UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER: 0-14818

TRANS WORLD ENTERTAINMENT CORPORATION

(Exact name of registrant as specified in its charter)

38 Corporate Circle

Albany, New York 12203

(Address of principal executive offices, including zip code)

(518) 452-1242

(Registrant’s telephone number, including area code)

Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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. Yesx Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero          Accelerated filero           Non-accelerated filero

Smaller reporting companyx

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 450 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-1 of this chapter). 

Emerging growth companyo

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 Exchange Act). Yeso Nox

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,

36,117,05536,212,570 shares outstanding as of July 29, 2017May 5, 2018

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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)

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($in thousands, except per share amounts)
thousands)

(unaudited)

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

($in thousands)

(unaudited)

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($in thousands)

(unaudited)

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
July

May 5, 2018 and April 29, 2017 and July 30, 2016

Note 1. Nature of Operations

Trans World Entertainment Corporation and subsidiaries (“the Company”) is one of the largest specialty retailers of entertainment products, including trend, video, music, electronics and related products in the United States. 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.comandwww.secondspin.com. As of July 29, 2017,May 5, 2018, the fye segment operated 269253 stores totaling approximately 1.51.4 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.

Liquidity and Cash Flows:

The Company’s primary sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility. The Company’s cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns, the related terms on the purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs for the foreseeable future, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments.

Management anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed infacility. See note 98 in the interim condensed consolidated financial statements.statements for additional information.

In connection with the preparation of these unaudited interim condensed consolidated financial statements, the Company conducted an evaluation as to whetherhas evaluated and concluded there wereare no conditions andor events, considered in the aggregate, which raisedthat raise substantial doubt as toabout the entity’sCompany’s ability to continue as a going concern withinfor a period of one year afterfollowing the date of the issuance, or the date of availability, of the interim condensed consolidatedthat these financial statements to be issued, noting that there did not appear to be evidence of substantial doubt of the entity’s ability to continue as a going concern.are issued.

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 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 U.S. GAAPaccounting 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 and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended January 28, 2017February 3, 2018 contained in the Company’s Annual Report on Form 10-K filed April 13, 2017.May 4, 2018. The results of operations for the thirteen and twenty-six weeks ended July 29, 2017May 5, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 3, 2018.2, 2019. 

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 January 28, 2017.February 3, 2018.

There have been no material changes to the accounting policies applied to our consolidated results and footnote disclosures.

Note 3. RecentRecently Adopted Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 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. ThisOn February 4, 2018, the Company adopted ASU will replace most existingNo. 2014-09 using the modified retrospective approach. The adoption of this ASU impacted the timing of revenue recognition guidancefor gift card breakage. Prior to adoption of ASU No. 2014-09, gift card breakage was recognized at the point gift card redemption became remote. In accordance with this ASU, the Company will recognize gift card breakage in U.S. GAAP when it becomes effective.proportion to the pattern of rights exercised by the customer. The new standard is effective foradoption of this ASU also impacted presentation of our condensed consolidated financial statements related to sales return reserves. The cumulative effect of initially applying ASU No. 2014-09 was a $0.5 million decrease to the Company’s fiscal year beginningopening balance of retained earnings as of February 4, 2018. This ASU will most likely changeThe comparative prior period information continues to be reported under the way the Company accounts for sales returns, our customer loyalty program, gift card breakage and certain other promotional programs. The Company is continuing to evaluate which transition approach it will utilize and the impact this standard will have on the Company’s consolidated financial statements upon adoption.accounting standards in effect during those periods.

Note 3. Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases,“Leases”, which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of this ASU is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. The new standard requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. The new standard will be effective for the Company’s fiscal year beginning February 3, 2019, and requires the modified retrospective method of adoption. Early adoptionManagement is permitted. The Company is inprogressing with implementation and continuing to evaluate the process of determiningeffect to the methodCompany’s Condensed Consolidated Financial Statements and timing of adoption and assessing the impact of ASU 2016-02 on its consolidated financial statements.disclosures. Given the nature of the operating leases for the Company’s home office, distribution center, and stores, the Company expects an increase to the carrying value of its assets and liabilities.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test whereby a goodwill impairment loss is determined by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Rather, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for the Company in fiscal 2020, applied on a prospective basis, and early adoption is allowed for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

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 is effective for the Company’s fiscal year beginning February 3, 2019, and must be applied retrospectively. ASU 2017-07 is permitted for early adoption, but only at the beginning of an annual period for which financial statements have not been issued or made available for issuance. The Company is currently evaluating the impact that this ASU will have on its reporting and asset recognition.

