Quarterly Report


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended July 30, 2016

Commission File Number 01-34219

 

DESTINATION XL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

04-2623104

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

555 Turnpike Street, Canton, MA

 

02021

(Address of principal executive offices)

 

(Zip Code)

(781) 828-9300

(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   x     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   x     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

 

x

 

 

 

 

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   x

The number of shares of the registrant’s common stock outstanding as of August 19, 2016 was 50,862,299.

 

 

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

DESTINATION XL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

July 30, 2016

 

 

January 30, 2016

 

 

 

(Fiscal 2016)

 

 

(Fiscal 2015)

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,764

 

 

$

5,170

 

Accounts receivable

 

 

7,113

 

 

 

4,721

 

Inventories

 

 

121,307

 

 

 

125,014

 

Prepaid expenses and other current assets

 

 

8,656

 

 

 

8,254

 

Total current assets

 

 

142,840

 

 

 

143,159

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation and amortization

 

 

125,084

 

 

 

124,962

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Intangible assets

 

 

2,431

 

 

 

2,669

 

Other assets

 

 

3,671

 

 

 

3,557

 

Total assets

 

$

274,026

 

 

$

274,347

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,524

 

 

$

7,155

 

Current portion of deferred gain on sale-leaseback

 

 

1,465

 

 

 

1,465

 

Accounts payable

 

 

36,052

 

 

 

30,684

 

Accrued expenses and other current liabilities

 

 

30,395

 

 

 

33,778

 

Borrowings under credit facility

 

 

41,174

 

 

 

41,984

 

Total current liabilities

 

 

116,610

 

 

 

115,066

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

14,873

 

 

 

19,003

 

Deferred rent and lease incentives

 

 

33,783

 

 

 

30,934

 

Deferred gain on sale-leaseback, net of current portion

 

 

12,456

 

 

 

13,189

 

Deferred tax liability

 

 

222

 

 

 

196

 

Other long-term liabilities

 

 

5,823

 

 

 

7,555

 

Total long-term liabilities

 

 

67,157

 

 

 

70,877

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 1,000,000 shares  authorized, none issued

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized,  61,739,738 and  61,692,285 shares issued at July 30, 2016 and January 30, 2016, respectively

 

 

617

 

 

 

617

 

Additional paid-in capital

 

 

303,838

 

 

 

302,727

 

Treasury stock at cost, 10,877,439 shares at July 30, 2016 and January 30, 2016

 

 

(87,977

)

 

 

(87,977

)

Accumulated deficit

 

 

(119,898

)

 

 

(120,311

)

Accumulated other comprehensive loss

 

 

(6,321

)

 

 

(6,652

)

Total stockholders' equity

 

 

90,259

 

 

 

88,404

 

Total liabilities and stockholders' equity

 

$

274,026

 

 

$

274,347

 

 

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

 

 

2


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

July 30, 2016

 

 

August 1, 2015

 

 

July 30, 2016

 

 

August 1, 2015

 

 

 

(Fiscal 2016)

 

 

(Fiscal 2015)

 

 

(Fiscal 2016)

 

 

(Fiscal 2015)

 

 

 

 

 

Sales

 

$

117,875

 

 

$

114,147

 

 

$

225,766

 

 

$

218,552

 

Cost of goods sold including occupancy costs

 

 

63,032

 

 

 

60,264

 

 

 

121,157

 

 

 

116,430

 

Gross profit

 

 

54,843

 

 

 

53,883

 

 

 

104,609

 

 

 

102,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

46,299

 

 

 

47,121

 

 

 

87,668

 

 

 

88,590

 

Depreciation and amortization

 

 

7,527

 

 

 

6,928

 

 

 

14,869

 

 

 

13,450

 

Total expenses

 

 

53,826

 

 

 

54,049

 

 

 

102,537

 

 

 

102,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

1,017

 

 

 

(166

)

 

 

2,072

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(783

)

 

 

(746

)

 

 

(1,567

)

 

 

(1,507

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

 

234

 

 

 

(912

)

 

 

505

 

 

 

(1,425

)

Provision for income taxes

 

 

35

 

 

 

67

 

 

 

92

 

 

 

128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

199

 

 

$

(979

)

 

$

413

 

 

$

(1,553

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic and diluted

 

$

0.00

 

 

$

(0.02

)

 

$

0.01

 

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

49,531

 

 

 

49,081

 

