UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended November 2, 2019
     
    or
     
  o 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     0-14818  

 

TRANS WORLD ENTERTAINMENT CORPORATION

 

(Exact Name of Registrant as Specified in its Charter)

 

  New York   14-1541629  
  State or Other Jurisdiction of
Incorporation or Organization
  I.R.S. Employer Identification No.  
         
  38 Corporate Circle
Albany, New York
  12203  
  Address of Principal Executive Offices   Zip Code  

 

(518) 452-1242

Registrant’s Telephone Number, Including Area Code

 

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

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, $.01 par value per share TWMC NASDAQ Stock Market

 

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 x     No o

 

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 x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an 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 o Accelerated filer o
  Non-accelerated filer x Smaller reporting company x
    Emerging growth company o

 

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.    o

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes o    No o 

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $.01 par value,

1,816,311 shares outstanding as of December 13, 2019

 

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

  Form 10-Q
Page No.
     
PART I. FINANCIAL INFORMATION    
     
Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited)    
     
Condensed Consolidated Balance Sheets at November 2, 2019,
February 2, 2019 and November 3, 2018
  3
     
Condensed Consolidated Statements of Operations –
Thirteen and Thirty-Nine Weeks Ended November 2, 2019 and November 3, 2018
  4
     
Condensed Consolidated Statements of Comprehensive Loss –
Thirteen and Thirty-Nine Weeks Ended November 2, 2019 and November 3, 2018
  5
     
Condensed Consolidated Statements of Shareholders’ Equity –
Thirteen and Thirty-Nine Weeks Ended November 2, 2019 and November 3, 2018
  6
     
Condensed Consolidated Statements of Cash Flows –
Thirty-Nine Weeks Ended November 2, 2019 and November 3, 2018
  7
     
Notes to Interim Condensed Consolidated Financial Statements   8
     
Item 2 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations
  21
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   30
     
Item 4 – Controls and Procedures   30
     
PART II.  OTHER INFORMATION    
     
Item 1 – Legal Proceedings   31
     
Item 1A- Risk Factors   31
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   31
     
Item 3 – Defaults Upon Senior Securities   31
     
Item 4 – Mine Safety Disclosures   32
     
Item 5 – Other Information   32
     
Item 6 – Exhibits   32
     
Signatures   33
2

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

Item 1 – Interim Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

(unaudited)

 

    November 2,     February 2,     November 3,  
    2019     2019     2018  
ASSETS                        
CURRENT ASSETS                        
Cash and cash equivalents   $ 3,073     $ 4,355     $ 4,497  
Restricted cash     950       4,126       4,122  
Accounts receivable     4,284       5,383       5,659  
Merchandise inventory     101,130       94,842       131,285  
Prepaid expenses and other assets     4,719       6,657       9,227  
Total current assets     114,156       115,363       154,790  
                         
Restricted cash     5,139       5,745       5,944  
Fixed assets, net     4,987       7,529       12,177  
Operating lease right-of-use assets     8,978              
Goodwill                 39,191  
Intangible assets, net     2,810       3,668       21,052  
Other assets     5,410       5,708       5,907  
TOTAL ASSETS     141,480       138,013       239,061  
                         
LIABILITIES                        
CURRENT LIABILITIES                        
Accounts payable   $ 29,994     $ 34,329     $ 42,272  
Short-term borrowings     27,771             27,440  
Accrued expenses and other current liabilities     5,584       8,132       8,624  
Deferred revenue     5,989       6,955       6,454  
Current portion of operating lease liabilities     9,440              
Total current liabilities     78,778       49,416       84,790  
                         
Operating lease liabilites     16,227              
Other long-term liabilites     21,600       24,867       25,853  
TOTAL LIABILITIES     116,605       74,283       110,643  
                         
SHAREHOLDERS’ EQUITY                        
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)                  
Common stock ($0.01 par value; 200,000,000 shares authorized; 3,225,627, 3,221,834 and 3,221,834 shares issued, respectively)     32       32       32  
Additional paid-in capital     345,043       344,826       344,123  
Treasury stock at cost (1,409,316, 1,408,892 and 1,408,043 shares, respectively)     (230,168 )     (230,166 )     (230,167 )
Accumulated other comprehensive loss     (720 )     (735 )     (1,013 )
(Accumulated deficit) Retained earnings     (89,312 )     (50,227 )     15,443  
TOTAL SHAREHOLDERS’ EQUITY     24,875       63,730       128,418  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 141,480     $ 138,013     $ 239,061  

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

3

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
    November 2,
2019
    November 3,
2018
    November 2,
2019
    November 3,
2018
 
                                 
Net sales   $ 68,592     $ 90,877     $ 223,100     $ 287,148  
Other revenue     864       1,107       2,510       3,613  
Total revenue     69,456       91,984       225,610       290,761  
                                 
Cost of sales     46,377       64,598       152,025       199,514  
Gross profit     23,079       27,386       73,585       91,247  
Selling, general and administrative expenses     29,921       41,140       95,470       122,550  
Asset impairment charges     16,035             16,035        
Loss from operations     (22,877 )     (13,754 )     (37,920 )     (31,303 )
                                 
Interest expense     228       277       554       444  
                                 
Other (income) loss     (30 )     (43 )     388       (171 )
Loss before income tax expense     (23,075 )     (13,988 )     (38,862 )     (31,576 )
Income tax expense     80       64       223       136  
Net loss   $ (23,155 )   $ (14,052 )   $ (39,085 )   $ (31,712 )
                                 
BASIC AND DILUTED LOSS PER SHARE:                                
Basic and diluted loss per common share   $ (12.73 )   $ (7.74 )   $ (21.51 )   $ (17.48 )
                                 
Weighted average number of common shares outstanding – basic and diluted     1,819       1,815       1,817       1,814  

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

4

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

    Thirteen Weeks ended     Thirty-nine Weeks Ended  
    November 2,
2019
    November 3,
2018
    November 2,
2019
    November 3,
2018
 
                                 
Net loss   $ (23,155 )   $ (14,052 )   $ (39,085 )   $ (31,712 )
Amortization of pension gain     5       5       15       15  
Comprehensive loss   $ (23,150 )   $ (14,047 )   $ (39,070 )   $ (31,697 )

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

5

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars and shares in thousands)

 

    Thirteen Weeks Ended November 2, 2019  
    Number of shares
outstanding
                      Accumulated              
    Common
Shares
    Treasury
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Treasury
Stock
At Cost
    Other
Comprehensive
Loss
    Accumulated
Deficit
    Shareholders’
Equity
 
Balance as of August 3, 2019     3,224       (1,409 )   $ 32     $ 344,983     $ (230,168 )   $ (725 )   $ (66,157 )   $ 47,965  
Net Loss                                         (23,155 )     (23,155 )
Other comprehensive income                                   5             5  
Vested restricted shares     2                                            
Amortization of unearned compensation/restricted stock amortization                       60                         60  
Balance as of November 2, 2019     3,226       (1,409 )   $ 32     $ 345,043     $ (230,168 )   $ (720 )   $ (89,312 )   $ 24,875  
                                                 
    Thirty-nine Weeks Ended November 2, 2019  
    Number of shares
outstanding
                      Accumulated              
    Common
Shares
    Treasury
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Treasury
Stock
At Cost
    Other
Comprehensive
Loss
    Accumulated
Deficit
    Shareholders’
Equity
 
