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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 the IPO) or (iii) the operations of the non-Vince businesses after giving effect to the 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. The Company reaches its customers through a variety of channels, specifically through major wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through the Company’s branded retail locations and the Company’s website. The Company designs products in the U.S. and sources the vast majority of products from contract manufacturers outside the U.S., primarily in Asia and South America. Products are manufactured to meet the Company’s 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 30, 2016, as set forth in the 2015 Annual Report on Form 10-K.
The condensed consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned subsidiaries as of April 30, 2016. 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.
(C) Rights Offering: During fiscal year 2015 and fiscal year 2016, the Company has made strategic investments for the future growth of the VINCE brand. Management believes these significant investments are essential to the commitment to developing a strong foundation from which the Company can drive consistent profitable growth for the long term. In order to enhance the Company’s liquidity position in support of these investments, during the three months ended April 30, 2016, the Company completed a rights offering (the “Rights Offering”) whereby the Company received subscriptions and over-subscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, and received gross proceeds of $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of proceeds from a related Investment Agreement entered into with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc. (collectively the “Investors”) and issued to the Investors 195,663 shares of its common stock in connection therewith. See Note 11 “Related Party Transactions” for additional details. As a result of the Rights Offering and related Investment Agreement transactions, the Company received total gross proceeds of $65,000, issued 11,818,181 shares of its common stock and recorded increases of $118 within Common Stock and $63,992 within Additional paid-in capital on the condensed consolidated balance sheet.
The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,258 (see Note 11 “Related Party Transactions” for additional details), and (2) repay all outstanding indebtedness, totaling $20,000, under the Revolving Credit Facility. The Company intends to use the remaining net proceeds for additional strategic investments and general corporate purposes, which may include future amounts owed by the Company under the Tax Receivable Agreement.
Management believes that the Company’s current balances of cash and cash equivalents, cash flow from operations and amounts available under the Revolving Credit Facility will be sufficient to comply with any covenants under the Term Loan Facility and the Revolving Credit Facility, fund the Company’s debt service requirements, fund the Company’s obligations under the Tax Receivable Agreement, and fund planned capital expenditures and working capital needs for at least the next twelve months. However, there can be no assurance that the Company will be able to achieve its strategic initiatives in the future and failure to do so would have a significant adverse effect on the Company’s operations.
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Note 2. Goodwill and Intangible Assets
Net goodwill balances and changes therein by segment are as follows:
(in thousands) |
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Wholesale |
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Direct-to-consumer |
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Total Net Goodwill |
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Balance as of April 30, 2016 |
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$ |
41,435 |
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$ |
22,311 |
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$ |
63,746 |
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Balance as of January 30, 2016 |
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$ |
41,435 |
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$ |
22,311 |
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$ |
63,746 |
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The total carrying amount of goodwill for all periods presented was net of accumulated impairments of $46,942.
Identifiable intangible assets summary:
(in thousands) |
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Gross Amount |
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Accumulated Amortization |
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Net Book Value |
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Balance as of April 30, 2016: |
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Amortizable intangible assets: |
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|
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Customer relationships |
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$ |
11,970 |
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$ |
(4,924 |
) |
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$ |
7,046 |
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Indefinite-lived intangible assets: |
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|
|
|
|
|
|
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Trademarks |
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101,850 |
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— |
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101,850 |
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Total intangible assets |
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$ |
113,820 |
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$ |
(4,924 |
) |
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$ |
108,896 |
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(in thousands) |
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Gross Amount |
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Accumulated Amortization |
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Net Book Value |
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Balance as of January 30, 2016 |
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Amortizable intangible assets: |
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Customer relationships |
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$ |
11,970 |
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$ |
(4,774 |
) |
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$ |
7,196 |
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Indefinite-lived intangible assets: |
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|
|
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Trademarks |
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101,850 |
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— |
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101,850 |
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Total intangible assets |
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$ |
113,820 |
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$ |
(4,774 |
) |
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$ |
109,046 |
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Amortization of identifiable intangible assets was $150 for the three months ended April 30, 2016 and May 2, 2015. The estimated amortization expense for identifiable intangible assets is $598 for each fiscal year for the next five fiscal years.
