Basis of Financial Statement Presentation
|9 Months Ended
Oct. 29, 2022
|Summary of Significant Accounting Policies
|Basis of Financial Statement Presentation
(2) Basis of Financial Statement Presentation
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America have been condensed or omitted in accordance with these rules and regulations. The accompanying condensed consolidated
balance sheet as of January 29, 2022 has been derived from the Company’s audited financial statements for the fiscal year ended January 29, 2022. The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of these financial statements. Although management believes the disclosures and information presented are adequate, these interim condensed consolidated financial statements should be read in conjunction with the Company’s most recent audited financial statements and notes thereto included in its annual report on Form 10-K for fiscal year ended 2021. Operating results for the three and nine-month periods ended October 29, 2022 are not necessarily indicative of the results that may be expected for fiscal year ending January 28, 2023.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
The Company classifies a forward contract to purchase shares of its common stock that do not qualify for equity classification as a liability on its consolidated balance sheets as this forward contract contains freestanding financial instruments that may require the Company to transfer consideration upon exercise. Each instrument is initially recorded at fair value on date of grant using the Black-Scholes model for warrants and the market value for common shares and pre-funded warrants, and it is subsequently re-measured to fair value at each subsequent balance sheet date while liability-classified and outstanding. Changes in fair value of the instruments are recognized as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss. Issuance costs are expensed under liability treatment for forward contracts. The Company adjusts the forward contracts for changes in fair value until the earlier of the exercise, when the forward contract qualifies for equity treatment, or the expiration of the forward contract.
The Company’s fiscal year ends on the Saturday nearest to January 31 and results in either a 52-week or 53-week fiscal year. References to years in this report relate to fiscal years, rather than to calendar years. The Company’s most recently completed fiscal year, fiscal 2021, ended on January 29, 2022, and consisted of. Fiscal 2022 will end January 28, 2023 and will contain . The three and nine-month periods ended October 29, 2022 and October 30, 2021 consisted of 13 and 39 weeks.
Held for Sale Assets
The Company previously disclosed that it was marketing buildings located in Eden Prairie, MN and Bowling Green, KY, which currently serve as the Company’s corporate headquarters and production studios, and its distribution center (the “Buildings”). The Company received a Letter of Intent (“LOI”) in November 2022 from a real estate investment firm for the purchase of two buildings located in Bowling Green, KY, which serve as its distribution centers and one building located in Eden Prairie, MN which currently serves as the corporate headquarters and production studios for the Company. The LOI serves as the Company’s intent to enter into a sales-leaseback transaction for the Buildings with a purchase price of $48,000, and a lease term of twenty-one () years with additional renewal options available. The Company intends to use the net proceeds to retire existing debt and for working capital purposes and expects the transaction to close in the fourth quarter of fiscal year 2022. There can be no assurances that the sale-leaseback transaction will be successful.
The Buildings are currently measured at the carrying value of $14,000, which represents the lower of carrying value or fair value less cost to sell, in accordance with ASC 360-10-35-43, and thus no gain or loss was recorded at the initial measurement of the held for sale assets.
Recently Adopted Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), or ASU 2020-06. The guidance in ASU 2020-06 simplifies the accounting for convertible instruments and its application of the derivatives scope exception for contracts in its own equity. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard on January 30, 2022 using the modified retrospective approach. The adoption of ASU 2020-06 did not have a material impact on the Company’s condensed consolidated financial statements.
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. Topic 848 is effective upon issuance and generally can be applied through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which refines the scope of Topic 848 and clarifies some of its guidance. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments are effective immediately for all entities. An entity may elect to apply the amendments on a full retrospective basis. The Company has not adopted any of the optional expedients or exceptions through October 29, 2022, but the Company will continue to evaluate the possible adoption of any such expedients or exceptions and does not expect such adoption to have a material impact on its condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers, which provides guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. This ASU is effective for the Company on January 29, 2023, with early adoption permitted, and shall be applied on a prospective basis to business combinations that occur on or after the adoption date. The Company is evaluating the effect that the implementation of this standard may have on the Company's condensed consolidated financial statements but does not currently expect the impact to be material.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which provides guidance to increase the transparency of government assistance transactions with business entities that are accounted for by applying a grant or contribution accounting model. This ASU is effective for the Company's annual financial statements to be issued for the year ended January 28, 2023, with early adoption permitted. The Company expects to adopt this new accounting standard in its Annual Report on Form 10-K for the year ended January 28, 2023 and does not expect the adoption of this standard to have a material impact on the Company's condensed consolidated financial statements.
