Item 2 - Management’s Discussion and
Analysis of Financial Condition and
Results of Operations
May 4, 2019 and May 5, 2018
Overview
Management’s Discussion and Analysis of Financial Condition
and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding
of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a
historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include,
but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships,
general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s
filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition
and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements
and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K as of and for the fiscal year ended February 2, 2019.
The Company operates in two reportable segments: fye and etailz.
The fye segment operates a chain of retail entertainment stores and e-commerce sites,
www.fye.com
and
www.secondspin.com
.
As of May 4, 2019, the fye segment operated 206 stores totaling approximately 1.1
million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital
marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is
seasonal in nature for both segments, with the peak selling period being the holiday season which falls in the Company’s
fourth fiscal quarter.
The Company’s results have been, and will continue to be,
contingent upon management’s ability to understand industry trends and to manage the business in response to those trends
and general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Net Sales and Comparable Store Net Sales:
The fye segment
measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the beginning
of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store sales if
the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or downsizing.
Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately
preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz
segment measures total year over year sales growth by product category and evaluates product sales by supplier.
Cost of Sales and Gross Profit
: Gross profit is calculated
based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales
levels, mix of products sold, vendor discounts and allowances, shrinkage, obsolescence and distribution costs. Distribution expenses
include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs
associated with product returns to vendors.
Selling, General and Administrative (“SG&A”)
Expenses:
Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses
and depreciation charges. SG&A expenses also include fixed assets write-offs associated with store closures, if any, and miscellaneous
income and expense items, other than interest.
Balance Sheet and Ratios:
The Company views cash and working
capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Cash Flows
section for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen Weeks Ended May 4, 2019
Compared to the Thirteen Weeks Ended May 5, 2018
Segment Highlights:
|
|
Thirteen Weeks Ended
|
(amounts in thousands)
|
|
|
|
|
May 4,
2019
|
|
|
May 5,
2018
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
45,018
|
|
|
$
|
54,063
|
|
etailz
|
|
|
35,132
|
|
|
|
42,540
|
|
Total Company
|
|
$
|
80,150
|
|
|
$
|
96,603
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
17,502
|
|
|
$
|
22,271
|
|
etailz
|
|
|
7,888
|
|
|
|
9,417
|
|
Total Company
|
|
$
|
25,390
|
|
|
$
|
31,688
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
(6,100
|
)
|
|
$
|
(5,372
|
)
|
etailz
|
|
|
(1,541
|
)
|
|
|
(2,786
|
)
|
Total Company
|
|
$
|
(7,641
|
)
|
|
$
|
(8,158
|
)
|
|
|
|
|
|
|
|
|
|
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations
|
|
|
|
etailz loss from operations
|
|
$
|
(1,541
|
)
|
|
$
|
(2,786
|
)
|
Acquisition related amortization and compensation expenses
(1)
|
|
|
352
|
|
|
|
2,093
|
|
etailz adjusted loss from operations
(2)
|
|
$
|
(1,189
|
)
|
|
$
|
(693
|
)
|
(1)
For the 13 weeks
ended May 4, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $286 thousand and compensation
expenses of $66 thousand. For the 13 weeks ended May 5, 2018, acquisition related expenses consisted of amortization expense of
intangible assets of $972 thousand and compensation expenses of $1,121 thousand.
(2)
In
addition to the results of operations determined in accordance with generally accepted accounting principles in the United States
(“U.S. GAAP”), we reported non-GAAP adjusted operating income for the etailz segment as shown above.
Total
Revenue.
The following table sets forth a year-over-year
comparison of the Company’s total revenue:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Comp
|
|
|
|
May 4,
2019
|
|
|
May 5,
2018
|
|
|
$
|
|
%
|
|
Store Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye revenue
|
|
$
|
45,018
|
|
|
$
|
54,063
|
|
|
$
|
(9,045
|
)
|
|
|
-16.7%
|
|
|
|
0.0%
|
|
etailz revenue
|
|
|
35,132
|
|
|
|
42,540
|
|
|
|
(7,408
|
)
|
|
|
-17.4%
|
|
|
|
|
|
Total revenue
|
|
$
|
80,150
|
|
|
$
|
96,603
|
|
|
$
|
(16,453
|
)
|
|
|
-17.0%
|
|
|
|
|
|
Total revenue decreased 17.0% to $80.2 million for the thirteen
weeks ended May 4, 2019 compared to $96.6 million in the same period last year.
