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
For the six months ended:
|
|
(in thousands)
|
|
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
|
Balance at beginning of fiscal year
|
|
$
|
(6,478
|
)
|
|
$
|
47
|
|
|
$
|
(6,431
|
)
|
|
$
|
(5,521
|
)
|
|
$
|
(662
|
)
|
|
$
|
(6,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications, net of taxes
|
|
|
154
|
|
|
|
(39
|
)
|
|
|
115
|
|
|
|
55
|
|
|
|
(64
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other
comprehensive income, net of taxes (1)
|
|
|
341
|
|
|
|
—
|
|
|
|
341
|
|
|
|
237
|
|
|
|
—
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period
|
|
|
495
|
|
|
|
(39
|
)
|
|
|
456
|
|
|
|
292
|
|
|
|
(64
|
)
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of quarter
|
|
$
|
(5,983
|
)
|
|
$
|
8
|
|
|
$
|
(5,975
|
)
|
|
$
|
(5,229
|
)
|
|
$
|
(726
|
)
|
|
$
|
(5,955
|
)
|
|
|
(1)
|
Includes the amortization of the unrecognized loss on pension plans, which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $176,000 and $156,000 for the three-month period ended August 1, 2020 and August 3, 2019, respectively, and $341,000 and $321,000 for the six-month period ended August 1, 2020 and August 3, 2019, respectively. As a result of the adoption of ASU 2019-12, as discussed below, there was no tax provision for the second quarter and first six months of fiscal 2020. The tax effect for the second quarter and first six months of fiscal 2019 was $41,000 and $84,000, respectively.
|
10
Stock-based Compensation
All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires judgment. Actual results and future changes in estimates may differ from the Company’s current estimates.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the assumptions in the table below as it relates to stock options granted during the first six months of fiscal 2020. There were no grants of stock options during the first six months of fiscal 2019.
|
|
|
August 1, 2020
|
|
|
Expected volatility
|
|
82.3% - 87.8%
|
|
|
Risk-free interest rate
|
|
0.22% - 0.27%
|
|
|
Expected life
|
|
3.0 - 4.0 yrs.
|
|
|
Dividend rate
|
|
|
—
|
|
|
Weighted average fair value of options granted
|
|
$0.32
|
|
The Company has outstanding performance stock units (PSUs) with a market condition. The respective grant-date fair value and derived service periods assigned to the PSUs were determined using a Monte Carlo model. The valuation included assumptions with respect to the Company’s historical volatility, risk-free rate and cost of equity.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.
As a result of the significant impact of the COVID-19 pandemic on the Company’s business during the first quarter of fiscal 2020 and the continued uncertainty, the Company reassessed the recoverability of the carrying value for its long-lived assets as of May 2, 2020, assuming that its stores would gradually open throughout the second quarter of fiscal 2020 but that consumer retail spending will remain substantially curtailed for a period of time. Due to uncertainty around the duration and extent of the pandemic’s impact on future cash flows, the Company’s projections were based on multiple probability-weighted scenarios. Based on the results of that assessment, the Company recorded an impairment charge of $16.3 million in the first quarter of fiscal 2020. The impairment charge included approximately $12.5 million for the write-down of certain right-of-use assets and $3.8 million for the write-down of property and equipment, related to stores where the carrying value exceeded fair value.
There was no material impairment of long-lived assets in the second quarter of fiscal 2020 or for first six months of fiscal 2019.
Leases
The Company adopted ASU 2016-02, “Leases (Topic 842)” in the first quarter of fiscal 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning accumulated deficit.
Under ASC 842, the Company determines if an arrangement contains a lease at the inception of a contract. 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. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments, initial direct costs and any lease incentives are included in the value of those right-of use assets. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, based on information available at the lease measurement date to determine the present value of future payments. The Company elected the lessee non-lease component separation practical expedient, which permits the Company to not separate non-lease components from the lease components to which they relate. The Company also made an accounting policy election that the recognition requirement of ASC 842 will not be applied to certain, if any, non-store leases, with a term of 12 months or less, recognizing those lease payments on a straight-line basis over the lease term. At August 1, 2020, the Company has no short-term leases.
11
The Company’s store leases typically contain options that permit renewals for additional periods of up to five years each. In general, for store leases with an initial term of 10 years or more, the options to extend are not considered reasonably certain at lease commencement. For stores leases with an initial term of 5 years, the Company evaluates each lease independently and, only when the Company considers it reasonably certain that it will exercise an option to extend, will the associated payment of that option be included in the measurement of the right-of-use asset and lease liability. Renewal options are not included in the lease term for automobile and equipment leases because they are not considered reasonably certain of being exercised at lease commencement. Renewal options were not considered for the Company’s corporate headquarters and distribution center lease, which was entered into in 2006 and was for an initial 20-year term. At the end of the initial term, the Company will have the opportunity to extend this lease for six additional successive periods of five years.
