NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND OPERATIONS
The condensed consolidated balance sheet of Perfumania Holdings, Inc. and Subsidiaries (the "Company") as of
January 28, 2017
, which has been derived from our audited financial statements as of and for the year ended
January 28, 2017
, and the accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and note disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), have been condensed or omitted pursuant to those rules and regulations. The financial information presented herein, which is not necessarily indicative of results to be expected for the full current fiscal year, reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the interim unaudited condensed consolidated financial statements. Such adjustments are of a normal, recurring nature. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
January 28, 2017
.
Due to the seasonality of the Company’s business, with the most significant activity occurring from September through December each year, the results of operations for the thirteen weeks ended
April 29, 2017
are not necessarily indicative of results to be expected for the full fiscal year.
The Company is an independent, national, vertically integrated wholesale distributor and specialty retailer of perfumes and fragrances that conducts business through
six
wholly-owned operating subsidiaries; Perfumania, Inc. (“Perfumania”), Quality King Fragrance, Inc. (“QFG”), Perfumania.com, Inc. (“Perfumania.com”), Parlux Fragrances, LLC ("Parlux"), Five Star Fragrance Company, Inc. (“Five Star”) and Scents of Worth, Inc. ("SOW"). We operate in
two
industry segments, wholesale distribution and specialty retail sales of designer fragrances and related products.
Our wholesale businesses include QFG, Parlux and Five Star. QFG distributes designer fragrances to mass market retailers, drug and other chain stores, retail wholesale clubs, traditional wholesalers, and other distributors throughout the United States. The Company sells principally to retailers such as Burlington Coat Factory, CVS, Kohl's, Marshalls, Nordstrom Rack, Ross Stores, Sears, Target, Wal-Mart and Walgreens. The Company’s manufacturing divisions, Parlux and Five Star, own and license designer and other fragrance brands that are sold to regional and national department stores, including Belk, Bon Ton, Boscovs, Dillards, Lord & Taylor, Macy's and Stage Stores, international distributors, on military bases throughout the United States, by QFG and through the Company's retail business which is discussed below. Parlux also fulfills a selection of fragrances for several online retailers, shipping directly to their customers and billing the retailers. Five Star also manufactures, on behalf of Perfumania, the Jerome Privee product line, which includes bath and body products and which is sold exclusively in Perfumania's retail stores. All manufacturing operations of Parlux and Five Star are outsourced.
Our retail business is conducted through the following subsidiaries:
•
Perfumania, a specialty retailer of fragrances and related products,
•
Perfumania.com, an Internet retailer of fragrances and other specialty items, and
•
SOW, which sells fragrances in retail stores on a consignment basis.
As of
April 29, 2017
, Perfumania operated a chain of
240
retail stores specializing in the sale of fragrances and related products at discounted prices up to
75%
below the manufacturers’ suggested retail prices. Perfumania.com, our Company-owned website, offers a selection of our more popular products for sale online. SOW operates a national designer fragrance consignment program, with contractual relationships to sell products on a consignment basis in approximately
1,100
stores, including approximately
600
Kmart locations nationwide. Its other retail customers include Bealls, K & G and Steinmart.
Certain reclassifications were made to prior year amounts to conform to the classifications of such amounts for the thirteen-weeks ended
April 29, 2017
.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory (Topic 330
). The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. The Company adopted ASU No. 2015-11 prospectively effective January 29, 2017. There was no impact to the Company's consolidated financial statements.
NOTE 3 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's accounts receivable consist primarily of trade receivables due from wholesale customers. In May 2016, a Panama based customer of Parlux that distributes in certain Latin American countries was placed on the Specially Designated Nationals list by the Office of Foreign Assets Control of the U.S. Treasury Department. As a result, the customer's assets have been frozen and any dealings between U.S. companies, including Parlux, and the customer have been prohibited. Accordingly, during the thirteen weeks ended
April 30, 2016
, management reserved the outstanding accounts receivable balance from the customer of approximately
$1.7 million
due to the uncertainty of future collection of these receivables.
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
Goodwill in the amount of
$38.8 million
at
April 29, 2017
and
January 28, 2017
resulted from the April 18, 2012 acquisition of Parlux.
