VINCE HOLDING CORP. Our fiscal year ends on the Saturday closest toJanuary 31 . Fiscal years 2022 and 2021 ended onJanuary 28, 2023 ("fiscal 2022") andJanuary 29, 2022 ("fiscal 2021"), respectively. Fiscal 2022 and fiscal 2021 each consisted of 52 weeks. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. All amounts disclosed are in thousands except store counts, share and per share data and percentages. This discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. For a discussion of the risks facing our business, see "Part I, Item 1A-Risk Factors" included in this Annual Report.
COVID-19
The spread of COVID-19, which was declared a pandemic by theWorld Health Organization inMarch 2020 , remains highly volatile and continues to evolve. In response, we implemented various measures to effectively manage our business as well as the impacts from the COVID-19 pandemic, including (i) serving our customers through our online e-commerce websites during the periods in which we were forced to shut down retail locations or operate with reduced shopping hours, alongside other retailers, including our wholesale partners, in accordance with state and local regulations related to the COVID-19 pandemic; (ii) engaging with our lenders to provide additional liquidity and increased operational flexibility; (iii) temporarily reducing retained employee salaries and suspending board retainer fees; (iv) engaging with our landlords to address the operating environment throughout the COVID-19 pandemic, including amending existing lease terms; and (v) streamlining our expense structure and carefully managing operational initiatives to align with the business environment and sales opportunities. The unpredictable nature of the COVID-19 pandemic could negatively affect the outcome of the measures intended to address its impact and/or our current expectations of our future business performance. See Part I, Item 1A. Risk Factors - "Risks Related to Our Business and Industry - The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, cash flow, liquidity and results of operations" for additional discussion regarding risks to our business associated with the COVID-19 pandemic.
Executive Overview
We are a global contemporary retailer, and during fiscal 2022 and fiscal 2021 we consisted of three brands: Vince, Rebecca Taylor and Parker.
Vince, established in 2002, is a leading global luxury apparel and accessories
brand best known for creating elevated yet understated pieces for every day
effortless style. Known for its range of luxury products, Vince offers women's
and men's
23
--------------------------------------------------------------------------------ready-to-wear, footwear and accessories through 50 full-price retail stores, 17 outlet stores, its e-commerce site, vince.com, and through its subscription service Vince Unfold, vinceunfold.com, as well as through premium wholesale channels globally.
Rebecca Taylor, founded in 1996 inNew York City , is a contemporary womenswear line lauded for its signature prints, romantic detailing and vintage inspired aesthetic, reimagined for a modern era. OnSeptember 12, 2022 , the Company announced its decision to wind down the Rebecca Taylor business. OnDecember 22, 2022 , the Company's indirectly wholly owned subsidiary,Rebecca Taylor, Inc. , completed the sale of its intellectual property and certain related ancillary assets toRT IPCO, LLC , an affiliate ofRamani Group . See Note 2 "Wind Down of the Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for additional information. The Rebecca Taylor collection was previously available through retail stores and outlet stores, through its branded e-commerce site and through its subscription service Rebecca Taylor RNTD, as well as through major department and specialty stores in theU.S. and in select international markets. All Rebecca Taylor retail and outlet stores operated by the Company were closed as ofJanuary 28, 2023 and the e-commerce site operated by the Company ceased inDecember 2022 . Parker, founded in 2008 inNew York City , is a contemporary women's fashion brand that is trend focused. During the first half of fiscal 2020 the Company decided to pause the creation of new products to focus resources on the operations of the Vince and Rebecca Taylor brands. OnFebruary 17, 2023 , the Company's indirectly wholly owned subsidiary,Parker Lifestyle, LLC , completed the sale of its intellectual property and certain related ancillary assets toParker IP Co. LLC , an affiliate of BCI Brands. See Note 15 "Subsequent Events" to the Consolidated Financial Statements in this Annual Report for additional information. The Parker collection was previously available through major department stores and specialty stores worldwide as well as through its e-commerce website. OnApril 21, 2023 , the Company entered into a strategic partnership ("Authentic Transaction") withAuthentic Brands Group, LLC ("Authentic"), a global brand development, marketing and entertainment platform, whereby the Company will contribute its intellectual property to a newly formed Authentic subsidiary ("ABG Vince") for a total consideration of$76,500 in cash and a 25% membership interest in ABG Vince. Through the agreement, Authentic will own the majority stake of 75% membership interest in ABG Vince. The Cash Consideration generated by the Asset Sale (as defined below) is expected to be used to prepay in fullVince, LLC's existing Term Loan Credit Facility (as defined below) and to repay a portion of the outstanding borrowings underVince, LLC's 2018 Revolving Credit Facility (as defined below). The Company expects to close the Asset Sale inMay 2023 . Concurrent with the Authentic Transaction,Vince, LLC entered into the certain Consent and Second Amendment to Amended and Restated Credit Agreement (the "Second Amendment to ABL Credit Agreement") to adjust the initial commitment level commensurate with the expected net proceeds after transaction related fees and the expected debt pay down, and to revise the maturity date toJune 30, 2024 , among other things, which will be effective upon the closing of the Asset Sale. See Note 15 "Subsequent Events" to the Consolidated Financial Statements in this Annual Report for additional information. We serve our customers through a variety of channels that reinforce our brand images. Our diversified channel strategy allows us to introduce our products to customers through multiple distribution points that are presented in three reportable segments: Vince Wholesale, Vince Direct-to-consumer and Rebecca Taylor and Parker. Results of Operations Comparable Sales Comparable sales include our e-commerce sales in order to align with how we manage our brick-and-mortar retail stores and e-commerce online stores as a combined single direct-to-consumer channel of distribution. As a result of our omni-channel sales and inventory strategy, as well as cross-channel customer shopping patterns, there is less distinction between our brick-and-mortar retail stores and our e-commerce online stores and we believe the inclusion of e-commerce sales in our comparable sales metric is a more meaningful representation of these results and provides a more comprehensive view of our year over year comparable sales metric. A store is included in the comparable sales calculation after it has completed 13 full fiscal months of operations and includes stores, if any, that have been remodeled or relocated within the same geographic market the Company served prior to the relocation. Non-comparable sales include new stores which have not completed 13 full fiscal months of operations, sales from closed stores, and relocated stores serving a new geographic market. For 53-week fiscal years, we continue to adjust comparable sales to exclude the additional week. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. 24 --------------------------------------------------------------------------------
Fiscal 2022 Compared to Fiscal 2021
The following table presents, for the periods indicated, our operating results as a percentage of net sales as well as earnings (loss) per share data:
Fiscal Year
2022 2021 Variances
% of Net % of Net
(in thousands, except per
share data and percentages) Amount Sales Amount Sales Amount Percent
Statements of Operations:
Net sales $ 357,442 100.0 % $ 322,683 100.0 % $ 34,759 10.8 %
Cost of products sold 219,472 61.4 % 176,113 54.6 % 43,359 24.6 %
Gross profit 137,970 38.6 % 146,570 45.4 % (8,600 ) (5.9 )%
Impairment of intangible
assets 1,700 0.5 % - 0.0 % 1,700 *
Impairment of long-lived
assets 1,880 0.5 % - 0.0 % 1,880 *
Gain on sale of intangible
assets (1,620 ) (0.5 )% - 0.0 % (1,620 ) *
Selling, general and
administrative expenses 161,432 45.2 % 146,087 45.3 % 15,345 10.5 %
(Loss) income from operations (25,422 ) (7.1 )% 483 0.1 % (25,905 ) *
Interest expense, net 9,887 2.8 % 8,606 2.7 % 1,281 14.9 %
Loss before income taxes (35,309 ) (9.9 )% (8,123 ) (2.5 )% (27,186 ) 334.7 %
Provision for income taxes 3,037 0.8 % 4,581 1.4 % (1,544 ) (33.7 )%
Net loss $ (38,346 ) (10.7 )% $ (12,704 ) (3.9 )% $ (25,642 ) 201.8 %
Loss per share:
Basic loss per share $ (3.14 ) $ (1.07 )
Diluted loss per share $ (3.14 ) $ (1.07 )
(*) Not meaningful
Net sales for fiscal 2022 were
Gross profit decreased$8,600 , or 5.9%, to$137,970 in fiscal 2022 from$146,570 in fiscal 2021. As a percentage of sales, gross margin was 38.6%, compared with 45.4% in the prior year. The total gross margin rate decrease was primarily driven by the following factors:
•
The unfavorable impact from an increase in promotional activity in the Direct-to-consumer segment which contributed negatively by approximately 440 basis points;
•
The unfavorable impact of year-over-year adjustments to inventory reserves contributed negatively by approximately 320 basis points;
•
The unfavorable impact from inventory write-downs and other liquidation efforts as a result of the wind down of the Rebecca Taylor business contributed negatively by approximately 270 basis points; which were partly offset by
•
The favorable impact from lower freight costs which contributed positively by approximately 200 basis points; and
•
The favorable impact of leveraging our distribution and other overhead costs contributed positively by approximately 140 basis points.
