Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - HAMPSHIRE GROUP LTD | ex31-2.htm |
| EX-32.2 - EXHIBIT 32.2 - HAMPSHIRE GROUP LTD | ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - HAMPSHIRE GROUP LTD | ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - HAMPSHIRE GROUP LTD | ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2015
OR
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from U U to U U
Commission File Number: 000-20201
UHAMPSHIRE GROUP, LIMITEDU
(Exact name of registrant as specified in its charter)
|
Delaware |
06-0967107 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
114 W. 41st Street, New York, New York |
10036 |
|
(Address of principal executive offices) |
(Zip Code) |
(212) 840-5666
(Registrant’s telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Number of shares of common stock outstanding as of March 1, 2016: 8,795,530
HAMPSHIRE GROUP, LIMITED
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 26, 2015
|
“SAFE HARBOR” STATEMENT |
ii |
|
PART I – FINANCIAL INFORMATION |
1 |
|
Item 1. Financial Statements. |
1 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
17 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk. |
25 |
|
Item 4. Controls and Procedures. |
25 |
|
PART II – OTHER INFORMATION |
26 |
|
Item 1. Legal Proceedings. |
26 |
|
Item 1A. Risk Factors. |
26 |
|
Item 6. Exhibits |
27 |
|
SIGNATURES |
29 |
“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts), as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Quarterly Report on Form 10-Q for the quarter ended September 26, 2015 (the “Form 10-Q”), as well as those made in other filings with the SEC.
Forward-looking statements can be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “should,” “would,” “could,” “attempt,” “project,” “estimate,” “believe,” “continue,” “forecast,” “foresee” and other terms with similar meaning indicating possible future events or potential impact on our business or stockholders. The reader is cautioned not to place undue reliance on these forward-looking statements, which are not guarantees of future performance. The forward-looking statements are based on management’s current assumptions, beliefs, plans and expectations, all of which are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. The potential risks and uncertainties that could cause our actual future financial condition and results of operations to differ materially from those expressed or implied in our forward-looking statements include, but are not limited to, the risks described in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “2014 Annual Report”) and other information set forth in this Form 10-Q.
We expressly disclaim any obligation to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.
As used herein, except as otherwise indicated by the context, the terms “Hampshire,” “Company,” “we,” “our” and “us” are used to refer to Hampshire Group, Limited and our wholly-owned subsidiaries.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Hampshire Group, Limited
Unaudited Condensed Consolidated Balance Sheets
| (In thousands, except par value and shares) |
September 26, 2015 |
December 31, 2014 |
||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 1,441 | $ | 1,758 | ||||
|
Accounts receivable, net of allowances of $2,607 and $2,924 as of September 26, 2015 and December 31, 2014, respectively |
15,402 | 11,649 | ||||||
|
Other receivables |
2,442 | 368 | ||||||
|
Inventories, net |
13,558 | 8,107 | ||||||
|
Other current assets |
2,023 | 2,373 | ||||||
|
Assets of discontinued operations |
120 | 17,095 | ||||||
|
Total current assets |
34,986 | 41,350 | ||||||
|
Fixed assets, net |
938 | 827 | ||||||
|
Goodwill |
420 | 420 | ||||||
|
Intangible assets, net |
1,148 | 1,234 | ||||||
|
Other assets |
375 | 465 | ||||||
|
Total assets |
$ | 37,867 | $ | 44,296 | ||||
|
Current liabilities: |
||||||||
|
Credit facility borrowings and notes payable |
$ | 21,821 | $ | 16,114 | ||||
|
Accounts payable |
10,888 | 11,700 | ||||||
|
Accrued expenses and other liabilities |
3,987 | 6,143 | ||||||
|
Liabilities of discontinued operations |
2 | 1,038 | ||||||
|
Total current liabilities |
36,698 | 34,995 | ||||||
|
Long-term debt |
2,415 | 3,000 | ||||||
|
Other long-term liabilities |
5,686 | 11,568 | ||||||
|
Total liabilities |
44,799 | 49,563 | ||||||
|
Commitments and contingencies (Note 7) |
||||||||
|
Stockholders’ deficit: |
||||||||
|
Preferred stock, $0.10 par value, 1,000,000 shares authorized; none issued |
— | — | ||||||
|
Series A junior participating preferred stock, $0.10 par value, 10,000 shares authorized; none issued |
— | — | ||||||
|
Common stock, $0.10 par value, 13,333,333 shares authorized; 9,496,350 and 9,249,902 shares issued as of September 26, 2015 and December 31, 2014, respectively |
950 | 925 | ||||||
|
Additional paid-in capital |
43,104 | 42,663 | ||||||
|
Deficit |
(45,519 |
) |
(43,388 |
) | ||||
|
Treasury stock, 753,356 shares at cost as of September 26, 2015 and December 31, 2014 |
(5,467 |
) |
(5,467 |
) | ||||
|
Total stockholders’ deficit |
(6,932 |
) |
(5,267 |
) | ||||
|
Total liabilities and stockholders’ deficit |
$ | 37,867 | $ | 44,296 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
Hampshire Group, Limited
Unaudited Condensed Consolidated Statements of Operations
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| (In thousands, except per share data) |
September 26, 2015 |
September 27, 2014 |
September 26, 2015 |
September 27, 2014 |
||||||||||||
|
Net sales |
$ | 18,608 | $ | 20,836 | $ | 43,428 | $ | 30,555 | ||||||||
|
Cost of goods sold |
14,709 | 14,957 | 33,093 | 22,621 | ||||||||||||
|
Gross profit |
3,899 | 5,879 | 10,335 | 7,934 | ||||||||||||
|
Selling, general and administrative expenses |
5,191 | 5,225 | 14,690 | 14,400 | ||||||||||||
|
Lease litigation settlement (Note 7) |
— | — | 5,284 | — | ||||||||||||
|
(Gain) loss on lease obligations (Notes 4 and 7) |
— | (8 | ) | (10,590 |
) |
74 | ||||||||||
|
Income (loss) from operations |
(1,292 |
) |
662 | 951 | (6,540 |
) | ||||||||||
|
Other income (expense): |
||||||||||||||||
|
Interest expense |
(304 |
) |
(345 |
) |
(965 |
) |
(827 |
) | ||||||||
|
Other, net |
140 | 86 | 484 | 107 | ||||||||||||
|
Income (loss) from continuing operations before income taxes |
(1,456 |
) |
403 | 470 | (7,260 |
) | ||||||||||
|
Income tax provision (benefit) |
(79 |
) |
(345 |
) |
14 | (205 |
) | |||||||||
|
Income (loss) from continuing operations |
(1,377 |
) |
748 | 456 | (7,055 |
) | ||||||||||
|
Loss from discontinued operations, net of taxes (Notes 8 and 9) |
(228 |
) |
(440 |
) |
(2,587 |
) |
(1,510 |
) | ||||||||
|
Net income (loss) |
$ | (1,605 |
) |
$ | 308 | $ | (2,131 |
) |
$ | (8,565 |
) | |||||
|
Basic income (loss) per share: |
||||||||||||||||
|
Income (loss) from continuing operations |
$ | (0.16 |
) |
$ | 0.09 | $ | 0.05 | $ | (0.83 |
) | ||||||
|
Loss from discontinued operations, net of taxes |
(0.02 |
) |
(0.05 |
) |
(0.30 |
) |
(0.18 |
) | ||||||||
|
Net income (loss) |
$ | (0.18 |
) |
$ | 0.04 | $ | (0.25 |
) |
$ | (1.01 |
) | |||||
|
Diluted income (loss)per share: |
||||||||||||||||
|
Income (loss) from continuing operations |
$ | (0.16 |
) |
$ | 0.08 | $ | 0.05 | $ | (0.83 |
) | ||||||
|
Loss from discontinued operations, net of taxes |
(0.02 |
) |
(0.05 |
) |
(0.30 |
) |
(0.18 |
) | ||||||||
|
Net income (loss) |
$ | (0.18 |
) |
$ | 0.03 | $ | (0.25 |
) |
$ | (1.01 |
) | |||||
|
Weighted-average number of common shares outstanding: |
||||||||||||||||
|
Basic |
8,736 | 8,486 | 8,610 | 8,475 | ||||||||||||
|
B Diluted |
8,736 | 9,878 | 8,610 | 8,475 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Hampshire Group, Limited
Unaudited Condensed Consolidated Statement of Stockholders’ Deficit
|
Common Stock |
Additional |
Treasury Stock |
Total | |||||||||||||||||||||||||
| (In thousands, except shares) |
Shares |
Amount |
Paid-in |
Deficit |
Shares |
Amount |
Stockholders’ Deficit |
|||||||||||||||||||||
|
Balance as of December 31, 2014 |
9,249,902 | $ | 925 | $ | 42,663 | $ | (43,388 | ) | 753,356 | $ | (5,467 | ) | $ | (5,267 | ) | |||||||||||||
|
Net loss |
— | — | — | (2,131 | ) | — | — | (2,131 | ) | |||||||||||||||||||
|
Stock-based compensation |
— | — | 370 | — | — | — | 370 | |||||||||||||||||||||
|
Issuance of common stock to directors in lieu of cash |
246,448 | 25 | 71 | — | — | — | 96 | |||||||||||||||||||||
|
Balance as of September 26, 2015 |
9,496,350 | $ | 950 | $ | 43,104 | $ | (45,519 | ) | 753,356 | $ | (5,467 | ) | $ | (6,932 | ) | |||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Hampshire Group, Limited
Unaudited Condensed Consolidated Statements of Cash Flows
|
Nine Months Ended |
||||||||
| (In thousands) |
September 26, 2015 |
September 27, 2014 |
||||||
|
Cash flows from operating activities: |
||||||||
|
Net loss |
$ | (2,131 |
) |
$ | (8,565 |
) | ||
|
Less: Loss from discontinued operations, net of taxes |
2,587 | 1,510 | ||||||
|
Income (loss) from continuing operations |
456 | (7,055 |
) | |||||
|
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) continuing operating activities: |
||||||||
|
Depreciation and amortization |
537 | 885 | ||||||
|
Lease litigation settlement |
5,284 | — | ||||||
|
(Gain) loss on lease obligations |
(10,590 |
) |
74 | |||||
|
Stock-based compensation |
370 | 894 | ||||||
|
Deferred income taxes |
9 | (335 |
) | |||||
|
Loss on the sale of fixed assets |
— | 1 | ||||||
|
Changes in operating assets and liabilities: |
||||||||
|
Receivables, net |
(3,505 |
) |
(11,353 |
) | ||||
|
Inventories, net |
(5,451 |
) |
(7,788 |
) | ||||
|
Other assets |
289 | 3,051 | ||||||
|
Liabilities |
2,034 | 7,108 | ||||||
|
Net cash provided by (used in) continuing operating activities |
(10,567 |
) |
(14,518 |
) | ||||
|
Net cash provided by (used in) operating activities of discontinued operations |
3,267 | 1,934 | ||||||
|
Net cash provided by (used in) operating activities |
(7,300 |
) |
(12,584 |
) | ||||
|
Cash flows from investing activities: |
||||||||
|
Capital expenditures |
(311 |
) |
(406 |
) | ||||
|
Acquisition of business |
— | (300 |
) | |||||
|
Proceeds from the sale of Rio |
4,600 | — | ||||||
|
Proceeds from the disposal of fixed assets |
— | 1 | ||||||
|
Net cash provided by (used in) investing activities of continuing operations |
4,289 | (705 |
) | |||||
|
Net cash provided by (used in) investing activities of discontinued operations |
(13 |
) |
(266 |
) | ||||
|
Net cash provided by (used in) investing activities |
4,276 | (971 |
) | |||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds (payments) of the line of credit, net |
2,595 | 12,960 | ||||||
|
Other notes payable, net |
112 | — | ||||||
|
Net cash provided by (used in) financing activities |
2,707 | 12,960 | ||||||
|
Net increase (decrease) in cash and cash equivalents |
(317 |
) |
(595 |
) | ||||
|
Cash and cash equivalents at beginning of period |
1,758 | 1,385 | ||||||
|
Cash and cash equivalents at end of period |
$ | 1,441 | $ | 790 | ||||
|
Supplemental disclosures of cash flow information: |
||||||||
|
Issuance of common stock to directors in lieu of cash |
$ | 96 | $ | 105 | ||||
|
Lease settlement notes |
6,581 | — | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Hampshire Group, Limited
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation and Liquidity and Financing
The accompanying unaudited condensed consolidated financial statements of Hampshire Group, Limited and its subsidiaries (the “Company” or “Hampshire”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the requirements of the United States Securities and Exchange Commission (the “SEC”) for interim reporting under Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. (the “2014 Annual Report”).
