UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _____________________ to ____________________

Commission file number:  000-49850

 

BIG 5 SPORTING GOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4388794

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2525 East El Segundo Boulevard

El Segundo, California

 

90245

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (310) 536-0611

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

BGFV

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

There were 21,830,003 shares of common stock, with a par value of $0.01 per share outstanding as of May 20, 2020.

 

 

 


 

Explanatory Note

The impact caused by the novel coronavirus (“COVID-19”) pandemic has led to disruptions in the day-to-day activities for Big 5 Sporting Goods Corporation (“we” or “our”), including reduced staffing levels and limited access to facilities and certain technology systems that we rely on to timely prepare our interim financial information. These disruptions required additional time to develop and process our financial information as well as prepare required disclosures related to the impact of COVID-19 and delayed our ability to complete our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2020 (“Quarterly Report”). As a result, we relied on the Securities and Exchange Commission’s Orders under Section 36 of the Securities and Exchange Act of 1934, as amended, dated March 4, 2020 and March 25, 2020 (Release Nos. 34-88318 and 34-88465) to delay the filing of this Quarterly Report.

 

 

 

 

 


 

BIG 5 SPORTING GOODS CORPORATION

INDEX

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

4

 

Unaudited Condensed Consolidated Balance Sheets as of March 29, 2020 and December 29, 2019

4

 

Unaudited Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended March 29, 2020 and March 31, 2019

5

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen Weeks Ended March 29, 2020 and March 31, 2019

6

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended March 29, 2020 and March 31, 2019

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

Report of Independent Registered Public Accounting Firm

22

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4

Controls and Procedures

31

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

32

Item 1A

Risk Factors

32

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3

Defaults Upon Senior Securities

33

Item 4

Mine Safety Disclosures

33

Item 5

Other Information

33

Item 6

Exhibits

34

 

 

SIGNATURES

35

 

 

 

 


 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

March 29,

2020

 

 

December 29,

2019

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

44,203

 

 

$

8,223

 

Accounts receivable, net of allowances of $64 and $58, respectively

 

 

7,834

 

 

 

13,646

 

Merchandise inventories, net

 

 

312,347

 

 

 

309,315

 

Prepaid expenses

 

 

8,129

 

 

 

9,680

 

Total current assets

 

 

372,513

 

 

 

340,864

 

Operating lease right-of-use assets, net

 

 

269,996

 

 

 

262,588

 

Property and equipment, net

 

 

66,347

 

 

 

68,414

 

Deferred income taxes

 

 

12,974

 

 

 

13,619

 

Other assets, net of accumulated amortization of $2,126 and $2,043, respectively

 

 

3,273

 

 

 

3,315

 

Total assets

 

$

725,103

 

 

$

688,800

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

73,244

 

 

$

83,655

 

Accrued expenses

 

 

53,111

 

 

 

64,935

 

Current portion of operating lease liabilities

 

 

71,969

 

 

 

71,542

 

Current portion of finance lease liabilities

 

 

2,522

 

 

 

2,678

 

Total current liabilities

 

 

200,846

 

 

 

222,810

 

Operating lease liabilities, less current portion

 

 

213,336

 

 

 

206,806

 

Finance lease liabilities, less current portion

 

 

3,978

 

 

 

4,787

 

Long-term debt

 

 

124,275

 

 

 

66,559

 

Other long-term liabilities

 

 

7,610

 

 

 

7,466

 

Total liabilities

 

 

550,045

 

 

 

508,428

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 50,000,000 shares; issued 25,487,561 and

   25,314,289 shares, respectively; outstanding 21,837,348 and 21,664,076 shares, respectively

 

 

254

 

 

 

252

 

Additional paid-in capital

 

 

120,430

 

 

 

120,054

 

Retained earnings

 

 

96,901

 

 

 

102,593

 

Less: Treasury stock, at cost; 3,650,213 shares

 

 

(42,527

)

 

 

(42,527

)

Total stockholders' equity

 

 

175,058

 

 

 

180,372

 

Total liabilities and stockholders' equity

 

$

725,103

 

 

$

688,800

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

- 4 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

Net sales

 

$

217,736

 

 

$

245,286

 

Cost of sales

 

 

153,181

 

 

 

169,410

 

Gross profit

 