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 is effective for the Company for interim and annual periods in fiscal year beginning February 3, 2019, with early adoption permitted and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company will consider the impact that this standard may have on future stock-based payment award modifications should they occur.

Note 4. Asset Acquisitions

Business Combination-etailz

On October 17, 2016, the Company completed the purchase of all of the issued and outstanding shares of etailz, Inc. (etailz), an innovative and leading digital marketplace retailer. etailz operates both domestically and internationally. They use a data driven approach to digital marketplace retailing utilizing proprietary software and ecommerce insight coupled with a direct customer relationship engagement to identify new distributors and wholesalers, isolate emerging product trends, and optimize price positioning and inventory purchase decisions.

The Company paid $32.3 million in cash, issued 5.7 million shares of Trans World Entertainment Corporation stock (TWMC Stock) at closing to the shareholders of etailz (the selling shareholders) as consideration for the selling shareholders’ ownership, and paid $4.3 million in cash advances to settle obligations of the selling shareholders. Based on the fair value of $3.56 per share of TWMC Stock on the acquisition date, the shares had a value of $20.4 million. An earn-out of up to a maximum of $14.6 million would be payable in fiscal 2018 and fiscal 2019 subject to the achievement by etailz of $6 million in operating income in fiscal 2017 and $7.5 million in fiscal 2018 as outlined in the share purchase agreement prior to its amendment as discussed in the following paragraph. In connection with the acquisition, the Company assumed the liability of the selling shareholders for etailz’s employee retention bonus plan, of which $1.9 million was due and payable at closing and funded as part of the cash advances and the remaining $2.3 million will be earned over a two year service period. The acquisition and related costs were funded primarily from the Company’s cash on hand and short term borrowings under its revolving credit facility. The acquisition was accounted for using the purchase method of accounting.

During the thirteen weeks ended July 29, 2017, the share purchase agreement with the selling shareholders of etailz was amended to provide that $11.5 million be released from the earnout escrow account and the $3.1 million remaining in the earnout escrow account may be payable in cash to the selling shareholders in 2019, subject to the achievement by etailz of operating income in excess of $15.5 million during the twenty-four month period ending February 2, 2019. In the event that etailz achieves operating income in excess of $13.5 million, but less than $15.5 million, an earnout of $1.6 million would be payable in 2019. If etailz operating income is below $13.5 million, the $3.1 million escrow would be returned to the Company.

The amount released from escrow was disbursed during the second quarter of 2017 as follows: $5.0 million to the Company for future investment to support growth initiatives, $5.0 million to the selling shareholders, and $1.5 million to the Company (to be allocated to increase the maximum amount available under the etailz employee retention bonus plan from $4.2 million to $5.7 million).

In the second quarter of fiscal 2017, the Company recorded a $1.4 million benefit related to its contingent consideration liability. The decrease in the value of the contingent liability resulted from actual second quarter financial results of etailz and the amendment of the earnout agreement as described in the paragraph above. This benefit is recorded in selling, general, and administrative expenses in the Company’s condensed consolidated statements of operations.

The results of operations of etailz will be reported in the Company’s etailz segment and has been included in the consolidated results of operations of the Company from the date of acquisition. The following unaudited pro forma financial information for the thirteen and twenty-six weeks ended July 30, 2016, presents consolidated information as if the etailz acquisition had occurred on February 1, 2016. Because of different fiscal period ends, and in order to present results for comparable periods, the unaudited pro forma financial information for the thirteen and twenty-six weeks ended July 30, 2016, combines (i) the Company’s historical statement of operations for the thirteen and twenty-six weeks ended July 30, 2016, and (ii) etailz historical statement of income for the periods from May 1, 2016 through July 30, 2016 and from February 1, 2016 through July 30, 2016, respectively. The unaudited pro forma financial information is presented after giving effect to certain adjustments for acquisition-related costs, depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, and related income tax effects. The unaudited pro forma financial information is based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma financial information does not purport to present what the Company’s results of operations would actually have been if the aforementioned transaction had in fact occurred on such date or at the beginning of the period indicated, nor does it project the Company’s financial position or results of operations at any future date or for any future period.

