10-Q 1 dest-10q_20190803.htm 10-Q dest-10q_20190803.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 03, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-21196

 

Destination Maternity Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3045573

(State or other jurisdiction

of incorporation or organization)

(IRS Employer

Identification No.)

232 Strawbridge Drive

Moorestown, New Jersey

08057

(Address of principal executive offices)

(Zip code)

(856) 291-9700

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

DEST

NASDAQ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1) of the Exchange Act    

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value — 14,226,121 shares outstanding as of September 3, 2019

 

 

 


 

 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

  

3

 

 

 

 

 

 

 

Consolidated Balance Sheets

  

3

 

 

 

 

 

 

 

Consolidated Statements of Operations

  

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

  

5

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity

  

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

  

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

  

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

30

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

31

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

32

 

 

 

 

 

Item 1A.

 

Risk Factors

  

32

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

33

 

 

 

 

 

Item 5.

 

Other Information

  

34

 

 

 

 

 

Item 6.

 

Exhibits

  

35

 

 

 

Signatures

 

36

 

 

 

2

 


 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

             (unaudited)

 

 

August 3, 2019

 

 

February 2, 2019

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

1,142

 

 

$

1,154

 

Trade receivables, net

 

 

7,012

 

 

 

7,945

 

Inventories

 

 

67,691

 

 

 

70,872

 

Prepaid expenses and other current assets

 

 

9,961

 

 

 

9,407

 

Total current assets

 

 

85,806

 

 

 

89,378

 

Property and equipment, net of accumulated depreciation and amortization of

   $111,181 and $106,479

 

 

48,215

 

 

 

51,483

 

Operating lease assets

 

 

125,283

 

 

 

 

Deferred income taxes

 

 

3,967

 

 

 

2,671

 

Other non-current assets

 

 

1,868

 

 

 

2,642

 

Total assets

 

$

265,139

 

 

$

146,174

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Line of credit borrowings

 

$

23,300

 

 

$

20,400

 

Current portion of long-term debt

 

 

3,841

 

 

 

4,372

 

Accounts payable

 

 

21,477

 

 

 

21,854

 

Operating lease liabilities

 

 

30,301

 

 

 

 

Accrued expenses and other current liabilities

 

 

24,226

 

 

 

31,056

 

Total current liabilities

 

 

103,145

 

 

 

77,682

 

Long-term debt

 

 

21,343

 

 

 

21,784

 

Operating leases and other non-current liabilities

 

 

119,225

 

 

 

19,557

 

Total liabilities

 

 

243,713

 

 

 

119,023

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, 1,656,381 shares authorized, none outstanding

 

 

 

 

 

 

Common stock, $.01 par value; 20,000,000 shares authorized, 14,227,184 and

   14,416,500 shares issued and outstanding

 

 

142

 

 

 

144

 

Additional paid-in capital

 

 

107,932

 

 

 

107,675

 

Accumulated deficit

 

 

(86,574

)

 

 

(80,594

)

Accumulated other comprehensive loss

 

 

(74

)

 

 

(74

)

Total stockholders’ equity

 

 

21,426

 

 

 

27,151

 

Total liabilities and stockholders’ equity

 

$

265,139

 

 

$

146,174

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3

 


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

August 3, 2019

 

 

August 4, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

84,901

 

 

$

96,395

 

 

$

179,114

 

 

$

199,622

 

Cost of goods sold

 

 

41,253

 

 

 

46,530

 

 

 

83,869

 

 

 

94,354

 

Gross profit

 

 

43,648

 

 

 

49,865

 

 

 

95,245

 

 

 

105,268

 

Selling, general and administrative expenses

 

 

45,153

 

 

 

50,095

 

 

 

93,643

 

 

 

101,952

 

Store closing, asset impairment and asset disposal expenses

 

 

778

 

 

 

672

 

 

 

1,647

 

 

 

1,641

 

Other (income) charges, net

 

 

(119

)

 

 

1,923

 

 

 

543

 

 

 

3,073

 