 

 

49,522

 

 

 

49,050

 

Diluted

 

 

49,953

 

 

 

49,081

 

 

 

49,902

 

 

 

49,050

 

 

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

 

 

 

3


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

July 30, 2016

 

 

August 1, 2015

 

 

July 30, 2016

 

 

August 1, 2015

 

 

 

(Fiscal 2016)

 

 

(Fiscal 2015)

 

 

(Fiscal 2016)

 

 

(Fiscal 2015)

 

Net income (loss)

 

$

199

 

 

$

(979

)

 

$

413

 

 

$

(1,553

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(188

)

 

 

39

 

 

 

(143

)

 

 

62

 

Pension plans

 

 

261

 

 

 

277

 

 

 

474

 

 

 

513

 

Other comprehensive income before taxes

 

 

73

 

 

 

316

 

 

 

331

 

 

 

575

 

Tax provision related to items of other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

73

 

 

 

316

 

 

 

331

 

 

 

575

 

Comprehensive income (loss)

 

$

272

 

 

$

(663

)

 

$

744

 

 

$

(978

)

 

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

 

 

 

4


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at January 30, 2016

 

 

61,692

 

 

$

617

 

 

$

302,727

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(120,311

)

 

$

(6,652

)

 

$

88,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

755

 

Board of Directors compensation

 

 

48

 

 

 

 

 

 

 

356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

356

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

474

 

 

 

474

 

Foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(143

)

 

 

(143

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

413

 

 

 

 

 

 

 

413

 

Balance at July 30, 2016

 

 

61,740

 

 

$

617

 

 

$

303,838

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(119,898

)

 

$

(6,321

)

 

$

90,259

 

 

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

 

 

 

5


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months Ended

 

 

 

July 30, 2016

 

 

August 1, 2015

 

 

 

(Fiscal 2016)

 

 

(Fiscal 2015)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

413

 

 

$

(1,553

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of deferred gain on sale-leaseback

 

 

(733

)

 

 

(732

)

Amortization of deferred debt issuance costs

 

 

139

 

 

 

139

 

Depreciation and amortization

 

 

14,869

 

 

 

13,450

 

Deferred taxes, net of valuation allowance

 

 

26

 

 

 

53

 

Stock compensation expense

 

 

755

 

 

 

1,088

 

Board of Directors stock compensation

 

 

356

 

 

 

265

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,392

)

 

 

(1,196

)

Inventories

 

 

3,707

 

 

 

(8,348

)

Prepaid expenses and other current assets

 

 

(402

)

 

 

(1,160

)

Other assets

 

 

(114

)

 

 

171

 

Accounts payable

 

 

5,368

 

 

 

6,241

 

Deferred rent and lease incentives

 

 

2,849

 

 

 

1,415

 

Accrued expenses and other liabilities

 

 

(5,696

)

 

 

(3,163

)

Net cash provided by operating activities

 

 

19,145

 

 

 

6,670

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property and equipment, net

 

 

(13,841

)

 

 

(16,979

)

Net cash used for investing activities

 

 

(13,841

)

 

 

(16,979

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

 

 

 

61

 

Principal payments on long-term debt

 

 

(3,840

)

 

 

(3,737

)

Costs associated with debt issuances

 

 

 

 

 

(15

)

Net borrowings (repayments) under credit facility

 

 

(870

)

 

 

15,212

 

Net cash provided by (used for) financing activities

 

 

(4,710

)

 

 

11,521

 

Net increase in cash and cash equivalents

 

 

594

 

 

 

1,212

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

5,170

 

 

 

4,586

 

End of period

 

$

5,764

 

 

$

5,798

 

 

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

 

 

 

6


DESTINATION XL GROUP, INC.

Notes to Consolidated Financial Statements

 

 

1. Basis of Presentation

In the opinion of management of Destination XL Group, Inc., a Delaware corporation (formerly known as Casual Male Retail Group, Inc. and, collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended January 30, 2016 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 18, 2016.

The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2016 and fiscal 2015 are 52-week periods ending January 28, 2017 and January 30, 2016, respectively.

Segment Information

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of two principal operating segments: its retail business and its direct business. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment, consistent with its omni-channel business approach. The direct operating segment includes the operating results and assets for LivingXL ® and ShoesXL ® .

 

Intangibles

At July 30, 2016, the “Casual Male” trademark had a carrying value of $0.8 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value on an accelerated basis, consistent with projected cash flows through fiscal 2018, its estimated remaining useful life.

