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 endedJanuary 30, 2021 .
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 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 a leading interactive media company that owns a growing portfolio of
lifestyle television networks, consumer brands, online marketplaces and media
commerce services that together position the Company as the leading
single-source partner to television advertisers and consumer brands seeking to
entertain and transact with customers using interactive video. The Company's
growth strategy revolves around its ability to increase its expertise and scale
using interactive video to engage customers within multiple business models and
multiple sales channels. The Company believes its growth strategy builds on its
core strengths and provides it an advantage in these marketplaces.
27
Table of Contents
The Company's lifestyle television networks are ShopHQ, ShopBulldogTV and
ShopHQHealth. ShopHQ is the Company's flagship, nationally distributed shopping
entertainment network that offers a mix of proprietary, exclusive, and
name-brand merchandise in the categories of Jewelry and Watches, Home, Beauty
and Health, and Fashion and Accessories directly to consumers 24 hours a day
using engaging interactive video. ShopBulldogTV, which launched in the fourth
quarter of fiscal 2019, is a niche television shopping entertainment network
that offers male-oriented products and services to men and to women shopping for
men. ShopHQHealth, which launched in the third quarter of fiscal 2020, is a
niche television shopping entertainment network that offers women and men
products and services focused on health and wellness categories such as
physical, mental and spiritual health, financial and motivational wellness,
weight management and telehealth medical services.
The Company's engaging, interactive video programming is distributed primarily
in linear television through cable and satellite distribution agreements,
agreements with telecommunications companies and arrangements with over-the-air
broadcast television stations. This interactive programming is also streamed
live online at shophq.com, shopbulldogtv.com and shophqhealth.com, which are
comprehensive digital commerce platforms that sell products which appear on the
Company's television lifestyle networks as well as an extended assortment of
online-only merchandise. The Company's interactive video is also available on
the OTT and CTV platforms such as Roku, Apple TV, Samsung connected televisions,
and on mobile devices, including smartphones and tablets, and through the
leading social media channels.
The Company's consumer brands include J.W. Hulme , Cooking with Shaquille O'Neal ,
Kate & Mallory, Live Fit MD, and Christopher & Banks. Christopher & Banks was
acquired during the fiscal year 2021.
The Company's online marketplace brands are OurGalleria.com, a high-end branded,
online marketplace launched in November 2020 that offers discounted merchandise
within an exciting interactive shopping experience, and TheCloseout.com, a
deeply-discount branded online marketplace acquired in fiscal year 2021 that
offers discounted merchandise in many categories within an exciting interactive
shopping experience.
The Company's media commerce services brands are Float Left, an OTT app technology services business and the Company's customer solutions and logistics services business called, i3PL.
ShopHQ Reporting Segment
ShopHQ offers its merchandise, which includes products in Jewelry and Watches,
Home, Beauty and Health, and Fashion and Accessories across all its sales
channels. Our merchandising strategy 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, OTT and
CTV 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. While changes in this product mix do occur as
a result of customer demand during certain times of the year, our legacy
strengths in Jewelry and Watches continue to represent our largest category. Our
merchants focus on diversifying our merchandise assortment within our existing
product categories and offer new products in new assortments. We offer customers
proprietary brands and merchandise as well as exclusive and/or less
28
Table of Contents
distributed bundles of name-brands products. The following table shows our ShopHQ reporting segment merchandise mix as a percentage of net merchandise sales for the periods indicated.
For the Three-Month
Period Ended
May 1, May 2,
Net Merchandise Sales by Category 2021 2020
Jewelry & Watches 48 % 46 %
Home 15 % 21 %
Beauty & Health 22 % 18 %
Fashion & Accessories 15 % 15 %
Total 100 % 100 %
Our ShopHQ promotional strategy is driven by offering our customers competitive
pricing and special values, which drive new and existing customer engagement.