fye Segment
The following table sets forth a period over period comparison of
net fye sales by merchandise category:
|
|
Thirteen Weeks Ended
|
|
Change
|
|
|
(amounts in thousands)
|
|
May 4, 2019
|
|
|
May 5, 2018
|
|
|
$
|
|
%
|
|
Comp
Store Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye net sales
|
|
$
|
44,157
|
|
|
|
52,692
|
|
|
$
|
(8,535
|
)
|
|
|
-16.2%
|
|
|
|
0.0%
|
|
Other revenue
|
|
|
861
|
|
|
|
1,371
|
|
|
|
(510
|
)
|
|
|
-37.2%
|
|
|
|
|
|
Total revenue
|
|
$
|
45,018
|
|
|
|
$54,063
|
|
|
$
|
(9,045
|
)
|
|
|
-16.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of FYE net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trend/Lifestyle
|
|
|
42.8%
|
|
|
|
37.8%
|
|
|
|
|
|
|
|
|
|
|
|
7.3%
|
|
Video
|
|
|
28.3%
|
|
|
|
31.8%
|
|
|
|
|
|
|
|
|
|
|
|
-8.0%
|
|
Music
|
|
|
17.9%
|
|
|
|
18.7%
|
|
|
|
|
|
|
|
|
|
|
|
-0.1%
|
|
Electronics
|
|
|
11.0%
|
|
|
|
11.7%
|
|
|
|
|
|
|
|
|
|
|
|
-4.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Count:
|
|
|
206
|
|
|
|
253
|
|
|
|
(47
|
)
|
|
|
-18.6%
|
|
|
|
|
|
Total Square footage
|
|
|
1,145
|
|
|
|
1,394
|
|
|
|
(249
|
)
|
|
|
-17.9%
|
|
|
|
|
|
Net sales.
The 16.2% net sales decline
from the prior year is primarily due to an 18.6% decline in total stores in operation.
Trend/lifestyle:
fye stores offer a selection of trend/lifestyle products that primarily
relate to theatrical, music, and gaming releases. The trend/lifestyle category increased 7.3% on a comparable store sales basis
during the thirteen weeks ended May 4, 2019. The trend/lifestyle category represented 42.8% of the Company’s total net sales
for the thirteen weeks ended May 4, 2019 versus 37.8% in the comparable quarter last year. The Company continues to take advantage
of opportunities to strengthen its selection and shift product mix to growing categories of entertainment-related merchandise.
The Company grew comparable store sales in this category by strengthening its assortment of consumables and collectables, as well
as by improving the product presentation and value proposition.
Video:
Comparable store net sales in the video category decreased 8.0%
during the thirteen weeks ended May 4, 2019. The video category represented 28.3% of total net sales for the thirteen weeks ended
May 4, 2019 compared to 31.8% in the comparable quarter last year, as the fye segment is shifting its product mix to growing categories
of entertainment and pop culture related merchandise.
Music:
Comparable store net sales in the music category decreased 0.1%
during the thirteen weeks ended May 4, 2019. The music category represented 17.9% of total net sales for the thirteen weeks ended
May 5, 2018 compared to 18.7% in the comparable quarter last year.
Electronics:
Comparable store net sales in the electronics category decreased
4.3% during the thirteen weeks ended May 4, 2019. Electronics net sales represented 11.0% of total net sales for the thirteen weeks
ended May 4, 2019 compared to 11.7% in the comparable quarter last year.
Other Revenue.
Other revenue, which was primarily related
to commissions and fees earned from third parties, was approximately $0.9 million and $1.4 million for the thirteen weeks ended
May 4, 2019 and May 5, 2018, respectively.
etailz Segment
etailz revenue for the thirteen weeks ended May 4, 2019 was
$35.1 million, compared to $42.5 million for the same 13 week period in the prior fiscal year. etailz generates revenue across
a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics,
health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the thirteen weeks ended
May 4, 2019, etailz sold approximately 25,000 SKUs from over 1,450 suppliers, compared to approximately 31,000 SKUs from over 2,200
suppliers during the thirteen weeks ended May 5, 2018.
