dest-10q_20181103.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 03, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-21196

 

Destination Maternity Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3045573

(State or other jurisdiction

of incorporation or organization)

(IRS Employer

Identification No.)

232 Strawbridge Drive

Moorestown, New Jersey

08057

(Address of principal executive offices)

(Zip code)

(856) 291-9700

Registrant’s telephone number, including area code

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act    

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value — 14,447,524 shares outstanding as of November 30, 2018

 

 

 

 


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

  

3

 

 

 

 

 

 

 

Consolidated Balance Sheets

  

3

 

 

 

 

 

 

 

Consolidated Statements of Operations

  

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

  

5

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity

  

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

  

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

  

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

31

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

32

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

33

 

 

 

 

 

Item 1A.

 

Risk Factors

  

33

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

33

 

 

 

 

 

Item 6.

 

Exhibits

  

34

 

 

 

Signatures

 

35

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

November 3, 2018

 

 

 

 

February 3, 2018

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,247

 

 

 

 

$

1,635

 

Trade receivables, net

 

 

7,261

 

 

 

 

 

6,692

 

Inventories

 

 

79,054

 

 

 

 

 

71,256

 

Prepaid expenses and other current assets

 

 

10,270

 

 

 

 

 

11,522

 

Total current assets

 

 

97,832

 

 

 

 

 

91,105

 

Property and equipment, net of accumulated depreciation and amortization of

   $106,276 and $98,024

 

 

55,158

 

 

 

 

 

66,146

 

Other assets:

 

 

 

 

 

 

 

 

 

 

Deferred line of credit financing costs, net of accumulated amortization of

   $898 and $829

 

 

383

 

 

 

 

 

450

 

Other intangible assets, net of accumulated amortization of $1,027 and $907

 

 

863

 

 

 

 

 

953

 

Deferred income taxes

 

 

4,805

 

 

 

 

 

2,829

 

Other non-current assets

 

 

1,064

 

 

 

 

 

1,099

 

Total other assets

 

 

7,115

 

 

 

 

 

5,331

 

Total assets

 

$

160,105

 

 

 

 

$

162,582

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Line of credit borrowings

 

$

21,700

 

 

 

 

$

8,000

 

Current portion of long-term debt

 

 

4,729

 

 

 

 

 

4,780

 

Accounts payable

 

 

25,767

 

 

 

 

 

30,949

 

Accrued expenses and other current liabilities

 

 

30,988

 

 

 

 

 

31,661

 

Total current liabilities

 

 

83,184

 

 

 

 

 

75,390

 

Long-term debt

 

 

22,704

 

 

 

 

 

23,809

 

Deferred rent and other non-current liabilities

 

 

20,856

 

 

 

 

 

22,715

 

Total liabilities

 

 

126,744

 

 

 

 

 

121,914

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock, 1,656,381 shares authorized, none outstanding

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 20,000,000 shares authorized, 14,447,524 and

   14,684,117 shares issued and outstanding

 

 

145

 

 

 

 

 

147

 

Additional paid-in capital

 

 

107,482

 

 

 

 

 

106,865

 

Accumulated deficit

 

 

(74,192

)

 

 

 

 

(66,274

)

Accumulated other comprehensive loss

 

 

(74

)

 

 

 

 

(70

)

Total stockholders’ equity

 

 

33,361

 

 

 

 

 

40,668

 

Total liabilities and stockholders’ equity

 

$

160,105

 

 

 

 

$

162,582

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

92,837

 

 

$

96,354

 

 

$

292,459

 

 

$

301,060

 

Cost of goods sold

 

 

44,181

 

 

 

45,453

 

 

 

138,535

 

 

 

140,167

 

Gross profit

 

 

48,656

 

 

 

50,901

 

 

 

153,924

 

 

 

160,893

 

Selling, general and administrative expenses

 

 

48,629

 

 

 

53,234

 

 

 

150,581

 

 

 

161,689

 

Store closing, asset impairment and asset disposal expenses

 

 

1,028

 

 

 

1,011

 

 

 

2,669

 

 

 

3,649

 

Other charges, net

 

 

1,825

 

 

 