The following table provides information related to goodwill and intangible assets (in thousands). Intangible assets are included in intangible and other assets, net on the accompanying condensed consolidated balance sheets as of
April 29, 2017
and
January 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
January 28, 2017
|
|
Useful Life
(years)
|
|
Original
Cost
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Original
Cost
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Goodwill
|
N/A
|
|
$
|
38,769
|
|
|
$
|
—
|
|
|
$
|
38,769
|
|
|
$
|
38,769
|
|
|
$
|
—
|
|
|
$
|
38,769
|
|
Tradenames
|
4-20
|
|
9,357
|
|
|
8,181
|
|
|
1,176
|
|
|
9,357
|
|
|
8,084
|
|
|
1,273
|
|
Customer relationships
|
10
|
|
5,171
|
|
|
2,629
|
|
|
2,542
|
|
|
5,171
|
|
|
2,500
|
|
|
2,671
|
|
Favorable leases
|
7
|
|
886
|
|
|
886
|
|
|
—
|
|
|
886
|
|
|
886
|
|
|
—
|
|
License agreements
|
3-5
|
|
16,313
|
|
|
15,779
|
|
|
534
|
|
|
16,313
|
|
|
15,643
|
|
|
670
|
|
Tradename (non-amortizing)
|
N/A
|
|
7,180
|
|
|
—
|
|
|
7,180
|
|
|
7,180
|
|
|
—
|
|
|
7,180
|
|
|
|
|
$
|
77,676
|
|
|
$
|
27,475
|
|
|
$
|
50,201
|
|
|
$
|
77,676
|
|
|
$
|
27,113
|
|
|
$
|
50,563
|
|
In accordance with US GAAP, goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually by comparing the estimated fair values to their carrying values.
Trademarks, including tradenames and owned licenses having finite lives, are amortized over their respective lives to their estimated residual values and are also reviewed for impairment in accordance with accounting standards when changes in circumstances indicate the assets’ values may be impaired. Customer relationships are amortized over the expected period of benefit and license agreements are amortized over the remaining contractual term. Impairment testing is based on a review of forecasted operating cash flows and the profitability of the related brand to determine its fair value. There were no triggering events during the thirteen weeks ended
April 29, 2017
that would indicate potential impairment and the requirement to review the carrying value of goodwill and intangible assets.
Amortization expense associated with intangible assets subject to amortization is included in depreciation and amortization on the accompanying condensed consolidated statements of operations. Amortization expense for intangible assets subject to amortization was
$0.4 million
and
$0.9 million
during the thirteen-weeks ended
April 29, 2017
and
April 30, 2016
, respectively. As of
April 29, 2017
, estimated future amortization expense associated with intangible assets subject to amortization is as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Amortization
Expense
|
Remainder of 2017
|
|
$
|
1,065
|
|
2018
|
|
877
|
|
2019
|
|
709
|
|
2020
|
|
684
|
|
2021
|
|
682
|
|
2022
|
|
235
|
|
|
|
$
|
4,252
|
|
NOTE 5 - ACCOUNTING FOR SHARE-BASED PAYMENTS
The 2010 Equity Incentive Plan (the “2010 Plan”) provides for equity-based awards to the Company’s employees, directors and consultants. Under the 2010 Plan, the Company initially reserved
1,000,000
shares of common stock for issuance. This number automatically increases on the first trading day of each fiscal year beginning with fiscal 2011, by an amount equal to
1.5%
of the shares of common stock outstanding as of the last trading day of the immediately preceding fiscal year; accordingly,
2,426,711
shares of common stock were reserved for issuance as of
April 29, 2017
. The Company previously had two stock option plans which expired on October 31, 2010. No further awards will be granted under these plans, although all options previously granted and outstanding will remain outstanding until they are either exercised or forfeited. As of
April 29, 2017
,
1,059,252
stock options have been granted pursuant to the 2010 Plan.