Balance as of February 2, 2019     3,222       (1,409 )   $ 32     $ 344,826     $ (230,166 )   $ (735 )   $ (50,227 )   $ 63,730  
Net Loss                                         (39,085 )     (39,085 )
Other comprehensive income                                   15             15  
Vested restricted shares     4                   3       (2 )                 1  
Amortization of unearned compensation/restricted stock amortization                       214                         214  
Balance as of November 2, 2019     3,226       (1,409 )   $ 32     $ 345,043     $ (230,168 )   $ (720 )   $ (89,312 )   $ 24,875  
                                                 
    Thirteen Weeks Ended November 3, 2018  
    Number of shares
outstanding
                      Accumulated     Retained        
    Common
Shares
    Treasury
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Treasury
Stock
At Cost
    Other
Comprehensive
Loss
    Earnings
(Accumulaed
Deficit)
    Shareholders’
Equity
 
Balance as of August 4, 2018     3,219       (1,408 )   $ 32     $ 343,322     $ (230,149 )   $ (1,008 )   $ 29,495     $ 141,692  
Net Loss                                         (14,052 )     (14,052 )
Other comprehensive loss                                   (5 )           (5 )
Vested restricted shares     3                   3       (18 )                 (15 )
Amortization of unearned compensation/restricted stock amortization                       798                         798  
Balance as of November 3, 2018     3,222       (1,408 )   $ 32     $ 344,123     $ (230,167 )   $ (1,013 )   $ 15,443     $ 128,418  
                                                 
    Thirty-nine Weeks Ended November 3, 2018  
    Number of shares
outstanding
                      Accumulated     Retained        
    Common
Shares
    Treasury
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Treasury
Stock
At Cost
    Other
Comprehensive
Loss
    Earnings
(Accumulaed
Deficit)
    Shareholders’
Equity
 
Balance as of February 3, 2018     3,215       (1,408 )   $ 32     $ 341,714     $ (230,145 )   $ (998 )   $ 47,611     $ 158,214  
Adjustment for adoption of accounting standard, ASU 2014-09                                         (456 )     (456 )
Net Loss                                         (31,712 )     (31,712 )
Other comprehensive loss                                   (15 )           (15 )
Vested restricted shares     4                   9       (22 )                 (13 )
Common stock issued-new grants     3                   75                         75  
Amortization of unearned compensation/restricted stock amortization                       2,325                         2,325  
Balance as of November 3, 2018     3,222       (1,408 )   $ 32     $ 344,123     $ (230,167 )   $ (1,013 )   $ 15,443     $ 128,418  
6

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    Thirty-nine Weeks Ended  
    November 2,
2019
    November 3,
2018
 
OPERATING ACTIVITIES:                
Net loss   $ (39,085 )   $ (31,712 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation of fixed assets     2,272       3,893  
Amortization of intangible assets     858       2,915  
Amortization of right-of-use assets     6,171        
Stock-based compensation     214       2,387  
Write down of investment     500        
Adjustment to contingent consideration           (272 )
Loss on disposal of fixed assets     27       327  
Loss on impairment of long lived assets     16,035        
Change in cash surrender value     (189 )     90  
Changes in operating assets and liabilities that provide (use) cash:                
Accounts receivable     1,099       (1,190 )
Merchandise inventory     (6,288 )     (21,908 )
Prepaid expenses and other current assets     1,190       (2,251 )
Other long-term assets     (129 )     (163 )
Accounts payable     (4,335 )     492  
Accrued expenses and other current liabilities     (852 )     (642 )
Deferred revenue     (966 )     (2,010 )
Other long-term liabilities     (7,344 )     (3,293 )
Net cash used in operating activities     (30,822 )     (53,337 )
                 
INVESTING ACTIVITIES:                
Purchases of fixed assets     (2,128 )     (2,851 )
Capital distributions from joint venture     115       1,305  
Net cash used in investing activities     (2,013 )     (1,546 )
                 
FINANCING ACTIVITIES:                
Proceeds from short term borrowings     27,771       27,440  
Payments to etailz shareholders           (1,500 )
Net cash provided by financing activities     27,771       25,940  
                 
Net decrease in cash, cash equivalents, and restricted cash     (5,064 )     (28,943 )
Cash, cash equivalents, and restricted cash, beginning of period     14,226       43,506  
Cash, cash equivalents, and restricted cash, end of period   $ 9,162     $ 14,563  

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

7

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

November 2, 2019 and November 3, 2018

 

Note 1. Nature of Operations

 

Trans World Entertainment Corporation and subsidiaries (“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 November 2, 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.

 

Liquidity and Cash Flows Considerations:

 

The unaudited condensed consolidated financial statements for the thirteen and thirty-nine weeks ended November 2, 2019 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and satisfy liabilities and commitments 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 continued implementation of the performance improvement plan for the etailz segment, the availability of future funding and the completion of other strategic alternatives. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

The Company incurred net losses of $39.1 million and $31.7 million for the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively, and has an accumulated deficit of $89.3 million at November 2, 2019. In addition, net cash used in operating activities for the thirty-nine weeks ended November 2, 2019 was $30.8 million. Net cash used in operating activities for the thirty-nine weeks ended November 3, 2018 was $53.3 million. The Company also experienced negative cash flows from operations during fiscal 2018 and 2017, and expects to incur net losses in the foreseeable future. Based on its recurring losses from operations, expectation of continuing operating losses for the foreseeable future, and uncertainty with respect to any available future funding, as well as the completion of other strategic alternatives, the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of filing of this Quarterly Report on Form 10-Q.

 

Management has plans to address the Company’s current liquidity position. As disclosed in the Company’s Annual Report on Form 10-K filed May 14, 2019, the Company implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiencies and conserving working capital needed to support the growth of the etailz segment (the “performance improvement plan”). As a result of the initiative, and inventory management in the fye segment, the Company was able to reduce cash used in operations by $22.5 million for the thirty-nine weeks ended November 2, 2019 as compared to the thirty-nine weeks ended November 2, 2018. We anticipate continued improvement in cash flows used in operations for the remainder of fiscal 2019. In addition, the Company continues to evaluate other strategic initiatives including establishing a credit facility at the etailz segment which could provide additional liquidity. At November 2, 2019, we had cash and cash equivalents of $3.1 million, net working capital of $35.4 million, short-term borrowings in the amount of $27.8 million on our revolving credit facility and $11.0 million of availability on our revolving credit facility. This compares to $4.5 million in cash and cash equivalents, net working capital of $70.0 million, short-term borrowings in the amount of $27.4 million on the Company’s revolving credit facility at November 3, 2018, and $22.1 million of availability on our revolving credit facility.

 

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 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 in the implementation of our strategy and planned activities.

 

In addition to the aforementioned current sources of existing working capital, the Company is continuing its efforts to generate additional sales and increase margins. There can be no assurance that any of the initiatives or strategic alternatives described above will be implemented, successful or consummated.

8

 

Reverse Stock Split:

 

On August 15, 2019, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-twenty pursuant to a Certificate of Amendment to the Company’s Certificate of Incorporation filed with the Secretary of State of the State of New York. The reverse stock split was reflected on the Nasdaq Capital Market (“Nasdaq”) beginning with the opening of trading on August 15, 2019. The primary purpose of the reverse stock split, which was approved by the Company’s stockholders at the Company’s Annual Stockholders Meeting on June 27, 2019, was to enable the Company to regain compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq. Pursuant to the reverse stock split, every twenty shares of the Company’s issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of the common stock. Unless otherwise indicated, all share and per share amounts of the common stock included in the accompanying interim condensed consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. Amounts of common stock resulting from the reverse stock split were rounded up to the nearest whole share. The reverse stock split affected all issued and outstanding shares of the Company’s common stock, and the respective numbers of shares of common stock underlying outstanding stock options, and the Company’s equity incentive plans were proportionately adjusted.