The information included herein is not necessarily indicative of the annual results that may be expected for the year ending December 31, 2015, but does reflect all adjustments (which are of a normal and recurring nature) considered, in the opinion of management, necessary for a fair presentation of the results for the interim period presented. The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make accounting estimates based on assumptions, judgments or projections of future results of operations and cash flows. Actual results could differ materially from these estimates under different assumptions or conditions. In addition, the Company’s revenues are subject to the seasonality of the apparel industry, which may result in fluctuations in financial results for interim periods.
The accompanying condensed consolidated financial statements were prepared under the assumption that the Company will continue to operate as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business.
Management’s Liquidity and Financing Plan
The Company is in default under its credit facility and entered into a forbearance agreement and amendment to the credit facility on November 30, 2015, which among other things, changed the maturity date of the credit facility to February 29, 2016. The Company has received a term sheet for a credit facility from a new lender and is negotiating the definitive agreements with the new lender. On March 8, 2016, the Company and the existing lenders entered into an extension of the forbearance date and maturity date to April 4, 2016, subject to an earlier date in the discretion of the lenders in the event that the lenders receive notice that the new credit facility will not be completed as currently contemplated. There can be no assurance that the new credit facility will be completed in a timely manner, or at all, or that the existing lenders will give further extensions of the forbearance and maturity dates beyond April 4, 2016. See Note 5 – Credit Agreement.
The Company incurred losses from continuing operations of $28.8 million, $12.8 million, $9.3 million, $16.8 million and $8.6 million, in the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively. As of September 26, 2015, the Company had a negative net worth or stockholders’ deficit of $6.9 million.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. Management’s plans in regard to these matters are described below.
Beginning in the Spring of 2015, the Company initiated plans to realign its resources with its operations. Hampshire substantially altered its operations by reducing costs and cash outflows, consolidating operations and raising funds:
|
● |
On June 18, 2015, the Company entered into an Amendment of Lease dated as of June 1, 2015 for its New York Lease. The revised agreement provides for a payment structure that will reduce the Company’s cash payments, as compared to the previous agreement, by approximately $16.4 million over the next eight years through the termination of the lease. See Note 7 – Commitments and Contingencies – New York Office Lease; |
|
● |
On April 27, 2015, the Company announced that it had entered into an agreement with Sole Asset Holdings, Inc. to terminate a license agreement, effective February 28, 2015. See Note 8 – Related Party Transactions – License Agreement and Termination Agreement with Sole Asset Holdings, Inc. doing business as “Gramicci”; and, |
|
● |
On September 15, 2015, Company completed the sale of the stock of Rio for $6.0 million and caused Rio to assume approximately $3.2 million in certain liabilities. See Note 8 – Related Party Transactions – Rio Sale. |
These, along with other actions, reduced the footprint of the Company’s operations as well as the number of full time employees, which totaled over 700 at December 31, 2014 and decreased to 64 at December 31, 2015. Management continues to explore opportunities to match its operations with its business prospects. There are no assurances that actions to date will allow the Company to operate profitably and it may have to further “right size” operations.
The Company has had discussions with potential lenders and investors about its capital requirements:
|
● |
The Company has spoken with potential lenders to replace the current credit facility. Several parties met with management and reviewed certain information about the Company, but there can be no assurances that new financing will be available in sufficient amounts, or on acceptable terms, or at all; and, |
|
● |
The Company also approached potential investors about a possible debt and/or equity investment in the Company. An equity investment could cause substantial dilution to existing stockholders or an “overhang” that may also adversely affect the market price of the Company’s common stock. There can be no assurances that any investment will be in sufficient amounts, or on acceptable terms, or at all. |
Sale of Rio Garment S.A.
Pursuant to the terms of a Stock Purchase Agreement, dated as of April 10, 2015, as amended (the “Rio Agreement”), on September 15, 2015, the Company sold all the shares of stock of its wholly-owned subsidiary, Rio Garment S.A. (“Rio”), to Rio Asset Holdco, LLC and Rio Asset Holdings, LLC. In accordance with GAAP, the unaudited condensed consolidated financial statements of Rio are reflected as discontinued operations for the periods presented herein. For accounting and financial reporting purposes, the sale of Rio was deemed to have occurred effective as of the close of business on April 10, 2015 to the fullest extent permitted by applicable law. For additional information see Note 8 – Related Party Transactions – Rio Sale and Note 9 – Discontinued Operations. Additionally, certain prior year amounts in the unaudited condensed consolidated financial statements and footnotes have been reclassified to conform to the 2015 presentation. The reclassifications had no effect on previously-reported net loss or the stockholders’ deficit.
Recent Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in amounts that reflect the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, may require more judgment and estimates within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued an amendment to ASU 2014-09, which defers the effective date by one year to December 15, 2017, for annual reporting periods, including interim reporting periods within those periods, beginning after that date. Early adoption is permitted, but not before the original effective date of December 15, 2016. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which the standard will be adopted or whether it will adopt the standard for 2017 or 2018.
In June 2014, FASB issued ASU No. 2014-12, Compensation – Stock Compensation (“ASU 2014-12”). ASU 2014-12 is intended to resolve diverse accounting treatment for share based awards in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 and may be applied prospectively or retrospectively. The Company does not expect adoption of this standard will have a significant impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and if those conditions exist, to provide the required disclosures. The standard is effective for annual periods ending after December 15, 2016, and interim periods therein. The Company does not expect adoption of this standard will have a significant impact on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company does not expect adoption of this standard will have a significant impact on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, ("ASU 2015-11"). This new guidance requires an entity to measure inventory at the lower of cost and net realizable value. Currently, entities measure inventory at the lower of cost and market. ASU 2015-11 replaces market with net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early application is permitted. The Company is evaluating the effect that ASU 2015-11 will have on its consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-15, Interest – Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ("ASU 2015-15”), which clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. Under the new guidance, these costs may be presented as an asset and amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. ASU 2015-15 is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect adoption of this standard will have a significant impact on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, rather than non-current and current, thereby simplifying the process. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-17 on its financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”), which changes the guidance on the classification and measurement of financial instruments related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. Under the new guidance, equity investments (excluding those accounted for under the equity method or those that result in consolidation) will be measured at fair value, with changes in fair value recognized in net income. For financial liabilities that an entity has elected to measure at fair value in accordance with the fair value option guidance, the amendments require an entity to present separately in other comprehensive income the portion of the change in fair value that results from a change in instrument-specific credit risk. ASU No. 2016-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect adoption of this standard will have a significant impact on its consolidated financial statements.
Note 2 – Inventories, Net
Inventories, net as of September 26, 2015 and December 31, 2014 consisted of the following:
| (In thousands) |
September 26, 2015 |
December 31, 2014 |
||||||
|
Finished goods |
$ | 13,481 | $ | 7,912 | ||||
|
Raw materials and supplies |
77 | 195 | ||||||
|
Inventories, net |
$ | 13,558 | $ | 8,107 | ||||
Note 3 – Goodwill and Intangible Assets, Net
The Company’s goodwill and intangible assets are related to the 2014 James Campbell acquisition.
Intangible Assets, Net
Intangible assets as of September 26, 2015 and December 31, 2014 consisted of the following:
|
September 26, 2015 |
December 31, 2014 |
|||||||||||||||||||||||
|
(In thousands) James Campbell |
Gross Carrying |
Accumulated Amortization |
Net |
Gross Carrying |
Accumulated Amortization |
Net | ||||||||||||||||||
|
Customer relationships |
$ | 230 | $ | (36 |
) |
$ | 194 | $ | 230 | $ | (19 | ) | $ | 211 | ||||||||||
|
Trade name |
1,100 | (146 |
) |
954 | 1,100 | (77 | ) | 1,023 | ||||||||||||||||
|
Intangible assets |
$ | 1,330 | $ | (182 |
) |
$ | 1,148 | $ | 1,330 | $ | (96 | ) | $ | 1,234 | ||||||||||
Intangible asset amortization expense for continuing operations was approximately $29,000 for the three months ended September 26, 2015 and September 27, 2014. Intangible asset amortization expense for continuing operations was approximately $86,000 and $67,000 for the nine months ended September 26, 2015 and September 27, 2014, respectively. Annual intangible amortization expense for the year ending December 31, 2015 and in each of the following four years is estimated to be $115,000.