Gross Profit.
The following table
sets forth a year-over-year comparison of the Company’s gross profit:
|
|
Thirteen
Weeks Ended
|
|
Change
|
(amounts in thousands)
|
|
May
4,
2019
|
|
May 5,
2018
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit
|
|
$
|
17,502
|
|
|
$
|
22,271
|
|
$
|
(4,769
|
)
|
|
|
-21.4%
|
|
etailz gross profit
|
|
|
7,888
|
|
|
|
9,417
|
|
|
(1,529
|
)
|
|
|
-16.2%
|
|
Total gross profit
|
|
$
|
25,390
|
|
|
$
|
31,688
|
|
$
|
(6,298
|
)
|
|
|
-19.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit as a % of fye revenue
|
|
|
38.9%
|
|
|
|
41.2%
|
|
|
|
|
|
|
|
|
etailz gross profit as a % of etailz revenue
|
|
|
22.5%
|
|
|
|
22.1%
|
|
|
|
|
|
|
|
|
Total gross profit as a % of total revenue
|
|
|
31.7%
|
|
|
|
32.8%
|
|
|
|
|
|
|
|
|
Gross profit decreased
$6.3 million to $25.4 million for the thirteen weeks ended May 4, 2019 compared to $31.7 million for the thirteen weeks ended May
5, 2018.
fye Segment
fye gross profit as a percentage of total revenue for the thirteen
weeks ended May 4, 2019 was 38.9% compared to 41.2% for the thirteen weeks ended May 5, 2018. The decline in rate was primarily
driven by aggressive actions to clear holiday merchandise.
etailz Segment
etailz gross profit as a percentage of
revenue for the thirteen weeks ended May 4, 2019 was 22.5% versus 22.1% for the thirteen weeks ended May 5, 2018. The 40 basis
points increase in the gross profit rate was a result of the performance improvement plan implemented during the fourth quarter
of 2018. See Note 1 above for the description of the etailz segment performance improvement plan.
SG&A Expenses.
The following table sets forth a period
over period comparison of the Company’s SG&A expenses:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
(amounts in thousands)
|
|
May 4,
2019
|
|
May 5,
2018
|
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
fye SG&A, excluding depreciation and amortization
|
|
$
|
23,030
|
|
|
$
|
26,489
|
|
|
$
|
(3,459
|
)
|
|
|
-13.1%
|
|
As a % of total fye revenue
|
|
|
51.2%
|
|
|
|
49.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
etailz SG&A, excluding depreciation and amortization
|
|
|
9,021
|
|
|
|
11,124
|
(1)
|
|
|
(2,103
|
)
|
|
|
-18.9%
|
|
As a % of total etailz revenue
|
|
|
25.7%
|
|
|
|
26.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
980
|
|
|
|
2,233
|
|
|
|
(1,253
|
)
|
|
|
-56.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A expenses
|
|
$
|
33,031
|
|
|
$
|
39,846
|
|
|
$
|
(6,815
|
)
|
|
|
-17.1%
|
|
(1)
There was no income from the Company’s joint venture during the first fiscal quarter of 2019. As a result, due to the
immaterial nature of the joint venture income, last year’s income from the Company’s joint venture in the amount of
$233 thousand was included within SG&A expenses in order to conform to the current year presentation for SG&A expenses.
SG&A expenses decreased $6.8 million
or 17.1%.
fye Segment
fye SG&A expenses, excluding depreciation
and amortization expenses, decreased $3.5 million, or 13.1%. As a percentage of fye revenue, SG&A expenses in the fye segment
were 51.2% compared to 49.0% for the same quarter last year. The decline in SG&A expenses was due to fewer stores in operation
and other expense saving initiatives implemented in the fourth quarter of 2018. The increase in SG&A as a percentage of revenue
was due to an increase in healthcare costs and outside consulting fees.
etailz Segment
etailz SG&A expenses, excluding depreciation and amortization
expenses, decreased $2.1 million primarily due to expense reduction initiatives implemented in the fourth quarter of 2018.
Depreciation and Amortization
Expense
.