Operating loss

 

 

(2,164

)

 

 

(2,825

)

 

 

(588

)

 

 

(1,398

)

Interest expense, net

 

 

1,340

 

 

 

1,144

 

 

 

2,755

 

 

 

2,301

 

Loss before income taxes

 

 

(3,504

)

 

 

(3,969

)

 

 

(3,343

)

 

 

(3,699

)

Income tax provision

 

 

31

 

 

 

56

 

 

 

62

 

 

 

112

 

Net loss

 

$

(3,535

)

 

$

(4,025

)

 

$

(3,405

)

 

$

(3,811

)

Net loss per share— Basic

 

$

(0.25

)

 

$

(0.29

)

 

$

(0.25

)

 

$

(0.28

)

Average shares outstanding— Basic

 

 

13,871

 

 

 

13,823

 

 

 

13,848

 

 

 

13,831

 

Net loss per share— Diluted

 

$

(0.25

)

 

$

(0.29

)

 

$

(0.25

)

 

$

(0.28

)

Average shares outstanding— Diluted

 

 

13,871

 

 

 

13,823

 

 

 

13,848

 

 

 

13,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4

 


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

August 3, 2019

 

 

August 4, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,535

)

 

$

(4,025

)

 

$

(3,405

)

 

$

(3,811

)

Foreign currency translation adjustments

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Comprehensive loss

 

$

(3,535

)

 

$

(4,027

)

 

$

(3,405

)

 

$

(3,813

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

 


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number

of

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Other

Comprehensive

Loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of February 2, 2019

 

 

14,417

 

 

$

144

 

 

$

107,675

 

 

$

(80,594

)

 

$

(74

)

 

$

27,151

 

Adoption of ASC 842 - Leases

 

 

 

 

 

 

 

 

 

 

 

(2,576

)

 

 

 

 

 

(2,576

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

130

 

 

 

 

 

 

130

 

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

75

 

 

 

1

 

 

 

143

 

 

 

 

 

 

 

 

 

144

 

Repurchase and retirement of common stock

 

 

(116

)

 

 

(1

)

 

 

(33

)

 

 

 

 

 

 

 

 

(34

)

Balance as of May 4, 2019

 

 

14,376

 

 

$

144

 

 

$

107,785

 

 

$

(83,039

)

 

$

(74

)

 

$

24,816

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,535

)

 

 

 

 

 

(3,535

)

Stock-based compensation

 

 

6

 

 

 

0

 

 

 

146

 

 

 

 

 

 

 

 

 

146

 

Repurchase and retirement of common stock

 

 

(155

)

 

 

(2

)

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

Balance as of August 3, 2019

 

 

14,227

 

 

$

142

 

 

$

107,932

 

 

$

(86,574

)

 

$

(74

)

 

$

21,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of February 3, 2018

 

 

14,684

 

 

$

147

 

 

$

106,865

 

 

$

(66,274

)

 

$

(70

)

 

$

40,668

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

214

 

 

 

 

 

 

214

 

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

383

 

 

 

4

 

 

 

324

 

 

 

 

 

 

 

 

 

328

 

Repurchase and retirement of common stock

 

 

(62

)

 

 

(1

)

 

 

(18

)

 

 

 

 

 

 

 

 

(19

)

Balance as of May 5, 2018

 

 

15,005

 

 

$

150

 

 

$

107,171

 

 

$

(66,059

)

 

$

(70

)

 

$

41,192

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,025

)

 

 

 

 

 

(4,025

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Dividends forfeited

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Stock-based compensation

 

 

60

 

 

 

 

 

 

256

 

 

 

 

 

 

 

 

 

256

 

Exercise of stock options, net

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Repurchase and retirement of common stock

 

 

(260

)

 

 

(2

)

 

 

(8

)

 

 

 

 

 

 

 

 

(10

)

Balance as of August 4, 2018

 

 

14,805

 

 

$

148

 

 

$

107,420

 

 

$

(70,081

)

 

$

(72

)

 

