| | | Delaware | | 75-3264870 | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
500 5th5th Avenue—20th Floor New York, New York 10110 (Address of principal executive offices) (Zip code) (212) 515-2600 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: | | | Title of Each Class | | Name of Exchange on Which Registered | Common Stock, $0.01 par value per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒ 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 x☒ No ¨☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x☒ No ¨☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | Large accelerated filer | | ¨☐ | | Accelerated filer | | x☒ | | | | | Non-accelerated filer | | ¨☐ (Do not check if a smaller reporting company)
| | 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 Exchange Act). Yes ¨☐ No x☒ The aggregate market value of the registrant’s Common Stock held by non-affiliates as of August 2, 2014,July 30, 2016, the last day of the registrant’s most recently completed second quarter, was approximately $553.1$102.4 million based on a closing price per share of $33.16$5.00 as reported on the New York Stock Exchange on August 1, 2014.July 29, 2016. As of March 20, 2015,31, 2017, there were 36,748,24549,427,606 shares of the registrant’s Common Stock outstanding. Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 20152017 annual meeting of stockholders are incorporated by reference into Part III of this annual reportAnnual Report on Form 10-K.
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INTRODUCTORY NOTE On November 27, 2013, Vince Holding Corp. (“VHC” or the “Company”), previously known as Apparel Holding Corp., closed an initial public offering (“IPO”) of its common stock and completed a series of restructuring transactions (the “Restructuring Transactions”) through which (i) Kellwood Holding, LLC acquired the non-Vince businesses, which includeincluded Kellwood Company, LLC (“Kellwood Company” or “Kellwood”), from the Company and (ii) theCompany. The Company continues to own and operate the Vince business, which includes Vince, LLC. On November 18, 2016, Kellwood Intermediate Holding, LLC and Kellwood Company, LLC entered into a Unit Purchase Agreement with Sino Acquisition, LLC (the “Kellwood Purchaser”) whereby the Kellwood Purchaser agreed to purchase all of the outstanding equity interests of Kellwood Company, LLC. Prior to the closing, Kellwood Intermediate Holding, LLC and Kellwood Company, LLC conducted a pre-closing reorganization pursuant to which certain assets of Kellwood Company, LLC were distributed to a newly formed subsidiary of Kellwood Intermediate Holding, LLC, St. Louis Transition, LLC (“St. Louis, LLC”). The transaction closed on December 21, 2016 (the “Kellwood Sale”). St. Louis, LLC is anticipated to be wound down by or around December 2017. Prior to the IPO and the Restructuring Transactions, VHC was a diversified apparel company operating a broad portfolio of fashion brands, which included the Vince business. As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business, and the stockholders immediately prior to the consummation of the Restructuring Transactions (the “Pre-IPO Stockholders”) (through their ownership of Kellwood Holding, LLC) retained the full ownership and control of the non-Vince businesses. The Vince business is now the sole operating business of Vince Holding Corp. Historical financial information for the non-Vince businesses has been presented as a component of discontinued operations, until the businesses were separated on November 27, 2013, in this annual report on Form 10-K and our Consolidated Financial Statements and related notes included herein. DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS This annual reportAnnual Report on Form 10-K, and certain informationany statements incorporated by reference herein, contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. SuchForward-looking statements often includeare indicated by words or phrases such as “may,” “will,” “should,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” “project,” “forecast,” “envision” and other similar phrases. Although we believe the assumptions and expectations reflected in these forward-looking statements are reasonable, these assumptions and expectations may not prove to be correct and we may not achieve the financial results or benefits anticipated. These forward-looking statements are not guarantees of actual results. Ourresults, and our actual results may differ materially from those suggested in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, including, without limitation: our ability to maintain adequate cash flow from operations or availability under our revolving credit facility to meet our liquidity needs (including our obligations under the Tax Receivable Agreement with the Pre-IPO Stockholders); our ability to continue as a going concern; our ability to successfully operate the newly implemented systems, processes and functions recently transitioned from Kellwood Company; our ability to remediate the identified material weaknesses in our internal control over financial reporting; our ability to ensure the proper operation of the distribution facility by a third-party logistics provider recently transitioned from Kellwood; our ability to remain competitive in the areas of merchandise quality, price, breadth of selection and customer service; our ability to anticipate and/or react to changes in customer demand and attract new customers;customers, including in connection with making inventory commitments; our ability to control the level of sales in the off-price channels; our ability to manage excess inventory in a way that will promote the long-term health of the brand; changes in consumer confidence and spending; our ability to maintain projected profit margins; unusual, unpredictable and/or severe weather conditions; the execution and management of our retail store growth plans, including the availability and cost of acceptable real estate locations for new store openings; the execution and management of our international expansion, including our ability to promote our brand and merchandise outside the U.S. and find suitable partners in certain geographies,geographies; our ability to expand our product offerings into new product categories, including the ability to find suitable licensing partners; our ability to successfully implement our marketing initiatives; our ability to protect our trademarks in the U.S. and internationally; our ability to maintain the security of electronic and other confidential information; serious disruptions and catastrophic events; changes in global economies and credit and financial markets; competition; our ability to attract and retain key personnel; commodity, raw material and other cost increases; compliance with domestic and international laws, regulations and orders; changes in laws and regulations; outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith; tax mattersmatters; and other factors as set forth from time to time in our Securities and Exchange Commission (“SEC”) filings, including those described in this annual reportAnnual Report on Form 10-K under “Item 1A—Risk Factors.” We intend these forward-looking statements to speak only as of the time of this annual reportAnnual Report on Form 10-K and do not undertake to update or revise them as more information becomes available. Part Iavailable, except as required by law.
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PART I For purposes of this annual reportAnnual Report on Form 10-K, “Vince,” the “Company,” “we,” “us,” and “our,” refer to Vince Holding Corp. (“VHC”) and its wholly owned subsidiaries, including Vince Intermediate Holding, LLC and Vince, LLC. References to “Kellwood” refer, as applicable, to Kellwood Holding, LLC and its consolidated subsidiaries (including Kellwood Company, LLC) or the operations of the non-Vince businesses after giving effect to the Restructuring Transactions.Transactions and prior to the Kellwood Sale. Overview Established in 2002, Vince is a leading contemporary fashionglobal luxury brand best known for utilizing luxe fabrications and innovative techniques to create a product assortment that combines urban utility and modern effortless stylestyle. From its edited core collection of ultra-soft cashmere knits and everyday luxury essentials. Founded in 2002, thecotton tees, Vince has evolved into a global lifestyle brand now offers a wide range of women’s, men’s and children’s apparel,destination for both women’s and men’s footwear,apparel and handbags.accessories. Vince products are sold in prestige distribution worldwide, including over 2,400approximately 2,300 distribution pointslocations across 45more than 40 countries. Vince has generated strong sales momentum over the last decade. We believe that we will achieve continued success by expanding our product assortment distributed through premier wholesale partners in the U.S. and select international markets, as well as in our own branded retail locations and on our e-commerce platform. We have a small number of wholesale partners who account for a significant portion of our net sales. Net sales to the full-price, off-price and e-commerce operations of our three largest wholesale partners were 45%, 43% and 49% of our total revenue for fiscal 2016, fiscal 2015 and fiscal 2014, and 46% of our total revenue for fiscal 2013.respectively. These partners include Nordstrom, Saks Fifth AvenueInc., Hudson’s Bay Company and Neiman Marcus Group LTD, each accounting for more than 10% of our total revenue for fiscal 20142016, fiscal 2015 and fiscal 2013.2014. We design our products in the U.S. and source the vast majority of our products from contract manufacturers outside the U.S., primarily in Asia and South America.Asia. We serve our customers through a variety of channels that reinforce the Vince brand image. Our diversified channel strategy allows us to introduce our products to customers through multiple distribution points that are reported in two segments: wholesale and direct-to-consumer. Our wholesale segment is comprised of sales to premiermajor department stores and specialty stores in the U.S. and in select international markets, with U.S. wholesale representing 51%, 56% and 67% of our fiscal 2016, fiscal 2015 and fiscal 2014 net sales, respectively, and the total wholesale segment representing 63%, 67% and 76% of our fiscal 2014 sales. We believe that our successsales in for the U.S.same periods. International wholesale channelrepresented 10%, 10% and our strong relationships with premier wholesale partners provide opportunities for continued growth. These growth initiatives include creating enhanced product assortments and brand extensions through both in-house development activities and licensing arrangements, as well as continuing the build-out of branded shop-in-shops in select wholesale partner locations. We also believe international wholesale, which represented 9% of net sales for fiscal 2016, fiscal 2015 and fiscal 2014, compared to 8% in fiscal 2013, presents a significant growth opportunity as we strengthen our presence in existing geographies and introduce Vince in new markets globally.respectively. Our wholesale segment also includes our licensing business related to our licensing arrangementsarrangement for our women’s and men’s footwear and children’s apparel line.footwear. Our direct-to-consumer segment includes our company-operated retail and outlet stores and our e-commerce business. In 2008, we initiated a direct-to-consumer strategy with the opening of our first retail store. During fiscal year 2014,2016, we opened ninesix new full-price retail stores. As of January 28, 2017, we operated 54 stores, consisting of six40 company-operated full-price retail stores and three14 company-operated outlet locations. As of January 31, 2015, we operated 37 stores, consisting of 28 full-price retail stores and nine outlet locations. Based on a combination of third-party analyses and internal projections, we believe that the U.S. market can currently support at least 100 free-standing Vince store locations. The direct-to-consumer segment also includes our e-commerce website,www.vince.com, which was launched in 2008 and re-launched with enhancements to the website during fiscal 2014.. The direct-to-consumer segment accounted for 37%, 33% and 24% of fiscal 2016, fiscal 2015 and fiscal 2014 net sales, compared to 21% of net sales in the prior year. We expect sales from this channel to continue to grow as we drive productivity in existing stores, open new stores and continue to make improvements in our e-commerce business.respectively. Vince operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52 or 53-week period ending on the Saturday closest to January 31 of31. References to “fiscal year 2016” or “fiscal 2016” refer to the following year.fiscal year ended January 28, 2017; References to “fiscal year 2015” or “fiscal 2015” refer to the fiscal year ended January 30, 2016; and References to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015;2015. References to “fiscal year 2013” or “fiscal 2013” refer to the fiscal year ended February 1, 2014;
References to “fiscal year 2012” or “fiscal 2012” refer to the fiscal year ended February 2, 2013.
Each of fiscal years 20142016, 2015 and 20132014 consisted of a 52-week period and fiscal year 2012 consisted of a53-week period. Vince Holding Corp., previously named Apparel Holding Corp., was incorporated in Delaware in February 2008 in connection with the acquisition of Kellwood Company by affiliates of Sun Capital Partners, Inc. (“Sun Capital”). In September 2012, Kellwood Company formed Vince, LLC and all assets constituting the Vince business were contributed to Vince, LLC at such time (the “Vince Transfer”). On November 27, 2013, Apparel Holding Corp. was renamed Vince Holding Corp. in connection with the consummation of thean IPO. Certain restructuring transactions were completed in connection with the consummation of the IPO. These transactions, among other things, included Kellwood Holding, LLC acquiring the non-Vince businesses, which include Kellwood Company, LLC, from the Company;Company. The Company has since owned and the Company continues to own and operateoperated the Vince business, which includes Vince, LLC. The restructuring transactions separated the Vince and non-Vince businesses on November 27, 2013. Any and all debt obligations outstanding at the time of the restructuring transactions either remained with Kellwood Holding, LLC and its subsidiaries (i.e. the non-Vince businesses) and/or were discharged, repurchased or refinanced in connection with the consummation of the IPO. Historical financial information for the non-Vince businesses has been presented as a component of discontinued operations, until the businesses were separated on November 27, 2013, in this annual report on Form 10-K and our Consolidated Financial Statements and related notes included herein. Our principal executive office is located at 500 Fifth5th Avenue, 20th Floor, New York, New York 10110 and our telephone number is(212) 515-2600. Our corporate website address iswww.vince.com. Brand and Products Established in 2002, Vince is a leading contemporary fashionglobal luxury brand best known for utilizing luxe fabrications and innovative techniques to create a product assortment that combines urban utility and modern effortless style and every luxury essentials. The Vince brand was founded in 2002 with astyle. From its edited core collection of stylish women’sultra-soft cashmere knits and cashmere sweaters that rapidly attracted a loyal customer base drawn to the casual sophistication and luxurious feel of our products. Over the last decade,cotton tees, Vince has generated strong sales momentumevolved into a global lifestyle brand and has successfully grown to include adestination for both women’s and men’s collection in 2007, denim, leather apparel 4
and outerwear lines in 2010 and a women’s handbag line in 2014. In addition, through licensing partnerships, we launched women’s footwear in 2012, men’s footwear in 2014 and children’s apparel in 2014. The Vince brand is synonymous with a clean, timeless aesthetic, sophisticated design and superior quality. We believe these attributes have generated strong customer loyalty and have enabled us to hold a distinctive position among contemporary fashion brands. We also believe that we will achieve continued success by expanding our product assortment and distributing this expanded product assortment through our premier wholesale partners in the U.S. and select international markets, as well as through our growing number of branded retail locations and on oure-commerce platform. Since our inception in 2002, we have offered contemporary apparel with a focus on clean and authentic design and superior quality.accessories. We believe that our differentiated design aesthetic and strong attention to detail and fit allow us to maintain premium pricing, and that the combination of quality and value positions Vince as an everyday luxury brand that encourages repeat purchases among our customers. We also believe that we can expand our product assortment and distribute this expanded product assortment through our premier wholesale partners in the U.S. and select international markets, as well as through our branded retail locations and on our e-commerce platform.
Over 88% of Vince’s sales were comprised ofOur women’s products in fiscal 2014, with particular strength in sweaters, dresses, pants and outerwear. The women’s line under the Vince brandcollection includes seasonal collections of
luxurious cashmere sweaters and silk blouses, leather and suede leggings and jackets, dresses, denim, pants, tanks and t-shirts, handbagsfootwear and a growing assortment of outerwear. TheOur men’s collection under the Vince brand includes t-shirts, knit and woven tops, sweaters, denim, pants, blazers, footwear, outerwear and stylish leather jackets. We have identified additional brand extension opportunities, including elevating our men’s collection, expanding outerwear, women’s pants and dresses, and implementing a replenishment program for core items. In addition, through our licensing arrangements, we also offer women’s and men’s footwear and children’s apparel. We continue to evaluate other brand extension opportunities through both in-house development activities as well as through potential partnerships or licensing arrangements with third parties.
Design and Merchandising Our product design and merchandising effortsWe are led by our President and Chief Creative Officer and a team of designers and merchandisers. Our design team is focused on developing an elevated collection of Vince apparel and accessories that buildbuilds upon the brand’s product heritage of modern, effortless style and everyday luxury essentials. The current design vision is to create a cohesive and compelling product assortment with sophisticated head-to-toe looks for multiple wear occasions. During fiscal 2016, our product, merchandising and creative efforts were overseen by our co-founders as consultants, whose consultancy subsequently ended in February 2017. Our design efforts are supported by well-established product development and production teams and processes that enable us to bring new products to market quickly. We are looking to further build our merchant capabilities and believe continued collaboration between design and merchandising will ensure we respond to consumer preferences and market trends with new innovative product offerings while maintaining our core fashion foundation.
Business Segments We serve our customers through a variety of channels that reinforce the Vince brand image. Our diversified channel strategy allows us to introduce our products to customers through multiple distribution points that are reported in two segments: wholesale and direct-to-consumer. | | | | Net Sales by Segment | | | Fiscal Year | | | | | Fiscal Year | | | 2016 | | | 2015 | | | 2014 | | | (in thousands) | | 2014 | | | 2013 | | | 2012(a) | | | | | | | | | | | | | | Wholesale | | $ | 259,418 | | | $ | 229,114 | | | $ | 203,107 | | | $ | 170,053 | | | $ | 201,182 | | | $ | 259,418 | | Direct-to-consumer | | | 80,978 | | | | 59,056 | | | | 37,245 | | | | 98,146 | | | | 101,275 | | | | 80,978 | | | | | | | | | | | | | Total net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | | $ | 268,199 | | | $ | 302,457 | | | $ | 340,396 | | | | | | | | | | | | |
(a) | Fiscal 2012 contained 53 weeks. The additional week contributed approximately $17.6 million and $0.9 million of net sales to the wholesale and direct-to-consumer segments, respectively. |
Wholesale Segment Our wholesale segment is comprised of sales to premiermajor department stores and specialty stores in the U.S. and in select international markets, with U.S. wholesale representing 51%, 56% and 67% of net sales in fiscal 2016, fiscal 2015 and fiscal 2014, respectively and international wholesale representing 10%, 10% and 9% of our net sales for fiscal 2014.the same periods. Our products are currently sold in 45more than 40 countries. As of January 31, 2015,28, 2017, our products were sold to consumers at approximately 2,4002,260 doors through our wholesale partners. In addition, we also haveThis includes shop-in-shops, which are operated by our domestic and international wholesale partners, where we sell the merchandise to the partners on a wholesale basis recognizingand recognize revenue upon shipment ofwhen goods when title and risk of loss passes to the wholesale partner.are shipped in accordance with customer orders. The shop-in-shops are dedicated spaces within the selling floors of select domestic and international wholesale partners where Vince product is prominently displayed and sold. Vince generally provides the shop-in-shop fixtures needed to build out the spaces within the department stores operated by our wholesale partners. As of January 31, 2015,28, 2017, there were 4255 shop-in-shops consisting of 2936 shop-in-shops with our U.S. wholesale partners and 1319 shop-in-shops with our international wholesale partners. We also have twofour international free-standing stores in Tokyo and Istanbul that which are owned and operated throughby local license and distribution arrangementspartners whereby Vince provides the merchandise to the distribution partnerspartner for sale in the free-standing store which solely sells Vince product. Our wholesale segment also includes our licensing business related to our licensing arrangementsarrangement for our women’s and men’s footwear and children’s apparel line. Under these licensing arrangements we launched women’s footwear in fiscal 2012 and in fiscal 2014 we launched men’s footwear and children’s apparel. The licensed products including footwear and children’s apparel are sold in our own stores and by our licensee to select wholesale partners, and wepartners. We earn a royalty based on net sales to the wholesale partners. Direct-to-Consumer Segment Our direct-to-consumer segment includes our company-operated retail and outlet stores and our e-commerce business. In 2008, we initiated a direct-to-consumer strategy with the opening of our first retail store. As of January 31, 2015,28, 2017, we operated 3754 stores, which consisted of 2840 company-operated full-price retail stores and nine14 company-operated outlet locations. The direct-to-consumer segment also includes our e-commerce website,www.vince.com which was launched in 2008 and re-launched with website enhancements during fiscal 2014.. The direct-to-consumer segment accounted for approximately37%, 33% and 24% of fiscal 2016, fiscal 2015 and fiscal 2014 net sales, compared to 21% in the prior year. We expect sales from this channel to continue to grow as we drive productivity in existing stores, open new stores and continue to make improvements in our e-commerce business.respectively. 5
The following table details the number of retail stores we operated for the past three fiscal years: | | | | | | | Fiscal Year | | | | | Fiscal
2014 | | | Fiscal
2013 | | Fiscal
2012 | | 2016 | | | 2015 | | | 2014 | | Beginning of fiscal year | | | 28 | | | | 22 | | | 19 | | | 48 | | | | 37 | | | | 28 | | Opened | | | 9 | | | | 7 | | | 3 | | | 6 | | | | 11 | | | | 9 | | Closed | | | — | | | | (1 | ) | | | — | | | | | | | | | | | | | | End of fiscal year | | | 37 | | | | 28 | | | | 22 | | | 54 | | | | 48 | | | | 37 | | | | | | | | | | | | |
Marketing, Advertising and Public Relations We use marketing, advertising and public relations as critical tools to deliver a consistent and compelling brand message.message to consumers. Our brand message and marketing is focused on showcasing our product and sophisticated style, as well as building an emotional connection with the customer. The Vince brand image is developed andstrategies are cultivated by dedicated creative, design, marketing, visual merchandising and public relations teams. These teams that, along with the Vince design team and select outside agencies, work closely together to communicate a consistent brand message across various consumer touchpoints.develop and execute campaigns that appeal to both our core and aspirational customers. WeTo execute our marketing strategies, we engage in a wide range of marketing programscampaign tactics that include traditional media (direct(such as direct mail, print advertising, cooperative advertising with wholesale partners and outdoor advertising), digital media (email and web)(such as email, search and social media (Facebook, Twitter, Instagramdisplay) and Pinterest)experiential campaigns (such as events and collection previews) to drive traffic, brand awareness, conversion and ultimately sales across all channels. We believe our customers will continue to be receptive to our marketing and social media efforts, which, in management’s opinion, have presented us with a strong new marketing channel to reach existing and prospective customers. We use Facebook as the main social media hub to generate conversation about the brand through daily lifestyle posts, focusing on product launches, style tips and in-store events. Social media platforms like Instagram allow us to tell our brand story creatively by offering behind-the-scenes access to events, press reviews and the Vince showroom, as well as featuring Vince enthusiasts wearing our products. In addition, the growing number ofwe use social platforms such as Instagram, Facebook, Twitter and Pinterest to engage customers and create excitement about our brand. The visits towww.vince.com, which totaled 3.9approximately 5.4 million in fiscal 2014, representing a 50% increase from fiscal 2013, provides2016, also provide an opportunity to grow our customer base and communicate directly with our customers.
Our public relations team conducts a wide variety of press activities to reinforce the Vince brand image and create excitement around the brand. Vince apparel handbags and footwear have appeared in the pages of major fashion magazines such asVogue, Harper’s Bazaar, Elle, W, GQ, Esquire andVanity FairWSJ. Well-known trend setters in entertainment and fashion are also regularly seen wearing the Vince brand. Sourcing and Manufacturing Vince does not own or operate any manufacturing facilities. We contract for the purchase of finished goods with manufacturers who are responsible for the entire manufacturing process, including the purchase of piece goods and trim. Although we do not have long-term written contracts with manufacturers, we have long-standing relationships with a diverse base of vendors which we believe to be mutually satisfactory. We work with over 3040 manufacturers across five countries, with 88%92% of our products produced in China in fiscal 2014.2016. For cost and control purposes, we contract with select third-party vendors in the U.S. to produce a small portion of our merchandise that includes woven pants and products manufactured with man-made fibers. All of our garments are produced according to our specifications, and we require that all of our manufacturers adhere to strict regulatory compliance and standards of conduct. Our vendors’ factories are monitored by our production team to ensure quality control, and they are monitored by independent third-party inspectors we employ for compliance with local manufacturing standards and regulations on an annual basis. Our quality assurance staff in the U.S. and AsiaWe also monitorsmonitor our vendors’ manufacturing facilities regularly, providing technical assistance and performing in-line and final audits to ensure the highest possible quality. Shared Services Agreement In connection with the consummation of the IPO, Vince, LLC entered into a shared services agreementShared Services Agreement with Kellwood Company, LLC on November 27, 2013 (the “Shared Services Agreement”) pursuant to which Kellwood Company, LLC provides certainwould provide support services in various areas including, among other things, certain accounting functions, tax, e-commerce operations, distribution, logistics, information technology, accounts payable, credit and back office support. Kellwood will provide these services until we elect to terminate the provision thereof in accordance with the terms of such agreement. Some of the Kellwood systems we continue to use followingcollections and payroll and benefits administration. Since the IPO, include enterprise resourcing planning, or “ERP”, human resource management systems and distribution applications. In conjunction with our separation from Kellwood, we arehad been in the process of separating our assetstransitioning certain functions performed by Kellwood under the Shared Services Agreement and as of the end of fiscal 2016, we have completed the transition of all such functions and systems from those of Kellwood. We have recently commenced the development and implementation ofKellwood to our own ERP system and IT infrastructure, engaged with a new e-commerce platform provider and migrated the human resource recruitment system.systems or processes as well as to third-party service providers. Refer to the discussion under “Information Systems” below for further information on our ERP implementation.transition of information technology systems and infrastructure in-house from Kellwood. See also “Item 1A. Risk Factors—We have completed the transition of certain services, which had been provided to us by Kellwood provides us with certain key services forsince our business, some of which we are in the process of transitioninginitial public offering, to our own systems.systems or processes as well as external resources. If Kellwood fails to perform its obligations to us during the period of transition or if we cannotnewly implemented systems, processes and functions do not operate successfully, transition these services to our own systems, our business, financial condition, results of operations and cash flows could be materially harmed.” In addition, see “Shared Services Agreement” under Note 1512 “Related Party Transactions” to the Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K for further information. Distribution Facilities
Pursuant toIn connection with the Kellwood Sale, the Shared Services Agreement Kellwood provides distribution facilitieswas contributed to St. Louis, LLC. St. Louis, LLC continues to provide minor transitional services relating to historical records and legacy functions, which we are in the process of
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winding down. The Shared Services Agreement will terminate automatically upon the termination of all services provided thereunder. After termination of the agreement, St. Louis, LLC will have no obligation to provide any services to us in the U.S. These services include distribution, storage and fulfillment. Kellwood will continue to provide these services to us until such time as we elect to terminate the provision of such services in accordance with the terms of the Shared Services Agreement. See “Shared Services Agreements” under Note 15 to the Consolidated Financial Statements in this annual report on Form 10-K for additional information regarding the Shared Services Agreement.us. Distribution Facilities As of January 31, 2015,28, 2017, we operated out of threetwo distribution centers, twoone located in the U.S. and one in Belgium. TheIn the U.S., we historically relied on a distribution facility operated by Kellwood in City of Industry, California as part of the Shared Services Agreement. In November 2015, we entered into a service agreement with a new third-party distribution provider in California and we completed the migration of the distribution facility from Kellwood in 2016. This primary warehouse, operated by the third-party distribution provider is located in City of Industry, California, and includes 75,000approximately 115,000 square feet dedicated to fulfilling orders for our wholesale partners, and retail locations. An adjacent warehouse spanning 22,000 square feet supports Vince’slocations and e-commerce business and offers additional capacity to support our projected growth over the next several years. Our space in both of the California warehouses utilizeutilizes warehouse management systems that are fully customer and vendor compliant and are completely integrated with our current ERP and accounting systems.compliant. The warehouse in Belgium is operated by a third-party logistics provider and supports our wholesale orders for customers located primarily in Europe. The warehouse management systems of the Belgium warehouse are integrated with our current ERP systems to provide us with near real-time visibility into our international distribution. We believe we have sufficient capacity in our domestic and international distribution facilities to support our continued growth.current and projected business. Information Systems Kellwood has continued to provideOur enterprise resource planning (“ERP”) system is Microsoft Dynamics AX and is cloud based and integrates with our point-of-sale (“POS”) system, e-commerce platform and other supporting systems.
Collectively, these systems replaced all systems used under the Shared Services Agreement. Since the IPO, we relied on certain systems and information technology services to us and will continue to do so until such time as we elect to terminate provision of such services in accordance withKellwood pursuant to the terms of the Shared Services Agreement. These services currently includehistorically included information technology planning and administration, desktop support and help desk, our ERP system, financial applications, warehouse systems, reporting and analysis applications and our retail and e-commerce interfaces. Our current ERP system was developedSince the IPO, we had been working on transitioning these systems and information technology services from a core system that is widely used inKellwood and as of the apparel and fashion industry, whichend of fiscal 2016, we have customizedcompleted the transition of all such systems from Kellwood to suit our inventory management and order processing requirements. We have integrated Oracle Financials with our ERP system to meet our financial reporting and accounting requirements. Additionally, we use a suite of third-party hosted retail applications integrated with our ERP system that provide us with merchandising, retail inventory management, point-of-sale systems, customer relationship management and retail accounting. Our retail applications are supported through a “Software as a Service” model, which allows for new implementations to occur quickly. Our ERP and warehouse management systems are also integrated with a hosted, third-party e-commerce platform. During fiscal 2014, we commencedown systems. This included the development and implementation of our own ERP and supporting systems, POS system, and IT infrastructure, engaged with a newthird-party e-commerce platform, providerdistribution applications, network infrastructure and migrated therelated IT support services, and human resource payroll and recruitment system. The ERP implementation is expectedsystems. We no longer rely on Kellwood’s information technology services except for certain minor transitional services relating to be completed by the end of the third quarter of fiscal 2015. The new ERP system is based on a system from Microsoft Dynamics AXhistorical records and is cloud based. It will replace our current Oracle Financials and retail related sub systems.legacy functions.
See “—Shared“Shared Services Agreement,” “Itemabove, Part I, Item 1A. Risk“Risk Factors—We have completed the transition of certain services, which had been provided to us by Kellwood provides us with certain key services forsince our business, some of which we are in the process of transitioninginitial public offering, to our own systems.systems or processes as well as external resources. If Kellwood fails to perform its obligations to us during the period of transition or if we cannotnewly implemented systems, processes and functions do not operate successfully, transition these services to our own systems, our business, financial condition, results of operations and cash flows could be materially harmed.” and Part II, Item 9A. “Controls and Procedures.” In addition, see “Shared Services Agreement” under Note 1512 “Related Party Transactions” to the Consolidated Financial Statements in this annual reportAnnual Report on form 10-K for further information. Seasonality The apparel and fashion industry in which we operate is cyclical and, consequently, our revenues are affected by general economic conditions and the seasonal trends characteristic to the apparel and fashion industry. Purchases of apparel are sensitive to a number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates, consumer confidence as well as the impact from adverse weather conditions. In addition, fluctuations in sales in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting direct-to-consumer sales; as such, the financial results for any particular quarter may not be indicative of results for the fiscal year. Competition We face strong competition in each of the product categories and markets wherein which we compete on the basis of style, quality, price and brand recognition. Some of our competitors have achieved significant recognition for their brand names or have substantially greater financial, marketing, distribution and other resources thancompared to us. However, we believe that we have established a sustainable advantage and distinct position in the current marketplace, driven by a product assortment that combines classic and fashion-forward styling, and a pricing strategy that offers customers accessible luxury. Our competitors are varied, but include Theory, Helmut Lang, Rag & Bone, Joie, and J Brand, James Perse and J. Crew, among others. 7
Employees As of January 31, 2015,28, 2017, we had 498597 employees, of which 272355 were employed in our company-operated retail stores. Except for one employeesix employees in France, who isare covered by a collective bargaining agreementagreements pursuant to French law, none of our employees are currently covered by a collective bargaining agreement, and we believe our employee relations are good. Trademarks and Licensing We own theVince trademark for the production, marketing and distribution of our products in the U.S. and internationally. We have registered the trademark domestically and have registrations on file or pending in a number of foreign jurisdictions. We intend to continue to strategically register, both domestically and internationally, trademarks that we use today and those we develop in the future. We license the domain name for our website,www.vince.com, www.vince.com, pursuant to a license agreement. Under this license agreement, we have an exclusive, irrevocable license to use thewww.vince.com domain name without restriction at a nominal annual cost. While we may terminate such license agreement at our discretion, the agreement does not provide for termination by the licensor. We also own unregistered copyright rights in our design marks. Available Information We make available free of charge on our website,www.vince.com, copies of our annual reportsAnnual Reports on Form10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after filing such material electronically with, or otherwise furnishing it to, the Securities and Exchange Commission (the “SEC”). The public may read and copy these materials at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Vince and other companies that electronically file materials with the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this annual reportAnnual Report on Form 10-K. The following risk factors should be carefully considered when evaluating our business and the forward-looking statements in this annual reportAnnual Report on Form 10-K. See “Disclosures Regarding Forward-Looking Statements.” All amounts disclosed are in thousands except shares, per share amounts, percentages, stores and number of leases. Risks Related to Our Business Our ability to continue to have the liquidity necessary to service our debt, meet contractual payment obligations, including under the Tax Receivable Agreement, and fund our operations depends on many factors, including our ability to generate sufficient cash flow from operations, maintain adequate availability under our Revolving Credit Facility or obtain other financing. Our ability to timely service our indebtedness, meet contractual payment obligations and to fund our operations will depend on our ability to generate sufficient cash, either through cash flows from operations, borrowing availability under the Revolving Credit Facility or other financing. Our recent financial results have been, and our future financial results are expected to be, subject to substantial fluctuations impacted by business conditions and macroeconomic factors. In April 2016, the Company completed a rights offering (the “Rights Offering”) whereby the Company received subscriptions and over-subscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, resulting in aggregate gross proceeds of $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of gross proceeds from the related backstop investment by Sun Cardinal, LLC and SCSF Cardinal, LLC (the “Sun Investors”) and issued to the Sun Investors 195,663 shares of its common stock pursuant to the related Investment Agreement. The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,262 (see Note 12 “Related Party Transactions” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional details), and (2) repay all then outstanding indebtedness, totaling $20,000, under the Revolving Credit Facility. The Company intends to use the remaining net proceeds, which funds are to be held by Vince Holding Corp. until needed by its operating subsidiary, for additional strategic investments and general corporate purposes, which may include future amounts owed by the Company under the Tax Receivable Agreement. During April 2017, the Company utilized $6,241 of the funds held by Vince Holding Corp. to make a Specified Equity Contribution, as defined under the Term Loan Facility, in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not 8
exceed 3.25 to 1.00. Vince Holding Corp. had $15,196 of funds remaining on April 28, 2017. In fiscal 2017, the Company also anticipates making an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan as of April 29, 2017. Additionally, in order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with Bank of America (“BofA”), as administrative agent and collateral agent under the Revolving Credit Facility which temporarily modified the covenant that requires that at any point when “Excess Availability” is less than the greater of (i) 15% of the adjusted loan cap (without giving effect to item (iii) of the loan cap described in Note 4 “Long-Term Debt and Financing Arrangements” to the Consolidated Financial Statements included in this Annual Report on Form 10-K) or (ii) $10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, we must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000 measured at the end of each applicable fiscal month for the trailing twelve-month period. The Letter provided that during the period from March 6, 2017 until and through April 30, 2017, the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” under the Revolving Credit Facility were temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined under the Revolving Credit Facility) and (b) $5,000. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety (the “Amended Letter”). The Amended Letter provides that during the period from April 13, 2017 until and through July 31, 2017 (the “Letter Period”), the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” in the Revolving Credit Facility continue to be temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. The Amended Letter further provides that during the Letter Period, so long as the Company’s cash is held in a deposit account of the Company maintained with BofA (the “BofA Account”), the Company may include in the Borrowing Base (i) up to $10,000 of such cash after April 13, 2017 through May 31, 2017 and (ii) up to $5,000 of such cash after May 31, 2017 through July 31, 2017. During the Letter Period, to the extent that the cash and cash equivalents held by the Loan Parties at the close of business on any given day exceeds $1,000 (excluding amounts in the BofA Account and certain other excluded accounts, as well as amounts equal to all undrawn checks and ACH issued in the ordinary course of business for payroll, rent and other accounts payable needs), Vince shall use any such cash in excess of $1,000 to repay the loans under the Revolving Credit Facility. There can be no assurances that we will be able to generate sufficient cash flow from operations to meet our liquidity needs, that we will have the necessary availability under the Revolving Credit Facility, that the funds held by Vince Holding Corp. will be sufficient to support additional Specified Equity Contributions, or be able to obtain other financing when liquidity needs arise. In the event that we are unable to timely service our debt service, meet other contractual payment obligations or fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness before maturity, seek waivers of or amendments to our contractual obligations for payment, reduce or delay scheduled expansions and capital expenditures or sell material assets or operations. Payment defaults under our debt agreements or other contracts could result in a default under the Term Loan Facility or the Revolving Credit Facility, which could result in all amounts outstanding under those credit facilities becoming immediately due and payable. Additionally, the lenders under those credit facilities would not be obligated to lend us additional funds. See “In accordance with the new accounting guidance that became effective for fiscal 2016, our management has concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued” for additional details. In accordance with the new accounting guidance that became effective for fiscal 2016, our management has concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. In accordance with the new accounting guidance that became effective for fiscal 2016, management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation does not initially consider the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. As further discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies — (D) Sources and Uses of Liquidity” to the Consolidated Financial Statements included in this Annual Report on Form 10-K, understanding the difficulties to project the current retail environment and as management’s plans to mitigate the substantial doubt have not been fully executed, our management has concluded there is substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on the execution of our plans to mitigate the substantial doubt that currently exists, including discussions with existing and prospective lenders and with our majority shareholder on additional financing options and actions to improve the capital structure of the Company and cost containment initiatives. While management believes that these plans are reasonably possible of occurring, it cannot predict with certainty the impact of various factors, including a challenging retail environment, on the Company’s business operations and financial results. Such impact could give rise to unanticipated capital needs that we may not be able to meet and/or result in our inability to service our existing debt or comply with the covenants therein. If such an event occurs, if we are unsuccessful in securing 9
amendments to our existing debt agreements or other financing arrangement or otherwise improving our capital structure, we may be unable to meet our payment obligations as they become due and may be required to restructure our business. In addition, the inclusion of our management’s conclusion described above may materially adversely affect the Company’s stock price and its relationships with its customers, vendors and other business partners. Our operations are restricted by our credit facilities. We entered into the Revolving Credit Facility and the Term Loan Facility, in each case as amended, in connection with the IPO and Restructuring Transactions which closed on November 27, 2013. Our facilities contain significant restrictive covenants. These covenants may impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants will likely restrict our ability and, if applicable, the ability of our subsidiaries to, among other things: make certain investments and acquisitions; enter into certain types of transactions with affiliates; use assets as security in other transactions; sell certain assets or merge with or into other companies; guarantee the debt of others; enter into new lines of businesses; make capital expenditures; prepay, redeem or exchange our debt; and form any joint ventures or subsidiary investments. Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating performance. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to maintain compliance with our debt obligations. If we are unable to obtain any necessary waivers and the debt is accelerated, a material adverse effect on our financial condition and future operating performance would likely result. For further details, see Note 1 “Description of Business and Summary of Significant Accounting Policies — (D) Sources and Uses of Liquidity” to the Consolidated Financial Statements included in this Annual Report on Form 10-K. The terms of our debt obligations and the amount of borrowing availability under our facilities may restrict or delay our ability to fulfill our obligations under the Tax Receivable Agreement. In accordance with the terms of the Tax Receivable Agreement, delayed or unpaid amounts thereunder would accrue interest at a default rate of one-year LIBOR plus 500 basis points until paid. Our obligations under the Tax Receivable Agreement could result in a failure to comply with covenants or financial ratios required by our debt financing agreements and could result in an event of default under such a debt financing. See “Tax Receivable Agreement” under Note 12 “Related Party Transactions” to the Consolidated Financial Statements in this Annual Report on Form 10-K for further information. In connection with the completion of the Rights Offering and related Investment Agreement, the Company made the required payment under the Tax Receivable Agreement for its obligations related to taxable year 2014. (See full discussion in – “Our ability to continue to have the liquidity necessary to service our debt, meet contractual payment obligations, including under the Tax Receivable Agreement, and fund our operations depends on many factors, including our ability to generate sufficient cash flow from operations, maintain adequate availability under our Revolving Credit Facility or obtain other financing.”) In addition, the Company made a payment of $7,438, including any accrued interest, for the tax benefit related to taxable year 2015 in November 2016. Intense competition in the apparel and fashion industry could reduce our sales and profitability. As a fashion company, we face intense competition from other domestic and foreign apparel, footwear and accessories manufacturers and retailers. Competition may result in pricing pressures, reduced profit margins, lost market share or failure to grow our market share, any of which could substantially harm our business and results of operations. Competition is based on many factors including, without limitation, the following: establishing and maintaining favorable brand recognition; developing products that appeal to consumers; pricing products appropriately; determining and maintaining product quality; obtaining access to sufficient floor space in retail locations; providing appropriate services and support to retailers; maintaining and growing market share; hiring and retaining key employees; and protecting intellectual property. 10
Competition in the apparel and fashion industry is intense and is dominated by a number of very large brands, many of which have longer operating histories, larger customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial, research and development, marketing, distribution and other resources than we do. These capabilities of our competitors may allow them to better withstand downturns in the economy or apparel and fashion industry. Any increased competition, or our failure to adequately address any of these competitive factors which we have seen from time to time, could result in reduced sales, which could adversely affect our business, financial condition and operating results. Competition, along with such other factors as consolidation within the retail industry and changes in consumer spending patterns, could also result in significant pricing pressure and cause the sales environment to be more promotional, as it washas been in 2014.recent years, impacting our financial results. If promotional pressure remains intense, either through actions of our competitors or through customer expectations, this may cause us to reducea further reduction in our sales prices to our wholesale partners and retail consumers, which could cause our gross margins to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions with comparable reductions in our operating costs. If our sales prices decline and we fail to sufficiently reduce our product costs or operating expenses, our profitability may decline, which could have a material adverse effect on our business, financial condition and operating results.results as we focus on full-price selling. General economic conditions in the U.S. and other parts of the world, including a continued weakening of the economy and restricted credit markets, can affect consumer confidence and consumer spending patterns. The apparel industry has historically been subject to cyclical variations, recessions in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits which could negatively impact our business overall, the carrying value of our tangible and intangible assets and specifically sales, gross margins and profitability. The success of our operations depends on consumer spending. Consumer spending is impacted by a number of factors, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment, wages, energy costs and consumer debt levels), customer traffic within shopping and selling environments, business conditions, interest rates and availability of credit and tax rates in the general economy and in the international, regional and local markets in which our products are sold.
Recent global economic conditions have included significant recessionary pressures and declines in employment levels, disposable income and actual and/or perceived wealth and further declines in consumer confidence and economic growth. The recent depressed economic environment was characterized by a decline in consumer discretionary spending and has disproportionately affected retailers and sellers of consumer goods, particularly those whose goods are viewed as discretionary or luxury purchases, including fashion apparel and accessories such as ours. During such recessionary periods, we may have to increase the number of promotional sales or otherwise dispose of inventory which we have previously paid to manufacture. While we have seen occasional signs of stabilization in the North American markets during 2013 and 2014, the recent recession may have resulted in a shift in consumer spending habits that makes it unlikely that spending will return to prior levels for the foreseeable future as the promotional environment has continued and may continue going forward. Such factors as well as another shift towards recessionary conditions have impacted, and could further adversely impact, our sales volumes and overall profitability in the future. profitability. Further, growing concerns that European countries could default on their national debt have caused instability in the European economy, which is one of the areas that we are currently targeting for international expansion. Continued economic and political volatility and declines in the value of the Euro or other foreign currencies could negatively impact the global economy as a whole and have a material adverse effect on the profitability and liquidity of our international operations, as well as hinder our ability to grow through expansion in the international markets. In addition, domestic and international political situations also affect consumer confidence. Theconfidence, including the threat, outbreak or escalation of terrorism, military conflicts or other hostilities around the worldworld. We have completed the transition of certain services, which had been provided to us by Kellwood since our initial public offering, to our own systems or processes as well as external resources. If the newly implemented systems, processes and functions do not operate successfully, our business, financial condition, results of operations and cash flows could leadbe materially harmed. Since the IPO and Restructuring Transactions, we have relied on certain administrative and operational support functions and systems of Kellwood to decreasesrun our business pursuant to a Shared Services Agreement (the “Shared Services Agreement”), dated November 27, 2013, by and between Kellwood and us. As of the end of fiscal 2016, we have completed the transition of all such functions and systems from Kellwood to our own systems or processes as well as external resources. See “Shared Services Agreement” under Note 12 “Related Party Transactions” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further details. The new systems we have recently implemented have not initially operated as successfully as the systems we historically used as such systems were highly customized or proprietary and has resulted in disruptions to our business, such as delayed shipments which resulted in order cancellations, including identified material weaknesses in our internal controls. See “We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements” below. Any further failures of those systems could materially and adversely impact the Company’s operations, including its internal controls. Moreover, the processes and functions that were transitioned to our internal capabilities may not achieve the appropriate levels of operational efficiency in a timely manner, or at all, and the third-party service providers we engaged may be unable to effectively replace the functions historically provided by Kellwood in a manner that meets our business needs. In addition, our employees and outsource service providers may not be able to effectively utilize the new systems and employ the new processes in a timely manner, or at all. If we are unable to successfully operate these new systems, processes and functions, we may be forced to adopt more costly, less capable alternatives to replace those systems and functions and our business and results of operations, cash flows and liquidity may be materially and adversely affected. The Shared Services Agreement has governed the provisions of certain support services to us, including distribution, information technology and back office support by Kellwood, as described above. In connection with the Kellwood Sale, the Shared Services Agreement was contributed to St. Louis, LLC. St. Louis, LLC continues to provide minor transitional services relating to historical records and legacy functions, which we are in the process of winding down. The Shared Services Agreement will terminate automatically upon the termination of all services provided thereunder. After termination of the agreement, St. Louis, LLC will have no obligation to provide any services to us. 11
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements. We have identified and concluded that we have material weaknesses relating to our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of an entity’s financial statements will not be prevented or detected and corrected on a timely basis. Refer to Part II, Item 9A in this Annual Report on Form 10-K for more details. As further described in Part II, Item 9A in this Annual Report on Form 10-K, we are taking specific steps to remediate the material weaknesses that we identified by implementing and enhancing our control procedures. These material weaknesses will not be remediated until all necessary internal controls have been implemented, tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our consolidated financial statements. Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition. We recently completed the process of migrating our U.S. distribution system from Kellwood to a new third-party provider. Problems with our distribution system, including any disruption caused by the recent migration, could materially harm our ability to meet customer expectations, manage inventory, complete sale transactions and achieve targeted operating efficiencies. In the U.S., we historically relied on a distribution facility operated by Kellwood in City of Industry, California as part of the Shared Services Agreement. In November 2015, we entered into a service agreement with a new third-party distribution provider in California and completed the migration of the distribution facility from Kellwood in 2016. Our ability to meet the needs of our wholesale partners and our own direct-to-consumer business depends on the proper operation of this distribution facility. The migration of these services from Kellwood required us to implement new system integrations. There can be no assurance that we will not encounter problems as a result of such transition to the new third-party provider, including significant chargebacks from our wholesale partners and delays in shipments of merchandise to our customers, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We also have a warehouse in Belgium operated by a third-party logistics provider to support our wholesale orders for customers located primarily in Europe. Because substantially all of our products are distributed from one location, our operations could also be interrupted by labor difficulties, or by floods, fires, earthquakes or other natural disasters near such facility. For example, a majority of our ocean shipments go through the ports in Los Angeles, which had previously been subject to significant processing delays due to labor issues involving the port workers. We maintain business interruption insurance. These policies, however, may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, including those that may arise from the migration. If we encounter problems with any of our distribution systems, our ability to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies could be harmed. Any of the foregoing factors could have a material adverse effect on our business, financial condition and operating results. System security risk issues as well as other major system failures could disrupt our internal operations or information technology services, and any such disruption could negatively impact our net sales, increase our expenses and harm our reputation. Experienced computer programmers and hackers, and even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of our network. In addition, we rely on third parties for the operation of our website, www.vince.com, and for the various social media tools and websites we use as part of our marketing strategy. Consumers are increasingly concerned over the security of personal information transmitted over the internet, consumer spending.identity theft and user privacy, and any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or breaches. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our systems. The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated with our newly transitioned systems or outsourced services could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other 12
critical functions. In addition to taking the necessary precautions ourselves, we require that third-party service providers implement reasonable security measures to protect our customers’ identity and privacy as well as credit card information. We do not, however, control these third-party service providers and cannot guarantee that no electronic or physical computer break-ins and security breaches will occur in the future. We could also incur significant costs in complying with the multitude of state, federal and foreign laws regarding the use and unauthorized disclosure of personal information, to the extent they are applicable. In the case of a disaster affecting our information technology systems, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support our operations and other breakdowns in normal communication and operating procedures that could materially and adversely affect our financial condition and results of operations. Any disputes that arise between us and St. Louis, LLC with respect to any past or ongoing relationships under the Shared Services Agreement, or between us and Kellwood, which is now an unaffiliated entity, with respect to our past relationship, could materially harm our business operations. Disputes may arise between St. Louis, LLC and us with respect to any past or ongoing transitional services provided under the Shared Services Agreement. In addition, disputes may arise between us and Kellwood, which is now an unaffiliated entity as a result of the Kellwood Sale, in a number of areas relating to our past relationships, including intellectual property and technology matters; information retention, labor, tax, employee benefit, indemnification and other matters arising from our separation from Kellwood. Any dispute relating to the Shared Services Agreement may not be addressed adequately as St. Louis, LLC is in the process of winding down its businesses. In addition, we may not be able to resolve any potential conflicts with Kellwood and the resolution might be more difficult with an unaffiliated party due to, among other things, lack of historical knowledge and understanding of the nature of our past relationship with Kellwood. Any such dispute, if not resolved, could materially harm our business operations. Our business depends on a strong brand image, and if we are not able to maintain or enhance our brand, particularly in new markets where we have limited brand recognition, we may be unable to sell sufficient quantities of our merchandise, which would harm our business and cause our results of operations to suffer. We believe that maintaining and enhancing the Vince brand is critical to maintaining and expanding our customer base. Maintaining and enhancing our brand may require us to make substantial investments in areas such as visual merchandising (including working with our wholesale partners to transform select Vince displays into branded shop-in-shops), marketing and advertising, employee training and store operations. A primary component of our strategy involves expanding into other geographic markets and working with existing wholesale partners, particularly within the U.S. We anticipate that, as our business expands into new markets and further penetrates existing markets, and as the markets in which we operate become increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Certain of our competitors in the fashion industry have faced adverse publicity surrounding the quality, attributes and performance of their products. Our brand may similarly be adversely affected if our public image or reputation is tarnished by failing to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Maintaining and enhancing our brand will depend largely on our ability to be a leader in the contemporary fashion industry and to continue to provide high quality products. If we are unable to maintain or enhance our brand image, our results of operations may suffer and our business may be harmed. A substantial portion of our revenue is derived from a small number of large wholesale partners, and the loss of any of these wholesale partners could substantially reduce our total revenue. We have a small number of wholesale partners who account for a significant portion of our net sales. Net sales to the full-price, off-price and e-commerce operations of our three largest wholesale partners were 49%45% of our total revenue for fiscal 2014.2016. These partners include Nordstrom Saks Fifth AvenueInc., Hudson’s Bay Company and Neiman Marcus Group LTD, each accounting for more than 10% of our total revenue for fiscal 2014.2016. We do not have written agreements with any of our wholesale partners, and purchases generally occur on an order-by-order basis. A decision by any of our major wholesale partners, whether motivated by marketing strategy, competitive conditions, financial difficulties or otherwise, to significantly decrease the amount of merchandise purchased from us or our licensing partners, or to change their manner of doing business with us or our licensing partners, could substantially reduce our revenue and have a material adverse effect on our profitability. Furthermore, due to the concentration of our wholesale partner base, our results of operations could be adversely affected if any of these wholesale partners fails to satisfy its payment obligations to us when due. During the past several years, the retail industry has experienced a great deal of ownership change, and we expect such change will continue. In addition, store closings by our wholesale partners decrease the number of stores carrying our products, while the remaining stores may purchase a smaller amount of our products and may reduce the retail floor space designated for our brand. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target markets. Any of these types of actions could decrease the number of stores that carry our products or increase the ownership concentration within the retail industry. These changes could decrease our opportunities in the market, increase our reliance on a 13
diminishing number of large wholesale partners and decrease our negotiating strength with our wholesale partners. These factors could have a material adverse effect on our business, financial condition and operating results. We may not be able to successfully expand our wholesale partnership base or grow our presence with existing wholesale partners. As part of our growth strategy, we intend to increase productivity and penetration with existing wholesale partners and form relationships with new, international wholesale partners. These initiatives may include the expansion of floor space with existing partners or new partners through the growth of offerings in new or under-developed product categories, such as handbags, lifestyle products and men’s apparel, as well as the establishment of additional shop-in-shops within select department stores. The location of Vince displays or shop-in-shops within department stores is controlled in large part by our wholesale partners. Although the investments made by us and our wholesale partners in the development and installation of Vince displays and shop-in-shops decreases the risk that our wholesale partners will require us to move to a less desirable area of their store or reduce the space allocated to such displays and shops, they are not contractually prohibited from doing so or required to grant additional or more desirable space to us. While expanding the number of shop-in-shopsincreasing productivity and penetration within our wholesale partners is part of our growth strategy, there can be no assurances we will be able to align our wholesale partners with this strategy and continue to receive floor space from our wholesale partners to open or expand shop-in-shops. Our ability to attract customers to our stores depends heavily on successfully locating our stores in suitable locations and any impairment of a store location, including any decrease in customer traffic, could cause our sales to be less than expected.
Our approach to identifying locations for our retail stores typically favors street and mall locations near luxury and contemporary retailers that we believe are consistent with our key customers’ demographics and shopping preferences. Sales at these stores are derived, in part, from the volume of foot traffic in these locations. Changes in areas around our existing retail locations that result in reductions in customer foot traffic or otherwise render the locations unsuitable could cause our sales to be less than expected and the related leases are generally non-cancelable. Store locations may become unsuitable due to, and our sales volume and customer traffic generally may be harmed by, among other things:
economic downturns in a particular area;
competition from nearby retailers selling similar apparel or accessories;
changing consumer demographics in a particular market;
changing preferences of consumers in a particular market;
the closing or decline in popularity of other businesses located near our stores; and
store impairments due to acts of God or terrorism.
Our ability to successfully open and operate new retail stores depends on many factors, including, among others, our ability to:
identify new markets where our products and brand image will be accepted or the performance of our retail stores will be successful;
obtain desired locations, including store size and adjacencies, in targeted malls or streets;
negotiate acceptable lease terms, including desired rent and tenant improvement allowances, to secure suitable store locations;
achieve brand awareness, affinity and purchase intent in the new markets;
hire, train and retain store associates and field management;
assimilate new store associates and field management into our corporate culture;
source and supply sufficient inventory levels; and
successfully integrate new retail stores into our existing operations and information technology systems, which will initially be provided by Kellwood under the terms of the Shared Services Agreement.
