NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations: Trans World Entertainment Corporation and subsidiaries (“the Company”) operates in two reportable segments: fye and etailz. The fye segment is a specialty retailer of entertainment
products, including trend, video, music, electronics and related products in the United States. The fye segment operates a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com. As of February 1, 2020, the fye segment operated 200 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.
Recent Developments: On February 20, 2020, the Company consummated the sale of substantially all of the assets of and certain of the liabilities relating to fye to a subsidiary of 2428391 Ontario Inc. o/a
Sunrise Records (“Sunrise Records”) pursuant to an Asset Purchase Agreement (as amended by the Amendment, the “Asset Purchase Agreement”) dated January 23, 2020, by and among Trans World Entertainment Corporation, Record Town, Inc., Record Town USA
LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. (the “FYE Transaction”).
All of our financial information for fiscal 2019 includes the fye segment. For pro forma information, see Note 13 of the Notes to the Consolidated Financial Statements.
In addition, as referenced herein, subsequent to year end, the Company restructured its debt, including the paydown of its existing credit facility with Wells Fargo, entered into a new credit facility with Encina, as well as a new subordinated
debt agreement.
Also, as a direct result of COVID-19, most of our employees are working remotely. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses,
reserves and allowances, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as
the economic impact on local, regional, national and international customers and markets, which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the possible effects on its financial
condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the effects of the COVID-19 outbreak to our results of
operations, financial condition, or liquidity.
Liquidity: The Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent,
cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and 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;
successful implementation of our strategy and planned activities; and our ability to overcome the impact of the COVID-19 pandemic.
The Company incurred net losses of $58.7 million and $97.4 million for the years ended February 1, 2020 and February 2, 2019, respectively, and has an accumulated deficit of $109.0 million at February 1, 2020. In addition, net cash used in
operating activities for the year ended February 1, 2020 was $15.8 million.
The Company experienced negative cash flows from operations during fiscal 2019 and 2018 and we expect to incur net losses in 2020.
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 strategic initiative to reposition etailz as a platform
of software and services, the availability of future funding, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock
in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the
Company, and overcoming the impact of the COVID-19 pandemic.
There can be no assurance that we will be successful in further implementing our business strategy or that the strategy, including the completed initiatives, will be successful in sustaining acceptable levels of
sales growth and profitability. As a result, 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 Annual Report on
Form 10-K. In addition, the proceeds from the PPP Loan are subject to audit and there is a risk of repayment.
At February 1, 2020, we had cash and cash equivalents of $3.0 million, net working capital of $22.1 million, and outstanding borrowings of $13.1 million on our revolving credit facility, as further discussed below. This compares to $4.4 million in
cash and cash equivalents and net working capital of $65.9 million and no outstanding borrowings on our revolving credit facility at February 2, 2019.
In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). As of February 1, 2020, the Company had borrowings of $13.1 million under the Credit Facility and as of February 2, 2019 the Company did not have
any borrowings under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2019 and fiscal 2018 were $35.9 million and $35.7 million, respectively. As of February 1, 2020 and February 2, 2019, the Company had no outstanding
letters of credit. The Company had $12 million and $41 million available for borrowing under the Credit Facility as of February 1, 2020 and February 2, 2019, respectively.
On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the New Credit Facility, as
further discussed below, and the Credit Facility is no longer available to the Company.
New Credit Facility
On February 20, 2020, etailz Inc. entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”),, as administrative agent, under which the lenders party thereto committed to provide up to $25 million
in loans under a three-year, secured revolving credit facility (the “ New Credit Facility”). Concurrent with the FYE Transaction, the Company borrowed $3.3 million under the New Credit Facility in order to satisfy the remaining obligations of the
Company under the aforementioned Credit Facility.
The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.
Subordinated Debt Agreement
On March 30, 2020, the Company and etailz (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan
Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement
was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make investments, make
restricted payments or specified payments and merge or acquire assets.
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral
Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to etailz with a scheduled maturity date of May 22, 2023.
Paycheck Protection Program
On April 17, 2020, etailz received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan, which was in the form
of a promissory note (the “Note”), dated April 10, 2020, between etailz and First Interstate Bank, as the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is payable in monthly installments of $112,975.55
commencing on November 10, 2020. While under the terms of the PPP, some or all of the PPP Loan amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and the Note, such as payroll costs,
benefits, rent, and utilities, there is no assurance that the Company will be successful in qualifying for and receiving forgiveness on the PPP Loan amount.
In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well continuing our efforts to generate additional sales and
increase margins. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should we require such additional funds. If the Company
is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely affected.
Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional
funds. Similarly, if our Common Stock is delisted from the NASDAQ Capital Market, it may also limit our ability to raise additional funds.
