ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis of financial condition and results of operations is qualified by reference to and should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this annual report.
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report on Form 10-K, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward-looking. We often use words such as anticipates, believes, estimates, expects, intends, predicts, hopes, should, plans, will and similar expressions to identify forward-looking statements. These statements are based on management’s current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): consumer preferences, spending and debt levels; the general economic and credit environment; interest rates; seasonal variations in consumer purchasing activities; the ability to achieve the most effective product category mixes to maximize sales and margin objectives; competitive pressures on sales; pricing and gross sales margins; the level of cable and satellite distribution for our programming and the associated fees or estimated cost savings from contract renegotiations; our ability to establish and maintain acceptable commercial terms with third-party vendors and other third parties, with whom we have contractual relationships, and to successfully manage key vendor relationships and develop key partnerships and proprietary brands; our ability to manage our operating expenses successfully and our working capital levels; our ability to remain compliant with our credit facilities covenants; our ability to successfully transition our brand name and corporate name; customer acceptance of our new branding strategy and our repositioning as a digital commerce company; the market demand for television station sales; changes to our management and information systems infrastructure; challenges to our data and information security; changes in governmental or regulatory requirements; including without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings; litigation or governmental proceedings affecting our operations; significant public events that are difficult to predict, or other significant television-covering events causing an interruption of television coverage or that directly compete with the viewership of our programming; our ability to obtain and retain key executives and employees; our ability to attract new customers and retain existing customer; changes in shipping costs; our ability to offer new or innovative products and customer acceptance of the same; changes in customer viewing habits or television programming; and the risks identified under Item 1A (Risk Factors) in this report on Form 10-K. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are under no obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements whether as a result of new information, future events or otherwise.
Overview
Our Company
We are a digital commerce company that offers a mix of proprietary, exclusive and name brands directly to consumers in an engaging and informative shopping experience through TV, online and mobile devices. We operate a 24-hour television shopping network, EVINE Live, which is distributed primarily on cable and satellite systems, through which we offer proprietary, exclusive and name brand merchandise in the categories of jewelry & watches; home & consumer electronics; beauty; and fashion & accessories. We also operate evine.com, a comprehensive digital commerce platform that sells products which appear on our television shopping network as well as an extended assortment of online-only merchandise. Our programming and products are also marketed via mobile devices - including smartphones and tablets, and through the leading social media channels.
New Corporate Name and Branding
On November 18, 2014, we announced that we had changed our corporate name to EVINE Live Inc. from ValueVision Media, Inc. Effective November 20, 2014, our NASDAQ trading symbol also changed to EVLV from VVTV. We transitioned from doing business as "ShopHQ" and rebranded to "EVINE Live" and evine.com on February 14, 2015.
In May 2013, we previously announced a rebranding of our 24-hour television shopping network and digital commerce internet website from ShopNBC and ShopNBC.com to ShopHQ and ShopHQ.com, respectively.
Products and Customers
Products sold on our media channel platforms include jewelry & watches, home & consumer electronics, beauty, and fashion & accessories. Historically jewelry & watches has been our largest merchandise category. While changes in our product mix have occurred as a result of customer demand and other factors including our efforts to diversify our offerings within our major merchandise categories, jewelry & watches remained our largest merchandise category in fiscal 2015. We are focused on diversifying our merchandise assortment both among our existing product categories as well as with potentially new product categories, including proprietary, exclusive and name brands, in an effort to increase revenues and to grow our new and active customer base. The following table shows our merchandise mix as a percentage of television shopping and online net merchandise sales for the years indicated by product category group. Certain fiscal 2014 and 2013 product category percentages in the accompanying table have been reclassified to conform to our fiscal 2015 product group hierarchy:
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For the Years Ended
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
February 1,
2014
|
Merchandise Category
|
|
|
|
|
|
|
Jewelry & Watches
|
|
39%
|
|
42%
|
|
43%
|
Home & Consumer Electronics
|
|
31%
|
|
30%
|
|
35%
|
Beauty
|
|
14%
|
|
12%
|
|
11%
|
Fashion & Accessories
|
|
16%
|
|
16%
|
|
11%
|
Our product strategy is to continue to develop and expand new product offerings across multiple merchandise categories based on customer demand, as well as to offer competitive pricing and special values in order to drive new customers and maximize margin dollars per minute. Our digital commerce customers — those who interact with our network and transact through TV, online and mobile device — are primarily women between the ages of 40 and 70. We also have a strong presence of male customers of similar age. We believe our customers make purchases based on our unique products, quality merchandise and value.
Company Strategy
As a digital commerce company, our strategy includes offering exciting proprietary, exclusive and name brand merchandise using online, mobile, social media and our commerce infrastructure, which includes television access to approximately
88 million
cable and satellite homes in the United States. We believe our greatest growth opportunity lies in leveraging these digital commerce platforms in a way that engages customers far more often than just when they are in the mood to shop.
By investing in new brands and offering a more diverse assortment of proprietary, exclusive (i.e., brands that are not readily available elsewhere) and name brand merchandise, presented in an engaging, entertaining, shopping-centric format, we believe we will attract a larger customer base targeting a broader demographic. At the root of our efforts to attract a larger customer base is a focus on expanding and strengthening our relationships with the brands, personalities and vendors with whom we do business.
In addition to offering our customers a more diverse assortment of proprietary, exclusive and name brand merchandise, we are focusing on increasing awareness of the EVINE Live brand and our Shop.Share.Smile platform while at the same time augmenting our distribution footprint, with the goal of expanding our customer base. Properly executed, we believe these initiatives may provide us a greater opportunity to grow our top and bottom lines in a more meaningful and competitive way.
Priorities for fiscal 2016 that we believe will ultimately drive sustainable profitability are: improving our discipline around offering the most popular and profitable merchandise mix that our customers prefer; careful attention to gross profit and our cost structure; capitalizing on our expertise in video-based ecommerce; sensibly broadening our distribution base; improving channel adjacencies and placement; exploiting new technologies in mobile and logistics; increasing customer penetration, improving customer and partner relationship management; process improvements; brand building and delivering value to our customers and business partners. We believe that our new brand identity coupled with a fresh focus on existing as well as emerging platforms and technologies and the development of proprietary and exclusive brands along with an improved program distribution footprint will begin repositioning our Company as a digital commerce company that delivers a more engaging and enjoyable customer experience with sales and service that exceed expectations.
Our Competition
The digital commerce retail business is highly competitive and we are in direct competition with numerous retailers, including online retailers, many of whom are larger, better financed and have a broader customer base than we do. In our television shopping and digital commerce operations, we compete for customers with other television shopping and e-commerce retailers, infomercial companies, other types of consumer retail businesses, including traditional "brick and mortar" department stores, discount stores, warehouse stores and specialty stores; catalog and mail order retailers and other direct sellers.
Our direct competitors within the television shopping industry include QVC (owned by Liberty Interactive Corporation), and HSN, Inc. (in whom Liberty Interactive Corporation also has a substantial interest, according to public filings), both of whom are substantially larger than we are in terms of annual revenues and customers, and whose programming is carried more broadly to U.S. households, including High Definition bands and multi-channel carriage, than our programming. Multimedia Commerce Group, Inc., which operates Jewelry Television, also competes with us for customers in the jewelry category. Furthermore, on March 8, 2016, Amazon announced the premiere of a live television program,
Style Code Live
, which features products that viewers can order online. This program, and any additional similar programs that Amazon may offer in the future, may compete with us. In addition, there are a number of smaller niche players and startups in the television shopping arena who compete with us. We believe that our major competitors incur cable and satellite distribution fees representing a significantly lower percentage of their sales attributable to their television programming than we do, and that their fee arrangements are substantially on a commission basis (in some cases with minimum guarantees) rather than on the predominantly fixed-cost basis that we currently have. At our current sales level, our distribution costs as a percentage of total consolidated net sales are higher than those of our competition. However, one of our strategies is to maintain our fixed distribution cost structure in order to leverage our profitability.
We anticipate continued competition for viewers and customers, for experienced television shopping and e-commerce personnel, for distribution agreements with cable and satellite systems and for vendors and suppliers - not only from television shopping companies, but also from other companies that seek to enter the television shopping and online retail industries, including telecommunications and cable companies, television networks, and other established retailers. We believe that our ability to be successful in the digital commerce industry will be dependent on a number of key factors, including continuing to expand our digital footprint to meet our customers' "watch and shop anytime, anywhere" needs, increasing the number of customers who purchase products from us and increasing the dollar value of sales per customer from our existing customer base.
Results for
Fiscal 2015, 2014 and 2013
Consolidated net sales in
fiscal 2015
were
$693.3 million
compared to
$674.6 million
in
fiscal 2014
, a
3%
increase. Consolidated net sales in
fiscal 2014
were
$674.6 million
compared to
$640.5 million
in
fiscal 2013
, a
5%
increase. Results of operations for fiscal 2015 include executive and management transition costs of $3.5 million and distribution facility consolidation and technology upgrade costs of $1.3 million. We reported an operating loss of
$8.7 million
and a net loss of
$12.3 million
for
fiscal 2015
. We reported operating income of $1.0 million and a net loss of $1.4 million for fiscal 2014. Results of operations for fiscal 2014 include executive and management transition costs and activist shareholder response charges of approximately $5.5 million and $3.5 million, respectively. We reported operating income of $77,000 and a net loss of $2.5 million for fiscal 2013. Our operating income in fiscal 2013 includes activist shareholder response charges of approximately $2.1 million.
GACP Credit Agreement & PNC Credit Facility Amendment
On March 10, 2016, the Company entered into a five-year term loan credit and security agreement (the "GACP Credit Agreement") with GACP Finance Co., LLC ("GACP") for a term loan of $17 million. Proceeds from the term loan under the GACP Credit Agreement (the "GACP Term Loan") will be used to provide for working capital and for general corporate purposes of the Company. The GACP Credit Agreement matures on March 9, 2021. The GACP Term Loan bears interest at a fixed rate based on the greater of LIBOR for interest periods of one, two or three months or 1% plus a margin of 11.0%. On the same day, we entered into the sixth amendment to the PNC Credit Facility authorizing the Company to enter into the GACP Credit Agreement.
Executive & Management Transition Costs
On February 8, 2016, subsequent to the end of fiscal 2015, Mark Bozek resigned as a member of the Company's board of directors and as Chief Executive Officer. In addition, on February 8, 2016, Russell Nuce resigned as Chief Strategy Officer and Interim General Counsel. We expect to record a $1.9 million charge to income in the first quarter of fiscal 2016 relating primarily to severance payments to be made in conjunction with the resignations. In addition, we expect to cut our full year operating expenses through reductions in corporate overhead and other operating costs.
On March 26, 2015, we announced the termination and departure of three executive officers, namely our Chief Financial Officer, our Senior Vice President and General Counsel, and President. In addition, during the first quarter of fiscal 2015, we also announced the hiring of a new Chief Financial Officer and a new Chief Merchandising Officer. In conjunction with these executive changes as well as other management terminations made during fiscal 2015, we recorded charges to income of
$3.5 million
, which relate primarily to severance payments made as a result of the executive officer terminations and other direct costs associated with our 2015 executive and management transition.
On June 22, 2014, Keith R. Stewart resigned as a member of our board of directors and as our Chief Executive Officer. In conjunction with Mr. Stewart's resignation and separation agreement, as well as other executive terminations made subsequent to June 22, 2014, we recorded charges to income of
$5.5 million
during fiscal 2014, relating primarily to severance payments which Mr. Stewart was entitled to in accordance with the terms of his employment agreement; severance payments for the termination of our Chief Operating and Chief Merchandising Officers; and other direct costs associated with our executive and management
transition. Following Mr. Stewart's resignation, our board of directors appointed Mr. Mark Bozek as our Chief Executive Officer effective June 22, 2014.
Distribution Facility Expansion, Consolidation and Technology Upgrade Costs
During fiscal 2014, we began a significant operational expansion initiative with respect to overall warehousing capacity and new equipment and system technology upgrades at our Bowling Green, Kentucky distribution facility. During the first quarter of fiscal 2015 the new building was substantially completed and we expanded our
262,000
square foot facility to an approximately
600,000
square foot facility. Subsequently, during the second quarter of fiscal 2015, we finished the building expansion and moved out of our expired leased satellite warehouse space. The updated facilities and technology upgrade will include a new high-speed parcel shipping and item sortation system coupled with a new warehouse management system to support our increased level of shipments and units and a new call center facility to better serve our customers. The new sortation and warehouse management systems are expected to be phased into production through the first half of fiscal 2016. The total cost of the physical building expansion, new sortation equipment and call center facility was approximately
$25 million
and was financed with our expanded PNC revolving line of credit and a
$15 million
PNC term loan.
As a result of our distribution facility expansion, consolidation and technology upgrade initiative, we incurred approximately
$1.3 million
in incremental expenses during fiscal 2015, relating primarily to increased labor, inventory and other warehousing transportation costs, training costs and increased equipment rental costs associated with: the move into the new expanded warehouse building, the move out of previously leased warehouse space and the preparation of our expanded facility for the new high-speed parcel shipping and item sortation system and upgraded warehouse management system.
Activist Shareholder Response Costs
In October of 2013, we received a demand from an activist shareholder to call a special meeting of shareholders for the purpose, among other things, of voting on a new slate of directors and amending certain of our bylaws. We retained a team of advisers, including a financial adviser, proxy solicitor, investor relations firm and legal counsel, to assist in responding to the demand and the solicitation of proxies. In conjunction with such activities, we recorded charges to income in
fiscal 2014
and fiscal 2013 totaling
$3.5 million
and
$2.1 million
, respectively, which includes
$750,000
as reimbursement for a portion of the activist shareholder’s expenses in fiscal 2014.
Results of Operations
The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales.
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Year Ended (a)
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January 30,
2016
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January 31,
2015
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|
February 1,
2014
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Net sales
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100.0
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%
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100.0
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%
|
|
100.0
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%
|
Gross margin
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34.4
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%
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36.3
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%
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35.9
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%
|
Operating expenses:
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Distribution and selling
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30.3
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%
|
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30.0
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%
|
|
30.0
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%
|
General and administrative
|
|
3.5
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%
|
|
3.6
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%
|
|
3.7
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%
|
Depreciation and amortization
|
|
1.2
|
%
|
|
1.3
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%
|
|
1.9
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%
|
Executive and management transition costs
|
|
0.5
|
%
|
|
0.8
|
%
|
|
—
|
%
|
Distribution facility consolidation and technology upgrade costs
|
|
0.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Activist shareholder response costs
|
|
—
|
%
|
|
0.5
|
%
|
|
0.3
|
%
|
Total operating expenses
|
|
35.7
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%
|
|
36.2
|
%
|
|
35.9
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%
|
Operating income (loss)
|
|
(1.3
|
)%
|
|
0.1
|
%
|
|
—
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%
|
Interest expense, net
|
|
(0.4
|
)%
|
|
(0.2
|
)%
|
|
(0.2
|
)%
|
Loss before income taxes
|
|
(1.7
|
)%
|
|
(0.1
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)%
|
|
(0.2
|
)%
|
Income taxes
|
|
(0.1
|
)%
|
|
(0.1
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)%
|
|
(0.2
|
)%
|
Net loss
|
|
(1.8
|
)%
|
|
(0.2
|
)%
|
|
(0.4
|
)%
|
Key Operating Metrics
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Year Ended (a)
|
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|
January 30, 2016
|
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Change
|
|
January 31, 2015
|
|
Change
|
|
February 1, 2014
|
Program Distribution
|
|
|
|
|
|
|
|
|
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|
Total homes (average 000's)
|
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88,105
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1%
|
|
87,481
|
|
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2%
|
|
86,120
|
|
Merchandise Metrics
|
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|
Gross margin %
|
|
34.4
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%
|
|
(190) bps
|
|
36.3
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%
|
|
40 bps
|
|
35.9
|
%
|
Net shipped units (000's)
|
|
9,853
|
|
|
9%
|
|
9,055
|
|
|
27%
|
|
7,152
|
|
Average selling price
|
|
$64
|
|
(4)%
|
|
$67
|
|
(17)%
|
|
$81
|
Return rate
|
|
19.8
|
%
|
|
(170) bps
|
|
21.5
|
%
|
|
(80) bps
|
|
22.3
|
%
|
Online net sales % (b)
|
|
46.9
|
%
|
|
230 bps
|
|
44.6
|
%
|
|
(60) bps
|
|
45.2
|
%
|
Total Customers - 12 Month Rolling (000's)
|
|
1,436
|
|
|
(1)%
|
|
1,446
|
|
|
7%
|
|
1,357
|
|
(a) The Company’s most recently completed fiscal year,
fiscal 2015
, ended on
January 30, 2016
, and consisted of
52
weeks. Fiscal 2014 ended on
January 31, 2015
and consisted of
52
weeks. Fiscal 2013 ended on
February 1, 2014
and consisted of
52
weeks.
(b) Online net sales percentage is calculated based on net sales that are generated from our evine.com website and mobile platforms, which are primarily ordered directly online.
Program Distribution
Average homes reached, or full time equivalent ("FTE") subscribers, grew
1%
in
fiscal 2015
, resulting in a
624,000
increase in average homes reached versus
fiscal 2014
. The fiscal 2015 increase was driven primarily by organic subscriber growth of our distribution platforms. Average FTE subscribers grew
2%
in
fiscal 2014
, resulting in a
1.4 million
increase in average homes reached compared to
fiscal 2013
. The fiscal 2014 annual increase was driven primarily by an increase in our footprint as we expanded into more widely distributed digital tiers of service. We have made low-cost infrastructure investments that have enabled us to soft launch an up-converted version of our digital signal in a high definition ("HD") format and that improved the appearance of our primary network feed. We distribute the networks' HD feed in selected markets and we believe that having an HD feed of our service allows us to attract new viewers and customers. Our television shopping programming is also simulcast live 24 hours a day, 7 days a week through our internet website, evine.com, which is not included in the foregoing data on homes reached.
Cable and Satellite Distribution Agreements
We have entered into distribution agreements with cable operators, direct-to-home satellite providers and telecommunications companies to distribute our television network over their systems. The terms of the affiliation agreements typically range from
one
to
five
years. During the fiscal year, certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the cable operators or we may cancel the agreements prior to their expiration. Additionally, we may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. If the operator drops our service or if either we or the operator fails to reach mutually agreeable business terms concerning the distribution of our service so that the agreements are terminated, our business may be materially adversely affected. Failure to maintain our distribution agreements covering a material portion of our existing households on acceptable financial and other terms could materially and adversely affect our future growth, sales revenues and earnings unless we are able to arrange for alternative means of broadly distributing our television programming.