During fiscal year 2020, we began offering static programming for our viewers,
meaning we aired the same shows at the same times each week, and this has
improved our customers viewership of our programming. Our core customers are
primarily women between the ages of 45 and 70. We also have a smaller presence
of male customers of similar age. We believe our customers purchases are driven
by our engaging interactive video that demonstrates the product's utility and
quality, and our dependable, friendly customer experience.
ShopHQ distributes its interactive video content 24-hours a day primarily on
U.S. linear television's cable and satellite systems and it reached more than 75
million homes during the three months ended May 1, 2021 and May 2, 2020 . ShopHQ
is also streamed 24 hours a day, 7 days a week on our ShopHQ website, broadcast
over-the-air in certain markets and is also available on mobile and social
channels and on various video streaming OTT and CTV platforms, 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.
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.
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.
During fiscal year 2020, we entered into certain affiliation agreements with
television providers for carriage of our television programming over their
systems that includes broadcast rights associated with our channel position on
their systems. As a result, we recorded a television broadcast rights asset of
$43.7 million in total during fiscal 2020. The remaining liability relating to
the television broadcast right was $30.8 million as of May 1, 2021 , of which
$26.1 million was classified as current. We believe having consistent favorable
channel positioning within the general entertainment area on the distributor's
channel line-up improves 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.
ShopHQ offers a balanced mix of merchandise to customers using interactive video and faces two competition from a variety of sources, including, QVC and HSN.
Both QVC and HSN are owned by Qurate Retail Inc. and each are substantially
larger than ShopHQ in terms of annual revenues and customers, and the
programming of each is carried more broadly to
29
Table of Contents
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 ShopHQ's ability to be successful in the interactive video arena will depend several key factors, including its ability to continue to curate compelling product assortments, capture and engage new and existing customers, and continually offer its interactive video on all the video distribution platforms available.
Emerging Business Reporting Segment
By leveraging ShopHQ's interactive video expertise, national scaled promotional power, expansive media and vendor relationships, customer experience and fulfillment capabilities, and financial resources, iMedia is able to strategically build and acquire growing businesses that accelerate the Company's ability to launch its own factual content streaming services in the OTT and CTV marketplaces while also enabling the Company to provide media commerce services to consumer brands seeking a compelling, single-source partner to promote and monetize their brands across all sales channels using interactive video.
Within this segment, the Company's operates its two recently launched niche
lifestyle television networks, ShopBulldogTV and ShopHQHealth, its consumer
brands that include
In terms of competitors for its the Emerging Business reporting segment, we
believe there is a growing number of competitors in the creation, distribution
and consumption of streaming fact-based video content in the online, OTT and CTV
marketplaces, and for the media commerce services offered in the online, OTT,
CTV marketplaces. Today, we believe our competition in these arenas range from
the larger media commerce service companies like Brightcove ("BCOV") and
ChannelAdvisor ("ECOM"), to the smaller factual content streaming network
providers like Curiosity Streams ("CURI").
Our Corporate Website
OuriMedia Brands corporate website is imediabrands.com and our Nasdaq trading symbol is IMBI. Our annual report is filed as our Form 10-K. We issue quarterly reports on Form 10-Q and our current first quarter press release is filed on Form 8-K. Proxy and information statements, and amendments to these reports if applicable, are available, without charge, in the investor relations section of our corporate website, 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 our Legal Department,iMedia Brands, Inc. ,6740 Shady Oak Road ,Eden Prairie, Minnesota 55344-3433. Our goal is to maintain the investor relations section of our corporate 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 corporate 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.