$

37,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6

 


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(3,405

)

 

$

(3,811

)

Adjustments to reconcile net loss to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,992

 

 

 

7,961

 

Stock-based compensation expense

 

 

290

 

 

 

584

 

Loss on impairment of long-lived assets

 

 

1,172

 

 

 

1,519

 

Loss on disposal of assets

 

 

259

 

 

 

68

 

Grow NJ award benefit

 

 

(1,296

)

 

 

(1,412

)

Amortization of deferred financing costs

 

 

346

 

 

 

336

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

 

 

 

Trade receivables

 

 

933

 

 

 

(145

)

Inventories

 

 

3,181

 

 

 

3,503

 

Prepaid expenses and other current assets

 

 

(554

)

 

 

479

 

Operating leases and other non-current assets

 

 

8,583

 

 

 

12

 

Decrease in:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses, operating leases and other current liabilities

 

 

(4,822

)

 

 

(1,831

)

Operating leases and other non-current liabilities

 

 

(10,262

)

 

 

(1,417

)

Net cash provided by operating activities

 

 

1,417

 

 

 

5,846

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,780

)

 

 

(2,579

)

Net cash used in investing activities

 

 

(3,780

)

 

 

(2,579

)

Financing Activities

 

 

 

 

 

 

 

 

Increase (decrease) in cash overdraft

 

 

759

 

 

 

(2,657

)

Increase (decrease) in line of credit borrowings

 

 

2,900

 

 

 

(700

)

Proceeds from long-term debt

 

 

1,802

 

 

 

2,500

 

Repayment of long-term debt

 

 

(3,075

)

 

 

(2,537

)

Deferred financing costs paid

 

 

 

 

 

(160

)

Withholding taxes on stock-based compensation paid in connection

   with repurchase of common stock

 

 

(35

)

 

 

(29

)

Net cash provided by (used in) financing activities

 

 

2,351

 

 

 

(3,583

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

(2

)

Net Decrease in Cash and Cash Equivalents

 

 

(12

)

 

 

(318

)

Cash and Cash Equivalents, Beginning of Period

 

 

1,154

 

 

 

1,635

 

Cash and Cash Equivalents, End of Period

 

$

1,142

 

 

$

1,317

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,367

 

 

$

1,965

 

Cash (received) paid for income taxes

 

$

(177

)

 

$

118

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

 


DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

BASIS OF FINANCIAL STATEMENT PRESENTATION

 

The accompanying unaudited consolidated financial statements for the three and six months ended August 3, 2019 and August 4, 2018 have been prepared in accordance with the requirements for Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures have been condensed or omitted. See the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019 for Destination Maternity Corporation and subsidiaries (the “Company” or “Destination Maternity”) as filed with the Securities and Exchange Commission (“SEC”) for additional disclosures including a summary of the Company’s accounting policies.

In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. Since the Company’s operations are seasonal, the interim operating results of the Company may not be indicative of operating results for the full year.

The Company operates on a 52/53-week fiscal year ending on the Saturday nearest January 31 of each year. References to the Company’s fiscal 2019 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 3, 2019 and will end February 1, 2020. References to the Company’s fiscal 2018 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 4, 2018 and ended February 2, 2019.

  

2.

GOING CONCERN  

 

As of August 3, 2019, the Company was in compliance with all covenants under the Credit Facility and Term Loan Agreement. However, the lender under the Credit Facility has imposed additional availability reserves which will increase over time. Based on the Company’s current operating plan, the Company anticipates significant liquidity constraints, and considering these liquidity concerns, there is no assurance that the Company will be able to remain in compliance.  If any event of default is triggered and the Company does not obtain a waiver from its lenders, the lenders can, among other things, accelerate the entire outstanding amount of the debt, which could result in the Company needing to seek bankruptcy protection to protect stakeholder value. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.  The Company is, with the assistance of strategic advisors including Greenhill & Co., LLC, exploring various potential strategic and financial alternatives and is engaged in ongoing discussions with its lenders. Such strategic and financial alternatives include, among other things, a sale of the company or certain of its assets and consideration of out-of-court restructurings as well as bankruptcy court proceedings to effectuate any such sale or to recapitalize or restructure the Company’s indebtedness and other obligations.  There are no assurances that such alternatives will be available on terms acceptable to the Company, or at all. In an effort to reduce costs and better position the Company for operational profitability the Company has adopted a plan to close approximately 50 underperforming stores as their leases expire over the next six months.  The Company has also made provisions to have sufficient inventory available through the anticipated duration of the Company’s exploration of financial and strategic alternatives.