The Company’s “Rochester” trademark is considered an indefinite-lived intangible asset and has a carrying value of $1.5 million. During the first six months ended July 30, 2016, no event or circumstance occurred which would cause a reduction in the fair value of the Company’s reporting units, requiring interim testing of the Company’s “Rochester” trademark.

 

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “ Fair Value Measurements and Disclosures ,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

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

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

7


The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At July 30, 2016, the fair value approximates the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.

The fair value of indefinite-lived assets, which consists of the Company’s “Rochester” trademark, is measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of the trademark is determined using a projected discounted cash flow analysis based on unobservable inputs and are classified within Level 3 of the valuation hierarchy. See Intangibles above.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.

 

Accumulated Other Comprehensive Income (Loss) - (“AOCI”)

Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income and reclassifications from AOCI for the three and six months ended July 30, 2016 and August 1, 2015, respectively, were as follows:

 

 

 

 

July 30, 2016

 

 

August 1, 2015

 

For the three months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of the quarter

 

$

(5,900

)

 

$

(494

)

 

$

(6,394

)

 

$

(7,559

)

 

$

(420

)

 

$

(7,979

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

61

 

 

 

(188

)

 

 

(127

)

 

 

93

 

 

 

39

 

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of taxes   (1)

 

 

200

 

 

 

 

 

 

200

 

 

 

184

 

 

 

 

 

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

261

 

 

 

(188

)

 

 

73

 

 

 

277

 

 

 

39

 

 

 

316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(5,639

)

 

$

(682

)

 

$

(6,321

)

 

$

(7,282

)

 

$

(381

)

 

$

(7,663

)

 

 

 

July 30, 2016

 

 

August 1, 2015

 

For the six months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of fiscal year

 

$

(6,113

)

 

$

(539

)

 

$

(6,652

)

 

$

(7,795

)

 

$

(443

)

 

$

(8,238

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

122

 

 

 

(143

)

 

 

(21

)

 

 

190

 

 

 

62

 

 

 

252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of taxes   (1)

 

 

352

 

 

 

 

 

 

352

 

 

 

323

 

 

 

 

 

 

323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

474

 

 

 

(143

)

 

 

331

 

 

 

513

 

 

 

62

 

 

 

575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(5,639

)

 

$

(682

)

 

$

(6,321

)

 

$

(7,282

)

 

$

(381

)

 

$

(7,663

)

 

(1)

Includes the amortization of the unrecognized loss on pension plans which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $200,000 and $184,000 for the three months ended July 30, 2016 and August 1, 2015, respectively, and $352,000 and $323,000 for the six months ended July 30, 2016 and August 1, 2015, respectively. There was no tax benefit for any period.

 

8


Revenue Recognition

Revenue from the Company’s retail business is recorded upon purchase of merchandise by customers, net of an allowance for sales returns. Revenue from the Company’s direct business is recognized at the time a customer order is delivered, net of an allowance for sales returns. Revenue is recognized by the operating segment that fulfills a customer’s order.

 

Stock-based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results and future changes in estimates may differ from the Company’s current estimates.

 

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “ Revenue from Contracts with Customers ,” which supersedes the revenue recognition requirements in ASC 605, “ Revenue Recognition ,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “ Other Assets and Deferred Costs - Capitalized Advertising Costs ”. The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is permitted after December 15, 2016. The Company is currently evaluating the impact of the adoption of ASU No. 2014-09 on its Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, " Inventory (Topic 330): Simplifying the Measurement of Inventory, " which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact this pronouncement will have on its Consolidated Financial Statements but does not expect that there will be any material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842) ,” which will require an entity to recognize lease assets and lease liabilities on its balance sheet and will increase disclosure requirements on its leasing arrangements.  The ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein.  Early adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating the impact this pronouncement will have on its Consolidated Financial Statements.   

In   March 2016, the FASB issued  ASU   2016 - 04 , “ Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products, ” which amends exempting gift cards and other prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue guidance in Topic 606. However, the exemption only applies to breakage liabilities that are not subject to unclaimed property laws or that are attached to segregated bank accounts (e.g., consumer debit cards).  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements .

In March 2016, the FASB issued ASU 2016-09, “ Compensation - Stock Compensation (Topic 718) -   Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not expect that the adoption of this pronouncement will have a material impact on its Consolidated Financial Statements .

