VINCE HOLDING CORP., 10-Q filed on 12/10/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Oct. 31, 2015
Dec. 7, 2015
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Oct. 31, 2015 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
VNCE 
 
Entity Registrant Name
VINCE HOLDING CORP. 
 
Entity Central Index Key
0001579157 
 
Current Fiscal Year End Date
--01-30 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
36,779,417 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Oct. 31, 2015
Jan. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 124 
$ 112 
Trade receivables, net
18,868 
33,797 
Inventories, net
43,895 
37,419 
Prepaid expenses and other current assets
10,252 
9,812 
Total current assets
73,139 
81,140 
Property, plant and equipment, net
36,302 
28,349 
Intangible assets, net
109,196 
109,644 
Goodwill
63,746 
63,746 
Deferred income taxes and other assets
93,122 
95,769 
Total assets
375,505 
378,648 
Current liabilities:
 
 
Accounts payable
30,154 
29,118 
Accrued salaries and employee benefits
1,972 
7,380 
Other accrued expenses
29,469 
27,992 
Total current liabilities
61,595 
64,490 
Long-term debt
75,219 
84,450 
Deferred rent
14,517 
11,676 
Other liabilities
148,003 
146,063 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock at $0.01 par value (100,000,000 shares authorized, 36,775,443 and 36,748,245 shares issued and outstanding at October 31, 2015 and January 31, 2015, respectively)
368 
367 
Additional paid-in capital
1,012,124 
1,011,244 
Accumulated deficit
(936,256)
(939,577)
Accumulated other comprehensive loss
(65)
(65)
Total stockholders' equity
76,171 
71,969 
Total liabilities and stockholders' equity
$ 375,505 
$ 378,648 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Oct. 31, 2015
Jan. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
36,775,443 
36,748,245 
Common stock, shares outstanding
36,775,443 
36,748,245 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 31, 2015
Nov. 1, 2014
Oct. 31, 2015
Nov. 1, 2014
Income Statement [Abstract]
 
 
 
 
Net sales
$ 80,859 
$ 102,947 
$ 220,694 
$ 245,725 
Cost of products sold
40,854 
52,299 
129,159 
124,652 
Gross profit
40,005 
50,648 
91,535 
121,073 
Selling, general and administrative expenses
27,662 
25,818 
80,633 
71,092 
Income from operations
12,343 
24,830 
10,902 
49,981 
Interest expense, net
1,428 
2,235 
4,367 
7,570 
Other expense, net
899 
72 
1,390 
557 
Income before income taxes
10,016 
22,523 
5,145 
41,854 
Provision for income taxes
4,123 
9,212 
1,824 
16,658 
Net Income
$ 5,893 
$ 13,311 
$ 3,321 
$ 25,196 
Earnings per share:
 
 
 
 
Basic earnings per share
$ 0.16 
$ 0.36 
$ 0.09 
$ 0.69 
Diluted earnings per share
$ 0.16 
$ 0.35 
$ 0.09 
$ 0.66 
Weighted average shares outstanding:
 
 
 
 
Basic
36,775,443 
36,728,969 
36,767,770 
36,726,338 
Diluted
36,816,972 
38,303,603 
37,633,633 
38,243,368 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 31, 2015
Nov. 1, 2014
Oct. 31, 2015
Nov. 1, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 5,893 
$ 13,311 
$ 3,321 
$ 25,196 
Comprehensive income
$ 5,893 
$ 13,311 
$ 3,321 
$ 25,196 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Oct. 31, 2015
Nov. 1, 2014
Operating activities
 
 
Net income
$ 3,321 
$ 25,196 
Add (deduct) items not affecting operating cash flows:
 
 
Depreciation
5,792 
3,111 
Amortization of intangible assets
448 
449 
Amortization of deferred financing costs
959 
912 
Amortization of deferred rent
1,536 
2,182 
Deferred income taxes
2,871 
15,695 
Share-based compensation expense
706 
1,250 
Loss on disposal of property, plant and equipment
309 
 
Changes in assets and liabilities:
 
 
Receivables, net
14,929 
2,106 
Inventories, net
(6,476)
(18,769)
Prepaid expenses and other current assets
848 
4,825 
Accounts payable and accrued expenses
(1,904)
3,521 
Other assets and liabilities
795 
958 
Net cash provided by operating activities
24,134 
41,436 
Investing activities
 
 
Payments for capital expenditures
(14,107)
(15,306)
Net cash used in investing activities
(14,107)
(15,306)
Financing activities
 
 
Proceeds from borrowings under the Revolving Credit Facility
108,423 
41,700 
Payments for Revolving Credit Facility
(98,514)
(21,200)
Payments for Term Loan Facility
(20,000)
(68,000)
Fees paid for Term Loan Facility and Revolving Credit Facility
(99)
(114)
Stock option exercise
175 
34 
Net cash used in financing activities
(10,015)
(47,580)
Increase (decrease) in cash and cash equivalents
12 
(21,450)
Cash and cash equivalents, beginning of period
112 
21,484 
Cash and cash equivalents, end of period
124 
34 
Supplemental Disclosures of Cash Flow Information
 
 
Cash payments for interest
2,945 
6,966 
Cash payments for income taxes, net of refunds
1,235 
65 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
 
 
Capital expenditures in accounts payable
$ 517 
$ 223 
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation

Note 1. Description of Business and Basis of Presentation

On November 27, 2013, Vince Holding Corp. (“VHC” or the “Company”), previously known as Apparel Holding Corp., closed an initial public offering (“IPO”) of its common stock and completed a series of restructuring transactions (the “Restructuring Transactions”) through which (i) Kellwood Holding, LLC acquired the non-Vince businesses, which include Kellwood Company, LLC (“Kellwood Company” or “Kellwood”), from the Company and (ii) the Company continues to own and operate the Vince business, which includes Vince, LLC. Prior to the IPO and the Restructuring Transactions, VHC was a diversified apparel company operating a broad portfolio of fashion brands, which included the Vince business and other businesses. As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business, and the stockholders immediately prior to the consummation of the Restructuring Transactions (the “Pre-IPO Stockholders”) retained full ownership and control of the non-Vince businesses through their ownership of Kellwood Holding, LLC. The Vince business is now the sole operating business of Vince Holding Corp.

In this interim report on Form 10-Q, “Kellwood” refers, as applicable and unless otherwise defined, to any of (i) Kellwood Company, (ii) Kellwood Company, LLC (a limited liability company to which Kellwood Company converted at the time of the Restructuring Transactions related to our IPO) or (iii) the operations of the non-Vince businesses after giving effect to our IPO and the related Restructuring Transactions.

(A) Description of Business: Vince is a leading contemporary fashion brand best known for modern effortless style and everyday luxury essentials. Established in 2002, the brand now offers a wide range of women’s and men’s apparel, women’s and men’s footwear and handbags. We reach our customers through a variety of channels, specifically through premier wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through our branded retail locations and our website. We design our products in the U.S. and source the vast majority of our products from contract manufacturers outside the U.S., primarily in Asia and South America. Products are manufactured to meet our product specifications and labor standards.

