Shareholders' Equity

Private Placement Securities Purchase Agreement

On May 2, 2019, the Company entered into a private placement securities purchase agreement ("Purchase Agreement") with certain accredited investors pursuant to which the Company: (a) sold, in the aggregate, 8,000,000 shares of the Company's common stock at a price of $0.75 per share and (b) issued five-year warrants ("5-year Warrants") to purchase 3,500,000 shares of the Company's common stock at an exercise price of $1.50 per share. The 5-year Warrants are exercisable in whole or in part from time to time through the expiration date of May 2, 2024. The purchasers included Invicta Media Investments, LLC, Michael and Leah Friedman, Timothy Peterman and certain other private investors. Invicta Media Investments, LLC is owned by IWCA, which is the designer and manufacturer of Invicta-branded watches and watch accessories, one of the Company’s largest and longest tenured brands. Michael and Leah Friedman are owners and officers of Sterling Time, which is the exclusive distributor of IWCA’s watches and watch accessories for television home shopping and our long-time vendor. A description of the relationship between the Company, IWCA and Sterling Time is contained in Note 15 - “Related Party Transactions”. Under the Purchase Agreement, the purchasers agreed to customary standstill provisions related to the Company for a period of two years, as well as to vote their shares in favor of matters recommended by the Company’s board of directors for approval by our shareholders. In addition, the Company agreed in the Purchase Agreement to appoint Eyal Lalo, an owner of IWCA, as vice chair of the Company’s board of directors, Michael Friedman to the Company’s board of directors and Timothy Peterman as the Company’s chief executive officer.

In connection with the closing under the Purchase Agreement, the Company entered into certain other agreements with IWCA, Sterling Time and the purchasers, including a five-year vendor exclusivity agreement with Sterling Time and IWCA. The vendor exclusivity agreement grants the Company the exclusive right in television shopping to market, promote and sell the products from IWCA.

The Company received gross proceeds of $6.0 million and incurred approximately $175,000 of issuance costs. The Company allocated the proceeds of the stock offering to the shares of common stock issued. The par value of the shares issued was recorded within common stock, with the remainder of the proceeds, less issuance costs, recorded as additional paid in capital in the Company's balance sheet. The Company has used the proceeds for general working capital purposes. The 5-year Warrants were issued primarily as consideration for a five-year vendor exclusivity agreement with IWCA and Sterling Time. The aggregate market value of the 5-year Warrants on the grant date was $193,000, which was recorded as an intangible asset and is being amortized as cost of sales over the agreement term. The 5-year Warrants are indexed to the Company's publicly traded stock and were classified as equity. As a result, the fair value of the 5-year Warrants was recorded as an increase to additional paid-in capital.

Warrants

As of November 2, 2019, the Company had outstanding warrants to purchase 7,349,365 shares of the Company’s common stock, of which 7,349,365 are fully exercisable. The warrants expire five years from the date of grant. The following table summarizes information regarding warrants outstanding at November 2, 2019:



Grant Date	Warrants Outstanding	Warrants Exercisable	Exercise Price (Per Share)	Expiration Date
September 19, 2016	2,976,190	2,976,190	$2.90	September 19, 2021
November 10, 2016	333,873	333,873	$3.00	November 10, 2021
January 23, 2017	489,302	489,302	$1.76	January 23, 2022
March 16, 2017	50,000	50,000	$1.92	March 16, 2022
May 2, 2019	3,500,000	3,500,000	$1.50	May 2, 2024

On November 27, 2018, the Company issued warrants to Fonda, Inc. for 1,500,000 shares of our common stock in connection with and as consideration for entering into a services and trademark licensing agreement between the companies. The aggregate market value on the date of the award was $441,000 and was being amortized as cost of sales over the three-year services and trademark licensing agreement term. On July 29, 2019, the Company and Fonda, Inc. agreed to terminate the services and trademark licensing agreement and the warrants for 1,500,000 shares were forfeited.