Note 4 – Loss on Lease Obligations
In 2011, the Company completely vacated two of the five floors leased of its corporate office space located at 114 West 41st Street, New York, NY 10036 (the “New York Office”) and, as a result, the Company recorded a loss on lease obligation of approximately $6.3 million. In 2014 and 2013, the Company accrued losses for its lease obligations of approximately $0.4 million and $5.4 million, respectively. The 2014 and 2013 loss on lease obligation charges were primarily as a result of the Company completely vacating additional floors of the New York Office and were net of the release of the deferred rent liability attributable to the additional vacated space.
The New York Office lease was amended effective June 1, 2015 and the vacated floors were surrendered to the Landlord in exchange for, among other things, a surrender fee and changes to the rent schedule, resulting in the reversal of the New York Office loss on lease obligations in the quarter ended June 27, 2015. For additional information about the New York Office lease see Note 7 – Commitments and Contingencies – New York Office Lease. The reversal of the New York loss on lease obligations is reflected in the Loss on lease adjustments row in the reconciliation of the beginning and ending liability balances for the total loss on lease obligations for the three months and nine months ended September 26, 2015 as shown below:
|
Three Months Ended September 26, 2015 |
Nine Months Ended September 26, 2015 |
|||||||||||||||||||||||
| (In thousands) |
New York Office |
Other |
Total |
New York Office |
Other |
Total |
||||||||||||||||||
|
Beginning of period |
$ | — | $ | 29 | $ | 29 | $ | 10,765 | $ | 130 | $ | 10,895 | ||||||||||||
|
Loss on lease adjustments |
— | — | — | (9,595 |
) |
(87 |
) |
(9,682 |
) | |||||||||||||||
|
Interest accretion |
— | — | — | 276 | 8 | 284 | ||||||||||||||||||
|
Payments, net of sublease rentals received |
— | (6 |
) |
(6 |
) |
(1,446 |
) |
(28 |
) |
(1,474 |
) | |||||||||||||
|
End of period |
$ | — | $ | 23 | $ | 23 | $ | — | $ | 23 | $ | 23 | ||||||||||||
As of September 26, 2015 and December 31, 2014, total loss on lease obligation liabilities (including other office leases separate from the New York Office lease) of approximately $11,000 and $3.8 million, respectively, are included in Accrued expenses and other liabilities and approximately $12,000 and $7.1 million, respectively, are included in Other long-term liabilities in the unaudited condensed consolidated balance sheets.
Note 5 – Credit Agreement
On September 26, 2013, the Company and its subsidiaries, Hampshire Brands, Rio, Hampshire International, LLC and Scott James, LLC (collectively, the “Subsidiaries” and with the Company, the “Borrowers”), entered into a Credit Agreement (the “Credit Agreement”) and related agreements with Salus Capital Partners, LLC and Salus CLO 2012-1, Ltd. (collectively, the “Lender”) providing for: (i) a $27.0 million revolving credit facility (which includes up to $15.0 million for letters of credit), subject to borrowing base limitations and (ii) a $3.0 million term loan.
As reported in Note 8 – Related Party Transactions – Rio Sale, Rio was sold on September 15, 2015, effective as of April 10, 2015.
The Company currently is in default under the Credit Agreement. On November 30, 2015, the Borrowers and Lender entered into a Forbearance Agreement and Fifth Amendment to Credit Agreement under which, among other items, (i) the maturity date of the loans was changed to February 29, 2016 and (ii) the Lender agreed to forbear from exercising its rights with respect to certain specified defaults. The Company is seeking a replacement credit facility and is also considering raising additional financing through the sale of equity or debt. The Company has received a term sheet for a credit facility from a new lender and is negotiating the definitive agreements with the new lender. On March 8, 2016, the Company and the Lender entered into an extension of the forbearance date and maturity date to April 4, 2016, subject to an earlier date in the discretion of the Lender in the event that the Lender receives notice that the new credit facility will not be completed as currently contemplated. There can be no assurance that the new credit facility will be completed in a timely manner, or at all, or that the Lender will give further extensions of the forbearance and maturity dates beyond April 4, 2016. For additional information, see Note 1 – Basis of Presentation and Liquidity and Financing.
Information regarding the credit facility and related matters is presented in the Company’s 2014 Annual Report in Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, and Item 8. Financial Statements and Supplementary Data, Note 1 – Organization, Liquidity and Financing, and Audit Committee Investigation and Note 10 – Credit Facility and is incorporated herein by reference.
Available borrowings under the revolving credit facility are limited to a borrowing base, generally consisting of specified percentages of inventory and trade receivables, less the total of availability reserves established under the Credit Agreement.
Loans under the Credit Agreement are secured by a security interest in substantially all of the assets of the Borrowers, including a pledge of the stock of the Subsidiaries. All of the Borrowers are jointly and severally liable for all borrowings under the Credit Agreement. The Credit Agreement will expire, and all outstanding loans will become due and payable, on April 4, 2016, subject to an earlier date as noted above..
Loans under the Credit Agreement bear interest at the prime rate of interest published from time to time by www.bankrate.com plus 4.50%, provided, however, that the applicable annual interest rate on all loans will not be lower than 8.0%. In the event of a default under the Credit Agreement, the loans will bear interest at the applicable rate plus an additional 3%. Interest is payable monthly in arrears. As of September 26, 2015, the interest rate on both the term loan and the outstanding borrowings on the revolving credit facility was 8.0%. Additional fees are payable under the Credit Agreement, including a letter of credit issuance fee, an unused line fee, a collateral monitoring fee and an early termination fee.
No principal payments are required under the term loan. All remaining principal and accrued interest is payable on the termination of the Credit Agreement. The Borrowers are also required to use the net cash proceeds of certain asset sales, insurance proceeds, sales of equity securities or incurrence of debt to prepay the loan.
The Credit Agreement includes various representations, warranties, affirmative and negative covenants, events of default, remedies and other provisions customary for a transaction of this nature. The Credit Agreement initially also contained covenants regarding average availability and minimum EBITDA levels.
As of September 26, 2015, the Company had outstanding borrowings of $3.0 million on the term loan and approximately $18.6 million on the revolving credit facility and no outstanding letters of credit under the Credit Agreement. Availability under the Credit Agreement at September 30, 2015 was approximately $0.2 million.
As of September 26, 2015 and December 31, 2014, the fair value of the term loan was approximately $3.0 million and was determined by discounting the cash flows using the current interest rate (8.0%) on the loan (Level 3).
Note 6 – Income Taxes
The Company’s income tax benefit for the quarter ended September 26, 2015 was comprised primarily of the recognition of tax benefits associated with the expiration of certain statutes of limitations, partially offset by foreign income taxes and interest on unrecognized tax benefits.
The Company’s provision for income taxes for the nine months ended September 26, 2015 was comprised primarily of foreign income taxes and interest on unrecognized tax benefits, partially offset by the recognition of tax benefits associated with the expiration of certain statutes of limitations.
The Company’s income tax benefit for the three and nine month periods ended September 27, 2014 was comprised primarily of reductions in foreign income tax withholdings, partially offset by interest and penalties on unrecognized tax benefits.
As of September 26, 2015, unrecognized tax benefits of approximately $2.5 million, including approximately $1.6 million of accrued interest and penalties are included in Other long-term liabilities in the unaudited condensed consolidated balance sheet. The Company anticipates that total unrecognized tax benefits will increase by approximately $0.1 million within the next twelve months.
The Company maintains a full valuation allowance on all of the net deferred tax assets due to the significant negative evidence with regard to future realization of these net deferred tax assets as of September 26, 2015 and December 31, 2014. Excluding the valuation allowances on net deferred tax assets, in the third quarter of 2015, the Company would have recognized a tax benefit from continuing operations of approximately $0.6 million, or an effective tax rate of 42.4%, due to losses incurred in the three months ended September 26, 2015. Excluding the valuation allowances on net deferred tax assets, in the third quarter of 2014, the Company would have recognized a negligible tax expense from continuing operations, or an effective tax rate of 9.9%, due to income generated in the three months ended September 27, 2014. Excluding the valuation allowances on net deferred tax assets, in the nine months ended September 26, 2015, the Company would have recognized tax expense from continuing operations of approximately $0.4 million, or an effective tax rate of 79.6%, due to income generated in the nine months ended September 26, 2015. Excluding the valuation allowances on net deferred tax assets, in the nine months ended September 27, 2014, the Company would have recognized a tax benefit from continuing operations of approximately $2.4 million, or an effective tax rate of 33.1%, due to losses incurred in the nine months ended September 27, 2014. The effective tax rates vary from the statutory rates due primarily to changes in unrecognized tax benefits, changes in valuation allowances, foreign income taxes and nondeductible expenses.
Note 7 – Commitments and Contingencies
New York Office Lease
In July 2007, the Company entered into a lease (the “New York Lease”) for the New York Office. As previously reported, the Company had been in litigation over the New York Lease with the landlord and/or the court appointed receiver for the property since 2011 over claims by the Company that the landlord failed to complete certain agreed upon capital improvements to the common areas of the New York Office, which would result in reduced rent, and claims by the receiver for unpaid rent.
On June 18, 2015, the Company entered into an Amendment of Lease dated as of June 1, 2015 (the “Lease Amendment”) with Klaus Kretschmann, not individually but as Court-Approved Receiver for 114 West 41st Street, New York, New York a/k/a 119 West 40th Street, New York (“Landlord”). The Lease Amendment amended the lease agreement for the Company’s New York City offices to, among other things:
|
● |
provide for the surrender to the Landlord of four floors no longer needed by the Company in exchange for a surrender fee of $3.15 million payable in various installments through 2020 and evidenced by a promissory note (the “Surrender Note”); |
|
● |
make certain changes to the rent schedule; |
|
● |
provide for the payment by the Company of $1.64 million in rent arrearages in various installments through 2016; and, |
|
● |
provide for the discontinuance and settlement of litigation and appeals between the parties related to the New York Lease. |
In connection with the Lease Amendment, the Company executed and delivered to the Landlord the Surrender Note dated as of April 1, 2015 in the principal amount of $3.15 million. The Surrender Note provides for principal repayment as follows: (a) thirty-six (36) equal installments of $55,555.56 on the first day of each month from January 1, 2017 through and including December 1, 2019; (b) $500,000.00 on or before July 1, 2020; and (c) $650,000 on or before October 1, 2020. The Surrender Note does not bear interest, except that upon and during the continuance of an event of default, as defined, unpaid principal bears interest at an annual rate of 10%. Events of default include the failure to make any payment of principal or interest when due, breach of a representation or covenant, breach of the lease agreement for the New York Office or the bankruptcy, insolvency or similar event with respect to the Company. The Landlord may accelerate the payment of all amounts due under the Surrender Note upon and during the continuance of an event of default.