The consolidated financial statements for the fiscal year ended February 1, 2020 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of
business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the etailz segment and the availability of future funding. The
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis of Presentation: The consolidated financial statements consist of Trans World Entertainment Corporation, its wholly owned subsidiaries, Trans World NY Sub, Inc. (f/k/a
Record Town, Inc.) and its subsidiaries, and etailz, Inc. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions, including those related to merchandise inventory and return costs; valuation of goodwill and long-lived assets, income taxes, accounting for gift card liabilities, retirement
plan obligation, and other long-term liabilities that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Items Affecting Comparability: The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2019 and fiscal 2018 ended February 1,
2020 and February 2, 2019, respectively. Both fiscal years were 52 week periods.
Concentration of Business Risks: The fye segment purchases inventory from approximately 460 suppliers. In fiscal 2019, 38% of fye purchases were made from ten suppliers including Universal Studio Home
Entertainment, Paramount Video , Buena Vista Home Video, SONY Music, Twentieth Century Fox Home Entertainment, Warner/Elektra/Atlantic, Universal Music Group Distribution, Funko LLC, Warner Home Video, and Alliance Entertainment.
The etailz segment purchases various inventory from numerous suppliers and does not have material long-term purchase contracts; rather, it purchases products from its suppliers on an order-by-order basis. Historically, the etailz segment has not
experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply.
etailz generates substantially all its revenue through the Amazon Marketplace. Therefore, the segment depends in large part on its relationship with Amazon for its continued growth. In particular, the etailz segment depends on its ability to
offer products on the Amazon Marketplace and on its timely delivery of products to customers.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash: Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in Restricted Cash on the
Company’s consolidated balance sheet.
Concentration of Credit Risks: The Company maintains centralized cash management and investment programs whereby excess cash balances are invested in short-term money market
funds. The Company limits the amount of credit exposure with any one financial institution and believes that no significant concentration of credit risk exists with respect to cash investments.
Accounts Receivable: Accounts receivable for the fye segment are primarily comprised of receivables from commissions due from third parties. For the etailz segment, accounts
receivable are comprised of receivables due from Amazon. There are no provisions for uncollectible amounts from retail sales of merchandise inventory since payment is received at the time of sale.
Merchandise Inventory and Return Costs: Merchandise inventory is stated at the lower of cost or net realizable value under the average cost method. In the current year, the
Company recorded an inventory adjustment to net realizable value based on the sale of its fye inventory after the balance street date, which was for $12.7 million. Inventory valuation requires significant judgment and estimates, including
obsolescence, shrink and any adjustments to net realizable value, if market value is lower than cost. The Company records obsolescence and any adjustments to net realizable value (if lower than cost) based on current and anticipated demand, customer
preferences and market conditions. The provision for inventory shrink is estimated as a percentage of store sales for the period from the last date a physical inventory was performed to the end of the fiscal year. Such estimates are based on
historical results and trends, and the shrink results from the last physical inventory. Physical inventories are taken at least annually for all stores and the distribution center throughout the year, and inventory records are adjusted accordingly.
The Company is generally entitled to return merchandise purchased from major music vendors for credit against other purchases from these vendors. Certain vendors reduce the credit with a merchandise return charge
which varies depending on the type of merchandise being returned. Certain other vendors charge a handling fee based on units returned. The Company records all merchandise return charges in cost of sales.
Fixed Assets and Depreciation: Fixed assets are recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method. The estimated useful lives are as
follows:
Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs are expensed as incurred.
Goodwill: The Company’s goodwill resulted from the acquisition of etailz and represented the excess purchase price over the net identifiable assets acquired. All of the goodwill is associated with etailz, a
separate reporting unit, and there is no goodwill associated with the other reporting unit, fye. Goodwill is not amortized and the Company is required to evaluate goodwill for impairment at least annually or whenever indicators of impairment are
present.
As a result of the annual impairment review, the Company performed its impairment test over goodwill. During fiscal 2018, based on the Company’s annual impairment test, it was determined that the goodwill balance was fully impaired, and the
Company recognized an impairment loss of $39.2 million.
Long-Lived Assets other than Goodwill: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally measured based on discounted estimated future
cash flows. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less disposition costs. For the purpose of the asset impairment test, the fye
segment has two asset groupings – corporate and store level assets. For the purposes of the asset impairment test, the etailz segment has one asset grouping, which is the same as the etailz reporting unit level.
During fiscal 2019 and fiscal 2018, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected sales that triggering events had occurred in each respective fiscal year, and pursuant to FASB ASC
360, Property, Plant, and Equipment, an evaluation of the fye long-lived assets for impairment was required. Long-lived 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 fiscal 2019 and fiscal 2018, resulting in
the recording of asset impairment charges of $23.2 million and $1.9 million, respectively. Based on the fair value as determined attributable to the fixed assets and operating lease right-of-use assets in contemplation of the sale of the fye segment,
it was determined that the fixed assets and operating lease right-of-use assets were fully impaired, as of February 1, 2020.