For store leases, the Company accounts for lease components and non-lease components as a single lease component. Certain store leases may require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, and are expensed as incurred as variable lease costs. Other store leases contain one periodic fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities. Tenant allowances are included as an offset to the right-of-use asset and amortized as reductions to rent expense over the associated lease term.
See Note 4 ‘‘Leases’’ for additional information.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” This guidance amends several aspects of the measurement of credit losses on financial instruments, including trade receivables. Topic 326 replaces the existing incurred credit loss model with an impairment model (known as the current expected credit loss ("CECL") model), which is based on expected losses rather than incurred losses. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this standard in the first quarter of fiscal 2020 and it did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance modifies the disclosure requirements on fair value measurements in Topic 820 by removing disclosures regarding transfers between Level 1 and Level 2 of the fair value hierarchy, by modifying the measurement uncertainty disclosure, and by requiring additional disclosures for Level 3 fair value measurements, among others. The Company adopted this standard in the first quarter of fiscal 2020 with new disclosures adopted on a prospective basis. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, while also clarifying and amending existing guidance, including interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. In the first quarter of fiscal 2020, the Company elected early adoption of ASU 2019-12. The provisions related to intra period tax allocation and interim recognition of enactment of tax laws are being adopted on a prospective basis. The effect of the adoption of ASU 2019-12 was not material to the Company's Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
No new accounting pronouncements, issued or effective during the first six months of fiscal 2020, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
2. Revenue Recognition
The Company operates as a retailer of big and tall men’s clothing, which includes stores, direct and wholesale. Revenue is recognized by the operating segment that initiates a customer’s order. Store sales are defined as sales that originate and are fulfilled directly at the store level. Direct sales are defined as sales that originate online, including those initiated online at the store level, on its website or on third-party marketplaces. Wholesale sales are defined as sales made to wholesale customers pursuant to the terms of each customer’s contract with the Company. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included as part of accrued expenses on the Consolidated Balance Sheets.
|
|
̶
|
Revenue from the Company’s store operations is recorded upon purchase of merchandise by customers, net of an allowance for sales returns, which is estimated based upon historical experience.
|
|
|
̶
|
Revenue from the Company’s direct operations is recognized at the time a customer order is delivered, net of an allowance for sales returns, which is estimated based upon historical experience.
|
12
|
|
̶
|
Revenue from the Company’s wholesale operations is recognized at the time the wholesale customer takes physical receipt of the merchandise, net of any identified discounts in accordance with each individual order. For the first six months of fiscal 2020 and fiscal 2019, chargebacks were immaterial.
|
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers. Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Based on historical redemption patterns, the Company can reasonably estimate the amount of gift cards, gift certificates, and credit vouchers for which redemption is remote, which is referred to as “breakage”. Breakage is recognized over two years in proportion to historical redemption trends and is recorded as sales in the Consolidated Statements of Operations. The gift card liability, net of breakage, was $2.1 million and $2.7 million at August 1, 2020 and February 1, 2020, respectively.
Unredeemed Loyalty Coupons. The Company offers a free loyalty program to its customers for which points accumulate based on the purchase of merchandise. Over 90% of the Company’s customers participate in the loyalty program. Under ASC 606, Revenue from Contracts with Customers, these loyalty points provide the customer with a material right and a distinct performance obligation with revenue deferred and recognized when the points are expected to redeem or expire. The cycle of earning and redeeming loyalty points is generally under one year in duration. The loyalty accrual, net of breakage, was $1.0 million and $1.0 million at August 1, 2020 and February 1, 2020, respectively.
Shipping. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales for all periods presented. Amounts related to shipping and handling that are billed to customers are recorded in sales, and the related costs are recorded in cost of goods sold, including occupancy costs, in the Consolidated Statements of Operations.