3,100

 

 

 

4,898

 

 

 

3,746

 

Operating loss

 

 

(2,826

)

 

 

(6,444

)

 

 

(4,224

)

 

 

(8,191

)

Interest expense, net

 

 

1,232

 

 

 

1,006

 

 

 

3,533

 

 

 

2,989

 

Loss before income taxes

 

 

(4,058

)

 

 

(7,450

)

 

 

(7,757

)

 

 

(11,180

)

Income tax provision

 

 

56

 

 

 

73

 

 

 

168

 

 

 

259

 

Net loss

 

$

(4,114

)

 

$

(7,523

)

 

$

(7,925

)

 

$

(11,439

)

Net loss per share— Basic

 

$

(0.30

)

 

$

(0.55

)

 

$

(0.57

)

 

$

(0.83

)

Average shares outstanding— Basic

 

 

13,895

 

 

 

13,800

 

 

 

13,867

 

 

 

13,777

 

Net loss per share— Diluted

 

$

(0.30

)

 

$

(0.55

)

 

$

(0.57

)

 

$

(0.83

)

Average shares outstanding— Diluted

 

 

13,895

 

 

 

13,800

 

 

 

13,867

 

 

 

13,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,114

)

 

$

(7,523

)

 

$

(7,925

)

 

$

(11,439

)

Foreign currency translation adjustments

 

 

(2

)

 

 

 

 

 

(4

)

 

 

2

 

Comprehensive loss

 

$

(4,116

)

 

$

(7,523

)

 

$

(7,929

)

 

$

(11,437

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number

of

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Other

Comprehensive

Loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of February 3, 2018

 

 

14,684

 

 

$

147

 

 

$

106,865

 

 

$

(66,274

)

 

$

(70

)

 

$

40,668

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,925

)

 

 

 

 

 

(7,925

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(4

)

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

7

 

Stock-based compensation

 

 

477

 

 

 

5

 

 

 

745

 

 

 

 

 

 

 

 

 

750

 

Exercise of stock options, net

 

 

0

 

 

 

0

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Repurchase and retirement of common stock

 

 

(683

)

 

 

(7

)

 

 

(129

)

 

 

 

 

 

 

 

 

(136

)

Balance as of November 3, 2018

 

 

14,478

 

 

$

145

 

 

$

107,482

 

 

$

(74,192

)

 

$

(74

)

 

$

33,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 28, 2017

 

 

14,010

 

 

$

140

 

 

$

105,775

 

 

$

(44,693

)

 

$

(72

)

 

$

61,150

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,439

)

 

 

 

 

 

(11,439

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Stock-based compensation

 

 

616

 

 

 

6

 

 

 

852

 

 

 

 

 

 

 

 

 

858

 

Repurchase and retirement of common stock

 

 

(15

)

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

(45

)

Balance as of October 28, 2017

 

 

14,611

 

 

$

146

 

 

$

106,582

 

 

$

(56,117

)

 

$

(70

)

 

$

50,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(7,925

)

 

$

(11,439

)

Adjustments to reconcile net loss to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,789

 

 

 

13,259

 

Stock-based compensation expense

 

 

750

 

 

 

858

 

Loss on impairment of long-lived assets

 

 

2,236

 

 

 

3,267

 

Loss on disposal of assets

 

 

238

 

 

 

283

 

Grow NJ award benefit

 

 

(1,977

)

 

 

1,096

 

Amortization of deferred financing costs

 

 

506

 

 

 

375

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(569

)

 

 

(1,218

)

Inventories

 

 

(7,798

)

 

 

(4,896

)

Prepaid expenses and other current assets

 

 

1,251

 

 

 

3,110

 

Other non-current assets

 

 

35

 

 

 

(59

)

(Decrease) increase in:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other current liabilities

 

 

(3,861

)

 

 

2,474

 

Deferred rent and other non-current liabilities

 

 

(2,087

)

 

 

23

 

Net cash provided by (used in) operating activities

 

 

(7,412

)

 

 

7,133

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,456

)

 

 

(5,484

)

Additions to intangible assets

 

 

 

 

 

(18

)

Net cash used in investing activities

 