The Company recorded $5.3 million in charges related to the present value of the surrender fee payments as well as for certain changes made to the rent schedule, which is reflected in Lease settlement litigation in the unaudited condensed consolidated statement of operations in the quarter ended September 26, 2015. The Company reversed accrued liabilities of approximately $10.6 million, which are reflected in (Gain) loss on lease obligations in the unaudited condensed consolidated statement of operations for the quarter ended September 26, 2015. The reversals were comprised of the following: (i) $9.6 million in loss on lease obligations and $0.4 million of deferred rent and related liabilities associated with the New York Office Lease Amendment; (ii) $0.5 million in broker’s fees; and, (iii) $0.1 million of loss on lease obligations and deferred rent associated with the Company’s South Carolina offices.
As of September 26, 2015, approximately $1.2 million is included in Accrued expenses and other liabilities, $2.4 million is included in Long-term debt and $2.7 million is included in Other long-term liabilities related to the Lease Amendment in the unaudited condensed consolidated balance. For additional information about the New York Lease see Note 4 – Loss on Lease Obligations.
Matters Related to scott james
As previously reported, the Company sold its scott james business in June 2013. In May 2015, the Company and the purchasers entered into a settlement agreement releasing all claims and dismissing litigation that ensued after the sale. Information regarding scott james is presented in the Company’s 2014 Annual Report in Item 8. Financial Statements and Supplementary Data, Note 12 – Commitments and Contingencies – Legal Items – Matters Related to scott james included in the Company’s financial statements for the year ended December 31, 2014 and is incorporated herein by reference. For additional information, see Note 9 – Discontinued Operations.
Other
The Company is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its business, financial condition or operations.
Note 8 – Related Party Transactions
License Agreement and Termination Agreement with Sole Asset Holdings, Inc. doing business as “Gramicci”
Agreement
On July 1, 2014, the Company announced that it had entered into a license agreement (“License Agreement”) with Sole Asset Holdings, Inc., which does business under the name Gramicci (“Gramicci”), a California-based hiking and climbing-inspired brand owned by Mr. Paul Buxbaum, the Company’s Chief Executive Officer.
Termination
On April 27, 2015, the Company announced that it had entered into an agreement with Gramicci to terminate the License agreement, effective February 28, 2015 (the “Termination Agreement”). Pursuant to the Termination Agreement, the parties agreed that at the termination of the License Agreement, the Company had an outstanding payable to Gramicci of approximately $118,000. The Company agreed to pay this amount prior to March 1, 2020, subject to independent verification.
Under the Termination Agreement, the Company was also responsible for:
|
● |
paying the salaries and benefits of certain Gramicci employees through March 13, 2015, which aggregated to approximately $88,800; |
|
● |
paying Gramicci monthly rent of approximately $5,000 for space occupied by the Company’s James Campbell business at Gramicci’s office; |
|
● |
fulfilling certain purchase orders that Company received prior to the termination effective date; and, |
|
● |
assisting Gramicci (subject to Gramicci reimbursing Company for any out-of-pocket expenses) with and allowing Gramicci to collect revenue (i.e., accounts receivable) arising from or related to the License Agreement. |
Obligations that Gramicci is responsible for include:
|
● |
assuming all rights and obligations with respect to all current and future sales orders related to products covered by the License Agreement, effective March 1, 2015, except as otherwise noted; |
|
● |
assuming all costs associated with Spring 2015 samples; and, |
|
● |
using its best efforts to sell-off Fall ’14 samples and promptly remit proceeds to the Company net of out-of-pocket expenses. |
As part of the termination, Gramicci disclosed to the Company that Gramicci is involved in ongoing negotiations to renew third party licenses related to the trademarks at issue in the License Agreement, to enter into new third party licenses related to the trademarks at issue in the License Agreement, and/or to sell the trademarks at issue in the License Agreement.
The amount of Gramicci’s net sales and income from operations included in the Company’s unaudited condensed consolidated statements of operations for the quarter ended September 26, 2015 was approximately $0.1 million and $36,000, respectively. The amount of Gramicci’s net sales and income from operations included in the Company’s unaudited condensed consolidated statements of operations for the nine months ended September 26, 2015 was approximately $1.3 million and $0.1 million, respectively. The amount of Gramicci’s net sales and loss from operations included in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 27, 2014 was approximately $1.6 million and $0.1 million, respectively. There were no royalties earned by Gramicci for the periods ended September 26, 2015 and September 27, 2014.
Information regarding Gramicci is presented in the Company’s 2014 Annual Report in Item 8. Financial Statements and Supplementary Data, Note 13 – Related Party Transactions – License Agreement and Termination with Sole Asset Holdings, Inc. doing business as “Gramicci” and is incorporated herein by reference.
Brandon Buxbaum Employment
In connection with the Gramicci License Agreement, the Company hired Brandon Buxbaum, the son of Mr. Buxbaum, on July 1, 2014, as an operations manager for Gramicci at an annual salary of $100,000 plus benefits, which primarily consisted of health care insurance and paid time off. Mr. Brandon Buxbaum received salary payments of approximately $29,500 and $47,700 in the quarter ended March 28, 2015 and the year ended December 31, 2014, respectively. In connection with the termination of the Gramicci license, Mr. Brandon Buxbaum was terminated in March 2015 and received approximately $3,800 in severance. Mr. Brandon Buxbaum received no compensation from the Company after the quarter ended March 28, 2015.
Rio Sale
Rio Acquisition
In 2011, the Company acquired Rio Garment S. de R.L. by way of a merger of that entity with and into RG Merger Sub S.A., a wholly-owned subsidiary of the Company, which was subsequently renamed Rio Garment S.A. Rio is a Honduras-based apparel manufacturer, designing, sourcing and manufacturing knit tops for men, women and children, which are sold to retailers and distributors, primarily in the United States. The former Rio equity holders included: (i) Paul Buxbaum, the current Chairman of the Board, President and Chief Executive Officer of the Company, (ii) Benjamin Yogel, the current lead director of the Company and (iii) David Gren, a former executive officer of the Company.
Rio Sale
Pursuant to the terms of a Stock Purchase Agreement, dated as of April 10, 2015, as amended (the “Rio Agreement”), on September 15, 2015, the Company sold all the stock of Rio to Rio Asset Holdco, LLC and Rio Asset Holdings, LLC (collectively, the “Rio Buyers”), a group headed by David Gren. Mr. Gren was an executive officer of the Company until his resignation in May 2015 in connection with the sale and remains as president of Rio. Mr. Gren was the holder of approximately 11.4% of the Company’s common stock as of February 1, 2016. For financial reporting purposes, the sale of Rio will be deemed to have occurred effective as of the close of business on April 10, 2015 (the “Rio Effective Date”) to the fullest extent permitted by applicable law.
Under the Rio Agreement, the Rio Buyers purchased all of the stock of Rio for $6.0 million (of which $1.0 million is payable on the first anniversary of closing), caused Rio to transfer to the Company accounts receivable in existence as of the Rio Effective Date and certain other assets of Rio totaling approximately $5.1 million and caused Rio to assume approximately $3.2 million in certain liabilities. In addition to the deferred purchase price of $1.0 million, Rio is also responsible for repayment of certain Rio expenses paid by the Company totaling approximately $381,000, of which $274,000 is payable pursuant to a promissory note of Rio and the balance of $107,000 is payable from the proceeds of certain receivables of Rio. The promissory note bears interest at a rate equal to the Company’s cost of capital from its senior lender and is payable in 12 equal monthly installments of principal, with interest, beginning on October 1, 2015.
Mr. Gren and his wife guaranteed all of the obligations of Rio and the Rio Buyers under the Rio Agreement. Further, Mr. Gren pledged all of his stock of the Company to the Company to secure his obligations under the guaranty. Mr. Gren also entered into a Mutual Release Agreement with the Company, under which:
|
● |
Mr. Gren resigned as an officer and employee of the Hampshire companies effective as of May 8, 2015; |
|
● |
The parties agreed to a termination of Mr. Gren’s employment agreement and the release of the Company and Hampshire International of their obligations under the employment agreement; |
|
● |
The Company agreed to pay Mr. Gren a severance payment of $5,000 as well as salary, vacation and sick pay through the effective date; and |
|
● |
The parties entered into mutual releases. |
In connection with the Mutual Release Agreement, the Company and Pure Fresh Coast LLC, a company affiliated with Mr. Gren, entered into Consulting Agreement to provide certain services with respect to Rio through the later of August 15, 2015 or the closing or termination of the Stock Purchase Agreement. The Company paid a consulting fee of $70,000 in three monthly installments that began on June 15, 2015.
The Company recorded a loss on the sale of Rio of approximately $1.3 million in the condensed consolidated statement of operations in the three and nine month periods ended September 26, 2015. For additional information, see Note 9 – Discontinued Operations.
Buxbaum Group
Information regarding the Company’s agreements with Buxbaum Holdings, Inc., d/b/a Buxbaum Group (“Buxbaum Group”) related to services provided to the Company by Paul Buxbaum (the Company’s CEO) is presented in the Company’s 2014 Annual Report in Item 8. Financial Statements and Supplementary Data, Note 13 – Related Party Transactions – Buxbaum Group Agreements included in the Company’s consolidated financial statements for the year ended December 31, 2014 and is incorporated herein by reference. During the each of the three month periods ended September 26, 2015 and September 27, 2014, the Company incurred $112,500 in fees to Buxbaum Group pursuant to these agreements. During each of the nine month periods ended September 26, 2015 and September 27, 2014, the Company incurred $337,500 in fees to Buxbaum Group pursuant to these agreements.