(B) Basis of Presentation: The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with VHC’s audited financial statements for the fiscal year ended January 31, 2015, as set forth in the 2014 Annual Report on Form 10-K.

The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries as of October 31, 2015. All intercompany accounts and transactions have been eliminated. The amounts and disclosures included in the notes to the condensed consolidated financial statements, unless otherwise indicated, are presented on a continuing operations basis. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or the fiscal year as a whole. As used in this report, unless the context requires otherwise, “our,” “us,” “we” and the “Company” refer to VHC and its consolidated subsidiaries.

(C) Our Business and Liquidity: During fiscal 2015 we have experienced declining sales and additional costs associated with making strategic investments for the future growth of the VINCE brand, including costs associated with the write-down of excess inventory, consulting agreements with our co-founders and the reorganization of our management team. We believe these significant investments are essential to our commitment to developing a strong foundation from which we can drive consistent profitable growth for the long term. We have also undertaken steps to enhance our liquidity position. Accordingly, on December 9, 2015 we received a Rights Offering Commitment Letter from Sun Capital Partners V, L.P. (“Sun Fund V”) that commits Sun Fund V to provide the Company with an amount equal to $65,000 of cash proceeds in the event that the Company conducts a rights offering for its common stock to its stockholders (a “Rights Offering”). Such Contribution Obligation (as defined herein) will be reduced by any proceeds received from the Rights Offering. Refer to Note 12. Related Party Transactions for additional details. Proceeds committed to us under the Rights Offering Commitment Letter from Sun Fund V will provide the Company with additional liquidity that will allow us to maintain a net debt balance sufficient to comply with any covenants under our Term Loan Facility and our Revolving Credit Facility, as well as provide additional cash for use in our operations. Refer to Note 4. Financing Arrangements and Note 5. Long-Term Debt for additional details regarding our debt covenants. However, failure to achieve our operational and strategic objectives could have a significant adverse effect on our operations, liquidity and compliance with debt covenants.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 2. Goodwill and Intangible Assets

Goodwill balances and changes therein subsequent to the January 31, 2015 condensed consolidated balance sheet are as follows (in thousands):

 

 

 

Gross Goodwill

 

 

Accumulated Impairment

 

 

Net Goodwill

 

Balance as of January 31, 2015

 

$

110,688

 

 

$

(46,942

)

 

$

63,746

 

Balance as of October 31, 2015

 

$

110,688

 

 

$

(46,942

)

 

$

63,746

 

 

Identifiable intangible assets summary (in thousands):

 

 

 

Gross Amount

 

 

Accumulated Amortization

 

 

Net Book Value

 

Balance as of January 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

11,970

 

 

$

(4,176

)

 

$

7,794

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

101,850

 

 

 

 

 

 

101,850

 

Total intangible assets

 

$

113,820

 

 

$

(4,176

)

 

$

109,644

 

 

 

 

Gross Amount

 

 

Accumulated Amortization

 

 

Net Book Value

 

Balance as of October 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

11,970

 

 

$

(4,624

)

 

$

7,346

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

101,850

 

 

 

 

 

 

101,850

 

Total intangible assets

 

$

113,820

 

 

$

(4,624

)

 

$

109,196

 

 

Amortization of identifiable intangible assets was $149 and $150 for the three months ended October 31, 2015 and November 1, 2014, respectively, and $448 and $449 for the nine months ended October 31, 2015 and November 1, 2014, respectively. The estimated amortization expense for identifiable intangible assets is expected to be $598 for each fiscal year for the next five fiscal years.

Fair Value
Fair Value

Note 3. Fair Value

Accounting Standards Codification (“ASC”) Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance outlines a valuation framework, creates a fair value hierarchy to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy as follows:

 

Level 1 — quoted market prices in active markets for identical assets or liabilities

 

 

Level 2 — observable market-based inputs (quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active) or inputs that are corroborated by observable market data

 

 

Level 3 — significant unobservable inputs that reflect our assumptions and are not substantially supported by market data

The Company did not have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at October 31, 2015 or January 31, 2015. At October 31, 2015 and January 31, 2015, the Company believes that the carrying value of cash and cash equivalents, receivables and accounts payable approximates fair value, due to the short maturity of these items. As the Company’s debt obligations as of October 31, 2015 are at variable rates, the fair value approximates the carrying value of the Company’s debt.

The Company’s non-financial assets, which primarily consist of goodwill, intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at their carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite lived intangible assets), non-financial assets are assessed for impairment and, if applicable, written down to (and recorded at) fair value.

Financing Arrangements
Financing Arrangements

Note 4. Financing Arrangements

Revolving Credit Facility

On November 27, 2013, Vince, LLC entered into a $50,000 senior secured revolving credit facility (as amended from time to time, the “Revolving Credit Facility”) with Bank of America, N.A. (“BofA”) as administrative agent. Vince, LLC is the borrower and VHC and Vince Intermediate Holding, LLC, a direct subsidiary of VHC and the direct parent company of Vince, LLC (“Vince Intermediate”), are the guarantors under the Revolving Credit Facility. On June 3, 2015, Vince LLC entered into a first amendment to the Revolving Credit Facility, that among other things, increased the aggregate commitments under the facility from $50,000 to $80,000, subject to a loan cap of $70,000 until debt obligations under the Company’s term loan facility have been paid in full, and extended the maturity date from November 27, 2018 to June 3, 2020.  The Revolving Credit Facility also provides for a letter of credit sublimit of $25,000 (plus any increase in aggregate commitments) and an accordion option that allows for an increase in aggregate commitments up to $20,000. Interest is payable on the loans under the Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, with applicable margins subject to a pricing grid based on an excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0%. During the continuance of an event of default and at the election of the required lender, interest will accrue at a rate of 2% in excess of the applicable non-default rate.

The Revolving Credit Facility contains a maintenance requirement that, at any point when “Excess Availability” is less than the greater of (i) 15% percent of the adjusted loan cap or (ii) $10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, Vince, LLC must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000. We have not been subject to this maintenance requirement as Excess Availability was greater than the required minimum.

The Revolving Credit Facility contains representations and warranties, other covenants and events of default that are customary for this type of financing, including limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of its business or its fiscal year. The Revolving Credit Facility generally permits dividends in the absence of any event of default (including any event of default arising from the contemplated dividend), so long as (i) after giving pro forma effect to the contemplated dividend, for the following six months Excess Availability will be at least the greater of 20% of the aggregate lending commitments and $10,000 and (ii) after giving pro forma effect to the contemplated dividend, the “Consolidated Fixed Charge Coverage Ratio” for the 12 months preceding such dividend shall be greater than or equal to 1.1 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.1 to 1.0 if, after giving pro forma effect to the contemplated dividend, Excess Availability for the six fiscal months following the dividend is at least the greater of 35% of the aggregate lending commitments and $15,000).  We are in compliance with applicable financial covenants.