As of January 31, 2015, we had 37 stores, which consisted of 28 full-price retail stores and nine outlet locations. We plan to increase our store base over the next three to five years, including the expected openings of eight to 10 new stores in fiscal 2015. Our new stores, however, may not be immediately profitable and we may incur losses until these stores become profitable. Unavailability of desired store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital restraints, difficulties in staffing and operating new store locations or a lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores. There can be no assurance that we will open the planned number of stores in fiscal 2015 or thereafter. Any failure to successfully open and operate new stores may adversely affect our business, financial condition and operating results.
As we expand our store base, we may be unable to maintain or grow comparable store sales or average sales per square foot at the same rates that we have achieved in the past, which could cause our share price to decline.
As we expand our store base, we may not be able to maintain or grow at the same rates of comparable store sales growth that we have achieved historically. In addition, we may not be able to maintain or grow our historic average sales per square foot as we move into new markets. If our future comparable store sales or average sales per square foot decline or fail to meet market expectations, the price of our common stock could decline. In addition, the aggregate results of operations through our wholesale partners and at our retail locations have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect both comparable store sales and average sales per square foot, including, among others, consumer spending patterns, fashion trends, competition, current economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our product assortment, the success of marketing programs and weather conditions. If we misjudge the market for our products, we may incur excess inventory for some of our products and miss opportunities for other products. These factors may cause our comparable store sales results and average sales per square foot in the future to be materially lower than recent periods or our expectations, which could harm our results of operations and result in a decline in the price of our common stock.
We have grown rapidly in recent years and we have limited operating experience as a team at our current scale of operations. If we are unable to manage our operations at our current size or are unable to manage any future growth effectively, our business results and financial performance may suffer.
We have expanded our operations rapidly since our inception in 2002, and we have limited operating experience at our current size. Our business has grown significantly over the past three years, as we have grown our total net sales from $240.4 million in fiscal 2012 to $340.4 million in fiscal 2014. We have made and are making investments to support our near and longer-term growth. If our operations continue to grow over the longer term, of which there can be no assurance, we will be required to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes, and to obtain more space for our expanding administrative support and other headquarters personnel. Our expansion may exceed the capacity that Kellwood is able to provide, on attractive pricing terms or at all, under the terms of the Shared Services Agreement (as more fully described below in “—Problems with our distribution system could harm our ability to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies”). Our continued growth could strain our existing resources, and we could experience operating difficulties, including obtaining sufficient raw materials at acceptable prices, securing manufacturing capacity to produce our products and experiencing delays in production and shipments. These difficulties would likely lead to a decrease in net revenue, income from operations and the price of our common stock.
Kellwood provides us with certain key services for our business, some of which we are in the process of transitioning to our own systems. If Kellwood fails to perform its obligations to us during the period of transition or if we cannot successfully transition these services to our own systems, our business, financial condition, results of operations and cash flows could be materially harmed.
Prior to the IPO and Restructuring Transactions that closed on November 27, 2013, we operated as a business unit of Kellwood, and we historically relied on the financial resources and the administrative and operational support systems of Kellwood to run our business. Some of the Kellwood systems we continue to use following the IPO and Restructuring Transactions include ERP, human resource management systems and distribution applications. In conjunction with our separation from Kellwood, we are in the process of separating our assets from those of Kellwood. We have recently commenced the development and implementation of our own ERP system and IT infrastructure, engaged with a new e-commerce platform provider and migrated the human resource recruitment system. The new systems we implement may not operate as successfully as the systems we historically used as such systems are highly customized or proprietary. Moreover, we may be unable to obtain necessary goods, technology and services to continue replacing the Kellwood systems at prices and on terms as favorable as those available to us prior to the separation, which could increase our costs and reduce our profitability. If we fail to successfully transition the systems, our business and results of operations may be materially and adversely affected.
We entered into a Shared Services Agreement in connection with the IPO and Restructuring Transactions on November 27, 2013. The Shared Services Agreement governs the provisions by which Kellwood provides certain support services to us, including distribution, information technology and back office support. Kellwood will provide these services until we elect to terminate the provision thereof in accordance with the terms of such agreement or, for services which require a term as a matter of law or which are based on a third-party agreement with a set term, the related termination date specified in the schedule thereto. Upon the termination of certain services, Kellwood may no longer be in a position to provide certain other related services. Assuming we proceed with our request to terminate the original services, such related services shall also be terminated in connection with such termination. The Shared Services Agreement will terminate automatically upon the termination of all services provided thereunder, unless earlier terminated by either party in connection with the other party’s material breach upon 30 days prior notice to such defaulting party. After termination of the agreement, Kellwood will have no obligation to provide any services to us. See “Shared Services Agreement” under Note 15 to the Consolidated Financial Statements in this annual report on Form 10-K for a description of these services. The services provided under the Shared Services Agreement (as may be amended from time to time) may not be sufficient to meet our needs and we may not be able to replace these services at favorable costs and on favorable terms, if at all. In addition, Kellwood has experienced financial difficulty in the past. For example, in 2009, Kellwood’s independent auditors raised substantial doubt regarding Kellwood’s ability to continue as a going concern. If Kellwood encounters any issues during the transitional period which impact its ability to provide services pursuant to the Shared Services Agreement, our business could be materially harmed. Any failure or significant downtime in our own financial or administrative systems or in Kellwood’s financial or administrative systems during the transitional period and any difficulty in separating our assets from Kellwood’s assets and integrating newly acquired assets into our business could result in unexpected costs, impact our results or prevent us from paying our suppliers and employees and performing other administrative services on a timely basis and materially harm our business, financial condition, results of operations and cash flows.
System security risk issues could disrupt our internal operations or information technology services, and any such disruption could negatively impact our net sales, increase our expenses and harm our reputation.
Experienced computer programmers and hackers, and even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such
inadvertent disclosure or any security breaches of our network. This risk is heightened because we collect and store customer information, including credit card information, and use certain customer information for our marketing purposes. In addition, we rely on third parties for the operation of our website, www.vince.com, and for the various social media tools and websites we use as part of our marketing strategy.
Consumers are increasingly concerned over the security of personal information transmitted over the internet, consumer identity theft and user privacy, and any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or breaches. In addition, sophisticated hardware and operating system software and applications that we procure form third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our systems. The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions. In addition to taking the necessary precautions ourselves, we require that third-party service providers implement reasonable security measures to protect our customers’ identity and privacy. We do not, however, control these third-party service providers and cannot guarantee that no electronic or physical computer break-ins and security breaches will occur in the future. Finally, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the use and unauthorized disclosure of personal information, to the extent they are applicable.
Any disputes that arise between us and Kellwood with respect to our past and ongoing relationships could harm our business operations.
Disputes may arise between Kellwood and us in a number of areas relating to our past and ongoing relationships, including:
intellectual property and technology matters;
labor, tax, employee benefit, indemnification and other matters arising from our separation from Kellwood;
employee retention and recruiting;
business combinations involving us;
the nature, quality and pricing of transitional services Kellwood has agreed to provide us; and
business opportunities that may be attractive to both Kellwood and us.
We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party. As of January 31, 2015, affiliates of Sun Capital, who also control Kellwood, owned approximately 55% of our common stock. Additionally, Sun Cardinal, LLC, an affiliate of Sun Capital, has the ability to designate a majority of our directors.
Our limited operating experience and brand recognition in international markets may delay our expansion strategy and cause our business and growth to suffer. We face additional risks with respect to our strategy to expand internationally, including our efforts to further expand our business in Canada, select European countries, Asia and the Middle East through company-operated locations, wholesale arrangements as well as with international partners. Our current operations are based largely in the U.S., with international wholesale sales representing approximately 9%10% of net sales for fiscal 2014.2016. Therefore, we have a limited number of customers and experience in operating outside of the U.S. We also do not have extensive experience with regulatory environments and market practices outside of the U.S. and cannot guarantee, notwithstanding our international partners’ familiarity with such environments and market practices, that we will be able to penetrate or successfully operate in any market outside of the U.S. Many of these markets have different operational characteristics, including employment and labor regulations, transportation, logistics, real estate (including lease terms) and local reporting or legal requirements. See – “Changes in laws, including employment laws and laws related to our merchandise, as well as foreign laws, could make conducting our business more expensive or otherwise change the way we do business.” Furthermore, consumer demand and behavior, as well as style preferences, size and fit, and purchasing trends, may differ in these markets and, as a result, sales of our product may not be successful, or the margins on those sales may not be in line with those that we currently anticipate. In addition, in many of these markets there is significant competition to attract and retain experienced and talented employees. Failure to develop new markets outside of the U.S. or disappointing sales growth outside of the U.S. may harm our business and results of operations. In addition, in January 2017, we established a subsidiary of Vince, LLC in France in the form of a “societe a responsibilitee limitee” and became subject to French laws including tax, employment and corporate laws, which may vary from those that previously governed the French branch of Vince, LLC. We are in the early stages of complying with the laws relating to our French subsidiary. If we fail to comply with some or all of those laws, we may be subject to fines or penalties that could negatively impact our business and results of operations. Our plans to improve and expand our product offerings may not be successful, and the implementation of these plans may divert our operational, managerial and administrative resources, which could harm our competitive position and reduce our net revenue and profitability. In addition to our store expansion strategy, weWe plan to grow our business by increasing our core product offerings, which includes expanding our men’s collection and women’s bottoms, dressesouterwear assortment and outerwear assortment. We also plan to develop and introduce selectintroducing new product categories and may pursue select additional licensing opportunities such as eyewear, fragrancelifestyle products. In December 2016, we partnered with various third parties and fashion accessories.launched Vince Collective, through which we now offer a curated selection of home goods and accessories in select retail stores and on our website.
The principal risks to our ability to successfully carry out our plans to improve and expand our product offerings are that: if our expected product offerings fail to maintain and enhance our brand identity, our image may be diminished or diluted and our sales may decrease; if we fail to find and enter into relationships with external partners with the necessary specialized expertise or execution capabilities, we may be unable to offer our planned product extensions or to realize the additional revenue we have targeted for those extensions; and the use of licensing partners may limit our ability to conduct comprehensive final quality checks on merchandise before it is shipped to our stores or to our wholesale partners. In addition, our ability to successfully carry out our plans to improve and expand our product offerings may be affected by economic and competitive conditions, changes in consumer spending patterns and changes in consumer preferences and style trends. 14
These plans could be abandoned, could cost more than anticipated and could divert resources from other areas of our business, any of which could impact our competitive position and reduce our net revenue and profitability. Our current and future licensing arrangements may not be successful and may make us susceptible to the actions of third parties over whom we have limited control. We currently have product licensing agreements for women’s footwear and men’s footwear and children’s apparel.footwear. In the future, we may enter into select additional licensing arrangements for product offerings which require specialized expertise. We may also enterIn addition, we have entered into select licensing agreements pursuant to which we may granthave granted certain third parties the right to distribute and sell our products in certain geographic areas.areas, and may continue to do so in the future. Although we have taken and will continue to take steps to select potential licensing partners carefully and monitor the activities of our existing licensing partners (through, among other things, approval rights over product design, production quality, packaging, merchandising, marketing, distribution and advertising), such arrangements may not be successful. Our licensing partners may fail to fulfill their obligations under their license agreements or have interests that differ from or conflict with our own, such as the pricing of our products and the offering of competitive products. In addition, the risks applicable to the business of our licensing partners may be different than the risks applicable to our business, including risks associated with each such partner’s ability to: exercise operational and financial control over its business; manage its labor relations;
maintain relationships with suppliers; manage its credit and bankruptcy risks; and maintain customer relationships. Any of the foregoing risks, or the inability of any of our licensing partners to successfully market our products or otherwise conduct its business, may result in loss of revenue and competitive harm to our operations in regions or product categories where we have entered into such licensing arrangements. Our business will suffer if we fail to respond to changing customer tastes.
Customer tastes can change rapidly. We may not be able to anticipate, gauge or respond to these changes within a timely manner. We may also not be able to continue to satisfy our customers’ existing tastes and preferences. If we misjudge the market for products or product groups, or if we fail to identify and respond appropriately to changing consumer demands, we may be faced with unsold finished goods inventory, which could materially adversely affect expected operating results and decrease sales, gross margins and profitability.
If we are unable to accurately forecast customer demand for our products, our manufacturers may not be able to deliver products to meet our requirements, and this could result in delays in the shipment of products to our stores, wholesale partners and to wholesale partners.e-commerce customers. We stock our stores, and provide inventory to our wholesale partners, based on our or their estimates of future demand for particular products. Our inventory management and planning team determines the number of pieces of each product that we will order from our manufacturers based upon past sales of similar products, sales trend information and anticipated demand at our suggested retail prices. However, if our inventory and planning team fails to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products. There can be no assurance that we will be able to successfully manage our inventory at a level appropriate for future customer demand. Factors that could affect our inventory management and planning team’s ability to accurately forecast customer demand for our products include: a substantial increase or decrease in demand for our products or for products of our competitors; our failure to accurately forecast customer acceptance for our new products; new product introductions or pricing strategies by competitors; changes in our product items across seasonal fashion items and replenishment; changes to our overall seasonal promotional cadence and the number and timing of promotional events; more limited historical store sales information for our newer markets; weakening of economic conditions or consumer confidence in the future, which could reduce demand for discretionary items, such as our products; and acts or threats of war or terrorism which could adversely affect consumer confidence and spending or interrupt production and distribution of our products and our raw materials. BecauseIn fiscal 2015, we recorded a charge of our rapid growth, we have occasionally placed insufficient levels$10,300 associated with inventory write-downs of desirableexcess and aged product with our wholesale partners and in our retail locations such that we were unable to fully satisfy customer demand at those locations.inventory. We cannot guarantee that we will be able to match supply with demand in all cases in the future, whether as a result of our inability to produce sufficient levels of desirable product or our failure to forecast demand accurately. As a result of these inabilities or failures, we may in the future encounter further difficulties in filling customer orders or in liquidating excess inventory at discount prices and may experience significant write-offs. Additionally, if we over-produce a product based on an aggressive forecast of demand, retailers may not be able to sell the product and cancel future orders or require give backs. These outcomes could have a material adverse effect on brand image and adversely impact sales, gross margins and profitability.
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Our senior management team has limited experience working together as a group, and may not be able to manage our business effectively.
Our CEO, Jill Granoff, and CFO, Lisa Klinger, joined the company in 2012. Many of the other members of our senior management team, including our President and Chief Creative Officer, Karin Gregersen, have been with us less than 2 years. As a result, our senior management team has limited experience working together as a group. This lack of shared experience could negatively impact our senior management team’s ability to quickly and efficiently respond to problems and effectively manage our business. If our management team is not able to work together as a group, our results of operations may suffer and our business may be harmed.
If we lose any key personnel, or are unable to attract key personnel, or assimilate and retain new employees,our key personnel, we may not be able to successfully operate or grow our business. Our continued success is dependent on theour ability to attract, assimilate, retain and motivate qualified management, designers, administrative talent and sales associates to support existing operations and future growth. Competition for qualified talent in the apparel and fashion industry is intense, and we compete for these individuals with other companies that in many cases have greater financial and other resources. The loss of the services of any members of senior management or the inability to attract and retain other qualified executives could have a material adverse effect on our business, results of operations and financial condition. In addition, we will need to continue to attract, assimilate, retain and motivate highly talented employees with a range of other skills and experience, especially at the store management levels. Although we have hired and trained new store managers and experienced sales associates at several of our retail locations, competition for employees in our industry is intense and we may from time to time experience difficulty in retaining our associates or attracting the additional talent necessary to support the growth of our business. These problems could be exacerbated as we embark on our strategy of opening new retail stores over the next several years. We will also need to attract, assimilate and retain other professionals across a range of disciplines, including design, production, sourcing and international business, as we develop new product categories and continue to expand our international presence. Furthermore,In addition, in February 2017, we will needmutually agreed to continueend the agreements with the consultants who provided consulting services to recruit employees to provide, or enter into consulting or outsourcing arrangements with respect tooversee the provision of, services provided by Kellwood under the Shared Services Agreement when Kellwood no longer provides such services thereunder.Company’s product, merchandising and creative efforts. If we are unable to attract, assimilate and retain additionalour employees with the necessary skills and experience, including employees filling the roles performed by the consultants, we may not be able to grow or successfully operate our business.business, which would have an adverse impact on our results. Our competitive position could suffer if our intellectual property rights are not protected. We believe that our trademarks and designs are of great value. From time to time, third parties have challenged, and may in the future try to challenge, our ownership of our intellectual property. In some cases, third parties with similar trademarks or other intellectual property may have pre-existing and potentially conflicting trademark registrations. We rely on cooperation from third parties with similar trademarks to be able to register our trademarks in jurisdictions in which such third parties have already registered their trademarks. We are susceptible to others imitating our products and infringing our intellectual property rights. Imitation or counterfeiting of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenues. The actions we have taken to establish and protect our trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to invalidate our trademarks or block sales of our products as a violation of the trademarks and intellectual property rights of others. In addition, others may assert rights in, or ownership of, our trademarks and other intellectual property rights or in similar marks or marks that we license and/or market and we may not be able to successfully resolve these conflicts to our satisfaction. We may need to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of resources. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products. In addition, resolution of claims may require us to redesign our products, license rights from third parties or cease using those rights altogether. Any of these events could harm our business and cause our results of operations, liquidity and financial condition to suffer. We license our website domain name from a third-party. Pursuant to the license agreement (the “Domain License Agreement”), our license to usewww.vince.com will expire in 2018 and will automatically renew for successive one year periods, subject to our right to terminate the arrangement with or without cause; provided, that we must pay the applicable early termination fee and provide 30 days prior notice in connection with a termination without cause. The licensor has no termination rights under the Domain License Agreement. Any failure by the licensor to perform its obligations under the License Agreement could adversely affect our brand and make it more difficult for users to find our website. Problems with our distribution systemOur goodwill and indefinite-lived intangible assets could harm our abilitybecome further impaired, which may require us to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies.take significant non-cash charges against earnings.
In accordance with Financial Accounting Standards Board ASC Topic 350 Intangibles-Goodwill and Other (“ASC 350”), goodwill and other indefinite-lived intangible assets are tested for impairment at least annually during the U.S.,fourth fiscal quarter and in an interim period if a triggering event occurs. Determining the fair value of goodwill and indefinite-lived intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. We base our estimates on assumptions we rely on a distribution facility operated by Kellwood in Citybelieve to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. During the fourth quarter of Industry, California. Our abilityfiscal 2016, the Company recorded impairment charges of $22,311 related to meet the needsdirect-to-consumer reporting unit goodwill and $30,750 related to the tradename intangible asset. It is possible that our current estimates of our wholesale partnersfuture operating results could change adversely and our own retail stores depends onimpact the proper operation of this distribution facility. Kellwood will continue to provide distribution services, until we elect to terminate such services, as partevaluation of the Shared Services Agreement. We also have a warehouse in Belgium operated by athird-party logistics provider to support our wholesale orders for customers located primarily in Europe.recoverability of the remaining carrying value of goodwill and intangible assets and that the effect of such changes could be material. There can be no assuranceassurances that we will not be ablerequired to enter into other contracts for an alternate or replacement distribution centers on acceptable terms or at all. Such an event could disruptrecord further charges in our operations. In addition, because substantially allfinancial statements which would negatively impact our results of operations during the period in which any impairment of our products are distributed from one location, our operations could also be interrupted by labor difficulties,goodwill or by floods, fires, earthquakes or other natural disasters near such facility. For example, a majority of our ocean shipments go through the ports in Los Angeles, which were recently subject to significant processing delays due to labor issues involving the port workers. We maintain business interruption insurance and are a beneficiary under similar Kellwood insurance policies related to Kellwoodintangible assets or services we utilize under the Shared Services Agreement. These policies, however, may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve targeted operating efficiencies could be harmed. Any of the foregoing factors could have a material adverse effect on our business, financial condition and operating results.is determined. 16
The extent of our foreign sourcing may adversely affect our business. Our products are primarily produced by, and purchased or procured from, independent manufacturing contractors located outside of the U.S.,We work with approximately 96%40 manufacturers across five countries, with 92% of our total revenue forproducts produced in China in fiscal 2014 attributable to manufacturing contractors located outside of the U.S. These manufacturing contractors are located mainly in countries in Asia and South America, with approximately 88% of our purchases for fiscal 2014 attributable to manufacturing contractors located in China.2016. A manufacturing contractor’s failure to ship products to us in a timely manner or to meet the required quality standards could cause us to miss the delivery date requirements of our customers for those items. The failure to make timely deliveries may cause customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could have a material adverse effect on us. As a result of the magnitude of our foreign sourcing, our business is subject to the following risks:
political and economic instability in countries or regions, especially Asia, including heightened terrorism and other security concerns, which could subject imported or exported goods to additional or more frequent inspections, leading to delays in deliveries or impoundment of goods; imposition of regulations, quotas and other trade restrictions relating to imports, including quotas imposed by bilateral textile agreements between the U.S. and foreign countries; imposition of increased duties, taxes and other charges on imports; labor union strikes at ports through which our products enter the U.S.; labor shortages in countries where contractors and suppliers are located; a significant decrease in availability or an increase in the cost of raw materials; restrictions on the transfer of funds to or from foreign countries; disease epidemics and health-related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; the migration and development of manufacturing contractors, which could affect where our products are or are planned to be produced; increases in the costs of fuel, travel and transportation; reduced manufacturing flexibility because of geographic distance between our foreign manufacturers and us, increasing the risk that we may have to mark down unsold inventory as a result of misjudging the market for a foreign-made product; and violations by foreign contractors of labor and wage standards and resulting adverse publicity. If these risks limit or prevent us from manufacturing products in any significant international market, prevent us from acquiring products from foreign suppliers, or significantly increase the cost of our products, our operations could be seriously disrupted until alternative suppliers are found or alternative markets are developed, which could negatively impact our business. We do not have written agreements with any of our third-party manufacturing contractors. As a result, any single manufacturing contractor could unilaterally terminate its relationship with us at any time. One of our manufacturers in China, with whom we have worked for over five years, accounted for the production of approximately 16% of our finished products during fiscal 2014. Supply disruptions from this manufacturer (or any of our other manufacturers) could have a material adverse effect on our ability to meet customer demands, if we are unable to source suitable replacement materials at acceptable prices or at all. Our inability to promptly replace manufacturing contractors that terminate their relationships with us or cease to provide high quality products in a timely and cost-efficient manner could have a material adverse effect on our business, financial condition and operating results.
Fluctuations in the price, availability and quality of raw materials could cause delays and increase costs and cause our operating results and financial condition to suffer. Fluctuations in the price, availability and quality of the fabrics or other raw materials, particularly cotton, silk, leather and synthetics used in our manufactured apparel, could have a material adverse effect on cost of sales or our ability to meet customer demands. The prices of fabrics depend largely on the market prices of the raw materials used to produce them. The price and availability of the raw materials and, in turn, the fabrics used in our apparel may fluctuate significantly, depending on many factors, including crop yields, weather patterns, labor costs and changes in oil prices. We may not be able to create suitable design solutions that utilize raw materials with attractive prices or, alternatively, to pass higher raw materials prices and related transportation costs on to our customers. We are not always successful in our efforts to protect our business from the volatility of the market price of raw materials, and our business can be materially affected by dramatic movements in prices of raw materials. The ultimate effect of this change on our earnings cannot be quantified, as the effect of movements in raw materials prices on industry selling prices are uncertain, but any significant increase in these prices could have a material adverse effect on our business, financial condition and operating results. Our reliance on independent manufacturers could cause delays or quality issues which could damage customer relationships. We use independent manufacturers to assemble or produce all of our products, whether inside or outside the U.S. We are dependent on the ability of these independent manufacturers to adequately finance the production of goods ordered and maintain sufficient manufacturing capacity. The use of independent manufacturers to produce finished goods and the resulting lack of direct control could subject us to difficulty in obtaining timely delivery of products of acceptable quality. We generally do not have long-term contractswritten agreements with any independent manufacturers. AlternativeAs a result, any single manufacturing contractor could unilaterally terminate its relationship with us at any time. Our top five manufacturers accounted for the production of approximately 52% of our finished products during fiscal 2016. Supply disruptions from these manufacturers (or any of our other manufacturers) could have a material adverse effect on our ability to meet customer demands, if we are unable to source suitable replacement materials at acceptable prices or at all. Moreover, alternative manufacturers, if available, may not be able to provide us with products or services of a comparable quality, at an acceptable price or on a timely basis. We may also, from time to time, make a decision to enter into a relationship with a new manufacturer. Identifying a suitable supplier is an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial stability and labor and other ethical practices. There can be no assurance 17
that there will not be a disruption in the supply of our products from independent manufacturers or that any new manufacturer will be successful in producing our products in a manner we expected. In the event of any disruption with a disruption, thatmanufacturer, we wouldmay not be able to substitute suitable alternative manufacturers in a timely and cost-efficient manner. The failure of any independent manufacturer to perform or the loss of any independent manufacturer could have a material adverse effect on our business, results of operations and financial condition. If our independent manufacturers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity. We have established and currently maintain operating guidelines which promote ethical business practices such as fair wage practices, compliance with child labor laws and other local laws. While we monitor compliance with those guidelines, we do not control our independent manufacturers or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation of labor or other laws by our independent manufacturers or the divergence of an independent manufacturer’s labor or other practices from those generally accepted as ethical in the U.S. or other markets in which we do business could also attract negative publicity for us and our brand. From time to time, our audit results have revealed a lack of compliance in certain respects, including with respect to local labor, safety and environmental laws. Other fashion companies have faced criticism after highly-publicized incidents or compliance issues have occurred or been exposed at factories producing their products. To the extent our manufacturers do not bring their operations into compliance with such laws or resolve material issues identified in any of our audit results, we may face similar criticism and negative publicity. This could diminish the value of our brand image and reduce demand for our merchandise. In addition, other fashion companies have encountered organized boycotts of their products in such situations. If we, or other companies in our industry, encounter similar problems in the future, it could harm our brand image, stock price and results of operations. Monitoring compliance by independent manufacturers is complicated by the fact that expectations of ethical business practices continually evolve, may be substantially more demanding than applicable legal requirements and are driven in part by legal developments and by diverse groups active in publicizing and organizing public responses to perceived ethical shortcomings. Accordingly, we cannot predict how such expectations might develop in the future and cannot be certain that our guidelines would satisfy all parties who are active in monitoring and publicizing perceived shortcomings in labor and other business practices worldwide. Our operating results aremay be subject to seasonal and quarterly variations in our net revenue and income from operations,operations. The apparel and fashion industry in which could causewe operate is cyclical and, consequently, our revenues are affected by general economic conditions and the priceseasonal trends characteristic to the apparel and fashion industry. Purchases of our common stockapparel are sensitive to decline. We have experienced,a number of factors that influence the level of consumer spending, including economic conditions and expect to continue to experience, seasonal variations in our net revenue andthe level of disposable consumer income, consumer debt, interest rates, consumer confidence as well as the impact from operations. Seasonal variations in our net revenue are primarily related to increased sales of our products during our fiscal third and fourth quarters, reflecting our historical strength in sales during the fall and holiday seasons. Historically, seasonable variations in our income from operations have been driven principally by increased net revenue in such fiscal quarters.
Our rapid growth may have overshadowed whatever seasonal or cyclical factors might have influenced our business to date.adverse weather conditions. In addition, as our revenue mix evolves over time to include more sales from additional retail stores, we may see an increasefluctuations in the percentageamount of sales occurring duringin any fiscal quarter are affected by the fourth quarter. Suchtiming of seasonal or cyclical variations in our businesswholesale shipments and events affecting direct-to-consumer sales; as such, the financial results for any particular quarter may harm ournot be indicative of results of operations infor the future, if we do not plan inventory appropriately, if customer shopping patterns fluctuate during such seasonal periods or if bad weather during the fourth quarter constrains shopping activity.
fiscal year. Any future seasonal or quarterly fluctuations in our results of operations may not match the expectations of market analysts and investors to assess the longer-term profitability and strength of our business at any particular point, which could lead to increased volatility in our stock price. Increased volatility Our growth strategy includes opening, operating and maintaining successful retail stores in suitable select locations. If we are unable to execute this strategy in a timely manner, or at all, our financial condition and results of operations could causebe materially and adversely affected. As part of our stock pricegrowth strategy, we intend to sufferopen and operate successful retail stores, both domestically and internationally, in comparisontargeted streets or malls with desired size and adjacencies, typically near luxury retailers that we believe are consistent with our key customers’ demographics and shopping preferences. The success of this strategy depends on a number of factors, including the identification of suitable markets and sites, negotiation of acceptable lease and renewal terms while securing those favorable locations, including desired rent and tenant improvement allowances, and if entering a new market, the achievement of brand awareness, affinity and purchase intent in that market, as well as our business condition in funding the opening and operations of stores. Furthermore, we may not be able to less volatile investments.maintain the successful operation of our retail stores if the areas around our existing retail locations undergo changes that result in reductions in customer foot traffic or otherwise render the locations unsuitable, such as economic downturns in the area, changes in demographics and customer preferences and closing or decline in popularity of the adjacent stores. During fiscal 2016, we recorded non-cash asset impairment charges of $2,082, within selling, general and administrative expenses on the Consolidated Statements of Operations, related to the impairment of property and equipment of certain retail stores with carrying values that were determined not to be recoverable and exceeded fair value. If we are unable to successfully implement our retail 18
strategy in a timely manner, or at all, our financial condition and results of operations may be materially and adversely affected, including the potential of further impairments of tangible assets. As of January 28, 2017, we operated 54 stores, including 40 company-operated full-price stores and 14 company-operated outlet stores throughout the United States. We opened six new stores in fiscal 2016 and plan to increase our store base based on business needs, including the expected opening of one new store in fiscal 2017. We are subject to risks associated with leasing retail and office space, are generally subject to long-termnon-cancelable leases and are required to make substantial lease payments under our operating leases, and any failure to make these lease payments when due would likely harm our business, profitability and results of operations. We do not own any of our stores, or our offices including our New York and Los Angeles offices, or our showroom space in Paris but instead lease all of such space under operating leases. Our leases generally have initial terms of 10 years, and generally can be extended only for one additional 5-year term. AllSubstantially all of our leases require a fixed annual rent, and most require the payment of additional rent if store sales exceed a negotiated amount. Most of our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities, and we generally cannot cancel these leases at our option. Additionally, certain of our leases allow the lessor to terminate the lease if we do not achieve a specified gross sales threshold. We have experienced circumstances in the past where landlords have attempted to invoke these contractual provisions. Although we believe we will achieve the required threshold to continue those leases, we cannot assure you that we will do so. Any loss of our store locations due to underperformance may harm our results of operations, stock price and reputation. Payments under these leases account for a significant portion of our selling, general and administrative expenses. For example, as of January 31, 2015,28, 2017, we were a party to 59 operating leases associated with our retail stores and our office and showroom spaces requiring future minimum lease payments of $15.6 million$21,096 in the aggregate through fiscal 20152017 and approximately $134.5 million$129,695 thereafter. We expect that anyAny new retail stores we open will also be leased by us under operating leases which will further increase our operating lease expenses and require significant capital expenditures. Our substantial operating lease obligations could have significant negative consequences, including, among others: increasing our vulnerability to general adverse economic and industry conditions; limiting our ability to obtain additional financing; requiring a substantial portion of our available cash to pay our rental obligations, thus reducing cash available for other purposes; limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and placing us at a disadvantage with respect to some of our competitors. We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under our credit facilities or from other sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would harm our business. In addition, additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term if we cannot negotiate a mutually acceptable termination payment. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations or incur costs in relocating our office space. OfIn fiscal 2017, two of our existing leases no existing retail leases expire in fiscal 2015.will expire. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close, our business, profitability and results of operations may be harmed. The Patient Protection and Affordable Care Act may materially increase our costs and/or make it harder for us to compete as an employer.
The Patient Protection and Affordable Care Act imposed new mandates on employers, requiring employers with 50 or more full-time employees to provide “credible” health insurance to employees or pay a financial penalty. Given our current health plan design, and assuming the law is implemented without significant changes, these mandates could materially increase our costs. Moreover, if we choose to opt out of offering health insurance to our employees, we may become less attractive as an employer and it may be harder for us to compete for qualified employees.
Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business. We are subject to numerous regulations, including labor and employment, customs, truth-in-advertising, consumer protection, and zoning and occupancy laws and ordinances that regulate retailers generally or govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. If these regulations were to change or were violated by our management, employees, vendors, independent manufacturers or partners, the costs of certain goods could increase, or we could experience delays in shipments of our products, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations. In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our employees at our retail locations, which would increase our selling costs and may cause us to reexamine our wage structure for such employees. Other laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, supervisory status, leaves of absence, mandated health benefits, overtime pay, 19
unemployment tax rates and citizenship requirements, could negatively impact us, by increasing compensation and benefits costs which would in turn reduce our profitability. Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws and future actions or payments related to such changes could be material to us. Our operations are restricted by our new credit facilities entered into on November 27, 2013.
We entered into a revolving credit facility and a term loan facility in connection with the IPO and Restructuring Transactions closed on November 27, 2013. Our new facilities contain significant restrictive covenants. These covenants may impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants will likely restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:
incur additional debt;
make certain investments and acquisitions;
enter into certain types of transactions with affiliates;
use assets as security in other transactions;
pay dividends;
sell certain assets or merge with or into other companies;
guarantee the debt of others;
enter into new lines of businesses;
make capital expenditures;
prepay, redeem or exchange our debt; and
form any joint ventures or subsidiary investments.
Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating performance. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to maintain compliance with our debt obligations. If we are unable to obtain any necessary waivers and the debt is accelerated, a material adverse effect on our financial condition and future operating performance would likely result. The terms of our debt obligations may restrict or delay our ability to fulfill our obligations under the Tax Receivable Agreement. In accordance with the terms of the Tax Receivable Agreement, delayed or unpaid amounts thereunder would accrue interest at a default rate of one-year LIBOR plus 200 basis points until paid. Our obligations under the Tax Receivable Agreement could result in a failure to comply with covenants or financial ratios required by our debt financing agreements and could result in an event of default under such a debt financing. See “Tax Receivable Agreement” under Note 15 to the Consolidated Financial Statements in this annual report on Form 10-K for further information.
We are required to pay to the Pre-IPO Stockholders 85% of certain tax benefits, and could be required to make substantial cash payments in which our stockholders will not participate. We entered into a Tax Receivable Agreement with the Pre-IPO Stockholders in connection with the IPO and Restructuring Transactions which closed on November 27, 2013. Under the Tax Receivable Agreement, we will be obligated to pay to the Pre-IPO Stockholders an amount equal to 85% of the cash savings in federal, state and local income tax realized by us by virtue of our future use of the federal, state and local net operating losses (“NOLs”) held by us as of November 27, 2013, together with section 197 intangible deductions (collectively, the “Pre-IPO Tax Benefits”). “Section 197 intangible deductions” means amortization deductions with respect to certain amortizable intangible assets which are held by us and our subsidiaries immediately after November 27, 2013. Cash tax savings generally will be computed by comparing our actual federal, state and local income tax liability to the amount of such taxes that we would have been required to pay had such Pre-IPO Tax Benefits not been available to us. While payments made under the Tax Receivable Agreement will depend upon a number of factors, including the amount and timing of taxable income we generate in the future and any future limitations that may be imposed on our ability to use the Pre-IPO Tax Benefits, the payments could be substantial.substantial and could potentially exceed any cash flow benefits realized in any particular year. Assuming the federal, state and local corporate income tax rates presently in effect, no material change in applicable tax law and no limitation on our ability to use the Pre-IPO Tax Benefits under Section 382 of the U.S. Internal Revenue Code, as amended (the “Code”), the estimated cash benefit of the full use of these Pre-IPO Tax Benefits as of January 28, 2017 would be approximately $202 million,$203,357, of which 85%, or approximately $172 million,$172,853 plus accrued interest, is potentially payable to thePre-IPO Stockholders under the terms of the Tax Receivable Agreement. TheAs of January 28, 2017, $140,618, plus accrued interest, is currently outstanding. Accordingly, the Tax Receivable Agreement accordingly could require us to make substantial cash payments. Although we are not aware of any issue that would cause the U.S. Internal Revenue Service (the “IRS”) to challenge any tax benefits arising under the Tax Receivable Agreement, the affiliates of Sun Capital will not reimburse us for any payments previously made if such benefits subsequently were disallowed, although the amount of any tax savings subsequently disallowed will reduce any future payment otherwise owed to thePre-IPO Stockholders. For example, if our determinations regarding the applicability (or lack thereof) and amount of any limitations on the NOLs under Section 382 of the Code were to be successfully challenged by the IRS after payments relating to such NOLs had been made to the Pre-IPO Stockholders, we would not be reimbursed by the Pre-IPO Stockholders and our recovery would be limited to the extent of future payments (if any) otherwise remaining under the Tax Receivable Agreement. As a result, in such circumstances we could make payments to the Pre-IPO Stockholders under the Tax Receivable Agreement in excess of our actual cash tax savings. Furthermore, while we will generally only make payments under the Tax Receivable Agreement after we have recognized a cash flow benefit from the utilization of the Pre-IPO Tax Benefits (other than upon a change of control or other acceleration event), the payments required under the agreement could require us to use a substantial portion of our cash from operations for those purposes. At the effective date of the Tax Receivable Agreement, the liability recognized was accounted for in our financial statements as a reduction of additional paid-in capital. Subsequent changes in the Tax Receivable Agreement liability will be recorded through earnings in operating expenses.earnings. Even if the NOLs are available to us, the Tax Receivable Agreement will operate to transfer 85% of the benefit to the Pre-IPO Stockholders. Additionally, the payments we make to the Pre-IPO Stockholders under the Tax Receivable Agreement are not expected to give rise to any incidental tax benefits to us, such as deductions or an adjustment to the basis of our assets. Federal and state laws impose substantial restrictions on the utilization of NOL carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Code. Under the rules, such an ownership change is generally any change in ownership of more than 50 percent of a company’s stock within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly 5% or more of the stock of the company and any change in ownership arising from new issuances of stock by the company. While we have performed an analysis under Section 382 of the Code that indicates the IPO and Restructuring Transactions would not constitute an ownership change, such technical guidelines are complex and subject to significant judgment and interpretation. With the IPO and Restructuring Transactions and other transactions that have occurred over the past three years, we may trigger or have already triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in stock ownership. As a result, if we earn net taxable income, our ability to use the pre-change NOL carry-forwards (after giving effect to payments to be made to the Pre-IPO Stockholders under the Tax Receivable Agreement) to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. Notwithstanding the foregoing, our analysis to date under Section 382 of the Code indicates that the IPO Restructuring Transactions have not triggered an “ownership change” limitation. If we did not enter into the Tax Receivable Agreement, we would be entitled to realize the full economic benefit of the Pre-IPO Tax Benefits, to the extent allowed by federal, state and local law, including Section 382 of the Code. Subject to exceptions, the Tax Receivable Agreement is designed with the objective of causing our annual cash costs attributable to federal state and local income taxes (without regard to our continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as we would have paid had we not 20
had the Pre-IPO Tax Benefits available to offset our federal, state and local taxable income. As a result, we will not be entitled to the economic benefit of the Pre-IPO Tax Benefits that would have been available if the Tax Receivable Agreement were not in effect (except to the extent of our continuing 15% interest in the Pre-IPO Tax Benefits). In certain cases, payments under the Tax Receivable Agreement to the Pre-IPO stockholdersStockholders may be accelerated and/or significantly exceed the actual benefits we realize in respect of the Pre-IPO Tax Benefits. Upon the election of an affiliate of Sun Capital to terminate the Tax Receivable Agreement pursuant to a change in control (as defined in the Tax Receivable Agreement) or upon our election to terminate the Tax Receivable Agreement early, all of our payment and other obligations under the Tax Receivable Agreement will be accelerated and will become due and payable. Additionally, the Tax Receivable Agreement provides that in the event that we breach any of our material obligations under the Tax Receivable Agreement by operation of law as a result of the rejection of the Tax Receivable Agreement in a case commenced under Title 11 of the United States Code (the “Bankruptcy Code”) then all of our payment and other obligations under the Tax Receivable Agreement will be accelerated and will become due and payable. In the case of any such acceleration, we would be required to make an immediate payment equal to 85% of the present value of the tax savings represented by any portion of the Pre-IPO Tax Benefits for which payment under the Tax Receivable Agreement has not already been made, which upfront payment may be made years in advance of the actual realization of such future benefits. Such payments could be substantial and could exceed our actual cash tax savings from the Pre-IPO Tax Benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will have sufficient cash available or that we will be able to finance our obligations under the Tax Receivable Agreement. If we were to elect to terminate the Tax Receivable Agreement, based on a discount rate equal to monthly LIBOR plus 200 basis points, we estimate that as of January 28, 2017 we would be required to pay approximately $159 million$126,666 in the aggregate under the Tax Receivable Agreement. We could incur significant costs in complying with environmental, health and safety laws or as a result of satisfying any liability or obligation imposed under such laws. Our operations are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. We could be held liable for the costs to address contamination of any real property ever owned, operated or used as a disposal site. In addition, in the event that Kellwood becomes financially incapable of addressing the environmental liability incurred prior to the structural reorganization separating Kellwood from Vince that occurred on November 27, 2013, a third party may file suit and attempt to allege that Kellwood and Vince engaged in a fraudulent transfer by arguing that the purpose of the separation of the non-Vince assets from Vince Holding Corp. was to insulate our assets from the environmental liability. For example, pursuant to a Consent Decree with the U.S. Environmental Protection Agency (“EPA”) and the State of Missouri, a non-Vince subsidiary, which was separated from us in the Restructuring Transactions, is conducting a cleanup of contamination at the site of a plant in New Haven, Missouri, which occurred between 1973 and 1985. Kellwood has posted a letter of credit in the amount of $5.9 millionapproximately $5,900 as a performance guarantee for the estimated cost of the required remediation work. In connection with the Kellwood Sale, the letter of credit was transferred to the account of the Kellwood Purchaser. If, despite the financial assurance provided by Kellwoodthe letter of credit as required by the EPA, the buyer of Kellwood became financially unable to address this remediation, and if the corporate separateness of Vince is disregarded or if a fraudulent transfer is found to have occurred, we could be liable for the full amount of the remediation. If this were to occur or if we were to become liable for other environmental liabilities or obligations, it could have a material adverse effect on our business, financial condition or results of operations. We will continue to incur significant expenses as a result of being a public company, which will negatively impact our financial performance and could cause our results of operations and financial condition to suffer.
We will continue to incur significant legal, accounting, insurance, share-based compensation and other expenses as a result of being a public company. The Sarbanes-Oxley Act, as well as related rules implemented by the SEC and the securities regulators and by the NYSE, have required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404(b) of the Sarbanes-Oxley Act once we are no longer an emerging growth company, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or to incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. To assist in the recruitment of qualified directors, officers and other members of senior management and to help align their interests with those of our stockholders, we have made and intend to continue to make equity grants under our current management equity incentive plan (the “Vince 2013 Incentive Plan”). As a result of the foregoing, we expect an increase in legal, accounting, insurance, share-based compensation and certain other expenses in the future, which will negatively impact our financial performance and could cause our results of operations and financial condition to suffer.