The following is a summary of the stock option activity during the thirteen weeks ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding as of January 28, 2017
|
1,184,000
|
|
|
$
|
6.07
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(100,000
|
)
|
|
7.70
|
|
|
|
|
|
|
Outstanding as of April 29, 2017
|
1,084,000
|
|
|
$
|
5.92
|
|
|
6.9
|
|
$
|
—
|
|
Vested and expected to vest as of April 29, 2017
|
709,834
|
|
|
$
|
7.79
|
|
|
6.9
|
|
$
|
—
|
|
Exercisable as of April 29, 2017
|
709,834
|
|
|
$
|
7.79
|
|
|
6.9
|
|
$
|
—
|
|
The following is a summary of stock warrants activity during the thirteen weeks ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding as of January 28, 2017
|
6,299,971
|
|
|
$
|
11.80
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(2,133,332
|
)
|
|
8.00
|
|
|
|
|
|
|
Outstanding as of April 29, 2017
|
4,166,639
|
|
|
$
|
13.74
|
|
|
1.8
|
|
$
|
—
|
|
Vested and expected to vest as of April 29, 2017
|
4,166,639
|
|
|
$
|
13.74
|
|
|
1.8
|
|
$
|
—
|
|
Exercisable as of April 29, 2017
|
4,166,639
|
|
|
$
|
13.74
|
|
|
1.8
|
|
$
|
—
|
|
Share-based compensation expense was less than
$0.1 million
during each of the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
.
NOTE 6 - REVOLVING CREDIT FACILITY AND NOTES PAYABLE TO AFFILIATES
The Company’s revolving credit facility and notes payable to affiliates consist of the following:
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
January 28, 2017
|
|
(in thousands)
|
Revolving credit facility, interest payable monthly, secured by a pledge of substantially all of the Company's assets
|
$
|
4,517
|
|
|
$
|
—
|
|
Subordinated notes payable-affiliates
|
125,366
|
|
|
125,366
|
|
|
129,883
|
|
|
125,366
|
|
Less current portion
|
—
|
|
|
—
|
|
Total long-term debt
|
$
|
129,883
|
|
|
$
|
125,366
|
|
The Company has a revolving Senior Credit Facility with a syndicate of banks that is used for the Company’s general corporate purposes including working capital and capital expenditures. The maximum borrowing amount under the Senior Credit Facility is
$175 million
and the termination date is April 2019. Under this facility, which does not require amortization of principal, revolving loans may be drawn, repaid and reborrowed up to the amount available under a borrowing base calculated with reference to specified percentages of the Company’s credit card and trade receivables and inventory, which may be reduced by the lender in its reasonable discretion. The Company must
maintain excess availability under the facility of at least
$10 million
. As of
April 29, 2017
, the Company had
$80.1 million
of net ava
ilability which includes
$25 million
for letters of credit.
Interest under the Senior Credit Facility is at variable rates plus specified margins that are determined based upon the Company’s excess availability from time to time. The Company is also required to pay monthly commitment fees based on the unused amount of the Senior Credit Facility and a monthly fee with respect to outstanding letters of credit. As of
April 29, 2017
, the interest rate on outstanding borrowings was
5.0%
.
All obligations of the Company related to the Senior Credit Facility are secured by first priority perfected security interests in all personal and real property owned by the Company, including without limitation
100%
(or, in the case of excluded foreign subsidiaries,
66%
) of the outstanding equity interests in the subsidiaries. The Company is subject to customary limitations on its ability to, among other things, pay dividends and make distributions, make investments and enter into joint ventures, and dispose of assets. The Company was in compliance with all financial and operating covenants as of
April 29, 2017
.
In addition, the Company has outstanding unsecured debt obligations to affiliates as follows:
(i)
a promissory note in the principal amount of
$35 million
, (the “QKD Note”) held by Quality King Distributors, Inc. ("Quality King"), which provides for payment of principal in quarterly installments between July 31, 2019 and October 31, 2022, with a final installment on October 31, 2022 of the remaining balance, and payment of interest in quarterly installments commencing on January 31, 2011 at the then current senior debt rate, as defined in the Senior Credit Facility, plus
1%
per annum;
(ii)
promissory notes in the aggregate principal amount of approximately
$85.4 million
held by
six
estate trusts established by Glenn, Stephen and Arlene Nussdorf (the “Nussdorf Trust Notes”), which provide for payment of the principal in full on July 31, 2019 and payments of interest in quarterly installments commencing on July 31, 2012 at the then current senior debt rate plus
2%
per annum; and
(iii) a promissory note in the principal amount of
$5 million
held by Glenn and Stephen Nussdorf (the “2004 Note”), which provided for payment in January 2009 and is currently in default because of the restrictions on payment described below, resulting in an increase of
2%
in the nominal interest rate, which is the prime rate plus
1%
.