 

(3,456

)

 

 

(5,502

)

Financing Activities

 

 

 

 

 

 

 

 

Decrease in cash overdraft

 

 

(1,486

)

 

 

(461

)

Increase in line of credit borrowings

 

 

13,700

 

 

 

3,600

 

Proceeds from long-term debt

 

 

2,500

 

 

 

3,401

 

Repayment of long-term debt

 

 

(3,935

)

 

 

(8,493

)

Deferred financing costs paid

 

 

(160

)

 

 

(277

)

Withholding taxes on stock-based compensation paid in connection

   with repurchase of common stock

 

 

(136

)

 

 

(45

)

Proceeds from exercise of stock options

 

 

1

 

 

 

 

Net cash provided by (used in) financing activities

 

 

10,484

 

 

 

(2,275

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(4

)

 

 

2

 

Net Decrease in Cash and Cash Equivalents

 

 

(388

)

 

 

(642

)

Cash and Cash Equivalents, Beginning of Period

 

 

1,635

 

 

 

2,859

 

Cash and Cash Equivalents, End of Period

 

$

1,247

 

 

$

2,217

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,997

 

 

$

2,640

 

Cash (received) paid for income taxes

 

$

118

 

 

$

(4,240

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements for the three and nine months ended November 3, 2018 and October 28, 2017 have been prepared in accordance with the requirements for Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures have been condensed or omitted. See the Company’s Annual Report on Form 10-K as of and for the year ended February 3, 2018 for Destination Maternity Corporation and subsidiaries (the “Company” or “Destination Maternity”) as filed with the Securities and Exchange Commission (“SEC”) for additional disclosures including a summary of the Company’s accounting policies.

In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. Since the Company’s operations are seasonal, the interim operating results of the Company may not be indicative of operating results for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

The Company operates on a 52/53-week fiscal year ending on the Saturday nearest January 31 of each year. References to the Company’s fiscal 2018 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 4, 2018 and will end February 2, 2019. References to the Company’s fiscal 2017 refer to the 53-week fiscal year, or periods within such fiscal year, which began January 29, 2017 and ended February 3, 2018.

  

 

2.

EARNINGS PER SHARE (“EPS”) AND DIVIDENDS

Basic net loss per share (“Basic EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding, excluding restricted stock awards for which the restrictions have not lapsed. Diluted net loss per share (“Diluted EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding, after giving effect to the potential dilution, if applicable, from the assumed lapse of restrictions on restricted stock and restricted stock unit (“RSU”) awards, and from shares of common stock resulting from the assumed exercise of outstanding stock options. Common shares issuable in connection with the award of performance-based restricted stock units (“PRSUs”) are excluded from the calculation of EPS until the PRSUs’ performance conditions are achieved and the shares in respect of the PRSUs become issuable (see Note 13).

The following tables summarize the Basic EPS and Diluted EPS calculations (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted EPS

 

$

(4,114

)

 

 

13,895

 

 

$

(0.30

)

 

$

(7,523

)

 

 

13,800

 

 

$

(0.55

)

 

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted EPS

 

$

(7,925

)

 

 

13,867

 

 

$

(0.57

)

 

$

(11,439

)

 

 

13,777

 

 

$

(0.83

)

 

 

In addition to PRSUs, for the three and nine months ended November 3, 2018 stock options and unvested restricted stock totaling approximately 436,000 and 804,000 shares, respectively, were excluded from the calculation of Diluted EPS as their effect would have been antidilutive. Stock options and unvested restricted stock totaling approximately 1,130,000 and 1,604,000 shares of the Company’s common stock were outstanding as of November 3, 2018 and October 28, 2017, respectively, but were not included in the computation of Diluted EPS for the three and nine months ended November 3, 2018 and October 28, 2017 due to the Company’s net loss. If the Company had reported a profit for the three and nine months ended November 3, 2018 and for the three and nine months ended October 28, 2017 the weighted average number of dilutive shares outstanding for computation of Diluted EPS would have been approximately 14,186,000, 14,159,000, 13,811,000 and 13,797,000 shares, respectively.