Risks Related to Our Structure and Ownership We are a “controlled company,” controlled by investment funds advised by affiliates of Sun Capital, whose interests in our business may be different from yours. Affiliates of Sun Capital owned approximately 55%58% of our outstanding common stock as of March 20, 2015.31, 2017. As such, affiliates of Sun Capital will, for the foreseeable future, have significant influence over our reporting and corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. For so long as affiliates of Sun Capital own 30% or more of our outstanding shares of common stock, Sun Cardinal, LLC, an affiliate of Sun Capital, will have the right to designate a majority of our board of directors. For so long as affiliates of Sun Capital have the right to designate a majority of our board of directors, the directors designated by affiliates of Sun Capital are expected to constitute a majority of each committee of our board of directors, other than the Audit Committee, and the chairman of each of the committees, other than the Audit Committee, is expected to be a director serving on such committee who is designated by affiliates of Sun Capital, provided that, at such time as we are not a “controlled 21
“controlled company” under the NYSE corporate governance standards, our committee membership will comply with all applicable requirements of those standards and a majority of our board of directors will be “independent directors,” as defined under the rules of the NYSE (subject to applicable phase-in rules). As a “controlled company,” the rules of the NYSE exempt us from the obligation to comply with certain corporate governance requirements, including the requirements that a majority of our board of directors consists of “independent directors,” as defined under such rules, and that we have nominating and corporate governance and compensation committees that are each composed entirely of independent directors. These exemptions do not modify the requirement for a fully independent audit committee, which we have. Similarly, once we are no longer a “controlled company,” we must comply with the independent board committee requirements as they relate to the nominating and corporate governance and compensation committees, which are permitted to be phased-in as follows: (1) one independent committee member on the date we cease to be a “controlled company”; (2) a majority of independent committee members within 90 days of such date; and (3) all independent committee members within one year of such date. Additionally, we will have 12 months from the date we cease to be a “controlled company” to have a majority of independent directors on our board of directors. Affiliates of Sun Capital control actions to be taken by us, our board of directors and our stockholders, including amendments to our amended and restated certificate of incorporation and amended and restated bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors designated by affiliates of Sun Capital have the authority, subject to the terms of our indebtedness and the rules and regulations of the NYSE, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. The NYSE independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. Our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” does not apply against Sun Capital or its affiliates, or any of our directors who are associates of, or affiliated with, Sun Capital, in a manner that would prohibit them from investing in competing businesses or doing business with our partners or customers. It is possible that the interests of Sun Capital and its affiliates may in some circumstances conflict with our interests and the interests of our other stockholders, including you.you. For example, Sun Capital may have different tax positions from other stockholders which could influence their decisions regarding whether and when we should dispose of assets, whether and when we should incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreement, and whether and when we should terminate the Tax Receivable Agreement and accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration tax or other considerations of Sun Capital and its affiliates even where no similar benefit would accrue to us. See “Tax Receivable Agreement” under Note 1512 “Related Party Transactions” to the Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K for additional information. We are a holding company and we are dependent upon distributions from our subsidiaries to pay dividends, taxes and other expenses. Vince Holding Corp. is a holding company with no material assets other than its ownership of membership interests in Vince Intermediate Holding, LLC, a holding company that has no material assets other than its interest in Vince, LLC.LLC and its foreign subsidiaries. In addition, Vince Holding Corp. holds the remaining proceeds from the Rights Offering. Neither Vince Holding Corp. nor Vince Intermediate Holding, LLC have any independent means of generating revenue. To the extent that we need funds, for a cash dividend to holders of our common stock or otherwise, and Vince Intermediate Holding, LLC or Vince, LLC is restricted from making such distributions under applicable law or regulation or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition. We file consolidated income tax returns on behalf of Vince Holding Corp. and Vince Intermediate Holding, LLC. Most of our future tax obligations will likely be attributed to the operations of Vince, LLC. Accordingly, most of the payments against the Tax Receivable Agreement will be attributed to the operations of Vince, LLC. We intend to cause Vince, LLC to pay distributions or make funds available to us in an amount sufficient to allow us to pay our taxes and any payments due to certain of our stockholders under the Tax Receivable Agreement. If, as a consequence of these various limitations and restrictions, we do not have sufficient funds to pay tax or other liabilities, we may have to borrow funds and thus our liquidity and financial condition could be materially adversely affected. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest at a default rate of one-year LIBOR plus 500 basis points until paid. See “Tax Receivable Agreement” under Note 1512 “Related Party Transactions” to the Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K for more information regarding the terms of the Tax Receivable Agreement. Anti-takeover provisions of Delaware law and our amended and restated certificate of incorporation and bylaws could delay and discourage takeover attempts that stockholders may consider to be favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our Company more difficult without the approval of our board of directors. These provisions include: the classification of our board of directors so that not all members of our board of directors are elected at one time; 22
| • | the authorization of the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock; |
stockholder action can only be taken at a special or regular meeting and not by written consent following the time that Sun Capital and its affiliates cease to beneficially own a majority of our common stock; advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings; removal of directors only for cause following the time that Sun Capital and its affiliates cease to beneficially own a majority of our common stock; allowing Sun Cardinal to fill any vacancy on our board of directors for so long as affiliates of Sun Capital own 30% or more of our outstanding shares of common stock and thereafter, allowing only our board of directors to fill vacancies on our board of directors; and following the time that Sun Capital and its affiliates cease to beneficially own a majority of our common stock, super-majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation. Our amended and restated certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law (“DGCL”), and prevents us from engaging in a business combination, such as a merger, with a person or group who acquires at least 15% of our voting stock for a period of three years from the date such person became an interested stockholder, unless board or stockholder approval is obtained prior to acquisition. However, our amended and restated certificate of incorporation also provides that both Sun Capital and its affiliates and any persons to whom a Sun Capital affiliate sells its common stock will be deemed to have been approved by our board of directors. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change of control of our Company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. Our amended and restated certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is, to the fullest extent permitted by applicable law, the sole and exclusive forum for any of the following: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition. We are an “emerging growth company” and have elected to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors. We are an “emerging growth company,” as defined by the JOBSJumpstart Our Business Startups (“JOBS”) Act. For as long as we continue to be an emerging growth company, we have chosen to take advantage of certain exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years after the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), which such fifth anniversary will occur in 2018. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We will become a large accelerated filer the year after we have an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of $700 million or more. We have taken advantage of certain of the reduced disclosure obligations regarding executive compensation in this annual report on Form 10-Kcertain of our reports filed with the SEC and may elect to take advantage of other reduced burdens in future filings. As a result, the information we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our common stock and the price for our common stock may be more volatile. 23
As an emerging growth company we are not required to comply with the rules of the SEC implementing Section 404(b) of the Sarbanes-Oxley Act and therefore our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until the fiscal year followingafter the fiscal year we cease to be an emerging growth company. We are required, however, to comply with the SEC’s rules implementing Section 302 and 404 other than 404(b) of the Sarbanes-Oxley Act. These rules require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. If we are unable to conclude that we have effective internal control over financial reporting, our independent registered public accounting firm is unable to provide us with an unqualified report as and when required by Section 404 or we are required to restate our financial statements, we may fail to meet our public reporting obligations and investors could lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None. We do not own any real estate. Our 33,009 square-foot principal executive and administrative offices are located at 500 Fifth Avenue, 19th and 20th Floors, New York, New York 10110 and are leased under an agreement expiring in April 2025. In July 2014, we signed aWe also lease for a 28,541 square-foot design studio located at 900 N. Cahuenga Blvd., Los Angeles, California leased under an agreement expiring in July 2020. We moved into the new design studio space in February 2015 after the expiration in January 2015 of our previous 17,640 square-foot design studio at 5410 Wilshire Boulevard, Los Angeles, California. In December 2014, we signed a lease for2020 and a 4,209 square-foot showroom space in Paris, France which opened in March 2015, and is leased under an agreement expiring in December 2020. As of January 31, 2015,28, 2017, we leased approximately 81,374127,804 gross square feet related to our 3754 company-operated retail stores. Our leases generally have initial terms of 10 years and cannot be extended or can be extended for one additional5-year term. OurSubstantially all of our leases require a fixed annual rent, and most require the payment of additional rent if store sales exceed a negotiated amount. Most of our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. Although we generally cannot cancel these leases at our option, certain of our leases allow us, and in some cases, the lessor, to terminate the lease if we do not achieve a specified gross sales threshold. The following store list shows the location, opening date, type and size of our company-operated retail locations as of January 31, 2015:28, 2017: | | | | | | | | | | | | | | | | | Vince Location | | State | | Opening Date | | Type | | | Gross Square
Feet | | | Selling Square
Feet | | Robertson (Los Angeles) | | CA | | April 9, 2008 | | | Street | | | | 1,151 | | | | 938 | | Melrose (Los Angeles) | | CA | | September 4, 2008 | | | Street | | | | 1,537 | | | | 1,385 | | Washington St. (Meatpacking - Women’s) | | NY | | February 3, 2009 | | | Street | | | | 2,000 | | | | 1,600 | | Prince St. (Nolita) | | NY | | July 25, 2009 | | | Street | | | | 1,396 | | | | 1,108 | | San Francisco | | CA | | October 15, 2009 | | | Street | | | | 1,895 | | | | 1,408 | | Chicago | | IL | | October 1, 2010 | | | Street | | | | 2,590 | | | | 1,371 | | Madison Ave. | | NY | | August 3, 2012 | | | Street | | | | 3,503 | | | | 1,928 | | Westport | | CT | | March 28, 2013 | | | Street | | | | 1,801 | | | | 1,344 | | Greenwich | | CT | | July 19, 2013 | | | Street | | | | 2,463 | | | | 1,724 | | Mercer St. (Soho) | | NY | | August 22, 2013 | | | Street | | | | 4,500 | | | | 3,080 | | Columbus Ave. (Upper West Side) | | NY | | December 18, 2013 | | | Street | | | | 4,465 | | | | 3,126 | | Washington St. (Meatpacking - Men’s) | | NY | | June 2, 2014 | | | Street | | | | 1,827 | | | | 1,027 | | Newbury St. (Boston) | | MA | | May 24, 2014 | | | Street | | | | 4,124 | | | | 3,100 | | Pasadena | | CA | | August 7, 2014 | | | Street | | | | 3,475 | | | | 2,200 | | Walnut St. (Philadelphia) | | PA | | August 4, 2014 | | | Street | | | | 3,250 | | | | 2,000 | | | | | | | | | | | | | | | | | | | Total Street (15): | | | | | | | | | | | 39,977 | | | | 27,339 | | | | | | | | | | | | | | | | | | | Malibu | | CA | | August 9, 2009 | | | Mall | | | | 797 | | | | 705 | | Dallas | | TX | | August 28, 2009 | | | Mall | | | | 1,368 | | | | 1,182 | | Boca Raton | | FL | | October 13, 2009 | | | Mall | | | | 1,547 | | | | 1,199 | | Copley Place (Boston) | | MA | | October 20, 2009 | | | Mall | | | | 1,370 | | | | 1,015 | | White Plains | | NY | | November 6, 2009 | | | Mall | | | | 1,325 | | | | 1,045 | | Atlanta | | GA | | April 16, 2010 | | | Mall | | | | 1,643 | | | | 1,356 | | Palo Alto | | CA | | September 17, 2010 | | | Mall | | | | 2,028 | | | | 1,391 | | Bellevue Square | | WA | | November 5, 2010 | | | Mall | | | | 1,460 | | | | 1,113 | | Manhasset (Long Island) | | NY | | April 22, 2011 | | | Mall | | | | 1,414 | | | | 1,000 | | Newport Beach | | CA | | May 20, 2011 | | | Mall | | | | 1,656 | | | | 1,242 | | The Grove | | CA | | November 20, 2012 | | | Mall | | | | 1,862 | | | | 1,160 | | Bal Harbour | | FL | | October 4, 2014 | | | Mall | | | | 2,600 | | | | 1,820 | | Chestnut Hill | | MA | | July 25, 2014 | | | Mall | | | | 2,357 | | | | 1,886 | | | | | | | | | | | | | | | | | | | Total Mall and Lifestyle Centers (13) | | | | | | | | | | | 21,427 | | | | 16,114 | | | | | | | | | | | | | | | | | | | Total Full-Price (28) | | | | | | | | | | | 61,404 | | | | 43,453 | | | | | | | | | | | | | | | | | | | Orlando | | FL | | June 17, 2009 | | | Outlet | | | | 2,065 | | | | 1,446 | | Cabazon | | CA | | November 11, 2011 | | | Outlet | | | | 2,066 | | | | 1,653 | | Riverhead | | NY | | November 30, 2012 | | | Outlet | | | | 2,100 | | | | 1,490 | | Chicago | | IL | | August 1, 2013 | | | Outlet | | | | 2,611 | | | | 1,828 | | Seattle | | WA | | August 30, 2013 | | | Outlet | | | | 2,214 | | | | 1,550 | | Las Vegas | | NV | | October 3, 2013 | | | Outlet | | | | 2,028 | | | | 1,420 | | San Marcos | | TX | | October 10, 2014 | | | Outlet | | | | 2,433 | | | | 1,703 | | Carlsbad | | CA | | October 24, 2014 | | | Outlet | | | | 2,453 | | | | 1,717 | | Wrentham | | MA | | September 29, 2014 | | | Outlet | | | | 2,000 | | | | 1,400 | | | | | | | | | | | | | | | | | | | Total Outlets (9) | | | | | | | | | | | 19,970 | | | | 14,207 | | | | | | | | | | | | | | | | | | | Total (37) | | | | | | | | | | | 81,374 | | | | 57,660 | | | | | | | | | | | | | | | | | | |
Vince Location | | State | | Opening Date | | Type | | Gross Square Feet | | | Selling Square Feet | | Robertson (Los Angeles) | | CA | | April 9, 2008 | | Street | | | 1,151 | | | | 938 | | Melrose (Los Angeles) | | CA | | September 4, 2008 | | Street | | | 1,537 | | | | 1,385 | | Washington St. (Meatpacking - Women's) | | NY | | February 3, 2009 | | Street | | | 2,000 | | | | 1,600 | | Prince St. (Nolita) | | NY | | July 25, 2009 | | Street | | | 1,396 | | | | 1,108 | | San Francisco | | CA | | October 15, 2009 | | Street | | | 1,895 | | | | 1,408 | | Chicago | | IL | | October 1, 2010 | | Street | | | 2,590 | | | | 1,371 | | Madison Ave. | | NY | | August 3, 2012 | | Street | | | 3,503 | | | | 1,928 | | Westport | | CT | | March 28, 2013 | | Street | | | 1,801 | | | | 1,344 | | Greenwich | | CT | | July 19, 2013 | | Street | | | 2,463 | | | | 1,724 | | Mercer St. (Soho) | | NY | | August 22, 2013 | | Street | | | 4,500 | | | | 3,080 | | Columbus Ave. (Upper West Side) | | NY | | December 18, 2013 | | Street | | | 4,465 | | | | 3,126 | | Washington St. (Meatpacking - Men's) | | NY | | June 2, 2014 | | Street | | | 1,827 | | | | 1,027 | | Newbury St. (Boston) | | MA | | May 24, 2014 | | Street | | | 4,124 | | | | 3,100 | | Pasadena | | CA | | August 7, 2014 | | Street | | | 3,475 | | | | 2,200 | | Walnut St. (Philadelphia) | | PA | | August 4, 2014 | | Street | | | 3,250 | | | | 2,000 | | Abott Kiney (Los Angeles) | | CA | | September 26, 2015 | | Street | | | 1,990 | | | | 1,815 | | Total Street (16): | | | | | | | | | 41,967 | | | | 29,154 | | Malibu | | CA | | August 9, 2009 | | Lifestyle Center | | | 797 | | | | 705 | | Dallas | | TX | | August 28, 2009 | | Lifestyle Center | | | 1,368 | | | | 1,182 | | Boca Raton | | FL | | October 13, 2009 | | Mall | | | 1,547 | | | | 1,199 | | Copley Place (Boston) | | MA | | October 20, 2009 | | Mall | | | 1,370 | | | | 1,015 | | White Plains | | NY | | November 6, 2009 | | Mall | | | 1,325 | | | | 1,045 | | Atlanta | | GA | | April 16, 2010 | | Mall | | | 1,643 | | | | 1,356 | |
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Vince Location | | State | | Opening Date | | Type | | Gross Square Feet | | | Selling Square Feet | | Palo Alto | | CA | | September 17, 2010 | | Lifestyle Center | | | 2,028 | | | | 1,391 | | Bellevue Square | | WA | | November 5, 2010 | | Mall | | | 1,460 | | | | 1,113 | | Manhasset (Long Island) | | NY | | April 22, 2011 | | Lifestyle Center | | | 1,414 | | | | 1,000 | | Newport Beach | | CA | | May 20, 2011 | | Lifestyle Center | | | 1,656 | | | | 1,242 | | Bal Harbour | | FL | | October 4, 2014 | | Lifestyle Center | | | 2,600 | | | | 1,820 | | Chestnut Hill | | MA | | July 25, 2014 | | Lifestyle Center | | | 2,357 | | | | 1,886 | | Brookfield (Downtown) | | NY | | March 26, 2015 | | Lifestyle Center | | | 2,966 | | | | 2,373 | | Merrick Park (Coral Gables) | | FL | | April 30, 2015 | | Lifestyle Center | | | 2,512 | | | | 1,871 | | Washington D.C. City Center | | DC | | April 30, 2015 | | Lifestyle Center | | | 3,202 | | | | 2,562 | | Scottsdale Quarter | | AZ | | May 15, 2015 | | Lifestyle Center | | | 2,753 | | | | 2,200 | | Houston | | TX | | October 1, 2015 | | Lifestyle Center | | | 2,998 | | | | 2,398 | | Westlake Village | | CA | | February 26, 2016 | | Lifestyle Center | | | 2,520 | | | | 2,016 | | Las Vegas | | NV | | April 1, 2016 | | Mall | | | 3,220 | | | | 2,576 | | Tyson's Galleria (McLean) | | VA | | April 29, 2016 | | Mall | | | 2,668 | | | | 2,134 | | The Grove | | CA | | May 23, 2016 | | Lifestyle Center | | | 2,717 | | | | 2,174 | | Troy | | MI | | May 27, 2016 | | Mall | | | 2,700 | | | | 2,160 | | King of Prussia | | PA | | August 18, 2016 | | Mall | | | 2,600 | | | | 2,080 | | San Diego (Fashion Valley) | | CA | | August 25, 2016 | | Lifestyle Center | | | 2,817 | | | | 2,254 | | Total Mall and Lifestyle Centers (24) | | | | | | | | | 53,238 | | | | 41,752 | | Total Full-Price (40) | | | | | | | | | 95,205 | | | | 70,906 | | Orlando | | FL | | June 17, 2009 | | Outlet | | | 2,065 | | | | 1,446 | | Cabazon | | CA | | November 11, 2011 | | Outlet | | | 2,066 | | | | 1,653 | | Riverhead | | NY | | November 30, 2012 | | Outlet | | | 2,100 | | | | 1,490 | | Chicago | | IL | | August 1, 2013 | | Outlet | | | 2,611 | | | | 1,828 | | Seattle | | WA | | August 30, 2013 | | Outlet | | | 2,214 | | | | 1,550 | | Las Vegas | | NV | | October 3, 2013 | | Outlet | | | 2,028 | | | | 1,420 | | San Marcos | | TX | | October 10, 2014 | | Outlet | | | 2,433 | | | | 1,703 | | Carlsbad | | CA | | October 24, 2014 | | Outlet | | | 2,453 | | | | 1,717 | | Wrentham | | MA | | September 29, 2014 | | Outlet | | | 2,000 | | | | 1,400 | | Camarillo | | CA | | February 1, 2015 | | Outlet | | | 3,001 | | | | 2,101 | | Livermore | | CA | | August 13, 2015 | | Outlet | | | 2,500 | | | | 1,767 | | Chicago Premium | | IL | | August 27, 2015 | | Outlet | | | 2,300 | | | | 1,840 | | Woodbury Commons | | NY | | November 6, 2015 | | Outlet | | | 2,289 | | | | 1,831 | | Sawgrass | | FL | | December 4, 2015 | | Outlet | | | 2,539 | | | | 1,771 | | Total Outlets (14) | | | | | | | | | 32,599 | | | | 23,517 | | Total (54) | | | | | | | | | 127,804 | | | | 94,423 | |
ITEM 3. | LEGAL PROCEEDINGS. |
We are subjecta party to various legal proceedings, compliance matters and environmental claims whichthat arise in the ordinary course of our business. AlthoughWe are not currently a party to any legal proceedings, compliance investigations or environmental claims that we believe would, individually or in the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters willaggregate have a material adverse effect on our financial condition,position, results of operations or cash flows, or results of operation.although these proceedings and claims are subject to inherent uncertainties. ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable. 25
PartPART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information Our common stock has been traded on the New York Stock Exchange under the symbol “VNCE” since November 22, 2013. Prior to that time there was no public market for our stock. The following table sets forth the high and low sale prices of our common stock as reported on the New York Stock Exchange: | | | | | | Market Price | | | | | Market Price | | | High | | | Low | | | | | High | | | Low | | | Fiscal 2014: | | | | | | Fiscal 2016: | | | | | | | | | | First quarter | | | $ | 8.11 | | | $ | 4.14 | | Second quarter | | | $ | 6.75 | | | $ | 4.81 | | Third quarter | | | $ | 7.17 | | | $ | 4.60 | | Fourth quarter | | $ | 37.68 | | | $ | 22.07 | | | $ | 5.50 | | | $ | 2.90 | | Fiscal 2015: | | | | | | | | | | First quarter | | | $ | 25.30 | | | $ | 16.50 | | Second quarter | | | $ | 18.86 | | | $ | 9.46 | | Third quarter | | $ | 39.08 | | | $ | 29.67 | | | $ | 9.80 | | | $ | 3.31 | | Second quarter | | $ | 38.00 | | | $ | 24.19 | | | First quarter | | $ | 28.00 | | | $ | 22.53 | | | Fiscal 2013: | | | | | | Fourth quarter (since November 22, 2013) | | $ | 32.76 | | | $ | 22.84 | | | Fourth quarter | | | $ | 7.06 | | | $ | 3.49 | |
Record Holders As of March 20, 201531, 2017 there were 3 holders of record holders of our common stock. Dividends We have never paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, because we are a holding company, our ability to pay dividends depends on our receipt of cash distributions from our subsidiaries. The terms of our indebtedness substantially restrict the ability to pay dividends. See “Current Existing Credit Facilities and Debt (Post IPO and Restructuring Transactions)” under “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”Financing Activities” of this annual reportAnnual Report on Form 10-K for a description of the related restrictions. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current and future financing instruments and other factors that our board of directors deems relevant. Performance Graph The following graph shows a monthly comparison of the cumulative total return on a $100 investment in the Company’s common stock, the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Retail Select Industry Index. The cumulative total return for the Vince Holding Corp. common stock assumes an initial investment of $100 in the common stock of the Company on November 22, 2013, which was the Company’s first day of trading on the New York Stock Exchange after its IPO. The cumulative total returns for the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Retail Select Industry Index assume an initial investment of $100 on October 31, 2013. The comparison also assumes the reinvestment of any dividends. The stock price performance included in this graph is not necessarily indicative of future stock price performance. 
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”) except to the extent we specifically incorporate it by reference into such filing. Purchases of Equity Securities by the Issuer and Affiliated Purchasers We did not repurchase any shares of common stock during the three months ended January 31, 2015.28, 2017. Unregistered Sales of Equity Securities We didOn March 15, 2016, the Company entered into an Investment Agreement with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc. (collectively the “Investors”) pursuant to which the Investors agreed to backstop a rights offering by purchasing at the subscription price of $5.50 per share any and all shares not sell any unregistered securities during fiscal year 2014.subscribed through the exercise of rights, including the over-subscription. See Note 1 “Description of Business and Summary of Significant Accounting Policies” within the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information regarding the rights offering. Simultaneous with the closing of the rights offering, on April 22, 2016, the Company received $1.1 million of proceeds from the related Investment Agreement and issued to the Investors 195,663 shares of its common stock in connection therewith. The Company intends to use the remaining net proceeds, which funds are held by Vince Holding Corp. until needed by its operating subsidiary, for additional strategic investments and general corporate purposes, which may include future amounts owed by the Company under the Tax Receivable Agreement. The shares issued to the Investors pursuant to the Investment Agreement were sold in reliance on the exemption set forth in Section 4(a)(2) under the Securities Act and/or Regulation D promulgated thereunder.
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ITEM 6. | SELECTED CONSOLIDATED FINANCIALSELECTED FINANCIAL DATA. |
The selected historical consolidated financial data set forth below for each of the years in the four-yearfive-year period ended January 31, 201528, 2017 and as of January 31, 201528, 2017 have been derived from our audited consolidated financial statements. The historical results presented below are not necessarily indicative of the results expected for any future period. The information should be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this annual reportAnnual Report on Form 10-K and our Consolidated Financial Statements and related notes included herein. | | | | | | | | | | | | | | | | | | | | Fiscal Year (1) | | | (In thousands, except for share data) | | 2014 | | | 2013 | | | 2012 | | | 2011 | | Statement of Operations Data | | | | | | | | | | | | | | | | | Net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | | $ | 175,255 | | Cost of products sold | | | 173,567 | | | | 155,154 | | | | 132,156 | | | | 89,545 | | | | | | | | | | | | | | | | | | | Gross profit | | | 166,829 | | | | 133,016 | | | | 108,196 | | | | 85,710 | | Selling, general and administrative expenses (2) | | | 96,579 | | | | 83,663 | | | | 67,260 | | | | 42,793 | | | | | | | | | | | | | | | | | | | Income from operations | | | 70,250 | | | | 49,353 | | | | 40,936 | | | | 42,917 | | Interest expense, net (3) | | | 9,698 | | | | 18,011 | | | | 68,684 | | | | 81,364 | | Other expense, net | | | 835 | | | | 679 | | | | 769 | | | | 478 | | | | | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 59,717 | | | | 30,663 | | | | (28,517 | ) | | | (38,925 | ) | Provision for income taxes | | | 23,994 | | | | 7,268 | | | | 1,178 | | | | 2,997 | | | | | | | | | | | | | | | | | | | Net income (loss) from continuing operations | | | 35,723 | | | | 23,395 | | | | (29,695 | ) | | | (41,922 | ) | Net loss from discontinued operations, net of tax | | | — | | | | (50,815 | ) | | | (78,014 | ) | | | (105,944 | ) | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 35,723 | | | $ | (27,420 | ) | | $ | (107,709 | ) | | $ | (147,866 | ) | | | | | | | | | | | | | | | | | | Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | Basic earnings (loss) per share from continuing operations | | $ | 0.97 | | | $ | 0.83 | | | $ | (1.13 | ) | | $ | (1.60 | ) | Basic loss per share from discontinued operations | | | — | | | | (1.81 | ) | | | (2.98 | ) | | | (4.04 | ) | | | | | | | | | | | | | | | | | | Basic earnings (loss) per share | | $ | 0.97 | | | $ | (0.98 | ) | | $ | (4.11 | ) | | $ | (5.64 | ) | | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share from continuing operations | | $ | 0.93 | | | $ | 0.83 | | | $ | (1.13 | ) | | $ | (1.60 | ) | Diluted loss per share from discontinued operations | | | — | | | | (1.81 | ) | | | (2.98 | ) | | | (4.04 | ) | | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share | | $ | 0.93 | | | $ | (0.98 | ) | | $ | (4.11 | ) | | $ | (5.64 | ) | | | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | | | | | Basic | | | 36,730,490 | | | | 28,119,794 | | | | 26,211,130 | | | | 26,211,130 | | Diluted | | | 38,244,906 | | | | 28,272,925 | | | | 26,211,130 | | | | 26,211,130 | |
| | | | | | | | | | | | | | | | | | | | As of | | | (In thousands) | | January 31,
2015 | | | February 1,
2014 | | | February 2,
2013 | | | January 28,
2012 | | Balance Sheet Data: | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 112 | | | $ | 21,484 | | | $ | 317 | | | $ | 1,839 | | Working capital | | | 16,650 | | | | 65,398 | | | | 9,746 | | | | (2,149 | ) | Total assets | | | 382,198 | | | | 414,342 | | | | 442,124 | | | | 468,445 | | Long-term debt | | | 88,000 | | | | 170,000 | | | | 391,434 | | | | 605,292 | | Other liabilities (long-term) (4) | | | 146,063 | | | | 169,015 | | | | — | | | | — | | Stockholders’ equity (deficit) | | | 71,969 | | | | 33,551 | | | | (561,265 | ) | | | (743,021 | ) |
| | Fiscal Year (1) | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | (in thousands, except for share data) | | | | | | | | | | | | | | | | | | | | | Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 268,199 | | | $ | 302,457 | | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | Gross profit (2) | | | 122,819 | | | | 132,516 | | | | 166,829 | | | | 133,016 | | | | 108,196 | | Selling, general and administrative expenses (3) | | | 134,430 | | | | 116,790 | | | | 96,579 | | | | 83,663 | | | | 67,260 | | (Loss) income from operations (4) | | | (64,672 | ) | | | 15,726 | | | | 70,250 | | | | 49,353 | | | | 40,936 | | Net (loss) income from continuing operations (4) (5) | | | (162,659 | ) | | | 5,099 | | | | 35,723 | | | | 23,395 | | | | (29,695 | ) | Net loss from discontinued operations, net of tax (6) | | | — | | | | — | | | | — | | | | (50,815 | ) | | | (78,014 | ) | Net (loss) income (4) (5) | | | (162,659 | ) | | | 5,099 | | | | 35,723 | | | | (27,420 | ) | | | (107,709 | ) | Basic (loss) earnings per share: | | | | | | | | | | | | | | | | | | | | | Basic (loss) earnings per share from continuing operations | | $ | (3.50 | ) | | $ | 0.14 | | | $ | 0.97 | | | $ | 0.83 | | | $ | (1.13 | ) | Basic (loss) earnings per share | | $ | (3.50 | ) | | $ | 0.14 | | | $ | 0.97 | | | $ | (0.98 | ) | | $ | (4.11 | ) | Diluted (loss) earnings per share: | | | | | | | | | | | | | | | | | | | | | Diluted (loss) earnings per share from continuing operations | | $ | (3.50 | ) | | $ | 0.14 | | | $ | 0.93 | | | $ | 0.83 | | | $ | (1.13 | ) | Diluted (loss) earnings per share | | $ | (3.50 | ) | | $ | 0.14 | | | $ | 0.93 | | | $ | (0.98 | ) | | $ | (4.11 | ) | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | Basic | | | 46,420,533 | | | | 36,770,430 | | | | 36,730,490 | | | | 28,119,794 | | | | 26,211,130 | | Diluted | | | 46,420,533 | | | | 37,529,227 | | | | 38,244,906 | | | | 28,272,925 | | | | 26,211,130 | |
| | | | | | | | | | | | | | | | | | | | Fiscal Year (1) | | | (In thousands, except for percentages, door counts and store counts) | | 2014 | | | 2013 | | | 2012 | | | 2011 | | Other Operating and Financial Data: | | | | | | | | | | | | | | | | | Net Sales by Segment: | | | | | | | | | | | | | | | | | Wholesale | | $ | 259,418 | | | $ | 229,114 | | | $ | 203,107 | | | $ | 151,921 | | Direct-to-Consumer | | | 80,978 | | | | 59,056 | | | | 37,245 | | | | 23,334 | | | | | | | | | | | | | | | | | | | Total net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | | $ | 175,255 | | | | | | | | | | | | | | | | | | | Total wholesale doors at end of period | | | 2,394 | | | | 2,300 | | | | 2,145 | | | | 1,761 | | Total stores at end of period | | | 37 | | | | 28 | | | | 22 | | | | 19 | | Comparable store sales growth (5) | | | 7.8 | % | | | 20.6 | % | | | 20.8 | % | | | 7.6 | % | Depreciation and amortization | | $ | 5,267 | | | $ | 2,785 | | | $ | 2,009 | | | $ | 1,701 | | Capital expenditures | | $ | 19,699 | | | $ | 10,073 | | | $ | 1,821 | | | $ | 1,450 | |
| | As of | | | | January 28, 2017 | | | January 30, 2016 | | | January 31, 2015 | | | February 1, 2014 | | | February 2, 2013 | | (in thousands) | | | | | | | | | | | | | | | | | | | | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 20,978 | | | $ | 6,230 | | | $ | 112 | | | $ | 21,484 | | | $ | 317 | | Working capital | | | 24,170 | | | | (11,415 | ) | | | 16,650 | | | | 65,398 | | | | 9,746 | | Total assets | | | 239,480 | | | | 363,568 | | | | 378,648 | | | | 409,374 | | | | 442,124 | | Debt principal | | | 50,200 | | | | 60,000 | | | | 88,000 | | | | 170,000 | | | | 391,434 | | Other liabilities (long-term) (7) | | | 137,830 | | | | 140,838 | | | | 146,063 | | | | 169,015 | | | | — | | Stockholders' (deficit) equity | | | (13,981 | ) | | | 78,502 | | | | 71,969 | | | | 33,551 | | | | (561,265 | ) |
| | Fiscal Year (1) | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | Other Operating and Financial Data: | | | | | | | | | | | | | | | | | | | | | Total wholesale doors at end of period | | | 2,260 | | | | 2,441 | | | | 2,394 | | | | 2,300 | | | | 2,145 | | Total company-operated stores at end of period | | | 54 | | | | 48 | | | | 37 | | | | 28 | | | | 22 | | Comparable sales (8) (9) | | | -16.2 | % | | | 4.2 | % | | | 12.6 | % | | | 25.2 | % | | | 35.9 | % |
(1) | Fiscal year ends on Saturday closest to January 31. Fiscal 2016 (ended January 28, 2017), Fiscal 2015 (ended January 30, 2016), Fiscal 2014 (ended January 31, 2015), fiscal and Fiscal 2013 (ended February 1, 2014) and fiscal 2011 (ended January 28, 2012) consisted of 52 weeks. Fiscal 2012 (ended February 2, 2013) consisted of 53 weeks. |
(2) | IncludesFiscal 2015 includes the impact of $10,300 pre-tax expense associated with inventory write-downs primarily related to excess out of season and current inventory. |
(3) | Fiscal 2016 includes the impact of a $2,082 non-cash asset impairment charge related to the assets of certain retail stores with asset carrying values that were determined not to be recoverable and exceeded fair value. Fiscal 2015 includes the net impact of |
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| $2,702 pre-tax expense associated with executive severance costs and executive search costs partly offset by the favorable impact of executive stock option forfeitures. Fiscal 2014 includes $571 pre-tax expense associated with the secondary offering by certain stockholders of the Company completed in July 2014. Fiscal 2013 and Fiscal 2012 include $9,751 and $9,331, respectively, pre-tax expense associated with the impact of public company transition costscosts. |
(4) | Fiscal 2016 includes the impact of approximately $9,751a pre-tax impairment charges of $22,311 related to goodwill and $9,331$30,750 related to the tradename intangible asset. See Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” to the Consolidated Financial Statements included in fiscal 2013 and 2012, respectively. Alsothis Annual Report on Form 10-K for additional details. |
(5) | Fiscal 2016 includes costs associated with the Secondary Offering (as defined herein)impact of $571a $121,836 valuation allowance recorded against our deferred tax assets. See Note 10 “Income Taxes” to the Consolidated Financial Statements included in fiscal 2014.this Annual Report on Form 10-K for additional details. |
(3)(6) | Interest expense priorPrior to the Company’s IPO in November 2013 is associated withand Restructuring Transactions, the Sun Promissory NotesCompany was a diversified apparel company operating a broad portfolio of fashion brands, which included the Vince business. As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business, and the Sun Capital Loan Agreement (bothstockholders immediately prior to the consummation of the Restructuring Transactions retained the full ownership and control of the non-Vince businesses. The Vince business is now the sole operating business of Vince Holding Corp. Historical financial information for the non-Vince businesses is presented as defined herein). Interest expense aftera component of discontinued operations, until the IPO inbusinesses were separated on November 2013 represents interest and amortization of deferred financing costs incurred in connection with the Company’s $175,000 Term Loan Facility and $50,000 Revolving Credit Facility.27, 2013. |
(4)(7) | Other liabilities includes the impact of recording the long-term portion of the liability related to the Tax Receivable Agreement, with the Pre-IPO Stockholders entered into in November 2013, which represents our obligation to pay 85% of estimated cash savings on federal, state and local income taxes realized by us through our use of certain net tax assets retained by us subsequent to the completion of the IPO and Restructuring Transactions executed in November 2013. |
(8) | Comparable sales include our e-commerce sales in order to align with how we manage our brick-and-mortar retail stores and e-commerce online store as a combined single direct-to-consumer segment. As a result of our omni-channel sales and inventory strategy as well as cross-channel customer shopping patterns, there is less distinction between our brick-and-mortar retail stores and our e-commerce online store and we believe the inclusion of e-commerce sales in our comparable sales metric is a more meaningful representation of these results and provides a more comprehensive view of our year over year comparable sales metric. |
(9) | A store is included in the comparable sales calculation after it has completed 13 full fiscal months of operations. Non-comparable sales include new stores which have not completed 13 full fiscal months of operations and sales from closed stores. In the event that we relocate or change square footage of an existing store, we would treat that store as non-comparable until it has completed 13 full fiscal months of operations following the relocation or square footage adjustment. For 53-week fiscal years, we adjust comparable sales to exclude the additional week. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. |
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(5)ITEM 7. | Comparable Store Sales Policy:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
A store is included in the comparable store sales calculation after it has completed at least 12 full fiscal months of operations. Non-comparable store sales include new stores which have not completed at least 12 full fiscal months of operations and sales from closed stores. In the event that we relocate, or change square footage of an existing store, we would treat that store as a non-comparable store until it has completed at least 12 full fiscal months of operation following the relocation or square footage adjustment. For 53-week fiscal years, we do not adjust comparable store sales to exclude the additional week.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion summarizes our consolidated operating results, financial condition and liquidity during each of the years in the three-year period ended January 31, 2015. Our fiscal year ends on the Saturday closest to January 31. Fiscal years 2014, 20132016, 2015 and 20122014 ended on January 28, 2017 (“fiscal 2016”), January 30, 2016 (“fiscal 2015”) and January 31, 2015 February 1, 2014 and February 2, 2013,(“fiscal 2014”), respectively. Fiscal years 2016, 2015 and 2014 and 2013each consisted of 52 weeks and fiscal year 2012 consisted of 53 weeks. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual reportAnnual Report on Form 10-K. All amounts disclosed are in thousands except door and store counts, countries, share and per share data and percentages.
OnFor purposes of this Annual Report on Form 10-K, “Vince,” the “Company,” “we,” and “our,” refer to Vince Holding Corp. (“VHC”) and its wholly owned subsidiaries, including Vince Intermediate Holding, LLC (“Vince Intermediate”) and Vince, LLC. References to “Kellwood” refer, as applicable, to Kellwood Holding, LLC and its consolidated subsidiaries (including Kellwood Company, LLC) or the operations of the non-Vince businesses after giving effect to the Restructuring Transactions that were completed in connection with our IPO on November 27, 2013 Vince Holding Corp. completedand prior to the IPO and the Restructuring Transactions. As a result, the non-Vince businesses were separated from the Vince business. The Vince business is now the sole operating business of Vince Holding Corp. Historical financial information for the non-Vince businesses has been included as discontinued operations until the businesses were separated on November 27, 2013.Kellwood Sale.
This discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. Factors that might cause such differences include those described underFor a discussion of the risks facing our business, see “Item 1A—Risk Factors,” “Disclosures Regarding Forward-Looking Statements” and elsewhereFactors” included in this annual reportAnnual Report on Form 10-K. Executive Overview Established in 2002, Vince is a leading contemporary fashionglobal luxury brand best known for utilizing luxe fabrications and innovative techniques to create a product assortment that combines urban utility and modern effortless stylestyle. From its edited core collection of ultra-soft cashmere knits and everyday luxury essentials. Founded in 2002, thecotton tees, Vince has evolved into a global lifestyle brand now offers a wide range of women’s, men’s and children’s apparel,destination for both women’s and men’s footwear,apparel and handbags.accessories. Vince products are sold in prestige distribution worldwide, including over 2,400approximately 2,300 distribution pointslocations across 45more than 40 countries. Vince has generated strongWhile we have experienced a decline in sales, momentum over the last decade. Wewe believe that we will achieve continued successcan generate growth by improving and expanding our product assortment distributed through premier wholesale partners in the U.S. and selectoffering, expanding our selling into additional international markets, as well as inand growing our own branded retail locations and on our e-commerce platform. As of January 31, 2015, we sold our products at 2,394 doors through our wholesale partners in the U.S. and international markets and we operated 37 retail stores, including 28 full price stores and nine outlet stores, throughout the United States.
The following is a summary of fiscal 2014 highlights:
Our net sales totaled $340.4 million, reflecting an 18.1% increase over prior year net sales of $288.2 million.
Our wholesale net sales increased 13.2% to $259.4 million and our direct-to-consumer net sales increased 37.1% to $81.0 million.
businesses. Operating income increased 42.3% to $70.3 million, or 20.6% of net sales, which represents a 340 basis point improvement over the prior year.
We made voluntary prepayments totaling $105.0 million on the Term Loan Facility. As of January 31, 2015, we had $88.0 million of total debt outstanding comprised of $65.0 million outstanding on our Term Loan Facility and $23.0 million outstanding on our Revolving Credit Facility.
We opened nine new retail stores during fiscal year 2014 and increased our wholesale door count by 94 additional doors.
Certain selling stockholders of the Company, including affiliates of Sun Capital (collectively with the other selling stockholders, the “Selling Stockholders”), completed a secondary offering (the “Secondary Offering”) of common stock of the Company on July 1, 2014. Following the Secondary Offering, affiliates of Sun Capital held 54.6% of the Company’s common stock. We did not receive any proceeds from the Secondary Offering.
We serve our customers through a variety of channels that reinforce the Vince brand image. Our diversified channel strategy allows us to introduce our products to customers through multiple distribution points that are reported in two segments: Wholesale and Direct-to-consumer. As of January 28, 2017, our products were sold at 2,260 doors through our wholesale partners in the U.S. and direct-to-consumer.international markets and we operated 54 retail stores, including 40 full price stores and 14 outlet stores, throughout the United States. The following is a summary of our wholesale and direct-to-consumerfiscal 2016 highlights: Our net sales for fiscal years 2014, 2013 and 2012: | | | | | | | | | | | | | | | | Net Sales by Segment | | | | | Fiscal Year | | | (in thousands) | | 2014 | | | 2013 | | | 2012 | | Wholesale | | $ | 259,418 | | | $ | 229,114 | | | $ | 203,107 | | Direct-to-consumer | | | 80,978 | | | | 59,056 | | | | 37,245 | | | | | | | | | | | | | | | Total net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | | | | | | | | | | | | | |
We have expanded our operations rapidly since our inception in 2002, and we have limited operating experience at our current size. Our growth intotaled $268,199, reflecting an 11.3% decrease compared to prior year net sales has also ledof $302,457.
Our Wholesale net sales decreased 15.5% to increased selling,$170,053 and our Direct-to-consumer net sales decreased 3.1% to $98,146. Comparable store sales including e-commerce decreased 16.2% compared to last year. We continue to incur costs associated with certain strategic investments within Cost of products sold and Selling, general and administrative expenses. We have made and are making investments to support our near and longer-term growth. If our operations continue to grow over the longer term, of which there can be no assurance, we will be required to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes, and to obtain more space for our expanding administrative support and other headquarters personnel. Whileexpenses that we believe will facilitate achieving our growth strategy offers significant opportunities, it also presents risks and challenges, including among others,long-term goals. We incurred charges of $6,950 during fiscal 2016 related to (i) the risks that we may not be able to hire and train qualified associates, that our new product offerings and expanded sales channels may not maintain or enhance our brand image and thatmigration of our distribution facilities to a new third-party service provider; (ii) the realignment of our supplier base; (iii) the transition of information technology systems and information systems may not be adequateinfrastructure in-house from Kellwood; (iv) the estimated impact of our strategic decision regarding handbags; and (v) our brand update initiatives.
Our net loss was $162,659, or $3.50 per share, compared to supportnet income of $5,009, or $0.14 per diluted share, in the prior year. Net loss in the current year included pre-tax impairment charges of $53,061 related to goodwill and our growth plans. Forindefinite-lived tradename intangible asset and a $121,836 valuation allowance established against our deferred tax assets. Net income in the prior year included pre-tax expense of $10,300 associated with inventory write-downs primarily related to excess out of season and current inventory, pre-tax expense of $3,394 of executive severance costs, pre-tax expense of $615 associated with executive search costs and pre-tax income of $1,307 related to executive stock option forfeitures. We opened 6 new retail stores during fiscal 2016. As of January 28, 2017, we had $50,200 of total debt principal outstanding comprised of $45,000 outstanding under our Term Loan Facility and $5,200 outstanding under our Revolving Credit Facility, as well as $20,978 of cash and cash equivalents. We continued to invest in infrastructure related to our IT migration efforts which were completed during the fourth quarter of fiscal 2016. 30
Results of Operations Comparable Sales Comparable sales include our e-commerce sales in order to align with how we manage our brick-and-mortar retail stores and e-commerce online store as a combined single Direct-to-consumer segment. As a result of our omni-channel sales and inventory strategy, as well as cross-channel customer shopping patterns, there is less distinction between our brick-and-mortar retail stores and our e-commerce online store and we believe the inclusion of e-commerce sales in our comparable sales metric is a more complete discussionsmeaningful representation of risks facingthese results and provides a more comprehensive view of our business see “Item 1A—Risk Factors”year over year comparable sales metric. A store is included in the comparable sales calculation after it has completed 13 full fiscal months of this annual report onForm 10-K. Resultsoperations. Non-comparable sales include new stores which have not completed 13 full fiscal months of Operationsoperations and sales from closed stores. In the event that we relocate or change square footage of an existing store, we would treat that store as non-comparable until it has completed 13 full fiscal months of operations following the relocation or square footage adjustment. For 53-week fiscal years, we adjust comparable sales to exclude the additional week. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales.
Fiscal 20142016 Compared to Fiscal 20132015 The following table presents, for the periods indicated, our operating results as a percentage of net sales as well as earnings per share data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended | | | | | | | | January 31, 2015 | | | February 1, 2014 | | | Variances | | (In thousands, except share data, store and door counts,
and percentages) | | Amount | | | % of Net
Sales | | | Amount | | | % of Net
Sales | | | Amount | | | Percent | | Statement of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 340,396 | | | | 100.0 | % | | $ | 288,170 | | | | 100.0 | % | | $ | 52,226 | | | | 18.1 | % | Cost of products sold | | | 173,567 | | | | 51.0 | % | | | 155,154 | | | | 53.8 | % | | | 18,413 | | | | 11.9 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 166,829 | | | | 49.0 | % | | | 133,016 | | | | 46.2 | % | | | 33,813 | | | | 25.4 | % | Selling, general and administrative expenses | | | 96,579 | | | | 28.4 | % | | | 83,663 | | | | 29.0 | % | | | 12,916 | | | | 15.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 70,250 | | | | 20.6 | % | | | 49,353 | | | | 17.2 | % | | | 20,897 | | | | 42.3 | % | Interest expense, net | | | 9,698 | | | | 2.8 | % | | | 18,011 | | | | 6.3 | % | | | (8,313 | ) | | | (46.2 | )% | Other expense, net | | | 835 | | | | 0.3 | % | | | 679 | | | | 0.2 | % | | | 156 | | | | 23.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 59,717 | | | | 17.5 | % | | | 30,663 | | | | 10.7 | % | | | 29,054 | | | | 94.8 | % | Provision for income taxes | | | 23,994 | | | | 7.0 | % | | | 7,268 | | | | 2.5 | % | | | 16,726 | | | | 230.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Net income from continuing operations | | | 35,723 | | | | 10.5 | % | | | 23,395 | | | | 8.2 | % | | | 12,328 | | | | 52.7 | % | Net loss from discontinued operations, net of taxes | | | — | | | | — | | | | (50,815 | ) | | | (17.6 | )% | | | 50,815 | | | | (100.0 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 35,723 | | | | 10.5 | % | | $ | (27,420 | ) | | | (9.4 | )% | | $ | 63,143 | | | | (230.3 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic EPS—continuing operations | | $ | 0.97 | | | | | | | $ | 0.83 | | | | | | | | | | | | | | Basic EPS—discontinued operations | | | — | | | | | | | | (1.81 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic EPS—Total | | $ | 0.97 | | | | | | | $ | (0.98 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | Diluted EPS—continuing operations | | $ | 0.93 | | | | | | | $ | 0.83 | | | | | | | | | | | | | | Diluted EPS—discontinued operations | | | — | | | | | | | | (1.81 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted EPS—Total | | $ | 0.93 | | | | | | | $ | (0.98 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Operating and Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale doors at end of period | | | 2,394 | | | | | | | | 2,300 | | | | | | | | | | | | | | Total stores at end of period | | | 37 | | | | | | | | 28 | | | | | | | | | | | | | | Comparable store sales growth | | | 7.8 | % | | | | | | | 20.6 | % | | | | | | | | | | | | |
| | Fiscal Year | | | | | | | | | | | | 2016 | | | 2015 | | | Variances | | | | | | | | % of Net | | | | | | | % of Net | | | | | | | | | | | | Amount | | | Sales | | | Amount | | | Sales | | | Amount | | | Percent | | (in thousands, except per share data, store and door counts and percentages) | | | | | | | | | | | | | | Statements of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 268,199 | | | | 100.0 | % | | $ | 302,457 | | | | 100.0 | % | | $ | (34,258 | ) | | | (11.3 | )% | Cost of products sold | | | 145,380 | | | | 54.2 | % | | | 169,941 | | | | 56.2 | % | | | (24,561 | ) | | | (14.5 | )% | Gross profit | | | 122,819 | | | | 45.8 | % | | | 132,516 | | | | 43.8 | % | | | (9,697 | ) | | | (7.3 | )% | Impairment of goodwill and indefinite-lived intangible asset | | | 53,061 | | | | 19.8 | % | | | — | | | | 0.0 | % | | | 53,061 | | | | 100.0 | % | Selling, general and administrative expenses | | | 134,430 | | | | 50.1 | % | | | 116,790 | | | | 38.6 | % | | | 17,640 | | | | 15.1 | % | (Loss) income from operations | | | (64,672 | ) | | | (24.1 | )% | | | 15,726 | | | | 5.2 | % | | | (80,398 | ) | | * | | Interest expense, net | | | 3,932 | | | | 1.5 | % | | | 5,680 | | | | 1.9 | % | | | (1,748 | ) | | | (30.8 | )% | Other expense, net | | | 329 | | | | 0.1 | % | | | 1,733 | | | | 0.6 | % | | | (1,404 | ) | | | (81.0 | )% | (Loss) income before income taxes | | | (68,933 | ) | | | (25.7 | )% | | | 8,313 | | | | 2.7 | % | | | (77,246 | ) | | * | | Provision for income taxes | | | 93,726 | | | | 34.9 | % | | | 3,214 | | | | 1.0 | % | | | 90,512 | | | * | | Net (loss) income | | $ | (162,659 | ) | | | (60.6 | )% | | $ | 5,099 | | | | 1.7 | % | | $ | (167,758 | ) | | * | | (Loss) earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic (loss) earnings per share | | $ | (3.50 | ) | | | | | | $ | 0.14 | | | | | | | | | | | | | | Diluted (loss) earnings per share | | $ | (3.50 | ) | | | | | | $ | 0.14 | | | | | | | | | | | | | | Other Operating and Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale doors at end of period | | | 2,260 | | | | | | | | 2,441 | | | | | | | | | | | | | | Total stores at end of period | | | 54 | | | | | | | | 48 | | | | | | | | | | | | | | Comparable sales growth | | | -16.2 | % | | | | | | | 4.2 | % | | | | | | | | | | | | |
Net Salessalesfor the fiscal year ended January 31, 20152016 were $340.4 million, increasing $52.2 million,$268,199, decreasing $34,258, or 18.1%11.3%, versus $288.2 million$302,457 for the fiscal year ended February 1, 2014. The increase in sales compared to the prior year is due to an increase in volume across both of our business segments. The following is a summary of our net2015. Net sales by reportable segment for the fiscal year ended January 31, 2015 and the fiscal year ended February 1, 2014:are as follows: | | | | Net Sales by Segment | | | | | | Fiscal Year Ended | | | Fiscal Year | | | (in thousands) | | January 31,
2015 | | | February 1,
2014 | | | 2016 | | | 2015 | | Net Sales: | | | | | | Wholesale | | $ | 259,418 | | | $ | 229,114 | | | $ | 170,053 | | | $ | 201,182 | | Direct-to-consumer | | | 80,978 | | | | 59,056 | | | | 98,146 | | | | 101,275 | | | | | | | | | | Total net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 268,199 | | | $ | 302,457 | | | | | | | | | |
31
Net sales from our wholesaleWholesale segment increased $30.3 million, decreased $31,129, or 13.2%15.5%, to $259.4 million$170,053 in the fiscal year ended January 31,2016 from $201,182 in fiscal 2015, from $229.1 million in the fiscal year ended February 1, 2014primarily driven by strong performancea reduction in both our domestic and international markets. The expansion of our wholesale business contributed to the sales increase as our wholesale door counts increased byfull-price orders, which includes a net 94 wholesale doors and we opened 21 additional shop-in-shops that are operated by our domestic and international partners. Additionally, there are two international free-standing stores which are operated by our distribution partners, onereduction in Tokyo that opened in the fall of 2013, and one in Istanbul that opened in the spring of 2014.replenishment product. Net sales from our direct-to-consumerDirect-to-consumer segment increased $21.9 million, decreased $3,129, or 37.1%3.1%, to $81.0 million$98,146 in fiscal 2016 from $101,275 in fiscal 2015. Comparable sales declined $15,761, or 16.2%, including e-commerce, reflecting declines in the fiscal year ended January 31, 2015 from $59.1 million in the fiscal year ended February 1, 2014. This sales growth wasnumber of transactions, due to (i) comparable retaillower conversion rates and reduced traffic, and a decrease in average order value. This was partly offset by non-comparable store sales, growthwhich contributed $12,632 of 7.8% which was driven primarily by increased transactions and contributed $3.3 million, (ii) opening nine new stores as compared tosales growth. Since the end of the prior fiscal year (bringing2015, 6 new stores have opened, bringing our total retail store count to 3754 as of January 31, 2015,28, 2017, compared to 2848 as of February 1, 2014) inclusiveJanuary 30, 2016. Gross profit decreased $9,697, or 7.3%, to $122,819 in fiscal 2016 from $132,516 in fiscal 2015. As a percentage of non-comparable sales, growth contributing $15.3 million,gross margin was 45.8%, compared with 43.8% in the prior year. Gross profit and (iii) e-commerce sales growth contributing $3.3 million. Gross Profit/Gross Margin rate increased 280 basis pointsmargin were negatively impacted in the prior year by net charges totaling $10,300 associated with the Company’s decision to 49.0% foraccelerate the fiscal year ended January 31, 2015 compared to 46.2% for the fiscal year ended February 1, 2014.disposition of aged and excess product. The total gross margin rate increase was primarily driven primarily by the following factors:
Increased sales penetration of the international and licensing businessesThe favorable impact from year-over-year adjustments to inventory reserves contributed 80approximately 800 basis points of improvement; ContinuedThe unfavorable impact from increased supply chain efficiencies including our strategic shift to transport more of ourand product costs contributed negatively by sea versus air as well as other operational improvements contributed 80approximately 400 basis points of improvement;points; and
Increased sales penetration of the direct-to-consumer segment contributed 90 basis points of improvement; and
FavorableThe unfavorable impact from inventory reserveincreased discounts and an increase in the rate of sales allowances contributed negatively by approximately 200 basis points.
Impairment of goodwill and indefinite-lived intangible asset for fiscal 2016 includes charges of $22,311 related adjustments contributed 50 basis pointsto goodwill and $30,750 related to our indefinite-lived tradename asset. See “Critical Accounting Policies — Fair Value Assessments of improvement. The above increases were partially offset by the impact of certain product mix which had a negative impact of (20) basis points.
Selling, general and administrative expenses(“SG&A”) expensesfor the fiscal year ended January 31, 20152016 were $96.6 million,$134,430, increasing $12.9 million,$17,640, or 15.4%15.1%, versus $83.7 million$116,790 for fiscal 2015. SG&A expenses as a percentage of sales were 50.1% and 38.6% for fiscal 2016 and fiscal 2015, respectively. As we continue to invest in initiatives that we believe will drive future growth and with a decrease in sales in fiscal 2016 compared to fiscal 2015, our SG&A expenses as a percentage of sales have deleveraged. SG&A expenses in the fiscalprior year ended February 1, 2014.included a $2,702 charge for net management transition costs. The increase in SG&A expenses compared to the prior year period wereis primarily due to: Increase in compensation expenseCertain strategic investments of $7.3 million, including share-based$5,366 related to the transition of the information technology systems and incentive compensation, employee benefitsinfrastructure in-house from Kellwood, the realignment of our supplier base, costs related to our brand update initiatives and severance and other costs related increases due to hiring and retaining additional employees to support our growth plans;handbags. Increase inIncreased rent and occupancy costs of $5.6 million$4,673 primarily due primarily to new retail store openings andopenings;
Increased consulting fees of $4,587 largely driven by expenses associated with the consulting agreement with our new headquarter office spaces;co-founders; Increase in marketing, advertising and promotional expenses of $2.6 million to support our efforts to increase brand awareness, drive traffic and build customer loyalty;
Increase in depreciation expense of $2.4 million due to new stores, shop-in-shop expenditures and our new headquarter office spaces;
Increase in otherIncreased product development costs of $2.2 million consisting$4,387; and
A non-cash asset impairment charge of increases$2,082 in areas such as designfiscal 2016 related to the impairment of property and development, travel, consulting and legal; Increase in public company expensesequipment of $1.9 million due to costs incurredcertain retail stores with carrying values that were determined not to be a stand-alone public company;recoverable and exceeded fair value.
Increase of $0.6 million related to fees incurred in connection with the Secondary Offering completed in July 2014.
The above increases were partially offset by the decrease in public companyby:Decreased marketing and advertising expenses of $1,021; and A net charge of $2,702 for management transition costs of $9.8 million incurredrecorded in the prior fiscal year in preparation for our IPO that was completed on November 27, 2013.year. The following is a summary of our operating(Loss) income from operations by segment for fiscal 2016 and fiscal 2015 is summarized in the fiscal year ended January 31, 2015 and the fiscal year ended February 1, 2014:following table:
| | | | Operating Income by Segment | | | | | | Fiscal Year Ended | | | Fiscal Year | | | (in thousands) | | January 31,
2015 | | | February 1,
2014 | | | 2016 | | | 2015 | | Wholesale | | $ | 100,623 | | | $ | 81,822 | | | $ | 47,098 | | | $ | 61,571 | | Direct-to-consumer | | | 14,556 | | | | 10,435 | | | | 1,216 | | | | 7,839 | | | | | | | | | | Subtotal | | | 115,179 | | | | 92,257 | | | | 48,314 | | | | 69,410 | | Unallocated expenses | | | (44,929 | ) | | | (42,904 | ) | | | | | | | | | | Total operating income | | $ | 70,250 | | | $ | 49,353 | | | | | | | | | | | Unallocated corporate expenses | | | | (59,925 | ) | | | (53,684 | ) | Impairment of goodwill and indefinite-lived intangible asset | | | | (53,061 | ) | | | — | | Total (loss) income from operations | | | $ | (64,672 | ) | | $ | 15,726 | |
32
Operating income from our wholesaleWholesale segment increased $18.8 million, decreased $14,473, or 23.0%23.5%, to $100.6 million$47,098 in the fiscal year ended January 31, 20152016 from $81.8 million$61,571 in the fiscal year ended February 1, 2014.2015. This increasedecrease was driven primarilyby lower gross profit resulting from the sales volume increase of $30.3 million and gross margin rate improvement noteddecline discussed above, as well aspartly offset by the favorable impact of wholesale segment operating expenses which were lower as a percentage of net sales versus the prior fiscal year.from year-over-year adjustments in inventory reserves. Operating income from our direct-to-consumerDirect-to-consumer segment increased $4.1 million, decreased $6,623, or 39.5%84.5% to $14.6 million$1,216 in the fiscal year ended January 31, 20152016 from $10.4 million$7,839 in the fiscal year ended February 1, 2014.2015. The increasedecrease resulted primarily from the sales volumeimpact of non-cash asset impairment charges of $2,082 related to property and equipment of certain retail stores with carrying values that were determined not to be recoverable and exceeded fair value and higher SG&A expenses associated with new stores. This was partly offset by an increase in gross profit including the favorable impact from year-over-year adjustments in inventory reserves. Unallocated corporate expenses are comprised of $21.9 millionSG&A expenses attributable to corporate and gross margin rate improvement noted above which more than offsetadministrative activities (such as marketing, design, finance, information technology, legal and human resources departments), and other charges that are not directly attributable to our reportable segments. In fiscal 2016, the additional operating expenses incurred,Company recorded $53,061 of impairment charges related to goodwill and the tradename intangible asset. See “Critical Accounting Policies — Fair Value Assessments of Goodwill and Other Indefinite-Lived Intangible Assets” below for further details. Interest expense decreased $1,748, or 30.8%, to $3,932 in fiscal 2016 from $5,680 in fiscal 2015. The reduction in interest expense is primarily due to lower overall debt balances as a result of opening new stores, during the period to support the sales growth. Interest expense for the fiscal year ended January 31, 2015 was $9.7 million, decreasing $8.3 million, or 46.2%, versus $18.0 million for the fiscal year ended February 1, 2014. Interest expense decreased as we had lower average debt balances period over period. The decrease in overall debt balances was primarily due to certain affiliates of Sun Capital contributing certain outstanding indebtedness to the Company in June 2013, thus eliminating interest expensevoluntary prepayments on approximately $407.5 million in debt at that time. On November 27, 2013, in connection with the IPO and Restructuring Transactions, we entered into a $175.0 millionour Term Loan Facility and a $50.0 millionduring fiscal 2015 as well as lower overall average borrowings on the Revolving Credit Facility. Interest expense for fiscal 2014 relates to interest charges under these facilities.
Other expense, netwas $0.8 million decreased $1,404, or 81.0%, to $329 in fiscal 2016 from $1,733 in fiscal 2015. In fiscal 2016, the Company reduced the overall obligation under the Tax Receivable Agreement with the pre-IPO stockholders by $209, whereas in fiscal 2015, the Company increased the obligation under the Tax Receivable Agreement by $981. See Note 12 “Related Party Transactions” within the notes to Consolidated Financial Statements in this Annual Report on Form 10-K for the fiscal year ended January 31, 2015 compared to $0.7 million for the fiscal year ended February 1, 2014.additional information. Provision for income taxes for the fiscal year ended January 31, 20152016 was $24.0 million$93,726 as compared to $7.3 million$3,214 for the fiscal year ended February 1, 2014.2015. Our effective tax rate on pretax income for the fiscal year ended January 31,2016 and fiscal 2015 was (136.0)% and the fiscal year ended February 1, 2014 was 40.2% and 23.7%38.7%, respectively. The effective tax rate for fiscal 2016 included the impact of a valuation allowance established against our deferred tax assets in the amount of $121,836, or 176.8%, due to the combination of (i) a current year pre-tax loss, including goodwill and tradename impairment charges; (ii) levels of projected pre-tax income; and (iii) the Company’s ability to carry forward or carry back tax losses. Excluding the impact of the valuation allowance, the effective tax rate was 40.8% for fiscal year ended January 31,2016 and differed from the U.S. statutory rate of 35% primarily due to the impact of state taxes. The effective tax rate for fiscal 2015 differed from the U.S. statutory rate of 35.0%35% primarily due to state taxes. The rate for the fiscal year ended February 1, 2014 differed from the U.S. statutory rate of 35.0% primarily due to changes in our valuation allowance offset in part by state taxes and nondeductible interest. Net loss from discontinued operations
The separation of the non-Vince businesses was completed on November 27, 2013. Net loss from discontinued operations was $50.8 million for the fiscal year ended February 1, 2014.
Net income (loss)
Net income was $35.7 million for the fiscal year ended January 31, 2015, increasing $63.1 million from a net loss of $(27.4) million for the fiscal year ended February 1, 2014. The increase in net income was primarily due to increased income from operations of $20.9 million, reduced interest expense of $8.3 million and a lower net loss from discontinued operations of $50.8 million, partiallynon-deductible expenses, mostly offset by the increase in income taxesfavorable impact of $16.7 million.recent changes to state and local tax laws, primarily New York City, that impacted the net operating loss deferred tax assets and the return to provision adjustment.