These notes are subordinated to the Senior Credit Facility. No principal may be paid on any of them until three months after the Senior Credit Facility terminates and is paid in full, and payment of interest is subject to satisfaction of certain conditions, including the Company’s maintaining excess availability under the Senior Credit Facility of the greater of
$17.5 million
or
17.5%
of the borrowing base certificate after giving effect to the payment, and a fixed charge coverage ratio, as defined in the credit agreement, of
1.1
:1.0. Interest expense on these notes was approximately
$2.1 million
and
$1.5 million
for the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
, respectively, and is included in interest expense on the accompanying condensed consolidated statements of operations. No payments of principal or interest have been made on the QKD Note or the Nussdorf Trust Notes. On the 2004 Note, no payments of principal have been made and no interest payments have been made since October 2008. Accrued interest payable due at
April 29, 2017
and
January 28, 2017
on the Nussdorf Trust Notes, the QKD Note, and the 2004 Note was approximately
$52.9 million
and
$50.8 million
, respectively, and is included in other long-term liabilities on the accompanying condensed consolidated balance sheets as of
April 29, 2017
and
January 28, 2017
, respectively.
NOTE 7 - ACCOUNTING FOR INCOME TAXES
The Company conducts business throughout the United States, Puerto Rico and the United States Virgin Islands and, as a result, files income tax returns in the U.S. Federal and various state jurisdictions, Puerto Rico and the United States Virgin Islands. In the normal course of business, the Company is subject to examinations in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. Federal, state, local or Puerto Rico income tax examinations for fiscal years prior to 2008. State and foreign income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any Federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.
The Company continues to provide a full valuation allowance against its net deferred tax assets due to the uncertainty as to when and if business conditions will improve sufficiently to enable it to utilize its deferred tax assets. The Company did not record a Federal or state tax expense for the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
, since the Company had a cumulative operating loss for each thirteen-week period.
During the thirteen weeks ended
April 29, 2017
, there were no changes to the liability for income tax associated with uncertain tax positions. The Company accrues interest related to unrecognized tax benefits as well as any related penalties in the income tax provision in its condensed consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods. The accrual for interest and penalties related to uncertain tax positions as of
April 29, 2017
and
January 28, 2017
was not significant.
The Company does not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months; however, the ultimate outcome of tax matters is uncertain and unforeseen results can occur.
NOTE 8 - BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share has been computed by dividing net loss by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise prices for the respective periods.
During the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
there were
5,250,639
and
7,135,556
, respectively, potential shares of common stock which were excluded from the diluted loss per share calculation because the effect of including these potential shares would have been antidilutive.
NOTE 9 - FAIR VALUE MEASUREMENTS
The Company applies authoritative accounting guidance regarding fair value and disclosures as it applies to financial and non-financial assets and liabilities. The guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1: Observable inputs such as quoted prices in active markets (the fair value hierarchy gives the highest priority to
Level 1 inputs);
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data and require the reporting entity to develop its own assumptions.
As of
April 29, 2017
, the Company had no material financial assets or liabilities measured on a recurring basis at fair value. The Company measures certain assets at fair value on a non-recurring basis, specifically long-lived assets evaluated for impairment. No such impairments were recorded during the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
.
The fair values of the Company’s assets and liabilities that qualify as financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The reported amounts of long-term obligations approximate fair value, given management’s evaluation of the instruments’ current rates compared to market rates of interest and other factors.
NOTE 10 - CONTINGENCIES
On February 21, 2017, Kiss Nail Products, Inc. (Plaintiff) sued Parlux and Roraj Trade, LLC (the licensor of Rihanna’s intellectual property), ("Defendants"), in the U.S. District Court for the Southern District of New York alleging both federal and state law trademark infringement and unfair competition arising out of Parlux’s sale and distribution of the “Kiss by Rihanna” fragrance. Plaintiff alleges that such sale and distribution infringes its “Kiss” mark on nail care and other beauty products. Plaintiff seeks, inter alia, to enjoin Defendants’ distribution and sales of the alleged offending products and seeks unspecified money damages as well as treble damages, attorneys’ fees, punitive damages and interest. Pursuant to an agreement between Parlux and Roraj, Parlux has agreed to defend and indemnify Roraj in this case. On April 19, 2017, the Defendants filed an Answer in the nature of a general denial along with Counterclaims seeking a declaratory judgment that Plaintiff has abandoned the mark with regard to perfume, fragrance, cologne and related fragrance products. Defendants are also seeking a declaration that they have not infringed any of Plaintiff’s marks. The Court has set a schedule which calls for the conclusion of fact and expert discovery on or about December 20, 2017, with dispositive motion practice likely to follow. The Court has also referred the case to a Magistrate Judge for a settlement conference.
