UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

x
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 2020
or

For the quarterly period endedAugust 3, 2019
☐
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

For the transition period from ___________ to ___________

Commission File Number  0-14818

TRANS WORLD ENTERTAINMENT CORPORATION


Kaspien Holdings Inc.
(Exact Name of Registrant as Specified in its Charter)

New York
14-1541629
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.



38 Corporate Circle
Albany, New York2818 N. Sullivan Rd. Ste 30
12203
Spokane, WA 99216

99216
Address of Principal Executive Offices
Zip Code

(518) 452-1242
Registrant’s Telephone Number, Including Area Code

(855) 300-2710
Registrant’s Telephone Number, Including Area Code

Trans World Entertainment Corporation
38 Corporate Circle
Albany, New York
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per shareTWMCKSPNNASDAQ StockCapital Market


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx ☒     Noo

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yesx ☒    Noo

☐

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

Large accelerated filero ☐Accelerated filero ☐
Non-accelerated filero ☒Smaller reporting companyx ☒
 Emerging growth companyo ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yeso ☐    Nox

☒


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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.      Yeso ☐    Noo

☐


APPLICABLE ONLY TO CORPORATE ISSUERS


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


Common Stock, $.01 par value,

1,816,061

1,825,198 shares outstanding as of September 13, 2019

1, 2020

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Form 10-Q
Page No.
 
PART I. FINANCIAL INFORMATION 
PART I. FINANCIAL INFORMATION

 
Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited)
 3


 

Condensed Consolidated Balance Sheets at August 3, 2019,1, 2020, February 2, 20191, 2020 and August 4, 20183, 2019
3


 

Condensed Consolidated Statements of Operations – Thirteen and Twenty-Six Weeks Ended August 3, 20191, 2020 and August 4, 20183, 2019
4


 

Condensed Consolidated Statements of Comprehensive Loss – Thirteen and Twenty-Six Weeks Ended August 3, 20191, 2020 and August 4, 20183, 2019
5


 

Condensed Consolidated Statements of Shareholders’ Equity – Thirteen and Twenty-Six Weeks Ended August 3, 20191, 2020 and August 4, 20183, 2019
6


 

Condensed Consolidated Statements of Cash Flows – Twenty-SixThirteen Weeks Ended August 3, 20191, 2020 and August 4, 20183, 2019
7


 

Notes to Interim Condensed Consolidated Financial Statements
8


 
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
25

21
 
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
32

29
 
Item 4 – Controls and Procedures
32

29
 
PART II.  OTHER INFORMATION 
PART II. OTHER INFORMATION

 
Item 1 – Legal Proceedings
32

30
 
Item 1A- Risk Factors
33

30
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
33

31
 
Item 3 – Defaults Upon Senior Securities
33

31
 
Item 4 – Mine Safety Disclosures
33

31
 
Item 5 – Other Information
33

31
 
Item 6 – Exhibits
33

31
 
Signatures
3235
2

2

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

Item 1 –- Interim Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

(unaudited)

  August 3,
2019		  February 2,
2019		  August 4,
2018		 
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents $3,635  $4,355  $4,477 
Restricted cash  950   4,126   4,116 
Accounts receivable  5,281   5,383   6,509 
Merchandise inventory  89,785   94,842   114,920 
Prepaid expenses and other assets  4,642   6,657   8,937 
Total current assets  104,293   115,363   138,959 
             
Restricted cash  5,345   5,745   6,147 
Fixed assets, net  7,605   7,529   12,648 
Operating lease right-of-use assets  24,704   —   — 
Goodwill  —   —   39,191 
Intangible assets, net  3,096   3,668   22,023 
Other assets  5,130   5,708   6,119 
TOTAL ASSETS  150,173   138,013   225,087 
             
LIABILITIES            
CURRENT LIABILITIES            
Accounts payable $29,044  $34,329  $34,200 
Short-term borrowings  12,086   —   6,341 
Accrued expenses and other current liabilities  5,617   8,132   9,508 
Deferred revenue  5,974   6,955   6,810 
Current portion of operating lease liabilities  9,266   —   — 
Total current liabilities  61,987   49,416   56,859 
             
Operating lease liabilites  18,684   —   — 
Other long-term liabilites  21,537   24,867   26,533 
TOTAL LIABILITIES  102,208   74,283   83,392 
             
SHAREHOLDERS’ EQUITY            
Preferred stock ($0.01 par value; 5,000,000 shares
authorized; none issued)		  —   —   — 
Common stock ($0.01 par value; 200,000,000 shares authorized;
3,223,898, 3,221,834 and 3,219,334 shares issued,
respectively)		  32   32   32 
Additional paid-in capital  344,983   344,826   343,322 
Treasury stock at cost (1,409,317, 1,408,892 and 1,408,043
shares, respectively)		  (230,168)  (230,166)  (230,149)
Accumulated other comprehensive loss  (725)  (735)  (1,008)
(Accumulated deficit) Retained earnings  (66,157)  (50,227)  29,498 
TOTAL SHAREHOLDERS’ EQUITY  47,965   63,730   141,695 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $150,173  $138,013  $225,087 


  
August 1,
2020
  
February 1,
2020
  
August 3,
2019
 
ASSETS Unaudited     Unaudited 
CURRENT ASSETS         
Cash and cash equivalents $3,337  $2,977  $3,635 
Restricted cash  950   950   950 
Accounts receivable  2,239   4,139   2,324 
Merchandise inventory  20,576   17,836   20,185 
Prepaid expenses and other current assets  1,085   2,974   983 
Assets held for discontinued operations  -   51,189   104,121 
Total current assets  28,187   80,065   132,198 
             
Restricted cash  4,362   4,925   5,345 
Fixed assets, net  2,285   2,190   1,898 
Operating lease right-of-use assets  3,030   3,311   3,586 
Intangible assets, net  1,246   1,760   3,096 
Cash Surrender Value  3,411   3,353   3,199 
Other assets  2,036   2,202   851 
TOTAL ASSETS $44,557  $97,806  $150,173 
             
LIABILITIES            
CURRENT LIABILITIES            
Accounts payable $9,857  $14,447  $9,285 
Short-term borrowings  2,151   13,149   12,086 
Accrued expenses and other current liabilities  3,812   3,521   2,084 
Current portion of operating lease liabilites  571   534   511 
Current portion of PPP loan
  1,017
   -
   -
 
Liabilities held for discontinued operations  -   39,410   56,204 
Total current liabilities  17,408   71,061   80,170 
             
Operating lease liabilities  2,564   2,204   2,614 
PPP loan
  1,001   -   - 
Long-term debt  4,401   -   - 
Other long-term liabilities  19,613   20,026   19,424 
TOTAL LIABILITIES  44,987   93,291   102,208 
             
SHAREHOLDERS' EQUITY            
Preferred stock  ($0.01 par value; 5,000,000  shares authorized; none issued)  -   -   - 
Common stock ($0.01 par value; 200,000,000  shares  authorized; 3,235,576, 3,225,627 and 3,223,898  shares issued,  respectively)  32   32   32 
Additional paid-in capital  346,457   345,102   344,983 
Treasury stock at cost (1,410,378, 1,409,316 and 1,408,043 shares, respectively)  (230,169)  (230,169)  (230,168)
Accumulated other comprehensive loss  (1,473)  (1,479)  (725)
Accumulated deficit  (115,277)  (108,971)  (66,157)
TOTAL SHAREHOLDERS' EQUITY  (430)  4,515   47,965 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,557  $97,806  $150,173 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

3

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

thousands)

(unaudited)

  Thirteen Weeks Ended  Twenty-six Weeks Ended 
  August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
Net sales $75,152  $101,039  $154,508  $196,271 
Other revenue  852   1,135   1,646   2,506 
Total revenue  76,004   102,174   156,154   198,777 
                 
Cost of sales  50,888   70,001   105,648   134,916 
Gross profit  25,116   32,173   50,506   63,861 
Selling, general and administrative expenses  32,517   41,562   65,548   81,409 
Loss from operations  (7,401)  (9,389)  (15,042)  (17,548)
                 
Interest expense  194   103   326   166 
                 
Other loss (income)  462   (49)  419   (128)
Loss before income tax expense  (8,057)  (9,443)  (15,787)  (17,586)
Income tax expense  71   67   143   71 
Net loss $(8,128) $(9,510) $(15,930) $(17,657)
BASIC AND DILUTED LOSS PER SHARE:                
Basic and diluted loss per common share $(4.48) $(5.23) $(8.77) $(9.73)
                 
Weighted average number of common shares outstanding – basic and diluted  1,816   1,818   1,816   1,815 


  Thirteen Weeks Ended  Twenty-six Weeks Ended 
    
August 1,
2020
    
August 3,
2019
    
August 1,
2020
    
August 3,
2019
  
             
Net revenue  42,296   34,260   73,885   69,392 
                 
Cost of sales  37,873   31,173   66,151   63,528 
Gross profit  4,423   3,087   7,734   5,864 
Selling, general and administrative expenses  4,916   6,666   13,406   13,644 
Loss from continuing operations  (493)  (3,579)  (5,672)  (7,780)
Interest expense  406   172   634   308 
Loss from continuing operations before income tax benefit  (899)  (3,751)  (6,306)  (8,088)
Income tax expense  -   7   -   16 
Loss from continued operations  (899)  (3,758)  (6,306)  (8,104)
Loss from fye business, net of tax  -   (4,370)  -   (7,826)
Net loss  (899)  (8,128)  (6,306)  (15,930)
                 
BASIC AND DILUTED LOSS PER SHARE:                
Basic and diluted loss per common share $(0.49) $(4.48) $(3.46) $(8.78)
                 
Weighted average number of common shares outstanding – basic and diluted  1,825   1,816   1,823   1,815 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

4

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(amounts in thousands)

(unaudited)

  Thirteen Weeks ended  Twenty-six Weeks Ended 
  August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
             
Net loss $(8,128) $(9,510) $(15,930) $(17,657)
                 
Amortization of pension gain  5   5   10   10 
                 
Comprehensive loss $(8,123) $(9,505) $(15,920) $(17,647)


  Thirteen Weeks Ended  Twenty-six 
    
August 1,
2020
    
August 3,
2019
    
August 1,
2020
    
August 3,
2019
  
             
Net loss $(899) $(8,128) $(6,306) $(15,930)
Amortization of pension gain  1   5   2   10 
Comprehensive loss $(898) $(8,123) $(6,304) $(15,920)

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

5

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars and shares in thousands)

  Thirteen Weeks Ended August 3, 2019 
  Number of shares outstanding           Accumulated       
           Additional  Treasury  Other       
  Common  Treasury  Common  Paid-in  Stock  Comprehensive  Accumulated  Shareholders’ 
  Shares  Shares  Stock  Capital  At Cost  Loss  Deficit  Equity 
Balance as of May 4, 2019  3,222   (1,409) $32  $344,905  $(230,166) $(730) $(58,029) $56,012 
Net Loss  —   —   —   —   —   —   (8,128)  (8,128)
Other comprehensive income  —   —   —   —   —   5   —   5 
Vested restricted shares  2   —   —   3   (2)  —   —   1 
Amortization of unearned compensation/restricted stock amortization  —   —   —   75   —   —   —   75 
Balance as of August 3, 2019  3,224   (1,409) $32  $344,983  $(230,168) $(725) $(66,157) $47,965 
                                 
  Twenty-six Weeks Ended August 3, 2019 
  Number of shares outstanding           Accumulated       
           Additional  Treasury  Other       
  Common  Treasury  Common  Paid-in  Stock  Comprehensive  Accumulated  Shareholders’ 
  Shares  Shares  Stock  Capital  At Cost  Loss  Deficit  Equity 
Balance as of February 2, 2019  3,222   (1,409) $32  $344,826  $(230,166) $(735) $(50,227) $63,730 
Net Loss  —   —   —   —   —   —   (15,930)  (15,930)
Other comprehensive income  —   —   —   —   —   10   —   10 
Vested restricted shares  2   —   —   3   (2)  —   —   1 
Amortization of unearned compensation/restricted stock amortization  —   —   —   154   —   —   —   154 
Balance as of August 3, 2019  3,224   (1,409) $32  $344,983  $(230,168) $(725) $(66,157) $47,965 
                                 