Results of Operations33
Fiscal 20132015 Compared to Fiscal 20122014 The following table presents, for the periods indicated, our operating results as a percentage of net sales as well as earnings per share data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended | | | | | | | | | | | February 1, 2014 | | | February 2, 2013 | | | Variances | | (In thousands, except share data, store and door counts, and
percentages) | | Amount | | | % of Net
Sales | | | Amount | | | % of Net
Sales | | | Amount | | | Percent | | Statement of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 288,170 | | | | 100.0 | % | | $ | 240,352 | | | | 100.0 | % | | $ | 47,818 | | | | 19.9 | % | Cost of products sold | | | 155,154 | | | | 53.8 | % | | | 132,156 | | | | 55.0 | % | | | 22,998 | | | | 17.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 133,016 | | | | 46.2 | % | | | 108,196 | | | | 45.0 | % | | | 24,820 | | | | 22.9 | % | Selling, general and administrative expenses | | | 83,663 | | | | 29.0 | % | | | 67,260 | | | | 28.0 | % | | | 16,403 | | | | 24.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 49,353 | | | | 17.2 | % | | | 40,936 | | | | 17.0 | % | | | 8,417 | | | | 20.6 | % | Interest expense, net | | | 18,011 | | | | 6.3 | % | | | 68,684 | | | | 28.6 | % | | | (50,673 | ) | | | (73.8 | )% | Other expense, net | | | 679 | | | | 0.2 | % | | | 769 | | | | 0.3 | % | | | (90 | ) | | | (11.7 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 30,663 | | | | 10.7 | % | | | (28,517 | ) | | | (11.9 | )% | | | 59,180 | | | | (207.5 | )% | Provision for income taxes | | | 7,268 | | | | 2.5 | % | | | 1,178 | | | | 0.5 | % | | | 6,090 | | | | 517.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) from continuing operations | | | 23,395 | | | | 8.2 | % | | | (29,695 | ) | | | (12.4 | )% | | | 53,090 | | | | (178.8 | )% | Net loss from discontinued operations, net of taxes | | | (50,815 | ) | | | (17.6 | )% | | | (78,014 | ) | | | (32.5 | )% | | | 27,199 | | | | (34.9 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | $ | (27,420 | ) | | | (9.4 | )% | | $ | (107,709 | ) | | | (44.9 | )% | | $ | 80,289 | | | | (74.5 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic EPS—continuing operations | | $ | 0.83 | | | | | | | $ | (1.13 | ) | | | | | | | | | | | | | Basic EPS—discontinued operations | | | (1.81 | ) | | | | | | | (2.98 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic EPS—Total | | $ | (0.98 | ) | | | | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | Diluted EPS—continuing operations | | $ | 0.83 | | | | | | | $ | (1.13 | ) | | | | | | | | | | | | | Diluted EPS—discontinued operations | | | (1.81 | ) | | | | | | | (2.98 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted EPS—Total | | $ | (0.98 | ) | | | | | | $ | (4.11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Operating and Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale doors at end of period | | | 2,300 | | | | | | | | 2,145 | | | | | | | | | | | | | | Total stores at end of period | | | 28 | | | | | | | | 22 | | | | | | | | | | | | | | Comparable store sales growth | | | 20.6 | % | | | | | | | 20.8 | % | | | | | | | | | | | | |
| | Fiscal Year | | | | | | | | | | | | 2015 | | | 2014 | | | Variances | | | | | | | | % of Net | | | | | | | % of Net | | | | | | | | | | | | Amount | | | Sales | | | Amount | | | Sales | | | Amount | | | Percent | | (in thousands, except per share data, store and door counts and percentages) | | | | | | | | | | | | | | | | | | | | | | | | | Statements of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 302,457 | | | | 100.0 | % | | $ | 340,396 | | | | 100.0 | % | | $ | (37,939 | ) | | | (11.1 | )% | Cost of products sold | | | 169,941 | | | | 56.2 | % | | | 173,567 | | | | 51.0 | % | | | (3,626 | ) | | | (2.1 | )% | Gross profit | | | 132,516 | | | | 43.8 | % | | | 166,829 | | | | 49.0 | % | | | (34,313 | ) | | | (20.6 | )% | Selling, general and administrative expenses | | | 116,790 | | | | 38.6 | % | | | 96,579 | | | | 28.4 | % | | | 20,211 | | | | 20.9 | % | Income from operations | | | 15,726 | | | | 5.2 | % | | | 70,250 | | | | 20.6 | % | | | (54,524 | ) | | | (77.6 | )% | Interest expense, net | | | 5,680 | | | | 1.9 | % | | | 9,698 | | | | 2.8 | % | | | (4,018 | ) | | | (41.4 | )% | Other expense, net | | | 1,733 | | | | 0.6 | % | | | 835 | | | | 0.3 | % | | | 898 | | | | 107.5 | % | Income before income taxes | | | 8,313 | | | | 2.7 | % | | | 59,717 | | | | 17.5 | % | | | (51,404 | ) | | | (86.1 | )% | Provision for income taxes | | | 3,214 | | | | 1.0 | % | | | 23,994 | | | | 7.0 | % | | | (20,780 | ) | | | (86.6 | )% | Net income | | $ | 5,099 | | | | 1.7 | % | | $ | 35,723 | | | | 10.5 | % | | $ | (30,624 | ) | | | (85.7 | )% | Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 0.14 | | | | | | | $ | 0.97 | | | | | | | | | | | | | | Diluted earnings per share | | $ | 0.14 | | | | | | | $ | 0.93 | | | | | | | | | | | | | | Other Operating and Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale doors at end of period | | | 2,441 | | | | | | | | 2,394 | | | | | | | | | | | | | | Total stores at end of period | | | 48 | | | | | | | | 37 | | | | | | | | | | | | | | Comparable sales growth | | | 4.2 | % | | | | | | | 12.6 | % | | | | | | | | | | | | |
Net Salessalesfor the fiscal year ended February 1, 20142015 were $288.2 million, increasing $47.8 million,$302,457, decreasing $37,939, or 19.9%11.1%, versus $240.4 million$340,396 for the fiscal year ended February 2, 2013.2014. The increasedecrease in sales compared to the prior year is due to an increasea decrease in volume across both of our business segments.Wholesale segment. The following is a summary of our net sales by segment for the fiscal year ended February 1, 20142015 and the fiscal year ended February 2, 2013:2014: | | | | Net Sales by Segment | | | | | | Fiscal Year Ended | | | Fiscal Year | | | (in thousands) | | February 1,
2014 | | | February 2,
2013 | | | 2015 | | | 2014 | | Net Sales: | | | | | | Wholesale | | $ | 229,114 | | | $ | 203,107 | | | $ | 201,182 | | | $ | 259,418 | | Direct-to-consumer | | | 59,056 | | | | 37,245 | | | | 101,275 | | | | 80,978 | | | | | | | | | | Total net sales | | $ | 288,170 | | | $ | 240,352 | | | $ | 302,457 | | | $ | 340,396 | | | | | | | | | |
Net sales from our wholesaleWholesale segment increased $26.0 million, decreased $58,236, or 12.8%22.4%, to $229.1 million$201,182 in the fiscal year ended February 1,2015 from $259,418 in fiscal 2014 from $203.1 million in the fiscal year ended February 2, 2013. We increased volume with manyprimarily due to lower full price customer reorders and lower off price orders. The contraction of our premier wholesale partners through increased sales productivitybusiness was partly offset by an increase in existingnet wholesale doors including our first women’s shop-in-shop at Saks Fifth Avenue, opened in September 2012,of 47 and the openingaddition of 20 additional11 shop-in-shops with our domestic and international partners. Additionally, there is one international free-standing store in Tokyo that is operated by onewholesale partners since the end of our distribution partners that opened in the fall of 2013.fiscal 2014. Net sales from our direct-to-consumerDirect-to-consumer segment increased $21.8 million,$20,297, or 58.6%25.1%, to $59.1 million$101,275 in the fiscal year ended February 1, 20142015 from $37.2 million$80,978 in the fiscal year ended February 2, 2013. This2014. $3,291 of the sales growth was dueis attributable to (i) comparable retail store sales growth of 20.6% contributing $5.5 million, (ii) opening six net4.2%, including e-commerce, primarily due to an increase in transactions partly offset by a decrease in the average order size. Non-comparable store sales contributed $17,006 of the sales growth and includes the impact of 11 new stores as compared tothat have opened since the prior yearend of fiscal 2014 (bringing our total retail store count to 2848 as of February 1, 2014,January 30, 2016, compared to 2237 as of February 2, 2013) inclusiveJanuary 31, 2015). Gross profit decreased $34,313, or 20.6%, to $132,516 in fiscal 2015 from $166,829 in fiscal 2014. As a percentage of non-comparable sales, growth contributing $12.7 million,gross margin was 43.8%, compared with 49.0% in the prior year. Gross profit and (iii) e-commercegross margin were negatively impacted by the full year $16,263 inventory reserve charge in the current year. Of this charge, $10,300 is attributable to inventory that no longer supports our prospective brand positioning strategy, with the balance relating to normal, recurring provisions based on our existing accounting policy for aged inventory. The total gross margin rate decrease was driven primarily by the following factors: The impact from higher assistance to wholesale partners had a combined negative impact of 490 basis points; 34
| • | Higher year-over-year inventory reserve charge impacted gross margins negatively by 301 basis points; and |
Increased sales growth contributing $3.5 million. Gross Profit/Gross Margin rate increased 120penetration of the Direct-to-consumer segment contributed 190 basis points of improvement.
SG&A expenses for fiscal 2015 were $116,790, increasing $20,211, or 20.9%, versus $96,579 for fiscal 2014. SG&A expenses as a percent of net sales were 38.6% and 28.4% for fiscal 2015 and fiscal 2014, respectively. SG&A expenses in the current year include a $2,702 charge for net management transition costs which consists of $3,394 of severance expense and $615 of executive search costs which were partly offset by $1,307 of stock option forfeitures. See Note 5 “Commitments and Contingencies” within the notes to 46.2%Consolidated Financial Statements in this Annual Report on Form 10-K for additional details. SG&A expenses in the fiscalprior year ended February 1, 2014 comparedinclude $571 of costs incurred by us related to 45.0% for the fiscal year ended February 2, 2013. The total margin rate increase was drivensecondary offering by a higher percentagecertain stockholders of our sales coming from the direct-to-consumer segment,Company completed in whichJuly 2014. As we generally recognize higher margins, and an increased percentage of full-pricecontinue to off-price salesinvest in our wholesale segment. The margin rate was unfavorably impacted during the fiscal year ended February 1, 2014 by increased inventory reserves,growth and increased margin assistance provided tofrom our wholesale partners. Selling, general and administrativerecent decline in sales, our SG&A expenses for the fiscal year ended February 1, 2014 were $83.7 million, increasing $16.4 million, or 24.4%, versus $67.3 million for the fiscal year ended February 2, 2013. as a percent of sales have deleveraged. The increase in SG&A expenses compared to the prior year period wasis primarily due to:
IncreasedIncrease in compensation expense and professional search fees of $5.5 million$8,668, primarily driven by the net management transition costs discussed above, as well as employee benefits and related increases due to hiring and retaining certain key employees;additional employees to support our growth plans; IncreasedIncrease in rent and occupancy costs of $4,661 due primarily to the 11 new retail store expensesopenings and our new design studio and Paris showroom space;
Increase in depreciation expense of $4.5 million$3,072 due primarily to the 11 new retail store openings;stores, shop-in-shop expenditures and Increased our new design developmentstudio and Paris showroom space;
Increase in marketing, advertising and promotional expenses of $6.0 million$1,763 to support our efforts to increase brand awareness drive traffic, build customer loyaltygrowth efforts primarily in the e-commerce channel; Increase in consulting fees of $1,546 largely driven by expenses associated with the consulting agreements with our co-founders; and open new retail stores. The following is a summaryabove increases were partly offset by $2,340 of lower costs charged under our operating income Shared Services Agreement as we have transitioned certain back office support functions in-house that were previously performed by Kellwood under the Shared Services Agreement. Income from operations by segment for fiscal 2015 and fiscal 2014 is summarized in the fiscal year ended February 1, 2014 and the fiscal year ended February 2, 2013:following table: | | | | Operating Income by Segment | | | | | | Fiscal Year Ended | | | Fiscal Year | | | (in thousands) | | February 1,
2014 | | | February 2,
2013 | | | 2015 | | | 2014 | | Wholesale | | $ | 81,822 | | | $ | 72,913 | | | $ | 61,571 | | | $ | 100,623 | | Direct-to-consumer | | | 10,435 | | | | 4,465 | | | | 7,839 | | | | 14,556 | | | | | | | | | | Subtotal | | | 92,257 | | | | 77,378 | | | | 69,410 | | | | 115,179 | | Unallocated expenses | | | (42,904 | ) | | | (36,442 | ) | | | | | | | | | | Total operating income | | $ | 49,353 | | | $ | 40,936 | | | | | | | | | | | Unallocated corporate expenses | | | | (53,684 | ) | | | (44,929 | ) | Total income from operations | | | $ | 15,726 | | | $ | 70,250 | |
Operating income from our wholesaleWholesale segment increased $8.9 million, decreased $39,052, or 12.2%38.8%, to $81.8 million$61,571 in the fiscal year ended February 1, 20142015 from $72.9 million$100,623 in the fiscal year ended February 2, 2013.2014. This increasedecrease was driven primarily fromby the lower gross margin performance due to wholesale inventory reserves of $9,615 and the sales volume increase of $26.0 million and a decrease in operating expenses as a percentage of wholesale sales, partially offset by a reduction in the gross margin rate primarily due to charges associated with recording additional inventory reserves. The decrease in operating expenses as a percentage of net wholesale sales resulted as our net wholesale sales grew at a rate greater than our expenses during fiscal 2013.noted above. Operating income from our direct-to-consumerDirect-to-consumer segment increased $6.0 million, decreased $6,717, or 133.7%46.1% to $10.4 million$7,839 in fiscal 2015 from $14,556 in fiscal 2014. The decrease resulted primarily from the impact of inventory reserves of $6,648 combined with lower gross margins driven by higher promotional activity and higher SG&A expenses associated with the 11 new stores that have opened since the end of fiscal year ended February 1,2014. Interest expense decreased $4,018, or 41.4%, to $5,680 in fiscal 2015 from $9,698 in fiscal 2014. The reduction in interest expense is primarily due to the lower overall debt balances since the end of fiscal 2014 from $4.5 million inas a result of voluntary prepayments on the Term Loan Facility and borrowings against the Revolving Credit Facility with more favorable interest rates. Other expense, net was $1,733 for fiscal year ended February 2, 2013.2015 compared to $835 for fiscal 2014. The increase resulted primarily from an increase in the sales volume increase of $21.8 million which more than offsetobligation under the additional operating expenses incurred duringTax Receivable Agreement (see Note 12 “Related Party Transactions” within the periodnotes to support the sales growth.Consolidated Financial Statements in this Annual Report on Form 10-K). Interest expenseProvision for theincome taxes for fiscal year ended February 1, 20142015 was $18.0 million, decreasing $50.7 million, or 73.8%, versus $68.7 million for the fiscal year ended February 2, 2013. Interest expense decreased as we had lower average debt balances period over period. The decrease in overall debt balances was primarily due to certain affiliates of Sun Capital contributing certain outstanding indebtedness to the Company in June 2013, thus eliminating interest expense on approximately $407.5 million in debt at that time. On November 27, 2013, in connection with the IPO and Restructuring Transactions, we entered into the Term Loan Facility and the Revolving Credit Facility.
Other expense, net,was $0.7 million for the fiscal year ended February 1, 2014$3,214 as compared to $0.8 million$23,994 for the fiscal year ended February 2, 2013.
Provision for income taxes for the fiscal year ended February 1, 2014 was $7.3 million, increasing $6.1 million versus $1.2 million for the fiscal year ended February 2, 2013.2014. Our effective tax rate on pretax income for the fiscal year ended February 1,2015 and fiscal 2014 was 38.7% and the fiscal year ended February 2, 2013 was 23.7% and (4.1%)40.2%, respectively. The ratesrate for the fiscal year ended February 1, 2014 and the fiscal year ended February 2, 20132015 differed from the U.S. statutory rate of 35.0% primarily due to state taxes nondeductible interest and non-deductible expenses, mostly offset by the favorable impact of recent changes in our valuation allowances.
Netto state and local tax laws, primarily New York City, that impacted the net operating loss deferred tax assets and the return to provision adjustment. The rate for fiscal 2014 differed from discontinued operations
The separationthe U.S. statutory rate of the non-Vince businesses was completed on November 27, 2013. Net loss from discontinued operations was $50.8 million for the fiscal year ended February 1, 2014, decreasing $27.2 million, or 34.9%, from a net loss of $78.0 million for the fiscal year ended February 2, 2013.
Net loss
Net loss was $27.4 million for the fiscal year ended February 1, 2014, decreasing $80.3 million, or 74.5%, from a net loss of $107.7 million for the fiscal year ended February 2, 2013. The reduction in our net loss was35.0% primarily due to increased income from operations of $8.4 million, reduced interest expense of $50.7 million and a lower net loss from discontinued operations of $27.2 million, partially offset by the increase in income taxes of $6.1 million.state taxes.
Discontinued Operations35
On November 27, 2013, in connection with the IPO and Restructuring Transactions, we separated the Vince and non-Vince businesses whereby the non-Vince businesses are now owned by Kellwood Holding, LLC, which is controlled by affiliates of Sun Capital. As the Company and Kellwood Holding, LLC were under the common control of affiliates of Sun Capital, this separation transaction resulted in a $73.1 million adjustment to additional paid-in capital on our Consolidated Balance Sheet at February 1, 2014.
As a result of the separation with the non-Vince businesses, the financial results for the non-Vince businesses, through the separation on November 27, 2013, are now included in results from discontinued operations. The non-Vince businesses continue to operate as a stand-alone company. Due to differences in the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of the non-Vince businesses included within discontinued operations of the Company may not be indicative of actual financial results of the non-Vince businesses as a stand-alone company.
In connection with the Restructuring Transactions, the Company issued a promissory note (the “Kellwood Note Receivable”) to Kellwood Company, LLC, in the amount of $341.5 million. Following the completion of the IPO and the Company’s entry into the Term Loan Facility and the Revolving Credit Facility, the Company used proceeds from the IPO and borrowings under the Term Loan Facility to repay the Kellwood Note Receivable, which proceeds, in turn, were primarily used by Kellwood to repay, discharge or repurchase indebtedness of Kellwood Company, LLC. As a result, neither Vince Holding Corp. nor any of its consolidated subsidiaries have any obligations with respect to the Wells Fargo Facility, the Cerberus Term Loan, the Sun Term Loan Agreements, any 12.875% Notes or any 7.625% Notes, which are each described below under “Financing Activities”.
The separation of the non-Vince businesses was completed on November 27, 2013. Accordingly, there are no results from discontinued operations reflected on the Consolidated Financial Statements for the fiscal year ended January 31, 2015. The results of the non-Vince businesses included in discontinued operations for the fiscal years ended February 1, 2014 and February 2, 2013 are summarized in the following table below (in thousands, except effective tax rates).
| | | | | | | | | | | | Fiscal Year | | | | | 2013 | | | 2012 | | Net sales | | $ | 400,848 | | | $ | 514,806 | | Cost of products sold | | | 313,620 | | | | 409,763 | | | | | | | | | | | Gross profit | | | 87,228 | | | | 105,043 | | Selling, general and administrative expenses | | | 98,016 | | | | 132,871 | | Restructuring, environmental and other charges | | | 1,628 | | | | 5,732 | | Impairment of long-lived assets | | | 1,399 | | | | 6,497 | | Change in fair value of contingent consideration | | | 1,473 | | | | (7,162 | ) | Interest expense, net | | | 46,677 | | | | 55,316 | | Other expense, net | | | 498 | | | | (9,776 | ) | | | | | | | | | | Loss before income taxes | | | (62,463 | ) | | | (78,435 | ) | Income taxes | | | (11,648 | ) | | | (421 | ) | | | | | | | | | | Net loss from discontinued operations, net of taxes | | $ | (50,815 | ) | | $ | (78,014 | ) | | | | | | | | | | Effective tax rate | | | 18.6 | % | | | 0.5 | % | | | | | | | | | |
Net loss from discontinued operations—Fiscal 2013 Compared to Fiscal 2012
The separation of the non-Vince businesses was completed on November 27, 2013. Net loss from discontinued operations was $50.8 million for the fiscal year ended February 1, 2014, decreasing $27.2 million, or 34.9%, from a net loss of $78.0 million for the fiscal year ended February 2, 2013. Results for fiscal 2013 include two fewer months compared to fiscal 2012 and were positively impacted by income tax benefit of $11.6 million. This tax benefit was generated primarily as a result of the release of valuation allowance related to the allocation of a disallowed tax loss on the sale of a trademark to intangibles with indefinite lives, resulting in fewer deferred tax liabilities that cannot be offset against deferred tax assets for valuation allowance purposes.
Liquidity and Capital Resources Vince Holding Corp.’sOur sources of liquidity are our cash and cash equivalents, cash flows from operations, andif any, borrowings available under the Revolving Credit Facility.Facility and our ability to access capital markets. Our primary cash needs are capital expenditures for new stores and related leasehold improvements, for our new offices and showroom spaces, meeting our debt service requirements, paying amounts due perunder the Tax Receivable Agreement and funding working capital requirements. The most significant components of our working capital are cash and cash equivalents, accounts receivable, inventories, accounts payable and other current liabilities. In accordance with new accounting guidance that became effective for fiscal 2016, management has concluded there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. See “—Outlook” below.Note 1 “Description of Business and Summary of Significant Accounting Policies — (D) Sources and Uses of Liquidity” within the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional details. In addition, see Part I. Item 1A. “Risk Factors” included in this Annual Report on Form 10-K.
On November 27, 2013,March 15, 2016, the Company entered into an Investment Agreement with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc. (collectively the “Investors”) pursuant to which Sun Cardinal and SCSF Cardinal agreed to backstop a rights offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription. See Note 12 “Related Party Transactions” within the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K. On March 29, 2016, the Company commenced a rights offering (the “Rights Offering”), whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holders”) received one non-transferrable right to purchase 0.3191 shares for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercised their subscription rights were entitled to subscribe for additional shares that remained unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allowed a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights could only be exercised for whole numbers of shares; no fractional shares of common stock were issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors fully subscribed in the Rights Offering and exercised their oversubscription right. The Company received subscriptions and oversubscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, resulting in aggregate gross proceeds of approximately $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of gross proceeds from the related Investment Agreement and issued to the Investors 195,663 shares of its common stock in connection therewith. In total, the Company received total gross proceeds of $65,000 as a result of the Rights Offering and related Investment Agreement transactions. Upon the completion of these transactions, affiliates of Sun Capital owned 58% of our outstanding common stock. The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by us under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,262 (see Note 12 “Related Party Transactions” within the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K), and (2) repay all then outstanding indebtedness, totaling $20,000, under our Revolving Credit Facility. The Company intends to use the remaining net proceeds, which funds are held by VHC until needed by our operating subsidiary, for additional strategic investments and general corporate purposes, which may include future amounts owed by us under the Tax Receivable Agreement. During April 2017, the Company utilized $6,241 of the funds held by VHC to make a Specified Equity Contribution, as defined under the Term Loan Facility, in connection with the consummationcalculation of the IPOConsolidated Net Total Leverage Ratio under the Term Loan as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00. As of April 28, 2017, VHC retains $15,196 of funds and Restructuring Transactions, all previously outstanding debt obligations either remained with Kellwood (i.e. the non-Vince businesses) or were discharged, repurchased or refinanced. Inmanagement anticipates it will be necessary to make an additional Specified Equity Contribution in connection with the consummationcalculation of these transactions, Vince Holding Corp. entered intothe Consolidated Net Total Leverage Ratio under the Term Loan Facility as of April 29, 2017, utilizing a portion of this retained cash. Additionally, in order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with BofA, as administrative agent and collateral agent under the Revolving Credit Facility which are discussedtemporarily modified the covenant that requires that at any point when “Excess Availability” is less than the greater of (i) 15% of the adjusted loan cap (without giving effect to item (iii) of the loan cap described below) or (ii) $10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, we must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000 measured at the end of each applicable fiscal month for the trailing twelve-month period. The Letter provided that during the period from March 6, 2017 until and through April 30, 2017, the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” under the Revolving Credit Facility were temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined under the Revolving Credit Facility) and (b) $5,000. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety (the “Amended Letter”). The Amended Letter provides that during the period from April 13, 2017 until and through July 31, 2017 (the “Letter 36
Period”), the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” in the Revolving Credit Facility continue to be temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. The Amended Letter further below.provides that during the Letter Period, so long as the Company’s cash is held in a deposit account of the Company maintained with BofA (the “BofA Account”), the Company may include in the Borrowing Base (i) up to $10,000 of such cash after April 13, 2017 through May 31, 2017 and (ii) up to $5,000 of such cash after May 31, 2017 through July 31, 2017. During the Letter Period, to the extent that the cash and cash equivalents held by the Loan Parties at the close of business on any given day exceeds $1,000 (excluding amounts in the BofA Account and certain other excluded accounts, as well as amounts equal to all undrawn checks and ACH issued in the ordinary course of business for payroll, rent and other accounts payable needs), Vince shall use any such cash in excess of $1,000 to repay the loans under the Revolving Credit Facility. Operating Activities | | | | | | | | | | | | | | | | Fiscal Year | | | (in thousands) | | 2014 | | | 2013 | | | 2012 | | Operating activities | | | | | | | | | | | | | Net income (loss) | | $ | 35,723 | | | $ | (27,420 | ) | | $ | (107,709 | ) | Less: Net loss from discontinued operations | | | — | | | | (50,815 | ) | | | (78,014 | ) | Add (deduct) items not affecting operating cash flows: | | | | | | | | | | | | | Depreciation | | | 4,668 | | | | 2,186 | | | | 1,411 | | Amortization of intangible assets | | | 599 | | | | 599 | | | | 598 | | Amortization of deferred financing costs | | | 1,532 | | | | 178 | | | | — | | Amortization of deferred rent | | | 3,045 | | | | 465 | | | | 426 | | Deferred income taxes | | | 23,248 | | | | 7,225 | | | | 1,147 | | Share-based compensation expense | | | 1,896 | | | | 347 | | | | — | | Capitalized PIK Interest | | | — | | | | 15,883 | | | | 68,684 | | Loss on disposal of property, plant and equipment | | | — | | | | 262 | | | | — | | Changes in assets and liabilities: | | | | | | | | | | | | | Receivable, net | | | 6,401 | | | | (6,265 | ) | | | (7,459 | ) | Inventories, net | | | (3,463 | ) | | | (15,069 | ) | | | (8,360 | ) | Prepaid expenses and other current assets | | | 2,809 | | | | 1,681 | | | | (2,455 | ) | Accounts payable and accrued expenses | | | 3,066 | | | | 3,235 | | | | 17,208 | | Other assets and liabilities | | | 742 | | | | (156 | ) | | | (131 | ) | | | | | | | | | | | | | | Net cash provided by operating activities—continuing operations | | | 80,266 | | | | 33,966 | | | | 41,374 | | Net cash used in operating activities—discontinued operations | | | — | | | | (54,667 | ) | | | (67,408 | ) | | | | | | | | | | | | | | Net cash provided by/(used in) operating activities | | $ | 80,266 | | | $ | (20,701 | ) | | $ | (26,034 | ) | | | | | | | | | | | | | |
| | Fiscal Year | | (in thousands) | | 2016 | | | 2015 | | | 2014 | | Operating activities | | | | | | | | | | | | | Net (loss) income | | $ | (162,659 | ) | | $ | 5,099 | | | $ | 35,723 | | Add (deduct) items not affecting operating cash flows: | | | | | | | | | | | | | Impairment of goodwill and indefinite-lived intangible asset | | | 53,061 | | | | — | | | | — | | Depreciation and amortization | | | 8,684 | | | | 8,350 | | | | 5,267 | | Impairment of property and equipment | | | 2,082 | | | | — | | | | — | | Provision for inventories | | | 839 | | | | 16,263 | | | | 3,719 | | Deferred rent | | | 413 | | | | 1,723 | | | | 3,045 | | Deferred income taxes | | | 93,444 | | | | 2,745 | | | | 23,248 | | Share-based compensation expense | | | 1,344 | | | | 1,259 | | | | 1,896 | | Other | | | 701 | | | | 1,634 | | | | 1,532 | | Changes in assets and liabilities: | | | | | | | | | | | | | Receivables, net | | | (936 | ) | | | 24,397 | | | | 6,401 | | Inventories | | | (2,792 | ) | | | (15,420 | ) | | | (7,182 | ) | Prepaid expenses and other current assets | | | 598 | | | | 3,441 | | | | 2,809 | | Accounts payable and accrued expenses | | | (24,414 | ) | | | 1,044 | | | | 3,066 | | Other assets and liabilities | | | (25 | ) | | | 1,093 | | | | 742 | | Net cash (used in) provided by operating activities | | $ | (29,660 | ) | | $ | 51,628 | | | $ | 80,266 | |
Net cash used in operating activities during fiscal 2016 was $29,660, which consisted of a net loss of $162,659, impacted by non-cash items of $160,568, including $121,836 to record a full valuation allowance on our deferred tax assets, and cash used in working capital of $27,569. Net cash used in working capital resulted primarily from a cash outflow in accounts payable and accrued expenses of $24,414, which included the payment of $29,700, including interest, under the Tax Receivable Agreement with Sun Cardinal. Continuing operationsNet cash provided by operating activities during fiscal 2015 was $51,628, which consisted of net income of $5,099, impacted by non-cash items of $31,974 and cash provided by working capital of $14,555. Net cash provided by working capital resulted from a cash inflow in receivables, net of $24,397 driven largely by the timing of current year collections from prior year receivables and lower wholesale performance and a cash inflow in prepaid expenses and other current assets of $3,441 primarily due to timing, partly offset by a cash outflow in inventories of $15,420 due to new store additions, increased handbag inventory and higher in-transit inventory.
Net cash provided by operating activities during fiscal 2014 was $80.3 million,$80,266, which consisted of net income from continuing operations of $35.7 million,$35,723, impacted by non-cash items of $35.0 million$38,707 and cash provided by working capital of $9.6 million.$5,836. Net cash provided by working capital was, in part, due to a decreasecash inflow in receivables, net of $6.4 million$6,401 driven largely by higher trade deductions, a decrease of $2.8 millioncash inflows in prepaid expenses and other current assets of $2,809 and a $3.1 million increase in accounts payable and accrued expenses.expenses of $3,066. This was partially offset by a $3.5 million increasecash outflow in inventoryinventories of $7,182 due to increased inventory purchases to support new stores and shop-in-shops and the impact of higher intransitin-transit inventory resulting primarily from a change in our shipping strategy to an FOB shipment basis. Net cash provided by operating activities during fiscal 2013 primarily consists of net income (loss), adjusted for certain non-cash items including PIK interest on the Sun Promissory Notes and Sun Capital Loan Agreement, which was later contributed as capital, as well as depreciation, amortization and changes in deferred income taxes and the effects of changes in working capital and other activities.37
Net cash provided by operating activities during fiscal 2012 was $41.4 million, which consisted of net loss of $29.7 million, impacted by non-cash items of $72.3 million and cash used in working capital of $1.2 million. Non-cash expenses primarily consisted of PIK interest expense of $68.7 million. Net cash used in working capital primarily resulted from an increase in inventories, net of $8.4 million due to timing of inventory receipts and an increase in receivables, net of $7.5 million due to the timing of customer receipts. This was partially offset by increases in our accounts payable and other accrued expenses of $17.2 million due to the timing of vendor payments as well as the accrual of $6.4 million in transition payment to our founders, which was subsequently paid during fiscal 2013.
Discontinued operations
Net cash used in operating activities for 2013 was $54.7 million, which consisted of net loss of $50.8 million adjusted for non-cash charges of $15.3 million, and cash used in working capital of $19.2 million.
Net cash used in operating activities for 2012 was $67.4 million, which consisted of net loss of $78.0 million adjusted for non-cash charges of $25.5 million, and cash used in working capital of $14.9 million.
Investing Activities | | | | | | | | | | | | | | | | Fiscal Year | | | (in thousands) | | 2014 | | | 2013 | | | 2012 | | Investing activities | | | | | | | | | | | | | Payments for capital expenditures | | $ | (19,699 | ) | | $ | (10,073 | ) | | $ | (1,821 | ) | Payments for contingent purchase price | | | — | | | | — | | | | (806 | ) | | | | | | | | | | | | | | Net cash used in investing activities—continuing operations | | | (19,699 | ) | | | (10,073 | ) | | | (2,627 | ) | Net cash (used in)/provided by investing activities—discontinued operations | | | — | | | | (5,936 | ) | | | 20,088 | | | | | | | | | | | | | | | Net cash (used in)/provided by investing activities | | $ | (19,699 | ) | | $ | (16,009 | ) | | $ | 17,461 | | | | | | | | | | | | | | |
| | Fiscal Year | | (in thousands) | | 2016 | | | 2015 | | | 2014 | | Investing activities | | | | | | | | | | | | | Payments for capital expenditures | | $ | (14,287 | ) | | $ | (17,591 | ) | | $ | (19,699 | ) | Net cash used in investing activities | | $ | (14,287 | ) | | $ | (17,591 | ) | | $ | (19,699 | ) |
Continuing operations
Net cash used in investing activities of $19.7 million$14,287 during fiscal 2016 represents capital expenditures primarily related to the investment in our new systems and related infrastructure and retail store build-outs, including leasehold improvements and store fixtures. Net cash used in investing activities of $17,591 during fiscal 2015 represents capital expenditures related to retail store build-outs, including leasehold improvements, costs related to the build-out of our design studio and Paris showroom space, store fixtures as well as expenditures for our shop-in-shop spaces operated by certain distribution partners and the investment in new systems and related infrastructure. Net cash used in investing activities of $19,699 during fiscal 2014 represents capital expenditures related to retail store build-outs, including leasehold improvements and store fixtures as well as expenditures for our shop-in-shop spaces operated by certain distribution partners and the costs related to the build-out of our new corporate office spaces and showroom facilities. Net cash used in investing activities of $10.1 million during fiscal 2013 represents capital expenditures, primarily related to retail store build-outs, including leasehold improvements and store fixtures
Net cash used in investing activities of $2.6 million during fiscal 2012 is primarily attributable to capital expenditures and cash payments paid to CRL Group (former owners of the Vince business) related to the acquisition of the Vince business as a result of achievement of performance goals as specified in the related purchase agreement.
Discontinued operations
Net cash used in investing activities for 2013 was $5.9 million, primarily consisting of $7.1 million of cash and cash equivalents retained by the non-Vince business after the Restructuring Transactions. Additionally there were $4.8 million in payments for capital expenditures and other assets related to the non-Vince business during the year, offset in part by proceeds from the sale of various assets of the non-Vince business prior to the Restructuring Transactions of $5.4 million, net of selling costs.
Net cash provided by investing activities for 2012 was $20.1 million, consisting of proceeds from the sale of various assets of the non-Vince business of $28.9 million, net of selling costs, offset in part by payments for capital expenditures and other assets of the non-Vince business of $8.3 million.
Financing Activities | | | | | | | | | | | | | | | | Fiscal Year | | | (in thousands) | | 2014 | | | 2013 | | | 2012 | | Financing activities | | | | | | | | | | | | | Proceeds from borrowings under the Revolving Credit Facility | | $ | 50,500 | | | $ | — | | | $ | — | | Payments for Revolving Credit Facility | | | (27,500 | ) | | | — | | | | — | | Proceeds from borrowings under the Term Loan Facility | | | — | | | | 175,000 | | | | — | | Payments for Term Loan Facility | | | (105,000 | ) | | | (5,000 | ) | | | — | | Payment for Kellwood Note Receivable | | | — | | | | (341,500 | ) | | | — | | Fees paid for Term Loan Facility and Revolving Credit Facility | | | (114 | ) | | | (5,146 | ) | | | — | | Proceeds from common stock issuance, net of certain transaction costs | | | — | | | | 186,000 | | | | — | | Stock option exercise | | | 175 | | | | 42 | | | | — | | | | | | | | | | | | | | | Net cash (used in)/provided by financing activities—continuing operations | | | (81,939 | ) | | | 9,396 | | | | — | | Net cash provided by financing activities—discontinued operations | | | — | | | | 46,917 | | | | 8,615 | | | | | | | | | | | | | | | Net cash (used in)/provided by financing activities | | $ | (81,939 | ) | | $ | 56,313 | | | $ | 8,615 | | | | | | | | | | | | | | |
| | Fiscal Year | | (in thousands) | | 2016 | | | 2015 | | | 2014 | | Financing activities | | | | | | | | | | | | | Proceeds from borrowings under the Revolving Credit Facility | | $ | 181,367 | | | $ | 115,127 | | | $ | 50,500 | | Repayment of borrowings under the Revolving Credit Facility | | | (191,167 | ) | | | (123,127 | ) | | | (27,500 | ) | Repayment of borrowings under the Term Loan Facility | | | — | | | | (20,000 | ) | | | (105,000 | ) | Proceeds from common stock issuance, net of transaction costs | | | 63,773 | | | | — | | | | — | | Proceeds from stock option exercises and issuance of common stock under employee stock purchase plan | | | 4,722 | | | | 175 | | | | 175 | | Fees paid for Term Loan Facility and Revolving Credit Facility | | | — | | | | (94 | ) | | | (114 | ) | Net cash provided by (used in) financing activities | | $ | 58,695 | | | $ | (27,919 | ) | | $ | (81,939 | ) |
Continuing operations
Net cash provided by financing activities was $58,695 during fiscal 2016, primarily relates to borrowings and repaymentsconsisting of the debt obligations and debt issuance costs related thereto, as well as activity related tonet proceeds received from the issuance of our common stock in connection with the completed Rights Offering of $63,773 and exercise$4,722 of proceeds received from stock option exercises and issuance of common stock under our employee stock options.purchase plan, partly offset by $9,800 of net repayments of borrowings under our Revolving Credit Facility. Net cash used by financing activities was $81.9 million$27,919 during fiscal 2015, primarily consisting of voluntary prepayments totaling $20,000 on our Term Loan Facility and $8,000 of net repayments of borrowings under our Revolving Credit Facility. Net cash used by financing activities was $81,939 during fiscal 2014, primarily consisting of voluntary prepayments totaling $105.0 million$105,000 on theour Term Loan Facility, partially offset by $23.0 million$23,000 of net proceeds from borrowings under our Revolving Credit Facility. Net cash provided by financing activities was $9.4 million during fiscal 2013, primarily consisting of $186.0 million of proceeds from the issuance of common stock, net of certain transactions costs, on November 27, 2013. In connection with the IPO and the Restructuring Transactions discussed elsewhere in this
annual report in Form 10-K, the Company made borrowings of $175.0 million under the Term Loan Facility and also entered into an agreement for the Revolving Credit Facility for which we paid $5.1 million in debt issuance costs. Proceeds from the IPO and borrowings under the Term Loan Facility were then used to repay the Kellwood Note Receivable of $341.5 million. In January of fiscal 2013, the Company made a voluntary prepayment of $5.0 million on the Term Loan Facility.
Discontinued operations
Net cash provided by financing activities during fiscal 2013 was $46.9 million, primarily consisting of $5.0 million borrowings under the Sun Term Loan Agreements, as well a $41.9 million net increase in borrowings under the Kellwood revolving credit facilities, net of fees paid.
Net cash provided by financing activities during fiscal 2012 was $8.6 million, primarily consisting of $30.0 million borrowings under the Sun Term Loan Agreements and $1.9 million in payments under the Rebecca Taylor earnout agreement, offset in part by $15.0 million payments for debt extinguishment during the year as well as $1.0 million in fees paid related to financing agreements.
Current Existing Credit Facilities and Debt (Post IPO and Restructuring Transactions)
Revolving Credit Facility
On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, Vince, LLC entered into a $50,000 senior secured revolving credit facility (the(as amended from time to time, the “Revolving Credit Facility”). with Bank of America, N.A. (“BofA”) serves as administrative agentagent. Vince, LLC is the borrower and VHC and Vince Intermediate, a direct subsidiary of VHC and the direct parent company of Vince, LLC, are the guarantors under this facility. Thisthe Revolving Credit Facility. On June 3, 2015, Vince LLC entered into a first amendment to the Revolving Credit Facility, provides forthat among other things, increased the aggregate commitments under the facility from $50,000 to $80,000, subject to a revolving lineloan cap which is the lesser of credit of up to $50.0 million maturing on(i) the Borrowing Base, as defined in the loan agreement, (ii) the aggregate commitments, or (iii) $70,000 until debt obligations under the Company’s term loan facility have been paid in full, and extended the maturity date from November 27, 2018.2018 to June 3, 2020. The Revolving Credit Facility also provides for a letter of credit sublimit of $25.0 million$25,000 (plus any increase in aggregate commitments) and an accordion option that allows for an increase in aggregate commitments of up to $20.0 million. Vince, LLC is the borrower and Vince Holding Corp. and Vince Intermediate Holding, LLC are the guarantors under the Revolving Credit Facility.$20,000. Interest is payable on the loans under the Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, withplus an applicable marginsmargin of 1.25% to 1.75% for LIBOR loans or 0.25% to 0.75% for Base Rate loans, and in each case subject to a pricing grid based on an average daily 38
excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0%. During the continuance of an event of default and at the election of the required lender, interest will accrue at a rate of 2% in excess of the applicable non-default rate. The Revolving Credit Facility contains a requirementcovenant that, at any point when “Excess Availability” is less than the greater of (i) 15% percentof the adjusted loan cap (without giving effect to item (iii) of the loan cap described above) or (ii) $7.5 million,$10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, Vince, LLCwe must maintain a consolidated EBITDA (as defined in the related credit agreement)Revolving Credit Facility) equal to or greater than $20.0 million. We have$20,000 measured at the end of each applicable fiscal month for the trailing twelve-month period. As of January 28, 2017, we were not been subject to this maintenance requirement sincecovenant as Excess Availability has beenwas greater than the required minimum. Additionally, in order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into the Letter with BofA, as administrative agent and collateral agent under the Revolving Credit Facility which temporarily modified the covenant discussed above. The Letter provided that during the period from March 6, 2017 until and through April 30, 2017, the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” under the Revolving Credit Facility were temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined under the Revolving Credit Facility) and (b) $5,000. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety (the “Amended Letter”). The Amended Letter provides that during the period from April 13, 2017 until and through July 31, 2017 (the “Letter Period”), the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” in the Revolving Credit Facility continue to be temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. The Amended Letter further provides that during the Letter Period, so long as the Company’s cash is held in a deposit account of the Company maintained with BofA (the “BofA Account”), the Company may include in the Borrowing Base (i) up to $10,000 of such cash after April 13, 2017 through May 31, 2017 and (ii) up to $5,000 of such cash after May 31, 2017 through July 31, 2017. During the Letter Period, to the extent that the cash and cash equivalents held by the Loan Parties at the close of business on any given day exceeds $1,000 (excluding amounts in the BofA Account and certain other excluded accounts, as well as amounts equal to all undrawn checks and ACH issued in the ordinary course of business for payroll, rent and other accounts payable needs), Vince shall use any such cash in excess of $1,000 to repay the loans under the Revolving Credit Facility. The Revolving Credit Facility contains representations and warranties, other covenants and events of default that are customary for this type of financing, including limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of itsthe Company’s business or its fiscal year. The Revolving Credit Facility generally permits dividends in the absence of any event of default (including any event of default arising from the contemplated dividend), so long as (i) after givingpro-forma effect to the contemplated dividend, for the following six months Excess Availability will be at least the greater of 20% of the aggregate lending commitmentsadjusted loan cap and $7.5 million$10,000 and (ii) after giving pro forma effect to the contemplated dividend, the “Consolidated Fixed Charge Coverage Ratio” for the 12 months preceding such dividend shall be greater than or equal to 1.11.0 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.11.0 to 1.0 if, after giving pro forma effect to the contemplated dividend, Excess Availability for the six fiscal months following the dividend is at least the greater of 35% of the aggregate lending commitmentsadjusted loan cap and $10 million)$15,000). We areAs of January 28, 2017, we were in compliance with applicable financial covenants. As of January 28, 2017, the availability under the Revolving Credit Facility was $27,157 net of the amended loan cap and there were $5,200 of borrowings outstanding and $7,474 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 28, 2017 was 4.3%. As of January 30, 2016, the availability under the Revolving Credit Facility was $28,127 net of the amended loan cap and there were $15,000 of borrowings outstanding and $7,522 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 30, 2016 was 2.1%. As of January 31, 2015, the availability under the $50.0 million Revolving Credit Facility was $19.4 million. As of January 31, 2015,$19,353 and there was $23.0 million$23,000 of borrowings outstanding and $7.6 million$7,647 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 31, 2015 was 2.1%. There were no borrowings outstanding under the Revolving Credit Facility as of February 1, 2014. Term Loan Facility On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, Vince, LLC and Vince Intermediate entered into a $175.0 million$175,000 senior secured term loan credit facility (the(as amended from time to time, the “Term Loan Facility”) with the lenders party thereto, BofA, as administrative agent, JPMorganJP Morgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and Cantor Fitzgerald as documentation agent. The Term Loan Facility will mature on November 27, 2019. On November 27, 2013, net borrowingsVince, LLC and Vince Intermediate are borrowers (the “Borrowers”) and VHC is a guarantor under the Term Loan Facility were used at closing, together with proceeds from the IPO, to repay the Kellwood Note Receivable issued by Vince Intermediate to Kellwood Company, LLC immediately prior to the consummation of the IPO as part of the Restructuring Transactions.Facility. The Term Loan Facility also provides for an incremental facility of up to the greater of $50.0 million$50,000 and an amount that would result in the consolidated net total secured leverage ratio not exceeding 3.00 to 1.00, in addition to certain other rights to refinance or 39
repurchase portions of the term loan. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the Term Loan Facility (adjusted to reflect any prepayments), with the balance payable at final maturity. Interest is payable on loans under the Term Loan Facility at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00% based on a consolidated net total leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a consolidated net total leverage ratio. During the continuance of a payment or bankruptcy event of default, interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the non-default interest rate then applicable to base rate loans.The Term Loan Facility requires Vince, LLC and Vince Intermediate to make mandatory prepayments upon the occurrence of certain events, including additional debt issuances, common and preferred stock issuances, certain asset sales, and annual payments of 50% of excess cash flow, subject to reductions to 25% and 0% if Vince, LLC and Vince Intermediate maintain a Consolidated Net Total Leverage Ratio of 2.50 to 1.00 and 2.00 to 1.00, respectively, and subject to reductions for voluntary prepayments made during such fiscal year. The Term Loan Facility contains a requirementcovenant that Vince, LLC and Vince Intermediate maintain a “Consolidated Net Total Leverage Ratio” as of the last day of any period of four fiscal quarters not to exceed 3.753.25 to 1.001.00. The Term Loan Facility permits VHC to make a Specified Equity Contribution, as defined under the Agreement, to the Borrowers in order to increase, dollar for dollar, Consolidated EBITDA for such fiscal quarter for the purposes of determining compliance with this covenant at the end of such fiscal quarter and applicable subsequent periods provided that (a) in each four fiscal quarter period there shall be at least two fiscal quarters ending February 1, 2014 through November 1, 2014, 3.50in which no Specified Equity Contribution is made; (b) no more than five Specified Equity Contributions shall be made in the aggregate during the term of the Agreement; and (c) the amount of any Specified Equity Contribution shall be no greater than the amount required to 1.00 forcause the fiscal quarters ending January 31, 2015, through October 31, 2015, and 3.25Company to 1.00 for the fiscal quarter ending January 30, 2016 and each fiscal quarter thereafter. be in compliance with this covenant. In addition, the Term Loan Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of itsthe Company’s business or its fiscal year, and distributions and dividends. The Term Loan Facility generally permits dividends to the extent that no default or event of default is continuing or would result from the contemplated dividend and the pro forma Consolidated Net Total Leverage Ratio after giving effect to such contemplated dividend is at least 0.25 lower than the maximum Consolidated Net Total Leverage Ratio for such quarter.quarter in an amount not to exceed the excess available amount, as defined in the loan agreement. All obligations under the Term Loan Facility are guaranteed by Vince Holding Corp.VHC and any future material domestic restricted subsidiaries of Vince, LLC and secured by a lien on substantially all of the assets of Vince Holding Corp.,VHC, Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries. We are As of January 28, 2017, we were in compliance with applicable financial covenants.During April 2017, the Company utilized $6,241 of the funds held by VHC to make a Specified Equity Contribution, as defined under the Term Loan Facility, in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00. As of April 28, 2017, VHC retains $15,196 of funds and management anticipates it will be necessary to make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of April 29, 2017, utilizing a portion of this retained cash. Through January 31, 2015,28, 2017, on an inception to date basis, we have made voluntary prepayments totaling $110.0 million$130,000 in the aggregate on the original $175.0 million$175,000 Term Loan Facility entered into on November 27, 2013. Of the total $110.0 million aggregate voluntary2013, with no such prepayments $105.0 million were paidmade during fiscal 2014. The voluntary prepayments of $105.0 million made during the current fiscal year were partially funded by $23.0 million of net borrowings under the Revolving Credit Facility.2016. As of January 31, 201528, 2017 we had $65.0 million$45,000 of debt outstanding under the Term Loan Facility. Credit Facilities and Debt Prior to IPO and Restructuring Transactions which occurred on November 27, 2013
Sun Promissory Notes
On May 2, 2008, Vince Holding Corp. issued the Sun Promissory Notes in amounts totaling $300.0 million. The unpaid principal balance of the note accrued interest at 12% per annum until the maturity date of October 15, 2016, at which point any unpaid principal balance of the note would have accrued interest at a rate of 14% per annum until the note was paid in full. No interest was paid on the Sun Promissory Notes.
On December 28, 2012, all interest accrued under the note prior to July 19, 2012 was waived. This resulted in an increase to additional paid-in-capital in the amount of $270.8 million as both parties were under the common control of affiliates of Sun Capital.
Effective June 18, 2013, an affiliate of Sun Capital contributed $407.5 million of indebtedness under the Sun Capital Loan Agreement and the Sun Promissory Notes as a capital contribution to Vince Holding Corp., and as a result, no amount remains outstanding under either instrument.
Sun Capital Loan Agreement
Vince Holding Corp. was party to the Sun Capital Loan Agreement with SCSF Kellwood Finance, LLC (“SCSF Finance”) and Sun Kellwood Finance (as successors to Bank of Montreal) for a $72.0 million line of credit. Under the terms of this agreement, as amended from time to time, interest accrued at the greater of prime plus 2% per annum or LIBOR plus 4.75% per annum and was due by the last day of each fiscal quarter.
On December 28, 2012, Sun Kellwood Finance and SCSF Finance waived all interest capitalized and accrued under the loan authorization agreement prior to July 19, 2012 (which was the scheduled maturity date). As all parties were under the common control of affiliates of Sun Capital, this transaction resulted in a capital contribution of $18.2 million, which was recorded as an adjustment to additional paid-in-capital as of February 2, 2013.
Effective June 18, 2013, an affiliate of Sun Capital contributed $407.5 million of indebtedness under the Sun Capital Loan Agreement and the Sun Promissory Notes as a capital contribution to Vince Holding Corp., and as a result, no amount remains outstanding under either instrument.
Wells Fargo Facility
On October 19, 2011 Kellwood Company and certain of its domestic subsidiaries, as borrowers, entered into a credit agreement with Wells Fargo Bank, National Association, as agent, and lenders from time to time party thereto (“the “Wells Fargo Facility”). The Wells Fargo Facility provided a non-amortizing senior revolving credit facility with aggregate lending commitments of $155.0 million. The borrowings were secured by a first-priority security interest in substantially all of the assets of the borrowers, including the assets of Vince, LLC. Borrowings bore interest at a rate per annum equal to an applicable margin (generally 1.25%-1.75% per annum plus, at the borrowers’ election, LIBOR or a Base Rate). On November 27, 2013, in connection with the consummation of the IPO and Restructuring Transactions, the Wells Fargo Facility was amended and restated in accordance with its terms. After giving effect to such amendment and restatement, neither Vince Holding Corp. nor any of its subsidiaries have any obligations thereunder.
Cerberus Term Loan
On October 19, 2011, Kellwood Company and certain of its domestic subsidiaries, as borrowers, entered into a Term Loan Agreement (the “Term Loan Agreement”), as amended, with Cerberus Business Finance, LLC, as agent and the lenders from time to time party thereto. The Term Loan Agreement provided the borrowers with a non-amortizing secured term loan in an aggregate amount of $55.0 million (the “Cerberus Term Loan”), of which $10.0 million was repaid during fiscal 2012. All borrowings under the Cerberus Term Loan bore interest at a rate per annum equal to an applicable margin (10.25%-11.25% per annum for LIBOR Rate Loans and8.25%-8.75% for Reference Rate Loans) plus, at the borrower’s election, LIBOR or a Reference Rate as defined in the Term Loan Agreement. The Term Loan Agreement also provided for a portion of such interest equal to 1.0% per annum to be paid-in-kind and added to the principal amount of such term loans. The Cerberus Term Loan was secured by a security interest in substantially all of the assets of the borrowers, including the assets of Vince, LLC. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the Cerberus Term Loan was repaid with the proceeds from the Company’s repayment of the Kellwood Note Receivable, as such neither Vince Holding Corp. nor any of its subsidiaries have any obligations thereunder.
Sun Term Loan Agreements
Since fiscal year 2009, Kellwood Company and certain of its domestic subsidiaries, as borrowers, entered into various term loan agreements (“Sun Term Loan Agreements”) with affiliates of Sun Capital, as lenders, and Sun Kellwood Finance, as collateral agent. The Sun Term Loan Agreements were secured by a security interest in substantially all of the assets of the borrowers, which included the assets of Vince, LLC, which security interest was contractually subordinated to the security interests of the lenders under Wells Fargo Facility and the Cerberus Term Loan. The borrowings under the Sun Term Loan Agreements bore interest at a rate per annum of 5.0%-6.0%, paid-in-kind and added to the principal amount of such term loans. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the obligations under the Sun Term Loan Agreements were discharged through (i) the application of Kellwood Note Receivable proceeds repaid by the Company and (ii) capital contributions by Sun Capital affiliates, as such neither Vince Holding Corp. nor any of its subsidiaries have any obligations thereunder.