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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— |
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quoted market prices in active markets for identical assets or liabilities |
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Level 2— |
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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 |
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Level 3— |
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significant unobservable inputs that reflect the Company’s 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 April 30, 2016 or January 30, 2016. At April 30, 2016 and January 30, 2016, 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 instruments and would be measured using Level 1 inputs. As the Company’s debt obligations as of April 30, 2016 are at variable rates, the fair value approximates the carrying value of the Company’s debt and would be measured using Level 2 inputs.
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 values. 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.
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Note 4. Long-Term Debt and Financing Arrangements
Long-term debt consisted of the following as of April 30, 2016 and January 30, 2016:
(in thousands) |
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April 30, 2016 |
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January 30, 2016 |
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Term Loan Facility |
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$ |
45,000 |
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$ |
45,000 |
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Revolving Credit Facility |
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— |
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15,000 |
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Total long-term debt principal |
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45,000 |
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60,000 |
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Less: Deferred financing costs |
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2,387 |
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|
2,385 |
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Total long-term debt |
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$ |
42,613 |
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$ |
57,615 |
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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. Vince, LLC and Vince Intermediate are borrowers and VHC is a guarantor under the Term Loan Facility.
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 consolidated net total leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a consolidated net total 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 requires Vince, LLC and Vince Intermediate to make mandatory prepayments upon the occurrence of certain events, including additional debt issuances, common and preferred stock issuances, certain asset sales, and annual payments of 50% of excess cash flow, subject to reductions to 25% and 0% if Vince, LLC and Vince Intermediate maintain a Consolidated Net Total Leverage Ratio of 2.50 to 1.00 and 2.00 to 1.00, respectively, and subject to reductions for voluntary prepayments made during such fiscal year.
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, and 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 in an amount not to exceed the excess available amount, as defined in the loan agreement. 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. As of April 30, 2016, the Company was in compliance with applicable financial covenants.
Through April 30, 2016, 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, $0 was paid during the three months ended April 30, 2016. As of April 30, 2016, the Company had $45,000 of debt outstanding under the Term Loan Facility.
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 which is the lesser of (i) the Borrowing Base, as defined in the loan agreement, (ii) the aggregate commitments, or (iii) $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, plus an applicable margin of 1.25% to 1.75% for LIBOR loans or 0.25% to 0.75% for Base Rate loans, and in each case subject to a pricing grid based on an average daily 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 (without giving effect to item (iii) of the loan cap described above) 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 measured at the end of each applicable fiscal month for the trailing twelve-month period. The Company has 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 adjusted loan cap 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 1.0 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.0 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 adjusted loan cap and $15,000). The Company is in compliance with applicable financial covenants.
As of April 30, 2016, $43,685 is available under the Revolving Credit Facility, net of the amended loan cap, and there were $0 of borrowings outstanding and $7,474 of letters of credit outstanding under the Revolving Credit Facility. As of January 30, 2016, there was $15,000 of borrowings outstanding and $7,522 of letters of credit outstanding under the Revolving Credit Facility.
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Note 5. Inventory
Inventories consist of the following:
(in thousands) |
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April 30, 2016 |
|
|
|
January 30, 2016 |
|
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Finished goods |
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$ |
31,716 |
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|
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$ |
49,837 |
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Less: reserves |
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(8,349 |
) |
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|
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(13,261 |
) |
Total inventories, net |
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$ |
23,367 |
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|
|
$ |
36,576 |
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Note 8. Commitments and Contingencies
Restructuring Charges
In the second quarter of 2015, a number of senior management departures occurred. In connection with these departures, the Company had certain obligations under existing employment arrangements with respect to severance and employee related benefits. As a result, the Company recognized a net charge of $3,394 for these departures within selling, general, and administrative expenses on the condensed consolidated statement of operations during fiscal year 2015. This net charge was reflected within the “unallocated corporate expenses” for segment disclosures. These amounts will be paid over a period of six to eighteen months, which began in the third quarter of fiscal 2015.
The following is a reconciliation of the accrued severance and employee related benefits associated with the above charge included within total current liabilities on the condensed consolidated balance sheet:
(in thousands) |
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|
|
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Balance at January 30, 2016 |
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$ |
1,837 |
|
Cash payments |
|
|
(714 |
) |
Balance at April 30, 2016 |
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$ |
1,123 |
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Litigation
The Company is currently a party to various legal proceedings. Although the outcome of such items cannot be determined with certainty, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.
