The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of Business
J.Jill, Inc., “J.Jill” or the “Company”, is a premier omnichannel retailer and nationally recognized women’s apparel brand committed to delighting customers with great wear-now product. The brand represents an easy, thoughtful and inspired style that reflects the confidence of remarkable women who live life with joy, passion and purpose. J.Jill offers a guiding customer experience through about 275 stores nationwide and a robust ecommerce platform. J.Jill is headquartered outside Boston.
2. Summary of Significant Accounting Policies
Basis of Presentation
Our interim consolidated financial statements are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted, in accordance with the rules of the Securities and Exchange Commission (the “SEC”) associated with reporting of interim period financial information. We consistently applied the accounting policies described in our 2019 Annual Report on Form 10-K ("2019 Form 10-K") in preparing these unaudited interim Consolidated Financial Statements. In the opinion of management, these interim consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the financial position and results of operations of the Company. The consolidated balance sheet as of February 1, 2020 is derived from the audited consolidated balance sheet as of that date. The unaudited results of operations for the thirteen and thirty-nine weeks ended October 31, 2020 are not necessarily indicative of future results or results to be expected for the full year ending January 30, 2021 (“Fiscal Year 2020”). You should read these statements in conjunction with our audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended February 1, 2020.
Certain prior year amounts have been restated to reflect the reverse stock split on November 9, 2020 including common stock par value and additional paid-in capital on the Consolidated Balance Sheets and, shares and per share amounts on the Consolidated Statements of Operations and Comprehensive Income (Loss). The prior year’s impairment of long-lived assets has been reclassified to be consistent with the current year presentation on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern,” the Company’s management evaluated whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date of issuance of these financial statements. Although the following matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements have been issued, the Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern.
In December 2019, COVID-19 pandemic (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization declared COVID-19 a pandemic on March 11, 2020 resulting in federal, state and local governments and private entities mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. After close monitoring and taking into consideration the guidance from federal, state and local governments, in an effort to mitigate the spread of COVID-19, effective March 18, 2020, the Company closed all of its stores and its offices with employees working remotely where possible. The Company began reopening its stores in May 2020, with all stores having been reopened by late June 2020; however, operations of the stores may again be restricted by local guidelines.
As a result of COVID-19, the Company’s revenues, results of operations and cash flows were materially adversely impacted, which resulted in a failure by us to comply with the financial covenants contained in our Asset Based Revolving Credit Agreement (“ABL Facility”) and Term Loan Agreement (“Term Loan”). Additionally, the inclusion of substantial doubt about the Company’s ability to continue as a going concern in the report of our independent registered public accounting firm on our financial statements for the fiscal year ended February 1, 2020 resulted in a violation of affirmative covenants under our ABL Facility and Term Loan. During 2020, the Company entered into forbearance agreements (the “Forbearance Agreements”) with the lenders under its ABL Facility and Term Loan. Under the Forbearance Agreements, the respective lenders agreed not to exercise any rights and remedies through the period of time that allowed the Company to enter into a Transaction Support Agreement (“TSA”) on August 31, 2020 with lenders holding greater than 70% of the Company’s term loans (“Consenting Lenders”) and a majority of our shareholders on the principal terms of a financial restructuring (“Transaction”). The Transaction was consented to by the requisite term loan lenders and was
6
Table of Contents
consummated on an out-of-court basis on September 30, 2020. The Transaction resulted in a waiver of any past non-compliance with the terms of the Company’s credit facilities, provided the Company with additional liquidity and extended the maturity of certain participating debt by two years, through May 2024. Refer to Note 7, Debt for a further discussion of the Company’s debt restructuring.
The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, additional charges from potential adjustments to the carrying amount of its inventory, goodwill, intangible assets, right-of-use assets and long-lived assets as well as additional store closures. Actual results may differ materially from the Company’s current estimates as considerable risk remains related to the performance of stores, the resilience of the customer in an uncertain economic climate, and the possibility of a resurgence of COVID-19 with its potential for future business disruption and the related impacts on the U.S. economy in the coming 12 months. If one or more of these risks materialize, we believe that our current liquidity and capital may not be sufficient to finance our continued operations for at least the next 12 months. These risks raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements have been issued.
In response to COVID-19, we have taken and continue to take aggressive and prudent actions to reduce expenses and manage working capital to preserve cash on-hand. These actions include, but are not limited to:
|
•
|
reduced staffing and operating hours at retail locations for a phase-in period since reopening;
|
|
•
|
base salary reductions for our senior leadership team for a period of time, and suspension of pay raises for corporate employees;
|
|
•
|
extension of payment terms for all accounts payable, including merchandising vendors, other than those necessary to support our ecommerce business;
|
|
•
|
negotiated with certain landlords for rent abatements and/or rent deferrals;
|
|
•
|
withheld rent for certain retail locations related to the period of time they were closed, while continuing to negotiate with landlords for amended lease terms;
|
|
•
|
eliminated approximately half of our catalogs and are considering implementing this as a permanent change; and
|
|
•
|
significantly reduced planned capital expenditures.
|
Additionally, we have filed an income tax refund for $6.9 million, of which we have received $5.9 million, with the IRS and multiple state jurisdictions related to the provision under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) enacted in March 2020 that provides numerous tax provisions and other stimulus measures, including temporary suspension of certain payment requirements for the employer-paid portion of social security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company has elected to defer the employer-paid portion of social security taxes beginning with pay dates on and after April 1, 2020. A portion of the deferral is payable in 2021 with the remainder due in 2022. We continue to evaluate the provisions of the CARES Act and the ways in which it could assist our business and improve our liquidity.