During fiscal 2019 and fiscal 2018, the Company concluded, based on continued operating losses for the etailz segment that a triggering event had occurred, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the etailz fixed assets and intangible assets for impairment was required. For fiscal 2019, intangible assets related to vendor relationships were fully impaired resulting in the
recognition of asset impairment charges of $0.8 million. For fiscal 2018, fixed assets related to internally developed technology at etailz were written down to their estimated fair values resulting in the recognition of asset impairment charges of
$2.1 million and intangible assets related to technology and vendor relationships were written down to their estimated fair values resulting in the recognition of asset impairment charges of $16.4 million.
Conditional Asset Retirement Obligations: The Company records the fair value of an asset retirement obligation (“ARO”) as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the asset. The Company also records a corresponding asset that is depreciated over the life of
the asset. Subsequent to its initial measurement, the ARO is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.
Commitments and Contingencies: The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business. 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 or in the aggregate, will not have a material adverse effect on the results of
operations and financial condition of the Company. During the fourth quarter of fiscal 2019, the Company recognized a charge of $0.4 million related to litigation (see Note 12).
Revenue Recognition:
Retail Sales
The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer (point of sale). Internet sales include shipping revenue and are recorded upon shipment to the customer. The
Company records shipping and handling costs in cost of sales. Additionally, estimated sales returns are calculated based on expected returns.
Membership Fee Revenue
The Company recognizes membership fee revenue over the term of the membership, which is typically 12 months for the Company’s Platinum Backstage Pass membership, and 24 months for the Company’s Backstage Pass VIP membership. For the Company’s
Platinum Backstage Pass program, the contractual term of the program is 12 months, in which revenue is recognized over that service period. For the Company’s Backstage Pass VIP program, the term of the program is indefinite until a customer cancels
the membership. The Company estimates 24 months as the service period based on historical cancellation patterns and recognizes revenue over that service period. Membership in each program provides customers with merchandise discounts and exclusive
member-only offers. Total membership fees related to the loyalty programs collected in advance, net of estimated refunds, were as follows: cash received from customers during fiscal 2019 and 2018 was $13.0 million and $13.7 million, respectively.
Membership fee revenue recognized was $13.3 million and $15.0 million during fiscal 2019 and 2018, respectively, and recognized on a straight-line basis over the service period. The remaining performance obligation associated with the membership
programs was $4.6 million and $4.8 million as of the end of fiscal 2019 and fiscal 2018, respectively. Membership fee revenue is included in Net Sales in the Company’s Consolidated Statements of Operations. Deferred membership revenue is included in
Deferred Revenue in the Company’s Consolidated Balance Sheets.
Other Revenue
The Company recognizes revenue related to commissions earned from third parties. The Company assesses the principal versus agent considerations depending on control of the good or service before it is transferred to the customer. As the Company is
the agent and does not have control of the specified good or service, the Company recognizes the fee or commission to which the Company expects to be entitled for the agency service. Commissions earned from third parties were $3.7 million and $5.0
million during fiscal 2019 and fiscal 2018, respectively, and are included in Other Revenue in the Company’s Consolidated Statements of Operations.
Gift Cards
The Company offers gift cards for sale, which is included in deferred revenue in the Consolidated Balance Sheets. When gift cards are redeemed at the store level, revenue is recorded, and the related liability is
reduced. Breakage is estimated based on proportion to the pattern of rights exercised by the customer. The Company has the ability to reasonably and reliably estimate the gift card liability based on historical experience with redemption rates
associated with a large volume of homogeneous transactions. The Company issued $1.5 million and $1.9 million in gift cards for fiscal 2019 and fiscal 2018, respectively. The Company recognized in revenue for redeemed gift cards of $1.4 million and
$1.9 million for fiscal 2019 and fiscal 2018, respectively. The Company recorded breakage on its gift cards for both fiscal 2019 and fiscal 2018 in the amount of $0.2 million. Gift card breakage is recorded as Other Revenue in the Company’s
Consolidated Statements of Operations. The remaining performance obligation associated with our gift cards was $1.9 million and $2.0 million as of the end of fiscal 2019 and fiscal 2018, respectively.
Cost of Sales: In addition to the cost of product, the Company includes in cost of sales those costs associated with purchasing, receiving, shipping, online marketplace
fulfillment fees, inspecting and warehousing product, and depreciation related to distribution operations. Also included are costs associated with the return of product to vendors. Cost of sales further includes the cost of inventory shrink losses
and obsolescence and the benefit of vendor allowances and discounts.
Selling, General and Administrative Expenses (SG&A): Included in SG&A expenses are payroll and related costs, store operating costs, occupancy charges, Amazon fees, professional and service fees,
general operating and overhead expenses and depreciation charges (excluding those related to distribution operations). Selling, general and administrative expenses also include fixed asset write offs associated with store closures, if any, and
miscellaneous income and expense items, other than interest.