Impairment of intangible assets for fiscal 2022 was
Impairment of long-lived assets for fiscal 2022 was
Gain on sale of intangible assets for fiscal 2022 was$1,620 related to the sale of the Rebecca Taylor intellectual property and certain related ancillary assets in fiscal 2022. See Note 2 "Wind Down of the Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for additional information. 25 -------------------------------------------------------------------------------- Selling, general and administrative ("SG&A") expenses for fiscal 2022 were$161,432 , increasing$15,345 , or 10.5%, versus$146,087 for fiscal 2021. SG&A expenses as a percentage of sales were 45.2% and 45.3% for fiscal 2022 and fiscal 2021, respectively. The change in SG&A expenses compared to the prior year period was primarily due to:
•
$7,727 of net costs associated with the wind down of the Rebecca Taylor business (see Note 2 "Wind Down of Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for a detailed listing);
•
$7,342 of increased compensation and benefits, partly due to lower expense in the prior year associated with our retail store associates as a result of the impact of COVID-19;
•
•
$2,513 of decreased rent expense primarily due to lease modifications effective in the third quarter of fiscal 2022, as well as higher rent expense in the prior year driven by the repayment of rent deferrals associated with COVID-19; and
•
Interest expense, net increased$1,281 , or 14.9%, to$9,887 in fiscal 2022 from$8,606 in fiscal 2021 primarily due to higher interest rates, which was partly offset by a$758 write-off of deferred financing costs and a$743 prepayment penalty, both associated with the termination of the 2018 Term Loan Facility during fiscal 2021. Provision for income taxes for fiscal 2022 was$3,037 as compared to$4,581 for fiscal 2021. Our effective tax rate for fiscal 2022 and fiscal 2021 was (8.6)% and (56.4)%, respectively. The effective tax rate for fiscal 2022 differed from theU.S. statutory rate of 21% primarily due to the increase in deferred tax liabilities attributable to indefinite-lived goodwill and intangible assets, as well as state and foreign taxes partially offset by the impact of valuation allowance established against additional deferred tax assets. The effective tax rate for fiscal 2021 differed from theU.S. statutory rate of 21% primarily due to the increase in deferred tax liabilities attributable to indefinite-lived goodwill and intangible assets and the impact of the valuation allowance established against additional deferred tax assets. See Note 11 "Income Taxes" to the Consolidated Financial Statements in this Annual Report for further information.
Performance by Segment
The Company has identified three reportable segments as further described below:
•
Vince Wholesale segment-consists of the Company's operations to distribute Vince brand products to major department stores and specialty stores inthe United States and select international markets;
•
Vince Direct-to-consumer segment-consists of the Company's operations to distribute Vince brand products directly to the consumer through its Vince branded full-price specialty retail stores, outlet stores, and e-commerce platform, and its subscription service Vince Unfold; and
•
Rebecca Taylor and Parker segment-consisted of the Company's operations to distribute Rebecca Taylor and Parker brand products to major department stores and specialty stores in theU.S. and select international markets, directly to the consumer through their own branded e-commerce platforms and Rebecca Taylor retail and outlet stores, and through its subscription service Rebecca Taylor RNTD. OnSeptember 12, 2022 , the Company announced its decision to wind down the Rebecca Taylor business. OnDecember 22, 2022 , the Company's indirectly wholly owned subsidiary,Rebecca Taylor, Inc. , completed the sale of its intellectual property and certain related ancillary assets toRT IPCO, LLC , an affiliate ofRamani Group . See Note 2 "Wind Down of Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for further information. Substantially all Rebecca Taylor inventory was liquidated as ofJanuary 28, 2023 . Additionally, all Rebecca Taylor retail and outlet stores operated by the Company were closed as ofJanuary 28, 2023 and the e-commerce site operated by the Company ceased inDecember 2022 . OnFebruary 17, 2023 , the Company's indirectly wholly owned subsidiary,Parker Lifestyle, LLC , completed the sale of its intellectual property and certain related ancillary assets toParker IP Co. LLC , an affiliate of BCI Brands. See Note 15 "Subsequent Events" to the Consolidated Financial Statements in this Annual Report for additional information. Unallocated corporate expenses are related to the Vince brand and are comprised of SG&A expenses attributable to corporate and administrative activities (such as marketing, design, finance, information technology, legal and human resource departments), and other charges that are not directly attributable to the Company's Vince Wholesale and Vince Direct-to-consumer reportable segments. 26 --------------------------------------------------------------------------------
Fiscal Year
(in thousands) 2022 2021
Net Sales :
Vince Wholesale $ 169,375 $ 147,817
Vince Direct-to-consumer 149,770 135,720
Rebecca Taylor and Parker 38,297 39,146
Total net sales $ 357,442 $ 322,683
Income (loss) from operations:
Vince Wholesale $ 43,592 $ 45,839
Vince Direct-to-consumer 2,397 10,873
Rebecca Taylor and Parker (21,255 ) (9,213 )
Subtotal 24,734 47,499
Unallocated corporate (50,156 ) (47,016 )
Total (loss) income from operations
Vince Wholesale
Fiscal Year
(in thousands) 2022 2021 $ Change
Net sales $ 169,375 $ 147,817 $ 21,558
Income from operations 43,592 45,839 (2,247 )
Net sales from our Vince Wholesale segment increased $21,558 , or 14.6%, to
$169,375 in fiscal 2022 from $147,817 in fiscal 2021, primarily due to higher
full-price shipments as the prior year was impacted by COVID-19, as well as an
increase in off-price shipments.
Income from operations from our Vince Wholesale segment decreased $2,247 , or
4.9%, to $43,592 in fiscal 2022 from $45,839 in fiscal 2021 primarily due to a
decline in gross margin and increased SG&A expenses, partly offset by higher
sales as noted above.
Vince Direct-to-consumer
Fiscal Year
(in thousands) 2022 2021 $ Change
Net sales $ 149,770 $ 135,720 $ 14,050
Income from operations 2,397 10,873 (8,476 )
Net sales from our Vince Direct-to-consumer segment increased $14,050 , or 10.4%,
to $149,770 in fiscal 2022 from $135,720 in fiscal 2021. Comparable sales
increased $12,258 , or 9.5%, including e-commerce, primarily due to an increase
in store traffic as the prior year reflected the impact from COVID-19.