Recently Adopted Accounting Standards
In November 2018, the FASB issued ASU 2018-18 – Collaborative Arrangements (“Topic 808”), which clarifies the interaction between Topic 808 and Topic 606, Revenue from Contracts with Customers. The provisions of ASU 2018-18 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-18 had no impact on the consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12 – Income Tax Accounting (“Topic 740”), which simplifies the accounting for income taxes. The provisions of ASU 2019-12 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company will be required to adopt this standard in the first quarter of Fiscal Year 2021. This standard is not expected to have a material impact on our consolidated financial statements and related disclosures.
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Table of Contents
3. Revenues
Disaggregation of Revenue
The Company sells its apparel and accessory merchandise through retail stores (“Retail”) and through its website and catalog orders (“Direct”). The following table presents disaggregated revenues by source (in thousands):
|
|
For the Thirteen Weeks Ended
|
|
|
For the Thirty-Nine Weeks Ended
|
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
Retail
|
|
$
|
42,991
|
|
|
$
|
94,748
|
|
|
$
|
104,388
|
|
|
$
|
301,008
|
|
Direct
|
|
|
74,233
|
|
|
|
71,337
|
|
|
|
196,441
|
|
|
|
222,273
|
|
Net revenues
|
|
$
|
117,224
|
|
|
$
|
166,085
|
|
|
$
|
300,829
|
|
|
$
|
523,281
|
|
Contract Liabilities
The Company recognizes a contract liability when it has received consideration from the customer and has a future obligation to the customer. Total contract liabilities consisted of the following (in thousands):
|
|
October 31, 2020
|
|
|
February 1, 2020
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
Signing bonus
|
|
$
|
400
|
|
|
$
|
506
|
|
Unredeemed gift cards
|
|
|
5,444
|
|
|
|
7,264
|
|
Total contract liabilities(1)
|
|
$
|
5,845
|
|
|
$
|
7,770
|
|
(1)
|
Included in accrued expenses and other current liabilities on the Company's consolidated balance sheet. The short-term portion of the signing bonus is included in accrued expenses on the consolidated balance sheet as of October 31, 2020.
|
For the thirteen and thirty-nine weeks ended October 31, 2020, the Company recognized approximately $1.7 million and $5.7 million, respectively, of revenue related to gift card redemptions and breakage. For the thirteen and thirty-nine weeks ended November 2, 2019, the Company recognized approximately $2.0 million and $8.5 million, respectively, of revenue related to gift card redemptions and breakage. Revenue recognized consists of gift cards that were part of the unredeemed gift card balance at the beginning of the period as well as gift cards that were issued during the period.
Performance Obligations
The Company has a remaining performance obligation of $0.4 million for a signing bonus related to the private label credit card agreement that is being amortized to revenue evenly through the third quarter of Fiscal Year 2023.
Unredeemed gift cards also require a performance obligation for revenue to be recognized, but substantially all gift cards are redeemed in the first year of issuance.
4. Other Income
The Company filed an insurance claim as a result of a cargo vessel fire on or about January 8, 2019, where contents of two containers carried J.Jill inventory. In July 2019, it was determined that the inventory onboard the cargo vessel was nonsalable, and the insurance claim was settled for $3.3 million. The Company recorded a gain of $2.4 million on insurance proceeds in selling, general and administrative expenses in the consolidated statement of operations and comprehensive income (loss) for the thirty-nine weeks ended November 2, 2019.
5. Asset Impairments
Long-lived Asset Impairments
In the first quarter and third quarter of Fiscal Year 2020, the Company reduced the net carrying value of certain long-lived assets to their estimated fair value, which was determined using a discounted cash flows method. These impairment charges arose from the material adverse effect that COVID-19 had on our results of operations, particularly with our store fleet. The Company incurred non-cash impairment charges of $0.7 million and $7.3 million, respectively, on leasehold improvements for the thirteen and thirty-nine weeks ended October 31, 2020 and $0.2 million and $20.2 million, respectively, on the right-of-use assets for the thirteen and thirty-nine weeks ended October 31, 2020.
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Table of Contents
In the second quarter of Fiscal Year 2019, the Company reduced the net carrying value of certain long-lived assets to their estimated fair value, determined using a discounted cash flows method. These impairment charges arose from the Company’s decision to vacate and sublease one floor of the corporate headquarters located in Quincy, Massachusetts. The Company incurred non-cash impairment charges of $0.3 million on leasehold improvements and $1.8 million on the right-of-use asset, which were recorded as impairment of long-lived assets in the consolidated statement of operations and comprehensive income (loss).
Goodwill and Other Intangible Asset Impairments
In the first quarter of Fiscal Year 2020, the Company temporarily closed its retail locations due to COVID-19, which had a material adverse effect on our results of operations, financial position and liquidity and led to a significant decline in our net sales for the first quarter of Fiscal Year 2020, as well as an expected decline for the full Fiscal Year 2020. The Company concluded that these factors, as well as the decrease in stock price represented indicators of impairment and required the Company to test goodwill and indefinite-lived and definite-lived intangible assets for impairment during the first quarter of Fiscal Year 2020 (the “Q1 Impairment Test”).