 

3.

EARNINGS PER SHARE (“EPS”)

 

Basic net income (loss) (or earnings) per share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding, excluding restricted stock awards for which the restrictions have not lapsed. Diluted net income (loss) (or earnings) per share (“Diluted EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding, after giving effect to the potential dilution, if applicable, from the assumed lapse of restrictions on restricted stock and restricted stock unit (“RSU”) awards, and from shares of common stock resulting from the assumed exercise of outstanding stock options. Common shares issuable in connection with the award of performance-based restricted stock units (“PRSUs”) are excluded from the calculation of EPS until the PRSUs’ performance conditions are achieved and the shares in respect of the PRSUs become issuable (see Note 14).

8

 


DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

The following tables summarize the Basic EPS and Diluted EPS calculations (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted EPS

 

$

(3,535

)

 

 

13,871

 

 

$

(0.25

)

 

$

(4,025

)

 

 

13,823

 

 

$

(0.29

)

 

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

Net Loss

 

 

Shares

 

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted EPS

 

$

(3,405

)

 

 

13,848

 

 

$

(0.25

)

 

$

(3,811

)

 

 

13,831

 

 

$

(0.28

)

 

 

In addition to PRSUs, for the three and six months ended August 3, 2019 and August 4, 2018 stock options and unvested restricted stock totaling approximately 707,000 and 538,000 shares, respectively, were excluded from the calculation of Diluted EPS as their effect would have been antidilutive. Stock options and unvested restricted stock totaling approximately 717,000 and 1,696,000 shares of the Company’s common stock were outstanding as of August 3, 2019 and August 4, 2018, respectively, but were not included in the computation of Diluted EPS for the three and six months ended August 3, 2019 and August 4, 2018 due to the Company’s net loss. Had the Company reported a profit for the three and six months ended August 3, 2019 and August 4, 2018 the weighted average number of dilutive shares outstanding for computation of Diluted EPS would have been approximately 13,872,000, 13,887,000, 14,284,000 and 14,124,000 shares, respectively.

  

 

4.

TRADE RECEIVABLES

 

Trade receivables are recorded based on revenue recognized for sales of the Company’s merchandise and for other revenue earned by the Company through its marketing partnership programs and international franchise agreements, and are non-interest bearing. The Company evaluates the collectability of trade receivables based on a combination of factors, including aging of trade receivables, write-off experience, analysis of historical trends and expectations of future performance. An allowance for doubtful accounts is recorded for trade receivables that are considered unlikely to be collected. When the Company’s collection efforts are unsuccessful, uncollectible trade receivables are charged against the allowance for doubtful accounts. As of August 3, 2019, and February 2, 2019 the Company’s trade receivables were net of allowance for doubtful accounts of $166,000 and $166,000, respectively.

 

5.

INVENTORIES

 

Inventories were comprised of the following (in thousands):

 

 

 

August 3, 2019

 

 

February 2, 2019

 

 

 

 

 

 

 

 

 

 

Finished goods

 

$

67,479

 

 

$

70,660

 

Work-in-progress

 

 

34

 

 

 

148

 

Raw materials

 

 

178

 

 

 

64

 

 

 

$

67,691

 

 

$

70,872

 

 

9

 


DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

6.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities were comprised of the following (in thousands):

 

 

 

August 3, 2019

 

 

February 2, 2019

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

5,890

 

 

$

6,741

 