Summary Results for the First Quarter of Fiscal 2021
Consolidated net sales for our fiscal 2021 first quarter were$113.2 million compared to$95.8 million for our fiscal 2020 first quarter, which represents a 18.1% increase. We reported an operating loss of$2.1 million and a net loss of$3.4 million for our fiscal 2021 first quarter. We reported an operating loss of$5.6 million and a net loss of$6.8 million for our fiscal 2020 first quarter. The operating and net loss for the fiscal 2020 first quarter included restructuring costs of$209,000 and transaction, settlement and integration costs, net, totaling$259,000 . 30 Table of Contents Public Equity Offering OnFebruary 18, 2021 , we completed a public offering, in which we issued and sold 3,289,000 of our common stock at a public offering price of$7.00 per share, including 429,000 shares sold upon the exercise of the underwriter's option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately$21.2 million . We have used and intend to use the proceeds for general working capital purposes. OnAugust 28, 2020 , we completed a public offering, in which we issued and sold 2,760,000 shares of our common stock at a public offering price of$6.25 per share, including 360,000 shares sold upon the exercise of the underwriter's option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately$15.8 million . We used the proceeds for general working capital purposes. 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$209,000 for the third quarter 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 ofMay 1, 2021 . The first quarter fiscal 2020 optimization initiative is expected to eliminate approximately$16 million in annual overhead costs. 31 Table of Contents Results of Operations Selected Condensed Consolidated Financial Data Operations Dollar Amount as a Percentage of Net Sales for the Three-Month Periods Ended May 1, May 2, 2021 2020 Net sales 100.0 % 100.0 % Gross margin 40.6 % 37.1 % Operating expenses: Distribution and selling 30.3 % 35.2 % General and administrative 5.7 % 5.6 % Depreciation and amortization 6.5 % 2.0 % Restructuring costs - % 0.2 % Total operating expenses 42.5 % 43.0 % Operating loss (1.8) % (5.9) % Interest expense, net (1.2) % (0.6) % Loss before income taxes (3.0) % (6.5) % Income tax provision (0) % - % Net loss (3.0) % (6.5) % Key Performance Metrics For the Three-Month Periods Ended May 1, May 2, 2021 2020 Change Merchandise Metrics Gross margin % 40.6 % 37.1 % 354 bps
Net shipped units (in thousands) 1,513 1,348
12.2 %
Average selling price $ 66 $ 64 $ 3.1 %
Return rate 16.8 % 17.8 % 100 bpsShopHQ Digital net sales % (a) 51.5 % 53.1 % 160 bps Total Customers - 12 Month Rolling (in thousands) 1,071 991
8.1 %
Digital net sales percentage is calculated based on ShopHQ net sales that are
(a) 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 2021 first quarter increased 12% from the prior year comparable quarter
to approximately 1.5 million. The ASP increases in the first quarter primarily
driven by an increase in ASP in our jewelry & watches product category.
Average Selling Price
The average selling price ("ASP") per net unit was $66 in the first quarter of
fiscal 2021, a 3% increase from the prior year quarter. ASP decreases in the
first quarter ended May 1, 2021 were primarily driven by a mix shift into our
Beauty & Health product category.
32
Table of Contents
Return Rates
For the three months endedMay 1, 2021 , our return rate was 16.8% compared to 17.8% for the comparable prior year quarter, a 100 basis-point decrease. The decrease in the return rate was primarily driven by a sales mix shift out of Jewelry and Watches into Beauty & Health, 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 increased 8% over the prior year to approximately 1.1 million. The increase in total customers was mainly attributed to an increase in both new customers and reactivated customers compared to the prior year. We continue to focus on the following initiatives, among others, to increase our active customer file:
? introducing by appointment viewing "static programming," so viewers know when
to watch;
launching innovative programming, such as "Learning to Cook with Shaq," "By
? Appointment with
Fatima and Kathy"; and
? establishing category specific customer growth priorities around ASP, product
assortment and product margins.