As of
January 30, 2016
, the direct ownership of NBCU (which is indirectly owned by Comcast) in the Company consisted of
7,141,849
shares of common stock. The Company has a significant cable distribution agreement with Comcast and believes that the terms of this agreement are comparable to those with other cable system operators.
Net Shipped Units
The number of net shipped units during
fiscal 2015
increased
9%
from
fiscal 2014
to
9.9 million
from
9.1 million
. The number of net shipped units during fiscal 2014 increased
27%
from
fiscal 2013
to
9.1 million
from
7.2 million
. The increase in units shipped during
fiscal 2015
was driven by the strong performances of our beauty and fashion & accessories product categories and from a decreased ASP in our home & consumer electronics product category from increased markdowns taken during fiscal 2015.
Average Selling Price
Our average selling price, or ASP, per net unit was
$64
in
fiscal 2015
, a
4%
decrease from
fiscal 2014
. The decrease in the ASP during
fiscal 2015
, was primarily due to markdowns taken in our home & consumer electronics product category and strong sales growth within our beauty and fashion & accessories product categories, which typically have lower average selling prices. These ASP decreases contributed to our increase in net shipped units by
9%
. For
fiscal 2014
, the ASP was
$67
, a
17%
decrease over
fiscal 2013
. The decrease in the
fiscal 2014
ASP was driven primarily by strong growth within our fashion & accessories and beauty categories, which typically have lower average selling prices, as well as a general shift to lower price points in other merchandise categories. Decreasing our ASP has been a key component in our customer acquisition efforts, however, we are planning to migrate our merchandising mix to achieve a more ideal balance between ASP and gross margin productivity.
Return Rates
Our return rate was
19.8%
in
fiscal 2015
as compared to
21.5%
in
fiscal 2014
, a 170 basis point ("bps") decrease. The decrease in the return rate was driven by rate decreases across all our merchandise categories, as well as a reduction in our jewelry sales mix, which typically has higher return rates. The decreases in the category return rates were driven by the decreases in ASP as described above an
d improvements in the execution of our returns poli
cy. Our return rate was
21.5%
in
fiscal 2014
compared to
22.3%
in
fiscal 2013
, an 80 bps decrease. The decrease in the
fiscal 2014
return rate was primarily driven by decreases in our return rates within our beauty, watch and consumer electronics merchandise categories. We continue to monitor our return rates in an effort to keep our overall return rates in line and commensurate with our current product mix and our average selling price levels.
Total Customers
Total customers purchasing over the last twelve months decreased 1% to 1,436,000 during fiscal 2015 from 1,446,000 in fiscal 2014. The slight decrease was driven by a reduction in new customers over the prior year, partially offset by an increase in our retention of current customers. Total customers purchasing increased 7% to 1,446,000 during fiscal 2014 from 1,357,000 in fiscal 2013. We believe the increase in total customers was primarily due to broadening of our product assortment at lower price points.
Net Sales
Consolidated net sales, inclusive of shipping and handling revenue, for
fiscal 2015
were
$693.3 million
, a
3%
increase over consolidated net sales of
$674.6 million
for
fiscal 2014
. The increase in consolidated net sales was driven primarily by strong growth in our beauty, fashion & accessories and home & consumer electronics product categories and increased customer purchase frequency. These increases were offset by a net sales decrease in our jewelry & watches category as we shifted our product mix from jewelry in favor of home & consumer electronics, beauty and fashion & accessories. In addition, we also experienced a decrease in shipping and handling revenue due to increased promotional shipping offers made to remain competitive. Our online sales penetration, or, the percentage of net sales that are generated from our evine.com website and mobile platforms, which are primarily ordered directly online, was
46.9%
in
fiscal 2015
as compared to
44.6%
in
fiscal 2014
. Overall, we continue to deliver strong online sales penetration. We believe the increase in penetration during the periods was driven by higher mobile sales as a result of our new mobile site and application launched late in fiscal 2014. Our mobile penetration increased to 42.3% of total online sales during fiscal 2015 versus 33.5% of total online sales during fiscal 2014. We believe that the increase experienced in our mobile penetration during fiscal 2015 was due to the rollout of our new mobile site and application launched late in fiscal 2014 and the overall increase in consumers' use of tablets on mobiles devices for retail purchases since 2014.
Consolidated net sales, inclusive of shipping and handling revenue, for fiscal 2014 were $674.6 million, a 5% increase over consolidated net sales of $640.5 million for fiscal 2013. The increase in our consolidated net sales from the prior year was driven primarily by sales growth in our fashion & accessories product category but also increased sales volume in our home, watches and beauty categories, partially offset by sales decreases in our consumer electronics and jewelry product categories. Our e-commerce sales penetration, or, the percentage of net sales that are generated from our evine.com website and mobile platforms, which are primarily ordered directly online, was 44.6% in fiscal 2014 as compared to 45.2% in fiscal 2013. Overall, we continue to deliver strong online sales penetration. The decrease in penetration during fiscal 2014 is primarily due to our mix shift away from watches and consumer electronics, which have a strong online penetration. Our mobile penetration increased to 33.5% of total online sales during fiscal 2014 versus 25.2% of total online sales during fiscal 2013. We believe that the increase experienced in our mobile penetration during fiscal 2014 was due to the rollout of our tablet mobile applications in the fall of 2013, improvements made in our mobile phone checkout site and the overall increase in consumers' use of tablets for retail purchases since 2013.
Gross Profit
Gross profit for
fiscal 2015
was
$238.5 million
, a decrease of
3%
, compared to
$245.0 million
for
fiscal 2014
. The decrease in the gross profits experienced during
fiscal 2015
was primarily driven by lower gross margin percentages experienced across our product categories. Gross margin percentages for
fiscal 2015
,
fiscal 2014
and
fiscal 2013
were
34.4%
,
36.3%
and
35.9%
respectively, representing a 190 bps decrease from
fiscal 2014
to
fiscal 2015
, and a 40 bps increase from
fiscal 2013
to
fiscal 2014
. The decrease in the gross margin percentage experienced in fiscal 2015 reflects the following: a 110 basis point margin decrease attributable to reduced gross profit rates within the jewelry & watches and home product categories and other markdowns taken fiscal 2015; a 30 basis point margin decrease attributable to reduced margins due to a shift in product mix from jewelry & watches in favor of consumer electronics, which typically have a lower margin, partially offset by a positive mix into beauty and fashion; a 20 basis point margin decrease attributable to reduced shipping and handling margin due to increased shipping promotions (as discussed above); and a 20 basis point margin decrease attributable to increased fulfillment depreciation due to the expansion and upgrades made to our Bowling Green facility and placed in service during fiscal 2015. The increase in the gross margin percentage experienced in fiscal 2014 reflects an increased sales mix of fashion & accessories and beauty, which typically carry higher margin percentages, as well as margin rate improvements in beauty, partially offset by increased levels of shipping and handling promotional activity during the year.
Gross profit for fiscal 2014 was $245.0 million, an increase of 7%, compared to $230.0 million for fiscal 2013. The increase in the gross profits experienced during fiscal 2014 was driven primarily by the year-over-year sales increase discussed above and the higher gross margin percentages experienced due to sales of higher margin products.
Operating Expenses
Total operating expenses were
$247.2 million
,
$244.0 million
and
$229.9 million
for
fiscal 2015
,
fiscal 2014
and
fiscal 2013
respectively, representing an increase of
$3.2 million
or
1%
from
fiscal 2014
to
fiscal 2015
, and an increase of $14.1 million, or 6% from
fiscal 2013
to
fiscal 2014
. Total operating expenses as a percentage of net sales were 35.7%, 36.2% and 35.9% for
fiscal 2015
,
fiscal 2014
and
fiscal 2013
, respectively. Total operating expense for fiscal 2015 includes executive and management transition costs of $3.5 million and distribution facility consolidation and technology upgrade costs of $1.3 million. Total operating expenses for fiscal 2014 includes activist shareholder response charges of $3.5 million and executive transition costs of $5.5 million. Total operating expenses for fiscal 2013 includes activist shareholder response charges of $2.1 million. Excluding executive and management transition costs, distribution facility consolidation and technology upgrade costs and shareholder activist response, total operating expenses as a percentage of net sales were 35.0%, 34.8% and 35.6% for fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
Distribution and selling expense for
fiscal 2015
increased
$6.7 million
, or
3%
, to
$209.3 million
or 30.3% of net sales compared to
$202.6 million
or
30.0%
of net sales in
fiscal 2014
. Distribution and selling expense increased during
fiscal 2015
due to increased program distribution expense of $2.3 million relating to a
1%
increase in average homes reached during fiscal 2015 and investments made in the fourth quarter of fiscal 2015 to increase our HD channel carriage. The increase over the comparable period was also due to an increase in variable salaries and wages of $4.4 million, increased customer service and telecommunication expense of $1.1 million, increased online selling and search fees of $1.9 million, production expenses of $531,000 and rebranding expense of $260,000, offset by decreased accrued incentive compensation of $2.7 million, decreased share based compensation of $654,000 and decreased credit card processing fees and credit expenses of $304,000. Total variable expenses during
fiscal 2015
were approximately 9.2% of total net sales versus 8.7% of total net sales for the prior year comparable period. The increase in variable expenses as a percentage of net sales was primarily due to a
9%
increase in net shipped units compared with a
3%
increase in consolidated net sales and the decline in our average selling price during fiscal 2015.
Distribution and selling expense for
fiscal 2014
increased $10.9 million, or 6%, to
$202.6 million
, or
30.0%
of net sales compared to
$191.7 million
or 30.0% of net sales in
fiscal 2013
. Distribution and selling expense increased during fiscal 2014 primarily due to increased program distribution expense of $6.1 million relating to a 2% increase in average homes reached during the year as well as investments made associated with improved channel positions which began in the second half of fiscal 2013 and continued through fiscal 2014. The increase over the prior year was also due to increases in variable credit card processing fees and other credit expenses of $2.0 million, customer service and telecommunications expenses of $1.3 million, increases in salaries, wages and accrued incentive compensation costs of $1.3 million and increased warehouse occupancy expense of $689,000, partially offset by decreased share-based compensation expenses of $503,000. Total variable expenses in fiscal 2014 were approximately 8.7% of total net sales versus approximately 8.0% of total net sales in fiscal 2013. The increase in variable expense as a percentage of net sales coincides with the reduction in average selling price and resulting 27% increase in net shipped units during fiscal 2014.
To the extent that our average selling price continues to decline, our variable expense as a percentage of net sales could continue to increase as the number of our shipped units increase. Program distribution expense is primarily a fixed cost per
household, however, this expense may be impacted by growth in the number of average homes reached or by rate changes associated with improvements in our channel position.
General and administrative expense for
fiscal 2015
increased
$0.5 million
, or
2%
, to
$24.5 million
, or
3.5%
of net sales compared to
$24.0 million
or
3.6%
of net sales in
fiscal 2014
. General and administrative expense increased from fiscal 2015 primarily as a result of increased costs associated with leased software, maintenance contracts and telecommunication of $940,000, costs incurred for the implementation of our Shareholder Rights Plan of $446,000, professional and legal fees of $419,000, personal property taxes of $222,000, executive travel expenses of $135,000 and reduced 2014 year to date expense of $135,000 related to a property easement payment received in fiscal 2014. These increases were offset by decreased share-based compensation expense of $1.0 million relating to our former chief executive officer's transition and new board member equity grants made in the second quarter of fiscal 2014 and decreased salary and accrued incentive compensation expenses of $861,000. General and administrative expense for
fiscal 2014
increased $0.2 million, or 1%, to
$24.0 million
or
3.6%
of net sales compared to
$23.8 million
or 3.7% of net sales in
fiscal 2013
. General and administrative expense increased from
fiscal 2013
primarily as a result of increased share-based compensation expense of $1.1 million due to immediate equity vesting associated with the termination of our former chief executive officer and new board member grants and software expense of $319,000, offset by lower salary and accrued incentive compensation expenses of $1.1 million and decreased legal fees of $137,000. In addition, fiscal 2014 general and administrative expense included $349,000 in information systems and website related rebranding costs.
Depreciation and amortization expense was
$8.5 million
,
$8.4 million
and
$12.3 million
for
fiscal 2015
,
fiscal 2014
and
fiscal 2013
, respectively, representing an increase of
$29,000
, or
0.3%
from
fiscal 2014
to
fiscal 2015
and a decrease of $3.9, or 31% from
fiscal 2013
to
fiscal 2014
. Depreciation and amortization expense as a percentage of net sales was
1.2%
for
fiscal 2015
,
1.3%
for
fiscal 2014
and 1.9%
fiscal 2013
. The marginal increase in depreciation and amortization expense of $29,000 during fiscal 2015 was primarily due to the amortization of the "EVINE Live" trademark and brand name intangible of $43,000. The decrease in depreciation and amortization expense during fiscal 2014 was primarily due to decreased amortization expense of $4.0 million associated with the expiration of the NBC trademark license.
Operating Income (Loss)
We reported an operating loss of
$8.7 million
in
fiscal 2015
compared to operating income of
$1.0 million
for
fiscal 2014
, representing a decrease of
$9.7 million
. Our operating results decreased during
fiscal 2015
primarily as a result of decreased gross profit and an increase in distribution and selling and distribution facility consolidation and technology upgrade costs, offset by a decrease in executive and management transition costs and elimination of activist shareholder response costs (as noted above).
We reported operating income of
$1.0 million
for
fiscal 2014
compared with an operating income of $77,000 for
fiscal 2013
, representing an improvement of $926,000. Our operating results improved during
fiscal 2014
primarily as a result of increased gross profit dollars achieved and lower depreciation and amortization expense, primarily offset by higher distribution and selling expense, executive transition costs and activist shareholder response costs.
Net Loss
For
fiscal 2015
, we reported a net loss of
$12.3 million
or
$0.22
per basic and dilutive share, on
57,004,321
weighted average common shares outstanding. For
fiscal 2014
we reported a net loss of
$1.4 million
or
$0.03
per basic and dilutive share, on
53,458,662
weighted average common shares outstanding. For
fiscal 2013
, we reported a net loss of
$2.5 million
, or
$0.05
per basic and dilutive share, on
49,504,892
weighted average common shares outstanding. Net loss for fiscal 2015 includes executive and management transition costs of $3.5 million and distribution facility consolidation and technology upgrade costs of $1.3 million and interest expense of $2.7 million, relating primarily to interest on outstanding advances under the PNC Credit Facility and the amortization of fees paid to obtain the PNC Credit Facility, offset by interest income totaling
$8,000
earned on our cash and restricted cash and investments. Net loss for fiscal 2014 includes costs related to an activist shareholder response of approximately $3.5 million, executive transition costs of $5.5 million and interest expense of $1.6 million, relating primarily to interest on outstanding advances under the PNC Credit Facility and the amortization of fees paid to obtain the PNC Credit Facility, offset by interest income totaling $10,000 earned on our cash and restricted cash and investments. Net loss for fiscal 2013 includes costs related to an activist shareholder response of approximately $2.1 million and interest expense of $1.4 million, relating primarily to interest on outstanding advances under the PNC Credit Facility and the amortization of fees paid to obtain the PNC Credit Facility, offset by interest income totaling $18,000 earned on our cash and restricted cash and investments.
For
fiscal 2015
, net loss reflects an income tax provision of
$834,000
. The
fiscal 2015
tax provision includes a non-cash charge of approximately
$788,000
relating to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. The remaining
fiscal 2015
income tax provision relates to state income taxes payable on certain income for which there is no loss carryforward benefit available. For fiscal 2014, net loss reflects an income tax provision of $819,000. The fiscal 2014 tax provision includes a non-cash charge of approximately $788,000 relating to changes in our long-
term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. The remaining fiscal 2014 income tax provision relates to state income taxes payable on certain income for which there is no loss carryforward benefit available. For fiscal 2013, net loss reflects an income tax provision with a non-cash charge of approximately $1.2 million relating to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license and state income taxes payable on certain income for which there is no loss carryforward benefit available.
We have not recorded any income tax benefit on the losses recorded during
fiscal 2015
,
fiscal 2014
and
fiscal 2013
due to the uncertainty of realizing income tax benefits in the future as indicated by our recording of an income tax valuation allowance. Based on our recent history of losses, a full valuation allowance has been recorded and was calculated in accordance with GAAP, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. We will continue to maintain a valuation allowance against our net deferred tax assets, including those related to net operating loss carryforwards, until we believe it is more likely than not that these assets will be realized in the future.
Quarterly Results
The following summarized unaudited results of operations for the quarters in
fiscal 2015
and
fiscal 2014
have been prepared on the same basis as the annual financial statements and reflect normal recurring adjustments that we consider necessary for a fair presentation of results of operations for the periods presented. Our results of operations have varied and may continue to fluctuate significantly from quarter to quarter due to seasonality and the timing of operating expenses. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
|
(In thousands, except percentages and per share amounts)
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
158,451
|
|
|
$
|
161,061
|
|
|
$
|
162,258
|
|
|
$
|
211,542
|
|
|
$
|
693,312
|
|
Gross profit
|
|
57,305
|
|
|
58,856
|
|
|
55,910
|
|
|
66,409
|
|
|
238,480
|
|
Gross profit margin
|
|
36.2
|
%
|
|
36.5
|
%
|
|
34.5
|
%
|
|
31.4
|
%
|
|
34.4
|
%
|
Operating expenses
|
|
61,232
|
|
|
61,032
|
|
|
60,192
|
|
|
64,762
|
|
|
247,218
|
|
Operating income (loss) (a)
|
|
(3,927
|
)
|
|
(2,176
|
)
|
|
(4,282
|
)
|
|
1,647
|
|
|
(8,738
|
)
|
Other expense, net
|
|
(596
|
)
|
|
(667
|
)
|
|
(688
|
)
|
|
(761
|
)
|
|
(2,712
|
)
|
Income tax provision
|
|
(205
|
)
|
|
(205
|
)
|
|
(205
|
)
|
|
(219
|
)
|
|
(834
|
)
|
Net income (loss) (a)
|
|
$
|
(4,728
|
)
|
|
$
|
(3,048
|
)
|
|
$
|
(5,175
|
)
|
|
$
|
667
|
|
|
$
|
(12,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.22
|
)
|
Net income (loss) per share — assuming dilution
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.22
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
56,641
|
|
|
57,093
|
|
|
57,125
|
|
|
57,158
|
|
|
57,004
|
|
Diluted
|
|
56,641
|
|
|
57,093
|
|
|
57,125
|
|
|
57,158
|
|
|
57,004
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
159,701
|
|
|
$
|
156,587
|
|
|
$
|
157,106
|
|
|
$
|
201,224
|
|
|
$
|
674,618
|
|
Gross profit
|
|
60,006
|
|
|
60,435
|
|
|
59,066
|
|
|
65,541
|
|
|
245,048
|
|
Gross profit margin
|
|
37.6
|
%
|
|
38.6
|
%
|
|
37.6
|
%
|
|
32.6
|
%
|
|
36.3
|
%
|
Operating expenses
|
|
58,954
|
|
|
64,142
|
|
|
59,263
|
|
|
61,686
|
|
|
244,045
|
|
Operating income (loss) (b)
|
|
1,052
|
|
|
(3,707
|
)
|
|
(197
|
)
|
|
3,855
|
|
|
1,003
|
|
Other expense, net
|
|
(391
|
)
|
|
(381
|
)
|
|
(404
|
)
|
|
(386
|
)
|
|
(1,562
|
)
|
Income tax provision
|
|
(201
|
)
|
|
(201
|
)
|
|
(207
|
)
|
|
(210
|
)
|
|
(819
|
)
|
Net income (loss) (b)
|
|
$
|
460
|
|
|
$
|
(4,289
|
)
|
|
$
|
(808
|
)
|
|
$
|
3,259
|
|
|
$
|
(1,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
Net income (loss) per share — assuming dilution
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
49,844
|
|
|
52,200
|
|
|
55,433
|
|
|
56,357
|
|
|
53,459
|
|
Diluted
|
|
56,341
|
|
|
52,200
|
|
|
55,433
|
|
|
57,598
|
|
|
53,459
|
|
(a) Net income (loss) and operating income (loss) for the second, third and fourth quarters of fiscal 2015 includes distribution facility consolidation and technology upgrade costs of approximately $972,000, $294,000 and $81,000, respectively. In addition, net loss and operating loss for the first, second and third quarters of fiscal 2015 includes executive and management transition costs of $2.6 million, $205,000 and $754,000, respectively.
