LEGACY IMBDS, INC. The following discussion and analysis of financial condition and results of operations is qualified by reference to and should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes included herein and the audited consolidated financial statements and notes included in our annual report on Form 10-K for the fiscal year endedFebruary 1, 2020 . Cautionary Statement Concerning Forward-Looking Statements The following Management's Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with theSEC (as well as information included in oral statements or other written statements made or to be made by us) contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact, including statements regarding guidance and the expected impact of cost initiatives, industry prospects or future results of operations or financial position are forward-looking. We often use words such as "anticipates," "believes," "estimates," "expects," "intends," "predicts," "hopes," "should," "plans," "will" and similar expressions to identify forward-looking statements. These statements are based on management's current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, many of which are, and will be, amplified by the COVID-19 pandemic, including (but not limited to): the impact of the COVID-19 pandemic on our sales, operations and supply chain, variability in consumer preferences, shopping behaviors, spending and debt levels; the general economic and credit environment; interest rates; seasonal 24
--------------------------------------------------------------------------------
Table of Contents
variations in consumer purchasing activities; the ability to achieve the most effective product category mixes to maximize sales and margin objectives; competitive pressures on sales and sales promotions; pricing and gross sales margins; the level of cable and satellite distribution for our programming and the associated fees or estimated cost savings from contract renegotiations; our ability to establish and maintain acceptable commercial terms with third-party vendors and other third parties with whom we have contractual relationships, and to successfully manage key vendor and shipping relationships and develop key partnerships and proprietary and exclusive brands; our ability to manage our operating expenses successfully and our working capital levels; our ability to remain compliant with our credit facility covenants; customer acceptance of our branding strategy and our repositioning as a video commerce company; our ability to respond to changes in consumer shopping patterns and preferences, and changes in technology and consumer viewing patterns; changes to our management and information systems infrastructure; challenges to our data and information security; changes in governmental or regulatory requirements, including without limitation, regulations of theFederal Communications Commission andFederal Trade Commission , and adverse outcomes from regulatory proceedings; litigation or governmental proceedings affecting our operations; significant events (including disasters, weather events or events attracting significant television coverage) that either cause an interruption of television coverage or that divert viewership from our programming; disruptions in our distribution of our network broadcast to our customers; our ability to protect our intellectual property rights; our ability to obtain and retain key executives and employees; our ability to attract new customers and retain existing customers; changes in shipping costs; expenses relating to the actions of activist or hostile shareholders; our ability to offer new or innovative products and customer acceptance of the same; changes in customer viewing habits of television programming; and the risks identified under "Risk Factors" in our most recently filed Form 10-K and any additional risk factors identified in our periodic reports since the date of such report. More detailed information about those factors is set forth in our filings with theSEC , including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are under no obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements whether as a result of new information, future events or otherwise. Overview Our Company We are an interactive media company that manages ShopHQ, our nationally distributed shopping entertainment network, Bulldog Shopping Network and Media Commerce Services. ShopHQ offers a mix of proprietary, exclusive and name-brand merchandise in the categories of jewelry & watches, home & consumer electronics, beauty & wellness, and fashion & accessories directly to consumers 24 hours a day in an engaging and informative shopping experience via television, online and mobile devices. ShopHQ programming is distributed in more than 79 million homes through cable and satellite distribution agreements, agreements with telecommunications companies and arrangements with over-the-air broadcast television stations. ShopHQ programming is also streamed live online at shophq.com, a comprehensive digital commerce platform that sells products which appear on its television shopping network as well as an extended assortment of online-only merchandise, and is available on mobile channels and over-the-top ("OTT") platforms. Our programming and products are also marketed via mobile devices, including smartphones and tablets, and through the leading social media channels. Our nascent, but growing Media Commerce Services offers creative and interactive advertising and third-party logistics. During the fourth quarter of fiscal 2019, we launched the Bulldog Shopping Network, a niche television shopping network geared towards male consumers and acquired Float Left andJ.W. Hulme . OnSeptember 1,2020 , we expect to launch a new health and wellness television retailing network, ShopHQHealth, in approximately 15 million homes. Our website address is www.imediabrands.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy and information statements, and amendments to these reports if applicable, are available, without charge, on our investor relations website at investors.imediabrands.com as soon as reasonably practicable after they are electronically filed with or furnished to theSEC . Copies also are available, without charge, by contacting the General Counsel,iMedia Brands, Inc. ,6740 Shady Oak Road ,Eden Prairie, Minnesota 55344-3433. Our goal is to maintain the investor relations website as a way for investors to easily find information about us, including press releases, announcements of investor conferences, investor and analyst presentations and corporate governance. The information found on our website is not part of this or any other report we file with, or furnish to, theSEC . TheSEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding us and other companies that file materials with theSEC electronically. New Corporate Name and Branding OnJuly 16, 2019 , we changed our corporate name toiMedia Brands, Inc. fromEVINE Live Inc. EffectiveJuly 17, 2019 , our Nasdaq trading symbol also changed from EVLV to IMBI. OnAugust 21, 2019 , we changed the name of our primary network, Evine, back to ShopHQ, which was the name of the network in 2014. 25
--------------------------------------------------------------------------------
Table of Contents
ShopHQ Products and Customers
Products sold on our digital commerce platforms include jewelry & watches, home
& consumer electronics, beauty & wellness, and fashion & accessories.
Historically jewelry & watches has been our largest merchandise category. While
changes in our product mix have occurred as a result of customer demand and
other factors including our efforts to diversify our offerings within our major
merchandise categories, jewelry & watches remained our largest merchandise
category during the first six months of fiscal 2020. We are focused on
diversifying our merchandise assortment within our existing product categories
as well as by offering potential new product categories, including proprietary,
exclusive and name-brands, in an effort to increase revenues, gross profits and
to grow our new and active customer base. The following table shows our ShopHQ
segment merchandise mix as a percentage of total digital commerce net
merchandise sales for the periods indicated by product category group. We have
recast certain fiscal 2019 product category percentages in the accompanying
table to conform to our new segment structure.
For the Three-Month For the Six-Month
Periods Ended Periods Ended
August 1, August 3, August 1, August 3,
2020 2019 2020 2019
Net Merchandise Sales by Category
Jewelry & Watches 36% 48% 40% 46%
Home & Consumer Electronics 11% 19% 13% 19%
Beauty & Wellness 43% 19% 35% 19%
Fashion & Accessories 10% 14% 12% 16%
Total 100% 100% 100% 100%
Our product strategy is to continue to develop and expand new product offerings
across multiple merchandise categories based on customer demand, as well as to
offer competitive pricing and special values in order to drive new customers and
maximize margin dollars per minute. During the first quarter of fiscal 2019, we
started implementing a new strategy to shift airtime and merchandise mix into
higher contribution margin categories, such as jewelry & watches and beauty &
wellness, to drive better customer engagement, and improve our merchandising
margin and shipping margin. We also expect this changed mix will lower our
variable costs as a percentage of revenue. Our core digital commerce customers -
those who interact with our network and transact through television, online and
mobile devices - are primarily women between the ages of 45 and 70. We also have
a strong presence of male customers of similar age. We believe our customers
make purchases based on our unique products, quality merchandise and value.
Company Strategy
iMedia is a leading interactive media company that manages a growing portfolio
of niche television networks, niche national advertisers and media commerce
services. Our strategy includes developing and growing multiple monetization
models, including TV retailing, e-commerce, advertising and service fees, to
grow our business. We expect that these initiatives build upon our core
strengths and provide us an advantage in the marketplace.
Our strategy includes offering our curated assortment of proprietary, exclusive
(i.e., products that are not readily available elsewhere), emerging and
name-brand products. Our programming is distributed through our video commerce
infrastructure, which includes television access to more than 79 million homes
in the United States , primarily on cable and satellite systems as well as
over-the-air broadcast and OTT platforms. Our merchandising plan is focused on
delivering a balanced assortment of profitable products presented in an
engaging, entertaining, shopping-centric format using our unique expertise in
storytelling and "live on location" broadcasting. We are also focused on growing
our high lifetime value customer file and growing our revenues, through social,
mobile, online, and OTT platforms, as well as leveraging our capacity, system
capability and expertise in distribution and product development to generate new
business relationships. We believe these initiatives will position us to deliver
a more engaging and enjoyable customer experience with product offerings and
service that exceed customer expectations. On August 21, 2019 , we changed the
name of the Evine network back to ShopHQ, which was the name of the network in
2014. We believe ShopHQ is easier to recognize for existing television retailing
customers.