 

Asset Impairment Charges:

 

During the thirty nine weeks ended November 2, 2019, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected third quarter sales that triggering events had occurred, and an evaluation of the fye long-lived assets for impairment was required. Fixed assets and operating lease right-of-use assets, primarily at the Company’s retail store locations, as well as certain fixed assets at the corporate location, consisting of the home office and the Albany distribution center, where impairment was determined to exist were written down to their estimated fair values as of the end of November 2, 2019, resulting in the recording of fixed assets and operating lease right-of-use assets impairment charges of $2.4 million and $13.6 million, respectively. Estimated fair values for long-lived assets at these locations, including operating lease right of use assets, store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

 

Note 2. Basis of Presentation

 

The accompanying interim condensed consolidated financial statements consist of Trans World Entertainment Corporation, Record Town, Inc. (“Record Town”), Record Town’s subsidiaries and etailz, Inc., all of which are wholly-owned. All intercompany accounts and transactions have been eliminated.

 

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these unaudited interim condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for the fair

9

presentation of such financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.

 

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended February 2, 2019 contained in the Company’s Annual Report on Form 10-K filed May 14, 2019.

 

The results of operations for the thirteen and thirty-nine weeks ended November 2, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 1, 2020. 

 

As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a significant accounting policy. With the exception of goodwill, the Company’s significant accounting policies are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal year ended February 2, 2019.

 

Note 3. Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842). Lessees are required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a frontloaded expense pattern (similar to capital leases under the prior accounting standard).

 

The Company adopted this new accounting standard on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases greater than one year. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward the existing lease classification. The Company does not engage in any Lessor transactions, and as a Lessee, the Company does not have any finance leases. As a result, the new standard had a material impact on the unaudited condensed consolidated balance sheet, but did not materially impact the Company’s consolidated operating results and did not materially impact the Company’s cash flows.

 

The following is a discussion of the Company’s lease policy under the new lease accounting standard:

 

The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and reduced by lease incentives. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet and lease expense is recognized on a straight-line basis over the term of the short-term lease.

 

For real estate leases, the Company accounts for lease components and non-lease components as a single lease component. Certain real estate leases require additional payments based on reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities.

10

We elected the following package of practical expedients permitted under the lease standard: We do not record leases with an initial term of 12 months or less on the balance sheet but continue to expense them on a straight-line basis over the lease term. As of November 2, 2019, 153 leases were short-term in nature and were exempt from being recorded on the balance sheet.

 

The Company leases its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016, and expires on December 31, 2020. Under the lease, accounted for as an operating lease, the Company is responsible for monthly payments in the amount of $103 thousand per month. Under the terms of the lease agreement, the Company is also responsible for property taxes and other operating costs with respect to the premises.

 

During the thirty nine weeks ended November 2, 2019, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected third quarter sales that triggering events had occurred, and an evaluation of the fye operating lease right-of-use asset for impairment was required. Operating lease right-of-use assets, primarily at the Company’s retail store locations, where impairment was determined to exist were written down to their estimated fair values as of the end of November 2, 2019, resulting in the recording of asset impairment charges of $13.7 million. Estimated fair values at these locations were determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

11

Impact of New Lease Standard on Balance Sheet Line Items

As a result of applying the new lease standard using a modified retrospective method, the following adjustments were made to accounts on the condensed consolidated balance sheet as of February 3, 2019:

 

    Impact of Change in Accounting Policy  
    As Reported
February 2,
2019
    Adjustments     Adjusted
February 3,
2019
 
ASSETS                        
CURRENT ASSETS                        
Cash and cash equivalents   $ 4,355     $     $ 4,355  
Restricted cash     4,126             4,126  
Accounts receivable     5,383             5,383  
Merchandise inventory     94,842             94,842  
Prepaid expenses and other current assets     6,657       (748 )     5,909  
Total current assets     115,363       (748 )     114,615  
                         
Restricted cash     5,745             5,745  
Fixed assets, net     7,529             7,529  
Operating lease right-of-use assets           28,044       28,044  
Intangible assets, net     3,668             3,668  
Other assets     5,708             5,708  
TOTAL ASSETS   $ 138,013     $ 27,296     $ 165,309  
                         
LIABILITIES                        
CURRENT LIABILITIES                        
Accounts payable   $ 34,329     $     $ 34,329  
Accrued expenses and other current liabilities     8,132       (1,319 )     6,813  
Deferred revenue     6,955             6,955  
Current portion of operating lease liabilites           9,064       9,064  
Total current liabilities     49,416       7,745       57,161  
                         
Operating lease liabilities           22,728       22,728  
Other long-term liabilities     24,867       (3,177 )     21,690  
TOTAL LIABILITIES     74,283       27,296       101,579  
                         
SHAREHOLDERS’ EQUITY                        
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)                  
Common stock ($0.01 par value; 200,000,000 shares authorized; 3,221,834 shares issued)     32             32  
Additional paid-in capital     344,826             344,826  
Treasury stock at cost (1,408,892 shares)     (230,166 )           (230,166 )
Accumulated other comprehensive loss     (735 )           (735 )
Accumulated deficit     (50,227 )           (50,227 )
TOTAL SHAREHOLDERS’ EQUITY     63,730             63,730  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 138,013     $ 27,296     $ 165,309  
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The following table is a summary of the Company’s components of net lease cost for the thirteen and thirty-nine week periods ended November 2, 2019:

 

Lease Cost

           

        Thirteen
Weeks Ended
    Thirty-nine
Weeks Ended
(amounts in thousands)   Classification   November 2,
2019
    November 2,
2019
Short-term operating lease cost   SG&A   $ 4,838     $ 10,043
Operating lease cost   SG&A     1,753       7,013
Variable lease cost   SG&A     127       369
Net lease cost       $ 6,718     $ 17,425

 

During the thirteen and thirty-nine weeks ended November 3, 2018, the Company recorded minimum rentals of $7.2 million and $21.9 million, respectively, and did not record any contingent rentals.

 

As of November 2, 2019, the maturity of lease liabilities is as follows:

 

(amounts in thousands)   Operating Leases  
2019   $ 2,656  
2020     10,502  
2021     7,312  
2022     3,181  
2023     2,278  
Thereafter     2,116  
Total lease payments     28,045  
Less: amounts representing interest     (2,378 )
Present value of lease liabilities   $ 25,667  

 

Lease term and discount rate are as follows:

 

    November 2, 2019    
Weighted-average remaining lease term (years) Operating leases     1.06    
Weighted-average discount rate
Operating leases
    5 %  
           
Other information:          
    Thirty-nine
Weeks Ended
   
(amounts in thousands)   November 2, 2019    
 
Cash paid for amounts included in the measurement of operating lease liabilities
Operating cash flows from operating leases   $ 6,582    

 

As determined prior to the adoption of the new lease standard, the future minimum lease payments under operating leases in effect as of February 2, 2019 were as follows:

 

(amounts in thousands)

2019   $   24,426    
2020     8,393  
2021     5,239  
2022     1,881  
2023     1,137  
Thereafter     1,060  
Total minimum lease payments   $ 42,136  
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Note 4. Intangible Assets

 

The determination of the fair value of intangible assets acquired in a business acquisition, including the Company’s acquisition of etailz in 2016, is subject to many estimates and assumptions. Our identifiable intangible assets that resulted from our acquisition of etailz consisted of vendor relationships, technology and tradenames. We review amortizable intangible asset groups for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

 

During fiscal 2018, the Company concluded, based on continued operating losses for the etailz segment driven by lower than expected operating results culminating in the fourth quarter of fiscal 2018 that a triggering event had occurred, and an evaluation of intangible assets for impairment was required. Intangible assets related to technology and vendor relationships were written down to their estimated fair value at the end of fiscal 2018 resulting in the recognition of asset impairment charges of $16.4 million.

