LIFETIME BRANDS, INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q of Lifetime Brands, Inc. (the “Company” and, unless the context otherwise requires, references to the “Company” shall include its consolidated subsidiaries), contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information concerning the Company’s plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. When used in this Quarterly Report on Form 10-Q, the words “estimates,” “expects,” “intends,” “predicts,” “plans,” “believes,” “may,” “should,” “would,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, those based on the Company’s examination of historical operating trends, are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct. There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) in Part I, Item 1A under the heading Risk Factors . Such risks, uncertainties and other important factors include, among others, risks related to: • General economic factors and political conditions; • Exit of the United Kingdom from the European Union; • Tariffs; • Port disruptions and higher transportation costs; • Indebtedness and compliance with credit agreements; • Access to the capital markets and credit markets; • The credit-worthiness of our customers and the counterparties to our derivatives; • Seasonality; • Liquidity; • Interest rates; • Competition; • Customer practices; • Intellectual property, brands and licenses; • Goodwill; • International operations; • Supply chain; • Foreign exchange rates; • International trade, including trade negotiations; • Transportation; • Product liability; • Regulatory matters; • Product development; • Reputation; • Technology; • Cyber security; • Personnel; - 28 - Table of Contents • Price fluctuations; • Business interruptions; • Projections; • Fixed costs; • Governance; • Acquisition integration; • Acquisitions and investments; • Public health pandemics and related effects, such as the COVID-19 pandemic; and • Social unrest, including related protests or disturbances. There may be other factors that may cause the Company’s actual results to differ materially from the forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. The Company is required to file its Annual Reports on Forms 10-K, Quarterly Reports on Forms 10-Q, Current Reports on Form 8-K, and other reports and documents as required from time to time with the United States Securities and Exchange Commission (the “SEC”). The Company also maintains a website at http://www.lifetimebrands.com . Information contained on this website is not a part of or incorporated by reference into this Annual Report. The Company makes available on its website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports as soon as reasonably practicable after these reports are filed with or furnished to the SEC. Users can access these reports free of charge on the Company’s website. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding the Company’s electronic filings with the SEC at http://www.sec.gov. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. Such disclosures will be included on the Company’s website in the ‘Investor Relations’ section. Accordingly, investors should monitor such portion of the Company's website, in addition to following the Company's press releases, SEC filings and public conference calls and webcasts. ABOUT THE COMPANY The Company designs, sources and sells branded kitchenware, tableware and other products used in the home. The Company’s product categories include two categories of products used to prepare, serve, and consume foods: Kitchenware (kitchen tools and gadgets, cutlery, kitchen scales, thermometers, cutting boards, shears, cookware, pantryware, spice racks, and bakeware) and Tableware (dinnerware, stemware, flatware, and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, bath scales, weather and outdoor household products, food storage, neoprene travel products and home décor). In 2020, Kitchenware products and Tableware products accounted for approximately 83% of the Company’s U.S. segment’s net sales and 85% of the Company’s consolidated net sales. The Company markets several product lines within each of its product categories and under most of the Company’s brands, primarily targeting moderate price points through virtually every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development, and its sourcing capabilities. The Company owns or licenses a number of leading brands in its industry, including Farberware ® , Mikasa ® , Taylor ® , KitchenAid ® , KitchenCraft ® , Pfaltzgraff ® , Built NY ® , Rabbit ® , Kamenstein ® , and MasterClass®. Historically, the Company’s sales growth has come from expanding product offerings within its product categories, by developing existing brands, acquiring new brands (including complementary brands in markets outside the U.S.), and establishing new product categories. Key factors in the Company’s growth strategy have been the selective use and management of the Company’s brands and the Company’s ability to provide a stream of new products and designs. A significant element of this strategy is the Company’s in-house design and development teams that create new products, packaging and merchandising concepts. - 29 - Table of Contents BUSINESS SEGMENTS The Company has two reportable segments, U.S. and International. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The U.S. segment includes the Company’s primary domestic business that designs, markets and distributes its products to retailers, distributors and directly to consumers through its own websites. The International segment consists of certain business operations conducted outside the U.S. Management evaluates the performance of the U.S. and International segments based on net sales and income from operations. Such measures give recognition to specifically identifiable operating costs such as cost of sales, distribution expenses and selling, general and administrative expenses. Certain general and administrative expenses, such as senior executive salaries and benefits, stock compensation, director fees, and accounting, legal and consulting fees, are not allocated to the specific segments and are reflected as unallocated corporate expenses. EQUITY INVESTMENTS The Company owns approximately 30% of the outstanding capital stock of Grupo Vasconia S.A.B. (“Vasconia”), an integrated manufacturer of aluminum products and one of Mexico’s largest housewares companies. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. The Quotation Key is VASCONI. The Company accounts for its investment in Vasconia using the equity method of accounting and records its proportionate share of Vasconia’s net income in the Company’s condensed consolidated statements of operations. Accordingly, the Company has recorded its proportionate share of Vasconia’s net income (reduced for amortization expense related to the customer relationships acquired) for the three months ended March 31, 2021 and 2020 in the accompanying unaudited condensed consolidated statements of operations. Pursuant to a Shares Subscription Agreement, the Company may designate four persons to be nominated as members of Vasconia’s Board of Directors. As of March 31, 2021, Vasconia’s Board of Directors is comprised of fourteen members of whom the Company has designated three members. SEASONALITY The Company’s business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2020 and 2019, net sales for the third and fourth quarters accounted for 62% and 60% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. The Company's inventory levels at March 31, 2021, did not decrease from the previous two quarters. The higher inventory levels are a result of increased inventory purchases to meet higher expected demand in 2021. Consistent with the seasonality of the Company’s net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next. The COVID-19 pandemic has caused, and may continue to cause, shifts in some of the Company's selling and purchasing cycles as customers deviate from their historical ordering patterns. RESTRUCTURING During the three months ended March 31, 2021 and 2020, the Company did not incur any restructuring expenses. RECENT DEVELOPMENTS The Company has not experienced significant disruptions in its supply chain related to the COVID-19 pandemic. In limited instances and categories, increased demand has strained the manufacturing capacity of certain of the Company’s suppliers. The Company expects, in the short term, higher inbound freight cost to import inventory as a result of expected higher demand of the Company's products and broader macroeconomic demand for ocean freight. Additionally, in the U.S., the Company has experienced instances of trucking availability shortages, resulting in delays of shipments to certain of its customers. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to the Company’s critical accounting policies and estimates discussed in the 2020 Annual Report on Form 10-K in Item 7 under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates . - 30 - Table of Contents RESULTS OF OPERATIONS The following table sets forth statements of operations data of the Company as a percentage of net sales for the periods indicated: Three Months Ended March 31, 2021 2020 Net sales 100.0 % 100.0 % Cost of sales 66.3 63.5 Gross margin 33.7 36.5 Distribution expenses 9.5 11.4 Selling, general and administrative expenses 19.5 28.6 Goodwill and other impairments — 13.9 Income (loss) from operations 4.7 (17.4) Interest expense (2.1) (3.2) Mark to market gain (loss) on interest rate derivatives 0.3 (1.6) Income (loss) before income taxes and equity in (losses) earnings 2.9 (22.2) Income tax (provision) benefit (1.2) 2.6 Equity in (losses) earnings, net of taxes (0.1) 0.2 Net income (loss) 1.6 % (19.4) % MANAGEMENT’S DISCUSSION AND ANALYSIS THREE MONTHS ENDED MARCH 31, 2021 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2020 Net Sales Consolidated net sales for the three months ended March 31, 2021 were $195.7 million, representing an increase of $50.6 million, or 34.9%, as compared to net sales of $145.1 million for the corresponding period in 2020. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2021 average rates to 2020 local currency amounts, consolidated net sales increased by $49.6 million, or 34.0%, as compared to consolidated net sales in the corresponding period in 2020. Net sales for the U.S. segment for the three months ended March 31, 2021 were $176.2 million, an increase of $47.0 million, or 36.4%, as compared to net sales of $129.2 million for the corresponding period in 2020. Net sales for the U.S. segment’s Kitchenware product category were $120.0 million for the three months ended March 31, 2021, an increase of $40.7 million, or 51.3%, as compared to $79.3 million for the corresponding period in 2020. The increase was mainly driven by higher consumer demand, in both e-commerce and wholesale channels, for essential kitchen tools and gadgets, cutlery and board and bakeware products. The strong demand for these products have been a result of shifts in consumer purchasing patterns. Net sales for the U.S. segment’s Tableware product category were $30.2 million for the three months ended March 31, 2021, an increase of $6.6 million , or 28.0%, as compared to $23.6 million for the corresponding period in 2020. The increase came from all product lines most notably on flatware sales from warehouse club programs and dinnerware sales from higher e-commerce sales. Net sales for the U.S. segment’s Home Solutions product category were $26.0 million for the three months ended March 31, 2021, a decrease of $0.3 million, or 1.1%, as compared to $26.3 million for the corresponding period in 2020. The decrease was primarily driven by lower sales in the hydration product category due to a warehouse club program not repeating in 2021, partially offset by an increase in home décor and measurement product sales. Net sales for the International segment were $19.5 million for the three months ended March 31, 2021, an increase of $3.6 million, or 22.6%, as compared to net sales of $15.9 million for the corresponding period in 2020. In constant currency, which excludes the impact of foreign exchange fluctuations, net sales increased $2.7 million, or 15.8%, as compared to consolidated net sales in the corresponding period in 2020. The increase in sales was primarily attributable to the continued recovery of sales to brick-and-mortar retailers to pre-pandemic levels, and an increase in e-commerce sales. - 31 - Table of Contents Gross margin Gross margin for the three months ended March 31, 2021 was $66.0 million, or 33.7%, as compared to $52.9 million, or 36.5%, for the corresponding period in 2020. Gross margin for the U.S. segment was $59.8 million, or 33.9%, for the three months ended March 31, 2021, as compared to $49.3 million, or 38.2%, for the corresponding period in 2020. The decrease in gross margin was primarily due to higher inbound freight costs, product mix and the 2020 quarter reflected a benefit from a duty exclusion on certain products. Gross margin for the International segment was $6.2 million, or 31.8%, for the three months ended March 31, 2021, as compared to $3.6 million, or 22.9%, for the corresponding period in 2020. The increase in gross margin was driven by the comparable period being negatively impacted by higher sales allowances and allowances for excess inventory. Distribution expenses Distribution expenses for the three months ended March 31, 2021 were $18.6 million, as compared to $16.6 million for the corresponding period in 2020. Distribution expenses as a percentage of net sales were 9.5% for the three months ended March 31, 2021, as compared to 11.4% for the three months ended March 31, 2020. Distribution expenses as a percentage of net sales for the U.S. segment were approximately 8.7% and 9.8% for the three months ended March 31, 2021 and 2020, respectively. As a percentage of sales shipped from the Company’s U.S. warehouses distribution expenses were 8.9% and 9.8% for the three months ended March 31, 2021 and 2020, respectively. The improvement was a result of the leverage benefit of fixed costs on higher sales volume, partially offset by higher hourly labor rates. Distribution expenses as a percentage of net sales for the International segment were 17.2% for the three months ended March 31, 2021, compared to 24.7% for the corresponding period in 2020. Distribution expenses during the three months ended March 31, 2020 include $0.8 million for the Company’s facility relocation costs. As a percentage of sales shipped from the Company’s U.K. warehouses, excluding the moving and relocation costs for U.K. operations, distribution expenses were 14.4% and 15.9% for the three months ended March 31, 2021 and 2020, respectively. The decrease was primarily attributed to an improvement in labor efficiencies as the prior period experienced inefficiencies associated with the setting up of the new U.K. warehouse. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended March 31, 2021 were $38.1 million, a decrease of $3.4 million, or 8.2%, as compared to $41.5 million for the corresponding period in 2020. Selling, general and administrative expenses for the U.S. segment were $27.4 million for the three months ended March 31, 2021, as compared to $30.4 million for the corresponding period in 2020. As a percentage of net sales, selling, general and administrative expenses were 15.6% and 23.5% for the three months ended March 31, 2021 and 2020, respectively. The decrease was primarily attributable to lower estimates for bad debt expense and selling and facility expenses which was partially offset by an increase in incentive compensation. Selling, general and administrative expenses for the International segment were $5.0 million for the three months ended March 31, 2021, as compared to $6.5 million for the corresponding period in 2020. The decrease was primarily attributable to lower estimates for bad debt expense, and lower employee expenses due to a reduction in headcount. Unallocated corporate expenses