12.875% Notes
Interest on the 12.875% Second-Priority Senior Secured Payment-In-Kind Notes due 2014 (the “12.875% Notes”) of Kellwood Company was paid (a) in cash at a rate of 7.875% per annum payable in January and July; and (b) in the form of PIK interest at a rate of 5.0% per annum (“PIK Interest”) payable either by increasing the principal amount of the outstanding 12.875% Notes, or by issuing additional 12.875% Notes with a principal amount equal to the PIK Interest accrued for the interest period. The 12.875% Notes were guaranteed by various of Kellwood Company’s subsidiaries on a secured basis (including the assets of Vince, LLC), which security interest was contractually subordinated to security interests of lenders under the Wells Fargo Facility, the Cerberus Term Loan and the Sun Term Loan Agreements. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the 12.875% Notes were redeemed with proceeds from the repayment of the Kellwood Note Receivable by the Company, at which time Vince, LLC was released as a guarantor and the obligations under the indenture were satisfied and discharged.
7.625% Notes
Interest on the 7.625% 1997 Debentures due October 15, 2017 of Kellwood Company (the “7.625% Notes”) was payable in April and October. On November 27, 2013, in connection with the closing of the IPO and as an early settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) approximately $33.5 million in aggregate principal amount of the 7.625% Notes. On December 12, 2013, as part of the final settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) an additional approximately $4.6 million in aggregate principal amount of the 7.625% Notes. After giving effect to
these settlements, approximately $48.8 million of the 7.625% Notes remain issued and outstanding; provided, that neither Vince Holding Corp. nor its subsidiaries are a guarantor or obligor of such notes.
Outlook
Currently, our short-term and long-term liquidity needs arise primarily from debt service, amounts payable under our Tax Receivable Agreement, capital expenditures and working capital requirements associated with our growth strategies. Management believes that our current balances of cash and cash equivalents, cash flow from operations and amounts available under the Revolving Credit Facility will be adequate to fund our debt service requirements, obligations under our Tax Receivable Agreement, planned capital expenditures and working capital needs for at least the next twelve months. Our ability to make planned capital expenditures, to fund our debt service requirements and to remain in compliance with our financial covenants, and to fund operations depends on our future operating performance, which in turn, may be impacted by prevailing economic conditions and other financial and business factors, some of which are beyond our control.
Capital expenditures are expected to increase as we continue to invest in the direct-to-consumer store expansion and wholesale shop-in-shop build-out. In fiscal 2015, we project capital expenditures to aggregate $17.0 million to $20.0 million related to our new and remodeled stores, shop-in-shop build-outs, our new Paris showroom, LA design studio and other corporate activities, including capital spending on our information system infrastructure.
Off-Balance Sheet Arrangements Vince Holding Corp.We did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes during the periods presented herein.
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Contractual Obligations The following table summarizes our contractual obligations as of January 31, 2015 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:28, 2017: | | | | | | | | | | | | Future payments due by period | | | | | | Future payments due by period (1) | | | | (In thousands) | | Less than
1 Year | | | 1 to 3 years | | | 3 to 5 years | | | More than
5 Years | | | Total | | | (in thousands) | | | 2017 | | | 2018-2019 | | | 2020-2021 | | | Thereafter | | | Total | | | Unrecorded contractual obligations | | | | | | | | | | | | | | | | | | | | | | | Operating lease obligations | | $ | 15,593 | | | $ | 35,789 | | | $ | 35,169 | | | $ | 63,516 | | | $ | 150,067 | | | $ | 21,096 | | | $ | 41,795 | | | $ | 37,147 | | | $ | 50,753 | | | $ | 150,791 | | | Unrecognized tax benefits (2) | | | | | | | | | | | | Other contractual obligations (1) | | | | 36,617 | | | | 4,024 | | | | 1,653 | | | | — | | | | 42,294 | | | Recorded contractual obligations | | | | | | | | | | | | | | | | | | | | | | | Long-term debt obligations | | | — | | | | — | | | | 88,000 | | | | — | | | | 88,000 | | | | — | | | | 45,000 | | | | 5,200 | | | | — | | | | 50,200 | | | Interest on long-term debt (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | Tax Receivable Agreement (4)(2) | | | 22,869 | | | | — | | | | — | | | | — | | | | 168,932 | | | | 2,788 | | | | | | | | | | | | | | | | 140,618 | | | | | | | | | | | | | | | | | | | | Total | | $ | 38,462 | | | $ | 35,789 | | | $ | 123,169 | | | $ | 63,516 | | | $ | 406,999 | | | $ | 60,501 | | | $ | 90,819 | | | $ | 44,000 | | | $ | 50,753 | | | $ | 383,903 | | | | | | | | | | | | | | | | | | | |
(1) | Vince, LLC has entered into the Shared Services Agreement with Kellwood Company, LLC pursuant to which Kellwood provides support services in various operational areas including, among other things, distribution, information technologyConsists primarily of inventory purchase obligations and back office support (as described in “Certain Relationships and Related Party Transactions—Shared Services Agreement”). We have excluded the amounts due under such agreement from the table herein as we cannot precisely estimate the future payments to be made thereunder and timing thereof. However, we currently expect to pay between $7.0 million to $9.0 million on an annualized basis for services provided by Kellwood under the Shared Services Agreement.service contracts. |
(2) | As of January 31, 2015, we have recorded $4.5 million of unrecognized tax benefits, excluding interest and penalties. We are unable to make reliable estimates of cash flows by period due to the inherent uncertainty surrounding the effective settlement of these positions. |
(3) | The Term Loan Facility has interest payable at LIBOR (subject to a 1.00% floor) plus 4.75% or the base rate (subject to a 2% floor) plus 3.75%. The weighted average interest rate on the borrowings under the Revolving Credit Facility as of January 31, 2015 was 2.1%. |
(4) | Vince Holding Corp.VHC entered into the Tax Receivable Agreement with the Pre-IPO Stockholders (as described in “Shared Services Agreement” under Note 1512 “Related Party Transactions” within the notes to the Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K.)10-K). We cannot, however, reliably estimate in which future periods these amounts would become due, other than those amounts expected to be paid within one year. The amount set forth in the “Total” column represents the remaining obligation as of January 31, 201528, 2017 under the Tax Receivable Agreement. |
The summary above does not include the following items: As of January 28, 2017, we have recorded $2,339 of unrecognized tax benefits, excluding interest and penalties. We are unable to make reliable estimates of cash flows by period due to the inherent uncertainty surrounding the effective settlement of these positions. Interest payable under the Term Loan Facility, which is calculated at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00% based on a consolidated net total leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a consolidated net total leverage ratio. Interest payable under the Revolving Credit facility, which is calculated at either the LIBOR or the Base Rate, in each case, plus an applicable margin of 1.25% to 1.75% for LIBOR loans or 0.25% to 0.75% for Base Rate loans, and in each case subject to a pricing grid based on an average daily excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0%. Seasonality The apparel and fashion industry in which we operate is cyclical and, consequently, our revenues are affected by general economic conditions and the seasonal trends characteristic to the apparel and fashion industry. Purchases of apparel are sensitive to a number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence as well as the impact of adverse weather conditions. In addition, fluctuations in the amount of sales in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting direct-to-consumer sales; as such, the financial results for any particular quarter may not be indicative of results for the fiscal year. We expect such seasonality to continue. Inflation While inflation may impact our sales, cost of goods sold and expenses, we believe the effects of inflation on our results of operations and financial condition are not significant. While it is difficult to accurately measure the impact of inflation, management believes it has not been significant and cannot provide any assurances that our results of operations and financial condition will not be materially impacted by inflation in the future. Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations is based upon 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 estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Management bases estimates on historical experience and other assumptions it believes to be 41
reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policespolicies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent consolidated results of operations. For more information on our accounting policies, please refer to the Notes to Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K. Revenue Recognition and Accounts Receivable Reserves for Allowances Sales are recognized when goods are shipped in accordance with customer orders for the wholesale andbusiness, upon receipt by the customer for the e-commerce businesses, business, and at the time of sale to consumerconsumers for the retail business. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known. Accrued discounts, returns and allowances are included as an offset to accounts receivable. Accounts Receivable—Reserves for Allowances
Accounts receivable are recorded net of allowances for expected future chargebacks and margin support from wholesale partners. It is the nature of the apparel industry that suppliers like us face significant pressure from wholesale partners in the retail industry to provide allowances to compensate for their margin shortfalls. This pressure often takes the form of customers requiring us to provide price concessions on prior shipments as a prerequisite for obtaining future orders. Pressure for these concessions is largely determined by overall retail sales performance and, more specifically, the performance of our products at retail. To the extent our wholesale partners have more of our goods on hand at the end of the season, there will be greater pressure for us to grant markdown concessions on prior shipments. Our accounts receivable balances are reported net of expected allowances for these matters based on the historical level of concessions required and our estimates of the level of markdowns and allowances that will be required in the coming season in order to collect the receivables.season. We evaluate the allowance balances on a continual basis and adjust them as necessary to reflect changes in anticipated allowance activity. We also provide an allowance for sales returns based on historical return rates. Accounts Receivable—AllowanceAt January 28, 2017, a hypothetical 1% change in the reserves for Doubtful Accounts
We maintain an allowance for doubtfulallowances would have resulted in a change of $197 in accounts receivable for estimated losses resulting from wholesale partners that are unable to meet their financial obligations. Our estimation of the allowance for doubtful accounts involves consideration of the financial condition of specific customers as well as general estimates of future collectability based on historical experience and expected future trends. The estimation of these factors involves significant judgment. In addition, actual collection experience, and thus bad debt expense, can be significantly impacted by the financial difficulties of as few as one customer.net sales.
Inventory Valuation Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost. Our products can be classified into two types: replenishment and non-replenishment. Replenishment items are those basics that are not highly seasonal or dependent on fashion trends. The same products are sold by retailers 12 months a year and styles evolve slowly. Retailers generally replenish their stocks of these items as they are sold. Only a relatively small portion of our business involves replenishment items. The majority of our products consist of items that are non-replenishment as a result of being tied to a season. For these products, the selling season generally ranges from three to six months. The value of this seasonal merchandise might be sufficient for us to generate a profit over its cost throughout the season, but after its season a few months later the same inventory might be saleable at less than cost. The value may rise again the following year when the season in which the goods sell approaches—or it may not, depending on the level of prior year merchandise on the market and on year-to-year fashion changes.
The majority of out-of-seasonOut-of-season inventories may be sold to off-price retailers and other customers who serve a customer base that will purchase prior year fashions in addition to liquidationand may be liquidated through our Vince outlets.outlets and our e-commerce website. The amount, if any, that these customers will pay for prior year fashions is determined by the desirability of the inventory itself as well as the general level of prior year goods available to these customers. The assessment of inventory value, as a result, is highly subjective and requires an assessment of the seasonality of the inventory, its future desirability, and future price levels in the off-price sector.
ManyIn our wholesale business, some of our products are purchased for and sold to specific customers’ orders. OthersFor the remainder of our business, products are purchased in anticipation of selling them to a specific customer based on historical trends. The loss of a major customer, whether due to the customer’s financial difficulty or other reasons, could have a significant negative impact on the value of the inventory expected to be sold to that customer. This negative impact can also extend to purchase obligations for goods that have not yet been received. These obligations involve product to be received into inventory over the next one to six months.
Deferred RentAt January 28, 2017, a hypothetical 1% change in the inventory obsolescence reserve would have resulted in a change of $21 in inventory, net and Deferred Lease Incentivescost of products sold.
We lease various office spaces, showrooms and retail stores. Many of these operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease and record the difference between the amount charged to operations and amounts paid as deferred rent. Certain of our retail store leases contain provisions for contingent rent, typically a percentage of retail sales once a predetermined threshold has
been met. These amounts are expensed as incurred. Additionally, we received lease incentives in certain leases. These allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense.
Fair Value Assessments of Goodwill and Other Indefinite-Lived Intangible Assets Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. We completed our annual impairment testing on our goodwill and indefinite-lived intangible assetsasset during the fourth quarters of fiscal 2014,2016, fiscal 20132015 and fiscal 2012.2014. In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to ASC Topic 350 Intangibles-Goodwill and Other. Under this amendment, anAn entity may elect to perform a qualitative impairment assessment for goodwill.goodwill and indefinite-lived intangible assets. If adverse trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, a quantitative impairment test is required. “Step
“Step one” of thisthe quantitative impairment test for goodwill requires thatan entity to determine the fair value of each reporting unit and compare such fair value to the respective carrying amount. If the estimated fair value of the reporting unit be estimatedexceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and comparedwe are not required to its carrying amount.perform further testing. If the carrying amount of the reporting unit exceeds theits estimated fair value, of the asset, “step two” of the impairment test is performed in order to calculatedetermine the amount of the impairment loss. An“Step two” of the goodwill impairment test includes valuing the tangible and intangible 42
assets of the impaired reporting unit based on the fair value determined in “step one” and calculating the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities. The goodwill impairment test is dependent on a number of factors, including estimates of future growth, profitability and cash flows, discount rates and other variables. We base our estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We estimate the fair value of our tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology. This methodology assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. The relief from royalty approach is dependent on a number of factors, including estimates of future growth, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the tradename intangible asset is recognized to the extentless than the carrying amount of the reporting unit exceeds the implied fair value. An entity may pass on performing the qualitative assessment for a reporting unit or indefinite-lived intangible asset and directly perform “step one” of the quantitative assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods. In fiscal 2016, a quantitative impairment test on goodwill determined that the fair value of our Direct-to-consumer reporting unit was below its carrying value. During fiscal 2016, the sales results within the Direct-to-consumer reporting unit were impacted by continued declines in average order values as well as declines in the number of transactions due to lower conversion rates and reduced traffic and as a result, the Direct-to-consumer reporting unit has not met expectations, resulting in lower current and expected future cash flows. We estimated the fair value of our Direct-to-consumer reporting unit using both the income and market valuation approaches, with a weighting of 80% and 20%, respectively. “Step one” of the assessment determined that the fair value of the Direct-to-consumer reporting unit was below the carrying amount by approximately 40%. Accordingly, “step two” of the assessment was performed, which compared the implied fair value of the goodwill to the carrying value of such goodwill by performing a hypothetical purchase price allocation using the fair value of the reporting unit determined in “step one”. Based on the results from “step two,” we recorded a goodwill impairment charge of $22,311 to write-off all of the goodwill in our Direct-to-consumer reporting unit. The amendment is effectivecharge was recorded within Impairment of goodwill and indefinite-lived intangible asset on the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016. Additionally, the results of “step one” of the assessment determined that the fair value of the Wholesale reporting unit exceeded its fair value by approximately 40% and therefore did not result in any impairment of goodwill. However, further declines in the net sales or operating results of the Wholesale reporting unit may result in a partial or full impairment of its goodwill, which amounted to $41,435 as of January 28, 2017. Significant assumptions utilized in the discounted cash flow analysis included a discount rate of 16.0%. Significant assumptions utilized in a market-based approach were market multiples ranging from 0.50x to 0.90x for annual and interimthe Company’s reporting units. In fiscal 2015, we elected to perform a quantitative impairment teststest on goodwill. The results of the quantitative test did not result in any impairment of goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. The fair values of the Company’s reporting units exceeded their respective carrying values by at least 15% as of the date of the impairment test. Significant assumptions utilized in the discounted cash flow analysis included discount rates that ranged from 16.0% to 17.0%. Significant assumptions utilized in a market-based approach were market multiples ranging from 0.85x to 0.95x for goodwill performed for fiscal years beginning after December 15, 2011. We adopted this amendment during fiscal 2012.the Company’s reporting units. In fiscal 2014 fiscal 2013 and fiscal 2012, we performedelected to perform a qualitative assessment on the goodwill and determined that it was not more likely than not that the carrying value of the reporting unit was greater than the fair value. As such, we were not required to perform “step two” of the impairment test. In July 2012, FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwillfiscal 2016, a quantitative assessment on our indefinite-lived intangible asset, which consists of the Vince tradename, determined that the fair value of our tradename intangible asset was below its carrying value. During fiscal 2016, our sales results have not met expectations resulting in lower current and Other (Topic 350): Testing Indefinite Lived Assets forexpected future cash flows. We estimated the fair value of our tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology and determined that the fair value of our tradename intangible asset was below the carrying amount by approximately 30%. Accordingly, we recorded an impairment charge of $30,750, which was recorded within Impairment. Under this amendment, of goodwill and indefinite-lived intangible asset on the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016. Discount rate assumptions were based on an entity may electassessment of the risk inherent in the projected future cash flows generated by the intangible asset. Also subject to judgment are assumptions about royalty rates, which were based on the estimated rates at which similar tradenames are being licensed in the marketplace. In fiscal 2015 we elected to perform a qualitativequantitative assessment on our tradename intangible asset. The results of the quantitative test did not result in any impairment assessment for indefinite-lived intangible assets similar tobecause the goodwill impairment testing guidance discussed above. An entity may pass on performingfair value of the qualitative assessment for an indefinite-livedCompany’s tradename intangible asset and directly perform “step one”exceeded its carrying value. The estimate of fair value of the tradename intangible asset was determined using a discounted cash flow valuation analysis, which was based on the “relief from royalty” methodology. Discount rate assumptions were based on an assessment of the assessment. This determination can be maderisk inherent in
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the projected future cash flows generated by the intangible asset. Also subject to judgment are assumptions about royalty rates, which were based on an asset by asset basis, and an entity may resume performing a qualitative assessmentthe estimated rates at which similar tradenames are being licensed in subsequent periods. The amendment is effective for annual and interim impairment tests for indefinite-lived intangible assets performed for fiscal years beginning after September 15, 2012. We early adopted this amendment during fiscal 2012.the marketplace. In fiscal 2014, fiscal 2013 and fiscal 2012, we elected to perform a qualitative assessment onindefinite-lived the tradename intangible assetsasset and determined that it was not more likely than not that the carrying value of the assetsasset exceeded the fair value. Property and Equipment and Other Finite-Lived Intangible Assets The Company reviews its property and equipment and finite-lived intangible assets for impairment when management determines that the carrying value asof such we wereassets may not requiredbe recoverable due to perform “step two”events or changes in circumstances. Recoverability of these assets is evaluated by comparing the carrying value of the asset with estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment test. Determiningloss is calculated as the difference between the carrying value and the fair value of goodwillthe asset and other intangible assetsthe loss is judgmental in naturerecognized during that period. During fiscal 2016, we recorded non-cash asset impairment charges of $2,082, within SG&A expenses on the Consolidated Statements of Operations, related to the impairment of property and requiresequipment of certain retail stores with carrying values that were determined not to be recoverable and exceeded fair value. Prior to the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is possible that estimates of future operating results could change adversely and impact the evaluation of the recoverability of the carryingimpairment charge, these retail stores had a total net book value of goodwill and intangible assets and that the effect of such changes could be material.$3,124. The Company did not record any significant impairment charges in fiscal 2015 or fiscal 2014.
Definite-livedFinite-lived intangible assets are comprised of customer relationships and are being amortized on a straight-line basis over their useful lives of 20 years.
Provision for incomeIncome taxes and Valuation Allowances
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. We determineassess the appropriatenesslikelihood of the realization of deferred tax assets and adjust the carrying amount of these deferred tax assets by a valuation allowances in accordance withallowance to the “moreextent we believe it more likely than not” recognition criteria.not that all or a portion of the deferred tax assets will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the provision for income taxes. Changes in estimates may create volatility in our effective tax rate in future periods for various reasons, including changes in tax laws or rates, changes in forecasted amounts of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. The ultimate tax outcome is uncertain for certain transactions. We recognize tax positions in our Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Due to the uncertain nature of the realization of our deferred income tax assets, during the fourth quarter of fiscal 2016, we recorded valuation allowances in the amount of $121,836, within Provision for income taxes on the Consolidated Statements of Operations, due to the combination of (i) a current year pretax loss, including goodwill and tradename impairment charges; (ii) levels of projected pre-tax income; and (iii) the Company’s ability to carry forward or carry back tax losses. This valuation allowance is subject to periodic review, and, if the allowance is reduced, the tax benefit will be recorded in future operations as a reduction of our income tax expense. Recent Accounting Pronouncements For information on certain recently issued or proposed accounting standards which may impact Vince Holding Corp., please refer to the notes to Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K. ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our principal market risk relates to interest rate sensitivity, which is the risk that changes in interest rates will reduce our net income or net assets. Our variable rate debt consists of borrowings under the Term Loan Facility and Revolving Credit Facility. Our current interest rate on the Term Loan Facility is based on the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00%. Our interest rate on the Revolving Credit Facility is based on the Eurodollar rate or the Base Rate (as defined in the Revolving Credit Facility) with applicable margins subject to a pricing grid based on excess availability. As of January 31, 2015,28, 2017, a one percentage point increase in the interest rate on our variable rate debt would result in additional interest expense of approximately $0.9 million$502 for the $88.0 million$50,200 borrowings outstanding under the Term Loan Facility and Revolving Credit Facility as of such date, calculated on an annual basis. We do not believeexpect that foreign currency risk, commodity price or inflation risks are expected to be material to our business or our consolidated financial position, results of operations or cash flows. Substantially all of our foreign sales and purchases are made in U.S. dollars. 44
ITEM 8. | FINANCIAL STATEMENTSSTATEMENTS AND SUPPLEMENTARY DATA. |
See “Index to the Audited Consolidated Financial Statements,” which is located on page F-1 appearing at the end of this annual reportAnnual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None. ITEM 9A. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer and Chief Financial Officer. Rule 13a-14 of the Exchange Act requires that we include these certifications with this report. This Controls and Procedures section includes information concerning the disclosure controls and procedures referred to in the certifications. You should read this section in conjunction with the certifications. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of January 31, 2015.28, 2017. We evaluate the effectiveness of our disclosure controls and procedures on at least a quarterly basis. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures arewere not effective due to material weaknesses in our internal control over financial reporting, which is described below under “Management’s Annual Report on Internal Control Over Financial Reporting.” As a result of the material weaknesses identified, we performed additional analysis, substantive testing and other post-closing procedures intended to ensure information is recorded, processed, summarizedthat our consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, management believes that the consolidated financial statements and reported withinrelated notes thereto included in this Annual Report on Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.presented. Limitations on the Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, we recognized that disclosure controls and procedures, no matter how well conceived and well operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. We have also designed our disclosure controls and procedures based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting There was no changeSince the IPO, the Company had been in the process of transitioning certain functions performed by Kellwood under the Shared Services Agreement and during the quarter ended January 28, 2017, the Company completed the transition of all such functions and systems from Kellwood to the Company’s own systems or processes as well as to third-party service providers. Functions that transitioned to the Company, including its third-party service providers, included accounting related functions, tax, accounts payable, credit and collections, e-commerce customer service, distribution and logistics, payroll and benefits administration, and information technology support. Additionally, the Company has completed the implementation of its own enterprise resource planning and supporting systems, point-of-sale system, third-party e-commerce platform, human resource payroll and recruitment systems, distribution applications, and network infrastructure. As a result, we have updated our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures.
As described in the preceding paragraph, there were changes in our internal control over financial reporting that occurred during our latest fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in RuleRules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. 45
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of January 31, 2015.28, 2017. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on this assessment, management has concluded that, as of January 31, 2015,28, 2017, our internal control over financial reporting was not effective, atas management identified deficiencies in internal control over financial reporting that were determined to be material weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable assurance level.possibility that a material misstatement of an entity’s financial statements will not be prevented or detected and corrected on a timely basis. We did not design and implement effective control over risk assessment with regard to our processes and procedures commensurate with our financial reporting requirements, which deficiency was identified as a material weakness. Specifically, we did not maintain appropriate corporate governance and oversight, change management and system implementation controls intended to address the risks associated with the implementation of our ERP and payroll systems and to timely identify and appropriately mitigate such risk prior to transitioning to the new systems. The risk assessment material weakness contributed to a second material weakness related to the design and maintenance of information technology (“IT”) general controls for information systems that are relevant to the preparation of financial statements. Specifically, the Company did not (i) maintain program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records were tested, approved and implemented appropriately; and (ii) maintain adequate user access controls to ensure appropriate segregation of duties and to adequately restrict access to financial applications and data. These material weaknesses could impact the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) and could result in misstatements potentially impacting all financial statement line items and disclosures, which would not be prevented or detected. Because we are an emerging growth company under the JOBS Act, this Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm. Remediation Plan Management has initiated a remediation plan to address the control deficiencies that led to the material weaknesses. The remediation plan includes, but is not limited to: The enhancement of our risk assessment and governance controls related to managing information technology development and related organizational change. This includes establishment of an IT Steering Committee, which will adopt comprehensive information technology governance policies and procedures, perform a robust IT risk assessment and implement an improved IT organizational structure; The development of information technology processes and procedures to appropriately monitor data processing and system interfaces; The implementation of (i) controls to ensure that only appropriate system access rights are granted to system users; and (ii) controls related to routine reviews of user system access; and The implementation of appropriate segregation of duties in all systems that impact internal control over financial reporting. Our goal is to implement these control improvements during fiscal 2017 and to fully remediate these material weaknesses by the end of 2017, subject to there being sufficient opportunities to conclude, through testing, that the implemented controls are operating effectively. Until the controls are remediated, we will continue to perform additional analysis, substantive testing and other post-closing procedures to ensure that our consolidated financial statements are prepared in accordance with U.S. GAAP. ITEM 9B. | OTHER INFORMATION. |
None. 46
PART III ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015our 2017 annual meeting of stockholders. Our definitive proxy statement will be filed on or before 120 days after the end of fiscal 2016. ITEM 11. | EXECUTIVE COMPENSATION. |
The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015our 2017 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS. |
The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015our 2017 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015our 2017 annual meeting of stockholders. ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015our 2017 annual meeting of stockholders. PartPART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
| (a) | Financial Statements and Financial statement Schedules. See “Index to the Audited Consolidated Financial Statements” which is located on F-1 of this annual reportAnnual Report on Form 10-K. |
| (b) | Exhibits. See the exhibit index which is included herein. |
Exhibit Listing: | | | Exhibit Number | | Exhibit Description | | | 3.1 | | Amended & Restated Certificate of Incorporation of Vince Holding Corp. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | 3.2 | | Amended & Restated Bylaws of Vince Holding Corp. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | 4.1 | | Form of Stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on November 12, 2013) | | | 4.2 | | Registration Agreement, dated as of February 20, 2008, among Apparel Holding Corp., Sun Cardinal, LLC, SCSF Cardinal, LLC and the Other Investors party thereto (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.1 | | Shared Services Agreement, dated as of November 27, 2013, between Vince, LLC and Kellwood Company, LLC (incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | |
47
Exhibit Number | | Exhibit Description | 10.2 | | 10.2 | | Tax Receivable Agreement, dated as of November 27, 2013, between Vince Intermediate Holding, LLC, the Stockholders, and Sun Cardinal, LLC as Stockholder Representative (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | | 10.3 | | Consulting Agreement, dated as of November 27, 2013, between Vince Holding Corp. and Sun Capital Partners Management V, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | 10.4 | | Credit Agreement, dated as of November 27, 2013, by and among Vince, LLC, Vince Intermediate Holding, LLC, Bank of America, N.A., as Administrative Agent, J.P. Morgan Securities LLC, as Syndication Agent, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Bookrunners, and Cantor Fitzgerald Securities, as Documentation Agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | 10.5 | | Credit Agreement, dated as of November 27, 2013, by and among Vince, LLC, the guarantors party thereto, Bank of America, N.A., as Agent, the other lenders party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Book Runner (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) |
| | | Exhibit
Number
| | Exhibit Description | 10.6† | | 10.6† | | Employment Agreement, dated as of May 4, 2012, between Jill Granoff and Kellwood Company(incorporated by reference to Exhibit 10.48 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.7† | | Amendment to Employment Agreement, dated as of December 30, 2012, between Jill Granoff and Kellwood Company (incorporated by reference to Exhibit 10.49 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.8† | | Amendment No. 2 to Employment Agreement, dated as of September 24, 2013, between Jill Granoff and Kellwood Company (incorporated by reference to Exhibit 10.50 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.9† | | Debt Recovery Bonus Side Letter Agreement, dated June 11, 2013, between Jill Granoff and Kellwood Company (incorporated by reference to Exhibit 10.51 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.10† | | Employment Agreement, dated March 2013, between Karin Gregersen and Vince, LLC(incorporated by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K filed on April 4, 2014) | | | 10.11† | | Employment Agreement, dated April 5 2013, between Michele Sizemore and Vince, LLC(incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K filed on April 4, 2014) | | | 10.12† | | Employment Agreement, dated September 25, 2013, between Jay Dubiner and Vince, LLC(incorporated by reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K filed on April 4, 2014) | | | 10.13† | | Employment Agreement, dated November 21, 2014, between Melissa Wallace and Vince Holding Corp. | | | 10.14† | | Assignment and Assumption Agreement, dated as of November 27, 2013, by and among Kellwood Company, LLC, Apparel Holding Corp. and Jill Granoff(incorporated by reference to Exhibit 10.5510.13 to the Company’s Annual Report on Form 10-K filed on April 4, 2014)March 27, 2015) | | | 10.15†10.7† | | Employment Offer Letter, dated as of November 2, 2012, between Lisa Klinger and Kellwood Company (incorporated by reference to Exhibit 10.52 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.16† | | Assignment and Assumption Agreement, dated as of November 27, 2013, by and between Kellwood Company, LLC and Apparel Holding Corp.(incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K filed on April 4, 2014) | | | 10.17†10.8† | | 2010 Stock Option Plan of Kellwood Company (incorporated by reference to Exhibit 10.56 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.18†10.9† | | Form of 2010 Stock Option Plan grant agreement for executive officers (incorporated by reference to Exhibit 10.57 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) |
| | | Exhibit
Number
| | Exhibit Description | 10.10† | | 10.19† | | 2010 Stock Plan of Kellwood Company Grant Agreement, dated as of May 4, 2012, by and between Kellwood Company and Jill Granoff (incorporated by reference to Exhibit 10.43 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.20† | | Amendment to Grant Agreement, between Kellwood Company and Jill Granoff (incorporated by reference to Exhibit 10.59 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.21† | | First Amendment to Grant Agreement, dated December 30, 2012, between Kellwood Company and Jill Granoff ( incorporated by reference to Exhibit 10.60 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013 ) | | | 10.22† | | Second Amendment to Grant Agreement, dated November 26, 2013, between Kellwood Company and Jill Granoff (incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | 10.23† | | 2010 Stock Plan of Kellwood Company Grant Agreement, dated as of December 10, 2012, by and between Kellwood Company and Lisa Klinger (incorporated by reference to Exhibit 10.61 to the Company’s Registration Statement on Form S-1 (File No. 333-191336) filed with the Securities Exchange Commission on September 24, 2013) | | | 10.24† | | First Amendment to Grant Agreement, dated November 26, 2013, between Kellwood Company and Lisa Klinger (incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 27, 2013) | | | 10.25† | | Form of Indemnification Agreement (for directors and officers affiliated with Sun Capital Partners) (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on November 27, 2013) | | | 10.26†10.11† | | Form of Indemnification Agreement (for directors and officers not affiliated with Sun Capital Partners) (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on November 27, 2013) | | | 10.27†10.12† | | Vince Holding Corp. 2013 Incentive Plan (incorporated by reference to Exhibit 10.66 to the Company’s Registration Statement on Form S-1 (File No. (333-191336) filed with the Securities Exchange Commission on November 12, 2013) | | | 10.28†10.13† | | Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on November 27, 2013) | | | 10.29†10.14† | | Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed on November 27, 2013) | | | 10.30†10.15† | | Form of Vince Holding Corp. Amended and Restated 2013 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.67Annex A to the Company’s RegistrationInformation Statement on Form S-1 (File No. (333-191336)Schedule 14C filed with the Securities Exchange Commission on November 12, 2013September 3, 2015) | | | 21.110.16 | | ListFirst Amendment to Credit Agreement, dated as of subsidiariesJune 3, 2015, by and among the Company, the guarantors parties thereto, BofA, as administrative agent, and each lender party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on September 8, 2015). | | | | 10.17 | | First Amendment to the Tax Receivable Agreement, dated as of September 1, 2015, between Vince Holding Corp., the Stockholders, and the Stockholder Representative (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on December 8, 2015). | | | | 10.18† | | Employment Offer Letter, dated as of September 1, 2015, from Vince Holding Corp. to David Stefko relating to his appointment as the Interim Chief Financial Officer and Treasurer of the Company (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on December 8, 2015). | | | |
48
Exhibit Number | | Exhibit Description | | | 10.19† | | Employment Offer Letter, dated as of October 22, 2015, from Vince, LLC to Brendan Hoffman relating to his appointment as the Chief Executive Officer of the Company (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on December 8, 2015). | | | | 10.20† | | Transition Services and Separation Agreement, dated as of October 6, 2015, between Vince Holding Corp and Jill Granoff (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on December 8, 2015). | | | | 10.21† | | Confidential Severance Agreement and General Release, dated as of August 6, 2015, between Vince Holding Corp and Lisa Klinger (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on December 8, 2015). | | | | 10.22† | | Severance Agreement and General Release, dated as of September 28, 2015, between Vince, LLC and Karin Gregersen McLennan (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on December 8, 2015). | | | | 10.23 | | Consulting Agreement, dated as of November 23, 2015, between Vince, LLC and Rea Laccone (incorporated by reference to Exhibit 21.110.41 to the Company’s Annual Report on Form 10-K filed on April 4, 2014)14, 2016). | | | | 23.110.24 | | Consulting Agreement, dated as of November 23, 2015, between Vince, LLC and Christopher LaPolice (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed on April 14, 2016). | | | | 10.25† | | Employment Offer Letter, dated as of January 12, 2016, from Vince, LLC to David Stefko relating to his appointment as the Chief Financial Officer of the Company (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K filed on April 14, 2016). | | | | 10.26 | | Investment Agreement, dated as of March 15, 2016, by and among Vince Holding Corp., Sun Cardinal, LLC and SCSF Cardinal, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 16, 2016). | | | | 10.27† | | Employment Agreement, dated as of December 18, 2015, between Vince, LLC to Katayone Adeli (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on June 8, 2016). | | | | 10.28† | | Confidential Severance Agreement and General Release, dated as of February 29, 2016, between Vince, LLC and Michele Sizemore (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on June 8, 2016). | | | | 10.29† | | Employment Agreement, dated as of June 30, 2016, between Vince, LLC to Mark Engebretson (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on September 8, 2016). | | | | 10.30† | | Amendment No. 1 to Offer Letter, dated as of September 12, 2016, between Vince, LLC to Mark Engebretson (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on September 8, 2016). | | | 21.1 | | List of subsidiaries of Vince Holding Corp. | | | 23.1 | | Consent of PricewaterhouseCoopers LLP | | | 31.1 | | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | 31.2 | | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | Exhibit
Number
| | Exhibit Description | 32.1 | | 32.1 | | CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | 32.2 | | CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | 101 | | Financial Statements in XBRL Format |
† | Indicates exhibits that constitute management contracts or compensatory plans or arrangements |
ITEM 16. | FORM 10-K SUMMARY. |
None. SIGNATURES
49
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | VINCE HOLDING CORP. | | | | | By: | | By: | | /s/ Jill GranoffBrendan Hoffman | Name: | | Jill GranoffName: | | Brendan Hoffman | Title: | | Chairman and Title: | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates listed. | | | | | Signature | | Title | | Date | | | | /s/ Jill Granoff Jill GranoffBrendan Hoffman
| | Chairman and Chief Executive Officer (principal executive officer)(Principal Executive Officer) (Director) | | March 27, 2015April 28, 2017 | Brendan Hoffman | | | | | | | | /s/ Lisa Klinger Lisa KlingerDavid Stefko
| | Executive Vice President, Chief Financial Officer (Principal Financial and Treasurer (principal financial and accounting officer)Accounting Officer) | | March 27, 2015April 28, 2017 | David Stefko | | | | | | | /s/ Jonathan H. Borell | | Director | | April 28, 2017 | Jonathan H. Borell | | Director | | March 27, 2015 | | | | /s/ Robert A. Bowman | | Director | | April 28, 2017 | Robert A. Bowman | | Director | | March 27, 2015 | | | | /s/ Mark E. Brody Mark E. BrodyRyan J. Esko
| | Director | | March 27, 2015April 28, 2017 | Ryan J. Esko | | | | | | | | /s/ Jerome Griffith | | Director | | April 28, 2017 | Jerome Griffith | | Director | | March 27, 2015 | | | | /s/ Marc J. Leder | | Director | | April 28, 2017 | Marc J. Leder | | Director | | March 27, 2015 | | | | | | /s/ Steven M. Liff Steven M. LiffDonald V. Roach
| | Director | | March 27, 2015April 28, 2017 | Donald V. Roach | | | | | | | | /s/ Eugenia Ulasewicz | | Director | | April 28, 2017 | Eugenia Ulasewicz | | Director | | March 27, 2015 |
INDEX TO THE AUDITED CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
ReportReport of Independent RegisteredRegistered Public Accounting Firm
To the Board of Directors and Shareholders of Vince Holding Corp.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Vince Holding Corp. and its subsidiaries atas of January 31, 201528, 2017 and February 1, 2014,January 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 201528, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these financial statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has determined there is risk of future non-compliance with its debt covenant that raises substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. | /s/ PricewaterhouseCoopers LLP | New York, New York
| March 27, 2015
|
New York, New York April 28, 2017 F-2
VINCE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) | | | | | | January 28, | | | January 30, | | | | | January 31,
2015 | | February 1,
2014 | | | 2017 | | | 2016 | | Assets | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 112 | | | $ | 21,484 | | | $ | 20,978 | | | $ | 6,230 | | Trade receivables, net | | | 33,797 | | | 40,198 | | | | 10,336 | | | | 9,400 | | Inventories, net | | | 37,419 | | | 33,956 | | | | 38,529 | | | | 36,576 | | Prepaid expenses and other current assets | | | 9,812 | | | 8,093 | | | | 4,768 | | | | 8,027 | | | | | | | | | | Total current assets | | | 81,140 | | | | 103,731 | | | | 74,611 | | | | 60,233 | | Property, plant and equipment: | | | Building and improvements | | | 27,645 | | | | 15,355 | | | Machinery and equipment | | | 5,384 | | | | 2,439 | | | Capitalized software | | | 1,341 | | | | 630 | | | Construction in process | | | 3,369 | | | | 1,200 | | | | | | | | | | | Total property, plant and equipment | | | 37,739 | | | | 19,624 | | | Less: accumulated depreciation and amortization | | | (9,390 | ) | | | (6,009 | ) | | | | | | | | | | Property, plant and equipment, net | | | 28,349 | | | | 13,615 | | | Property and equipment, net | | | | 42,945 | | | | 37,769 | | Intangible assets, net | | | 109,644 | | | | 110,243 | | | | 77,698 | | | | 109,046 | | Goodwill | | | 63,746 | | | | 63,746 | | | | 41,435 | | | | 63,746 | | Deferred income taxes and other assets | | | 99,319 | | | | 123,007 | | | | | | | | | | | Deferred income taxes | | | | — | | | | 89,280 | | Other assets | | | | 2,791 | | | | 3,494 | | Total assets | | $ | 382,198 | | | $ | 414,342 | | | $ | 239,480 | | | $ | 363,568 | | | | | | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | Liabilities and Stockholders' (Deficit) Equity | | | | | | | | | | Current liabilities: | | | | | | | | | | Accounts payable | | $ | 29,118 | | | $ | 23,847 | | | $ | 37,022 | | | $ | 28,719 | | Accrued salaries and employee benefits | | | 7,380 | | | | 5,425 | | | | 3,427 | | | | 5,755 | | Other accrued expenses | | | 27,992 | | | | 9,061 | | | | 9,992 | | | | 37,174 | | | | | | | | | | Total current liabilities | | | 64,490 | | | | 38,333 | | | | 50,441 | | | | 71,648 | | Long-term debt | | | 88,000 | | | | 170,000 | | | | 48,298 | | | | 57,615 | | Deferred rent | | | 11,676 | | | | 3,443 | | | | 16,892 | | | | 14,965 | | Other liabilities | | | 146,063 | | | | 169,015 | | | | 137,830 | | | | 140,838 | | | | | | | | | | | | Commitments and contingencies (Note 13) | | | Commitments and contingencies (Note 5) | | | | | | | | | | | | | | | | | | | | Stockholders’ equity: | | | Common stock at $0.01 par value (100,000,000 shares authorized, 36,748,245 and 36,723,727 shares issued and outstanding at January 31, 2015 and February 1, 2014, respectively) | | | 367 | | | | 367 | | | Stockholders' (deficit) equity: | | | | | | | | | | Common stock at $0.01 par value (100,000,000 shares authorized, 49,427,606 and 36,779,417 shares issued and outstanding at January 28, 2017 and January 30, 2016, respectively) | | | | 494 | | | | 368 | | Additional paid-in capital | | | 1,011,244 | | | | 1,008,549 | | | | 1,082,727 | | | | 1,012,677 | | Accumulated deficit | | | (939,577 | ) | | | (975,300 | ) | | | (1,097,137 | ) | | | (934,478 | ) | Accumulated other comprehensive loss | | | (65 | ) | | | (65 | ) | | | (65 | ) | | | (65 | ) | Total stockholders' (deficit) equity | | | | (13,981 | ) | | | 78,502 | | Total liabilities and stockholders' (deficit) equity | | | $ | 239,480 | | | $ | 363,568 | | | | | | | | | | | | | | | | | Total stockholders’ equity | | | 71,969 | | | | 33,551 | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 382,198 | | | $ | 414,342 | | | | | | | | | | |
See accompanying notes to Consolidated Financial Statements. F-3
VINCE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data and share amounts) | | | | | | | | | | | | | | | | Fiscal Year | | | | | 2014 | | | 2013 | | | 2012 | | Net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | Cost of products sold | | | 173,567 | | | | 155,154 | | | | 132,156 | | | | | | | | | | | | | | | Gross profit | | | 166,829 | | | | 133,016 | | | | 108,196 | | Selling, general and administrative expenses | | | 96,579 | | | | 83,663 | | | | 67,260 | | | | | | | | | | | | | | | Income from operations | | | 70,250 | | | | 49,353 | | | | 40,936 | | Interest expense, net | | | 9,698 | | | | 18,011 | | | | 68,684 | | Other expense, net | | | 835 | | | | 679 | | | | 769 | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 59,717 | | | | 30,663 | | | | (28,517 | ) | Provision for income taxes | | | 23,994 | | | | 7,268 | | | | 1,178 | | | | | | | | | | | | | | | Net income (loss) from continuing operations | | | 35,723 | | | | 23,395 | | | | (29,695 | ) | Net loss from discontinued operations, net of tax | | | — | | | | (50,815 | ) | | | (78,014 | ) | | | | | | | | | | | | | | Net income (loss) | | $ | 35,723 | | | $ | (27,420 | ) | | $ | (107,709 | ) | | | | | | | | | | | | | | Basic earnings (loss) per share: | | | | | | | | | | | | | Basic earnings (loss) per share from continuing operations | | $ | 0.97 | | | $ | 0.83 | | | $ | (1.13 | ) | Basic loss per share from discontinued operations | | | — | | | | (1.81 | ) | | | (2.98 | ) | | | | | | | | | | | | | | Basic earnings (loss) per share | | $ | 0.97 | | | $ | (0.98 | ) | | $ | (4.11 | ) | | | | | | | | | | | | | | Diluted earnings (loss) per share: | | | | | | | | | | | | | Diluted earnings (loss) per share from continuing operations | | $ | 0.93 | | | $ | 0.83 | | | $ | (1.13 | ) | Diluted loss per share from discontinued operations | | | — | | | | (1.81 | ) | | | (2.98 | ) | | | | | | | | | | | | | | Diluted earnings (loss) per share | | $ | 0.93 | | | $ | (0.98 | ) | | $ | (4.11 | ) | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 36,730,490 | | | | 28,119,794 | | | | 26,211,130 | | Diluted | | | 38,244,906 | | | | 28,272,925 | | | | 26,211,130 | |
| Fiscal Year | | | 2016 | | | 2015 | | | 2014 | | Net sales | $ | 268,199 | | | $ | 302,457 | | | $ | 340,396 | | Cost of products sold | | 145,380 | | | | 169,941 | | | | 173,567 | | Gross profit | | 122,819 | | | | 132,516 | | | | 166,829 | | Impairment of goodwill and indefinite-lived intangible asset | | 53,061 | | | | — | | | | — | | Selling, general and administrative expenses | | 134,430 | | | | 116,790 | | | | 96,579 | | (Loss) income from operations | | (64,672 | ) | | | 15,726 | | | | 70,250 | | Interest expense, net | | 3,932 | | | | 5,680 | | | | 9,698 | | Other expense, net | | 329 | | | | 1,733 | | | | 835 | | (Loss) income before income taxes | | (68,933 | ) | | | 8,313 | | | | 59,717 | | Provision for income taxes | | 93,726 | | | | 3,214 | | | | 23,994 | | Net (loss) income | $ | (162,659 | ) | | $ | 5,099 | | | $ | 35,723 | | (Loss) earnings per share: | | | | | | | | | | | | Basic (loss) earnings per share | $ | (3.50 | ) | | $ | 0.14 | | | $ | 0.97 | | Diluted (loss) earnings per share | $ | (3.50 | ) | | $ | 0.14 | | | $ | 0.93 | | Weighted average shares outstanding: | | | | | | | | | | | | Basic | | 46,420,533 | | | | 36,770,430 | | | | 36,730,490 | | Diluted | | 46,420,533 | | | | 37,529,227 | | | | 38,244,906 | |
See accompanying notes to Consolidated Financial Statements. F-4
VINCE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS) (In thousands) | | | | | | | | | | | | | | | | Fiscal Year | | | | | 2014 | | | 2013 | | | 2012 | | Net income (loss) | | $ | 35,723 | | | $ | (27,420 | ) | | $ | (107,709 | ) | Foreign currency translation adjustment | | | — | | | | 1 | | | | (3 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | $ | 35,723 | | | $ | (27,419 | ) | | $ | (107,712 | ) | | | | | | | | | | | | | |
See accompanying notes to Consolidated Financial Statements
VINCE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | | | | | | | | | | | | | | | | Number of
Shares
Outstanding | | | Par
Value | | | Additional
Paid-In Capital | | | Accumulated
Deficit | | | Accumulated
Other
Comprehensive
Loss | | | Total
Stockholders’
Equity (Deficit) | | Balance as of January 28, 2012 | �� | | 26,211,130 | | | $ | 262 | | | $ | 96,951 | | | $ | (840,171 | ) | | $ | (63 | ) | | $ | (743,021 | ) | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | — | | | | — | | | | — | | | | (107,709 | ) | | | — | | | | (107,709 | ) | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | Share-based compensation expense | | | — | | | | — | | | | 367 | | | | — | | | | — | | | | 367 | | Capital contribution from stockholders | | | — | | | | — | | | | 289,101 | | | | — | | | | — | | | | 289,101 | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of February 2, 2013 | | | 26,211,130 | | | | 262 | | | | 386,419 | | | | (947,880 | ) | | | (66 | ) | | | (561,265 | ) | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | — | | | | — | | | | — | | | | (27,420 | ) | | | — | | | | (27,420 | ) | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | | Common stock issuance, net of certain costs | | | 10,000,000 | | | | 100 | | | | 185,900 | | | | — | | | | — | | | | 186,000 | | Share-based compensation expense | | | — | | | | — | | | | 898 | | | | — | | | | — | | | | 898 | | Exercise of stock options | | | 512,597 | | | | 5 | | | | 37 | | | | — | | | | — | | | | 42 | | Capital contribution from stockholders | | | — | | | | — | | | | 407,527 | | | | — | | | | — | | | | 407,527 | | Recognition of certain deferred tax assets, net | | | — | | | | — | | | | 127,833 | | | | — | | | | — | | | | 127,833 | | Recognition of tax receivable agreement obligation | | | — | | | | — | | | | (173,146 | ) | | | — | | | | — | | | | (173,146 | ) | Separation of non-Vince businesses and settlement of Kellwood Note Receivable | | | — | | | | — | | | | 73,081 | | | | — | | | | — | | | | 73,081 | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of February 1, 2014 | | | 36,723,727 | | | | 367 | | | | 1,008,549 | | | | (975,300 | ) | | | (65 | ) | | | 33,551 | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 35,723 | | | | — | | | | 35,723 | | Share-based compensation expense | | | — | | | | — | | | | 1,896 | | | | — | | | | — | | | | 1,896 | | Exercise of stock options | | | 22,018 | | | | — | | | | 175 | | | | — | | | | — | | | | 175 | | Restricted stock unit vesting | | | 2,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | Tax receivable agreement obligation adjustment | | | — | | | | — | | | | 624 | | | | — | | | | — | | | | 624 | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of January 31, 2015 | | | 36,748,245 | | | $ | 367 | | | $ | 1,011,244 | | | $ | (939,577 | ) | | $ | (65 | ) | | $ | 71,969 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | 2016 | | | 2015 | | | 2014 | | Net (loss) income | | $ | (162,659 | ) | | $ | 5,099 | | | $ | 35,723 | | Comprehensive (loss) income | | $ | (162,659 | ) | | $ | 5,099 | | | $ | 35,723 | |
See accompanying notes to Consolidated Financial Statements. F-5
VINCE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (In thousands, except share amounts) | | Common Stock | | | | | | | | | | | | | | | | | | | | Number of Shares Outstanding | | | Par Value | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Loss | | | Total Stockholders' Equity | | Balance as of February 1, 2014 | | | 36,723,727 | | | $ | 367 | | | $ | 1,008,549 | | | $ | (975,300 | ) | | $ | (65 | ) | | $ | 33,551 | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 35,723 | | | | — | | | | 35,723 | | Share-based compensation expense | | | — | | | | — | | | | 1,896 | | | | — | | | | — | | | | 1,896 | | Exercise of stock options | | | 22,018 | | | | — | | | | 175 | | | | — | | | | — | | | | 175 | | Restricted stock unit vestings | | | 2,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | Tax receivable agreement obligation adjustment | | | — | | | | — | | | | 624 | | | | — | | | | — | | | | 624 | | Balance as of January 31, 2015 | | | 36,748,245 | | | | 367 | | | | 1,011,244 | | | | (939,577 | ) | | | (65 | ) | | | 71,969 | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | — | | | | — | | | | — | | | | 5,099 | | | | — | | | | 5,099 | | Share-based compensation expense | | | — | | | | — | | | | 1,259 | | | | — | | | | — | | | | 1,259 | | Exercise of stock options | | | 26,209 | | | | 1 | | | | 174 | | | | — | | | | — | | | | 175 | | Restricted stock unit vestings | | | 4,963 | | | | — | | | | — | | | | — | | | | — | | | | — | | Balance as of January 30, 2016 | | | 36,779,417 | | | | 368 | | | | 1,012,677 | | | | (934,478 | ) | | | (65 | ) | | | 78,502 | | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | — | | | | — | | | | — | | | | (162,659 | ) | | | — | | | | (162,659 | ) | Common stock issuance, net of certain costs | | | 11,818,181 | | | | 118 | | | | 63,992 | | | | — | | | | — | | | | 64,110 | | Share-based compensation expense | | | — | | | | — | | | | 1,344 | | | | — | | | | — | | | | 1,344 | | Exercise of stock options and issuance of common stock under employee stock purchase plan | | | 815,428 | | | | 8 | | | | 4,714 | | | | — | | | | — | | | | 4,722 | | Restricted stock unit vestings | | | 14,580 | | | | — | | | | — | | | | — | | | | — | | | | — | | Balance as of January 28, 2017 | | | 49,427,606 | | | $ | 494 | | | $ | 1,082,727 | | | $ | (1,097,137 | ) | | $ | (65 | ) | | $ | (13,981 | ) |
See accompanying notes to Consolidated Financial Statements. F-6
VINCE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) | | | | | | | | | | | | | | | | Fiscal Year | | | | | 2014 | | | 2013 | | | 2012 | | Operating activities | | | | | | | | | | | | | Net income (loss) | | $ | 35,723 | | | $ | (27,420 | ) | | $ | (107,709 | ) | Less: Net loss from discontinued operations | | | — | | | | (50,815 | ) | | | (78,014 | ) | Add (deduct) items not affecting operating cash flows: | | | | | | | | | | | | | Depreciation | | | 4,668 | | | | 2,186 | | | | 1,411 | | Amortization of intangible assets | | | 599 | | | | 599 | | | | 598 | | Amortization of deferred financing costs | | | 1,532 | | | | 178 | | | | — | | Amortization of deferred rent | | | 3,045 | | | | 465 | | | | 426 | | Deferred income taxes | | | 23,248 | | | | 7,225 | | | | 1,147 | | Share-based compensation expense | | | 1,896 | | | | 347 | | | | — | | Capitalized PIK Interest | | | — | | | | 15,883 | | | | 68,684 | | Loss on disposal of property, plant and equipment | | | — | | | | 262 | | | | — | | Changes in assets and liabilities: | | | | | | | | | | | | | Receivable, net | | | 6,401 | | | | (6,265 | ) | | | (7,459 | ) | Inventories, net | | | (3,463 | ) | | | (15,069 | ) | | | (8,360 | ) | Prepaid expenses and other current assets | | | 2,809 | | | | 1,681 | | | | (2,455 | ) | Accounts payable and accrued expenses | | | 3,066 | | | | 3,235 | | | | 17,208 | | Other assets and liabilities | | | 742 | | | | (156 | ) | | | (131 | ) | | | | | | | | | | | | | | Net cash provided by operating activities—continuing operations | | | 80,266 | | | | 33,966 | | | | 41,374 | | Net cash used in operating activities—discontinued operations | | | — | | | | (54,667 | ) | | | (67,408 | ) | | | | | | | | | | | | | | Net cash provided by/(used in) operating activities | | | 80,266 | | | | (20,701 | ) | | | (26,034 | ) | | | | | | | | | | | | | | Investing activities | | | | | | | | | | | | | Payments for capital expenditures | | | (19,699 | ) | | | (10,073 | ) | | | (1,821 | ) | Payments for contingent purchase price | | | — | | | | — | | | | (806 | ) | | | | | | | | | | | | | | Net cash used in investing activities—continuing operations | | | (19,699 | ) | | | (10,073 | ) | | | (2,627 | ) | Net cash (used in)/provided by investing activities—discontinued operations | | | — | | | | (5,936 | ) | | | 20,088 | | | | | | | | | | | | | | | Net cash (used in)/provided by investing activities | | | (19,699 | ) | | | (16,009 | ) | | | 17,461 | | | | | | | | | | | | | | | Financing activities | | | | | | | | | | | | | Proceeds from borrowings under the Revolving Credit Facility | | | 50,500 | | | | — | | | | — | | Payments for Revolving Credit Facility | | | (27,500 | ) | | | — | | | | — | | Proceeds from borrowings under the Term Loan Facility | | | — | | | | 175,000 | | | | — | | Payments for Term Loan Facility | | | (105,000 | ) | | | (5,000 | ) | | | — | | Payment for Kellwood Note Receivable | | | — | | | | (341,500 | ) | | | — | | Fees paid for Term Loan Facility and Revolving Credit Facility | | | (114 | ) | | | (5,146 | ) | | | — | | Proceeds from common stock issuance, net of certain transaction costs | | | — | | | | 186,000 | | | | — | | Stock option exercise | | | 175 | | | | 42 | | | | — | | | | | | | | | | | | | | | Net cash (used in)/provided by financing activities—continuing operations | | | (81,939 | ) | | | 9,396 | | | | — | | Net cash provided by financing activities—discontinued operations | | | — | | | | 46,917 | | | | 8,615 | | | | | | | | | | | | | | | Net cash (used in)/provided by financing activities | | | (81,939 | ) | | | 56,313 | | | | 8,615 | | | | | | | | | | | | | | | (Decrease) increase in cash and cash equivalents | | | (21,372 | ) | | | 19,603 | | | | 42 | | Cash and cash equivalents, beginning of period | | | 21,484 | | | | 1,881 | | | | 1,839 | | | | | | | | | | | | | | | Cash and cash equivalents, end of period | | | 112 | | | | 21,484 | | | | 1,881 | | Less: Cash and cash equivalents of discontinued operations, end of period | | | — | | | | — | | | | (1,564 | ) | | | | | | | | | | | | | | Cash and cash equivalents of continuing operations, end of period | | $ | 112 | | | $ | 21,484 | | | $ | 317 | | | | | | | | | | | | | | |
| | Fiscal Year | | | | 2016 | | | 2015 | | | 2014 | | Operating activities | | | | | | | | | | | | | Net (loss) income | | $ | (162,659 | ) | | $ | 5,099 | | | $ | 35,723 | | Add (deduct) items not affecting operating cash flows: | | | | | | | | | | | | | Impairment of goodwill and indefinite-lived intangible asset | | | 53,061 | | | | — | | | | — | | Depreciation and amortization | | | 8,684 | | | | 8,350 | | | | 5,267 | | Impairment of property and equipment | | | 2,082 | | | | — | | | | — | | Provision for inventories | | | 839 | | | | 16,263 | | | | 3,719 | | Deferred rent | | | 413 | | | | 1,723 | | | | 3,045 | | Deferred income taxes | | | 93,444 | | | | 2,745 | | | | 23,248 | | Share-based compensation expense | | | 1,344 | | | | 1,259 | | | | 1,896 | | Other | | | 701 | | | | 1,634 | | | | 1,532 | | Changes in assets and liabilities: | | | | | | | | | | | | | Receivables, net | | | (936 | ) | | | 24,397 | | | | 6,401 | | Inventories | | | (2,792 | ) | | | (15,420 | ) | | | (7,182 | ) | Prepaid expenses and other current assets | | | 598 | | | | 3,441 | | | | 2,809 | | Accounts payable and accrued expenses | | | (24,414 | ) | | | 1,044 | | | | 3,066 | | Other assets and liabilities | | | (25 | ) | | | 1,093 | | | | 742 | | Net cash (used in) provided by operating activities | | | (29,660 | ) | | | 51,628 | | | | 80,266 | | Investing activities | | | | | | | | | | | | | Payments for capital expenditures | | | (14,287 | ) | | | (17,591 | ) | | | (19,699 | ) | Net cash used in investing activities | | | (14,287 | ) | | | (17,591 | ) | | | (19,699 | ) | Financing activities | | | | | | | | | | | | | Proceeds from borrowings under the Revolving Credit Facility | | | 181,367 | | | | 115,127 | | | | 50,500 | | Repayment of borrowings under the Revolving Credit Facility | | | (191,167 | ) | | | (123,127 | ) | | | (27,500 | ) | Repayment of borrowings under the Term Loan Facility | | | — | | | | (20,000 | ) | | | (105,000 | ) | Proceeds from common stock issuance, net of transaction costs | | | 63,773 | | | | — | | | | — | | Proceeds from stock option exercises and issuance of common stock under employee stock purchase plan | | | 4,722 | | | | 175 | | | | 175 | | Fees paid for Term Loan Facility and Revolving Credit Facility | | | — | | | | (94 | ) | | | (114 | ) | Net cash provided by (used in) financing activities | | | 58,695 | | | | (27,919 | ) | | | (81,939 | ) | Increase (decrease) in cash and cash equivalents | | | 14,748 | | | | 6,118 | | | | (21,372 | ) | Cash and cash equivalents, beginning of period | | | 6,230 | | | | 112 | | | | 21,484 | | Cash and cash equivalents, end of period | | $ | 20,978 | | | $ | 6,230 | | | $ | 112 | | | | | | | | | | | | | | | Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | | Cash payments on TRA obligation | | $ | 29,700 | | | $ | — | | | $ | 3,199 | | Cash payments for interest | | | 2,952 | | | | 3,838 | | | | 8,737 | | Cash payments for income taxes, net of refunds | | | 330 | | | | 1,491 | | | | 88 | | Supplemental Disclosures of Non-Cash Investing and Financing Activities | | | | | | | | | | | | | Capital expenditures in accounts payable and accrued liabilities | | | 1,054 | | | | 309 | | | | 452 | | | | | | | | | | | | | | |
See accompanying notes to Consolidated Financial Statements Statements.
