Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.16pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.27pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.04pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
deficiencies+14
weaknesses+12
criticism+4
losses+3
harm+3
Positive rising
effective+6
adequately+1
success+1
advances+1
assure+1
Risk Factors (Item 1A)
9,184 words
Item 1A. Risk Factors
Our businesses are subject to many risks. The following are material factors known to us that could have a material adverse effect on our business, reputation, operating results, industry, financial position, or future financial performance. The following risks should be considered in evaluating an investment in us.
Risks Relating to Our Businesses
We are subject to the auditor attestation requirement on the assessment of our internal control over financial reporting for our year ended January 29, 2022 and we and our auditors have identified material weaknesses in our internal control over financial reporting as disclosed in this 2021 Form 10-K.
The Company is now subject to the requirement to include in this 2021 Form 10-K our auditor’s attestation report on its assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act (“SOX”). We and our auditors have identified deficiencies in our internal control over financial reporting as disclosed in this 2021 Form 10-K as required under Section 404 of SOX. As some of these deficiencies are deemed material weaknesses in internal control over financing reporting, our auditors have issued an opinion in their assessment of our internal control over financial reporting. The issuance of an opinion regarding our internal control over financial reporting could impact investor confidence in the accuracy, reliability, and completeness of our financial reports.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
impairment+9
unpaid+5
delays+2
prolonged+2
weakness+2
Positive rising
improvement+3
effective+3
highest+2
able+1
leading+1
MD&A (Item 7)
10,464 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands)
Introduction
The following discussion and analysis of financial condition and results of operations is qualified by reference to and should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K. This annual report on Form 10-K, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements.
Overview
Our Company
We are a leading interactive media company capitalizing on the convergence of entertainment, ecommerce, and advertising. We own a growing, global portfolio of entertainment, consumer brands and media commerce services businesses that cross promote and exchange data with each other to optimize the engagement experiences we create for advertisers and consumers. Our growth strategy revolves around our ability to increase our expertise and scale using interactive video and first-party data to engage customers within multiple business models and multiple sales channels. We believe our growth strategy builds on our core and provides an in these marketplaces.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to effectively remediate these material weaknesses and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, investors could lose confidence in our financial and other public reporting, which would harm our business.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, is designed to prevent fraud. In connection with the preparation of our consolidated financial statements as of January 29, 2022 and for the year then ended, we identified material weaknesses
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in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses in our internal control over financial reporting have been identified:
We did not maintain an effective control environment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the control environment of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) appropriate organizational structure, reporting lines, and authority and responsibilities in pursuit of objectives; (ii) our commitment to attract, develop, and retain competent individuals; and (iii) holding individuals accountable for their internal control related responsibilities.
We did not design and implement an effective risk assessment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the risk assessment component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) identifying, assessing, and communicating appropriate objectives; (ii) identifying and analyzing risks to achieve these objectives; (iii) considering the potential for fraud in assessing risks; and (iv) identifying and assessing changes in the business that could impact our system of internal controls.
We did not design and implement effective control activities based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the control activities component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
We did not consistently generate or provide adequate quality supporting information and communication based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the information and communication component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information to support the functions of internal control; and (ii) communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.
We did not design and implement effective monitoring activities based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the monitoring component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) selecting, developing, and performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning; and (ii) evaluating and communicating internal control deficiencies in a timely manner to those parties responsible for taking corrective action.
If we are unable to effectively remediate these material weaknesses and maintain effective internal control over financial reporting, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial statements.
We have a history of losses and a high fixed cost operating base and may not be able to achieve or maintain profitable operations in the future.
We experienced operating losses of approximately $10,725, $7,940 and $52,525 in fiscal 2021, fiscal 2020 and fiscal 2019. We reported net losses of $23,026, $13,234 and $56,296 in fiscal 2021, fiscal 2020 and fiscal 2019. There is no assurance that we will be able to achieve or maintain profitable operations in future fiscal years. Our television shopping business operates with a high fixed cost base, primarily driven by fixed fees under distribution agreements with cable and direct-to-home satellite providers to carry our programming. In order to operate on a profitable basis, we must reach and maintain sufficient annual sales revenues to cover our high fixed cost base and/or negotiate a reduction in this cost structure. If our sales levels are not sufficient to cover our operating expenses, our ability to reduce operating expenses in the near term will be limited by the fixed cost base. In that case, our earnings, cash balance and growth prospects could be materially adversely affected.
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Given this trend, if not reversed, it could reduce our operating cash resources to the point where we will not have sufficient liquidity to meet the ongoing cash commitments and obligations to continue operating our business. As of January 29, 2022, we had approximately $11,295 in unrestricted cash. We expect to use our cash and available credit line to finance our working capital requirements and to make necessary capital expenditures in order to operate our business and to fund any further operating losses. We have had a historic trend of operating losses, which, if not reversed, could reduce our operating cash resources to the point where we would not be able to adequately fund working capital requirements or necessary capital expenditures.
We have had a historic trend of operating losses, which, if not reversed, could reduce our operating cash resources to the point where we will not have sufficient liquidity to meet the ongoing cash commitments and obligations to continue operating our business.
Given this trend, if not reversed, it could reduce our operating cash resources to the point where we will not have sufficient liquidity to meet the ongoing cash commitments and obligations to continue operating our business. As of January 29, 2022, we had approximately $11,295 in unrestricted cash. We expect to use our cash and available credit line to finance our working capital requirements and to make necessary capital expenditures in order to operate our business and to fund any further operating losses. We have had a historic trend of operating losses, which, if not reversed, could reduce our operating cash resources to the point where we would not be able to adequately fund working capital requirements or necessary capital expenditures.
We have a loan and security agreement (as amended through September 20, 2021, the “Siena Loan”) with Siena Lending Group LLC (“Siena”), and the other lenders party thereto from time to time, Siena Lending Group LLC, as agent (the “Agent”), and certain additional of our subsidiaries, as guarantors thereunder. The Siena Loan provides a revolving line of credit of up to $80,000 and provides for the issuance of letters of credit in an aggregate amount up to $5,000 which, upon issuance, would be deemed advances under the revolving line of credit.
As of January 29, 2022, we had total borrowings of $60,216 under our revolving line of credit with Siena. Remaining available capacity under the revolving line of credit as of January 29, 2022 was approximately $11,400, which provided liquidity for working capital and general corporate purposes. As of January 29, 2022, we were in compliance with applicable financial covenants of the Siena Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months.
We and our subsidiaries (the “Borrowers”) have a Promissory Note Secured by Mortgages with GreenLake Real Estate Finance LLC whereby GreenLake agreed to make a secured term loan to the Borrowers in the original amount of $28,500. The GreenLake Note is secured by, among other things, mortgages encumbering our owned properties in Eden Prairie, Minnesota and Bowling Green, Kentucky (collectively, the “Mortgages”) as well as other assets as described in the GreenLake Note. The GreenLake Note is scheduled to mature on July 31, 2024.
As of January 29, 2022, there was $28,500 outstanding under the term loan with GreenLake. Principal borrowings under the term loan are non-amortizing over the life of the loan.
We completed and closed on our $80,000 offering of 8.50% Senior Unsecured Notes due 2026 (the “Notes”) and issued the Note. As of January 29, 2022, the entire $80,000 principal amount of the Notes was outstanding.
We have significant future commitments for our cash, which primarily include payments for cable and satellite program distribution obligations and the eventual repayment of the Siena Loan, GreenLake Financing, and Senior Notes. Based on our current projections for fiscal 2022, we believe that our existing cash balances and available credit line will be sufficient to maintain liquidity to fund our normal business operations over the next twelve months. We further believe that our financial resources, along with managing expenses, will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future which may include reduced sales and net income levels for us.
The seasonality of our business places increased strain on our operations.
Our businesses are subject to seasonal fluctuation, with the highest sales activity normally occurring during our fourth fiscal quarter of the year, namely November through January. Additionally, in our entertainment reporting segment, our television audience (and therefore sales revenue) can be significantly impacted by major world or domestic television-covering events which attract viewership and divert audience attention away from our programming. The seasonality of
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our businesses places increased strain on our operations. If we do not stock or restock popular products sufficient to meet customer demand, our business would be adversely affected. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce profitability. We may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments and additional long-zone shipments necessary to ensure timely delivery for the holiday season. Additionally, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and delivery services and other fulfillment companies and customer service providers may be unable to meet the seasonal demand. The occurrence of any of these factors could have an adverse effect on our business.
Our business, financial condition and results of operations are negatively influenced by adverse economic conditions that impact consumer spending, including inflation and the COVID-19 pandemic.
Our business is sensitive to general economic conditions and business conditions affecting consumer spending including, for example, increased inflation and the COVID-19 pandemic. Our businesses, financial condition and results of operations are negatively influenced by economic conditions that impact consumer spending. If macroeconomic conditions do not continue to improve or if conditions worsen, our business could be adversely affected.
Our results of operations may be adversely impacted by the ongoing COVID-19 pandemic, and the duration and extent to which it will impact our results of operations remains uncertain. Our operations may also be limited or impacted by government monitoring and/or regulation of product sales in connection with the COVID-19 pandemic. The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which the COVID-19 pandemic impacts our business, operations, financial results and financial condition will depend on numerous evolving factors which are uncertain and cannot be predicted, including: the duration and scope of the pandemic; governmental, business and individuals’ actions taken in response; the effect on our customers and customers’ demand for our services and products; the effect on our suppliers and disruptions to the global supply chain; our ability to sell and provide our services and products, including as a result of travel restrictions and people working from home; disruptions to our operations resulting from the illness of any of our employees, including employees at our fulfillment center; restrictions or disruptions to transportation, including reduced availability of ground or air transport; the ability of our customers to pay for our services and products; and any closures of our and our suppliers’ and customers’ facilities. We have been experiencing disruptions to our business as we implement modifications to employee travel, employee work locations and cancellation of events, among other modifications. In addition, the impact of COVID-19 on macroeconomic conditions may impact the proper functioning of financial and capital markets, commodity and energy prices, and interest rates. If any of these effects of the COVID-19 pandemic were to worsen, it could result in lost or delayed revenue to us. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Our employees have been and could be subject to work-from-home orders and other limitations on our business in the states in which we operate. The restrictions, among other things, require us to operate with only certain employees in-person at our facilities. We have focused on taking necessary steps to keep our employees, contractors, vendors, customers, guests, and their families safe during these uncertain times. These uncertainties could reduce our profitability and impact our results of operations.