Agreement with GRL Capital Advisors
On March 13, 2015, the Company entered into a Services Agreement dated as of March 9, 2015 with GRL Capital Advisors (“GRL”). Pursuant to the Agreement, GRL provides the services of William Drozdowski to serve as interim chief financial officer. The services are provided for a fee of $40,000 per month plus GRL’s reasonable expenses. Mr. Drozdowski will not be entitled to any direct compensation from the Company in respect of his service as interim chief financial officer. If additional GRL personnel are engaged by the Company, they will be billed at the hourly rates set forth in the Service Agreement. Payments made to GLR in the quarter and nine months ended September 26, 2015 were approximately $104,000 and $333,000 respectively, which included approximately $24,000 and $53,000 of expense reimbursements, respectively. Accounts payable to this vendor were approximately $25,000 as of September 26, 2015.
Other
The Company paid zero and approximately $0.1 million for screen printing services to a vendor affiliated with David Gren for the three months ended September 26, 2015 and September 27, 2014, respectively. The Company paid approximately $1,200 and $0.2 million for screen printing services to this vendor for the nine months ended September 26, 2015 and September 27, 2014, respectively. Accounts payable to this vendor were zero and approximately $3,000 as of September 26, 2015 and December 31, 2014, respectively. The Company paid zero and approximately $4,500 to the father of Mr. Gren for factory repair and maintenance services at Rio for the nine months ended September 26, 2015 and September 27, 2014, respectively, with no accounts payable as of September 26, 2015. Mr. Gren was an executive officer of the Company until his resignation in May 2015 and was the holder of approximately 11.4% of the Company’s common stock as of February 1, 2016.
Note 9 – Discontinued Operations
Pursuant to the terms of the Rio Agreement, the Company sold all the stock of Rio to the Rio Buyers on September 15, 2015, effective as of April 10, 2015. For additional information, see Note 8 – Related Party Transactions – Rio Sale. In accordance with GAAP, Rio is reflected as discontinued operations for the periods presented herein.
The assets and liabilities of Rio are included in Assets of discontinued operations and Liabilities of discontinued operations, respectively, in the unaudited condensed consolidated balance sheets. Rio’s underlying assets and liabilities of discontinued operations as of September 26, 2015 and December 31, 2014 were as follows:
| (In thousands) |
2015 |
2014 |
||||||
|
Trade and other receivables, net |
$ | 120 | $ | 4,313 | ||||
|
Inventories, net |
— | 12,445 | ||||||
|
Other current assets |
— | 311 | ||||||
|
Fixed assets, net and other non-current assets |
— | 26 | ||||||
|
Total assets |
$ | 120 | $ | 17,095 | ||||
|
Accrued expenses and other liabilities |
$ | 2 | $ | 917 | ||||
|
Other non-current liabilities |
— | 121 | ||||||
|
Total liabilities |
$ | 2 | $ | 1,038 | ||||
Operating results for discontinued operations, represented in the consolidated condensed statement of operations as Loss from discontinued operations, net of taxes, for the three and nine month periods ended September 26, 2015 and September 27, 2014 were as follows:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| (In thousands) |
September 26, 2015 |
September 27, 2014 |
September 26, 2015 |
September 27, 2014 |
||||||||||||
|
Net sales |
$ | — | $ | 10,114 | $ | 7,458 | $ | 31,306 | ||||||||
|
Loss |
— | (440 |
) |
(1,324 |
) |
(1,510 |
) | |||||||||
|
Loss on sale of discontinued operations |
(228 |
) |
— | (1,263 |
) |
— | ||||||||||
|
Loss from discontinued operations before income taxes |
(228 |
) |
(440 |
) |
(2,587 |
) |
(1,510 |
) | ||||||||
|
Income tax provision |
— | — | — | — | ||||||||||||
|
Loss from discontinued operations, net of taxes |
$ | (228 |
) |
$ | (440 |
) |
$ | (2,587 |
) |
$ | (1,510 |
) | ||||
Operating results for discontinued operations for the three and nine month periods ended September 27, 2014 included zero and $110,000 of net sales respectively, and zero and $92,000 of net income, respectively, related to scott james, which was sold on June 7, 2013. There were no operating results related to scott james for the three and nine month periods ended September 26, 2015.
Cash flows related to discontinued operations have been reported separately in the condensed consolidated statements of cash flows.
Information regarding the acquisition and sale of Rio is presented in the Company’s 2014 Annual Report in Item 8. Financial Statements and Supplementary Data, Note 13 – Related Party Transactions – Acquisition and Sale of Rio Garment S. A. and Note 22 – Rio Pro Forma Condensed Financial Information (Unaudited) and is incorporated herein by reference.
Note 10 – Income (Loss) Per Share
The weighted-average number of common shares outstanding used to calculate basic and diluted net (loss) income per share from continuing operations for the three and nine month periods ended September 26, 2015 and September 27, 2014 was as follows:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| (In thousands) |
September 26, 2015 |
September 27, 2014 |
September 26, 2015 |
September 27, 2014 |
||||||||||||
|
Basic weighted-average number of common shares outstanding |
8,736 | 8,486 | 8,610 | 8,475 | ||||||||||||
|
Effect of potentially dilutive securities (stock options) |
— | 1,392 | — | — | ||||||||||||
|
Diluted weighted-average number of common shares outstanding |
8,736 | 9,878 | 8,610 | 8,475 | ||||||||||||
For the three months ended September 26, 2015, options to purchase approximately 1,174,100 shares were excluded from the calculation of dilutive shares because the impact would have been anti-dilutive due to the loss from continuing operations. For the nine month periods ended September 26, 2015, options to purchase approximately 1,174,100 shares were excluded from the calculation of dilutive shares as the impact would have been anti-dilutive to income from continuing operations because the exercise price of the outstanding options exceeded the average market price.
For the nine months ended September 27, 2014, options to purchase approximately 1,392,400 shares were excluded from the calculation of dilutive shares because the impact would have been anti-dilutive due to the loss from continuing operations.
Note 11 – Subsequent Events
On November 30, 2015, the Company and certain of its subsidiaries entered into a Forbearance Agreement and Fifth Amendment to Credit Agreement with Salus CLO 2012-1, Ltd. and Salus Capital Partners, LLC, under which, among other things, (i) the maturity date of the loans was changed to February 29, 2016 and (ii) the lenders agreed to forbear from exercising its rights with respect to certain specified defaults. On March 8, 2016, the Company and the lenders entered into an extension of the forbearance date and maturity date to April 4, 2016, subject to an earlier date in the discretion of the lenders in the event that the lenders receive notice that the credit facility with a new lender will not be completed as currently contemplated. See Note 1 – Basis of Presentation and Liquidity and Financing and Note 5 – Credit Facility.
The Company has evaluated subsequent events through the date the condensed consolidated financial statements were issued. There were no other items not otherwise disclosed which would have materially impacted the Company’s unaudited condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1. Financial Statements in this report. The following discussion contains statements that are forward-looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of, among other reasons, factors discussed in the “Safe Harbor” statement on page ii of this report, in Part I, Item 1A. Risk Factors of our 2014 Annual Report and elsewhere in this report. Our 2014 Annual Report includes the following risk factors:
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● |
there is substantial doubt about our ability to continue as a going concern due to: the April 4, 2016 maturity date of our credit facility, potentially insufficient liquidity to fund our operations, our history of losses and our stockholders’ deficit. Our auditor’s opinion, for the year ended December 31, 2014, noted that these conditions raise substantial doubt about our ability to continue as a going concern; |
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● |
risks from the sale of Rio Garment S.A.; |
|
● |
matters related to our Audit Committee investigation; |
|
● |
identified material weaknesses in our internal controls; |
|
● |
restricted ability to borrow under our credit facility; |
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● |
a prolonged period of depressed consumer spending; |
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● |
use of foreign suppliers for raw materials and manufacture of our products; |
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● |
volatility in the trading price of our common stock and the lack of an established public trading market for our common stock; |
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● |
decreases in business from or the loss of any one of our key customers; |
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● |
financial instability experienced by our customers; |
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● |
chargebacks and margin support payments; |
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● |
loss of or inability to renew certain licenses; |
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● |
change in consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers; |
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● |
failure of our manufacturers to use acceptable ethical business practices; |
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failure to deliver quality products in a timely manner; |
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● |
problems with our distribution system and our ability to deliver products; |
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● |
labor disruptions at ports, our suppliers, manufacturers or distribution facilities; |
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● |
failure, inadequacy, interruption or security lapse of our information technology; |
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● |
failure to compete successfully in a highly competitive and fragmented industry; |
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● |
challenges integrating any business we have acquired or may acquire; |
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● |
potential impairment of acquired intangible assets; |
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● |
unanticipated expenses beyond the amount reserved on our balance sheet or unanticipated cash payments related to the ultimate resolution of income and other possible tax liabilities; |
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significant adverse changes to international trade regulations; |
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loss of certain key personnel which could negatively impact our ability to manage our business; |
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risks related to the global economic, political and social conditions; |
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fluctuations in the price of raw materials adversely affecting our results of operations; |
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adverse fluctuations and volatility in our energy and fuel costs; and, |
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cyber-security risks related to breaches of security pertaining to sensitive company, customer, employee, and vendor info. |
OVERVIEW
We are a provider of fashion apparel across a broad range of product categories, channels of distribution and price points. As a holding company, we operate through our wholly-owned subsidiaries, Hampshire Brands, Inc. (“Hampshire Brands”) and Hampshire International, LLC. As noted above, we completed the sale of Rio Garment S.A. (“Rio”) effective as of April 10, 2015.
Hampshire Brands designs and markets men’s sportswear to department stores, chain stores and mass market retailers under licensed brands. We offer a full tops assortment under the Dockers® brand and a full men’s assortment under our James Campbell® brand (which is discussed further below), both of which are licensed. Under our multi-year licensing agreement with Dockers® for its men’s “good” category tops in the United States, we oversee the design, production, sales and distribution of the line to certain chain and department stores including Kohl’s Department Stores, Inc., J.C. Penney Company, Inc. and Sears Holding Corporation. The woven and knit line includes button down shirts, polos, fleece tops and t-shirts and we believe that these categories complement and strengthen the marketability of our Dockers® sweater offering and, taken together, help to ensure we have a compelling international brand to offer to retailers.
We believe our primary strength is our ability to design, develop, source and deliver quality products within a given price range, while providing superior levels of customer service. Our diversification of product lines allows for multi-category licensing through Hampshire Brands. We have developed international sourcing abilities that permit us to deliver quality merchandise at competitive prices to our customers.
The apparel market is highly competitive. Competition is primarily based on product design, price, quality and service. We face competition from apparel designers, manufacturers, importers, licensors and our own customers’ private label programs, many of which are larger and have greater financial and marketing resources than we have available to us.