8


 

During the nine months ended November 3, 2018 and October 28, 2017, $7,000 and $15,000, respectively, of previously declared and undistributed dividends, for which payment was subject to completion of service requirements under restricted stock awards, were forfeited back to the Company in connection with the cancellation of the restricted stock awards.

 

 

3.

TRADE RECEIVABLES

Trade receivables are recorded based on revenue recognized for sales of the Company’s merchandise and for other revenue earned by the Company through its marketing partnership programs and international franchise agreements, and are non-interest bearing. The Company evaluates the collectability of trade receivables based on a combination of factors, including aging of trade receivables, write-off experience, analysis of historical trends and expectations of future performance. An allowance for doubtful accounts is recorded for the amount of trade receivables that are considered unlikely to be collected. When the Company’s collection efforts are unsuccessful, uncollectible trade receivables are charged against the allowance for doubtful accounts. As of November 3, 2018, and February 3, 2018 the Company’s trade receivables were net of allowance for doubtful accounts of $166,000 and $166,000, respectively.

 

 

4.

INVENTORIES

Inventories were comprised of the following (in thousands):

 

 

 

November 3, 2018

 

 

February 3, 2018

 

 

 

 

 

 

 

 

 

 

Finished goods

 

$

78,711

 

 

$

70,687

 

Work-in-progress

 

 

142

 

 

 

182

 

Raw materials

 

 

201

 

 

 

387

 

 

 

$

79,054

 

 

$

71,256

 

 

 

5.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities were comprised of the following (in thousands):

 

 

 

November 3, 2018

 

 

February 3, 2018

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

6,256

 

 

$

7,133

 

Accrued expenses

 

 

4,866

 

 

 

3,244

 

Insurance, primarily self-insurance reserves

 

 

3,858

 

 

 

5,048

 

Deferred rent

 

 

2,983

 

 

 

3,211

 

Sales and use taxes

 

 

2,827

 

 

 

2,638

 

Gift certificates and store credits

 

 

2,832

 

 

 

3,385

 

Product return reserve

 

 

2,298

 

 

 

2,799

 

Deferred revenue

 

 

1,668

 

 

 

1,001

 

Audit and legal

 

 

1,399

 

 

 

714

 

Accrued property and equipment additions

 

 

185

 

 

 

218

 

Other

 

 

1,816

 

 

 

2,270

 

 

 

$

30,988

 

 

$

31,661

 

 

 

 

6.

LINE OF CREDIT

After completion of a debt refinancing on February 1, 2018 the Company has in place a $50,000,000 senior secured revolving credit facility (the “Credit Facility”), which was amended and restated in connection with the issuance of the Company’s $25,000,000 Term Loan (see Note 7). The Company’s previous $70,000,000 Credit Facility had been in place since March 25, 2016. In connection with the Term Loan financing the maturity date of the Credit Facility was extended to January 31, 2023 and certain availability reserves were reduced or eliminated. Proceeds from advances under the Credit Facility, subject to certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, and other general corporate purposes.

9


 

The Credit Facility contains various affirmative and negative covenants and representations and warranties including the requirement that the Company maintain Excess Availability (as defined in the related Credit Agreement) of more than the greater of 10% of the Combined Loan Caps (as defined in the related Credit Agreement) and $7,000,000. In the event that the outstanding balance of the Term Loan exceeds the Term Loan Borrowing Base (as defined in the related Term Loan Agreement) then a reserve will be imposed against availability under the Credit Facility. The Credit Facility is secured by a security interest in the Company’s trade receivables, inventory, letter of credit rights, cash, intangibles and certain other assets. The interest rate on outstanding borrowings is equal to, at the Company’s election, either 1) the lender’s base rate plus 0.50% or 2) a LIBOR rate plus 1.0%. The Company also pays an unused line fee under the Credit Facility of 0.25% per annum.