Collaborative Arrangement

On April 11, 2017, the Company entered into an agreement with another party for the purpose of acquiring and selling certain retail merchandise. etailz holds a 50% economic interest in the arrangement as of July 29, 2017. The initial cash investment was $2.6 million dollars. The total investment of $2.7 million was included in other assets as of July 29, 2017.

Note 5.4. Goodwill and Other Intangible Assets

Our goodwill results from our acquisition of etailz and represents the excess purchase price over the net identifiable assets acquired. All of our goodwill is associated with etailz, a separate reporting unit, and there is no goodwill associated with our other reporting unit, fye. Goodwill and intangible assets with indefinite useful lives areis not amortized butand we are testedrequired to evaluate our goodwill for impairment at least annually. Goodwill representsannually or whenever indicators of impairment

are present. Our annual test is completed during the excessfourth fiscal quarter, and interim tests are conducted when circumstances indicate the carrying value of the purchase price overgoodwill or other intangible assets may not be recoverable. 

Estimating the fair value of reporting units requires the net tangibleuse of estimates and identifiable intangible assets acquiredsignificant judgments that are based on a number of factors including actual operating results. It is possible that these judgments and estimates could change in each business combination.future periods.

DeterminingThe determination of the fair value of intangible assets and liabilities acquired in a reporting unit requiresbusiness acquisition, including the useCompany’s acquisition of significantetailz in 2016, is subject to many estimates and assumptions, including revenue growth rates, operating margins, discount rates,assumptions. Our identifiable intangible assets that resulted from our acquisition of etailz consist of vendor relationships, technology and future market conditions, among others. Goodwill and other long-lived assets are reviewedtradenames. We review amortizable intangible asset groups for impairment ifwhenever events or changes in circumstances indicate that the related carrying amountamounts may not be recoverable.

We are continuing to amortize certain vendor relationships, technology, and trade names and trademarks that have finite lives.

Identifiable intangible assets as of July 29, 2017May 5, 2018 consisted of the following (in thousands, except weighted-average amortization period)($ in thousands):

The changes in net intangibles and goodwill from January 28, 2017 to July 29, 2017 were as follows:

Estimated amortization expense for the remainder of fiscal 20172018 and the five succeeding fiscal years and thereafter is as follows:

Note 6.5. Depreciation and Amortization

Depreciation and amortization included in the interim condensed consolidated statements of operations is as follows:

Note 7.6. 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. etailz results included in the tables below are for the period starting when etailz was acquired, therefore, results are only included in the thirteen and twenty-six weeks ended July 29, 2017.table:

Note 8.7. Restricted Cash

As of July 29, 2017,May 5, 2018, the Company had restricted cash of $1.5$4.1 million and $10.7$6.4 million reported in current and other assets on the accompanying interim condensed consolidated balance sheet, respectively. TheAs of April 29, 2017, the Company did not havehad restricted cash as of July 30, 2016.$13.0 million and $10.5 million reported in current and other assets on the accompanying interim condensed consolidated balance sheet, respectively.

In connection with the acquisition of etailz and under the terms of the amended and restated share purchase agreement, as amended (see Note 4),the Company designated $1.5 million of the restricted cash to be made available to satisfy any indemnification claims within 18 months from the date of acquisition and $3.2 million of the restricted cash to equal the maximum earn-out amount that could be paid to the selling shareholders of etailz in accordance with the share purchase agreement, as amended.agreement.

During the thirteen weeks ended May 5, 2018, the Company paid out $1.5 million of the restricted cash to the etailz shareholders per the terms of the original etailz acquisition share purchase agreement.

In addition, as a result of the death of its former Chairman, the Company received $7.5holds $7.3 million which is held in a rabbi trust, of which $0.9 million is classified as restricted cash in current assets and was$6.4 million is classified as restricted cash in other assets on the accompanying interim condensed consolidated balance sheet.

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

Note 9.8. Line of Credit

In January 2017, the Company entered into a $50 million asset based credit facility (“Credit Facility”) which amended the previous credit facility. The availability under the Credit Facility is subject to limitations based on 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 a provision to increase availability to $75 million during 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 Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, 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 and share repurchases 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. As of May 5, 2018, 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 2.25%1.75% to 2.75%2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.25%1.00%. In addition, a commitment fee ranging from 0.375% to 0.50%of 0.25% is also payable on unused commitments.

The Credit Facility contains customary affirmativeAs of May 5, 2018 and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions, covenants around the net number of store closings, and restrictions related to the payment of cash dividends, including limiting the amount of dividends and share repurchases 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.

During the second quarters of fiscalApril 29, 2017, and 2016, the Company did not have any borrowings under its existing credit facilities. Peak borrowings under its credit facility during fiscal 2016 were $21.5 million. As of July 29, 2017 and July 30, 2016, the Company had no outstanding letters of credit.Credit Facility. The Company had $37$41.1 million and $36$35.0 million available for borrowing as of JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, respectively.

As of May 5, 2018, the Company had $1.2 million in outstanding letters of credit related to an import purchase. As of April 29, 2017 the Company did not have any outstanding letters of credit.

Note 10.9. Stock Based Compensation

As of July 29, 2017,May 5, 2018, there was approximately $1.1$2.8 million of unrecognized compensation cost related to stock option awards that iscomprised of the following: $0.7 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 2.7 years.2.3 years; $0.2 million was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 3.0 years; and $1.9 million was related to restricted shares issued in connection with the acquisition of etailz, as discussed further below, and expected to be recognized as expense over the next 9 months.

As of July 29,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 Company’s current long term equity incentive plans totaled 13.0 million shares. There are certain authorized stock awards for whichNew Plan total 5.0 million. As of May 5, 2018, of the Company no longer grants awards. Of these awards authorized for issuance 3.1under the Stock Award Plans, 2.5 million shares were granted and are outstanding, 1.4 million shares of which were vested and exercisable. AwardsShares available for future grants of options and other share based awards under the New Plan at July 29, 2017May 5, 2018 were 2.5 million shares.4.9 million.

The table below outlines the assumptions that the Company used to estimate the fair value of stock based awards granted during the twenty-six weeks ended July 29, 2017:

The following table summarizes stock award activity during the twenty-sixthirteen weeks ended July 29, 2017:May 5, 2018:

As of July 29, 2017, the intrinsic value ofMay 5, 2018, all stock awards outstanding and exercisable was approximately $12 thousand.had a grant price higher than the market price of the stock and had no intrinsic value.

In connection with the acquisition of etailz, the Company issued 1,572,552 restricted shares of Company stock to a key etailz employee, with a grant date fair value of $3.56 per share. These shares vest ratably through January 2019. As of July 29, 2017,During the thirteen weeks ended May 5, 2018, the Company recognized $2.0 million$622 thousand of compensation cost related to these shares, of which $1.2 million was recorded in fiscal 2017.shares. As of July 29, 2017,May 5, 2018, there was approximately $3.6$1.9 million of unrecognized compensation cost related to these restricted shares that is expected to be recognized as expense over the next 189 months.

Note 11.10. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss that the Company reports in the interim 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 (gain) associated with Company’s defined benefit plan for the thirteen and twenty-six weeks ended JulyMay 5, 2018 and April 29 2017 and July 30, 2016.2017.

Note 12.11. Defined Benefit Plan

The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for a limited number ofcertain executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. During the twenty-sixthirteen weeks ended July 29, 2017,May 5, 2018, the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.2 million in benefits relating to the SERP during fiscal 2017.2018.

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.

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

Note 13.12. Basic and Diluted Loss Per Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding for the period. Diluted income (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 income (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 twenty-six week periodsperiod ended July 29, 2017 and July 30, 2016,May 5, 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 iswas the same. For the thirteen week period ended April 29, 2017, 37 thousand shares of employee stock options were considered dilutive. Total anti-dilutive stock awards for the thirteen and twenty-six weeks ended July 29, 2017May 5, 2018, were approximately 3.12.6 million shares and 2.7 million shares, respectively, as compared to 1.62.3 million shares and 1.8 million shares, respectively, for the thirteen and twenty-six weeks ended July 30, 2016.April 29, 2017.

Note 14.13. 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 3, 2018.2, 2019.  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 January 28, 2017,February 3, 2018, the Company had a net operating loss carry forward of $181.4$208.3 million for federal income tax purposes and approximately $243$273.4 million for state income tax purposes that expire at various times through 20362037 and are subject to certain limitations and statutory expiration periods. The Company has also recorded $0.1 million of deferred tax liability relating to the etailz segment that relates to state income tax returns that do not allow consolidated filing. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its new deferred tax assets, which remain fully reserved.

Note 15.14. 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.

Store Manager Class Actions

Two former Store Managers filed actions alleging claims of entitlement to unpaid compensation for overtime. In one action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Store Manager and Senior Assistant Manager) while the other plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Store Manager).