  Thirteen Weeks Ended August 4, 2018 
  Number of shares outstanding           Accumulated  Retained    
           Additional  Treasury  Other  Earnings    
  Common  Treasury  Common  Paid-in  Stock  Comprehensive  (Accumulaed  Shareholders’ 
  Shares  Shares  Stock  Capital  At Cost  Loss  Deficit)  Equity 
Balance as of May 5, 2018  3,218   (1,408) $32  $342,557  $(230,145) $(1,003) $39,008  $150,449 
Adjustment for adoption of accounting standard, ASU 2014-09  —   —   —   —   —   —   —   — 
Net Loss  —   —   —   —   —   —   (9,510)  (9,510)
Other comprehensive loss  —   —   —   —   —   (5)  —   (5)
Vested restricted shares  1   —   —   5   (4)  —   —   1 
Common stock issued-new grants  —   —   —   —   —   —   —   — 
Amortization of unearned compensation/restricted stock amortization  —   —   —   760   —   —   —   760 
Balance as of August 4, 2018  3,219   (1,408) $32  $343,322  $(230,149) $(1,008) $29,498  $141,695 
                                 
  Twenty-six Weeks Ended August 4, 2018 
  Number of shares outstanding           Accumulated  Retained    
           Additional  Treasury  Other  Earnings    
  Common  Treasury  Common  Paid-in  Stock  Comprehensive  (Accumulaed  Shareholders’ 
  Shares  Shares  Stock  Capital  At Cost  Loss  Deficit)  Equity 
Balance as of February 3, 2018  3,215   (1,408) $32  $341,714  $(230,145) $(998) $47,611  $158,214 
Adjustment for adoption of accounting standard, ASU 2014-09  —   —   —   —   —   —   (456)  (456)
Net Loss  —   —   —   —   —   —   (17,657)  (17,657)
Other comprehensive loss  —   —   —   —   —   (10)  —   (10)
Vested restricted shares  1   —   —   5   (4)  —   —   1 
Common stock issued-new grants  3   —   —   75   —   —   —   75 
Amortization of unearned compensation/restricted stock amortization  —   —   —   1,528   —   —   —   1,528 
Balance as of August 4, 2018  3,219   (1,408) $32  $343,322  $(230,149) $(1,008) $29,498  $141,695 
6
(unaudited)

TRANS WORLD ENTERTAINMENT CORPORATION



 Thirteen Weeks Ended August 1, 2020 

 Number of shares outstanding  
Common
Stock
  
Additional
Paid-in
Capital
  
Treasury
Stock
At Cost
  
Accumulated
Other
Comprehensive
Loss
  
Retained
Earnings
(Accumulated
Deficit)
  
Shareholders’
Equity
 

 
Common
Shares
  
Treasury
Shares
 
Balance as of May 2, 2020  3,236   (1,410) $32  $346,442  $(230,169) $(1,476) $(114,378) $451 
Net Loss  -   -   -   -   -   -   (899)  (899)
Other comprehensive income  -   -   -   -   -   3   -   3 
Issuance of warrants  -   -   -   -   -   -   -   - 
Vested restricted shares  -   -   -   -   -   -   -   - 
Common stock issued- Director grants  -   -   -   -   -   -   -   - 
Amortization of unearned compensation/restricted stock amortization  -   -   -   15   -   -   -   15 
Balance as of August 1, 2020  3,236  $(1,410) $32  $346,457  $(230,169) $(1,473) $(115,277) $(430)


 Twenty-six Weeks Ended August 1, 2020 

 Number of shares outstanding  
Common
Stock
  
Additional
Paid-in
Capital
  
Treasury
Stock
At Cost
  
Accumulated
Other
Comprehensive
Loss
  
Retained
Earnings
(Accumulated
Deficit)
  
Shareholders’
Equity
 

 
Common
Shares
  
Treasury
Shares
 
Balance as of February 1, 2020  3,226   (1,409) $32  $345,102  $(230,169) $(1,479) $(108,971) $4,515 
Net Loss  -   -   -   -   -   -   (6,306)  (6,306)
Other comprehensive income  -   -   -   -   -   6   -   6 
Issuance of warrants  -   -   -   836   -   -   -   836 
Vested restricted shares  4
   (1
)
  -   (9)  -   -   -   (9)
Common stock issued- Director grants  6
   -   -   243   -   -   -   243 
Amortization of unearned compensation/restricted stock amortization  -   -   -   285   -   -   -   285 
Balance as of August 1, 2020  3,236  $(1,410) $32  $346,457  $(230,169) $(1,473) $(115,277) $(430)


 Thirteen Weeks Ended August 3, 2019 

 Number of shares outstanding  
Common
Stock
  
Additional
Paid-in
Capital
  
Treasury
Stock
At Cost
  
Accumulated
Other
Comprehensive
Loss
  
Accumulated
Deficit
  
Shareholders’
Equity
 

 
Common
Shares
  
Treasury
Shares
 
Balance as of May 4, 2019  3,222   (1,409) $32  $344,905  $(230,166) $(730) $(58,029) $56,012 
Net Loss  -   -   -   -   -   -   (8,128)  (8,128)
Other comprehensive income  -   -   -   -   -   5   -   5 
Vested restricted shares  2   -   -   3   (2)  -   -   1 
Amortization of unearned compensation/restricted stock amortization  -   -   -   75   -   -   -   75 
Balance as of August 3, 2019  3,224   (1,409) $32  $344,983  $(230,168) $(725) $(66,157) $47,965 


 Twenty-six Weeks Ended August 3, 2019 

 Number of shares outstanding  
Common
Stock
  
Additional
Paid-in
Capital
  
Treasury
Stock
At Cost
  
Accumulated
Other
Comprehensive
Loss
  
Accumulated
Deficit
  
Shareholders’
Equity
 

 
Common
Shares
  
Treasury
Shares
 
Balance as of February 2, 2019  3,222   (1,409) $32  $344,826  $(230,166) $(735) $(50,227) $63,730 
Net Loss  -   -   -   -   -   -   (15,930)  (15,930)
Other comprehensive income  -   -   -   -   -   10   -   10 
Vested restricted shares  2   -   -   3   (2)  -   -   1 
Common stock issued-new grants  -   -   -   -   -   -   -   - 
Balance as of August 3, 2019  3,224   (1,409) $32  $344,983  $(230,168) $(725) $(66,157) $47,965 

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

  Twenty-six Weeks Ended 
  August 3,  August 4, 
  2019  2018 
OPERATING ACTIVITIES:        
Net loss $(15,930) $(17,657)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation of fixed assets  1,460   2,563 
Amortization of intangible assets  572   1,944 
Stock-based compensation  154   1,603 
Write down of investment  500   — 
Loss on disposal of fixed assets  5   135 
Change in cash surrender value  (175)  (44)
Changes in operating assets and liabilities that provide (use) cash:        
Accounts receivable  102   (2,040)
Merchandise inventory  5,057   (5,543)
Prepaid expenses and other current assets  1,267   (1,961)
Other long-term assets  3,472   (73)
Accounts payable  (5,285)  (7,580)
Accrued expenses and other current liabilities  (995)  (30)
Deferred revenue  (981)  (1,654)
Other long-term liabilities  (4,185)  (2,607)
Net cash used in operating activities  (14,962)  (32,944)
         
INVESTING ACTIVITIES:        
Purchases of fixed assets  (1,541)  (1,800)
Capital distributions from joint venture  121   1,137 
Net cash used in investing activities  (1,420)  (663)
         
FINANCING ACTIVITIES:        
Proceeds from short term borrowings  12,086   6,341 
Payments to etailz shareholders  —   (1,500)
Net cash provided by financing activities  12,086   4,841 
         
Net decrease in cash, cash equivalents, and restricted cash  (4,296)  (28,766)
Cash, cash equivalents, and restricted cash, beginning of period  14,226   43,506 
Cash, cash equivalents, and restricted cash, end of period $9,930  $14,740 


  Twenty-Six Weeks Ended 
  
August 1,
2020
  
August 3,
2019 (1)
 
OPERATING ACTIVITIES:      
Net income loss 
$
(6,306
)
 
$
(15,930
)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation of fixed assets  
493
   
1,460
 
Amortization of intangible assets  
514
   
572
 
Stock-based compensation  
285
   
154
 
Loss on disposal of fixed assets  
-
   
5
 
Write down investment  
-
   
500
 
Amortization of ROU asset  
281
     
Change in cash surrender value  
(58
)
  
(175
)
Changes in operating assets and liabilities that provide (use) cash:        
Accounts receivable  
1,901
   
102
 
Merchandise inventory  
(2,739
)
  
5,057
 
Prepaid expenses and other current assets  
2,054
   
1,267
 
Other long-term assets  
-
   
3,472
 
Accounts payable  
1,978
   
(5,285
)
Accrued expenses and other current liabilities  
(6,242
)
  
(995
)
Deferred revenue  
-
   
(981
)
Other long-term liabilities  
(49
)
  
(4,185
)
Net cash used in operating activities  (7,888)  (14,962)
         
INVESTING ACTIVITIES:        
Purchases of fixed assets  (588)  (1,541)
Proceeds from sale of fye business  11,779   - 
Capital distribution from joint venture  -   121 
Net cash provided by (used in) investing activities  11,191   (1,420)
         
FINANCING ACTIVITIES:        
Proceeds from short term borrowings  2,151   12,086 
Proceeds from long term borrowings  4,401   - 
Proceeds from issuance of warrants  836   - 
Proceeds from PPP loan  2,018   - 
Issuance of director deferred shares and RSUs  237   - 
Payment of short term borrowings  (13,149)  - 
Net cash provided by (used in) financing activities  (3,506)  12,086 
         
Net increase (decrease) in cash, cash equivalents, and restricted cash  (203)  (4,296)
Cash, cash equivalents, and restricted cash, beginning of period  8,852   14,226 
Cash, cash equivalents, and restricted cash, end of period $8,649  $9,930 

(1)The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows.  See footnote 3.

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

7

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

August 1, 2020 and August 3, 2019 and August 4, 2018


Note 1. Nature of Operations


Kaspien Holdings Inc., formerly Trans World Entertainment Corporation, which, together with its consolidated subsidiaries, is referred to herein as “the Company”, “we”, “us” and subsidiaries“our”, was incorporated in New York in 1972. We own 100% of the outstanding common stock of Kaspien Inc., formerly etailz, Inc (“Kaspien”), through which our principal operations are conducted. Kaspien provides a platform of software and services to empower brands to grow their online distribution channels on digital marketplaces such as Amazon, Walmart, eBay, among others. The Company helps brands achieve their online retail goals through its innovative and proprietary technology, tailored strategies, and mutually beneficial partnerships.

Kaspien is positioning itself to be a brand’s ultimate online growth partner and is guided by seven core principles:

•Partner Obsession•Results
•Insights Driven•Ownership
•Simplicity•Diversity and Teamwork
•Innovation


Previously, the Company”) operates in two reportable segments:Company also operated fye, and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites,www.fye.comandwww.secondspin.com.  AsOn February 20, 2020, the Company consummated the sale of August 3, 2019, the fye segment operated 206 stores totaling approximately 1.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature for both segments, with the peak selling period beingassets and certain of the holiday season which falls inliabilities relating to fye to a subsidiary of 2428391 Ontario Inc. o/a Sunrise Records (“Sunrise Records”) pursuant to an Asset Purchase Agreement (as amended, the Company’s fourth fiscal quarter.

“Asset Purchase Agreement”) dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. (the “FYE Transaction”).


Liquidity and Cash Flows:


The Company’s primary sources of liquidity are its borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and the purchase of inventory and capital expenditures.inventory. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our net revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and changes insuccessful implementation of our strategy orand planned activities; and our planned activities.