Any amounts outstanding under the Credit Facility may be accelerated and become due and payable immediately and all loan and letter of credit commitments thereunder may be terminated upon an event of default and expiration of any applicable cure period. Events of default include: 1) nonpayment of obligations due under the subject loan agreement and related loan documents, 2) cross-defaults to other indebtedness and documents, 3) failure to perform any covenant or agreement contained in the subject loan agreement, 4) material misrepresentations, 5) failure to pay, or certain other defaults under, other material indebtedness of the Company, 6) certain bankruptcy or insolvency events, 7) a change of control, 8) indictments of the Company or senior management in a material forfeiture action, 9) default under certain material contracts to the extent such termination or default has or could reasonably be expected to have a material adverse effect, and 10) customary ERISA defaults, among others.

In connection with the original execution and subsequent amendments of the Credit Facility, the Company incurred deferred financing costs of $1,280,000.  These deferred financing costs are being amortized over the term of the Credit Facility agreement and are included in “interest expense, net” in the consolidated statements of operations.

As of November 3, 2018, the Company had $21,700,000 in outstanding borrowings under the Credit Facility, $7,327,000 in letters of credit and $13,505,000 of availability based on the Company’s Borrowing Base formula and availability reserve requirements. As of October 28, 2017, the Company had $8,200,000 in outstanding borrowings under the previous Credit Facility, $7,327,000 in letters of credit and $12,531,000 of availability. For the three months ended November 3, 2018 and October 28, 2017 borrowings had a weighted interest rate of 4.22% and 3.87% per annum, respectively. For the nine months ended November 3, 2018 and October 28, 2017 borrowings had a weighted interest rate of 4.11% and 3.51% per annum, respectively.  During the nine months ended November 3, 2018 and October 28, 2017 the Company’s average levels of direct borrowings were $17,258,000 and $8,707,000, respectively, and the Company’s maximum borrowings were $27,400,000 and $15,700,000, respectively.

On September 26, 2018, the Company entered into a commitment letter with Bank of America N.A. (“Bank of America”),, pursuant to which, and subject to the terms and conditions set forth therein, Bank of America committed to provide to the Company certain five-year asset-based senior secured facilities consisting of an ABL with an aggregate commitment of $52 million and a FILO Term Loan with an aggregate principal amount of $24 million. The interest rates are expected to be, at the Company’s option, adjusted LIBOR or base rate plus an applicable margin based on excess availability. Such applicable margins for the base rate loans expect to range between 0.50% and 1.00% per annum in the case of the ABL and between 2.25% and 2.75% per annum in the case of the FILO Term Loan. Such applicable margins for the LIBOR loans expect to range between 1.5% to 2.0% in the case of the ABL and between 3.25% to 3.75% in the case of the FILO Term Loan. The funding of the senior secured facilities under the commitment letter is contingent upon the satisfaction of customary conditions, including, but not limited to, the parties’ entering into definitive documentation, absence of material adverse events or conditions with respect to the Company and the receipt of payoff letters in respect of the Company’s existing credit agreements governing its outstanding indebtedness. It is anticipated that the Company will use the net proceeds of the senior secured facilities to repay outstanding indebtedness under its Term Loan previously discussed in this Note 7 and under its Credit Facility previously discussed in Note 6, pay a portion of the transaction fees and expenses in connection with entering into the senior secured facilities and to the extent any net proceeds remain, for ongoing working capital and other general corporate purposes of the Company.

 

7.

LONG-TERM DEBT

 

On February 1, 2018 (the “Closing Date”) the Company entered into a Term Loan Credit Agreement (the “Term Loan Agreement”) which provides for a term loan of up to $25,000,000 and matures on January 31, 2023 (the “Term Loan”).  On the Closing Date the Company borrowed $22,500,000 net of fees against the Term Loan and used the proceeds, in addition to $3,600,000 borrowed under its Credit Facility (see Note 6) to pay off the $22,999,000 balance of the Company’s then existing term loan (the “Prior Term Loan”) and $3,226,000 of fees and interest associated with the refinancing transaction. The Term Loan provided for an additional loan of $2,500,000 which could be borrowed at the Company’s discretion within a period of 45 days after delivery to the lender of the Company’s first quarter fiscal 2018 financial statements and satisfaction of certain other requirements. The Company met these requirements and borrowed the additional $2,500,000 on July 16, 2018. There is a minimum excess availability requirement of the greater of 10% of the Combined Loan Cap, as defined in the Term Loan Agreement, or $7,000,000.    