We remain focused on exploring opportunities to grow our sales and expand our retail relationships, leveraging our operating platform in the men’s business and actively pursuing other strategic opportunities. We continually review our portfolio of labels, business lines and divisions to evaluate whether they meet profitability and performance requirements and are in line with our business strategy and evaluate potential acquisitions, partnerships or license arrangements that leverage or complement our strengths.
In February 2014, we entered into an installment purchase and sale agreement with Maverick J, LLC, a Rick Solomon company, for the acquisition of the privately-held James Campbell® brands. James Campbell® is a West Coast designer brand positioned in the luxury sector of the men’s market and operates under the brands James Campbell, J. Campbell, Cultura International and Malibu Cowboy. James Campbell is sold in better stores in the United States with Nordstrom, Inc. the largest customer.
In April 2014, we entered into a license agreement with Levi Strauss & Co. for their Dockers brand in the women’s apparel category. The agreement provides us with the licensing rights to design, source, market and service the women’s category for both tops and bottoms beginning with the Spring 2015 season. The license for the U.S. market began with Spring 2015 and extended to include Mexico and Canada for Fall 2015. In May 2014, we entered into an extension to our license agreement with Levi Strauss & Co. for their Dockers brand’s men’s tops business, which includes knit and woven tops, as well as sweaters for the U.S. market. Each of these agreements, as amended, runs through November 2017.
Termination of License Agreement with Sole Asset Holdings, Inc.
On April 27, 2015, we announced that we agreed to terminate, effective as of February 28, 2015, our license agreement with Sole Asset Holdings, Inc., which does business under the name Gramicci, a California-based hiking and climbing-inspired brand owned by our Chief Executive Officer, Paul Buxbaum. We entered into the license agreement on July 1, 2014.
The amount of Gramicci’s net sales and income from operations included in our unaudited condensed consolidated statements of operations for the three months ended September 26, 2015 was approximately $0.1 million and $36,000, respectively. The amount of Gramicci’s net sales and income from operations included in our unaudited condensed consolidated statements of operations for the nine months ended September 26, 2015 was approximately $1.3 million and $0.1 million, respectively. The amount of Gramicci’s net sales and loss from operations included in our unaudited condensed consolidated statements of operations for the three and nine months ended September 27, 2014 was approximately $1.6 million and $0.1 million, respectively.
There were no royalties earned by Gramicci for the periods ended September 26, 2015 and September 27, 2014.
For additional information, see Item 1. Financial Statements, Note 8 – Related Party Transactions – License Agreement and Termination Agreement with Sole Asset Holdings, Inc. doing business as “Gramicci.”
Sale of Rio
Pursuant to the terms of a Stock Purchase Agreement, dated as of April 10, 2015, as amended (the “Rio Agreement”), on September 15, 2015, we sold all the stock of Rio to a buying group headed by a former executive officer of Hampshire. Under the Rio Agreement, the buyer purchased all the stock of Rio for $6.0 million (of which $1.0 million is payable on the first anniversary of closing), caused Rio to transfer to us accounts receivable in existence as of April 10, 2015 and certain other assets of Rio totaling approximately $5.1 million, and caused Rio to assume approximately $3.2 million in certain liabilities. For accounting and financial reporting purposes, the sale of Rio was deemed to have occurred effective as of the close of business on April 10, 2015 to the fullest extent permitted by applicable law.
Rio, acquired in 2011, is a Honduras-based apparel manufacturer, designing, sourcing and manufacturing knit tops for men, women and children, which are sold to retailers and distributors, primarily in the United States.
We recorded a loss of approximately $1.3 million in the unaudited condensed consolidated statement of operations in the nine months ended September 26, 2015. For additional information, see Item 1. Financial Statements, Note 8 – Related Party Transactions – Rio Sale and Note 9 - Discontinued Operations.
Lease Settlement
On June 18, 2015, we entered into an Amendment of Lease dated as of June 1, 2015 (the “Lease Amendment”) for our New York City offices to, among other things, provide for (i) the surrender to the Landlord of four floors no longer needed by us in exchange for a surrender fee; (ii) certain changes to the rent schedule; (iii) payment by us for rent arrearages in various installments; and, (iv) discontinuance and settlement of litigation and appeals between the parties related to the New York office lease.
Under the amended agreement, we returned four of the five floors we had previously leased but did not occupy, maintaining a lease for the single floor currently occupied by us. The revised agreement provides for a payment structure that will reduce our cash payments, as compared to the previous agreement, by approximately $16.4 million over the next eight years through the termination of the lease.
We recorded a charge of approximately $5.3 million related to the present value of the surrender fee as well as certain changes made to the rent schedule, which is reflected in Lease litigation settlement in the in the condensed consolidated statement of operations in the quarter ended September 26, 2015. We reversed accrued liabilities of approximately $10.6 million, which are reflected in (Gain) loss on lease obligations in the condensed consolidated statement of operations for the nine month period ended September 26, 2015. The reversals were comprised of the following: (i) $9.6 million in loss on lease obligations and $0.4 million of deferred rent and related liabilities associated with the New York Office Lease Amendment; (ii) $0.5 million in broker’s fees; and, (iii) $0.1 million of loss on lease obligations and deferred rent associated with the Company’s South Carolina offices. As of September 26, 2015, approximately $1.2 million is included in Accrued expenses and other liabilities, $2.4 million is included in Long-term Debt, and $2.7 million is included in Other long-term liabilities related to the Lease Amendment in the unaudited condensed consolidated balance. For additional information about the New York lease see Item 1. Financial Statements, Note 4 – Loss on Lease Obligations and Note 8 – Commitments and Contingencies – New York Office Lease.
Seasonality
In the past, our business was highly seasonal as a result of our product mix including a high concentration of sweaters. Although not as significant as in prior years, our business continues to be subject to seasonality, with approximately 62% of our sales during 2015 occurring in the third and fourth quarters. As a result of such seasonality, inventory begins to rise in the second quarter and typically peaks during the third quarter before descending to its cyclical low in the fourth quarter. Trade receivable balances rise commensurately with sales. Cash balances follow this cycle as inventory is purchased, product is sold and trade receivables are collected. Funding inventory and pending trade receivable collections deplete cash balances and typically require borrowings under our revolving credit facility in the third and fourth quarters. Our income or loss from continuing operations has generally been correlated with revenue, as a large percentage of our profits have historically been generated in the third and fourth quarters. In 2016 and beyond, we expect this seasonality to decline further as a result of the Dockers® and James Campbell® licenses, which we believe will increase our sales during the spring season.
RESULTS OF CONTINUING OPERATIONS
As discussed in Sale of Rio and Item 1. Financial Statements, Note 8 – Related Parties Transactions – Rio Sale and Note 9 – Discontinued Operations, we sold Rio effective as of April 10, 2015 and in Note 7 – Commitments and Contingencies, on June 7, 2013, we sold certain assets of the scott james clothing brand and line. In accordance with United States generally accepted accounting principles (“GAAP”), the unaudited condensed consolidated financial statements reflect the financial position, results of operations and cash flows of the Rio and scott james businesses as discontinued operations.
Quarterly Comparison – Three Months Ended September 26, 2015 and September 27, 2014
|
Three Months Ended |
||||||||
| (In thousands) |
September 26, 2015 |
September 27, 2014 |
||||||
|
Net sales |
$ | 18,608 | $ | 20,836 | ||||
|
Gross profit |
3,899 | 5,879 | ||||||
|
Selling, general and administrative expenses |
5,191 | 5,225 | ||||||
|
Income (loss) from continuing operations before income taxes |
(1,456 |
) |
403 | |||||
|
Income tax benefit |
(79 |
) |
(345 |
) | ||||
|
Income (loss) from continuing operations |
(1,377 |
) |
748 | |||||
Net Sales
Net sales decreased 10.7% to approximately $18.6 million in the three months ended September 26, 2015 compared to approximately $20.8 million in the same period last year. The reconciliation of net sales is outlined in the table below:
| (Dollars in thousands) |
Dollars |
Percentage of 2014 |
||||||
|
Net sales for the quarter ended September 27, 2014 |
$ | 20,836 | 100.0 | % | ||||
|
Effect of volume |
(586 |
) |
(2.8 | )% | ||||
|
Effect of average selling prices |
(1,642 |
) |
(7.9 | )% | ||||
|
Net sales for the quarter ended September 26, 2015 |
$ | 18,608 | 89.3 | % | ||||
The approximate $2.2 million decrease in net sales in the three month period ended September 26, 2015 compared to the same period last year was due to a decrease in Hampshire Brands volumes and lower average selling prices resulting from a change in sales mix. James Campbell, acquired in 2014, accounted for $1.3 million and $1.0 million of revenues in the quarters ended September 26, 2015 and September 27, 2014, respectively.
For the quarter ended September 26, 2015, $0.1 million of revenues were generated through Gramicci, which had $1.6 million of revenues in the quarter ended September 27, 2014. We terminated our license agreement with Gramicci effective February 28, 2015. For additional information, see Item 1. Financial Statements, Note 8 – Related Party Transactions – License Agreement and Termination Agreement with Sole Asset Holdings Inc. doing business as “Gramicci” and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Termination of License Agreement with Sole Asset Holdings, Inc.
Gross Profit
Gross profit in the three months ended September 26, 2015 was approximately $3.9 million compared to approximately $5.9 million in the same period last year, which, as a percentage of net sales, represented a decrease to 21.0% from 28.2% in the same quarter in 2014. Approximately $1.8 million of the decrease in gross profit in the three months ended September 26, 2015 compared to the same period last year was due to lower volumes and lower average selling prices at Hampshire Brands. Gross profit generated through James Campbell was $0.5 million and $0.3 million in the quarters ended September 26, 2015 and September 27, 2014, respectively. Revenues related to Gramicci accounted for less than $0.1 million of gross profit in the quarter ended September 26, 2015 compared to $0.7 million of gross profits in the quarter ended September 27, 2014.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses in the three months ended September 26, 2015 and September 27, 2014 were approximately $5.2 million, which, as a percentage of net sales, represented an increase to 27.9% from 25.0% for the same quarter in 2014.
Income Taxes
Our income tax benefit for the quarter ended September 26, 2015 was comprised primarily of the recognition of tax benefits associated with the expiration of certain statutes of limitations, partially offset by foreign income taxes and interest on unrecognized tax benefits. Our income tax benefit for the quarter ended September 27, 2014 was comprised primarily of reductions in foreign income tax withholdings, partially offset by interest and penalties on unrecognized tax benefits.