The Company performed the Q1 Impairment Test using a quantitative approach. The Q1 Impairment Test was performed using the income approach (or discounted cash flows method) for goodwill, the relief-from-royalty method for indefinite-lived intangible assets and a recoverability analysis for definite-lived intangible assets. The estimated fair values of goodwill and indefinite-lived and definite-lived intangible assets were below their carrying values resulting in a $17.9 million impairment of goodwill, a $4.0 million impairment of the Company’s tradename (indefinite-lived intangible asset) and a $2.6 million impairment of the Company’s customer list (definite-lived intangible asset).
During the third quarter of Fiscal Year 2020, the Company reduced its long-term estimates, and the Company concluded this represented an indicator of impairment and required the Company to test goodwill and indefinite-lived and definite-lived intangible assets for impairment during the third quarter of Fiscal Year 2020 (the “Q3 Impairment Test”).
The Company performed the Q3 Impairment Test using a quantitative approach. The Q3 Impairment Test was performed using the income approach (or discounted cash flows method) for goodwill, the relief-from-royalty method for indefinite-lived intangible assets and a recoverability analysis for definite-lived intangible assets. The estimated fair values of goodwill and indefinite-lived and definite-lived intangible assets were above their carrying values resulting in no further impairment. The Company will perform its annual impairment assessment during the fourth quarter of Fiscal Year 2020 and may incur further impairments based on the results of that assessment which may be material.
The most significant estimates and assumptions inherent in this approach are the preparation of revenue forecasts, selection of royalty and discount rates and a terminal year multiple. These assumptions are classified as Level 3 inputs. The methodology utilized for the Q1 Impairment Test and the Q3 Impairment Test has not changed materially from the prior year. The key assumptions used under the income approach and relief-from-royalty method include the following:
|
•
|
Future cash flow assumptions - The Company's projections for its reporting units were from historical experience and assumptions regarding future revenue growth and profitability trends. The Company's analyses incorporated an assumed period of cash flows of 5-10 years with a terminal value.
|
|
•
|
Discount rate - The discount rate was based on an estimated weighted average cost of capital ("WACC") for each reporting unit. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. The Company developed its cost of equity estimate based on perceived risks and predictability of future cash flows. The WACC used to estimate the fair values of the Company's reporting units was within a range of 20.5% to 22.5%. A 1% change in this discount rate would not result in an additional goodwill impairment charge.
|
|
•
|
Royalty rate - The royalty rates utilized consider external market evidence and internal financial metrics including a review of available returns after the consideration of property, plant and equipment, working capital and other intangible assets. The royalty rate used to estimate the available returns for the reporting units was within a range of 1% to 4%.
|
The Company is at risk of future impairments in Fiscal Year 2020 if actual results differ from forecasted results or there are changes to these key assumptions used in estimating the fair value.
9
Table of Contents
The following table displays a rollforward of the carrying amount of goodwill from February 2, 2019 to October 31, 2020 (in thousands):
Goodwill at February 2, 2019
|
|
$
|
197,026
|
|
Impairment losses
|
|
|
(119,429
|
)
|
Balance, February 1, 2020
|
|
|
77,597
|
|
Impairment losses
|
|
|
(17,900
|
)
|
Balance, October 31, 2020
|
|
$
|
59,697
|
|
The accumulated goodwill impairment losses as of October 31, 2020 are $137.3 million.
The following table reflects the gross carrying amount and accumulated amortization and impairment for each major intangible asset:
|
|
|
|
October 31, 2020
|
|
February 1, 2020
|
|
|
|
|
|
(in thousands)
|
|
|
|
Weighted Average Useful Life (Years)
|
|
Gross
|
|
|
Accumulated Amortization/ Impairment
|
|
|
Carrying Amount
|
|
|
Gross
|
|
|
Accumulated Amortization/ Impairment
|
|
|
Carrying Amount
|
|
Trade name
|
|
Indefinite
|
|
$
|
58,100
|
|
|
$
|
16,100
|
|
|
$
|
42,000
|
|
|
$
|
58,100
|
|
|
$
|
12,100
|
|
|
$
|
46,000
|
|
Customer relationships
|
|
13.2
|
|
|
134,200
|
|
|
|
76,960
|
|
|
|
57,240
|
|
|
|
134,200
|
|
|
|
67,386
|
|
|
|
66,814
|
|
Total intangible assets
|
|
|
|
$
|
192,300
|
|
|
$
|
93,060
|
|
|
$
|
99,240
|
|
|
$
|
192,300
|
|
|
$
|
79,486
|
|
|
$
|
112,814
|
|
The accumulated customer relationship impairment loss as of October 31, 2020 is $2.6 million.
In the second quarter of Fiscal Year 2019, the Company reduced comparable sales outlook for the second quarter that led to a reduced full year forecast of earnings for Fiscal Year 2019. The Company concluded that these factors, as well as the decrease in stock price represented indicators of impairment and required the Company to test goodwill and indefinite-lived intangible assets for impairment during the second quarter of Fiscal Year 2019 (the “Q2 FY19 Impairment Test”).