Non-comparable sales contributed $1,792 of sales growth, which includes new
stores that have not completed 13 full fiscal months of operations and Vince
Unfold. Since the end of fiscal 2021, one net store has closed, bringing our
total retail store count to 67 (consisting of 50 full price stores and 17 outlet
stores) as of January 28, 2023 , compared to 68 (consisting of 50 full price
stores and 18 outlet stores) as of January 29, 2022 .
Our Vince Direct-to-consumer segment had income from operations of $2,397 in
fiscal 2022 compared to income from operations of $10,873 in fiscal 2021. The
change was primarily driven by an increase in SG&A expenses driven by staffing
costs as the prior year was impacted by COVID-19, as well as investments in our
customer facing technologies to further expand our omni-channel capabilities and
increased investments in our e-commerce platforms. Additionally, fiscal 2022
includes $1,014 of impairment charges related to the impairment of property and
equipment associated with certain Vince retail locations.
27
--------------------------------------------------------------------------------
Rebecca Taylor and Parker
Fiscal Year
(in thousands) 2022 2021 $ Change
Net sales $ 38,297 $ 39,146 $ (849 )
Loss from operations (21,255 ) (9,213 ) (12,042 )
Net sales from our Rebecca Taylor and Parker segment decreased $849 , or 2.2%, to
$38,297 in fiscal 2022 from $39,146 in fiscal 2021 primarily due to (a) a $5,957
decrease in wholesale sales primarily driven by lower full-price shipments,
which was partly offset by (b) a $5,108 increase in the direct-to-consumer
channels primarily due to increased store traffic, as well as new stores.
Loss from operations from our Rebecca Taylor and Parker segment increased
$12,042 , or 130.7%, to $21,255 in fiscal 2022 from $9,213 , in fiscal 2021. The
increase was primarily driven by costs associated with the wind down of the
Rebecca Taylor business (see Note 2 "Wind Down of Rebecca Taylor Business" to
the Consolidated Financial Statements in this Annual Report for a detailed
listing), as well as $2,566 of impairment charges related to the impairment of
the Rebecca Taylor tradename and property and equipment.
Liquidity and Capital Resources
Our sources of liquidity are cash and cash equivalents, cash flows from operations, if any, borrowings available under the 2018 Revolving Credit Facility (as amended and restated and as defined below) and our ability to access the capital markets, including our Open Market Sale AgreementSM entered into withJefferies LLC inSeptember 2021 (see Note 9 "Stockholders' Equity" to the Consolidated Financial Statements in this Annual Report for further information). Our primary cash needs are funding working capital requirements, meeting our debt service requirements and capital expenditures for new stores and related leasehold improvements. The most significant components of our working capital are cash and cash equivalents, accounts receivable, inventories, accounts payable and other current liabilities. Our recent financial results have been, and our future financial results may be, subject to substantial fluctuations, and may be impacted by business conditions and macroeconomic factors as discussed below. While these potential fluctuations of our results introduce inherent uncertainty in our projections of liquidity, based on our current expectations, during the next twelve months from the date these financial statements are issued, we expect to maintain Excess Availability (as defined in the Revolving Credit Facility Agreement) minimally above the required threshold to meet our monthly Excess Availability covenant under our credit facilities and believe that our other sources of liquidity will generate sufficient cash flows to meet our operating obligations during this twelve month period. The foregoing expectation is dependent on a number of factors, including, among others, our ability to generate sufficient cash flow from operations, our ongoing ability to manage our operating obligations, the results of any future inventory valuations and potential borrowing restrictions imposed by our lenders based on their credit judgment, which could materially and negatively impact our borrowing capacity, the wind down of the Rebecca Taylor business, as well as macroeconomic factors such as the rising costs and inflationary impacts on our customers, residual effect of the COVID-19 pandemic and the armed conflict betweenUkraine andRussia . Any material negative impact from these factors or others could require us to implement alternative plans to satisfy our liquidity needs which may be unsuccessful. In the event that we are unable to timely service our debt, meet other contractual payment obligations or fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness before maturity, seek waivers of or amendments to our contractual obligations for payment, reduce or delay scheduled expansions and capital expenditures, liquidate inventory through additional discounting, sell material assets or operations or seek other financing opportunities. Upon closing of the Authentic Transaction, and the consummation of the amendments in the Second Amendment to ABL Credit Agreement, as discussed above within "Executive Overview", the Company expects to strengthen its overall liquidity position and increase its working capital by prepaying in full the outstanding borrowings underVince, LLC's Term Loan Credit Facility and to repay a portion of the outstanding borrowings underVince, LLC's 2018 Revolving Credit Facility. 28 --------------------------------------------------------------------------------
Operating Activities
Fiscal Year
(in thousands) 2022 2021
Operating activities
Net loss $ (38,346 ) $(12,704 ) Add (deduct) items not affecting operating cash flows: Impairment of intangible assets
1,700 -
Impairment of long-lived assets 1,880 - Depreciation and amortization 8,334 6,496 Provision for bad debt 424 (273 ) Gain on sale of intangible assets (1,620 )
-
Loss on disposal of property and equipment 121
12
Amortization of deferred financing costs 1,267
788
Deferred income taxes 2,866
4,380
Share-based compensation expense 2,095 2,076 Capitalized PIK Interest 2,869 2,339 Loss on debt extinguishment - 1,501 Changes in assets and liabilities: Receivables, net 8,787
2,202
Inventories (11,462 ) (10,341 ) Prepaid expenses and other current assets 1,198
2,677
Accounts payable and accrued expenses 2,704
6,024
Other assets and liabilities (2,078 ) (5,398 ) Net cash used in operating activities$ (19,261 ) $
(221 )
Net cash used in operating activities during fiscal 2022 was$19,261 , which consisted of a net loss of$38,346 , impacted by non-cash items of$19,936 and cash used by working capital of$851 . Net cash used by working capital resulted from a cash outflow in inventory of$11,462 primarily due to the increase of carry-over pre-fall and fall assortments as well as a higher investment in replenishment products, and higher product costs, partly offset by a cash inflow in receivables, net of$8,787 primarily due to the timing of collections. Net cash used in operating activities during fiscal 2021 was$221 which consisted of a net loss of$12,704 , impacted by non-cash items of$17,319 and cash used by working capital of$4,836 . Net cash used by working capital resulted from a cash outflow in inventory of$10,341 primarily due to the timing of receipts and reduced inventory purchases in the prior year, partly offset by a cash inflow in accounts payable and accrued expenses of$6,024 primarily due to the timing of payments to vendors. Investing Activities Fiscal Year (in thousands) 2022 2021 Investing activities Payments for capital expenditures$ (2,782 ) $ (5,055 ) Proceeds from sale of intangible assets 4,250 -
Net cash provided by (used in) investing activities
Net cash provided by investing activities of$1,468 during fiscal 2022 represents the proceeds received from the sale of intangible assets (see Note 2 "Wind Down of Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for further information), partly offset by capital expenditures primarily related to the investment in our e-commerce platforms, as well as retail store buildouts, including leasehold improvements and store fixtures.