As of October 31, 2015, $29,569 is available under the Revolving Credit Facility and there were $32,909 of borrowings outstanding and $7,522 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of October 31, 2015 was 2.3%. As of January 31, 2015, there was $23,000 of borrowings outstanding and $7,647 of letters of credit outstanding under the Revolving Credit Facility.

Long-Term Debt
Long-Term Debt

Note 5. Long-Term Debt

Long-term debt consisted of the following as of October 31, 2015 and January 31, 2015 (in thousands).

 

 

 

October 31,

2015

 

 

January 31, 2015

 

Term Loan Facility

 

$

45,000

 

 

$

65,000

 

Revolving Credit Facility

 

 

32,909

 

 

 

23,000

 

Total long-term debt principal

 

$

77,909

 

 

$

88,000

 

Less: Deferred financing costs (1)

 

 

2,690

 

 

 

3,550

 

Total long-term debt

 

$

75,219

 

 

$

84,450

 

 

(1)

Pursuant to new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2015, entities are no longer required to present deferred financing costs as a deferred asset. The guidance is effective for our fiscal year beginning in 2016, however, the Company has early adopted this accounting standard update effective as of February 1, 2015 and accordingly, the January 31, 2015 comparative balance sheet was adjusted to conform to the new classification presentation. There was no other impact on the financial statements related to the adoption other than the reclassification change on the condensed consolidated balance sheet. Refer to Note 10, Recent Accounting Pronouncements, for further information regarding the accounting standard update.

Term Loan Facility

On November 27, 2013, in connection with the closing of the IPO and related Restructuring Transactions, Vince, LLC and Vince Intermediate entered into a $175,000 senior secured term loan facility (the “Term Loan Facility”) with the lenders party thereto, BofA, as administrative agent, JP Morgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and Cantor Fitzgerald as documentation agent. The Term Loan Facility will mature on November 27, 2019. On November 27, 2013, net proceeds from the Term Loan Facility were used, at closing, to repay a promissory note (the “Kellwood Note Receivable”) issued to Kellwood Company, LLC in connection with the Restructuring Transactions which occurred immediately prior to the consummation of the IPO.

The Term Loan Facility also provides for an incremental facility of up to the greater of $50,000 and an amount that would result in the consolidated net total secured leverage ratio not exceeding 3.00 to 1.00, in addition to certain other rights to refinance or repurchase portions of the term loan. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the Term Loan Facility (adjusted to reflect any prepayments), with the balance payable at final maturity. Interest is payable on loans under the Term Loan Facility at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00% based on a leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a leverage ratio. During the continuance of a payment or bankruptcy event of default, interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the non-default interest rate then applicable to base rate loans.

The Term Loan Facility contains a requirement that Vince, LLC and Vince Intermediate maintain a “Consolidated Net Total Leverage Ratio” as of the last day of any period of four fiscal quarters not to exceed 3.75 to 1.00 for the fiscal quarters ending February 1, 2014 through November 1, 2014, 3.50 to 1.00 for the fiscal quarters ending January 31, 2015 through October 31, 2015, and 3.25 to 1.00 for the fiscal quarter ending January 30, 2016 and each fiscal quarter thereafter. In addition, the Term Loan Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or its fiscal year, and distributions and dividends. The Term Loan Facility generally permits dividends to the extent that no default or event of default is continuing or would result from the contemplated dividend and the pro forma Consolidated Net Total Leverage Ratio after giving effect to such contemplated dividend is at least 0.25 lower than the maximum Consolidated Net Total Leverage Ratio for such quarter. All obligations under the Term Loan Facility are guaranteed by VHC and any future material domestic restricted subsidiaries of Vince, LLC and secured by a lien on substantially all of the assets of VHC, Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries. We are in compliance with applicable financial covenants.

Through October 31, 2015, on an inception to date basis, the Company has made voluntary prepayments totaling $130,000 in the aggregate on the original $175,000 Term Loan Facility entered into on November 27, 2013. Of the $130,000 of aggregate voluntary prepayments made to date, $20,000 was paid during the nine months ended October 31, 2015. As of October 31, 2015, the Company had $45,000 of debt outstanding under the Term Loan Facility.

Inventory
Inventory

Note 6. Inventory

Inventories consist of the following:

 

 

 

October 31, 2015

 

 

 

January 31, 2015

 

Finished goods

 

$

43,895

 

 

 

$

37,395

 

Raw materials

 

 

 

 

 

 

24

 

Total inventories, net

 

 

43,895

 

 

 

 

37,419

 

Net of reserves of:

 

$

16,102

 

 

 

$

6,471

 

 

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost and is reflected in Cost of Goods Sold on the Condensed Consolidated Statements of Operations and Comprehensive Loss.  The adjustment to net realizable value is based on management's judgment regarding future demand and market conditions and analysis of historical experience. As of October 31, 2015, the lower of cost or market reserve included a write-down of the carrying value for certain excess inventory and aged product to its estimated net realizable value, as during the three months ended August 1, 2015 the Company recorded a charge of $14,447 associated with inventory that no longer supports the Company's prospective brand positioning strategy. During the three months ended October 31, 2015, the Company recorded pre-tax income of $1,986 associated with the recovery of the inventory write-down taken in the three months ended August 1, 2015.

Share-Based Compensation
Share-Based Compensation

Note 7. Share-Based Compensation

Prior to November 27, 2013, VHC did not have convertible equity or convertible debt securities, any of which could result in share-based compensation expense. In connection with our IPO, which closed on November 27, 2013, and the separation of the Vince and non-Vince businesses, VHC assumed Kellwood Company’s remaining obligations under the 2010 Stock Option Plan of Kellwood Company (the “2010 Option Plan”) and all Kellwood Company stock options previously issued to Vince employees under such plan became options to acquire shares of VHC common stock. Additionally, VHC assumed Kellwood Company’s obligations with respect to the vested Kellwood Company stock options previously issued to Kellwood Company employees, which options were cancelled in exchange for shares of VHC common stock. Accordingly, option information presented below for previously issued Kellwood Company stock options under the 2010 Option Plan has been adjusted to account for the split of the Company’s common stock and applicable conversion to options to acquire shares of VHC common stock.

Employee Stock Plans

2010 Option Plan

Kellwood Company had convertible equity securities that result in recognition of share-based compensation expense. On June 30, 2010, the board of directors approved the 2010 Stock Option Plan. As discussed above, in connection with the closing of the IPO, VHC assumed Kellwood Company’s remaining obligations under the 2010 Option Plan; provided that none of the issued and outstanding options (after giving effect to such assumption and the stock split effected as part of the Restructuring Transactions) were exercisable until the consummation of the IPO. Additionally, prior to the consummation of the IPO and after giving effect to the assumption described in this paragraph, VHC and the Vince employees to whom options had been previously granted under the 2010 Option Plan amended the related grant agreements to eliminate, effective as of the consummation of the IPO, restrictions on the exercisability of the subject employees vested options.