Consolidated depreciation and amortization expense decreased $1.3 million
primarily due to a $4.1 million net decrease in the carrying value of fixed assets and a $16.4 million net decrease in the carrying
value of intangible assets, resulting from impairment charges recorded during the fourth quarter of fiscal 2018. For a discussion
of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies”
in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended
February 2, 2019.
Interest Expense.
Interest expense was approximately
$132 thousand during the thirteen weeks ended May 4, 2019 compared to $64 thousand during the thirteen weeks ended May 5, 2018.
Other Income.
Other income was $43 thousand dollars during the thirteen weeks ended May 4, 2019 compared to $79 thousand dollars in the same
period last year.
Income Tax Expense.
Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the
Company’s deferred tax assets As a result, there were
insignificant tax expense
amounts recorded during the thirteen weeks ended May 4, 2019 and May 5, 2018.
Net Loss.
The following
table sets forth a period over period comparison of the Company’s net loss:
|
|
Thirteen Weeks Ended
|
|
|
May 4,
2019
|
|
May 5,
2018
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
($7,730)
|
|
|
|
($8,143)
|
|
|
|
$413
|
|
Income tax expense
|
|
|
72
|
|
|
|
4
|
|
|
|
68
|
|
Net loss
|
|
|
($7,802)
|
|
|
|
($8,147)
|
|
|
|
$345
|
|
LIQUIDITY
Liquidity and Cash Flows:
The Company’s primary sources of liquidity
are its borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash
generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including
funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future
liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the
timing and amount of our operating expenses; the timing and costs of working capital needs; and changes in our strategy or our
planned activities.
The Company incurred net losses of $7.8 million
and $8.1 million for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively, and has an accumulated deficit of $58.0
million at May 4, 2019. In addition, net cash used in operating activities for the thirteen weeks ended May 4, 2019 was $6.2 million.
Net cash used in operating activities for the thirteen weeks ended May 5, 2018 was $16.6 million.
As disclosed in the Company’s Annual Report
on Form 10-K filed May 14, 2019, the Company experienced negative cash flows from operations during fiscal 2018 and 2017,
and we expect to continue to incur net losses in the foreseeable future. We implemented strategic initiatives on December 11, 2018,
aimed at improving organizational efficiency and conserving working capital needed to support the growth of our etailz segment
(the “performance improvement plan”). As a result of the initiative, and disciplined inventory management in the fye
segment, the Company was able to reduce cash used in operations by $10.4 million for the first quarter of fiscal 2019 as compared
to the first quarter of fiscal 2018. We anticipate continued improvement in cash flows from operations for the remainder of the
fiscal 2019. At May 4, 2019, we had cash and cash equivalents of $3.8 million, net working capital of $49.6 million, and short-term
borrowings in the amount of $3.1 million on our revolving credit facility, as further discussed in footnote 8 to the interim condensed
consolidated financial statements included elsewhere in this Form 10-Q. This compares to $14.5 million in cash and cash equivalents,
net working capital of $89.1 million, and no borrowings on the Company’s credit facility at May 5, 2018.
Management anticipates any cash requirements
due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility. See note 8 in the interim
condensed consolidated financial statements included elsewhere in this Form 10-Q for additional information.
In addition to the aforementioned current sources of existing
working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well
as continuing the
efforts to generate additional sales and increase margins. However,
at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available
on acceptable terms or at all, should we require such additional funds. If the Company is unable to improve its operations,
it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially
adversely affected.
Furthermore, broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise
additional funds, should we require such additional funds. Similarly, if our common stock is delisted from the NASDAQ Global Market,
it may also limit our ability to raise additional funds.