Disaggregation of Revenue
As noted above under Segment Information in Note 1, the Company’s business consists of one reportable segment, its retail segment. Substantially all of the Company’s revenue is generated from its stores and direct businesses. The operating results from the wholesale segment, which were immaterial, have been aggregated with this reportable segment, but the revenues are separately reported below. Accordingly, the Company has determined that the following sales channels depict the nature, amount, timing, and uncertainty of how revenue and cash flows are affected by economic factors:
|
|
|
For the three months ended
|
|
|
|
|
|
For the six months ended
|
|
|
|
|
|
(in thousands)
|
|
August 1, 2020
|
|
|
|
|
August 3, 2019
|
|
|
|
|
|
August 1, 2020
|
|
|
|
|
August 3, 2019
|
|
|
|
|
|
Store sales
|
|
$
|
38,465
|
|
|
53.9
|
%
|
$
|
95,119
|
|
|
78.9
|
%
|
|
$
|
70,792
|
|
|
55.9
|
%
|
$
|
181,834
|
|
|
78.7
|
%
|
|
Direct sales
|
|
|
32,959
|
|
|
46.1
|
%
|
|
25,406
|
|
|
21.1
|
%
|
|
|
55,841
|
|
|
44.1
|
%
|
|
49,239
|
|
|
21.3
|
%
|
|
Retail segment
|
|
$
|
71,424
|
|
|
|
|
$
|
120,525
|
|
|
|
|
|
$
|
126,633
|
|
|
|
|
$
|
231,073
|
|
|
|
|
|
Wholesale segment
|
|
|
5,018
|
|
|
|
|
|
2,720
|
|
|
|
|
|
|
7,036
|
|
|
|
|
|
5,145
|
|
|
|
|
|
Total Sales
|
|
$
|
76,442
|
|
|
|
|
$
|
123,245
|
|
|
|
|
|
$
|
133,669
|
|
|
|
|
$
|
236,218
|
|
|
|
|
3. Debt
Credit Agreement with Bank of America, N.A.
On May 24, 2018, the Company entered into the Seventh Amended and Restated Credit Agreement, as amended, with Bank of America, N.A., as agent, providing for a secured $140.0 million credit facility. On April 15, 2020, the Company entered into a Third Amendment to the Seventh Amended and Restated Credit Facility, as amended (the “Third Amendment”). The Third Amendment, among other things, (i) extended the current advance rate of 10%, under the “first-in, last out” (FILO) term facility (the “FILO loan”), from May 24, 2020 to December 31, 2020, at which time it will step-down to 7.5%; (ii) lowered the Loan Cap, as described below, and eliminated the springing financial covenant, (iii) increased the Applicable Margins under the FILO and Revolving Facility (defined below) by 150 basis points and (iv) permitted the Company to enter into promissory notes with vendors in satisfaction of outstanding payables for existing goods, in an aggregate amount not to exceed $15.0 million (as amended, the “Credit Facility”).
The Credit Facility provides maximum committed borrowings of $125.0 million in revolver loans, with the ability, pursuant to an accordion feature, to increase the Credit Facility by an additional $50.0 million upon the request of the Company and the agreement of the lender(s) participating in the increase (the “Revolving Facility”). The Revolving Facility provides for a sublimit of $20.0 million for commercial and standby letters of credit and up to $15.0 million for swingline loans. The Company’s ability to borrow under the Revolving Facility (the “Loan Cap”) is determined using an availability formula based on eligible assets. Pursuant to the Third Amendment, the excess availability under the Credit Facility cannot be less than the greater of (i) 10% of the Revolving Loan Cap (calculated without giving effect to the FILO (first-in, last-out) Push Down Reserve) or (ii) $10.0 million. The maturity date of the Credit Facility is May 24, 2023. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets.
13
To help manage its near-term liquidity in light of the uncertainty related to COVID-19 and provide financial flexibility, the Company drew $30.0 million under its secured revolving credit facility in March 2020. At August 1, 2020, the Company had outstanding borrowings under the Revolving Facility of $66.8 million, before unamortized debt issuance costs of $0.3 million. At August 1, 2020, outstanding standby letters of credit were $2.8 million and outstanding documentary letters of credit were $0.6 million. Unused excess availability was $12.4 million at August 1, 2020. Average monthly borrowings outstanding under the Revolving Facility during the first six months of fiscal 2020 were $69.2 million, resulting in an average unused excess availability of approximately $23.2 million. The Company’s ability to borrow under the Revolving Facility was determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.
Borrowings made pursuant to the Revolving Facility bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 1.75% or 2.00%, or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 2.75% or 3.00%. The Company was also subject to an unused line fee of 0.25%. At August 1, 2020, the Company’s prime-based interest rate was 5.25%. At August 1, 2020, the Company had approximately $62.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 4.00%. The LIBOR-based contracts expired on August 3, 2020. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.