(b) Net income (loss) and operating income (loss) for the first and second quarters of fiscal 2014 includes activist shareholder response charges of approximately $1.0 million and $2.5 million, respectively. In addition, net income (loss) and operating income (loss) for the second, third and fourth quarters of fiscal 2014 includes executive transition costs of $2.6 million, $2.4 million and $485,000, respectively.
Financial Condition, Liquidity and Capital Resources
As of
January 30, 2016
, we had cash of
$11.9 million
and had restricted cash and investments of
$450,000
. Our restricted cash and investments are generally restricted for a period ranging from 30-60 days. In addition, under the PNC Credit Facility, we are required to maintain a minimum of
$10 million
of unrestricted cash and unused line availability at all times. As our unused
line availability is greater than
$10 million
at
January 30, 2016
, no additional cash is required to be restricted. As of
January 31, 2015
, we had cash of
$19.8 million
and had restricted cash and investments of
$2.1 million
pledged primarily as collateral for our issuances of commercial letters of credit. During
fiscal 2015
, working capital increased
$2.7 million
to
$83.7 million
compared to working capital of
$81.0 million
for
fiscal 2014
. The current ratio (our total current assets over total current liabilities) was
1.7
at
January 30, 2016
and
1.7
at
January 31, 2015
.
Sources of Liquidity
Our principal source of liquidity is our available cash of
$11.9 million
as of
January 30, 2016
, which was held in bank depository accounts primarily for the preservation of cash liquidity.
PNC Credit Facility
On February 9, 2012, we entered into the PNC Credit Facility, as lender and agent. The PNC Credit Facility was amended on October 8, 2015, to increase the size of the revolving line of credit from $75.0 million to
$90.0 million
. The Credit Facility, which includes The Private Bank as part of the facility, provides a revolving line of credit of
$90.0 million
and provides for a
$15.0 million
term loan on which the Company has drawn to fund improvements at the Company's distribution facility in Bowling Green, Kentucky. The PNC Credit Facility also provides for a new accordion feature that would allow the Company to expand the size of the revolving line of credit by an additional
$25.0 million
at the discretion of the lenders and upon certain conditions being met. On March 10, 2016, the Company entered into the sixth amendment to its Credit Facility with PNC authorizing the Company to enter into the GACP Credit Agreement (as defined below).
All borrowings under the PNC Credit Facility mature and are payable on May 1, 2020. Subject to certain conditions, the PNC Credit Facility also provides for the issuance of letters of credit in an aggregate amount up to
$6.0 million
which, upon issuance, would be deemed advances under the PNC Credit Facility. Maximum borrowings and available capacity under the revolving line of credit under the PNC Credit Facility are equal to the lesser of
$90.0 million
or a calculated borrowing base comprised of eligible accounts receivable and eligible inventory.
The revolving line of credit under the PNC Credit Facility bears interest at LIBOR plus
3%
per annum. Beginning March 10, 2016, the revolving line of credit will bear interest at LIBOR plus a margin of between 3% and 4.5% based on the Company's trailing twelve-month reported EBITDA (as defined in the Credit Facility) measured quarterly in fiscal 2016 and semi-annually thereafter as demonstrated in its financial statements. The term loan bears interest at either a LIBOR rate or a base rate plus a margin consisting of between 4% and 5% on base rate loans and 5% to 6% on LIBOR rate loans based on the Company’s leverage ratio as demonstrated in its audited financial statements.
As of
January 30, 2016
, the Company had borrowings of
$59.9 million
under its revolving line of credit. As of
January 30, 2016
, the term loan under the PNC Credit Facility had
$12.8 million
outstanding, which was used to fund the expansion initiative of which
$2.1 million
was classified as current in the accompanying balance sheet. Remaining available capacity under the revolving credit facility as of
January 30, 2016
was approximately
$29.7 million
, and provides liquidity for working capital and general corporate purposes. In addition, as of
January 30, 2016
, our unrestricted cash plus facility availability was
$41.6 million
and we were in compliance with applicable financial covenants of the PNC Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months.
Principal borrowings under the term loan are to be payable in monthly installments over an
84
month amortization period commencing on January 1, 2015 and are also subject to mandatory prepayment in certain circumstances, including, but not limited to, upon receipt of certain proceeds from dispositions of collateral. Borrowings under the term loan are also subject to mandatory prepayment starting in the current fiscal year ending January 30, 2016 in an amount equal to fifty percent (
50%
) of excess cash flow for such fiscal year, with any such payment not to exceed
$2.0 million
in any such fiscal year.
The PNC Credit Facility contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus facility availability of
$10.0 million
at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of 1.1 to 1.0, become applicable only if unrestricted cash plus facility availability falls below
$16.0 million
(increasing to $18.0 million beginning March 10, 2016). In addition, the PNC Credit Facility places restrictions on our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
GACP Term Loan
On March 10, 2016, we entered into a term loan credit and security agreement (the "GACP Credit Agreement") with GACP Finance Co., LLC ("GACP") for a term loan of $17 million. Proceeds from the GACP Term Loan will be used for working capital and general corporate purposes and to help strengthen our total liquidity position which will allow us the flexibility to drive
improved profitability. The term loan under the GACP Credit Agreement (the "GACP Term Loan") is secured on a first lien priority basis by the proceeds of any sale of our Boston television station FCC license and on a second lien priority basis by our accounts receivable, equipment, inventory and certain real estate as well as other assets as described in the GACP Credit Agreement. The GACP Credit Agreement matures on March 9, 2021. The GACP Term Loan bears interest at either (i) a fixed rate based on the greater of LIBOR for interest periods of one, two or three months or 1% plus a margin of 11.0%, or (ii) a daily floating Alternate Base Rate plus a margin of 10.0%. Principal borrowings under the GACP Term Loan are to be payable in consecutive monthly installments of $70,833 each, commencing on April 1, 2016, with a final installment due at the end of the five-year term equal to the aggregate principal amount of all loans outstanding on such date. The GACP Term Loan is also subject to mandatory prepayment in certain circumstances, including, but without limitation, from the proceeds of the sale of collateral assets and from 50% of annual excess cash flow as defined in the GACP Credit Agreement.
The GACP Credit Agreement contains customary covenants and conditions, which are consistent with the covenants and conditions under the PNC Credit Agreement, including, among other things, maintaining a minimum of unrestricted cash plus revolving line of credit availability under the PNC Credit Facility of $10.0 million at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the GACP Credit Agreement) and a minimum fixed charge coverage ratio of 1.1 to 1.0, become applicable only if unrestricted cash plus revolving line of credit availability under the PNC Credit Facility falls below $18 million. In addition, the GACP Credit Agreement places restrictions on our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
Other
Another potential source of near-term liquidity is our ability to increase our cash flow resources by reducing the percentage of our sales offered under our ValuePay installment program or by decreasing the length of time we extend credit to our customers under this installment program. However, any such change to the terms of our ValuePay installment program could impact future sales, particularly for products sold with higher price points. Please see "Cash Requirements" below for a discussion of our ValuePay installment program.
Cash Requirements
Currently, our principal cash requirements are to fund our business operations, which consist primarily of purchasing inventory for resale, funding accounts receivable growth through the use of our ValuePay installment program in support of sales growth, funding our basic operating expenses, particularly our contractual commitments for cable and satellite programming distribution, and the funding of necessary capital expenditures. We closely manage our cash resources and our working capital. We attempt to manage our inventory receipts and reorders in order to ensure our inventory investment levels remain commensurate with our current sales trends. We also monitor the collection of our credit card and ValuePay installment receivables and manage our vendor payment terms in order to more effectively manage our working capital which includes matching cash receipts from our customers, to the extent possible, with related cash payments to our vendors. Our ValuePay installment program entitles customers to purchase merchandise and generally make payments in two or more equal monthly credit card installments. ValuePay remains a cost effective promotional tool for us. We continue to make strategic use of our ValuePay program in an effort to increase sales and to respond to similar competitive programs.
During fiscal 2014, we began a significant operational expansion initiative with respect to overall warehousing capacity and new equipment and system technology upgrades at our Bowling Green, Kentucky distribution facility. During the first quarter of fiscal 2015 the new building was substantially completed and we expanded our
262,000
square foot facility to an approximately
600,000
square foot facility. Subsequently, during the second quarter of fiscal 2015, we completed the building expansion and moved out of our expired leased satellite warehouse space. The updated facilities and technology upgrade will include a new high-speed parcel shipping and item sortation system coupled with a new warehouse management system to support our increased level of shipments and units and a new call center facility to better serve our customers. The new sortation and warehouse management systems are expected to be phased into production through the first half of fiscal 2016. The total cost of the physical building expansion, new sortation equipment and call center facility was approximately
$25 million
and was financed with our expanded PNC revolving line of credit and a
$15 million
PNC term loan.
We also have significant future commitments for our cash, primarily payments for cable and satellite program distribution obligations and the eventual repayment of the PNC Credit Facility and GACP Credit Agreement. We believe that our existing cash balances and overall liquidity will be sufficient to fund our normal business operations over the next twelve months. We currently have total contractual cash obligations and commitments primarily with respect to our cable and satellite agreements, credit facility, and operating leases totaling approximately
$329.7 million
over the next five fiscal years.
For
fiscal 2015
, net cash used for operating activities totaled
$9.4 million
compared to net cash used for operating activities of
$1.3 million
in
fiscal 2014
and net cash provided by operating activities of
$14.0 million
in
fiscal 2013
. Net cash used for
operating activities for
fiscal 2015
reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, long-term deferred income taxes and the amortization of deferred revenue and other financing costs. In addition, net cash used for operating activities for
fiscal 2015
reflects an increase in accounts receivable, inventories and prepaid expenses and a decrease in accounts payable and accrued liabilities. Accounts receivable increased due to increased sales levels, primarily in the fourth quarter. Inventory increased as a result of planned purchases in support of higher sales levels and in preparation for fiscal 2016 sales growth initiatives. Accounts payable and accrued liabilities decreased during fiscal 2015 primarily due to a decrease in accounts payables related to customer shipments made directly by vendors in the fourth quarter which had shorter payment terms, a decrease in accrued incentive compensation and accrued severance.
Net cash used for operating activities for fiscal 2014 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, long-term deferred income taxes and the amortization of deferred revenue and other financing costs. In addition, net cash used for operating activities for fiscal 2014 reflects an increase in accounts receivable and inventories offset by a decrease in prepaid expenses and an increase in accounts payable and accrued liabilities. Accounts receivable increased due to increased sales levels, primarily in the fourth quarter. Inventory increased as a result of planned purchases in support of higher sales levels and in preparation for fiscal 2015 sales growth initiatives. Accounts payable and accrued liabilities increased during fiscal 2014 primarily due to increased inventory receipts and the timing of payments made to vendors.
Net cash provided by operating activities for fiscal 2013 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, long-term deferred income taxes and the amortization of deferred revenue and other financing costs. In addition, net cash provided by operating activities for fiscal 2013 reflects an increase in accounts receivable and inventories offset by a decrease in prepaid expenses and an increase in accounts payable and accrued liabilities. Accounts receivable increased due to increased sales levels, primarily in the fourth quarter, as well as due to higher utilization of our ValuePay installment payment program during the fourth quarter. Inventory increased as a result of planned purchases in support of higher sales levels and in preparation for fiscal 2014 sales growth initiatives. Accounts payable and accrued liabilities increased during fiscal 2013 primarily due to increased inventory receipts and the timing of payments made to vendors, an increase in accrued incentive compensation and employee benefit contributions and increased accrued activist shareholder response costs.
Net cash used for investing activities totaled
$20.4 million
for
fiscal 2015
compared to net cash used for investing activities of
$25.2 million
for
fiscal 2014
and net cash used for investing activities of
$11.1 million
in
fiscal 2013
. Expenditures for property and equipment were
$22.0 million
in
fiscal 2015
compared to
$25.1 million
in
fiscal 2014
and
$8.2 million
in
fiscal 2013
. Expenditures for property and equipment during
fiscal 2015, fiscal 2014 and fiscal 2013
primarily include capital expenditures made for the distribution facility expansion, development, upgrade and replacement of computer software, order management and merchandising systems, related computer equipment, digital broadcasting equipment and other office equipment, warehouse equipment and production equipment. The decrease in the capital expenditures in fiscal 2015 and the increase in fiscal 2014 primarily relate to expenditures totaling $10.1 million and $14.9 million, respectively, made in connection with our distribution facility expansion. Principal future capital expenditures are expected to include: the development, upgrade and replacement of various enterprise software systems; the continuation of our significant warehousing expansion effort and related equipment improvements and technology upgrade at our distribution facility in Bowling Green, Kentucky; security upgrades to our information technology; the upgrade and digitalization of television production and transmission equipment; and related computer equipment associated with the expansion of our television shopping business and digital commerce initiatives. During fiscal 2015, we decreased our restricted cash and investment collateral balance by $1.7 million. During fiscal 2013, we also made a cash payment of $2.8 million in connection with the extension of our now expired NBCU trademark license.
Net cash provided by financing activities totaled
$21.8 million
in
fiscal 2015
and related primarily to proceeds of the revolving loan under the PNC Credit Facility of $19.2 million, proceeds of the term loan under the PNC Credit Facility of $2.8 million and proceeds from the exercise of stock option of $2.5 million, partially offset by payments on the term loan of $2.1 million, payments for deferred debt issuance costs of $537,000 and capital lease payments of $52,000. Net cash provided by financing activities totaled $17.1 million in fiscal 2014 and related primarily to proceeds of the term loan under the PNC Credit Facility of $12.2 million, proceeds of the revolving loan under the PNC Credit Facility of $2.7 million and proceeds from the exercise of stock option of $2.8 million, partially offset by payments for deferred Credit Facility issuance costs of $307,000, payments on the term loan of $145,000 and capital lease payments of $50,000. Net cash used for financing activities totaled $176,000 in fiscal 2013 and related primarily to payments totaling $390,000 for deferred issuance costs in connection with increasing the PNC Credit Facility, capital lease payments of $13,000, offset by cash proceeds of $227,000 from the exercise of stock options.
Financial Covenants
The PNC Credit Facility contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus facility availability of
$10 million
at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of 1.1 to 1.0, become applicable only if unrestricted cash plus facility availability falls below
$16.0 million
(increasing to $18.0 beginning on March 10, 2016) or upon an event of default. As of
January 30, 2016
, our unrestricted cash plus facility availability was
$41.6 million
and we were in compliance with applicable financial covenants of the PNC Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months. Under the PNC Credit Facility, we are required to maintain a minimum of
$10 million
of unrestricted cash and unused line availability at all times.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not party to any derivative contracts or synthetic leases.
Contractual Cash Obligations and Commitments
The following table summarizes our obligations and commitments as of
January 30, 2016
, and the effect these obligations and commitments are expected to have on our liquidity and cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
|
|
(In thousands)
|
Cable and satellite agreements (a)
|
|
$
|
167,373
|
|
|
$
|
77,780
|
|
|
$
|
89,593
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long term credit facilities
|
|
74,514
|
|
|
2,754
|
|
|
5,177
|
|
|
66,583
|
|
|
—
|
|
Operating leases
|
|
1,578
|
|
|
1,407
|
|
|
171
|
|
|
—
|
|
|
—
|
|
Capital leases
|
|
37
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employment agreements
|
|
2,381
|
|
|
1,881
|
|
|
500
|
|
|
—
|
|
|
—
|
|
Purchase order obligations
|
|
83,861
|
|
|
83,861
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
329,744
|
|
|
$
|
167,720
|
|
|
$
|
95,441
|
|
|
$
|
66,583
|
|
|
$
|
—
|
|
_______________________________________
|
|
(a)
|
Future cable and satellite payment commitments are based on subscriber levels as of
January 30, 2016
and commitments entered into as of the date of this report. Future payment commitment amounts could increase or decrease as the number of cable and satellite subscribers increase or decrease, or with changes in channel position. Under certain circumstances, operators or we may cancel the agreements prior to expiration.
|
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for each of the fiscal years in the three-year period ended
January 30, 2016
. We cannot assure you that inflation will not have an adverse impact on our operating results and financial condition in future periods.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update (ASU) No. 2014-09), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. The guidance, also includes additional disclosure requirements regarding revenue, cash flows and obligations related to contracts with customers. In July 2015, the Financial Accounting Standards Board approved a one year deferral of the effective date of ASU 2014-09. The standard will now become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements.
In April 2015, the Financial Accounting Standards Board issued Simplifying the Presentation of Debt Issuance Costs, Subtopic 835-30 (ASU No 2015-03). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition
and measurement guidance for debt issuance costs are not affected by ASU 2015-03. In August 2015, the FASB issued Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Subtopic 835-30 (ASU No. 2015-15), which clarifies that absent authoritative guidance in ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the staff of the Securities and Exchange Commission would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in ASU No. 2015-03 are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2015-03 and ASU 2015-15 on our consolidated financial statements.
In July 2015, the Financial Accounting Standards Board issued Simplifying the Measurement of Inventory, Topic 330 (ASU No 2015-11). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost or net realizable value. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2015-11 on our consolidated financial statements.