Liquidity and Going Concern
In accordance with Accounting Standards Codification (“ASC”) Topic 205-40, Going Concern, management has evaluated whether there are certain conditions and events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern for twelve months after the date that these consolidated financial statements are issued. In applying this accounting guidance, the Company considered its current financial condition and liquidity sources, including current funds available, forecasted future cash flows and its unconditional obligations due over the next twelve months, including related covenants. In addition, the Company evaluates its history of financial performance, where we have had a historic trend of operating losses, net losses and negative
operating cash flows which continue to have an unfavorable impact on our overall liquidity. Most recently, we reported operating losses of $15,265 and $30,619, net losses of $6,002 and $10,423 for the three and nine months ended October 29, 2022, and negative operating cash flows of $18,591 for the nine months ended October 29, 2022. We also reported operating losses, net losses and negative operating cash flows for the fiscal years 2021 and 2020 which we expect to continue until operating results improve. In addition, we were in violation of our debt covenants as of October 29, 2022.
As of October 29, 2022, we had $10,571 in cash and cash equivalents and $1,839 of available capacity under our debt and related agreements, resulting in $12,410 of liquidity.
The Company is required to maintain certain financial ratios under various debt and related agreements. If we violate covenants in any debt or related agreement, we would be considered in default and our indebtedness would be due immediately and may not be able to make additional borrowings under the agreement which may be at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. As of October 29, 2022, the Company was not in compliance with certain of the covenants under the loan and security agreement governing its revolving loan. The Company is working with its asset-based lender, Siena Lending Group, LLC (“Siena”), to address the Company’s compliance with certain covenants under their loan agreement whether through the issuance of an amendment or forbearance agreement. Therefore, the amounts of the Company’s long-term debt that would otherwise be contractually due and payable after one year are reflected on the Company’s balance sheets as current liabilities, including the GCP Note and the GreenLake Note (see Note 6 for a discussion of the Company’s debt arrangements).
Improving operating results and cash flow is dependent upon the Company’s ability to achieve its business plans to grow its revenues and enhance its operations by reducing inventory through improved inventory management. In addition, management plans to execute a sale leaseback transaction and use the proceeds to pay down debt, and capital expenditure savings achieved through deferral of nonessential projects.
The Company previously disclosed that it was marketing buildings located in Eden Prairie, MN and Bowling Green, KY, which currently serve as the Company’s corporate headquarters and production studios, and its distribution center (the “Buildings”). The Company received a Letter of Intent (“LOI”) in November 2022 from a real estate investment firm for the purchase of two buildings located in Bowling Green, KY, which serve as its distribution centers and one building located in Eden Prairie, MN which currently serves as the corporate headquarters and production studios for the Company. The LOI serves as the Company’s intent to enter into a sales-leaseback transaction for the Buildings with a purchase price of $48,000, and a lease term of twenty-one () years with additional renewal options available. The Company intends to use the net proceeds to retire existing debt and for working capital purposes and expects the transaction to close in the fourth quarter of fiscal year 2022. There can be no assurances that the sale-leaseback transaction will be successful. As of December 13, 2022, this transaction is not complete.
There can be no assurances that management will be successful with the sale leaseback transaction nor with management’s other plans. As a result, there is substantial doubt about the Company’s ability to continue as a going concern within twelve months following the issuance date of the condensed consolidated financial statements as of and for the period ended October 29, 2022.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within twelve months after the date that these condensed financial statements are issued.