Prior to the IPO, the 2010 Option Plan, as amended, provided for the grant of options to acquire up to 2,752,155 shares of Kellwood Company common stock. The options granted pursuant to the 2010 Option Plan (i) vest in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date, subject to the employee’s continued employment, and (ii) expire on the earlier of the tenth anniversary of the grant date or upon termination of employment. We will not grant any future awards under the 2010 Option Plan. Future awards will be granted under the Vince 2013 Incentive Plan described further below.

Vince 2013 Incentive Plan

In connection with the IPO, the Company adopted the Vince 2013 Incentive Plan, which provides for grants of stock options, stock appreciation rights, restricted stock and other stock-based awards. The aggregate number of shares of common stock which may be issued or used for reference purposes under the Vince 2013 Incentive Plan or with respect to which awards may be granted may not exceed 3,400,000 shares. The shares available for issuance under the Vince 2013 Incentive Plan may be, in whole or in part, either authorized and unissued shares of our common stock or shares of common stock held in or acquired for our treasury. In general, if awards under the Vince 2013 Incentive Plan are cancelled for any reason, or expire or terminate unexercised, the shares covered by such award may again be available for the grant of awards under the Vince 2013 Incentive Plan. As of October 31, 2015, there were 2,209,958 shares under the Vince 2013 Incentive Plan available for future grants. Options granted pursuant to the Vince 2013 Incentive Plan (i) vest in equal installments over three or four years or at 33 1/3% per year beginning in year two, over four years, subject to the employees’ continued employment, and (ii) expire on the earlier of the tenth anniversary of the grant date or upon termination as outlined in the Vince 2013 Incentive Plan.     

     On October 2, 2015 the Company completed a tender offer to exchange certain options to purchase shares of its common stock, whether vested or unvested, from eligible employees. The exchange ratio for this offer was one-to-one (one stock option exchanged for every one new stock option granted). As a result of the tender offer, 346,004 stock options were cancelled and options to purchase the same amount of shares were granted with an exercise price of $3.60. The purpose of this exchange was to foster retention of our valuable employees and better align the interests of our employees and shareholders to maximize shareholder value.

Stock Options

A summary of stock option activity under the plans during the nine months ended October 31, 2015 is as follows:

 

 

 

Stock Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term (years)

 

 

Aggregate Intrinsic Value

(in thousands)

 

Outstanding at January 31, 2015

 

 

2,726,169

 

 

$

13.18

 

 

 

 

 

 

 

 

 

Granted

 

 

1,182,023

 

 

$

4.51

 

 

 

 

 

 

 

 

 

Exercised

 

 

(26,209

)

 

$

6.64

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(1,803,440

)

 

$

16.87

 

 

 

 

 

 

 

 

 

Outstanding at October 31, 2015

 

 

2,078,543

 

 

$

5.12

 

 

 

6.4

 

 

$

828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable at October 31, 2015

 

 

826,352

 

 

$

5.88

 

 

 

1.3

 

 

$

-

 

        

          Of the above outstanding shares, 1,913,049 are vested or expected to vest.

 

Restricted Stock Units

 

The Company also issues restricted stock units to its non-employee directors and directors not affiliated with Sun Capital (our controlling shareholder) under the Vince 2013 Incentive Plan. A summary of restricted stock unit activity during the nine months ended October 31, 2015 is as follows:

 

 

 

Restricted Stock Units

 

 

Weighted Average Grant Date Fair Value

 

Nonvested restricted stock units at January 31, 2015

 

 

12,384

 

 

$

26.24

 

Granted

 

 

5,341

 

 

$

15.76

 

Vested

 

 

(989

)

 

$

25.28

 

Nonvested restricted stock units at October 31, 2015

 

 

16,736

 

 

$

22.95

 

 

Share-Based Compensation Expense

 

Share-based compensation expense is recognized over the requisite service period of each share-based payment award and the expense is included as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. Share-based compensation expense for the three months ended October 31, 2015 was a net reversal of $(95), primarily due to option forfeitures as a result of executive departures. Share-based compensation expense for the three months ended November 1, 2014 was $458. Share-based compensation expense for the nine months ended October 31, 2015 and November 1, 2014 was $706 and $1,250, respectively.

Earnings Per Share
Earnings Per Share

Note 8. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, diluted earnings per share is calculated based on the weighted average number of outstanding shares of common stock plus the dilutive effect of share-based awards calculated under the treasury stock method. The following is a reconciliation of basic shares to diluted shares:  

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted-average shares—basic

 

 

36,775,443

 

 

 

36,728,969

 

 

 

36,767,770

 

 

 

36,726,338

 

Effect of dilutive equity securities

 

 

41,529

 

 

 

1,574,634

 

 

 

865,863

 

 

 

1,517,030

 

Weighted-average shares—diluted

 

 

36,816,972

 

 

 

38,303,603

 

 

 

37,633,633

 

 

 

38,243,368

 

 

For the three and nine months ended October 31, 2015, 649,236 and 617,078 options to purchase shares of the Company’s common stock, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.  

 

For the three and nine months ended November 1, 2014, 65,561 and 34,216 options to purchase shares of the Company’s common stock, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

Commitments and Contingencies
Commitments and Contingencies

Note 9. Commitments and Contingencies

In the second quarter of 2015, a number of senior management departures and announced departures occurred. In connection with these departures and announced departures, the Company has certain obligations under existing employment arrangements with respect to severance and employee related benefits. As a result, the Company recognized a charge of $3,717 for these expected departures within selling, general, and administrative expenses on the condensed consolidated statement of operations for the three months ended August 1, 2015. This charge is reflected within the “unallocated corporate expenses” for segment disclosures. These amounts will be paid over a period of six to eighteen months, starting in the third quarter of fiscal 2015. Payments of $783 were made during the three months ended October 31, 2015. The remaining accrual of $2,934 is included within total current liabilities on the condensed consolidated balance sheet as of October 31, 2015.  

We are currently party to various legal proceedings. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse impact on our financial position or results of operations or cash flows, litigation is subject to inherent uncertainties.

Recent Accounting Pronouncements
Recent Accounting Pronouncements

Note 10. Recent Accounting Pronouncements

In July 2015, new accounting guidance on accounting for inventory was issued, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest.” The standard requires deferred financing costs to be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as a deferred asset in the balance sheet. ASU 2015-03 does not change the recognition and measurement guidance for deferred financing costs. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. ASU 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years and early application is permitted. The Company has elected to early adopt the standard, effective February 1, 2015 and accordingly, the condensed consolidated balance sheets as of October 31, 2015 and January 31, 2015 reflect the deferred financing costs as a direct deduction from the carrying amount of our long-term debt. Refer to Note 5, Long-Term Debt, for further information.