Our expansion to international markets subject us to a variety of risks that may harm our business.
As a result of the acquisition of the 1-2-3.tv, our operations have expanded to international markets, including Germany and Austria, which exposes us to significant new risks. 1-2-3.tv operates in Germany and Austria, which requires significant resources and management attention and subjects us to legislative, judicial, accounting, regulatory, economic, and political risks in addition to those we already faced in the United States. These include:
the need to successfully adapt and localize products and policies for specific countries, including obtaining rights to third-party intellectual property used in each country;
successfully adapting and localizing products and policies for specific countries, including obtaining rights to third-party intellectual property used in each country;
complying with compliance with laws such as the Foreign Corrupt Practices Act and other anti-corruption laws, U.S. or foreign export controls and sanctions, and local laws prohibiting improper payments to government officials and requiring the maintenance of accurate books and records and a system of sufficient internal controls;
complying with increased financial accounting and reporting burdens and complexities;
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inflationary pressures, such as those the global market is currently experiencing, which may increase costs for materials, supplies, and services;
fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars;
challenges and costs associated with staffing and managing foreign operations; and
unstable political and economic conditions, social unrest or economic instability, whatever the cause, including due to pandemics, natural disasters, wars, terrorist attacks, tariffs, trade disputes, local or global recessions, diplomatic or economic tensions, environmental risks, and security concerns, in general or in a specific country or region in which we operate.
complying with local laws, regulations, and customs in other jurisdictions; complying with increased financial accounting and reporting burdens and complexities; planning for fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars; and political or social unrest or economic instability, terrorist attacks and security concerns in general in a specific country or region in which we operate.
The occurrence of any one of these risks could negatively affect our international business and, consequently, our results of operations generally. Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing, acquiring, or integrating operations in other countries will produce desired levels of revenues or profitability.
Our ValuePay installment payment program could lead to significant unplanned credit losses if our credit loss rate materially deteriorates.
In our entertainment and consumer brands reporting segments, our ValuePay installment payment program could lead to significant unplanned credit losses if our credit loss rate materially deteriorates. We utilize an installment payment program called ValuePay that enables customers to purchase merchandise and pay for the merchandise in two or more monthly installments. Our ValuePay installment program is a key element of our promotional strategy. As of January 29, 2022, we had approximately $47,008 due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. There is no guarantee that we will continue to experience the same credit loss rate that we have in the past or that losses will be within current provisions. A significant increase in our credit losses above what we have been experiencing could result in a material adverse impact on our financial performance.
The majority of customer purchases are paid for by credit or debit cards, including our private label credit card discussed above. Purchases and installment charges made with the ShopHQ private label credit card are non-recourse to us. However, we have credit collection risk from the potential inability to collect future ValuePay installments. Our ValuePay program is an interest-free installment payment program which allows customers to pay by credit card for certain merchandise in two or more equal monthly installments. The percentage of our net sales in which our customers utilized our ValuePay payment program over the past three fiscal years ranged from 50% to 57%. We intend to continue to sell merchandise using the ValuePay program due to its significant promotional value.
Our dependence on a limited number of vendors may impair our ability to operate profitably in the event of an unanticipatedloss of such a vendor:
In our entertainment and consumer brands reporting segments, we purchase products from domestic and foreign manufacturers and/or their suppliers and are often able to make purchases on more favorable terms due to the volume of products purchased or sold. Some of our purchasing arrangements with our vendors include inventory terms that allow for return privileges for a portion of the order or stock balancing. We generally do not have long-term commitments with our vendors, and a variety of sources are available for each category of merchandise sold. During fiscal 2021, 2020 and 2019, products purchased from one vendor accounted for approximately 16%, 20% and 19%, respectively, of our consolidated net sales. During fiscal 2021 and fiscal 2020, products purchased from a second vendor accounted for approximately 11% and 14%, respectively, of our consolidated net sales. Both vendors are related parties and additional information is contained in Note 19 – “Related Party Transactions” in the notes to our consolidated financial statements. We believe that we could find alternative products for these vendors’ merchandise assortment if they ceased supplying merchandise; however, the unanticipatedloss of any large supplier could negatively impact our sales and earnings.
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We rely on a limited number of independent shipping companies to deliver our merchandise. If our independent shipping companies fail to deliver our merchandise in a timely and accurate manner, our reputation and brand may be damaged. If relationships with our independent shipping companies are terminated, we may experience an increase in delivery costs. We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience.
Covenants in our debt agreements restrict our business in many ways.
The Siena Credit Facility contains various representation, warranties and financial and other covenants that limit our ability and/or our subsidiaries’ ability to, among other things, incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to common shareholders. The financial covenants include a maximum senior leverage ratio and minimum liquidity requirements. Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition, Liquidity and Capital Resources-Sources of Liquidity” below for a discussion of the Siena Credit Facility. Upon the occurrence of an event of default under the Siena Credit Facility, the lender could elect to declare all amounts outstanding under the Siena Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lender could proceed against the collateral granted to them to secure that indebtedness. If the lender and counter parties under the Siena Credit Facility accelerate the repayment of obligations, we may not have sufficient assets to repay such obligations. Our borrowings under the Siena Credit Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will also increase even though the amount borrowed remains the same, and our net income would decrease.
Our success depends on our continued ability to capture and retain customers in a cost-effective manner.
In our entertainment and consumer brands segments, our success depends on our continued ability to capture and retain customers in a cost-effective manner. In an effort to attract and retain customers, we use considerable funds and resources for various marketing and merchandising initiatives, particularly for the production and distribution of television programming and the updating of our digital strategy to increasingly engage customers through digital channels and social media. These initiatives, however, may not resonate with existing customers or consumers generally or may not be cost-effective. We believe that costs associated with the production and distribution of our television programming and costs associated with digital marketing, including search engine marketing and social media marketing, may increase in the foreseeable future. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results causing our website to place lower in search query results. Furthermore, the failure to successfully manage our search engine optimization and search engine marketing strategies could result in a substantial decrease in traffic to our website, as well as increased costs if we were to replace free traffic with paid traffic. Any failure to sustain user traffic or to monetize such traffic could materially adversely affect the financial performance of our business and, as a result, adversely affect our financial results. In addition, customers continue to increase their expectations for faster delivery times with free or reduced shipping prices. Increased delivery costs, particularly if we are unable to offset them by increasing prices without a detrimental effect on customer demand, and the extent to which we offer shipping promotions to our customers, could have an adverse effect on our business, financial condition and results of operations.
Our inability to recruit and retain key employees may adversely impact our ability to sustain growth.
Our growth is contingent, in part, on our ability to retain and recruit employees who have the distinct skills necessary for a business that demands knowledge of the interactive media industry, digital advertising industry, omnichannel retail industry, merchandising and product sourcing, television production, televised and internet-based marketing and direct-to-consumer and retail store fulfillment. In recent years, we have experienced significant senior management turnover and reductions in force as discussed in Note 21 – “Executive and Management Transition Costs” and Note 20 – “Restructuring Costs” in the notes to our consolidated financial statements. The marketplace for such key employees is very competitive and limited. Our growth may be adversely impacted if we are unable to attract and retain key employees. In addition, turnover of senior management can adversely impact our stock price, our results of operations, our vendor relationships and may make recruiting for future management positions more difficult. Further we may incur significant expenses related
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to any executive transition costs that may impact our operating results. In fiscal 2021, fiscal 2020 and fiscal 2019 we recorded charges to income of $0, $0 and $2,741, respectively, related to executive and management transition costs incurred, which included severance payments and other incremental expenses.
Any acquisition we make could adversely impact our performance.
From time to time, we may acquire other businesses. An acquisition involves certain inherent risks, including the failure to retain key personnel from an acquired business; undisclosed or subsequently arising liabilities; failure to successfully integrate operations of the acquired business into our existing business, such as new product offerings or information technology systems; failure to generate expected synergies such as cost reductions or revenue gains; and the potential diversion of management resources from existing operations to respond to unforeseen issues arising in the context of the integration of a new business. Additionally, we may incur significant expenses in connection with acquisitions and our overall profitability could be adversely affected if our associated investments and expenses are not justified by the revenues and profits, if any.
Risks Relating to the Products We Market and Sell
We depend on relationships with numerous manufacturers and suppliers for our products and proprietary brands; a decrease in product quality or an increase in product cost, the unanticipatedloss of our larger suppliers, or the lack of customer receptivity or brand acceptance to our proprietary brands could impact our sales.
We procure merchandise from numerous manufacturers and suppliers generally pursuant to short-term contracts and purchase orders. We depend on the ability of these parties to timely produce and deliver goods that meet applicable quality standards, which is impacted by a number of factors not within the control of these parties, such as political or financial instability, trade restrictions, tariffs, currency exchange rates, and transport capacity and costs, among others, and to deliver products that meet or exceed our customers’ expectations.
Our failure to identify new vendors and manufacturers, maintain relationships with a significant number of existing vendors and manufacturers and/or access quality merchandise in a timely and efficient manner could cause us to miss customer delivery dates or delay scheduled promotions, which could result in the failure to meet customer expectations and could cause customers to cancel orders or cause us to be unable to source merchandise in sufficient quantities, which could result in lost sales.
It is possible that one or more of our significant brands or vendors could experience financial difficulties and be unable to supply us their product. In addition, the unanticipatedloss of one or a number of our significant brands or vendors, could materially and adversely impact our sales and profitability.
Our efforts to accelerate the development of proprietary brands may require working capital investments for the development and promotion of new brands and concepts. In addition, factors such as minimum purchase quantities and reduced merchandise return rights, typically associated with the purchasing of products associated with proprietary brands, can lead to excess on-hand inventory if sales of these brands do not meet our expectations due to a lack of customer receptivity or brand acceptance. Our ability to successfully offer a wider assortment of proprietary merchandise may also be adversely impacted if any of the risks mentioned above related to our manufacturers and suppliers materialize.
If we do not manage our inventory effectively, our sales, gross profit and profitability could be adversely affected. If we do not identify and respond to emerging trends in consumer spending and preferences quickly enough, we may harm our ability to retain our existing customers or attract new customers. If we purchase too much inventory, we may be forced to sell our merchandise at lower average margins through increased markdowns, which could adversely affect our results of operations, our overall gross margins and our profitability.