The Company performed the Q2 FY19 Impairment Test using a quantitative approach with the assistance of an independent valuation firm. The Q2 FY19 Impairment Test was performed using the income approach (or discounted cash flows method) for goodwill and the relief-from-royalty method for indefinite-lived intangible assets. The estimated fair values of goodwill and indefinite-lived intangible assets were below carrying values resulting in an $88.4 million impairment of goodwill and a $7.0 million impairment of the Company’s tradename (indefinite-lived intangible asset).
6. Restructuring Costs
In July 2019, the Company implemented a restructuring plan (the “2019 Restructuring Plan”) focused on cost reduction initiatives designed to execute against long-term strategies. The 2019 Restructuring Plan included headcount reductions primarily at the Company’s corporate headquarters in Quincy, Massachusetts and at the facility in Tilton, New Hampshire.
As a result of the 2019 Restructuring Plan, the Company recorded $1.6 million of restructuring costs in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. All restructuring costs were recognized in the second quarter of Fiscal Year 2019 and payments were completed in the third quarter of Fiscal Year 2020, ending on October 31, 2020.
The following table summarizes the activity of the restructuring costs discussed above and related accruals recorded in accrued other and other current liabilities on the consolidated balance sheet (in thousands):
|
|
February 1, 2020
|
|
|
Cash
Payments
|
|
|
Adjustments
|
|
|
October 31, 2020
|
|
|
Program Costs to Date October 31, 2020
|
|
Employee separation costs
|
|
$
|
216
|
|
|
$
|
131
|
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
1,402
|
|
Other
|
|
|
39
|
|
|
|
1
|
|
|
|
38
|
|
|
|
—
|
|
|
|
195
|
|
Total restructuring costs
|
|
$
|
255
|
|
|
$
|
132
|
|
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
1,597
|
|
10
Table of Contents
7. Debt
The components of the Company’s outstanding debt were as follows (in thousands):
|
|
Carrying value of debt
|
|
|
|
October 31, 2020
|
|
|
February 1, 2020
|
|
Term Loan (principal of $5,022 and $237,579, respectively)
|
|
$
|
4,911
|
|
|
$
|
233,999
|
|
Priming Loan (principal of $230,457)
|
|
|
223,525
|
|
|
|
-
|
|
Subordinated Facility (principal and paid-in kind interest of $15,168)
|
|
|
2,910
|
|
|
|
-
|
|
Less: Current portion
|
|
|
(2,799
|
)
|
|
|
(2,799
|
)
|
Net long-term debt
|
|
$
|
228,547
|
|
|
$
|
231,200
|
|
As a result of COVID-19 related store closures, the Company was unable to maintain compliance with certain of its non-financial and financial covenants for the period ended May 2, 2020. Additionally, the inclusion of substantial doubt about the Company’s ability to continue as a going concern in the report of our independent registered public accounting firm on our financial statements for the fiscal year ended February 1, 2020 resulted in a violation of affirmative covenants under our ABL Facility and Term Loan.
On August 31, 2020, the Company entered into the TSA with the Consenting Lenders and the Subordinated Lenders to support the Transaction. Subsequently, on September 11, 2020, the Company received the consent of the term loan lenders representing more than 95.0% of the aggregate outstanding principal amount of the term loan claims under the Company’s previously existing term loan facility (the “Existing Term Facility”) to proceed with the documentation and consummation of the Transaction on an out-of-court basis, pursuant to the terms and conditions set forth in the out-of-court term sheet under the TSA. Under the TSA, the Company implemented the following series of transactions:
|
a)
|
an amendment of the Company’s Existing Term Loan Facility (the lenders thereunder, the “Existing Term Lenders”) to, among other things, waive any non-compliance with the terms of the Existing Term Facility;
|
|
b)
|
entry into a new senior secured priming term loan facility (the “Priming Credit Agreement” and, the lenders thereunder, the “Priming Lenders”), the proceeds of which have been used to repurchase the term loans under the Existing Term Facility (the “Existing Term Loans”) from the Consenting Lenders;
|
|
c)
|
an amendment of the Company’s existing ABL Facility, to, among other things, waive any non-compliance with the terms of the ABL Facility; and
|
|
d)
|
the provision by TowerBrook and certain other investors of new capital pursuant to a subordinated term loan facility (the “Subordinated Facility” and, the lenders thereunder, the “Subordinated Lenders”)
|
Term Loan
On September 30, 2020, in accordance with the TSA, the Company entered into an Amendment to the Term Loan (the “Amendment”). In connection with the Amendment, the Existing Term Lenders:
|
(i)
|
consented to the entry by the Company into the Priming Facility, the Subordinated Facility and the other transactions contemplated by the TSA; and
|
|
(ii)
|
permanently waived any defaults or events of default under the Existing Term Loan Agreement existing on or prior to September 30, 2020.
|
The Amendment also eliminated substantially all of the covenants and events of default in the Existing Term Facility and provided that no guarantors of, or collateral securing, the Existing Term Loan Agreement were released. The maturity date of the Amended Existing Term Loan Agreement continues to be May 8, 2022. Loans under the Amended Existing Term Loan Agreement continue to accrue interest at LIBOR plus 5.00%, with a minimum LIBOR per annum of 1.00%, with the interest payable on a quarterly basis. The Company may alternatively elect to accrue interest at a Base Rate (as defined in the Amended Existing Term Loan Agreement) plus 4.00%.
Additionally, in connection with the Amendment, the Company made an offer to all Existing Term Lenders to repurchase 100% of such Existing Term Lenders’ Existing Term Loans, and 97.9% of the Existing Term Lenders accepted the offer.