F-7
VINCE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | Fiscal Year | | | | | 2014 | | | 2013 | | | 2012 | | Supplemental Disclosures of Cash Flow Information, continuing operations | | | | | | | | | | | | | Cash payments on TRA obligation | | $ | 3,199 | | | $ | — | | | $ | — | | Cash payments for interest | | | 8,737 | | | | 1,018 | | | | — | | Cash payments for income taxes, net of refunds | | | 88 | | | | 31 | | | | 18 | | Supplemental Disclosures of Cash Flow Information, discontinued operations | | | | | | | | | | | | | Cash payments for interest | | | — | | | | 20,644 | | | | 30,454 | | Cash payments for income taxes, net of refunds | | | — | | | | 566 | | | | 882 | | Supplemental Disclosures of Non-Cash Investing and Financing Activities | | | | | | | | | | | | | Capital expenditures in accounts payable | | | 452 | | | | 222 | | | | 160 | | Forgiveness of principal and capitalized and accrued interest on related-party debt | | | — | | | | (407,527 | ) | | | (289,101 | ) | Capital contribution from stockholder | | | — | | | | 407,527 | | | | 289,101 | | Supplemental Disclosures of Non-Cash Investing and Financing Activities, discontinued operations | | | | | | | | | | | | | Accrued adjustment to sale proceeds from disposed business | | | — | | | | — | | | | 221 | |
See accompanying notes to Consolidated Financial Statements
VINCE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data and share amounts) Note 1. Description of Business and Summary of Significant Accounting Policies On November 27, 2013, Vince Holding Corp. (“VHC” or the “Company”), previously known as Apparel Holding Corp., closed an initial public offering (“IPO”) of its common stock and completed a series of restructuring transactions (the “Restructuring Transactions”) through which (i) Kellwood Holding, LLC acquired the non-Vince businesses, which includeincluded Kellwood Company, LLC (“Kellwood Company” or Kellwood”), from the Company. The Company owns and (ii) the Company continues to own and operateoperates the Vince business, which includes Vince, LLC. The historical financial information presented herein asPrior to the IPO and the Restructuring Transactions, VHC was a diversified apparel company operating a broad portfolio of January 31, 2015 includes onlyfashion brands, which included the Vince business. As a result of the IPO and Restructuring Transactions, the non-Vince businesses and all historical financial information prior to November 27, 2013 includeswere separated from the Vince business, as continuing operations and the stockholders immediately prior to the consummation of the Restructuring Transactions (the “Pre-IPO Stockholders”) (through their ownership of Kellwood Holding, LLC) retained the full ownership and control of the non-Vince businesses asbusinesses. The Vince business is now the sole operating business of VHC.
On November 18, 2016, Kellwood Intermediate Holding, LLC and Kellwood Company, LLC entered into a componentUnit Purchase Agreement with Sino Acquisition, LLC (the “Kellwood Purchaser”) whereby the Kellwood Purchaser agreed to purchase all of discontinued operations.the outstanding equity interests of Kellwood Company, LLC. Prior to the closing, Kellwood Intermediate Holding, LLC and Kellwood Company, LLC conducted a pre-closing reorganization pursuant to which certain assets of Kellwood Company, LLC were distributed to a newly formed subsidiary of Kellwood Intermediate Holding, LLC, St. Louis Transition, LLC (“St. Louis, LLC”). The transaction closed on December 21, 2016 (the “Kellwood Sale”). St. Louis, LLC is anticipated to be wound down by or around December 2017. (A)Description of Business: Established in 2002, Vince is a leading contemporary fashionglobal luxury brand best known for utilizing luxe fabrications and innovative techniques to create a product assortment that combines urban utility and modern effortless stylestyle. From its edited core collection of ultra-soft cashmere knits and everyday luxury essentials. Established in 2002, thecotton tees, Vince has evolved into a global lifestyle brand now offers a wide range of women’s, men’s and children’s apparel,destination for both women’s and men’s footwear,apparel and handbags. We reach ouraccessories. The Company reaches its customers through a variety of channels, specifically through premiermajor wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through ourthe Company’s branded retail locations and ourthe Company’s website. We design ourThe Company designs products in the U.S. and sourcesources the vast majority of our products from contract manufacturers outside the U.S., primarily in Asia and South America.Asia. Products are manufactured to meet ourthe Company’s product specifications and labor standards. (B)Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The consolidated financial statements include ourthe Company’s accounts and the accounts of ourthe Company’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The amounts and disclosures included in the notes to the consolidated financial statements, unless otherwise indicated, are presented on a continuing operations basis. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. As used in this report, unless the context requires otherwise, “our,” “us” and “we” refer to VHC and its consolidated subsidiaries. Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation. The reclassification had no impact on previously reported net income or stockholders’ equity. (C)Fiscal Year: VHCThe Company operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52 or 53-week period ending on the Saturday closest to January 31 of31. References to “fiscal year 2016” or “fiscal 2016” refer to the following year.fiscal year ended January 28, 2017; References to “fiscal year 2015” or “fiscal 2015” refer to the fiscal year ended January 30, 2016; and References to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015;2015. References to “fiscal year 2013” or “fiscal 2013” refer to the fiscal year ended February 1, 2014;
References to “fiscal year 2012” or “fiscal 2012” refer to the fiscal year ended February 2, 2013.
Fiscal years 20142016, 2015 and 20132014 consisted of a 52-week period. (D) Sources and Uses of Liquidity: The Company’s sources of liquidity are cash and cash equivalents, cash flows from operations, if any, borrowings available under the Revolving Credit Facility and the Company’s ability to access capital markets. The Company’s primary cash needs are capital expenditures for new stores and related leasehold improvements, meeting debt service requirements, paying amounts due under the Tax Receivable Agreement and funding working capital requirements. F-8
During fiscal 2015 and fiscal 2016, the Company has made significant strategic decisions and investments to reset and support the future growth of the Vince brand. Management believes these significant investments are essential to the commitment to developing a strong foundation from which the Company can drive consistent profitable growth for the long term. In order to enhance the Company’s liquidity position in support of these investments, the Company performed the following actions: During the three months ended April 30, 2016, the Company completed a rights offering and related Investment Agreement transactions, issuing an aggregate of 11,818,181 shares of its common stock for total gross proceeds of $65,000. See Note 12 “Related Party Transactions” for additional details. The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year including accrued interest, totaling $22,262 (see Note 12 “Related Party Transactions” for additional details), and (2) repay all then outstanding indebtedness, totaling $20,000, under the Revolving Credit Facility, allowing full borrowing capacity under this facility at that time. To provide the Company with greater flexibility on certain debt covenants while it was executing brand reset strategies, the Company retained approximately $21,000 of proceeds from the rights offering discussed above at Vince Holding Corp. to be utilized in the event a Specified Equity Contribution (as defined under the Term Loan Facility) was required under the Term Loan Facility. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. Any amounts contributed from Vince Holding Corp. as a Specified Equity Contribution can then be utilized for normal operating needs. During April 2017, the Company utilized $6,241 of the funds held by Vince Holding Corp. to make a Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00. As of April 28, 2017, Vince Holding Corp. retains $15,196 of funds and management anticipates it will be necessary to make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of April 29, 2017, utilizing a portion of this retained cash. In order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with Bank of America, as administrative agent and collateral agent under the Revolving Credit Facility to temporarily modify certain covenants. On April 14, 2017, the Letter was amended and restated to further increase borrowing flexibility through July 31, 2017 and allow the Company to borrow against a portion of the cash retained at Vince Holding Corp. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. In accordance with the new accounting guidance that became effective for the Company’s fiscal year ended January 28, 2017 (see (T) Recent Accounting Pronouncements below for further details), management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation does not initially consider the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. In performing this initial evaluation, management concluded that the following conditions raise substantial doubt about the Company’s ability to meet its financial obligations, specifically its ability to comply with the Consolidated Net Total Leverage Ratio under the Term Loan Facility. Since fiscal 2015, the Company has undertaken the task to reset the brand during a challenging retail environment, making strategic decisions and investments which had a cost to the short-term results but were necessary for the long-term sustainability of the Vince brand. The Company raised $65,000 under the Rights Offering, which was completed in anticipation of the difficulty of these undertakings. During fiscal 2016, the Company’s sales results did not meet expectations. Management’s future projections consider the uncertainty of trends in the retail environment in which the Company operates and anticipate that the Company will make an additional Specified Equity Contribution in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility for the first fiscal quarter of 2017. Beyond the first fiscal quarter, scenarios, including those beyond our control, could develop that include unanticipated declines in sales and operating results requiring additional Specified Equity Contributions. Although the Company would have cash retained by Vince Holding Corp. to make additional contributions, there are limits on the number of contributions that can be made in any four fiscal quarter period and fiscalthere is a limit on the amount of cash that has been retained for the purpose of making Specified Equity Contributions. Understanding the difficulties to project the current retail environment, the historical sales performance of the Company and as management’s plans to mitigate the substantial doubt have not been fully executed, management has therefore concluded there is substantial doubt about the Company’s ability to continue as a going concern within one year 2012 consistedafter the date that the financial statements are issued. Management cannot predict with certainty the impact of various factors, including a 53-week period. challenging retail environment, on the Company’s business operations and financial results. Such impact could give rise to unanticipated capital needs that we may not be able to meet and/or result in our inability to service our existing debt or comply with the covenants therein. OurF-9
(D)inability to comply with such covenants could result in the amounts outstanding under our debt to become immediately due and we might not be able to meet such payment obligations.
As mitigating plans, management has had discussions with lenders and with the Company’s majority shareholder on additional financing options and actions to improve the capital structure of the Company. In addition, management believes it has the ability to pursue cost reduction initiatives in order to further improve the Company’s financial performance and benefit the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility. While management believes that each of these actions is reasonably possible of occurring if necessary and could alleviate the substantial doubt, none of these actions has been executed at the time of the filing of the Company’s financial statements and therefore cannot be considered as mitigating events under the accounting guidance. (E) Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates and assumptions may affect many items in the financial statements. Actual results could differ from estimates and assumptions in amounts that may be material to the consolidated financial statements. Significant estimates inherent in the preparation of the consolidated financial statements include accounts receivable allowances, customer returns, the realizability of inventory, reserves for contingencies, useful lives and impairments of long-lived tangible and intangible assets, and accounting for income taxes and related uncertain tax positions, and valuation of share-based compensation, among others. (E)(F) Cash and cash equivalents: equivalents: All demand deposits and highly liquid short-term deposits with original maturities of three months or less maintained under cash management activities are considered cash equivalents. The effect of foreign currency exchange rate fluctuations on cash and cash equivalents was not significant for fiscal 2014, fiscal 2013, or fiscal 2012.
(F)(G) Accounts Receivable and Concentration of Credit Risk: We maintainThe Company maintains an allowance for accounts receivable estimated to be uncollectible. The activity in this allowance for continuing operations is summarized as follows (in thousands).
| | | | | | | | | | | | | | | | 2014 | | | 2013 | | | 2012 | | Balance, beginning of year | | $ | 353 | | | $ | 279 | | | $ | 450 | | Provisions for bad debt expense | | | 168 | | | | 249 | | | | 314 | | Bad debts written off | | | (142 | ) | | | (175 | ) | | | (485 | ) | | | | | | | | | | | | | | Balance, end of year | | $ | 379 | | | $ | 353 | | | $ | 279 | | | | | | | | | | | | | | |
The provision for bad debts is included in selling, general and administrative expense. Substantially all of ourthe Company’s trade receivables are derived from sales to retailers and are recorded at the invoiced amount and do not bear interest. We performThe Company performs ongoing credit evaluations of ourits wholesale partners’ financial condition and requirerequires collateral as deemed necessary. The past due status of a receivable is based on its contractual terms. Account balances are charged off against the allowance when we believeit is probable the receivable will not be collected. Accounts receivable are recorded net of allowances forincluding expected future chargebacks and margin support from wholesale partners.partners and estimated margin support. It is the nature of the apparel and fashion industry that suppliers like ussimilar to the Company face significant pressure from customers in the retail industry to provide allowances to compensate for wholesale partner margin shortfalls. This pressure often takes the form of customers requiring usthe Company to provide price concessions on prior shipments as a prerequisite for obtaining future orders. Pressure for these concessions is largely determined by overall retail sales performance and, more specifically, the performance of ourthe Company’s products at retail. To the extent ourthe Company’s wholesale partners have more of ourthe Company’s goods on hand at the end of the season, there will be greater pressure for usthe Company to grant markdown concessions on prior shipments. Our accountsAccounts receivable balances are reported net of expected allowances for these matters based on the historical level of concessions required and our estimates of the level of markdowns and allowances that will be required in the coming season in order to collect the receivables. We evaluateseason. The Company evaluates the allowance balances on a continual basis and adjustadjusts them as necessary to reflect changes in anticipated allowance activity. WeThe Company also provideprovides an allowance for sales returns based on known trends and historical return rates. In fiscal 2016, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 19.6%, 14.4% and 10.8% of fiscal 2016 net sales. In fiscal 2015, sales to three wholesale partners each accounted for more than ten percent of the Company’s net sales. These sales represented 18.3%, 13.8% and 10.8% of fiscal 2015 net sales. In fiscal 2014, sales to three wholesale partners each accounted for more than ten percent of ourthe Company’s net sales from continuing operations.sales. These sales represented 23.2%, 13.2% and 12.3% of fiscal 2014 net sales. In fiscal 2013, sales to three Three wholesale partners each accounted for morerepresented greater than ten percent of our net sales from continuing operations. These sales represented 19.8%, 12.8% and 12.8%the Company’s gross accounts receivable balance as of fiscal 2013 net sales. In fiscal 2012, sales to threeJanuary 28, 2017, with a corresponding aggregate total of 57.5% of such balance. Three wholesale partners each accounted for morerepresented greater than ten percent of our net sales from continuing operations. These sales represented 21.4%, 15.5% and 14.3% of fiscal 2012 net sales.
In fiscal 2014 accounts receivable from four wholesale partners each accounted for more than ten percent of ourthe Company’s gross accounts receivable in continuing operations. These receivables represented 24.5%, 13.8%, 12.7% and 11.4%as of fiscal 2014 gross accounts receivable. In fiscal 2013, accounts receivable from three wholesale partners each accounted for more than ten percentJanuary 30, 2016, with a corresponding aggregate total of our gross accounts receivable in continuing operations. These receivables represented 25.7%, 24.8% and 13.4%51.8% of fiscal 2013 gross accounts receivable.such balance.
(G)(H) Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. The cost of inventory includes manufacturing or purchase cost as well as sourcing, transportation, duty and other processing costs associated with acquiring, importing and preparing inventory for sale. Inventory costs are included in cost of products sold at the time of their sale. Product development costs are expensed in selling, general and administrative expense when incurred. Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost.
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Inventories of continuing operations consistconsisted of the following (in thousands).following: | | | | | | | | | | | | January 31,
2015 | | | February 1,
2014 | | Finished goods | | $ | 37,395 | | | $ | 32,946 | | Work in process | | | — | | | | 98 | | Raw materials | | | 24 | | | | 912 | | | | | | | | | | | Total inventories, net | | | 37,419 | | | | 33,956 | | | | | | | | | | | Net of reserves of: | | $ | 6,471 | | | $ | 3,929 | | | | | | | | | | |
| | January 28, | | | January 30, | | (in thousands) | | 2017 | | | 2016 | | Finished goods | | $ | 40,771 | | | $ | 49,837 | | Less: reserves | | | (2,242 | ) | | | (13,261 | ) | Total inventories, net | | $ | 38,529 | | | $ | 36,576 | |
(H)
As of January 30, 2016, the reserve included a provision to reduce the carrying value of certain excess inventory and aged product to estimated net realizable value, as during fiscal 2015 the Company recorded a net charge of $10,300 associated with inventory that no longer supported the Company's prospective brand positioning strategy. (I) Property Plant and Equipment: Property plant and equipment are stated at cost. Depreciation is computed on the straight-line method over estimated useful lives of 3three to 10seven years for furniture, fixtures, and computer equipment. Leasehold improvements are amortizeddepreciated on the straight-line basis over the shorter of their estimated useful lives or the remaining lease term, excluding renewal terms. Capitalized software is amortizeddepreciated on the straight-line basis over the estimated economic useful life of the software, generally three to fiveseven years. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings. Property and equipment consisted of the following: | | January 28, | | | January 30, | | (in thousands) | | 2017 | | | 2016 | | Leasehold improvements | | $ | 41,214 | | | $ | 38,452 | | Furniture, fixtures and equipment | | | 12,267 | | | | 8,236 | | Capitalized software | | | 10,862 | | | | 1,764 | | Construction in process | | | 236 | | | | 4,716 | | Total property and equipment | | | 64,579 | | | | 53,168 | | Less: accumulated depreciation | | | (21,634 | ) | | | (15,399 | ) | Property and equipment, net | | $ | 42,945 | | | $ | 37,769 | |
Depreciation expense related to continuing operations was $4,668, $2,186$7,070, $6,426 and $1,411$3,381 for fiscal 2014, 20132016, fiscal 2015 and 2012,fiscal 2014, respectively. (I)(J) Impairment of Long-lived Assets: We reviewThe Company reviews long-lived assets with a finite life for existence of facts and circumstances which indicate that the useful life is shorter than previously estimated or that the carrying amount of such assets may not be recoverable from future operations based on undiscounted expected future cash flows. Impairment losses are then recognized in operating results to the extent discounted expected future cash flows are less than the carrying value of the asset. During fiscal 2016, the Company recorded non-cash asset impairment charges of $2,082 within Selling, general and administrative expenses in the Consolidated Statements of Operations, related to the impairment of certain retail stores with asset carrying values that were determined not to be recoverable and exceeded fair value. There were no significant impairment charges for continuing operations related to long-lived assets recorded in fiscal 2014,2015 and fiscal 2013 or fiscal 2012.2014.
(J)(K) Goodwill and Other Intangible Assets:Assets: Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. WeThe Company completed ourits annual impairment testing on ourits goodwill and indefinite-lived intangible assetsasset during the fourth quarters of fiscal 2014,2016, fiscal 20132015 and fiscal 2012.2014. Goodwill is not allocated to ourthe Company’s operating segments in the measure of segment assets regularly reported to and used by management, however goodwill is allocated to operating segments (goodwill reporting units) for the sole purpose of the annual impairment test for goodwill.
Goodwill represents the excess of the cost of acquired businesses over the fair market value of the identifiable net assets. Indefinite-livedThe indefinite-lived intangible assets are primarily company-owned trademarks. Asasset is the Vince tradename.acquisition by Kellwood Company of the net assets of Vince occurred prior to the current requirements of ASC Topic 805 Business Combinations, the additional purchase consideration paid to the former owners of Vince subsequent to the acquisition date was recorded as an addition to the purchase price, and therefore goodwill, once determined.
In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the Intangibles-Goodwill and Other topic of Accounting Standards Codification (“ASC”). Under this amendment, anAn entity may elect to perform a qualitative impairment assessment for goodwill.goodwill and indefinite-lived intangible assets. If adverse qualitative trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, a quantitative impairment test is required. “Step one” of thisthe quantitative impairment test for goodwill requires thatan entity to determine the fair value of each reporting unit and compare such fair value to the respective carrying amount. If the estimated fair value of the reporting unit be estimatedexceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and comparedthe Company is not required to its carrying amount.perform further testing. If the carrying amount of the reporting unit exceeds theits estimated fair value, of the asset, “step two” of the impairment test is performed in order to calculate
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determine the amount of the impairment loss. An“Step two” of the goodwill impairment test includes valuing the tangible and intangible assets of the impaired reporting unit based on the fair value determined in “step one” and calculating the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities. The goodwill impairment test is dependent on a number of factors, including estimates of future growth, profitability and cash flows, discount rates and other variables. The Company bases its estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company estimates the fair value of the tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology. This methodology assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. The relief from royalty approach is dependent on a number of factors, including estimates of future growth, royalty rates in the category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the tradename intangible asset is recognized to the extentless than the carrying amount of the reporting unit exceeds the implied fair value. An entity may pass on performing the qualitative assessment for a reporting unit or indefinite-lived intangible asset and directly perform “step one” of the quantitative assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this amendment during fiscal year 2012. In fiscal 2016, a quantitative impairment test on goodwill determined that the fair value of its Direct-to-consumer reporting unit was below its carrying value. During fiscal 2016, the sales results within the Direct-to-consumer reporting unit were impacted by continued declines in average order values as well as declines in the number of transactions due to lower conversion rates and reduced traffic and as a result, the Direct-to-consumer reporting unit has not met expectations resulting in lower current and expected future cash flows. The Company estimated the fair value of its Direct-to-consumer reporting unit using both the income and market valuation approaches, with a weighting of 80% and 20%, respectively. “Step one” of the assessment determined that the fair value of the Direct-to-consumer reporting unit was below the carrying amount by approximately 40%. Accordingly, “step two” of the assessment was performed, which compared the implied fair value of the goodwill to the carrying value of such goodwill. Based on the results from “step two,” the Company recorded a goodwill impairment charge of $22,311, to write-off all of the goodwill in the Direct-to-consumer reporting unit. The charge was recorded in Impairment of goodwill and indefinite-lived intangible asset in the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016. Additionally, the results of “step one” of the assessment determined that the fair value of the Wholesale reporting unit exceeded its fair value by approximately 40% and therefore did not result in any impairment of goodwill. However, further declines in the net sales or operating results of the Wholesale reporting unit may result in a partial or full impairment of its goodwill, which amounted to $41,435 as of January 28, 2017. Significant assumptions utilized in the discounted cash flow analysis included a discount rate of 16.0%. Significant assumptions utilized in a market-based approach were market multiples ranging from 0.50x to 0.90x for the Company’s reporting units. In fiscal 2015, the Company elected to perform a quantitative impairment test on goodwill. The results of the quantitative test did not result in any impairment of goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. As such, the Company was not required to perform “step two” of the impairment test. In fiscal 2014, 2013 and fiscal 2012, we performedthe Company elected to perform a qualitative assessment on the goodwill and determined that it was not more likely than not that the carrying value of the reporting unit was greater than the fair value. As such, we werethe Company was not required to perform “step two” of the impairment test. In July 2012,fiscal 2016, a quantitative assessment of the FASB issued Accounting Standards Update No. 2012-02, Intangibles—GoodwillCompany’s indefinite-lived intangible asset, which consists of the Vince tradename, determined that the fair value of its tradename intangible asset was below its carrying value. During fiscal 2016, the Company’s sales results have not met expectations resulting in lower current and Other (Topic 350): Testing Indefinite Lived Assetsexpected future cash flows. The Company estimated the fair value of its tradename intangible asset using a discounted cash flow valuation analysis, which is based on the “relief from royalty” methodology and determined that the fair value of the tradename intangible asset was below the carrying amount by approximately 30%. Accordingly, the Company recorded an impairment charge for its tradename intangible asset of $30,750, which was recorded in Impairment (“ASU 2012-02”). Under this amendment, an entity may elect of goodwill and indefinite-lived intangible asset in the Consolidated Statements of Operations, during the fourth quarter of fiscal 2016. In fiscal 2015, the Company elected to perform a qualitativequantitative assessment on its tradename intangible assets. The results of the quantitative test did not result in any impairment assessment for indefinite-lived intangible assets similar tobecause the goodwill impairment testing guidance discussed above. An entity may pass on performingfair value of the qualitative assessment for an indefinite-livedCompany’s tradename intangible asset and directly perform “step one” of the assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods. The amendment is effective for annual and interim impairment tests for indefinite-lived intangible assets performed for fiscal years beginning after September 15, 2012. We early adopted this amendment during fiscal 2012.
exceeded its carrying value. In fiscal 2014, 2013 and fiscal 2012, wethe Company elected to perform a qualitative assessment on indefinite-livedits tradename intangible assets and determined that it was not more likely than not that the carrying value of the assets exceeded the fair value, as such we were not required to perform “step two” of the impairment test.value. Determining the fair value of goodwill and other intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is possible that estimates of future operating results could change adversely and impact the evaluation of the recoverability of the carrying value of goodwill and intangible assets and that the effect of such changes could be material. Definite-lived intangible assets are comprised of customer relationships and are being amortized on a straight-line basis over their useful lives of 20 years. F-12
See Note 42 “Goodwill and Intangible Assets” for more information on the details surrounding goodwill and intangible assets. (K)(L) Deferred Financing Costs: Deferred financing costs, such as underwriting, financial advisory, professional fees, and other similar fees are capitalized and recognized in interest expense over the contractual life of the related debt instrument using the straight-line method, as this method results in recognition of interest expense that is materially consistent with that of the effective interest method.
(L)(M) Deferred Rent and Deferred Lease Incentives: We leaseIncentives: The Company leases various office spaces, showrooms and retail stores. Many of these operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, we recognizethe Company recognizes the related rental expense on a straight-line basis over the life of the lease and recordrecords the difference between the amount charged to operations and amounts paid as deferred rent. Certain of ourthe Company’s retail store leases contain provisions for contingent rent, typically a percentage of retail sales once a predetermined threshold has been met. These amounts are expensed as incurred. Additionally, we receivedthe Company receives lease incentives in certain leases. These allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense.
(M)(N) Revenue Recognition: Sales are recognized when goods are shipped in accordance with customer orders for ourthe Company’s wholesale business, andupon receipt by the customer for the Company’s e-commerce businesses,business, and at the time of sale to the consumer for ourthe Company’s retail business. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales whenRevenue associated with gift cards is recognized upon redemption. For the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known to us. Accrued discounts, returns and allowances are included as an offset to accounts receivable in the Consolidated Balance Sheets for our wholesale business. The activity in the accrued discounts, returns and allowances account for continuing operations is summarized as follows (in thousands).
| | | | | | | | | | | | | | | | 2014 | | | 2013 | | | 2012 | | Balance, beginning of year | | $ | 9,265 | | | $ | 7,179 | | | $ | 4,347 | | Provision | | | 54,467 | | | | 39,171 | | | | 29,400 | | Utilization | | | (47,634 | ) | | | (37,085 | ) | | | (26,568 | ) | | | | | | | | | | | | | | Balance, end of year | | $ | 16,098 | | | $ | 9,265 | | | $ | 7,179 | | | | | | | | | | | | | | |
For ourCompany’s wholesale business, amounts billed to customers for shipping and handling costs are not significant. Our stated terms are FOB shipping point. There is no stated obligation to customers after shipment, other than specifically set forth allowances or discounts that are accrued at the time of sale. The rights of inspection or acceptance contained in certain sales agreements are limited to whether the goods received by ourthe Company’s wholesale partners are in conformance with the order specifications.
(N) Estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known. Accrued discounts, returns and allowances are included as an offset to accounts receivable in the Consolidated Balance Sheets for the Company’s wholesale business.
(O) Cost of Products Sold: OurSold: The Company’s cost of products sold and gross margins may not necessarily be comparable to that of other entities as a result of different practices in categorizing costs. The primary components of ourthe Company’s cost of products sold are as follows: the cost of purchased merchandise, including raw materials; the cost of inbound transportation, including freight; the cost of ourthe Company’s production and sourcing departments; other processing costs associated with acquiring and preparing the inventory for sale as charged by Kellwood Company, LLC as part of the Shared Services Agreement;sale; and shrink and valuation reserves. (O)(P) Marketing and Advertising: We provideThe Company provides cooperative advertising allowances to certain of ourits customers. These allowances are accounted for as reductions in sales as discussed in “Revenue Recognition” above. Production expense related to company-directed advertising is deferred until the first time at which the advertisement runs. Communication expenseAll other expenses related to company-directed advertising isare expensed as incurred.
Marketing and advertising expense recorded in selling, general and administrative expenses for continuing operations was $7,427, $4,858,$8,156, $9,177 and $2,591$7,427 in fiscal 2014, 20132016, fiscal 2015 and 2012,fiscal 2014, respectively. At January 31, 201528, 2017 and February 1, 2014,January 30, 2016, deferred production expenses associated with company-directed advertising were $643$182 and $305,$416, respectively. (P)(Q) Share-Based Compensation: New, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock units, are measured at fair value and recognized as compensation expense, net of estimated forfeitures, over the requisite service period and is included as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations. Additionally, share-based awards granted to non-employees are expensed over the period in which the related services are rendered at their fair value, using the Black Scholes Pricing Model to determine fair value.
(R) Income Taxes: We accountThe Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. We determineThe Company assesses the appropriatenesslikelihood of the realization of deferred tax assets and adjusts the carrying amount of these deferred tax assets by a valuation allowances in accordance withallowance to the “moreextent the Company believes it more likely than not” recognition criteria. We recognizenot that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in F-13
the period such determination is made. The Company recognizes tax positions in the Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Accrued interest and penalties related to unrecognized tax benefits are included in income taxes in the Consolidated Statements of Operations. (Q)(S) Earnings Per Share: Basic net incomeearnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net incomeExcept when the effect would be anti-dilutive, diluted earnings (loss) per share is calculated similarly, but includes potential dilution frombased on the exerciseweighted average number of shares of common stock options for which future service is required as a condition to deliveroutstanding plus the underlying stock.dilutive effect of share-based awards calculated under the treasury stock method.
(R)(T) Recent Accounting Pronouncements
: In January 2015,2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items—Simplifying Income Statement Presentationguidance to simplify the accounting for goodwill impairment. The guidance removes “step two” of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by Eliminatingwhich a reporting unit’s carrying value exceeds its fair value, not to exceed the Conceptcarrying amount of Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. ASU 2015-01goodwill. The guidance is effective for fiscal years,interim and interim periods within thoseannual impairment tests in fiscal years beginning after December 15, 2015,2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company intends to early adopt this guidance on January 29, 2017. In November 2016, the FASB issued guidance that requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with earlycash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017 using a retrospective transition method to each period presented. Early adoption permitted. The standard primarily involves presentation and disclosure and, therefore,is permitted, including adoption in an interim period. This new guidance is not expected to have a material impact on our financial positionthe Company’s Consolidated Statement of Cash Flows. In August 2016, the FASB issued guidance which clarifies how companies present and results of operations. Note 2. The IPOclassify certain cash receipts and Restructuring Transactions
Initial Public Offering
On November 27, 2013, VHC completed an initial public offering (“IPO”) of 10,000,000 shares of VHC common stock at a public offering price of $20.00 per share. The selling stockholderscash payments in the offering sold an additional 1,500,000 sharesstatement of VHC common stockcash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017 and must be applied using a retrospective transition method to each period presented. The Company is currently evaluating the underwritersimpact of adopting this guidance on its Consolidated Statement of Cash Flows.
In March 2016, the FASB issued guidance regarding share-based compensation, to simplify the accounting for share-based payment transactions, including accounting for forfeitures, income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2016. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements. In February 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize right-of-use lease assets and lease liabilities on the balance sheet for those leases currently classified as operating leases. The guidance is required to be adopted retrospectively by restating all years presented in the IPO. SharesCompany’s financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of the Company’s common stock are listedadopting this guidance on the New York Stock Exchange under the ticker symbol “VNCE”. VHC received net proceeds of $177,000, after deducting underwriting discounts, commissions and offering expenses from its sale of shares in the IPO. The Company retained approximately $5,000 of such proceeds for general corporate purposes and used the remaining net proceeds, together with net borrowings under the Term Loan Facility (described under Note 7 “Long-Term Debt) to repay a promissory note (“the Kellwood Note Receivable”) issued to Kellwood Company, LLC in connection with the Restructuring Transactions (described below) which occurred immediately prior to the consummation of the IPO. Proceeds from the repayment of the Kellwood Note Receivable were used to repay or discharge certain existing debt of Kellwood Company.consolidated financial statements. In connection withNovember 2015, the IPO and the Restructuring Transactions described below, we separated the Vince and non-Vince businesses on November 27, 2013. Any and all debt obligations outstanding at the time of the transactions either remain with Kellwood Intermediate Holding, LLC and its subsidiaries (i.e. the non-Vince businesses) and/or were discharged, repurchased or refinanced. See information below for a summary of the Company’s Revolving Credit Facility and Term Loan Facility. Stock split
In connection with the IPO, VHC’s board of directors approved the conversion of all non-voting common stock into voting common stock on a one for one basis, and a 28.5177 for one split of its common stock. Accordingly, all references to share and per share information in all periods presented have been adjusted to reflect the stock split. The par value per share of common stock was changed to $0.01 per share.
Restructuring Transactions
The following transactions were consummated as part of the Restructuring Transactions:
Affiliates of Sun Capital contributed certain indebtedness under the Sun Term Loan Agreements as a capital contribution to Vince Holding Corp. (the “Additional Sun Capital Contribution”);
Vince Holding Corp. contributed such indebtedness to Kellwood Company as a capital contribution, at which time such indebtedness was cancelled;
Vince Intermediate Holding, LLC was formed and became a direct subsidiary of Vince Holding Corp.;
Kellwood Company, LLC (which was converted from Kellwood Company in connection with the Restructuring Transactions) was contributed to Vince Intermediate Holding, LLC;
Vince Holding Corp. and Vince Intermediate Holding, LLC entered into the Transfer Agreement with Kellwood Company, LLC;
Kellwood Company, LLC distributed 100% of Vince, LLC’s membership interests to Vince Intermediate Holding, LLC, whoFASB issued the Kellwood Note Receivable to Kellwood Company, LLC. Proceeds from the repayment of the Kellwood Note Receivable were used to, among other things, repay, discharge or repurchase indebtedness of Kellwood Company, LLC;
Kellwood Holding, LLC was formed by Vince Intermediate Holding, LLC and Vince Intermediate Holding, LLC, through a series of steps, contributed 100% of the membership interests of Kellwood Company, LLC to Kellwood Intermediate Holding, LLC (which was formed as a wholly-owned subsidiary of Kellwood Holding, LLC);
100% of the membership interests of Kellwood Holding, LLC were distributed to the Pre-IPO Stockholders;
Revolving Credit Facility—Vince, LLC entered into a new senior secured revolving credit facility. Bank of America, N.A. (“BofA”) serves as administrative agent under this new facility. This revolving credit facility provides for a revolving line of credit of up to $50,000;
Term Loan Facility—Vince, LLC and Vince Intermediate Holding, LLC entered into a new $175,000 senior secured term loan credit facility with the lenders party thereto, BofA, as administrative agent, J.P. Morgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers;
Shared Services Agreement—Vince, LLC entered into the Shared Services Agreement with Kellwood Company, LLC pursuant to which Kellwood Company, LLC provides support services to Vince, LLC in various operational areas including, among other things, distribution, logistics, information technology, accounts payable, credit and collections, and payroll and benefits;
Tax Receivable Agreement—The Company entered into the Tax Receivable Agreement with its stockholders immediately prior to the consummation of the Restructuring Transactions (the “Pre-IPO Stockholders”). The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by the Company and its subsidiaries from the utilization of certain tax benefits (including net operating losses and tax credits generated prior to the IPO and certain section 197 intangible deductions); and
The conversion of all of our issued and outstanding non-voting common stock into common stock on a one-for-one basis and the subsequent stock split of our common stock on a 28.5177 for one basis, at which time Apparel Holding Corp. became Vince Holding Corp.
As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business, and the Pre-IPO Stockholders (through their ownership of Kellwood Holding, LLC) retained the full ownership and control of the non-Vince businesses. The Vince business is now the sole operating business of Vince Holding Corp., with the Pre-IPO stockholders retaining approximately a 68% ownership (calculated immediately after consummation of the IPO).
Immediately after the consummation of the IPO and as described below, Vince Holding Corp. contributed the net proceeds from the IPO to Vince Intermediate Holding, LLC. Vince Intermediate Holding, LLC used such proceeds, less approximately $5,000 retained for general corporate purposes, and approximately $169,500 of net borrowings under its Term Loan Facility to immediately repay the Kellwood Note Receivable. There was no outstanding balanceguidance on the Kellwood Note Receivable after giving effectbalance sheet classification of deferred taxes, which requires entities to such repayment. Proceeds from the repayment of the Kellwood Note Receivable were used to (i) repay, discharge or repurchase indebtedness of Kellwood Company, LLC in connection with the closing of the IPO (including approximately $9,100 of accrued and unpaid interest on such indebtedness), and (ii) pay (A) the restructuring fee payable to Sun Capital Management and (B) the debt recovery bonus payable to our Chief Executive Officer, all after giving effect to the Additional Sun Capital Contribution. The Kellwood Note Receivable did not include amounts outstanding under the Wells Fargo Facility. Kellwood Company, LLC refinanced the Wells Fargo Facility in connection with the consummation of the IPO. Neither Vince Holding Corp. nor Vince, LLC guarantee or are a borrower party to the refinanced credit facility.
Kellwood Company, LLC used the proceeds from the repayment of the Kellwood Note Receivable to, after giving effect to the Additional Sun Capital Contribution, (i) repay, at closing, all indebtedness outstanding under (A) the Cerberus Term Loan and (B) the Sun Term Loan Agreements, (ii) redeem at par all of the 12.875% Notes, pursuant to an unconditional redemption notice issued at the closing of the IPO, plus, with respect to clauses (i) and (ii), fees, expenses and accrued and unpaid interest thereon, (iii) pay a restructuring fee equal to $3,300 to Sun Capital Management pursuant to the Management Services Agreement, and (iv) pay a debt recovery bonus to our Chief Executive Officer.
In addition, Kellwood Company conducted a tender offer for all of its outstanding 7.625% Notes, at par plus accrued and unpaid interest thereon, using proceeds from the repayment of the Kellwood Note Receivable. On November 27, 2013, in connection with the closing of the IPO and as an early settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) approximately $33,474 in aggregate principal amount of the 7.625% Notes. On December 12, 2013, as part of the final settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) an additional $4,670 in aggregate principal amount of the 7.625% Notes. After giving effect to these settlements, approximately $48,808 of the 7.625% Notes remain issued and outstanding; provided, that neither VHC, nor Vince Intermediate nor Vince, LLC are a guarantor or obligor of such notes.
In addition, Kellwood Company, LLC refinanced the Wells Fargo Facility (as defined below), to among other things, remove Vince, LLC as an obligor thereunder.
After completion of these various transactions (including the Additional Sun Capital Contribution) and payments and application of the net proceeds from the repayment of the Kellwood Note Receivable, Vince, LLC’s obligations under the Wells Fargo Facility, the Cerberus Term Loan, the Sun Term Loan Agreements and the 12.875% Notes were terminated or discharged. Neither VHC, nor Vince Intermediate Holding, LLC nor Vince, LLC is a guarantor or obligor of the 7.625% Notes or the refinanced Wells Fargo Facility. Thereafter, VHC is not responsible for the obligations described above and the only outstanding obligations of Vince Holding Corp. and its subsidiaries immediately after the consummation of the IPO is $175,000 outstanding under our new Term Loan Facility.
Note 3. Discontinued Operations
On November 27, 2013, in connection with the IPO and Restructuring Transactions, we separated the Vince and non-Vince businesses whereby the non-Vince business is now owned by Kellwood Holding, LLC, of which 100% of the membership interests are owned by the Pre-IPO Stockholders. In connection with the Restructuring Transactions, the Company issued the Kellwood Note Receivable to Kellwood Company, LLC, in the amount of $341,500, which was immediately repaid with proceeds from the IPO and borrowings under the new term loan facility. There was no remaining balance on the Kellwood Note Receivable after such repayment. Proceeds from the repayment of the Kellwood Note Receivable were used by Kellwood to (i) repay, discharge or repurchase indebtedness of Kellwood Company, LLC (including approximately $9,100 of accrued and unpaid interest on such indebtedness), and (ii) pay (A) the restructuring fee payable to Sun Capital Management and (B) the debt recovery bonus payable to our Chief Executive Officer.
As the Company and Kellwood Holding, LLC are under the common control of affiliates of Sun Capital, this separation transaction resulted in a $73,081 adjustment to additional paid in capital on our Consolidated Balance Sheet at February 1, 2014.
As a result of the separation with the non-Vince businesses, the financial results of the non-Vince businesses, through the separation date of November 27, 2013, are now included in results from discontinued operations. The non-Vince businesses continue to operate as a stand-alone company. Due to differences in the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of the non-Vince businesses included within discontinued operations of the Company may not be indicative of actual financial results of the non-Vince businesses as a stand-alone company.
On November 27, 2013, we entered into a Shared Services agreement with Kellwood pursuant to which Kellwood provides support services in various operational areas as further discussed in Note 15. Other than the payments for services provided under this agreement, we do not expect any future cash flows related to the non-Vince business.
The results of the non-Vince businesses included in discontinued operations (through the separation of the non-Vince businesses on November 27, 2013) for the fiscal years ended February 1, 2014 and February 2, 2013 are summarized in the following table (in thousands).
| | | | | | | | | | | | Fiscal Year | | | | | 2013 | | | 2012 | | Net sales | | $ | 400,848 | | | $ | 514,806 | | Cost of products sold | | | 313,620 | | | | 409,763 | | | | | | | | | | | Gross profit | | | 87,228 | | | | 105,043 | | Selling, general and administrative expenses | | | 98,016 | | | | 132,871 | | Restructuring, environmental and other charges | | | 1,628 | | | | 5,732 | | Impairment of long-lived assets | | | 1,399 | | | | 6,497 | | Change in fair value of contingent consideration | | | 1,473 | | | | (7,162 | ) | Interest expense, net | | | 46,677 | | | | 55,316 | | Other expense, net | | | 498 | | | | (9,776 | ) | | | | | | | | | | Loss before income taxes | | | (62,463 | ) | | | (78,435 | ) | Income taxes | | | (11,648 | ) | | | (421 | ) | | | | | | | | | | Net loss from discontinued operations, net of taxes | | $ | (50,815 | ) | | $ | (78,014 | ) | | | | | | | | | | Effective tax rate | | | 18.6 | % | | | 0.5 | % | | | | | | | | | |
The fiscal 2013 effective tax rate for discontinued operations differs from the U.S. statutory rate of 35% primarily due to the release of valuation allowance. The release in valuation allowance is primarily due to the allocation of the disallowed tax loss on the sale of a trademark to intangible assets with indefinite lives resulting in fewer deferred tax liabilities that cannot be offset againstclassify deferred tax assets for valuation allowance purposes.
The fiscal 2012 effective tax rate for discontinued operations differ from the U.S. statutory rate of 35% primarily due to a full valuation allowance on current year deferred tax assets offset in part by state taxes.
At February 1, 2014, there are no remaining assets orand liabilities of the non-Vince businesses reflectedas noncurrent in the consolidated balance sheet. Currently, deferred tax assets and liabilities must be classified as current or noncurrent amounts in the consolidated balance sheet. This guidance is effective for financial statements issued for interim and annual periods beginning after December 15, 2016. The guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company will reclassify deferred tax balances, as required.
Financing arrangementsIn July 2015, the FASB issued new guidance on accounting for inventory, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued new guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the non-Vince business Short-term borrowings represent borrowings underarrangement consistent with the Wells Fargo Facility (as defined herein),acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as amended. On October 19, 2011 Kellwood Company and certain of its domestic subsidiaries, as borrowers,a service contract. This guidance became effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. The Company adopted this accounting guidance for any contracts entered into or materially modified after January 30, 2016. The adoption of this guidance did not have a credit agreement with Wells Fargo Bank, National Association,material effect on the Company’s consolidated financial statements.
In August 2014, the FASB issued new guidance which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as agent,a going concern within one year after F-14
the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company’s annual period ended January 28, 2017. In May 2014, the FASB issued new guidance on revenue recognition accounting, which requires entities to recognize revenue when promised goods or services are transferred to customers and lenders from timein an amount that reflects the consideration to time (the “Wells Fargo Facility”). The Wells Fargo Facility provided a non-amortizing senior revolving credit facility with aggregate lending commitments of $160,000, of which $5,000 was permanently extinguished during fiscal 2012. The amount which the borrowers could borrow was determined onentity expects to be entitled in exchange for those goods or services. Since its issuance, the basis of a borrowing base formula, and borrowings were secured by a first-priority security interest in substantially allFASB has amended several aspects of the assetsnew guidance. In August 2015, the FASB elected to defer the effective dates for this guidance, which is now effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the borrowers, including the assets of Vince, LLC. Borrowings bore interest at a rate per annum equal to an applicable margin (generally 1.25%-1.75% per annum at the borrowers’ election, LIBOR or a Base Rate (as defined in the Wells Fargo Facility)). On November 27, 2013, in connection with the consummationadoption of the IPO and Restructuring Transactions, the Wells Fargo Facility was amended and restated in accordance withnew guidance on its terms. After such amendment and restatement, neither VHC nor any of its subsidiaries have any obligations thereunder.consolidated financial statements. Cerberus Term Loan
On October 19, 2011, Kellwood Company and certain of its domestic subsidiaries, as borrowers (the “Cerberus Borrowers”), entered into a term loan agreement (the “Term Loan Agreement”), as amended, with
Cerberus Business Finance, LLC (the “Agent”), as agent and the lenders from time to time party thereto. The Term Loan Agreement provided the Cerberus Borrowers with a non-amortizing secured Cerberus Term Loan in an aggregate amount of $55,000 (the “Cerberus Term Loan”), of which $10,000 was repaid during fiscal 2012. All borrowings under the Cerberus Term Loan bore interest at a rate per annum equal to an applicable margin (10.25%-11.25% per annum for LIBOR Rate Loans (as defined in the Term Loan Agreement) and 7.75%-8.75% for Reference Rate Loans (as defined in the Term Loan Agreement)) plus, at the Cerberus Borrowers’ election, LIBOR or a Reference Rate as defined in the Term Loan Agreement. The agreement also provided for a portion of such interest equal to 1% per annum to be paid-in-kind and added to the principal amount of such term loans. The Cerberus Term Loan was secured by a security interest in substantially all of the assets of the Cerberus Borrowers, including Vince, LLC. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the Cerberus Term Loan was repaid with the proceeds from the repayment of the Kellwood Note Receivable, as such neither VHC nor any of its subsidiaries have any obligations thereunder.
Sun Term Loan Agreements
Since fiscal year 2009, Kellwood Company and certain of its domestic subsidiaries, as borrowers (the “Sun Term Loan Borrowers”), entered into various term loan agreements (“Sun Term Loan Agreements”) with affiliates of Sun Capital, as lenders, and Sun Kellwood Finance, as collateral agent. The Sun Term Loan Agreements were secured by a security interest in substantially all of the assets of the Sun Term Loan Borrowers, which included the assets of Vince, LLC, which security interest was contractually subordinated to the security interests of the lenders under the Wells Fargo Facility and the Cerberus Term Loan. These term loans bore interest at a rate per annum of 5.0%-6.0% paid-in-kind and added to the principal amounts of such term loans. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the Sun Term Loan Agreements were discharged through (i) the application of the Kellwood Note Receivable proceeds and (ii) capital contributions by Sun Capital affiliates, as such neither VHC nor any of its subsidiaries have any obligations thereunder.
12.875% Notes
Interest on the 12.875% 2009 Debentures due December 31, 2014 of Kellwood Company (the “12.875% Notes”) was paid (a) in cash at a rate of 7.875% per annum payable in January and July; and (b) in the form of PIK interest at a rate of 5.0% per annum (“PIK Interest”) payable either by increasing the principal amount of the outstanding 12.875% Notes, or by issuing additional 12.875% Notes with a principal amount equal to the PIK Interest accrued for the interest period. The 12.875% Notes were guaranteed by various of Kellwood Company’s subsidiaries on a secured basis (including the assets of Vince, LLC), which security interest was contractually subordinated to security interests of lenders under the Wells Fargo Facility, the Cerberus Term Loan and the Sun Term Loan Agreements. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the 12.875% Notes were redeemed with proceeds from the repayment of the Kellwood Note Receivable, at which time VHC and all subsidiaries were released as a guarantor and the obligations under the indenture were satisfied and discharged.