The Company incurred net lossesability to overcome the impact of $15.9 million and $17.7 million for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, and has an accumulated deficit of $66.2 million at August 3, 2019. In addition, net cash used in operating activities for the twenty-six weeks ended August 3, 2019 was $15.0 million. Net cash used in operating activities for the twenty-six weeks ended August 4, 2018 was $32.9 million.

COVID-19 pandemic.

As disclosed in the Company’sCompany's Annual Report on Form 10-K filed May 14, 2019,June 15, 2020, the Company experienced negative cash flows from operations during fiscal 20182019 and 2017,2018 and we expect to continue to incur net losses in 2020.

The ability of the foreseeable future. We implementedCompany to meet its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the strategic initiative to reposition Kaspien as a platform of software and services, the availability of future funding, implementation of one or more corporate initiatives on December 11, 2018, aimedto reduce costs at improving organizational efficiencythe parent company level (which could include a voluntary delisting from NASDAQ and conserving working capital needed to support the growthderegistering of our etailz segment (the “performance improvement plan”). AsCommon Stock in order to substantially eliminate the costs associated with being a resultpublic company), satisfying all unassumed liabilities of the initiative, and disciplined inventory management in the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company, was ableand overcoming the impact of the COVID-19 pandemic.

There can be no assurance that we will be successful in further implementing our business strategy or that the strategy, including the completed initiatives, will be successful in sustaining acceptable levels of sales growth and profitability.  In addition, the proceeds from the PPP Loan are subject to reduce cash usedaudit and there is a risk of repayment. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

On August 4, 2020, the Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it is no longer in operationscompliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2,500,000 and as of August 4, 2020, the Company did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.

The notification letter has no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 45 calendar days, or until September 18, 2020, to submit a plan to regain compliance with the minimum stockholders’ equity standard. If the Company submits a plan to regain compliance that is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the notification letter to regain compliance. If the Company does not submit a plan to regain compliance or if such plan is not accepted, or if it is accepted and the Company does not regain compliance in the timeframe required by $18.0 millionNasdaq, the Nasdaq staff could provide notice that the Company’s Common Stock is subject to delisting.

The unaudited condensed consolidated financial statements for the twenty-sixthirteen weeks ended August 3, 2019 as compared1, 2020 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the twenty-six weeks ended August 3, 2018. We anticipate continued improvement in cash flows used in operations for the remaindernormal course of business. The ability of the fiscal 2019. At August 3, 2019, we had cashCompany to meet its liabilities and cash equivalents of $3.6 million, netto continue as a going concern is dependent on continued improved profitability and the other factors set forth in the preceding paragraph. For the next 12 months, management believes that the Company’s existing liquidity will be adequate to fund its working capital of $42.3 million, and short-term borrowings in the amount of $12.1 million on our revolving credit facility, as further discussed in footnote 8. This compares to $4.5 million in cash and cash equivalents, net working capital of $82.1 million, and short-term borrowings in the amount of $6.3 million on the Company’s revolving credit facility at August 4, 2018.

needs. Management anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility. Seefacility, as discussed in note 89 in the interim condensed consolidated financial statementsstatements.


At August 1, 2020, we had cash and cash equivalents of $3.3 million, net working capital of $10.8 million, and outstanding borrowings of $2.2 million on our revolving credit facility, as further discussed below.

New Credit Facility
On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as administrative agent, under which the lenders party thereto committed to provide up to $25 million in loans under a three-year, secured revolving credit facility (the “New Credit Facility”).  Concurrent with the FYE Transaction, the Company borrowed $3.3 million under the New Credit Facility in order to satisfy the remaining obligations of the Company under the aforementioned Credit Facility.

The commitments by the lenders under the New Credit Facility are subject to borrowing base and availability restrictions. Up to $5.0 million of the New Credit Facility may be used for the making of swing line loans.

As of August 1, 2020, borrowings under the Credit Facility were $2.2 million. The Company had $6.5 million available for borrowing as of August 1, 2020. As of August 1, 2020, unamortized debt issuance costs of $1.0 million are included in “Other assets” on the unaudited condensed consolidated balance sheet.

Subordinated Debt Agreement
On March 30, 2020, the Company and Kaspien (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan Agreement, (ii) the Company granted a first priority security interest in substantially all of the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional information.

indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.


On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term loan (the “Subordinated Loan”) to Kaspien with a scheduled maturity date of August 12, 2023. As of August 1, 2020, unamortized debt issuance costs of $0.2 million are included in “Long Term Debt” on the unaudited condensed consolidated balance sheet.

Directors Jonathan Marcus, Thomas Simpson, and Michael Reickert are the chief executive officer of Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III, LLC and Kick-Start IV, LLC (“Kick-Start”), and a trustee of the Robert J. Higgins TWMC Trust (the “Trust”), an affiliate of RJHDC, LLC (“RJHDC” and together with Alimco and Kick-Start, “Related Party Entities”), respectively.  The Related Party Entities are parties to the Subordinated Loan Agreement.

Paycheck Protection Program
On April 17, 2020, Kaspien received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan, which was in the form of a promissory note (the “Note”), dated April 10, 2020, between Kaspien and First Interstate Bank, as the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is payable in monthly installments of $112,975.55 commencing on November 10, 2020. While under the terms of the PPP, some or all of the PPP Loan amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and the Note, such as payroll costs, benefits, rent, and utilities, there is no assurance that the Company will be successful in qualifying for and receiving forgiveness on the PPP Loan amount. The Company submitted an application for forgiveness on August 14, 2020.

In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well as continuing theour efforts to generate additional sales and increase margins.  However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should we require such additional funds.  If the Company is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely affected.

8

Furthermore, broad market and industry factors may seriously harm the market price of our common stock,Common Stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional funds.

The Similarly, if our Common Stock is delisted from the NASDAQ Capital Market, it may also limit our ability to raise additional funds.The unaudited condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 20191, 2020 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the etailzKaspien segment and the availability of future funding. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Reverse Stock Split

FYE Transaction
On August 15, 2019,February 20, 2020, the Company effectedconsummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a reverse stock splitsubsidiary of its outstanding shares of common stock at a ratio of one-for-twentySunrise Records pursuant to a Certificate of Amendment to the Company’s Certificate of Incorporation filed with the Secretary of State of the State of New York. The reverse stock split was reflected on the Nasdaq Capital Market (“Nasdaq”) beginning with the opening of trading on August 15, 2019. The primary purpose of the reverse stock split, which was approvedan Asset Purchase Agreement dated January 23, 2020, by the Company’s stockholders at the Company’s Annual Stockholders Meeting on June 27, 2019, was to enableand among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records.

The fye business is reported as discontinued operations in our Consolidated Statements of Income, and the related assets and liabilities have been presented as held-for-sale in the Consolidated Balance Sheets, through their dates of disposal. These changes have been applied to regain compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq. Pursuantall periods presented. Unless otherwise noted, discussion within these notes to the reverse stock split, every twenty shares of the Company’s issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of the common stock. Unless otherwise indicated, all share and per share amounts of the common stock included in the accompanying interim condensed consolidated financial statements have been retrospectively adjustedrelates to give effectcontinuing operations. Refer to Note 3 for additional information on discontinued operations.

Impact of COVID-19
To date, as a direct result of COVID-19, most of our employees are working remotely. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, reserves and allowances, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international customers and markets, which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity.

In response to the reverse stock split for all periods presented, including reclassifying an amount equalrapidly evolving COVID-19 pandemic, we activated our business continuity program, led by our Executive Team in conjunction with Human Resources, to help us manage the situation. In mid-March, we transitioned our corporate office staff to work 100% remotely. This process was aided through the implementation of a flexible work from home policy rolled out to the reductionorganization in par valuefiscal 2019, having a companywide communication platform for instant messaging and video conferencing, and cloud-based critical business applications. However, while our business is not dependent on physical office locations nor travel, having a 100% remote workforce does present increased operational risk. Our leadership team believes we have the necessary controls in place to additional paid-in capital. Amounts of common stock resultingmitigate these impacts and allow the team to continue to operate effectively remotely as long as required by State guidelines.

While e-commerce has largely benefited from the reverse stock split were rounded upclosure of brick-and-mortar locations as consumer spending has been pushed online to marketplaces such as Amazon and Walmart, the industry nor our organization has been immune to the nearest whole share. The reverse stock split affected all issuedimpact to our supply chains. For instance, in March, Amazon reduced replenishment in their fulfillment centers to essential items which limited a significant percentage of  SKUs carried by Kaspien and outstanding sharesa number of Kaspien’s partners shut their warehouses or suffered limited processing capacity due to COVID-19. While Amazon has since lifted restrictions and the leadership team executed contingency plans to mitigate the adverse impact from these restrictions, this highlights the fluid nature of COVID-19 across supply chains.

Additionally, since the beginning of the Company’s common stock, andpandemic, tens of millions of Americans have lost their jobs, significantly increasing the respectiverisk of near-term economic contraction in the United States that may affect e-commerce sales. The risk of a second wave or increased numbers of sharespositive COVID-19 cases also presents further risk to supply chains. Leadership is actively monitoring the situation and potential impacts on its financial condition, liquidity, operations and workforce but the full extent of common stock underlying outstanding stock options, and the Company’s equity incentive plans were proportionately adjusted.

impact is still highly uncertain.

Note 2. Basis of Presentation


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


The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these unaudited interim condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for the fair presentation of such financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenuesnet revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.

9

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended February 2, 20191, 2020 contained in the Company’sCompany's Annual Report on Form 10-K filed May 14, 2019.

June 15, 2020.  The results of operations for the thirteen and twenty-six weeks ended August 3, 20191, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 1, 2020. 

As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a significant accounting policy. With the exception of goodwill, the3, 2021.


The Company’s significant accounting policies are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal year ended February 2, 2019.

1, 2020.

Note 3. Discontinued Operations

On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records.

The results for fye were previously reported in the fye segment. Certain corporate overhead costs and segment costs previously allocated to fye for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.

The following table summarizes the major line items for fye that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income:
  Thirteen Weeks Ended  Twenty-Six Weeks Ended 
(In thousands) 
August 1,
2020
  
August 3,
2019
  
August 1,
2020
  
August 3,
2019
 
Net revenue $—  $41,744  $—  $86,762 
Cost of goods sold  —   24,731   —   52,247 
Selling, general and administrative expenses  —   20,835   —   41,777 
Interest expense  —   22   —   18 
Other expense  —   462   —   419 
Loss from discontinued operations before income taxes  —   (4,306)  —   (7,699)
Income tax expense  —   64   —   127 
Loss from discontinued operations, net of tax $—  $(4,370) $—  $(7,826)

The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:

(In thousands) August 1, 2020  February 1, 2020  August 3, 2019 
Cash 
$
—
  
$
—
  
$
—
 
Accounts receivable, net  
—
   
62
   
2,957
 
Inventories  
—
   
50,122
   
69,600
 
Other current assets  
—
   
1,005
   
3,659
 
Property, plant and equipment, net  
—
   
—
   
5,707
 
Operating lease right-to-use asset  
—
   
—
   
21,118
 
Other assets  
—
   
—
   
1,080
 
Total assets of discontinued operations 
$
—
  
$
51,189
  
$
104,121
 
             
             
Accounts payable 
$
—
  
$
9,769
   
19,759
 
Accrued liabilities  
—
   
779
   
3,533
 
Deferred revenue  
—
   
6,764
   
5,974
 
Current portion of lease liabilities  
—
   
8,976
   
8,755
 
Operating lease liabilities  
—
   
11,059
   
16,070
 
Other liabilities  
—
   
2,063
   
2,113
 
Total liabilities of discontinued operations (a) 
$
—
  
$
39,410
  
$
56,204
 

The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. The following table summarizes the cash flows for discontinued operations that are included in the Consolidated Statements of Cash Flows:

  Twenty-six Weeks Ended 
(In thousands) August 1, 2020  August 3, 2019 
Net cash used in operating activities $—  $(11,555)
Net cash provided by(used) in investing activities  
—
   
(477
)
         
Depreciation and amortization  
—
   
1,188
 
Purchases of fixed assets  
—
   
(1,068
)

Note 4. Sale of fye business

On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. The following table reconciles the assets sold to and liabilities assumed by Sunrise to cash proceeds received:

Assets sold   
Inventory 
$
50,122
 
Accounts receivable  
62
 
Prepaid expenses and other current assets  
654
 
Other assets  
351
 
fye business assets sold $51,189 
     
     
Less liabilities assumed:    
Accounts payable  
(9,769
)
Deferred revenue  
(6,764
)
Accrued expenses and other current liabilities  
(779
)
Other long-term liabilities  
(2,063
)
Operating lease liabilities  
(20,035
)
fye business liabilities assumed $39,410 
     
Net proceeds 
$
11,779
 

The Company did not recognize a gain/loss upon the sale of the fye business as the assets of fye were impaired to the fair value of the assets as of February 1, 2020.

