Vince.(VNCE) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements Presents unaudited condensed consolidated financial statements, reflecting COVID-19's impact on revenues, net losses, and asset impairments Condensed Consolidated Balance Sheets Balance sheet as of October 31, 2020, shows decreased total assets and stockholders' equity, driven by operating losses and impairments Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | October 31, 2020 | February 1, 2020 | | :--- | :--- | :--- | | Total current assets | $126,525 | $114,244 | | Total assets | $354,454 | $362,302 | | Total current liabilities | $85,877 | $90,277 | | Long-term debt | $92,823 | $48,680 | | Total liabilities | $281,308 | $231,522 | | Total stockholders' equity | $73,146 | $130,780 | Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) Net sales declined significantly due to COVID-19, with substantial impairment charges leading to a significant net loss Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Oct 31, 2020 | Three Months Ended Nov 2, 2019 | Nine Months Ended Oct 31, 2020 | Nine Months Ended Nov 2, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $69,022 | $104,539 | $145,062 | $270,779 | | Gross profit | $31,654 | $50,997 | $60,994 | $132,243 | | Income (loss) from operations | $6,264 | $7,550 | $(57,162) | $(17,089) | | Net earnings (loss) | $4,963 | $6,001 | $(58,277) | $(21,288) | | Diluted EPS | $0.42 | $0.50 | $(4.96) | $(1.83) | - For the nine months ended October 31, 2020, the company recorded significant impairment charges totaling $26,900 thousand ($13,800 thousand for goodwill and intangibles, and $13,000 thousand for long-lived assets), contributing heavily to the net loss[12] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $130,800 thousand at the beginning of the fiscal year to $73,100 thousand as of October 31, 2020, primarily due to the period's net loss - Total stockholders' equity fell by approximately 44% from $130,780 thousand on February 1, 2020, to $73,146 thousand on October 31, 2020, mainly due to the accumulated deficit increasing from the period's net loss[16] Condensed Consolidated Statements of Cash Flows Significant cash outflow from operations due to net loss and inventory increase, offset by increased financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Oct 31, 2020 | Nine Months Ended Nov 2, 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(38,135) | $2,189 | | Net cash used in investing activities | $(2,560) | $(3,563) | | Net cash provided by financing activities | $40,851 | $1,983 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, COVID-19 impact, impairment charges, debt, segment performance, related party transactions, and subsequent events - The company operates three brands: Vince, Rebecca Taylor, and Parker. The acquisition of Rebecca Taylor and Parker in November 2019 was a transaction between commonly controlled entities, requiring retrospective combination of financial statements[27][28] - Due to COVID-19's impact, the company recorded non-cash impairment charges of $13,800 thousand for goodwill and intangible assets and $13,000 thousand for property, equipment, and right-of-use assets during the nine months ended October 31, 2020[36][37][52] - Subsequent to the quarter end, on December 11, 2020, the company entered into a new $20,000 thousand subordinated term loan (Third Lien Credit Facility) with an affiliate of its majority stockholder, Sun Capital, to enhance liquidity[85][112][126] - The obligation under the Tax Receivable Agreement with Pre-IPO Stockholders was adjusted down by $2,320 thousand to an estimated total of $0 as of October 31, 2020, due to revised projections of future pre-tax income[120] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's negative impact on sales and operations, detailing segment performance and liquidity measures taken Results of Operations Net sales fell significantly in Q3 and YTD 2020, with gross margin contraction and substantial impairment charges leading to operating loss Q3 2020 vs Q3 2019 Performance (in thousands) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $69,022 | $104,539 | -34.0% | | Gross Profit | $31,654 | $50,997 | -37.9% | | Gross Margin | 45.9% | 48.8% | -290 bps | | SG&A Expenses | $25,390 | $43,447 | -41.6% | | Income from Operations | $6,264 | $7,550 | -17.0% | Nine Months 2020 vs 2019 Performance (in thousands) | Metric | YTD 2020 | YTD 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $145,062 | $270,779 | -46.4% | | Gross Profit | $60,994 | $132,243 | -53.9% | | Gross Margin | 42.0% | 48.8% | -680 bps | | Loss from Operations | $(57,162) | $(17,089) | -234.5% | - The decrease in SG&A expenses was driven by cost-saving measures in response to COVID-19, including reduced compensation and benefits ($7,700 thousand in Q3), lower rent and occupancy costs ($4,200 thousand in Q3), and decreased marketing and travel expenses[149][155] Performance by Segment All segments experienced significant sales declines in Q3 and YTD 2020 due to COVID-19, despite e-commerce growth in one segment Net Sales by Segment - Q3 (in thousands) | Segment | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Vince Wholesale | $38,746 | $51,102 | -24.2% | | Vince Direct-to-consumer | $22,822 | $35,302 | -35.4% | | Rebecca Taylor and Parker | $7,454 | $18,135 | -58.9% | Net Sales by Segment - Nine Months (in thousands) | Segment | YTD 2020 | YTD 2019 | % Change | | :--- | :--- | :--- | :--- | | Vince Wholesale | $66,598 | $121,850 | -45.3% | | Vince Direct-to-consumer | $55,958 | $91,027 | -38.5% | | Rebecca Taylor and Parker | $22,506 | $57,902 | -61.1% | - Despite reduced traffic in retail locations, the Vince Direct-to-consumer segment saw mid-teens growth in e-commerce sales in Q3 and over 30% growth for the nine-month period[159][172] Liquidity and Capital Resources COVID-19 significantly impacted liquidity, leading to cash usage from operations, credit facility amendments, and new subordinated debt - Net cash used in operating activities was $38,100 thousand for the nine months ended Oct 31, 2020, compared to net cash provided by operating activities of $2,200 thousand in the prior-year period[185][186] - On June 8, 2020, the company amended its 2018 Revolving Credit Facility and 2018 Term Loan Facility to, among other things, temporarily increase borrowing availability and suspend certain financial covenants[177] - On December 11, 2020, the company entered into a new $20,000 thousand Third Lien Credit Facility with SK Financial, an affiliate of Sun Capital, and executed the Fifth Amendments to its existing credit facilities to extend covenant relief and revise terms[178][179][180] Quantitative and Qualitative Disclosure About Market Risk As a "smaller reporting company," the company is not required to provide this information - As a "smaller reporting company," the company is exempt from the requirement to provide quantitative and qualitative disclosures about market risk[219] Controls and Procedures Disclosure controls and procedures were ineffective due to material weaknesses in IT general controls, with remediation efforts ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of October 31, 2020[222] - The ineffectiveness is due to material weaknesses in internal control over financial reporting concerning IT program change management and user access controls, which could impact segregation of duties[224] - During the quarter, the company completed the transition of the Acquired Businesses' ERP system to its existing system, which constituted a material change in internal control over financial reporting[231] PART II. OTHER INFORMATION Legal Proceedings Stockholder lawsuit alleging misleading statements was dismissed, but plaintiff filed appeals which are currently pending - A stockholder lawsuit alleging misleading statements about an ERP system transition was dismissed in its entirety on September 9, 2020[97][233] - The plaintiff filed notices of appeal on October 6, 2020, and the appeals are currently pending[97][233] Risk Factors COVID-19 pandemic adversely affects business, financial condition, and operations, posing risks to stores, demand, inventory, and liquidity - The primary risk factor discussed is the ongoing and uncertain negative impact of the COVID-19 pandemic on all aspects of the business[237] - Specific risks cited include temporary store closures, reduced consumer demand for luxury goods, excess inventory, supply chain disruptions, and the ability to access capital and maintain compliance with credit facilities[237] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for the period - None[239] Defaults Upon Senior Securities No defaults upon senior securities to report for the period - None[240] Mine Safety Disclosures This item is not applicable to the company - Not applicable[241] Other Information No other information to report for the period - None[242] Exhibits Lists exhibits filed with Form 10-Q, including CEO certifications and financial statements in XBRL format - Exhibits filed include CEO certifications (31.1, 32.1) and financial statements in XBRL format (101.1)[243]