 

Identifiable intangible assets as of November 2, 2019 consisted of the following:

 

    November 2, 2019  
(amounts in thousands)   Weighted
Average
Amortization
Period
(in months)
  Original
Gross
Carrying
Amount
    Accumulated
Impairment
    Accumulated
Amortization
    Net Carrying
Amount
 
                                             
Vendor relationships   120   $ 19,100       $ 13,822       $ 4,485       $ 793  
Technology   60       6,700         2,587         3,369         744  
Trade names and trademarks   60       3,200                 1,927         1,273  
        $ 29,000       $ 16,409       $ 9,781       $ 2,810  
                                             
The changes in net intangibles from February 2, 2019 to November 2, 2019 were as follows:
                                             
(amounts in thousands)       February 2,
2019
    Impairment Expense     Amortization Expense     November 2,
2019
 
                                             
Amortized intangible assets:                                  
Vendor relationships   $   880       $       $ 87       $ 793  
Technology       1,035                 291         744  
Trade names and trademarks       1,753                 480         1,273  
Net amortized intangible assets   $ 3,668       $       $ 858       $ 2,810  

 

Amortization expense of intangible assets for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018 consisted of the following:

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
(amounts in thousands)   November 2,
 2019
    November 3,
2018
    November 2,
2019
    November 3,
2018
 
                                 
Amortized intangible assets:                                
Vendor relationships   $ 29     $ 477     $ 87     $ 1,430  
Technology     97       335       291       1,005  
Trade names and trademarks     160       160       480       480  
Total amortization expense   $ 286     $ 972     $ 858     $ 2,915  
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Estimated amortization expense for the remainder of fiscal 2019 and the five succeeding fiscal years and thereafter is as follows:

 

Year Annual
Amortization
(amounts in thousands)  
2019 $286
2020 1,143
2021 847
2022 115
2023 115
2024 115
Thereafter 189

 

Note 5. Depreciation and Amortization

 

Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the thirteen weeks ended November 2, 2019 and November 3, 2018 was $1.1 million and $2.3 million, respectively. Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the thirty-nine weeks ended November 2, 2019 and November 3, 2018 was $3.1 million and $6.8 million, respectively. The decrease was primarily due to a $4.1 million net decrease in carrying value of fixed assets and a $16.4 million net decrease in 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.

 

As noted within Footnote 1, the Company recorded $2.4 million in fixed asset impairment during the third fiscal quarter of 2019.

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Note 6. Segment Data

 

As described in Note 1 to the interim condensed consolidated financial statements, we operate in two reportable segments as shown in the following table:

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended        
(amounts in thousands)   November 2,
2019
    November 3,
2018
    November 2,
2019
    November 3,
2018
       
Total Revenue                                      
fye   $ 40,840     $ 47,865     $ 127,602     $ 152,473          
etailz     28,616       44,119       98,008     138,288          
Total Company   $ 69,456     $ 91,984     $ 225,610     $ 290,761          
                                         
Gross Profit                                        
fye   $ 16,155     $ 18,276     $ 50,670     $ 61,181          
etailz     6,924       9,110       22,915       30,066          
Total Company   $ 23,079     $ 27,386     $ 73,585     $ 91,247          
                                         
Loss From Operations                                        
fye   $ (21,524 )   $ (9,493 )   $ (34,280 )   $ (21,495 )        
etailz     (1,353 )     (4,261 )     (3,640 )     (9,808 )        
Total Company   $ (22,877 )   $ (13,754 )   $ (37,920 )   $ (31,303 )        
                                         
Total Assets                   November 2,
2019
    February 2,
2019
    November 3,
2018
 
fye                   $ 107,707     $ 101,785     $ 132,699  
etailz                     33,773       36,228       106,362  
Total Company                   $ 141,480     $ 138,013     $ 239,061  

 

Note 7. Restricted Cash

 

As of November 2, 2019, the Company had restricted cash of $1.0 million and $5.1 million reported in current assets and other assets on the accompanying condensed consolidated balance sheet, respectively. As of November 3, 2018, the Company had restricted cash of $4.1 million and $5.9 million reported in current assets and other assets on the accompanying condensed consolidated balance sheet, respectively. The decrease in these restricted cash balances during the thirty-nine weeks ended November 2, 2019, was primarily due to the return of the $3.2 million earn-out escrow balance to the Company as a result of the etailz segment not achieving the earnings target, as described in the amended etailz acquisition share purchase agreement.

 

The restricted cash reported as of November 2, 2019 is comprised entirely of a $6.1 million rabbi trust, which is restricted for SERP payments as described in note 11.

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A summary of cash, cash equivalents and restricted cash is as follows (amounts in thousands):

 

    November 2,
2019
    February 2,
2019
    November 3,
2018
 
Cash and cash equivalents   $ 3,073     $ 4,355     $ 4,497  
Restricted cash     6,089       9,871       10,066  
Total cash, cash equivalents and restricted cash   $ 9,162     $ 14,226     $ 14,563  

 

Note 8. Short Term Borrowings

 

In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company.

 

The Credit Facility contains customary affirmative and negative covenants, including incurrence of additional indebtedness and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment.

 

The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. On December 17, 2019, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late delivery of the Quarterly Financial Statements. As of November 2, 2019, the Company was compliant with all covenants.

 

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a fee of 0.25% is also payable on unused commitments.

 

As of November 2, 2019, borrowings under the Credit Facility were $27.8 million as compared to $27.4 million as of November 3, 2018. The Company had $11.0 million available for borrowing as of November 2, 2019. As of November 2, 2019 and November 3, 2018, the Company did not have any outstanding letters of credit. The Company records short term borrowings at cost, in which the carrying value approximates fair value due to its short term maturity.

 

Note 9. Stock Based Compensation

 

As of November 2, 2019, there was approximately $338 thousand of unrecognized compensation cost related to stock option awards comprised of the following: $245 thousand was related to stock option awards listed in the table below and expected to be recognized as expense over a weighted average period of 1.4 years, and $94 thousand was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 2.9 years.

 

The Company has outstanding awards under three employee stock award plans, the 2005 Long Term Incentive and Share Award Plan, the Amended and Restated 2005 Long Term Incentive and Share Award Plan (the “Old Plans”); and the 2005 Long Term Incentive and Share Award Plan (as amended and restated April 5, 2017 (the “New Plan”). Collectively, these

17

plans are referred to herein as the Stock Award Plans. Additionally, the Company had a stock award plan for non-employee directors (the “1990 Plan”). The Company no longer issues stock options under the Old Plans or the 1990 Plan.

 

Equity awards authorized for issuance under the New Plan total 250 thousand. As of November 2, 2019, of the awards authorized for issuance under the Stock Award Plans, approximately 129 thousand were granted and are outstanding, 99 thousand of which were vested and exercisable. Shares available for future grants of options and other share based awards under the New Plan at November 2, 2019 were 213 thousand.