We may be subject to product liability claims if people or properties are harmed by products sold or developed by us, or we may be subject to voluntary or involuntary product recalls, or subject to liability for on-air statements made by our hosts or guest-hosts.
Products sold or developed by us may expose us to product liability or product safety claims relating to personal injury, death or property damage caused by such products and may require us to take actions such as product recalls, which could involve significant expense incurred by us.
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We maintain and have generally required the manufacturers and vendors of these products to carry product liability and errors and omissions insurance. We also require that our vendors fully indemnify us for such claims. There can be no assurance that we will maintain this insurance coverage or obtain additional coverage on acceptable terms, or that this insurance will provide adequate coverage against all potential claims or even be available with respect to any particular claim. There also can be no assurance that our suppliers will continue to maintain this insurance or that this coverage will be adequate or available with respect to any particular claims or will fulfill their contractual indemnification duties. Product liability claims could result in a material adverse impact on our financial performance.
We may also be subject to involuntary product recalls, or we may voluntarily conduct a product recall. The costs associated with product recalls individually or in the aggregate in any given fiscal year, or for any particular recall event, could be significant. Although we maintain product recall insurance, and we require that our vendors fully indemnify us for such events, an involuntary product recall could result in a material adverse impact on our financial performance. In addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations.
In addition, the live unscripted nature of our television broadcasting may subject us to misrepresentation or false advertising claims by our customers, the Federal Trade Commission and state attorneys general. We are subject to two FTC consent decrees, one issued in 2001 and one issued in 2003; both have a duration of 20 years. They consist of claims involving recordkeeping, compliance policies, and attention to detail on claim substantiation. Violations of these decrees could result in significant civil fines and penalties.
Risks Relating to Television Viewership Trends, Technologies & Costs
Changes in technology and in consumer viewing patterns may negatively impact our video content viewing and could result in a decrease in revenue.
As a multiplatform interactive video service, we are dependent on our ability to attract and retain viewers and must successfully adapt to technological advances in the media entertainment industry, including the emergence of alternative distribution platforms, such as digital video recorders, video-on-demand and subscription video-on-demand ( e.g. , Netflix, Hulu, Amazon Prime). New technologies affect the manner in which our programming is distributed to consumers, the sources and nature of competing content offerings, and the time and manner in which consumers view our programming. This trend has impacted the traditional forms of distribution, as evidenced by the industry-wide decline in ratings for broadcast television, the development of alternative distribution channels for broadcast and cable programming and declines in cable and satellite subscriber levels across the industry. In order to respond to these developments, we have developed a multiplatform distribution approach, including delivering our content over various streaming applications such as Roku and Apple TV and distribution through social media platforms. However, there can be no assurance that we will successfully respond to these changes which could result in a loss of viewership and a decrease in revenue.
The failure to secure suitable placement for our television programming could adversely affect our ability to attract and retain television viewers and could result in a decrease in revenue.
We are dependent upon our ability to compete for television viewers. Effectively competing for television viewers is dependent, in part, on our ability to secure placement of our television programming within a suitable programming tier at a desirable channel position or format. The majority of multi-video programming distributors now offer programming on a digital basis, which has resulted in increased channel capacity.
In the entertainment reporting segment, we generally operate under distribution agreements with cable operators, direct-to-home satellite providers and telecommunications companies to distribute our television programming over their systems. The terms of the distribution agreements typically range from one to five years. During any fiscal year, certain agreements with cable, satellite or other distributors may or have expired. Under certain circumstances, we or our distributors may cancel the agreements prior to their expiration. Additionally, we may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. The distribution agreements generally provide that we will pay each operator a monthly access fee, based on the number of homes receiving our programming, and in some cases marketing support payments. We frequently review distribution opportunities with cable system operators and broadcast stations providing for full- or part-time carriage of our programming. We believe that our major competitors to our entertainment brands leverage their economies of scale to incur cable and satellite distribution fees
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representing a significantly lower percentage of their sales attributable to their television programming than we do, and that their fee arrangements are substantially on a commission basis (in some cases with minimum guarantees) rather than on the predominantly fixed-cost basis that we currently have. At our current sales level, our distribution costs as a percentage of total consolidated net sales are higher than those of our competition. However, we can leverage this fixed expense with sales growth to accelerate improvement in our profitability. We may not be able to expand or could lose some of our existing programming distribution if we cannot negotiate profitable distribution agreements.
We may not be able to maintain our satellite services in certain situations beyond our control, which may cause our programming to go off the air for a period of time and cause us to incur substantial additional costs.
Our programming is presently distributed to cable systems, television stations and satellite dish operators via a leased communications satellite transponder. Satellite service may be interrupted due to a variety of circumstances beyond our control, such as satellite transponder failure, satellite fuel depletion, governmental action, preemption by the satellite service provider, solar activity and service failure. Our satellite transponder agreement provides us with preemptible back-up service if satellite transmission is interrupted under certain conditions. In the event of a serious transmission interruption where back-up service is not available, we may need to enter into new arrangements, resulting in substantial additional costs and the inability to broadcast our signal for some period of time.
A natural disaster or significant weather event could seriously impact our ability to operate, including our ability to broadcast, operate websites, process and fulfill transactions, respond to customer inquiries and generally maintain cost-efficient operations.
Our television broadcast studios, internet operations, IT systems, merchandising team, inventory control systems, executive offices, and finance/accounting functions, among others, are in our adjacent offices at 6740 and 6690, Shady Oak Road in Eden Prairie, Minnesota. In addition, our only fulfillment and distribution facility is centralized at a location in Bowling Green, Kentucky. Fire, flood, severe weather, power loss, telecommunications failure, hurricanes, tornadoes, earthquakes, acts of war or terrorism, acts of God and similar events or disruptions may damage or interrupt our broadcast, computer, broadband or other communications systems and infrastructures, including the distribution of our network to our customers, at any time. While we have certain business continuity plans in place, no assurances can be given as to how quickly we would be able to resume operations and how long it may take to return to normal operations. We could incur substantial financial losses above and beyond what may be covered by applicable insurance policies, and may experience a loss of sales, customers, vendors and employees during the recovery period.
A natural disaster or significant weather event could materially interfere with our customers’ ability to receive our broadcast or reach us to purchase our products and services.
Our operations rely on our customers’ access to third party content distribution networks, communications providers and utilities like cable, satellite and OTT television services, as well as internet, telephone and power utilities. A natural disaster or significant weather event could make one or more of these third-party services unavailable to our customers and could lead to the deferral or loss of sales of our goods and services.
Risks Related to Digital Advertising
We rely on integrations with demand- and supply-side advertising platforms, ad servers and social platforms. A decrease in demand for advertising and public criticism of digital advertising technology in the U.S. and internationally could adversely affect the demand for and use of our solutions.
Our business depends, in part, on the demand for digital advertising technology. The digital advertising industry has been and may in the future be subject to reputational harm, negative media attention and public complaint relating to, among other things, the allegedlack of transparency and anti-competitive behavior among advertising technology companies. This public criticism could result in increased data privacy and anti-trust regulation in the digital advertising industry in the U.S. and internationally. In addition, our services are delivered in web browsers, mobile apps and other software environments where online advertising is displayed, and certain of these environments have announced future plans to phase out or end the use of cookies and other third-party tracking technology on their operating systems in order to provide more consumer data privacy. While our technology and solutions do not rely on
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persistent identifiers or cookie-based or cross-site tracking, these changes and other updates to software functionality in these environments could hurt our ability to effectively deliver our services.
We may not be able to accurately predict changes in overall advertiser demand for the channels in which it operates and cannot assure that our investment in formats will correspond to any such changes. Advertisers may change the fees they charge users or otherwise change their business model in a manner that slows the widespread acceptance of advertisements. In order for our services to be successful, there must be a large base of advertisers to deliver content. We have limited or no control over the availability or acceptance of those advertisements, and any change in the licensing terms, costs, availability or user acceptance of these advertisements could adversely affect our business. Any decrease in the use of mobile, display, and video advertising, whether due to customers losing confidence in the value or effectiveness of such channels, regulatory restrictions, public criticism or other causes, or any inability to further penetrate CTV or enter new and emerging advertising channels, could adversely affect our business, results of operations, and financial condition. Any change or decrease in the demand for digital advertising, including on social media platforms as a result of avoidance campaigns or similar events, may negatively affect the demand for and use of our solutions. If our customers significantly reduce or eliminate their digital ad spend in response to the public criticism of the digital advertising industry or its related effects, our business, financial condition and results of operations could be adversely affected.
Risks Related to Our Securities
Our stock price has been volatile, and continued volatility could adversely affect our ability to raise additional capital and/or cause us to be subject to securities class action litigation.
Most recently, on April 21, 2022, the market price of our common stock, as reported on The Nasdaq Capital Market, closed at a price of $4.38 per share. The prices at which our common stock is quoted and the prices which investors may realize will be influenced by several factors, some specific to our company and operations and some that may affect our sector or public companies generally. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in securities’ analysts’ recommendations or earnings estimates, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, significant sales of our common stock by existing stockholders and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, including the first half of 2020, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These market fluctuations, regardless of the cause, may materially and adversely affect our stock price, regardless of our operating results. In addition, we may be subject to securities class action litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition.
There can be no assurance that we will be able to comply with the continued listing standards of The Nasdaq Capital Market and we could be delisted.
Even though our common stock is listed on The Nasdaq Capital Market, we cannot assure you that we will be able to comply with standards necessary to maintain a listing of our common stock on The Nasdaq Capital Market. Our failure to meet the continuing listing requirements may result in our common stock being delisted from The Nasdaq Capital Market.
Our business could be negatively affected as a result of the actions of activist or hostile shareholders.
Our business could be negatively affected as a result of shareholder activism, which could cause us to incur significant expense, hinder execution of our business strategy, and impact the trading value of our securities. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in publicly traded companies in recent years and we are subject to the risks associated with such activism. In 2014, we were the subject of a proxy contest. Shareholder activism, including potential proxy contests, requires significant time and attention by management and the board of directors, potentially interfering with our ability to execute our strategic plan. Additionally, such shareholder activism could give rise to perceived uncertainties as to our future direction, adversely affect our relationships with key executives and business partners and make it more difficult to attract and retain qualified personnel. Also, we may be
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required to incur significant legal fees and other expenses related to activist shareholder matters. Any of these impacts could materially and adversely affect our business and operating results. Further, the market price of our common stock could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties described in this “Risk Factors” section.
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders.