9


No   other   new   accounting pronouncements, issued or effective during the   first six months of fiscal 2016, have had or are expected to have a significant impact on the Company’s Consolidated Financial Stat ements.

 

 

2. Debt

Credit Agreement with Bank of America, N.A.

On October 30, 2014, the Company amended its credit facility with Bank of America, N.A, effective October 29, 2014, by executing the Second Amendment to the Sixth Amended and Restated Loan and Security Agreement (as amended, the “Credit Facility”).

The Credit Facility provides for maximum committed borrowings of $125 million. The Credit Facility includes, pursuant to an accordion feature, the ability to increase the Credit Facility by an additional $50 million upon the request of the Company and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20 million for commercial and standby letters of credit and a sublimit of up to $15 million for swingline loans. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The maturity date of the Credit Facility is October 29, 2019. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets, excluding (i) a first priority lien held by the lenders of the Term Loan Facility on certain equipment of the Company described below and (ii) intellectual property.

At July 30, 2016, the Company had outstanding borrowings under the Credit Facility of $41.6 million, before unamortized debt issuance costs of $0.4 million. Outstanding standby letters of credit were $2.3 million and outstanding documentary letters of credit were $0.5 million. Unused excess availability at July 30, 2016 was $66.0 million. Average monthly borrowings outstanding under the Credit Facility during the first six months of fiscal 2016 were $50.6 million, resulting in an average unused excess availability of approximately $59.0 million. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.  Pursuant to the terms of the Credit Facility, if the Company’s excess availability under the Credit Facility fails to be equal to or greater than the greater of (i) 10% of the Loan Cap (defined in the Credit Facility as the lesser of the revolving credit commitments at such time or the borrowing base at the relevant measurement time) and (ii) $7.5 million, the Company will be required to maintain a minimum consolidated fixed charge coverage ratio of 1.0:1.0 in order to pursue certain transactions, including but not limited to, stock repurchases, payment of dividends and business acquisitions.

Borrowings made pursuant to the Credit Facility will bear interest at a rate equal to the base rate (determined as the highest of (a) Bank of America N.A.’s prime rate, (b) the Federal Funds rate plus 0.50% or (c) the annual ICE-LIBOR rate (“LIBOR”) for the respective interest period) plus a varying percentage, based on the Company’s borrowing base, of 0.50%-0.75% for prime-based borrowings and 1.50%-1.75% for LIBOR-based borrowings. The Company is also subject to an unused line fee of 0.25%. At July 30, 2016, the Company’s prime-based interest rate was 4.0%. At July 30, 2016, the Company had approximately $38.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 1.94%. The LIBOR-based contracts expired between July 31, 2016 and August 3, 2016. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.

The fair value of the amount outstanding under the Credit Facility at July 30, 2016 approximated the carrying value.

Long-Term Debt

Components of long-term debt are as follows:

 

(in thousands)

 

July 30, 2016

 

 

January 30, 2016

 

Equipment financing notes

 

$

9,563

 

 

$

12,901

 

Term loan, due 2019

 

 

13,250

 

 

 

13,750

 

Less: unamortized debt issuance costs

 

 

(416

)

 

 

(493

)

Total long-term debt

 

 

22,397

 

 

 

26,158

 

Less: current portion of long-term debt

 

 

7,524

 

 

 

7,155

 

Long-term debt, net of current portion

 

$

14,873

 

 

$

19,003

 

 

Equipment Financing Loans

Pursuant to a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC, dated July 20, 2007 and amended on September 30, 2013 (the “Master Agreement”), the Company entered into twelve equipment security notes between September 2013 and June 2014 (in aggregate, the “Notes”), whereby the Company borrowed an aggregate of $26.4 million. The Notes are for a term of 48 months and accrue interest at fixed rates ranging from 3.07% and 3.50%. Principal and interest are paid monthly, in arrears.

10


The Notes are secured by a security interest in all of the Company’s rights, title and interest in and to certain equipment. The Company was subject to prepayment penalties through the second anniversary of each note.  As of June 23, 2016, the Company is no longer subject to any prepayment penalties. The Master Agreement includes default provisions that are customary for financings of this type and are similar and no more restrictive than the Company’s ex isting Credit Facility.