Borrowings and repayments under the Revolving Facility for the six months ended August 1, 2020 and August 3, 2019 were as follows:
|
|
|
For the six months ended
|
|
|
(in thousands)
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
Borrowings
|
|
$
|
53,471
|
|
|
$
|
72,384
|
|
|
Repayments
|
|
|
(26,246
|
)
|
|
|
(64,882
|
)
|
|
Net borrowings (repayments)
|
|
$
|
27,225
|
|
|
$
|
7,502
|
|
The fair value of the amount outstanding under the Revolving Facility at August 1, 2020 approximated the carrying value.
Long-Term Debt
Long-term debt at August 1, 2020 and February 1, 2020 is as follows:
|
(in thousands)
|
|
August 1, 2020
|
|
|
February 1, 2020
|
|
|
FILO Loan
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
Less: unamortized debt issuance costs
|
|
|
(159
|
)
|
|
|
(187
|
)
|
|
Total long-term debt
|
|
|
14,841
|
|
|
|
14,813
|
|
|
Less: current portion of long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
Long-term debt, net of current portion
|
|
$
|
14,841
|
|
|
$
|
14,813
|
|
The total borrowing capacity under the FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts (including certain trade names) that step down over time, plus a specified percentage of the value of eligible inventory that steps down over time. The Third Amendment to the Credit Facility extended these advance rates by approximately seven months before they begin to step down. The FILO loan can be repaid, in whole or in part, subject to certain payment conditions. The term loan expires on May 24, 2023, if not repaid in full prior to that date.
As a result of extending the advance rates under the FILO loan, the applicable margin rates for borrowings were increased by approximately 150 basis points. Accordingly, borrowings made under the FILO loan will bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a carrying percentage based on the Company’s excess availability, of either 3.75% or 4.00% until May 24, 2021 or 3.25% or 3.50% after May 24, 2021 or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability of either 4.75% or 5.00% until May 24, 2021, or 4.25% or 4.50% after May 24, 2021. At August 1, 2020, the outstanding balance of $15.0 million was in a 6-month LIBOR-based contract with an interest rate of 6.00%. The LIBOR-based contract expired on November 15, 2020. When a LIBOR-based contract expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.
The Company paid interest and fees totaling $1.6 million and $1.8 million for the six months ended August 1, 2020 and August 3, 2019, respectively.
14
4. Leases
The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of 5 years to 10 years, with options that usually permit renewal for additional five-year periods. The initial term of the lease for the corporate headquarter was for 20 years, with the opportunity to extend for six additional successive periods of five years, beginning in fiscal 2026. The Company also leases certain equipment and other assets under operating leases, typically with initial terms of 3 to 5 years. The Company is generally obligated for the cost of property taxes, insurance and common area maintenance fees relating to its leases, which are considered variable lease costs and are expensed as incurred.
Due to the COVID-19 pandemic and all stores having to close temporarily, the Company held rent payments for the period of April through June 2020. During the second quarter of fiscal 2020, the Company received concessions with the majority of its landlords in the form of rent deferrals, abatements and, to a lesser extent, lease extensions. For the remainder of the leases, the outstanding lease payments were paid and the leases remain in good standing. ASC 842 requires the assessment of any lease modification to determine if the modification should be treated as a separate lease and if not, modification accounting would be applied. Lease modification accounting requires the recalculation of the ROU asset, lease liability and lease expense over the respective lease term. In April 2020, the FASB issued guidance allowing entities to make a policy election to account for lease concessions related to the COVID-19 pandemic as though enforceable rights and obligations for those concessions existed. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. The Company has opted not to elect this practical expedient and instead account for these rent concessions as lease modifications during the second quarter of fiscal 2020 in accordance with ASC 842. As of August 1, 2020, no material amounts related to leases remain in Accounts Payable, and the Company’s operating leases liabilities represent the present value of the remaining future minimum lease payments updated based on second quarter concessions and lease modifications.
The following table is a summary of the Company’s components of net lease cost for the second quarter and first six months ended August 1, 2020 and August 3, 2019:
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
11,300
|
|
|
$
|
13,215
|
|
|
$
|
23,932
|
|
|
$
|
26,468
|
|
|
Variable lease costs(1)
|
|
|
3,266
|
|
|
|
3,954
|
|
|
|
7,069
|
|
|
|
7,999
|
|
|
Total lease costs
|
|
$
|
14,566
|
|
|
$
|
17,169
|
|
|
$
|
31,001
|
|
|
$
|
34,467
|
|
|
|
(1)
|
Variable lease costs include the cost of property taxes, insurance and common area maintenance fees related to its leases.