We evaluate our deferred tax assets each reporting period to determine if valuation allowances are required. Currently, GAAP requires a full valuation allowance on all of our net deferred tax assets due to the weight of significant negative evidence with regard to future realization of these net deferred tax assets. Excluding the valuation allowances on net deferred tax assets, in the three month period ended September 26, 2015, we would have recognized a tax benefit from continuing operations of approximately $0.6 million, or an effective tax rate of 42.4%, due to losses incurred during the period. Excluding the valuation allowances on net deferred tax assets, in the three month period ended September 27, 2014, we would have recognized a negligible tax expense from continuing operations, or an effective tax rate of 9.9%, due to income generated during the period. The effective tax rates vary from the statutory rates due primarily to changes in unrecognized tax benefits, changes in valuation allowances, foreign income taxes and nondeductible expenses. For additional information, see Item 1. Financial Statements, Note 6 – Income Taxes.
Year-to Date Comparison – Nine Months Ended September 26, 2015 and September 27, 2014
|
Nine Months Ended |
||||||||
| (In thousands) |
September 26, 2015 |
September 27, 2014 |
||||||
|
Net sales |
$ | 43,428 | $ | 30,555 | ||||
|
Gross profit |
10,335 | 7,934 | ||||||
|
Selling, general and administrative expenses |
14,690 | 14,400 | ||||||
|
Lease litigation settlement |
5,284 | — | ||||||
|
(Gain) loss on lease obligations |
(10,590 |
) |
74 | |||||
|
Income (loss) from continuing operations before income taxes |
470 | (7,260 |
) | |||||
|
Income tax provision (benefit) |
14 | (205 |
) | |||||
|
Income (loss) from continuing operations |
456 | (7,055 |
) | |||||
Net Sales
Net sales increased 42.1% to approximately $43.4 million in the nine months ended September 26, 2015 compared to approximately $30.6 million in the same period last year. The reconciliation of net sales is outlined in the table below:
| (Dollars in thousands) |
Dollars |
Percentage of 2014 |
||||||
|
Net sales for the nine months ended September 27, 2014 |
$ | 30,555 | 100.0 | % | ||||
|
Effect of volume |
14,710 | 48.1 | % | |||||
|
Effect of average selling prices |
(1,837 |
) |
(6.0 | )% | ||||
|
Net sales for the nine months ended September 26, 2015 |
$ | 43,428 | 142.1 | % | ||||
The approximate $12.9 million increase in net sales for the nine month periods ended September 26, 2015 compared to the same period last year was due to an increase in Hampshire Brands volumes, partially offset by lower average selling prices as a result of a change in sales mix. James Campbell, acquired in 2014, accounted for $6.1 million and $1.1 million of revenues in the nine month periods ended September 26, 2015 and September 27, 2014, respectively.
For the nine month periods ended September 26, 2015 and September 27, 2014, $1.3 million and $1.6 million of revenues, respectively, were generated through Gramicci. We terminated our license agreement with Gramicci effective February 28, 2015. For additional information, see Item 1. Financial Statements, Note 8 – Related Party Transactions – License Agreement and Termination Agreement with Sole Asset Holdings Inc. doing business as “Gramicci.”
Gross Profit
Gross profit in the nine months ended September 26, 2015 was approximately $10.3 million compared to approximately $7.9 million in the same period last year, which, as a percentage of net sales, represented a decrease to 23.8% from 26.0% in the same period in 2014. Approximately $0.5 million of the increase in gross profit in the nine months ended September 26, 2015 compared to the same period last year was due to higher volumes and sourcing synergies at Hampshire Brands. James Campbell generated $2.3 million of gross profit in the nine months ended September 26, 2015 compared to $0.3 million in the nine months ended September 27, 2014. Revenues related to Gramicci accounted for approximately $0.6 million and $0.7 million of gross profit in the nine month periods ended September 26, 2015 and September 27, 2014, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses in the nine months ended September 26, 2015 were approximately $14.7 million compared to approximately $14.4 million in the same period last year, which, as a percentage of net sales, represented a decrease to 33.8% from 47.1% for the same nine month period in 2014. The increase in SG&A expenses in the nine months ended September 26, 2015 compared to the same period last year was primarily due to higher warehousing and freight costs associated with higher 2015 revenues, partially offset by lower depreciation expenses in the nine months ended September 26, 2015 as compared to the same period last year.
Lease Litigation Settlement
Effective June 1, 2015 we amended our New York City office lease to, among other things, provide for (i) the surrender to the landlord of four floors no longer needed by us in exchange for a surrender fee; (ii) certain changes to the rent schedule; (iii) payment by us for rent arrearages in various installments; and, (iv) discontinuance and settlement of litigation and appeals between the parties related to the New York office lease. We recorded a charge of approximately $5.3 million related to the present value of the surrender fee as well as certain changes made to the rent schedule in the quarter ended September 26, 2015. For additional information about the New York lease, see Item 1. Financial Statements, Note 4 – Loss on Lease Obligations and Note 8 – Commitments and Contingencies – New York Office Lease and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Lease Settlement.
Gain (Loss) on Lease Obligations
We reversed accrued liabilities of approximately $10.6 million in the condensed consolidated statement of operations for the quarter ended September 26, 2015. The reversals were comprised of the following: (i) $9.6 million in loss on lease obligations and $0.4 million of deferred rent and related liabilities associated with the New York offices, as a result of the lease litigation settlement; (ii) $0.5 million in broker’s fees; and, (iii) $0.1 million of loss on lease obligations and deferred rent associated with the Company’s South Carolina offices. For additional information about the New York lease Item 1. Financial Statements, Note 4 – Loss on Lease Obligations and Note 8 – Commitments and Contingencies – New York Office Lease and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Lease Settlement.
Income Taxes
Our provision for income taxes for the nine months ended September 26, 2015 was comprised primarily of foreign income taxes and interest on unrecognized tax benefits, partially offset by the recognition of tax benefits associated with the expiration of certain statutes of limitations. Our income tax benefit for the nine months ended September 27, 2014 was comprised primarily of reductions in foreign income tax withholdings, partially offset by interest and penalties on unrecognized tax benefits.
We evaluate our deferred tax assets each reporting period to determine if valuation allowances are required. Currently, GAAP requires a full valuation allowance on all of our net deferred tax assets due to the weight of significant negative evidence with regard to future realization of these net deferred tax assets. Excluding the valuation allowances on net deferred tax assets, in the nine month period ended September 26, 2015, we would have recognized tax expense from continuing operations of approximately $0.4 million, or an effective tax rate of 79.6%, due to income generated during the period. Excluding the valuation allowances on net deferred tax assets, in the nine month period ended September 27, 2014, we would have recognized a tax benefit from continuing operations of approximately $2.4 million, or an effective tax rate of 33.1%, due to losses incurred during the period. The effective tax rates vary from the statutory rates due primarily to changes in unrecognized tax benefits, changes in valuation allowances, foreign income taxes and nondeductible expenses. For additional information, see Item 1. Financial Statements, Note 6 – Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary liquidity and capital requirements are to fund working capital for current operations, including funding the seasonal buildup in inventories and accounts receivable. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations and borrowings under our revolving credit facility. Due to the seasonality of our business, increased borrowings under our revolving credit facility will generally occur during the third and fourth quarters of the year.
We are in default under our credit facility and entered into a forbearance agreement and amendment to our credit facility, which among other items, changed the maturity date of the credit facility to February 29, 2016. We are seeking a replacement credit facility and are also considering raising additional financing through the sale of equity or debt. We have received a term sheet for a credit facility from a new lender and are negotiating the definitive agreements with the new lender. On March 8, 2016, the existing lender extended the forbearance date and maturity date to April 4, 2016, subject to an earlier date in the discretion of the lender in the event that the lender receives notice that the new credit facility will not be completed as currently contemplated. There can be no assurance that the new credit facility will be completed in a timely manner, or at all, or that the existing lender will give further extensions of the forbearance and maturity dates beyond April 4, 2016. For additional information see, Item 1. Financial Statements, Note 1 – Basis of Presentation and Liquidity and Financing and Note 5 – Credit Agreement and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Lease Settlement.
No assurance can be given that any refinancing or sale of equity or debt will be possible or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. If we do not generate sufficient cash from operations, or if we incur additional unanticipated liabilities, we may be required to seek additional financing or sell equity or debt on terms which may not be as favorable as we could have otherwise obtained.
This, among other reasons, raises substantial doubt about our ability to continue as a going concern. As a result, our independent registered accounting firm issued an opinion in our 2014 Annual Report on our consolidated financial statements that states that the consolidated financial statements were prepared assuming we will continue as a going concern. This opinion further states that there is substantial doubt about our ability to continue as a going concern.
Credit Agreement
On September 26, 2013, we and certain of our subsidiaries, Hampshire Brands, Rio, Hampshire International, LLC and Scott James, LLC (collectively, the “Subsidiaries” and with the Company, the “Borrowers”), entered into a Credit Agreement (the “Credit Agreement”) and related agreements with Salus Capital Partners, LLC and Salus CLO 2012-1, Ltd. (collectively, the “Lender”) providing for: (i) a $27.0 million revolving credit facility (which includes up to $15.0 million for letters of credit), subject to borrowing base limitations and (ii) a $3.0 million term loan.
As reported in Note 8 – Related Party Transactions – Rio Sale, Rio was sold effective April 10, 2015.
We are in default under the Credit Agreement. On November 30, 2015, the Borrowers and Lender entered into a Forbearance Agreement and Fifth Amendment to Credit Agreement under which, among other items, (i) the maturity date of the loans was changed to February 29, 2016 and (ii) the Lender agreed to forbear from exercising its rights with respect to certain specified defaults. We are seeking a replacement credit facility and are also considering raising additional financing through the sale of equity or debt. We have received a term sheet for a credit facility from a new lender and are negotiating the definitive agreements with the new lender. On March 8, 2016, the Lender extended the forbearance date and maturity date to April 4, 2016, subject to an earlier date in the discretion of the Lender in the event that the Lender receives notice that the new credit facility will not be completed as currently contemplated. There can be no assurance that the new credit facility will be completed in a timely manner, or at all, or that the Lender will give further extensions of the forbearance and maturity dates beyond April 4, 2016.