 

The following table summarizes stock award activity during the thirty-nine weeks ended November 2, 2019:

 

    Employee and Director Stock Award Plans  
    Number of Shares Subject To Option     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term     Other Share Awards (1)     Weighted Average Grant Fair Value/ Exercise Price  
Balance February 2, 2019     138,921     $ 55.00       5.8       13,571     $ 33.60  
Granted     5,750       3.76                    
Cancelled/Forfeited     (15,475 )     57.68                    
Exercised                       (3,626 )     5.66  
Balance November 2, 2019     129,196     $ 52.11       6.1       9,945     $ 36.75  
Exercisable November 2, 2019     99,040     $ 59.29       5.4       5,757     $ 44.92  

 

  (1) Other Share Awards include deferred shares granted to Directors and restricted share units granted to executive officers.

 

As of November 2, 2019, all stock awards outstanding and exercisable had a grant price higher than the market price of the stock and had no intrinsic value.

 

Note 10. Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss that the Company reports in the condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan. Comprehensive loss consists of net loss and the amortization of pension costs associated with Company’s defined benefit plan for the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 2018.

 

Note 11. Defined Benefit Plan

 

The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for a limited number of executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. During the thirty-nine weeks ended November 2, 2019, the Company did not make any cash contributions to the SERP and paid out approximately $0.9 million in retirement benefits. The Company presently expects to pay approximately $1.2 million in benefits relating to the SERP during fiscal 2019.

 

The measurement date for the SERP is the fiscal year end, using actuarial techniques which reflect estimates for mortality, turnover and expected retirement. In addition, management makes assumptions concerning future salary increases. Discount rates are generally established as of the measurement date using theoretical bond models that select high-grade corporate bonds with maturities or coupons that correlate to the expected payouts of the applicable liabilities.

18

The following represents the components of the net periodic pension cost related to the Company’s SERP for the respective periods:

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
(amounts in thousands)   November 2,
2019
    November 3,
2018
    November 2,
2019
    November 3,
2018
 
Service cost   $ 14     $ 14     $ 42     $ 42  
Interest cost     142       140       426       420  
Amortization of net gain(1)     (5 )     (5 )     (15 )     (15 )
Net periodic pension cost   $ 151     $ 149     $ 453     $ 447  

 

(1) The amortization of net gain is related to a director retirement plan previously provided by the Company.

 

Note 12. Basic and Diluted Loss Per Share

 

Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is computed by dividing net loss by the sum of the weighted average shares outstanding and additional common shares that would have been outstanding if the dilutive potential common shares had been issued for the Company’s common stock awards from the Company’s Stock Award Plans.

 

For the thirteen and thirty-nine week periods ended November 2, 2019 and November 3, 2018, the impact of all outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Total anti-dilutive stock awards for the thirteen and thirty-nine weeks ended November 2, 2019 were approximately 126 thousand shares and 132 thousand shares, as compared to 157 thousand shares and 148 thousand shares, respectively, for the thirteen and thirty-nine weeks ended November 3, 2018. See note 1 in the interim condensed consolidated financial statements for information on the reverse stock split effected by the Company in August of the current fiscal year.

 

Note 13. Income Taxes

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment.  Based on available objective evidence, management concluded that a full valuation allowance should continue to be recorded against the Company’s deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable income in its conclusion of the need for a full valuation allowance.  Any reversal of the Company’s valuation allowance will favorably impact its results of operations in the period of reversal.  The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future.  The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending February 1, 2020.  The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of November 2, 2019, the Company had a net operating loss carry forward of $246.9 million for federal income tax purposes and approximately $265.2 million for state income tax purposes that expire at various times through 2038 and are subject to certain limitations and statutory expiration periods. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.

19

Note 14. Commitments and Contingencies

 

Legal Proceedings

 

The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company. As a result, the liability for the cases listed below is remote.

 

Loyalty Memberships and Magazine Subscriptions Class Action

On November 14, 2018, three consumers filed a punitive class action complaint against the Company and Synapse Group, Inc. in the United States District Court for the District of Massachusetts, Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions.  The complaint alleged, among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without obtaining the consumers’ consent.  The complaint sought to represent a nationwide class of “all persons in the United States” who were enrolled in and/or charged for Backstage Pass VIP memberships and/or magazine subscriptions, and to obtain statutory and actual damages on their behalf. 

 

On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit.  On May 8, 2019, two of the plaintiffs from the dismissed lawsuit filed a similar punitive class action in Massachusetts state court (Civ. Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based on the same allegations, but this time seeking to represent only a class of “FYE customers in Massachusetts” who were charged for VIP Backstage Pass Memberships and/or magazine subscriptions. The Company believes it has meritorious defenses to the plaintiffs’ claims and, if the new case is not dismissed in full, the Company intends to vigorously defend the action.

 

Store Manager Class Actions

There are two pending class actions.  The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”).  The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide.  It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers “SAMs” nationwide, and that both SMs and SAMs worked “off-the-clock.”  It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs.  The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”).  The Roper Action also asserts a nationwide misclassification claim on behalf of Store Managers.  Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.

 

Plaintiffs moved for conditional certification of a collective of SMs in June 2018, and that motion was partially granted in January 2019.  The opt-in period for the collective that was certified was closed on April 6, 2019.  Opt-in discovery relating to that potential collective has commenced.  The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to vigorously defend the action.

 

Note 15. Related Party Transactions

 

The Company leases its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016, and expires on December 31, 2020. Under the lease accounted for as an operating lease, for the thirteen and thirty-nine week periods ended November 2, 2019 and November 3, 2018, the Company paid $0.3 million and $0.9 million, respectively, during both fiscal periods. Under the terms of the lease agreement, the Company is responsible for property taxes and other operating costs with respect to the premises.

 

20

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

Item 2 - Management’s Discussion and Analysis of Financial Condition and

Results of Operations

November 2, 2019 and November 3, 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 November 2, 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.

21

RESULTS OF OPERATIONS

 

Thirteen and Thirty-nine Weeks Ended November 2, 2019

Compared to the Thirteen and Thirty-nine Weeks Ended November 3, 2018

 

Segment Highlights (amounts in thousands):

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
    November 2,
2019
    November 3,
2018
    November 2,
2019
    November 3,
2018
 
Total Revenue                    
fye   $ 40,840     $ 47,865     $ 127,602     $ 152,473  
etailz     28,616       44,119       98,008       138,288  
Total Company   $ 69,456     $ 91,984     $ 225,610     $ 290,761  
                                 
Gross Profit                    
fye   $ 16,155     $ 18,276     $ 50,670     $ 61,181  
etailz     6,924       9,110       22,915       30,066  
Total Company   $ 23,079     $ 27,386     $ 73,585     $ 91,247  
                                 
Loss From Operations            
fye   $ (21,524 )   $ (9,493 )   $ (34,280 )   $ (21,495 )
etailz     (1,353 )     (4,261 )     (3,640 )     (9,808 )
Total Company   $ (22,877 )   $ (13,754 )   $ (37,920 )   $ (31,303 )
                                 
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations    
etailz loss from operations   $ (1,353 )   $ (4,261 )   $ (3,640 )   $ (9,808 )
Acquisition related amortization and compensation expenses (1)     286       1,722       924       5,906  
etailz adjusted loss from operations (2)   $ (1,067 )   $ (2,539 )   $ (2,716 )   $ (3,902 )
   