Insurance, primarily self-insurance reserves

 

 

3,164

 

 

 

3,049

 

Gift certificates and store credits

 

 

2,812

 

 

 

3,464

 

Sales and use taxes

 

 

2,757

 

 

 

2,737

 

Accrued expenses

 

 

2,045

 

 

 

4,561

 

Deferred revenue

 

 

1,914

 

 

 

2,435

 

Product return reserve

 

 

1,834

 

 

 

2,078

 

Audit and legal

 

 

1,410

 

 

 

1,341

 

Other

 

 

2,400

 

 

 

1,549

 

Deferred rent

 

 

 

 

 

3,101

 

 

 

$

24,226

 

 

$

31,056

 

 

 

 

7.

LINE OF CREDIT

 

After completion of a debt refinancing on February 1, 2018 the Company has in place a $50,000,000 senior secured revolving credit facility (the “Credit Facility”), which was entered into in connection with the issuance of the Company’s $25,000,000 Term Loan (as defined below) (see Note 7).   Proceeds from advances under the Credit Facility, subject to certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, and other general corporate purposes.

 

The Credit Facility, which matures on January 31, 2023, contains various affirmative and negative covenants and representations and warranties including the requirement that the Company maintain Excess Availability (as defined in the related Credit Agreement) of more than the greater of 10% of the Combined Loan Caps (as defined in the related Credit Agreement) and $7,000,000. In the event the outstanding balance of the Term Loan exceeds the Term Loan Borrowing Base (as defined in the related Term Loan Agreement) then a reserve will be imposed against availability under the Credit Facility. The Credit Facility is secured by a security interest in the Company’s trade receivables, inventory, letter of credit rights, cash, intangibles and certain other assets. The interest rate on outstanding borrowings is equal to, at the Company’s election, either 1) the lender’s base rate plus 0.50% or 2) a LIBOR rate plus 1.0%. The Company also pays an unused line fee under the Credit Facility of 0.25% per annum.

 

Any amounts outstanding under the Credit Facility may be accelerated and become due and payable immediately and all loan and letter of credit commitments thereunder may be terminated upon an event of default and expiration of any applicable cure period. Events of default include: 1) nonpayment of obligations due under the subject loan agreement and related loan documents, 2) cross-defaults to other indebtedness and documents, 3) failure to perform any covenant or agreement contained in the subject loan agreement, 4) material misrepresentations, 5) failure to pay, or certain other defaults under, other material indebtedness of the Company, 6) certain bankruptcy or insolvency events, 7) a change of control, 8) indictments of the Company or senior management in a material forfeiture action, 9) default under certain material contracts to the extent such termination or default has or could reasonably be expected to have a material adverse effect, and 10) customary ERISA defaults, among others.

 

In connection with the original execution and subsequent amendments of the Credit Facility, the Company incurred deferred financing costs of $1,281,000. These deferred financing costs are being amortized over the term of the Credit Facility agreement and are included in “interest expense, net” in the consolidated statements of operations.

 

As of August 3, 2019, the Company had $23,300,000 in outstanding borrowings under the Credit Facility, $6,297,000 in letters of credit and $5,169,000 of availability based on the Company’s Borrowing Base formula and availability reserve requirements. As of August 4, 2018, the Company had $7,300,000 in outstanding borrowings under the previous Credit Facility, $7,327,000 in letters of credit and $19,044,000 of availability. For the three months ended August 3, 2019 and August 4, 2018 borrowings had a weighted interest rate of 4.37% and 4.13% per annum, respectively. For the six months ended August 3, 2019 and August 4, 2018 borrowings had a weighted interest rate of 4.45% and 3.97% per annum, respectively.  During the six months ended August 3, 2019 and August 4,

10

 


DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2018 the Company’s average levels of direct borrowings were $26,904,000 and $16,356,000, respectively, and the Company’s maximum borrowings were $32,300,000 and $27,400,000, respectively.

 

 

8.