Term Loan

 

On October 30, 2014, the Company entered into a term loan agreement with respect to a new $15 million senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”). The effective date of the Term Loan Facility is October 29, 2014 (the “Effective Date”). The proceeds from the Term Loan Facility were used to repay borrowings under the Credit Facility.

 

The Term Loan Facility bears interest at a rate per annum equal to the greater of (a) 1.00% and (b) the one month LIBOR rate, plus 6.50%.  Interest payments are payable on the first business day of each calendar month, and increase by 2% following the occurrence and during the continuance of an “event of default,” as defined in the Term Loan Facility. The Term Loan Facility provides for quarterly principal payments on the first business day of each calendar quarter, which commenced the first business day of January 2015, in an aggregate principal amount equal to $250,000, subject to adjustment, with the balance payable on the termination date.

 

The Term Loan Facility includes usual and customary mandatory prepayment provisions for transactions of this type that are triggered by the occurrence of certain events.  In addition, the amounts advanced under the Term Loan Facility can be optionally prepaid in whole or part. All prepayments are subject to an early termination fee in the amount of 2% of the amount prepaid if the prepayment is before October 29, 2016 and 1% of the amount prepaid if the prepayment is after October 29, 2016 but prior to October 29, 2017.  There is no prepayment penalty after October 29, 2017.    

 

The Term Loan Facility matures on October 29, 2019. It is secured by a first priority lien on certain equipment of the Company, and a second priority lien on substantially all of the remaining assets of the Company, excluding intellectual property.

 

 

3. Long-Term Incentive Plans

The following is a summary of the Company’s long-term incentive plans.  All equity awards previously granted under these long-term incentive plans were issued from the Company’s 2006 Incentive Compensation Plan, which expired on July 31, 2016.  As of August 4, 2016, any future grants of equity awards will be issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan.  See Note 4, Stock-Based Compensation.

2013-2016 LTIP

The 2013-2016 Long-Term Incentive Plan (“2013-2016 LTIP”) was approved in the second quarter of fiscal 2013.    Pursuant to the terms of the 2013-2016 LTIP, on the date of grant, each participant was granted an unearned and unvested award equal in value to four times his/her annual salary multiplied by the applicable long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 50% for other participants in the plan, which the Company refers to as the “Projected Benefit Amount.” Each participant was granted 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash.

Of the total Projected Benefit Amount, 50% is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award (half of the shares of restricted stock, options and cash) vests in three installments with 20% of the time-vested portion having vested at the end of fiscal 2014, 40% having vested at the end of fiscal 2015 and the remaining 40% vesting at the end of fiscal 2016.

 

In fiscal 2016, the Company must achieve revenue of at least $600 million and an operating margin of not less than 8.0% for participants to receive 100% vesting of the performance-based portion of the Projected Benefit Amount. If the Company does not meet the performance target at the end of fiscal 2016, but the Company is able to achieve revenue equal to or greater than $510 million at the end of fiscal 2016 and the operating margin is not less than 8.0%, then the participants will receive a pro-rata portion of the performance-based award based on minimum sales of $510 million (50% payout) and $600 million (100% payout).

 

Assuming the Company achieves the performance target and 100% of the Projected Benefit Amount vests, excluding estimated forfeitures, the total potential value of all awards over this four-year period, as of July 30, 2016, would be approximately $19.6 million. Approximately half of the compensation expense relates to the time-vested awards, which is being expensed over forty-four months, based on the respective vesting dates. As the performance targets were not deemed probable at July 30, 2016, no expense for the performance-based awards has been recognized through July 30, 2016.

11


2016 Long-Term Incentive Wrap-Around Plan

The 2016 Long-Term Incentive Wrap-Around Plan (the “Wrap-Around Plan”), which was approved in the fourth quarter of fiscal 2014, is a supplemental performance-based incentive plan that is only effective if there is no vesting of the performance-based awards under the 2013-2016 LTIP and, as a result, all performance-based awards under that plan are forfeited. Under the Wrap-Around Plan, if the target level performance metrics for fiscal 2016 are met, participants will be eligible to receive a payout equal to 80% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  If the target level performance metrics for fiscal 2016 under the Wrap-Around Plan are exceeded, the greatest payout that participants will be eligible to receive is 100% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  Any award earned will be paid 50% in cash and 50% in shares of restricted stock.

The performance target under the Wrap-Around Plan consists of two metrics, Sales and EBITDA, with threshold (50%), target (80%) and maximum (100%) payout levels.  Each metric is weighted as 50% of the total performance target.  However, in order for there to be any payout under either metric, EBITDA for fiscal 2016 must be equal to or greater than the minimum threshold.    