|
Supplemental cash flow and balance sheet information related to leases for the first six months ended August 1, 2020 and August 3, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
For the six months ended
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
Operating cash flows for operating leases (1)
|
|
$
|
18,527
|
|
|
$
|
29,221
|
|
|
Non-cash operating activities:
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
$
|
559
|
|
|
$
|
3,053
|
|
|
Net decrease in right-of-use assets due to lease modifications
associated with rent concessions during the second quarter of fiscal 2020
|
|
$
|
(578
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
5.0 yrs.
|
|
|
5.6 yrs.
|
|
|
Weighted average discount rate
|
|
6.48%
|
|
|
7.10%
|
|
|
|
(1)
|
This decrease in cash payments for the first six months of fiscal 2020 as compared to the prior year is primarily due to rent abatements and deferments negotiated during the second quarter of fiscal 2020 for rent obligations due while stores were closed.
|
15
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the Consolidated Balance Sheet as of August 1, 2020:
|
(in thousands)
|
|
|
|
|
|
2020 (remaining)
|
|
$
|
27,978
|
|
|
2021
|
|
|
58,166
|
|
|
2022
|
|
|
49,959
|
|
|
2023
|
|
|
41,321
|
|
|
2024
|
|
|
31,031
|
|
|
Thereafter
|
|
|
38,509
|
|
|
Total minimum lease payments
|
|
$
|
246,964
|
|
|
Less: amount of lease payments representing interest
|
|
|
36,028
|
|
|
Present value of future minimum lease payments
|
|
$
|
210,936
|
|
|
Less: current obligations under leases
|
|
|
45,626
|
|
|
Long-term lease obligations
|
|
$
|
165,310
|
|
5. Long-Term Incentive Plans
The following is a summary of the Company’s Long-Term Incentive Plan (“LTIP”). All equity awards granted under long-term incentive plans are issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan. See Note 6, Stock-Based Compensation.
At August 1, 2020, the Company has three active LTIPs: 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP. Each participant in the plan participates based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her LTIP percentage. Under each LTIP, 50% of each participant’s Target Cash Value is subject to time-based vesting and 50% is subject to performance-based vesting. All time-based awards under the 2018-2020 LTIP were granted in restricted stock units (RSUs) and the time-based awards for the 2019-2021 LTIP were granted in a combination of 50% RSUs and 50% cash. For the 2020-2022 LTIP, the time-based awards were granted in a combination of 50% stock options and 50% cash.
Performance targets for the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP were established and approved by the Compensation Committee on October 24, 2018, August 7, 2019, and June 11, 2020, respectively. The performance period for each LTIP is three years. Awards for any achievement of performance targets will not be granted until the performance targets are achieved and then will be subject to additional vesting through August 31, 2021, August 31, 2022 and August, 31, 2023, respectively. The time-based awards under the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP vest in four equal installments through April 1, 2022, April 1, 2023 and April 1, 2024, respectively. Assuming that the Company achieves the performance targets at target levels and all time-based awards vest, the compensation expense associated with the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP is estimated to be approximately $3.7 million, $3.8 million and $3.8 million, respectively. Approximately half of the compensation expense for each LTIP relates to the time-based awards, which are being expensed straight-line over 41 months, 44 months and 46 months, respectively.
Through the end of the second quarter of fiscal 2020, the Company has accrued $0.2 million for performance awards under the 2018-2020 LTIP and $0.1 million for performance awards under the 2020-2022 LTIP. There was no accrual at August 1, 2020 for performance awards under the 2019-2021 LTIP.
6. Stock-Based Compensation
The Company has one active stock-based compensation plan: the 2016 Incentive Compensation Plan (the “2016 Plan”). The initial share reserve under the 2016 Plan was 5,725,538 shares of common stock. A grant of a stock option award or stock appreciation right will reduce the outstanding reserve on a one-for-one basis, meaning one share for every share granted. A grant of a full-value award, including, but not limited to, restricted stock, restricted stock units and deferred stock, will reduce the outstanding reserve by a fixed ratio of 1.9 shares for every share granted. On August 8, 2019, the Company’s shareholders approved an amendment to increase the share reserve by an additional 2,800,000 shares. At August 1, 2020, the Company had 842,466 shares available under the 2016 Plan. Subsequent to the end of the second quarter of fiscal 2020, the Company’s shareholders approved an amendment to increase the share reserve by an additional 1,740,000 shares.