In November 2015, the Financial Accounting Standards Board issued Balance Sheet Classification of Deferred Taxes, Topic 740 (ASU No 2015-17). ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted and applied either prospectively or retrospectively. We are currently evaluating the impact of adopting ASU 2015-17 on our consolidated financial statements.
In February 2016, the Financial Accounting Standards Board issued Leases, Topic 842 (ASU No 2016-02). ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and assumptions, including those related to the realizability of accounts receivable, inventory, product returns, intangible assets and deferred tax assets. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect the more significant assumptions and estimates used in the preparation of the consolidated financial statements:
|
|
•
|
Accounts receivable.
We utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two or more equal monthly credit card installments in which we bear the risk of collection. The percentage of our net sales generated utilizing our ValuePay payment program over the past three fiscal years ranged from
71% to 77%
. As of
January 30, 2016
and
January 31, 2015
, we had approximately
$108.9 million
and
$106.7 million
, respectively, due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimates are used in determining the provision for doubtful accounts and are based on historical rates of actual write offs and delinquency rates, historical collection experience, credit policy, current trends in the credit quality of our customer base, average length of ValuePay offers, average selling prices, our sales mix and accounts receivable aging. The provision for doubtful accounts receivable, which is primarily related to our ValuePay program, for
fiscal 2015, fiscal 2014 and fiscal 2013
was
$11.8 million
,
$13.0 million
and
$12.8 million
, respectively. Based on our
fiscal 2015
bad debt experience, a one-half point increase or decrease in our bad debt experience as a percentage of total television shopping and online net sales would have an impact of approximately $3.5 million on consolidated distribution and selling expense.
|
|
|
•
|
Inventory.
We value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or net realizable value. As of
January 30, 2016
and
January 31, 2015
, we had inventory balances of
$65.8 million
and
$61.5 million
, respectively. We regularly review inventory quantities on hand and record a provision
|
for excess and obsolete inventory based primarily on the following factors: age of the inventory, estimated required sell-through time, stage of product life cycle and whether items are selling below cost. In determining appropriate reserve percentages, we look at our historical write off experience, the specific merchandise categories affected, our historic recovery percentages on various methods of liquidations, forecasts of future product airings and current markdown processes. Provision for excess and obsolete inventory for
fiscal 2015, fiscal 2014 and fiscal 2013
was
$7.2 million
in fiscal 2015 and
$3.8 million
for both fiscal 2014 and fiscal 2013. Based on our
fiscal 2015
inventory write down experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately
$717,200
on consolidated gross profit.
|
|
•
|
Product returns.
We record a reserve as a reduction of gross sales for anticipated product returns at each month-end and must make estimates of potential future product returns related to current period product revenue. Our return rates on our television and online sales were
19.8%
in
fiscal 2015
,
21.5%
in
fiscal 2014
, and
22.3%
in
fiscal 2013
. We estimate and evaluate the adequacy of our returns reserve by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the sales returns reserve in any accounting period. Reserves for future product returns, included in accrued liabilities in the accompanying balance sheets at the end of
fiscal 2015
and
fiscal 2014
were
$4.7 million
and
$5.6 million
, respectively. Based on our
fiscal 2015
sales returns, a one-point increase or decrease in our television and online sales returns rate would have had an impact of approximately $3.4 million on gross profit.
|
|
|
•
|
FCC broadcasting license
. As of
January 30, 2016
and
January 31, 2015
, we have recorded an intangible FCC broadcasting license asset totaling
$12.0 million
, as a result of our acquisition of Boston television station WWDP TV in fiscal 2003. We annually review our FCC television broadcast license for impairment in the fourth quarter, or more frequently if an impairment indicator is present. We estimated the fair value of our FCC television broadcast license primarily by using income-based discounted cash flow models with the assistance of an independent outside fair value consultant. The discounted cash flow models utilize a range of assumptions including revenues, operating profit margin, projected capital expenditures and a discount rate. We also consider comparable asset market and sales data for recent comparable market transactions for standalone television broadcasting stations to assist in determining fair value. While we believe that our estimates and assumptions regarding the valuation of the license are reasonable, different assumptions or future events could materially affect its valuation. In addition, due to the illiquid nature of this asset, our valuation for this license could be materially different if we were to decide to sell it in the short term which, upon revaluation, could result in a future impairment of this asset.
|
|
|
•
|
Deferred taxes.
We account for income taxes under the liability method of accounting whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income (loss). Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of such laws. We assess the recoverability of our deferred tax assets in accordance with GAAP. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In accordance with that standard, as of
January 30, 2016
and
January 31, 2015
, we recorded a valuation allowance of approximately
$130.1 million
and
$124.3 million
, respectively, for our net deferred tax assets, including net operating loss carryforwards. Based on our recent history of losses, a full valuation allowance was recorded in
fiscal 2015, fiscal 2014 and fiscal 2013
. We intend to maintain a full valuation allowance for our net deferred tax assets until sufficient positive evidence exists to support reversal of allowances.
|
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF EVINE Live Inc.
AND SUBSIDIARIES
|
|
|
|
|
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
Consolidated Balance Sheets as of January 30, 2016 and January 31, 2015
|
|
Consolidated Statements of Operations for the Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
|
|
Consolidated Statements of Shareholders’ Equity for the Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
|
|
Consolidated Statements of Cash Flows for the Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
|
|
Notes to Consolidated Financial Statements
|
|
Financial Statement Schedule — Schedule II — Valuation and Qualifying Accounts
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
EVINE Live Inc. and Subsidiaries
Eden Prairie, Minnesota
We have audited the accompanying consolidated balance sheets of EVINE Live Inc. and subsidiaries (the "Company") as of January 30, 2016 and January 31, 2015, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 30, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of EVINE Live Inc. and subsidiaries as of January 30, 2016 and January 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 30, 2016, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
March 31, 2016
expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 31, 2016
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
|
(In thousands, except share and per share data)
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
11,897
|
|
|
$
|
19,828
|
|
Restricted cash and investments
|
|
450
|
|
|
2,100
|
|
Accounts receivable, net
|
|
114,949
|
|
|
112,275
|
|
Inventories
|
|
65,840
|
|
|
61,456
|
|
Prepaid expenses and other
|
|
5,913
|
|
|
5,284
|
|
Total current assets
|
|
199,049
|
|
|
200,943
|
|
Property & equipment, net
|
|
52,629
|
|
|
42,759
|
|
FCC broadcasting license
|
|
12,000
|
|
|
12,000
|
|
Other assets
|
|
2,085
|
|
|
1,989
|
|
|
|
$
|
265,763
|
|
|
$
|
257,691
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
77,779
|
|
|
$
|
81,457
|
|
Accrued liabilities
|
|
35,342
|
|
|
36,683
|
|
Current portion of long term credit facility
|
|
2,143
|
|
|
1,736
|
|
Deferred revenue
|
|
85
|
|
|
85
|
|
Total current liabilities
|
|
115,349
|
|
|
119,961
|
|
Capital lease liability
|
|
—
|
|
|
36
|
|
Deferred revenue
|
|
164
|
|
|
249
|
|
Deferred tax liability
|
|
2,734
|
|
|
1,946
|
|
Long term credit facility
|
|
70,537
|
|
|
50,971
|
|
Total liabilities
|
|
188,784
|
|
|
173,163
|
|
Commitments and contingencies
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
Preferred stock, $.01 per share par value, 400,000 shares authorized; zero shares issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $.01 per share par value, 100,000,000 shares authorized; 57,170,245 and 56,448,663 shares issued and outstanding
|
|
571
|
|
|
564
|
|
Additional paid-in capital
|
|
423,574
|
|
|
418,846
|
|
Accumulated deficit
|
|
(347,166
|
)
|
|
(334,882
|
)
|
Total shareholders’ equity
|
|
76,979
|
|
|
84,528
|
|
|
|
$
|
265,763
|
|
|
$
|
257,691
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
February 1,
2014
|
|
|
|
(In thousands, except share and per share data)
|
Net sales
|
|
|
$
|
693,312
|
|
|
$
|
674,618
|
|
|
$
|
640,489
|
|
Cost of sales
|
|
|
454,832
|
|
|
429,570
|
|
|
410,465
|
|
Gross profit
|
|
|
238,480
|
|
|
245,048
|
|
|
230,024
|
|
Operating expense:
|
|
|
|
|
|
|
|
Distribution and selling
|
|
|
209,328
|
|
|
202,579
|
|
|
191,695
|
|
General and administrative
|
|
|
24,520
|
|
|
23,983
|
|
|
23,799
|
|
Depreciation and amortization
|
|
|
8,474
|
|
|
8,445
|
|
|
12,320
|
|
Executive and management transition costs
|
|
|
3,549
|
|
|
5,520
|
|
|
—
|
|
Distribution facility consolidation and technology upgrade costs
|
|
|
1,347
|
|
|
—
|
|
|
—
|
|
Activist shareholder response costs
|
|
|
—
|
|
|
3,518
|
|
|
2,133
|
|
Total operating expense
|
|
|
247,218
|
|
|
244,045
|
|
|
229,947
|
|
Operating income (loss)
|
|
|
(8,738
|
)
|
|
1,003
|
|
|
77
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest income
|
|
|
8
|
|
|
10
|
|
|
18
|
|
Interest expense
|
|
|
(2,720
|
)
|
|
(1,572
|
)
|
|
(1,437
|
)
|
Total other expense
|
|
|
(2,712
|
)
|
|
(1,562
|
)
|
|
(1,419
|
)
|
Loss before income taxes
|
|
|
(11,450
|
)
|
|
(559
|
)
|
|
(1,342
|
)
|
Income tax provision
|
|
|
(834
|
)
|
|
(819
|
)
|
|
(1,173
|
)
|
Net loss
|
|
|
$
|
(12,284
|
)
|
|
$
|
(1,378
|
)
|
|
$
|
(2,515
|
)
|
Net loss per common share
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Net loss per common share — assuming dilution
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
57,004,321
|
|
|
53,458,662
|
|
|
49,504,892
|
|
Diluted
|
|
|
57,004,321
|
|
|
53,458,662
|
|
|
49,504,892
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Years Ended
January 30, 2016
,
January 31, 2015
and
February 1, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Common
Stock
Purchase
Warrants
|
|
Additional
Paid-In
Capital
|
|
|
|
Total Shareholders'
Equity
|
|
|
Number
of Shares
|
|
Par
Value
|
|
|
|
Accumulated
Deficit
|
|
|
|
(In thousands, except share data)
|
BALANCE, February 2, 2013
|
|
49,139,361
|
|
|
$
|
491
|
|
|
$
|
533
|
|
|
$
|
407,244
|
|
|
$
|
(330,989
|
)
|
|
$
|
77,279
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,515
|
)
|
|
(2,515
|
)
|
Common stock issuances pursuant to equity compensation plans
|
|
704,892
|
|
|
7
|
|
|
—
|
|
|
220
|
|
|
—
|
|
|
227
|
|
Share-based payment compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,217
|
|
|
—
|
|
|
3,217
|
|
BALANCE, February 1, 2014
|
|
49,844,253
|
|
|
498
|
|
|
533
|
|
|
410,681
|
|
|
(333,504
|
)
|
|
78,208
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,378
|
)
|
|
(1,378
|
)
|
Common stock issuances pursuant to equity compensation plans
|
|
1,366,827
|
|
|
13
|
|
|
—
|
|
|
2,781
|
|
|
—
|
|
|
2,794
|
|
Share-based payment compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,860
|
|
|
—
|
|
|
3,860
|
|
Common stock issuance - warrant exercise
|
|
5,058,741
|
|
|
51
|
|
|
(533
|
)
|
|
482
|
|
|
—
|
|
|
—
|
|
Common stock issuance
|
|
178,842
|
|
|
2
|
|
|
—
|
|
|
1,042
|
|
|
—
|
|
|
1,044
|
|
BALANCE, January 31, 2015
|
|
56,448,663
|
|
|
564
|
|
|
—
|
|
|
418,846
|
|
|
(334,882
|
)
|
|
84,528
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,284
|
)
|
|
(12,284
|
)
|
Common stock issuances pursuant to equity compensation plans
|
|
721,582
|
|
|
7
|
|
|
—
|
|
|
2,453
|
|
|
—
|
|
|
2,460
|
|
Share-based payment compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,275
|
|
|
—
|
|
|
2,275
|
|
BALANCE, January 30, 2016
|
|
57,170,245
|
|
|
$
|
571
|
|
|
$
|
—
|
|
|
$
|
423,574
|
|
|
$
|
(347,166
|
)
|
|
$
|
76,979
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
February 1,
2014
|
|
|
(in thousands)
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,284
|
)
|
|
$
|
(1,378
|
)
|
|
$
|
(2,515
|
)
|
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,327
|
|
|
8,872
|
|
|
12,585
|
|
Share-based payment compensation
|
|
2,275
|
|
|
3,860
|
|
|
3,217
|
|
Amortization of deferred revenue
|
|
(85
|
)
|
|
(86
|
)
|
|
(85
|
)
|
Amortization of deferred financing costs
|
|
271
|
|
|
231
|
|
|
178
|
|
Deferred income taxes
|
|
788
|
|
|
788
|
|
|
1,158
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
(2,674
|
)
|
|
(4,889
|
)
|
|
(9,026
|
)
|
Inventories
|
|
(4,384
|
)
|
|
(10,294
|
)
|
|
(14,007
|
)
|
Prepaid expenses and other
|
|
(565
|
)
|
|
815
|
|
|
649
|
|
Accounts payable and accrued liabilities
|
|
(3,080
|
)
|
|
766
|
|
|
21,799
|
|
Net cash provided by (used for) operating activities
|
|
(9,411
|
)
|
|
(1,315
|
)
|
|
13,953
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Property and equipment additions
|
|
(22,014
|
)
|
|
(25,119
|
)
|
|
(8,247
|
)
|
Purchase of NBC trademark license
|
|
—
|
|
|
—
|
|
|
(2,830
|
)
|
Purchase of EVINE trademark
|
|
—
|
|
|
(59
|
)
|
|
—
|
|
Change in restricted cash and investments
|
|
1,650
|
|
|
—
|
|
|
—
|
|
Net cash used for investing activities
|
|
(20,364
|
)
|
|
(25,178
|
)
|
|
(11,077
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Payments for deferred issuance costs
|
|
(537
|
)
|
|
(307
|
)
|
|
(390
|
)
|
Proceeds of term loan
|
|
2,849
|
|
|
12,152
|
|
|
—
|
|
Proceeds from issuance of revolving loan
|
|
19,200
|
|
|
2,700
|
|
|
—
|
|
Payments on term loan
|
|
(2,076
|
)
|
|
(145
|
)
|
|
—
|
|
Payments on capital leases
|
|
(52
|
)
|
|
(50
|
)
|
|
(13
|
)
|
Proceeds from exercise of stock options
|
|
2,460
|
|
|
2,794
|
|
|
227
|
|
Net cash provided by (used for) financing activities
|
|
21,844
|
|
|
17,144
|
|
|
(176
|
)
|
Net increase (decrease) in cash
|
|
(7,931
|
)
|
|
(9,349
|
)
|
|
2,700
|
|
BEGINNING CASH
|
|
19,828
|
|
|
29,177
|
|
|
26,477
|
|
ENDING CASH
|
|
$
|
11,897
|
|
|
$
|
19,828
|
|
|
$
|
29,177
|
|
The accompanying notes are an integral part of these consolidated financial statements.
EVINE Live Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended
January 30, 2016
, January 31, 2015 and February 1, 2014
(1) The Company
EVINE Live Inc. and its subsidiaries ("we," "our," "us," or the "Company") are collectively a digital commerce company that offers a mix of proprietary, exclusive and name brand merchandise directly to consumers in an engaging and informative shopping experience through TV, online and mobile devices. The Company operates a 24-hour television shopping network, EVINE Live, which is distributed primarily on cable and satellite systems, through which it offers proprietary, exclusive and name brand merchandise in the categories of jewelry & watches; home & consumer electronics; beauty; and fashion & accessories. Orders are taken via telephone, online and mobile channels. The television network is distributed into approximately
88 million
homes, primarily through cable and satellite affiliation agreements and agreements with telecommunications companies such as AT&T and Verizon. Programming is also streamed live online at evine.com and is also available on mobile channels. Programming is also distributed through a Company-owned full power television station in Boston, Massachusetts and through leased carriage on a full power television station in Seattle, Washington.
The Company also operates evine.com, a comprehensive digital commerce platform that sells products which appear on its television shopping network as well as an extended assortment of online-only merchandise. The live programming and products are also marketed via mobile devices, including smartphones and tablets, and through the leading social media channels.
On November 18, 2014, the Company announced that it had changed its corporate name to EVINE Live Inc. from ValueVision Media, Inc. Effective November 20, 2014, the Company's NASDAQ trading symbol also changed to EVLV from VVTV. The Company transitioned from doing business as "ShopHQ" to "EVINE Live" and evine.com on February 14, 2015.
In May 2013, the Company previously announced a rebranding of its 24-hour television shopping network and digital commerce internet website from ShopNBC and ShopNBC.com to ShopHQ and ShopHQ.com, respectively.
(2) Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 31. References to years in this report relate to fiscal years, rather than to calendar years. The Company’s most recently completed fiscal year,
fiscal 2015
, ended on
January 30, 2016
, and consisted of
52
weeks. Fiscal 2014 ended on
January 31, 2015
and consisted of
52
weeks. Fiscal 2013 ended on
February 1, 2014
and consisted of
52
weeks.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition and Accounts Receivable
Revenue is recognized at the time merchandise is shipped or when services are provided. Shipping and handling fees charged to customers are recognized as merchandise is shipped and are classified as revenue in the accompanying statements of operations in accordance with generally accepted accounting principles ("GAAP"). The Company classifies shipping and handling costs in the accompanying statements of operations as a component of cost of sales. Revenue is reported net of estimated sales returns and excludes sales taxes. Sales returns are estimated and provided for at the time of sale based on historical experience. Payments received for unfilled orders are reflected as a component of accrued liabilities.
Accounts receivable consist primarily of amounts due from customers for merchandise sales and from credit card companies, and are reflected net of reserves for estimated uncollectible amounts of
$6,870,000
at
January 30, 2016
and
$6,706,000
at
January 31, 2015
. The Company utilizes an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two or more equal monthly credit card installments. As of
January 30, 2016
and
January 31, 2015
, the Company had approximately
$108,921,000
and
$106,678,000
, respectively, of net receivables due from customers under the ValuePay installment program. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Provision for doubtful accounts receivable primarily
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
related to the Company’s ValuePay program were
$11,795,000
,
$13,007,000
and
$12,762,000
for
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively.