Advertising Costs and Vendor Allowances: The fye segment often receives allowances from its vendors to fund in-store displays, print and radio advertising, and other promotional
events. Vendor advertising allowances which exceed specific, incremental and identifiable costs incurred in relation to the advertising and promotions offered by the Company to its vendors are classified as a reduction in the purchase price of
merchandise inventory. Accordingly, advertising and sales promotion costs are charged to operations, offset by direct vendor reimbursements, as incurred. Total advertising expense, excluding vendor allowances, was $1.7 million and $2.2 million in
fiscal 2019 and fiscal 2018, respectively. In the aggregate, vendor allowances supporting the fye segment’s advertising and promotion are included as a reduction of SG&A expenses, and reimbursements of such costs were $1.7 million and $2.1
million in fiscal 2019 and 2018, respectively. Advertising costs for the etailz segment primarily consist of Amazon marketing expenses which were $0.9 million and $1.7 million in fiscal 2019 and fiscal 2018, respectively.
Lease Accounting: Operating lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company’s
incremental borrowing rates for its population of leases. Related operating ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by contributions from landlords, plus any prepaid rent and direct costs
from executing the leases. ROU assets are tested for impairment in the same manner as long-lived assets. Lease terms include the non-cancellable portion of the underlying leases along with any reasonably certain lease periods associated with
available renewal periods, termination options and purchase options. Lease agreements with lease and non-lease components are combined as a single lease component for all classes of underlying assets.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payments are
recognized as lease expense as they are incurred.
Prior to February 3, 2019, leases were accounted for under Accounting Standards Codification (ASC) Subtopic 840, Leases. The Company’s calculation of straight-line rent expense
includes the impact of escalating rents for the lease period and includes any period during which the Company is not obligated to pay rent while the store is being constructed (“rent holiday”). The Company accounts for step rent provisions,
escalation clauses and other lease concessions by recognizing these amounts on a straight-line basis over the initial lease term. The Company capitalizes leasehold improvements funded by tenant improvement allowances, depreciating them over the
term of the related leases. The tenant improvement allowances are recorded as deferred rent within other long-term liabilities in the Consolidated Balance Sheets and are amortized as a reduction in rent expense over the life of the related leases.
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50%
likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense
(benefit) in the Consolidated Statements of Operations.
Comprehensive Loss: Comprehensive loss consists of net loss and a pension actuarial income (loss) adjustment that is recognized in other comprehensive income
(loss) (see Note 9).
Stock-Based Compensation: Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The Company measures stock-based
compensation cost at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis (net of estimated forfeitures) over the option’s requisite service period. The Company recognizes
compensation expense based on estimated grant date fair value using the Black‑Scholes option‑pricing model. Tax benefits, if any, resulting from tax deductions in excess of the compensation cost recognized for those options are to be classified and
reported as both an operating cash outflow and financing cash inflow.
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 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.
Loss Per Share: Basic and diluted loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. During fiscal 2019 and
fiscal 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 for fiscal 2019 and fiscal 2018 was the same.
Total anti-dilutive stock awards for both fiscal 2019 and fiscal 2018 were approximately 100 thousand.
Fair Value of Financial Instruments: Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date.
In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying value of life insurance policies included in other assets approximates fair value based on estimates received from insurance companies and are classified as Level 2 measurements within the hierarchy as defined by
applicable accounting standards. The Company had no Level 3 financial assets or liabilities at February 1, 2020 or at February 2, 2019.
Segment Information: The Company operates in two reportable segments: fye and etailz. Operating loss by operating segment, is defined as loss from operations, excluding interest expense, other (loss)
income, and income taxes. The following balances by reportable segment were as follows:
Note 2. Recently Adopted and Issued Accounting Pronouncements
During the fiscal ended February 1, 2020, the Company adopted the following accounting pronouncements.
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). Lessees are required to recognize a right-of-use asset and a lease liability for virtually all 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 fiscal 2018. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes the ability to carry forward
the existing lease classification and to use hindsight when determining lease term. 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 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.
The Company elected the short-term lease exemption permitted under the lease standard. As such, the Company does 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 February 1, 2020, 153 leases were short-term in nature and were exempt from being recorded on the balance sheet.
During fiscal 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 fiscal 2019, resulting in the recording of asset impairment charges of $18.5 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.
As a result of applying the new lease standard using a modified retrospective method, the following adjustments were made to accounts on consolidated balance sheet as of February 3, 2019:
Compensation – Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which is intended to improve the presentation of
net periodic pension cost and net periodic post-retirement benefit cost in an entity’s financial statements by requiring the service cost component be disaggregated from other components of net benefit costs and presented in the same line item or
items as other compensation costs for the employees. Additionally, only the service cost component of net benefit cost is eligible for capitalization when applicable. ASU 2017-07 was effective for the Company’s fiscal year beginning February 3,
2019. This standard did not have a material effect on the Company’s consolidated financial statements.
Compensation – Stock Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provided clarity as to what changes to the terms or conditions of share-based payment awards require an entity to
apply modification accounting in Topic 718. ASU 2017-09 was effective for the Company for interim and annual periods in fiscal year beginning February 3, 2019. This standard did not have a material effect on the Company’s consolidated financial
statements.