Restricted Stock Award

On November 23, 2018, the Company entered into a restricted stock award agreement with Flageoli Classic Limited, LLC (“FCL”) granting FCL 1,500,000 restricted shares of the Company's common stock in connection with and as consideration for entering into a vendor exclusivity agreement with the Company. The vendor exclusivity agreement grants us the exclusive right in television shopping to market, promote and sell products under the trademark of Serious Skincare, a skin-care brand that launched on the Company's television network on January 3, 2019. Additionally, the agreement identifies Jennifer Flavin-Stallone as the primary spokesperson for the brand on the Company's television network. The restricted shares will vest in three tranches. Of the restricted shares granted, 500,000 vested on January 4, 2019, which was the first business day following the initial appearance of the Serious Skincare brand on the Company's television network. The remaining restricted shares will vest in equal amounts on January 4, 2020 and January 4, 2021. The aggregate market value on the date of the award was $1,408,000 and is being amortized as cost of sales over the three-year vendor exclusivity agreement term. The estimated fair value of the restricted stock is based on the grant date closing price of the Company's stock for time-based vesting awards.

Compensation expense relating to the restricted stock award was $117,000 and $352,000 for the third quarter and first nine months of fiscal 2019. As of November 2, 2019, there was $967,000 of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted average period of 2.1 years.

A summary of the status of the Company’s non-vested restricted stock award activity as of November 2, 2019 and changes during the nine months then ended is as follows:



	Restricted Stock
	Shares	Weighted Average Grant Date Fair Value
Non-vested outstanding, February 2, 2019	1,000,000	$	0.94
Granted	—	$	—
Vested	—	$	—
Non-vested outstanding, November 2, 2019	1,000,000	$	0.94

Stock-Based Compensation - Stock Options

Compensation is recognized for all stock-based compensation arrangements by the Company. Stock-based compensation expense related to stock option awards was $79,000 and $315,000 for the third quarters of fiscal 2019 and fiscal 2018 and $593,000 and $857,000 for the first nine months of fiscal 2019 and fiscal 2018. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future.

As of November 2, 2019, the Company had one omnibus stock plan for which stock awards can be currently granted: the 2011 Omnibus Incentive Plan that provides for the issuance of up to 13,000,000 shares of the Company's stock. The 2004 Omnibus Stock Plan expired on June 22, 2014. No further awards may be made under the 2004 Omnibus Plan, but any award granted under the 2004 Omnibus Plan and outstanding on June 22, 2014 will remain outstanding in accordance with its terms. The 2011 plan is administered by the human resources and compensation committee of the board of directors and provides for awards for employees, directors and consultants. All employees and directors of the Company and its affiliates are eligible to receive awards under the plan. The types of awards that may be granted under this plan include restricted and unrestricted stock, restricted stock units, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the human resources and compensation committee may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. No incentive stock option may be granted more than 10 years after the effective date of the respective plan's inception or be exercisable more than 10 years after the date of grant. Options granted to outside directors are nonstatutory stock options with an exercise price equal to 100% of the fair market value of the underlying stock as of the date of grant. Except for market-based options, options granted generally vest over three years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and have contractual terms of 10 years from the date of grant.

The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company uses the simplified method in estimating its expected option term because it believes that historical exercise data cannot be accurately relied upon at this time to provide a reasonable basis for estimating an expected term due to the extreme volatility of its stock price and the resulting unpredictability of its stock option exercises. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.



	Fiscal 2019			Fiscal 2018
Expected volatility:	75%	-	82%	72%
Expected term (in years):	6 years			6 years
Risk-free interest rate:	1.4%	-	2.6%	2.8%	-	3.0%

A summary of the status of the Company’s stock option activity as of November 2, 2019 and changes during the nine months then ended is as follows:



	2011 Incentive Stock Option Plan		Weighted Average Exercise Price		2004 Incentive Stock Option Plan		Weighted Average Exercise Price
Balance outstanding, February 2, 2019	4,759,000		$	1.36	107,000		$	4.87
Granted	329,000		$	0.46	—		$	—
Exercised	—		$	—	—		$	—
Forfeited or canceled	(2,316,000	)	$	1.24	(40,000	)	$	4.47
Balance outstanding, November 2, 2019	2,772,000		$	1.35	67,000		$	5.11
Options exercisable at November 2, 2019	1,692,000		$	1.60	67,000		$	5.11

The following table summarizes information regarding stock options outstanding at November 2, 2019:



	Options Outstanding						Options Vested or Expected to Vest
Option Type	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
2011 Incentive:	2,772,000	$	1.35	7.0	$	20,000	2,669,000	$	1.37	6.9	$	17,000
2004 Incentive:	67,000	$	5.11	4.2	$	—	67,000	$	5.11	4.2	$	—

The weighted average grant-date fair value of options granted in the first nine months of fiscal 2019 and fiscal 2018 was $0.31 and $0.74. The total intrinsic value of options exercised during the first nine months of fiscal 2019 and fiscal 2018 was $0 and $26,000. As of November 2, 2019, total unrecognized compensation cost related to stock options was $368,000 and is expected to be recognized over a weighted average period of approximately 1.4 years.