We adopted a Shareholder Rights Plan to preserve the value of certain deferred tax benefits, including those generated by net operating losses, as described further under Part II, Item 5 below. The Shareholder Rights Plan may have anti-takeover effects. The provisions of the Shareholder Rights Plan could have the effect of delaying, deferring, or preventing a change of control of us and could discourage bids for our common stock at a premium over the market price of our common stock.
Risks Related to Regulation
Trade policies, tariffs, tax or other government regulations that increase the effective price of products manufactured in other countries and imported into the United States could have a material adverse effect on our business.
A material percentage of the products that we offer on our television programming and our e-commerce websites are imported by us or our vendors, from other countries. Uncertainty with respect to trade policies, tariffs, tax and government regulations affecting trade between the United States and other countries has increased. Many of our vendors source a large percentage of the products we sell from other countries. Major developments in trade relations, such as the imposition of tariffs on imported products, could have a material adverse effect on our financial results and business.
We may be subject to claims by consumers and state and federal authorities for security breaches involving customer information, which could materially harm our reputation and business or add significant administrative and compliance cost to our operations.
In order to operate our business, which includes multiple retail channels, we take orders for our products from customers. This requires us to obtain personal information from these customers including, but not limited to, credit card numbers. Although we take reasonable and appropriate security measures to protect customer information, there is still the risk that external or internal security breaches or digital or telecommunications spoofing could occur, including cyber incidents. In addition, new tools and discoveries by third parties in computer or communications technology or software or other developments may facilitate or result in a future compromise of consumer information under applicable law or breach of our computer systems. Such compromises or breaches could result in consumer harm or risk of harm, data loss and/or identity theft leading to significant liability or costs to us from notification requirements, lawsuits brought by consumers, shareholders or other businesses seeking monetary redress, state and federal authorities for fines and penalties, and could also lead to interruptions in our operations and negative publicity causing damage to our reputation and limiting customers’ willingness to purchase products from us. Businesses in the retail industry have experienced material sales declines after discovering data breaches, and our business could be similarly impacted by cyber incidents. Reputational value is based in large part on perceptions of subjective qualities. While reputations may take decades to build, a significant negativeincident can erode trust and confidence, particularly if it results in adverse mainstream and social media publicity, governmental investigations or litigation. Theft of credit card numbers of consumers could result in significant fines and consumer settlement costs, litigation costs, FTC audit requirements, and significant internal administrative costs.
Various federal, state, and foreign laws and regulations as well as industry standards and contractual obligations govern the collection, use, retention, protection, disclosure, cross-border transfer, localization, sharing, and security of the data we receive from and about our users, employees, and other individuals. The regulatory environment for the collection and use of personal information by device manufacturers, online service providers, content distributors, advertisers, and publishers is evolving in the United States and internationally. Privacy and consumer rights groups and government bodies (including the U.S. Federal Trade Commission (“FTC”), state attorneys general, the European Commission, and European data protection authorities), have increasingly scrutinized privacy issues with respect to devices that identify or are identifiable to a person (or household or device) and personal information collected through the internet, and we expect such scrutiny to continue to increase. The U.S. federal government, U.S. states, and foreign governments have enacted (or are considering) laws and regulations that could significantly restrict industry participants’ ability to collect, use, and share
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personal information, such as by regulating the level of consumer notice and consent required before a company can place cookies or other tracking technologies. For example, the EU General Data Protection Regulation (“GDPR”) imposes detailed requirements related to the collection, storage, and use of personal information related to people located in the EU (or which is processed in the context of EU operations) and places new data protection obligations and restrictions on organizations and may require us to make further changes to our policies and procedures in the future beyond what we have already done.
We made changes to our data protection compliance program to prepare for the GDPR and will continue to monitor the implementation and evolution of data protection regulations, but if we are not compliant with GDPR or other data protection laws or regulations if and when implemented, we may be subject to significant fines and penalties (such as restrictions on personal information processing) and our business may be harmed. For example, under the GDPR, fines of up to 4% of the annual global revenue of a noncompliant company, as well as data processing restrictions, could be imposed for violation of certain of the GDPR’s requirements. Data protection laws continue to proliferate throughout the world and such laws likely apply to our business.
In addition to possible claims for security breaches involving customer information, the secure processing, maintenance and transmission of customer information is critical to our operations and business strategy, and we devote significant resources to protect our customer information. The expenses associated with complying with a patchwork of state laws imposing differing security requirements depending on the residence of our customers could reduce our operating margins. As mentioned above, there have been continuing efforts to increase the legal and regulatory obligations and restrictions on companies conducting commerce, primarily in the areas of taxation, consumer privacy and protection of consumer personal information, and we may have to devote significant resources to information security.
Nearly all of our sales are paid for by customers using credit or debit cards and the increasingly heightened Payment Card Industry (“PCI”) standards regarding the storage and security of customer information could potentially impact our ability to accept card brands.
Nearly all of our customers pay for purchases via a credit or debit card. Credit and debit card payment organizations continue to heighten PCI standards that are applicable to all merchants who accept these cards. These standards primarily pertain to the processes and procedures for encrypted use and secure storage of customer data. By virtue of the volume of our overall credit card transactions, we are a Level 1 merchant which requires the annual completion of a formal Report of Compliance (“ROC”) by a Qualified Security Assessor. Failure to comply with PCI standards, as required by card issuers, could result in card brand fines and/or the possible inability for us to accept a card brand. Our inability to accept one or all card brands could materially adversely affect sales. Although we received an approved ROC on July 31, 2020, there is no guarantee that we will continue to receive such approvals.
Technology and Intellectual Property Risks
We significantly rely on technology and information management tools and operational applications to run our existing businesses, the failure of which could adversely impact our operations.
Our businesses are dependent, in part, on the use of sophisticated technology, some of which is provided to us by third parties. These technologies include, but are not necessarily limited to, satellite based transmission of our programming, use of the internet and other mobile commerce devices in relation to our on-line business, new digital technology used to manage and supplement our television broadcast operations, the age of our legacy operational applications to distribute product to our customers and a network of complex computer hardware and software to manage an ever increasing need for information and information management tools. The failure of any of these legacy systems or operational infrastructure elements, technologies, or our inability to have this technology supported, updated, expanded or integrated into new business processes or other technologies, could adversely impact our operations. Although we have developed alternative sources of technology and built redundancy into our computer networks and tools, there can be no assurance that these efforts to date would protect us against all potential issues or disaster occurrences related to the loss of any such technologies or their use. Further, we may face challenges in keeping pace with rapid technological changes and adopting new products or platforms and migrating to new systems.
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We may fail to adequately protect our intellectual property rights or may be accused of infringing upon the intellectual property rights of third parties.
We regard our intellectual property rights, including patents, service marks, trademarks and domain names, copyrights and trade secrets, as critical to our success. We rely heavily upon software, databases and other systemic components that are necessary to manage and support our business operations, many of which utilize or incorporate third party products, services or technologies. In addition, we license intellectual property rights in connection with the various products and services we offer to consumers. As a result, we are subject to legal proceedings and claims in the ordinary course of business, including claims of allegedinfringement of the trademarks, copyrights, patents and other intellectual property rights of third parties. In addition, litigation may be necessary to enforce our intellectual property rights, protect trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business, financial condition and results of operations. Patent litigation tends to be particularly protracted and expensive. Our failure to protect our intellectual property rights in a meaningful manner or challenges to third party intellectual property we utilize or that is related to our contractual rights could result in erosion of brand names; limit our ability to control marketing on or through the internet using our various domain names; limit our useful technologies; disrupt normal business operations or result in unanticipated costs, which could adversely affect our business, financial condition and results of operations .
strengths
advantage
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During fiscal 2021, we began reporting based on three reportable segments:
Entertainment, which is comprised of our television networks, ShopHQ, ShopBulldogTV, ShopHQHealth, ShopJewelryHQ and 1-2-3.tv.
Consumer Brands, which is comprised of Christopher & Banks (“C&B”), J.W. Hulme Company (“JW”), Cooking with Shaquille O’Neal (“Shaq”), OurGalleria.com and TheCloseout.com (“TCO”).
Media Commerce Services, which is comprised of iMedia Digital Services (“iMDS”), Float Left (“FL”) and i3PL.
The corresponding current and prior period segment disclosures have been recast to reflect the current segment presentation.
Results of Operations – iMedia Consolidated
The following table sets forth, for the periods indicated, certain statement of operations data.
Fiscal Year Ended
January 29,
January 30,
February 1,
Net sales
Gross margin
Operating expenses:
Distribution and selling
General and administrative
Depreciation and amortization
Restructuring costs
Executive and management transition costs
Total operating expenses
Operating loss
Interest expense, net
Loss on debt extinguishment
Loss before income taxes
Income tax provision
Net loss
Consolidated Net Sales
Consolidated net sales during fiscal 2021 were $551,134 compared to $454,171 during fiscal 2020, a 21.3% increase. Consolidated net sales during fiscal 2020 were $454,171 compared to $501,822 during fiscal 2019, a 9.5% decrease. The increase in consolidated net sales in 2021 was primarily due to the incremental net sales from the completed 2021 acquisitions of Christopher & Banks, Synacor, 1-2-3.tv, and TCO, and the improved performance of the entertainment segment. For 2020, the $47,651 or 9.5% decrease in net sales was primarily due to our priority to increase our gross margin by decreasing net sales of merchandise categories with lower gross margin rates, such as consumer electronics.
Gross Margin
Consolidated gross margin percentages were 40.4%, 36.8% and 32.6% for 2021, 2020 and 2019, respectively. For 2021, the 361-basis point improvement was primarily attributable to the entertainment segment’s intentional increase in the percentage of sales from merchandise categories with higher margin rates, such as jewelry and watches, fashion and beauty. Our consolidated gross margin percentage was further improved in 2021 due to the impact from the completed 2021 acquisition of Christopher & Banks in the consumer brands segment. The consumer brands segment had a gross margin percentage of 49.5% for 2021 and contributed 9.9% of total gross margin in 2021 compared to 0.5% of total gross margin in 2020. For 2020, the 417-basis point increase was also primarily attributable to the entertainment segment’s gross margin increases due to strategic promotional and pricing initiatives.