 

64,555

 

 

 

75,876

 

Selling and administrative expense

 

 

71,370

 

 

 

72,611

 

Operating (loss) income

 

 

(6,815

)

 

 

3,265

 

Interest expense

 

 

735

 

 

 

776

 

(Loss) income before taxes

 

 

(7,550

)

 

 

2,489

 

Income tax (benefit) expense

 

 

(2,939

)

 

 

825

 

Net (loss) income

 

$

(4,611

)

 

$

1,664

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.22

)

 

$

0.08

 

Diluted

 

$

(0.22

)

 

$

0.08

 

Weighted-average shares of common stock

   outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

21,149

 

 

 

21,029

 

Diluted

 

 

21,149

 

 

 

21,054

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

- 5 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

13 Weeks Ended March 29, 2020

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of December 29, 2019

 

 

21,664,076

 

 

$

252

 

 

$

120,054

 

 

$

102,593

 

 

$

(42,527

)

 

$

180,372

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,611

)

 

 

 

 

 

(4,611

)

Dividends on common stock ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,081

)

 

 

 

 

 

(1,081

)

Issuance of nonvested share awards

 

 

241,600

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

475

 

 

 

 

 

 

 

 

 

475

 

Forfeiture of nonvested share awards

 

 

(3,755

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment of

  withholding tax

 

 

(64,573

)

 

 

 

 

 

(97

)

 

 

 

 

 

 

 

 

(97

)

Balance as of March 29, 2020

 

 

21,837,348

 

 

$

254

 

 

$

120,430

 

 

$

96,901

 

 

$

(42,527

)

 

$

175,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of December 30, 2018

 

 

21,424,094

 

 

$

250

 

 

$

118,351

 

 

$

98,787

 

 

$

(42,527

)

 

$

174,861

 

Cumulative adjustment from change in

  accounting principle, net of tax

 

 

 

 

 

 

 

 

 

 

 

(339

)

 

 

 

 

 

(339

)

Net income

 

 

 

 

 

 

 

 

 

 

 

1,664

 

 

 

 

 

 

1,664

 

Dividends on common stock ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,068

)

 

 

 

 

 

(1,068

)

Issuance of nonvested share awards

 

 

265,792

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

538

 

 

 

 

 

 

 

 

 

538

 

Forfeiture of nonvested share awards

 

 

(6,320

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment of

  withholding tax

 

 

(59,094

)

 

 

(1

)

 

 

(220

)

 

 

 

 

 

 

 

 

(221

)

Balance as of March 31, 2019

 

 

21,624,472

 

 

$

252

 

 

$

118,666

 

 

$

99,044

 

 

$

(42,527

)

 

$

175,435

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 6 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(4,611

)

 

$

1,664

 

Adjustments to reconcile net (loss) income to net cash

 

 

 

 

 

 

 

 

    (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,606

 

 

 

4,932

 

Share-based compensation

 

 

475

 

 

 

538

 

Amortization of other assets

 

 

83

 

 

 

65

 

ROU asset gain on disposal

 

 

 

 

 

(110

)

Noncash lease expense

 

 

15,792

 

 

 

13,911

 

Deferred income taxes

 

 

645

 

 

 

624

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5,812

 

 

 

3,441

 

Merchandise inventories, net

 

 

(3,032

)

 

 

(1,339

)

Prepaid expenses and other assets

 

 

1,510

 

 

 

1,853

 

Accounts payable

 

 

1,589

 

 

 

13,219

 

Operating lease liabilities

 

 

(16,243

)

 

 

(19,001

)

Accrued expenses and other long-term liabilities

 

 

(11,928

)

 

 

(7,257

)

Net cash (used in) provided by operating activities

 

 

(5,302

)

 

 

12,540

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,342

)

 

 

(1,522

)

Net cash used in investing activities

 

 

(2,342

)

 

 

(1,522

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

116,913

 

 

 

43,826

 

Payments under revolving credit facility

 

 

(59,197

)

 

 

(63,415

)

Changes in book overdraft

 

 

(11,852

)

 

 

9,413

 

Principal payments under finance lease liabilities

 

 

(951

)

 

 

(866

)

Tax withholding payments for share-based compensation

 

 

(97

)

 

 

(221

)

Dividends paid

 