Revenue Recognition
In June 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. On February 4, 2018, the Company adopted Topic 606 using the modified retrospective approach. The new standard states that revenue is recognized when performance obligations are satisfied by transferring goods or services to the customer
in an amount that the entity expects to collect in exchange for those goods or services. The satisfaction of a performance obligation with a single customer may occur at a point in time or may occur over time. The significant majority of the
Company’s revenue is recognized at a point in time, generally when a customer purchases and takes possession of merchandise through the stores or when merchandise purchased through our e-commerce websites is shipped to a customer. Revenues do not
include sales taxes or other taxes collected from customers. The Company has arrangements with customers where the performance obligations are satisfied over time, which primarily relate to the loyalty programs and gift card liabilities. The adoption
of Topic 606 impacted the timing of revenue recognition for gift card breakage. Prior to adoption of Topic 606, gift card breakage was recognized at the point gift card redemption became remote. In accordance with the Topic 606, the Company
recognizes gift card breakage in proportion to the pattern of rights exercised by the customer. The adoption of Topic 606 also impacted presentation of the Consolidated Balance Sheets related to sales return reserves to be recorded on a gross basis,
consisting of a separate right of return asset and liability. The Company’s evaluation of Topic 606 included a review of certain third-party arrangements to determine whether the Company acts as principal or agent in such arrangements, and such
evaluation did not result in any material changes in gross versus net presentation as a result of the adoption of the new standard. The cumulative effect of initially applying Topic 606 was a $0.3 million increase to the opening balance of inventory,
a $0.3 million increase to the opening balance of accrued expenses and other liabilities, a $0.5 million increase to the opening balance of deferred revenue, and a $0.5 million decrease to the opening balance of retained earnings as of February 4,
2018
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduced an expected credit loss model for the impairment of financial assets
measured at amortized cost. The model replaces the probable, incurred loss model for those assets and instead, broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost. ASU
No. 2016-13 is effective beginning in the first quarter of fiscal 2020. Early adoption is permitted. We will adopt this standard in the first quarter of Fiscal 2020. We have evaluated the impact of this new standard on the consolidated financial
statements which is immaterial.
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework— Changes to the Disclosure Requirements for Defined Benefit Plans”, which removes certain
disclosures that are no longer cost beneficial and also includes additional disclosures to improve the overall usefulness of the disclosure requirements to financial statement users. This standard will be effective for public entities for fiscal
years beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for
intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the enacted changes in tax laws or
rates. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new
standard on the consolidated financial statements.
Recent accounting pronouncements pending adoption not discussed above are either not applicable or are not expected to have a material impact on our consolidated financial condition, results of operations, or cash flows.
Note 3. Goodwill and Other Intangible Assets
Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others.
Goodwill and other long-lived assets are reviewed for impairment if circumstances indicate that the carrying amount may not be recoverable.
During fiscal 2019, the Company fully impaired its vendor relationships and the Company recognized an impairment loss of $0.8 million.
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. As a result of the annual goodwill impairment review, it was determined that the goodwill balance was fully impaired, and the Company recognized an impairment loss of $39.2 million.
The Company continues to amortize certain vendor relationships, technology, and trade names and trademarks that have finite lives.
Identifiable intangible assets as of February 1, 2020 consisted of the following:
The changes in net intangibles and goodwill from February 2, 2019 to February 1, 2020 were as follows:
The changes in net intangibles and goodwill from February 3, 2018 to February 2, 2019 were as follows:
Estimated amortization expense for the remaining useful lives of the intangible assets is as follows (amounts in thousands):
Note 4. Fixed Assets
Fixed assets consist of the following:
Depreciation expense included in fiscal 2019 and fiscal 2018 SG&A expenses within the Consolidated Statements of Operations were $3.3 million and $5.2 million, respectively. The Company recorded $4.7 million and
$4.1 million in fixed asset impairment during fiscal 2019 and fiscal 2018, respectively.
Note 5. Restricted Cash
As of February 1, 2020 and February 2, 2019, the Company had restricted cash of $5.9 million and $9.9 million, respectively.
Restricted cash balance at the end of fiscal 2019 consisted of $5.9 million rabbi trust, that resulted from the death of the Company’s former Chairman, of which $1.0 million was classified as restricted cash in current assets and $4.9 million was
classified as restricted cash as a long-term asset.
Restricted cash balance at the end of fiscal 2018 consisted of $3.2 million related to the earn-out amount that could be paid to the selling shareholders of etailz in accordance with the share purchase agreement created during the acquisition of
etailz in fiscal 2016; and a $6.7 million rabbi trust, that resulted from the death of the Company’s former Chairman, of which $1.0 million was classified as restricted cash in current assets and $5.7 million was classified as restricted cash as a
long-term asset.
During fiscal 2019, the $3.2 million earn-out escrow balance was returned to the Company as a result of etailz not achieving the prescribed earnings target, outlined in the amended etailz acquisition share purchase
agreement, as amended.