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Note 9. Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance regarding share-based compensation, to simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
In February 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize right-of-use lease assets and lease liabilities on the balance sheet for those leases currently classified as operating leases. The guidance is required to be adopted retrospectively by restating all years presented in the Company’s financial statements. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
In November 2015, the FASB issued new accounting guidance on the balance sheet classification of deferred taxes, which requires entities to classify deferred tax assets and liabilities as noncurrent in the consolidated balance sheet. Currently deferred tax assets and liabilities must be classified as current and noncurrent amounts in the consolidated balance sheet. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company will reclassify deferred tax balances, as required.
In July 2015, the FASB issued new accounting guidance on accounting for inventory, 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 consolidated financial statements.
In April 2015, the FASB issued new 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 adopted this accounting guidance for any contracts entered into or materially modified after January 30, 2016. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued new guidance on revenue recognition accounting, which 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. Since its issuance, the FASB has amended several aspects of the new guidance. In August 2015, the FASB elected to defer the effective dates. 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 consolidated financial statements.
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Note 10. Segment Financial Information
The Company operates and manages its business by distribution channel and has identified two reportable segments, as further described below. Management 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:
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|
Wholesale segment—consists of the Company’s operations to distribute products to major department stores and specialty stores in the United States and select international markets; and |
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Direct-to-consumer segment—consists of the Company’s operations to distribute products directly to the consumer through its branded full-price specialty retail stores, outlet stores, and e-commerce platform. |
The accounting policies of the Company’s segments are consistent with those described in Note 1 to the audited Consolidated Financial Statements of VHC for the fiscal year ended January 30, 2016 included in the 2015 Annual Report on Form 10-K. 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 the Company’s reportable segments. Unallocated corporate assets are comprised of the carrying values of goodwill and unamortized trademark, deferred tax assets, and other assets that will be utilized to generate revenue for both of the Company’s reportable segments.
Summary information for the Company’s reportable segments is presented below.
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Three Months Ended |
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|
|
April 30, |
|
|
May 2, |
|
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(in thousands) |
|
2016 |
|
|
2015 |
|
||
Net Sales: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
44,776 |
|
|
$ |
38,287 |
|
Direct-to-consumer |
|
|
22,869 |
|
|
|
21,555 |
|
Total net sales |
|
$ |
67,645 |
|
|
$ |
59,842 |
|
Income (loss) from Operations: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
10,274 |
|
|
$ |
14,277 |
|
Direct-to-consumer |
|
|
1,677 |
|
|
|
2,371 |
|
Subtotal |
|
|
11,951 |
|
|
|
16,648 |
|
Unallocated expenses |
|
|
(15,499 |
) |
|
|
(11,547 |
) |
Total (loss) income from operations |
|
$ |
(3,548 |
) |
|
$ |
5,101 |
|
There were no material changes in assets by reportable segment except for unallocated corporate which increased from $280,378 at January 30, 2016 to $299,104 at April 30, 2016.
|
Note 11. Related Party Transactions
Shared Services Agreement
In connection with the consummation of the Company’s IPO on November 27, 2013, Vince, LLC entered into a Shared Services Agreement pursuant to which Kellwood would provide support services in various operational areas, including, among other things, e-commerce operations, distribution, logistics, information technology, accounts payable, credit and collections and payroll and benefits. Since the IPO, the Company has 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. The Company has also been working on developing its own information technology infrastructure and is now in the process of implementing its own enterprise resource planning (“ERP”) system, point-of-sale systems, e-commerce platform and supporting systems. The Company has substantially completed the migration of its U.S. distribution system from Kellwood to a new third party provider. Until those systems are implemented, the Company will continue to utilize the Kellwood information technology infrastructure, including e-commerce platform systems, under the Shared Services Agreement.