 

(1,192

)

 

 

(1,221

)

Net cash provided by (used in) financing activities

 

 

43,624

 

 

 

(12,484

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

35,980

 

 

 

(1,466

)

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

8,223

 

 

 

6,765

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

44,203

 

 

$

5,299

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired under finance leases

 

$

 

 

$

864

 

Property and equipment additions unpaid

 

$

931

 

 

$

761

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

772

 

 

$

762

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

- 7 -


 

BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Description of Business

Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating 431 stores and an e-commerce platform as of March 29, 2020. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet.  The Company’s product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, winter and summer recreation and roller sports. The Company is a holding company that operates as one reportable segment through Big 5 Corp., its 100%-owned subsidiary, and Big 5 Services Corp., which is a 100%-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift cards and returned merchandise credits (collectively, “stored-value cards”).

The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its 100%-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 29, 2019 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented.

The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

 

 

(2)

Summary of Significant Accounting Policies

Consolidation

The accompanying Interim Financial Statements include the accounts of Big 5 Sporting Goods Corporation, Big 5 Corp. and Big 5 Services Corp.  Intercompany balances and transactions have been eliminated in consolidation.

Reporting Period

The Company follows the concept of a 52-53 week fiscal year, which ends on the Sunday nearest December 31. Fiscal year 2020 is comprised of 53 weeks and ends on January 3, 2021. Fiscal year 2019 was comprised of 52 weeks and ended on December 29, 2019. The first three quarters in fiscal 2020 are each comprised of 13 weeks, and the fourth quarter of fiscal 2020 is comprised of 14 weeks. The four quarters of fiscal 2019 were each comprised of 13 weeks.

Recently Adopted Accounting Updates

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard removes, modifies, and adds certain disclosure requirements for fair value measurements, and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU No. 2018-13 in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and the impact from this standard was immaterial.

- 8 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and can be adopted either prospectively or retrospectively. Accordingly, the Company adopted the updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and the impact from this standard was immaterial.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, while also clarifying and amending existing guidance, including interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU No. 2019-12 in the first quarter of fiscal 2020 and expects the impact from this standard to be immaterial.

Recently Issued Accounting Updates

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities. The Company is evaluating the expedients and exceptions provided by the amendments in this standard to determine their impact.

Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.

COVID-19 Impact on Concentration of Risk

The novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.

 The Company primarily operates traditional sporting goods retail stores located in the western United States, with approximately 52% of its stores, along with its corporate offices and distribution center, located in California. Because of this, the Company is subject to regional risks, including the impact of the COVID-19 outbreak. Beginning on March 20, 2020, the Company temporarily closed more than one-half of its retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. The Company has since been able to gradually reopen all of its store locations in some capacity based on qualifying as an “essential” business under applicable regulations or as a result of the easing of regulatory restrictions on retail operations in the Company’s market areas, with approximately 12% of the Company’s stores operating for curbside business only as of May 26, 2020 in response to state and local shelter orders. The temporary closure of additional stores may be required if additional orders are issued. Additionally, the shelter orders that remain in place in the Company’s market areas have negatively impacted customer traffic into the stores that the Company currently operates. The Company also has implemented reduced store hours for open stores and has limited the number of customers in its stores at any one time. As a result of the reduced customer traffic and sales, and in an effort to preserve capital, the Company has implemented workforce reductions throughout the organization, suspended normal annual salary increases and reduced advertising and planned capital spending in fiscal 2020. The Company has also reduced merchandise inventory orders, which could impact product availability in the Company’s stores and sales in future periods. The Company may further restrict its store operations and operations in its distribution facility if deemed necessary or if recommended or mandated by authorities.

 

 

- 9 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

A substantial amount of the Company’s inventory is manufactured abroad. COVID-19 has also impacted the Company’s supply chain for products sold, particularly those products that are sourced from China. To the extent one or more vendors is negatively impacted by COVID-19, including due to the closure of those vendors’ distribution centers or manufacturing facilities, the Company may be unable to maintain delivery schedules or adequate inventory in its stores. 