Cost of Sales and Other Operating Expenses
Cost of sales includes primarily the cost of merchandise sold, shipping and handling costs, inbound freight costs, excess and obsolete inventory charges, distribution facility depreciation and customer courtesy credits. Purchasing and receiving costs, including costs of inspection, are included as a component of distribution and selling expense and were approximately
$10,730,000
,
$10,984,000
and
$10,112,000
for
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively. Distribution and selling expense consist primarily of cable and satellite access fees, credit card fees, bad debt expense and costs associated with purchasing and receiving, inspection, marketing and advertising, show production, website marketing and merchandising, telemarketing, customer service, warehousing and fulfillment. General and administrative expense consists primarily of costs associated with executive, legal, accounting and finance, information systems and human resources departments, software and system maintenance contracts, insurance, investor and public relations and director fees.
Cash
Cash consists of cash on deposit. The Company maintains its cash balances at financial institutions in demand deposit accounts that are federally insured. The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk on its cash.
Restricted Cash and Investments
The Company had restricted cash and investments of
$450,000
and
$2,100,000
for
fiscal 2015
and
fiscal 2014
, respectively. The Company’s restricted cash and investments consist of certificates of deposit. Interest income is recognized when earned.
Inventories
Inventories, which consists of consumer merchandise held for resale, are stated at the lower of average cost or net realizable value, giving consideration to obsolescence provision write downs of
$7,172,000
,
$3,838,000
and
$3,776,000
for
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred and consist primarily of contractual marketing fees paid to certain cable operators for cross channel promotions and online advertising, including amounts paid to online search engine operators and customer mailings. Total marketing and advertising costs and online search marketing fees totaled
$3,300,000
,
$1,946,000
and
$1,827,000
for
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively. The Company includes advertising costs as a component of distribution and selling expense in the Company’s consolidated statement of operations.
Property and Equipment
Property and equipment are stated at cost. Improvements and renewals that extend the life of an asset are capitalized and depreciated. Repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are removed from the related accounts, and any residual values are charged or credited to operations. Depreciation and amortization for financial reporting purposes are provided on the straight-line method based upon estimated useful lives. Costs incurred to develop software for internal use and for the Company’s websites are capitalized and amortized over the estimated useful life of the software. Costs related to maintenance of internal-use software and for the Company’s website are expensed as incurred.
Intangible Assets
The Company’s primary identifiable intangible assets include an FCC broadcast license and the EVINE trademark and brand name and prior to its expiration in January 2014, a trademark license agreement. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount.
Income Taxes
The Company accounts for income taxes under the liability method of accounting whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax basis of
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of such laws. The Company assesses the recoverability of its deferred tax assets in accordance with GAAP.
The Company recognizes interest and penalties related to uncertain tax positions within income tax expense.
Net Loss Per Common Share
Basic loss per share is computed by dividing reported loss by the weighted average number of common shares outstanding for the reported period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods.
A reconciliation of net loss per share calculations and the number of shares used in the calculation of basic net loss per share and diluted net loss per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
February 1,
2014
|
Net loss (a)
|
|
$
|
(12,284,000
|
)
|
|
$
|
(1,378,000
|
)
|
|
$
|
(2,515,000
|
)
|
Weighted average number of common shares outstanding — Basic
|
|
57,004,321
|
|
|
53,458,662
|
|
|
49,504,892
|
|
Dilutive effect of stock options, non-vested shares and warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average number of common shares outstanding — Diluted
|
|
57,004,321
|
|
|
53,458,662
|
|
|
49,504,892
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Net loss per common share — assuming dilution
|
|
$
|
(0.22
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
(a) The net losses for
fiscal 2015
and
fiscal 2014
includes executive and management transition costs of
$3,549,000
and
$5,520,000
, respectively. In addition,
fiscal 2015
includes distribution facility consolidation and technology upgrade costs of
$1,347,000
. The net loss for
fiscal 2014
and
fiscal 2013
includes activist shareholder response charges of
$3,518,000
and
$2,133,000
, respectively.
For
fiscal 2015, fiscal 2014 and fiscal 2013
, approximately -
0
-,
3,118,000
and
6,247,000
, respectively, incremental in-the-money potentially dilutive common share stock options and, with respect to fiscal 2013, warrants have been excluded from the computation of diluted earnings per share, as the effect of their inclusion would be anti-dilutive.
Fair Value of Financial Instruments
GAAP requires disclosures of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. GAAP excludes certain financial instruments and all non-financial instruments from its disclosure requirements.
The Company used the following methods and assumptions in estimating its fair values for financial instruments:
The carrying amounts reported in the accompanying consolidated balance sheets approximate the fair value for cash, short-term investments, accounts receivable, trade payables and accrued liabilities, due to the short maturities of those instruments. The fair value of the Company’s
$73 million
Credit Facility is estimated based on rates available to the Company for issuance of debt. As of
January 30, 2016
, the Company's Credit Facility had a carrying amount and an estimated fair value of
$73 million
.
Fair Value Measurements on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to the Company's tangible fixed assets and intangible FCC broadcasting license asset, which are remeasured when estimated fair value is below carrying value on the consolidated balance sheets. For these assets, the Company does not periodically adjust its carrying value to fair value except in the event of impairment. If the Company determines that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded as a loss within operating income in the consolidated statement of operations. The Company had no remeasurements of such assets or liabilities to fair value during fiscal 2015, fiscal 2014 and fiscal 2013.
Use of Estimates
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The preparation of financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during reporting periods. These estimates relate primarily to the carrying amounts of accounts receivable and inventories, the realizability of certain long-term assets and the recorded balances of certain accrued liabilities and reserves. Ultimate results could differ from these estimates.
Stock-Based Compensation
Compensation is recognized for all stock-based compensation arrangements by the Company, including employee and non-employee stock options granted. The estimated grant date fair value of each stock-based award is recognized over the requisite service period, which is generally the vesting period. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model for time-based vesting awards and a Monte Carlo valuation model for market-based vesting awards. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the fair value on the date of grant.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update (ASU) No. 2014-09), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. The guidance, also includes additional disclosure requirements regarding revenue, cash flows and obligations related to contracts with customers. In July 2015, the Financial Accounting Standards Board approved a one year deferral of the effective date of ASU 2014-09. The standard will now become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements.
In April 2015, the Financial Accounting Standards Board issued Simplifying the Presentation of Debt Issuance Costs, Subtopic 835-30 (ASU No 2015-03). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. In August 2015, the FASB issued Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Subtopic 835-30 (ASU No. 2015-15), which clarifies that absent authoritative guidance in ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the staff of the Securities and Exchange Commission would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in ASU No. 2015-03 are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2015-03 and ASU 2015-15 on our consolidated financial statements.
In July 2015, the Financial Accounting Standards Board issued Simplifying the Measurement of Inventory, Topic 330 (ASU No 2015-11). ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost or net realizable value. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2015-11 on our consolidated financial statements.
In November 2015, the Financial Accounting Standards Board issued Balance Sheet Classification of Deferred Taxes, Topic 740 (ASU No 2015-17). ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted and applied either prospectively or retrospectively. We are currently evaluating the impact of adopting ASU 2015-17 on our consolidated financial statements.
In February 2016, the Financial Accounting Standards Board issued Leases, Topic 842 (ASU No 2016-02). ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.
(3) Property and Equipment
Property and equipment in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life (In Years)
|
|
January 30, 2016
|
|
January 31, 2015
|
Land and improvements
|
|
—
|
|
$
|
3,394,000
|
|
|
$
|
3,394,000
|
|
Buildings and improvements
|
|
5-40
|
|
38,405,000
|
|
|
24,215,000
|
|
Transmission and production equipment
|
|
5-10
|
|
5,180,000
|
|
|
5,424,000
|
|
Office and warehouse equipment
|
|
3-15
|
|
19,264,000
|
|
|
9,298,000
|
|
Computer hardware, software and telephone equipment
|
|
3-7
|
|
95,708,000
|
|
|
89,615,000
|
|
Distribution Center Expansion - Construction in Process
|
|
3-40
|
|
—
|
|
|
16,151,000
|
|
Leasehold improvements
|
|
3-5
|
|
2,681,000
|
|
|
2,681,000
|
|
|
|
|
|
164,632,000
|
|
|
150,778,000
|
|
Less — Accumulated depreciation
|
|
|
|
(112,003,000
|
)
|
|
(108,019,000
|
)
|
|
|
|
|
$
|
52,629,000
|
|
|
$
|
42,759,000
|
|
Depreciation expense in
fiscal 2015, fiscal 2014 and fiscal 2013
was
$10,266,000
,
$8,854,000
and
$8,589,000
, respectively.
(4) Intangible Assets
Intangible assets in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Life
(Years)
|
|
January 30, 2016
|
|
January 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
EVINE trademark
|
|
15
|
|
1,103,000
|
|
|
(80,000
|
)
|
|
1,103,000
|
|
|
(18,000
|
)
|
Total finite-lived intangible assets
|
|
|
|
$
|
1,103,000
|
|
|
$
|
(80,000
|
)
|
|
$
|
1,103,000
|
|
|
$
|
(18,000
|
)
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
FCC broadcast license
|
|
|
|
$
|
12,000,000
|
|
|
|
|
$
|
12,000,000
|
|
|
|
The Company annually reviews its FCC television broadcast license for impairment in the fourth quarter, or more frequently if an impairment indicator is present. As of
January 30, 2016
, the Company had an intangible FCC broadcasting license with a carrying value and fair value of
$12,000,000
and
$12,900,000
, respectively. As of
January 31, 2015
, the Company had an intangible FCC broadcasting license with a carrying value and fair value of
$12,000,000
and
$13,100,000
, respectively.
The Company estimates the fair value of its FCC television broadcast license primarily by using income-based discounted cash flow models with the assistance of an independent outside fair value consultant. The Company also considers comparable asset market and sales data for recent comparable market transactions for standalone television broadcasting stations to assist in determining fair value. The discounted cash flow models utilize a range of assumptions including revenues, operating profit margin, projected capital expenditures and an unobservable discount rate of
9.5%
-
10.0%
. The Company concluded that the inputs used in its intangible FCC broadcasting license valuation at
January 30, 2016
are Level 3 inputs related to this valuation.
While the Company believes that its estimates and assumptions regarding the valuation of the license are reasonable, different assumptions or future events could materially affect its valuation. In addition, due to the illiquid nature of this asset, the Company's valuation for this license could be materially different if it were to decide to sell it in the short term which, upon revaluation, could result in a future impairment of this asset.
On November 18, 2014, the Company entered into an asset purchase agreement with Dollars Per Minute, Inc., a Delaware corporation ("DPM") to purchase certain assets of DPM, including the EVINE Live trademark. As consideration for the purchase of this trademark, the Company issued
178,842
unregistered shares of our common stock, which represented an aggregate value of
$1,044,000
based on the closing price of our common stock on November 13, 2014,
$20,000
in cash consideration and incurred
$39,000
in professional fees associated with acquiring the asset.
On January 31, 2014, ShopNBC and ShopNBC.com officially transitioned to the brand, ShopHQ and ShopHQ.com. On May 11, 2012, the Company amended its trademark license agreement for the use of the ShopNBC brand name with NBCU, extending the term of the license agreement through January 2014. As consideration for the amendment, the Company paid NBCU
$4,000,000
upon execution and paid an additional
$2,830,000
on May 15, 2013.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amortization expense in
fiscal 2015, fiscal 2014 and fiscal 2013
was
$62,000
,
$18,000
and
$3,997,000
, respectively. As of February 1, 2014, the Company's trademark license agreement with NBCU was fully amortized. Estimated amortization expense for each of the next five fiscal years is $74,000.
(5) Accrued Liabilities
Accrued liabilities in the accompanying consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Accrued cable access fees
|
|
$
|
15,739,000
|
|
|
$
|
14,669,000
|
|
Accrued salaries and related
|
|
5,661,000
|
|
|
10,089,000
|
|
Reserve for product returns
|
|
4,726,000
|
|
|
5,585,000
|
|
Other
|
|
9,216,000
|
|
|
6,340,000
|
|
|
|
$
|
35,342,000
|
|
|
$
|
36,683,000
|
|
(6) EVINE Private Label Consumer Credit Card Program
The Company has a private label consumer credit card program (the "Program"). The Program is made available to all qualified consumers for the financing of purchases of products from EVINE. The Program provides a number of benefits to customers including instant purchase credits and free or reduced shipping promotions throughout the year. Use of the EVINE credit card furthers customer loyalty, reduces total credit card expense and reduces the Company’s overall bad debt exposure since the credit card issuing bank bears the risk of loss on EVINE credit card transactions that do not utilize the Company's ValuePay installment payment program. In December 2011, the Company entered into a Private Label Consumer Credit Card Program Agreement Amendment with Synchrony Financial, formerly known as GE Capital Retail Bank, extending the Program for an additional
seven years
until 2018. The Company received a
$500,000
signing bonus as an incentive for the Company to extend the Program. The signing bonus has been recorded as deferred revenue in the accompanying financial statements and is being recognized as revenue over the
seven
-year term of the agreement.
Synchrony Financial, the issuing bank for the Program, was previously indirectly majority-owned by the General Electric Company ("GE"), which is also the parent company of GE Equity. We believe as of January 30, 2016, GE Equity had an approximate
6%
beneficial ownership in the Company and has certain rights as further described in Note 18, "Relationship with NBCU, Comcast and GE Equity".
(7) Fair Value Measurements
GAAP utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
As of
January 30, 2016
and
January 31, 2015
the Company had $
450,000
and
$2,100,000
, respectively, in Level 2 investments in the form of bank certificates of deposit. The Company's investments in certificates of deposits were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2 investments. As of
January 30, 2016
and
January 31, 2015
the Company also had a long-term variable rate Credit Facility with carrying values of
$72,680,000
and
$52,707,000
, respectively. As of
January 30, 2016
and
January 31, 2015
,
$2,143,000
and
$1,736,000
was classified as current. The fair value of the variable rate Credit Facility approximates and is based on its carrying value. The Company has no Level 3 investments that use significant unobservable inputs.
Non Financial Assets Measured at Fair Value - Nonrecurring Basis
As of
January 30, 2016
and
January 31, 2015
the Company had an intangible FCC broadcasting license asset with a carrying value of
$12,000,000
. The Company estimates the fair value of its FCC television broadcast license asset primarily by using income-based discounted cash flow models. In determining fair value, the Company considered, among other factors, the advice of an independent outside fair value consultant. The discounted cash flow models utilize a range of assumptions including revenues,
operating profit margin, projected capital expenditures and an unobservable input discount rates of
9.5%
-
10.0%
. The Company concluded that the inputs used in its intangible FCC broadcasting license asset valuation are Level 3 inputs.
The following table provides a reconciliation of the beginning and ending balances of non-financial assets measured at fair value on a nonrecurring basis that use significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2016
|
|
January 31,
2015
|
Intangible FCC Broadcasting License Asset:
|
|
|
|
|
Beginning balance
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
Losses included in earnings (asset impairment)
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
12,000,000
|
|
|
$
|
12,000,000
|
|
(8) Credit Agreement
The Company's long-term credit facility consists of:
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Credit Facility
|
|
|
|
|
Revolving loan
|
|
$
|
59,900,000
|
|
|
$
|
40,700,000
|
|
Term loan
|
|
12,780,000
|
|
|
12,007,000
|
|
Total long-term credit facility
|
|
72,680,000
|
|
|
52,707,000
|
|
Less current portion of long-term credit facility
|
|
(2,143,000
|
)
|
|
(1,736,000
|
)
|
Long-term credit facility, excluding current portion
|
|
$
|
70,537,000
|
|
|
$
|
50,971,000
|
|
On February 9, 2012, the Company entered into a credit and security agreement (as amended on October 8, 2015, the "PNC Credit Facility") with PNC Bank, N.A. ("PNC"), a member of The PNC Financial Services Group, Inc., as lender and agent. The PNC Credit Facility, which includes The Private Bank as part of the facility, provides a revolving line of credit of
$90.0 million
and provides for a
$15.0 million
term loan on which the Company has drawn to fund improvements at the Company's distribution facility in Bowling Green, Kentucky. As part of the October 8, 2015 amendment, the Company exercised the then current accordion feature, which expanded the size of the revolving line of credit by
$15.0 million
, to its total revolving line of credit of
$90.0 million
. The PNC Credit Facility also provides a new accordion feature that would allow the Company to expand the size of the revolving line of credit by another
$25.0 million
at the discretion of the lenders and upon certain conditions being met. On March 10, 2016, the Company entered into the sixth amendment to the PNC Credit Facility authorizing the Company to enter into the GACP Credit Agreement (as defined below).
All borrowings under the PNC Credit Facility mature and are payable on May 1, 2020. Subject to certain conditions, the PNC Credit Facility also provides for the issuance of letters of credit in an aggregate amount up to
$6.0 million
which, upon issuance, would be deemed advances under the PNC Credit Facility. Maximum borrowings and available capacity under the revolving line of credit under the PNC Credit Facility are equal to the lesser of
$90.0 million
or a calculated borrowing base comprised of eligible accounts receivable and eligible inventory. The PNC Credit Facility is secured by a first security interest in substantially all of the Company’s personal property, as well as the Company’s real properties located in Eden Prairie, Minnesota and Bowling Green, Kentucky up to
$13 million
. Under certain circumstances, the borrowing base may be adjusted if there were to be a significant deterioration in value of the Company’s accounts receivable and inventory.
The revolving line of credit under the PNC Credit Facility bears interest at LIBOR plus
3%
per annum. Beginning March 10, 2016, the revolving line of credit will bear interest at LIBOR plus a margin of between
3%
and
4.5%
based on the Company's trailing twelve-month reported EBITDA (as defined in the PNC Credit Facility) measured quarterly in fiscal 2016 and semi-annually thereafter as demonstrated in its financial statements.
The term loan bears interest at either (i) a fixed rate based on the LIBOR Rate for interest periods of
one
,
two
,
three
or
six
months, or (ii) a daily floating alternate base rate (the “Base Rate”), plus until January 31, 2015, a margin of
5%
on the Base Rate and
6%
on the LIBOR Rate and then the margin adjusts each fiscal year to a rate consisting of between
4%
and
5%
on Base Rate term loans and
5%
to
6%
on LIBOR Rate term loans based on the Company’s leverage ratio as demonstrated in its financial statements.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of
January 30, 2016
, the Company had borrowings of
$59.9 million
under its revolving credit facility. Remaining available capacity under the revolving credit facility as of
January 30, 2016
is approximately
$29.7 million
, and provides liquidity for working capital and general corporate purposes. The PNC Credit Facility also provides for a
$15.0 million
term loan on which the Company has drawn to fund an expansion at the Company's distribution facility in Bowling Green, Kentucky. As of
January 30, 2016
, there was approximately
$12.8 million
outstanding under the PNC Credit Facility term loan of which
$2.1 million
was classified as current in the accompanying balance sheet.