Consolidated net sales, inclusive of shipping and handling revenue, for the
fiscal 2021 first quarter were
During the first quarter of fiscal 2021, our consolidated net sales, inclusive of shipping and handling revenue, increased 18% and reversed a multi-year trend of net sales decreases. Our increase in net sales was primarily driven by an 8% increase in our 12-month active customer file (as discussed under "Total Customers" above), along with revenue growth from our Emerging businesses. ConsolidatedNet Sales for First Quarter of Fiscal 2021 Compared to First Quarter Fiscal 2020 For the Three-Month Periods Ended May 1, May 2, 2021 2020 Change % Change ShopHQ (dollars in thousands) Net merchandise sales by category: Jewelry & Watches $ 43,254$ 39,402 $ 3,852 10 % Home 13,186 18,490 (5,304) (29) % Beauty & Health 19,245 15,140 4,105 27 %
Fashion & Accessories 13,580 12,724 856 7 % All other (primarily shipping & handling revenue) 10,597
8,043 2,554 32 %
Total ShopHQ 99,862 93,799 6,063 6 %
Emerging Business 13,341 2,035 11,306 556 %Consolidated net sales $ 113,203
$ 95,834 $ 17,369 18 % Jewelry & Watches: The$3.9 million increase in jewelry & watches during the first quarter of fiscal 2021 was primarily due to an increase in airtime productivity (dollars per airtime minute) compared to the prior year. Jewelry & watches continues to be our most productive category.
Home: The
Beauty & Health: The
33
Table of Contents
Fashion & Accessories : The$0.9 million increase during the first quarter of fiscal 2021 was primarily due to an increase in airtime productivity compared to the prior year.
Other: The
Emerging Business: The$11.3 million increase during the first quarter of fiscal 2021 was mainly driven by revenue from business initiatives following the comparable prior year period, such as our launch of the ShopHQHealth network inSeptember 2020 , along with revenue from our newly acquired businesses of Christopher & Banks and TheCloseout.com.
Digital and Mobile
We believe that our interactive television video is a key driver of traffic to
both our website and mobile applications whereby many of the online sales
originate from customers viewing our interactive television video 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
51.5% during the first quarter of fiscal 2021 compared to 53.1% during the first
quarter of fiscal 2020. Overall, we continue to deliver strong digital sales
penetration. Our mobile penetration decreased to 52.8% of total digital orders
in the first quarter of fiscal 2021 versus 55.6% of total digital orders for the
comparable prior year period.
Gross Profit
For the Three-Month Periods Ended
May 1, May 2,
2021 2020 Change % Change
(dollars in thousands)
ShopHQ $ 40,363 $ 34,955 $ 5,408 15 %
Emerging Business 5,644 602 5,042 838 %Consolidated gross profit $ 46,007 $
35,557$ 10,450 29 % Consolidated gross profit for the first quarter of fiscal 2021 was$46.0 million , an increase of$10,450 , or 29.4%, compared to the first quarter of fiscal 2020. ShopHQ's gross profit increased$5.4 million , or 15.5% compared to the first quarter of fiscal 2020 and was primarily driven by the 6.0% increase in net sales (as discussed above) and by higher gross profit percentages experienced in most product categories during the first quarter of fiscal 2021. Emerging Business gross profit increased$5.0 million compared to the first quarter of fiscal 2020 and was primarily driven by the increase in net sales (as discussed above). Consolidated gross margin percentages for the first quarters of fiscal 2021 and fiscal 2020 were 40.6% and 37.1%, which represent a 350-basis point increase. ShopHQ's gross margin percentages for the first quarters of fiscal 2021 and fiscal 2020 were 40.4% and 37.3%, which represent a 310-basis point increase. The increase in the gross margin percentage primarily reflects an increase attributable to increased gross profit rates in most product categories, primarily jewelry & watches and fashion. The category gross profit rates were positively impacted by more disciplined pricing and markdown execution. Emerging Business gross margin percentages for the first quarters of fiscal 2021 and fiscal 2020 were 42.3% and 29.6%. The increase in the Emerging Business gross margin percentage reflects new business initiatives not included in the prior year comparable period, such as ShopHQHealth, and recently acquired businesses, Christopher & Banks and TheCloseout.com.