Net cash used in investing activities of
29
--------------------------------------------------------------------------------
Financing Activities
Fiscal Year
(in thousands) 2022 2021
Financing activities
Proceeds from borrowings under the Revolving
Credit Facilities $ 402,652 $ 331,489
Repayment of borrowings under the Revolving Credit Facilities (378,778 ) (337,264 ) Repayment of borrowings under the Term Loan Facilities (5,622 ) (24,750 ) Proceeds from borrowings under the Term Loan Facilities -
35,000
Proceeds from common stock issuance, net of certain fees 825
150
Tax withholdings related to restricted stock vesting (213 ) (69 ) Proceeds from stock option exercises, restricted stock vesting, and issuance of common stock under employee stock purchase plan 75
114
Financing fees (1,128 ) (2,156 ) Net cash provided by financing activities$ 17,811 $
2,514
Net cash provided by financing activities was
Net cash provided by financing activities was$2,514 during fiscal 2021, primarily consisting of$35,000 of proceeds received from the Term Loan Credit Facility, partly offset by the repayment of$24,750 of borrowings under the 2018 Term Loan Facility,$5,775 net repayment of borrowings under the 2018 Revolving Credit Facility and financing fees of$2,156 (which includes a$743 prepayment penalty associated with the termination of the 2018 Term Loan Facility during fiscal 2021). Term Loan Credit Facility OnSeptember 7, 2021 ,Vince, LLC entered into a new term loan credit facility as described below. The proceeds were used to repay in full all outstanding amounts under the$27,500 senior secured term loan facility (the "2018 Term Loan Facility") pursuant to a credit agreement originally entered into onAugust 21, 2018 and a portion of the borrowings outstanding under the 2018 Revolving Credit Facility, totaling$25,960 , which included interest and a prepayment penalty of$743 (which was included within financing fees on the Consolidated Statements of Cash Flows). The 2018 Term Loan Facility was terminated and, as a result, the Company recorded expense of$758 related to the write-off of the remaining deferred financing costs.Vince, LLC entered into a new$35,000 senior secured term loan credit facility (the "Term Loan Credit Facility") pursuant to a Credit Agreement (the "Term Loan Credit Agreement") by and amongVince, LLC , as the borrower, the guarantors named therein,PLC Agent, LLC , as administrative agent and collateral agent, and the other lenders from time to time party thereto.Vince Holding Corp. andVince Intermediate Holding, LLC ("Vince Intermediate") are guarantors under the Term Loan Credit Facility. The Term Loan Credit Facility matures on the earlier ofSeptember 7, 2026 and 91 days after the maturity date of the 2018 Revolving Credit Facility (as defined below). The Term Loan Credit Facility is subject to quarterly amortization of$875 commencing onJuly 1, 2022 , with the balance payable at final maturity. Interest is payable on loans under the Term Loan Credit Facility at a rate equal to the 90-day LIBOR rate, or an alternate applicable reference rate in the event LIBOR is no longer available, subject, in either case, to a 1.0% floor, plus 7.0%. During the continuance of certain specified events of default, interest will accrue on the overdue amount of any loan at a rate of 2.0% in excess of the rate otherwise applicable to such amount. In addition, the Term Loan Credit Agreement requires mandatory prepayments upon the occurrence of certain events, including but not limited to, an Excess Cash Flow payment (as defined in the Term Loan Credit Agreement), subject to reductions for voluntary prepayments made during such fiscal year, commencing with the fiscal year endingJanuary 28, 2023 . The Term Loan Credit Facility contains a requirement thatVince, LLC will maintain an availability under its 2018 Revolving Credit Facility of the greater of 10% of the commitments thereunder or$9,500 . The Term Loan Credit Facility did not permit dividends prior toApril 30, 2022 , or an earlier date designated byVince, LLC (the period until such date, the "Accommodation Period") and now permits them to the extent that no default or event of default is continuing or would result from a contemplated dividend, so long as after giving pro forma effect to the contemplated dividend subtracting any accounts payable amounts that are or are projected to be past due for the following six months, excess availability for such six month period will be at least the greater of 25.0% of the aggregate lending commitments and$15,000 . In addition, the Term Loan Credit Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, burdensome agreements, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of its business or its fiscal year, and distributions and dividends. Furthermore, the Term Loan Credit Facility is subject to a Borrowing Base (as defined in the 30 -------------------------------------------------------------------------------- Term Loan Credit Agreement) which can, under certain conditions result in the imposition of a reserve under the 2018 Revolving Credit Facility. As ofJanuary 28, 2023 , the Company was in compliance with applicable covenants. All obligations under the Term Loan Credit Facility are guaranteed by Vince Intermediate and the Company and any future material domestic restricted subsidiaries ofVince, LLC and secured by a lien on substantially all of the assets of the Company,Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries. OnSeptember 30, 2022 ,Vince, LLC entered into the First Amendment to the Term Loan Credit Agreement (the "TL First Amendment"). The TL First Amendment, among other things, (i) requires more frequent borrowing base reporting and establishes variance reporting in connection with theRebecca Taylor, Inc. liquidation; (ii) removes the assets (other than intellectual property) of theRebecca Taylor, Inc. andParker Holding, LLC companies from the term loan borrowing base; (iii) permits the sale of the intellectual property of theRebecca Taylor, Inc. andParker Holding, LLC companies and theRebecca Taylor, Inc. liquidation; (iv) amends the ABL (as defined in the Term Loan Credit Agreement) excess availability covenant to provide the Company with up to$5,000 of additional potential liquidity throughDecember 28, 2022 ; and (v) requires prepayment of the Obligations in an amount equal to 100% of the Net Cash Proceeds received from the sale of the intellectual property of theRebecca Taylor, Inc. andParker Holding, LLC companies to be applied against the Obligations as outlined in the TL First Amendment. OnDecember 22, 2022 , the Company's indirectly wholly owned subsidiary,Rebecca Taylor, Inc. , completed the sale of its intellectual property and certain related ancillary assets and net cash proceeds of$2,997 were used to repay a portion of the Term Loan Credit Facility. See Note 2 "Wind Down of Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for further information. In connection with the TL First Amendment,Vince, LLC agreed to pay the term lenders fees equal to (i)$600 and (ii) if the underlying term loan is not paid in full byJanuary 31, 2023 , an additional$850 , which is payable upon Payment in Full of the Term Loan Credit Facility. As a result of the TL First Amendment, the Company incurred a total of$1,525 of financing costs. In accordance with ASC Topic 470, "Debt", the Company accounted for this amendment as a debt modification and has recorded$75 of the financing costs paid to third parties within selling, general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss) in fiscal 2022. The remaining$1,450 of financing costs are recorded as deferred debt issuance costs (which is presented within Long-term debt on the Consolidated Balance Sheets) which will be amortized over the remaining term of the Term Loan Credit Facility.