Our growth strategy also includes building profitable niche interactive media
networks and services, such as the Bulldog Shopping Network, which launched in
November 2019 , ShopHQHealth and LaVenta. The Bulldog Shopping Network is a new
omni-channel, television shopping brand that sells and advertises men's
merchandise and services, and the aspirational lifestyles associated with its
brands and personalities. ShopHQHealth, a new health and wellness television
retailing network, is expected to launch on September 1, 2020 in approximately
15 million homes. In addition, in 2021, we expect to launch LaVenta, a new
omni-channel, Spanish language, television shopping brand centered on the Latin
culture to sell and advertise merchandise, services and personalities,
celebrating aspirational lifestyles. To grow our service revenue, we launched
Media Commerce Services, which includes creative and interactive services and
third-party logistics services. We plan to expand our service offerings to
provide a
26--------------------------------------------------------------------------------
Table of Contents
"one-stop commerce services offering" targeting brands interested in propelling their growth using our unique combination of assets in television, web and third-party logistics services. During the fourth quarter of fiscal 2019 we acquired two businesses,J.W. Hulme and Float Left.J.W. Hulme is a business specializing in artisan-crafted leather products, including handbags and luggage. We plan to accelerateJ.W. Hulme's revenue growth by creating its own programming on ShopHQ and utilizeJ.W. Hulme to craft private-label accessories for the Company's existing owned and operated fashion brands. Float Left is a business comprised of connected TVs, video-based content, application development and distribution, including technical consulting services, software development and maintenance related to video distribution. We plan to utilize Float Left's team and technology platform to further grow our content delivery capabilities in OTT platforms while providing new revenue opportunities. Impact of COVID-19 on Our Business InDecember 2019 , a new coronavirus disease ("COVID-19") pandemic was reported to have surfaced inWuhan, China and subsequently spread across the globe, including all the locations where we operate. As a result of the spread of the virus, certain state and local governmental agencies have imposed travel restrictions, quarantines or stay at home restrictions to contain the spread, which has caused a significant disruption to most sectors of the economy. Based on the various standards published to date, the work our employees and contractors perform may not qualify as critical, essential or life-sustaining and could be adversely impacted by such orders. We have focused on taking necessary steps to keep our employees, contractors, vendors, customers, guests, and their families safe during these uncertain times. Throughout the pandemic, we have mandated that non-essential personnel work from home, reduced the number of personnel who are allowed in our facilities and on our production set, and implemented increased cleaning protocols, social distancing measures, and temperature screenings for those personnel who enter our facilities. We have also mandated that all essential personnel who do not feel comfortable coming to work will not be required to do so. We have experienced certain disruptions in our business due to these modifications and resource constraints. Restrictions on travel have also negatively impacted the availability of some of our on-air experts and has eliminated our ability to produce remote broadcasts. We have also experienced longer ship times in our transportation network, which has driven increased calls into our customer service center and increased wait times. In view of the COVID-19 pandemic, we have been reducing spending more broadly across the Company, only proceeding with operating and capital spending that is critical. In addition, we eliminated positions across the ShopHQ segment during the first quarter of fiscal 2020, the majority of whom were employed in customer service, order fulfillment, and television production. We developed contingency plans to reduce costs further if the situation continues to deteriorate. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our associates, customers, suppliers and shareholders. As a result, at the time of this filing, we are unable to determine or predict the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources. Despite these past and potential adverse impacts of the COVID-19 pandemic, we believe it has been impacted our business less than other media companies because of our direct to consumer business model that serves home-bound consumers who seek to buy goods without leaving the safety of their homes. As a result, beginning at the end ofMarch 2020 and continuing through the second quarter of 2020, we observed an increase in demand for merchandise within our beauty & wellness product category and a decrease in demand for higher priced merchandise within our jewelry category. We have continued to offer our installment payment option. While we expect demand for our products will continue, we cannot estimate the impact that the COVID-19 pandemic will have on our business in the future due to the unpredictable nature of the ultimate scope and duration of the pandemic. As the COVID-19 pandemic continues, there is risk of changes in consumer demand, consumer spending patterns, and changes in consumer tastes which may adversely affect our operating results. Program Distribution ShopHQ, our 24-hour television shopping program, which is distributed primarily on cable and satellite systems, reached more than 79 million homes during the six months endedAugust 1, 2020 andAugust 3, 2019 . Our television home shopping programming is also simulcast 24 hours a day, 7 days a week on our ShopHQ website, broadcast over-the-air in certain markets and is also available on all mobile channels and on various video streaming applications, such as Roku and Apple TV. This multiplatform distribution approach, complemented by our strong mobile and online efforts, ensures that our programming is available wherever and whenever our customers choose to shop. 27
--------------------------------------------------------------------------------
Table of Contents
We continue to increase the number of channels on existing distribution
platforms and alternative distribution methods, including reaching deals to
launch our programming on high definition ("HD") channels. We believe that our
distribution strategy of pursuing additional channels in productive homes
already receiving our programming is a more balanced approach to growing our
business than merely adding new television homes in untested areas. We believe
that having an HD feed of our service allows us to attract new viewers and
customers.
Cable and Satellite Distribution Agreements
We have entered into distribution agreements with cable operators,
direct-to-home satellite providers and telecommunications companies to
distribute our television programming over their systems. The terms of the
distribution agreements typically range from one to five years. During any
fiscal year, certain agreements with cable, satellite or other distributors may
or have expired. Under certain circumstances, the cable operators or we may
cancel the agreements prior to their expiration. Additionally, we may elect not
to renew distribution agreements whose terms result in sub-standard or negative
contribution margins. If the operator drops our service or if either we or the
operator fails to reach mutually agreeable business terms concerning the
distribution of our service so that the agreements are terminated, our business
may be materially adversely affected. Failure to maintain our distribution
agreements covering a material portion of our existing households on acceptable
financial and other terms could materially and adversely affect our future
growth, sales and earnings unless we are able to arrange for alternative means
of broadly distributing our television programming.
Television Distribution Rights
During the first six months of fiscal 2020, we entered into certain affiliation
agreements with television providers for carriage of our television programming
over their systems, including channel placement rights. As a result, we recorded
a television distribution rights asset of $30.6 million . The liability relating
to the television distribution right was $29.8 million as of August 1, 2020 , of
which $21.2 million was classified as current. We believe having favorable
channel positioning within the general entertainment area on the distributor's
channel line-up impacts our sales. We believe that a portion of our sales is
attributable to purchases resulting from channel "surfing" and that a channel
position near popular cable networks increases the likelihood of such
purchases.
Our Competition
The video and digital commerce retail business is highly competitive, and we are
in direct competition with numerous retailers, including online retailers, many
of whom are larger, better financed and have a broader customer base than we do.
In our television shopping and digital commerce operations, we compete for
customers with other television shopping and e-commerce retailers, infomercial
companies, other types of consumer retail businesses, including traditional
"brick and mortar" department stores, discount stores, warehouse stores and
specialty stores, catalog and mail order retailers and other direct sellers.
Our direct competitors within the television shopping industry include QVC, Inc.
and HSN, Inc. , which are owned by Qurate Retail Inc. Both QVC, Inc. and HSN,
Inc. are substantially larger than we are in terms of annual revenues and
customers, and the programming of each is carried more broadly to U.S.
households, including high definition bands and multi-channel carriage, than our
programming. Multimedia Commerce Group, Inc. , which operates Jewelry Television ,
also competes with us for customers in the jewelry category. In addition, there
are a number of smaller niche retailers and startups in the television shopping
arena who compete with us. We believe that our major competitors incur cable and
satellite distribution fees representing a significantly lower percentage of
their sales attributable to their television programming than we do, and that
their fee arrangements are substantially on a commission basis (in some cases
with minimum guarantees) rather than on the predominantly fixed-cost basis that
we currently have. At our current sales level, our distribution costs as a
percentage of total consolidated net sales are higher than those of our
competition. However, we have the ability to leverage this fixed expense with
sales growth to accelerate improvement in our profitability.