Operating Expenses
Total operating expenses for the fiscal 2021 first quarter were approximately$48.1 million compared to$41.2 million for the comparable prior year period, an increase of 16.7%. Total operating expenses as a percentage of net sales were 42.5% during the first quarter of fiscal 2021, compared to 43.0% during the comparable prior year periods of fiscal 2020. Total operating expenses for the fiscal 2020 first quarter included restructuring costs of$209,000 . Excluding restructuring costs, total operating expenses as a percentage of net sales for the first quarter of fiscal 2021 were 42.5% compared to 42.8% for the first quarter of fiscal 2020. Distribution and selling expense increased$512,000 , or 1.5%, to$34.2 million , or 30.3% of net sales during the fiscal 2021 first quarter compared to$33.7 million , or 35.2% of net sales for the comparable prior year fiscal quarter. Distribution and selling expense 34
Table of Contents
increased during the quarter primarily due to an increase in costs associated with the expansion of our Emerging Business segment of$2.1 million and an increase of variable costs of$543,000 , partially offset by decreased ShopHQ segment program distribution expense of$2.7 million . 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, channels reached or by rate changes associated with changes in our channel position with carriers. General and administrative expense for the fiscal 2021 first quarter increased$1.1 million , or 19.9%, to$6.4 million or 5.7% of net sales, compared to$5.4 million or 5.6% of net sales for the comparable prior year fiscal quarter. General and administrative expense increased during the first quarter primarily due to increased transaction and integration costs related to the Christopher & Banks and TheCloseout.com business acquisitions of$441,000 and increased software maintenance costs of$206,000 . Depreciation and amortization expense for the fiscal 2021 first quarter increased$5.5 million , or 292.1%, to$7.4 million compared to$1.9 million for the comparable prior year period. Depreciation and amortization expense as a percentage of net sales for the first quarters of fiscal 2021 and fiscal 2020 was 6.5% and 2.0%. The increase in depreciation and amortization expense for the first quarter of fiscal 2021 was primarily due to increased amortization expense of$5.1 million relating to the television broadcast rights obtained during fiscal year 2020, plus increased depreciation and amortization expenses of$304,000 , attributable to the expansion of the Emerging Business segment.
Operating Loss
For the fiscal 2021 first quarter, we reported an operating loss of approximately$2.1 million compared to an operating loss of$5.6 million for the fiscal 2020 first quarter. ShopHQ reported an operating loss of$1.9 million and Emerging Business reported an operating loss of$159,000 for the fiscal 2021 first quarter compared to operating losses of$3.8 million and$1.8 million , respectively, for the fiscal 2020 first quarter. For the first quarter of fiscal 2021, ShopHQ's operating loss improved primarily as a result of increased margins, decreases in distribution and selling expense and restructuring costs. The improvement in ShopHQ's operating loss was partially offset by an increase in television broadcast rights amortization expense. Emerging Business operating loss decreased during the fiscal 2021 first quarter primarily from an increase in gross profits of$5.0 million , partially offset by increased distribution and selling expense of$2.1 million and an increase in general and administrative expense of$995,000 . Interest Expense Total interest expense for the fiscal 2021 first quarter increased$135,000 , or 11.4%, to$1.3 million compared to$1.2 million for the comparable prior year period. The increase in interest expense was primarily driven by the recorded liabilities relating to television broadcast rights, which represents the present value of payments for the television channel placement. The interest expense related to our television broadcast rights recorded during the first quarter of fiscal 2021 and fiscal 2020 was$503,000 and$6,000 . The total liability was$30.8 million as ofMay 1, 2021 , of which$26.1 million was classified as current in the accompanying condensed balance sheets. Estimated interest expense for the television broadcast obligation is$1.3 million for fiscal 2021, and$212,000 for fiscal 2022. The increase in interest expense for the fiscal 2021 first quarter was also partially offset by a lower average balance outstanding on our PNC Credit Facility, an impact of approximately$364,000 .