Information regarding the credit facility and related matters is presented in our 2014 Annual Report in Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, and Item 8. Financial Statements and Supplementary Data, Note 1 – Organization, Liquidity and Financing, and Audit Committee Investigation and Note 10 – Credit Facility and is incorporated herein by reference.
Available borrowings under the revolving credit facility are limited to a borrowing base, generally consisting of specified percentages of inventory and trade receivables, less the total of availability reserves established under the Credit Agreement.
Loans under the Credit Agreement are secured by a security interest in substantially all of the assets of the Borrowers, including a pledge of the stock of the Subsidiaries. All of the Borrowers are jointly and severally liable for all borrowings under the Credit Agreement. The Credit Agreement will expire, and all outstanding loans will become due and payable, on April 4, 2016, subject to an earlier date as noted above.
Loans under the Credit Agreement bear interest at the prime rate of interest published from time to time by www.bankrate.com plus 4.50%, provided, however, that the applicable annual interest rate on all loans will not be lower than 8.0%. In the event of a default under the Credit Agreement, the loans will bear interest at the applicable rate plus an additional 3%. Interest is payable monthly in arrears. As of September 26, 2015, the interest rate on both the term loan and the outstanding borrowings on the revolving credit facility was 8.0%. Additional fees are payable under the Credit Agreement, including a letter of credit issuance fee, an unused line fee, a collateral monitoring fee and an early termination fee.
No principal payments are required under the term loan. All remaining principal and accrued interest is payable on the termination of the Credit Agreement. The Borrowers are also required to use the net cash proceeds of certain asset sales, insurance proceeds, sales of equity securities or incurrence of debt to prepay the loan.
The Credit Agreement includes various representations, warranties, affirmative and negative covenants, events of default, remedies and other provisions customary for a transaction of this nature. The Credit Agreement initially also contained covenants regarding average availability and minimum EBITDA levels.
As of September 26, 2015, we had outstanding borrowings of $3.0 million on the term loan and approximately $18.6 million on the revolving credit facility and no letters of credit outstanding under the Credit Agreement. Availability under the Credit Agreement at September 30, 2015 was approximately $0.2 million.
As of September 26, 2015 and December 31, 2014, the fair value of the term loan was approximately $3.0 million and was determined by discounting the cash flows using the current interest rate (8.0%) on the loan (Level 3).
Summary of Cash Flows
A summary of cash flows for the nine months ended September 26, 2015 and September 27, 2014 was as follows:
|
Nine Months Ended |
||||||||
| (In thousands) |
September 26, 2015 |
September 27, 2014 |
||||||
|
Net cash used in operating activities |
$ | (7,300 |
) |
$ | (12,584 |
) | ||
|
Net cash provided by (used in) investing activities |
4,276 | (971 |
) | |||||
|
Net cash provided by financing activities |
2,707 | 12,960 | ||||||
|
Net decrease in cash and cash equivalents |
$ | (317 |
) |
$ | (595 |
) | ||
Cash used in operating activities
We used approximately $5.3 million less cash in operating activities in the first nine months of 2015 compared to the same period last year. An increase in income from continuing operations, adjusted for non-cash items, changes in operating assets and liabilities and an increase in cash provided by discontinued operations in the nine months ended September 26, 2015 primarily accounted for the decrease in cash used in operations as compared to the same period in 2014.
Cash provided by (used in) investing activities
We generated approximately $5.2 million more cash in investing activities in the first nine months of 2015 compared to the same period last year. This increase was primarily from the proceeds related to the sale of Rio in 2015.
Cash provided by financing activities
We generated approximately $10.3 million less cash in financing activities in the first nine months of 2015 compared to the same period last year. This decrease was primarily due to less net proceeds from our revolving credit facility in the first nine months of 2015 compared to the same period last year.
INFLATION
We are subject to increased prices for the products we source due to both inflation and exchange rate fluctuations. We have historically managed to lessen the impact of inflation by achieving sourcing efficiencies, controlling costs in other parts of our operations and, when necessary, passing along a portion of our cost increases to our customers through higher selling prices. We face increasing inflationary pressures in our cost of goods, including those caused by rising costs in transportation, labor and materials, particularly cotton. If these costs rise at rates higher than those we have historically experienced, there can be no guarantee that we will be successful in passing a sufficient portion of such increases onto our customers to preserve our gross profit.
OFF-BALANCE SHEET ARRANGEMENTS
We utilize letters of credit and are a party to operating leases. It is currently not our general business practice to have material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates as set forth in our 2014 Annual Report.
No new accounting pronouncements, issued or effective during 2015, have had or are expected to have a significant impact on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to the Company’s management, including the Chief Executive Officer and Interim Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of the Chief Executive Officer and the Interim Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the Chief Executive Officer and the Interim Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.
There were no changes during the quarter ended September 26, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of litigation and certain related matters, see Part I, Item 1. Financial Statements, Note 7 – Commitments and Contingencies, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors in Part I, Item 1A. Risk Factors of our 2014 Annual Report. These risk factors could materially affect our business, financial condition or future results of operations in evaluating our business and any investment in our common stock. In particular, the risks described in our 2014 Annual Report could cause actual events to differ materially from those contemplated in the forward-looking statements in this Form 10-Q. The risks described in our 2014 Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially affect our business, financial condition or future results.
Item 6. Exhibits.
|
Exhibit No. |
Description |
|
2.1 |
Assignment and Assumption of Rights Under and Joinder to Stock Purchase Agreement dated as of September 15, 2015 among David Gren, Minor Valle, Rio Asset Holdings, LLC, Rio Asset Holdco, LLC, Rio Garment, S.A. Hampshire Group, Limited and Hampshire International, LLC. (Incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
2.2 |
Amendment No. 2 to Stock Purchase Agreement dated as of September 15, 2015 among David Gren, Rio Asset Holdings, LLC, Rio Asset Holdco, LLC, Hampshire Group, Limited, Hampshire International, LLC and Rio Garment, S.A. Omitted schedules and exhibits will be supplied to the SEC upon request. (Incorporated by reference to Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.1 |
Promissory Note dated of September 15, 2015 between Rio Garment, S.A. and Hampshire Group, Limited. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.2 |
Guaranty Agreement dated as of September 15, 2015 among David Gren, Angela Smith, Hampshire Group, Limited and Hampshire International, LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.3 |
Pledge and Security Agreement dated as of September 15, 2015 between David Gren and Hampshire Group, Limited. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.4 |
Forbearance Agreement and Fifth Amendment to Credit Agreement, dated as of November 30, 2015 among Hampshire Group, Limited, Hampshire Brands, Inc., Hampshire International, LLC and Scott James, LLC, as borrowers, and Salus CLO 2012-1, Ltd. and Salus Capital Partners, LLC, as lenders. (Incorporated by reference to Exhibit 10.14.6 to the Company’s Annual Report on Form 10-K filed with the SEC on December 11, 2015). |
|
10.5 |
Non-Employee Directors Stock Fee Election Program, as amended, adopted under the Hampshire Group, Limited 2009 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.15.1 to the Company’s Annual Report on Form 10-K filed with the SEC on December 11, 2015). |
|
31.1* |
Certification of Principal Executive Officer pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2* |
Certification of Principal Financial Officer pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1* |
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2* |
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101 |
The following materials from this Quarterly Report on Form 10-Q for the three and nine month periods ended September 26, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets as of September 26, 2015 and December 31, 2014; (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended September 26, 2015 and September 27, 2014; (iii) the Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 26, 2015; (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 26, 2015 and September 27, 2014; and (v) the Notes to the Unaudited Condensed Consolidated Financial Statements.* |
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
|
* |
Filed with this Form 10-Q. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
Hampshire Group, Limited | |||
|
Date: March 24, 2016 |
|
By: |
/s/ Paul M. Buxbaum | ||
|
|
|
|
Paul M. Buxbaum | ||
|
|
|
|
|
President and Chief Executive Officer | |
|
(Principal Executive Officer) | |||||
|
/s/ William Drozdowski | |||||
| William Drozdowski | |||||
| Interim Chief Financial Officer | |||||
| (Principal Financial Officer and Principal Accounting Officer) | |||||
EXHIBIT INDEX
|
Exhibit No. |
Description |
|
2.1 |
Assignment and Assumption of Rights Under and Joinder to Stock Purchase Agreement dated as of September 15, 2015 among David Gren, Minor Valle, Rio Asset Holdings, LLC, Rio Asset Holdco, LLC, Rio Garment, S.A. Hampshire Group, Limited and Hampshire International, LLC. (Incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
2.2 |
Amendment No. 2 to Stock Purchase Agreement dated as of September 15, 2015 among David Gren, Rio Asset Holdings, LLC, Rio Asset Holdco, LLC, Hampshire Group, Limited, Hampshire International, LLC and Rio Garment, S.A. Omitted schedules and exhibits will be supplied to the SEC upon request. (Incorporated by reference to Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.1 |
Promissory Note dated of September 15, 2015 between Rio Garment, S.A. and Hampshire Group, Limited. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.2 |
Guaranty Agreement dated as of September 15, 2015 among David Gren, Angela Smith, Hampshire Group, Limited and Hampshire International, LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.3 |
Pledge and Security Agreement dated as of September 15, 2015 between David Gren and Hampshire Group, Limited. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2015). |
|
10.4 |
Forbearance Agreement and Fifth Amendment to Credit Agreement, dated as of November 30, 2015 among Hampshire Group, Limited, Hampshire Brands, Inc., Hampshire International, LLC and Scott James, LLC, as borrowers, and Salus CLO 2012-1, Ltd. and Salus Capital Partners, LLC, as lenders. (Incorporated by reference to Exhibit 10.14.6 to the Company’s Annual Report on Form 10-K filed with the SEC on December 11, 2015). |
|
10.5 |
Non-Employee Directors Stock Fee Election Program, as amended, adopted under the Hampshire Group, Limited 2009 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.15.1 to the Company’s Annual Report on Form 10-K filed with the SEC on December 11, 2015). |
|
31.1* |
Certification of Principal Executive Officer pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2* |
Certification of Principal Financial Officer pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1* |
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2* |
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101 |
The following materials from this Quarterly Report on Form 10-Q for the nine months ended September 26, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets as of September 26, 2015 and December 31, 2014; (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended September 26, 2015 and September 27, 2014; (iii) the Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 26, 2015; (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 26, 2015 and September 27, 2014; and (v) the Notes to the Unaudited Condensed Consolidated Financial Statements.* |
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
|
* |
Filed with this Form 10-Q. |
31