Through
2018 Revolving Credit Facility
OnAugust 21, 2018 ,Vince, LLC entered into an$80,000 senior secured revolving credit facility (the "2018 Revolving Credit Facility") pursuant to a credit agreement by and amongVince, LLC , as the borrower, VHC and Vince Intermediate, as guarantors,Citizens Bank, N.A. ("Citizens"), as administrative agent and collateral agent, and the other lenders from time to time party thereto. The 2018 Revolving Credit Facility provides for a revolving line of credit of up to$80,000 , subject to a Loan Cap, which is the lesser of (i) the Borrowing Base as defined in the credit agreement for the 2018 Revolving Credit Facility and (ii) the aggregate commitments, as well as a letter of credit sublimit of$25,000 . It also provides for an increase in aggregate commitments of up to$20,000 . Interest is payable on the loans under the 2018 Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, with applicable margins subject to a pricing grid based on an average daily excess availability calculation. The "Base Rate" means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by Citizens as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.5%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.00%. During the continuance of certain specified events of default, at the election of Citizens, interest will accrue at a rate of 2.0% in excess of the applicable non-default rate. The 2018 Revolving Credit Facility contains a requirement that, at any point when Excess Availability (as defined in the credit agreement for the 2018 Revolving Credit Facility) is less than 10.0% of the loan cap and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days,Vince, LLC must maintain during that time a Consolidated Fixed Charge Coverage Ratio (as defined in the credit agreement for the 2018 Revolving Credit Facility) equal to or greater than 1.0 to 1.0 measured as of the last day of each fiscal month during such period. The 2018 Revolving Credit Facility contains representations and warranties, other covenants and events of default that are customary for this type of financing, including covenants with respect to limitations on the incurrence of additional indebtedness, liens, burdensome agreements, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of the Company's business or its fiscal year. The 2018 Revolving Credit Facility generally permits dividends in the absence of any event of default (including any event of default arising from a contemplated dividend), so long as (i) after giving pro forma effect to the contemplated dividend and for the 31 -------------------------------------------------------------------------------- following six months Excess Availability will be at least the greater of 20.0% of the Loan Cap and$10,000 and (ii) after giving pro forma effect to the contemplated dividend, the Consolidated Fixed Charge Coverage Ratio for the 12 months preceding such dividend will be greater than or equal to 1.0 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.0 to 1.0 if, after giving pro forma effect to the contemplated dividend, Excess Availability for the six fiscal months following the dividend is at least the greater of 25.0% of the Loan Cap and$12,500 ). OnNovember 1, 2019 ,Vince, LLC entered into the First Amendment (the "First Revolver Amendment") to the 2018 Revolving Credit Facility, which provided the borrower the ability to elect the Daily LIBOR Rate in lieu of the Base Rate to be applied to the borrowings upon applicable notice. The "Daily LIBOR Rate" means a rate equal to the Adjusted LIBOR Rate in effect on such day for deposits for a one day period, provided that, upon notice and not more than once every 90 days, such rate may be substituted for a one week or one month period for the Adjusted LIBOR Rate for a one day period. OnNovember 4, 2019 ,Vince, LLC entered into the Second Amendment (the "Second Revolver Amendment") to the credit agreement of the 2018 Revolving Credit Facility. The Second Revolver Amendment increased the aggregate commitments under the 2018 Revolving Credit Facility by$20,000 to$100,000 . Pursuant to the terms of the Second Revolver Amendment, the Acquired Businesses became guarantors under the 2018 Revolving Credit Facility and jointly and severally liable for the obligations thereunder. OnJune 8, 2020 ,Vince, LLC entered into the Third Amendment (the "Third Revolver Amendment") to the 2018 Revolving Credit Facility. The Third Revolver Amendment, among others, increased availability under the facility's borrowing base by (i) temporarily increasing the aggregate commitments under the 2018 Revolving Credit Facility to$110,000 throughNovember 30, 2020 (such period, the "Third Amendment Accommodation Period") (ii) temporarily revising the eligibility of certain account debtors during the Third Amendment Accommodation Period by extending by 30 days the period during which those accounts may remain outstanding past due as well as increasing the concentration limits of certain account debtors and (iii) for any fiscal four quarter period ending prior to or onOctober 30, 2021 , increasing the cap on certain items eligible to be added back to Consolidated EBITDA to 27.5% from 22.5%. The Third Revolver Amendment also (a) waived events of default; (b) temporarily increased the applicable margin on all borrowings of revolving loans by 0.75% per annum during the Third Amendment Accommodation Period and increased the LIBOR floor from 0% to 1.0%; (c) eliminated Vince LLC's and any loan party's ability to designate subsidiaries as unrestricted and to make certain payments, restricted payments and investments during the Third Amendment Extended Accommodation Period; (d) temporarily suspended the Fixed Charge Coverage Ratio covenant through the Third Amendment Extended Accommodation Period; (e) requiredVince, LLC to maintain a Fixed Charge Coverage Ratio of 1.0 to 1.0 in the event the excess availability under the 2018 Revolving Credit Facility was less than (x)$10,000 betweenSeptember 6, 2020 andJanuary 9, 2021 , (y)$12,500 betweenJanuary 10, 2021 andJanuary 31, 2021 and (z)$15,000 at all other times during the Third Amendment Extended Accommodation Period; (f) imposed a requirement (y) to pay down the 2018 Revolving Credit Facility to the extent cash on hand exceeded$5,000 on the last day of each week and (z) that, after giving effect to any borrowing thereunder,Vince, LLC may have no more than$5,000 of cash on hand; (g) permittedVince, LLC to incur up to$8,000 of additional secured debt (in addition to any interest accrued or paid in kind), to the extent subordinated to the 2018 Revolving Credit Facility on terms reasonably acceptable to Citizens; (h) established a method for imposing a successor reference rate if LIBOR should become unavailable, (i) extended the delivery periods for (x) annual financial statements for the fiscal year endedFebruary 1, 2020 toJune 15, 2020 and (y) quarterly financial statements for the fiscal quarters endedMay 2, 2020 andAugust 1, 2020 toJuly 31, 2020 andOctober 29, 2020 , respectively, and (j) granted ongoing relief throughSeptember 30, 2020 with respect to certain covenants regarding the payment of lease obligations. OnDecember 11, 2020 ,Vince, LLC entered into the Fifth Amendment (the "Fifth Revolver Amendment") to the 2018 Revolving Credit Facility. The Fifth Revolver Amendment, among other things, (i) extended the period fromNovember 30, 2020 toJuly 31, 2021 (such period, "Accommodation Period"), during which the eligibility of certain account debtors was revised by extending by 30 days the time those accounts may remain outstanding past due as well as increasing the concentration limits of certain account debtors; (ii) extended the period through which the applicable margin on all borrowings of revolving loans by 0.75% per annum during such Accommodation Period; (iii) extended the period fromOctober 30, 2021 toJanuary 29, 2022 , during which the cap on which certain items eligible to be added back to "Consolidated EBITDA" (as defined in the 2018 Revolving Credit Facility) was increased to 27.5% from 22.5%; (iv) extended the temporary suspension of the Consolidated Fixed Charge Coverage Ratio ("FCCR") covenant through the delivery of a compliance certificate relating to the fiscal quarter endedJanuary 29, 2022 (such period, the "Extended Accommodation Period"), other than the fiscal quarter endingJanuary 29, 2022 ; (v) requiredVince, LLC to maintain an FCCR of 1.0 to 1.0 in the event the excess availability under the 2018 Revolving Credit Facility was less than (x)$7,500 through the end of the Accommodation Period; and (y)$10,000 fromAugust 1, 2020 through the end of the Extended Accommodation Period; (vi) permittedVince, LLC to incur the debt under the Third Lien Credit Facility (as described below); (vii) revised the definition of "Cash Dominion Trigger Amount" to mean$15,000 through the end of the Extended Accommodation Period and at all other times thereafter, 12.5% of the loan cap and$5,000 , whichever is greater; (viii) deemed the Cash Dominion Event (as defined in the credit agreement for the 2018 Revolving Credit Facility) as triggered during the Accommodation Period; and (ix) required an engagement by the Company of a financial advisor fromFebruary 1, 2021 untilMarch 31, 2021 (or until the excess availability was greater than 25% of the loan cap for a period of at least thirty days, whichever is later) to assist in the preparation of certain financial reports, including 32 --------------------------------------------------------------------------------