A summary of cash, cash equivalents and restricted cash is as follows (amounts in thousands):
Note 6. Debt
Credit Facility
In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provided 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.
As of February 1, 2020, the Company had outstanding borrowings of $13.1 million under the Credit Facility and as of February 2, 2019 the Company did not have any outstanding borrowings under the Credit Facility. Peak borrowings under the Credit
Facility during fiscal 2019 and fiscal 2018 were $35.9 million and $35.7 million, respectively. As of February 1, 2020 and February 2, 2019, the Company had no outstanding letters of credit. The Company had $12 million and $41 million available for
borrowing under the Credit Facility as of February 1, 2020 and February 2, 2019, respectively.
On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the new etailz credit facility,
as further discussed below, accordingly the Credit Facility is no longer available to the Company.
New Credit Facility
On February 20, 2020, etailz Inc. entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as administrative agent, under which the lenders party thereto committed to provide up to $25 million
in loans under a three-year, secured revolving credit facility (the “ New Credit Facility”). Concurrent with the sale of the fye business, the Company borrowed $3.3 million under the New Credit Facility to satisfy the remaining obligations of the
Company under the aforementioned Credit Facility.
The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.
Interest under the New Credit Facility accrues, subject to certain terms and conditions under the Loan Agreement, at a LIBOR Rate or Base Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability
as defined in the Loan Agreement, with the Applicable Margin for LIBOR Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%.
The New Credit Facility is secured by a first priority security interest in substantially all of the assets of etailz, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors
under the New Credit Facility (collectively, the “Credit Facility Parties”) and by a first priority pledge by the Company of its equity interests in etailz. The Company will provide a limited guarantee of etailz’s obligations under the New Credit
Facility.
Among other things, the Loan Agreement limits etailz’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets. The Loan Agreement also requires etailz
to comply with a financial maintenance covenant.
The Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events
of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the Credit Facility Parties taken as a whole, the occurrence of an uninsured
loss to a material portion of collateral and failure of the obligations under the New Credit Facility to constitute senior indebtedness under any applicable subordination or intercreditor agreements.
On March 30, 2020, the Company and etailz (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan
Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement
was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make investments, make
restricted payments or specified payments and merge or acquire assets.
Subordinated Loan Agreement
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral
Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to etailz with a scheduled maturity date of May 22, 2023.
Interest on the Subordinated Loan accrues, subject to certain terms and conditions under the Subordinated Loan Agreement, at the rate of twelve percent (12.0%) per annum, compounded on the last day of each calendar quarter by becoming a part of
the principal amount of the Subordinated Loan.
The Subordinated Loan is secured by a second priority security interest in substantially all of the assets of the Loan Parties, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and
guarantors under the Subordinated Loan Agreement (collectively, the “Second Lien Credit Facility Parties”). The Company will provide a limited guarantee of etailz’s obligations under the Subordinated Loan.
Among other things, the Subordinated Loan Agreement limits the Loan Parties’ ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.
The Subordinated Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults,
certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the Second Lien Credit Facility Parties taken as a whole and the
occurrence of an uninsured loss to a material portion of collateral.
Note 7. Leases
During fiscal 2019, the Company conducted all of its operations from leased premises that include retail stores, distribution centers, and administrative offices. At February 1, 2020, the Company leased 200 stores
under operating leases. In addition, the Company currently leases 2 distribution centers and 2 administrative offices.
The following table is a summary of the Company’s components of net lease cost for the thirteen- and fifty-two-week period ended February 1, 2020:
During the thirteen and fifty-two weeks ended February 2, 2019, the Company recorded minimum rentals of $6.4 million and $21.7 million, respectively, and did not record any contingent rentals. During fiscal 2018, minimum
rent payments based on a store’s sales volume were $0.5 million.
As of February 1, 2020, the maturity of lease liabilities is as follows:
Lease term and discount rate are as follows:
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:
Effective with the sales of the fye segment all future obligations for store leases and the lease for the distribution center and administrative offices in Albany, NY were assumed by Sunrise Records, pursuant to the
Asset Purchase Agreement.
Future minimum rental payments required under the remaining leases for the administrative office and distribution center in Spokane, Washington at February 1, 2020, are as follows (amounts in thousands):
Note 8. Shareholders’ Equity
The Company classifies repurchased shares as treasury stock on the Company’s Consolidated Balance Sheet. There were no treasury stock repurchases during fiscal 2019 and fiscal 2018.
On August 15, 2019, we completed a 1-for-20 reverse stock split of our outstanding Common Stock. As a result of this stock split, our issued and outstanding Common Stock decreased from 36,291,620 to 1,814,581 shares.
Accordingly, all share and per share information contained in this report has been restated to retroactively show the effect of this stock split.
No cash dividends were paid in fiscal 2019 and fiscal 2018. The Company’s Credit Facility contained certain restrictions related to the payment of cash dividends, 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.
Note 9. Benefit Plans
401(k) Savings Plan
Each segment of the Company offers a 401(k) Savings Plan to eligible employees meeting certain age and service requirements.