In August 2015, the Company was named as a defendant in a class action filed in the Superior Court for the State of California, County of Ventura. The plaintiff, a former employee of Perfumania, sought to represent all current and former sales associates at California Perfumania stores. The complaint alleged various violations of California law related to wages, meal periods and wage statements, among other things. In October 2016, the parties agreed in principle on a settlement which has been submitted to the Court. The settlement proceeds will be deposited with the settlement administrator when the court provides its final approval, which is expected sometime in 2017. The Company accrued the estimated settlement of approximately $0.5 million during the thirteen weeks ended October 29, 2016.
In November 2015, the Company was named as a defendant in a putative class action in the U.S. District Court for the Southern District of Alabama. The complaint, and thereafter an amended complaint, alleged that the Company violated the Telephone Consumer Protection Act ("TCPA") by sending unsolicited facsimiles which advertised goods and/or services offered by the Company. The plaintiff sought to represent a nationwide class of all recipients of such unsolicited faxes for the period November 3, 2011 to the present. Plaintiff sought statutory damages of at least $500 per violative fax, plus other non-monetary relief. The parties agreed to mediate the matter, which resulted in a settlement in principle. A formal settlement agreement, on a class wide basis, was entered into in late November 2016. Defendants will obtain a release, on a class wide basis, from all members of the settlement class who do not opt out, back to January 2011. The settlement has been preliminarily approved by the Court and notice has been disseminated to potential class members, who had the opportunity to opt out of the class or to object to the settlement on or before March 31, 2017. No objections have been received, but there have been four opt-outs and various claims. The settlement will be presented to the Court for final approval at a hearing currently scheduled for June 29, 2017. Assuming final approval, claims will be submitted, reviewed, and paid as appropriate. It is expected that this process will be concluded during calendar 2017. The Company accrued the estimated settlement of approximately $0.5 million during the thirteen weeks ended October 29, 2016.
The Company is involved in various legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters, although management believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a materially adverse effect on the Company's consolidated financial position, results of operations or cash flows. See also the discussion of litigation with licensor in Note 11 of this Form 10-Q.
NOTE 11 - RELATED-PARTY TRANSACTIONS
Glenn, Stephen and Arlene Nussdorf owned an aggregate
7,742,282
shares or approximately
50.0%
of the total number of shares of the Company’s outstanding common stock as of
April 29, 2017
, excluding shares issuable upon exercise of certain warrants and not assuming the exercise of any outstanding options. Stephen Nussdorf has served as the Chairman of the
Company’s Board of Directors since February 2004 and Executive Chairman of the Board since April 2011. Glenn Nussdorf is a director of subsidiaries of the Company.
The Nussdorfs are officers and principals of Quality King, which distributes pharmaceuticals and health and beauty care products, and the Company’s President and Chief Executive Officer, Michael W. Katz, is also an executive of Quality King.
See Note 6 for a discussion of notes payable to affiliates.
Transactions With Affiliated Companies
Glenn Nussdorf has an ownership interest in Lighthouse Beauty Marketing, LLC, Lighthouse Beauty, LLC and Lighthouse Beauty KLO, LLC (collectively the "Lighthouse Companies"), all of which are manufacturers and distributors of prestige fragrances and have been suppliers to the Company.
The Company purchases merchandise from Jacavi Beauty Supply, LLC (“Jacavi”), a fragrance distributor. Jacavi's managing member is Rene Garcia. Rene Garcia, his family trusts and related entities are members of a group (the "Garcia Group") that owned an aggregate
2,211,269
shares, or approximately
14.3%
, of the total number of shares of the Company's outstanding common stock as of
April 29, 2017
, excluding shares issuable upon exercise of certain warrants. See disclosures of merchandise purchases in the table below.
The Company sells merchandise to Reba Americas LLC ("Reba"), which distributes fragrances primarily in Puerto Rico and the Caribbean. Family trusts of Rene Garcia own
50%
of Reba. Net sales to Reba were approximately
$1.1 million
and
$0.7 million
during the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
, respectively. The balance due from Reba as of
April 29, 2017
and
January 28, 2017
was approximately
$0.6 million
and
$0.4 million
, respectively, and is included in accounts receivable, net of allowances, on the accompanying condensed consolidated balance sheets. The Company also purchased certain merchandise from Reba during the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
.
The amounts due to these related companies are non-interest bearing and are included in accounts payable-affiliates in the accompanying condensed consolidated balance sheets. Transactions for merchandise purchases with these related companies during the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchases
Thirteen Weeks Ended
April 29, 2017
|
|
Total Purchases
Thirteen Weeks Ended
April 30, 2016
|
|
Balance Due
April 29, 2017
|
|
Balance Due
January 28, 2017
|
|
|
|
|
|
|
|
|
Lighthouse Companies
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
90
|
|
Jacavi
|
311
|
|
|
1,449
|
|
|
—
|
|
|
590
|
|
Quality King
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
Reba
|
—
|
|
|
122
|
|
|
357
|
|
|
337
|
|
|
$
|
311
|
|
|
$
|
1,584
|
|
|
$
|
447
|
|
|
$
|
1,017
|
|
Glenn, Stephen and Arlene Nussdorf own GSN Trucking, Inc. (“GSN”) which provides general transportation and freight services. The Company periodically utilizes GSN to transport both inbound purchases of merchandise and outbound shipments to wholesale customers. There were no payments to GSN during the thirteen weeks ended
April 29, 2017
. During the thirteen weeks ended
April 30, 2016
, total payments to GSN for transportation services provided were less than
$0.1 million
. There was no balance due to GSN at
April 29, 2017
or
January 28, 2017
.
Quality King leases a
560,000
square foot facility in Bellport, NY. The Company began occupying approximately half of this facility in December 2007 under a sublease that terminates on September 30, 2027 and this location serves as the Company’s principal offices. As of
April 29, 2017
, the monthly current sublease payments are approximately
$240,000
and increase by
3%
annually. Total payments by the Company to Quality King for this sublease were approximately
$0.7 million
during each of the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
, respectively.
The Company and Quality King are parties to a Services Agreement providing for the Company’s participation in certain third party arrangements at the Company’s respective share of Quality King’s cost, including allocated overhead, plus a
2%
administrative fee, and the provision of legal services. The Company also shares with Quality King the economic benefit of the bulk rate contract that the Company has with UPS to ship Quality King’s merchandise and related items. The Services Agreement will terminate on thirty days’ written notice from either party. The expenses charged under these arrangements to the Company were
$0.2 million
during each of the thirteen-week periods ended
April 29, 2017
and
April 30, 2016
. The balance
due to Quality King for expenses charged under the Services Agreement was
$0.1 million
and less than
$0.1 million
at
April 29, 2017
and
January 28, 2017
, respectively.
On April 18, 2012, Parlux, Artistic Brands Development LLC (“Artistic Brands”) (a company controlled by Rene Garcia), Shawn C. Carter (who is the beneficial owner of 10% of the Company’s common stock) and S. Carter Enterprises, LLC entered into a sublicense agreement and Artistic Brands, Shawn Carter and S. Carter Enterprises, LLC entered into a license agreement. In connection with these agreements, the Company issued to Artistic Brands and its designees, including Shawn Carter, warrants for the purchase of an aggregate of
1,599,999
shares of the Company's common stock at an exercise price of
$8.00
per share. Pursuant to the license agreement, Artistic Brands obtained the exclusive right and license to manufacture, promote, distribute, and sell prestige fragrances and related products under the Jay-Z trademark. The initial term of the license agreement expires at the earlier of (i)
five years
following the first date on which licensed products are shipped and (ii) December 31, 2018. Artistic Brands has the right to renew the license agreement, so long as certain financial conditions are met and it has not otherwise breached the agreement. Pursuant to the license agreement, Artistic Brands agreed to make certain royalty payments, including certain guaranteed minimum royalties. Pursuant to the sublicense agreement, Artistic Brands sublicensed all rights granted under the license agreement to the Company, and in return the Company assumed all of Artistic Brands' obligations under the license agreement, including making all royalty payments and certain guaranteed minimum royalties owed to S. Carter Enterprises, LLC. No royalties have been paid during the thirteen weeks ended
April 29, 2017
or
April 30, 2016
.