Note 3.5. Recently Adopted Accounting Pronouncements


Compensation – Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which is intended to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost in an entity’s financial statements by requiring the service cost component be disaggregated from other components of net benefit costs and presented in the same line item or items as other compensation costs for the employees. Additionally, only the service cost component of net benefit cost is eligible for capitalization when applicable. ASU 2017-07 was effective for the Company’s fiscal year beginning February 3, 2019.  This standard did not have a material effect on the Company’s consolidated financial statements.

Compensation – Stock Compensation
In August 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provided clarity as to what changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. ASU 2017-09 was effective for the Company for interim and annual periods in fiscal year beginning February 3, 2019.  This standard did not have a material effect on the Company’s consolidated financial statements.

Recently Adopted and Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”)FASB issued ASU 2016-02, LeasesNo. 2016-13, “Financial Instruments – Credit Losses (Topic 842). Lessees326): Measurement of Credit Losses on Financial Instruments,” which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost. The model replaces the probable, incurred loss model for those assets and instead, broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost. This standard will be effective for smaller reporting companies for fiscal years beginning after December 15, 2022, however early adoption is permitted. We are required to recognize a right-of-use asset and a lease liability for virtually allcurrently evaluating the impact of their leases (other than leases that meetthis new standard on the definition of a short-term lease). The liability is equalconsolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework— Changes to the present valueDisclosure Requirements for Defined Benefit Plans”, which removes certain disclosures that are no longer cost beneficial and also includes additional disclosures to improve the overall usefulness of lease payments. The assetthe disclosure requirements to financial statement users. This standard will be effective for public entities for fiscal years beginning after December 15, 2020, however early adoption is basedpermitted. We are currently evaluating the impact of this new standard on the liability, subjectconsolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740), which simplifies the accounting for income taxes by eliminating certain exceptions to certain adjustments, such asthe guidance in ASC 740 related to the approach for initial direct costs. Forintraperiod tax allocation, the methodology for calculating income statement purposes, a dual model was retained, requiring leasestaxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the enacted changes in tax laws or rates. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a frontloaded expense pattern (similar to capital leases under the prior accounting standard).

The Company adopted this new accounting standard on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases greater than one year. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the packagediscontinued because of practical expedients permitted under the transition guidance within the new standard, which includes,reference rate reform. ASU 2020-04 provides, among other things, guidance that modifications of contracts within the ability to carry forwardscope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; modifications of contracts within the scope of Topic 840, Leases, should be accounted for as a continuation of the existing lease classification.contract; and, changes in the critical terms of hedging relationships, caused by reference rate reform, should not result in the de-designation of the instrument, provided certain criteria are met. The Company’s exposure to LIBOR rates includes its credit facility. The amendments are effective as of March 12, 2020 through December 31, 2022. Adoption is permitted at any time. The Company doesis currently evaluating the impact this update will have on its Condensed Consolidated Financial Statements.


Recent accounting pronouncements pending adoption not engage in any Lessor transactions, and as a Lessee, the Company doesdiscussed above are either not applicable or are not expected to have any finance leases. As a result, the new standard had a material impact on the unaudited condensedour consolidated balance sheet, but did not materially impact the Company’s consolidated operatingfinancial condition, results and did not materially impact the Company’sof operations, or cash flows.

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

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

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

10

We elected the following practical expedients permitted under the lease standard: We do not record leases with an initial term of 12 months or less on the balance sheet but continue to expense them on a straight-line basis over the lease term. As of August 3, 2019, 154 leaseswere short-term in nature and were exempt from being recorded on the balance sheet.

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

11

Impact of New Lease Standard on Balance Sheet Line Items

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

  Impact of Change in Accounting Policy 
  As Reported
February 2,
2019		  Adjustments  Adjusted
February 3,
2019		 
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents $4,355  $—  $4,355 
Restricted cash  4,126   —   4,126 
Accounts receivable  5,383   —   5,383 
Merchandise inventory  94,842   —   94,842 
Prepaid expenses and other current assets  6,657   (748)  5,909 
Total current assets  115,363   (748)  114,615 
             
Restricted cash  5,745   —   5,745 
Fixed assets, net  7,529   —   7,529 
Operating lease right-of-use assets  —   28,044   28,044 
Intangible assets, net  3,668   —   3,668 
Other assets  5,708   —   5,708 
TOTAL ASSETS $138,013  $27,296  $165,309 
             
LIABILITIES            
CURRENT LIABILITIES            
Accounts payable $34,329  $—  $34,329 
Accrued expenses and other current liabilities  8,132   (1,319)  6,813 
Deferred revenue  6,955   —   6,955 
Current portion of operating lease liabilites  —   9,064   9,064 
Total current liabilities  49,416   7,745   57,161 
             
Operating lease liabilities  —   22,728   22,728 
Other long-term liabilities  24,867   (3,177)  21,690 
TOTAL LIABILITIES  74,283   27,296   101,579 
             
SHAREHOLDERS’ EQUITY            
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)  —   —   — 
Common stock ($0.01 par value; 200,000,000 shares authorized; 3,221,834 and 3,221,834 shares issued)  32   —   32 
Additional paid-in capital  344,826   —   344,826 
Treasury stock at cost (1,408,892 and 1,408,892 shares)  (230,166)  —   (230,166)
Accumulated other comprehensive loss  (735)  —   (735)
Accumulated deficit  (50,227)  —   (50,227)
TOTAL SHAREHOLDERS’ EQUITY  63,730   —   63,730 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $138,013  $27,296  $165,309 
12

The following table is a summary of the Company’s components of net lease cost for the thirteen and twenty-six week periods ended August 3, 2019:

Lease Cost

(amounts in thousands) Classification Thirteen
Weeks Ended
August 3, 2019		  Twenty-six
Weeks Ended
August 3, 2019		 
Short-term operating lease cost SG&A $3,234  $5,315 
Operating lease cost SG&A  2,604   5,150 
Variable lease cost SG&A  117   242 
Net lease cost   $5,955  $10,707 

As of August 3, 2019, the maturity of lease liabilities is as follows:

(amounts in thousands) Operating Leases 
     
2019 $5,267 
2020  10,502 
2021  7,312 
2022  3,181 
2023  2,278 
Thereafter  2,116 
Total lease payments  30,656 
Less: amounts representing interest  (2,706)
Present value of lease liabilities $27,950 

Lease term and discount rate are as follows:

August 3, 2019
Weighted-average remaining lease term (years)
Operating leases1.4
Weighted-average discount rate
Operating leases5%

Other information:

  Twenty-six Weeks Ended 
(amounts in thousands)   
  August 3, 2019 
Cash paid for amounts included in the measurement of operating lease liabilities    
Operating cash flows from operating leases $5,103 

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

(amounts in thousands)   
    
2019 $24,426 
2020  8,393 
2021  5,239 
2022  1,881 
2023  1,137 
Thereafter  1,060 
Total minimum lease payments $42,136 
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Note 4.6. Intangible Assets


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


During fiscal 2019, the Company fully impaired its vendor relationships and the Company recognized an impairment loss of $0.8 million.

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


Identifiable intangible assets as of August 1, 2020 consisted of the following (amounts in thousands):

  August 1, 2020 
  
Weighted
Average
Amortization
Period
(in months)
  
Original
Gross
Carrying
Amount
  
Accumulated
Impairment
  
Accumulated
Amortization
  
Net Carrying
Amount
 
                
Vendor relationships  120  $19,100  $14,587  $4,513  $- 
Technology  60   6,700   2,587   3,660   453 
Trade names and trademarks  60   3,200   -   2,407   793 
      $29,000  $17,174  $10,580  $1,246 

The changes in net intangibles and goodwill from February 1, 2010 to August 1, 2020 were as follows:

(amounts in thousands) February 1,
2020		  
Impairment
Expense
  
Amortization
Expense
  August 1,
2020		 
             
Amortized intangible assets:            
Technology $647  $-  $194  $453 
Trade names and trademarks  1,113   -   320   793 
Net amortized intangible assets $1,760  $-  $514  $1,246 

Amortization expense of intangible assets for the thirteen and twenty six week periods ended August 1, 2020 and August 3, 2019 consisted of the following:

  August 3, 2019 
(amounts in thousands) Weighted
Average
Amortization
Period
(in months)		 Original
Gross
Carrying
Amount		  Accumulated
Impairment		  Accumulated
Amortization		  Net Carrying
Amount		 
                   
Vendor relationships 120 $19,100  $13,822  $4,456  $822 
Technology 60  6,700   2,587   3,272   841 
Trade names and trademarks 60  3,200   —   1,767   1,433 
    $29,000  $16,409  $9,495  $3,096 
                   
The changes in net intangibles from February 2, 2019 to August 3, 2019 were as follows: 
                   
(amounts in thousands)   February 2,
2019		  Impairment
Expense		  Amortization
Expense		  August 3,
2019		 
                   
Amortized intangible assets:                  
Vendor relationships   $880  $—  $58  $822 
Technology    1,035   —   194   841 
Trade names and trademarks    1,753   —   320   1,433 
Net amortized intangible assets   $3,668  $—  $572  $3,096 
         
Amortization expense of intangible assets for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 consisted of the following:
         
    Thirteen Weeks Ended  Twenty-six Weeks Ended 
(amounts in thousands)   August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
                   
Amortized intangible assets:                  
Vendor relationships   $29  $477  $58  $954 
Technology    97   335   194   670 
Trade names and trademarks    160   160   320   320 
Total amortization expense   $286  $972  $572  $1,944 
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  Thirteen Weeks Ended  Twenty-Six Weeks Ended 
(amounts in thousands) August 1,
2020		  
August 3,
2019
  August 1,
2020		  
August 3,
2019
 
             
Amortized intangible assets:            
Vendor relationships $-  $29  $-  $58 
Technology  97   97   194   194 
Trade names and trademarks  160   160   320   320 
Total amortization expense $257  $286  $514  $572 


Estimated amortization expense for the remainder of fiscal 20192020 and the five succeeding fiscal years and thereafter is as follows:

Year Annual
Amortization		 
(amounts in thousands)    
2019 $572 
2020  1,143 
2021  847 
2022  115 
2023  115 
2024  115 
Thereafter  189 

Fiscal Year Amortization 
    
2020 $514 
2021  732 
2022  - 
2023  - 
2024  - 
Thereafter  - 

Note 5.7. Depreciation and Amortization


Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the thirteen weeks ended August 1, 2020 and August 3, 2019 and August 4, 2018 was $1.1$0.5 million and $2.3$0.4 million, respectively.

Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the twenty-six weekstwenty - six ended August 1, 2020 and August 3, 2019 and August 4, 2018 was $2.0 million and $4.5 million, respectively. The decrease was primarily due to a $4.1 million net decrease in carrying value of fixed assets and a $16.4 million net decrease in carrying value of intangible assets, resulting from impairment charges recorded during the fourth quarter of fiscal 2018. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019.