In accordance with the terms of the 2016 Plan, any shares outstanding under the previous 2006 Incentive Compensation Plan (the “2006 Plan”) at August 4, 2016 that subsequently terminate, expire or are cancelled for any reason without having been exercised or paid are added back and become available for issuance under the 2016 Plan, with stock options being added back on a one-for-one
16
basis and full-value awards being added back on a 1 to 1.9 basis. At August 1, 2020, 464,016 stock options remained outstanding under the 2006 Plan.
The 2016 Plan is administered by the Compensation Committee. The Compensation Committee is authorized to make all determinations with respect to amounts and conditions covering awards. Options are not granted at a price less than fair value on the date of the grant. Except with respect to 5% of the shares available for awards under the 2016 Plan, no award will become exercisable unless such award has been outstanding for a minimum period of one year from its date of grant.
The following tables summarize the share activity and stock option activity for the Company’s 2006 Plan, 2016 Plan and inducement awards, on a combined basis, for the first six months of fiscal 2020:
|
|
|
RSUs (1)
|
|
|
Deferred shares (2)
|
|
|
Fully-vested
shares (3)
|
|
|
Performance Share Units (4)
|
|
|
Total number of shares
|
|
|
Weighted-average
grant-date
fair value
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding non-vested shares at beginning of year
|
|
|
1,420,803
|
|
|
|
295,604
|
|
|
|
—
|
|
|
|
720,000
|
|
|
|
2,436,407
|
|
|
$
|
1.95
|
|
|
Shares granted
|
|
|
—
|
|
|
|
45,714
|
|
|
|
69,440
|
|
|
|
—
|
|
|
|
115,154
|
|
|
$
|
1.08
|
|
|
Shares vested/issued
|
|
|
(436,839
|
)
|
|
|
(13,936
|
)
|
|
|
(69,440
|
)
|
|
|
—
|
|
|
|
(520,215
|
)
|
|
$
|
2.20
|
|
|
Shares canceled
|
|
|
(17,443
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,443
|
)
|
|
$
|
2.11
|
|
|
Outstanding non-vested shares at end of quarter
|
|
|
966,521
|
|
|
|
327,382
|
|
|
|
—
|
|
|
|
720,000
|
|
|
|
2,013,903
|
|
|
$
|
1.84
|
|
|
|
(1)
|
During the first six months of fiscal 2020, the vesting of RSUs was primarily related to the time-based awards under the Company’s LTIP plans, see Note 5, Long-Term Incentive Plans.
|
|
|
(2)
|
The 45,714 shares of deferred stock, with a grant date fair value of $49,371, represent compensation to certain directors in lieu of cash, in accordance with their irrevocable elections. The shares of deferred stock will vest three years from the date of grant or at separation of service, based on the irrevocable election of each director pursuant to the Company’s Fourth Amended and Restated Non-Employee Director Compensation Plan (“Non-Employee Director Compensation Plan”)
|
|
|
(3)
|
During the first six months of fiscal 2020, the Company granted 69,440 shares of stock, with a fair value of approximately $74,995, to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. Directors are required to elect 50% of their quarterly retainer in equity. Any shares in excess of the minimum required election are issued from the Non-Employee Director Compensation Plan.
|
|
|
(4)
|
The 720,000 shares of performance stock units (“PSUs”), with a fair value of $1.0 million, represent a sign-on grant to Mr. Kanter. The PSUs vest in installments when the following milestones are met: one-third of the PSUs vest when the trailing 90-day volume-weighted average closing stock price (“VWAP”) is $4.00, one-third of the PSUs vest when the VWAP is $6.00 and one-third when the VWAP is $8.00. All PSUs will expire on April 1, 2023 if no performance metric is achieved. The $1.0 million is being expensed over the respective derived service periods of each tranche of 16 months, 25 months and 30 months, respectively. The respective fair value and derived service periods assigned to the PSUs were determined using a Monte Carlo model based on: the Company’s historical volatility of 55.9%, a term of 4.1 years, stock price on the date of grant of $2.50 per share, a risk-free rate of 2.5% and a cost of equity of 9.5%.