7.625% Notes
Interest on the 7.625% 1997 Debentures due October 15, 2017 of Kellwood Company (the “7.625% Notes”) was payable in cash at a rate of 7.625% per annum in April and October. On November 27, 2013, in connection with the closing of the IPO and as an early settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) approximately $33,474 in aggregate principal amount of the 7.625% Notes. On December 12, 2013, as part of the final settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) an additional $4,670 in aggregate principal amount of the 7.625% Notes. After giving effect to these settlements, approximately $48,809 of the 7.625% Notes remain issued and outstanding; provided, that neither VHC nor its subsidiaries are a guarantor or obligor of such notes.
Note 4.2. Goodwill and Intangible Assets GoodwillNet goodwill balances and changes therein subsequent to the February 2, 2013 Consolidated Balance Sheet areby segment were as follows (in thousands).follows:
| | | | | | | | | | | | | | | | Gross Goodwill | | | Accumulated
Impairment | | | Net Goodwill | | Balance as of February 2, 2013 | | $ | 110,688 | | | $ | (46,942 | ) | | $ | 63,746 | | | | | | | �� | | | | | | | | Balance as of February 1, 2014 | | $ | 110,688 | | | $ | (46,942 | ) | | $ | 63,746 | | | | | | | | | | | | | | | Balance as of January 31, 2015 | | $ | 110,688 | | | $ | (46,942 | ) | | $ | 63,746 | | | | | | | | | | | | | | |
(in thousands) | | Wholesale | | | Direct-to-consumer | | | Total Net Goodwill | | Balance as of January 31, 2015 | | $ | 41,435 | | | $ | 22,311 | | | $ | 63,746 | | Balance as of January 30, 2016 | | | 41,435 | | | | 22,311 | | | | 63,746 | | Impairment charge | | | — | | | | (22,311 | ) | | | (22,311 | ) | Balance as of January 28, 2017 | | $ | 41,435 | | | $ | — | | | $ | 41,435 | |
Identifiable
The total carrying amount of goodwill was net of accumulated impairments of $69,253, $46,942 and $46,942 as of January 28, 2017, January 30, 2016 and January 31, 2015, respectively. During the fourth quarter of fiscal 2016, the Company recorded a $22,311 goodwill impairment charge as a result of the Company’s annual goodwill impairment test. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (K) Goodwill and Other Intangible Assets” for additional details. There were no impairments recorded as a result of the Company’s annual goodwill impairment test performed during fiscal 2015 and fiscal 2014. The following tables present a summary of identifiable intangible assets summary (in thousands):assets: | | | | Gross Amount | | | Accumulated
Amortization | | | Net Book
Value | | | Balance as of February 1, 2014: | | | | | | | | (in thousands) | | | Gross Amount | | | Accumulated Amortization | | | Impairment Charge | | | Net Book Value | | Balance as of January 28, 2017 | | | | | | | | | | | | | | | | | | Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | | | Customer relationships | | $ | 11,970 | | | $ | (3,577 | ) | | $ | 8,393 | | | $ | 11,970 | | | $ | (5,372 | ) | | $ | — | | | $ | 6,598 | | Indefinite-lived intangible assets: | | | | | | | | Trademarks | | | 101,850 | | | | — | | | | 101,850 | | | | | | | | | | | | | | Indefinite-lived intangible asset: | | | | | | | | | | | | | | | | | | Tradename | | | | 101,850 | | | | — | | | | (30,750 | ) | | | 71,100 | | Total intangible assets | | $ | 113,820 | | | $ | (3,577 | ) | | $ | 110,243 | | | $ | 113,820 | | | $ | (5,372 | ) | | $ | (30,750 | ) | | $ | 77,698 | | | | | | | | | | | | | | | | | Gross Amount | | | Accumulated
Amortization | | | Net Book
Value | | | Balance as of January 31, 2015: | | | | | | | | Amortizable intangible assets: | | | | | | | | Customer relationships | | $ | 11,970 | | | $ | (4,176 | ) | | $ | 7,794 | | | Indefinite-lived intangible assets: | | | | | | | | Trademarks | | | 101,850 | | | | — | | | | 101,850 | | | | | | | | | | | | | | Total intangible assets | | $ | 113,820 | | | $ | (4,176 | ) | | $ | 109,644 | | | | | | | | | | | | | |
(in thousands) | | Gross Amount | | | Accumulated Amortization | | | Net Book Value | | Balance as of January 30, 2016 | | | | | | | | | | | | | Amortizable intangible assets: | | | | | | | | | | | | | Customer relationships | | $ | 11,970 | | | $ | (4,774 | ) | | $ | 7,196 | | Indefinite-lived intangible asset: | | | | | | | | | | | | | Tradename | | | 101,850 | | | | — | | | | 101,850 | | Total intangible assets | | $ | 113,820 | | | $ | (4,774 | ) | | $ | 109,046 | |
During the fourth quarter of fiscal 2016, the Company recorded a $30,750 impairment charge as a result of the Company’s quantitative assessment on its tradename intangible asset. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (K) Goodwill and Other Intangible Assets” for additional details. No impairments of the Vince tradename were recorded as a result of the Company’s annual asset impairment tests performed during fiscal 2015 and fiscal 2014. F-15
Amortization of identifiable intangible assets was $599, $599$598, $598 and $598$599 for fiscal 2014, 20132016, fiscal 2015 and 2012,fiscal 2014, respectively, which is included in selling,Selling, general and administrative expenses on the Consolidated Statements of Operations. Amortization expense for each of the fiscal years 20152017 to 20192021 is expected to be as follows (in thousands).follows: | | | | Future | | | | | Future
Amortization | | | 2015 | | $ | 598 | | | 2016 | | | 598 | | | (in thousands) | | | Amortization | | 2017 | | | 598 | | | $ | 598 | | 2018 | | | 598 | | | | 598 | | 2019 | | | 598 | | | | 598 | | | | | | | 2020 | | | | 598 | | 2021 | | | | 598 | | Total next 5 fiscal years | | $ | 2,990 | | | $ | 2,990 | | | | | | |
Identifiable indefinite-lived intangible assets represent the Vince trademark. No impairments of the Vince trademark were recorded as a result of our annual asset impairment tests during fiscal years 2014, 2013 or 2012. In fiscal 2014, 2013 and 2012, we performed the qualitative assessment on the Vince Trademark as allowed by the Intangible—Goodwill and Other Topic of ASC and determined that it was not more likely than not that the carrying value exceeded the fair value of the asset.
Additionally, there were no impairments recorded as a result of our annual goodwill impairment test during fiscal 2014, 2013 or 2012. In fiscal 2014, 2013 and 2012, we used a qualitative analysis to assess the goodwill and determined that it was not more likely than not that the fair value was less than the carrying value, as allowed by the Intangible—Goodwill and Other Topic of ASC.
Note 5.3. Fair Value Measurements ASCAccounting Standards Codification (“ASC”) Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance outlines a valuation framework, creates a fair value hierarchy to increase the consistency and comparability of fair value measurements and details the disclosures that are required for items measured at fair value. Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy as follows:
| | | Level 1— | | quoted market prices in active markets for identical assets or liabilities | | | | | Level 2— | | observable market-based inputs (quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active) or inputs that are corroborated by observable market data | | | | | Level 3— | | significant unobservable inputs that reflect ourthe Company’s assumptions and are not substantially supported by market data |
The Company did not have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at January 31, 201528, 2017 or February 1, 2014.January 30, 2016. At January 31, 201528, 2017 and February 1, 2014,January 30, 2016, the Company believes that the carrying valuevalues of cash and cash equivalents, receivables and accounts payable approximatesapproximate fair value, due to the shortshort-term maturity of these instruments. As theinstruments and would be measured using Level 1 inputs. The Company’s debt obligationobligations as of January 31, 2015 is28, 2017 are at variable interest rates there is no significant difference betweenand management estimates that the fair value and carrying value of the Company’s debt.outstanding debt obligations was approximately $48,000 based upon quoted prices in markets that are not active, which is considered a Level 2 input. The Company’s non-financial assets, which primarily consist of goodwill, intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at their carrying value.values. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and intangible assets), non-financial assets are assessed for impairment, and if applicable, written down to (and recorded at) fair value. The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in fiscal 2016, based on such fair value hierarchy: | | Net Carrying Value as of | | | Fair Value Measured and Recorded at Reporting Date Using: | | | Total Losses - Year Ended | | | (in thousands) | | January 28, 2017 | | | Level 1 | | | Level 2 | | | Level 3 | | | January 28, 2017 | | | Property and equipment | | $ | 1,042 | | | $ | — | | | $ | — | | | $ | 1,042 | | | $ | 2,082 | | (1) | Goodwill | | | 41,435 | | | | — | | | | — | | | | 41,435 | | | | 22,311 | | (2) | Tradename | | | 71,100 | | | | — | | | | — | | | | 71,100 | | | | 30,750 | | (2) |
(1) Recorded within Selling, general and administrative expenses on the Consolidated Statements of Operations. See Note 6.1 “Description of Business and Summary of Significant Accounting Policies – (I) Property and Equipment” for additional information. (2) Recorded within Impairment of goodwill and indefinite-lived intangible asset on the Consolidated Statements of Operations. See Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for additional details. F-16
Note 4. Long-Term Debt and Financing Arrangements Revolving CreditLong-term debt consisted of the following:
| | January 28, | | | January 30, | | (in thousands) | | 2017 | | | 2016 | | Term Loan Facility | | $ | 45,000 | | | $ | 45,000 | | Revolving Credit Facility | | | 5,200 | | | | 15,000 | | Total long-term debt principal | | | 50,200 | | | | 60,000 | | Less: Deferred financing costs | | | 1,902 | | | | 2,385 | | Total long-term debt | | $ | 48,298 | | | $ | 57,615 | |
Term Loan Facility On November 27, 2013, Vince, LLC entered into the Revolving Credit Facility in connection with the closing of the IPO and Restructuring Transactions.Transactions, Vince, LLC and Vince Intermediate Holding, LLC, a direct subsidiary of VHC and the direct parent company of Vince, LLC (“Vince Intermediate”), entered into a $175,000 senior secured term loan facility (as amended from time to time, the “Term Loan Facility”) with the lenders party thereto, Bank of America, N.A. (“BofA”) serves as administrative agent, JP Morgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and Cantor Fitzgerald as documentation agent. The Term Loan Facility will mature on November 27, 2019. Vince, LLC and Vince Intermediate are borrowers and VHC is a guarantor under the Term Loan Facility. The Term Loan Facility also provides for an incremental facility of up to the greater of $50,000 and an amount that would result in the consolidated net total secured leverage ratio not exceeding 3.00 to 1.00, in addition to certain other rights to refinance or repurchase portions of the term loan. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the Term Loan Facility (adjusted to reflect any prepayments), with the balance payable at final maturity. Interest is payable on loans under the Term Loan Facility at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00% based on a consolidated net total leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a consolidated net total leverage ratio. During the continuance of a payment or bankruptcy event of default, interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the non-default interest rate then applicable to base rate loans. The Term Loan Facility requires Vince, LLC and Vince Intermediate to make mandatory prepayments upon the occurrence of certain events, including additional debt issuances, common and preferred stock issuances, certain asset sales, and annual payments of 50% of excess cash flow, subject to reductions to 25% and 0% if Vince, LLC and Vince Intermediate maintain a Consolidated Net Total Leverage Ratio of 2.50 to 1.00 and 2.00 to 1.00, respectively, and subject to reductions for voluntary prepayments made during such fiscal year. The Term Loan Facility contains a requirement that Vince, LLC and Vince Intermediate maintain a “Consolidated Net Total Leverage Ratio” as of the last day of any period of four fiscal quarters not to exceed 3.25 to 1.00. The Term Loan Facility permits Vince Holding Corp. to make a Specified Equity Contribution, as defined under the Agreement, to the Borrowers in order to increase, dollar for dollar, Consolidated EBITDA for such fiscal quarter for the purposes of determining compliance with this facility.covenant at the end of such fiscal quarter and applicable subsequent periods provided that (a) in each four fiscal quarter period there shall be at least two fiscal quarters in which no Specified Equity Contribution is made; (b) no more than five Specified Equity Contributions shall be made in the aggregate during the term of the Agreement; and (c) the amount of any Specified Equity Contribution shall be no greater than the amount required to cause the Company to be in compliance with this covenant. In addition, the Term Loan Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of the Company’s business or its fiscal year, and distributions and dividends. The Term Loan Facility generally permits dividends to the extent that no default or event of default is continuing or would result from the contemplated dividend and the pro forma Consolidated Net Total Leverage Ratio after giving effect to such contemplated dividend is at least 0.25 lower than the maximum Consolidated Net Total Leverage Ratio for such quarter in an amount not to exceed the excess available amount, as defined in the loan agreement. All obligations under the Term Loan Facility are guaranteed by VHC and any future material domestic restricted subsidiaries of Vince, LLC and secured by a lien on substantially all of the assets of VHC, Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries. As of January 28, 2017, the Company was in compliance with applicable financial covenants. During April 2017, the Company utilized $6,241 of the funds held by VHC to make a Specified Equity Contribution, as defined under the Term Loan Facility, in connection with the calculation of the Consolidated Net Total Leverage Ratio under the Term Loan Facility as of January 28, 2017 so that the Consolidated Net Total Leverage Ratio would not exceed 3.25 to 1.00. F-17
Through January 28, 2017, on an inception to date basis, the Company has made voluntary prepayments totaling $130,000 in the aggregate on the original $175,000 Term Loan Facility entered into on November 27, 2013, with no such prepayments made during fiscal 2016. As of January 28, 2017, the Company had $45,000 of debt outstanding under the Term Loan Facility. Revolving Credit Facility On November 27, 2013, Vince, LLC entered into a $50,000 senior secured revolving credit facility (as amended from time to time, the “Revolving Credit Facility”) with BofA as administrative agent. Vince, LLC is the borrower and VHC and Vince Intermediate are the guarantors under the Revolving Credit Facility. On June 3, 2015, Vince LLC entered into a first amendment to the Revolving Credit Facility, provides forthat among other things, increased the aggregate commitments under the facility from $50,000 to $80,000, subject to a revolving lineloan cap which is the lesser of credit of up to $50,000(i) the Borrowing Base, as defined in the loan agreement, (ii) the aggregate commitments, or (iii) $70,000 until debt obligations under the Company’s term loan facility have been paid in full, and matures onextended the maturity date from November 27, 2018.2018 to June 3, 2020. The Revolving Credit Facility also provides for a letter of credit sublimit of $25,000 (plus any increase in aggregate commitments) and an accordion option that allows for an increase in aggregate commitments of up to $20,000. Vince, LLC is the borrower and VHC and Vince Intermediate Holding, LLC (“Vince Intermediate”) are the guarantors under the new Revolving Credit Facility. Interest is payable on the loans under the Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, withplus an applicable marginsmargin of 1.25% to 1.75% for LIBOR loans or 0.25% to 0.75% for Base Rate loans, and in each case subject to a pricing grid based on an average daily excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0%. During the continuance of an event of default and at the election of the required lender, interest will accrue at a rate of 2% in excess of the applicable non-default rate. The Revolving Credit Facility contains a requirementcovenant that, at any point when “Excess Availability” is less than the greater of (i) 15% percentof an adjusted loan cap (without giving effect to item (iii) of the loan cap described above) or (ii) $7,500,$10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, Vince, LLC must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000. We have$20,000 measured at the end of each applicable fiscal month for the trailing twelve-month period. As of January 28, 2017, the Company was not been subject to this maintenance requirement sincecovenant as Excess Availability has beenwas greater than the required minimum. Additionally, in order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into a side letter (the “Letter”) with BofA, as administrative agent and collateral agent under the Revolving Credit Facility which temporarily modified the covenant discussed above. The Letter provided that during the period from March 6, 2017 until and through April 30, 2017, the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” under the Revolving Credit Facility were temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety (the “Amended Letter”). The Amended Letter provides that during the period from April 13, 2017 until and through July 31, 2017 (the “Letter Period”), the respective thresholds included in the definitions of “Covenant Compliance Event” and “Trigger Event” in the Revolving Credit Facility continue to be temporarily modified to be the greater of (a) 12.5% of the Adjusted Loan Cap (as defined in the Revolving Credit Facility) and (b) $5,000. The Amended Letter further provides that during the Letter Period, so long as the Company’s cash is held in a deposit account of the Company maintained with BofA (the “BofA Account”), the Company may include in the Borrowing Base (i) up to $10,000 of such cash after April 13, 2017 through May 31, 2017 and (ii) up to $5,000 of such cash after May 31, 2017 through July 31, 2017. During the Letter Period, to the extent that the cash and cash equivalents held by the Loan Parties at the close of business on any given day exceeds $1,000 (excluding amounts in the BofA Account and certain other excluded accounts, as well as amounts equal to all undrawn checks and ACH issued in the ordinary course of business for payroll, rent and other accounts payable needs), Vince shall use any such cash in excess of $1,000 to repay the loans under the Revolving Credit Facility. The Revolving Credit Facility contains representations and warranties, other covenants and events of default that are customary for this type of financing, including limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of itsthe Company’s business or its fiscal year. The Revolving Credit Facility generally permits dividends in the absence of any event of default (including any event of default arising from the contemplated dividend), so long as (i) after giving pro forma effect to the contemplated dividend, for the following six months Excess Availability will be at least the greater of 20% of the aggregate lending commitmentsadjusted loan cap and $7,500$10,000 and (ii) after giving pro forma effect to the contemplated dividend, the “Consolidated Fixed Charge Coverage Ratio” for the 12 months preceding such dividend shall be greater than or equal to 1.11.0 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.11.0 to 1.0 if, after giving pro forma effect to the contemplated dividend, Excess Availability for the six fiscal months following the dividend is at least the greater of 35% of the aggregate lending commitmentsadjusted loan cap and $10,000)$15,000). As of January 28, 2017, the Company was in compliance with applicable financial covenants. As of January 31, 2015, the availability28, 2017, $27,157 was available under the $50,000 Revolving Credit Facility, was $19,353. Asnet of January 31, 2015,the amended loan cap, and there was $23,000were $5,200 of borrowings outstanding and $7,647$7,474 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 31, 201528, 2017 was 2.1%4.3%. There F-18
As of January 30, 2016, $28,127 was available under the Revolving Credit Facility, net of the amended loan cap, and there were no$15,000 of borrowings outstanding and $7,522 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of February 1, 2014. Note 7. Long-Term Debt
Long-term debt consisted of the following as of, January 31, 2015 and February 1, 2014 (in thousands).
| | | | | | | | | | | | January 31,
2015 | | | February 1,
2014 | | Term Loan Facility | | $ | 65,000 | | | $ | 170,000 | | Revolving Credit Facility | | | 23,000 | | | | — | | | | | | | | | | | Total long-term debt | | $ | 88,000 | | | $ | 170,000 | | | | | | | | | | |
Term Loan Facility
On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, Vince, LLC and Vince Intermediate entered into the $175,000 Term Loan Facility with the lenders party thereto, BofA, as administrative agent, JPMorgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and Cantor Fitzgerald as documentation agent. The Term Loan Facility will mature on November 27, 2019. On November 27, 2013, net proceeds from the Term Loan Facility were used, at closing, to repay the Kellwood Note Receivable.
The Term Loan Facility also provides for an incremental facility of up to the greater of $50,000 and an amount that would result in the consolidated net total secured leverage ratio not exceeding 3.00 to 1.00, in addition to certain other rights to refinance or repurchase portions of the term loan. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the Term Loan Facility, with the balance payable at final maturity. Interest is payable on loans under the Term Loan
Facility at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus an applicable margin of 4.75% to 5.00% based on a leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a leverage ratio. During the continuance of a payment or bankruptcy event of default, interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the nondefault interest rate then applicable to base rate loans.
The Term Loan Facility contains a requirement that Vince, LLC and Vince Intermediate maintain a “Consolidated Net Total Leverage Ratio” as of the last day of any period of four fiscal quarters not to exceed 3.75 to 1.00 for the fiscal quarters ending February 1, 2014 through November 1, 2014, 3.50 to 1.00 for the fiscal quarters ending January 31, 2015 through October 31, 2015, and 3.25 to 1.00 for the fiscal quarter ending January 30, 2016 and each fiscal quarter thereafter. In addition, the Term Loan Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of its business or its fiscal year, and distributions and dividends. The Term Loan Facility generally permits dividends to the extent that no default or event of default is continuing or would result from the contemplated dividend and the pro forma Consolidated Net Total Leverage Ratio after giving effect to such contemplated dividend is at least 0.25 lower than the maximum Consolidated Net Total Leverage Ratio for such quarter. All obligations under the Term Loan Facility are guaranteed by VHC and any future material domestic restricted subsidiaries of Vince, LLC and secured by a lien on substantially all of the assets of VHC, Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries. We are in compliance with applicable financial covenants.
Through January 31, 2015, on an inception to date basis, the Company has made voluntary prepayments totaling $110,000 in the aggregate on the original $175,000 Term Loan Facility entered into on November 27, 2013. Of the $110,000 aggregate voluntary prepayments made to date, $105,000 was paid during fiscal 2014. The voluntary prepayments of $105,000 made during the current fiscal year were partially funded by $23,000 of net borrowings under the Revolving Credit Facility. As of January 31, 2015 the Company had $65,000 of debt outstanding under the Term Loan Facility.
Sun Promissory Notes
On May 2, 2008, VHC entered into a $225,000 Senior Subordinated Promissory Note and a $75,000 Senior Subordinated Promissory Note with Sun Kellwood Finance, LLC (“Sun Kellwood Finance”), an affiliate of Sun Capital Partners, Inc. We collectively refer to these notes as our “Sun Promissory Notes”2.1%. The unpaid principal balance of the notes accrue interest at 15% per annum until the maturity date of October 15, 2011, at which point any unpaid principal balance of the notes shall accrue interest at a rate of 17% per annum until the notes are paid in full. All interest which is not paid in cash on or before the last day of each calendar month are deemed paid in kind and added to the principal balance of the notes unless an election is made otherwise.
On July 19, 2012, Vince Holding Corp. amended the Sun Promissory Notes to extend the maturity date to October 15, 2016 and reduce the interest rate to 12% per annum until maturity, at which point any unpaid principal balance of the notes shall accrue interest at a rate of 14% per annum until the notes are paid in full.
On December 28, 2012, Sun Kellwood Finance, LLC (“Sun Capital Finance”) waived all interest capitalized and accrued under the notes prior to July 19, 2012. As both parties were under the common control of affiliates of Sun Capital Partners, Inc. (“Sun Capital”), this transaction resulted in a capital contribution of $270,852 which was recorded as an adjustment to additional paid in capital on our Consolidated Balance Sheet as of February 2, 2013.
On June 18, 2013, Sun Kellwood Finance assigned all title and interest in the Sun Promissory Notes to Sun Cardinal, LLC (“Sun Cardinal”). Immediately following the assignment, Sun Cardinal contributed all outstanding principal and interest due under these notes as of June 18, 2013 to the capital of VHC. As both parties were under common control of affiliates of Sun Capital at such time, this transaction resulted in a capital contribution of $334,595, which was recorded as an adjustment to VHC’s additional paid in capital on the Consolidated Balance Sheet as of February 1, 2014.
Sun Capital Loan Agreement
VHC was party to a Loan Authorization Agreement, originally dated February 13, 2008, by and between VHC (as the successor entity to Cardinal Integrated, LLC), SCSF Kellwood Finance, LLC (“SCSF Finance”) and Sun Kellwood Finance (as successors to Bank of Montreal) for a $72,000 line of credit, and $69,485 principal balance, which we refer to as the “Sun Capital Loan Agreement”. Under the terms of this agreement, as amended from time to time, interest accrued at a rate equal to the rate per annum announced by the Bank of Montreal, Chicago, Illinois, from time to time as its prime commercial rate, or equivalent, for U.S. dollar loans to borrowers located in the U.S. plus 2%. Interest on the loan was due by the last day of each fiscal quarter and is payable either in immediately available funds on each interest payment date or by adding such interest to the unpaid principal balance of the loan on each interest payment date. The original maturity date of the loan was August 6, 2009. On July 19, 2012, the maturity date of the loan was extended to August 6, 2014.
On December 28, 2012, Sun Kellwood Finance and SCSF Finance waived all interest capitalized and accrued under the loan authorization agreement prior to July 19, 2012. As all parties were under the common control of affiliates of Sun Capital, this transaction resulted in a capital contribution of $18,249, which was recorded as an adjustment to additional paid in capital on our Consolidated Balance Sheet as of February 2, 2013.
On June 18, 2013, Sun Kellwood Finance and SCSF Finance assigned all title and interest in the note under the Sun Capital Loan Agreement to Sun Cardinal. Immediately following the assignment, Sun Cardinal contributed all outstanding principal and interest due under this note as of June 18, 2013 to the capital of VHC. As all parties were under common control of affiliates of Sun Capital at such time, this transaction resulted in a capital contribution of $72,932, which was recorded as an adjustment to VHC’s additional paid in capital on the Consolidated Balance Sheet as of February 1, 2014.
Note 8. 5. Commitments and Contingencies Leases We lease substantially all of ourThe Company leases its office, and showroom space and retail stores and certain machinery and equipment under operating leases havingwhich have remaining terms up to eleventen years, excluding renewal terms. Most of ourthe Company’s real estate leases contain covenants that require usthe Company to pay real estate taxes, insurance, and other executory costs. Certain of these leases require contingent rent payments or contain kick-out clauses and/or opt-out clauses, based on the operating results of the retail operations utilizing the leased premises. Rent under leases with scheduled rent changes or lease concessions are recorded on a straight-line basis over the lease term. Rent expense under all operating leases was $23,545, $20,015 and $16,161 $10,467for fiscal 2016, fiscal 2015 and $7,448 forfiscal 2014, 2013respectively, the majority of which is recorded within selling, general and 2012, respectively.administrative expenses.
The future minimum lease payments under operating leases at January 31, 201528, 2017 were as follows (in thousands):follows: | | | | | | | | Minimum
Lease
Payments | | 2015 | | $ | 15,593 | | 2016 | | | 17,877 | | 2017 | | | 17,912 | | 2018 | | | 17,655 | | 2019 | | | 17,514 | | Thereafter | | | 63,516 | | | | | | | Total minimum lease payments | | $ | 150,067 | | | | | | |
| | Minimum Lease | | (in thousands) | | Payments | | Fiscal 2017 | | $ | 21,096 | | Fiscal 2018 | | | 20,918 | | Fiscal 2019 | | | 20,877 | | Fiscal 2020 | | | 19,792 | | Fiscal 2021 | | | 17,355 | | Thereafter | | | 50,753 | | Total minimum lease payments | | $ | 150,791 | |
Note 9. Share-Based CompensationOther Contractual Cash Obligations
Prior to November 27, 2013, Vince Holding Corp. did not have convertible equity or convertible debt securities, anyAt January 28, 2017, the Company’s other contractual cash obligations of which could result in share-based compensation expense.$42,294 consisted primarily of inventory purchase obligations and service contracts.
Restructuring Charges In the second quarter of fiscal 2015, a number of senior management departures occurred. In connection with these departures, the IPO, which closed on November 27, 2013, and the separation of the Vince and non-Vince businesses, VHC assumed Kellwood Company’s remainingCompany had certain obligations under the 2010 Stock Option Plan of Kellwood Company (the “2010 Option Plan”) and all Kellwood Company stock options previously issued to Vince employees under such plan became options to acquire shares of VHC common stock. Additionally, VHC assumed Kellwood Company’s obligationsexisting employment arrangements with respect to the vested Kellwood Company stock options previously issued to Kellwood Company employees, which options were cancelled in exchange for shares of VHC common stock. Accordingly, option information presented below for previously issued Kellwood Company stock options under the 2010 Option Plan has been adjusted to account for the split of the Company’s common stockseverance and applicable conversion to options to acquire shares of Vince Holding Corp. common stock. Employee Stock Plans
2010 Option Plan
Kellwood Company had convertible equity securities thatemployee related benefits. As a result, in recognition of share-based compensation expense. On June 30, 2010, the board of directors approved the 2010 Stock Option Plan. On November 21, 2013 and as discussed above, VHC assumed Kellwood Company’s remaining obligations under the 2010 Option Plan; provided, that none of the issued and outstanding options (after giving effect to such assumption and the stock split effected as part of the Restructuring Transactions) were exercisable until the consummation of the IPO. Additionally, prior to the consummation of the IPO and after giving effect to the assumption described in this paragraph, VHC and the Vince employees to whom options had been previously granted under the 2010 Option Plan, amended the related grant agreements to eliminate, effective as of the consummation of the IPO, restrictions on the exercisability of the subject employees vested options.
Prior to the IPO, the 2010 Option Plan, as amended, provided for the grant of options to acquire up to 2,752,155 shares of Kellwood Company common stock. The options granted pursuant to the 2010 Option Plan (i) vest in five equal installments on the first, second, third, fourth, and fifth anniversary of the grant date, subject to the employee’s continued employment and, (ii) expire on the earlier of the tenth anniversary of the grant date or upon termination of employment. We will not grant any future awards under the 2010 Option Plan. Future awards shall be granted under the Vince 2013 Incentive Plan described further below.
Vince 2013 Incentive Plan
In connection with the IPO, the Company adopted the Vince 2013 Incentive Plan, which provides for grantsrecognized a charge of stock options, stock appreciation rights, restricted stock and other stock-based awards. The aggregate number of shares of common stock which may be issued or used for reference purposes under the Vince 2013 Incentive Plan or with respect to which awards may be granted may not exceed 3,400,000 shares. The shares available for issuance under the Vince 2013 Incentive Plan may be, in whole or in part, either authorized and unissued shares of our common stock or shares of common stock held in or acquired for our treasury. In general, if awards under the Vince 2013 Incentive Plan are for any reason cancelled, or expire or terminate unexercised, the shares covered by such award may again be available for the grant of awards under the Vince 2013 Incentive Plan. As of January 31, 2015, there were 2,514,959 shares under the Vince 2013 Incentive Plan available for future grants. Options granted pursuant to the Vince 2013 Incentive Plan (i) vest in equal installments over three or four years or at 33 1/3% per year beginning in year two, over four years, subject to the employees’ continued employment and (ii) expire on the earlier of the tenth anniversary of the grant date or upon termination as outlined in the Vince 2013 Incentive Plan.
Stock Options
A summary of stock option activity for fiscal 2014 is as follows:
| | | | | | | | | | | | | | | | | | | | Stock Options | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Term
(years) | | | Aggregate
Intrinsic
Value | | Outstanding at February 1, 2014 | | | 2,289,530 | | | $ | 8.26 | | | | 8.8 | | | | | | Granted | | | 577,437 | | | $ | 32.82 | | | | | | | | | | Exercised | | | (22,018 | ) | | $ | 7.99 | | | | | | | | | | Forfeited or expired | | | (118,780 | ) | | $ | 14.88 | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at January 31, 2015 | | | 2,726,169 | | | $ | 13.18 | | | | 8.2 | | | $ | 33,367 | | | | | | | | | | | | | | | | | | | Vested or expected to vest at January 31, 2015 | | | 2,726,169 | | | $ | 13.18 | | | | 8.2 | | | $ | 33,367 | | Vested and exercisable at January 31, 2015 | | | 653,861 | | | $ | 6.35 | | | | 7.5 | | | $ | 11,181 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2014 and the exercise price, multiplied by the number of such in-the-money options) that would have been received by the option holders had all options holders exercised their options on January 31, 2015. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised during fiscal 2014 (based on the differences between the Company’s stock price on the respective exercise date and the respective exercise price, multiplied by the number of respective options exercised) was $620.
The Company’s weighted average assumptions used to estimate the fair value of stock options granted on November 21, 2013 in connection with our IPO and the options granted during fiscal 2014 were estimated using a Black-Scholes option valuation model and were as follows. Expected term of 4.5 years, expected volatility of 51.1%, risk-free interest rate of 1.4% and expected dividend yield of 0.0%. Due to the limited trading history of the Company’s common stock, the volatility and expected term assumptions used were based on averages from a peer group of publicly traded retailers. The risk-free interest rate was based upon the U.S. Treasury five year yield curve. Based on these assumptions used, the weighted average grant date fair value for options granted during fiscal 2014 and for the options granted on November 21, 2013 in connection with our IPO was $14.13 per share and $8.82 per share, respectively.
The fair value of stock options granted in fiscal 2012 through October 2013 was determined at the grant date using a Black-Scholes option valuation model, which requires us to make several significant assumptions including risk-free interest rate, volatility, expected term, and discount factors for shareholders in a privately-held company. The estimated term of 6.5 years$3,394 for these options was developed using a simplified method permitted by SEC Staff Accounting Bulletin Topic 14: Share-Based Payment, available for companies with “plain-vanilla” options and have limited historical exercise data. Our selected volatility rate of 55.0% was estimated using both: (i) volatility reported by companies comparable to Kellwood Company with publicly-traded stock, and (ii) calculated volatility of companies comparable to Kellwood Company with publicly-traded stock using historical stock prices. We applied a cumulative discount factor to the price per share of 36.25% to adjust for the lack of marketability of the shares, as well as the impact of the shares representing a minority interest in a privately-held company. Our estimates were developed using market data for companies comparable to Kellwood Company and empirical studies regarding the impact on the value of private-company shares resulting from transfer restrictions. Finally, the risk-free rate of 0.85% is based upon the U.S. Treasury five year yield curve.
At January 31, 2015 there was $11,504 of unrecognized compensation costs related to stock options that will be recognized over a remaining weighted average period of 3.3 years.
Restricted Stock Units
A summary of restricted stock unit activity for fiscal 2014 is as follows:
| | | | | | | | | | | | Restricted
Stock
Units | | | Weighted
Average
Grant Date
Fair Value | | Nonvested restricted stock units at February 1, 2014 | | | 7,500 | | | $ | 20.00 | | Granted | | | 7,384 | | | $ | 30.47 | | Vested | | | (2,500 | ) | | $ | 20.00 | | Forfeited | | | — | | | | — | | | | | | | | | | | Nonvested restricted stock units at January 31, 2015 | | | 12,384 | | | $ | 26.24 | | | | | | | | | | |
The fair value of restricted stock units is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense on a straight-line basis over the requisite service period, which is generally over a three year vesting period, subject to continued service and applicable conditions of the Vince 2013 Incentive Plan.
At January 31, 2015 there was $289 of unrecognized compensation costs related to restricted stock units that will be recognized over a remaining weighted average period of 2.4 years.
Share-Based Compensation Expense
Share-based compensation expense is recognized over the requisite service period of the each share-based payment award and the expense is included as a component of selling,departures within Selling, general, and administrative expenses inon the Consolidated Statements of Operations. DuringOperations during fiscal 2014 we recognized share-based compensation expense2015. This net charge was reflected within “unallocated corporate expenses” for segment disclosures. These amounts are being paid over a period of $1,896 andsix to eighteen months, which began in the third quarter of fiscal 2015.
The following is a related tax benefit of approximately $758. During fiscal 2013, from our IPO through the endreconciliation of the fiscal year, we recognized share-based compensation expenseaccrued severance and employee related benefits associated with the above charge included within total current liabilities on the Consolidated Balance Sheet: (in thousands) | | | | | Balance at August 1, 2015 | | $ | 3,717 | | Cash payments | | | (1,557 | ) | Non-cash recovery | | | (323 | ) | Balance at January 30, 2016 | | | 1,837 | | Cash payments | | | (1,719 | ) | Balance at January 28, 2017 | | $ | 118 | |
Litigation The Company is a party to legal proceedings, compliance matters and environmental claims that arise in the ordinary course of $347 and a related tax benefitits business. Although the outcome of approximately $139. During fiscal year 2013, fromsuch items cannot be determined with certainty, management believes that the beginning ultimate outcome F-19
of the fiscal year through our IPO date,these items, individually and in fiscal 2012 we recognized share-based compensation expense of $551 and $367, respectively, which was included in net loss from discontinued operations as such expense wasthe aggregate, will not have a component of the non-Vince businesses which were separated from the Vince business on November 27, 2013. In addition, as a result of the deferred tax valuation allowance during these periods, the Company did not recognize the related tax benefitmaterial adverse impact on the share-based compensation expense.Company’s financial position, results of operations or cash flows. Note 10.6. Share-Based Compensation In connection with the IPO, which closed on November 27, 2013, and the separation of the Vince and non-Vince businesses, VHC assumed Kellwood Company’s remaining obligations under the 2010 Stock Option Plan of Kellwood Company (the “2010 Option Plan”) and all Kellwood Company stock options previously issued to Vince employees under such plan became options to acquire shares of VHC common stock. Additionally, VHC assumed Kellwood Company’s obligations with respect to the vested Kellwood Company stock options previously issued to Kellwood Company employees, which options were cancelled in exchange for shares of VHC common stock. Accordingly, option information presented below for previously issued Kellwood Company stock options under the 2010 Option Plan has been adjusted to account for the split of the Company’s common stock and applicable conversion to options to acquire shares of VHC common stock. Employee Stock Plans 2010 Option Plan On June 30, 2010, the board of directors approved the 2010 Stock Option Plan. On November 21, 2013 and as discussed above, VHC assumed Kellwood Company’s remaining obligations under the 2010 Option Plan; provided, that none of the issued and outstanding options (after giving effect to such assumption and the stock split effected as part of the Restructuring Transactions) were exercisable until the consummation of the IPO. Additionally, prior to the consummation of the IPO and after giving effect to the assumption described in this paragraph, VHC and the Vince employees to whom options had been previously granted under the 2010 Option Plan, amended the related grant agreements to eliminate, effective as of the consummation of the IPO, restrictions on the exercisability of the subject employees vested options. Prior to the IPO, the 2010 Option Plan, as amended, provided for the grant of options to acquire up to 2,752,155 shares of Kellwood Company common stock. The options granted pursuant to the 2010 Option Plan (i) vested in five equal installments on the first, second, third, fourth, and fifth anniversaries of the grant date, subject to the employee’s continued employment and, (ii) expired on the earlier of the tenth anniversary of the grant date or upon termination of employment. The Company will not grant any future awards under the 2010 Option Plan. Future awards will be granted under the Vince 2013 Incentive Plan described further below. As of January 28, 2017, there are no options outstanding under the 2010 Stock Option Plan. Vince 2013 Incentive Plan In connection with the IPO, the Company adopted the Vince 2013 Incentive Plan, which provides for grants of stock options, stock appreciation rights, restricted stock and other stock-based awards. The aggregate number of shares of common stock which may be issued or used for reference purposes under the Vince 2013 Incentive Plan or with respect to which awards may be granted may not exceed 3,400,000 shares. The shares available for issuance under the Vince 2013 Incentive Plan may be, in whole or in part, either authorized and unissued shares of the Company’s common stock or shares of common stock held in or acquired for the Company’s treasury. In general, if awards under the Vince 2013 Incentive Plan are cancelled for any reason, or expire or terminate unexercised, the shares covered by such award may again be available for the grant of awards under the Vince 2013 Incentive Plan. As of January 28, 2017, there were 1,010,308 shares under the Vince 2013 Incentive Plan available for future grants. Options granted pursuant to the Vince 2013 Incentive Plan (i) vest in equal installments over two, three or four years or at 33 1/3% per year beginning in year two, over four years, subject to the employees’ continued employment and (ii) expire on the earlier of the tenth anniversary of the grant date or upon termination as outlined in the Vince 2013 Incentive Plan. Options granted to non-employee consultants vest 50% after one year, 25% after 18 months and 25% after two years and expire on the earlier of the tenth anniversary of the grant date or upon termination as outlined in their grant agreements pursuant to the Vince 2013 Incentive Plan. Restricted stock units granted vest in equal installments over a three year period or vest in equal installments over four years, subject to the employee’s continued employment. Employee Stock Purchase Plan The Company maintains an employee stock purchase plan (“ESPP”) for its employees. Under the ESPP, all eligible employees may contribute up to 10% of their base compensation, up to a maximum contribution of $10 per year. The purchase price of the stock is 90% of the fair market value, with purchases executed on a quarterly basis. The plan is defined as compensatory, and accordingly, a charge for compensation expense is recorded to Selling, general and administrative expense for the difference between the fair market value and the discounted purchase price of the Company’s Stock. As of January 28, 2017, 7,883 shares of common stock have been issued under the ESPP. F-20
Stock Options A summary of stock option activity for both employees and non-employees for fiscal 2016 is as follows: | | Stock Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (years) | | | Aggregate Intrinsic Value (in thousands) | | Outstanding at January 30, 2016 | | | 2,879,735 | | | $ | 4.61 | | | | 8.7 | | | $ | 2,402 | | Granted | | | 725,451 | | | $ | 5.77 | | | | | | | | | | Exercised | | | (807,545 | ) | | $ | 5.79 | | | | | | | | | | Forfeited or expired | | | (538,854 | ) | | $ | 4.75 | | | | | | | | | | Outstanding at January 28, 2017 | | | 2,258,787 | | | $ | 4.53 | | | | 8.9 | | | $ | — | | | | | | | | | | | | | | | | | | | Vested and exercisable at January 28, 2017 | | | 605,937 | | | $ | 4.24 | | | | 8.8 | | | $ | — | |
Of the above outstanding shares, 1,414,972 are vested or expected to vest. The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2016 and the exercise price, multiplied by the number of such in-the-money options) that would have been received by the option holders had all options holders exercised their options on January 28, 2017. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised during fiscal 2016, fiscal 2015 and fiscal 2014 (based on the differences between the Company’s stock price on the respective exercise date and the respective exercise price, multiplied by the number of respective options exercised) was $640, $316 and $620, respectively. The Company’s weighted average assumptions used to estimate the fair value of stock options granted during fiscal 2016, fiscal 2015 and fiscal 2014 were estimated using a Black-Scholes option valuation model. Due to the limited trading history of the Company’s common stock, the volatility and expected term assumptions used were based on averages from a peer group of publicly traded retailers. The risk-free interest rate was based upon the U.S. Treasury yield curve in effect at the grant date. | | Fiscal Year | | | | 2016 | | | 2015 | | | 2014 | | Weighted-average expected volatility | | | 42.6 | % | | | 46.0 | % | | | 51.1 | % | Expected term (in years) | | 4.2 years | | | 4.5 years | | | 4.5 years | | Risk-free interest rate | | | 1.1 | % | | | 1.4 | % | | | 1.4 | % | Expected dividend yield | | —% | | | —% | | | —% | |
Based on these assumptions used, the weighted average grant date fair value for options granted to employees during fiscal 2016, fiscal 2015 and fiscal 2014 was $1.22 per share, $1.75 per share and $14.13 per share, respectively. The weighted average grant date fair value for options granted to non-employees in fiscal 2015 was $1.45 per share. At January 28, 2017, there was $2,396 of unrecognized compensation costs related to stock options granted to employees and non-employees that will be recognized over a remaining weighted average period of 1.8 years. Restricted Stock Units A summary of restricted stock unit activity for fiscal 2016 is as follows: | | Restricted Stock Units | | | Weighted Average Grant Date Fair Value | | Nonvested restricted stock units at January 30, 2016 | | | 29,532 | | | $ | 12.22 | | Granted | | | 99,478 | | | $ | 5.80 | | Vested | | | (14,580 | ) | | $ | 13.11 | | Forfeited | | | (6,618 | ) | | $ | 5.98 | | Nonvested restricted stock units at January 28, 2017 | | | 107,812 | | | $ | 6.56 | |
F-21
The weighted average grant date fair value for restricted stock units granted during fiscal 2015 and fiscal 2014 was $7.27 and $30.47, respectively. The total fair value of restricted stock units vested during fiscal 2016, fiscal 2015 and fiscal 2014 was $191, $125 and $50, respectively. At January 28, 2017, there was $553 of unrecognized compensation costs related to restricted stock units that will be recognized over a remaining weighted average period of 1.7 years. Share-Based Compensation Expense During fiscal 2016, the Company recognized share-based compensation expense of $1,344, including $348 of expense related to non-employees, and a related tax benefit of $0. During fiscal 2015, the Company recognized share-based compensation expense of $1,259, including $160 of expense related to non-employees, and a related tax benefit of $504, including $64 of tax benefit related to non-employees. During fiscal 2014, the Company recognized share-based compensation expense of $1,896 and a related tax benefit of $758. Note 7. Defined Contribution Plan On May 1, 2015, the Company adopted the Vince Holding Corp. 401(k) Plan (“401k Plan”), which is a defined contribution plan covering all U.S.-based employees. Employees who meet certain eligibility requirements may participate in this program by contributing between 1% and 100% of annual compensation to the 401k Plan, subject to IRS limitations. The Company may make matching contributions in an amount equal to 50% of employee contributions up to 3% of eligible compensation. Prior to the adoption of the 401k Plan, employees of the Company participated in the Kellwood Company Retirement Savings Plan administered by Kellwood Holding, LLC. The annual expense incurred by the Company for defined contribution plans was $405, $426 and $344 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Note 8. Stockholders’ Equity Common Stock:Stock WeThe Company currently havehas authorized for issuance 100,000,000 shares of ourits Voting Common Stock, par value of $0.01 per share. As of January 31, 201528, 2017 and February 1, 2014 weJanuary 30, 2016, the Company had 36,748,24549,427,606 and 36,723,72736,779,417 shares issued and outstanding, respectively (after giving effect torespectively.
Rights Offering On April 22, 2016, the conversionCompany issued an aggregate of all our issued11,818,181 shares in conjunction with the completed Rights Offering and outstanding non-voting common stock into common stock on a one-for-one basisInvestment Agreement. See Note 1 “Description of Business and the subsequent splitSummary of our common stock on a oneSignificant Accounting Policies” for 28.5177 basis, as part of the Restructuring Transactions).additional information. Secondary Offering of Common Stock:Stock In July 2014, certain selling stockholders of VHC, including affiliates of Sun Capital (the “Selling Stockholders”), sold 4,975,254 shares of VHC’s common stock at a public offering price of $34.50 per share in a secondary public offering (the “Secondary Offering”). The total shares sold includeincluded 648,946 shares sold by the Selling Stockholders pursuant to the exercise by the underwriters of their option to purchase additional shares. The Company did not receive any proceeds from the Secondary Offering. Immediately following the Secondary Offering, affiliates of Sun Capital beneficially owned 54.6% of VHC’s issued and outstanding common stock. The Company incurred approximately $571 of expenses in connection with the Secondary Offering during fiscal 2014. Dividends:Dividends
We haveThe Company has not paid dividends, and ourthe Company’s current ability to pay such dividends is restricted by the terms of ourits debt agreements. OurThe Company’s future dividend policy will be determined on a yearly basis and will depend on earnings, financial condition, capital requirements, and certain other factors. We doThe Company does not expect to declare dividends with respect to ourits common stock in the foreseeable future.
Note 11. Earnings Per ShareF-22
All share information presented below and herein has been adjusted to reflect the stock split approved by VHC’s board of directors as of November 27, 2013. The fiscal year ended February 1, 2014 includes the impact of 10,000,000 shares issued by the Company on November 21, 2013. As fiscal year ended February 2, 2013 included a net loss, there were no dilutive securities as the impact would have been anti-dilutive.
The following is a reconciliation of weighted average basic shares to weighted average diluted shares outstanding:
| | | | | | | | | | | | | | | | Fiscal Year Ended | | | | | January 31,
2015 | | | February 1,
2014 | | | February 2,
2013 | | Weighted-average shares—basic | | | 36,730,490 | | | | 28,119,794 | | | | 26,211,130 | | Effect of dilutive equity securities | | | 1,514,416 | | | | 153,131 | | | | — | | | | | | | | | | | | | | | Weighted-average shares—diluted | | | 38,244,906 | | | | 28,272,925 | | | | 26,211,130 | | | | | | | | | | | | | | |
For the fiscal year ended January 31, 2015, 123,959 options to purchase common stock were excluded from the computation of weighted average shares for diluted earnings per share since the related exercises prices exceeded the average market price of the Company’s common stock and such inclusion would be anti-dilutive. There were no antidilutive securities in the fiscal year ended February 1, 2014 and February 2, 2013.
Note 12. Income Taxes
The provision for income taxes for continuing operations consists of the following (in thousands):
| | | | | | | | | | | | | | | | 2014 | | | 2013 | | | 2012 | | Current: | | | | | | | | | | | | | Domestic: | | | | | | | | | | | | | Federal | | $ | 759 | | | $ | — | | | $ | — | | State | | | 344 | | | | 43 | | | | 31 | | Foreign | | | — | | | | — | | | | — | | | | | | | | | | | | | | | Total current | | | 1,103 | | | | 43 | | | | 31 | | Deferred: | | | | | | | | | | | | | Domestic: | | | | | | | | | | | | | Federal | | | 20,416 | | | | 6,333 | | | | 1,030 | | State | | | 2,475 | | | | 905 | | | | 124 | | Foreign | | | — | | | | (13 | ) | | | (7 | ) | | | | | | | | | | | | | | Total deferred | | | 22,891 | | | | 7,225 | | | | 1,147 | | | | | | | | | | | | | | | Total provision for income taxes | | $ | 23,994 | | | $ | 7,268 | | | $ | 1,178 | | | | | | | | | | | | | | |
The sources of income (loss) for continuing operations before provision for income taxes are from the United States for all years. We file U.S. federal income tax returns and income tax returns in various state and local jurisdictions.
Current income taxes are the amounts payable under the respective tax laws and regulations on each year’s earnings. A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
| | | | | | | | | | | | | | | | 2014 | | | 2013 | | | 2012 | | Statutory federal rate | | | 35.0 | % | | | 35.0 | % | | | (35.0 | )% | State taxes, net of federal benefit | | | 5.7 | % | | | 9.5 | % | | | 7.4 | % | Nondeductible interest | | | 0.0 | % | | | 18.1 | % | | | 84.3 | % | Nondeductible transaction costs | | | 0.0 | % | | | 6.7 | % | | | 0.0 | % | Valuation allowance | | | (0.7 | )% | | | (45.5 | )% | | | (52.7 | )% | Other | | | 0.2 | % | | | (0.1 | )% | | | 0.1 | % | | | | | | | | | | | | | | Total | | | 40.2 | % | | | 23.7 | % | | | 4.1 | % | | | | | | | | | | | | | |
Deferred income tax assets and liabilities for continuing operations consisted of the following (in thousands):
| | | | | | | | | | | | January 31,
2015 | | | February 1,
2014 | | Deferred tax assets: | | | | | | | | | Depreciation and amortization | | $ | 29,935 | | | $ | 44,742 | | Employee related costs | | | 3,503 | | | | 2,048 | | Allowance for asset valuations | | | 3,172 | | | | 2,454 | | Accrued expenses | | | 3,933 | | | | 1,589 | | Net operating losses | | | 65,111 | | | | 80,936 | | Tax credits | | | 888 | | | | — | | Other | | | 90 | | | | 1,067 | | | | | | | | | | | Total deferred tax assets | | | 106,632 | | | | 132,836 | | Less: valuation allowances | | | (1,074 | ) | | | (1,843 | ) | | | | | | | | | | Net deferred tax assets | | | 105,558 | | | | 130,993 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Cancellation of debt income | | | (8,876 | ) | | | (11,095 | ) | Other | | | (493 | ) | | | — | | | | | | | | | | | Total deferred tax liabilities | | | (9,369 | ) | | | (11,095 | ) | | | | | | | | | | Net deferred tax assets | | $ | 96,189 | | | $ | 119,898 | | | | | | | | | | | Included in: | | | | | | | | | Prepaid expenses and other current assets | | $ | 4,015 | | | $ | 4,476 | | Deferred income taxes and other assets | | | 92,174 | | | | 115,422 | | | | | | | | | | | Net deferred income tax assets | | $ | 96,189 | | | $ | 119,898 | | | | | | | | | | |
As of January 31, 2015, various federal and state net operating losses were available for carryforward to offset future taxable income. Substantially all of these net operating losses will expire between 2030 and 2034. The valuation allowance of $1,074 at January 31, 2015 and $1,843 at February 1, 2014, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax assets will not be realized due to the inability to generate sufficient state taxable income. Adjustments to the valuation allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable.
Net operating losses as of January 31, 2015 presented above do not include fiscal 2014 and 2013 deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes since they have not yet reduced income taxes payable. The excess deduction will reduce income taxes payable and increase additional paid in capital by $2,675 when ultimately deducted in a future year.
As discussed in Note 2, we completed an IPO during fiscal 2013. The completion of the IPO and Restructuring Transactions resulted in the non-Vince businesses being separated from the Vince business. As a result, the Company determined that the full valuation allowance on the U.S. net deferred tax assets was no longer necessary. Since the IPO and Restructuring Transactions occurred between related parties and were considered one integrated transaction along with the establishment of the Tax Receivable Agreement liability, the offset of the release of the valuation allowance was recorded as an adjustment to additional paid-in capital on our Consolidated Balance Sheet at February 1, 2014 in accordance with ASC 740-20-45-11(g). The total valuation allowance on deferred tax assets for continuing operations decreased on a net basis by $769 in the fiscal year ended January 31, 2015 and decreased by $62,924 in the fiscal year ended February 1, 2014.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
| | | | | | | | | | | | | | | | 2014 | | | 2013 | | | 2012 | | Beginning balance | | $ | 3,693 | | | $ | 9,378 | | | $ | 11,057 | | Increases for tax positions in current year | | | 2,397 | | | | 3,743 | | | | 2,199 | | Increases for tax positions in prior years | | | 135 | | | | 356 | | | | 52 | | Decreases for tax positions in prior years | | | (1,738 | ) | | | (4,186 | ) | | | (102 | ) | Settlements | | | — | | | | (3,022 | ) | | | (2,105 | ) | Lapse in statute of limitations | | | — | | | | (102 | ) | | | (1,723 | ) | Restructuring Transactions | | | — | | | | (2,474 | ) | | | — | | | | | | | | | | | | | | | Ending balance | | $ | 4,487 | | | $ | 3,693 | | | $ | 9,378 | | | | | | | | | | | | | | |
As of January 31, 2015 and February 1, 2014, unrecognized tax benefits in the amount of $2,195 (net of tax) and $2,155 (net of tax), respectively, would impact our effective tax rate if recognized. It is reasonably possible that within the next 12 months certain temporary unrecognized tax benefits could fully reverse. Should this occur, our unrecognized tax benefits could be reduced by up to $2,054.