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Note 6. Segment Data

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

  Thirteen Weeks Ended  Twenty-six Weeks Ended 
(amounts in thousands) August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
Total Revenue                
fye $41,744  $50,545  $86,762  $104,608 
etailz  34,260   51,629   69,392  $94,169 
Total Company $76,004  $102,174  $156,154  $198,777 
                 
Gross Profit                
fye $17,013  $20,634  $34,515  $42,905 
etailz  8,103   11,539   15,991   20,956 
Total Company $25,116  $32,173  $50,506  $63,861 
                 
Loss From Operations                
fye $(6,655) $(6,629) $(12,755) $(12,001)
etailz  (746)  (2,760)  (2,287)  (5,547)
Total Company $(7,401) $(9,389) $(15,042) $(17,548)

Total Assets as of August 3,
2019		  February 2,
2019		  August 4,
2018		 
fye $118,100  $101,785  $121,750 
etailz  32,073   36,228   103,337 
Total Company $150,173  $138,013  $225,087 

Note 7. Restricted Cash

As of August 3, 2019, the Company had restricted cash of $1.0 million and $0.8 million, respectively.


Note 8. Restricted Cash

As a result of the death of its former Chairman, the Company holds $5.3 million reportedin a rabbi trust, of which $1.0 million is classified as restricted cash in current assets and $4.3 million is classified as restricted cash in other assets on the accompanying interim condensed consolidated balance sheet respectively. As of August 4, 2018, the Company had restricted cash of $4.1 million and $6.1 million reported in current assets and other assets on the accompanying condensed consolidated balance sheet, respectively. The decrease in these restricted cash balances during the twenty-six weeks ended August 3, 2019, was primarily due to the return of the $3.2 million earn-out escrow balance to the Company as a result of the etailz segment not achieving the earnings target, as described in the amended etailz acquisition share purchase agreement.

The restricted cash reported as of August 3, 2019, as described in the paragraph above, is comprised entirely of a $6.3 million rabbi trust, which resulted from the death of the Company’s former Chairman.

16
1, 2020.

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

  August 3,  February 2,  August 4, 
  2019  2019  2018 
Cash and cash equivalents $3,635  $4,355  $4,477 
Restricted cash  6,295   9,871   10,263 
Total cash, cash equivalents and restricted cash $9,930  $14,226  $14,740 


  
August 1,
2020
  
February 1,
2020
  
August 3,
2019
 
Cash and cash equivalents $3,337  $2,977  $3,635 
Restricted cash  5,312   5,875   6,295 
Total cash, cash equivalents and restricted cash $8,649  $8,852  $9,930 

Note 8. Short Term Borrowings

9.  Debt


Credit Facility
In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”).  The Credit Facility providesprovided for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability

On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility through proceeds received from the sale of the fye business and borrowings under the new Kaspien credit facility, as further discussed below, accordingly the Credit Facility is subjectno longer available to limitations based on receivables and inventory levels. The principal amountthe Company.

As of all outstanding loansAugust 3, 2019, borrowings under the Credit Facility togetherwere $12.1 million.

New Credit Facility
On February 20, 2020, Kaspien Inc. entered into a Loan and Security Agreement (the “Loan Agreement”) with any accrued but unpaid interest, are due and payableEncina Business Credit, LLC (“Encina”), as administrative agent, under which the lenders party thereto committed to provide up to $25 million in January 2022, unless otherwise paid earlier pursuant toloans under a three-year, secured revolving credit facility (the “ New Credit Facility”).  Concurrent with the termssale of the fye business, the Company borrowed $3.3 million under the New Credit Facility to satisfy the remaining obligations of the Company under the aforementioned Credit Facility. Payments of amounts due

The commitments by the lenders under the New Credit Facility are secured by the assets of the Company. During fiscal 2018, the Company exercised the right to increase its availability to $60 million subject to the same limitations noted above.

The Credit Facility contains customary affirmativeborrowing base 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 dividendsavailability restrictions. Up to $5.0 million annually and not allowing borrowings underof the amended facilityNew Credit Facility may be used for the six months before or six months after the dividend payment.

The Credit Facility also includes customary eventsmaking of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. On May 3, 2019, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late delivery of the Annual Financial Statements. As of May 4, 2019, the Company was compliant with all covenants.

swing line loans.


Interest under the New Credit Facility will accrue, ataccrues, subject to certain terms and conditions under the election of the Company,Loan Agreement, at a BaseLIBOR Rate or LIBOBase Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability,Availability as defined in the Loan Agreement, with the Applicable Margin for LIBOLIBOR Rate loans ranging from 1.75%4.00% to 2.00%4.50% and the Applicable Margin for PrimeBase Rate loans ranging from 0.75%3.00% to 1.00%3.50%.

The New Credit Facility is secured by a first priority security interest in substantially all of the assets of Kaspien, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors under the New Credit Facility (collectively, the “Credit Facility Parties”) and by a first priority pledge by the Company of its equity interests in Kaspien.  The Company will provide a limited guarantee of Kaspien’s obligations under the New Credit Facility.

Among other things, the Loan Agreement limits Kaspien’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.  The Loan Agreement also requires Kaspien to comply with a financial maintenance covenant.

The Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the Credit Facility Parties taken as a whole, the occurrence of an uninsured loss to a material portion of collateral and failure of the obligations under the New Credit Facility to constitute senior indebtedness under any applicable subordination or intercreditor agreements.

On March 30, 2020, the Company and Kaspien (the “Loan Parties”) entered into Amendment No. 1 to the Loan Agreement (the “Amendment”). In addition,Pursuant to the Amendment, among other things, (i) the Company was added as “Parent” under the Amended Loan Agreement, (ii) the Company granted a commitment feefirst priority security interest in substantially all of 0.25% is also payable on unused commitments.

the assets of the Company, including inventory, accounts receivable, cash and cash equivalents and certain other collateral, and (iii) the Loan Agreement was amended to (a) permit the incurrence of certain subordinated indebtedness under the Subordinated Loan Agreement (as defined below) and (b) limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.


As of August 3, 2019,1, 2020, borrowings under the New Credit Facility were $12.1 million as compared to $6.3 million as of August 4, 2018.$2.2 million. The Company had $16.1$6.5 million available for borrowing as of August 3, 2019.

1, 2020. As of August 3, 2019, the Company did not have any outstanding letters1, 2020, unamortized debt issuance costs of credit. As of August 4, 2018, the Company had $1.1$1.0 million in outstanding letters of credit related to an import purchase.

the New Credit Facility are included in Other assets on the unaudited condensed consolidated balance sheet.


The Company records short term borrowings at cost, in which the carrying value approximates fair value due to its shortshort-term maturity.

Subordinated Loan Agreement
On March 30, 2020, the Loan Parties entered into a Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with the lenders party thereto from time to time (the “Lenders”) and TWEC Loan Collateral Agent, LLC (“Collateral Agent”), as collateral agent for the Lenders, pursuant to which the Lenders made a $5.2 million secured term maturity.

17
loan (the “Subordinated Loan”) to Kaspien with a scheduled maturity date of May 22, 2023.

Interest on the Subordinated Loan accrues, subject to certain terms and conditions under the Subordinated Loan Agreement, at the rate of twelve percent (12.0%) per annum, compounded on the last day of each calendar quarter by becoming a part of the principal amount of the Subordinated Loan.

The Subordinated Loan is secured by a second priority security interest in substantially all of the assets of the Loan Parties, including inventory, accounts receivable, cash and cash equivalents and certain other collateral of the borrowers and guarantors under the Subordinated Loan Agreement (collectively, the “Second Lien Credit Facility Parties”).  The Company will provide a limited guarantee of Kaspien’s obligations under the Subordinated Loan.
Among other things, the Subordinated Loan Agreement limits the Loan Parties’ ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets.
The Subordinated Loan Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the Second Lien Credit Facility Parties taken as a whole and the occurrence of an uninsured loss to a material portion of collateral.
In conjunction with the Subordinated Debt Agreement, the Company issued warrants to purchase up to 244,532 shares of Common Stock to the Related Party Entities (127,208 shares for Alimco, 23,401 shares for Kick-Start, and 93,923 shares for RJHDC), subject to adjustment in accordance with the terms of the Warrants, at an exercise price of $0.01 per share. The value of the warrants of $0.8 million was allocated against the principal proceeds of the Subordinated Debt Agreement.
Paycheck Protection Program
On April 17, 2020, Kaspien received loan proceeds of $2.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan, which was in the form of a promissory note (the “Note”), dated April 10, 2020, between Kaspien and First Interstate Bank, as the lender, matures on April 17, 2022, bears interest at a fixed rate of 1% per annum, and is payable in monthly installments of $112,976 commencing on November 10, 2020. While under the terms of the PPP, some or all of the PPP Loan amount may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and the Note, such as payroll costs, benefits, rent, and utilities, there is no assurance that the Company will be successful in qualifying for and receiving forgiveness on the PPP Loan amount.

Note 9.10. Stock Based Compensation

As of August 3, 2019, there was approximately $435 thousand of unrecognized compensation cost related to stock option awards comprised of the following: $330 thousand was related to stock option awards listed in the table below and expected to be recognized as expense over a weighted average period of 9 months, and $105 thousand was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 3.1 years.


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


The FYE Transaction in February 2020 constituted a change of control and vesting on all unvested options was accelerated. As a result, unrecognized compensation expense of $0.2 million was recognized in the first quarter of fiscal 2020. Total compensation expense recognized in the twenty-six weeks ended August 1, 2020 was $0.3 million.

Equity awards authorized for issuance under the New Plan total 250 thousand.250,000.  As of August 3, 2019,1, 2020, of the awards authorized for issuance under the Stock Award Plans, approximately 130 thousand133,462 options were granted and are outstanding, 102 thousand46,900 of which were vested and exercisable.  Shares available for future grants of options and other share basedshare-based awards under the New Plan at August 3, 20191, 2020 were 219 thousand.

152,188.


The following table summarizes stock award activity during the twenty-sixthirteen weeks ended August 3, 2019:

  Employee and Director Stock Award Plans 
  Number of
Shares
Subject To
Option		  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		  Other
Share
Awards(1)		  Weighted
Average
Grant Fair
Value		 
Balance February 2, 2019  138,921  $55.00   5.8   13,571  $33.60 
Granted  —   —   —   —   — 
Cancelled/Forfeited  (8,975)  —   —   —   — 
Exercised  —   —   —   (2,064)  30.76 
Balance August 3, 2019  129,946  $54.79   5.2   11,507  $34.19 
Exercisable August 3, 2019  102,196  $59.68   4.4   6,132  $52.38 

1, 2020:

  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
 
Balance February 1, 2020  129,196  $52.11   5.8   9,945  $36.75 
Granted  86,562   6.27   9.9   -   - 
Canceled  (82,297)  54.92   -   -   - 
Exercised  -   -   -   (9,945)  36.75 
Balance August 1, 2020  133,461  $20.64   7.6   -  $- 
Exercisable August 1, 2020  55,900  $47.18   3.3   -  $- 

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


As of August 3, 2019, all1, 2020, the intrinsic value of stock awards outstanding was $22,400 and the intrinsic value of stock awards exercisable had a grant price higher than the market price of the stock and had no intrinsic value.

was $171,669.

Note 10.11. Accumulated Other Comprehensive Loss


Accumulated other comprehensive loss that the Company reports in the interim condensed consolidated balance sheets represents net loss, adjusted for the difference between the  accrued pension liability and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan.   Comprehensive loss consists of net loss and the amortization of pension costsgains associated with Company’s defined benefit plan for the thirteen and twenty-sixtwenty six weeks ended August 3, 20191, 2020 and August 4, 2018.

3, 2019.

Note 11.12. Defined Benefit Plan


The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for a limited number ofcertain executive officers of the Company.  The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements.  During the twenty-sixthirteen weeks ended August 3, 2019,1, 2020, 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 2019.

18
2020.