Net Income (Loss)
For the fiscal 2021 first quarter, we reported a net loss of$3.4 million , or$0.21 per share, on 15,517,454 weighted average basic common shares outstanding compared with a net loss of$6.8 million , or$0.82 per share, on 8,290,790 weighted average basic common shares outstanding in the fiscal 2020 first quarter. The net loss for the first quarter of fiscal 2021 included transaction, settlement and integrations costs totaling$701,000 and interest expense of$1.3 million . The net loss for the first quarter of fiscal 2020 included restructuring costs of$209,000 ; transaction, settlement and integrations costs, net, totaling$259,000 ; and interest expense of$1.2 million . For the first quarters of fiscal 2021 and fiscal 2020, the net loss reflects an income tax provision of$15,000 and$15,000 . The income tax provision for these periods relates to state income taxes payable on certain income for which there is no loss carryforward 35 Table of Contents 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 2021 first quarter was$8.1 million compared to Adjusted EBITDA of$(1.6) million for the fiscal 2020 first quarter for an increase of$9.8 million or 592%.
A reconciliation of the comparable GAAP measure, net income (loss), to Adjusted EBITDA follows, in thousands:
Periods Ended
May 1, May 2,
2021 2020
Net loss $ (3,228) $ (6,828)
Adjustments:Depreciation and amortization (a) 8,317
2,905 Interest income (1) (1) Interest expense 1,313 1,179 Income taxes 15 15 EBITDA (b)$ 6,416 $ (2,730) A reconciliation of EBITDA to Adjusted EBITDA is as follows: EBITDA (b)$ 6,416 $ (2,730) Adjustments: Transaction, settlement and integration costs, net (c) 701
259
Restructuring costs - 209
One-time customer concessions 341 -Non-cash share-based compensation expense 678
615
Adjusted EBITDA (b) $ 8,136 $ (1,647) Includes distribution facility depreciation of
the three-month periods ended
(a) facility depreciation is included as a component of cost of sales within the
accompanying condensed consolidated statements of operations. The three-month
periods ended
related to the television broadcast rights totaling
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
(b) 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.
Transaction, settlement and integration costs for the three-month period
ended
(c) TCO and C&B business acquisition. Transaction, settlement and integration
costs, net, for the three-month period ended
fees incurred to explore additional loan financings, settlement costs, and
incremental COVID-19 related legal costs.
We use "Adjusted EBITDA" 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 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
36
Table of Contents
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.
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 ofMay 1, 2021 , we had cash of$14.9 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 ofJanuary 30, 2021 , we had cash of$15.5 million . For the first three months of fiscal 2021, working capital increased$15.2 million to$48.9 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 1.40 atMay 1, 2021 and 1.20 atJanuary 30, 2021 .
PNC Credit Facility
OnFebruary 9, 2012 , the Company entered into a credit and security agreement (as amended throughFebruary 5, 2021 , the "PNC Credit Facility") withPNC Bank, N.A. ("PNC"), a member of The PNC Financial Services Group, Inc., 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$70.0 million and provides for a term loan on which the Company had originally drawn to fund improvements at the Company's distribution facility inBowling Green, Kentucky and subsequently to pay down the Company's previously outstanding term loan withGACP Finance Co., LLC . The PNC Credit Facility also an accordion feature that would allow the Company to expand the size of the revolving line of credit by another$20.0 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$70.0 million or a calculated borrowing base comprised of eligible accounts receivable and eligible inventory. 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 is secured by a first security interest in substantially all of the Company's personal property, as well as the Company's real properties located inEden Prairie, Minnesota andBowling Green, Kentucky . Under certain circumstances, the borrowing base may be adjusted if there were to be a significant deterioration in value of the Company's accounts receivable and inventory. The revolving line of credit under the PNC Credit Facility bears interest at 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 the Company's trailing twelve-month reported leverage ratio (as defined in the PNC Credit Facility) measured semi-annually as demonstrated in its 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 the Company's leverage ratio measured annually as demonstrated in its audited financial statements. As ofMay 1, 2021 , the Company had borrowings of$41.0 million under its revolving line of credit. Remaining available capacity under the revolving line of credit as ofMay 1, 2021 was approximately$9.3 million , which provided liquidity for working capital and general corporate purposes. The PNC Credit Facility also provides for a term loan on which the Company had originally drawn to fund an expansion and improvements at the Company's distribution facility inBowling Green, Kentucky and subsequently to partially pay down the Company's previously outstanding term loan withGACP Finance Co., LLC and reduce its revolving line of credit borrowings. 37
Table of Contents
As ofMay 1, 2021 , there was approximately$11.8 million outstanding under the term loan, of which$2.7 million was classified as current in the accompanying condensed consolidated balance sheet. Principal borrowings under the term loan are to be 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 is also subject to other mandatory prepayment in certain circumstances. In addition, if the total PNC Credit Facility is terminated prior to maturity, the Company would be required to pay an early termination fee of 0.5% if terminated on or beforeJuly 27, 2021 , and no fee if terminated afterJuly 27, 2021 . As ofMay 1, 2021 , the imputed effective interest rate on the PNC term loan was 0.0%.