The Company is invoiced by Kellwood monthly for the services provided under the Shared Services Agreement and generally is 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. For the three months ended April 30, 2016 and May 2, 2015 the Company recognized $2,178 and $2,330, respectively, of expense within the condensed consolidated statement of operations for services provided under the Shared Services Agreement. As of April 30, 2016, the Company has recorded $559 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. The Company and its former subsidiaries have generated certain tax benefits (including NOLs and tax credits) prior to the Restructuring Transactions consummated in connection with the Company’s IPO and will generate certain section 197 intangible deductions (the “Pre-IPO Tax Benefits”), which would reduce the actual liability for taxes that the Company 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 the Company and its 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) the Company’s 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) the Company’s 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, management concluded that the Company would not be able to fund the payment when due. Accordingly, on September 1, 2015, the Company 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, estimated at $21,762 plus accrued interest, to September 15, 2016. 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 remained at LIBOR plus 200 basis points per annum. As a condition of the Investment Agreement, the Company repaid its current obligation, including accrued interest, totaling $22,258, with respect to the 2014 taxable year under the Tax Receivable Agreement upon the closing of the Rights Offering.
As of April 30, 2016, the Company’s total obligation under the Tax Receivable Agreement is estimated to be $148,171, of which $7,317 is included as a component of other accrued expenses and $140,854 is included as a component of other liabilities on the condensed consolidated balance sheet. The tax benefit payment, plus accrued interest, with respect to the 2015 taxable year is expected to be paid in the fourth quarter of 2016. There is a remaining term of eight years under the Tax Receivable Agreement. During the three months ended April 30, 2016, the obligation under the Tax Receivable Agreement was adjusted in connection with the reversal of certain valuation allowances. The adjustment resulted in a net increase of $16 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.
Investment Agreement and Rights Offering
On March 15, 2016, the Company entered into an Investment Agreement with the Investors pursuant to which Sun Cardinal and SCSF Cardinal agreed to backstop a rights offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription. The Investment Agreement superseded the Rights Offering Commitment Letter, dated December 9, 2015, from Sun Capital Partners V, L.P., which is disclosed in further detail in the Company’s 2015 Annual Report on Form 10-K, Note 15 “Related Party Transactions.” Additionally, see Note 1 “Description of Business and Basis of Presentation” for additional information.
On March 29, 2016, the Company commenced a Rights Offering, whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holders”) received one non-transferrable right to purchase 0.3191 shares for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercised their subscription rights were entitled to subscribe for additional shares that remained unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allowed a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights could only be exercised for whole numbers of shares; no fractional shares of common stock were issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors fully subscribed in the Rights Offering and exercised their oversubscription right. The Company received subscriptions and oversubscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, resulting in aggregate gross proceeds of approximately $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of gross proceeds from the related Investment Agreement and issued to the Investors 195,663 shares of its common stock in connection therewith. In total, the Company received total gross proceeds of $65,000 as a result of the Rights Offering and related Investment Agreement transactions. As of April 30, 2016, affiliates of Sun Capital owned 58.2% of the Company’s outstanding common stock.
The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement (as discussed above) with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,258, and (2) repay all outstanding indebtedness, totaling $20,000, under the Company’s Revolving Credit Facility. The Company intends to use the remaining net proceeds for additional strategic investments and general corporate purposes, which may include future amounts owed by the Company under the Tax Receivable Agreement.
Sun Capital Consulting Agreement
On November 27, 2013, the Company 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 the Company and (ii) provide Sun Capital Management with customary indemnification for any such services.
During the three months ended April 30, 2016 and May 2, 2105, the Company paid Sun Capital Management $25 and $7, respectively, for reimbursement of expenses under the Sun Capital Consulting Agreement.
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(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. The Company reaches its customers through a variety of channels, specifically through major wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through the Company’s branded retail locations and the Company’s website. The Company designs products in the U.S. and sources the vast majority of products from contract manufacturers outside the U.S., primarily in Asia and South America. Products are manufactured to meet the Company’s 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 30, 2016, as set forth in the 2015 Annual Report on Form 10-K.
The condensed consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned subsidiaries as of April 30, 2016. 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.