The Wrap-Around Plan also provides for an opportunity to receive additional shares of restricted stock if the performance targets are achieved and the Company’s closing stock price is $6.75 or higher on the day earnings for fiscal 2016 are publicly released. If the Company’s stock price is $6.75, the payout in restricted shares will be increased by 20% and if the stock price is $7.25 or higher, the payout in restricted shares will be increased by 30%, with a pro-rata payout between $6.75 and $7.25.  The portion of the award payable in cash is not affected by the stock price. All awards granted pursuant to the Wrap-Around Plan will not vest until the last day of the second quarter of fiscal 2017.

Assuming that the Company achieves the performance target at target levels under the Wrap-Around Plan, and further assuming that the Company’s stock price is greater than $7.25, at the time the Company’s earnings are publicly released, the compensation expense associated with this Wrap-Around Plan is estimated to be approximately $8.8 million.  Through the end of the second quarter of fiscal 2016, the Company has accrued approximately $1.9 million in compensation expense related to the potential payout of performance awards under the Wrap-Around Plan.

2016-2017 Long-Term Incentive Plan

With the 2013-2016 LTIP and Wrap-Around Plan expiring at the end of fiscal 2016, on March 15, 2016, the Compensation Committee approved the Destination XL Group, Inc. Long-Term Incentive Plan (the “new LTIP”).

 

Under the terms of the new LTIP, each year the Compensation Committee will establish performance targets which will cover a two-year performance period (each a “Performance Period”), thereby creating overlapping Performance Periods.  Each participant in the plan will be entitled to receive an award based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 25% for other participants in the plan.  Because of the overlapping two-year Performance Periods, the Target Cash Value for any award is based on one year of annual salary, as opposed to two years to avoid doubling an award payout in any given fiscal year.

 

For each participant, 50% of the Target Cash Value is subject to time-based vesting and 50% is subject to performance-based vesting.  The time-vested portion of the award will vest in two installments with 50% of the time-vested portion vesting on April 1 following the fiscal year end which marks the end of the applicable Performance Period and 50% vesting on April 1 the succeeding year. The performance-based vesting is subject to the achievement of the performance target(s) for the applicable Performance Period.   Any performance award granted will vest on August 31 following the end of the applicable Performance Period.  

 

The Compensation Committee established two performance targets for the 2016-2017 Performance Period under the new LTIP (the “2016-2017 LTIP”), each weighted 50%. The first target is EBITDA for fiscal 2017, defined as earnings before interest, taxes, depreciation and amortization and the second target is “DXL Comparable Store Marginal Cash-Over-Cash Return”, defined as the aggregate of each comparable DXL store’s four-wall cash flow for fiscal 2017 divided by the aggregate capital investment, net of any tenant allowance, for each comparable DXL store.  

 

All awards granted under the 2016-2017 LTIP will be in restricted stock units (RSUs). Assuming that the Company achieves the performance target at target levels and all time-vested awards vest, the compensation expense associated with the 2016-2017 LTIP is estimated to be approximately $4.4 million.  Approximately half of the compensation expense, or $2.2 million, relates to the time-vested RSUs, which are being expensed over thirty-six months, based on the respective vesting dates. With respect to the performance-based component, RSUs will be granted at the end of the performance period if the performance targets are achieved. Through the end of the second quarter of fiscal 2016, the Company has accrued approximately $0.3 million in compensation expense related to the potential payout of performance awards under the 2016-2017 LTIP.

 

12


 

4. Stock-Based Compensation

Through the end of the second quarter of fiscal 2016, the Company’s 2006 Incentive Compensation Plan (as amended and restated effective as of August 1, 2013, the “2006 Plan”) was the only stockholder-approved plan.

The 2006 Plan expired on July 31, 2016. Subsequent to the end of the second quarter of fiscal 2016, at the Company’s 2016 Annual Meeting of Stockholders held August 4, 2016, the Company’s stockholders approved the adoption of the 2016 Incentive Compensation Plan (the “2016 Plan”).  See “2016 Plan” below for a summary of the new plan.

2006 Incentive Compensation Plan

The following tables summarize the stock option activity and share activity under the 2006 Plan for the first six months of fiscal 2016:

 

 

 

Number of

shares

 

 

Weighted-average