Principal borrowings under the term loan are to be payable in monthly installments over an
84
month amortization period commencing on January 1, 2015 and are also subject to mandatory prepayment in certain circumstances, including, but not limited to, upon receipt of certain proceeds from dispositions of collateral. Borrowings under the term loan are also subject to mandatory prepayment starting in the fiscal year ended January 30, 2016 in an amount equal to fifty percent (
50%
) of excess cash flow for such fiscal year, with any such payment not to exceed
$2.0 million
in any such fiscal year. The PNC Credit Facility is also subject to other mandatory prepayment in certain circumstances. In addition, if the total PNC Credit Facility is terminated prior to maturity, the Company would be required to pay an early termination fee of
3.0%
if terminated on or before October 8, 2016;
1.0%
if terminated on or before October 8, 2017,
0.5%
if terminated on or before October 8, 2018; and no fee if terminated after October 8, 2018. Interest expense recorded under the PNC Credit Facility's revolving line of credit was
$2,702,000
,
$1,554,000
and $
1,435,000
for
fiscal 2015
,
fiscal 2014
and
fiscal 2013
, respectively.
The PNC Credit Facility contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus facility availability of
$10.0 million
at all times and limiting annual capital expenditures. As our unused line availability was greater than
$10.0 million
at
January 30, 2016
, no additional cash was required to be restricted. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of
1.1 to 1.0
, become applicable only if unrestricted cash plus facility availability falls below
$16.0 million
(increasing to
$18.0 million
beginning March 10, 2016). As of
January 30, 2016
, the Company's unrestricted cash plus facility availability was
$41.6 million
and the Company was in compliance with applicable financial covenants of the PNC Credit Facility and expects to be in compliance with applicable financial covenants over the next twelve months. In addition, the PNC Credit Facility places restrictions on the Company’s ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
Costs incurred to obtain amendments to the PNC Credit Facility totaling
$1,109,000
and unamortized costs incurred to obtain the original PNC Credit Facility totaling
$466,000
have been deferred and are being expensed as additional interest over the
five
-year term of the PNC Credit Facility.
The aggregate maturities of the Company's long-term PNC Credit Facility as of
January 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
Fiscal year
|
|
Term loan
|
|
Revolving loan
|
|
Total
|
2016
|
|
$
|
2,143,000
|
|
|
$
|
—
|
|
|
$
|
2,143,000
|
|
2017
|
|
2,143,000
|
|
|
—
|
|
|
2,143,000
|
|
2018
|
|
2,143,000
|
|
|
—
|
|
|
2,143,000
|
|
2019
|
|
2,143,000
|
|
|
—
|
|
|
2,143,000
|
|
2020
|
|
4,208,000
|
|
|
59,900,000
|
|
|
64,108,000
|
|
|
|
$
|
12,780,000
|
|
|
$
|
59,900,000
|
|
|
$
|
72,680,000
|
|
GACP Credit Agreement
On March 10, 2016, the Company entered into a term loan credit and security agreement (the "GACP Credit Agreement") with GACP Finance Co., LLC ("GACP") for a term loan of
$17.0 million
. Proceeds from the GACP Term Loan will be used to provide for working capital and general corporate purposes and to help strengthen the Company's total liquidity position which will allow the Company the flexibility to drive improved profitability. The term loan under the GACP Credit Agreement (the "GACP Term Loan") is secured on a first lien priority basis by the proceeds of any sale of the Company's Boston television station FCC license and on a second lien priority basis by the Company's accounts receivable, equipment, inventory and certain real estate as well as other assets as described in the GACP Credit Agreement. The Company has also pledged the stock of certain subsidiaries to secure such obligations on a second lien priority basis.
The GACP Credit Agreement matures on March 9, 2021. The GACP Term Loan bears interest at either (i) a fixed rate based on the greater of LIBOR for interest periods of
one
,
two
or
three
months or
1%
plus a margin of
11.0%
, or (ii) a daily floating Alternate Base Rate plus a margin of
10.0%
.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Principal borrowings under the GACP Term Loan are to be payable in consecutive monthly installments of
$70,833
each, commencing on April 1, 2016, with a final installment due at the end of the
five
- year term equal to the aggregate principal amount of all loans outstanding on such date. The GACP Term Loan is also subject to mandatory prepayment in certain circumstances, including, but without limitation, from the proceeds of the sale of collateral assets and from
50%
of annual excess cash flow as defined in the GACP Credit Agreement. The GACP Term Loan can be prepaid voluntarily at any time and, if terminated prior to maturity, the Company would be required to pay an early termination fee of
3.0%
if terminated on or before March 10, 2017;
2.0%
if terminated on or before March 10, 2018;
1.0%
if terminated on or before March 10, 2019; and no fee if terminated after March 10, 2019.
The GACP Credit Agreement contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus revolving line of credit availability under the PNC Credit Facility of
$10.0 million
at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the GACP Credit Agreement) and a minimum fixed charge coverage ratio of
1.1 to 1.0
, become applicable only if unrestricted cash plus revolving line of credit availability under the PNC Credit Facility falls below
$18.0 million
. In addition, the GACP Credit Agreement places restrictions on the Company’s ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
(9) Shareholder's Equity
Common Stock
The Company currently has authorized
100,000,000
shares of undesignated capital stock, of which
57,170,245
shares were issued and outstanding as common stock as of
January 30, 2016
. The board of directors may establish new classes and series of capital stock by resolution without shareholder approval; however, approval of GE Equity is required in certain circumstances.
Preferred Stock
The Company authorized
400,000
Series A Junior Participating Cumulative Preferred Stock,
$0.01
par value, during fiscal 2015 as part of the Shareholder Rights Plan. As of
January 30, 2016
, there were
zero
shares issued and outstanding. See Note 11 for additional information.
Dividends
The Company has never declared or paid any dividends with respect to its capital stock. Under the terms of the amended and restated shareholder agreement between the Company and GE Equity, the Company is prohibited from paying dividends on its common stock without GE Equity’s prior consent. The Company is further restricted from paying dividends on its stock by its Credit Facility.
Warrants
In June 2014, GE Equity exercised its common stock warrants in a cashless exercise acquiring
5,058,741
shares of our common stock. The warrants were issued in connection with the issuance of the Company’s Series B Redeemable Preferred Stock in February 2009. As of
January 30, 2016
, the Company had no outstanding warrants.
Stock-Based Compensation - Stock Options
Compensation is recognized for all stock-based compensation arrangements by the Company. Stock-based compensation expense for
fiscal 2015, fiscal 2014 and fiscal 2013
related to stock option awards was
$611,000
,
$2,537,000
and
$2,405,000
, respectively. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future.
As of
January 30, 2016
, the Company had
one
omnibus stock plan for which stock awards can be currently granted: the 2011 Omnibus Incentive Plan that provides for the issuance of up to
6,000,000
shares of the Company's stock. The 2004 Omnibus Stock Plan expired on June 22, 2014. No further awards may be made under the 2004 Omnibus Plan, but any award granted under the 2004 Omnibus Plan and outstanding on June 22, 2014 will remain outstanding in accordance with its terms. The 2001 Omnibus Stock Plan expired on June 21, 2011. No further awards may be made under the 2001 Omnibus Plan, but any award granted under the 2001 Omnibus Plan and outstanding on June 21, 2011 will remain outstanding in accordance with its terms. The 2011 plan is administered by the human resources and compensation committee of the board of directors and provides for awards for employees, directors and consultants. All employees and directors of the Company and its affiliates are eligible to receive awards
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
under the plan. The types of awards that may be granted under this plan include restricted and unrestricted stock, restricted stock units, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the human resources and compensation committee may determine but not less than
100%
of the fair market value of the underlying stock as of the date of grant. No incentive stock option may be granted more than
10
years after the effective date of the respective plan's inception or be exercisable more than
10 years
after the date of grant. Options granted to outside directors are nonstatutory stock options with an exercise price equal to
100%
of the fair market value of the underlying stock as of the date of grant. With the exception of market-based options, options granted generally vest over
three
years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and have contractual terms of
10 years
from the date of grant.
The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company uses the simplified method in estimating its expected option term because it believes that historical exercise data cannot be accurately relied upon at this time to provide a reasonable basis for estimating an expected term due to the extreme volatility of its stock price and the resulting unpredictability of its stock option exercises. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
Fiscal 2014
|
|
Fiscal 2013
|
Expected volatility
|
75% - 82%
|
|
88% - 98%
|
|
98% - 100%
|
Expected term (in years)
|
6 years
|
|
5 - 6 years
|
|
5 - 6 years
|
Risk-free interest rate
|
1.7% - 1.9%
|
|
1.5% - 2.2%
|
|
1.1% - 2.1%
|
Market-Based Stock Option Awards
On October 3, 2012, the Company granted
2,125,000
non-qualified market-based stock options to its executive officers as part of the Company's long-term executive compensation program. The options were granted with an exercise price of
$4.00
and each option will become exercisable in
three
tranches, as follows, on the dates when the Company's average closing stock price for
20
consecutive trading days equals or exceeds the following prices: Tranche 1 (
50%
of the shares subject to the option at
$6.00
per share); Tranche 2 (
25%
at
$8.00
per share); and Tranche 3 (
25%
at
$10.00
per share). On August 14, 2013,
50%
of this stock option grant (Tranche 1) vested and as a result, the vesting of the second and third tranches can occur any time on or before the fifth anniversary of the grant date. As of
January 30, 2016
,
818,127
market-based stock option awards were outstanding. The total grant date fair value was estimated to be
$1,998,000
and is being amortized over the derived service periods for each tranche.
Grant date fair values and derived service periods for each tranche were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
0.38%
, a weighted average expected life of
3.3
years and an implied volatility of
78%
and were as follows for each tranche:
|
|
|
|
|
|
|
Fair Value (Per Share)
|
|
Derived Service Period
|
Tranche 1 ($6.00/share)
|
$0.93
|
|
15
|
months
|
Tranche 2 ($8.00/share)
|
$0.95
|
|
20
|
months
|
Tranche 3 ($10.00/share)
|
$0.95
|
|
24
|
months
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the status of the Company’s stock option activity as of
January 30, 2016
and changes during the year then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
|
2004
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
|
2001
Incentive
Stock
Option
Plan
|
|
Weighted
Average
Exercise
Price
|
|
Other Non-
Qualified
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
Balance outstanding,
January 31, 2015
|
|
2,463,000
|
|
|
$
|
4.09
|
|
|
1,206,000
|
|
|
$
|
6.71
|
|
|
826,000
|
|
|
$
|
6.89
|
|
|
450,000
|
|
|
$
|
4.51
|
|
Granted
|
|
315,000
|
|
|
$
|
5.56
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
(78,000
|
)
|
|
$
|
4.30
|
|
|
(30,000
|
)
|
|
$
|
2.70
|
|
|
(130,000
|
)
|
|
$
|
3.18
|
|
|
(372,000
|
)
|
|
$
|
4.57
|
|
Forfeited or canceled
|
|
(1,145,000
|
)
|
|
$
|
4.33
|
|
|
(506,000
|
)
|
|
$
|
7.55
|
|
|
(297,000
|
)
|
|
$
|
7.32
|
|
|
(78,000
|
)
|
|
$
|
4.23
|
|
Balance outstanding,
January 30, 2016
|
|
1,555,000
|
|
|
$
|
4.30
|
|
|
670,000
|
|
|
$
|
6.18
|
|
|
399,000
|
|
|
$
|
7.78
|
|
|
—
|
|
|
$
|
—
|
|
Options Exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
995,000
|
|
|
$
|
3.97
|
|
|
652,000
|
|
|
$
|
6.22
|
|
|
399,000
|
|
|
$
|
7.78
|
|
|
—
|
|
|
$
|
—
|
|
January 31, 2015
|
|
1,322,000
|
|
|
$
|
4.05
|
|
|
1,179,000
|
|
|
$
|
6.76
|
|
|
826,000
|
|
|
$
|
6.89
|
|
|
380,000
|
|
|
$
|
4.60
|
|
February 1, 2014
|
|
1,229,000
|
|
|
$
|
3.78
|
|
|
2,037,000
|
|
|
$
|
6.21
|
|
|
1,121,000
|
|
|
$
|
6.05
|
|
|
397,000
|
|
|
$
|
4.11
|
|
The following table summarizes information regarding stock options outstanding at
January 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Vested or Expected to Vest
|
Option Type
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
2011 Incentive:
|
|
1,555,000
|
|
|
$
|
4.30
|
|
|
7.5
|
|
$
|
—
|
|
|
1,514,000
|
|
|
$
|
4.27
|
|
|
7.5
|
|
$
|
—
|
|
2004 Incentive:
|
|
670,000
|
|
|
$
|
6.18
|
|
|
3.2
|
|
$
|
—
|
|
|
668,000
|
|
|
$
|
6.18
|
|
|
3.2
|
|
$
|
—
|
|
2001 Incentive:
|
|
399,000
|
|
|
$
|
7.78
|
|
|
2.2
|
|
$
|
—
|
|
|
399,000
|
|
|
$
|
7.78
|
|
|
2.2
|
|
$
|
—
|
|
Non-Qualified:
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
The weighted average grant-date fair value of options granted in
fiscal 2015, fiscal 2014 and fiscal 2013
was
$3.95
,
$3.92
and
$3.96
, respectively. The total intrinsic value of options exercised during
fiscal 2015, fiscal 2014 and fiscal 2013
was
$1,441,000
,
$6,099,000
and
$469,000
, respectively. As of
January 30, 2016
, total unrecognized compensation cost related to stock options was
$923,000
and is expected to be recognized over a weighted average period of approximately
2.0
years.
Stock Option Tax Benefit
The exercise of certain stock options granted under the Company’s stock option plans give rise to compensation, which is included in the taxable income of the applicable employees and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of the Company’s common stock subsequent to the date of grant of the applicable exercised stock options and these increases are not recognized as an expense for financial accounting purposes, as the options were originally granted at the fair market value of the Company’s common stock on the date of grant. The related tax benefits will be recorded as additional paid-in capital if and when realized, and totaled
$526,000
,
$1,129,000
and
$174,000
in
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively. The Company has not recorded any income tax benefit from the exercise of stock options through paid in capital in these fiscal years, due to the uncertainty of realizing income tax benefits in the future. These benefits are expected to be recorded in the applicable future periods.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Stock
Compensation expense recorded in
fiscal 2015, fiscal 2014 and fiscal 2013
relating to restricted stock grants was
$1,664,000
,
$1,323,000
and
$812,000
, respectively. As of
January 30, 2016
, there was
$2,360,000
of total unrecognized compensation cost related to non-vested restricted stock granted. That cost is expected to be recognized over a weighted average period of
1.6
years. The total fair value of restricted stock vested during
fiscal 2015, fiscal 2014 and fiscal 2013
was
$378,000
,
$1,136,000
and
$2,800,000
, respectively.
During the fourth quarter of fiscal 2015, the Company granted a total of
37,000
shares of time-based restricted stock awards to certain key employees as part of the Company's long-term incentive program. The restricted stock will vest in
three
equal annual installments beginning in the fourth quarter of fiscal 2016. The aggregate market value of the restricted stock at the date of the award was
$86,360
and is being amortized as compensation expense over the
three
-year vesting period.
During the third quarter of fiscal 2015, the Company granted a total of
32,000
shares of time-based restricted stock awards to certain key employees as part of the Company's long-term incentive program. The restricted stock will vest in
three
equal annual installments beginning October 1, 2016. The aggregate market value of the restricted stock at the date of the award was
$80,640
and is being amortized as compensation expense over the
three
-year vesting period.
During the second quarter of fiscal 2015, the Company granted a total of
182,334
shares of restricted stock to
eight
non-management board members as part of the Company's annual director compensation program. Each restricted stock award vests on the day immediately preceding the next annual meeting of shareholders following the date of grant. The aggregate market value of the restricted stock at the date of the award was
$520,000
and is being amortized as director compensation expense over the
twelve
-month vesting period. During the second quarter of fiscal 2015, the Company also granted a total of
26,810
shares of time-based restricted stock awards to certain key employees as part of the Company's long-term incentive program. The restricted stock will vest in
three
equal annual installments beginning in May 2016. The aggregate market value of the restricted stock at the date of the award was
$158,000
and is being amortized as compensation expense over the
three
-year vesting period.
During the first quarter of fiscal 2015, the Company granted a total of
67,786
shares of time-based restricted stock awards to certain key employees as part of the Company's long-term incentive program. The restricted stock will vest in
three
equal annual installments beginning March 20, 2016. The aggregate market value of the restricted stock at the date of the award was
$417,593
and is being amortized as compensation expense over the
three
-year vesting period.
During the first quarter of fiscal 2015, the Company also granted a total of
106,963
shares of market-based restricted stock performance units to certain executives as part of the Company's long-term incentive program. The number of restricted stock units earned is based on the Company's total shareholder return ("TSR") relative to a group of industry peers over a three-year performance measurement period. The total grant date fair value was estimated to be
$776,865
, or
$7.26
per share and is being amortized over the three-year performance period. Grant date fair values were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
0.9%
, a weighted average expected life of
three
years and an implied volatility of
54%
-
55%
. The percent of the target market-based performance vested restricted stock unit award that will be earned based on the Company's TSR relative to the peer group is as follows:
|
|
|
Percentile Rank
|
Percentage of
Units Vested
|
< 33%
|
0%
|
33%
|
50%
|
50%
|
100%
|
100%
|
150%
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On November 17, 2014, the Company granted
199,790
shares of market-based restricted stock units to its chief executive officer and
79,916
shares of market-based restricted stock units to its chief strategy officer in conjunction with the hiring of these positions. As of
January 30, 2016
, these market-based restricted stock awards were outstanding. The total grant date fair value was estimated to be
$1,373,000
, or
$4.91
per share, and is being amortized over the three-year performance period. Grant date fair values were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
1.03%
, a weighted average expected life of
3
years and an implied volatility of
60%
. Each restricted stock award will vest if at any time during the three-year performance period the closing price of the Company's stock equals or exceeds, for ten consecutive trading days, the following cumulative total shareholder return ("TSR") thresholds:
|
|
|
Cumulative TSR Thresholds
|
Percentage of
Units Vested
|
Below 25%
|
0%
|
25% to 32%
|
25%
|
33% to 39%
|
50%
|
40% to 49%
|
75%
|
50% or Above
|
100%
|
On June 18, 2014, the Company granted a total of
56,000
shares of restricted stock to
seven
non-management board members as part of the Company's annual director compensation program. Each restricted stock award vests on the day immediately preceding the next annual meeting of shareholders following the date of grant. The aggregate market value of the restricted stock at the date of the award was
$281,000
and was amortized as director compensation expense over the
twelve
-month vesting period.