The fye segment offers a 401(k) plan which permits participants to contribute up to 80% of their salary, including bonuses, up to the maximum allowable by IRS regulations. The Company matches 50% of the first 6% of
employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of
service completed by the participant. Participants are fully vested upon the completion of four years of service. As of February 3, 2019, the fye segment suspended its matching contribution in response to one of the Company’s cost‑cutting
initiatives. The Trans World Entertainment Corporation 401(K) Plan for the fye segment was transferred to the acquiring company as part of the FYE Transaction pursuant to the terms of the Asset Purchase Agreement.
The etailz segment offers a 401(k) plan, the etailz 401(K) Plan, which permits participants to contribute up to the maximum allowable by IRS regulations. The Company matches 100% of the first 6% of employee
contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of service
completed by the participant. Participants are fully vested upon the completion of three years of service. All participant forfeitures of non-vested benefits are used to reduce the Company’s contributions or fees in future years.
Total expense related to the fye segment’s matching contributions was approximately $0 and $340,000 in fiscal 2019 and fiscal 2018, respectively. Total expense related to the etailz segment’s matching contributions
was approximately $303,000 and $297,000 in fiscal 2019 and fiscal 2018, respectively.
Stock Award Plans
As of February 1, 2020, there was approximately $0.3 million of unrecognized compensation cost related to stock option awards comprised of the following: $0.2 million was related to stock option awards listed in the table below and expected to be
recognized as expense over a weighted average period of 1.2 years and $0.1 million was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 2.7 years. The FYE Transaction in February 2020
constituted a change of control and vesting on all unvested options was accelerated. As a result, all of the unrecognized compensation expense was recognized in the first quarter of fiscal 2020.
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 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 February 1, 2020, 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 February 1, 2020 were 213 thousand.
The fair values of the options granted have been estimated at the date of grant using the Black - Scholes option pricing model with the following assumptions:
The following table summarizes stock option activity under the Stock Award Plans:
(1) Other Share Awards include deferred shares granted to executives and directors.
As of February 1, 2020, all stock awards outstanding and exercisable had a grant price higher than the market price of the stock and had no intrinsic value.
During fiscal 2019, the Company recognized approximately $40 thousand in expenses for deferred shares issued to non-employee directors. During fiscal 2018, the Company recognized approximately $79 thousand in expenses
for deferred shares issued to non-employee directors. There were no exercises of non-restricted stock options during fiscal 2019 and fiscal 2018.
In connection with the acquisition of etailz, the Company issued 78,628 restricted shares of Company common stock to a key etailz employee, with a grant date fair value of $71.20 per share, as adjusted for the reverse stock split. These shares
vested ratably through January 2019 and were fully amortized in fiscal 2018. Total expense related to these shares was $2.4 million in fiscal 2018. The Company recognized a total of $5.6 million of compensation cost related to these restricted
shares.
Defined Benefit Plans
The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain Executive Officers of the Company. The SERP, which is unfunded, provides eligible executives defined pension benefits
that supplement benefits under other retirement arrangements. The annual benefit amount is based on salary and bonus at the time of retirement and number of years of service.
Prior to June 1, 2003, the Company had provided the Board of Directors with a noncontributory, unfunded retirement plan (“Director Retirement Plan”) that paid retired directors an annual retirement benefit.
For fiscal 2019 and 2018, net periodic benefit cost recognized under both plans totaled approximately $0.6 million in each fiscal year. The accrued pension liability for both plans was approximately $17.5 million and $18.3 million at February 1,
2020 and February 2, 2019, respectively, and is recorded within other long-term liabilities on the Consolidated Balance Sheets. The accumulated benefit obligation for both plans was $17.7 million and $18.4 million as of the fiscal years ended
February 1, 2020 and February 2, 2019, respectively.
The following is a summary of the Company’s defined benefit pension plans as of each fiscal year-end:
Obligation and Funded Status:
Amounts recognized in the Consolidated Balance Sheets consist of:
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss:
Net Periodic Benefit Cost:
Other Changes in Benefit Obligations Recognized in Other Comprehensive Loss:
The pre-tax components of accumulated other comprehensive loss, which have not yet been recognized as components of net periodic benefit cost as of February 1, 2020 and February 2, 2019 and the tax effect are summarized below.
The discount rate is based on the rates implicit in high-quality fixed-income investments currently available as of the measurement date. The Citigroup Pension Discount Curve (CPDC) rates are intended to represent the
spot rates implied by the high-quality corporate bond market in the U.S. The projected benefit payments attributed to the projected benefit obligation have been discounted using the CPDC mid-year rates and the discount rate is the single constant
rate that produces the same total present value.
The following benefit payments over the next ten years are expected to be paid:
Note 10. Income Taxes
Income tax expense consists of the following:
A reconciliation of the Company’s effective income tax rate with the federal statutory rate is as follows:
The Other category is comprised of various items, including the impacts of non-deductible entertainment, penalties and parking benefits and the refundable portion of the federal alternative minimum tax carryover
credit.