The unaudited condensed consolidated financial statements for
the thirteen weeks ended May 4, 2019 were prepared on the basis of a going concern which contemplates that the Company will be
able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities
and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the
etailz segment and the availability of future funding. The unaudited condensed consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
The following table sets forth a summary of key components of
cash flow and working capital:
|
|
|
|
|
As of or for the
Thirteen
Weeks Ended
|
|
Change
|
|
|
(amounts in thousands)
|
|
|
May 4,
2019
|
|
May 5,
2018
|
|
$
|
|
|
Operating Cash Flows
|
|
|
|
(6,182)
|
|
|
|
(16,621)
|
|
|
10,439
|
|
|
|
Investing Cash Flows
|
|
|
|
(799)
|
|
|
|
(409)
|
|
|
(390)
|
|
|
|
Financing Cash Flows
|
|
|
|
3,072
|
|
|
|
(1,500)
|
|
|
4,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
(1)
|
|
|
(842)
|
|
|
|
(863)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
(2)
|
|
|
10,317
|
|
|
|
24,976
|
|
|
(14,659)
|
|
|
|
Merchandise Inventory
|
|
|
|
88,487
|
|
|
|
110,677
|
|
|
(22,190)
|
|
|
|
Working Capital
|
|
|
|
49,581
|
|
|
|
89,070
|
|
|
(39,489)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in Investing Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Cash and cash equivalents per condensed consolidated
balance sheets
|
|
|
$
|
3,822
|
|
|
$
|
14,509
|
|
|
|
|
|
|
Add: restricted cash
|
|
|
|
6,495
|
|
|
|
10,467
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash
|
|
|
$
|
10,317
|
|
|
$
|
24,976
|
|
|
|
|
Cash used in operations was $6.2 million primarily due to net
loss of $7.8 million, a $5.4 million seasonal reduction of accounts payable, a $1.0 million decrease in accrued expenses and other
current liabilities and a $2.5 million decrease in other long term liabilities, offset by a $0.8 million decrease in accounts receivable,
a $6.4 million decrease in inventory, a $1.1 million decrease in prepaid expenses and other current assets, and a $2.1 million
decrease in other long-term assets. The Company’s merchandise inventory and accounts payable are influenced by the seasonality
of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for
merchandise inventory purchased during the prior year’s holiday season.
Cash used in investing activities was $0.8
million for the thirteen weeks ended May 4, 2019, which primarily consisted of capital expenditures. Cash used in investing activities
was $0.4 million for the thirteen weeks ended May 5, 2018, which consisted of $0.9 million in capital expenditures, offset by a
$0.5 million of capital distributions from the joint venture.
Cash provided by financing activities was $3.1 million for the
thirteen weeks ended May 4, 2019, which was comprised entirely of proceeds from short-term borrowings. Cash used in financing activities
was $1.5 million for the thirteen weeks ended May 5, 2018, which was comprised entirely of a payment to etailz shareholders as
per the original etailz acquisition share purchase agreement.
Capital Expenditures.
During the thirteen
weeks ended May 4, 2019, the Company made capital expenditures of $0.8 million. The Company currently plans to spend approximately
$3.9 million for capital expenditures during fiscal 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies
and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the
financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory
and return costs and income taxes. Management bases its estimates and judgments on historical experience and other factors that
are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions
or conditions.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in the Form 10-K as of and for the year ended February 2, 2019 includes a summary
of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial
statements. As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a critical accounting
policy. With the exception of goodwill, there have been no material changes or modifications to the policies since February 2,
2019.
Recent Accounting Pronouncements:
The information set forth under Note 2, Recently Adopted Accounting
Pronouncements section contained in Item 1, “Notes to Interim Condensed Consolidated Financial Statements”, is incorporated
herein by reference.
Non-GAAP Measures:
This Form 10-Q contains
certain non-GAAP metrics, including: adjusted operating loss for the etailz segment and SG&A excluding depreciation and amortization
expenses, for each reporting segment. A non-GAAP measure is not a recognized measure of financial performance under GAAP in the
United States, and should not be considered as a substitute for SG&A expenses, operating earnings, net earnings from continuing
operations or cash flows from operating activities, as determined in accordance with GAAP. Non-GAAP items are provided because
management believes that, when reconciled from the
GAAP items to which they
relate, they provide additional useful information to investors regarding the Company’s operational performance.
The Company calculates etailz
adjusted loss from operations to evaluate its own operating performance and as an integral part of its planning process. The Company
presents etailz adjusted loss from operations as a supplemental measure because it believes such a measure provides management
and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the
effects of certain charges.
The Company calculates SG&A
expenses, excluding depreciation and amortization expenses, for each reporting segment, to evaluate its own operating performance
and as an integral part of its planning process. The Company presents SG&A expenses, excluding depreciation and amortization
expenses, as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding
of its business operating results, including underlying trends, by excluding the effects of certain charges.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION