UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED |
| OR | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM |
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
| New York | 14-1541629 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer | |
| Identification Number) |
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 filer | Non-accelerated filero | ||
| Smaller reporting company |
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,
36,117,05536,225,824 shares outstanding as of July 29, 2017August 4, 2018
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| 2 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 1 – Interim Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
(unaudited)
| July 29, | January 28, | July 30, | ||||||||||
| 2017 | 2017 | 2016 | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 13,985 | $ | 27,974 | $ | 78,644 | ||||||
| Restricted cash | 1,502 | — | — | |||||||||
| Merchandise inventory | 126,687 | 126,004 | 120,268 | |||||||||
| Prepaid expenses and other assets | 13,469 | 15,356 | 8,971 | |||||||||
| Total current assets | 155,643 | 169,334 | 207,883 | |||||||||
| Restricted cash | 10,682 | 16,103 | — | |||||||||
| Net fixed assets | 43,876 | 45,097 | 34,990 | |||||||||
| Goodwill | 39,191 | 39,191 | — | |||||||||
| Net intangible assets | 25,914 | 27,857 | — | |||||||||
| Other assets | 8,033 | 10,228 | 9,662 | |||||||||
| TOTAL ASSETS | $ | 283,339 | $ | 307,810 | $ | 252,535 | ||||||
| LIABILITIES | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Accounts payable | $ | 37,169 | $ | 52,307 | $ | 42,753 | ||||||
| Accrued expenses and other current liabilities | 9,688 | 9,198 | 6,356 | |||||||||
| Deferred revenue | 7,732 | 9,228 | 8,147 | |||||||||
| Total current liabilities | 54,589 | 70,733 | 57,256 | |||||||||
| Contingent consideration | 2,115 | 8,552 | — | |||||||||
| Other long-term liabilities | 29,175 | 30,589 | 26,442 | |||||||||
| TOTAL LIABILITIES | 85,879 | 109,874 | 83,698 | |||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||
| Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) | — | — | — | |||||||||
| Common stock ($0.01 par value; 200,000,000 shares authorized; 64,255,171, 64,252,671 and 58,472,012 shares issued, respectively) | 643 | 643 | 585 | |||||||||
| Additional paid-in capital | 339,624 | 338,075 | 316,782 | |||||||||
| Treasury stock at cost (28,138,116, 28,137,283 and 28,118,798 shares, respectively) | (230,145 | ) | (230,144 | ) | (230,144 | ) | ||||||
| Accumulated other comprehensive loss | (793 | ) | (802 | ) | (709 | ) | ||||||
| Retained earnings | 88,131 | 90,164 | 82,323 | |||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 197,460 | 197,936 | 168,837 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 283,339 | $ | 307,810 | $ | 252,535 | ||||||
| August 4, | February 3, | July 29, | ||||||||||
| 2018 | 2018 | 2017 | ||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 4,477 | $ | 31,326 | $ | 13,985 | ||||||
| Restricted cash | 4,116 | 1,505 | 1,502 | |||||||||
| Accounts receivable | 6,509 | 4,469 | 6,445 | |||||||||
| Merchandise inventory | 114,920 | 109,377 | 126,687 | |||||||||
| Prepaid expenses and other assets | 8,937 | 6,976 | 7,024 | |||||||||
| Total current assets | 138,959 | 153,653 | 155,643 | |||||||||
| Restricted cash | 6,147 | 10,675 | 10,682 | |||||||||
| Fixed assets, net | 12,648 | 13,546 | 43,876 | |||||||||
| Goodwill | 39,191 | 39,191 | 39,191 | |||||||||
| Intangible assets, net | 22,023 | 23,967 | 25,914 | |||||||||
| Other assets | 6,119 | 7,139 | 8,033 | |||||||||
| TOTAL ASSETS | $ | 225,087 | $ | 248,171 | $ | 283,339 | ||||||
| LIABILITIES | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Accounts payable | $ | 34,200 | $ | 41,780 | $ | 37,169 | ||||||
| Short-term borrowings | 6,341 | — | — | |||||||||
| Accrued expenses and other current liabilities | 9,508 | 11,038 | 9,688 | |||||||||
| Deferred revenue | 6,810 | 8,464 | 7,732 | |||||||||
| Total current liabilities | 56,859 | 61,282 | 54,589 | |||||||||
| Contingent consideration | — | — | 2,115 | |||||||||
| Other long-term liabilities | 26,533 | 29,131 | 29,175 | |||||||||
| TOTAL LIABILITIES | 83,392 | 90,413 | 85,879 | |||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||
| Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) | — | — | — | |||||||||
| Common stock ($0.01 par value; 200,000,000 shares authorized; 64,386,671, 64,305,171 and 64,255,171 shares issued, respectively) | 644 | 643 | 643 | |||||||||
| Additional paid-in capital | 342,710 | 341,103 | 339,624 | |||||||||
| Treasury stock at cost (28,160,847, 28,156,601 and 28,138,116 shares, respectively) | (230,149 | ) | (230,145 | ) | (230,145 | ) | ||||||
| Accumulated other comprehensive loss | (1,008 | ) | (998 | ) | (793 | ) | ||||||
| Retained earnings | 29,498 | 47,155 | 88,131 | |||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 141,695 | 157,758 | 197,460 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 225,087 | $ | 248,171 | $ | 283,339 | ||||||
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
| 3 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
data)
(unaudited)
| Thirteen Weeks Ended | Twenty-six Weeks Ended | Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||||||||||||||
| July 29, | July 30, | July 29, | July 30, | August 4, | July 29, | August 4, | July 29, | |||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Net sales | $ | 100,914 | $ | 63,320 | $ | 201,665 | $ | 138,088 | $ | 101,039 | $ | 100,914 | $ | 196,271 | $ | 201,665 | ||||||||||||||||
| Other revenue | 1,565 | 1,028 | 2,781 | 1,990 | 1,135 | 1,565 | 2,506 | 2,781 | ||||||||||||||||||||||||
| Total revenue | 102,479 | 64,348 | 204,446 | 140,078 | 102,174 | 102,479 | 198,777 | 204,446 | ||||||||||||||||||||||||
| Cost of sales | 67,309 | 37,647 | 132,971 | 82,551 | 70,001 | 67,309 | 134,916 | 132,971 | ||||||||||||||||||||||||
| Gross profit | 35,170 | 26,701 | 71,475 | 57,527 | 32,173 | 35,170 | 63,861 | 71,475 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 40,539 | 31,223 | 82,051 | 62,734 | 41,562 | 40,539 | 81,409 | 82,051 | ||||||||||||||||||||||||
| Loss from operations | (5,369 | ) | (4,522 | ) | (10,576 | ) | (5,207 | ) | (9,389 | ) | (5,369 | ) | (17,548 | ) | (10,576 | ) | ||||||||||||||||
| Interest expense | 59 | 172 | 115 | 345 | 103 | 59 | 166 | 115 | ||||||||||||||||||||||||
| Loss (gain) on insurance proceeds | 129 | — | (8,706 | ) | — | — | 129 | — | (8,706 | ) | ||||||||||||||||||||||
| Other income | (43 | ) | (86 | ) | (57 | ) | (1,017 | ) | (49 | ) | (43 | ) | (128 | ) | (57 | ) | ||||||||||||||||
| Loss before income tax expense | (5,514 | ) | (4,608 | ) | (1,928 | ) | (4,535 | ) | (9,443 | ) | (5,514 | ) | (17,586 | ) | (1,928 | ) | ||||||||||||||||
| Income tax expense | 51 | 48 | 105 | 95 | 67 | 51 | 71 | 105 | ||||||||||||||||||||||||
| Net loss | $ | (5,565 | ) | $ | (4,656 | ) | $ | (2,033 | ) | $ | (4,630 | ) | $ | (9,510 | ) | $ | (5,565 | ) | $ | (17,657 | ) | $ | (2,033 | ) | ||||||||
| BASIC AND DILUTED LOSS PER SHARE: | ||||||||||||||||||||||||||||||||
| Basic loss per common share | $ | (0.15 | ) | $ | (0.15 | ) | $ | (0.06 | ) | $ | (0.15 | ) | ||||||||||||||||||||
| BASIC AND DILUTED LOSS PER COMMON SHARE: | ||||||||||||||||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.26 | ) | $ | (0.15 | ) | $ | (0.49 | ) | $ | (0.06 | ) | ||||||||||||||||||||
| Weighted average number of common shares outstanding – basic | 36,179 | 30,403 | 36,179 | 30,576 | ||||||||||||||||||||||||||||
| Diluted loss per share | $ | (0.15 | ) | $ | (0.15 | ) | $ | (0.06 | ) | $ | (0.15 | ) | ||||||||||||||||||||
| Weighted average number of common shares outstanding – diluted | 36,179 | 30,403 | 36,179 | 30,576 | ||||||||||||||||||||||||||||
| Weighted average number of common shares outstanding – basic and diluted | 36,352 | 36,179 | 36,295 | 36,179 | ||||||||||||||||||||||||||||
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
| 4 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
LOSS
(in thousands)
(unaudited)
| Thirteen Weeks Ended | Twenty-six Weeks Ended | Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||||||||||||||
| July 29, | July 30, | July 29, | July 30, | August 4, | July 29, | August 4, | July 29, | |||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Net loss | ($5,565 | ) | ($4,656 | ) | ($2,033 | ) | ($4,630 | ) | ($ | 9,510 | ) | ($ | 5,565 | ) | ($ | 17,657 | ) | ($ | 2,033 | ) | ||||||||||||
| Amortization of pension costs (gain) | (5 | ) | 51 | (10 | ) | 103 | ||||||||||||||||||||||||||
| Amortization of pension loss | (5 | ) | (5 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||||
| Comprehensive loss | ($5,570 | ) | ($4,605 | ) | ($2,043 | ) | ($4,527 | ) | ($ | 9,515 | ) | ($ | 5,570 | ) | ($ | 17,667 | ) | ($ | 2,043 | ) | ||||||||||||
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
| 5 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Twenty-six Weeks Ended | ||||||||
| July 29, | July 30, | |||||||
| 2017 | 2016 | |||||||
| Net cash used in operating activities | $ | (20,503 | ) | $ | (16,965 | ) | ||
| Cash flows from investing activities: | ||||||||
| Proceeds from company owned life insurance and SERP death benefits | 14,336 | — | ||||||
| Investment in collaborative arrangement | (2,575 | ) | — | |||||
| Proceeds from sale of investment | — | 1,600 | ||||||
| Purchases of fixed assets | (4,166 | ) | (7,693 | ) | ||||
| Net cash provided by (used in) investing activities | 7,595 | (6,093 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Exercise of stock options | — | 38 | ||||||
| Payments to shareholders | (5,000 | ) | — | |||||
| Purchase of treasury stock | — | (2,647 | ) | |||||
| Net cash used in financing activities | (5,000 | ) | (2,609 | ) | ||||
| Net decrease in cash and cash equivalents | (17,908 | ) | (25,667 | ) | ||||
| Cash, cash equivalents, and restricted cash, beginning of period | 44,077 | 104,311 | ||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 26,169 | 78,644 | |||||
| Supplemental disclosures and non-cash investing and financing activities: | ||||||||
| Issuance of restricted shares under deferred / restricted stock agreements | — | 476 | ||||||
| Twenty-six Weeks Ended | ||||||||
| August 4, | July 29, | |||||||
| 2018 | 2017 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | ($ | 17,657 | ) | ($ | 2,033 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation of fixed assets | 2,563 | 4,932 | ||||||
| Amortization of intangible assets | 1,944 | 1,943 | ||||||
| Stock based compensation | 1,603 | 1,550 | ||||||
| Adjustment to contingent consideration | — | (1,437 | ) | |||||
| Loss on disposal of fixed assets | 135 | 448 | ||||||
| Change in cash surrender value | (44 | ) | (137 | ) | ||||
| Gain on life insurance asset | — | (8,706 | ) | |||||
| Changes in operating assets and liabilities that provide (use) cash: | ||||||||
| Accounts receivable | (2,040 | ) | 640 | |||||
| Merchandise inventory | (5,543 | ) | (683 | ) | ||||
| Prepaid expenses and other current assets | (1,961 | ) | 1,247 | |||||
| Other long-term assets | (73 | ) | (720 | ) | ||||
| Accounts payable | (7,580 | ) | (15,138 | ) | ||||
| Accrued expenses and other current liabilities | (30 | ) | (1,010 | ) | ||||
| Deferred revenue | (1,654 | ) | (1,497 | ) | ||||
| Other long-term liabilities | (2,607 | ) | 98 | |||||
| Net cash used in operating activities | (32,944 | ) | (20,503 | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
| Purchases of fixed assets | (1,800 | ) | (4,166 | ) | ||||
| Proceeds from company owned life insurance | — | 14,336 | ||||||
| Investment in joint venture | — | (2,575 | ) | |||||
| Capital distributions from joint venture | 1,137 | — | ||||||
| Net cash (used in) provided by investing activities | (663 | ) | 7,595 | |||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from short term borrowings | 6,341 | — | ||||||
| Payments to etailz shareholders | (1,500 | ) | (5,000 | ) | ||||
| Net cash provided by (used in) financing activities | 4,841 | (5,000 | ) | |||||
| Net decrease in cash, cash equivalents, and restricted cash | (28,766 | ) | (17,908 | ) | ||||
| Cash, cash equivalents, and restricted cash, beginning of period | 43,506 | 44,077 | ||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 14,740 | $ | 26,169 | ||||
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
| 6 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
August 4, 2018 and July 29, 2017 and July 30, 2016
Note 1. Nature of Operations
Trans World Entertainment Corporation and subsidiaries (“the Company”) operates in two reportable segments: fye and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites,www.fye.comandwww.secondspin.com. As of July 29, 2017,August 4, 2018, the fye segment operated 269241 stores totaling approximately 1.51.3 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. 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, 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.
Managementcommitments and anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed in note 98 in the interim condensed consolidated financial statements.
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.eliminated in consolidation.
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. GAAP have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.
| 7 |
The accompanying interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying 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, 2017August 4, 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 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 retail 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.
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||
| July 30, | July 30, | |||||||
| 2016 | 2016 | |||||||
| Pro forma total revenue | $ | 93,672 | $ | 196,097 | ||||
| Pro forma net loss | (5,840 | ) | (6,850 | ) | ||||
| Pro forma basic and diluted loss per share | $ | (0.16 | ) | $ | (0.19 | ) | ||
| Pro forma weighted average number of common shares outstanding – basic and diluted | 36,134 | 36,307 | ||||||
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.
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DeterminingThe determination of the fair value of intangible assets and liabilities acquired in a reporting unit requires the use of significantbusiness acquisition is subject to certain 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, 2017August 4, 2018 consisted of the following (in thousands, except weighted-average amortization period)($ in thousands):
| July 29, 2017 | August 4, 2018 | |||||||||||||||||||||||||||||
| Weighted Average Amortization Period (in months) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period (in months) | Original Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Vendor relationships | 120 | $ | 19,100 | $ | 1,531 | $ | 17,569 | 120 | $ | 19,100 | $ | 3,442 | $ | 15,658 | ||||||||||||||||
| Technology | 60 | 6,700 | 1,068 | 5,632 | 60 | 6,700 | 2,408 | 4,292 | ||||||||||||||||||||||
| Trade names and trademarks | 60 | 3,200 | 487 | 2,713 | 60 | 3,200 | 1,127 | 2,073 | ||||||||||||||||||||||
| $ | 29,000 | $ | 3,086 | $ | 25,914 | $ | 29,000 | $ | 6,977 | $ | 22,023 | |||||||||||||||||||
The changes in net intangibles and goodwill from January 28, 2017February 3, 2018 to July 29, 2017August 4, 2018 were as follows:
| (in thousands) | January 28, 2017 | Amortization | July 29, 2017 | |||||||||||||||||||||||||
| ($ in thousands) | February 3, 2018 | Amortization | August 4, 2018 | |||||||||||||||||||||||||
| Amortized intangible assets: | ||||||||||||||||||||||||||||
| Vendor relationships | $ | 18,522 | $ | 953 | $ | 17,569 | $ | 16,612 | $ | 954 | $ | 15,658 | ||||||||||||||||
| Technology | 6,302 | 670 | 5,632 | 4,962 | 670 | 4,292 | ||||||||||||||||||||||
| Trade names and trademarks | 3,033 | 320 | 2,713 | 2,393 | 320 | 2,073 | ||||||||||||||||||||||
| Net amortized intangible assets | $ | 27,857 | $ | 1,943 | $ | 25,914 | $ | 23,967 | $ | 1,944 | $ | 22,023 | ||||||||||||||||
| Unamortized intangible assets: | ||||||||||||||||||||||||||||
| Goodwill | $ | 39,191 | — | $ | 39,191 | $ | 39,191 | $ | — | $ | 39,191 | |||||||||||||||||
| Total unamortized intangible assets | $ | 39,191 | — | $ | 39,191 | $ | 39,191 | $ | — | $ | 39,191 | |||||||||||||||||
Amortization expense of intangible assets for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017 consisted of the following:
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
| ($ in thousands) | August 4, 2018 | July 29, 2017 | August 4, 2018 | July 29, 2017 | ||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Vendor relationships | $ | 477 | $ | 470 | $ | 954 | $ | 953 | ||||||||
| Technology | 335 | 335 | 670 | 670 | ||||||||||||
| Trade names and trademarks | 160 | 160 | 320 | 320 | ||||||||||||
| Total amortization expense | $ | 972 | $ | 965 | $ | 1,944 | $ | 1,943 | ||||||||
Estimated amortization expense for the remainder of fiscal 20172018 and the five succeeding fiscal years and thereafter is as follows:
| Year | Annual Amortization | Annual Amortization | |||||||
| (in thousands) | |||||||||
| 2017 | $ | 1,945 | |||||||
| ($ in thousands) | ($ in thousands) | ||||||||
| 2018 | 3,890 | $ | 1,946 | ||||||
| 2019 | 3,890 | 3,890 | |||||||
| 2020 | 3,890 | 3,890 | |||||||
| 2021 | 3,325 | 3,325 | |||||||
| 2022 | 1,910 | 1,910 | |||||||
| 2023 | 1,910 | ||||||||
| Thereafter | 7,064 | 5,152 | |||||||
Note 6.5. Depreciation and Amortization
Depreciation and amortization included in the condensed consolidated statements of operations is as follows:
| Thirteen Weeks Ended | Twenty-six Weeks Ended | Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||||||||||||||
| July 29, | July 30, | July 29, | July 30, | August 4, | July 29, | August 4, | July 29, | |||||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
| ($ in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Cost of sales | $ | 157 | $ | 98 | $ | 311 | $ | 198 | $ | — | $ | 157 | $ | — | $ | 311 | ||||||||||||||||
| Selling, general and administrative expenses | 3,341 | 1,623 | 6,564 | 3,086 | 2,274 | 3,341 | 4,507 | 6,564 | ||||||||||||||||||||||||
| Total | $ | 3,498 | $ | 1,721 | $ | 6,875 | $ | 3,284 | $ | 2,274 | $ | 3,498 | $ | 4,507 | $ | 6,875 | ||||||||||||||||
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:
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
| ($ in thousands) | August 4, 2018 | July 29, 2017 | August 4, 2018 | July 29, 2017 | ||||||||||||
| Total Revenue | ||||||||||||||||
| fye | $ | 50,545 | $ | 58,958 | $ | 104,608 | $ | 123,902 | ||||||||
| etailz | 51,629 | 43,521 | 94,169 | 80,544 | ||||||||||||
| Total Company | $ | 102,174 | $ | 102,479 | $ | 198,777 | $ | 204,446 | ||||||||
| Gross Profit | ||||||||||||||||
| fye | $ | 20,634 | $ | 25,085 | $ | 42,905 | $ | 51,995 | ||||||||
| etailz | 11,539 | 10,085 | 20,956 | 19,480 | ||||||||||||
| Total Company | $ | 32,173 | $ | 35,170 | $ | 63,861 | $ | 71,475 | ||||||||
| Income (Loss) From Operations | ||||||||||||||||
| fye | $ | (6,629 | ) | $ | (5,467 | ) | $ | (12,001 | ) | $ | (9,853 | ) | ||||
| etailz | (2,760 | ) | 98 | (5,547 | ) | (723 | ) | |||||||||
| Total Company | $ | (9,389 | ) | $ | (5,369 | ) | $ | (17,548 | ) | $ | (10,576 | ) | ||||
| Total Assets As of August 4, 2018 and As of July 29, 2017 | ||||||||||||||||
| August 4, 2018 | July 29, 2017 | |||||||||||||||
| fye | $ | 121,750 | $ | 184,250 | ||||||||||||
| etailz | 103,337 | 99,089 | ||||||||||||||
| Total Company | $ | 225,087 | $ | 283,339 | ||||||||||||
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
| (in thousands) | July 29, 2017 | July 30, 2016 | July 29, 2017 | July 30, 2016 | ||||||||||||
| Total Revenue | ||||||||||||||||
| fye | $ | 58,958 | $ | 64,348 | $ | 123,902 | $ | 140,078 | ||||||||
| etailz | 43,521 | — | 80,544 | — | ||||||||||||
| Total Company | $ | 102,479 | $ | 64,348 | $ | 204,446 | $ | 140,078 | ||||||||
| Gross Profit | ||||||||||||||||
| fye | $ | 25,085 | $ | 26,701 | $ | 51,995 | $ | 57,527 | ||||||||
| etailz | 10,085 | — | 19,480 | — | ||||||||||||
| Total Company | $ | 35,170 | $ | 26,701 | $ | 71,475 | $ | 57,527 | ||||||||
| Loss From Operations | ||||||||||||||||
| fye | $ | (5,467 | ) | $ | (4,522 | ) | $ | (9,853 | ) | $ | (5,207 | ) | ||||
| etailz | 98 | — | (723 | ) | — | |||||||||||
| Total Company | $ | (5,369 | ) | $ | (4,522 | ) | $ | (10,576 | ) | $ | (5,207 | ) | ||||
| Total Assets | ||||||||||||||||
| fye | $ | 184,250 | $ | 252,535 | ||||||||||||
| etailz | 99,089 | — | ||||||||||||||
| Total Company | $ | 283,339 | $ | 252,535 | ||||||||||||
Note 8.7. Restricted Cash
As of August 4, 2018, the Company had restricted cash of $4.1 million and $6.2 million reported in current and other assets on the accompanying condensed consolidated balance sheet, respectively. As of July 29, 2017, the Company had restricted cash of $1.5 million and $10.7 million reported in current and other assets on the accompanying condensed consolidated balance sheet, respectively. The Company did not have restricted cash as of July 30, 2016.
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, which is classified as amended.restricted cash in current assets as of August 4, 2018 on the accompanying interim condensed consolidated balance sheet.
In addition, as a result of the death of its former Chairman, the Company received $7.5holds $7.1 million which is held in a rabbi trust, of which $0.9 million is classified as restricted cash in current assets and was$6.2 million is classified as restricted cash in other assets of August 4, 2018 on the accompanying interim condensed consolidated balance sheet.
A summary of cash, cash equivalents and restricted cash is as follows (in($ in thousands):
| August 4, | February 3, | July 29, | ||||||||||
| 2018 | 2018 | 2017 | ||||||||||
| Cash and cash equivalents | $ | 4,477 | $ | 31,326 | $ | 13,985 | ||||||
| Restricted cash | 10,263 | 12,180 | 12,184 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 14,740 | $ | 43,506 | $ | 26,169 | ||||||
| July 29, | January 28, | July 30, | ||||||||||
| 2017 | 2017 | 2016 | ||||||||||
| Cash and cash equivalents | $ | 13,985 | $ | 27,974 | $ | 78,644 | ||||||
| Restricted cash | 12,184 | 16,103 | — | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 26,169 | $ | 44,077 | $ | 78,644 | ||||||
During the twenty-six weeks ended August 4, 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.
Note 9. Line of Credit8. Short Term Borrowings
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 August 4, 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
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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 affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrenceAs 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 allowingAugust 4, 2018, borrowings under the amendedcredit facility were $6.3 million. There were no borrowings under the credit facility as of July 29, 2017. The Company had $29.9 million and $37.0 million available for the six months before or six months after the dividend payment.borrowing as of August 4, 2018 and July 29, 2017, respectively.
DuringAs of August 4, 2018, the second quartersCompany had $1.1 million in outstanding letters of fiscalcredit related to an import purchase. As of July 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.
The Company had $37 million and $36 million available for borrowing as of July 29, 2017 and July 30, 2016, respectively.records short term borrowings at cost, in which the carrying value approximates fair value due to its short term maturity.
Note 10.9. Stock Based Compensation
As of July 29, 2017,August 4, 2018, there was approximately $1.1$2.2 million of unrecognized compensation cost related to stock option awards that iscomprised of the following: $0.8 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.2.4 years; $0.2 million was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 4.0 years; and $1.2 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 six 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 August 4, 2018, of the Company no longer grants awards. Of these awards authorized for issuance 3.1under the Stock Award Plans, 3.0 million shares were granted and are outstanding, 1.41.6 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, 2017August 4, 2018 were 2.5 million shares.4.4 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-six weeks ended July 29, 2017:August 4, 2018:
| Employee and Director Stock Award Plans | Number of Shares Subject To Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Other Share Awards(1) | Weighted Average Grant Fair Value | |||||||||||||||||||||||||||||||||||
| Number of Shares Subject To Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Other Share Awards (1) | Weighted Average Grant Fair Value | ||||||||||||||||||||||||||||||||||||
| Balance January 28, 2017 | 2,459,564 | $ | 3.58 | 7.3 | 170,927 | $ | 3.87 | |||||||||||||||||||||||||||||||||
| Balance February 3, 2018 | 2,585,914 | $ | 3.06 | 7.2 | 183,427 | $ | 3.22 | |||||||||||||||||||||||||||||||||
| Granted | 620,000 | 1.84 | — | 65,000 | 1.85 | 505,000 | 0.98 | 10.0 | 135,484 | 0.98 | ||||||||||||||||||||||||||||||
| Forfeited | (23,750 | ) | 3.70 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Canceled | (164,150 | ) | 5.43 | — | — | — | (110,000 | ) | 3.29 | — | — | — | ||||||||||||||||||||||||||||
| Exercised | — | — | — | (2,500 | ) | 3.53 | — | — | — | (17,500 | ) | 3.53 | ||||||||||||||||||||||||||||
| Balance July 29, 2017 | 2,891,664 | $ | 3.10 | 7.8 | 233,427 | $ | 3.28 | |||||||||||||||||||||||||||||||||
| Exercisable July 29, 2017 | 1,316,164 | $ | 3.31 | 6.4 | 63,427 | $ | 4.50 | |||||||||||||||||||||||||||||||||
| Balance August 4, 2018 | 2,980,914 | $ | 2.70 | 7.3 | 301,411 | $ | 2.35 | |||||||||||||||||||||||||||||||||
| Exercisable August 4, 2018 | 1,584,539 | $ | 3.25 | 5.9 | 128,911 | $ | 2.85 | |||||||||||||||||||||||||||||||||
| (1) | Other Share Awards include deferred shares granted to Directors and restricted share units granted to executive officers. |
As of July 29, 2017, the intrinsic value ofAugust 4, 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.
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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 and twenty-six weeks ended August 4, 2018, the Company recognized $2.0$0.6 million and $1.2 million of compensation cost related to these shares, of which $1.2 million was recorded in fiscal 2017.respectively. As of July 29, 2017,August 4, 2018, there was approximately $3.6$1.2 million of unrecognized compensation cost related to these restricted shares that is expected to be recognized as expense over the next 18six months.
Note 11.10. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss that the Company reports in the condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan. Comprehensive loss consists of net loss and the amortization of pension costs (gain) associated with Company’s defined benefit plan for the thirteen and twenty-six weeks ended August 4, 2018 and July 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 of executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. During the twenty-six weeks ended July 29, 2017,August 4, 2018, the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.2 million in benefits relating to the SERP during fiscal 2017.2018.
The measurement date for the SERP is the fiscal year end, using actuarial techniques which reflect estimates for mortality, turnover and expected retirement. In addition, management makes assumptions concerning future salary increases. Discount rates are generally established as of the measurement date using theoretical bond
models that select high-grade corporate bonds with maturities or coupons that correlate to the expected payouts of the applicable liabilities.
The following represents the components of the net periodic pension cost related to the Company’s SERP for the respective periods:
| Thirteen Weeks Ended | Twenty-six Weeks Ended | Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||||||||||||||
| July 29, | July 30, | July 29, | July 30, | August 4, | July 29, | August 4, | July 29, | |||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
| ($ in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Service cost | $ | 16 | $ | 15 | $ | 32 | $ | 30 | $ | 14 | $ | 16 | $ | 28 | $ | 32 | ||||||||||||||||
| Interest cost | 139 | 137 | 278 | 274 | 140 | 139 | 280 | 278 | ||||||||||||||||||||||||
| Amortization of pension costs | 4 | 55 | 8 | 111 | — | 4 | — | 8 | ||||||||||||||||||||||||
| Amortization of net gain(1) | (9 | ) | (4 | ) | (18 | ) | (8 | ) | (5 | ) | (9 | ) | (10 | ) | (18 | ) | ||||||||||||||||
| Net periodic pension cost | $ | 150 | $ | 203 | $ | 300 | $ | 407 | $ | 149 | $ | 150 | $ | 298 | $ | 300 | ||||||||||||||||
| (1) | The amortization of net gain is related to a director retirement plan previously provided by the Company. |
Note 13.12. Basic and Diluted Loss Per Share
Basic income per share is calculated by dividing net income by the weighted average common shares outstanding for the period. Diluted income 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 by the sum of the weighted average shares outstanding and
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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 periods ended August 4, 2018 and July 29, 2017, and July 30, 2016, the impact of all outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Total anti-dilutive stock awards for the thirteen and twenty-six weeks ended July 29, 2017August 4, 2018 were approximately 3.1 million shares and 2.72.9 million shares, respectively, as compared to 1.63.1 million shares and 1.82.7 million shares, respectively, for the thirteen and twenty-six weeks ended July 30, 2016.29, 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 net 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).
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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 federalFederal 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.
Legal matters are defended and handled in the ordinary course of business. The Company has not established an accrual for the matters noted above as a loss is not considered to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation will have a material adverse impact on our results of operations, financial position, or cash flows.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
August 4, 2018 and July 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 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,August 4, 2018, the fye segment operated 269241 stores totaling approximately 1.51.3 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 trends and to manage the business in response to those trends and general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Net sales and comparable store net sales: The fye segment measures 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
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those related to distribution operations, as disclosed insee Note 65 to the condensed consolidated financial statements)Condensed Consolidated Financial Statements in this Form 10-Q). 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, 2017
August 4, 2018
Compared to the Thirteen and Twenty-six Weeks Ended July 30, 201629, 2017
Segment Highlights:
etailz results includedHighlights($ 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.thousands):
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||||||||||||||||
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||||||||||||||||||
| July 29, 2017 | July 30, 2016 | July 29, 2017 | July 30, 2016 | August 4, 2018 | July 29, 2017 | August 4, 2018 | July 29, 2017 | |||||||||||||||||||||||||
| Total Revenue | ||||||||||||||||||||||||||||||||
| fye | $ | 58,958 | $ | 64,348 | $ | 123,902 | $ | 140,078 | $ | 50,545 | $ | 58,958 | $ | 104,608 | $ | 123,902 | ||||||||||||||||
| etailz | 43,521 | — | 80,544 | — | 51,629 | 43,521 | 94,169 | 80,544 | ||||||||||||||||||||||||
| Total Company | $ | 102,479 | $ | 64,348 | $ | 204,446 | $ | 140,078 | $ | 102,174 | $ | 102,479 | $ | 198,777 | $ | 204,446 | ||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||||||||
| fye | $ | 25,085 | $ | 26,701 | $ | 51,995 | $ | 57,527 | $ | 20,634 | $ | 25,085 | $ | 42,905 | $ | 51,995 | ||||||||||||||||
| etailz | 10,085 | — | 19,480 | — | 11,539 | 10,085 | 20,956 | 19,480 | ||||||||||||||||||||||||
| Total Company | $ | 35,170 | $ | 26,701 | $ | 71,475 | $ | 57,527 | $ | 32,173 | $ | 35,170 | $ | 63,861 | $ | 71,475 | ||||||||||||||||
| Income (Loss) From Operations | ||||||||||||||||||||||||||||||||
| fye | $ | (5,467 | ) | $ | (4,522 | ) | $ | (9,853 | ) | $ | (5,207 | ) | $ | (6,629 | ) | $ | (5,467 | ) | $ | (12,001 | ) | $ | (9,853 | ) | ||||||||
| etailz | 98 | — | (723 | ) | — | (2,760 | ) | 98 | (5,547 | ) | (723 | ) | ||||||||||||||||||||
| Total Company | $ | (5,369 | ) | $ | (4,522 | ) | $ | (10,576 | ) | $ | (5,207 | ) | $ | (9,389 | ) | $ | (5,369 | ) | $ | (17,548 | ) | $ | (10,576 | ) | ||||||||
| Reconciliation of etailz Income (Loss) from Operations to etailz Adjusted Income from Operations | ||||||||||||||||||||||||||||||||
| Reconciliation of etailz Income (Loss) from Operations to etailz Adjusted Income (Loss) from Operations | Reconciliation of etailz Income (Loss) from Operations to etailz Adjusted Income (Loss) from Operations | |||||||||||||||||||||||||||||||
| etailz income (loss) fom operations | $ | 98 | $ | — | $ | (723 | ) | $ | — | $ | (2,760 | ) | $ | 98 | $ | (5,547 | ) | $ | (723 | ) | ||||||||||||
| Acquisition related amortization and compensation expenses (1) | 646 | — | 2,526 | — | ||||||||||||||||||||||||||||
| etailz adjusted income from operations (2) | $ | 744 | $ | — | $ | 1,803 | $ | — | ||||||||||||||||||||||||
| Acquisition related intangibles amortization | 972 | 965 | 1,944 | 1,943 | ||||||||||||||||||||||||||||
| Acquisition related compensation expense, net of contingency benefit | 1,118 | (319 | ) | 2,240 | 583 | |||||||||||||||||||||||||||
| etailz adjusted income (loss) from operations(1) | $ | (670 | ) | $ | 744 | $ | (1,363 | ) | $ | 1,803 | ||||||||||||||||||||||
(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:
| Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||
| July 29, 2017 | July 30, 2016 | $ | % | July 29, 2017 | July 30, 2016 | $ | % | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| fye revenue | $ | 58,958 | 64,348 | $ | (5,390 | ) | -8.4 | % | $ | 123,902 | 140,078 | $ | (16,176 | ) | -11.5 | % | ||||||||||||||||
| etailz revenue | 43,521 | — | 43,521 | n/a | 80,544 | — | 80,544 | n/a | ||||||||||||||||||||||||
| Total revenue | $ | 102,479 | $ | 64,348 | $ | 38,131 | 59.3 | % | $ | 204,446 | $ | 140,078 | $ | 64,368 | 46.0 | % | ||||||||||||||||
| Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||
| August 4, 2018 | July 29, 2017 | $ | % | August 4, 2018 | July 29, 2017 | $ | % | |||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| fye revenue | $ | 50,545 | 58,958 | $ | (8,413 | ) | -14.3 | % | $ | 104,608 | 123,902 | $ | (19,294 | ) | -15.6 | % | ||||||||||||||||
| etailz revenue | 51,629 | 43,521 | 8,108 | 18.6 | % | 94,169 | 80,544 | 13,625 | 16.9 | % | ||||||||||||||||||||||
| Total revenue | $ | 102,174 | $ | 102,479 | $ | (305 | ) | -0.3 | % | $ | 198,777 | $ | 204,446 | $ | (5,669 | ) | -2.8 | % | ||||||||||||||
Total revenue increased 59.3%decreased 0.3% and 46.0%2.8% for the thirteen and twenty-six weeks ended July 29, 2017August 4, 2018 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.
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fye Segment
The following table sets forth a period over period comparison of net fye sales by merchandise category:
| Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| July 29, 2017 | July 30, 2016 | $ | % | Comp Store Net Sales | July 29, 2017 | July 30, 2016 | $ | % | Comp Store Net Sales | August 4, 2018 | July 29, 2017 | $ | % | Comp Store Net Sales | August 4, 2018 | July 29, 2017 | $ | % | Comp Store Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| fye net sales | $ | 57,393 | 63,320 | $ | (5,927 | ) | -9.4 | % | -3.6 | % | $ | 121,121 | 138,088 | $ | (16,967 | ) | -12.3 | % | -6.7 | % | $ | 49,410 | $ | 57,393 | $ | (7,983 | ) | -13.9 | % | -6.7 | % | $ | 102,102 | $ | 121,121 | $ | (19,019 | ) | -15.7 | % | -7.6 | % | ||||||||||||||||||||||||||||||||||||||
| Other revenue | 1,565 | 1,028 | 537 | 52.2 | % | 2,781 | 1,990 | 791 | 39.7 | % | 1,135 | 1,565 | (430 | ) | -27.5 | % | 2,506 | 2,781 | (275 | ) | -9.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 58,958 | $ | 64,348 | $ | (5,390 | ) | -8.4 | % | $ | 123,902 | $ | 140,078 | $ | (16,176 | ) | -11.5 | % | $ | 50,545 | $ | 58,958 | $ | (8,413 | ) | -14.3 | % | $ | 104,608 | $ | 123,902 | $ | (19,294 | ) | -15.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
| As a % of fye net sales | As a % of fye net sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lifestyle | 37.0 | % | 28.8 | % | 18.5 | % | 34.6 | % | 27.0 | % | 14.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Video | 30.8 | % | 36.4 | % | -14.8 | % | 33.1 | % | 38.2 | % | -16.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Trend/Lifestyle | 40.9 | % | 37.0 | % | -1.7 | % | 39.3 | % | 34.6 | % | 0.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Video(1) | 29.0 | % | 31.2 | % | -9.9 | % | 30.5 | % | 33.6 | % | -12.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Music | 20.6 | % | 24.7 | % | -18.6 | % | 21.1 | % | 24.7 | % | -19.7 | % | 18.4 | % | 20.6 | % | -14.4 | % | 18.5 | % | 21.1 | % | -17.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Electronics | 11.2 | % | 9.3 | % | 12.7 | % | 10.7 | % | 9.1 | % | 8.6 | % | 11.7 | % | 11.2 | % | 1.4 | % | 11.7 | % | 10.7 | % | 2.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Video Games | 0.4 | % | 0.8 | % | -46.9 | % | 0.5 | % | 1.0 | % | -44.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Store Count: | 269 | 290 | (21 | ) | -7.2 | % | 241 | 269 | (28 | ) | -10.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Square footage | 1,497,500 | 1,672,085 | (174,585 | ) | -10.4 | % | 1,338,638 | 1,497,500 | (158,862 | ) | -10.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Includes Video Games category, which represented 0.1% of fye fiscal second quarter net sales. Fiscal 2017 data was adjusted to include this immaterial reclassification. |
Net sales.Net sales decreased 9.4%13.9% and 12.3%15.7% during the thirteen weeks and twenty-six weeks ended July 29, 2017August 4, 2018 as compared to the same period last year. The decline in net sales resulted from a 7.2%10.4% decline in total stores in operation and a 3.6%6.7% and 6.7%7.6% decline in comparable store net sales for the thirteen and twenty-six weeks ended July 29, 2017.August 4, 2018, respectively.
Trend/Lifestyle:
Comparable store net sales in the trend/lifestyle category increased 18.5% and 14.0%decreased 1.7% during the thirteen weeks ended August 4, 2018 and increased 0.4% for the twenty-six weeks ended July 29, 2017. LifestyleAugust 4, 2018, impacted by fidget spinners sales which represented 4% of sales in the second quarter last year. Trend/lifestyle products represented 37.0%40.9% and 34.6%39.3% of total net sales for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, compared to 28.8%37.0% and 27.0%34.6% in the comparable periods last year. The Company is focused on identifying, creatingcontinues to take advantage of opportunities to strengthen its selection and delivering merchandise that differentiates its customer experience and brand.
Media Categories:
Media categories, which consist of Video and Music, continue to experience industry wide declines due to non-physical options. As a result, the fye segment is shifting itsshift product mix to growing categories of entertainment and pop culture related merchandise, which is categorized as Lifestyle.entertainment-related merchandise.
Video:
Comparable store sales in the video category decreased 14.8%9.9% and 16.0%12.6% during the thirteen and twenty-six week periods ending July 29, 2017,ended August 4, 2018, respectively. The video category represented 30.8%29.0% and 33.1%30.5% of total net sales for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, compared to 36.4%31.2% and 38.2%33.6% in the comparable periods last year.year due to continued industry-wide decline in physical media sales
Music:
During the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, music sales in comparable stores decreased 18.6%14.4% and 19.7%17.4%, respectively, versus the thirteen and twenty-six weeks ended July 30, 2016.29, 2017. The music category represented 20.6%18.4% and 21.1%18.5% of total net sales for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, compared to 24.7% in both,20.6% and 21.1% for the thirteen and twenty-six weeks ended July 30, 2016.29, 2017 due to continued industry-wide decline in physical media sales.
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Electronics:
Comparable store net sales in the electronics category increased 12.7%1.4% and 8.6%2.3% during the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively. Electronics net sales represented 11.2% and 10.7%11.7% of total net sales for both the thirteen and twenty-six weeks ended July 29, 2017, respectively,August 4, 2018, compared to 9.3%11.2% and 9.1%10.7% in the comparable periods last year.
Other Revenue.Other revenue, which was primarily related to commissions and fees earned from third parties, was approximately $1.6$1.1 million and $2.8$2.5 million for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, compared to $1.0$1.6 million and $2.0$2.8 million in the comparable periods last year. The decline in other revenue was primarily due to lower number of stores in operation.
etailz Segment
etailz reported sales of $51.6 million and $94.2 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively compared to $43.5 million and $80.5 million sales for the thirteen and twenty-six weeks ended July 29, 2017, respectively.2017. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the twenty-six weeks ended August 4, 2018, etailz sold approximately 31,000 SKUs from approximately 2,200 suppliers, compared to approximately 21,000 SKUs from approximately 1,700 suppliers during the twenty-six weeks ended July 29, 2017.
Gross Profit.The following table sets forth a year-over-year comparison of the Company’s Gross Profit:
| Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||
| July 29, 2017 | July 30, 2016 | $ | % | July 29, 2017 | July 30, 2016 | $ | % | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| fye gross profit | $ | 25,085 | $ | 26,701 | $ | (1,616 | ) | -6.1 | % | $ | 51,995 | $ | 57,527 | $ | (5,532 | ) | -9.6 | % | ||||||||||||||
| etailz gross profit | 10,085 | — | 10,085 | n/a | 19,480 | — | 19,480 | n/a | ||||||||||||||||||||||||
| Total gross profit | $ | 35,170 | $ | 26,701 | $ | 8,469 | 31.7 | % | $ | 71,475 | $ | 57,527 | $ | 13,948 | 24.2 | % | ||||||||||||||||
| fye gross profit as a % of fye revenue | 42.5 | % | 41.5 | % | 42.0 | % | 41.1 | % | ||||||||||||||||||||||||
| etailz gross profit as a % of etailz revenue | 23.2 | % | — | 24.2 | % | — | ||||||||||||||||||||||||||
| Total gross profit as a % of total revenue | 34.3 | % | 41.5 | % | 35.0 | % | 41.1 | % | ||||||||||||||||||||||||
| Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||
| August 4, 2018 | July 29, 2017 | $ | % | August 4, 2018 | July 29, 2017 | $ | % | |||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| fye gross profit | $ | 20,634 | $ | 25,085 | $ | (4,451 | ) | -17.7 | % | $ | 42,905 | $ | 51,995 | $ | (9,090 | ) | -17.5 | % | ||||||||||||||
| etailz gross profit | 11,539 | 10,085 | 1,454 | 14.4 | % | 20,956 | 19,480 | 1,476 | 7.6 | % | ||||||||||||||||||||||
| Total gross profit | $ | 32,173 | $ | 35,170 | $ | (2,997 | ) | -8.5 | % | $ | 63,861 | $ | 71,475 | $ | (7,614 | ) | -10.7 | % | ||||||||||||||
| fye gross profit as a % of fye revenue | 40.8 | % | 42.5 | % | 41.0 | % | 42.0 | % | ||||||||||||||||||||||||
| etailz gross profit as a % of etailz revenue | 22.3 | % | 23.2 | % | 22.3 | % | 24.2 | % | ||||||||||||||||||||||||
| Total gross profit as a % of total revenue | 31.5 | % | 34.3 | % | 32.1 | % | 35.0 | % | ||||||||||||||||||||||||
Gross profit increased 31.7%decreased 8.5% to $32.2 million for the thirteen weeks ended August 4, 2018 compared to $35.2 million for the thirteen weeks ended July 29, 2017 compared to $26.7 million for the thirteen weeks ended July 30, 2016.2017. For the twenty-six weeks ended July 29, 2017,August 4, 2018, gross profit increased 24.2%decreased 10.7% to $71.5$63.9 million compared to $57.5$71.5 million for the comparable period last year. The increase in gross profit amount is the result of the acquisition of etailz in October 2016.
fye Segment
Totalfye gross profit as a percentage of total revenue for the thirteen and twenty-six weeks ended July 29, 2017August 4, 2018 was 42.5%40.8% and 42.0%41.0%, respectively, compared to 41.5%42.5% and 41.1%42.0% for the comparable periods last year. The increasedecline in rate was primarily driven by a higher number of closing stores during the quarter this year, and higher gross profit percentage is a result of better costing and price management.margin related to fidget spinners last year.
etailz Segment
etailz reported gross profit as a percentage of $10.1 million and $19.5 milliontotal revenue for both the thirteen and twenty-six weeks ended July 29, 2017. etailz gross profit as a percentage of revenueAugust 4, 2018 was 22.3%, compared to 23.2% and 24.2% for the thirteencomparable periods last year. The decline in the gross profit rate was primarily due to higher marketplace fulfillment and twenty-six weeks ended July 29, 2017, respectively.warehousing fees.
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SG&A Expenses.The following table sets forth a period over period comparison of the Company’s SG&A expenses:
| Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | August 4, 2018 | July 29, 2017 | $ | % | August 4, 2018 | July 29, 2017 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| July 29, 2017 | July 30, 2016 | $ | % | July 29, 2017 | July 30, 2016 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| fye SG&A, excluding depreciation, amortization, and acquistion related compensation expenses | $ | 28,226 | $ | 29,600 | ($ | 1,374 | ) | -4.6 | % | $ | 57,321 | $ | 59,648 | ($ | 2,327 | ) | -3.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| fye SG&A, excluding depreciation and amortization | $ | 26,103 | $ | 28,226 | ($ | 2,123 | ) | -7.5 | % | $ | 52,592 | $ | 57,321 | ($ | 4,729 | ) | -8.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| As a % of total fye revenue | 47.9 | % | 46.0 | % | 46.3 | % | 42.6 | % | 51.6 | % | 47.9 | % | 50.3 | % | 46.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| etailz SG&A, excluding depreciation, amortization, and acquistion related compensation expenses | 9,291 | — | 9,291 | n/a | 17,576 | — | 17,576 | n/a | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| etailz contingency adjustment, net of acquisition related compensation expenses | (319 | ) | — | (319 | ) | n/a | 590 | — | 590 | n/a | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| etailz SG&A, excluding depreciation and amortization | 13,185 | 8,972 | 4,213 | 47.0 | % | 24,310 | 18,166 | 6,144 | 33.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As a % of total etailz revenue | 25.2 | % | 20.6 | % | 25.9 | % | 21.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 3,341 | 1,623 | 1,718 | 105.9 | % | 6,564 | 3,086 | 3,478 | 112.7 | % | 2,274 | 3,341 | (1,067 | ) | -31.9 | % | 4,507 | 6,564 | (2,057 | ) | -31.3 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total SG&A | $ | 40,539 | $ | 31,223 | $ | 9,316 | 29.8 | % | $ | 82,051 | $ | 62,734 | $ | 19,317 | 30.8 | % | $ | 41,562 | $ | 40,539 | $ | 1,023 | 2.5 | % | $ | 81,409 | $ | 82,051 | ($ | 642 | ) | -0.8 | % | |||||||||||||||||||||||||||||||
| As a % of total revenue | 39.6 | % | 48.5 | % | 40.1 | % | 44.8 | % | 40.5 | % | 39.6 | % | 41.0 | % | 40.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
SG&A expenses increased $9.3$1.0 million and $19.3decreased $0.6 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, due to expenses for etailz, acquisition related compensation expenses, and higher depreciation and amortization expenses, offset slightly by lower fye expenses, and a benefit recorded to the Company’s contingent consideration.August 4, 2018, respectively.
fye Segment
fye SG&A, excluding depreciation and acquisitionamortization expenses, decreased $1.4$2.1 million, or 4.6%7.5%, and $2.3$4.7 million, or 3.9%8.3%, for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively. As a percentage of fye revenue,
SG&A expenses in the fye segment for the thirteen and twenty-six weeks ended July 29, 2017August 4, 2018 were 51.6% and 50.3%, respectively, compared to 47.9% and 46.3% compared to 46.0% and 42.6% for the same period last year. The decline in SG&A expenses was due to fewer stores in operation. The increase in the rate was primarily due to the compcomparable sales decline and expenses to support the upgrading of the Company’s digital foundation, including the re-platforming of fye.com.decline.
etailz Segment
etailz reported SG&A, excluding depreciation and amortization and acquisition related compensation expenses, of $9.3increased $4.2 million and $17.6$6.1 million for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 4, 2018 were 25.2% and 25.9%, respectively, which primarily includes commission feescompared to 20.6% and payroll costs.21.8% for the same period last year. The increase in SG&A expenses was due to investments in product identification and sourcing, technology, platform diversification, in addition to higher marketplace commissions on the higher sales.
Depreciation and amortization.Consolidated depreciation and amortization expense increased $1.7decreased $1.1 million and $3.5$2.1 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively. Amortization of intangibles, as described in Note 5 to the condensed consolidated financial statements, increased $0.9 million and $1.9 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively. Depreciation expense increased $0.8 million and $1.6 million for the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, primarily due to the fye segment’s investments$29.1 million net decrease in technology enhancements, new and remodeled stores and the chain wide rolloutcarrying value of new marketplace fixtures to supportfixed assets, resulting from impairment charges recorded for the fye segment’s shiftsegment, during the fourth quarter of fiscal 2017. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in merchandising assortmentthe Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018.
Income from media categories to its lifestyle category.Joint Venture.Income from joint venture was $83 thousand during the twenty-six weeks ended August 4, 2018.
Interest Expense.Interest expense was $59$103 thousand and $115$166 thousand during the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively. Interest expense consisted primarily of unused commitment fees and the amortization of fees related to the Company’s credit facility. Interest expense during the thirteen and twenty-six weeks ended July 30, 201629, 2017 was $172$59 thousand and $345$115 thousand, respectively. The reductionincrease in
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interest expense was due to the amendment ofborrowings under the credit facility as discussed in Note 98 to the condensed consolidated financial statements.
Gain (Loss) on Insurance Proceeds.TheDuring the twenty-six weeks ended July 29, 2017, the fye segment recorded an $8.7 million gain on insurance proceeds related to the death of the Company’s former Chairman was $8.7 million during the twenty-six weeks ended July 29, 2017, which consisted of $8.8 million gain recorded during the first fiscal quarter of 2017 and a loss of $129 thousand recorded during the second fiscal quarter of 2017.Chairman.
Other Income.Other income was $43$49 thousand and $57$128 thousand during the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, compared to $86$43 thousand and $1.0 million$57 thousand for the same periods last year. Other income for the twenty-six weeks ended July 30, 2016 included an $800 thousand gain on the sale of an investment.
Income Tax Expense.Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the Company’s deferred tax assets As a result, thereassets. There were insignificant tax expense amounts recorded during the thirteen and twenty-six weeks ended July 29, 2017.August 4, 2018 and comparative periods last year due to the losses recognized each period.
Net Loss. The following table sets forth a period over period comparison of the Company’s net loss:
| Thirteen Weeks ended | Twenty-six Weeks Ended | |||||||||||||||||||||||
| July 29, | July 30, | July 29, | July 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
| Loss before income tax | $ | (5,514 | ) | $ | (4,608 | ) | $ | (906 | ) | $ | (1,928 | ) | $ | (4,535 | ) | $ | 2,607 | |||||||
| Income tax expense | 51 | 48 | 3 | 105 | 95 | 10 | ||||||||||||||||||
| Net loss | $ | (5,565 | ) | $ | (4,656 | ) | $ | (909 | ) | $ | (2,033 | ) | $ | (4,630 | ) | $ | 2,597 | |||||||
For the thirteen weeks ended July 29, 2017, the Company’s net loss increased $0.9 million primarily due to comparable store sales decline and expenses to support the upgrading of the Company’s digital foundation, including the re-platforming of fye.com. For the twenty-six weeks ended July 29, 2017, the Company’s net loss decreased $2.6 million primarily due to the gain recognized from the insurance proceeds collected during the first half of fiscal 2017.
| Thirteen Weeks ended | Twenty-six Weeks ended | |||||||||||||||||||||||
| August 4, | July 29, | August 4, | July 29, | |||||||||||||||||||||
| ($ in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
| Loss before income tax | $ | (9,443 | ) | $ | (5,514 | ) | $ | (3,929 | ) | $ | (17,586 | ) | $ | (1,928 | ) | $ | (15,658 | ) | ||||||
| Income tax expense | 67 | 51 | 16 | 71 | 105 | (34 | ) | |||||||||||||||||
| Net loss | $ | (9,510 | ) | $ | (5,565 | ) | $ | (3,945 | ) | $ | (17,657 | ) | $ | (2,033 | ) | $ | (15,624 | ) | ||||||
LIQUIDITY
Liquidity and Cash Flows:
In connection with the preparation of the condensed consolidated financial statements, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the 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.
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 in Note 9 tonote 8 in the Company’sinterim condensed consolidated financial statements.
In connection with the preparation of these unaudited interim condensed consolidated financial statements, the Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these financial statements are issued.
The following table sets forth a summary of key components of cash flow and working capital:
| As of or for the | |||||||||||||||||||||||
| As of or for the Twenty-six Weeks Ended | Twenty-six Weeks Ended | Change | |||||||||||||||||||||
| (in thousands) | July 29, 2017 | July 30, 2016 | August 4, | July 29, | |||||||||||||||||||
| Operating Cash Flows | (20,503 | ) | (16,965 | ) | ($ in thousands) | 2018 | 2017 | $ | |||||||||||||||
| Investing Cash Flows | 7,595 | (6,093 | ) | Operating Cash Flows | (32,944 | ) | (20,503 | ) | (12,441 | ) | |||||||||||||
| Financing Cash Flows | (5,000 | ) | (2,609 | ) | Investing Cash Flows | (663 | ) | 7,595 | (8,258 | ) | |||||||||||||
| Financing Cash Flows | 4,841 | (5,000 | ) | 9,841 | |||||||||||||||||||
| Capital Expenditures | (1) | (4,166 | ) | (7,693 | ) | ||||||||||||||||||
| Capital Expenditures | (1) | (1,800 | ) | (4,166 | ) | 2,366 | |||||||||||||||||
| Cash, Cash Equivalents, and Restricted Cash | (2) | 26,169 | 78,644 | Cash, Cash Equivalents, and Restricted Cash | (2) | 14,740 | 26,169 | (11,429 | ) | ||||||||||||||
| Merchandise Inventory | 126,687 | 120,268 | Merchandise Inventory | 114,920 | 126,687 | (11,767 | ) | ||||||||||||||||
| Working Capital | 101,054 | 150,627 | Working Capital | 82,100 | 101,054 | (18,954 | ) | ||||||||||||||||
| (1) | Included in Investing Cash Flows | Included in Investing Cash Flows | |||||||||||||||||||||
| (2) | Cash and cash equivalents per condensed consolidated balance sheets | $ | 13,985 | $ | 78,644 | Cash and cash equivalents per interim condensed consolidated balance sheets | $ | 4,477 | $ | 13,985 | $ | (9,508 | ) | ||||||||||
| Add: restricted cash | 12,184 | — | Add: restricted cash | 10,263 | 12,184 | (1,921 | ) | ||||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 26,169 | $ | 78,644 | |||||||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 14,740 | $ | 26,169 | $ | (11,429 | ) | ||||||||||||||||
Cash used fromin operations was $20.5$32.9 million for the twenty-six weeks ended July 29, 2017 millionAugust 4, 2018, primarily due to a net loss of $2.0$17.7 million, adding back depreciation and amortization of $6.9$4.5 million and non-cash compensation of $1.6 million, less the adjustment to the contingent consideration liability of $1.4$2.0 million the gain on insurance proceeds of $8.7increase in accounts receivable, $5.5 million seasonal increase in inventory, $2.0 million increase in prepaid expenses, and reductions in accounts payable, and deferred revenue, and other long-term liabilities of $15.1$7.6 million, $1.7 million, and $2.5$2.6 million, respectively. The Company’s merchandise inventory and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for merchandise inventory purchased during the prior year’s holiday season.
Cash provided byused in investing activities was $7.6$0.7 million for the twenty-six weeks ended July 29, 2017,August 4, 2018, which consisted of Company owned life insurance and SERP benefits proceeds of $14.3 million, less $4.2$1.8 million in capital expenditures, and a $2.6offset by $1.1 million investment in a collaborative arrangement.of capital distributions from the joint venture.
Cash provided by financing activities for the twenty-six weeks ended August 4, 2018, was entirely comprised of $6.3 million proceeds from short-term borrowings, offset by a $5.0$1.5 million payment to the etailz shareholders foras per the twenty-six weeks ended July 29, 2017, in connection with the amendment to theoriginal etailz acquisition share purchase agreement.
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.
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% to 2.75% and the Applicable Margin for Prime
Rate loans ranging from 0.75% to 1.25%. In addition, a commitment fee ranging from 0.375% to 0.50% is also payable on unused commitments.
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, 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.
Refer to footnote 9 in the interim condensed consolidated financial statements for further information regarding the Company’s credit facility.
Capital Expenditures.During the thirteen and twenty-six weeks ended July 29, 2017,August 4, 2018, respectively, the Company made capital expenditures of $1.9$0.9 million and $4.2 million.$1.8 million, respectively. The Company’s planned annual fiscal 2017Company currently plans to spend approximately $3.0 million for capital expenditures is approximately $9.0 million.during fiscal 2018.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs and income taxes. Management bases its estimates and judgments on
| 23 |
historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K for the year ended January 28, 2017February 3, 2018 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements. There have been no material changes or modifications to the policies since January 28, 2017.February 3, 2018.
Recent Accounting Pronouncements:
The information set forth under Note 2, Recently Adopted Accounting Pronouncements section, and Note 3, Recently Issued Accounting Pronouncements, contained in Item 1, “Notes to Interim Condensed Consolidated Financial Statements”, is incorporated herein by reference.
Non-GAAP Measures:
This Form 10-Q contains certain non-GAAP metrics, including: etailz adjusted operating income for the etailz segment(loss) from operations and SG&A excluding depreciation amortization, and acquisition related compensationamortization, expenses for each reporting segment. SuchA non-GAAP measure is not a recognized measure of financial performance under GAAP in the United States, and should not be considered as a substitute for SG&A expenses, operating earnings, net earnings from continuing operations or cash flows from operating activities, as determined in accordance with GAAP.Non-GAAP items are provided because management believes that, when reconciled from the GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance.
The Company calculates etailz adjusted income (loss) from operations to evaluate its own operating performance and as an integral part of its planning process. The Company presents etailz adjusted income (loss) from operations as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.
The Company calculates SG&A, excluding depreciation and amortization expenses for each reporting segment, to evaluate its own operating performance and as an integral part of its planning process. The Company presents SG&A, excluding depreciation and amortization expenses, as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company does not hold any financial instruments that expose it to significant market risk and does not engage in hedging activities. To the extent the Company borrows under its Credit Facility,revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its Credit Facilitycredit facility can be variable. 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 as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 2.25% to 2.75% and the Applicable Margin for Base Rate loans ranging from 0.75% to 1.25%. If interest rates on the Company’s Credit Facilityrevolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, income before income taxes would be reduced by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 28, 2017. The Company does not currently hold any derivative instruments.February 3, 2018.
Item 4 – Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of July 29, 2017,August 4, 2018, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b)Changes in internal controls. The acquisition of etailz was significant tocontrols.There have been no changes in the Company and was consummated effective October 17, 2016. Upon consummation of the acquisition, etailz became a consolidated subsidiary of the Company. The Company intends to take a period of time to fully incorporate the etailz operations that it acquired into its evaluation ofCompany’s internal controlcontrols over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
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).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 federalFederal 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.
Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the year ended January 28, 2017.February 3, 2018.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Mine Safety Disclosure
Not Applicable.
None.
| (A) Exhibits - | |||
| Exhibit No. | Description | ||
| 31.1 | Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31.2 | Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101.INS | XBRL Instance Document (furnished herewith) | ||
| 101.SCH | XBRL Taxonomy Extension Schema (furnished herewith) | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase (furnished herewith) | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
| September | By: /s/ Michael Feurer | ||
| Michael Feurer | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| September | By: /s/ John Anderson | ||
| John Anderson | |||
| Chief Financial Officer | |||
| (Principal and Chief Accounting Officer) | |||