10


 

The interest rate on the Term Loan is equal to a LIBOR rate plus 9.0%. The Company is required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $312,500 which commenced on July 31, 2018, with the remaining outstanding balance payable on the maturity date. Additionally, the Term Loan can be prepaid at the Company's option subject to certain restrictions and subject to a prepayment premium as follows: 1) if the prepayment occurs on or prior to the second anniversary of the Closing Date, the greater of  a) interest on the prepayment that would otherwise have been paid with the 24 month period following the Closing Date minus actual interest payments made through the prepayment date and b) 2% of the prepayment and 2) 2% of the prepayment amount if paid between the second and third anniversary of the Closing Date.

The Term Loan is secured by a security interest in substantially all of the assets of the Company, including accounts receivable, inventory, equipment, letter of credit rights, cash, intellectual property and other intangibles, and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the Credit Facility Lender. The Term Loan Agreement prohibits the payment of dividends or share repurchases by the Company for three years and imposes certain restrictions on the Company's ability to, among other things, incur additional indebtedness and enter into other various types of transactions.

On September 26, 2018, the Company entered into a commitment letter with Bank of America, pursuant to which, and subject to the terms and conditions set forth therein, Bank of America committed to provide to the Company certain five-year asset-based senior secured facilities consisting of an ABL with an aggregate commitment of $52 million and a FILO Term Loan with an aggregate principal amount of $24 million. The interest rates are expected to be, at the Company’s option, adjusted LIBOR or base rate plus an applicable margin based on excess availability. Such applicable margins for the base rate loans expect to range between 0.50% and 1.00% per annum in the case of the ABL and between 2.25% and 2.75% per annum in the case of the FILO Term Loan. Such applicable margins for the LIBOR loans expect to range between 1.5% to 2.0% in the case of the ABL and between 3.25% to 3.75% in the case of the FILO Term Loan. The funding of the senior secured facilities under the commitment letter is contingent upon the satisfaction of customary conditions, including, but not limited to, the parties’ entering into definitive documentation, absence of material adverse events or conditions with respect to the Company and the receipt of payoff letters in respect of the Company’s existing credit agreements governing its outstanding indebtedness. It is anticipated that the Company will use the net proceeds of the senior secured facilities to repay outstanding indebtedness under its Term Loan previously discussed in this Note 7 and under its Credit Facility previously discussed in Note 6, pay a portion of the transaction fees and expenses in connection with entering into the senior secured facilities and to the extent any net proceeds remain, for ongoing working capital and other general corporate purposes of the Company.

On March 25, 2016 the Company entered into a Term Loan Agreement Credit Agreement (the “Prior Term Loan Agreement”) for the Company’s $32,000,000 Prior Term Loan that had a maturity date of March 25, 2021. The proceeds of the Prior Term Loan were used to repay a portion of the indebtedness that was outstanding under the Company’s credit facility at that time.  The interest rate on the Prior Term Loan was equal to a LIBOR rate (with a 1.0% LIBOR floor) plus 7.5%. The Company was required to make minimum repayments of the principal amount in quarterly installments of $800,000 with the remaining outstanding balance payable on the maturity date.  As amended on December 19, 2016 and April 7, 2017, the Prior Term Loan Agreement contained various minimum excess availability requirements including $5,000,000 against availability under the Company Credit Facility that was reduced dollar for dollar for prepayments of the Prior Term Loan, and an amount equal to the greater of 10% of the Combined Loan Cap (as defined in the Credit Facility Agreement) or $10,000,000.

In connection with the execution of the Term Loan Agreement, the Prior Term Loan Agreement and subsequent amendments, the Company incurred deferred financing costs of $4,557,000. Of this amount, the unamortized balance of $1,542,000 in deferred financing costs incurred in connection with the Prior Term Loan were written off upon entering into the Term Loan and charged to loss on extinguishment of debt in the Company consolidated statements of operations. There were $2,460,000 of deferred financing costs incurred in connection with the Term Loan. These deferred financing costs are reflected as a direct deduction from the Term Loan liability in the consolidated balance sheets and are being amortized over the term of the Term Loan Agreement. The amortization is included in “interest expense, net” in the consolidated statements of operations.