the review of the weekly cashflow reports and other items. As of
OnSeptember 7, 2021 , concurrently with the Term Loan Credit Facility,Vince, LLC entered into an Amended and Restated Credit Agreement (the "A&R Revolving Credit Facility Agreement") which, among other things, contained amendments to reflect the terms of the Term Loan Credit Facility and extended the maturity of the 2018 Revolving Credit Facility to the earlier ofJune 8, 2026 and 91 days prior to the maturity of the Term Loan Credit Facility. In addition, the A&R Revolving Credit Facility Agreement, among others: (i) lowered all applicable margins by 0.75%; (ii) revised the end of the Accommodation Period (as defined therein) toApril 30, 2022 or an earlier date as elected byVince, LLC ; (iii) amended the borrowing base calculation to exclude Eligible Cash On Hand (as defined therein); (iv) revised the threshold under the definition of the Cash Dominion Trigger Event to be the excess availability of the greater of (a) 12.5% of the loan cap and (b)$11,000 ; (v) deleted the financial covenant and replaced it with a requirement to maintain a minimum excess availability not to be less than the greater of (a)$9,500 and (b) 10% of the commitments at any time; and (vi) revised certain representations and warranties as well as operational covenants. Concurrently with the TL First Amendment, onSeptember 30, 2022 ,Vince, LLC entered into the First Amendment to the A&R Revolving Credit Facility Agreement (the "ABL First Amendment"). The ABL First Amendment, among other things, (i) requires more frequent borrowing base reporting and establishes variance reporting in connection with theRebecca Taylor, Inc. liquidation; (ii) amends the definition of "Availability Reserves" to account for the difference between the aggregate amount of the ABL borrowing base attributable to the assets of theRebecca Taylor, Inc. andParker Holding, LLC companies and the amounts received (or anticipated to be received) as net proceeds of asset sales in connection with theRebecca Taylor, Inc. liquidation; (iii) permits the sale of the intellectual property of theRebecca Taylor, Inc. andParker Holding, LLC companies and theRebecca Taylor, Inc. liquidation; (iv) amends the excess availability covenant to provide the Company with up to$5,000 of additional potential liquidity throughDecember 28, 2022 ; and (v) removes the assets of theRebecca Taylor, Inc. andParker Holding, LLC companies from the borrowing base from and afterNovember 30, 2022 . In connection with the ABL First Amendment,Vince, LLC agreed to pay the ABL lenders fees equal to (i)$375 and (ii) if the ABL is not paid in full byDecember 15, 2022 , an additional$125 payable onJanuary 31, 2023 . As a result of the ABL First Amendment, the Company incurred a total of$708 of financing costs. In accordance with ASC Topic 470, "Debt", the Company accounted for this amendment as a debt modification and therefore, these financing costs were recorded as deferred debt issuance costs (which is presented within Other assets on the Consolidated Balance Sheets) which will be amortized over the remaining term of the 2018 Revolving Credit Facility.
On
As ofJanuary 28, 2023 , the Company was in compliance with applicable covenants. As ofJanuary 28, 2023 ,$24,001 was available under the 2018 Revolving Credit Facility, net of the loan cap, and there were$58,498 of borrowings outstanding and$5,099 of letters of credit outstanding under the 2018 Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the 2018 Revolving Credit Facility as ofJanuary 28, 2023 was 6.1%. As ofJanuary 29, 2022 ,$40,620 was available under the 2018 Revolving Credit Facility, net of the loan cap, and there were$34,624 of borrowings outstanding and$5,345 of letters of credit outstanding under the 2018 Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the 2018 Revolving Credit Facility as ofJanuary 29, 2022 was 1.8%.
Third Lien Credit Facility
OnDecember 11, 2020 ,Vince, LLC entered into a$20,000 subordinated term loan credit facility (the "Third Lien Credit Facility") pursuant to a credit agreement (the "Third Lien Credit Agreement"), datedDecember 11, 2020 , by and amongVince, LLC , as the borrower, VHC and Vince Intermediate, as guarantors, andSK Financial Services, LLC ("SK Financial"), as administrative agent and collateral agent, and other lenders from time to time party thereto. SK Financial is an affiliate ofSun Capital , whose affiliates own, as ofJanuary 28, 2023 , approximately 69% of the Company's common stock. The ThirdLien Credit Facility was reviewed and approved by the Special Committee of the Company's Board of Directors, consisting solely of directors not affiliated withSun Capital , which committee was represented by independent legal advisors. Interest on loans under the Third Lien Credit Facility is payable in kind at a rate equal to the LIBOR rate (subject to a floor of 1.0%) plus applicable margins subject to a pricing grid based on minimum Consolidated EBITDA (as defined in the Third Lien Credit Agreement). During the continuance of certain specified events of default, interest may accrue on the loans under the Third Lien Credit Facility at a rate of 2.0% in excess of the rate otherwise applicable to such amount. The Third Lien Credit Facility contains representations, covenants and conditions that were substantially similar to those under the 2018 Term Loan Facility, except the Third Lien Credit Facility does not contain any financial covenants. 33 -------------------------------------------------------------------------------- The Company incurred$485 in deferred financing costs associated with the Third Lien Credit Facility of which a$400 closing fee is payable in kind and was added to the principal balance. These deferred financing costs are recorded as deferred debt issuance costs which will be amortized over the remaining term of the Third Lien Credit Facility. All obligations under the Third Lien Credit Facility are guaranteed by the Company, Vince Intermediate and the Company's existing material domestic restricted subsidiaries as well as any future material domestic restricted subsidiaries and are secured on a junior basis relative to the 2018 Revolving Credit Facility and the 2018 Term Loan Facility by a lien on substantially all of the assets of the Company, Vince Intermediate,Vince, LLC and the Company's existing material domestic restricted subsidiaries as well as any future material domestic restricted subsidiaries.
The proceeds were received on
OnSeptember 7, 2021 , concurrently with the Term Loan Credit Facility as well as the A&R Revolving Credit Facility Agreement,Vince, LLC entered into an amendment (the "Third Lien First Amendment") to the Third Lien Credit Facility which amended its terms to extend its maturity toMarch 6, 2027 , revised the interest rate to remove the tiered applicable margins so that the rate is now equal to the 90-day LIBOR rate, or an alternate applicable reference rate in the event LIBOR is no longer available, plus 9.0% at all times, and to reflect the applicable terms of the Term Loan Credit Facility as well as the A&R Revolving Credit Facility Agreement. Concurrently with the TL First Amendment and the ABL First Amendment, onSeptember 30, 2022 ,Vince, LLC entered into the Second Amendment to the Third Lien Credit Agreement (the "Third Lien Second Amendment"). The Third Lien Second Amendment, among other things, (i) establishes variance reporting in connection with theRebecca Taylor, Inc. liquidation; and (ii) permits the sale of the intellectual property of theRebecca Taylor, Inc. andParker Holding, LLC companies and theRebecca Taylor, Inc. liquidation.
On
Contractual Obligations
The following table summarizes our contractual obligations as ofJanuary 28, 2023 : Future payments due by fiscal year (in thousands) 2023 2024-2025 2026-2027 Thereafter Total Unrecorded contractual obligations Other contractual obligations (1)$ 39,451 $ 3,966 $ 1,342 $ -$ 44,759 Recorded contractual obligations Operating lease obligations 26,072 39,568 20,415 26,868 112,923 Long-term debt obligations 3,500 7,000 44,834 - 55,334 Tax Receivable Agreement (2) - Total$ 69,023 $ 50,534 $ 66,591 $ 26,868 $ 213,016
(1) Consists primarily of inventory purchase obligations and service contracts.
(2) VHC entered into the Tax Receivable Agreement with the Pre-IPO Stockholders (as described in Note 14 "Related Party Transactions" to the Consolidated Financial Statements in this Annual Report).
The summary above does not include the following items:
•
As ofJanuary 28, 2023 , we have recorded$556 of unrecognized tax benefits, excluding interest and penalties. We are unable to make reliable estimates of cash flows by period due to the inherent uncertainty surrounding the effective settlement of these positions.