|
17
|
|
|
Number of
shares
|
|
|
Weighted-average
exercise price
per option
|
|
|
Weighted-average
remaining
contractual term
|
|
|
Aggregate
intrinsic value
(in 000's)
|
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at beginning of year
|
|
|
754,833
|
|
|
$
|
4.84
|
|
|
2.6 years
|
|
|
$
|
—
|
|
|
Options granted (1)
|
|
|
3,185,542
|
|
|
$
|
0.55
|
|
|
|
—
|
|
|
|
2
|
|
|
Options expired and canceled
|
|
|
(264,146
|
)
|
|
$
|
4.85
|
|
|
|
—
|
|
|
|
—
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding options at end of quarter
|
|
|
3,676,229
|
|
|
$
|
1.12
|
|
|
9.0 years
|
|
|
$
|
—
|
|
|
Options exercisable at end of quarter
|
|
|
490,687
|
|
|
$
|
4.83
|
|
|
3.1 years
|
|
|
$
|
—
|
|
|
|
(1)
|
In the second quarter of fiscal 2020, the Company granted to Mr. Kanter a stock option to purchase 450,000 shares of the Company’s common stock, at an exercise price of $0.64 per share, which will vest over 34 months. The Company also granted stock options to purchase an aggregate of 2,735,542 shares of the Company’s common stock, at an exercise price of $0.53 per share, in connection with the time-based grant of awards under its 2020-2022 LTIP, see Note 5, Long-Term Incentive Plans.
|
For the first six months of fiscal 2020, the Company granted stock options to purchase an aggregate of 3,185,542 shares of common stock and 45,714 shares of deferred stock. For the first six months of fiscal 2019, the Company granted 720,000 PSUs, 390,299 RSUs and 43,455 shares of deferred stock. The Company’s non-employee directors voted to suspend their compensation for the second quarter of fiscal 2020. Subsequently, such compensation resumed in the third quarter of fiscal 2020.
Non-Employee Director Compensation Plan
The Company granted 23,148 shares of common stock, with a fair value of approximately $24,999, to certain of its non-employee directors as compensation in lieu of cash in the first six months of fiscal 2020. As mentioned above, the non-employee directors voted to suspend their second quarter compensation.
Stock Compensation Expense
The Company recognized total stock-based compensation expense of $0.8 million and $0.9 million for the first six months of fiscal 2020 and fiscal 2019, respectively. The total compensation cost related to time-vested stock options, RSU and PSU awards not yet recognized as of August 1, 2020 was approximately $2.7 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 32 months.
7. Earnings per Share
The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
51,078
|
|
|
|
49,867
|
|
|
|
50,918
|
|
|
|
49,734
|
|
|
Common stock equivalents – stock options and restricted stock (1)
|
|
|
—
|
|
|
|
308
|
|
|
|
—
|
|
|
|
—
|
|
|
Diluted weighted average common shares outstanding
|
|
|
51,078
|
|
|
|
50,175
|
|
|
|
50,918
|
|
|
|
49,734
|
|
|
|
(1)
|
Common stock equivalents of 178 shares and 206 shares for the three and six months ended August 1, 2020, respectively, and 415 shares for the six months ended August 3, 2019, were excluded due to the net loss in each period.
|
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period, because the exercise price of such options was greater than the average market price per share of common stock for the respective periods or because of the unearned compensation associated with either stock options, restricted stock units, restricted or deferred stock had an anti-dilutive effect.
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
August 1, 2020
|
|
|
August 3, 2019
|
|
|
(in thousands, except exercise prices)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,676
|
|
|
|
865
|
|
|
|
3,676
|
|
|
|
850
|
|
|
Restricted stock units
|
|
|
963
|
|
|
|
1,056
|
|
|
|
963
|
|
|
|
1,040
|
|
|
Restricted and deferred stock
|
|
|
160
|
|
|
|
85
|
|
|
|
160
|
|
|
|
63
|
|
|
Range of exercise prices of such options
|
|
$0.53 - $7.02
|
|
|
$1.85 - $7.02
|
|
|
$0.53 - $7.02
|
|
|
$2.00 - $7.02
|
|
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The above options, which were outstanding at August 1, 2020, expire from January 31, 2021 to June 11, 2030.
Excluded from the computation of basic and diluted earnings per share for both periods were 720,000 shares of unvested performance stock units. These performance-based awards will be included in the computation of basic and diluted earnings per share if, and when, the respective performance targets are achieved. In addition, 327,382 shares and 242,040 shares of deferred stock at August 1, 2020 and August 3, 2019, respectively, were excluded from basic earnings per share. Outstanding shares of deferred stock are not considered issued and outstanding until the vesting date of the deferral period.
8. Income Taxes
Since the end of fiscal 2014, the Company has maintained a full valuation allowance against its deferred tax assets. While the Company has projected it will return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, the Company believes that a full valuation allowance remains appropriate at this time, based on the Company’s forecast for fiscal 2020. Realization of the Company’s deferred tax assets is dependent on generating sufficient taxable income in the near term. At August 1, 2020, the Company had total deferred tax assets of $107.4 million, total deferred tax liabilities of $47.4 million and a valuation allowance of $60.0 million.