Priming Loan
On September 30, 2020, in accordance with the TSA, the Company entered into the Priming Term Loan Credit Agreement, which provides for a secured term loan facility in an aggregate principal amount equal to $231.1 million. The proceeds of the Priming Credit Agreement were solely used to repurchase Existing Term Loans from the 97.9% of the Existing Term Loan Lenders that
11
Table of Contents
accepted the Company’s offer to purchase Existing Term Loans under the Amendment discussed above. The maturity date of the Priming Credit Agreement is May 8, 2024, and the loans under the Priming Credit Agreement will bear interest at the Company’s election at: (1) Base Rate (as defined in the Priming Credit Agreement) plus 4.00% or (2) LIBOR plus 5.00%, with a minimum LIBOR per annum of 1.00%, with the interest payable on a quarterly basis. The Priming Term Loan Credit Agreement requires a principal paydown of at least $25.0 million by August 30, 2021; otherwise, there will be a Paid-in-Kind (“PIK”) interest rate increase and a PIK fee as follows:
|
•
|
If the principal paydown is less than $15.0 million, the PIK interest rate increase will be 5.00%, and the PIK fee will be 7.50%;
|
|
•
|
If the principal paydown is greater than $15.0 million, but less than $20.0 million, the PIK interest rate increase will be 2.00% and the PIK fee will be 5.00%; or
|
|
•
|
If the principal paydown is greater than $20.0 million, but less than $25.0 million, the PIK interest rate increase will be 1.00% and the PIK fee will be 2.00%.
|
The Company’s obligations under the Priming Credit Agreement are secured by substantially all of the real and personal property of the Company and certain of its subsidiaries, subject to certain customary exceptions. The Priming Credit Agreement includes customary negative covenants, including covenants limiting the ability of the Company to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and purchases, pay dividends and distributions, enter into transactions with affiliates, and make payments in respect of junior indebtedness. The Priming Credit Agreement also has certain financial covenants, including (1) a minimum liquidity covenant that generally requires minimum liquidity on a weekly basis of $15 million, (2) a first lien net leverage ratio that requires compliance beginning in the fourth quarter of Fiscal Year 2021 with a net leverage ratio of 5:1, which reduces over time, and (3) limits on capital spending of $20 million annually.
In accordance with the Priming Credit Agreement, the Company issued to the Priming Lenders 656,717 shares (after giving effect to the 1-for-5 stock split described herein) of the Company’s Common Stock (the “Equity Consideration”). We recorded the issuance of shares valued at $2.0 million as equity with the offset as a reduction of the carrying value of the debt. On May 31, 2021, the Company will have the choice (the “May 31, 2021 Option”) to either (i) repay $4.9 million in aggregate principal amount of the loans under the Priming Credit Agreement, together with accrued and unpaid interest thereon or (ii) issue additional shares of Common Stock to the Priming Lenders in an amount equal to the greater of (I) 9.79% of the fully diluted shares of Common Stock as of October 1, 2020 less 656,717 shares and (II) a number of shares of Common Stock with an aggregate value of $0.5 million at the time of such issuance; provided, that the Priming Lenders shall not receive on such date shares of Common Stock having a value greater than $4.75 million at the time of such issuance. The May 31, 2021 Option was considered an embedded derivative within the Priming Loan. The Company determined the fair value of the May 31, 2021 Option was $1.4 million at the date of the Transaction, which was recorded within Warrants and derivative liabilities with the offset as a reduction in the carrying value of the debt. The fair value of the May 31, 2021 Option was determined using an option pricing model with a Monte Carlo simulation. The difference between the carrying value of the Priming Loan and the principal amount will be accreted over the term of the debt using the effective interest method. The May 31, 2021 Option was remeasured to its fair value as of the end of the third quarter of Fiscal 2020, with the adjustment of $0.3 million being recorded within Other expense in the Consolidated Statement of Operations.
Subordinated Facility
On September 30, 2020, in accordance with the TSA, the Company entered into a Subordinated Facility, with the Subordinated Lenders, that provides for a secured term loan facility in an aggregate principal amount equal to $15.0 million with an additional incremental capacity subject to certain customary conditions. The proceeds of the Subordinated Facility have been used for general corporate purposes.
The maturity date of the Subordinated Facility is November 8, 2024. Loans under the Subordinated Facility will bear interest at the Borrower’s election at (1) Base Rate (as defined in the Subordinated Facility) plus 11.00% or (2) LIBOR plus 12.00%, with a minimum LIBOR per annum of 1.00%. The Subordinated Facility is secured by substantially all of the real and personal property of the Company. The Subordinated Facility includes customary negative covenants for subordinated term loan agreements of this type, including covenants limiting the ability of the Company to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and purchases, pay dividends and distributions, enter into transactions with affiliates, and make payments in respect of junior indebtedness. The Subordinated Facility also has certain financial covenants, including (1) a minimum liquidity covenant that generally requires minimum liquidity on a weekly basis of $12.75 million, (2) a first lien net leverage ratio that requires compliance beginning in the fourth quarter of Fiscal Year 2021 with a net leverage ratio of 5.75:1, which reduces over time, and (3) limits on capital spending of $23 million annually.