•
Interest payable under the Term Loan Facility, which is calculated at a rate equal to the 90-day LIBOR rate, or an alternate applicable reference rate in the event LIBOR is no longer available, subject, in either case, to a 1.0% floor, plus 7.0%. See Note 5 "Long-Term Debt and Financing Arrangements" to the Consolidated Financial Statements in this Annual Report for additional information.
•
Interest payable under the 2018 Revolving Credit Facility (as amended and
restated), which is calculated at either the LIBOR rate or the Base Rate, in
each case, with applicable margins subject to a pricing grid based on an average
daily excess availability calculation. The "Base Rate" means, for any day, a
fluctuating rate per annum equal to the highest of (i)
34
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the rate of interest in effect for such day as publicly announced from time to
time by Citizens as its prime rate; (ii) the Federal Funds Rate for such day,
plus 0.5%; and (iii) the LIBOR Rate for a one month interest period as
determined on such day, plus 1.00%. See Note 5 "Long-Term Debt and Financing
Arrangements" to the Consolidated Financial Statements in this Annual Report for
additional information.
•
Interest payable under the Third Lien Credit Facility is payable in kind at a rate equal to the 90-day LIBOR rate, or an alternate applicable reference rate in the event LIBOR is no longer available, plus 9.0% at all times. See Note 5 "Long-Term Debt and Financing Arrangements" to the Consolidated Financial Statements in this Annual Report for additional information.
Seasonality
The apparel and fashion industry in which we operate is cyclical and, consequently, our revenues are affected by general economic conditions and the seasonal trends characteristic to the apparel and fashion industry. Purchases of apparel are sensitive to a number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence as well as the impact of adverse weather conditions. In addition, fluctuations in the amount of sales in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting direct-to-consumer sales; as such, the financial results for any particular quarter may not be indicative of results for the fiscal year. We expect such seasonality to continue.
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 1 "Description of Business and Summary of Significant Accounting Policies" to the Consolidated Financial Statements in this Annual Report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results. With respect to critical accounting estimates, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent consolidated results of operations. For more information on our accounting estimates and policies, please refer to the Notes to Consolidated Financial Statements in this Annual Report.
Revenue Recognition and Reserves for Allowances
The Company recognizes revenue when performance obligations identified under the
terms of contracts with its customers are satisfied, which generally occurs upon
the transfer of control in accordance with the contractual terms and conditions
of the sale. Sales are recognized when the control of the goods are transferred
to the customer for the Company's wholesale businesses, upon receipt by the
customer for the Company's e-commerce businesses, and at the time of sale to the
consumer for the Company's retail businesses. Sales are measured as the amount
of consideration the Company expects to receive in exchange for transferring
goods, which includes estimates for variable consideration. Variable
consideration mainly includes discounts, chargebacks, markdown allowances,
cooperative advertising programs, and sales returns. Estimated amounts of
discounts, chargebacks, markdown allowances, cooperative advertising programs,
and sales returns are accounted for as reductions of sales when the associated
sale occurs. These estimated amounts are adjusted periodically based on changes
in facts and circumstances when the changes become known. On the Company's
consolidated balance sheet, reserves for sales returns are included within other
accrued liabilities, and the value of inventory associated with reserves for
sales returns are included in prepaid expenses and other current assets. The
Company continues to estimate the amount of sales returns based on known trends
and historical return rates.
Accounts receivable are recorded net of allowances for expected future
chargebacks and estimated margin support from wholesale partners. It is the
nature of the apparel and fashion industry that suppliers like us face
significant pressure from wholesale partners in the retail industry to provide
allowances to compensate for their margin shortfalls. This pressure often takes
the form of customers requiring us to provide price concessions on prior
shipments as a prerequisite for obtaining future orders. Pressure for these
concessions is largely determined by overall retail sales performance and, more
specifically, the performance of our products at retail. To the extent our
wholesale partners have more of our goods on hand at the end of the season,
there will be greater pressure for us to grant markdown concessions on prior
shipments. Our accounts receivable balances are reported net of expected
allowances for these
35
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matters based on the historical level of concessions required and our estimates
of the level of markdowns and allowances that will be required in the coming
season. We evaluate the allowance balances on a continual basis and adjust them
as necessary to reflect changes in anticipated allowance activity.
At
Inventory Valuation
Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost. Out-of-season inventories may be sold to off-price retailers and other customerswho serve a customer base that will purchase prior year fashions and may be liquidated through our outlets and our e-commerce websites. The amount, if any, that these customers will pay for prior year fashions is determined by the desirability of the inventory itself as well as the general level of prior year goods available to these customers. The assessment of inventory value, as a result, is highly subjective and requires an assessment of the seasonality of the inventory, its future desirability, and future price levels in the off-price sector. In our wholesale businesses, some of our products are purchased for and sold to specific customers' orders. For the remainder of our business, products are purchased in anticipation of selling them to a specific customer based on historical trends. The loss of a major customer, whether due to the customer's financial difficulty or other reasons, could have a significant negative impact on the value of the inventory expected to be sold to that customer. This negative impact can also extend to purchase obligations for goods that have not yet been received. These obligations involve product to be received into inventory over the next one to six months.
At
Fair Value Assessments of
Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. As discussed in further detail below, we determined that a triggering event occurred in the Rebecca Taylor and Parker segment during the second quarter of fiscal 2022. An entity may elect to perform a qualitative impairment assessment for goodwill and indefinite-lived intangible assets. If adverse qualitative trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, a quantitative impairment test is required. "Step one" of the quantitative impairment test for goodwill requires an entity to determine the fair value of each reporting unit and compare such fair value to the respective carrying amount. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and we are not required to perform further testing. If the carrying amount of the reporting unit exceeds its estimated fair value, an impairment loss is recorded for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The goodwill impairment test is dependent on a number of factors, including estimates of projected revenues, EBITDA margins, long-term growth rates, working capital and discount rates. We base our estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We estimate the fair value of our tradename intangible assets using a discounted cash flow valuation analysis, which is based on the "relief from royalty" methodology. This methodology assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. The relief from royalty approach is dependent on a number of factors, including estimates of projected revenues, royalty rates in the category of intellectual property and discount rates. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the tradename intangible asset is less than the carrying value. An entity may pass on performing the qualitative assessment for a reporting unit or indefinite-lived intangible asset and directly perform the quantitative assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods. During the second quarter of fiscal 2022, the Company determined that a triggering event had occurred in the Rebecca Taylor and Parker segment as a result of changes to the Company's long-term projections. The Company performed an interim quantitative impairment assessment of the Rebecca Taylor tradename utilizing the relief from royalty valuation approach. The relief from royalty valuation approach is dependent on a number of factors, including estimates of projected revenues, royalty rates in the category of intellectual property, discount rates and other variables. The Company estimated the fair value of the Rebecca Taylor tradename intangible asset and determined that the fair value of the Rebecca Taylor tradename was below its carrying amount. Accordingly, the Company recorded an impairment charge for the Rebecca Taylor tradename intangible asset of$1,700 , which was recorded within Impairment of intangible assets on the Consolidated Statement of Operations and Comprehensive Income (Loss) in fiscal 2022. 36 --------------------------------------------------------------------------------
In both fiscal 2022 and fiscal 2021, the Company performed its annual impairment test during the fourth quarter.