In April 2015, the FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This guidance is effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. Retrospective application is permitted but not required. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

In May 2014, FASB issued revenue recognition guidance (ASU No. 2014-09). The new accounting guidance requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In August 2015, FASB elected to defer the effective dates (ASU No. 2015-14). The updated guidance is now effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  The Company is currently evaluating the impact of the adoption of the new guidance on its financial statements.

Segment Financial Information
Segment Financial Information

Note 11. Segment Financial Information

We operate and manage our business by distribution channel and have identified two reportable segments, as further described below. We considered both similar and dissimilar economic characteristics, internal reporting and management structures, as well as products, customers, and supply chain logistics to identify the following reportable segments:

 

Wholesale segment—consists of our operations to distribute products to premier department stores and specialty stores in the United States and select international markets; and

 

Direct-to-consumer segment—consists of our operations to distribute products directly to the consumer through our branded full-price specialty retail stores, outlet stores, and e-commerce platform.

The accounting policies of our segments are consistent with those described in Note 1 to the audited Consolidated Financial Statements of VHC for the fiscal year ended January 31, 2015 included in our 2014 Annual Report on Form 10K. Unallocated corporate expenses are comprised of selling, general, and administrative expenses attributable to corporate and administrative activities, and other charges that are not directly attributable to our operating segments. Unallocated corporate assets are comprised of the carrying values of our goodwill and unamortized trademark, deferred tax assets, and other assets that will be utilized to generate revenue for both of our reportable segments.

Our wholesale segment sells apparel to our direct-to-consumer segment at cost. The wholesale intercompany sales of $8,816 and $9,077 have been excluded from the net sales totals presented below for the three months ended October 31, 2015 and November 1, 2014, respectively. The wholesale intercompany sales of $22,510 and $16,978 have been excluded from the net sales totals presented below for the nine months ended October 31, 2015 and November 1, 2014, respectively. Furthermore, as intercompany sales are sold at cost, no intercompany profit is reflected in operating income presented below.

Summary information for our operating segments is presented below (in thousands).

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

56,505

 

 

$

78,898

 

 

$

153,104

 

 

$

190,564

 

Direct-to-consumer

 

 

24,354

 

 

 

24,049

 

 

 

67,590

 

 

 

55,161

 

Total net sales

 

$

80,859

 

 

$

102,947

 

 

$

220,694

 

 

$

245,725

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

22,233

 

 

$

30,577

 

 

$

44,249

 

 

$

74,204

 

Direct-to-consumer

 

 

1,526

 

 

 

6,042

 

 

 

1,970

 

 

 

9,855

 

Subtotal

 

 

23,759

 

 

 

36,619

 

 

 

46,219

 

 

 

84,059

 

Unallocated expenses

 

 

(11,416

)

 

 

(11,789

)

 

 

(35,317

)

 

 

(34,078

)

Total operating income

 

$

12,343

 

 

$

24,830

 

 

$

10,902

 

 

$

49,981

 

Capital Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

492

 

 

$

673

 

 

$

1,489

 

 

$

1,238

 

Direct-to-consumer

 

 

2,023

 

 

 

3,072

 

 

 

7,509

 

 

 

6,158

 

Unallocated corporate

 

 

549

 

 

 

4,210

 

 

 

5,109

 

 

 

7,910

 

Total capital expenditures

 

$

3,064

 

 

$

7,955

 

 

$

14,107

 

 

$

15,306

 

 

 

 

 

October 31, 2015

 

 

January 31, 2015

 

Total Assets:

 

 

 

 

 

 

 

 

Wholesale

 

$

63,733

 

 

$

70,635

 

Direct-to-consumer

 

 

36,707

 

 

 

33,793

 

Unallocated corporate

 

 

275,065

 

 

 

274,220

 

Total assets

 

$

375,505

 

 

$

378,648

 

 

Related Party Transactions
Related Party Transactions

Note 12. Related Party Transactions

Shared Services Agreement

In connection with the consummation of our IPO on November 27, 2013, Vince, LLC entered into a Shared Services Agreement pursuant to which Kellwood provides support services in various operational areas, including, among other things, e-commerce operations, distribution, logistics, information technology, accounts payable, credit and collections and payroll. Since the IPO, we have been working on transitioning certain back office functions performed by Kellwood under the Shared Services Agreement. Among these functions that have transitioned to Vince are certain accounting related functions as well as benefits administration. We have also been working on developing our own information technology infrastructure and are now in the process of implementing our own enterprise resource planning (“ERP”) system. We have engaged with a new e-commerce platform provider and are still developing that system.  The new ERP system is also under development.  Until those systems are implemented, we will continue to utilize the Kellwood information technology infrastructure, including e-commerce platform systems, under the Shared Services Agreement.

We are invoiced by Kellwood monthly for the services provided under the Shared Services Agreement and generally are required to pay within 15 business days of receiving such invoice. The payments will be trued-up and can be disputed once each fiscal quarter is completed. As of October 31, 2015, we have recorded $810 in other accrued expenses to recognize amounts payable to Kellwood under the Shared Services Agreement.

Tax Receivable Agreement

VHC entered into a Tax Receivable Agreement with the Pre-IPO Stockholders on November 27, 2013. We and our former subsidiaries have generated certain tax benefits (including NOLs and tax credits) prior to the Restructuring Transactions consummated in connection with our IPO and will generate certain section 197 intangible deductions (the “Pre-IPO Tax Benefits”), which would reduce the actual liability for taxes that we might otherwise be required to pay. The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by us and our subsidiaries from the utilization of the Pre-IPO Tax Benefits (the “Net Tax Benefit”).

For purposes of the Tax Receivable Agreement, the Net Tax Benefit equals (i) with respect to a taxable year, the excess, if any, of (A) our liability for taxes using the same methods, elections, conventions and similar practices used on the relevant company return assuming there were no Pre-IPO Tax Benefits over (B) our actual liability for taxes for such taxable year (the “Realized Tax Benefit”), plus (ii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on an amended schedule applicable to such prior taxable year over the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year, minus (iii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year over the Realized Tax Benefit reflected on the amended schedule for such prior taxable year; provided, however, that to the extent any of the adjustments described in clauses (ii) and (iii) were reflected in the calculation of the tax benefit payment for any subsequent taxable year, such adjustments shall not be taken into account in determining the Net Tax Benefit for any subsequent taxable year.  