In accordance with the Subordinated Facility, the Company issued Penny Warrants to the Subordinated Lenders, which, upon exercise, would grant the Subordinated Lenders 3,720,109 shares (after giving effect to the 1-for-5 stock split described herein) of
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common stock of the Company. The terms of the warrants include antidilution provisions, including a change to the conversion ratio if the Company chooses to issue additional shares to the Priming Lenders on May 31, 2021 rather than making a principal payment of $4.9 million. We recorded a reduction to the carrying value of the subordinated debt of $11.8 million due to the issuance of the Penny Warrants As a result of the antidilution provisions, the Penny Warrants have been recognized as a liability within Warrants and derivative liabilities, rather than equity, on the Balance Sheet and were remeasured to their fair value as of the end of the third quarter of Fiscal 2020, with the adjustment of $1.3 million being recorded within Other expense in the Consolidated Statements of Operations. The difference between the carrying value of the Subordinated Facility and the principal amount will be accreted over the term of the debt using the effective interest method.
Asset-Based Revolving Credit Agreement
The Company is party to a secured $40.0 million asset-based revolving credit facility agreement with a maturity date of May 8, 2023. On September 30, 2020, in accordance with the TSA, the Company entered into an amendment to the ABL Facility, whereby the ABL lenders (i) consented to the Company’s entry into the Priming Facility, the Subordinated Facility and other transactions contemplated by the TSA and (ii) permanently waived any defaults or events of default under the ABL Facility on or prior to September 30, 2020. As of October 31, 2020, there was no outstanding balance under the ABL Facility, and $2.7 million letters of credit outstanding. The undrawn borrowing availability under the ABL Facility was $37.3 million.
8. Income Taxes
The Company recorded an income tax benefit of $7.3 million and $38.5 million for the thirteen and thirty-nine weeks ended October 31, 2020, respectively and an income tax expense of $1.8 million and $0.1 million during the thirteen and thirty-nine weeks ended November 2, 2019, respectively. The effective tax rate was 24.0% and 25.5% for the thirteen and thirty-nine weeks ended October 31, 2020, respectively, and 42.5% and (0.1)% for the thirteen and thirty-nine weeks ended November 2, 2019, respectively.
The effective tax rate for the thirteen and thirty-nine weeks ended October 31, 2020 differs from the federal statutory rate of 21% primarily due to the impact of an anticipated benefit from the CARES Act, as well as the impact of state income taxes. These benefits were partially offset by the impact on the effective tax rate from the officer compensation limitation under Section 162 (m) of the Internal Revenue Code (“§162(m)”), goodwill impairment, which has no associated tax benefit, and change in valuation allowance on the thirteen and thirty-nine weeks ended October 31, 2020. The CARES Act provides for net operating losses in Fiscal Year 2020 to be carried back to earlier tax years with higher tax rates than the current year. The effective tax rate for the thirteen and thirty-nine weeks ended November 2, 2019 differs from the federal statutory rate of 21% primarily due to goodwill impairment of $88.4 million as well as recurring items including §162(m) officer compensation limitation, stock compensation and state income taxes.
Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax bases of assets and liabilities using statutory rates. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Under the applicable accounting standards, management has considered future reversals of existing taxable temporary differences to conclude there is sufficient positive evidence that it is more likely than not that the Company will not recognize part of the benefits of state net operating losses. Accordingly, a valuation allowance has been established against the Company’s state deferred tax assets.
Among the changes to the U.S. federal income tax rules, the CARES Act modified net operating loss carryback rules that were eliminated by the 2017 Tax Cuts and Jobs Act, restored 100% bonus depreciation for qualified improvement property, increased the limit on the deduction for net interest expense and accelerated the time frame for refunds of alternative minimum tax (“AMT”) credits. The Company’s ability to elect bonus depreciation for the 2018 and 2019 tax years, carryback net operating losses to earlier years, and immediately refund AMT credits due to the enactment of the CARES Act resulted in an estimated tax refund of $6.9 million of which the Company has received $5.9 million. The Company has elected to defer the employer-paid portion of social security taxes beginning with pay dates on and after April 1, 2020. The Company will continue to evaluate the effects of the CARES Act as additional legislative guidance becomes available.
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9. Earnings Per Share
The following table summarizes the computation of basic and diluted net income per share attributable to common shareholders (in thousands, except share and per share data):
|
|
For the Thirteen Weeks Ended
|
|
|
For the Thirty-Nine Weeks Ended
|
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders:
|
|
$
|
(23,159
|
)
|
|
$
|
2,387
|
|
|
$
|
(112,462
|
)
|
|
$
|
(89,982
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic:
|
|
|
9,177,350
|
|
|
|
8,767,733
|
|
|
|
9,004,321
|
|
|
|
8,730,636
|
|
Dilutive effect of stock options and restricted shares:
|
|
|
—
|
|
|
|
22,407
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of common shares outstanding, diluted:
|
|
|
9,177,350
|
|
|
|
8,790,140
|
|
|
|
9,004,321
|
|
|
|
8,730,636
|
|
Net (loss) income per common share attributable to common shareholders, basic:
|
|
$
|
(2.52
|
)
|
|
$
|
0.27
|
|
|
$
|
(12.49
|
)
|
|
$
|
(10.31
|
)
|
Net (loss) income per common share attributable to common shareholders, diluted:
|
|
$
|
(2.52
|
)
|
|
$
|
0.27
|
|
|
$
|
(12.49
|
)
|
|
$
|
(10.31
|
)
|
The weighted average common shares for the diluted earnings per share calculation exclude the impact of outstanding equity awards if the assumed proceeds per share of the award is in excess of the related fiscal period’s average price of the Company’s common stock. Equity compensation awards have been excluded when they have an antidilutive effect, such as when the Company has a net loss for the reporting period, which is the case for the thirteen and thirty-nine weeks ended October 31, 2020 and the thirty-nine weeks ended November 2, 2019. There were 416,363 antidilutive shares for the thirteen weeks ended October 31, 2020, and 800,003 antidilutive shares for the thirteen weeks ended November 2, 2019, of such awards excluded. There were 476,541 antidilutive shares for the thirty-nine weeks ended October 31, 2020, and 636,752 antidilutive shares for the thirty-nine weeks ended November 2, 2019, of such awards excluded. The 3,720,109 Penny Warrants that were issued during the third quarter of Fiscal Year 2020 were excluded from the calculation of earnings per share for both the thirteen and thirty-nine week periods ended October 31, 2020 because the effect of including them would have been antidilutive.
On November 4, 2020, the Company announced a 1-for-5 reverse stock split effective November 9, 2020. The Company’s shareholders received one share for every five shares held prior to the effective date. The Company adjusted the computations of basic and diluted EPS retroactively for all periods presented to reflect the change in capital structure.
10. Equity-Based Compensation
Equity-based compensation expense was $0.3 million for the thirteen weeks ended October 31, 2020, and $1.1 million for the thirteen weeks ended November 2, 2019. Equity-based compensation expense was $1.6 million for the thirty-nine weeks ended October 31, 2020, and $3.5 million for the thirty-nine weeks ended November 2, 2019.
Special Dividend
On March 6, 2019, the Company’s Board of Directors declared a special cash dividend (the “Special Dividend”) of $1.15 per share payable to shareholders of record as of March 19, 2019, of which $50.2 million was paid on April 1, 2019.
In connection with the Special Dividend, pursuant to anti-dilution provisions in the 2017 Omnibus Equity Incentive Plan (the “2017 Plan”), the Company adjusted outstanding equity awards in order to prevent dilution of such awards. Accordingly, the Company adjusted the number of outstanding unvested restricted stock units (“RSUs”) as of the payment date of the dividend with an additional number of RSUs (“Dividend Equivalent Units” or “DEUs”) equal to the quotient obtained by dividing (x) the product of the number of unvested RSUs as of the record date by the amount of the dividend per share, by (y) the fair market value of share on the payment date of the Special Dividend. The DEUs will follow the same vesting pattern as the RSUs. For holders of outstanding options as of March 19, 2019, the option strike price on such options was reduced by the per share amount of the Special Dividend. Holders of unvested Restricted Stock Awards (“RSAs”) received a forfeitable $1.15 per share dividend on unvested RSAs as of March 19, 2019.
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11. Related Party Transactions
On September 30, 2020, the Company entered into the Subordinated Facility, with TowerBrook Capital Partners L.P. as the primary lender; and the Company issued Penny Warrants to the Subordinated Lenders. See Note 7, Debt, for a further discussion of the Subordinated Facility and Penny Warrants.
The Company incurred $3.3 million of costs incurred for professional fees for advisors to TowerBrook Capital Partners L.P. for services associated with the Transaction.
For the thirteen and thirty-nine weeks ended October 31, 2020 and the thirteen and thirty-nine weeks ended November 2, 2019, the Company incurred an immaterial amount of other related party transactions.
12. Commitments and Contingencies
Legal Proceedings
The Company is subject to various legal proceedings that arise in the ordinary course of business. Although the outcome of such proceedings cannot be predicted with certainty, management does not believe that the Company is presently party to any legal proceedings the resolution of which management believes would have a material adverse effect on the Company’s business, financial condition, operating results or cash flows. The Company establishes reserves for specific legal matters when the Company determines that the likelihood of an unfavorable outcome is probable, and the loss is reasonably estimable.
13. Operating Leases
As of October 31, 2020, the Company leased certain retail stores, a distribution center, and office space. As of that same date, the Company did not have any finance leases and no operating leases containing material residual value guarantees or material restrictive covenants. Certain of the Company’s retail operating leases include variable rental payments based on a percentage of retail sales over contractual levels.
Some retail leases include one or more options to renew, with renewal terms that can extend the lease term from one to fifteen years. The Company’s distribution center has renewal terms that can extend the lease term up to twenty years. The exercise of lease renewal options is at the Company’s sole discretion. As of October 31, 2020, the Company included options to renew that are reasonably certain to be exercised in the operating lease assets and liabilities.
The components of lease expense were as follows (in thousands):
Lease Cost
|
|
Classification
|
|
For the Thirteen Weeks Ended October 31, 2020
|
|
|
For the Thirteen Weeks Ended November 2, 2019
|
|
|
For the Thirty-Nine Weeks Ended October 31, 2020
|
|
|
For the Thirty-Nine Weeks Ended November 2, 2019
|
|
Operating lease cost
|
|
SG&A Expenses
|
|
$
|
10,803
|
|
|
$
|
12,054
|
|
|
$
|
33,545
|
|
|
$
|
35,426
|
|
Variable lease cost
|
|
SG&A Expenses
|
|
|
366
|
|
|
|
976
|
|
|
|
1,262
|
|
|
|
2,516
|
|
Total lease cost
|
|
|
|
$
|
11,169
|
|
|
$
|
13,030
|
|
|
$
|
34,807
|
|
|
$
|
37,942
|
|
Additionally, during the thirteen and thirty-nine weeks ended October 31, 2020, the Company recognized a non-cash impairment charge of $0.2 million and $20.2 million, respectively, associated with right of use assets.