LONG-TERM DEBT

 

 

On February 1, 2018 (the “Closing Date”) the Company entered into a Term Loan Credit Agreement (the “Term Loan Agreement”) which provides for a term loan of up to $25,000,000 and matures on January 31, 2023 (the “Term Loan”).  On the Closing Date the Company borrowed $22,500,000.    The Term Loan provided for an additional loan of $2,500,000 which could be borrowed at the Company’s discretion within a period of 45 days after delivery to the lender of the Company’s first quarter fiscal 2018 financial statements and satisfaction of certain other requirements. The Company met these requirements and borrowed the additional $2,500,000 on July 16, 2018.       

 

The interest rate on the Term Loan is equal to a LIBOR rate plus 9.0%. The Company is required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $312,500 which commenced on July 31, 2018, with the remaining outstanding balance payable on the maturity date. There is a minimum excess availability requirement of the greater of 10% of the Combined Loan Cap, as defined in the Term Loan Agreement, or $7,000,000. Additionally, the Term Loan can be prepaid at the Company's option subject to certain restrictions and subject to a prepayment premium as follows: 1) if the prepayment occurs on or prior to the second anniversary of the Closing Date, the greater of  a) interest on the prepayment that would otherwise have been paid with the 24 month period following the Closing Date minus actual interest payments made through the prepayment date and b) 2% of the prepayment and 2) 2% of the prepayment amount if paid between the second and third anniversary of the Closing Date.

 

The Term Loan is secured by a security interest in substantially all of the assets of the Company, including accounts receivable, inventory, equipment, letter of credit rights, cash, intellectual property and other intangibles, and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the Credit Facility Lender. The Term Loan Agreement prohibits the payment of dividends or share repurchases by the Company for three years and imposes certain restrictions on the Company's ability to, among other things, incur additional indebtedness and enter into other various types of transactions.

 

There were $2,455,000 of deferred financing costs incurred in connection with the Term Loan. These deferred financing costs are reflected as a direct deduction from the Term Loan liability in the consolidated balance sheets and are being amortized over the term of the Term Loan Agreement. The amortization is included in “interest expense, net” in the consolidated statements of operations.

 

As of August 3, 2019, and August 4, 2018 there was $23,438,000 and $24,688,000, respectively, of principal outstanding under the Term Loan.

 

On February 22, 2019 the Company entered into a 24-month, $1,802,000 software development financing arrangement. The note has monthly payments of $81,648 with an interest rate of 8.16%. As of August 3, 2019, there was $1,379,000 of principal outstanding.

 

As of August 3, 2019, and August 4, 2018 there was $1,349,000 and $4,510,000, respectively, outstanding under a five-year equipment financing arrangement with the Company’s Credit Facility bank. The equipment note bears annual interest at 3.38%, with payments of $272,000 (including interest) due monthly through December 2019. The equipment note is collateralized by substantially all the material handling equipment at the Company’s distribution facility in Florence, New Jersey. Any amounts outstanding under the equipment note may be accelerated and become due and payable immediately upon an event of default and expiration of any applicable cure period. The specified events of default are substantially the same as those in the Credit Facility agreement (see Note 7).

 

In June 2017 the Company received $3,401,000 in proceeds from a three-year financing arrangement in the form of a sale and leaseback for certain furniture, fixtures and software. Monthly payments under the leaseback arrangement were $123,000 for the first 24 months and $48,000 for months 25 to 36. At the end of the leaseback term, the Company has the option to extend the lease for an additional year or to repurchase the financed property for a price to be agreed. As of August 3, 2019, and August 3, 2018 there was $935,000 and $1,988,000, respectively, of principal outstanding under this financing arrangement.

 

11

 


DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

9.