As of November 3, 2018, and October 28, 2017 there was $24,375,000 and $24,599,000, respectively, of principal outstanding under the Term Loan and Prior Term Loan.

As of November 3, 2018, and October 28, 2017 there was $3,730,000 and $7,064,000, respectively, outstanding under a five-year equipment financing arrangement with the Company’s Credit Facility bank. The equipment note bears annual interest at 3.38%, with payments of $272,000 (including interest) due monthly through December 2019. The equipment note is collateralized by substantially all of the material handling equipment at the Company’s distribution facility in Florence, New Jersey. Any amounts outstanding under the equipment note may be accelerated and become due and payable immediately upon an event of default and expiration of any applicable cure period. The specified events of default are substantially the same as those in the Credit Facility agreement (see Note 6).

11


 

On June 6, 2017 the Company received $3,401,000 in proceeds from a three-year financing arrangement in the form of a sale and leaseback for certain furniture, fixtures and software. Monthly payments under the leaseback arrangement are $123,000 for the first 24 months and $48,000 for months 25 to 36. At the end of the leaseback term, the Company has the option to extend the lease for an additional year or to repurchase the financed property for a price to be agreed. All of the proceeds from the transaction were used to prepay a portion of the Company’s Term Loan.  As of November 3, 2018, and October 28, 2017, there was $1,680,000 and $2,947,000 of principal outstanding under this financing arrangement.

 

8.

FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework for measuring fair value focused on exit price and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements as follows:

 

Level 1 – Quoted market prices in active markets for identical assets or liabilities

 

Level 2 – Observable market-based inputs or inputs that are corroborated by observable market data

 

Level 3 – Unobservable inputs that are not corroborated by market data

At both November 3, 2018 and February 3, 2018, the Company had cash equivalents of $4,000. The Company’s cash equivalents consist of investments in money market funds for which the carrying value approximates fair value (based on Level 1 inputs) due to the short-term nature of those instruments. The carrying values of trade receivables and accounts payable approximate fair value due to the short-term nature of those instruments.

The Company’s Credit Facility has variable interest rates that are tied to market indices. As of November 3, 2018, and February 3, 2018, the Company had $21,700,000 and $8,000,000, respectively, of direct borrowings outstanding under the Credit Facility. The carrying value of the Company’s Credit Facility borrowings approximates fair value as the variable interest rates approximate current market rates, which the Company considers to be Level 2 inputs.

The Company’s Term Loan, which represents a significant majority of the Company’s long-term debt, bears interest at variable rates, which adjust based on market conditions with a minimum annual rate of 9.00%. The carrying value of the Company’s Term Loan approximates fair value as the variable interest rates approximate current market rates for similar instruments available to companies with comparable credit quality, which the Company considers to be Level 2 inputs. The fair value of the Company’s fixed-rate equipment notes was determined using a discounted cash flow analysis based on interest rates currently available to the Company, which the Company considers to be Level 2 inputs. The difference between the carrying value and fair value of long-term debt held by the Company with a fixed rate of interest is not material.

 

 

9.

NET SALES

 

The following disaggregates the Company’s net sales by major source (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail stores

$

55,979

 

 

$

59,325

 

 

$

177,608

 

 

$

191,664

 

Leased departments

 

9,743

 

 

 

10,292

 

 

 

29,624

 

 

 

32,752

 

Total retail locations

 

65,722

 

 

 

69,617

 

 

 

207,232

 

 

 

224,416

 

Ecommerce

 

21,045

 

 

 

20,539

 

 

 

69,530

 

 

 

57,615

 

Marketing partnerships

 

4,110

 

 

 

4,475

 

 

 

12,236

 

 

 

13,004

 

Wholesale and franchise

 

1,960

 

 

 

1,723

 

 

 

3,461

 

 

 

6,025

 

Total net sales

$

92,837

 

 

$

96,354

 

 

$

292,459

 

 

$

301,060

 

 

 

The Company’s performance obligations consist primarily of transferring control of merchandise to customers.  Retail and ecommerce sales are recognized upon transfer of control, which occurs when merchandise is taken at point-of-sale for a retail transaction or upon receipt of shipment for an ecommerce transaction.  Sales are reported net of returns and sales taxes.  Shipping and handling fees billed to customers are recognized in net sales when control of the underling merchandise is transferred to the customer.