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 
  August 3,  August 4,  August 3,  August 4, 
(amounts in thousands) 2019  2018  2019  2018 
       
Service cost $14  $14  $28  $28 
Interest cost  142   140   284   280 
Amortization of net gain(1)  (5)  (5)  (10)  (10)
Net periodic pension cost $151  $149  $302  $298 

  Thirteen Weeks Ended  Twenty-Six Weeks Ended 
(amounts in thousands) 
August 1,
2020
  
August 3,
2019
  
August 1,
2020
  
August 3,
2019
 
       
Service cost $-  $14  $-  $28 
Interest cost  89   142   178   284 
Amortization of net gain(1)
  (3)  (5)  (6)  (10)
Net periodic pension cost $86  $151  $172  $302 

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

Note 12.13. Basic and Diluted Loss Per Share


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


For the thirteen and twenty-six week periods ended August 3, 20191, 2020 and August 4, 2018,3, 2019, the impact of all outstanding stock awards was not considered because the Company reported a net losslosses and such impact would be anti-dilutive.  Accordingly, basic and diluted loss per share iswas the same.  Total anti-dilutive stock awards for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were approximately 130 thousand128,462 and 129,946 shares, as compared to 155 thousand shares and 145 thousand shares, respectively,respectively. Total anti-dilutive stock awards for the thirteen and twenty-six weeks ended August 4, 2018. See note 1, in2020 and August 3, 2019 were approximately 127,079 and 134,433, respectively.
The following represents basic and diluted loss per share for continuing operations, loss from discontinued operations and net loss for the interim condensed consolidated financial statements for information on the reverse stock split effected by the Company during the current reporting period.

respective periods:


  Thirteen Weeks Ended  Twenty-Six Weeks Ended 
(in thousands, except per share amounts) 
August 1,
2020
  
August 3,
2019
  
August 1,
2020
  
August 3,
2019
 
       
Loss from continuing operations $(899) $(3,758) $(6,306) $(8,104)
Basic and diluted loss per common share from continuing operations $(0.49) $(2.07) $(3.46) $(4.47)
                 
Loss from discontinued operations $-  $(4,370) $-  $(7,826)
Basic and diluted loss per common share from discontinued operations $-  $(2.41) $-  $(4.31)
                 
Net loss $(899) $(8,128) $(6,306) $(15,930)
Basic and diluted loss per common share $(0.49) $(4.48) $(3.46) $(8.78)
                 
Weighted average number of common shares outstanding – basic and diluted  1,825   1,816   1,823   1,815 

Note 13.14. 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’sCompany's deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable income in its conclusion of the need for a full valuation allowance.  Any reversal of the Company’s valuation allowance will favorably impact its results of operations in the period of reversal.  The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future.  The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending February 1, 2020.  The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of February 2, 2019,1, 2020, the Company had a net operating loss carry forward of $253.5$288.1 million for federal income tax purposes and approximately $289.0$280.2 million for state income tax purposes that expire at various times through 20382039 and are subject to certain limitations and statutory expiration periods.  The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.

19

Note 14.15. Commitments and Contingencies


Legal Proceedings

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


Loyalty Memberships and Magazine Subscriptions Class Action

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


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

Store Manager Class Actions

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

Plaintiffs moved


The Company has reached a settlement with the plaintiffs for conditional certification of a collective of SMs in June 2018, and that motion was partially granted in January 2019.both store manager class actions.  The opt-in periodCompany reserved $425,000 for the collective that was certified was closed on April 6, 2019. Opt-in discovery relatingsettlement as of August 1, 2020.
Contingent Value Rights
On March 30, 2020, the Company entered into the Contingent Value Rights Agreement (the “CVR Agreement”), pursuant to that potential collective has commenced.which the Related Party Entities received contingent value rights (“CVRs”) representing the contractual right to receive cash payments from the Company in an amount equal, in the aggregate, to 19.9% of the proceeds (10.35% for Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by Kaspien and/or its equity interest in Kaspien.  The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to vigorously defend the action.

20
does not anticipate these contingencies being met in Fiscal 2020.

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

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

Results of Operations

August 1, 2020 and August 3, 2019 and August 4, 2018


Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding of its financial statements and results of operations.  To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties.  These risks include, but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships, general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s filings with the Securities and Exchange Commission.  The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the fiscal year ended February 2, 2019.

1, 2020.


The Company operates in two reportable segments:Kaspien, which provides a platform of software and services to grow a brand’s online distribution channel on digital marketplaces such as Amazon, Walmart, and eBay, among others. Kaspien empowers brands to achieve their online retail goals through its innovative, proprietary technology, tailored strategies, and mutually beneficial partnerships.

Kaspien is positioning itself to be a brand’s ultimate online growth partner and is guided by seven core principles:

•Partner Obsession•Results
•Insights Driven•Ownership
•Simplicity•Diversity and Teamwork
•Innovation

Previously, the Company also operated fye, and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites,www.fye.comandwww.secondspin.com.  AsOn February 20, 2020, the Company consummated the sale of August 3, 2019, the fye segment operated 206 stores totaling approximately 1.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature for both segments, with the peak selling period beingassets and certain of the holiday season which falls inliabilities relating to fye to a subsidiary of 2428391 Ontario Inc. o/a Sunrise Records (“Sunrise Records”) pursuant to an Asset Purchase Agreement (as amended, the Company’s fourth fiscal quarter.

“Asset Purchase Agreement”) dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. (the “FYE Transaction”).


The Company’s results have been, and will continue to be, contingent upon management’s ability to understand industry trends and to manage the business in response to those trends and general economic trends. Management monitors a number ofseveral key performance indicators to evaluate its performance, including:


Net Sales and Comparable Store Net Sales:Revenue:  The fye segment measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the beginning of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store sales if the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or downsizing. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz segmentCompany measures total year over year sales growth bygrowth. The Company measures its sales performance through several key performance indicators including number of partners and active product categorylistings and evaluates product sales by supplier.

per listing.


Cost of Sales and Gross Profit:  Gross profit is calculated based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales levels, mix of products sold, vendor discountsobsolescence, distribution costs and allowances, shrinkage, obsolescenceAmazon commissions and distribution costs. Distribution expenses include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs associated with product returns to vendors.

fees.


Selling, General and Administrative (“SG&A”) Expenses:  Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges. SG&A expenses also include fixed assets write-offs associated with store closures, if any, and miscellaneous income and expense items, other than interest.


Balance Sheet and Ratios:  The Company views cash and working capital (current assets less current liabilities) as relevant indicators of its financial position.  See Liquidity and Cash Flows section for further discussion of these items.

21

RESULTS OF OPERATIONS


Thirteen Weeks and Twenty-Six Weeks Ended August 1, 2020
Compared to the Thirteen and Twenty-sixTwenty-Six Weeks Ended August 3, 2019

Compared to the Thirteen


Net revenue and Twenty-six Weeks Ended August 4, 2018

Segment Highlights(amounts in thousands):

  Thirteen Weeks Ended  Twenty-six Weeks Ended 
  August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
Total Revenue                
 fye $41,744  $50,545  $86,762  $104,608 
 etailz  34,260   51,629   69,392   94,169 
Total Company $76,004  $102,174  $156,154  $198,777 
                 
Gross Profit                
 fye $17,013  $20,634  $34,515  $42,905 
 etailz  8,103   11,539   15,991   20,956 
Total Company $25,116  $32,173  $50,506  $63,861 
                 
Loss From Operations                
 fye $(6,655) $(6,629) $(12,755) $(12,001)
 etailz  (746)  (2,760)  (2,287)  (5,547)
Total Company $(7,401) $(9,389) $(15,042) $(17,548)
                 
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations        
etailz loss from operations $(746) $(2,760) $(2,287) $(5,547)
Acquisition related amortization and compensation expenses (1)  286   2,090   638   4,184 
etailz adjusted loss from operations(2) $(460) $(670) $(1,649) $(1,363)

(1) For the 13 weeks ended August 3, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $286 thousand. For the 26 weeks ended August 3, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $572 thousand and compensation expense of $66 thousand. For the 13 weeks ended August 4, 2018, acquisition related expenses consisted of amortization expense of intangible assets of $972 thousand and compensation expense of $1,118 thousand. For the 26 weeks ended August 4, 2018, acquisition related expenses consisted of amortization expense of intangible assets of $1,944 thousand and compensation expense of $2,240 thousand.

(2)Gross profit.  In addition to the results of operations determined in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we reported non-GAAP adjusted operating loss for the etailz 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    
(amounts in thousands) August 3,
2019		 August 4,
2018		 $  %  Comp
Store Net
Sales		  August 3,
2019		 August 4,
2018		  $  %  Comp
Store Net
Sales		 
                            
fye revenue $41,744  50,545 $(8,801)  -17.4%  -1.2% $86,762  104,608  $(17,846)  -17.1%  -0.6%
etailz revenue  34,260  51,629  (17,369)  -33.6%      69,392  94,169   (24,777)  -26.3%    
Total revenue $76,004 $102,174 $(26,170)  -25.6%     $156,154 $198,777  $(42,623)  -21.4%    

TotalNet revenue decreased 25.6% and 21.4% for the thirteen and twenty-six weeks ended August 3, 2019 as compared to the same period last year.

22
Gross profit:

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    
(amounts in thousands,
except store count)		August 3,
2019		  August 4,
2018		  $  %  Comp
Store Net
Sales		  August 3,
2019		  August 4,
2018		  $  %  Comp
Store Net
Sales		 
                               
fye net sales $40,892   49,410  $(8,518)  -17.2%  -1.2% $85,116   102,102  $(16,986)  -16.6%  -0.6%
Other revenue  852   1,135   (283)  -24.9%      1,646   2,506   (860)  -34.3%    
Total revenue $41,744  $50,545  $(8,801)  -17.4%     $86,762  $104,608  $(17,846)  -17.1%    
                                         
As a % of fye net sales                              
Trend / Lifestyle  46.8%  40.9%          9.6%  44.7%  39.3%          9.5%
Video  24.3%  29.0%          -16.1%  26.4%  30.5%          -11.6%
Music  17.5%  18.4%          -7.8%  17.7%  18.5%          -3.9%
Electronics  11.4%  11.7%          -0.1%  11.2%  11.7%          -2.3%
                                         
Store Count:                      206   241   (35)  -14.5%    
                                         
Total Square footage                      1,145   1,339   (194)  -14.5%    

fye net sales.
  Thirteen Weeks Ended  Change  Twenty-Six Weeks Ended  Change 
(amounts in thousands) 
August 1,
2020
  
August 3,
2019
  $  
%  
August 1,
2020
  
August 3,
2019
  $  
% 
                           
Net Revenue $42,296  $34,260  $8,036   23.5% $73,885  $69,392  $4,493   6.5%
                                 
Gross profit  4,423   3,087   1,336   43.3%  7,734   5,864   1,870   31.9%
% to sales  10.5%  9.0%          10.5%  8.5%        


Net sales decreased 17.2% and 16.6% during the thirteen weeks and twenty-six weeks ended August 3, 2019 as compared to the same period last year. The decline in net sales resulted from a 14.5% decline in total stores in operation and a 1.2% and 0.6% decline in comparable store net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively.

Trend/Lifestyle:

Comparable store net sales in the trend/lifestyle category increased 9.6% and 9.5% during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Trend/lifestyle products represented 46.8% and 44.7% of total net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to 40.9% and 39.3% in the comparable periods last year. The Company continues to take advantage of opportunities to strengthen its selection and shift product mix to growing categories of entertainment-related merchandise.

Video:

Comparable store sales in the video category decreased 16.1% and 11.6% during the thirteen and twenty-six week periods ended August 3, 2019, respectively. The video category represented 24.3% and 26.4% of total net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to 29.0% and 30.5% in the comparable periods last year due to continued industry-wide decline in physical media sales.

Music:

During the thirteen and twenty-six weeks ended August 3, 2019, music sales in comparable stores decreased 7.8% and 3.9%, respectively, versus the thirteen and twenty-six weeks ended August 4, 2018. The music category represented 17.5% and 17.7% of total net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to 18.4% and 18.5% for the thirteen and twenty-six weeks ended August 4, 2018 due to continued industry-wide decline in physical media sales.

