Quarterly report pursuant to Section 13 or 15(d)

RESTRUCTURING CHARGES

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RESTRUCTURING CHARGES
6 Months Ended
Feb. 29, 2020
RESTRUCTURING CHARGES  
RESTRUCTURING CHARGES

NOTE 13 – RESTRUCTURING CHARGES

During the second quarter of fiscal 2020, the Company adopted a comprehensive strategic plan (the “2020 Plan”) to more effectively execute the Company’s strategy of focusing its resources on more established, financially stable, and creditworthy customers (namely multi-state operators, licensed producers, and leading brands). In connection with the 2020 Plan, the Company began implementing a restructuring process that seeks to rationalize all aspects of its operations by, among other things, significantly reducing its overhead, implementing tighter expense controls, consolidating its warehouses, reducing its inventory, and drastically altering its sales strategy to focus more on these customers. The Company believes that this strategic shift and associated restructuring should result in a better forecast of demand, reduction of inventory and warehouse space, improved collections and cash flow, and potential revenue upside from these customers’ continued expansion and consolidation in the marketplace.

The Company has completed, or is in the process of completing, the following restructuring activities in connection with the 2020 Plan:

·

Severance: The Company is in the process of implementing a more efficient and automated approach to serve a smaller more targeted group of customers, which will require substantially fewer dedicated sales representatives, project managers, warehouse personnel, and other related personnel. As part of this process, the Company determined that certain positions at the Company were no longer essential to the execution of the Company’s strategy going forward. As a result, the Company underwent reductions in force to right-size and better align its workforce with this new strategy. During the second quarter of fiscal 2020, the Company terminated 28 employees, and incurred $379 in severance-related restructuring costs. In March 2020, the Company terminated 49 employees, and incurred $400 in severance-related restructuring costs.

·

Facility-Related Lease Termination Costs: As a result of the Company’s decision to discontinue nearly all of its stock inventory, the Company determined that it no longer needs the vast majority of its current warehouse space, and is currently in the process of negotiating with its landlords to terminate and exit the impacted warehouses. In March 2020, the Company vacated its Las Vegas, Nevada facility, and is planning to vacate additional facilities throughout the remainder of fiscal 2020 in order to consolidate its warehouse footprint.

Asset Impairment: With the Company’s planned facility closures, the Company has determined that the fair value of its fixed assets at these closing facilities is now below their carrying value, and that an impairment has occurred. The Company also determined that its product molds and tooling are no longer necessary assets, given its shift to focus exclusively on custom and best-selling stock inventory, creating an additional need for impairment. As a result, the Company recognized a total impairment charge related of approximately $3.9 million related to these fixed assets during the second quarter of its fiscal 2020. In addition, because of the Company’s decision to consolidate its warehouses, the Company determined that it will incur impairment charges to its right-of-use (“ROU”) assets. Based on internal calculations, the Company recognized impairment charges related to these assets of $3.0 million during the second quarter of its fiscal 2020.

The Company expects to incur a total of $11.1 million in restructuring charges upon the completion of the plan, which represents the Company’s best estimate as of February 29, 2020. The 2020 Plan is expected to be completed by the end of fiscal 2020. The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce and facility, ROU and asset impairment costs. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure that no excess accruals are retained, and the utilization of the provisions are for their intended purpose in accordance with developed plans. The following table reflects the movement of activity of the restructuring reserve for the three months ended February 29, 2020:

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

 

 

Severance related

 

Facility, ROU and

 

 

 

 

 

 costs

 

asset impairment

 

Total

Balance at December 1, 2019

 

$

 —

 

$

 —

 

$

 —

Provisions/Additions

 

 

400

 

 

6,901

 

 

7,301

Utilized/Paid

 

 

(400)

 

 

(6,901)

 

 

(7,301)

Balance at February 29, 2020

 

$

 —

 

$

 —

 

$

 —

 

Expenses incurred under the 2020 Plan during the three and six months ended February 29, 2020 are included within “Restructuring costs” in the Condensed Consolidated Statements of Operations.