Use of Estimates

Management makes a number of estimates and assumptions relating to the reporting of assets, liabilities and stockholders’ equity and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expense during the reporting period to prepare these consolidated financial statements in conformity with GAAP. Certain items subject to such estimates and assumptions include the carrying amount of merchandise inventories, property and equipment, lease assets and lease liabilities; valuation allowances for receivables, sales returns and deferred income tax assets; estimates related to stored-value cards and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after March 29, 2020, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.

Revenue Recognition

The Company operates solely as a sporting goods retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the western United States and online. Generally, all revenue is recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectibility is reasonably assured since the Company only extends immaterial credit purchases to certain municipalities and local school districts.

In accordance with ASC 606, Revenue from Contracts with Customers, the Company disaggregates net sales into the following major merchandise categories to depict the nature and amount of revenue and related cash flows:

 

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

 

(In thousands)

 

Hardgoods

 

$

108,774

 

 

$

103,436

 

Athletic and sport footwear

 

 

57,498

 

 

 

71,213

 

Athletic and sport apparel

 

 

49,128

 

 

 

68,553

 

Other sales

 

 

2,336

 

 

 

2,084

 

Net sales

 

$

217,736

 

 

$

245,286

 

 

Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:

 

Retail store sales

 

E-commerce sales

 

Stored-value cards

For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the product is tendered for delivery to the common carrier. For performance obligations related to stored-value cards, the Company typically transfers control upon redemption of the stored-value card through consummation of a future sales transaction. The Company accounts for shipping and handling relative to e-commerce sales as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only one performance obligation, the sale of the product, at shipping point (when the customer gains control). Revenue associated with e-commerce sales was not material for the 13 weeks ended March 29, 2020 and March 31, 2019.

 

- 10 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company recognized $1.9 million and $2.1 million in stored-value card redemption revenue for the 13 weeks ended March 29, 2020 and March 31, 2019, respectively. The Company also recognized $0.1 million in stored-value card breakage revenue for the 13 weeks ended March 29, 2020 and March 31, 2019. The Company had outstanding stored-value card liabilities of $6.4 million and $7.2 million as of March 29, 2020 and December 29, 2019, respectively, which are included in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.

The Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $0.8 million and $1.4 million related to estimated sales returns as of March 29, 2020 and December 29, 2019, respectively, and recorded, in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets, an allowance for sales returns reserve of $1.4 million and $2.7 million as of March 29, 2020 and December 29, 2019, respectively.

Share-Based Compensation

The Company accounts for its share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense on a straight-line basis over the requisite service period using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. See Note 10 to the Interim Financial Statements for a further discussion on share-based compensation.

Valuation of Merchandise Inventories, Net

The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related expense and allocated overhead expense associated with the Company’s distribution center.

Management regularly reviews inventories and records valuation reserves for damaged and defective merchandise, merchandise items with slow-moving or obsolescence exposure and merchandise that has a carrying value that exceeds net realizable value. Because of its merchandise mix, the Company has not historically experienced significant occurrences of obsolescence.

Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends.  The Company performs physical inventories of its stores at least once per year and cycle counts inventories at its distribution center throughout the year.  The reserve for inventory shrinkage primarily represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.

These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.

Valuation of Long-Lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (“asset group”), usually at the store level. The carrying amount of a store asset group includes stores’ property and equipment, leasehold improvements and operating lease right-of-use (“ROU”) assets. The carrying amount of a store asset group is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the store asset group. When stores are identified as having an indicator of impairment, the Company forecasts undiscounted cash flows over the store asset group’s remaining lease term and compares the undiscounted cash flows to the carrying amount of the store asset group. If the store asset group is determined not to be recoverable, then an impairment charge will be recognized in the amount by which the carrying amount of the store asset group exceeds its fair value, determined using discounted cash flow valuation techniques, as contemplated in ASC 820, Fair Value Measurements.

 

- 11 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company determines the cash flows expected to result from the store asset group by projecting future revenue, gross margin and operating expense for each store asset group under evaluation for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, and include assumptions about sales growth rates, gross margins and operating expense in relation to the current economic environment and the Company’s future expectations, competitive factors in its various markets, inflation, sales trends and other relevant environmental factors that may impact the store under evaluation. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. If economic conditions deteriorate in the markets in which the Company conducts business, or if other negative market conditions develop, the Company may experience additional impairment charges in the future for underperforming stores.

The resulting impairment charge, if any, is allocated to the property and equipment, leasehold improvements and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.

The Company did not recognize any impairment charges in the first quarter of fiscal 2020 or 2019.

Leases

In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the interim unaudited condensed consolidated balance sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term which amortizes the ROU asset by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in cost of sales or selling and administrative expense, based on the use of the leased asset, on the interim unaudited condensed consolidated statement of operations. Variable payments for property taxes, insurance and common area maintenance related to triple net leases are expensed as incurred, and leases with an initial term of 12 months or less, are excluded from minimum lease payments and are not recorded on the balance sheet. The Company recognizes variable lease expense for these short-term leases on a straight-line basis over the remaining lease term.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate (“IBR”) to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis. This analysis considers qualitative and quantitative factors based on guidance provided by a rating agency for the consumer durables industry. The Company adjusts the selected IBR quarterly with a company-specific unsecured yield curve that approximates the Company’s market risk profile. The collateralized IBR is also based upon the estimated impact that the collateral has on the IBR. To account for the collateralized nature of the IBR, the Company utilized a notching method based on notching guidance provided by a rating agency whereby the Company’s base credit rating is notched upward as the yield curve on a secured loan is expected to be lower versus an unsecured loan.

The operating lease ROU asset also includes any prepaid lease payments made and is reduced by lease incentives such as tenant improvement allowances. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

- 12 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Certain of the leases for the Company’s retail store facilities provide for payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease. Under ASC 842, these contingent rents are expensed as they accrue.

In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts.

In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company will account for payment reductions as reductions to lease expense and will account for payment deferrals as if no changes to the lease contract were made while continuing to recognize expense during the deferral period. There were no lease concessions recorded in the first quarter of fiscal 2020.

See Note 5 to the Interim Financial Statements for a further discussion on leases.

 

 

(3)

Fair Value Measurements

The carrying values of cash, accounts receivable, accounts payable and accrued expenses approximate the fair values of these instruments due to their short-term nature. The carrying amount for borrowings under the revolving credit facility (the “Credit Facility”) approximates fair value because of the variable market interest rate charged to the Company for these borrowings. When the Company recognizes impairment on certain of its underperforming stores, the carrying values of these stores are reduced to their estimated fair values.

As of March 29, 2020 and December 29, 2019, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were assets subject to long-lived asset impairment related to certain underperforming stores. The Company estimated the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the asset and on observable market data of underperforming stores’ specific comparable markets, when available. The Company classified these fair value measurements as Level 3 inputs, which are unobservable inputs for which market data are not available and that are developed using the best information available about pricing assumptions used by market participants in accordance with ASC 820.

 

 

(4)

Accrued Expenses

The major components of accrued expenses are as follows:

 

 

 

March 29,

2020

 

 

December 29,

2019

 

 

 

(In thousands)

 

Payroll and related expense

 

$

17,661

 

 

$

23,433

 

Occupancy expense

 

 

10,109

 

 

 

9,503

 

Sales tax

 

 

6,322

 

 

 

9,607

 

Other

 

 

19,019

 

 

 

22,392

 

Accrued expenses

 

$

53,111

 

 

$

64,935

 

 

 

 


 

- 13 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(5)

Lease Commitments

The Company adopted ASC 842 as of December 31, 2018, using the modified retrospective approach and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning on December 31, 2018 are reported and presented under ASC 842. Adoption of the standard resulted in the initial recognition of operating lease ROU assets of $262.9 million and operating lease liabilities of $279.7 million as of December 31, 2018. The adoption of this standard did not have a material impact on the Company’s interim unaudited condensed consolidated statements of operations, shareholders’ equity or cash flows, and had no material impact on beginning retained earnings in fiscal 2019. Additionally, the Company elected the transition package of practical expedients permitted within the new standard which, among other things, allowed it to carry forward the historical lease classification. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of ROU assets.

The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842.

Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance and common area maintenance payments related to triple net leases, rental payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation. The Company recognizes variable lease expense for these leases in the period incurred which, for contingent rent, begins in the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In accordance with ASC 842, the components of lease expense were as follows:

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

 

(In thousands)

 

Lease expense:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

722

 

 

$

680

 

Interest on lease liabilities

 

 

89

 

 

 

100

 

Finance lease expense

 

 

811

 

 

 

780

 

Operating lease expense

 

 

20,287

 

 

 

19,825

 

Variable lease expense (1)

 

 

4,124

 

 

 

4,227

 

Sublease income

 

 

(293

)

 

 

(316

)

Total lease expense

 

$

24,929

 

 

$

24,516

 

 

 

(1)

Subsequent to the issuance of the Company’s Interim Financial Statements as of March 31, 2019, management identified an immaterial correction related to the disclosure of certain variable lease payments. Variable lease expense for the 13 weeks ended March 31, 2019 did not previously include $4.1 million of variable lease payments for property taxes, insurance and common area maintenance related to triple net leases. Management corrected the disclosure related to variable lease expense in the table above for the 13 weeks ended March 31, 2019 and, except for this change, the correction had no impact upon the Company’s Interim Financial Statements.

 

 

- 14 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In accordance with ASC 842, other information related to leases was as follows:

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

 

(In thousands)

 

Operating cash flows from operating leases

 

$

20,742

 

 

$

24,914

 

Operating cash flows from finance leases

 

 

112

 

 

 

100

 

Financing cash flows from finance leases

 

 

951

 

 

 

866

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

21,805

 

 

$

25,880

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

$

 

 

$

864

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

23,282

 

 

$

5,833

 

Weighted-average remaining lease term—finance leases

 

3.0 years

 

 

3.4 years

 

Weighted-average remaining lease term—operating leases

 

5.2 years

 

 

5.3 years

 

Weighted-average discount rate—finance leases

 

 

4.7

%

 

 

5.8

%

Weighted-average discount rate—operating leases

 

 

6.1

%

 

 

6.5

%

In accordance with ASC 842, maturities of finance and operating lease liabilities as of March 29, 2020 were as follows:

 

Year Ending:

 

Finance

Leases

 

 

Operating

Leases

 

 

 

(In thousands)

 

2020 (remaining nine months)

 

$

2,112

 

 

$

67,806

 

2021

 

 

2,188

 

 

 

71,402

 

2022

 

 

1,740

 

 

 

59,060

 

2023

 

 

920

 

 

 

45,409

 

2024

 

 

 

 

 

36,486

 

Thereafter

 

 

 

 

 

53,850

 

Undiscounted cash flows

 

$

6,960

 

 

$

334,013

 

Reconciliation of lease liabilities:

 

 

 

 

 

 

 

 

Weighted-average remaining lease term

 

3.0 years

 

 

5.2 years

 

Weighted-average discount rate

 

 

4.7

%

 

 

6.1

%

Present values

 

$

6,500

 

 

$

285,305

 

Lease liabilities - current

 

 

2,522

 

 

 

71,969

 

Lease liabilities - long-term

 

 

3,978

 

 

 

213,336

 

Lease liabilities - total

 

$

6,500

 

 

$

285,305

 

Difference between undiscounted and discounted cash flows

 

$

460

 

 

$

48,708

 

 

 

- 15 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(6)

Long-Term Debt

On October 18, 2010, the Company, Big 5 Corp. and Big 5 Services Corp. entered into a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and a syndicate of other lenders, which was amended on October 31, 2011, December 19, 2013 and September 29, 2017 (as so amended, the “Credit Agreement”), and has a maturity date of September 29, 2022.

The Credit Agreement provides for a Credit Facility with an aggregate committed availability of up to $140.0 million, which amount may be increased (“accordion feature”) at the Company’s option up to a maximum of $165.0 million. As further discussed in Note 11 to the Interim Financial Statements, on March 30, 2020 the Company exercised the accordion feature of the Credit Agreement and increased the aggregate committed availability under the Credit Facility to $165.0 million. The Company may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lenders under the Credit Agreement will have the option to increase their commitments to accommodate the requested increase. If such existing lenders do not exercise that option, the Company may (with the consent of Wells Fargo, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The Credit Agreement includes a provision which permits the Company to elect to reduce the aggregate committed availability under the Credit Agreement to $100.0 million for a three-month period each calendar year. The Credit Facility includes a $25.0 million sublimit for issuances of letters of credit and a $20.0 million sublimit for swingline loans.

The Company may borrow under the Credit Facility from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Loan Cap”). The “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables; plus (b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the lesser of (i) the cost of eligible in-transit inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost of eligible in-transit inventory), or (ii) $10.0 million, minus (d) certain reserves established by Wells Fargo in its role as the Administrative Agent in its reasonable discretion.

Generally, the Company may designate specific borrowings under the Credit Facility as either base rate loans or LIBO rate loans. The applicable interest rate on the Company’s borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Loan Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as LIBO rate loans bear interest at a rate equal to the applicable adjusted LIBO rate plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-half of one percent (0.50%), (b) the LIBO rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced from time to time within Wells Fargo as its “prime rate.” The applicable margin for all loans is a function of Average Daily Availability for the preceding fiscal quarter as set forth below.

Level

 

Average Daily Availability

 

LIBO Rate

Applicable Margin

 

 

Base Rate

Applicable Margin

 

I

 

Greater than or equal to $70,000,000

 

1.25%

 

 

0.25%

 

II

 

Less than $70,000,000

 

1.375%

 

 

0.50%

 

 

The commitment fee assessed on the unused portion of the Credit Facility is 0.20% per annum.

Obligations under the Credit Facility are secured by a general lien and perfected security interest in substantially all of the Company’s assets. The Credit Agreement contains covenants that require the Company to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limit the ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. The Company may declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied. The Credit Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the Credit Facility, failure to pay any interest or other amounts under the Credit Facility for five days after becoming due, failure to comply with certain agreements or covenants contained in the Credit Agreement, failure to satisfy certain judgments against the Company, failure to pay when due (or any other default which does or may lead to the acceleration of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.

 

- 16 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

During March 2020, the World Health Organization declared the rapidly growing COVID-19 outbreak to be a global pandemic. On March 27, 2020, to support the Company’s liquidity in response to COVID-19, the Company increased borrowings under its $140.0 million Credit Facility to $124.3 million.

As of March 29, 2020, the Company had long-term revolving credit borrowings of $124.3 million and letter of credit commitments of $0.7 million outstanding, compared with borrowings of $66.6 million and letter of credit commitments of $0.7 million as of December 29, 2019. Total remaining borrowing availability, after subtracting letters of credit, was $15.0 million and $72.7 million as of March 29, 2020 and December 29, 2019, respectively.

 

 

(7)

Income Taxes

Under the asset and liability method prescribed under ASC 740, Income Taxes, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets is assessed throughout the year and a valuation allowance is recorded if necessary to reduce net deferred tax assets to the amount more likely than not to be realized. As of March 29, 2020 and December 29, 2019, the Company had a valuation allowance for deferred income tax assets of $1.2 million related to unused California Enterprise Zone Tax Credits, which the Company will no longer be able to carry forward beyond 2024 as a result of California’s termination of this program.

The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of limitations for consolidated federal income tax returns are open for fiscal years 2016 and after, and state and local income tax returns are open for fiscal years 2015 and after. 

The provision for income taxes for the 13 weeks ended March 29, 2020 and March 31, 2019 reflects the write-off of deferred tax assets of $0.4 million and $0.3 million, respectively, related to share-based compensation.

On March 27, 2020, the Federal government enacted the U.S. Coronavirus Aid, Relief and Economic Security (“CARES”) Act to provide relief from the impact of COVID-19. Among other relief, the CARES Act allows companies with a net operating loss (“NOL”) in either 2018, 2019 or 2020 to carry back those losses five years. As a result, the Company amended its 2018 income tax return to carry back its 2018 NOL to a period with a higher statutory tax rate in effect at that time, and recorded a related income tax refund receivable of $2.1 million in accounts receivable in the accompanying interim unaudited condensed consolidated balance sheet as of March 29, 2020.

As of March 29, 2020 and December 29, 2019, the Company had no unrecognized tax benefits including those that, if recognized, would affect the Company’s effective income tax rate over the next 12 months. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. As of March 29, 2020 and December 29, 2019, the Company had no accrued interest or penalties.

 


 

- 17 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(8)

Earnings Per Share

The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding, reduced by shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards. During periods of net loss, diluted loss per share is equal to basic loss per share because the antidilutive effect of potential common shares is disregarded.

The following table sets forth the computation of basic and diluted earnings per common share:

 

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

 

 

(In thousands, except per share data)

 

Net (loss) income

 

$

(4,611

)

 

$

1,664

 

Weighted-average shares of common stock outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

21,149

 

 

 

21,029

 

Dilutive effect of common stock equivalents arising

   from share option, nonvested share and nonvested

   share unit awards

 

 

 

 

 

25

 

Diluted

 

 

21,149

 

 

 

21,054

 

Basic (loss) earnings per share

 

$

(0.22

)

 

$

0.08

 

Diluted (loss) earnings per share

 

$

(0.22

)

 

$

0.08

 

Antidilutive share option awards excluded

   from diluted calculation

 

 

602

 

 

 

422

 

Antidilutive nonvested share and nonvested share unit

   awards excluded from diluted calculation

 

 

554

 

 

 

406

 

The computation of diluted earnings per share for the 13 weeks ended March 29, 2020 excludes all potential share option awards since the Company reported a net loss, and the effect of their inclusion would have been antidilutive (i.e., including such share option awards would result in higher earnings per share). The computation of diluted earnings per share for the 13 weeks ended March 31, 2019 does not include certain share option awards that were outstanding and antidilutive, since the exercise prices of these share option awards exceeded the average market price of the Company’s common shares.

The computation of diluted earnings per share for the 13 weeks ended March 29, 2020 excludes all potential nonvested share awards and nonvested share unit awards since the Company reported a net loss, and the effect of their inclusion would have been antidilutive. The computation of diluted earnings per share for the 13 weeks ended March 31, 2019 does not include certain nonvested share awards and nonvested share unit awards that were outstanding and antidilutive, since the grant date fair values of these nonvested share awards and nonvested share unit awards exceeded the average market price of the Company’s common shares.

 

 

(9)

Commitments and Contingencies

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s results of operations or financial condition.

 

 


 

- 18 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(10)

Share-based Compensation

In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”) and stopped making grants under its 2007 Equity and Performance Incentive Plan, as amended and restated in April 2011 and April 2016 (the “2007 Plan”). As of March 29, 2020, 2,718,945 shares remained available for future grant under the 2019 Plan.

At its discretion, the Company grants share option awards, nonvested share awards and nonvested share unit awards to certain employees, as defined by ASC 718, Compensation—Stock Compensation, under the Company’s 2019 Plan, and accounts for its share-based compensation in accordance with ASC 718. The Company recognized $0.5 million in share-based compensation expense for the 13 weeks ended March 29, 2020 and March 31, 2019.

Share Option Awards

Share option awards granted by the Company generally vest and become exercisable in four equal annual installments of 25% per year with a maximum life of ten years. The exercise price of share option awards is equal to the quoted market price of the Company’s common stock on the date of grant. In the first quarter of fiscal 2020, the Company granted 257,000 share option awards with a weighted-average grant-date fair value of $1.25 per option. In the first quarter of fiscal 2019, the Company granted 243,800 share option awards with a weighted-average grant-date fair value of $1.36 per option.

A summary of the status of the Company’s share option awards is presented below:

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life

(In Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 29, 2019

 

 

523,150

 

 

$

5.91

 

 

 

 

 

 

 

 

 

Granted

 

 

257,000

 

 

 

2.23

 

 

 

 

 

 

 

 

 

Forfeited or Expired

 

 

(1,250

)

 

 

6.20

 

 

 

 

 

 

 

 

 

Outstanding at March 29, 2020

 

 

778,900

 

 

$

4.70

 

 

 

8.65

 

 

$

 

Exercisable at March 29, 2020

 

 

215,047

 

 

$

7.55

 

 

 

7.23

 

 

$

 

Vested and Expected to Vest at March 29, 2020

 

 

762,840

 

 

$

4.73

 

 

 

8.63

 

 

$

 

 

The aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company’s most recent closing stock price of $1.21 as of March 29, 2020, which would have been received by the option holders had all option holders exercised their option awards as of that date.

The fair value of each share option award on the date of grant is estimated using the Black-Scholes method based on the following weighted-average assumptions:

 

 

 

13 Weeks Ended

 

 

 

March 29,

2020

 

 

March 31,

2019

 

Risk-free interest rate

 

 

0.9

%

 

 

2.6

%

Expected term

 

5.7 years

 

 

5.7 years

 

Expected volatility

 

 

63.0

%