Electronics:

Comparable store net sales in the electronics category decreased 0.1% and 2.3% during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Electronics net sales represented 11.4% and 11.2% of total net sales for the thirteen and twenty-six weeks ended August 4, 2019, respectively, compared to 11.7% of total net sales for both the thirteen and twenty-six weeks in the comparable periods last year.

23

Other Revenue.Other revenue, which was primarily related to commissions and fees earned from third parties for the fye segment, was approximately $0.9 million and $1.6 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to $1.1 million and $2.5 million in the comparable periods last year. The decline in otherNet revenue was primarily due to lower number of stores in operation.

etailz Segment

etailz reported sales of $34.3 million and $69.4 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively compared to $51.6 million and $94.2 million sales for the thirteen and twenty-six weeks ended August 4, 2018. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the twenty-six weeks ended August 3, 2019, etailz sold approximately 25,000 SKUs from approximately 1,500 suppliers, compared to approximately 31,000 SKUs from approximately 2,200 suppliers during the twenty-six weeks ended August 4, 2018. The decline in sales was attributable to the vendor remediation performance improvement plan which was implemented during the fourth quarter of 2018 for the etailz segment, as discussed in Note 1 to the interim condensed consolidated financial statements.

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 
(amounts in thousands) August 3,
2019		  August 4,
2018		  $  %  August 3,
2019		  August 4,
2018		  $  % 
                         
fye gross profit $17,013  $20,634  $(3,621)  -17.5% $34,515  $42,905  $(8,390)  -19.6%
etailz gross profit  8,103   11,539   (3,436)  -29.8%  15,991   20,956   (4,965)  -23.7%
Total gross profit $25,116  $32,173  $(7,057)  -21.9% $50,506  $63,861  $(13,355)  -20.9%
                                 
fye gross profit as a % of fye revenue  40.8%  40.8%          39.8%  41.0%        
etailz gross profit as a % of etailz revenue  23.7%  22.3%          23.0%  22.3%        
Total gross profit as a % of total revenue  33.0%  31.5%          32.3%  32.1%        

Gross profit decreased 21.9% to $25.1$42.3 million for the thirteen weeks ended August 3, 20191, 2020 a 23.5% increase from the comparable prior year period. The increase in net revenue was primarily attributable to increased velocity and improved average sales price for merchandise sold on the Fulfilled By Amazon US marketplace (“FBA US”).


Net revenue was $73.9 million for the twenty-six weeks ended August 1, 2020 a 6.5% increase from the comparable prior year period. The increase in net revenue was primarily attributable to strength on the Amazon US marketplace.

The primary source of revenue is the Retail as a Service (“RaaS”) model, which represented 99.3% of net revenue in the thirteen weeks ended August 1, 2020. As part of the Company’s diversification strategic initiative, net revenue from non-Amazon US marketplaces increased to 4.6% of net revenue from 3.2% of net revenue in the comparable period from the prior year. The increase was attributable to Amazon International, Walmart and Other Marketplaces. Subscriptions and Other share of net revenue increased to 0.7% of Total Revenue in the period during the thirteen weeks ended August 1, 2020.  The increase was attributable an increase in the number of partners and higher gross merchandise value (“GMV”) of partner revenue flowing through the platform Amazon Marketplace. In the thirteen weeks ending August 1, 2020 total subscriptions GMV from subscription partners increased 84% compared to $32.2the thirteen weeks ending August 3, 2019. The following table sets forth net revenue by marketplace as a percentage of total net revenue:

  Thirteen Weeks Ended  Twenty-Six Weeks Ended 
  
August 1,
2020
  
August 3,
2019
  Change  
August 1,
2020
  
August 3,
2019
  Change 
Amazon US  94.7%  96.4%  -1.7%  94.8%  96.1%  -1.3%
Amazon International  4.2%  3.0%  1.2%  4.1%  3.2%  0.9%
Walmart and other Marketplaces  0.4%  0.2%  0.2%  0.5%  0.3%  0.1%
Subtotal Retail  99.3%  99.6%  -0.3%  99.4%  99.6%  -0.3%
Subscriptions and other  0.7%  0.4%  0.3%  0.6%  0.4%  0.3%
Total  100.0%  100.0%  0.0%  100.0%  100.0%  0.0%

Gross Profit. Gross profit increased to $4.4 million, or 10.5% of net revenue for the thirteen weeks ended August 4, 2018. For1, 2020, as compared to $3.1 million, or 9.0% of net revenue for the comparable prior year period. The increased profit was primarily attributable to a reduction in the cost of sales on the Amazon US Platform and operational efficiencies.

Gross profit increased to $7.7 million, or 10.5% of net revenue for the twenty-six weeks ended August 3, 2019, gross profit decreased 20.9% to $50.5 million1, 2020, as compared to $63.9$5.9 million, or 8.5% of net revenue for the comparable period last year.

fye Segment

fye grossprior year period. The increased profit as a percentage of total revenue for the thirteenwas primarily attributable to operational efficiencies and twenty-six weeks ended August 3, 2019 was 40.8% and 39.8%, respectively, compared to 40.8% and 41.0% for the comparable periods last year.

etailz Segment

etailz gross profit as a percentage of total revenue for the thirteen and twenty-six weeks ended August 3, 2019 was 23.7% and 23.0%, respectively, compared to 22.3% for both the thirteen and twenty-six weeks for the comparable periods last year. The increase in the gross profit rate was a result of the performance improvement plan implemented during the fourth quarter of 2018. See Note 1 for the description of the etailz segment performance improvement plan.

24
improved inventory management.

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 
(amounts in thousands) August 3,
2019		  August 4,
2018		  $  %  August 3,
2019		  August 4,
2018		  $  % 
                                 
fye SG&A, excluding depreciation and amortization $23,052  $26,103  ($3,051)  -11.7% $46,082  $52,592  ($6,510)  -12.4%
As a % of total fye revenue  55.2%  51.6%          53.1%  50.3%        
                                 
etailz SG&A, excluding depreciation and amortization  8,413   13,185   (4,772)  -36.2%  17,434   24,310   (6,876)  -28.3%
As a % of total etailz revenue  24.6%  25.5%          25.1%  25.8%        
                                 
Depreciation and amortization  1,052   2,274   (1,222)  -53.7%  2,032   4,507   (2,475)  -54.9%
                                 
Total SG&A $32,517  $41,562  ($9,045)  -21.8% $65,548  $81,409  ($15,861)  -19.5%
                                 
As a % of total revenue  42.8%  40.7%          42.0%  41.0%        


  Thirteen Weeks Ended    Change  Twenty-Six Weeks Ended    Change 
(amounts in thousands) 
August 1,
2020
  
August 3,
2019
    $
  
%  
August 1,
2020
  
August 3,
2019
    $  
% 
                         
Kaspien SG&A $4,106  $3,833    $273   7.1% $8,197  $8,084    $113   1.4%
Corporate SG&A expenses  810   2,833  
(1) 
  (2,023)  -71.4%  5,209   5,560  
(1) 
  (351)  -6.3%
Total SG&A expenses $4,916  $6,666    $(1,750)  -26.3% $13,406  $13,644    $(238)  -1.7%
                                     
As a % of total revenue  11.6%  19.5%            18.1%  19.7%          

For the thirteen weeks ended August 1, 2020, SG&A expenses decreased $9.0 million and $15.9 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively.

fye Segment

fye SG&A, excluding depreciation and amortization expenses, decreased $3.1$1.8 million or 11.7%, and $6.5 million, or 12.4%, for the thirteen and twenty-six weeks ended August 3, 2019, respectively. As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and twenty-six weeks ended August 3, 2019 were 55.2% and 53.1%, respectively, compared to 51.6% and 50.3% for the same periods last year.26.3%.   The declinedecrease in SG&A expenses was due to lower sales primarily as a result of fewer stores$2.0 million in operation. The increasedecrease in corporate SG&A expenses.


Kaspien SG&A expenses as a percentage of revenue was due to an increase in outside consulting and professional fees.

etailz Segment

etailz SG&A, excluding depreciation and amortization expenses, decreased $4.8 million and $6.9increased $0.3 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 3, 2019 were 24.6% and 25.1%, respectively,1, 2020 as compared to 25.5% and 25.8% for the same periods last year. The decrease was primarily due to expense reduction initiatives implemented in the fourth quarter of 2018.

Depreciation and amortization.comparable prior year period.


Consolidated depreciation and amortization expense for the thirteen weeks ended August 1, 2020 was $0.5 million as compared to $0.4 million for the comparable prior year period.

For the twenty-six weeks ended August 1, 2020, SG&A expenses decreased $1.2$0.2 million or 1.8%.

Kaspien SG&A expenses increased $0.1 million for the twenty-six weeks ended August 1, 2020 as compared to the comparable prior year period.

Consolidated depreciation and $2.5amortization expense for the twenty-six weeks ended August 1, 2020 was $1.0 million as compared to $0.8 million for the comparable prior year period.

Interest Expense.   Interest expense was $0.4 million for the thirteen and twenty-sixweeks ended August 1, 2020 compared to $0.2 million for the thirteen weeks ended August 3, 2019, respectively, primarily due to the $29.1 million net decrease in carrying value of fixed assets and intangible assets, resulting from impairment charges recorded for the fye segment, during the fourth quarter of fiscal 2018. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019.

Interest Expense. Interest expense was $194 thousand and $326 thousand during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Interest expense consisted primarily of interest payments resulted from borrowings under the Company’s credit facility and unused commitment fees. Interest expense during the thirteen and twenty-six weeks ended August 4, 2018 was $103 thousand and $166 thousand, respectively.  The increase in interest expense was due to borrowings underincreased short and long-term borrowings.


Interest expense was $0.6 million for the credit facility as discussedtwenty-six weeks ended August 1, 2020 compared to $0.3 million for the twenty-six weeks ended August 3, 2019.  The increase in interest expense was due to increased long-term borrowings.  See Note 89 to the interim condensed consolidated financial statements.

25
Condensed Consolidated Financial Statements for further detail on the Company’s debt.

Other

Loss (Income). As ofFrom Discontinued Operations.  For the thirteen-weeks ended August 3, 2019, otherthe Company recognized a loss (income) consistedfrom discontinued operations of $4.4 million related to the following:

  Thirteen Weeks Ended  Twenty-six Weeks Ended 
(amounts in thousands) August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
Write-off of investment $500  $—  $500  $— 
Interest income  (38)  (49)  (81)  (128)
Other loss (income) $462  $(49) $419  $(128)

fye transaction. For the twenty-six weeks ended August 3, 2019, the Company recognized a loss from continuing operations of $7.8 million related to the fye transaction.

See Note 3 to the Condensed Consolidated Financial Statements for more information on the loss from discontinued operations.
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. Thereassets   As a result, there were insignificant tax expense amounts recorded during the thirteen weeks ended August 1, 2020 and August 3, 2019.
Net Loss. The net loss for the thirteen weeks ended August 1, 2020 was $0.9 million as compared to $8.1 million for the comparable prior year period.
The net loss for the twenty-six weeks ended August 3, 2019 and comparative periods last year.

Net Loss. The following table sets forth a period over period comparison of1, 2020 was $6.3 million as compared to $15.9 million for the Company’s net loss:

  Thirteen Weeks Ended  Twenty-six Weeks Ended 
(amounts in thousands) August 3,
2019		  August 4,
2018		  $
Change		  August 3,
2019		  August 4,
2018		  $
Change		 
                         
Loss before income tax $(8,057) $(9,443) $1,386  $(15,787) $(17,586) $1,799 
Income tax expense  71   67   4   143   71   72 
Net loss $(8,128) $(9,510) $1,382  $(15,930) $(17,657) $1,727 

comparable prior year period.