Reconciliation of fye Loss From Operations to fye Adjusted Loss From Operations  
fye Loss From Operations   $ (21,524 )   $ (9,493 )   $ (34,280 )   $ (21,495 )
Asset impairment charges     16,035             16,035        
fye Adjusted Loss From Operations (2)   $ (5,489 )   $ (9,493 )   $ (18,245 )   $ (21,495 )

 

(1) For the 13 weeks ended November 2, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $286 thousand. For the 39 weeks ended November 2, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $858 thousand and compensation expense of $66 thousand. For the 13 weeks ended November 3, 2018, acquisition related expenses consisted of amortization expense of intangible assets of $972 thousand and compensation expense of $750 thousand. For the 39 weeks ended November 3, 2018, acquisition related expenses consisted of amortization expense of intangible assets of $2,915 thousand and compensation expense of $2,991 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 loss for the etailz and the fye segments 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             Thirty-nine Weeks Ended     Change        
(amounts in thousands)   November 2,
2019
  November 3,
2018
    $   %     Comp
Store Net
Sales
    November 2,
2019
  November 3,
2018
    $   %     Comp
Store Net
Sales
 
fye revenue   $ 40,840     47,865     $ (7,025 )     -14.7 %     -5.2 %   $ 127,602     152,473     $ (24,871 )     -16.3 %     -2.1 %
etailz revenue     28,616       44,119       (15,503 )     -35.1 %             98,008       138,288       (40,280 )     -29.1 %        
Total revenue   $ 69,456     $ 91,984     $ (22,528 )     -24.5 %           $ 225,610     $ 290,761     $ (65,151 )     -22.4 %        

 

Total revenue decreased 24.5% and 22.4% for the thirteen and thirty-nine weeks ended November 2, 2019 as compared to the same period last year.

 

22

fye Segment

The following table sets forth a period over period comparison of net fye sales by merchandise category:

 

    Thirteen Weeks Ended     Change           Thirty-nine Weeks Ended     Change        
(amounts in thousands, except store count)   November 2,
2019
    November 3,
2018
    $     %     Comp
Store Net
Sales
    November 2,
2019
    November 3,
2018
    $     %     Comp
Store Net
Sales
 
                                                             
fye net sales   $ 39,988     46,758     $ (6,770 )     -14.5 %     -5.2 %   $ 127,602     149,975     $ (22,373 )     -14.9 %     -2.1 %
Other revenue     852       1,107       (255 )     -23.0 %                   2,498       (2,498 )     -100.0 %        
Total revenue   $ 40,840     $ 47,865     $ (7,025 )     -14.7 %           $ 127,602     $ 152,473     $ (24,871 )     -16.3 %        
                                                                                 
As a % of fye net sales                                                                        
Trend / Lifestyle     46.2 %     41.9 %                     6.3 %     45.2 %     40.1 %                     8.4 %
Video     25.8 %     29.6 %                     -17.7 %     26.2 %     30.2 %                     -13.7 %
Music     17.7 %     17.9 %                     -9.4 %     17.7 %     18.4 %                     -5.8 %
Electronics     10.3 %     10.6 %                     -7.4 %     10.9 %     11.3 %                     -3.9 %
      100.0 %     100.0 %                             100.0 %     100.0 %                        
                                                                                 
Store Count:                                             206       227       (21 )     -9.3 %        
                                                                                 
Total Square footage                                             1,145       1,268       (123 )     -9.7 %        

 

 

fye net sales. Net sales decreased 14.5% and 16.0% during the thirteen weeks and thirty-nine weeks ended November 2, 2019, respectively, as compared to the same periods last year. The decline in net sales resulted from a 9.3% decline in total stores in operation and a 5.2% and 2.1% decline in comparable store net sales for the thirteen and thirty-nine weeks ended November 2, 2019, respectively.

 

Trend/Lifestyle:

Comparable store net sales in the trend/lifestyle category increased 6.3% and 8.4% during the thirteen and thirty-nine weeks ended November 2, 2019, respectively. Trend/lifestyle products represented 46.2% and 45.2% of total net sales for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to 41.9% and 40.1% in the comparable periods 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.

 

Video:

Comparable store sales in the video category decreased 17.7% and 13.7% during the thirteen and thirty-nine week periods ended November 2, 2019, respectively. The video category represented 25.8% and 26.2% of total net sales for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to 29.6% and 30.2% in the comparable periods last year due to continued industry-wide decline in physical media sales.

 

Music:

During the thirteen and thirty-nine weeks ended November 2, 2019, music sales in comparable stores decreased 9.4% and 5.8%, respectively, versus the thirteen and thirty-nine weeks ended November 3, 2018. The music category represented 17.7% of total net sales for both thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to 17.9% and 18.4% for the thirteen and thirty-nine weeks ended November 3, 2018 due to continued industry-wide decline in physical media sales.

 

Electronics:

Comparable store net sales in the electronics category decreased 7.4% and 3.9% during the thirteen and thirty-nine weeks ended November 2, 2019, respectively. Electronics net sales represented 10.3% and 10.9% of total net sales for the thirteen and thirty-nine weeks ended November 3, 2019, respectively, compared to 10.6% and 11.3% of total net sales for the comparable periods last year.

23

Other Revenue. Other revenue, which was primarily related to commissions and fees earned from third parties for the fye segment, was approximately $0.9 million and $2.5 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to $1.1 million and $3.6 million in the comparable periods last year. The decline in other revenue was primarily due to lower number of stores in operation.

 

etailz Segment

etailz reported sales of $28.6 million and $98.0 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to $44.1 million and $138.3 million for the thirteen and thirty-nine weeks ended November 3, 2018. 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 thirty-nine weeks ended November 2, 2019, etailz sold approximately 28,000 unique SKUs from approximately 1,600 suppliers, compared to approximately 38,000 unique SKUs from approximately 2,100 suppliers during the thirty-nine weeks ended November 3, 2018. The decline in sales was attributable to the vendor remediation performance improvement plan which was implemented during the fourth quarter of 2018 for the etailz segment, as discussed in Note 1 to the interim condensed consolidated financial statements included elsewhere in this Form 10-Q.

 

Gross Profit. The following table sets forth a year-over-year comparison of the Company’s Gross Profit:

 

    Thirteen Weeks Ended     Change     Thirty-nine Weeks Ended     Change  
(amounts in thousands)   November 2, 2019     November 3, 2018     $     %     November 2, 2019     November 3, 2018     $     %  
                                                                 
fye gross profit   $ 16,155     $ 18,276     $ (2,121 )     -11.6 %   $ 50,670     $ 61,181     $ (10,511 )     -17.2 %
etailz gross profit     6,924       9,110       (2,186 )     -24.0 %     22,915       30,066       (7,151 )     -23.8 %
Total gross profit   $ 23,079     $ 27,386     $ (4,307 )     -15.7 %   $ 73,585     $ 91,247     $ (17,662 )     -19.4 %
                                                                 
fye gross profit as a % of fye revenue     39.6 %     38.2 %                     39.7 %     40.1 %                
etailz gross profit as a % of etailz revenue     24.2 %     20.6 %                     23.4 %     21.7 %                
Total gross profit as a % of total revenue     33.2 %     29.8 %                     32.6 %     31.4 %                

 

Gross profit decreased 15.7% to $23.1 million for the thirteen weeks ended November 2, 2019 compared to $27.4 million for the thirteen weeks ended November 3, 2018. For the thirty-nine weeks ended November 2, 2019, gross profit decreased 19.4% to $73.6 million compared to $91.2 million for the comparable period last year.