The Company had expected to make a required payment under the Tax Receivable Agreement in the fourth quarter of 2015.  As a result of lower than expected cash from operations due to weaker than projected performance, and the level of projected availability under the Company’s Revolving Credit Facility, we concluded that we would not be able to fund the payment when due.  Accordingly, on September 1, 2015, we entered into an amendment to the Tax Receivable Agreement with Sun Cardinal, LLC, an affiliate of Sun Capital Partners, Inc., for itself and as a representative of the other stockholders parties thereto. Pursuant to this amendment, Sun Cardinal agreed to postpone payment of the tax benefit with respect to the 2014 taxable year, currently estimated at $21,762 plus accrued interest, to September 15, 2016. As of October 31, 2015 our total obligation under the Tax Receivable Agreement is estimated to be $169,765, of which $21,762 is included as a component of other accrued expenses and $148,003 is included as a component of other liabilities on our condensed consolidated balance sheet. There is a remaining term of eight years under the Tax Receivable Agreement. During the three months ended October 31, 2015, we adjusted the obligation under the Tax Receivable Agreement in connection with the filing of our 2014 income tax returns. The return to provision adjustments resulted in a net increase of $801 to the liability under the Tax Receivable Agreement with the corresponding net increase accounted for as an adjustment to other expense, net on the Condensed Consolidated Statement of Operations. The amendment to the Tax Receivable Agreement also waived the application of a default interest rate at LIBOR plus 500 basis points per annum on the postponed payment. The interest rate on the postponed payment will remain at LIBOR plus 200 basis points per annum.

Rights Offering Commitment Letter

On December 9, 2015 we received a Rights Offering Commitment Letter from Sun Fund V that provides the Company with an amount equal to $65,000 of cash proceeds in the event that the Company conducts a Rights Offering (the “Contribution Obligation”). Such Contribution Obligation will be reduced by any proceeds received from the Rights Offering. The Company is required, simultaneously with the funding of the Contribution Obligation by Sun Fund V, or one or more of its affiliates, to issue to Sun Fund V or one or more of its affiliates the applicable number of shares of the Company’s common stock at the lesser of (i) a price per share equal to a 20% discount to the 30 day average trading price of the Company’s common stock on The New York Stock Exchange immediately prior to the date of the Rights Offering Commitment Letter, (ii) a price per share equal to a 20% discount to the 30 day average trading price of the Company’s common stock on The New York Stock Exchange immediately prior to the commencement of the Rights Offering and (iii) the price per share at which participants in the Rights Offering are entitled to purchase shares of new common stock issued by the Company. Sun Fund V will receive customary terms and conditions, to be negotiated between Sun Fund V and the Company, for providing the Contribution Obligation. If the Rights Offering has not commenced by March 8, 2016, the Company will pay Sun Fund V an amount equal to $950 in the event that the Company completes a Rights Offering. Sun Fund V’s obligations terminate upon the earliest to occur of (A) the consummation of the Rights Offering whereby the Company receives proceeds equal to or exceeding $65,000, (B) 11:59 p.m. New York City time on April 7, 2016 if the Rights Offering has not commenced by such time, (C) 11:59 p.m. New York City time on April 30, 2016, and (D) the date Sun Fund V, or its affiliates, funds the Contribution Obligation. The Company would be required to use a portion of proceeds from the Rights Offering or the Contribution Obligation to satisfy its current obligation under the Tax Receivable Agreement as amended (as discussed above), currently estimated at $21,762 plus accrued interest, and payable on September 15, 2016.

Sun Capital Consulting Agreement

On November 27, 2013, we entered into an agreement with Sun Capital Management to (i) reimburse Sun Capital Management or any of its affiliates providing consulting services under the agreement for out-of-pocket expenses incurred in providing consulting services to us and (ii) provide Sun Capital Management with customary indemnification for any such services.

During the three and nine months ended October 31, 2015, we paid Sun Capital Management approximately $3 and $32, respectively, for reimbursement of expenses under the Sun Capital Consulting Agreement.

Executive Officers

Mark E. Brody served as the Company’s Interim Chief Executive Officer from September 1, 2015 through October 22, 2015 when the Board approved the appointment of Brendan L. Hoffman to serve as the Chief Executive Officer of the Company, effective immediately. Mr. Brody remained with the Company in a non-executive capacity through a transition period which ended on November 20, 2015. Mr. Brody also served as Interim Chief Financial Officer and Treasurer of the Company from June 2015 through September 1, 2015. Mr. Brody received $63 per month and the reimbursement of reasonable cost of transportation and housing on a tax grossed-up basis during his employment with the Company. Mr. Brody also serves, and will continue to serve, as a member of the Board and received no additional compensation for serving as a director of the Company.

On September 1, 2015, David Stefko was appointed by the board of directors of the Company to serve as the Interim Chief Financial Officer and Treasurer of the Company. Mr. Stefko will receive $43 per month and the reimbursement of reasonable cost of transportation and housing on a tax grossed-up basis while he serves as the Interim Chief Financial Officer and Treasurer of the Company.  

Both Mr. Brody and Mr. Stefko were employees of Sun Capital Partners, Inc. prior to their appointment to the positions at the Company, remain covered by Sun Capital Partners, Inc.’s health and welfare benefit plans and continue to be eligible to receive a bonus under the Sun Capital Partners, Inc. annual bonus plan related to their work at Sun Capital Partners, Inc. Mr. Stefko is currently on leave of absence from his position at Sun Capital Partners, Inc. and Mr. Brody has returned to his former position. Affiliates of Sun Capital Partners, Inc. own approximately 56% of the outstanding shares of our common stock. In addition, Messrs. Brody and Stefko are partners in one or more investment partnerships that are affiliated with Sun Capital Partners, Inc. that beneficially own shares of common stock of the Company.

Subsequent Events
Subsequent Events

Note 13.  Subsequent Events

On November 23, 2015, the Company entered into consulting services agreements with the Company’s co-founders Rea Laccone and Christopher LaPolice. Ms. Laccone and Mr. LaPolice will oversee the Company’s product, merchandising and creative efforts.

The consulting services agreements have terms that end on February 3, 2018 and provide for the following compensation: (i) a base annual consulting fee of $2,500 for Ms. Laccone and $1,125 for Mr. LaPolice; (ii) an annual cash bonus of $1,000 for Ms. Laccone and $1,125 for Mr. LaPolice, prorated for the current fiscal year, subject to the consulting term continuing through the end of each fiscal year to which the bonus relates, provided that if the consultant is terminated without cause, she or he will be entitled to a pro-rata portion of the annual bonus calculated through the date of termination; and (iii) options to acquire 200,000 shares of the Company's common stock for Ms. Laccone and 150,000 shares of the Company's common stock for Mr. LaPolice, with the options vesting as to 50% of the shares on the first anniversary of the grant date, 25% of the shares on the 18 month anniversary of the grant date and 25% of the shares on the second anniversary of the grant date, in each case subject to the consulting period continuing through such time, provided that, if the consultant is terminated without cause, she or he will pro-rata vest in the next tranche of options based on the number of months completed in the vesting term prior to such termination.

Description of Business and Basis of Presentation (Policies)

(B) Basis of Presentation: The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with VHC’s audited financial statements for the fiscal year ended January 31, 2015, as set forth in the 2014 Annual Report on Form 10-K.