LIQUIDITY


Liquidity and Cash Flows:

The Company’s primary sources of liquidity are its borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and the purchase of inventory and capital expenditures.inventory. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our  net revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and changes insuccessful implementation of our strategy orand planned activities; and our planned activities.

The Company incurred net lossesability to overcome the impact of $15.9 million and $17.7 million for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, and has an accumulated deficit of $66.2 million at August 3, 2019. In addition, net cash used in operating activities for the twenty-six weeks ended August 3, 2019 was $15.0 million. Net cash used in operating activities for the twenty-six weeks ended August 4, 2018 was $32.9 million.

COVID-19 pandemic.

As disclosed in the Company's Annual Report on Form 10-K filed May 14, 2019, theJune 15, 2020, The Company experienced negative cash flows from operations during fiscal 20182019 and 2017,2018 and we expect to continue to incur net losses in 2020.

The ability of the foreseeable future. We implementedCompany to meet its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the strategic initiative to reposition Kaspien as a platform of software and services, the availability of future funding, implementation of one or more corporate initiatives on December 11, 2018, aimedto reduce costs at improving organizational efficiencythe parent company level (which could include a voluntary delisting from NASDAQ and conserving working capital needed to support the growthderegistering of our etailz segment (the “performance improvement plan”). AsCommon Stock in order to substantially eliminate the costs associated with being a resultpublic company), satisfying all unassumed liabilities of the initiative, and disciplined inventory management in the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company, was able to reduce cash used in operations by $18.0 million forand overcoming the twenty-six weeks ended August 3, 2019 as compared to the twenty-six weeks ended August 3, 2018. We anticipate continued improvement in cash flows used in operations for the remainderimpact of the fiscal 2019. At August 3, 2019,COVID-19 pandemic.

There can be no assurance that we had cash and cash equivalents of $3.6 million, net working capital of $42.3 million, and short-term borrowings in the amount of $12.1 million on our revolving credit facility, as further discussed in footnote 8 in the interim condensed consolidated financial statements. This compares to $4.5 million in cash and cash equivalents, net working capital of $82.1 million, and short-term borrowings in the amount of $6.3 million on the Company’s revolving credit facility at August 4, 2018.

26

Management anticipates any cash requirements due to a shortfall in cash from operations will be funded bysuccessful in further implementing our business strategy or that the Company’s revolving credit facility. See note 8strategy, including the completed initiatives, will be successful in sustaining acceptable levels of sales growth and profitability.  In addition, the interimproceeds from the PPP Loan are subject to audit and there is a risk of repayment. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.


On August 4, 2020, the Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it is no longer in compliance with the minimum stockholders’ equity requirement for additional information.

In additioncontinued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2,500,000 and as of August 4, 2020, the Company did not meet the alternative compliance standards relating to the aforementioned current sourcesmarket value of existing working capital,listed securities or net income from continuing operations.


The notification letter has no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company may explore certain other strategic alternatives that may become availablewith 45 calendar days, or until September 18, 2020, to submit a plan to regain compliance with the Company, as well as continuing the efforts to generate additional sales and increase margins. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should we require such additional funds.minimum stockholders’ equity standard. If the Company submits a plan to regain compliance that is unableaccepted, Nasdaq may grant an extension of up to improve its operations,180 calendar days from the date of the notification letter to regain compliance. If the Company does not submit a plan to regain compliance or if such plan is not accepted, or if it may be required to obtain additional funding,is accepted and the Company does not regain compliance in the timeframe required by Nasdaq, the Nasdaq staff could provide notice that the Company’s financial condition and results of operations may be materially adversely affected.

Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our abilityCommon Stock is subject to raise additional funds, should we require such additional funds.

delisting.


The unaudited condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 20191, 2020 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on continued improved profitability the performance improvement plan implemented for the etailz segment and the availability of future funding. The unauditedother factors set forth in the preceding paragraph. For the next 12 months, management believes that the Company’s existing liquidity will be adequate to fund its working capital needs. 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 in the interim condensed consolidated financial statements do not include any adjustments that might resultstatements.

Furthermore, broad market and industry factors may seriously harm the market price of our Common Stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional funds. Similarly, if our Common Stock is delisted from the outcome of these uncertainties.

NASDAQ Capital Market, it may also limit our ability to raise additional funds.

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

   As of or for the  Change 
   Twenty-six Weeks Ended   
 (amounts in thousands) August 3,
2019		  August 4,
2018		  $ 
 Operating Cash Flows  (14,962)  (32,944)  17,982 
 Investing Cash Flows  (1,420)  (663)  (757)
 Financing Cash Flows  12,086   4,841   7,245 
              
 Capital Expenditures (1) (1,541)  (1,800)  259 
              
 Cash, Cash Equivalents, and Restricted Cash (2) 9,930   14,740   (4,810)
 Merchandise Inventory  89,785   114,920   (25,135)
 Working Capital  42,306   82,100   (39,794)
              
(1)Included in Investing Cash Flows            
              
(2) Cash and cash equivalents per condensed consolidated balance sheets $3,635  $4,477     
 Add: restricted cash  6,295   10,263     
 Cash, cash equivalents, and restricted cash $9,930  $14,740     


      
As of or for the
Twenty-Six Weeks Ended
  Change 
 (amounts in thousands)    
August 1,
2020
  
August 3,
2019
  
$
 
 Operating Cash Flows    $(8,087) $(14,962) $6,875 
 Investing Cash Flows     11,191   (1,420)  12,611 
 Financing Cash Flows     (3,307)  12,086   (15,393)
                 
 Capital Expenditures
(1)
  (588)  (1,541)  953 
                 
 Cash, Cash Equivalents, and Restricted Cash 
(2)

  8,649   9,930   (1,281)
 Merchandise Inventory     20,576   20,185   391 
                 
(1)
Included in Investing Cash Flows               
                 
(2)
Cash and cash equivalents per condensed consolidated balance sheets  $3,337  $3,635     
 Add: restricted cash     5,312   6,295     
 Cash, cash equivalents, and restricted cash    $8,649  $9,930     

Cash used in operations was $15.0$8.1 million for the twenty-six weeks ended August 3, 2019, primarily due to a net loss of $15.9$6.3 million, adding back depreciationa $6.4 million decrease in accrued expenses and amortization ofa $2.7 million increase in inventory partially offset by a $1.9 million decrease in accounts receivable, a $2.0 million increase in accounts payable and a $5.1 million seasonal decrease in inventory, a $1.3$2.1 million decrease in prepaid expenses and other current assets, and a $4.0 millionassets. The decrease in other long-term assets, less a reduction in accounts payable, accrued expenses and other current liabilities, deferred revenue, and other long-term liabilitiesin primarily attributable to the payment of $5.3obligations related to the fye business.

Cash provided by investing activities was $11.2 million $1.0 million, $1.0 million, and $4.2 million, respectively. The Company's merchandise inventory and accounts payable are influencedfor the twenty-six weeks ended August 1, 2020, which primarily consisted proceeds from the sale of the fye business, partially offset by the seasonalitycapital expenditures 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.

27

$0.6 million.   Cash used in investing activities was $1.4 million for the twenty-six weeks ended August 3, 2019, which primarily consisted primarily of capital expenditures.


Cash providedused by financing activities was $3.3 million for the twenty-six weeks ended August 1, 2020.  The primary use of cash was the payoff of the Credit Facility.  The payoff the Credit Facility was partially offset by borrowings under the New Credit Facility of $2.2 million, the Subordinated Loan Agreement of $5.2 million and borrowings from the Payroll Protection Program of $2.0 million. Cash used in financing activities was $12.1 million for the twenty-six weeks ended August 3, 2019, which was comprised entirely of $12.1 million proceeds from short-termshort term borrowings.


Capital Expenditures.During the thirteen and twenty-six weeks ended August 3, 2019, respectively,1, 2020, the Company made capital expenditures of $0.7 million and $1.5 million, respectively.$0.6 million. The Company currently plans to spend approximately $3.9$1.5 million for capital expenditures during fiscal 2019.

2020

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements.  Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs and income taxes.  Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K as of and for the year ended February 2, 20191, 2020 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements.  As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a critical accounting policy. With the exception of goodwill, thereThere have been no material changes or modifications to the critical accounting policies since February 2, 2019.

1, 2020.


Recent Accounting Pronouncements:


The information set forth under Note 3,2, Recently Adopted Accounting Pronouncements section contained in Item 1, “Notes to Interim Condensed Consolidated Financial Statements”, is incorporated herein by reference.

Non-GAAP Measures:

This Form 10-Q contains certain non-GAAP metrics, including: adjusted operating loss for the etailz segment and SG&A excluding depreciation and amortization expenses, for each reporting segment. A non-GAAP measure is not a recognized measure of financial performance under GAAP in the United States, and should not be considered as a substitute for SG&A expenses, operating earnings, net earnings from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. Non-GAAP items are provided because management believes that, when reconciled from the GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance.

The Company calculates etailz adjusted loss from operations to evaluate its own operating performance and as an integral part of its planning process. The Company presents etailz adjusted loss from operations as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.

The Company calculates SG&A expenses, excluding depreciation and amortization expenses, for each reporting segment to evaluate its own operating performance and as an integral part of its planning process. The Company presents SG&A expenses, excluding depreciation and amortization expenses, as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.

28

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION


Item 3 - Quantitative and Qualitative Disclosures about Market Risk


The Company does not hold any financial instruments that expose it to significant market risk and does not engage in hedging activities.  To the extent the Company borrows under its revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its credit facility can be variable.  If interest rates on the Company’s revolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, interest expense would be increased by $2,500 per year.  For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019.

1, 2020.

Item 4 – Controls and Procedures


(a)   Evaluation of disclosure controls and procedures.    The Company’s ChiefPrincipal  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 August 3, 2019,1, 2020, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


(b)Changes in internal controls.There    The sale of the fye business was significant to the Company and was consummated on February 20, 2020. The Company intends to take a period of time to incorporate the impact of the transaction into its evaluation of internal control over financial reporting. In connection with the foregoing evaluation by the Company’s Principal Executive Officer and Chief Financial Officer, other than as noted above, there have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

29

TRANS WORLD ENTERTAINMENT CORPORATION

KASPIEN HOLDINGS INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION


Item 1 – Legal Proceedings

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


Loyalty Memberships and Magazine Subscriptions Class Action

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


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

Store Manager Class Actions

There are two pending class actions.  The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”).  The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide.  It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers “SAMs”(“SAMs”) nationwide, and that both SMs and SAMs worked “off-the-clock.”  It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs.  The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017August 1017 (the “Roper Action”).  The Roper Action also asserts a nationwide misclassification claim on behalf of Store Managers.SMs.  Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.

Plaintiffs moved


The Company has reached a settlement with the plaintiffs for conditional certification of a collective of SMs in June 2018, and that motion was partially granted in January 2019.both store manager class actions.  The opt-in periodCompany reserved $425,000 for the collective that was certified was closed on April 6, 2019. Opt-in discovery relating to that potential collective has commenced.The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to vigorously defend the action.

settlement as of February 2, 2020.

Item 1A – Risk Factors

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 fiscal year ended February 2, 2019.

30
1, 2020.

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.


Item 5 – Other Information

None.


Item 6 - Exhibits


(A) Exhibits -

Exhibit No. Description
3.9
Exhibit No.
 Certificate of Amendment to the Certificate of Incorporation.
Description
 
10.1
31.1
 Offer Letter by and between Trans World Entertainment Corporation and Kunal Chopra, dated July 5, 2019.
31.1Chief 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)
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SIGNATURES


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

TRANS WORLD ENTERTAINMENT CORPORATION


KASPIEN HOLDINGS INC.

September 17, 201915, 2020By: /s/ Michael FeurerKunal Chopra
Kunal Chopra
 Michael Feurer
ChiefPrincipal Executive Officer
 (Principal Executive Officer)

September 17, 201915, 2020By: /s/ Edwin Sapienza
 Edwin Sapienza

Chief Financial Officer

(Principal and Chief Accounting Officer)
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