On March 13, 2014, the Company granted a total of
53,000
shares of restricted stock to certain key employees as part of the Company's long-term incentive program. The restricted stock will vest in
three
equal annual installments beginning March 13, 2015. The aggregate market value of the restricted stock at the date of the award was
$290,000
and is being amortized as compensation expense over the
three
-year vesting period. During the first quarter of fiscal 2014, the Company also granted a total of
4,000
shares of restricted stock to
two
new non-management board members as part of the Company's annual director compensation program. Each restricted stock award vests on the day immediately preceding the next annual meeting of shareholders following the date of grant. The aggregate market value of the restricted stock at the date of the award was
$23,500
and was amortized as director compensation expense through June 2014.
On November 25, 2013, the Company granted a total of
436,000
shares of restricted stock to certain key employees as part of the Company's long-term incentive program. The restricted stock will vest in three equal annual installments beginning November 25, 2014. The aggregate market value of the restricted stock at the date of the award was
$2,426,000
and was amortized as compensation expense over the
three
-year vesting period.
During the first half of fiscal 2013, the Company granted a total of
44,000
shares of restricted stock to
six
non-management board members as part of the Company's annual director compensation program. Each restricted stock award vests on the day immediately preceding the next annual meeting of shareholders following the date of grant. The aggregate market value of the restricted stock at the date of the award was
$228,000
and was amortized as director compensation expense over the
twelve
-month vesting period.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On October 3, 2012, the Company granted
300,000
shares of market-based restricted stock to certain key employees as part of the Company's long-term incentive program. Each restricted stock award will vest in
three
tranches, as follows, on the dates when the Company's average closing stock price for
20
consecutive trading days equals or exceeds the following prices: Tranche 1 (
50%
of the shares subject to the award at
$6.00
per share); Tranche 2 (
25%
at
$8.00
per share); and Tranche 3 (
25%
at
$10.00
per share). On August 14, 2013,
50%
of this restricted stock grant (Tranche 1) vested and as a result, the vesting of the second and third tranches can occur any time on or before the fifth anniversary of the grant date. Net shares received upon the vesting of these market-based stock restricted awards (after shares are potentially withheld to cover applicable withholding taxes) may not be sold for a period of
one
year from the date of vesting. As of
January 30, 2016
,
133,000
market-based restricted stock awards were outstanding. The total grant date fair value was estimated to be
$425,000
and was amortized over the derived service periods for each tranche.
Grant date fair values and derived service periods for each tranche were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of
0.32%
, a weighted average expected life of
2.8
years and an implied volatility of
78%
and were as follows for each tranche:
|
|
|
|
|
|
|
Fair Value
(Per Share)
|
|
Derived Service
Period
|
Tranche 1 ($6.00/share)
|
$1.48
|
|
15
|
months
|
Tranche 2 ($8.00/share)
|
$1.39
|
|
20
|
months
|
Tranche 3 ($10.00/share)
|
$1.31
|
|
24
|
months
|
A summary of the status of the Company’s non-vested restricted stock activity as of
January 30, 2016
and changes during the twelve-month period then ended is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested outstanding, January 31, 2015
|
|
704,000
|
|
|
$4.54
|
Granted
|
|
453,000
|
|
|
$4.50
|
Vested
|
|
(138,000
|
)
|
|
$5.34
|
Forfeited
|
|
(158,000
|
)
|
|
$4.20
|
Non-vested outstanding, January 30, 2016
|
|
861,000
|
|
|
$4.46
|
(10) Business Segments and Sales by Product Group
The Company has only one reporting segment, which encompasses digital commerce retailing. The Company markets, sells and distributes its products to consumers primarily through its digital commerce television and online website, evine.com, platforms. The Company's television shopping and online operations have similar economic characteristics with respect to products, product sourcing, vendors, marketing and promotions, gross margins, customers, and methods of distribution. In addition, the Company believes that its television shopping program is a key driver of traffic to the evine.com website whereby many of the online sales originate from customers viewing the Company's television program and then place their orders online. All of the Company's sales are made to customers residing in the United States. The chief operating decision maker is the Chief Executive Officer of the Company. Certain fiscal 2014 and 2013 product category amounts in the accompanying table have been reclassified to conform to our fiscal 2015 product group hierarchy.
Information on net sales by significant product groups are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
January 30,
2016
|
|
January 31,
2015
|
|
February 1,
2014
|
Jewelry & Watches
|
|
|
$
|
248,951
|
|
|
$
|
256,219
|
|
|
$
|
253,358
|
|
Home & Consumer Electronics
|
|
|
193,931
|
|
|
186,772
|
|
|
203,468
|
|
Beauty
|
|
|
87,184
|
|
|
76,268
|
|
|
63,122
|
|
Fashion & Accessories
|
|
|
105,616
|
|
|
96,239
|
|
|
64,608
|
|
All other (primarily shipping & handling revenue)
|
|
|
57,630
|
|
|
59,120
|
|
|
55,933
|
|
Total
|
|
|
$
|
693,312
|
|
|
$
|
674,618
|
|
|
$
|
640,489
|
|
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(11) Income Taxes
The Company records deferred taxes for differences between the financial reporting and income tax bases of assets and liabilities, computed in accordance with tax laws in effect at that time. The deferred taxes related to such differences as of
January 30, 2016
and
January 31, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Accruals and reserves not currently deductible for tax purposes
|
|
$
|
6,990
|
|
|
$
|
7,420
|
|
Inventory capitalization
|
|
1,931
|
|
|
1,459
|
|
Differences in depreciation lives and methods
|
|
2,730
|
|
|
2,866
|
|
Differences in basis of intangible assets
|
|
(2,756
|
)
|
|
(1,968
|
)
|
Differences in investments and other items
|
|
551
|
|
|
215
|
|
Net operating loss carryforwards
|
|
117,909
|
|
|
112,318
|
|
Valuation allowance
|
|
(130,089
|
)
|
|
(124,258
|
)
|
Net deferred tax liability
|
|
$
|
(2,734
|
)
|
|
$
|
(1,948
|
)
|
The provision from income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Current
|
|
$
|
(46
|
)
|
|
$
|
(31
|
)
|
|
$
|
(15
|
)
|
Deferred
|
|
(788
|
)
|
|
(788
|
)
|
|
(1,158
|
)
|
|
|
$
|
(834
|
)
|
|
$
|
(819
|
)
|
|
$
|
(1,173
|
)
|
A reconciliation of the statutory tax rates to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Taxes at federal statutory rates
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
(0.6
|
)
|
|
(11.2
|
)
|
|
(5.3
|
)
|
Reestablishment of state net operating losses
|
|
6.0
|
|
|
—
|
|
|
—
|
|
Non-cash stock option vesting expense
|
|
(1.9
|
)
|
|
(158.6
|
)
|
|
(43.3
|
)
|
Other
|
|
4.9
|
|
|
(2.4
|
)
|
|
(0.6
|
)
|
FCC license deferred tax liability impact on valuation allowance
|
|
(6.5
|
)
|
|
(133.4
|
)
|
|
(81.5
|
)
|
Valuation allowance and NOL carryforward benefits
|
|
(44.2
|
)
|
|
124.0
|
|
|
8.4
|
|
Effective tax rate
|
|
(7.3
|
)%
|
|
(146.6
|
)%
|
|
(87.3
|
)%
|
Based on the Company’s recent history of losses, the Company has recorded a full valuation allowance for its net deferred tax assets as of
January 30, 2016
and
January 31, 2015
in accordance with GAAP, which places primary importance on the Company’s most recent operating results when assessing the need for a valuation allowance. The ultimate realization of these deferred tax assets depends on the ability of the Company to generate sufficient taxable income in the future, as well as the timing of such income. The Company intends to maintain a full valuation allowance for its net deferred tax assets until sufficient positive evidence exists to support reversal of the allowance. As of
January 30, 2016
, the Company has federal net operating loss carryforwards (NOLs) of approximately
$312 million
and state NOLs of approximately
$200 million
which are available to offset future taxable income. The Company's federal NOLs expire in varying amounts each year from 2023 through 2035 in accordance with applicable federal tax regulations and the timing of when the NOLs were incurred. During the first quarter of fiscal 2011, the Company had a change in ownership (as defined in Section 382 of the Internal Revenue Code) as a result of the issuance of common stock coupled with the redemption of all the Series B preferred stock held by GE Equity. Sections 382 and 383 limit the annual utilization of certain tax attributes, including NOL carryforwards incurred prior to a change in ownership. The limitations
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
imposed by Sections 382 and 383 are not expected to impair the Company's ability to fully realize its NOLs; however, the annual usage of NOLs incurred prior to the change in ownership will be limited.
For the year ended
January 30, 2016
and the year ended
January 31, 2015
, the income tax provision included non-cash tax charges of approximately
$788,000
and
$788,000
, respectively, relating to changes in the Company's long-term deferred tax liability related to the tax amortization of the Company's indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to the Company's income tax valuation allowance.
As of
January 30, 2016
and
January 31, 2015
, there were no unrecognized tax benefits for uncertain tax positions. Accordingly, a tabular reconciliation from beginning to ending periods is not provided. Further, to date, there have been no interest or penalties charged or accrued in relation to unrecognized tax benefits. The Company will classify any future interest and penalties as a component of income tax expense if incurred. The Company does not anticipate that the amount of unrecognized tax benefits will change significantly in the next twelve months.
The Company is subject to U.S. federal income taxation and the taxing authorities of various states. The Company’s tax years for 2012, 2013, and 2014 are currently subject to examination by taxing authorities. With limited exceptions, the Company is no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2012.
Shareholder Rights Plan
During the second quarter of fiscal 2015, the Company adopted a Shareholder Rights Plan to preserve the value of certain deferred tax benefits, including those generated by net operating losses. On July 10, 2015, the Company declared a dividend distribution of one purchase right (a “Right”) for each outstanding share of the Company’s common stock to shareholders of record as of the close of business on July 23, 2015 and issuable as of that date, and on July 13, 2015, the Company entered into a Shareholder Rights Plan (the “Rights Plan”) with Wells Fargo Bank, N.A., a national banking association, with respect to the Rights. Except in certain circumstances set forth in the Rights Plan, each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Cumulative Preferred Stock,
$0.01
par value, of the Company (“Preferred Stock” and each one one-thousandth of a share of Preferred Stock, a “Unit”) at a price of
$9.00
per Unit.
The Rights initially trade together with the common stock and are not exercisable. Subject to certain exceptions specified in the Rights Plan, the Rights will separate from the common stock and become exercisable following (i) the tenth calendar day after a public announcement or filing that a person or group has become an “Acquiring Person,” which is defined as a person who has acquired, or obtained the right to acquire, beneficial ownership of
4.99%
or more of the common stock then outstanding, subject to certain exceptions, or (ii) the tenth calendar day (or such later date as may be determined by the board of directors) after any person or group commences a tender or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. If a person or group becomes an Acquiring Person, each Right will entitle its holders (other than such Acquiring Person) to purchase one Unit at a price of
$9.00
per Unit. A Unit is intended to give the shareholder approximately the same dividend, voting and liquidation rights as would one share of Common Stock, and should approximate the value of one share of Common Stock. At any time after a person becomes an Acquiring Person, the board of directors may exchange all or part of the outstanding Rights (other than those held by an Acquiring Person) for shares of common stock at an exchange rate of one share of common stock (and, in certain circumstances, a Unit) for each Right. The Company will promptly give public notice of any exchange (although failure to give notice will not affect the validity of the exchange).
The Rights will expire upon certain events described in the Rights Plan, including the close of business on the earlier of the first anniversary of the date of the Plan or the date of the Company’s 2016 annual meeting of shareholders, if the Plan has not been approved by the Company’s shareholders, or the close of business on the date of the third annual meeting of shareholders following the last annual meeting of shareholders of the Company at which the Plan was most recently approved by shareholders, unless the Plan is re-approved by shareholders at that third annual meeting of shareholders. However, in no event will the Plan expire later than the close of business on July 13, 2025. Until the close of business on the tenth calendar day after the day a public announcement or a filing is made indicating that a person or group has become an Acquiring Person, the Company may in its sole and absolute discretion amend the Rights or the Plan agreement without the approval of any holders of the Rights or shares of common stock in any manner, including without limitation, amendments that increase or decrease the purchase price or redemption price or accelerate or extend the final expiration date or the period in which the Rights may be redeemed. The Company may also amend the Plan after the close of business on the tenth calendar day after the day such public announcement or filing is made to cure ambiguities, to correct defective or inconsistent provisions, to shorten or lengthen time periods under the Plan or in any other manner that does not adversely affect the interests of holders of the Rights. No amendment of the Plan may extend its expiration date.
In connection with the issuance, administration and monitoring of the Plan, the Company incurred
$446,000
of professional fees, included within general and administrative expense, during fiscal 2015.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) Commitments and Contingencies
Cable and Satellite Affiliation Agreements
As of
January 30, 2016
, the Company has entered into distribution agreements with cable operators, direct-to-home satellite providers and telecommunications companies to distribute our television network over their systems. The terms of the affiliation agreements typically range from
one
to
five
years. During the fiscal year, certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the television operators or the Company may cancel the agreements prior to their expiration. Additionally, the Company may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. The affiliation agreements generally provide that the Company will pay each operator a monthly access fee and in some cases a marketing support payment based on the number of homes receiving the Company's programming. For
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively, the Company expensed approximately
$100,830,000
,
$98,581,000
and
$92,473,000
under these affiliation agreements.
Over the past years, each of the material cable and satellite distribution agreements up for renewal has been renegotiated and renewed with no reduction to the Company’s distribution footprint. Failure to maintain the cable agreements covering a material portion of the Company’s existing cable households on acceptable financial and other terms could adversely affect future growth, sales revenues and earnings unless the Company is able to arrange for alternative means of broadly distributing its television programming. Cable operators serving a large majority of cable households offer cable programming on a digital basis. The use of digital compression technology provides cable companies with greater channel capacity. While greater channel capacity increases the opportunity for distribution and, in some cases, reduces access fees paid by us, it also may adversely impact the Company's ability to compete for television viewers to the extent it results in less desirable channel positioning for us, placement of the Company's programming in separate programming tiers, the broadcast of additional competitive channels or viewer fragmentation due to a greater number of programming alternatives.
The Company has entered into, and will continue to enter into, affiliation agreements with other television operators providing for full- or part-time carriage of the Company’s television shopping programming.
Future cable and satellite affiliation cash commitments at
January 30, 2016
are as follows:
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
|
2016
|
$
|
77,780,000
|
|
2017
|
63,562,000
|
|
2018
|
26,031,000
|
|
2019
|
—
|
|
2020 and thereafter
|
—
|
|
Employment Agreements
The Company has entered into employment agreements with some of its on-air hosts with original terms of
12 months
with auto annual renewals and with the chief executive officer of the Company with an original term of
36 months
. These agreements specify, among other things, the term and duties of employment, compensation and benefits, termination of employment (including for cause, which would reduce the Company’s total obligation under these agreements), severance payments and non-disclosure and non-compete restrictions. The aggregate commitment for future base compensation related to these agreements at
January 30, 2016
was approximately
$2,381,000
.
On November 17, 2014, the Company entered into an executive employment and severance agreement with Mr. Bozek, the Company's Chief Executive Officer. Among other things, the employment agreement provides for a three-year initial term, followed by automatic one-year renewals, an initial base salary of
$625,000
, annual bonus stipulations, a temporary living expense allowance and participation in the Company's executive relocation program. In conjunction with the employment agreement, the Company granted Mr. Bozek an award of performance restricted stock units under the Company's 2011 Omnibus Incentive Plan with a fair value of
$1.0 million
. The chief executive officer’s employment agreement also provides for severance in the event of employment termination of
1.5
times the sum of his (i) base salary plus (ii) the average of the annual cash incentive plan payments made in the three fiscal years immediately preceding the fiscal year in which the termination date occurs. In the event of a change of control, as defined in the agreement, the multiplier shall be
2
times.
On February 8, 2016, subsequent to the end of fiscal 2015, Mark Bozek resigned as a member of the Company's board of directors and as Chief Executive Officer. In addition, on February 8, 2016, Russell Nuce resigned as Chief Strategy Officer and
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interim General Counsel. The Company expects to record a
$1.9 million
charge to income in the first quarter of fiscal 2016 relating primarily to severance payments to be made in conjunction with the resignations.
The Company has established guidelines regarding severance for its senior executive officers, whereby, up to
12 months
of the executive's highest annual rate of base salary plus
one
times the target annual incentive bonus determined from such base salary may become payable in the event of terminations without cause under specified circumstances. Senior executive officers are also eligible for
1.5
times the executive's highest annual rate of base salary, plus
1.5
times the target annual incentive bonus determined from such base salary if, within a two-year period commencing on the date of a change in control, the senior executive is terminated without cause under specified circumstances.
Operating Lease Commitments
The Company leases certain property and equipment under non-cancelable operating lease agreements. Property and equipment covered by such operating lease agreements include offices and warehousing facilities at subsidiary locations, satellite transponder, office equipment and certain tower site locations.
Future minimum lease payments at
January 30, 2016
are as follows:
|
|
|
|
|
|
|
|
Future Minimum Lease Payments:
|
Amount
|
|
|
2016
|
$
|
1,407,000
|
|
2017
|
171,000
|
|
2018
|
—
|
|
2019
|
—
|
|
2020 and thereafter
|
—
|
|
Total rent expense under such agreements was approximately
$1,853,000
in
fiscal 2015
,
$2,140,000
in
fiscal 2014
and
$2,015,000
in
fiscal 2013
.
Capital Lease Commitments
The Company leases certain computer equipment and software licenses under noncancelable capital leases and includes these assets in property and equipment in the accompanying consolidated balance sheets. The capitalized cost of leased assets was approximately
$155,000
at
January 30, 2016
.
Future minimum lease payments for assets under capital leases at
January 30, 2016
are as follows:
|
|
|
|
|
Future Minimum Lease Payments:
|
Amount
|
|
|
2016
|
$
|
37,000
|
|
2017
|
—
|
|
2018
|
—
|
|
2019
|
—
|
|
2020 and thereafter
|
—
|
|
Total minimum lease payments
|
37,000
|
|
Less: Amounts representing interest
|
(1,000
|
)
|
|
36,000
|
|
Less: Current portion
|
(36,000
|
)
|
Long-term capital lease obligation
|
$
|
—
|
|
Retirement and Savings Plan
The Company maintains a qualified 401(k) retirement savings plan covering substantially all employees. The plan allows the Company’s employees to make voluntary contributions to the plan. The Company’s contribution, if any, is determined annually at the discretion of the board of directors. Starting in fiscal 2013, the Company elected to make matching contributions to the plan and matched
$0.50
for every
$1.00
contributed by eligible participants up to a maximum of
6%
of eligible compensation. Company plan contributions totaling approximately
$1,156,000
,
$1,062,000
and
$921,000
were accrued during
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively, and were contributed to the plan in February of the following fiscal year.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(13) Litigation
The Company is involved from time to time in various claims and lawsuits in the ordinary course of business. In the opinion of management, none of the claims and suits, either individually or in the aggregate will have a material adverse effect on the Company's operations or consolidated financial statements.