We include accrued interest and penalties on underpayments of income taxes in our income tax provision. As of January 31, 2015 and February 1, 2014, we did not have any interest and penalties accrued on our Consolidated Balance Sheets. Net interest and penalty provisions (benefit) of $0, $(232) and $600 were recognized in our Consolidated Statements of Operations for the years ended January 31, 2015, February 1, 2014 and February 2, 2013, respectively. Interest is computed on the difference between the tax position recognized net of any unrecognized tax benefits and the amount previously taken or expected to be taken in our tax returns.
All amounts above related to unrecognized tax benefits include continuing and discontinued operations until the separation of the Vince and non-Vince businesses on November 27, 2013, and the Vince business after such date.
With limited exceptions, we are no longer subject to examination for U.S. federal and state income tax for 2007 and prior.
Note 9. Earnings Per Share All share information presented below and herein has been adjusted to reflect the stock split approved by VHC’s board of directors as of November 27, 2013. The following is a reconciliation of weighted average basic shares to weighted average diluted shares outstanding: | | Fiscal Year | | | | 2016 | | | 2015 | | | 2014 | | Weighted-average shares—basic | | | 46,420,533 | | | | 36,770,430 | | | | 36,730,490 | | Effect of dilutive equity securities | | | — | | | | 758,797 | | | | 1,514,416 | | Weighted-average shares—diluted | | | 46,420,533 | | | | 37,529,227 | | | | 38,244,906 | |
Because the Company incurred a net loss for the fiscal year ended January 28, 2017, weighted-average basic shares and weighted-average diluted shares outstanding are equal for this period. For the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015, 1,719,135, 732,303 and 123,959 options to purchase common stock, respectively, were excluded from the computation of weighted average shares for diluted earnings per share since the related exercise prices exceeded the average market price of the Company’s common stock and such inclusion would be anti-dilutive. On April 22, 2016, the Company issued an aggregate of 11,818,181 shares in conjunction with the completed Rights Offering and Investment Agreement. See Note 1 “Basis of Presentation and Summary of Significant Accounting Policies” for additional information. Note 13. Commitments10. Income Taxes The provision for income taxes consisted of the following: | Fiscal Year | | (in thousands) | 2016 | | | 2015 | | | 2014 | | Current: | | | | | | | | | | | | Domestic: | | | | | | | | | | | | Federal | $ | — | | | $ | (53 | ) | | $ | 759 | | State | | 207 | | | | 522 | | | | 344 | | Foreign | | 75 | | | | — | | | | — | | Total current | | 282 | | | | 469 | | | | 1,103 | | Deferred: | | | | | | | | | | | | Domestic: | | | | | | | | | | | | Federal | | 83,323 | | | | 2,994 | | | | 20,416 | | State | | 10,121 | | | | (249 | ) | | | 2,475 | | Total deferred | | 93,444 | | | | 2,745 | | | | 22,891 | | Total provision for income taxes | $ | 93,726 | | | $ | 3,214 | | | $ | 23,994 | |
The sources of income (loss) before provision for income taxes are from the United States and Contingenciesthe Company’s French branch. The Company files U.S. federal income tax returns and income tax returns in various state and local jurisdictions. WeF-23
Current income taxes are currently partythe amounts payable under the respective tax laws and regulations on each year’s earnings. Deferred income tax assets and liabilities represent the tax effects of revenues, costs and expenses, which are recognized for tax purposes in different periods from those used for financial statement purposes. A reconciliation of the federal statutory income tax rate to various legal proceedings. While management currently believesthe effective tax rate is as follows: | Fiscal Year | | | 2016 | | | 2015 | | | 2014 | | Statutory federal rate | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | State taxes, net of federal benefit | | 5.5 | % | | | 6.5 | % | | | 5.7 | % | Nondeductible Tax Receivable Agreement adjustment | | 0.4 | % | | | 4.1 | % | | —% | | Valuation allowance | | (176.8 | )% | | | (0.5 | )% | | | (0.7 | )% | Return to provision adjustment | | (0.1 | )% | | | (2.4 | )% | | —% | | Changes in tax law | —% | | | | (3.2 | )% | | —% | | Other | —% | | | | (0.8 | )% | | | 0.2 | % | Total | | (136.0 | )% | | | 38.7 | % | | | 40.2 | % |
Deferred income tax assets and liabilities consisted of the following: | January 28, | | | January 30, | | (in thousands) | 2017 | | | 2016 | | Deferred tax assets: | | | | | | | | Depreciation and amortization | $ | 28,353 | | | $ | 17,071 | | Employee related costs | | 2,361 | | | | 2,163 | | Allowance for asset valuations | | 4,817 | | | | 2,551 | | Accrued expenses | | 7,349 | | | | 6,088 | | Net operating losses | | 83,670 | | | | 72,465 | | Tax credits | | 812 | | | | 812 | | Other | | 489 | | | | 457 | | Total deferred tax assets | | 127,851 | | | | 101,607 | | Less: valuation allowances | | (122,860 | ) | | | (1,024 | ) | Net deferred tax assets | | 4,991 | | | | 100,583 | | Deferred tax liabilities: | | | | | | | | Cancellation of debt income | | (4,607 | ) | | | (6,657 | ) | Other | | (384 | ) | | | (482 | ) | Total deferred tax liabilities | | (4,991 | ) | | | (7,139 | ) | Net deferred tax assets | $ | — | | | $ | 93,444 | | Included in: | | | | | | | | Prepaid expenses and other current assets | $ | — | | | $ | 4,164 | | Deferred income taxes | | — | | | | 89,280 | | Net deferred tax assets | $ | — | | | $ | 93,444 | |
Net operating losses as of January 28, 2017 presented above do not include prior deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes, since they have not yet reduced income taxes payable. The excess deduction will reduce income taxes payable and increase additional paid in capital by $2,350 when ultimately deducted in a future year. Net operating losses as of January 30, 2016 presented above do not include prior deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes since they have not yet reduced income taxes payable. The excess deduction that would reduce income taxes payable and increase additional paid in capital was $2,732 as of January 30, 2016. As of January 28, 2017, the ultimate outcomeCompany had a net operating loss of these proceedings, individually$224,519 (federal tax effected amount of $78,582) for federal income tax purposes that may be used to reduce future federal taxable income. As of January 28, 2017, the cumulative amount of tax deductions related to shared-based compensation and the corresponding compensation expense adjustment for financial reporting was $5,876 (federal and state tax effected amount of $2,350). The net operating losses for federal income tax purposes will expire between 2030 and 2037. As of January 28, 2017, the Company recorded a $9,777 deferred tax asset related to net operating loss carryforwards for state income tax purposes that may be used to reduce future state taxable income. The net operating loss carryforwards for state income tax purposes expire between 2022 and 2037. F-24
As of January 28, 2017, the Company had total deferred tax assets related to net operating loss carryforwards, reduced for excess stock deductions and uncertain tax positions, of $83,670, of which $74,752 and $8,918 were attributable to federal and domestic state and local jurisdictions, respectively. The valuation allowance for deferred tax assets was $122,860 at January 28, 2017, increasing $121,836 from the valuation allowance for deferred tax assets of $1,024 at January 30, 2016. During fiscal 2016, the Company recorded additional valuation allowances in the aggregate, willamount of $121,836 due to the combination of (i) a current year pre-tax loss, including goodwill and tradename impairment charges; (ii) levels of projected pre-tax income; and (iii) the Company’s ability to carry forward or carry back tax losses. The valuation allowance of $1,024 at January 30, 2016, reflected management’s assessment, based on available information, that it was more likely than not that a portion of the deferred tax assets would not be realized due to the inability to generate sufficient state taxable income. The total valuation allowance on deferred tax assets decreased on a net basis by $50 in the fiscal year ended January 30, 2016. Adjustments to the valuation allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows: | Fiscal Year | | (in thousands) | 2016 | | | 2015 | | | 2014 | | Beginning balance | $ | 2,127 | | | $ | 4,487 | | | $ | 3,693 | | Increases for tax positions in current year | | 208 | | | | 72 | | | | 2,397 | | Increases for tax positions in prior years | | 4 | | | | 27 | | | | 135 | | Decreases for tax positions in prior years | | — | | | | (2,459 | ) | | | (1,738 | ) | Ending balance | $ | 2,339 | | | $ | 2,127 | | | $ | 4,487 | | | | | | | | | | | | | |
As of January 28, 2017 and January 30, 2016 , unrecognized tax benefits in the amount of $0 and $2,161 (net of tax), respectively, would impact the Company’s effective tax rate if recognized. It is reasonably possible that within the next 12 months certain temporary unrecognized tax benefits could fully reverse. Should this occur, the Company’s unrecognized tax benefits could be reduced by up to $2,339. The Company includes accrued interest and penalties on underpayments of income taxes in its income tax provision. As of January 28, 2017 and January 30, 2016, the Company did not have a material adverse impactany interest and penalties accrued on our financialits Consolidated Balance Sheets and no related provision or benefit was recognized in each of the Company’s Consolidated Statements of Operations for the years ended January 28, 2017, January 30, 2016 and January 31, 2015. Interest is computed on the difference between the tax position recognized net of any unrecognized tax benefits and the amount previously taken or results of operations or cash flows, litigationexpected to be taken in the Company’s tax returns. With limited exceptions, the Company is no longer subject to inherent uncertainties.examination for U.S. federal and state income tax for 2007 and prior. Note 14.11. Segment and Geographical Financial Information We operateThe Company operates and manage ourmanages its business by distribution channel and havehas identified two reportable segments, as further described below. WeManagement considered both similar and dissimilar economic characteristics, internal reporting and management structures, as well as products, customers, and supply chain logistics to identify the following reportable segments:
Wholesale segment—consists of ourthe Company’s operations to distribute products to premiermajor department stores and specialty stores in the United States and select international markets.markets; and Direct-to-consumer segment—consists of ourthe Company’s operations to distribute products directly to the consumer through ourits branded full-price specialty retail stores, outlet stores, and e-commerce platform. The accounting policies of ourthe Company’s reportable segments are consistent with those described in Note 1 to the Consolidated Financial Statements. “Description of Business and Summary of Significant Accounting Policies.” Unallocated corporate expenses are comprised of selling, general and administrative expenses attributable to corporate and administrative activities (such as marketing, design, finance, information technology, legal and human resources departments), and other charges that are not directly attributable to our operatingthe Company’s reportable segments. Unallocated corporate assets are comprised of capitalized deferred financing costs, the carrying values of ourthe Company’s goodwill and unamortized trademark, debt andtradename, deferred tax assets, and other assets that will be utilized to generate revenue for both of ourthe Company’s reportable segments. As the Company’s goodwill and tradename are not allocated to the Company’s reportable segments in the measure of segment assets regularly reported to and used by management, the corresponding impairment charges associated with the goodwill and tradename are not reflected in the operating results of the Company’s reportable segments. Our wholesale segment sells apparel to our direct-to-consumer segment at cost. The wholesale intercompany sales of $22,595, $16,916, and $9,907 have been excluded from the net sales totals presented below for fiscal 2014, fiscal 2013, and fiscal 2012, respectively. Furthermore, as intercompany sales are sold at cost, no intercompany profit is reflected in operating income presented below.F-25
Summary information for our operatingthe Company’s reportable segments is presented below (in thousands).below. | | | | | | | | Fiscal Year | | | | | Fiscal Year | | | | | | 2014 | | | 2013 | | | 2012 | | | (in thousands) | | | 2016 | | | 2015 | | | 2014 | | Net Sales: | | | | | | | | | | | | | | | | | | | Wholesale | | $ | 259,418 | | | $ | 229,114 | | | $ | 203,107 | | | $ | 170,053 | | | $ | 201,182 | | | $ | 259,418 | | Direct-to-consumer | | | 80,978 | | | | 59,056 | | | | 37,245 | | | | 98,146 | | | | 101,275 | | | | 80,978 | | | | | | | | | | | | | Total net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | | $ | 268,199 | | | $ | 302,457 | | | $ | 340,396 | | | | | | | | | | | | | Operating Income: | | | Operating (Loss) Income: | | | | | | | | | | | | | | Wholesale | | $ | 100,623 | | | $ | 81,822 | | | $ | 72,913 | | | $ | 47,098 | | | $ | 61,571 | | | $ | 100,623 | | Direct-to-consumer | | | 14,556 | | | | 10,435 | | | | 4,465 | | | | | | | | | | | | | | Direct-to-consumer (1) | | | | 1,216 | | | | 7,839 | | | | 14,556 | | Subtotal | | | 115,179 | | | | 92,257 | | | | 77,378 | | | | 48,314 | | | | 69,410 | | | | 115,179 | | Unallocated expenses | | | (44,929 | ) | | | (42,904 | ) | | | (36,442 | ) | | | | | | | | | | | | | Total operating income | | $ | 70,250 | | | $ | 49,353 | | | $ | 40,936 | | | | | | | | | | | | | | Unallocated corporate expenses | | | | (59,925 | ) | | | (53,684 | ) | | | (44,929 | ) | Impairment of goodwill and indefinite-lived intangible asset | | | | (53,061 | ) | | | — | | | | — | | Total operating (loss) income | | | $ | (64,672 | ) | | $ | 15,726 | | | $ | 70,250 | | Depreciation & Amortization: | | | | | | | | | | | | | | Wholesale | | $ | 1,962 | | | $ | 1,204 | | | $ | 915 | | | $ | 1,754 | | | $ | 2,058 | | | $ | 1,962 | | Direct-to-consumer | | | 2,950 | | | | 1,581 | | | | 1,094 | | | | 4,611 | | | | 4,498 | | | | 2,950 | | Unallocated corporate | | | 355 | | | | — | | | | — | | | | 2,319 | | | | 1,794 | | | | 355 | | | | | | | | | | | | | Total depreciation & amortization | | $ | 5,267 | | | $ | 2,785 | | | $ | 2,009 | | | $ | 8,684 | | | $ | 8,350 | | | $ | 5,267 | | | | | | | | | | | | | Capital Expenditures: | | | | | | | | | | | | | | Wholesale | | $ | 2,076 | | | $ | 1,832 | | | $ | 459 | | | $ | 650 | | | $ | 1,629 | | | $ | 2,076 | | Direct-to-consumer | | | 8,117 | | | | 8,241 | | | | 1,362 | | | | 9,559 | | | | 9,442 | | | | 8,117 | | Unallocated corporate | | | 9,506 | | | | — | | | | — | | | | 4,078 | | | | 6,520 | | | | 9,506 | | | | | | | | | | | | | Total capital expenditure | | $ | 19,699 | | | $ | 10,073 | | | $ | 1,821 | | | | | | | | | | | | | | Total capital expenditures | | | $ | 14,287 | | | $ | 17,591 | | | $ | 19,699 | |
| | | | | | | | | | | | January 31,
2015 | | | February 1,
2014 | | Total Assets: | | | | | | | | | Wholesale | | $ | 70,635 | | | $ | 78,122 | | Direct-to-consumer | | | 33,793 | | | | 24,169 | | Unallocated corporate | | | 277,770 | | | | 312,051 | | | | | | | | | | | Total assets | | $ | 382,198 | | | $ | 414,342 | | | | | | | | | | |
(1) Includes non-cash impairment charges totaling $2,082 related to property and equipment. See Note 1 “Description of Business and Summary of Significant Accounting Policies – (I) Property and Equipment” for additional information. Sales resultsImpairment of goodwill and indefinite-lived intangible asset in Fiscal 2016 includes pre-tax impairment charges of $53,061 related to the Company’s goodwill and tradename intangible asset. See Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for further details.
Assets for each of the Company’s reportable segments are presented on a geographic basis below,below. | | January 28, | | | January 30, | | (in thousands) | | 2017 | | | 2016 | | Total Assets: | | | | | | | | | Wholesale | | $ | 44,442 | | | $ | 47,757 | | Direct-to-consumer | | | 45,038 | | | | 35,433 | | Unallocated corporate | | | 150,000 | | | | 280,378 | | Total assets | | $ | 239,480 | | | $ | 363,568 | |
The Company is domiciled in thousands. We predominately operate within the U.S. and sell our productsas of January 28, 2017, had no active international subsidiaries. Although the Company maintains a showroom in 45 countries either directly to premier departmentParis through a local branch, substantially all marketing, sales, order management and specialty stores, or through distribution relationships with highly-regarded international partners with exclusive rights to certain territories. Salescustomer service functions are presented based on customer location. Substantiallyperformed in the U.S. and therefore substantially all of the Company’s sales originate in the U.S. As a result, net sales by destination are no longer provided. Additionally, substantially all long-lived assets, including property plant and equipment and fixtures installed at ourthe Company’s retailer sites, are located in the U.S. | | | | | | | | | | | | | | | | Fiscal Year | | | | | 2014 | | | 2013 | | | 2012 | | Net Sales: | | | | | | | | | | | | | Domestic | | $ | 310,179 | | | $ | 265,622 | | | $ | 221,632 | | International | | | 30,217 | | | | 22,548 | | | | 18,720 | | | | | | | | | | | | | | | Total net sales | | $ | 340,396 | | | $ | 288,170 | | | $ | 240,352 | | | | | | | | | | | | | | |
Note 15.12. Related Party Transactions Shared Services Agreement OnIn connection with the consummation of the Company’s IPO on November 27, 2013, Vince, LLC entered into thea Shared Services Agreement with Kellwood (the “Shared Services Agreement”), pursuant to which Kellwood provideswould provide support services in various operational areas including, among other things, certain accounting functions, tax, e-commerce operations, distribution, logistics, information
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technology, accounts payable, credit and collections and payroll and benefits.benefits administration. Since the IPO, the Company had been in the process of transitioning certain functions performed by Kellwood under the Shared Services Agreement and as of the end of fiscal 2016, the Company has completed the transition of all such functions and systems from Kellwood to the Company’s own systems or processes as well as to third-party service providers. Functions that transitioned to the Company, including its third-party service providers, include accounting related functions, tax, accounts payable, credit and collections, e-commerce customer service, distribution and logistics, payroll and benefits administration, and information technology support. Additionally, the Company has completed the implementation of its own enterprise resource planning (“ERP”) and supporting systems, point-of-sale system, third-party e-commerce platform, human resource payroll and recruitment systems, distribution applications, and network infrastructure. In connection with the Kellwood Sale, the Shared Services Agreement was contributed to St. Louis, LLC. St. Louis, LLC continues to provide minor transitional services relating to historical records and legacy functions, which the Company is in the process of winding down. The Shared Services Agreement may be modified or supplementedwill terminate automatically upon the termination of all services provided thereunder. After termination of the agreement, St. Louis, LLC will have no obligation to include newprovide any services under terms and conditions to be mutually agreed upon in good faith by the parties. Company. The fees for all services received by Vince, LLC from Kellwood, including any new services mutually agreed upon byunder the parties, will beShared Services Agreement are at cost. Such costs shall beare the full amount of any and all actual and direct out-of-pocket expenses (including base salary and wages but without providing for any margin of profit or allocation of depreciation or amortization expense) incurred by the service provider or its affiliates in connection with the provision of the services. We may terminate any or all ofThe Company is invoiced monthly for the services at any time for any reason (with or without cause) upon giving Kellwood the required advance notice for termination for that particular service. Additionally, the provision of the following services, which are services which require a term as a matter of law and services which are based on a third-party agreement with a set term, shall terminate automatically upon the related date specified on the schedules toprovided under the Shared Services Agreement: Building Services NY; Tax; and Compensation & Benefits. If no specific notice requirement has been provided, 90 days prior written notice shall be required to be given. Upon the termination of certain services, Kellwood may no longer be in a position to provide certain other related services. Kellwood must notify us within 10 days following our request to terminate any services if they will no longer be able to provide other related services. Assuming we proceed with our request to terminate the original services, such related services shall also be terminated in connection with such termination.
We are invoiced by Kellwood monthly for these amountsAgreement and generally beis required to pay within 15 business days of receiving such invoice. The payments willcan be trued-up and can be disputed once each fiscal quarter. For the years ended January 28, 2017, January 30, 2016 and January 31, 2015, the Company recognized $4,256, $9,357 and $11,436, respectively, of expense within the Consolidated Statements of Operations for services provided under the Shared Services Agreement. As of January 31, 2015, we have28, 2017 and January 30, 2016, the Company has recorded $753$37 and $858, respectively, in otherOther accrued expenses to recognize amounts payable to Kellwood under the Shared Services Agreement.
Tax Receivable Agreement Vince Holding Corp.VHC entered into thea Tax Receivable Agreement with the Pre-IPO Stockholders on November 27, 2013. WeThe Company and ourits former subsidiaries generated certain tax benefits (including NOLs and tax credits) prior to the Restructuring Transactions consummated in connection with ourthe Company’s IPO and will generate certain section 197 intangible deductions (the “Pre-IPO Tax Benefits”), which would reduce the actual liability
for taxes that wethe Company might otherwise be required to pay. The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by usthe Company and ourits subsidiaries from the utilization of the Pre-IPO Tax Benefits (the “Net Tax Benefit”). For purposes of the Tax Receivable Agreement, the Net Tax Benefit equals (i) with respect to a taxable year, the excess, if any, of (A) ourthe Company’s liability for taxes using the same methods, elections, conventions and similar practices used on the relevant company return assuming there were no Pre-IPO Tax Benefits over (B) ourthe Company’s actual liability for taxes for such taxable year (the “Realized Tax Benefit”), plus (ii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on an amended schedule applicable to such prior taxable year over the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year, minus (iii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year over the Realized Tax Benefit reflected on the amended schedule for such prior taxable year; provided, however, that to extent any of the adjustments described in clauses (ii) and (iii) were reflected in the calculation of the tax benefit payment for any subsequent taxable year, such adjustments shall not be taken into account in determining the Net Tax Benefit for any subsequent taxable year. While the Tax Receivable Agreement is designed with the objective of causing ourthe Company’s annual cash costs attributable to federal, state and local income taxes (without regard to ourthe Company’s continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as that which wethe Company would have paid had wethe Company not had the Pre-IPO Tax Benefits available to offset ourits federal, state and local taxable income, there are circumstances in which this may not be the case. In particular, the Tax Receivable Agreement provides that any payments by usthe Company thereunder shall not be refundable. In that regard, the payment obligations under the Tax Receivable Agreement differ from a payment of a federal income tax liability in that a tax refund would not be available to usthe Company under the Tax Receivable Agreement even if wethe Company were to incur a net operating loss for federal income tax purposes in a future tax year. Similarly, the Pre-IPO Stockholders will not reimburse usthe Company for any payments previously made if any tax benefits relating to such payments are subsequently disallowed, although the amount of any such tax benefits subsequently disallowed will reduce future payments (if any) otherwise owed to such Pre-IPO Stockholders. In addition, depending on the amount and timing of ourthe Company’s future earnings (if any) and on other factors including the effect of any limitations imposed on ourthe Company’s ability to use the Pre-IPO Tax Benefits, it is possible that all payments required under the Tax Receivable Agreement could become due within a relatively short period of time following consummation of ourthe Company’s IPO. If wethe Company had not entered into the Tax Receivable Agreement, wethe Company would be entitled to realize the full economic benefit of the Pre-IPO Tax Benefits to the extent allowed by federal, state and local law. The Tax Receivable Agreement is designed with the objective of causing ourthe Company’s annual cash costs attributable to federal, state and local income taxes (without regard to ourthe Company’s continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as wethe Company would have paid had wethe F-27
Company not had the Pre-IPO Tax Benefits available to offset ourits federal, state and local taxable income. As a result, stockholders who purchased shares in the IPO are not entitled to the economic benefit of the Pre-IPO Tax Benefits that would have been available if the Tax Receivable Agreement were not in effect, except to the extent of ourthe Company’s continuing 15% interest in the Pre-IPO Benefits. Additionally, the payments we makethe Company makes to the Pre-IPO Stockholders under the Tax Receivable Agreement are not expected to give rise to any incidental tax benefits to us,the Company, such as deductions or an adjustment to the basis of ourthe Company’s assets. An affiliate of Sun Capital may elect to terminate the Tax Receivable Agreement upon the occurrence of a Change of Control (as defined below). In connection with any such termination, we arethe Company is obligated to pay the present value (calculated at a rate per annum equal to LIBOR plus 200 basis points as of such date) of all remaining Net Tax Benefit payments that would be required to be paid to the Pre-IPO Stockholders from such termination date, applying the valuation assumptions set forth in the Tax Receivable Agreement (the “Early Termination Period”). “Change of control,” as defined in the Tax Receivable Agreement shall mean an event or series of events by which (i) Vince Holding Corp.VHC shall cease directly or indirectly to own 100% of the capital stock of Vince, LLC; (ii) any “person” or “group” (as such terms are used in Section 13(d) and 14(d) of the Exchange Act), other than one or more permitted investors, shall be the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of capital stock having more, directly or indirectly, than 35% of the total voting power of all outstanding capital stock of Vince Holding Corp. in the election of directors, unless at such time the permitted investors are direct or indirect “beneficial owners” (as so defined) of capital stock of Vince Holding Corp. having a greater percentage of the total voting power of all outstanding capital stock of Vince Holding Corp.VHC in the election of directors than that owned by each other “person” or “group” described above; (iii) for any reason whatsoever, a majority of the board of directors of Vince Holding Corp.VHC shall not be continuing directors; or (iv) a “Change of Control” (or comparable term) shall occur under (x) any term loan or revolving credit facility of Vince Holding Corp.VHC or its subsidiaries or (y) any unsecured, senior, senior subordinated or subordinated indebtedness of Vince Holding Corp.VHC or its subsidiaries, if, in each case, the outstanding principal amount thereof is in excess of $15,000. WeThe Company may also terminate the Tax Receivable Agreement by paying the Early Termination Payment to the Pre-IPO Stockholders. Additionally, the Tax Receivable Agreement provides that in the event that we breachthe Company breaches any material obligations under the Tax Receivable Agreement by operation of law as a result of the rejection of the Tax Receivable Agreement in a case commenced under the Bankruptcy Code, then the Early Termination Payment plus other outstanding amounts under the Tax Receivable Agreement shall become due and payable. The Tax Receivable Agreement will terminate upon the earlier of (i) the date all such tax benefits have been utilized or expired, (ii) the last day of the tax year including the tenth anniversary of the IPO Restructuring Transactions and (iii) the mutual agreement of the parties thereto, unless earlier terminated in accordance with the terms thereof. The Company had expected to make a required payment under the Tax Receivable Agreement in the fourth quarter of fiscal 2015. As a result of lower than expected cash from operations due to weaker than projected performance, and the level of projected availability under the Company’s Revolving Credit Facility, management concluded that the Company would not be able to fund the payment when due. Accordingly, on September 1, 2015, the Company entered into an amendment to the Tax Receivable Agreement with Sun Cardinal, LLC, an affiliate of Sun Capital Partners, Inc., for itself and as a representative of the other stockholders parties thereto. Pursuant to this amendment, Sun Cardinal agreed to postpone payment of the tax benefit with respect to the 2014 taxable year, estimated at $21,762 plus accrued interest, to September 15, 2016. The amendment to the Tax Receivable Agreement also waived the application of a default interest rate at LIBOR plus 500 basis points per annum on the postponed payment. The interest rate on the postponed payment remained at LIBOR plus 200 basis points per annum. As a condition of the Investment Agreement, the Company repaid its obligation, including accrued interest, totaling $22,262, with respect to the 2014 taxable year under the Tax Receivable Agreement upon the closing of the Rights Offering. As of January 31, 2015, our28, 2017, the Company’s total obligation under the Tax Receivable Agreement is estimated to be $140,618, of which $2,788 is included as a component of Other accrued expenses and $137,830 is included as Other liabilities on the Consolidated Balance Sheet. The tax benefit payment of $7,438, including accrued interest, with respect to the 2015 taxable year was $168,932, which has a remaining termpaid in the fourth quarter of nine years.fiscal 2016. The Tax Receivable Agreement expires on December 31, 2023. The obligation was originally recorded in connection with the IPO as an adjustment to additional paid-in capital on ourthe Company’s Consolidated Balance Sheet. Approximately $22,869 is recordedDuring fiscal 2016, the obligation under the Tax Receivable Agreement was adjusted primarily as a componentresult of other accrued expenses and $146,063changes in tax laws that impacted the net operating loss deferred tax assets. The adjustment resulted in a net decrease of $209 to the liability under the Tax Receivable Agreement with the corresponding adjustment accounted for as other liabilitiesa decrease to Other expense, net on ourthe Consolidated Balance Sheet asStatements of January 31, 2015. Operations. During fiscal year 2014, we2015, the Company adjusted the obligation under the Tax Receivable Agreement in connection with the filing of ourits 2014 income tax returns and as a result of changes in tax laws that impacted the net operating loss deferred tax assets. These adjustments resulted in a net increase of $1,154 to the pre-IPO deferred tax assets and a net increase of $981 to the liability under the Tax Receivable Agreement with the corresponding net increase accounted for as an adjustment to other expense, net on the consolidated statements of operations. During fiscal year 2014, the Company adjusted the obligation under the Tax Receivable Agreement in connection with the filing of its 2013 income tax returns. The return to provision adjustment resulted in a net reduction of $818 to the pre-IPO deferred tax assets and a net reduction of $1,442 to the liability under the Tax Receivable Agreement with the corresponding net increase of $624 accounted for as an adjustment to additional paid in-capital. In addition, wethe Company made our its F-28
first tax benefit payment with respect to the 2013 taxable year of $3,199 including accrued interest which was paid during the fourth quarter of fiscal 2014. Investment Agreement and Rights Offering On March 15, 2016, the Company entered into an Investment Agreement with the Investors pursuant to which Sun Cardinal and SCSF Cardinal agreed to backstop the Rights Offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription. On March 29, 2016, the Company commenced a Rights Offering, whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holders”) received one non-transferrable right to purchase 0.3191 shares for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercised their subscription rights were entitled to subscribe for additional shares that remained unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allowed a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights could only be exercised for whole numbers of shares; no fractional shares of common stock were issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors fully subscribed in the Rights Offering and exercised their oversubscription right. The Company received subscriptions and oversubscriptions from its existing stockholders for a total of 11,622,518 shares of its common stock, resulting in aggregate gross proceeds of approximately $63,924. Simultaneous with the closing of the Rights Offering, the Company received $1,076 of gross proceeds from the related Investment Agreement and issued to the Investors 195,663 shares of its common stock in connection therewith. In total, the Company received total gross proceeds of $65,000 as a result of the Rights Offering and related Investment Agreement transactions and recorded increases of $118 within Common Stock and $63,992 within Additional paid-in capital on the consolidated balance sheet. Upon the completion of these transactions, affiliates of Sun Capital owned 58% of the Company’s outstanding common stock. The Company used a portion of the net proceeds received from the Rights Offering and related Investment Agreement to (1) repay the amount owed by the Company under the Tax Receivable Agreement (as discussed above) with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit payment with respect to the 2014 taxable year totaling approximately $22,869 plusincluding accrued interest, is expectedtotaling $22,262, and (2) repay all then outstanding indebtedness, totaling $20,000, under the Company’s Revolving Credit Facility. The Company intends to be paid inuse the fourth quarter of 2015. Transfer Agreement
On November 27, 2013, Kellwood and Vince Intermediate Holding, LLC entered into a transfer agreement (the “Transfer Agreement”). Pursuant to the terms of the Transfer Agreement, the following transactions occurred:
Kellwood distributed the Vince, LLC equity interests to Vince Intermediate Holding, LLC in exchange for a $341,500 promissory note issued by Vince Intermediate Holding, LLC (the “Kellwood Note Receivable”).
Vince Intermediate Holding, LLC immediately repaid the Kellwood Note Receivable in full using approximately $172,000 ofremaining net proceeds, from the IPO along with $169,500 of net borrowings under the new Term Loan Facility. Using the proceeds from the repayment of the Kellwood Note Receivable, after giving effect to the contribution of $70,100 of indebtedness under the Sun Term Loan Agreements to the capital of Vince Holding Corp.which funds are held by affiliates of Sun Capital, Kellwood repaid and discharged the indebtedness outstanding under its revolving credit facility and the Sun Term Loan Agreements, and redeemed all of its issued and outstanding 12.875% Notes. Kellwood also redeemed $38,100 aggregate
| principal amount of its 7.125% Notes, at par pursuant to a tender offer. In addition, Kellwood also used such proceeds to pay certain restructuring fees to Sun Capital Management. Kellwood also paid a debt recovery bonus of $6,000 to our Chief Executive Officer.
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Kellwood refinanced its Wells Fargo Facility to, among other things, release Vince, LLC as a guarantor or obligor thereunder.
In accordance with the terms of the Transfer Agreement, Kellwood has agreed to indemnify us for any losses which we may suffer, sustain or become subject to, relating to the Kellwood business or in connection with any contract contributed to us by Kellwood which is notVHC until needed by its terms permitted to be assigned. Kellwood has also agreed to indemnify usoperating subsidiary, for any losses associated with its failure to satisfy its obligations under the Transfer Agreement with respect to the repayment, repurchase, discharge or refinancing of certain of its indebtedness, as described in the immediately prior paragraph (including with respect to the removal of Vince, LLC as an obligor or guarantor under its refinanced revolving credit facility). Additionally, Vince Intermediate Holding, LLC has agreed to indemnify Kellwood against any lossesadditional strategic investments and general corporate purposes, which Kellwood may suffer, sustain or become subject to relating to the Vince business. The parties also agreed, upon the request of either the other party to, without further consideration, execute and deliver, or cause to be executed and delivered, such other instruments of conveyance, transfer, assignment and confirmation, and shall take or cause to be taken, such further or other actions as the other party may deem necessary or desirable to carry out the intent and purpose of the Transfer Agreement and give effect to the transactions contemplated thereby.
Kellwood Note Receivable
Vince Intermediate Holding, LLC issued the Kellwood Note Receivable in the aggregate principal amount of $341,500 to Kellwood Company, LLC on November 27, 2013, immediately prior to the consummation of our IPO. Vince Intermediate Holding, LLC repaid the Kellwood Note Receivable on the same day, using net proceeds from our IPO and net borrowings under the Term Loan Facility. No interest accrued under the Kellwood Note Receivable as the Kellwood Note Receivable was repaid on the date of issuance.
Debt Recovery Bonus to Our Chief Executive Officer
Our CEO received a debt recovery bonus of $6,000 (which included $440 of a prior unpaid debt recovery bonus) in connection with the repayment of certain Kellwood indebtedness, calculated as 4.4% of the related debt recovery, on November 27, 2013. Kellwood used proceeds from the repayment of the Kellwood Note Receivable to pay this bonus to our CEO at the closing of our IPO.
Earnout Agreement
In connection with the acquisition of the Vince business, Kellwood entered into an earnout agreement with CRL Group (former owners of the Vince business) providing for contingent earnout payments as additional consideration for the purchase of substantially all of the assets and properties of CRL Group (the “Earnout Agreement”). The Earnout Agreement provides for the payment of contingent annual earnout payments to CRL Group for five periods between 2007 and 2011, with the contingent amounts earned based on the amount of net sales and gross margin in each such period. The Earnout Agreement also provides for a cumulative contingent payment based on the amount of net sales during the Earnout Agreement period. Kellwood made payments under the Earnout Agreement of $806 during fiscal 2012 and no payments were made during fiscal 2014 and fiscal 2013.
Certain Indebtedness to Affiliates of Sun Capital
We had substantial indebtedness owed to affiliates of Sun Capital after giving effect to the acquisition of Kellwood Company by affiliates of Sun Capital Partners, Inc. in February 2008 under the Sun Promissory Notes
and Sun Capital Loan Agreement (as defined in Note 7). Subsequent to 2008, Kellwood Company made borrowings under the Sun Term Loan Agreements (as defined in Note 3) to fund negative cash flows of the non-Vince business. Allinclude future amounts owed by Vince Holding Corp. under these agreements were discharged as of February 1, 2014, as further discussed below.
On December 28, 2012, Sun Kellwood Finance waived all interest capitalized and accruedthe Company under the Sun Promissory notes prior to July 19, 2012. Additionally, Sun Kellwood Finance and SCSF Finance waived all interest capitalized and accrued under the Sun Capital Loan Agreement prior to July 19, 2012. As all parties were under the common control of affiliates of Sun Capital, both transactions resulted in capital contributions of $270,852 and $18,249 for the Sun Promissory Notes and Sun Capital Loan Agreement, respectively. The capital contributions were recorded as adjustments to additional paid in capital on our Consolidated Balance Sheet as of February 2, 2013. These transactions had no significant income tax consequences. The remaining principal and capitalized PIK interest owed under these agreements of $391,434 were reported within long-term debt on the Consolidated Balance Sheet as of February 2, 2013.
On June 18, 2013, Sun Kellwood Finance and SCSF Finance assigned all title and interest in both the Sun Promissory Notes and note under our Sun Capital Loan Agreement to Sun Cardinal, LLC. Immediately following the assignment of these notes, Sun Cardinal contributed all outstanding principal and interest due under these notes as of June 18, 2013 to the capital of Vince Holding Corp. As all parties were under the common control of Sun Capital at such time, these transactions were recorded in the second quarter of fiscal 2013 as increases to Vince Holding Corp.’s additional paid in capital in the amounts of $334,595 and $72,932 for the Sun Promissory Notes and Sun Capital Loan Agreement, respectively. As a result, Vince Holding Corp. has been discharged of all obligations under both agreements.Tax Receivable Agreement. See Note 7. Immediately prior1 “Description of Business and Summary of Significant Accounting Policies – (D) Sources and Uses of Liquidity” for additional details regarding the Company’s ability to utilize the Restructuring Transactions, affiliates of Sun Capital contributed $38,683 of principal under the Sun Term Loan Agreements to the capital of Kellwood Company.
On November 27, 2013, subsequent to the closing of the IPO and in connection with the Restructuring Transactions, all remaining debt obligations to affiliates of Sun Capital under the Sun Term Loan Agreements were retained by Kellwood Company, amounting to $83,355 (including accrued interest). Kellwood Company immediately discharged all obligations under these agreements through the application of a portion of the Kellwood Note Receivablenet proceeds. See Note 3.
Management Services Agreement In connection with the acquisition of Kellwood Company by affiliates of Sun Capital in 2008, Sun Capital Partners Management V, LLC, an affiliate of Sun Capital, entered into the Management Services Agreement (the “Management Services Agreement”) with Kellwood Company. Under this agreement, Sun Capital Management provided Kellwood Company with consulting and advisory services, including services relating to financing alternatives, financial reporting, accounting and management information systems. In exchange, Kellwood Company reimbursed Sun Capital Management for reasonable out-of-pocket expenses incurred in connection with providing consulting and advisory services, additional and customary and reasonable fees for management consulting services provided in connection with corporate events, and also paid an annual management fee equal to $2,200 which was prepaid in equal quarterly installments, a portion of which was charged to the Vince business. WeThe Company reported $79, $404$0, $0 and $779$79 for management fees to Sun Capital in otherOther expense, net, in the Consolidated Statements of Operations for fiscal 2014,2016, fiscal 2013,2015 and fiscal 2012, respectively. The remaining fees charged to the non-Vince businesses of $1,537, and $1,668 are included within net loss from discontinued operations in the Consolidated Statements of Operations for fiscal 2013 and fiscal 2012,2014, respectively. Upon the consummation of certain corporate events involving Kellwood Company or its direct or indirect subsidiaries, Kellwood Company was required to pay Sun Capital Management a transaction fee in an amount equal to 1% of the aggregate consideration paid to or by Kellwood Company and any of its direct or indirect subsidiaries or stockholders. WeThe Company incurred no material transaction fees payable to Sun Capital Management during all periods presented on the Consolidated Statementconsolidated statement of Operations.operations. On November 27, 2013, in connection with the closing of the Company’s IPO and Restructuring Transactions, VHC was released from the terms of the Management Services Agreement between Kellwood Company and Sun Capital Management. F-29
Sun Capital Consulting Agreement On November 27, 2013, wethe Company entered into an agreement with Sun Capital Management to (i) reimburse Sun Capital Management Corp. (“Sun Capital Management”) or any of its affiliates providing consulting services under the agreement for out-of-pocket expenses incurred in providing consulting services to usthe Company and (ii) provide Sun Capital Management with customary indemnification for any such services. The agreement is scheduled to terminate on November 27, 2023, the tenth anniversary of our IPO (i.e. November 27, 2023).the Company’s IPO. Under the consulting agreement, we havethe Company has no obligation to pay Sun Capital Management or any of its affiliates any consulting fees other than those which are approved by a majority of ourthe Company’s directors that are not affiliated with Sun Capital. To the extent such fees are approved in the future, wethe Company will be obligated to pay such fees in addition to reimbursing Sun Capital Management or any of its affiliates that provide usthe Company services under the consulting agreement for all reasonable out-of-pocket fees and expenses incurred by such party in connection with the provision of consulting services under the consulting agreement and any related matters. Reimbursement of such expenses shall not be conditioned upon the approval of a majority of ourthe Company’s directors that are not affiliated with Sun Capital Management, and shall be payable in addition to any fees that such directors may approve. Neither Sun Capital Management nor any of its affiliates are liable to usthe Company or ourthe Company’s affiliates, security holders or creditors for (1) any liabilities arising out of, related to, caused by, based upon or in connection with the performance of services under the consulting agreement, unless such liability is proven to have resulted directly and primarily from the willful misconduct or gross negligence of such person or (2) pursuing any outside activities or opportunities that may conflict with ourthe Company’s best interests, which outside activities we consentthe Company consents to and approveapproves under the consulting agreement, and which opportunities neither Sun Capital Management nor any of its affiliates will have any duty to inform usthe Company of. In no event will the aggregate of any liabilities of Sun Capital Management or any of its affiliates exceed the aggregate of any fees paid under the consulting agreement. In addition, we arethe Company is required to indemnify Sun Capital Management, its affiliates and any successor by operation of law against any and all liabilities, whether or not arising out of or related to such party’s performance of services under the consulting agreement, except to the extent proven to result directly and primarily from such person’s willful misconduct or gross negligence. We areThe Company is also required to defend such parties in any lawsuits which may be brought against such parties and advance expenses in connection therewith. In the case of affiliates of Sun Capital Management that have rights to indemnification and advancement from affiliates of Sun Capital, we agreethe Company agrees to be the indemnitor of first resort, to be liable for the full amounts of payments of indemnification required by any organizational document of such entity or any agreement to which such entity is a party, and that wethe Company will not make any claims against any affiliates of Sun Capital Partners for contribution, subrogation, exoneration or reimbursement for which they are liable under any organizational documents or agreement. Sun Capital Management may, in its sole discretion, elect to terminate the consulting agreement at any time. WeThe Company may elect to terminate the consulting agreement if SCSF Cardinal, Sun Cardinal or any of their respective affiliates’ aggregate ownership of ourthe Company’s equity securities falls below 30%. During fiscal 2016, fiscal 2015 and fiscal 2014, the Company incurred expenses of $121, $114 and $76, respectively, under the Sun Capital Consulting Agreement. Indemnification Agreements WeThe Company has entered into indemnification agreements with each of ourits executive officers and directors on November 27, 2013.directors. The indemnification agreements provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under the DGCL.
Amended and Restated Certificate of Incorporation OurThe Company’s amended and restated certificate of incorporation provides that for so long as affiliates of Sun Capital own 30% or more of ourthe Company’s outstanding shares of common stock, Sun Cardinal, a Sun Capital affiliate, has the right to designate a majority of ourthe Company’s board of directors. For so long as Sun Cardinal has the right to designate a majority of ourthe Company’s board of directors, the directors designated by Sun Cardinal are expected to constitute a majority of each committee of ourthe Company’s board of directors (other than the Audit Committee), and the chairman of each of the committees (other than the Audit Committee) is expected to be a director serving on the committee who is selected by affiliates of Sun Capital, provided that, at such time as we arethe Company is not a “controlled company” under the NYSE corporate governance standards, ourthe Company’s committee membership will comply with all applicable requirements of those standards and a majority of ourthe Company’s board of directors will be “independent directors,” as defined under the rules of the NYSE, subject to any applicable phase in requirements.
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Note 16.13. Quarterly Financial Information (unaudited) Summarized quarterly financial results for fiscal 20142016 and fiscal 2013 (in thousands, except per share data):2015 are as follows: | | | | | | | | | | | | | | | | | | | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | Fiscal 2014: | | | | | | | | | | | | | | | | | Net sales | | $ | 53,452 | | | $ | 89,326 | | | $ | 102,947 | | | $ | 94,671 | | Gross profit | | | 26,411 | | | | 44,014 | | | | 50,648 | | | | 45,756 | | Net income from continuing operations | | | 1,384 | | | | 10,501 | | | | 13,311 | | | | 10,527 | | Net loss from discontinued operations, net of tax | | | — | | | | — | | | | — | | | | — | | Net income | | | 1,384 | | | | 10,501 | | | | 13,311 | | | | 10,527 | | Basic earnings per share (1): | | | | | | | | | | | | | | | | | Basic earnings per share from continuing operations | | $ | 0.04 | | | $ | 0.29 | | | $ | 0.36 | | | $ | 0.29 | | Basic loss per share from discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Diluted earnings per share (1): | | | | | | | | | | | | | | | | | Diluted earnings per share from continuing operations | | $ | 0.04 | | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.28 | | Diluted loss per share from discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | Fiscal 2013: | | | | | | | | | | | | | | | | | Net sales | | $ | 40,363 | | | $ | 74,294 | | | $ | 85,755 | | | $ | 87,758 | | Gross profit | | | 17,513 | | | | 33,638 | | | | 41,723 | | | | 40,142 | | Net (loss) income from continuing operations | | | (9,779 | ) | | | 8,395 | | | | 16,468 | | | | 8,311 | | Net loss from discontinued operations, net of tax | | | (5,330 | ) | | | (18,929 | ) | | | (18,827 | ) | | | (7,729 | ) | Net (loss) income | | | (15,109 | ) | | | (10,534 | ) | | | (2,359 | ) | | | 582 | | Basic earnings (loss) per share (1): | | | | | | | | | | | | | | | | | Basic (loss) earnings per share from continuing operations | | $ | (0.37 | ) | | $ | 0.32 | | | $ | 0.63 | | | $ | 0.24 | | Basic loss per share from discontinued operations | | $ | (0.21 | ) | | $ | (0.72 | ) | | $ | (0.72 | ) | | $ | (0.22 | ) | Diluted earnings (loss) per share (1): | | | | | | | | | | | | | | | | | Diluted (loss) earnings per share from continuing operations | | $ | (0.37 | ) | | $ | 0.32 | | | $ | 0.62 | | | $ | 0.24 | | Diluted loss per share from discontinued operations | | $ | (0.21 | ) | | $ | (0.72 | ) | | $ | (0.71 | ) | | $ | (0.22 | ) |
(in thousands, expect per share data) | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter (1) | | Fiscal 2016: | | | | | | | | | | | | | | | | | Net sales | | $ | 67,645 | | | $ | 60,702 | | | $ | 75,973 | | | $ | 63,879 | | Gross profit | | | 28,258 | | | | 27,387 | | | | 37,958 | | | | 29,216 | | Net (loss) income | | | (1,924 | ) | | | (1,967 | ) | | | 3,380 | | | | (162,148 | ) | Basic (loss) earnings per share (2) | | $ | (0.05 | ) | | $ | (0.04 | ) | | $ | 0.07 | | | $ | (3.28 | ) | Diluted (loss) earnings per share (2) | | $ | (0.05 | ) | | $ | (0.04 | ) | | $ | 0.07 | | | $ | (3.28 | ) | | | | | | | | | | | | | | | | | | (in thousands, expect per share data) | | First Quarter | | | Second Quarter (3) | | | Third Quarter (4) | | | Fourth Quarter (5) | | Fiscal 2015: | | | | | | | | | | | | | | | | | Net sales | | $ | 59,842 | | | $ | 79,993 | | | $ | 80,859 | | | $ | 81,763 | | Gross profit | | | 30,741 | | | | 20,789 | | | | 40,005 | | | | 40,981 | | Net income (loss) | | | 2,454 | | | | (5,026 | ) | | | 5,893 | | | | 1,778 | | Basic earnings (loss) per share (2) | | $ | 0.07 | | | $ | (0.14 | ) | | $ | 0.16 | | | $ | 0.05 | | Diluted earnings (loss) per share (2) | | $ | 0.06 | | | $ | (0.14 | ) | | $ | 0.16 | | | $ | 0.05 | |
(1) | Net loss, basic loss per share and diluted loss per share include the impact of (i) $53,061 of non-cash pre-tax impairment charges related to goodwill and the tradename intangible asset (see Note 1 “Description of Business and Summary of Significant Accounting Policies (K) Goodwill and Other Intangible Assets” for additional details); (ii) a $2,082 non-cash pre-tax impairment charge related to property and equipment (see Note 1 “Description of Business and Summary of Significant Accounting Policies (J) Impairment of Long-lived Assets” for additional details); and (iii) a $121,836 valuation allowance against the Company’s deferred tax assets (see Note 10 “Income Taxes”) for additional details. |
(2) | The sum of the quarterly earnings per share may not equal the full-year amount as the computation of the weighted-average number of shares outstanding for each quarter and the full-year are performed independently. |
(3) | Includes the impact of $14,447 of pre-tax expense within cost of products sold associated with inventory write-downs primarily related to excess out of season and current inventory and $2,861 of pre-tax expense within selling, general and administrative expenses associated with executive severance costs partly offset by the favorable impact of executive stock option forfeitures. |
(4) | Includes the impact of $1,986 of pre-tax income within Cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter of 2015 and $164 pre-tax expense within Selling, general and administrative expenses associated with executive search costs, partly offset by the favorable impact of executive stock option forfeitures. |
(5) | Includes the impact of $2,161 of pre-tax income within Cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter of 2015 and $323 pre-tax income within Selling, general and administrative expenses associated with the favorable adjustment to management transition costs taken in the second quarter. Additionally, gross profit, net income (loss) and diluted earnings (loss) per share in the fourth quarter were overstated by $530, $313 and $0.01, respectively, as a result of an immaterial error in inventory valuation during the third quarter. |
Note 14. Subsequent Event In order to increase availability under the Revolving Credit Facility, on March 6, 2017, Vince, LLC entered into the Letter with BofA, as administrative agent and collateral agent under the Revolving Credit Facility, to temporarily modify a covenant. On April 14, 2017, Vince, LLC and BofA amended and restated the Letter in its entirety. See Note 4 “Long-Term Debt and Financing Arrangements” for additional details. F-31
SCHEDULESCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (In thousands) | | | | Beginning of
Period | | Expenses
Charges, net
of Reversals | | Deductions
and Write-offs
net of
Recoveries | | End of
Period | | | Beginning of Period | | | Expense Charges, net of Reversals | | | Deductions and Write-offs, net of Recoveries | | | End of Period | | Sales Allowances | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2016 | | | $ | (12,846 | ) | | $ | (59,078 | ) | | $ | 52,213 | | | $ | (19,711 | ) | Fiscal 2015 | | | | (16,098 | ) | | | (55,656 | ) | | | 58,908 | | | | (12,846 | ) | Fiscal 2014 | | $ | (9,265 | ) | | $ | (54,467 | ) | | $ | 47,634 | | | $ | (16,098 | ) | | | (9,265 | ) | | | (54,467 | ) | | | 47,634 | | | | (16,098 | ) | Fiscal 2013 | | | (7,179 | ) | | (39,171 | ) | | 37,085 | | | (9,265 | ) | | Fiscal 2012 | | | (4,347 | ) | | (29,400 | ) | | 26,568 | | | (7,179 | ) | | Allowance for Doubtful Accounts | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2016 | | | | (188 | ) | | | (192 | ) | | | 105 | | | | (275 | ) | Fiscal 2015 | | | | (379 | ) | | | 34 | | | | 157 | | | | (188 | ) | Fiscal 2014 | | | (353 | ) | | (168 | ) | | 142 | | | (379 | ) | | | (353 | ) | | | (168 | ) | | | 142 | | | | (379 | ) | Fiscal 2013 | | | (279 | ) | | (249 | ) | | 175 | | | (353 | ) | | Fiscal 2012 | | | (450 | ) | | (314 | ) | | 485 | | | (279 | ) | | Provision for Inventories | | | | | | | | | | | | | | | | | | Fiscal 2016 | | | | (13,248 | ) | | | 1,864 | | | | 9,322 | | | | (2,062 | ) | Fiscal 2015 | | | | (6,464 | ) | | | (16,263 | ) | | | 9,479 | | | | (13,248 | ) | Fiscal 2014 | | | | (3,868 | ) | | | (3,719 | ) | | | 1,123 | | | | (6,464 | ) | Valuation Allowances on Deferred Income Taxes | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2016 | | | | (1,024 | ) | | | (121,836 | ) | | | — | | | | (122,860 | ) | Fiscal 2015 | | | | (1,074 | ) | | | — | | | | 50 | | | | (1,024 | ) | Fiscal 2014 | | | (1,843 | ) | | | — | | | 769 | | | (1,074 | ) | | | (1,843 | ) | | | — | | | | 769 | | | | (1,074 | ) | Fiscal 2013 | | | (64,767 | ) | | (78,855 | ) | | 141,779 | (a) | | (1,843 | ) | | Fiscal 2012 | | $ | (49,933 | ) | | $ | (28,362 | ) | | $ | 13,528 | | | $ | (64,767 | ) | |
(a) | The reduction in the Valuation Allowance on Deferred Income Taxes recorded in Fiscal 2013 includes $127,833 that was recognized as in increase to additional paid-in capital in Stockholders’ Equity. |
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