Significant components of the Company’s deferred tax assets are as follows:
The Company, at the end of fiscal 2019, has a net operating loss carryforward of $288.1 million for federal income tax purposes which will expire at various times throughout 2039 with a portion being available
indefinitely. The Company has approximately $280.2 million of net operating loss carryforward for state income tax purposes as of the end of fiscal 2019 that expire at various times through 2039 and are subject to certain limitations and statutory
expiration periods. The state net operating loss carryforwards are subject to various business apportionment factors and multiple jurisdictional requirements when utilized. The Company has federal tax credit carryforwards of $0.5 million which
will expire in 2026. The Company has state tax credit carryforwards of $1.1 million, of which $0.2 million will expire in 2027.
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 upon 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 the available objective evidence, management concluded that a full valuation allowance should be recorded against its deferred tax assets. As of February 1, 2020, the valuation allowance increased to $104.6 million from $90.2 million at
February 2, 2019. Management will continue to assess the valuation allowance against the gross deferred assets.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the respective years is provided below. Amounts presented excluded interest and penalties, where applicable, on unrecognized tax benefits:
As of February 1, 2020, the Company had $1.9 million of gross unrecognized tax benefits, $1.5 million of which would affect the Company’s tax rate if recognized. While it is reasonably possible that the amount of unrecognized tax benefits will
increase or decrease within the next twelve months, the Company does not expect the change to have a significant impact on its results of operations or financial position. The Company is subject to U.S. federal income tax as well as income tax of
multiple state jurisdictions. The Company has substantially concluded all federal income tax matters and all material state and local income tax matters through fiscal 2013.
The Company’s practice is to recognize interest and penalties associated with its unrecognized tax benefits as a component of income tax expense in the Company’s Consolidated Statements of Operations. During fiscal
2019, the Company accrued a provision for interest expense of $0.2 million. As of February 1, 2020, the liability for uncertain tax positions reflected in the Company’s Consolidated Balance Sheets was $3.5 million, including accrued interest and
penalties of $2.7 million.
The Tax Cuts and Jobs Act also repeals the Corporation Alternative Minimum Tax (“AMT”) for tax years beginning after December 31, 2017. Any AMT carryover credits will be refundable starting in the 2018 tax year,
remaining credit will be fully refundable in 2021.
Note 11. Related Party Transactions
Prior to the consummation of the FYE Transaction, the Company leased 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 paid $1.2 million in both fiscal 2019 and fiscal 2018, which were included in selling, general and administrative expenses in the Statement of Operations. As of February 1, 2020,
the Company owed $1.1 million on the operating lease liability, which is included in the current portion of operating lease liabilities in the Balance Sheet. Under the terms of the lease agreement, the Company is responsible for property taxes and
other operating costs with respect to the premises.
On February 20, 2020, as part of the FYE Transaction, the Company assigned the rights and obligations of the lease to the acquiror.
Directors Jonathan Marcus, Thomas Simpson, and Michael Reickert are the chief executive officer of Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III, LLC and Kick-Start IV, LLC (“Kick-Start”), and a trustee of the Robert J. Higgins
TWMC Trust (the “Trust”), an affiliate of RJHDC, LLC (“RJHDC” and together with Alimco and Kick-Start, “Related Party Entities”), respectively. The Related Party Entities are parties to the following agreements with the Company entered into on March
30, 2020:
Note 12. 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.
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 SMs. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.
The Company has reached a preliminary settlement with the plaintiffs for both store manager class actions. The Company reserved $0.4 million for the settlement as of February 2, 2020.
Note 13. Sale of fye Business (Unaudited)
The following unaudited pro forma condensed consolidated statements of operations for the years ended February 1, 2020 and February 2, 2019 present the Company’s results of operations as adjusted to give effect to
the FYE Transaction as if it had occurred at the beginning of the period. The accompanying unaudited pro forma condensed consolidated balance sheet as of February 1, 2020 presents the Company’s financial position as if the FYE Transaction had
occurred on February 1, 2020. The unaudited pro forma condensed consolidated balance sheet as of February 1, 2020 reflects the elimination of the certain assets and liabilities of the fye business, the elimination of all intercompany accounts, the
inclusion of the net proceeds from the FYE Transaction, the application of such net proceeds to repay certain outstanding debt, and the recognition of the estimated loss from the FYE Transaction.
The unaudited pro forma information below is provided for information purposes only and is not necessarily indicative of what the actual financial position or results of operations of the Company would have been had
the transaction actually occurred on the dates indicated, nor does it purport to indicate the future financial position or results of operations of the Company. The pro forma adjustments are based upon available information and assumptions believed
to be reasonable in the circumstances. There can be no assurance that such information and assumptions will not change from those reflected in the unaudited pro forma condensed financial statements and notes thereto.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
Notes:
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Notes:
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
Notes:
Note 14. Quarterly Financial Information (Unaudited)