In fiscal 2022, the Company elected to perform a quantitative impairment test on goodwill allocated to the Company's Vince Wholesale reporting unit. The results of the quantitative test did not result in any impairment because the fair value of the Company's Vince Wholesale reporting unit exceeded its carrying value. The fair value of the Company's Vince Wholesale reporting unit was estimated using a combination of the income approach (the discounted cash flows method) and the market approach (guideline public company method). The more significant assumptions used in projecting the discounted cash flows included: a discount rate of 20.0%, which was determined from relevant market comparisons and adjusted for company specific risks and projected EBITDA margins of low double-digits based upon our current and past performance as well as industry data. The guideline public company method applies a representative market multiple derived from revenue and EBITDA for a group of comparable public companies to the Company's financial forecasts. Changes in these assumptions could have a significant impact on the valuation model. In fiscal 2021, the Company elected to perform a quantitative impairment test on goodwill allocated to the Company's Vince Wholesale reporting unit. The results of the quantitative test did not result in any impairment because the fair value of the Company's Vince Wholesale reporting unit exceeded its carrying value. The fair value of the Company's Vince Wholesale reporting unit was estimated using a combination of the income approach (the discounted cash flows method) and the market approach (guideline public company method). The more significant assumptions used in projecting the discounted cash flows included: a discount rate of 18.5%, which was determined from relevant market comparisons and adjusted for company specific risks and projected EBITDA margins of low double-digits based upon our current and past performance as well as industry data. The guideline public company method applies a representative market multiple derived from revenue and EBITDA for a group of comparable public companies to the Company's financial forecasts. Changes in these assumptions could have a significant impact on the valuation model.
In the fourth quarter of fiscal 2022, the Company elected to perform a quantitative impairment test on its Vince tradename indefinite-lived intangible asset. The results of the quantitative test did not result in any impairment because the fair value of the Company's Vince tradename intangible asset exceeded its carrying value. The more significant assumptions used in projecting the discounted cash flows included: a discount rate of 20.0% for the Vince tradename, which was determined from relevant market comparisons and adjusted for company specific risks; low single-digit royalty rates and projected revenues based upon our current and past performance as well as industry data. Changes in these assumptions could have a significant impact on the valuation model. OnSeptember 12, 2022 , the Company announced its decision to wind down the Rebecca Taylor business. Therefore, the Company determined that the indefinite life classification was no longer appropriate for the Rebecca Taylor tradename and began amortizing the Rebecca Taylor tradename in the third quarter of fiscal 2022. See Note 2 "Wind Down of the Rebecca Taylor Business" to the Consolidated Financial Statements in this Annual Report for additional information. In the fourth quarter of fiscal 2021, the Company elected to perform a quantitative impairment test on its Vince tradename and the Rebecca Taylor tradename indefinite-lived intangible assets. The results of the quantitative test did not result in any impairment because the fair value of the Company's Vince tradename and Rebecca Taylor tradename intangible assets exceeded their carrying values. The more significant assumptions used in projecting the discounted cash flows included: a discount rate of 18.5% and 19.5% for the Vince and Rebecca Taylor tradenames, respectively, which was determined from relevant market comparisons and adjusted for company specific risks; low single-digit royalty rates and projected revenues based upon our current and past performance as well as industry data. Changes in these assumptions could have a significant impact on the valuation model. Indefinite-lived tradename intangible assets were$67,100 as ofJanuary 28, 2023 and$71,800 as ofJanuary 29, 2022 , which is included within Intangible assets, net in our Consolidated Balance Sheets.
Property and Equipment, Operating Lease Assets and Other Finite-Lived Intangible Assets
The Company reviews its property and equipment, operating lease assets and finite-lived intangible assets for impairment when the existence of facts and circumstances indicate that the useful life is shorter than previously estimated or that the carrying amount of the asset groups to which these assets relate may not be recoverable. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores is at the store level. Recoverability of these assets is evaluated by comparing the carrying value of the asset group with its estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the assets within the asset group and the loss is recognized during that period. The estimates regarding recoverability and fair value can be affected by factors such as future store results, real estate demand, store closure plans, and economic conditions that can be difficult to predict. During the second quarter of fiscal 2022, the Company determined the need to assess recoverability for certain Rebecca Taylor retail locations. For the Rebecca Taylor retail store asset groups that did not pass the recoverability assessment, the Company recorded non-cash asset impairment charges of$866 related to property and equipment. The fair value of the property and equipment was based on its estimated liquidation value. 37 -------------------------------------------------------------------------------- During the fourth quarter of fiscal 2022, the Company determined the need to assess recoverability for certain Vince retail locations. For the Vince retail store asset groups that did not pass the recoverability assessment, the Company recorded non-cash asset impairment charges of$1,014 related to property and equipment. The fair value of the property and equipment was based on its estimated liquidation value. The finite-lived intangible assets as ofJanuary 28, 2023 is comprised of the Vince customer relationships which are being amortized on a straight-line basis over their useful lives of 20 years. OnSeptember 12, 2022 , the Company announced its decision to wind down the Rebecca Taylor business. Therefore, the Company determined that the indefinite life classification was no longer appropriate for the Rebecca Taylor tradename and began amortizing the Rebecca Taylor tradename in the third quarter of fiscal 2022. Amortization of the Rebecca Taylor tradename ceased upon classification as held for sale in the third quarter of fiscal 2022. OnDecember 22, 2022 , the Company completed the sale of the Rebecca Taylor tradename and certain related ancillary assets toRT IPCO, LLC , an affiliate ofRamani Group . See Note 2 "Wind Down of Rebecca Taylor Business" in this Annual Report for further information. Additionally, during the third quarter of fiscal 2022, the Parker tradename was classified as held for sale and amortization ceased. Prior to its classification as held for sale, the Parker tradename intangible asset was being amortized on a straight-line basis over 10 years. OnFebruary 17, 2023 , the Company completed the sale of the Parker tradename and certain related ancillary assets toParker IP Co. LLC , an affiliate of BCI Brands. See Note 15 "Subsequent Events" to the Consolidated Financial Statements in this Annual Report for further information.
Tax Receivable Agreement
In connection with the consummation of the IPO, we entered into a Tax Receivable Agreement with the Pre-IPO Stockholders. The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by the Company and its subsidiaries from the utilization of the Pre-IPO Tax Benefits. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related payment obligations under the Tax Receivable Agreement. Therefore, we would only recognize a liability for the Tax Receivable Agreement obligation if we determine if it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including revenue growth, operating margins, and projected retail location openings, among others. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would derecognize the portion of the liability related to benefits not expected to be utilized. Alternatively, if we generate additional future taxable income beyond our current estimate, we would recognize additional liability related to benefits expected to be utilized. See Note 14 "Related Party Transactions" to the Consolidated Financial Statements in this Annual Report for additional information.
As of
Income taxes and Valuation Allowances
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. We assess the likelihood of the realization of deferred tax assets and adjust the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe it more likely than not that all or a portion of the deferred tax assets will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the provision for income taxes. Changes in estimates may create volatility in our effective tax rate in future periods for various reasons, including changes in tax laws or rates, changes in forecasted amounts of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. The ultimate tax outcome is uncertain for certain transactions. We recognize tax positions in our Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Due to the uncertain nature of the realization of our deferred income tax assets, during the fourth quarter of fiscal 2016, we recorded valuation allowances within Provision for income taxes on the Consolidated Statements of Operations and Comprehensive Income (Loss). During fiscal 2022, the Company recorded additional valuation allowances in the amount of$11,850 and maintained a full valuation allowance on all deferred tax assets that have a definite life as we do not believe it is more likely than not that such deferred tax assets will be recognized. Indefinite-lived net operating losses have been recognized to the extent we believe they can be 38 --------------------------------------------------------------------------------
utilized against indefinite-lived deferred tax liabilities. This valuation allowance is subject to periodic review, and if the allowance is reduced, the tax benefit will be recorded in the future operations as a reduction of our income tax expense.
Recent Accounting Pronouncements
For information on certain recently issued or proposed accounting standards which may impact the Company, please refer to the notes to Consolidated Financial Statements in this Annual Report.
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