(14) Supplemental Cash Flow Information
Supplemental cash flow information and noncash investing and financing activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,353,000
|
|
|
$
|
1,470,000
|
|
|
$
|
1,259,000
|
|
Income taxes paid
|
|
$
|
33,000
|
|
|
$
|
30,000
|
|
|
$
|
16,000
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Deferred issuance costs included in accrued liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,000
|
|
Property and equipment purchases included in accounts payable
|
|
$
|
138,000
|
|
|
$
|
2,016,000
|
|
|
$
|
521,000
|
|
Non-cash warrant exercise
|
|
$
|
—
|
|
|
$
|
533,000
|
|
|
$
|
—
|
|
Issuance of 178,842 shares of common stock for trademark purchase
|
|
$
|
—
|
|
|
$
|
1,044,000
|
|
|
$
|
—
|
|
(15) Distribution Facility Expansion, Consolidation & Technology Upgrade
During fiscal 2014, the Company began a significant operational expansion initiative with respect to overall warehousing capacity and new equipment and system technology upgrades at our Bowling Green, Kentucky distribution facility. During the first quarter of fiscal 2015 the new building was substantially completed and the Company expanded our
262,000
square foot facility to an approximately
600,000
square foot facility. Subsequently, during the second quarter of fiscal 2015, the Company finished the building expansion and moved out of its expired leased satellite warehouse space. The updated facilities and technology upgrade will include a new high-speed parcel shipping and item sortation system coupled with a new warehouse management system to support our increased level of shipments and units and a new call center facility to better serve our customers. The new sortation and warehouse management systems are expected to be phased into production through the first half of fiscal 2016. The total cost of the physical building expansion, new sortation equipment and call center facility was approximately
$25 million
and was financed with our expanded PNC revolving line of credit and a
$15 million
PNC term loan.
As a result of our distribution facility expansion, consolidation and technology upgrade initiative, the Company incurred approximately
$1,347,000
in incremental expenses during fiscal 2015, relating primarily to increased labor, inventory and other warehousing transportation costs, training costs and increased equipment rental costs associated with: the move into the new expanded warehouse building, the move out of previously leased warehouse space and the preparation of our expanded facility for the new high-speed parcel shipping and item sortation system and upgraded warehouse management system.
(16) Activist Shareholder Response Costs
I
n October 2013, the Company received a demand from an activist shareholder to call a special meeting of shareholders for the purpose, among other things, of voting on a new slate of directors and amending certain of the Company’s bylaws. The Company retained a team of advisers, including a financial adviser, proxy solicitor, investor relations firm and legal counsel, to assist in responding to the demand and the solicitation of proxies. In conjunction with such activities, the Company recorded charges to income in fiscal 2014 and fiscal 2013 totaling
$3,518,000
and
$2,133,000
, respectively, which includes
$750,000
as reimbursement for a portion of the activist shareholder’s expenses in fiscal 2014. As previously disclosed, the activist shareholder requested that the Company reimburse it for certain of its expenses relating to the proxy contest. In exchange for paying certain activist shareholder expenses, the Company obtained a customary standstill agreement from the activist shareholder. The process of responding to the initial demand concluded with the Company’s annual shareholder meeting on June 18, 2014.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(17) Executive and Management Transition Costs
On February 8, 2016, subsequent to the end of fiscal 2015, Mark Bozek resigned as a member of the Company's board of directors and as Chief Executive Officer. In addition, on February 8, 2016, Russell Nuce resigned as Chief Strategy Officer and Interim General Counsel. The Company expects to record a
$1.9 million
charge to income in the first quarter of fiscal 2016 relating primarily to severance payments to be made in conjunction with the resignations. In addition, the Company expects to cut its full year operating expenses through reductions in corporate overhead and other operating costs.
On March 26, 2015, the Company announced the termination and departure of three executive officers, namely its Chief Financial Officer, its Senior Vice President and General Counsel, and President. In addition, during the first quarter of fiscal 2015, the Company also announced the hiring of a new Chief Financial Officer and a new Chief Merchandising Officer. In conjunction with these executive changes as well as other management terminations made during fiscal 2015, the Company recorded charges to income of
$3,549,000
, which relate primarily to severance payments made as a result of the executive officer terminations and other direct costs associated with the Company's 2015 executive and management transition.
On June 22, 2014, Keith R. Stewart resigned as a member of the Company's board of directors and as Chief Executive Officer of the Company. In conjunction with Mr. Stewart's resignation and separation agreement, as well as other executive terminations made subsequent to June 22, 2014, the Company recorded charges to income of
$5,520,000
during fiscal 2014, relating primarily to severance payments which Mr. Stewart was entitled to in accordance with the terms of his employment agreement; severance payments for the termination of our Chief Operating and Chief Merchandising Officers; and other direct costs associated with the Company's executive and management transition. Following Mr. Stewart's resignation, the Company's board of directors appointed Mr. Mark Bozek as Chief Executive Officer of the Company effective June 22, 2014.
18) Relationship with NBCU, Comcast and GE Equity
Relationship with GE Equity, Comcast and NBCU
The Company is a party to an amended and restated shareholder agreement, dated February 25, 2009 (the "GE/NBCU Shareholder Agreement"), with GE Capital Equity Investments, Inc. (“GE Equity”) and NBCUniversal Media, LLC ("NBCU"), which provides for certain corporate governance and standstill matters (as described further below). NBCU is an indirect subsidiary of Comcast Corporation ("Comcast"). The Company believes that as of
January 30, 2016
, the direct equity ownership of GE Equity in the Company consisted of
3,545,049
shares of common stock, and the direct ownership of NBCU in the Company consists of
7,141,849
shares of common stock. The Company has a significant cable distribution agreement with Comcast and believe that the terms of the agreement are comparable to those with other cable system operators.
General Electric Company ("GE"), the parent company of GE Equity, has agreed with Comcast that, for so long as GE Equity is entitled to appoint at least
two
members of the Company's board of directors, NBCU will be entitled to retain a board seat provided that NBCU beneficially owns at least
5%
of the Company's adjusted outstanding common stock (as computed under the amended and restated shareholders agreement described below). Furthermore, GE has also agreed to obtain the consent of NBCU prior to consenting to the Company's adoption of any shareholders rights plan or certain other actions that would impede or restrict the ability of NBCU to acquire or dispose of shares of the Company's voting stock or taking any action that would result in NBCU being deemed to be in violation of the Federal Communications Commission multiple ownership regulations. As of
January 30, 2016
GE Equity has an approximate
6%
beneficial ownership in the Company.
In an SEC filing made on August 18, 2015, GE Equity disclosed that on August 14, 2015, it and ASF Radio, L.P. ("ASF Radio"), an independent third party to the Company, entered into a Stock Purchase Agreement pursuant to which GE Equity agreed to sell
3,545,049
shares of the Company's common stock, which is all of the shares GE Equity currently owns, to ASF Radio for
$2.15
per share. The closing of the sale is subject to certain conditions and was scheduled for October 15, 2015. According to the SEC filing, ASF Radio is an affiliate of Ardian, an independent private equity investment company. As of
March 28, 2016
, the sale has not yet closed.
Amended and Restated Shareholder Agreement
The GE/NBCU Shareholder Agreement provides that GE Equity is entitled to designate nominees for
three
members of the Company’s board of directors so long as the aggregate beneficial ownership of GE Equity and NBCU (and their affiliates) is at least equal to
50%
of their beneficial ownership as of February 25, 2009 (i.e., beneficial ownership of approximately
8.7 million
common shares) (the "50% Ownership Condition"), and
two
members of the Company's board of directors so long as their aggregate beneficial ownership is at least
10%
of the shares of "adjusted outstanding common stock," as defined in the GE/NBCU Shareholder Agreement (the "10% Ownership Condition). In addition, the GE/NBCU Shareholder Agreement provides that GE Equity may designate any of its director-designees to be an observer of the audit, human resources and compensation, and corporate governance
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and nominating committees of the Company's board of directors. Neither GE Equity nor NBCU currently has any designees serving on our board of directors or committees. Upon the closing of the GE/ASF Radio Sale, the 50% Ownership Condition will no longer be met; however, the Company expects that the 10% Ownership Condition will continue to be met and therefore, following the closing of the GE/ASF Radio Sale, NBCU and its affiliates will continue to be entitled to designate nominees for two members of the Company's board of directors.
The GE/NBCU Shareholder Agreement requires that we obtain the consent of GE Equity before the Company (i) exceed certain thresholds relating to the issuance of securities, the payment of dividends, the repurchase or redemption of common stock, acquisitions (including investments and joint ventures) or dispositions, and the incurrence of debt; (ii) enter into any business different than what the Company and its subsidiaries are currently engaged; and (iii) amend the Company’s articles of incorporation to adversely affect GE Equity and NBCU (or their affiliates); provided, however, that these restrictions will no longer apply when both (1) GE Equity is no longer entitled to designate three director nominees and (2) GE Equity and NBCU no longer hold any Series B preferred stock. The Company is also prohibited from taking any action that would cause any ownership interest by the Company in television broadcast stations from being attributable to GE Equity, NBCU or their affiliates. The Company redeemed all of the Series B preferred stock in April 2011 and, upon the closing of the GE/ASF Radio Sale, the
50%
Ownership Condition will no longer be met. Therefore, GE Equity will no longer be entitled to these consent rights following the closing of the GE/ASF Radio Sale.
The GE/NBCU Shareholder Agreement further provides that during the "standstill period" (as described below), subject to certain limited exceptions, GE Equity and NBCU are prohibited from: (i) making any asset/business purchases from the Company in excess of
10%
of the total fair market value of the Company’s assets; (ii) increasing their beneficial ownership above
39.9%
of the Company's shares; (iii) making or in any way participating in any solicitation of proxies; (iv) depositing any securities of the Company in a voting trust; (v) forming, joining or in any way becoming a member of a "13D Group" with respect to any voting securities of the Company; (vi) arranging any financing for, or providing any financing commitment specifically for, the purchase of any voting securities of the Company; or (vii) otherwise acting, whether alone or in concert with others, to seek to propose to the Company any tender or exchange offer, merger, business combination, restructuring, liquidation, recapitalization or similar transaction involving the Company, or nominating any person as a director of the Company who is not nominated by the then incumbent directors, or proposing any matter to be voted upon by the Company’s shareholders. If, during the standstill period, any inquiry has been made regarding a "takeover transaction" or "change in control," each as defined in the GE/NBCU Shareholder Agreement, that has not been rejected by the Company’s board of directors, or the Company’s board of directors pursues such a transaction, or engages in negotiations or provides information to a third party and the board of directors has not resolved to terminate such discussions, then GE Equity or NBCU may propose to the Company a tender offer or business combination proposal.
In addition, unless GE Equity and NBCU beneficially own less than
5%
or more than
90%
of the adjusted outstanding shares of common stock, GE Equity and NBCU may not sell, transfer or otherwise dispose of any securities of the Company subject to limited exceptions for (i) transfers to affiliates, (ii) third party tender offers, (iii) mergers, consolidations and reorganizations and (iv) transfers pursuant to underwritten public offerings or transfers exempt from registration under the Securities Act (provided, in the case of (iii), such transfers do not result in the transferee acquiring beneficial ownership in excess of
10%
(or
20%
in the case of a transfer by NBCU)). As discussed above, we believe that NBCU owns more than
5%
but less than
90%
of the adjusted outstanding shares of our common stock and therefore, NBCU will remain subject to these restrictions following the consummation of the GE/ASF Radio Sale.
The standstill period will terminate on the earliest to occur of (i) the
ten
-year anniversary of the GE/NBCU Shareholder Agreement, (ii) the Company entering into an agreement that would result in a "change in control" (as defined in the GE/NBCU Shareholder Agreement and subject to reinstatement), (iii) an actual "change in control" (subject to reinstatement), (iv) a third-party tender offer (subject to reinstatement), or (v)
six
months after GE Equity can no longer designate any nominees to the Company’s board of directors. Following the expiration of the standstill period pursuant to clause (i) above and
two
years in the case of clause (v) above, GE Equity and NBCU’s beneficial ownership position may not exceed
39.9%
of the Company’s adjusted outstanding shares of common stock, except pursuant to issuances or exercises of any warrants or pursuant to a
100%
tender offer for the Company.
Registration Rights Agreement
On February 25, 2009, the Company entered into an amended and restated registration rights agreement providing GE Equity, NBCU and their affiliates and any transferees and assigns, an aggregate of
four
demand registrations and unlimited piggy-back registration rights. In addition, NBCU was subsequently granted
one
additional demand registration right pursuant to the second amendment of the now expired NBCU trademark license agreement.
EVINE Live INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2015 Letter Agreement with GE Equity
On July 9, 2015, the Company entered into a letter agreement with GE Equity pursuant to which GE Equity consented to our adoption of a Shareholder Rights Plan in consideration for our agreement to provide GE Equity, NBCU and certain of their respective affiliates with exemptions from the Shareholder Rights Plan. GE’s consent was required pursuant to the terms of the GE/NBCU Shareholder Agreement. This discussion is a summary of the terms of the letter agreement. For more information about the Shareholder Rights Plan see Note 11.
In the letter agreement, the Company agreed that if any of GE Equity, NBCU or any of their respective affiliates that holds shares of our common stock from time to time (each a “Grandfathered Investor”) sells or otherwise transfers shares of our common stock currently owned by such Grandfathered Investor to any third party identified to us in writing (any such third party, a “Exempt Purchaser”), we will take all actions necessary under the Shareholder Rights Plan so that such third party will not be deemed an Acquiring Person (as defined in the Shareholder Rights Plan) by virtue of the acquisition of such shares. The Company further agreed that, subject to certain limitations, upon request of any Grandfathered Investor or Exempt Purchaser, and in connection with a transfer by such Grandfathered Investor or Exempt Purchaser of shares of the Company's common stock to an Exempt Purchaser, the Company will enter into an agreement with the acquiring Exempt Purchaser granting such acquiring Exempt Purchaser substantially the same rights as set forth above with respect to any sale of the Company's outstanding shares of common stock to any other third party. Additionally, the Company agreed that without the consent of any Grandfathered Investor that is an affiliate of GE Equity and any Grandfathered Investor that is an affiliate of NBCU, the Company will not (i) amend the Shareholder Rights Plan in any material respect, other than to accelerate the Expiration Date or the Final Expiration Date, (ii) adopt another shareholders' rights plan or (iii) amend the letter agreement.
As of January 30, 2016, Comcast, through NBCU, held approximately
12.5%
of the Company’s outstanding common stock and GE Equity held approximately
6%
of the Company's outstanding common stock. Consequently, the letter agreement with GE Equity may significantly limit the Company's ability to grant exemptions from the Plan to other shareholders.
The foregoing summaries of the GE/NBCU Shareholder Agreement, the Registration Rights Agreement and the 2015 letter agreement with GE Equity do not purport to be complete and are qualified in their entirety by reference to the full text of such agreements, which have been filed as exhibits to this Annual Report on Form 10-K and are incorporated herein by reference.
(19) Related Party Transactions
Relationship with GE Equity and NBCU
In January 2011, General Electric Company ("GE") consummated a transaction with Comcast Corporation ("Comcast") pursuant to which GE contributed all of its holdings in NBCU to NBCUniversal, LLC, a newly formed entity beneficially owned
51%
by Comcast and
49%
by GE. As a result of that transaction, NBCU is now a wholly owned subsidiary of NBCUniversal, LLC. In March 2013, GE sold its remaining
49%
common equity interest in NBCUniversal, LLC to Comcast pursuant to an agreement reached in February 2013. The Company believes that as of
January 30, 2016
, the direct equity ownership of GE Equity in the Company consists of
3,545,049
shares of common stock and the direct ownership of NBCU in the Company consists of
7,141,849
shares of common stock. The Company has a significant cable distribution agreement with Comcast and believes that the terms of this agreement are comparable to those with other cable system operators.
In connection with the January 2011 transfer of its ownership in NBCU to NBCUniversal, LLC, GE also agreed with Comcast that, for so long as GE Equity is entitled to appoint
two
members of the Company's board of directors, NBCU will be entitled to retain a board seat provided that NBCU beneficially owns at least
5%
of the Company's adjusted outstanding common stock. Furthermore, GE agreed to obtain the consent of NBCU prior to consenting to the Company's adoption of any shareholders right plan or certain other actions that would impede or restrict the ability of NBCU to acquire or dispose of shares of the Company's voting stock or taking any action that would result in NBCU being deemed to be in violation of the Federal Communications Commission multiple ownership regulations. For additional information regarding the Company's arrangements with Comcast, GE, GE Equity and NBCU, see Note 18 above.
Asset Acquisition of Dollars Per Minute, Inc.
On November 18, 2014, the Company entered into an asset purchase agreement with Dollars Per Minute, Inc., a Delaware corporation ("DPM") to purchase certain assets of DPM, including the EVINE brand and trademark.
The principal stockholders of DPM are Mark Bozek, the Company's former Chief Executive Officer, and Russell Nuce, the Company's former Chief Strategy Officer. At the time of the transaction, DPM had debt outstanding under certain convertible bridge notes issued to several individuals, including Thomas Beers, one of the Company's directors and a trust for which Russell
Nuce has a contingent pecuniary interest. As consideration for the purchase of these assets, primarily related to intellectual property, the Company issued
178,842
unregistered shares of our common stock, which represented an aggregate value of
$1,044,000
based on the closing price of our common stock on November 13, 2014 and paid
$20,000
in cash consideration and incurred
$39,000
in professional fees associated with acquiring the assets.
Director Relationships
The Company entered into a service agreement with Newgistics, Inc. ("Newgistics") in fiscal 2004. Newgistics provides offsite customer returns consolidation and delivery services to the Company. The Company's interim Chief Executive Officer, Robert Rosenblatt, is a member of Newgistics Board of Directors. The Company made payments to Newgistics totaling approximately
$4,517,000
,
$4,680,000
and
$3,862,000
during
fiscal 2015, fiscal 2014 and fiscal 2013
, respectively.
One of the Company's directors, Thomas Beers, has a minority interest in one of the Company's on air food suppliers. The Company made inventory payments totaling
$3,467,000
during fiscal 2015 to this supplier.