(C) Rights Offering: During fiscal year 2015 and fiscal year 2016, the Company has made strategic investments for the future growth of the VINCE brand. Management believes these significant investments are essential to the commitment to developing a strong foundation from which the Company can drive consistent profitable growth for the long term. In order to enhance the Company’s liquidity position in support of these investments, during the three months ended April 30, 2016, the Company completed a rights offering (the “Rights Offering”) whereby the Company received subscriptions and over-subscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, and received gross proceeds of $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of proceeds from a related Investment Agreement entered into with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc. (collectively the “Investors”) and issued to the Investors 195,663 shares of its common stock in connection therewith. See Note 11 “Related Party Transactions” for additional details. As a result of the Rights Offering and related Investment Agreement transactions, the Company received total gross proceeds of $65,000, issued 11,818,181 shares of its common stock and recorded increases of $118 within Common Stock and $63,992 within Additional paid-in capital on the condensed consolidated balance sheet.
The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,258 (see Note 11 “Related Party Transactions” for additional details), and (2) repay all outstanding indebtedness, totaling $20,000, under the Revolving Credit Facility. The Company intends to use the remaining net proceeds for additional strategic investments and general corporate purposes, which may include future amounts owed by the Company under the Tax Receivable Agreement.
Management believes that the Company’s current balances of cash and cash equivalents, cash flow from operations and amounts available under the Revolving Credit Facility will be sufficient to comply with any covenants under the Term Loan Facility and the Revolving Credit Facility, fund the Company’s debt service requirements, fund the Company’s obligations under the Tax Receivable Agreement, and fund planned capital expenditures and working capital needs for at least the next twelve months. However, there can be no assurance that the Company will be able to achieve its strategic initiatives in the future and failure to do so would have a significant adverse effect on the Company’s operations.
|
Net goodwill balances and changes therein by segment are as follows:
(in thousands) |
|
Wholesale |
|
|
Direct-to-consumer |
|
|
Total Net Goodwill |
|
|||
Balance as of April 30, 2016 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 30, 2016 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Identifiable intangible assets summary:
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of April 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(4,924 |
) |
|
$ |
7,046 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,924 |
) |
|
$ |
108,896 |
|
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(4,774 |
) |
|
$ |
7,196 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,774 |
) |
|
$ |
109,046 |
|
|
Long-term debt consisted of the following as of April 30, 2016 and January 30, 2016:
(in thousands) |
|
April 30, 2016 |
|
|
January 30, 2016 |
|
||
Term Loan Facility |
|
$ |
45,000 |
|
|
$ |
45,000 |
|
Revolving Credit Facility |
|
|
— |
|
|
|
15,000 |
|
Total long-term debt principal |
|
|
45,000 |
|
|
|
60,000 |
|
Less: Deferred financing costs |
|
|
2,387 |
|
|
|
2,385 |
|
Total long-term debt |
|
$ |
42,613 |
|
|
$ |
57,615 |
|
|
Inventories consist of the following:
(in thousands) |
|
April 30, 2016 |
|
|
|
January 30, 2016 |
|
||
Finished goods |
|
$ |
31,716 |
|
|
|
$ |
49,837 |
|
Less: reserves |
|
|
(8,349 |
) |
|
|
|
(13,261 |
) |
Total inventories, net |
|
$ |
23,367 |
|
|
|
$ |
36,576 |
|
|
The following is a reconciliation of the accrued severance and employee related benefits associated with the above charge included within total current liabilities on the condensed consolidated balance sheet:
(in thousands) |
|
|
|
|
Balance at January 30, 2016 |
|
$ |
1,837 |
|
Cash payments |
|
|
(714 |
) |
Balance at April 30, 2016 |
|
$ |
1,123 |
|
|
Summary information for the Company’s reportable segments is presented below.
|
|
Three Months Ended |
|
|||||
|
|
April 30, |
|
|
May 2, |
|
||
(in thousands) |
|
2016 |
|
|
2015 |
|
||
Net Sales: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
44,776 |
|
|
$ |
38,287 |
|
Direct-to-consumer |
|
|
22,869 |
|
|
|
21,555 |
|
Total net sales |
|
$ |
67,645 |
|
|
$ |
59,842 |
|
Income (loss) from Operations: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
10,274 |
|
|
$ |
14,277 |
|
Direct-to-consumer |
|
|
1,677 |
|
|
|
2,371 |
|
Subtotal |
|
|
11,951 |
|
|
|
16,648 |
|
Unallocated expenses |
|
|
(15,499 |
) |
|
|
(11,547 |
) |
Total (loss) income from operations |
|
$ |
(3,548 |
) |
|
$ |
5,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|