 

12


 

The Company earns revenue through a variety of marketing partnership programs utilizing the Company’s opt-in customer database and various in-store marketing initiatives focused on baby and parent-related products and services.  Revenue from these activities is recognized when the goods or services are provided.

 

Sales of product to the Company’s wholesale customers and international franchisees are recognized upon transfer of control which is primarily when product is shipped.  Franchise fees are recorded by the Company when all material services have been performed or in the case of royalties earned on sales of product, in the period when the franchisee sells product to their retail customer.

 

10.

OTHER CHARGES, NET

 

In the first quarter of fiscal 2018 the Company received notification from a stockholder group (the “Stockholder Group”), of the nomination of a slate of alternative nominees for election to the Company’s Board of Directors at the Annual Meeting of Stockholders that was held on May 23, 2018 (the “Proxy Solicitation”).  At the Company’s 2018 Annual Meeting of Stockholders held on May 23, 2018, the Company’s stockholders replaced the incumbent board in its entirety and elected Holly N. Alden, Christopher B. Morgan, Marla A Ryan and Anne-Charlotte Windal as the Company’s new Board of Directors. During the nine months ended November 3, 2018 the Company incurred $2,224,000 of charges related to the Proxy Solicitation, including $83,000 during the three months ended November 3, 2018.

During the fourth quarter of fiscal 2015 the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with the Company’s largest shareholder, Orchestra, a France-based retailer of children’s wear, to complete a proposed business combination (“the Proposed Merger”).  During the second quarter of fiscal 2017 the parties determined that is was in the best interest of their respective stockholders to terminate the Merger and on July 27, 2017, the Company, Orchestra, and certain other affiliates of Orchestra entered into a Termination Agreement (the “Termination Agreement”).   In connection with the Termination Agreement, Orchestra and the Company agreed to reimburse each other for certain costs incurred in connection with their effort to implement the Merger Agreement.  During the nine months ended October 28, 2017 the Company incurred $1,113,000 of charges related to the proposed merger.

Over the last several years the Company has engaged in a series of management and organizational changes and, in connection therewith, retained consulting firms to review its costs and business strategy associated with such management and organizational changes.  The Company’s Board of Directors authorized changes to the Company’s chief executive function including the resignation of Anthony M. Romano as the Company’s Chief Executive Officer and President,  the September 17, 2017 appointment of B. Allen Weinstein, an independent member of the Company’s Board since 2010, as Interim Chief Executive Officer replacing Mr. Romano, the January 2, 2018 appointment of Melissa Payner-Gregor, an independent  member of the Company’s Board since 2009, as Interim Chief Executive Officer replacing Mr. Weinstein and the May 23, 2018 appointment of Marla Ryan as Chief Executive Officer replacing Ms. Payner-Gregor.  Ronald Masciantonio, the Company’s Chief Administrative Officer, resigned from his position on June 4, 2018.  David Stern, the Company’s former Chief Financial Officer departed the Company effective at the close of business on August 10, 2018. The Company also paid one-time retention bonuses with service conditions to certain key management personnel which are being recorded over the service period, while reducing its overall headcount to create a more efficient and effective operating structure. During the three and nine months ended November 3, 2018 and October 28, 2017 the Company incurred $1,742,000, $2,636,000, $2,674,000 and $2,633,000, respectively, of charges related to these management and organizational changes.

 

A summary of the net charges incurred in connection with the proxy solicitation and proposed merger and the management and organizational changes is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proxy Solicitation and Proposed Merger

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proxy solicitation

 

$

83

 

 

$

 

 

$

2,224

 

 

$

 

Proposed merger

 

 

 

 

 

464

 

 

 

 

 

 

1,113

 

Total proxy solicitation and proposed

   merger

 

 

83

 

 

 

464

 

 

 

2,224

 

 

 

1,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and Organizational Changes