for the three months ended March 31, 2021 were $5.7 million, as compared to $4.6 million for the corresponding period in 2020. The increase was driven by higher incentive compensation expense. Goodwill and infinite-lived intangible asset impairment During the three months ended March 31, 2020, the Company recorded a $20.1 million non-cash goodwill and intangible asset impairment charge related to the U.S. reporting unit. The impairment charge resulted from, among other factors, more conservative estimated future cash flows in light of the uncertain market conditions arising from the COVID-19 pandemic. Interest expense Interest expense was $4.0 million for the three months ended March 31, 2021 and $4.7 million for the three months ended March 31, 2020. The decrease in expense was a result of less debt outstanding. - 32 - Table of Contents Mark to market gain (loss) on interest rate derivatives Mark to market gain on interest rate derivatives was $0.5 million for the three months ended March 31, 2021 as compared to a mark to market loss on interest rate derivatives of $2.3 million for the three months ended March 31, 2020. The mark to market amount represents the change in fair value on the Company's interest rate derivatives that have not been designated as hedging instruments. These derivatives were entered into for purposes of locking-in a fixed interest rate on a portion of the Company's variable interest rate debt. The prior period loss was a result of significant declines in interest rates during that period. The intent of the Company is to hold these derivative contracts until their maturity. Therefore, the Company expects that this loss will reverse over time. Income taxes Income tax provision of $2.4 million and an income tax benefit of $3.7 million for the three months ended March 31, 2021 and 2020, respectively, represent taxes on both U.S. and foreign earnings at combined effective income tax provision rate of 42.2% and an income tax benefit rate of 11.6%, respectively. The effective tax rate for the three months ended March 31, 2021 differs from the federal statutory income tax rate of 21% primarily due to state and local tax expense, and foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. The effective tax rate fo r the three months ended March 31, 2020 differs from the federal statutory income tax rate primarily due to the impact of the non-deductible portion of the goodwill impairment charge recorded in the three months ended March 31, 2020. Equity in (losses) earnings Equity in losses of Vasconia, net of taxes, was $0.2 million for the three months ended March 31, 2021, as compared to equity in earnings of Vasconia, net of taxes, of $0.3 million for the three months ended March 31, 2020. Vasconia reported income from operations of $3.8 million for the three months ended March 31, 2021, as compared to loss from operations of $0.5 million for the three months ended March 31, 2020. The increase in income from operations was primarily attributable to improved operating results in the current period in both Vasconia's kitchenware and aluminum divisions. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company’s principal sources of cash to fund liquidity needs were: (i) cash provided by operating activities and (ii) borrowings available under its revolving credit facility under the ABL Agreement, as defined below. The Company’s primary uses of funds consist of working capital requirements, capital expenditures, acquisitions and investments, and payments of principal and interest on its debt. At March 31, 2021, the Company had cash and cash equivalents of $30.6 million, compared to $36.0 million at December 31, 2020. Working capital was $216.4 million at March 31, 2021, compared to $241.2 million at December 31, 2020. Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement, was approximately $177.2 million at March 31, 2021. Inventory, a large component of the Company’s working capital, is expected to fluctuate from period to period, with inventory levels higher primarily in the June through October time period. The Company's inventory levels at March 31, 2021, did not decrease from the previous two quarters. The higher inventory levels are a result of increased inventory purchases to meet higher expected demand in 2021. The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix. Certain product categories have lower inventory turnover rates as a result of minimum order quantities from the Company’s vendors or customer replenishment needs. Certain other product categories experience higher inventory turns due to lower minimum order quantities or trending sale demands. For the three months ended March 31, 2021, inventory turnover was 2.6 times, or 143 days, as compared to 2.2 times, or 167 days, for the three months ended March 31, 2020. The improvement was a result of an increase in consumer demand for certain products. The Company believes that availability under the revolving credit facility under its ABL Agreement, cash on hand and cash flows from operations are sufficient to fund the Company’s operations for the next twelve months. However, if circumstances were to adversely change, the Company may seek alternative sources of liquidity including debt and/or equity financing. However, there can be no assurance that any such alternative sources would be available or sufficient. The Company closely monitors the creditworthiness of its customers. Based upon its evaluation of changes in customers’ creditworthiness, the Company may modify credit limits and/or terms of sale. However, notwithstanding the Company’s efforts to monitor its customers’ financial condition, the Company could be materially adversely affected by changes in customers' creditworthiness in the future. Some of the Company’s customers may be adversely and materially affected by the COVID-19 pandemic. - 33 - Table of Contents Credit Facilities The Company’s credit agreement, dated as of March 2, 2018 (the “ABL Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), includes a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $150.0 million, which facility will mature on March 2, 2023, and a loan agreement (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”) that provides for a senior secured term loan credit facility in the original principal amount of $275.0 million, which matures on February 28, 2025. The Term Loan requires the Company to make an annual prepayment of principal based upon a percentage of the Company's excess cash flow, (“Excess Cash Flow”), if any. The percentage applied to the Company's excess cash flow is based on the Company's Total Net Leverage Ratio (as defined in our debt agreements). When an Excess Cash Flow payment is required, lenders have the option to decline a portion or all of the prepayment amount. This estimated amount is recorded in current maturity of term loan on the unaudited condensed consolidated balance sheets. Additionally, the Term Loan facility requires quarterly payments, which commenced on June 30, 2018, of principal equal to 0.25% of the original aggregate principal amount of the Term Loan facility. Per the Debt Agreements, when the Company makes an Excess Cash Flow payment, the payment is first applied to satisfy the future quarterly required payments in order of maturity. The quarterly principal payments have been satisfied through maturity of the Term Loan by the annual Excess Cash Flow payments. The maximum borrowing amount under the ABL Agreement may be increased to up to $200.0 million if certain conditions are met. One or more tranches of additional term loans (the “Incremental Facilities”) may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i) $50.0 million plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company’s secured net leverage ratio, as defined in and computed pursuant to the Term Loan, is no greater than 3.75 to 1.00, subject to certain limitations and for the period defined pursuant to the Term Loan. As of March 31, 2021 and December 31, 2020, the total availability under the ABL Agreement was as follows (in thousands): March 31, 2021 December 31, 2020 Maximum aggregate principal allowed $ 150,000 $ 150,000 Outstanding borrowings under the ABL Agreement — (27,302) Standby letters of credit (3,391) (2,698) Total availability under the ABL Agreement $ 146,609 $ 120,000 Availability under the ABL Agreement depends on the valuation of certain current assets comprising the borrowing base. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Due to the seasonality of the Company’s business, this may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year. Consequently, the $150.0 million commitment thereunder may not represent actual borrowing capacity. The current and non-current portions of the Company’s Term Loan facility included in the condensed consolidated balance sheets were as follows (in thousands): March 31, 2021 December 31, 2020 Current portion of Term Loan facility: Term Loan facility payment $ — $ — Estimated Excess Cash Flow principal payment 13,000 19,120 Estimated unamortized debt issuance costs (1,431) (1,463) Total Current portion of Term Loan facility $ 11,569 $ 17,657 Non-current portion of Term Loan facility: Term Loan facility, net of current portion $ 239,128 $ 243,485 Estimated unamortized debt issuance costs (4,160) (4,508) Total Non-current portion of Term Loan facility $ 234,968 $ 238,977 The estimated Excess Cash Flow principal payment recorded at March 31, 2021 represents the Company's estimate for the 2022 Excess Cash Flow payment. The 2021 Excess Cash Flow payment, paid on March 30, 2021, totaled $10.5 million. The Excess Cash Flow payment differs from the estimated amount at December 31, 2020 of $19.1 million as certain lenders opted to not require payment per the terms of the debt agreements. - 34 - Table of Contents The Company’s payment obligations under its Debt Agreements are unconditionally guaranteed by its existing and future U.S. subsidiaries with certain minor exceptions. Certain payment obligations under the ABL Agreement are also direct obligations of its foreign subsidiary borrowers designated as such under the ABL Agreement and, subject to limitations on such guaranty, are guaranteed by the foreign subsidiary borrowers, as well as by the Company. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S. subsidiary guarantors, subject to certain exceptions. Such security interest consists of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the “ABL Collateral”) pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan and (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the “Term Loan Collateral”) pledged as collateral in favor of lenders under the Term Loan and a second-priority lien in the Term Loan Collateral in favor of the lenders under the ABL Agreement. Borrowings under the ABL Agreement bear interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month LIBOR plus 1.0%, plus a margin of 0.25% to 0.75%, or (ii) LIBOR plus a margin of 1.25% to 1.75%. The respective margins are based upon the Company’s total leverage ratio, as defined in and computed pursuant to the ABL Agreement. There were no outstanding borrowings under the ABL Agreement at March 31, 2021. In addition, the Company pays a commitment fee of 0.375% on the unused portion of the ABL Agreement. The Term Loan facility bears interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of (x) the prime rate, (y) a federal funds and overnight bank funding based rate plus 0.5% or (z) one-month LIBOR, but not less than 1.0%, plus 1.0%, which alternate base rate shall not be less than 2%, plus a margin of 2.5% or (ii) LIBOR, but not less than 1%, plus a margin of 3.5%. The interest rate on outstanding borrowings under the Term Loan at March 31, 2021 was 4.5%. The Debt Agreements provide for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among other things. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently ended four consecutive fiscal quarters on or prior to the date availability under the ABL Agreement is less than the greater of $15.0 million and 10% of the aggregate commitment under the ABL Agreement at any time and (b) ending on the day after such availability has exceeded the greater of $15.0 million and 10% of the aggregate commitment under the ABL Agreement for 45 consecutive days, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 as of the last day of any period of four consecutive fiscal quarters. The Company was in compliance with the covenants of the Debt Agreements at March 31, 2021. The Company expects that it will continue to borrow, subject to availability, and repay funds under the ABL Agreement based on working capital and other corporate needs. Covenant Calculations Adjusted EBITDA (a non-GAAP financial measure), which is defined in the Company’s Debt Agreements, is used in the calculation of the Fixed Charge Coverage Ratio, Secured Net Leverage Ratio, Total Leverage Ratio and Total Net Leverage Ratio, which are required to be provided to the Company’s lenders pursuant to its Debt Agreements. The following is the Company’s adjusted EBITDA, for the last four fiscal quarters: Adjusted EBITDA for the Four Quarters Ended March 31, 2021 (in thousands) Three months ended March 31, 2021 $ 16,830 Three months ended December 31, 2020 32,458 Three months ended September 30, 2020 29,228 Three months ended June 30, 2020 12,388 Adjusted EBITDA $ 90,904 Capital expenditures for the three months ended March 31, 2021 were $0.7 million. - 35 - Table of Contents Non-GAAP financial measure Adjusted EBITDA is a non-GAAP financial measure within the meaning of Regulation G and Item 10(e) of Regulation S-K, each promulgated by the SEC. This measure is provided because management of the Company uses this financial measure in evaluating the Company’s on-going financial results and trends, and management believes that exclusion of certain items allows for more accurate period-to-period comparison of the Company’s operating performance by investors and analysts. Management also uses this non-GAAP information as an indicator of business performance. Adjusted EBITDA, as discussed above, is also one of the measures used to calculate financial covenants required to be provided to the Company’s lenders pursuant to its Debt Agreements. Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, the Company’s financial performance measures prepared in accordance with U.S. GAAP. Further, the Company’s non-GAAP information may be different from the non-GAAP information provided by other companies including other companies within the home retail industry. The following is a reconciliation of the net (loss) income, as reported, to adjusted EBITDA, for each of the last four quarters and the 12 months ended March 31, 2021: Three Months Ended Twelve Months Ended March 31, 2021 June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 (in thousands) Net (loss) income as reported $ (3,977) $ 13,913 $ 15,221 $ 3,067 $ 28,224 Undistributed equity losses (earnings), net 848 (147) (1,620) 247 (672) Income tax provision 3,031 3,711 6,853 2,416 16,011 Interest expense 4,230 4,128 4,183 4,014 16,555 Mark to market loss (gain) on interest rate derivatives 164 (99) (172) (498) (605) Depreciation and amortization 6,061 6,090 6,279 5,958 24,388 Stock compensation expense 1,420 1,575 1,630 1,444 6,069 Acquisition related expenses 55 57 126 182 420 Restructuring expenses (benefit) 253 — (42) — 211 Warehouse relocation expenses 303 — — — 303 Adjusted EBITDA $ 12,388 $ 29,228 $ 32,458 $ 16,830 $ 90,904 Adjusted EBITDA is a non-GAAP financial measure which is defined in the Company’s debt agreements. Adjusted EBITDA is defined as net (loss) income, adjusted to exclude undistributed equity in losses (earnings), income tax provision, interest expense, mark to market loss (gain) on interest rate derivatives, depreciation and amortization, stock compensation expense, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements. Accounts Receivable Purchase Agreement To improve its liquidity during seasonally high working capital periods, the Company has an uncommitted Receivables Purchase Agreement with HSBC Bank USA, National Association (“HSBC”) as Purchaser (the “Receivables Purchase Agreement”). Under the Receivables Purchase Agreement, the Company may offer to sell certain eligible accounts receivable (the “Receivables”) to HSBC, which may accept such offer, and purchase the offered Receivables. Under the Receivables Purchase Agreement, following each purchase of Receivables, the outstanding aggregate purchased Receivables shall not exceed $30.0 million. HSBC will assume the credit risk of the Receivables purchased, and the Company will continue to be responsible for all non-credit risk matters. The Company will service the Receivables, and as such servicer, collect and otherwise enforce the Receivables on behalf of HSBC. The term of the agreement is for 364 days and shall automatically be extended for annual successive terms unless terminated. Either party may terminate the agreement at any time upon sixty days’ prior written notice to the other party. Pursuant to this agreement, the Company sold to HSBC $40.6 million and $37.9 million of receivables during the three months ended March 31, 2021 and 2020, respectively. Charges of $0.1 million and $0.2 million related to the sale of the receivables are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021 and 2020, $25.6 million and $23.2 million, respectively, of receivables sold were outstanding and due to HSBC from customers. - 36 - Table of Contents Derivatives Interest Rate Swaps The Company's total outstanding notional value of interest rate swaps was $94.0 million at March 31, 2021. The Company designated a portion of these interest rate swaps as cash flow hedges of the Company's exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The hedge periods of these agreements commenced in April 2018 and expire in March 2023. The original notional values are reduced over these periods. The aggregate notional value of designated interest rate swaps were $69.0 million at March 31, 2021. In June 2019, the Company entered into additional interest rate swap agreements, with an aggregate notional value of $25.0 million at March 31, 2021. These non-designated interest rate swaps serve as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025. Foreign Exchange Contracts The Company is a party from time to time to certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies. Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect the Company’s revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in USD. Where the Company deems it prudent, the Company engages in hedging programs using foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. The Company purchases short-term (i.e., 12 months or less) foreign currency forward contracts to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers. The Company does not hedge the translation of foreign currency profits into USD, as the Company regards this as an accounting exposure rather than an economic exposure. The aggregate gross notional values of foreign exchange contracts at March 31, 2021 was $18.7 million. These foreign exchange contracts have been designated as hedges in order to apply hedge accounting. The Company is exposed to market risks as well as changes in foreign currency exchange rates as measured against the USD and each other, and to changes to the credit risk of derivative counterparties. The Company attempts to minimize these risks primarily by using foreign currency forward contracts and by maintaining counterparty credit limits. These hedging activities provide only limited protection against currency exchange and credit risk. Factors that could influence the effectiveness of the Company’s hedging programs include those impacting currency markets and the availability of hedging instruments and liquidity of the credit markets. All foreign currency forward contracts that the Company enters into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. The Company does not enter into such contracts for speculative purposes and as of March 31, 2021, the Company does not have any foreign currency forward contract derivatives that are not designated as hedges. Operating activities Net cash provided by operating activities was $36.3 million for the three months ended March 31, 2021, as compared to net cash provided by operating activities of $33.7 million for the three months ended March 31, 2020. The increase from 2021 compared to 2020 was attributable to an increase in net income, most significantly before goodwill impairment, partially offset by a higher investment in inventory and timing of collections related to accounts receivables. Investing activities Net cash used in investing activities was $0.9 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively. Financing activities Net cash used in financing activities was $40.8 million for the three months ended March 31, 2021, as compared to net cash provided by of $41.7 million for the three months ended March 31, 2020. The change was mainly attributable to repayments on the Company's revolving credit facility under its ABL Agreement in the 2021 period compared to proceeds received in the 2020 period, and the timing of the Company's term loan excess cash flow payment. - 37 - Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the 2020 Annual Report on Form 10-K.