Interest expense recorded under the PNC Credit Facility was
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 . As ofMay 1, 2021 , the Company's unrestricted cash plus unused line availability was$24.2 million , and the Company was in compliance with applicable financial covenants of the PNC Credit Facility and expects to be in compliance with applicable financial covenants over the next twelve months. In addition, the PNC Credit Facility places restrictions on the Company's ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders.
Public Equity Offering
OnFebruary 18, 2021 , we completed a public offering, in which we issued and sold 3,289,000 of our common stock at a public offering price of$7.00 per share, including 429,000 shares sold upon the exercise of the underwriter's option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately$21.2 million . We have used and intend to use the proceeds for general working capital purposes. OnAugust 28, 2020 , we completed a public offering, in which we issued and sold 2,760,000 shares of our common stock at a public offering price of$6.25 per share, including 360,000 shares sold upon the exercise of the underwriter's option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately$15.8 million . We used the proceeds for general working capital purposes.
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
38
Table of Contents
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 ofJanuary 30, 2021 , 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$181.0 million over the next five fiscal years. 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. For the three months endedMay 1, 2021 , net cash used for operating activities totaled$15.2 million compared to net cash provided by operating activities of approximately$16.4 million for the comparable fiscal 2020 period. Net cash (used for) provided by operating activities for the fiscal 2021 and 2020 periods reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, amortization of deferred financing costs, payments for television broadcast rights, and inventory impairment write-down. In addition, net cash used for operating activities for the three months endedMay 1, 2021 reflects decreases in accounts payable and accrued liabilities and accounts receivable. Inventories increased as we prepare for continued revenue growth in 2021. Accounts receivable decreased during the first three months of fiscal 2021 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 three months of fiscal 2021 primarily due the Company paying accrued cable distribution fees. Prepaid expenses and other increased primarily due to our new salesforce implementation in 2021. Net cash used for investing activities totaled$5.6 million for the first three months of fiscal 2021 was comprised primarily of the$3.5 million Christopher and Banks acquisition payment and compares to net cash used for investing activities of$1.2 million for the comparable fiscal 2020 period. For the three months endedMay 1, 2021 andMay 2, 2020 , expenditures for property and equipment were$2.1 million and$1.2 million . Capital expenditures made during the periods presented relate primarily to expenditures made for development, upgrade and replacement of computer software, order 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 39
Table of Contents
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 provided by financing activities totaled$20.3 million for the three months endedMay 1, 2021 and related primarily to proceeds from the issuance of common stock and warrants of$21.2 million and, principal payments on our PNC term loan of$0.7 million . Net cash used for financing activities totaled$9.3 million for the three months endedMay 2, 2020 and related primarily to principal payments on the PNC revolving loan of$15.8 million , principal payments on our PNC term loan of$905,000 , finance lease payments of$25,000 and tax payments for restricted stock unit issuances of$2,000 , offset by proceeds from our PNC revolving loan of$5.9 million and proceeds from the issuance of common stock and warrants of$1.5 million . .
© Edgar Online, source