As of August 1, 2020, for federal income tax purposes, the Company has net operating loss carryforwards of $158.2 million, which will expire from fiscal 2022 through fiscal 2036 and net operating loss carryforwards of $34.0 million that are not subject to expiration. For state income tax purposes, the Company has $112.2 million of net operating losses that are available to offset future taxable income, which will expire from fiscal 2020 through fiscal 2040. Additionally, the Company has $3.9 million of net operating loss carryforwards related to the Company’s operations in Canada, which will expire from fiscal 2025 through fiscal 2040.
The Company’s financial statements reflect the expected future tax consequences of uncertain tax positions that the Company has taken or expects to take on a tax return, based solely on the technical merits of the tax position. The liability for unrecognized tax benefits at August 1, 2020 was approximately $2.0 million and was associated with a prior tax position related to exiting the Company’s direct business in Europe during fiscal 2013. The amount of unrecognized tax benefits has been presented as a reduction in the reported amounts of the Company’s federal and state net operating losses carryforwards. No penalties or interest have been accrued on this liability because the carryforwards have not yet been utilized. The reversal of this liability would result in a tax benefit being recognized in the period in which the Company determines the liability is no longer necessary.
In March 2020, the Coronavirus Aid, Relief and Economic Security Act, ("CARES Act") was signed into law. This law includes several taxpayer favorable provisions which may impact the Company including relaxed interest expense limitations, a carryback of net operating losses, permitted accelerated depreciation on certain store build out costs and allowance for the deferral of employer FICA taxes. The CARES Act also included an Employee Retention Credit, which provided the Company with a $1.2 million refundable tax credit in the second quarter of fiscal 2020. The refundable tax credit allowed eligible employers to receive a 50% tax credit for each employee up to $10,000 in wages and other eligible expenses. This credit only impacts payroll taxes, which are recorded in pre-tax income and has no impact on the income tax provision. In addition, it provided for the accelerated payment of any refundable alternative minimum tax credit (“AMT”). Accordingly, during the second quarter of fiscal 2020, the Company received $1.1 million for its refundable AMT receivable.
The discrete tax rate method was used for calculating tax expense for the second quarter and first six months of fiscal 2020 and fiscal 2019. The net tax provision for the second quarter and first six months of fiscal 2020, primarily related to certain states’ margin tax. The Company’s net tax benefit for the second quarter and first six months of fiscal 2019 was the result of the deferred tax impact of $30,000 and $81,000, respectively, in other comprehensive income (loss), which resulted in a corresponding decrease in valuation allowance. This income tax benefit was partially offset by tax expense, primarily for certain states’ margin tax.
9. CEO Transition Costs
Results for the first six months of fiscal 2019, included $0.7 million related to CEO search costs, Acting CEO consulting costs, housing allowance and legal fees.
10. Nasdaq Notification of Non-Compliance
The Company’s common stock is publicly traded and listed on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DXLG.” Nasdaq has continued listing standards that the Company must maintain to avoid delisting, including, among others, a minimum bid price requirement of $1.00 per share. On April 9, 2020, the Company received a letter from the Listing Qualifications staff of Nasdaq notifying the Company that, based upon the closing bid price of its common stock for the last 30 consecutive trading days, the Company was not in compliance with Nasdaq Listing Rule 5450(a)(1), as the minimum bid price for the Company’s common stock was less than $1.00 per share for the previous 30 consecutive trading days. At that time, the Company was granted a 180 calendar-day grace period to regain compliance with the minimum bid price requirement. On April 17, 2020, the Company received a follow-up letter from the Listing Qualifications staff notifying the Company that Nasdaq had determined to toll all
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compliance periods through June 30, 2020. Accordingly, the Company’s 180 calendar-day grace period to regain compliance with the minimum bid price requirement was extended to December 21, 2020.
The Notice does not result in the immediate delisting of the Company’s common stock from the Nasdaq Global Select Market. The Company intends to monitor the closing bid price of the Company’s common stock to allow a reasonable period for the price to rebound from its recent decline but will continue to consider its available options to regain compliance. Subsequent to the end of the second quarter of fiscal 2020, on August 12, 2020, the Company received approval from its shareholders to effect a reverse stock split of the Company’s issued and outstanding common stock at a ratio of not less than 1-for-2 and not more than 1-for-5, such ratio, and the timing and implementation of such reverse stock split, to be determined in the sole discretion of the Company’s Board of Directors. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements.
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