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Total Operating Expenses
Total operating expenses were $233,341, $174,993 and $216,162 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, representing an increase of $58,348 or 33% from fiscal 2020 to fiscal 2021, and a decrease of $41,169 or 19.0% from fiscal 2019 to fiscal 2020. Total operating expenses as a percentage of net sales were 42.3%, 38.5% and 43.1% for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. For 2021, the increase in operating expenses is primarily due to the incremental operating expenses generated from the completed 2021 acquisitions of 1-2-3.tv, Synacor’s Portal and Advertising Business, Christopher & Banks, and TCO. These incremental operating costs from these acquisitions accounted for approximately 60% of the consolidated increase in total operating expenses. Additionally, in 2021 we incurred $6,974 of one-time transaction and transition costs associated with the 2021 acquisitions. Operating expenses also increased as a result of increased variable distribution and selling expenses and general and administrative expenses in the entertainment segment. Restructuring cost for 2021 were $634. For 2020, the decrease in operating expenses of $41,169 is due to the decline in distribution and selling expenses and lower general and administrative expenses.
Distribution and selling
Distribution and selling expense for fiscal 2021 increased $28,592, or 22.0%, to $158,512 or 28.8% of net sales compared to $129,920 or 28.6% of net sales in fiscal 2020. Approximately 70%, or $19,690, of the distribution and selling expense increase during fiscal 2021 is attributable to incremental distribution and selling expenses of the acquisitions of 1-2-3.tv, Synacor’s Portal and Advertising Business, Christopher & Banks, and TCO completed in 2021, and by the entertainment segment’s increased program distribution costs of $3,090. For 2020, the $40,667 decrease in distribution and selling expenses was primarily due to the entertainment segment’s decreased program distribution expenses, payroll and benefits, digital marketing expenses and other selling expenses.
General and administrative
General and administrative expense was $38,589, $20,336 and $25,611 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, representing an increase of $18,253 or 89.8% from fiscal 2020 to fiscal 2021, and a decrease of $5,275 or 20.6% from fiscal 2019 to fiscal 2020. General and administrative expenses as a percentage of net sales were 7.0%, 4.5% and 5.1% for fiscal 2021, fiscal 2020 and fiscal 2019. For 2021, approximately 61%, or $11,129, of the $18,253 increase in general and administrative expense was due to the incremental general and administrative expenses generated from the acquisitions completed in 2021, plus $6,974 in one-time transaction and transition costs associated with these acquisitions. For 2020, the $5,275 decrease in general and administrative expenses was primarily due to decreased payroll and benefits, reduced share-based compensation and other general expenses.
Depreciation and amortization
Depreciation and amortization expense was $35,606, $24,022 and $8,057 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, representing an increase of $11,584 from fiscal 2020 to fiscal 2021, and an increase of $15,965 or 198.2% from fiscal 2019 to fiscal 2020. Depreciation and amortization as a percentage of net sales was 6.5%, 5.3% and 1.6% for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. For 2021, the $11,584 increase in depreciation and amortization was primarily due to the entertainment segment’s increased broadcast rights amortization expense and the incremental depreciation and amortization expenses generated from the four acquisitions completed in 2021, including 1-2-3.tv, Synacor’s Portal and Advertising Business, Christopher & Banks, and TCO. For 2020, the $15,965 increase in depreciation and amortization expenses was primarily related to increased broadcast rights amortization expense.
Restructuring costs
Restructuring costs were $634, $715 and $9,166 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, representing a decrease of $81 or 11.3% from fiscal 2020 to fiscal 2021 and a decrease of $8,451 or 92.2% from fiscal 2019 to fiscal 2020. These costs in 2021, 2020, and 2019 were all related to our continued organizational optimization of our staffing, policies, and procedures that collectively work together to improve the velocity, quality, and decentralization of decision-making in the organization, to reduce the duplication of organizational effort, and to reduce costs. Fiscal 2019 represented the largest number and most financially impactful of these, which resulted in the most significant restructuring costs.
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Interest expense, net
Interest expense, net was $11,528, $5,234 and $3,760 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, representing an increase of $6,294 or 120.3% from fiscal 2020 to fiscal 2021 and an increase of $1,474 or 39.2% from fiscal 2019 to fiscal 2020. For 2021, the increase in net interest expense was primarily related to the $2,712 of interest expense on the $80,000 in 8.50% Senior Unsecured Bonds issued to finance the acquisition of 1-2-3.tv in 2021. In addition, we incurred higher interest expense in fiscal 2021 resulting from higher broadcast rights liabilities and higher average senior borrowings under the Siena and GreenLake credit facilities, respectively. For 2020, the increase in net interest expense was primarily related to television broadcast rights liabilities.
Effect of foreign exchange rates
In November of 2021, we acquired a foreign subsidiary, 1-2-3.tv, which reports its financial information in Euros. For the year ended January 29, 2022, we recognized foreign translation adjustments of ($2,428), which is part of other comprehensive income. Below is a summary of changes in foreign exchange rates for fiscal 2021 and 2020:
January 29,
January 30,
February 1,
Foreign Exchange Rate (USD / Euro) - Closing
% Change from prior year
The average exchange rate was $1.176 for the year ended January 29, 2022 and $1.151 for the year ended January 30, 2021. Below is a summary of the potential effect of changes in foreign exchange rates on our pro forma financial information for the year ended January 29, 2022 if we had acquired 1-2-3.tv as of the beginning of the fiscal year:
2021 Pro Forma
Effect of Foreign Exchange Rates
2021 Pro Forma at 2020 Rates
Net sales
Net income (loss)
Income tax provision
Our effective tax rate was (0.5)%, (0.5)% and 0.0%, for years ended January 29, 2022, January 30, 2021 and February 1, 2020. We have not recorded any income tax benefit on the losses recorded during fiscal 2021, 2020 or 2019 due to the uncertainty of realizing income tax benefits in the future as indicated by our recording of an income tax valuation allowance. We will continue to maintain a valuation allowance against our net deferred tax assets, including those related to net operating loss carryforwards, until we believe it is more likely than not that these assets will be realized in the future.
Net Loss Attributable to Shareholders
We had net losses attributable to shareholders of $22,008, $13,234, and $56,296 for the years ended January 29, 2022, January 30, 2021 and February 1, 2020. The change in net loss attributable to shareholders was a result of the above-described fluctuations in our net sales and expenses.
Adjusted EBITDA Reconciliation
To provide investors with additional information regarding our financial results, we also disclose Adjusted EBITDA (as defined below). Adjusted EBITDA was $41,647, $23,913, and ($18,391) for the years ended January 29, 2022, January 30, 2021 and February 1, 2020.
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The following table provides a reconciliation of the net loss attributable to shareholders to Adjusted EBITDA:
For the Fiscal Years Ended
January 29,
January 30,
February 1,
Net loss attributable to shareholders
Adjustments:
Depreciation and amortization (a)
Interest income
Interest expense
Income taxes
EBITDA (b)
A reconciliation of EBITDA to Adjusted EBITDA is as follows:
EBITDA (b)
Adjustments:
Transaction, settlement and integration costs, net (c)
Restructuring costs
One-time customer concessions
Costs related to Kentucky tornado
Inventory impairment write-down
Executive and management transition costs
Rebranding costs
Loss on debt extinguishment
Non-cash share-based compensation expense
Adjusted EBITDA (b)
Includes depreciation of $11,018, $10,662 and $10,661, which includes distribution facility depreciation of $3,755, $3,955 and $3,957 for the years ended January 29, 2022, January 30, 2021, and February 1, 2020, respectively. Distribution facility depreciation is included as a component of cost of sales within the accompanying consolidated statements of operations. The year ended January 29, 2022 and January 30, 2021 includes amortization expense related to the television distribution rights totaling $26,956 and $16,902, respectively. The year ended January 29, 2022 and January 30, 2021 includes amortization expense related to intangible assets totaling $1,416 and $415, respectively.
EBITDA as defined for this statistical presentation represents net income (loss) for the respective periods excluding depreciation and amortization expense, interest income (expense) and income taxes. We define Adjusted EBITDA as EBITDA excluding non-operating gains (losses); transaction, settlement and integration costs, net; restructuring costs; costs related to the Kentucky tornado; non-cash impairment charges and write downs; executive and management transition costs; one-time customer concessions; rebranding costs; gain on sale of television station; and non-cash share-based compensation expense.
Transaction, settlement and integration costs for the year ended January 29, 2022 include approximately $1,899 of transaction and transition costs related to our acquisition of 1-2-3.tv, approximately $2,304 of transaction and transition costs related to our acquisition of Christopher & Banks, $641 of transaction and transition costs related to our acquisition of Synacor’s Advertising and Portal business. Transaction, settlement and integration costs for the year ended January 30, 2021 include consulting fees incurred to explore additional loan financings, settlement costs, professional fees related to the TheCloseOut.com transaction, and incremental COVID-19 related legal costs. Transaction, settlement and integration costs, net, for year ended February 1, 2020 includes contract settlement costs of $1,200; business acquisition and integration-related costs of $246 to acquire Float Left and J.W. Hulme; costs incurred related to the implementation of our ShopHQ VIP customer loyalty program and our third-party logistics service offerings of $658, costs incurred to amend our Articles of Incorporation and to effect a reverse stock split of our common stock, partially offset by a $1,500 gain for the sale of our claim related to the Payment Card Interchange Fee and Merchant Discount AntitrustLitigation class action lawsuit.
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We have included the term “Adjusted EBITDA” in our reconciliation in order to adequately assess the operating strength and performance of our businesses. The Management team uses this measure to evaluate our business and make decisions about allocating resources to businesses and strategic initiatives. In addition, management uses Adjusted EBITDA as a financial measure to evaluate operating performance under our incentive compensation programs. Adjusted EBITDA should be considered in addition to, but not a substitute for operating income or loss, net income or loss or cash flows from operating activities and other measures as prepared in accordance with GAAP.
Results of Operations – Reporting Segments
The following table sets forth, for the periods indicated, certain statement of operations data for each segment.
Fiscal Year Ended
January 29,
January 30,
February 1,
Amount
% of Total
Amount
% of Total
Amount
% of Total
Net Sales
Entertainment
Consumer Brands
Media Commerce Services
Total net sales
Gross Margin
Entertainment
Consumer Brands
Media Commerce Services
Total gross margin
Operating Income (Loss)
Entertainment
Consumer Brands
Media Commerce Services
Total operating income (loss)
The entertainment segment continued to be our most significant segment in 2021 based on net sales, gross margin, and operating income (loss). The consumer brands segment had the highest rate of sales growth for fiscal 2021, with an increase of 1,958%. The consumer brands segment also had the highest gross margin rate, 49.5% for fiscal 2021. The results of operations for each segment and significant changes from year to year are discussed below.