Specifically, Carol Spack filed a complaint against Trans World Entertainment Corporation (Trans World) in the United States District Court, District of New Jersey, on April 20, 2017 (Case No.: 3:17-cv-02687-BRM-LHG) alleging that she is entitled to unpaid compensation for overtime under the federal Fair Labor Standards Act (FLSA). She brings a nationwide collective action under the FLSA on behalf of all Store Managers and Senior Assistant Managers. She also brings class action claims under New Jersey and Pennsylvania law on behalf of all persons who worked as Store Managers in New Jersey or Senior Assistant Managers in Pennsylvania.

On May 19, 2017, Natasha Roper filed a complaint against Trans World in the U.S. District Court for the Northern District of New York (Case No.: 1:17-cv-0553-TJM-CFH) in which she also alleges that she is entitled to unpaid compensation for overtime under the FLSA. Ms. Roper brings a nationwide collective action under the FLSA on behalf of all similarly situated Store Managers.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

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

May 5, 2018 and April 29, 2017 and July 30, 2016

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 for the fiscal year ended January 28, 2017.February 3, 2018.

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.comandwww.secondspin.com. As of July 29, 2017,May 5, 2018, the fye segment operated 269253 stores totaling approximately 1.51.4 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. fye stores offer predominantly entertainment products. The etailz segment is a leading 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 salesSales and comparable store net sales:Comparable Store Net Sales: The fye segment measures and reports the rate of change in comparable store net sales.sales change. A store is included in comparable store net sales calculations at the beginning of its thirteenth full month of operation. Stores relocated/relocated, expanded or downsized are excluded from comparable store net 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 stores netstore sales through the month immediately preceding the month of closing. Stores that are temporarily closed are excluded from the calculation of comparable stores sales for the applicable periods in the year of closure and the subsequent year. Included in comparable store net sales are sales from the fye segment websites. The fye segment further analyzes net sales by store format and by product category. The etailz segment measures total year over year performance in net sales.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 thenet sales levels, mix of products sold, byvendor discounts negotiated with vendors, discounts offered to customers, and fulfillment fees paid to Amazon. The Company records itsallowances, shrinkage, obsolescence and distribution and product shrink expenses in cost of sales.costs. Distribution expenses include those costs associated with receiving, shipping, inspecting and& warehousing productmerchandise, Amazon fulfillment fees, and costs associated with product

returns to vendors. Warehousing cost of sales also includes obsolescence costs and is reduced by the benefit of vendor allowances, net of direct reimbursements of expense.

Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, Amazon commissions, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations, as disclosed insee Note 65 to the condensed consolidated financial statements)Condensed Consolidated Financial Statements in this report). Selling, general and administrativeSG&A expenses also include fixed asset write offsassets write-offs associated with store closures, and change in square footage, if any, gift card breakage, and etailz related amortizationmiscellaneous income and compensation costs.expense items, other than interest. 

Balance Sheet and Ratios: The Company views cash, net inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.

RESULTS OF OPERATIONS

Thirteen and Twenty-six Weeks Ended July 29, 2017May 5, 2018
Compared to the Thirteen and Twenty-six Weeks Ended July 30, 2016April 29, 2017

Segment Highlights:

etailz results included in the tables below are for the period when etailz was acquired, therefore, etailz results are only included in the thirteen and twenty-six weeks ended July 29, 2017.

(1) Acquisition related expenses for the thirteen weeks ended July 29, 2017 consisted of amortization expense of intangible assets of $965 thousand and compensation expenses of $1,118 thousand net of a $1,437 thousand benefit resulted from a contingent consideration liability adjustment. Acquisition related expenses for the twenty-six weeks ended July 29, 2017 consisted of amortization expense of intangible assets of $1,943 thousand and compensation expenses of $2,020 thousand net of a $1,437 thousand benefit resulted from a contingent consideration liability adjustment.

(2)In addition to the results of operations determined in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we reported non-GAAP adjusted operating income for the etailz segment as shown above.

Total Revenue.The following table sets forth a year-over-year comparison of the Company’s total revenue:

Total revenue decreased 5.3% to $96.6 million for the thirteen weeks ended May 5, 2018 compared to $102.0 million in the same period last year.

Total revenue increased 59.3% and 46.0% for the thirteen and twenty-six weeks ended July 29, 2017 as compared to the same period last year. The increase was driven by $43.5 million and $80.5 million in revenue for the thirteen and twenty-six weeks ended July 29, 2017 as a result of the acquisition of etailz in October 2016.

fye Segment

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