The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries as of October 31, 2015. All intercompany accounts and transactions have been eliminated. The amounts and disclosures included in the notes to the condensed consolidated financial statements, unless otherwise indicated, are presented on a continuing operations basis. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or the fiscal year as a whole. As used in this report, unless the context requires otherwise, “our,” “us,” “we” and the “Company” refer to VHC and its consolidated subsidiaries.

(C) Our Business and Liquidity: During fiscal 2015 we have experienced declining sales and additional costs associated with making strategic investments for the future growth of the VINCE brand, including costs associated with the write-down of excess inventory, consulting agreements with our co-founders and the reorganization of our management team. We believe these significant investments are essential to our commitment to developing a strong foundation from which we can drive consistent profitable growth for the long term. We have also undertaken steps to enhance our liquidity position. Accordingly, on December 9, 2015 we received a Rights Offering Commitment Letter from Sun Capital Partners V, L.P. (“Sun Fund V”) that commits Sun Fund V to provide the Company with an amount equal to $65,000 of cash proceeds in the event that the Company conducts a rights offering for its common stock to its stockholders (a “Rights Offering”). Such Contribution Obligation (as defined herein) will be reduced by any proceeds received from the Rights Offering. Refer to Note 12. Related Party Transactions for additional details. Proceeds committed to us under the Rights Offering Commitment Letter from Sun Fund V will provide the Company with additional liquidity that will allow us to maintain a net debt balance sufficient to comply with any covenants under our Term Loan Facility and our Revolving Credit Facility, as well as provide additional cash for use in our operations. Refer to Note 4. Financing Arrangements and Note 5. Long-Term Debt for additional details regarding our debt covenants. However, failure to achieve our operational and strategic objectives could have a significant adverse effect on our operations, liquidity and compliance with debt covenants.

Goodwill and Intangible Assets (Tables)

Goodwill balances and changes therein subsequent to the January 31, 2015 condensed consolidated balance sheet are as follows (in thousands):

 

 

 

Gross Goodwill

 

 

Accumulated Impairment

 

 

Net Goodwill

 

Balance as of January 31, 2015

 

$

110,688

 

 

$

(46,942

)

 

$

63,746

 

Balance as of October 31, 2015

 

$

110,688

 

 

$

(46,942

)

 

$

63,746

 

 

Identifiable intangible assets summary (in thousands):

 

 

 

Gross Amount

 

 

Accumulated Amortization

 

 

Net Book Value

 

Balance as of January 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

11,970

 

 

$

(4,176

)

 

$

7,794

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

101,850

 

 

 

 

 

 

101,850

 

Total intangible assets

 

$

113,820

 

 

$

(4,176

)

 

$

109,644

 

 

 

 

Gross Amount

 

 

Accumulated Amortization

 

 

Net Book Value

 

Balance as of October 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

11,970

 

 

$

(4,624

)

 

$

7,346

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

101,850

 

 

 

 

 

 

101,850

 

Total intangible assets

 

$

113,820

 

 

$

(4,624

)

 

$

109,196

 

 

Long-Term Debt (Tables)
Summary of Long-Term Debt

Long-term debt consisted of the following as of October 31, 2015 and January 31, 2015 (in thousands).

 

 

 

October 31,

2015

 

 

January 31, 2015

 

Term Loan Facility

 

$

45,000

 

 

$

65,000

 

Revolving Credit Facility

 

 

32,909

 

 

 

23,000

 

Total long-term debt principal

 

$

77,909

 

 

$

88,000

 

Less: Deferred financing costs (1)

 

 

2,690

 

 

 

3,550

 

Total long-term debt

 

$

75,219

 

 

$

84,450

 

 

(1)

Pursuant to new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2015, entities are no longer required to present deferred financing costs as a deferred asset. The guidance is effective for our fiscal year beginning in 2016, however, the Company has early adopted this accounting standard update effective as of February 1, 2015 and accordingly, the January 31, 2015 comparative balance sheet was adjusted to conform to the new classification presentation. There was no other impact on the financial statements related to the adoption other than the reclassification change on the condensed consolidated balance sheet. Refer to Note 10, Recent Accounting Pronouncements, for further information regarding the accounting standard update.

Inventory (Tables)
Schedule of Inventories

Inventories consist of the following:

 

 

 

October 31, 2015

 

 

 

January 31, 2015

 

Finished goods

 

$

43,895

 

 

 

$

37,395

 

Raw materials

 

 

 

 

 

 

24

 

Total inventories, net

 

 

43,895

 

 

 

 

37,419

 

Net of reserves of:

 

$

16,102

 

 

 

$

6,471

 

 

Share-Based Compensation (Tables)

A summary of stock option activity under the plans during the nine months ended October 31, 2015 is as follows:

 

 

 

Stock Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term (years)

 

 

Aggregate Intrinsic Value

(in thousands)

 

Outstanding at January 31, 2015

 

 

2,726,169

 

 

$

13.18

 

 

 

 

 

 

 

 

 

Granted

 

 

1,182,023

 

 

$

4.51

 

 

 

 

 

 

 

 

 

Exercised

 

 

(26,209

)

 

$

6.64

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(1,803,440

)

 

$

16.87

 

 

 

 

 

 

 

 

 

Outstanding at October 31, 2015

 

 

2,078,543

 

 

$

5.12

 

 

 

6.4

 

 

$

828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable at October 31, 2015

 

 

826,352

 

 

$

5.88

 

 

 

1.3

 

 

$

-

 

 

A summary of restricted stock unit activity during the nine months ended October 31, 2015 is as follows:

 

 

 

Restricted Stock Units

 

 

Weighted Average Grant Date Fair Value

 

Nonvested restricted stock units at January 31, 2015

 

 

12,384

 

 

$

26.24

 

Granted

 

 

5,341

 

 

$

15.76

 

Vested

 

 

(989

)

 

$

25.28

 

Nonvested restricted stock units at October 31, 2015

 

 

16,736

 

 

$

22.95

 

 

Earnings Per Share (Tables)
Schedule of Reconciliation of Basic Shares to Diluted Shares

The following is a reconciliation of basic shares to diluted shares:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted-average shares—basic

 

 

36,775,443

 

 

 

36,728,969

 

 

 

36,767,770

 

 

 

36,726,338

 

Effect of dilutive equity securities

 

 

41,529

 

 

 

1,574,634

 

 

 

865,863

 

 

 

1,517,030

 

Weighted-average shares—diluted

 

 

36,816,972

 

 

 

38,303,603

 

 

 

37,633,633

 

 

 

38,243,368

 

 

Segment Financial Information (Tables)
Summary of Operating Segments Information

Summary information for our operating segments is presented below (in thousands).