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Entertainment Segment
The entertainment segment is comprised of our television networks: ShopHQ, ShopBulldogTV, ShopHQHealth, ShopJewelryHQ and 1-2-3.tv. The following table summarizes net sales by product category and other information from statements of operations for the entertainment segment:
Fiscal Year Ended
January 29,
January 30,
February 1,
Entertainment:
Amount
% of Rev
Amount
% of Rev
Amount
% of Rev
Jewelry & Watches
Health, Beauty & Wellness
Home
Fashion & Accessories
Other (primarily shipping & handling revenue)
Total entertainment revenues
Gross margin
Operating loss
Entertainment net sales increased $33,493 or 7.5% and decreased $50,717 or 10.2% for fiscal 2021 and 2020, respectively. For 2021, the increase in net sales was primarily due to the acquisition of 1-2-3.tv and growth in the Jewelry & Watches and Fashion & Accessories product lines, offset by decreases in Health, Beauty & Wellness, for ShopHQ. For 2020, the decrease in net sales was primarily due to our priority to increase our gross margin by reducing sales of less profitable products, particularly in consumer electronics.
Entertainment gross margin percentage was 40.2%, 36.8% and 32.8% for fiscal 2021, 2020 and 2019, respectively. For 2021, the 341-basis point improvement was primarily attributable to continued price optimization and product mix shift to higher margin rate categories, such as jewelry and watches, fashion, and beauty. For 2020, the 398-basis point increase was also primarily attributable to the gross margin increases due to strategic promotional and pricing initiatives.
Entertainment operating loss was (2.8)%, (1.4)% and (10.0)% for fiscal 2021, 2020, and 2019 respectively. For 2021, the increase in operating loss as a percentage of sales was due to an increase in program distribution expense of $3,090 and an increase in broadcast rights amortization. For 2020, the $43,437 improvement in Operating income was primarily due to margin improvement and cost saving initiatives.
Consumer Brands Segment
The consumer brands segment is comprised of Christopher & Banks (“C&B”), J.W. Hulme Company (“JW”), Cooking with Shaquille O’Neal (“Shaq”), OurGalleria.com and TheCloseout.com (“TCO”). The following table
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summarizes net sales by product category and other information from statements of operations for the consumer brands segment:
Fiscal Year Ended
January 29,
January 30,
February 1,
Consumer Brands:
Amount
% of Rev
Amount
% of Rev
Amount
% of Rev
Fashion & Accessories
Home
Jewelry & Watches
Other (primarily shipping & handling revenue)
Total consumer brands revenues
Gross margin
Operating income (loss)
Consumer brands net sales for the consumer brands segment increased $42,192 or 1,958% and decreased $119 or 5.2% for fiscal 2021 and 2020, respectively, when compared to the previous fiscal year. For 2021, the increase in net sales was primarily due to the 2021 acquisitions of C&B and TCO. C&B and TCO contributed approximately 83% and 11%, respectively, of consumer brands net sales for fiscal 2021. eCommerce sales contributed over 91% of the sales growth in fiscal 2021. For 2020, the decrease in net sales was primarily due to the negative impact of COVID-19 on our brick-and-mortar locations, which negatively impacted store sales at JW.
Consumer brands gross margin percentage was 49.5%, 41.5% and 35.0% for fiscal 2021, 2020 and 2019, respectively. For fiscal 2021, the 803-basis point improvement was primarily due to the 2021 acquisition of C&B, which has a standalone gross margin percentage of 54.0%. For fiscal 2020, the 652-basis point increase was primarily the result of continued promotions and pricing initiatives.
Consumer brands operating income (loss) as a percentage of sales was 3.6%, (74.2)%, and (84.8)% for fiscal 2021 and 2020, respectively. The increase in operating income as a percentage of sales in 2021 is primarily attributable to investments made in marketing campaigns and direct-to-consumer catalogs designed to reinvigorate the C&B customer base to drive sales in the near-term and create customer lifetime value through customer reactivation and acquisition. For 2020, we were not able to leverage the fixed operating expenses primarily for JW Hulme, which continues to be a brand that has long-term value.
Media Commerce Services Segment
The media commerce services segment is comprised of iMedia Digital Services (“iMDS”), Float Left (“FL”) and i3PL. The following table summarizes net sales by product category and other information from statements of operations for the consumer brands segment:
Fiscal Year Ended
January 29,
January 30,
February 1,
Media Commerce Services:
Amount
% of Rev
Amount
% of Rev
Amount
% of Rev
Syndication
Advertising & Search
OTT
Other
Total media commerce services revenues
Gross margin
Operating income (loss)
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Media commerce services net sales increased $21,278 or 324.2% and $3,185 or 94.3% for fiscal 2021 and 2020, respectively, when compared to the previous fiscal year. For 2021, the increase in net sales was primarily due to the acquisition of iMDS (Synacor acquisition), which contributed approximately 79% to sales for fiscal 2021. For 2020, the increase in net sales was primarily due to the acquisition of FL.
Media commerce services gross margin percentage was 29.0%, 34.5% and 1.1% for 2021, 2020 and 2019, respectively. For fiscal 2021, the 541-basis point decrease was primarily due to the shift to lower-margin portal and advertising services through the acquisition of iMDS. For fiscal 2020, the 3,340-basis point increase was primarily the result of growth in the higher-margin OTT service line through the acquisition of FL.
Media commerce services operating income (loss) was 4.2% and (0.8)% of sales for fiscal 2021 and 2020, respectively. For 2021, the increase in operating income as a percentage of sales is primarily due to the acquisition of iMDS. For 2020, labor investments in the business did not deliver anticipated results, which inflated the cost as a percentage of net sales as we were not able to leverage operating expenses in fiscal 2020.
Financial Condition, Liquidity and Capital Resources
As of January 29, 2022, we had cash of $11,295 and $11,400 of availability on the Siena Credit Facility. In addition, under the Sienna Credit Facility, we are required to maintain a minimum of $7,500 of unrestricted cash plus unused line availability at all times. As of January 30, 2021, we had cash of $15,485. During fiscal 2021, working capital increased $38,445 to $72,108 compared to working capital of $33,663 for fiscal 2020 (see “Cash Requirements” below for additional information on changes in working capital accounts). The current ratio (our total current assets divided by total current liabilities) improved to 1.4 at January 29, 2022 compared to 1.2 at January 30, 2021.
Sources of Liquidity
Our principal source of liquidity is our available cash and our additional borrowing capacity under our revolving credit facility with Siena Lending Group, LLC (“Siena”). As of January 29, 2022, we had cash of $11,295 and additional borrowing capacity of $11,400.
8.50% Senior Unsecured Notes
On September 28, 2021, we completed and closed on our $80,000 offering of 8.50% Senior Unsecured Notes due 2026 (the “Notes”) and issued the Notes. We received related net proceeds of $73,700 after deducting the underwriting discount and estimated offering expenses payable by us (including fees and reimbursements to the underwriters). The Notes were issued under an indenture, dated September 28, 2021 (the “Base Indenture”), between us and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated September 28, 2021 (the “Supplemental Indenture,” and the Base Indenture as supplemented by the Supplemental Indenture, the “Indenture”), between us and the Trustee. The Notes were denominated in denominations of $25.00 per note and integral multiples of $25.00 in excess thereof.
The Notes will pay interest quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on December 31, 2021, at a rate of 8.50% per year, and will mature on September 30, 2026.
The Notes are our senior unsecured obligations. There is no sinking fund for the Notes. The Notes are the obligations of iMedia Brands, Inc. only and are not obligations of, and are not guaranteed by, any of our subsidiaries. We may redeem the Notes for cash in whole or in part at any time at our option (i) on or after September 30, 2023 and prior to September 30, 2024, at a price equal to $25.75 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after September 30, 2024 and prior to September 30, 2025, at a price equal to $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after September 30, 2025 and prior to maturity, at a price equal to $25.25 per note, plus accrued and unpaid interest to, but excluding, the date of redemption. The Indenture provides for events of default that may, in certain circumstances, lead to the outstanding principal and unpaid interest of the Notes becoming immediately due and payable. If a Mandatory Redemption Event (as defined in the Supplemental Indenture) occurs, we will have an obligation to redeem the Notes, in whole but not in part, within 45 days after the occurrence of the Mandatory Redemption Event at a redemption price in cash equal to $25.50 per note plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
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We used all of the net proceeds from the offering to fund our closing cash payment in connection with the acquisition of 1.2.3.tv Invest GmbH and 1.2.3.tv Holding GmbH and any remaining proceeds for working capital and general corporate purposes, which may include payments related to the acquisition.
The offering was made pursuant to an effective shelf registration statement filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) on August 5, 2021 and declared effective by the Commission on August 12, 2020 (File No. 333-258519), a base prospectus included as part of the registration statement, and a prospectus supplement, dated September 23, 2021, filed with the SEC pursuant to Rule 424(b) under the Securities Act.
Debt issuance costs, net of amortization, relating to the Notes were $5,925 and $0 as of January 29, 2022, and January 30, 2021, respectively and are included as a direct reduction to the 8.50% Senior Unsecured Notes liability balance within the accompanying consolidated balance sheets. The balance of these costs is being expensed as additional interest over the five-year term of the 8.50% Senior Unsecured Notes.
Siena Credit Facility
On July 30, 2021, we and certain of our subsidiaries, as borrowers, entered into a loan and security agreement (as amended through September 20, 2021, the “Loan Agreement”) with Siena Lending Group LLC and the other lenders party thereto from time to time, Siena Lending Group LLC, as agent (the “Agent”), and certain additional of our subsidiaries, as guarantors thereunder. The Loan Agreement has a three-year term and provides for up to a $80,000 revolving line of credit. Subject to certain conditions, the Loan Agreement also provides for the issuance of letters of credit in an aggregate amount up to $5,000 which, upon issuance, would be deemed advances under the revolving line of credit. Proceeds of borrowings were used to refinance all indebtedness owing to PNC Bank, National Association, to pay the fees, costs, and expenses incurred in connection with the Loan Agreement and the transactions contemplated thereby, for working capital purposes, and for such other purposes as specifically permitted pursuant to the terms of the Loan Agreement. Our obligations under the Loan Agreement are secured by substantially all of our assets and the assets of our subsidiaries as further described in the Loan Agreement.