LEASES

 

The Company has operating leases for its retail locations, distribution center and corporate office. Many of these leases include one or more renewal options which can extend the lease for up to an additional 15 years.  In the event we are reasonably certain that an option to extend a lease will be exercised, we use the expected expiration date to determine the operating lease right-of-use asset and lease liability. We also have short-term leases that can be terminated by the Company or by the landlord with notification periods as short as 30 days, which are excluded from the operating lease liability. Some of our leases provide for rental payments based solely on a percent of retail sales which are treated as variable lease expenses and not included as part of the operating lease liability.  Most leases include payments for lease components such as minimum rent, non-lease components such as common area maintenance and not-lease components such as real estate taxes and insurance.  Finance leases were not material as of August 3, 2019 and the three and six-month periods then ended.  

For the three and six months ended August 3, 2019, the components of lease expense were as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

Fixed operating lease expense (1)

 

$

8,773

 

 

$

17,517

 

Variable operating lease expense

 

 

3,723

 

 

 

7,615

 

Total operating lease expense

 

$

12,496

 

 

$

25,132

 

(1) Includes short-term leases

 

 

 

 

 

 

 

 

The following table presents the operating lease balances within the Consolidated Balance Sheet, weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of August 3, 2019 ($ in thousands):

 

Lease Assets and Liabilities

Classification

 

 

 

Assets:

 

 

 

 

Operating lease ROU assets

Operating lease assets

$

125,283

 

 

 

 

 

 

Liabilities:

 

 

 

 

Current:

 

 

 

 

Operating lease liabilities

Operating lease liabilities

$

30,301

 

Long-term:

 

 

 

 

Operating lease liabilities

Operating lease and other non-current liabilities

 

118,925

 

Total undiscounted operating lease liabilities

 

$

149,226

 

 

 

 

 

 

Weighted average remaining lease term

 

6.3 years

 

Weighted average discount rate

 

 

7.41

%

 

The following table presents the maturity of the Company’s operating lease liabilities as of August 3, 2019 (in thousands):

 

Remainder of Fiscal 2019

 

$

22,140

 

2020

 

$

36,719

 

2021

 

$

30,545

 

2022

 

$

25,229

 

2023

 

$

21,216

 

Thereafter

 

$

54,794

 

Total operating lease payments

 

 

190,643

 

Less: Imputed interest

 

 

41,417

 

Total operating lease liabilities

 

$

149,226

 

 

12

 


DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Supplemental cash flow information related to the Company’s operating leases for the three and six months ended August 3, 2019 (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

11,572

 

 

$

23,565

 

ROU assets obtained in exchange for operating lease liability

 

 

6,014

 

 

 

7,844

 

 

 

10.

FAIR VALUE MEASUREMENTS

 

The accounting standard for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework for measuring fair value focused on exit price and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements as follows:

 

Level 1 – Quoted market prices in active markets for identical assets or liabilities

 

Level 2 – Observable market-based inputs or inputs that are corroborated by observable market data

 

Level 3 – Unobservable inputs that are not corroborated by market data

The carrying values of trade receivables and accounts payable approximate fair value due to the short-term nature of those instruments.

 

The Company’s Credit Facility has variable interest rates that are tied to market indices. As of August 3, 2019, and February 2, 2019, the Company had $23,300,000 and $20,400,000, respectively, of direct borrowings outstanding under the Credit Facility. The carrying value of the Company’s Credit Facility borrowings approximates fair value as the variable interest rates approximate current market rates, which the Company considers to be Level 2 inputs.

 

The Company’s Term Loan, which represents a significant majority of the Company’s long-term debt, bears interest at variable rates, which adjust based on market conditions with a minimum annual rate of 9.00%. The carrying value of the Company’s Term Loan approximates fair value as the variable interest rates approximate current market rates for similar instruments available to companies with comparable credit quality, which the Company considers to be Level 2 inputs. The fair value of the Company’s fixed-rate equipment notes was determined using a discounted cash flow analysis based on interest rates currently available to the Company, which the Company considers to be Level 2 inputs. The difference between the carrying value and fair value of long-term debt held by the Company with a fixed rate of interest is not material.

 

 

11.

NET SALES

 

The following disaggregates the Company’s net sales by major source (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

August 3, 2019

 

 

August 4, 2018

 

 

August 3, 2019

 

 

August 4, 2018