 

fye Segment

fye gross profit as a percentage of total revenue for the thirteen and thirty-nine weeks ended November 2, 2019 was 39.6% and 39.7%, respectively, compared to 38.2% and 40.1% for the comparable periods last year. The increase in the gross profit percentage for the thirteen weeks ended November 2, 2019, as compared to the thirteen weeks ended November 3, 2018, was primarily attributable to increased merchandise margin in the Trend/Lifestyle category.

 

etailz Segment

etailz gross profit as a percentage of total revenue for the thirteen and thirty-nine weeks ended November 2, 2019 was 24.2% and 23.4%, respectively, compared to 20.6% and 21.7% for the comparable periods last year. The increase in the gross profit rate was a result of the performance improvement plan implemented during the fourth quarter of 2018. See Note 1 to the interim condensed consolidated financial statements, included elsewhere in this Form 10-Q for the description of the etailz segment performance improvement plan.

 

24

SG&A Expenses. The following table sets forth a period over period comparison of the Company’s SG&A expenses:

 

    Thirteen Weeks Ended     Change     Thirty-nine Weeks Ended     Change  
(amounts in thousands)   November 2,
2019
  November 3,
2018
    $   %     November 2,
2019
  November 3,
2018
    $   %  
fye SG&A, excluding depreciation and amortization   $ 21,012     $ 26,620     $ (5,608 )     -21.1 %   $ 67,094     $ 79,214     $ (12,120 )     -15.3 %
As a % of total fye revenue     51.4 %     55.6 %                     52.6 %     52.0 %                
                                                                 
etailz SG&A, excluding depreciation and amortization     7,812       12,217       (4,405 )     -36.1 %     25,246       36,528       (11,282 )     -30.9 %
As a % of total etailz revenue     27.3 %     27.7 %                     25.8 %     26.4 %                
                                                                 
Depreciation and amortization     1,097       2,303       (1,206 )     -52.4 %     3,130       6,808       (3,678 )     -54.0 %
                                                                 
Total SG&A   $ 29,921     $ 41,140     $ (11,219 )     -27.3 %   $ 95,470     $ 122,550     $ (27,080 )     -22.1 %
                                                                 
As a % of total revenue     43.1 %     44.7 %                     42.3 %     42.1 %                

 

SG&A expenses decreased $11.2 million and $27.1 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively.

 

fye Segment

fye SG&A, excluding depreciation and amortization expenses, decreased $5.6 million, or 21.1%, and $12.1 million, or 15.3%, for the thirteen and thirty-nine weeks ended November 2, 2019, respectively. As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and thirty-nine weeks ended November 2, 2019 were 51.4% and 52.6%, respectively, compared to 55.6% and 52.0% for the same periods last year. The decline in SG&A expenses was due to lower sales primarily as a result of fewer stores in operation. The decrease in SG&A expenses as a percentage of revenue for the thirteen weeks ended November 2, 2019 was primarily due to a decrease in outside consulting and professional fees. The increase in SG&A expenses as a percentage of revenue for the thirty-nine weeks ended November 2, 2019 was primarily due to higher outside consulting and professional fees during the first and second quarters of fiscal 2019.

 

etailz Segment

etailz SG&A, excluding depreciation and amortization expenses, decreased $4.4 million and $11.3 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and thirty-nine weeks ended November 2, 2019 were 27.3% and 25.8%, respectively, compared to 27.7% and 26.4% for the same periods last year. The decrease was primarily due to expense reduction initiatives implemented in the fourth quarter of 2018.

 

Asset Impairment charges. During the thirty nine weeks ended November 2, 2019, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected third quarter sales that triggering events had occurred, and an evaluation of the fye long-lived assets for impairment was required. Fixed assets and operating lease right-of-use assets, primarily at the Company’s retail store locations, as well as certain fixed assets at the fye corporate location, consisting of the home office and the Albany distribution center, where impairment was determined to exist were written down to their estimated fair values as of the end of November 2, 2019, resulting in the recording of fixed assets and operating lease right-of-use assets impairment charges of $2.4 million and $13.6 million, respectively. Estimated fair values for long-lived assets at these locations, including operating lease right of use assets, store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

 

Depreciation and amortization. Consolidated depreciation and amortization expense decreased $1.2 million and $3.7 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, primarily due to the $4.1 million decrease in carrying value of fixed assets and the $16.4 million decrease in intangible assets resulting from impairment charges recorded during the fourth quarter of fiscal 2018. For a discussion of the Company’s

25

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 $228 thousand and $554 thousand during the thirteen and thirty-nine weeks ended November 2, 2019, respectively. Interest expense consisted primarily of interest payments resulting from borrowings under the Company’s credit facility and unused commitment fees. Interest expense during the thirteen and thirty-nine weeks ended November 3, 2018 was $277 thousand and $444 thousand, respectively. The decrease in interest expense for the thirteen weeks ended November 2, 2019 was due to a decrease in interest rates for the borrowings under our credit facility. The increase in interest expense for the thirty-nine weeks ended November 2, 2019 was due to 9 months of borrowings during fiscal 2019 as compared to 4 months of borrowings during fiscal 2018.

 

Other Loss (Income). As of November 2, 2019, other (income) loss consisted of the following:

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
(amounts in thousands)   November 2,
2019
    November 3,
2018
       November 2,
2019
    November 3,
2018
 
Investment write down   $     $     $ 500     $  
Interest income     (30 )     (43 )     (112 )     (171 )
Other (income) loss   $ (30 )   $ (43 ) $ 388     $ (171 )

 

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. There were insignificant tax expense amounts recorded during the thirteen and thirty-nine weeks ended November 2, 2019 and comparative periods last year.

 

Net Loss. The following table sets forth a period over period comparison of the Company’s net loss:

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
(amounts in thousands)   November 2,
2019
    November 2,
2018
    $
Change
    November 2,
2019
    November 2,
2018
    $ Change  
                         
Loss before income tax   $ (21,003 )   $ (13,988 )   $ (7,015 )   $ (15,666 )   $ (31,576 )   $ 15,910  
Income tax expense     80       64       16       223       136       87  
Net loss   $ (21,083 )   $ (14,052 )   $ (7,031 )   $ (15,889 )   $ (31,712 )   $ 15,823  
26

LIQUIDITY

 

Liquidity and Cash Flows Considerations:

 

The unaudited condensed consolidated financial statements for the thirteen and thirty-nine weeks ended November 2, 2019 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and satisfy liabilities and commitments 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 continued implementation of the performance improvement plan for the etailz segment, the availability of future funding and the completion of other strategic alternatives. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

The Company incurred net losses of $39.1 million and $31.7 million for the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively, and has an accumulated deficit of $89.3 million at November 2, 2019. In addition, net cash used in operating activities for the thirty-nine weeks ended November 2, 2019 was $30.8 million. Net cash used in operating activities for the thirty-nine weeks ended November 3, 2018 was $53.3 million. The Company also experienced negative cash flows from operations during fiscal 2018 and 2017, and expects to incur net losses in the foreseeable future. Based on its recurring losses from operations, expectation of continuing operating losses for the foreseeable future, and uncertainty with respect to any available future funding as well as the completion of other strategic alternatives, the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of filing of this Quarterly Report on Form 10-Q.