We anticipate continued competition for viewers and customers, for experienced
television commerce and e-commerce personnel, for distribution agreements with
cable and satellite systems and for vendors and suppliers - not only from
television shopping companies, but also from other companies that seek to enter
the television shopping and online retail industries, including
telecommunications and cable companies, television networks, and other
established retailers. We believe that our ability to be successful in the video
and digital commerce industry will be dependent on a number of key factors,
including continuing to expand our digital footprint to meet our customers'
needs and increasing the lifetime value of our customer base by a combination of
growing the number of customers who purchase products from us and maximizing the
dollar value of sales and profitability per customer.
Summary Results for the Second Quarter of Fiscal 2020
Consolidated net sales for our fiscal 2020 second quarter were $124.5 million
compared to $131.5 million for our fiscal 2019 second quarter, which represents
a 5% decrease. We reported operating income of $2.5 million and net income of
$1.1 million for
28--------------------------------------------------------------------------------
Table of Contents
our fiscal 2020 second quarter. The operating and net income for the fiscal 2020 second quarter included settlement and incremental COVID-19 related legal costs totaling$315,000 . We reported an operating loss of$9.3 million and a net loss of$10.2 million for our fiscal 2019 second quarter. The operating and net loss for the fiscal 2019 second quarter included restructuring costs of$5.2 million , charges relating to executive and management transition costs totaling$310,000 , and rebranding costs of$238,000 . Consolidated net sales for the first six months of fiscal 2020 were$220.3 million compared to$263.0 million for the first six months of fiscal 2019, which represents a 16% decrease. We reported an operating loss of$3.2 million and a net loss of$5.8 million for the first six months of fiscal 2020. The operating and net loss for the first six months of fiscal 2020 included transaction, settlement and integration costs totaling$574,000 ; and restructuring costs of$209,000 . We reported an operating loss of$29.5 million and a net loss of$31.2 million for the first six months of fiscal 2019. The operating and net loss for the first six months of fiscal 2019 included an inventory impairment write-down of$6.1 million , restructuring costs of$5.2 million , charges relating to executive and management transition costs totaling$2.3 million and rebranding costs of$238,000 . Private Placement OnApril 14, 2020 , we entered into a common stock and warrant purchase agreement with certain individuals and entities, pursuant to which we sold an aggregate of 1,836,314 shares of our common stock, issued warrants to purchase an aggregate of 979,190 shares of our common stock at a price of$2.66 per share, and fully-paid warrants to purchase an aggregate 114,698 shares of our common stock at a price of$0.001 per share in a private placement, for an aggregate cash purchase price of$4.0 million . The initial closing occurred onApril 17, 2020 and we received gross proceeds of$1.5 million . The additional closings occurred onMay 22, 2020 ,June 8, 2020 ,June 12, 2020 andJuly 11, 2020 and we received gross proceeds of$2.5 million . We have used the proceeds for general working capital purposes. The purchasers consisted of the following:Invicta Media Investments, LLC , Michael andLeah Friedman andHacienda Jackson LLC .Invicta Media Investments, LLC is owned byInvicta Watch Company of America, Inc. ("IWCA"), which is the designer and manufacturer of Invicta-branded watches and watch accessories, one of our largest and longest tenured brands. Michael andLeah Friedman are owners and officers ofSterling Time, LLC , which is the exclusive distributor of IWCA's watches and watch accessories for television home shopping and our long-time vendor. IWCA is owned by our Vice Chair and director,Eyal Lalo , andMichael Friedman also serves as a director of our company. A description of the relationship between the Company, IWCA and Sterling Time is contained in Note 15 - "Related Party Transactions" in the notes to our condensed consolidated financial statements. Further,Invicta Media Investments, LLC and Michael andLeah Friedman comprise a "group" of investors within the meaning of Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended, that is our largest shareholder. The warrants have an exercise price per share of$2.66 and are exercisable at any time and from time to time from six months following their issuance date untilApril 14, 2025 . We have included a blocker provision in the purchase agreement whereby no purchaser may be issued shares of our common stock if the purchaser would own over 19.999% of our outstanding common stock and, to the extent a purchaser in this offering would own over 19.999% of our outstanding common stock, that purchaser will receive fully-paid warrants (in contrast to the coverage warrants that will be issued in this transaction, as described above) in lieu of the shares that would place such holder's ownership over 19.999%. Further, we included a similar blocker in the warrants (and amended the warrants purchased by the purchasers onMay 2, 2019 , if any) whereby no purchaser of the warrants may exercise a warrant if the holder would own over 19.999% of our outstanding common stock. Restructuring Costs During the first quarter of fiscal 2020, the Company implemented and completed another cost optimization initiative, which eliminated positions across the ShopHQ segment, the majority of whom were employed in customer service, order fulfillment and television production. As a result of the first quarter fiscal 2020 cost optimization initiative, we recorded restructuring charges of$0 and$209,000 for the second quarter and first six months of fiscal 2020, which relate primarily to severance and other incremental costs associated with the consolidation and elimination of positions across the ShopHQ segment. These initiatives were substantially completed as ofAugust 1, 2020 , with related cash payments expected to continue through the third quarter of fiscal 2020. The first quarter fiscal 2020 optimization initiative is expected to eliminate approximately$16 million in annual overhead costs. 29
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Selected Condensed Consolidated Financial Data
Operations
Dollar Amount as a Dollar Amount as a
Percentage of Net Sales for the
Percentage of
Three-Month Periods Ended Six-Month Periods Ended
August 1, August 3, August 1, August 3,
2020 2019 2020 2019
Net sales 100.0% 100.0% 100.0% 100.0%
Gross margin 37.2% 36.3% 37.1% 32.3%
Operating expenses:
Distribution and selling 25.6% 33.1% 29.8% 34.3%
General and administrative 4.1% 4.2% 4.7% 4.7%
Depreciation and amortization 5.5% 1.9% 3.9% 1.6%
Restructuring costs -% 3.9% 0.1% 2.0%
Executive and management transition
costs -% 0.3% -% 0.9%
35.2% 43.4% 38.5% 43.5%
Operating income (loss) 2.0% (7.1)% (1.4)% (11.2)%
Key Performance Metrics
For the Three-Month For the Six-Month
Periods Ended Periods Ended
August 1, August 3, August 1, August 3,
2020 2019 Change 2020 2019 Change
Merchandise Metrics
Gross margin % 37.2% 36.3% 90 bps 37.1% 32.3% 480 bps
Net shipped units (in
thousands) 1,763 1,750 1% 3,111 3,649 (15)%
Average selling price $63 $68 (7)% $63 $65 (3)%
Return rate 11.9% 19.8% (790) bps 14.6% 20.0% (540) bps
ShopHQ Digital net sales %
(a) 50.1% 52.7% (260) bps 51.4% 52.6% (120) bps
Total Customers - 12 Month
Rolling (in thousands) 1,014 1,147 (12)% N/A N/A
(a) Digital net sales percentage is calculated based on ShopHQ net sales that
are generated from our website and mobile platforms, which are primarily ordered
directly online.
Net Shipped Units
The number of net shipped units (shipped units less units returned) during the
fiscal 2020 second quarter increased 1% from the prior year comparable quarter
to approximately 1.8 million. For the six months ended August 1, 2020 , net
shipped units decreased 15% from the comparable prior year period to 3.1
million. The increase in net shipped units during the second quarter was driven
primarily by a mix shift into health products within our beauty & wellness
product category, which is a lower average selling price assortment, partially
offset by a decrease in consolidated net sales. The decrease in the net shipped
units during the first six months of fiscal 2020 was driven primarily by a
decrease in consolidated net sales, partially offset by a mix shift into health
products within our beauty & wellness product category.
Average Selling Price
The average selling price ("ASP") per net unit was $63 in the second quarter of
fiscal 2020, a 7% decrease from the prior year quarter. For the six months ended
August 1, 2020 , the ASP was $63 , a 3% decrease from the prior year comparable
period.
30--------------------------------------------------------------------------------
Table of Contents
The ASP decreases in the second quarter and first six months endedAugust 1, 2020 were primarily driven by a mix shift into our beauty & wellness product category and ASP decreases in our jewelry & watches product category. Return Rates For the three months endedAugust 1, 2020 , our return rate was 11.9% compared to 19.8% for the comparable prior year quarter, a 790 basis point decrease. For the six months endedAugust 1, 2020 , our return rate was 14.6% compared to 20.0% for the comparable prior year period, a 540 basis point decrease. These decreases in the return rates were driven by return rate decreases in all product categories, primarily in our beauty & wellness and jewelry & watches product categories. The decrease in the return rate was additionally driven by a sales mix shift out of jewelry and into beauty & wellness, which has a lower return rate. We continue to monitor our return rates in an effort to keep our overall return rates commensurate with our current product mix and our ASP levels. Total Customers Total customers who have purchased over the last twelve months decreased 12% over the prior year to approximately 1.0 million. Total customers have declined for the last five years, primarily driven by continued decreases in attracting new customers compared to the prior year. We are working on reversing this trend by implementing the following initiatives, among others, to increase our active customer file: • introducing by appointment viewing "static programming," so viewers know
when to tune in;
• launching innovative programming, such as "Learning to Cook with Shaq,"
"By Appointment with
Talk with Fatima and Kathy"; and
• establishing category specific customer growth priorities around ASP,
product assortment and product margins.
Net Sales
Consolidated net sales, inclusive of shipping and handling revenue, for the
fiscal 2020 second quarter were $124.5 million , a 5% decrease from consolidated
net sales of $131.5 million for the comparable prior year quarter. Consolidated
net sales, inclusive of shipping and handling revenue, for the first six months
of fiscal 2020 were $220.3 million , a 16% decrease from consolidated net sales
of $263.0 million for the comparable prior year period.
Net Sales Trends
During the second quarter of fiscal 2020, our consolidated net sales, inclusive
of shipping and handling revenue, decreased 5% which continues a multi-year
trend of net sales decreases. Our continued decrease in net sales was primarily
driven by a 12% decline in our 12-month active customer file (as discussed under
"Total Customers" above), while our average spend per customer remained
relatively static. This trend has been a significant driver of our sales
decreases over the prior two years.
Consolidated Net Sales for the Second Quarter and First Six Months of Fiscal
2020 Compared to the Prior Year Periods
For the Three-Month Periods
Ended
August 1, August 3,
2020 2019 Change % Change
ShopHQ (in thousands)
Net merchandise sales by category:
Jewelry & Watches $ 39,058 $ 57,440 $ (18,382 ) (32 )%
Home & Consumer Electronics 12,375 22,540 (10,165 ) (45 )%
Beauty & Wellness 46,571 22,981 23,590 103 %
Fashion & Accessories 10,951 16,100 (5,149 ) (32 )%
All other (primarily shipping &
handling revenue) 11,715 11,687 28 - %
Total ShopHQ 120,670 130,748 (10,078 ) (8 )%
Emerging 3,845 755 3,090 409 %
Consolidated net sales $ 124,515 $ 131,503 $ (6,988 ) (5 )%
31--------------------------------------------------------------------------------
Table of Contents
For the Six-Month Periods Ended
August 1, August 3,
2020 2019 Change % Change
ShopHQ (in thousands)
Net merchandise sales by category:
Jewelry & Watches $ 78,460 $ 108,868 $ (30,408 ) (28 )%
Home & Consumer Electronics 25,142 46,567 (21,425 ) (46 )%
Beauty & Wellness 67,434 44,962 22,472 50 %
Fashion & Accessories 23,675 38,454 (14,779 ) (38 )%
All other (primarily shipping &
handling revenue) 19,758 22,696 (2,938 ) (13 )%
Total ShopHQ 214,469 261,547 (47,078 ) (18 )%
Emerging 5,880 1,477 4,403 298 %
Consolidated net sales $ 220,349 $ 263,024 Jewelry & Watches: The$18.4 million and$30.4 million decreases in jewelry & watches during the second quarter and first six months of fiscal 2020 were primarily due to reduced productivity (sales per on-air minute) from a declining customer file during the second quarter and first six months of fiscal 2020, primarily in jewelry. The decrease was also attributable to decreased airtime of 34% and 16% in the second quarter and first six months of fiscal 2020. Jewelry & watches continues to be our most productive category, primarily with watches. The airtime decreases in jewelry & watches was primarily within jewelry, as we shifted airtime into beauty & wellness as a result of increased demand for health related products during the second quarter. Home & Consumer Electronics: The$10.2 million and$21.4 million decreases during the second quarter and first six months of fiscal 2020 were driven by a 49% and 32% reduction in airtime during the quarter and a declining customer file. Beauty & Wellness: The$23.6 million and$22.5 million increases during the second quarter and first six months of fiscal 2020 were driven by increased active customers. The increases were also driven by increased airtime of 123% and 76% during the second quarter and first six months of fiscal 2020. Fashion & Accessories: The$5.1 million and$14.8 million decreases were driven by a decreased active customer base and an overall softness in this product category. The decreases were additionally driven by reduced airtime of 23% and 19%. Other: The$2.9 million decrease during the first six months of fiscal 2020 was driven by a decrease in shipping & handling revenue resulting from the 15% decrease in net shipped units. Emerging Businesses: The$3.1 million and$4.4 million increases during the second quarter and first six months of fiscal 2020 were driven by revenue from business initiatives commencing in second half of fiscal 2019, such as our third-party logistics services, the Bulldog Shopping Network, and recently acquired businesses,J.W. Hulme and Float Left. The increase was partially offset by reduced sales from our niche website, princetonwatches.com. Digital and MobileNet Sales We believe that our television shopping program is a key driver of traffic to both our website and mobile applications whereby many of the online sales originate from customers viewing our television program and then placing their orders online or through mobile devices. Our digital sales penetration, or, the percentage of ShopHQ net sales that are generated from our website and mobile platforms, which are primarily ordered directly online, was 50.1% and 51.4% during the second quarter and first six months of fiscal 2020 compared to 52.7% and 52.6% during the second quarter and first six months of fiscal 2019. Overall, we continue to deliver strong digital sales penetration. Our mobile penetration decreased to 55.5% and 55.6% of total digital orders in the second quarter of fiscal 2020 versus 58.5% and 58.6% of total digital orders for the comparable prior year period. 32
--------------------------------------------------------------------------------
Table of Contents
Gross Profit
For the Three-Month Periods Ended
August 1, August 3,
2020 2019 Change % Change
(in thousands)
ShopHQ $ 44,731 $ 47,669 $ (2,938 ) (6 )%
Emerging 1,561 57 1,504 2,639 %
Consolidated gross profit $ 46,292 $ 47,726 $ (1,434 ) (3 )%
Consolidated gross profit for the second quarter of fiscal 2020 was $46.3
million , a decrease of $1.4 million , or 3%, compared to the second quarter of
fiscal 2019. ShopHQ's gross profit decreased $2.9 million , or 6% compared to the
second quarter of fiscal 2019 and was primarily driven by the 8% decrease in net
sales (as discussed above), partially offset by higher gross profit percentages
experienced in most product categories during the second quarter of fiscal 2020.
Emerging's gross profit increased $1.5 million compared to the second quarter of
fiscal 2019 and was primarily driven by the increase in net sales (as discussed
above).
Consolidated gross margin percentages for the second quarters of fiscal 2020 and
fiscal 2019 were 37.2% and 36.3%, which represent a 90 basis point increase.
ShopHQ's gross margin percentages for the second quarters of fiscal 2020 and
fiscal 2019 were 37.1% and 36.5%, which represent a 60 basis point increase. The
increase in the gross margin percentage reflects the following: a 230 basis
point margin increase attributable to a shift into our beauty & wellness
category, which typically has a higher margin rate; a 140 basis point margin
increase attributable to increased gross profit rates in most product
categories, primarily jewelry & watches; and a 20 basis point increase due to
higher shipping and handling margins; partially offset by a 310 basis point
decrease attributable to increased inventory markdowns. Emerging's gross margin
percentages for the second quarters of fiscal 2020 and fiscal 2019 were 40.6%
and 7.5%. The increase in the Emerging gross margin percentage reflects business
initiatives commencing in the second half of fiscal 2019, such as Bulldog
Shopping Network, and recently acquired businesses, J.W. Hulme and Float Left.
Our third-party logistics services commenced operations at the end of our fiscal
2019 first quarter.
For the Six-Month Periods Ended
August 1, August 3,
2020 2019 Change % Change
(in thousands)
ShopHQ $ 79,686 $ 84,848 $ (5,162 ) (6 )%
Emerging 2,163 171 1,992 1,165 %
Consolidated gross profit $ 81,849 $ 85,019 $ (3,170 ) (4 )%
Consolidated gross profit for the first six months of fiscal 2020 was $81.8
million , a decrease of $3.2 million , or 4%, compared to the first six months of
fiscal 2019. ShopHQ's gross profit decreased $5.2 million , or 6% compared to the
first six months of fiscal 2019 and was primarily driven by the 18% decrease in
net sales (as discussed above), partially offset by higher gross profit
percentages experienced in most product categories during the first six months
of fiscal 2020. The first six months of fiscal 2019 includes a non-cash
inventory impairment write-down of $6.1 million . Emerging's gross profit
increased $2.0 million compared to the first six months of fiscal 2019 and was
primarily driven by the increase in net sales (as discussed above).
Consolidated gross margin percentages for the first six months of fiscal 2020
and fiscal 2019 were 37.1% and 32.3%, which represent a 480 basis point
increase. ShopHQ's gross margin percentages for the first six months of fiscal
2020 and fiscal 2019 were 37.2% and 32.4%, which represent a 480 basis point
increase. The increase in the gross margin percentage reflects the following: a
220 basis point margin increase attributable to increased gross profit rates in
most product categories, primarily jewelry & watches; a 150 basis point margin
increase attributable to a shift into our beauty & wellness category, which
typically has a higher margin; a 30 basis point increase due to higher shipping
and handling margins; and a 110 basis point increase attributable to decreased
inventory markdowns. Emerging's gross margin percentages for the first six
months of fiscal 2020 and fiscal 2019 were 36.8% and 11.6%. The increase in the
Emerging gross margin percentage reflects business initiatives commencing in the
second half of fiscal 2019, such as Bulldog Shopping Network, and recently
acquired businesses, J.W. Hulme and Float Left. Our third-party logistics
services commenced operations at the end of our fiscal 2019 first quarter.
Operating Expenses
Total operating expenses for the fiscal 2020 second quarter were approximately
$43.8 million compared to $57.0 million for the comparable prior year period, a
decrease of 23%. Total operating expenses for the first six months of fiscal
2020 were $85.0 million compared to $114.5 million for the comparable prior year
period, a decrease of 26%. Total operating expenses as a
33--------------------------------------------------------------------------------
Table of Contents
percentage of net sales were 35.2% and 38.5% during the second quarter and first six months of fiscal 2020, compared to 43.4% and 43.5% during the comparable prior year periods of fiscal 2019. Total operating expenses for the fiscal 2019 second quarter included restructuring costs of$5.2 million , executive and management transition costs of$310,000 and rebranding costs of$238,000 . Total operating expenses for the first six months of fiscal 2020 included restructuring costs of$209,000 while total operating expenses for the first six months of fiscal 2019 included restructuring costs of$5.2 million , executive and management transition costs of$2.3 million , and rebranding costs of$238,000 . Excluding restructuring costs and executive and management transition costs, total operating expenses as a percentage of net sales for the second quarter and first six months of fiscal 2020 were 35.2% and 38.4%, compared to 39.2% and 40.6% for the second quarter and first six months of fiscal 2019. Distribution and selling expense decreased$11.6 million , or 27%, to$31.9 million , or 25.6% of net sales during the fiscal 2020 second quarter compared to$43.5 million , or 33.1% of net sales for the comparable prior year fiscal quarter. Distribution and selling expense decreased during the quarter due to decreased program distribution expense of$7.5 million , decreased variable costs of$2.6 million , decreased salaries and benefits of$2.5 million , and decreased online selling and search fees of$137,000 . The decrease from the comparable prior period was partially offset by increased accrued incentive compensation of$1.1 million . The decrease in variable costs was primarily driven by decreased variable fulfillment and customer service salaries and wages of$1.8 million and decreased variable credit card processing fees and bad debt credit expense of$1.2 million , partially offset by increased customer services telecommunications service expense of$417,000 . Total variable expenses during the second quarter of fiscal 2020 were approximately 7.9% of total net sales versus 9.5% of total net sales for the prior year comparable period. Distribution and selling expense decreased$24.8 million , or 27%, to$65.6 million , or 29.8% of net sales during the first six months of fiscal 2020 compared to$90.4 million , or 34.3% of net sales for the comparable prior year period. Distribution and selling expense decreased during the first six months due to decreased program distribution expense of$14.4 million , decreased variable costs of$6.4 million , decreased salaries and benefits of$4.8 million , decreased online selling and search fees of$577,000 , and decreased travel expense of$214,000 . The decrease from the comparable prior period was partially offset by increased accrued incentive compensation of$1.4 million and increased production expense of$144,000 . The decrease in variable costs was primarily driven by decreased variable fulfillment and customer service salaries and wages of$3.6 million and decreased variable credit card processing fees and bad debt credit expense of$2.7 million . Total variable expenses during the first six months of fiscal 2020 were approximately 8.6% of total net sales versus 9.7% of total net sales for the prior year comparable period. To the extent that our ASP changes, our variable expense as a percentage of net sales could be impacted as the number of our shipped units change. Program distribution expense is primarily a fixed cost per household, however, this expense may be impacted by changes in the number of average homes or channels reached or by rate changes associated with changes in our channel position with carriers. General and administrative expense for the fiscal 2020 second quarter decreased$428,000 , or 8%, to$5.1 million or 4.1% of net sales, compared to$5.5 million or 4.2% of net sales for the comparable prior year fiscal quarter. General and administrative expense decreased during the second quarter primarily as a result of decreased salaries of$621,000 and decreased share-based compensation expense of$581,000 , partially offset by increased accrued incentive compensation of 460,000 and increased incremental COVID-19 related legal costs of$315,000 . For the first six months of fiscal 2020, general and administrative expense decreased$1.9 million , or 16%, to$10.5 million or 4.7% of net sales, compared to$12.4 million or 4.7% of net sales for the comparable prior year period. For the first six months of fiscal 2020, general and administrative expense decreased primarily as a result of decreased salaries of$1.7 million , decreased share-based compensation expense of$923,000 , decreased professional fees of$250,000 and decreased rebranding costs of$238,000 . The decrease from the comparable prior period was partially offset by increased accrued incentive compensation of$520,000 and increased transaction, settlement and integration costs of$574,000 relating to consulting fees incurred to explore additional loan financings and incremental COVID-19 legal costs. Depreciation and amortization expense for the fiscal 2020 second quarter increased$4.3 million , or 173%, to$6.8 million compared to$2.5 million for the comparable prior year period. Depreciation and amortization expense as a percentage of net sales for the second quarters of fiscal 2020 and fiscal 2019 was 5.5% and 1.9%. Depreciation and amortization expense for the first six months of fiscal 2020 increased$4.5 million , or 109%, to$8.7 million compared to$4.2 million for the comparable prior year period. Depreciation and amortization expense as a percentage of net sales for the first six months of fiscal 2020 and fiscal 2019 was 3.9% and 1.6%. The increase in depreciation and amortization expense for the second quarter and first six months of fiscal 2020 was primarily due to increased amortization expense of$5.1 million and$5.1 million relating to the channel placement rights obtained during the first six months of fiscal 2020, increased amortization expense of$94,000 and$188,000 relating to the intangible assets acquired during our fourth quarter fiscal 2019 business acquisitions, and increased depreciation expense of$79,000 and$181,000 resulting from an average net increase in our non-fulfillment depreciable asset base year over year. The increase in depreciation and amortization expense for the second quarter and first six months of fiscal 2020 was partially offset by decreased amortization expense of$935,000 and$976,000 relating primarily to the accelerated amortization of the Evine trademark in fiscal 2019. 34
--------------------------------------------------------------------------------
Table of Contents
Operating Loss For the fiscal 2020 second quarter, we reported operating income of approximately$2.5 million compared to an operating loss of$9.3 million for the fiscal 2019 second quarter. ShopHQ reported operating income of$3.7 million and Emerging reported an operating loss of$1.3 million for the fiscal 2020 second quarter compared to operating losses of$7.8 million and$1.5 million , respectively, for the fiscal 2019 second quarter. For the second quarter of fiscal 2020, ShopHQ's operating income improved primarily as a result of decreases in distribution and selling expense, restructuring costs, general and administrative expense, and executive and management transition costs. The increase in ShopHQ's operating income was partially offset by an increase in depreciation and amortization expense and a decrease in gross profit driven by decreases in consolidated net sales. Emerging's operating loss improved during the fiscal 2020 second quarter primarily from an increase in gross profit of$1.5 million , a decrease in restructuring costs of$828,000 , and a decrease in depreciation and amortization expense of$118,000 . The improvement in Emerging's operating loss was partially offset by an increase in distribution and selling expense of$1.6 million and an increase in general and administrative expense of$593,000 . Emerging's general and administrative expense and distribution and selling expense increased from business initiatives commencing during the second half of fiscal 2019, such as Bulldog Shopping Network, and recently acquired businesses,J.W. Hulme and Float Left. Our third-party logistics services commenced operations at the end of our fiscal 2019 first quarter. The increase in Emerging's distribution and selling expense was partially offset by a decrease related to our niche website, princetonwatches.com. For the six months endedAugust 1, 2020 , we reported an operating loss of approximately$3.2 million compared to an operating loss of$29.5 million for the comparable prior year period. ShopHQ and Emerging reported an operating loss of$55,000 and$3.1 million for the six months endedAugust 1, 2020 compared to$27.0 million and$2.4 million for the six months endedAugust 3, 2019 . ShopHQ's operating loss improved primarily as a result of decreases in distribution and selling expense, restructuring costs, executive and management transition costs, and general and administrative expense. ShopHQ's operating loss also improved due to the non-cash inventory write-down of$6.1 million during the comparable prior period. The improvement in ShopHQ's operating loss was partially offset by a decrease in gross profit driven by decreases in consolidated net sales and an increase in depreciation and amortization expense. Emerging's operating loss increased during the first six months of fiscal 2020 primarily from an increase in distribution and selling expense of$2.2 million , an increase in general and administrative expense of$1.3 million , and an increase in depreciation and amortization expense of$19,000 . The increase in Emerging's operating loss was partially offset by an increase in gross profit of$2.0 million and a decrease in restructuring costs of$828,000 . Interest Expense Total interest expense for the fiscal 2020 second quarter increased$538,000 , or 62%, to$1.4 million compared to$864,000 for the comparable prior year period. During the first and second quarter of fiscal 2020, we recorded liabilities relating to television distribution rights, which represents the present value of payments for the television channel placement. The interest expense recorded during the second quarter of fiscal 2020 includes interest expense related to our television distribution rights obligation of$397,000 . The total liability was$29.8 million as ofAugust 1, 2020 , of which$21.2 million was classified as current in the accompanying condensed balance sheets. Estimated interest expense for the television distribution obligation is$1.3 million for fiscal 2020,$691,000 for fiscal 2021 and$20,000 for fiscal 2022. The remainder of the interest expense increase during the second quarter was related to increased vendor financing interest of$145,000 . Total interest expense for the first six months of fiscal 2020 increased$887,000 , or 52%, to$2.6 million compared to$1.7 million for the comparable prior year period. Interest expense for the first six months of fiscal 2020 includes interest expense related to our television distribution rights obligation of$403,000 for the television distribution rights obligations recorded during the first and second quarter of fiscal 2020. The increase in interest rate expense for the first six months of fiscal 2020 was additionally driven by increased interest rate on our PNC Credit Facility, an impact of approximately$239,000 , and a higher average balance outstanding during the period, an impact of approximately$102,000 . The increase in interest rate was attributable to the increased interest rate margin resulting from theNovember 25, 2019 amendment to the PNC Credit Facility. The remainder of the interest expense increase during the first six months of fiscal 2020 was related to increased vendor financing interest of$147,000 . Net Income (Loss) For the fiscal 2020 second quarter, we reported net income of$1.1 million , or$0.11 per share, on 9,532,369 weighted average basic common shares outstanding compared with a net loss of$10.2 million , or$1.35 per share, on 7,550,265 weighted average basic common shares outstanding in the fiscal 2019 second quarter. For the first six months of fiscal 2020, we reported a net loss of$5.8 million , or$0.65 per share, on 8,911,580 weighted average basic common shares outstanding compared with a net loss of$31.2 million , or$4.36 per share, on 7,141,055 weighted average basic common shares outstanding in the first six months of fiscal 2019. The net loss for the second quarter of fiscal 2020 included transaction, settlement and integrations costs totaling$315,000 , and interest expense of$1.4 million . The net loss for the second quarter of fiscal 2019 included restructuring costs of$5.2 million , executive and management transition costs of$310,000 , rebranding costs of$238,000 and interest expense of$864,000 . 35
--------------------------------------------------------------------------------
Table of Contents
The net loss for the first six months of fiscal 2020 included transaction, settlement and integrations costs totaling$574,000 ; restructuring costs of$209,000 ; and interest expense of$2.6 million . The net loss for the first six months of fiscal 2019 included a non-cash inventory write-down of$6.1 million ; restructuring costs of$5.2 million ; executive and management transition costs of$2.3 million ; rebranding costs of$238,000 ; and interest expense of$1.7 million . For the second quarters of fiscal 2020 and fiscal 2019, the net loss reflects an income tax provision of$15,000 . For the first six months of fiscal 2020 and fiscal 2019, the net loss reflects an income tax provision of$30,000 . The income tax provision for these periods relates to state income taxes payable on certain income for which there is no loss carryforward benefit available. We have not recorded any income tax benefit on previously recorded net losses due to the uncertainty of realizing income tax benefits in the future as indicated by our recording of an income tax valuation allowance. Based on our recent history of losses, a full valuation allowance has been recorded and was calculated in accordance with GAAP, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. We will continue to maintain a valuation allowance against our net deferred tax assets, including those related to net operating loss carryforwards, until we believe it is more likely than not that these assets will be realized in the future. Adjusted EBITDA Reconciliation Adjusted EBITDA (as defined below) for the fiscal 2020 second quarter was$10.7 million compared to Adjusted EBITDA of$211,000 for the fiscal 2019 second quarter. For the six-month period endedAugust 1, 2020 , Adjusted EBITDA was$9.1 million compared with$(8.3) million for the comparable prior year period. A reconciliation of the comparable GAAP measure, net income (loss), to Adjusted EBITDA follows, in thousands: For the Three-Month For the Six-Month Periods Ended Periods Ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 Net income (loss)$ 1,054 $ (10,177 ) $ (5,774 ) $ (31,167 ) Adjustments: Depreciation and amortization 7,840 3,511 10,745 6,140 Interest income - (6 ) (1 ) (11 ) Interest expense 1,402 864 2,581 1,694 Income taxes 15 15 30 30 EBITDA (a)$ 10,311 $ (5,793 ) $ 7,581 $ (23,314 ) A reconciliation of EBITDA to Adjusted EBITDA is as follows: EBITDA (a)$ 10,311 $ (5,793 ) $ 7,581 $ (23,314 ) Adjustments: Transaction, settlement and integration costs (b) 315 - 574 - Restructuring costs - 5,165 209 5,165 Inventory impairment write-down - - - 6,050 Executive and management transition costs - 310 - 2,341 Rebranding costs - 238 - 238 Non-cash share-based compensation expense 108 291 723 1,257 Adjusted EBITDA (a)$ 10,734 $ 211 $ 9,087 $ (8,263 ) (a) EBITDA as defined for this statistical presentation represents net loss for the respective periods excluding depreciation and amortization expense, interest income (expense) and income taxes. We define Adjusted EBITDA as EBITDA excluding non-operating gains (losses); transaction, settlement and integration costs; restructuring costs; non-cash impairment charges and write downs; executive and management transition costs; rebranding costs; and non-cash share-based compensation expense. (b) Transaction, settlement and integration costs for the three and six-month period endedAugust 1, 2020 includes consulting fees incurred to explore additional loan financings, settlement costs, and incremental COVID-19 related legal costs. We have included the term "Adjusted EBITDA" in our EBITDA reconciliation in order to adequately assess the operating performance of our video and digital businesses and in order to maintain comparability to our analyst's coverage and financial 36
--------------------------------------------------------------------------------
Table of Contents
guidance, when given. Management believes that Adjusted EBITDA allows investors to make a meaningful comparison between our core business operating results over different periods of time with those of other similar companies. In addition, management uses Adjusted EBITDA as a metric measure to evaluate operating performance under our management and executive incentive compensation programs. Adjusted EBITDA should not be construed as an alternative to operating income (loss), net income (loss) or to cash flows from operating activities as determined in accordance with GAAP and should not be construed as a measure of liquidity. Adjusted EBITDA may not be comparable to similarly entitled measures reported by other companies. Seasonality Our business is subject to seasonal fluctuation, with the highest sales activity normally occurring during our fourth fiscal quarter of the year, namely November through January. Our business is also sensitive to general economic conditions and business conditions affecting consumer spending including, without limitation, the COVID-19 pandemic. Additionally, our television audience (and therefore sales revenue) can be significantly impacted by major world or domestic television-covering events which attract viewership and divert audience attention away from our programming. Critical Accounting Policies and Estimates A discussion of the critical accounting policies related to accounting estimates and assumptions are discussed in detail in our fiscal 2019 annual report on Form 10-K under the caption entitled "Critical Accounting Policies and Estimates." Recently Issued Accounting Pronouncements See Note 2 - "Basis of Financial Statement Presentation" in the notes to our condensed consolidated financial statements for a discussion of recent accounting pronouncements. Financial Condition, Liquidity and Capital Resources As ofAugust 1, 2020 , we had cash of$18.7 million . In addition, under the PNC Credit Facility (as defined below), we are required to maintain a minimum of$10 million of unrestricted cash plus unused line availability at all times. As ofFebruary 1, 2020 , we had cash of$10.3 million . For the first six months of fiscal 2020, working capital decreased$10.8 million to$22.6 million (see "Cash Requirements" below for additional information on changes in working capital accounts). The current ratio (our total current assets over total current liabilities) was 1.16 atAugust 1, 2020 and 1.26 atFebruary 1, 2020 . Sources of Liquidity Our principal source of liquidity is our available cash and our additional borrowing capacity under our revolving credit facility withPNC Bank, N.A. ("PNC"), a member of The PNC Financial Services Group, Inc. As ofAugust 1, 2020 , we had cash of$18.7 million and additional borrowing capacity of$9.4 million . Our cash was held in bank depository accounts primarily for the preservation of cash liquidity. PNC Credit Facility OnFebruary 9, 2012 , we entered into a credit and security agreement (as amended throughNovember 25, 2019 , the "PNC Credit Facility") with PNC, as lender and agent. The PNC Credit Facility, which includesCIBC Bank USA (formerly known asThe Private Bank ) as part of the facility, provides a revolving line of credit of$90.0 million and provides for a term loan on which we had originally drawn to fund improvements at our distribution facility inBowling Green, Kentucky and to partially pay down our previously outstanding term loan withGACP Finance Co., LLC . All borrowings under the PNC Credit Facility mature and are payable onJuly 27, 2023 . Subject to certain conditions, the PNC Credit Facility also provides for the issuance of letters of credit in an aggregate amount up to$6.0 million which, upon issuance, would be deemed advances under the PNC Credit Facility. The PNC Credit Facility also provides for an accordion feature that would allow us to expand the size of the revolving line of credit by an additional$25.0 million at the discretion of the lenders and upon certain conditions being met. Maximum borrowings and available capacity under the revolving line of credit under the PNC Credit Facility are equal to the lesser of$90.0 million or a calculated borrowing base comprised of eligible accounts receivable and eligible inventory. The revolving line of credit under the PNC Credit Facility bears interest at either a Base Rate or LIBOR plus a margin consisting of between 2% and 3.5% on Base Rate advances and 3% and 4.5% on LIBOR advances based on our trailing twelve-month reported leverage ratio (as defined in the PNC Credit Facility) measured semi-annually as demonstrated in our financial statements. The term loan bears interest at either a Base Rate or LIBOR plus a margin consisting of between 4% and 5% on Base Rate term loans and 5% to 6% on LIBOR Rate term loans based on our leverage ratio measured annually as demonstrated in our audited financial statements. 37
--------------------------------------------------------------------------------
Table of Contents
As ofAugust 1, 2020 , we had borrowings of$41.0 million under our revolving line of credit. As ofAugust 1, 2020 , the term loan under the PNC Credit Facility had$13.8 million outstanding, of which$2.7 million was classified as current in the accompanying condensed consolidated balance sheets. Remaining available capacity under the revolving credit facility as ofAugust 1, 2020 was approximately$9.4 million , which provides liquidity for working capital and general corporate purposes. In addition, as ofAugust 1, 2020 , our unrestricted cash plus unused line availability was$28.1 million , we were in compliance with applicable financial covenants of the PNC Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months. Principal borrowings under the term loan are payable in monthly installments over an 84-month amortization period that commenced onSeptember 1, 2018 and are also subject to mandatory prepayment in certain circumstances, including, but not limited to, upon receipt of certain proceeds from dispositions of collateral. Borrowings under the term loan are also subject to mandatory prepayment in an amount equal to fifty percent (50%) of excess cash flow for such fiscal year, with any such payment not to exceed$2.0 million in any such fiscal year. The PNC Credit Facility contains customary covenants and conditions, including, among other things, maintaining a minimum of unrestricted cash plus unused line availability of$10.0 million at all times and limiting annual capital expenditures. Certain financial covenants, including minimum EBITDA levels (as defined in the PNC Credit Facility) and a minimum fixed charge coverage ratio of 1.1 to 1.0, become applicable only if unrestricted cash plus unused line availability falls below$10.8 million . In addition, the PNC Credit Facility places restrictions on our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders. Private Placement Securities Purchase Agreement OnApril 14, 2020 , we entered into a common stock and warrant purchase agreement with certain individuals and entities, pursuant to which we will issue and sell shares of our common stock and warrants to purchase shares of our common stock. The initial closing occurred onApril 17, 2020 and we issued an aggregate of 731,937 shares and warrants to purchase an aggregate of 367,197 shares of our common stock. We received gross proceeds of$1.5 million for the initial closing. The additional closings occurred during the second quarter of fiscal 2020 with an aggregate cash purchase price of$2.5 million , in which we issued 1,104,377 shares of our common stock, warrants to purchase an aggregate of 611,993 shares of our common stock at a price of$2.66 per share, and fully-paid warrants to purchase an aggregate of 114,698 shares of our common stock at a price of$0.001 per share. See Note 8 - "Shareholders' Equity" in the notes to our condensed consolidated financial statements for additional information. Other Our ValuePay program is an installment payment program which allows customers to pay by credit card for certain merchandise in two or more equal monthly installments. Another potential source of near-term liquidity is our ability to increase our cash flow resources by reducing the percentage of our sales offered under our ValuePay installment program or by decreasing the length of time we extend credit to our customers under this installment program. However, any such change to the terms of our ValuePay installment program could impact future sales, particularly for products sold with higher price points. Please see "Cash Requirements" below for a discussion of our ValuePay installment program. Cash Requirements Currently, our principal cash requirements are to fund our business operations, which consist primarily of purchasing inventory for resale, funding ValuePay installment receivables, funding our basic operating expenses, particularly our contractual commitments for cable and satellite programming distribution, and the funding of necessary capital expenditures. We closely manage our cash resources and our working capital. We attempt to manage our inventory receipts and reorders in order to ensure our inventory investment levels remain commensurate with our current sales trends. We also monitor the collection of our credit card and ValuePay installment receivables and manage our vendor payment terms in order to more effectively manage our working capital which includes matching cash receipts from our customers, to the extent possible, with related cash payments to our vendors. ValuePay remains a cost-effective promotional tool for us. We continue to make strategic use of our ValuePay program in an effort to increase sales and to respond to similar competitive programs. We also have significant future commitments for our cash, primarily payments for cable and satellite program distribution obligations and the eventual repayment of our credit facility. As ofFebruary 1, 2020 , we had contractual cash obligations and commitments primarily with respect to our cable and satellite agreements, credit facility, operating leases, and capital leases totaling approximately$195.0 million over the next five fiscal years. We have experienced a decline in net sales and a decline in our active customer file during the first six months of fiscal 2020, and fiscal years 2019, 2018 and 2017 and a corresponding decrease in our profitability. We have taken or are taking the following steps to enhance our operations and liquidity position: entered into a private placement securities purchase agreements in which we received gross proceeds of$6.0 million during the first quarter of fiscal 2019; entered into a common stock and warrant purchase 38
--------------------------------------------------------------------------------
Table of Contents
agreement in which we received gross proceeds of$4.0 million during the first six months of fiscal 2020; implemented a reduction in overhead costs totaling$22 million in expected annualized savings for the reductions made during fiscal 2019 and$16 million in expected annualized savings for the reductions made during the first quarter of fiscal 2020, primarily driven by a reduction in our work force; negotiated improved payment terms with our inventory vendors; renegotiating with certain cable and satellite distributors to reduce our service costs and improve our payment terms; planned a reduction in capital expenditures compared to prior years; managing our inventory receipts in fiscal 2020 to reduce our inventory on hand; implemented by appointment viewing "static programming" to increase viewership; launching or have launched new innovative programming, such as "Learning to Cook with Shaq," "By Appointment withDr. Terry ," "Invicta Collectors Room ," and "Fashion Talk with Fatima and Kathy"; and establishing category specific customer growth priorities around ASP, product assortment and product margins; launched Bulldog Shopping Network, a niche television shopping network geared towards male consumers inNovember 2019 ; partnered with well-known personalities to develop and market exclusive lifestyle brands; and acquired Float Left andJ.W. Hulme . Float Left is a business comprised of connected TVs, video-based content, application development and distribution, including technical consulting services, software development and maintenance related to video distribution. The Company plans to utilize Float Left's team and technology platform to further grow its content delivery capabilities in OTT platforms while providing new revenue opportunities.J.W. Hulme is a business specializing in artisan-crafted leather products, including handbags and luggage. We plan to accelerateJ.W. Hulme's revenue growth by creating its own programming on ShopHQ. Additionally, we plan to utilizeJ.W. Hulme to craft private-label accessories for the Company's existing owned and operated fashion brands. Our ability to fund operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations, maintain or improve margins, decrease the rate of decline in our sales and to use available funds from our PNC Credit Facility. Our ability to borrow funds is dependent on our ability to maintain an adequate borrowing base and our ability to meet our credit facility's covenants (as described above). Accordingly, if we do not generate sufficient cash flow from operations to fund our working capital needs, planned capital expenditures and meet credit facility covenants, and our cash reserves are depleted, we may need to take further actions that are within the Company's control, such as further reductions or delays in capital investments, additional reductions to our workforce, reducing or delaying strategic investments or other actions. Additionally, the COVID-19 outbreak continues in both theU.S. and globally and is adversely affecting the economy, financial markets and has negatively impacted, and may continue to impact demand for our merchandise and impact our stock price. As a result, it is difficult to predict the overall impact of COVID-19 on our business and financial results. Despite these adverse impacts of COVID-19, we believe the COVID-19 pandemic has been impacting our business less than other media companies because of our direct to consumer business model that serves home-bound consumers who seek to buy goods without leaving the safety of their homes. As a result, beginning at the end ofMarch 2020 and continuing through the second quarter of 2020, we observed an increase in demand for merchandise within our beauty & wellness category, particularly in health products, and a decrease in demand for higher priced merchandise within our jewelry category. While we expect demand for our products will continue, we cannot estimate the impact that the COVID-19 pandemic will have on our business in the future due to the unpredictable nature of the ultimate scope and duration of the pandemic. As the COVID-19 pandemic continues, there is risk of changes in consumer demand, consumer spending patterns, and changes in consumer tastes which may adversely affect our operating results. We believe that it is probable our existing cash balances, together with the cost cutting measures described above and our availability under the PNC Credit Facility, will be sufficient to fund our normal business operations over the next twelve months from the issuance of this report. However, there can be no assurance that we will be able to achieve our strategic initiatives or obtain additional funding on favorable terms in the future which could have a significant adverse effect on our operations. For the six months endedAugust 1, 2020 , net cash provided by operating activities totaled$21.3 million compared to net cash provided by operating activities of approximately$92,000 for the comparable fiscal 2019 period. Net cash provided by operating activities for the fiscal 2020 and 2019 periods reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, amortization of deferred financing costs, payments for television distribution rights, and inventory impairment write-down. In addition, net cash provided by operating activities for the six months endedAugust 1, 2020 reflects decreases in inventory, accounts payable and accrued liabilities, accounts receivable, and prepaid expenses, and an increase in deferred revenue. Inventories decreased as a result of managing our inventory levels commensurate with our sales. Accounts receivable decreased during the first six months of fiscal 2020 as a result of collections made on outstanding receivables resulting from our seasonal high fourth quarter and decrease in sales. Accounts payable and accrued liabilities decreased during the first six months of fiscal 2020 primarily due to a decrease in inventory payables as a result of payments made for higher holiday season purchases and a decrease in accrued severance resulting from our 2019 cost optimization initiative and 2019 executive and management transition. The decrease in accounts payable and accrued liabilities was partially offset by an increase in accrued cable distribution fees as a result of negotiated extended payment agreements. Prepaid expenses and other decreased primarily due to a reduction in prepaid software fees. Net cash used for investing activities totaled$2.5 million for the first six months of fiscal 2020 compared to net cash used for investing activities of$3.5 million for the comparable fiscal 2019 period. For the six months endedAugust 1, 2020 andAugust 3, 2019 , expenditures for property and equipment were$2.5 million and$3.5 million . Capital expenditures made during the periods presented relate primarily to expenditures made for development, upgrade and replacement of computer software, order 39
--------------------------------------------------------------------------------
Table of Contents
management, merchandising and warehouse management systems; related computer equipment, digital broadcasting equipment, and other office equipment; warehouse equipment and production equipment. Principal future capital expenditures are expected to include: the development, upgrade and replacement of various enterprise software systems; equipment improvements and technology upgrades at our distribution facility inBowling Green, Kentucky ; security upgrades to our information technology; the upgrade of television production and transmission equipment; and related computer equipment associated with the expansion of our television shopping business and digital commerce initiatives. Net cash used for financing activities totaled$10.3 million for the six months endedAugust 1, 2020 and related primarily to principal payments on the PNC revolving loan of$18.8 million , principal payments on our PNC term loan of$1.4 million , finance lease payments of$49,000 , payments for common stock issuance costs of$17,000 , and tax payments for restricted stock unit issuances of$7,000 , offset by proceeds from our PNC revolving loan of$5.9 million and proceeds from the issuance of common stock and warrants of$4.0 million . Net cash provided by financing activities totaled$4.5 million for the six months endedAugust 3, 2019 and related primarily to proceeds from our PNC revolving loan of$109.7 million and proceeds from the issuance of common stock and warrants of$6.0 million , offset by principal payments on our PNC revolving loan of$109.7 million , principal payments on our PNC term loan of$1.4 million , payments for common stock issuance costs of$66,000 , finance lease payments of$23,000 and tax payments for restricted stock unit issuances of$21,000 .
© Edgar Online, source