Stock-Based Compensation - Restricted Stock Units

Compensation expense relating to restricted stock unit grants was $229,000 and $507,000 for the third quarters of fiscal 2019 and fiscal 2018 and $715,000 and $1,323,000 for the first nine months of fiscal 2019 and fiscal 2018. As of November 2, 2019, there was $1,034,000 of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted average expected life of 1.7 years. The total fair value of restricted stock units vested during the first nine months of fiscal 2019 and fiscal 2018 was $383,000 and $1,189,000. The estimated fair value of restricted stock units is based on the grant date closing price of the Company's stock for time-based vesting awards and a Monte Carlo valuation model for market-based vesting awards.

The Company has granted time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock units generally vest in three equal annual installments beginning one year from the grant date and are being amortized as compensation expense over the three-year vesting period. The Company has also granted restricted stock units to non-employee directors as part of the Company's annual director compensation program. Each restricted stock unit grant vests or vested on the day immediately preceding the next annual meeting of shareholders following the date of grant. The grants are amortized as director compensation expense over the twelve-month vesting period.

The Company granted no market-based restricted stock performance units to executives and key employees as part of the Company's long-term incentive program during the third quarters of fiscal 2019 and fiscal 2018 and 941,000 and 747,000 market-based restricted stock performance units during the first nine months of fiscal 2019 and fiscal 2018. The number of restricted stock units earned is based on the Company's total shareholder return ("TSR") relative to a group of industry peers over a three-year performance measurement period. Grant date fair values were determined using a Monte Carlo valuation model based on assumptions as follows:



	Fiscal 2019			Fiscal 2018
Total grant date fair value	$482,000			$859,000
Total grant date fair value per share	$0.51			$1.07	-	$1.30
Expected volatility	74%	-	82%	73%	-	76%
Weighted average expected life (in years)	3 years			3 years
Risk-free interest rate	1.7%	-	2.3%	2.4%	-	2.7%

The percent of the target market-based performance restricted stock unit award that will be earned based on the Company's TSR relative to the peer group is as follows:



Percentile Rank		Percentage of Units Vested
< 33%		0%
33%		50%
50%		100%
100%		150%

On May 2, 2019, Timothy A. Peterman was appointed as Chief Executive Officer and entered into an executive employment agreement. In conjunction with the employment agreement, the Company granted 680,000 restricted stock units to Mr. Peterman. The restricted stock units vest in three tranches, each tranche consisting of one-third of the units subject to the award. Tranche 1 will vest upon the one-year anniversary of the grant date. Tranche 2 will vest on the date the Company's average closing stock price for 20 consecutive trading days equals or exceeds $2.00 per share and the executive has been continuously employed at least one year. Tranche 3 will vest on the date the Company's average closing stock price for 20 consecutive trading days equals or exceeds $4.00 per share and the executive has been continuously employed at least two years. The vesting of the second and third tranches can occur any time on or before May 1, 2029. The total grant date fair value was estimated to be $220,000 and is being amortized over the derived service periods for each tranche.

Grant date fair values and derived service periods for each tranche were determined using a Monte Carlo valuation model based on assumptions, which included a weighted average risk-free interest rate of 2.5%, a weighted average expected life of 2.9 years and an implied volatility of 80% and were as follows for each tranche:



	Fair Value (Per Share)	Derived Service Period
Tranche 1 (one year)	$0.37	1.00 Year
Tranche 2 ($2.00/share)	$0.32	3.27 Years
Tranche 3 ($4.00/share)	$0.29	4.53 Years

A summary of the status of the Company’s non-vested restricted stock unit activity as of November 2, 2019 and changes during the nine-month period then ended is as follows:



	Restricted Stock Units
	Market-Based Units				Time-Based Units				Total
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Non-vested outstanding, February 2, 2019	1,629,000		$	1.35	1,807,000		$	1.04	3,436,000		$	1.18
Granted	1,395,000		$	0.44	2,378,000		$	0.44	3,773,000		$	0.44
Vested	—		$	—	(900,000	)	$	1.07	(900,000	)	$	1.07
Forfeited	(1,321,000	)	$	1.05	(1,424,000	)	$	0.70	(2,745,000	)	$	0.87
Non-vested outstanding, November 2, 2019	1,703,000		$	0.84	1,861,000		$	0.51	3,564,000		$	0.67