 

Management has plans to address the Company’s current liquidity position. As disclosed in the Company’s Annual Report on Form 10-K filed May 14, 2019, the Company implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiencies and conserving working capital needed to support the growth of the etailz segment (the “performance improvement plan”). As a result of the initiative, and inventory management in the fye segment, the Company was able to reduce cash used in operations by $22.5 million for the thirty-nine weeks ended November 2, 2019 as compared to the thirty-nine weeks ended November 2, 2018. We anticipate continued improvement in cash flows used in operations for the remainder of fiscal 2019. In addition, the Company continues to evaluate other strategic initiatives, including establishing a credit facility at the etailz segment, which could provide additional liquidity. At November 2, 2019, we had cash and cash equivalents of $3.1 million, net working capital of $35.4 million, short-term borrowings in the amount of $27.8 million on our revolving credit facility, and $11.0 million of availability on our revolving credit facility. This compares to $4.5 million in cash and cash equivalents, net working capital of $70.0 million, short-term borrowings in the amount of $27.4 million on the Company’s revolving credit facility at November 3, 2018, and $22.1 million of availability on our revolving credit facility.

 

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 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 in the implementation of our strategy and planned activities.

 

In addition to the aforementioned current sources of existing working capital, the Company is continuing its efforts to generate additional sales and increase margins. There can be no assurance that any of the initiatives or strategic alternatives described above will be implemented, successful or consummated.

27

 

The following table sets forth a summary of key components of cash flow and working capital:

 

        As of or for the
Thirty-nine Weeks Ended
    Change  
    (amounts in thousands)   November 2,
2019
    November 3,
2018
    $  
    Operating Cash Flows   (30,822 )   (53,337 )   22,515  
    Investing Cash Flows     (2,013 )     (1,546 )     (467 )
    Financing Cash Flows     27,771       25,940       1,831  
                             
    Capital Expenditures (1)   (2,128 )     (2,851 )     723  
                             
    Cash, Cash Equivalents, and Restricted Cash (2)   9,162       14,563       (5,401 )
    Merchandise Inventory     101,130       131,285       (30,155 )
    Working Capital     35,378       70,000       (34,622 )
                             
(1)   Included in Investing Cash Flows                        
                             
(2)   Cash and cash equivalents per condensed consolidated balance sheets   $ 3,073     $ 4,497          
    Add: restricted cash     6,089       10,066          
    Cash, cash equivalents, and restricted cash   $ 9,162     $ 14,563          

 

Cash used in operations was $30.8 million for the thirty-nine weeks ended November 2, 2019, primarily due to a net loss of $39.1 million, adding back loss on impairment of long lived assets of $16.0 million, depreciation and amortization of $3.1 million, a $6.3 million seasonal increase in inventory, a $1.2 million decrease in prepaid expenses and other current assets, and a $0.1 million decrease in other long-term assets, combined with a reduction in accounts payable, accrued expenses and other current liabilities, deferred revenue, and other long-term liabilities of $4.3 million, $0.9 million, $1.0 million, and $7.3 million, respectively. The Company’s merchandise inventory and accounts payable are influenced by the seasonality of its business.

 

Cash used in investing activities was $2.0 million for the thirty-nine weeks ended November 2, 2019, which consisted primarily of capital expenditures.

 

Cash provided by financing activities for the thirty-nine weeks ended November 2, 2019, was comprised of $27.8 million proceeds from short-term borrowings.

 

Capital Expenditures. During the thirteen and thirty-nine weeks ended November 2, 2019, the Company made capital expenditures of $0.6 million and $2.1 million, respectively. The Company currently plans to spend approximately $3.0 million for capital expenditures during fiscal 2019.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated 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 consolidated 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 critical accounting policies since February 2, 2019.

28

Recent Accounting Pronouncements:

 

The information set forth under Note 3, Recently Adopted Accounting Pronouncements section contained in Item 1, included elsewhere in the Form 10-Q, 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.

29

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

 

The Company does not hold any financial instruments that expose it to significant market risk and does not engage in hedging activities. To the extent the Company borrows under its revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its credit facility can be variable. If interest rates on the Company’s revolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, interest expense would be increased by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, 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.

 

Item 4 – Controls and Procedures

 

(a)    Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of November 2, 2019, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b)    Changes in internal controls. There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

30

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1 – Legal Proceedings

The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company. As a result, the liability for the cases listed below is remote.

 

Loyalty Memberships and Magazine Subscriptions Class Action

On November 14, 2018, three consumers filed a punitive class action complaint against the Company and Synapse Group, Inc. in the United States District Court for the District of Massachusetts, Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions.  The complaint alleged, among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without obtaining the consumers’ consent.  The complaint sought to represent a nationwide class of “all persons in the United States” who were enrolled in and/or charged for Backstage Pass VIP memberships and/or magazine subscriptions, and to obtain statutory and actual damages on their behalf. 

 

On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit.  On May 8, 2019, two of the plaintiffs from the dismissed lawsuit filed a similar punitive class action in Massachusetts state court (Civ. Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based on the same allegations, but this time seeking to represent only a class of “FYE customers in Massachusetts” who were charged for VIP Backstage Pass Memberships and/or magazine subscriptions. The Company believes it has meritorious defenses to the plaintiffs’ claims and, if the new case is not dismissed in full, the Company intends to vigorously defend the action.

 

Store Manager Class Actions

There are two pending class actions.  The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”).  The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide.  It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers (“SAMs”) nationwide, and that both SMs and SAMs worked “off-the-clock.”  It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs.  The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”).  The Roper Action also asserts a nationwide misclassification claim on behalf of Store Managers.  Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.             

 

Plaintiffs moved for conditional certification of a collective of SMs in June 2018, and that motion was partially granted in January 2019.  The opt-in period for the collective that was certified was closed on April 6, 2019.  Opt-in discovery relating to that potential collective has commenced.  The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to vigorously defend the action.

 

Item 1A – Risk Factors

The ability of the Company to satisfy its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the performance improvement plan at our etailz segment, the availability of future funding and the completion of other strategic alternatives. 

 

The unaudited condensed consolidated financial statements for the thirteen and thirty-nine weeks ended November 2, 2019 included in this report were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and satisfy liabilities and commitments in the normal course of business. 

 

As disclosed in this report and the Company’s previous filings with the Securities and Exchange Commission, the Company has suffered recurring losses from operations and the Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, and cash generated from operations, all of which are limited. Therefore, the ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the performance improvement plan for the etailz segment, the availability of future funding and the completion of other strategic alternatives. The Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of filing of the November 2, 2019 unaudited condensed consolidated financial statements. The financial results for the fiscal quarter ended November 2, 2019 included in this report do not include any adjustments that might result from the outcome of these uncertainties.

 

Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the year ended February 2, 2019.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3 – Defaults Upon Senior Securities

None.

31

Item 4 – Mine Safety Disclosure

Not Applicable.

 

Item 5 – Other Information

None.

 

Item 6 - Exhibits

 

(A)  Exhibits -

Exhibit No.   Description
  31.1   Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  31.2   Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  32   Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
  101.INS   XBRL Instance Document (furnished herewith)
       
  101.SCH   XBRL Taxonomy Extension Schema (furnished herewith)
       
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase (furnished herewith)
       
  101.DEF   XBRL Taxonomy Extension Definition Linkbase (furnished herewith)
       
  101.LAB   XBRL Taxonomy Extension Label Linkbase (furnished herewith)
       
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase (furnished herewith)
32

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TRANS WORLD ENTERTAINMENT CORPORATION

 

December 23, 2019 By: /s/ Michael Feurer  
  Michael Feurer  
  Chief Executive Officer  
  (Principal Executive Officer)  
     
December 23, 2019 By: /s/ Edwin Sapienza  
  Edwin Sapienza  
  Chief Financial Officer  
  (Principal and Chief Accounting Officer)  
33
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