As a result of COVID-19 related temporary store closures, the Company withheld rent payments for all of its retail locations in April and May 2020 and for some of its retail locations in June 2020. The Company successfully negotiated commercially reasonable lease concessions with the landlords of approximately half of our leases during the third quarter of Fiscal Year 2020, which include combinations of abated and deferred rent payments as well as term extensions. The Company is actively negotiating with the landlords of its other leases, and the withheld rent payments for such leases amounted to approximately $11.2 million as of October 31, 2020, which we have included in accrued expenses and other current liabilities on the consolidated balance sheet. The Company does not anticipate any significant late payment penalties; therefore, we have not accrued any related expenses as of October 31, 2020.
The Company has elected to apply the guidance provided by the FASB pertaining to lease concessions that are a result of COVID-19 and accordingly does not evaluate the rights and obligations pertaining to concessions in each lease but rather accounts for them assuming that such provisions exist. For each lease that contains concessions that do not significantly increase our obligations, the Company has remeasured the lease consistent with resolving a contingency and therefore adjusted the timing and amount of the lease payments without changing our assumptions (i.e. discount rate and lease classification). The concessions within the qualifying agreements vary and may include combinations of abated and deferred rent payments as well as term extensions ranging from one to six months. During the thirteen weeks ended October 31, 2020, the Company’s qualifying agreements provided abated rent payments
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of $3.7 million and deferred rent payments of $1.4 million that are payable over no more than 18 months beginning as early as August 2020.
For the thirteen and thirty-nine weeks ended October 31, 2020, total common area maintenance expense was $3.6 million and $11.0 million, respectively. For the thirteen and thirty-nine weeks ended October 31, 2020, operating lease liabilities increased $3.1 million and $4.2 million, respectively, due to the COVID related lease modifications noted above. For the thirteen and thirty-nine weeks ended November 2, 2019, total common area maintenance expense was $3.6 million and $10.7 million, respectively, while operating lease liabilities arising from obtaining operating lease assets were $9.6 million and $19.2 million, respectively.
For the thirteen and thirty-nine weeks ended October 31, 2020 total cash paid for amounts included in the measurement of operating lease liabilities was $13.9 million and $26.4 million, respectively. For the thirteen and thirty-nine weeks ended November 2, 2019, the total cash paid for amounts included in the measurement of operating lease liabilities was $12.1 million, and $35.8 million, respectively.
Lease Term and Discount Rate
|
|
October 31, 2020
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
Operating leases
|
|
|
6.7
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
|
6.6
|
%
|
Maturities of lease liabilities as of October 31, 2020 were as follows (in thousands):
Fiscal Year
|
|
Operating Leases(1)
|
|
2020
|
|
$
|
8,396
|
|
2021
|
|
|
50,312
|
|
2022
|
|
|
43,772
|
|
2023
|
|
|
40,603
|
|
2024
|
|
|
34,957
|
|
Thereafter
|
|
|
99,522
|
|
Subtotal
|
|
|
277,562
|
|
Less: Imputed interest
|
|
|
54,740
|
|
Present value of lease liabilities
|
|
$
|
222,822
|
|
(1)
|
There were no operating leases with legally binding minimum lease payments for leases signed but for which the Company has not taken possession.
|
14. Barter Arrangement
The Company entered into a bartering arrangement with Evergreen Trading, a vendor, where the Company provided inventory in exchange for media credits. During Q3 of Fiscal Year 2019, the Company exchanged inventory with a recorded value of $0.7 million for certain media credits valued at $2.0 million resulting in a gain of $1.3 million. The value of media credits was recognized as revenue, with the corresponding asset included in “Prepaid and other current assets” and “Other assets” on the accompanying consolidated balance sheet. The Company may use the media credits over seven years. The Company has used a minimal amount of the credits during the thirty-nine weeks ended October 31, 2020.
The Company accounted for this barter transaction under ASC Topic No. 606 “Revenue from Contracts with Customers.” Barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged unless the products received have a more readily determinable estimated fair value. Revenue associated with a barter transaction is recorded at the time of the exchange of the related assets.
15. Subsequent Event
On November 4, 2020, the Company announced a 1-for-5 reverse stock split effective November 9, 2020. The Company’s shareholders received one share for every five shares held prior to the effective date. All share and per share amounts have been adjusted retroactively to reflect the reverse stock split. In connection with the reverse stock split, the Company’s Certificate of Incorporation was amended to reduce the number of authorized shares of Common Stock to 50,000,000, and proportional adjustments were made to the Company’s 2017 Omnibus Equity Incentive Plan and Employee Stock Purchase Plan, including the number of shares of Common Stock available for issuance under such plans and the number of shares of Common Stock underlying outstanding awards granted pursuant to
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such plans. In accordance with the terms of the Penny Warrants issued to the Subordinated Lenders, the number of shares of Common Stock issuable upon exercise of each Warrant was also proportionately adjusted to give effect to the reverse stock split.
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