Subject to certain conditions, borrowings under the Loan Agreement bear interest at 4.50% plus the London interbank offered rate for deposits in dollars (“LIBOR”) for a period of 30 days as published in The Wall Street Journal three business days prior to the first day of each calendar month. There is a floor for LIBOR of 0.50%. If LIBOR is no longer available, a successor rate to be chosen by the Agent in consultation with us or a base rate.
The Loan Agreement contains customary representations and warranties and financial and other covenants and conditions. In addition, the Loan Agreement places restrictions on our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to shareholders. We also pay a monthly fee at a rate equal to 0.50% per annum of the average daily unused amount of the credit facility for the previous month.
As of January 29, 2022, we had total borrowings of $60,216 under our revolving line of credit with Siena. Remaining available capacity under the revolving line of credit as of January 29, 2022 was approximately $11,400, which provided liquidity for working capital and general corporate purposes. As of January 29, 2022, we were in compliance with applicable financial covenants of the Siena Credit Facility and expect to be in compliance with applicable financial covenants over the next twelve months.
Interest expense recorded under the Siena Credit Facility was $1,746 for fiscal 2021.
Deferred financing costs, net of amortization, relating to the revolving line of credit were $2,411 and $0 as of January 29, 2022 and January 30, 2021, respectively and are included within other assets within the accompanying consolidated balance sheets. The balance of these costs is being expensed as additional interest over the three-year term of the Siena Loan Agreement .
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GreenLake Real Property Financing
On July 30, 2021, two of the our subsidiaries, VVI Fulfillment Center, Inc. and EP Properties, LLC (collectively, the “Borrowers”), and us, as guarantor, entered into that certain Promissory Note Secured by Mortgages (the “GreenLake Note”) with GreenLake Real Estate Finance LLC (“GreenLake”) whereby GreenLake agreed to make a secured term loan (the “Term Loan”) to the Borrowers in the original amount of $28,500. The GreenLake Note is secured by, among other things, mortgages encumbering our owned properties in Eden Prairie, Minnesota and Bowling Green, Kentucky (collectively, the “Mortgages”) as well as other assets as described in the GreenLake Note. Proceeds of borrowings shall be used to (i) pay fees and expenses related to the transactions contemplated by the GreenLake Note, (ii) make certain payments approved by GreenLake to third parties, and (iii) provide for our working capital and general corporate purposes. We has also pledged the stock that we owns in the Borrowers to secure we guarantor obligations.
The GreenLake Note is scheduled to mature on July 31, 2024. The borrowings, which include all amounts advanced under the GreenLake Note, bear interest at 10.00% per annum or, at the election of the Lender upon no less than 30 days prior written notice to the Borrowers, at a floating rate equal to the prime rate plus 200 basis points.
The GreenLake Note contains customary representations and warranties and financial and other covenants and conditions, including, a requirement that the Borrowers comply with all covenants set forth in the Loan Agreement described above. The GreenLake Note also contains certain customary events of default .
As of January 29, 2022, there was $28,500 outstanding under the term loan with GreenLake, all of which was classified as long-term in the accompanying condensed consolidated balance sheet. Principal borrowings under the term loan are non-amortizing over the life of the loan.
Interest expense recorded under the GreenLake Note was $1,793 for the year ended January 29, 2022.
Debt issuance costs, net of amortization, relating to the GreenLake Note were $1,682 and $0 as of January 29, 2022, and January 30, 2021, respectively and are included as direct reductions to the GreenLake Note liability balance within the accompanying consolidated balance sheets. The balance of these costs is being expensed as additional interest over the three-year term of the GreenLake Note.
Seller Notes
On November 5, 2021 the Company issued a $20,800 seller note as a component of consideration for the acquisition of 1-2-3.tv. The seller note is payable annually in two equal installments in November 2022 and November 2023. The seller note bears interest at a rate of 8.50%. $20,062 is outstanding as of January 29, 2022. Interest expense recorded under the November 5, 2021 seller note was $406 for the year ended January 29, 2022.
On July 30, 2021, the Company issued a $10,000 seller note as a component of consideration for the acquisition of Synacor’s Portal and Advertising business. The seller note is payable in $1,000 quarterly installments, maturing on December 31, 2023. The seller note bears interest at rates between 6% and 11% depending upon the period outstanding. $8,000 is outstanding as of January 29, 2022. Interest expense recorded under the July 30, 2021 seller note was $278 for the year ended January 29, 2022.
Public Equity Offerings
On June 9, 2021, we completed a public offering, in which we issued and sold 4,830,918 shares of our common stock at a public offering price of $9.00 per share. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately $39,955. We have used or intend to use the proceeds for general working capital purposes, including potential acquisitions of businesses and assets that are complementary to our operations.
On February 18, 2021, we completed a public offering, in which we issued and sold 3,289,000 shares of our common stock at a public offering price of $7.00 per share, including 429,000 shares sold upon the exercise of the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately $21,224. We used the proceeds for general working capital purposes.
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On August 28, 2020, we completed a public offering, in which we issued and sold 2,760,000 shares of our common stock at a public offering price of $6.25 per share, including 360,000 shares sold upon the exercise of the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the public offering were approximately $15,833. We used the proceeds for general working capital purposes.
Private Placement Securities Purchase Agreement
On April 14, 2020, we entered into a common stock and warrant purchase agreement with certain individuals and entities, pursuant to which we sold an aggregate of 1,836,314 shares of our common stock, issued warrants to purchase an aggregate of 979,190 shares of our common stock at a price of $2.66 per share, and fully-paid warrants to purchase an aggregate 114,698 shares of our common stock at a price of $0.001 per share in a private placement, for an aggregate cash purchase price of $4,000. The initial closing occurred on April 17, 2020 and we received gross proceeds of $1,500. Additional closings occurred on May 22, 2020, June 8, 2020, June 12, 2020 and July 11, 2020 and we received gross proceeds of $2,500. We incurred approximately $190 of issuance costs during the first half of fiscal 2020. The Warrants are indexed to our publicly traded stock and were classified as equity. The par value of the shares issued was recorded within common stock, with the remainder of the proceeds, less issuance costs, recorded as additional paid in capital in the accompanying condensed consolidated balance sheets. We used the proceeds for general working capital purposes.
The purchasers consisted of the following: Invicta Media Investments, LLC, Michael and Leah Friedman and Hacienda Jackson LLC. Invicta Media Investments, LLC is owned by Invicta Watch Company of America, Inc. (“IWCA”), which is the designer and manufacturer of Invicta-branded watches and watch accessories, one of our largest and longest tenured brands. Michael and Leah Friedman are owners and officers of Sterling Time, LLC (“Sterling Time”), which is the exclusive distributor of IWCA’s watches and watch accessories for television home shopping and our long-time vendor. IWCA is owned by our Vice Chair and director, Eyal Lalo, and Michael Friedman also serves as one of our directors. A description of the relationship between us, IWCA and Sterling Time is contained in Note 19 – “Related Party Transactions.” Further, Invicta Media Investments, LLC and Michael and Leah Friedman comprise a “group” of investors within the meaning of Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended, that is our largest shareholder.
The warrants have an exercise price per share of $2.66 and are exercisable at any time and from time to time from six months following their issuance date until April 14, 2025. We have included a blocker provision in the purchase agreement whereby no purchaser may be issued shares of our common stock if the purchaser would own over 19.999% of our outstanding common stock and, to the extent a purchaser in this offering would own over 19.999% of our outstanding common stock, that purchaser will receive fully-paid warrants (in contrast to the coverage warrants that will be issued in this transaction, as described above) in lieu of the shares that would place such holder’s ownership over 19.999%. Further, we included a similar blocker in the warrants (and amended the warrants purchased by the purchasers on May 2, 2019, if any) whereby no purchaser of the warrants may exercise a warrant if the holder would own over 19.999% of our outstanding common stock.
Other
Our ValuePay program is an installment payment program offered to customers in our entertainment and consumer brands reporting segments, which allows customers to pay by credit card for certain merchandise in two or more equal monthly installments with no interest charge. As of January 29, 2022, we had approximately $47,008 of net receivables due from customers under the ValuePay program. A source of near-term liquidity is our ability to increase our cash flow resources by reducing the percentage of our sales offered under our ValuePay installment program or by decreasing the length of time we extend credit to our customers under this installment program. However, any such change to the terms of our ValuePay installment program could impact future sales, particularly for products sold with higher price points. The customer demand for “buy now pay later” options has created a competitive platform for third-party providers to develop and offer favorable “buy now pay later” payments options for consumers that could potentially benefit retailers. Those benefits include; sales growth, immediate cash flow to the retailer and reduction/elimination in collection risk. The risk of payment and working capital requirements, could potentially reside with the third-party providers. Please see “Cash Requirements” below for a discussion of our ValuePay installment program.
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Cash Requirements
Currently, our principal cash requirements are to fund our business operations and to fund our debt service. We closely manage our cash resources and our working capital. In our entertainment and consumer brands segments, we attempt to manage our inventory receipts and reorders in order to ensure our inventory investment levels remain commensurate with our current sales trends. We also monitor the collection of our credit card and ValuePay installment receivables and manage our vendor payment terms in order to more effectively manage our working capital which includes matching cash receipts from our customers to the extent possible, with related cash payments to our vendors. ValuePay remains a cost-effective promotional tool for us. We continue to make strategic use of our ValuePay program in an effort to increase sales and to respond to similar competitive programs.
Our ability to fund operations, debt service and capital expenditures in the future will be dependent on our ability to generate cash flow from operations, maintain margins and to use available funds from our Siena Loan Agreement. Our ability to borrow funds is dependent on our ability to maintain an adequate borrowing base, and our ability to meet our credit facility’s covenants. Accordingly, if we do not generate sufficient cash flow from operations to fund our working capital needs, debt service payments and planned capital expenditures and meet credit facility covenants, and our cash reserves are depleted, we may need to take actions that are within our control, such as further reductions or delays in capital investments, additional reductions to our workforce, reducing or delaying strategic investments or other actions. We believe our existing cash balances and our availability under the Siena Loan Agreement, will be sufficient to fund our normal business operations over the next twelve months from the issuance of this report.
Our entertainment segment brands like ShopHQ and 1-2-3.tv have significant future commitments for our cash, primarily payments for cable and satellite program distribution obligations and the eventual repayment of our credit facility. As of January 29, 2022, we had total contractual cash obligations and commitments primarily with respect to our cable and satellite agreements, credit facility, operating leases, and finance lease payments totaling approximately $407,900 coming due over the next five fiscal years.