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

56,505

 

 

$

78,898

 

 

$

153,104

 

 

$

190,564

 

Direct-to-consumer

 

 

24,354

 

 

 

24,049

 

 

 

67,590

 

 

 

55,161

 

Total net sales

 

$

80,859

 

 

$

102,947

 

 

$

220,694

 

 

$

245,725

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

22,233

 

 

$

30,577

 

 

$

44,249

 

 

$

74,204

 

Direct-to-consumer

 

 

1,526

 

 

 

6,042

 

 

 

1,970

 

 

 

9,855

 

Subtotal

 

 

23,759

 

 

 

36,619

 

 

 

46,219

 

 

 

84,059

 

Unallocated expenses

 

 

(11,416

)

 

 

(11,789

)

 

 

(35,317

)

 

 

(34,078

)

Total operating income

 

$

12,343

 

 

$

24,830

 

 

$

10,902

 

 

$

49,981

 

Capital Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

492

 

 

$

673

 

 

$

1,489

 

 

$

1,238

 

Direct-to-consumer

 

 

2,023

 

 

 

3,072

 

 

 

7,509

 

 

 

6,158

 

Unallocated corporate

 

 

549

 

 

 

4,210

 

 

 

5,109

 

 

 

7,910

 

Total capital expenditures

 

$

3,064

 

 

$

7,955

 

 

$

14,107

 

 

$

15,306

 

 

 

 

 

October 31, 2015

 

 

January 31, 2015

 

Total Assets:

 

 

 

 

 

 

 

 

Wholesale

 

$

63,733

 

 

$

70,635

 

Direct-to-consumer

 

 

36,707

 

 

 

33,793

 

Unallocated corporate

 

 

275,065

 

 

 

274,220

 

Total assets

 

$

375,505

 

 

$

378,648

 

 

Description of Business and Basis of Presentation - Additional Information (Detail) (Rights Offering Commitment Letter [Member], Subsequent Event [Member], USD $)
In Thousands, unless otherwise specified
0 Months Ended
Dec. 9, 2015
Rights Offering Commitment Letter [Member] |
Subsequent Event [Member]
 
Description Of Business And Summary Of Significant Accounting Policies [Line Items]
 
Proceed from contribution obligation
$ 65,000 
Goodwill and Intangible Assets - Summary of Goodwill Balances (Detail) (USD $)
In Thousands, unless otherwise specified
Oct. 31, 2015
Jan. 31, 2015
Goodwill And Intangible Assets Disclosure [Abstract]
 
 
Gross Goodwill
$ 110,688 
$ 110,688 
Accumulated Impairment
(46,942)
(46,942)
Net Goodwill
$ 63,746 
$ 63,746 
Goodwill and Intangible Assets - Summary of Identifiable Intangible Assets (Detail) (USD $)
In Thousands, unless otherwise specified
Oct. 31, 2015
Jan. 31, 2015
Identifiable Intangible Assets [Line Items]
 
 
Accumulated Amortization
$ (4,624)
$ (4,176)
Gross Amount
113,820 
113,820 
Net Book Value
109,196 
109,644 
Trademarks [Member]
 
 
Identifiable Intangible Assets [Line Items]
 
 
Net Book Value
101,850 
101,850 
Customer Relationships [Member]
 
 
Identifiable Intangible Assets [Line Items]
 
 
Gross Amount
11,970 
11,970 
Accumulated Amortization
(4,624)
(4,176)
Net Book Value
$ 7,346 
$ 7,794 
Goodwill and Intangible Assets - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 31, 2015
Nov. 1, 2014
Oct. 31, 2015
Nov. 1, 2014
Goodwill And Intangible Assets Disclosure [Abstract]
 
 
 
 
Amortization of identifiable intangible assets
$ 149 
$ 150 
$ 448 
$ 449 
Estimated amortization of identifiable intangible assets, year one
598 
 
598 
 
Estimated amortization of identifiable intangible assets, year two
598 
 
598 
 
Estimated amortization of identifiable intangible assets, year three
598 
 
598 
 
Estimated amortization of identifiable intangible assets, year four
598 
 
598 
 
Estimated amortization of identifiable intangible assets, year five
$ 598 
 
$ 598 
 
Fair Value - Additional Information (Detail) (USD $)
Oct. 31, 2015
Jan. 31, 2015
Fair Value Disclosures [Abstract]
 
 
Non-financial assets recognized at fair value
$ 0 
$ 0 
Non-financial liabilities recognized at fair value
$ 0 
$ 0 
Financing Arrangements - Additional Information (Detail) (USD $)
0 Months Ended 9 Months Ended 0 Months Ended 0 Months Ended
Jun. 3, 2015
Jun. 3, 2015
Revolving Credit Facility [Member]
Oct. 31, 2015
Revolving Credit Facility [Member]
Jan. 31, 2015
Revolving Credit Facility [Member]
Oct. 31, 2015
Revolving Credit Facility [Member]
Pro Forma [Member]
Oct. 31, 2015
Revolving Credit Facility [Member]
Excess Availability Greater than 35% [Member]
Jun. 3, 2015
Revolving Credit Facility [Member]
Maximum [Member]
Jun. 3, 2015
Revolving Credit Facility [Member]
Federal Funds Rate [Member]
Jun. 3, 2015
Revolving Credit Facility [Member]
LIBOR [Member]
Jun. 3, 2015
Senior Secured Revolving Credit Facility Due November 27, 2018 [Member]
Nov. 27, 2013
Senior Secured Revolving Credit Facility Due November 27, 2018 [Member]
Jun. 3, 2015
Senior Secured Revolving Credit Facility Due June 3, 2020 [Member]
Line of Credit Facility [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
Maximum borrowing capacity
 
 
 
 
 
 
 
 
 
 
$ 50,000,000 
$ 80,000,000 
Loan cap on revolving credit facility
70,000,000 
 
 
 
 
 
 
 
 
 
 
 
Revolving credit facility maturity date
 
 
 
 
 
 
 
 
 
Nov. 27, 2018 
 
Jun. 03, 2020 
Letters of credit sublimit amount
 
 
 
 
 
 
25,000,000 
 
 
 
 
 
Increase in aggregate commitments amount
 
 
 
 
 
 
20,000,000 
 
 
 
 
 
Debt interest terms
 
 
Interest is payable on the loans under the Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, with applicable margins subject to a pricing grid based on an excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0% 
 
 
 
 
 
 
 
 
 
Variable rate percentage
 
 
 
 
 
 
 
0.50% 
1.00% 
 
 
 
Line of credit facility percentage increase in interest rate in case of default
 
2.00% 
 
 
 
 
 
 
 
 
 
 
Percentage of loan greater than Excess Availability
 
 
15.00% 
 
20.00% 
35.00% 
 
 
 
 
 
 
Amount greater than Excess Availability
 
 
10,000,000 
 
 
 
 
 
 
 
 
 
Excess Availability period
 
 
30 days 
 
 
 
 
 
 
 
 
 
Consolidated EBITDA amount
 
 
20,000,000