On January 25, 2016, the Company and Parlux filed a lawsuit against S. Carter Enterprises, LLC and Shawn C. Carter in the Supreme Court of the State of New York, County of New York. In general, the lawsuit alleges that the defendants have breached the license described above and related agreements by not acting timely or in good faith in approving products and launches under the license and not supporting the brand via personal appearances as required by the license. The lawsuit seeks a determination that such breaches undermine the essence of the license thereby warranting rescission of the license, return of the consideration paid on account of the license and related agreements, monetary damages, and other relief. On May 6, 2016, the defendants filed an answer in the nature of a general denial, with a counterclaim for, inter alia, amounts allegedly due to them under the license agreements in the amount of approximately
$2.7 million
. The Company has filed a reply to that counterclaim in the nature of a general denial. The Court has set a schedule which calls for the conclusion of fact and expert discovery by January 2018, with dispositive motion practice to follow. On May 5, 2017, the defendants filed a motion for partial summary judgment on their counterclaim. The Company submitted opposition papers on June 9, 2017, and defendants have until June 30 to submit reply papers. Thereafter, the motion will be presented to the Court on July 5, 2017.
The Company has announced that a special committee of our independent directors is considering various alternatives to address the Company’s financial condition. The special committee is considering the Company’s capital structure and possible alternatives that could result in value to all shareholders, and has contacted members of the Nussdorf family, our principal shareholders, to begin discussions over possible approaches. The Company does not have a defined timeline for the strategic review process, and there can be no assurance that it will result in any strategic alternative being announced or consummated.
NOTE 12 - SEGMENT INFORMATION
The Company operates in two industry segments, wholesale distribution and specialty retail sales of designer fragrance and related products. Management reviews segment information by segment and on a consolidated basis each month. Retail sales include sales through Perfumania retail stores, the SOW consignment business and the Company’s internet site, Perfumania.com. Wholesale sales include sales through QFG, Parlux and Five Star to unrelated customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the fiscal year ended
January 28, 2017
. The Company’s chief operating decision maker, who is its Chief Executive Officer, assesses segment performance by reference to gross profit. Each of the segments has its own assets, liabilities, revenues and cost of goods sold. While each segment has certain unallocated operating expenses, these expenses are not reviewed by the chief operating decision maker on a segment basis, but rather on a consolidated basis. Financial information for these segments is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
April 29, 2017
|
|
Thirteen Weeks Ended
April 30, 2016
|
|
(in thousands)
|
Net sales:
|
|
|
|
Wholesale
|
$
|
51,102
|
|
|
$
|
53,464
|
|
Retail
|
46,794
|
|
|
51,675
|
|
|
$
|
97,896
|
|
|
$
|
105,139
|
|
Gross profit:
|
|
|
|
Wholesale
|
$
|
22,833
|
|
|
$
|
25,440
|
|
Retail
|
22,136
|
|
|
26,329
|
|
|
$
|
44,969
|
|
|
$
|
51,769
|
|
|
|
|
|
|
April 29, 2017
|
|
January 28, 2017
|
Total assets:
|
|
|
|
Wholesale
|
$
|
699,812
|
|
|
$
|
681,055
|
|
Retail
|
368,466
|
|
|
364,117
|
|
|
1,068,278
|
|
|
1,045,172
|
|
Eliminations (a)
|
(763,539
|
)
|
|
(732,372
|
)
|
Consolidated assets
|
$
|
304,739
|
|
|
$
|
312,800
|
|
|
|
(a)
|
Adjustment to eliminate intercompany receivables and investment in subsidiaries
|
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-Q, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “may,” “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast,” “objective,” “assume,” “strategies” and other words and terms of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.
Among the factors that could cause actual results, performance or achievement to differ materially from those described or implied in the forward-looking statements are our ability to service our obligations, our ability to comply with the covenants in our Senior Credit Facility, any deterioration of general economic conditions and weaker discretionary spending by consumers, due to various factors including the diminishing patronage by retail customers at malls where our stores are located and other factors included in our filings with the SEC. Copies of our SEC filings are available from the SEC or may be obtained upon request from us.
You should also consider carefully the statements under “Risk Factors” in our Form 10-K which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. We cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.