For fiscal 2021, net cash used for operating activities totaled $49,976 compared to net cash provided by operating activities of $6,231 in fiscal 2020 and net cash used for operating activities of $6,157 in fiscal 2019. Net cash used by operating activities for fiscal 2021 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, payments for television distribution rights, amortization of deferred financing costs and loss on debt extinguishment. In addition, net cash used for operating activities for fiscal 2021 reflects increases in inventories, accounts receivable, and prepaid expenses and other, and a decrease in deferred revenue and accounts payable and accrued liabilities. Inventories increased primarily as a result of the growth of inventory to support the Christopher and Banks business and additional inventory purchases made within the entertainment segment during Q3 to ensure we were not negatively impacted by logistic delays during our Q4.
For fiscal 2020, net cash provided by operating activities totaled $6,231 compared to net cash used for operating activities of $6,157 in fiscal 2019. Net cash provided by operating activities for fiscal 2020 reflects a net loss, as adjusted for depreciation and amortization, share-based payment compensation, payments for television distribution rights and amortization of deferred financing costs. In addition, net cash provided by operating activities for fiscal 2020 reflects decreases in inventories, accounts receivable and prepaid expenses, and an increase in deferred revenue; partially offset by decreases in accounts payable and accrued liabilities. Inventories decreased primarily as a result of disciplined management of overall working capital components commensurate with sales. Accounts receivable decreased primarily due to lower sales levels, as well as a slight decrease in the utilization of our ValuePay installment program. Accounts payable and accrued liabilities decreased during the first nine months of fiscal 2020 primarily due to a decrease in inventory payables as a result of lower inventory levels and timing of payments to vendors, a decrease in accrued severance resulting from our 2019 cost optimization initiative and 2019 executive and management transition, and a decrease in accrued cable distribution fees.
Net cash used for investing activities totaled $116,448 for fiscal 2021 compared to net cash used for investing activities of $4,892 for fiscal 2020. Net cash used for investing activities included expenditures for business acquisitions totaling $100,411 in fiscal 2021 and $0 in fiscal 2020. The 2021 expenditures for business acquisitions included $76,911 net, for 1-2-3.tv, $20,000 for Synacor’s Ad and Portal business, and $3,500 for Christopher & Banks. Expenditures for property and equipment were $10,037 in fiscal 2021 compared to $4,892 in fiscal 2020. The increase in capital expenditures in fiscal 2021 compared to fiscal 2020 primarily related to expenditures made for building improvements made at our Eden
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Prairie facility. Additional capital expenditures made during the periods presented relate primarily to the development, upgrade and replacement of computer software, order management, merchandising and warehouse management systems, related computer equipment, digital broadcasting equipment, and other office equipment, warehouse equipment and production equipment. Principal future capital expenditures are expected to include: the development, upgrade and replacement of various enterprise software systems; equipment improvements and technology upgrades at our distribution facility in Bowling Green, Kentucky; security upgrades to our information technology; and related computer and other equipment associated with the expansion of our entertainment, consumer brands and media commerce services business segments. During fiscal 2021, we also provided a cash deposit of $6,000 to a vendor to be used as working capital pursuant to a related exclusivity agreement.
Net cash used for investing activities totaled $4,892 for fiscal 2020 compared to net cash used for investing activities of $7,784 for fiscal 2019. Expenditures for property and equipment were $4,892 in fiscal 2020 compared to $7,146 in fiscal 2019. The decrease in capital expenditures in fiscal 2020 compared to fiscal 2019 primarily related to expenditures made for the upgrades in our customer service call routing technology during fiscal 2019. Additional capital expenditures made during the periods presented relate primarily to the development, upgrade and replacement of computer software, order management, merchandising and warehouse management systems, related computer equipment, digital broadcasting equipment, and other office equipment, warehouse equipment and production equipment.
Net cash provided by financing activities totaled $162,610 in fiscal 2021 and related primarily to proceeds from the issuance of 8.50% Senior Unsecured Notes of $80,000, PNC and Siena revolving loans of $96,952, proceeds from the issuance of common stock of $61,877 and proceeds from the issuance of the GreenLake Term Loan of $28,500. These cash proceeds were offset by principal payments on the PNC and Siena revolving loans of $77,736, principal payments on our PNC term loan of $12,440, payments for debt issuance costs of $11,191, payments on seller notes of $2,000, payments for debt extinguishment costs of $405, finance lease payments of $86 and tax payments for restricted stock unit issuances of $202.
Net cash provided by financing activities totaled $3,859 in fiscal 2020 and related primarily to proceeds from our PNC revolving loan of $26,400 and proceeds from the issuance of common stock and warrants of $20,043, offset by principal payments on the PNC revolving loan of $39,300, principal payments on our PNC term loan of $2,714, final payments related to our fiscal 2019 business acquisitions of $238, payments for common stock issuance costs of $216, finance lease payments of $103 and tax payments for restricted stock unit issuances of $13. Net cash provided by financing activities totaled $3,293 in fiscal 2019 and related primarily to proceeds from our PNC revolving loan of $188,100 and proceeds from the issuance of common stock and warrants of $6,000, offset by principal payments on the PNC revolving loan of $188,100, principal payments on our PNC term loan of $2,488, payments for common stock issuance costs of $109, finance lease payments of $71 and tax payments for restricted stock unit issuances of $39.
Financial Covenants
The Loan Agreement contains customary representations and warranties and financial and other covenants and conditions, including, among other things, minimum liquidity requirements. The Loan Agreement also requires we maintain a maximum senior net leverage ratios for each quarter. In addition, the Loan Agreement places restrictions on our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to shareholders.
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and assumptions, including those related to the realizability of accounts receivable, inventory and product returns. We base our estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about
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the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies estimates affect the more significant assumptions and estimates used in the preparation of the consolidated financial statements:
Accounts receivable. In our entertainment and consumer brands reporting segments, we utilize an installment payment program called ValuePay in our entertainment segment that entitles customers to purchase merchandise and pay for the merchandise in two or more equal monthly credit card installments in which we bear the risk of collection. The percentage of our net sales generated utilizing our ValuePay payment program over the past three fiscal years ranged from 50% to 57%. As of January 29, 2022 and January 30, 2021, we had approximately $47,008 and $49,736 due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimates are used in determining the provision for doubtful accounts and are based on historical rates of actual write offs and delinquency rates, historical collection experience, credit policy, current trends in the credit quality of our customer base, average length of ValuePay offers, average selling prices, our sales mix and accounts receivable aging. The provision for doubtful accounts, which is primarily related to our ValuePay program, for fiscal 2021, fiscal 2020, and fiscal 2019 was $4,067, $4,900, and $7,311, which is included in distribution and selling expense in the consolidated statements of operations. Based on our fiscal 2021 bad debt expense, a one-half point increase or decrease in bad debt expense as a percentage of total net sales would have an impact of approximately $1,100 on consolidated distribution and selling expense.
Inventory. In our entertainment and consumer brands reporting segments, we value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or net realizable value. As of January 29, 2022 and January 30, 2021, we had inventory balances of $116,256 and $68,715. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on the following factors: age of the inventory and the historical margins on the sales of aged inventory, estimated required sell-through time, stage of product life cycle and whether items are selling below cost. In determining appropriate reserve percentages, we look at our historical write off experience, the specific merchandise categories affected, our historic recovery percentages on various methods of liquidations, return to vendor contract rights, forecasts of future planned receipts, forecasts of inventory levels, forecasts of future product airings and current markdown processes. Provision for excess and obsolete inventory for fiscal 2021, fiscal 2020 and fiscal 2019$62, $5,512 and $8,798. The fiscal 2019 provision includes a non-cash inventory write-down of $6,050 resulting from a change in our merchandise strategy (see Note 17 – “Inventory Impairment Write-down” in the notes to our consolidated financial statements). Based on our fiscal 2021 inventory provision experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately $6 on consolidated gross profit.
Merchandise returns. In our entertainment and consumer brands reporting segments, we record a merchandise return liability as a reduction of gross sales for anticipated merchandise returns at each reporting period and must make estimates of potential future merchandise returns related to current period product revenue. Our return rates on our total net sales were 16.0% in fiscal 2021, 14.8% in fiscal 2020, and 19.4% in fiscal 2019. We estimate and evaluate the adequacy of our merchandise returns liability by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the merchandise return liability in any accounting period. As of January 29, 2022 and January 30, 2021, we recorded a merchandise return liability of $8,126 and $5,271, included in accrued liabilities, and a right of return asset of $3,770 and $2,749, included in other current assets. Based on our fiscal 2021 sales returns, a one-point increase or decrease in our returns rate would have had an impact of approximately $2,700 on gross profit.
Business combinations . We account for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations” using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as
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goodwill. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date.
Goodwill . Goodwill represents the excess of purchase price over the value assigned to the net assets, including identifiable intangible assets, of a business acquired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is defined as an operating segment or one level below an operating segment, referred to as a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. The Company performs its annual goodwill impairment tests as of the first day of the fourth quarter of the fiscal year or in interim periods if certain events occur indicating that the carrying amount may be impaired, such as changes in the business climate, poor indicators of operating performance or the sale or disposition of a significant portion of a reporting unit. When testing goodwill, the Company has the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than their respective carrying amounts as the basis to determine if it is necessary to perform a quantitative impairment test. If the Company chooses not to complete a qualitative assessment, or if the initial assessment indicates that it is more likely than not that the carrying amount of a reporting unit or the carrying amount of an indefinite-lived intangible asset exceed their respective estimated fair values, a quantitative test is required. In performing a quantitative impairment test, the Company compares the fair value of each reporting unit and with their respective carrying amounts. If the carrying amounts of the reporting unit exceed their respective fair values, an impairment charge is recognized in an amount equal to the difference, limited to the total amount of goodwill allocated to that reporting unit. There was no impairment of goodwill for the years ended January 29, 2022 and January 30, 2021; however, events such as prolonged economic weakness or unexpected significant declines in operating results of any of our reporting units or businesses, may result in goodwill impairment charges in the future.
Intangible Assets . Identifiable intangibles with finite lives are amortized over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. There was no impairment of intangible assets for the years ended January 29, 2022 and January 30, 2021; however, events such as prolonged economic weakness or unexpected significant declines in operating results of any of our reporting units or businesses, may result in intangible asset impairment charges in the future.
