UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~August~~May 4, ~~2018.~~2019.

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _________ to _________ .

Commission file number 001-14565

FRED’S, INC.

(Exact name of registrant as specified in its charter)

~~FRED’S, INC.~~
~~(Exact name of registrant as specified in its charter)~~
TENNESSEE	62-0634010
~~TENNESSEE~~	~~62-0634010~~
(State or Other Jurisdiction of	(I.R.S. Employer Identification Number)
Incorporation or Organization)

4300 New Getwell Road
Memphis, Tennessee 38118
(Address and Zip Code of Principal Executive Offices)

(901) 365-8880
(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Class A Common Stock, no par value

Share Purchase Rights

FRED

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.☐ .

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation ~~S-T~~S-T(§232.405 of this chapter ) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐.☐ .

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐☒

Emerging Growth Company ☐

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. ☐

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

☒ .

The registrant had ~~37,260,158~~35,239,125 shares of Class A voting, no par value common stock outstanding as of ~~September 7, 2018.~~June 18, 2019.

FRED’S, INC.

INDEX

~~FRED’S, INC.~~

~~INDEX~~

	Page No.
Part I - Financial Information

Item 1 - Financial ~~Statements~~Statements::

Condensed Consolidated Balance Sheets as of ~~August~~May 4, ~~2018~~2019 (unaudited) and February ~~3, 2018~~2, 2019	3

Condensed Consolidated Statements of Operations for the Thirteen weeks Ended May 4, 2019 (unaudited) and ~~Twenty-six Weeks Ended August 4,~~May 5, 2018 (unaudited) ~~and July 29, 2017 (unaudited)~~	4

Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss (unaudited)	5

Condensed Consolidated Statements of Changes in Shareholders' Equity for the Thirteen weeks Ended May 4, 2019 (unaudited) and ~~Twenty-six Weeks Ended August 4,~~May 5, 2018 (unaudited) ~~and July 29, 2017 (unaudited)~~	5 6

Condensed Consolidated Statements of Cash Flows for the ~~Twenty-six Weeks~~Thirteen weeks Ended ~~August~~May 4, ~~2018~~2019 (unaudited) and ~~July 29, 2017~~May 5, 2018 (unaudited)	6 7

Notes to Condensed Consolidated Financial Statements (unaudited)	~~7-20~~ 8

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~21-26~~ 21

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	26 27

Item 4 – Controls and Procedures	26 28

Part II - Other Information	~~27-29~~ 29

Item 1 – Legal Proceedings	27 29
Item 1A – Risk Factors	27 29
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	27 30
Item 3 – Defaults Upon Senior Securities	27 30
Item 4 – Mine Safety Disclosures	27 30
Item 5 – Other Information	27 30
Item 6 – Exhibits	28 31

Signatures	29 32

Part I – ~~FINANCIAL~~FINANCIAL INFORMATION

Item 1. Financial Statements

FRED’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for number of shares)

	May 4, 2019			February 2,
	(unaudited)			2019
ASSETS
Current assets:
Cash and cash equivalents	$	7,184		$	5,353
Inventories		221,460			246,517
Receivables, less allowance for doubtful accounts of $2,369 and $1,360, respectively		23,243			22,970
Other non-trade receivables		29,645			30,412
Current assets held for sale		—			—
Prepaid expenses and other current assets		6,924			10,074
Total current assets		288,455			315,327
Property and equipment, less accumulated depreciation and amortization		64,186			66,346
Noncurrent assets held for sale		4,839			4,839
Intangible assets, net		19,279			21,463
Other noncurrent assets, net		98,016			1,050
Total assets	$	474,774		$	409,025
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	105,897		$	97,107
Current portion of indebtedness		80,631			58,641
Accrued expenses and other		74,129			58,352
Current liabilities held for sale		—			—
Total current liabilities		260,657			214,100
Long-term portion of indebtedness		14,429			14,446
Noncurrent liabilities held for sale		—			—
Other noncurrent liabilities		105,081			15,015
Total liabilities		380,167			243,560

Commitments and contingencies (see Note 8- Leases, Note 9-Legal Contingencies and Note 10-Indebtedness)
Shareholders’ equity:
Preferred stock, nonvoting, no par value, 10,000,000 shares authorized, none outstanding		—			—
Preferred stock, Series C junior participating voting, no par value, 50,000 shares authorized, none outstanding		—			—
Common stock, Class A voting, no par value, 60,000,000 shares authorized, shares issued and outstanding 39,060, 971 at May 4, 2019 and 38,788,689 at February 2, 2019, respectively		127,705			127,182
Common stock, Class B nonvoting, no par value, 11,500,000 shares authorized, none outstanding		—			—
Treasury Stock, at cost; 3,800,000 shares at May 4, 2019 and 3,800,000 shares at February 2, 2019.		(10,823	)		(10,823	)
Retained earnings		(22,830	)		48,547
Accumulated other comprehensive income		555			559
Total shareholders’ equity		94,607			165,465
Total liabilities and shareholders’ equity	$	474,774		$	409,025

August 4, February 3,
2018 2018
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,781 $ 6,573
Inventories 263,982 279,175
Receivables, less allowance for doubtful accounts of $2,272 and $1,355, respectively 36,085 37,720
Other non-trade receivables 29,207 31,500
Current assets held for sale — 19,903
Prepaid expenses and other current assets 11,049 10,055
Total current assets 346,104 384,926
Property and equipment, less accumulated depreciation and amortization 107,927 115,466
Intangible assets, net 46,187 54,888
Noncurrent assets held for sale — 41,717
Other noncurrent assets, net 1,508 568
Total assets $ 501,726 $ 597,565

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 117,933 $ 129,213
Current portion of indebtedness 68 65
Accrued expenses and other 71,079 67,977
Current liabilities held for sale — 26,572
Total current liabilities 189,080 223,827
Long-term portion of indebtedness 162,523 167,100
Noncurrent liabilities held for sale — 48
Other noncurrent liabilities 21,236 25,542
Total liabilities 372,839 416,517
Commitments and contingencies (see Note 6-Long-Term Leases, Note 10-Other Commitments and Contingencies and Note 11-Indebtedness)
Shareholders’ equity:
Preferred stock, nonvoting, no par value, 10,000,000 shares authorized, none outstanding — —
Preferred stock, Series A junior participating nonvoting, no par value, 224,594 shares authorized, none outstanding — —
Preferred stock, Series B junior participating voting, $100 par value, 50,000 shares authorized, no shares issued or outstanding — —
Preferred stock, Series C junior participating voting, $60 par value, 50,000 shares authorized, no shares issued or outstanding — —
Common stock, Class A voting, no par value, 60,000,000 shares authorized, 37,260,158 and 38,366,517 shares issued and outstanding, respectively 126,105 123,950
Common stock, Class B nonvoting, no par value, 11,500,000 shares authorized, none outstanding — —
Treasury Stock, at cost; 1,242,000 shares at August 4, 2018 and at February 3, 2018 (4,975 ) (4,975 )
Retained earnings 7,198 61,514
Accumulated other comprehensive income 559 559
Total shareholders’ equity 128,887 181,048
Total liabilities and shareholders’ equity $ 501,726 $ 597,565

See accompanying notes to condensed consolidated financial statements.

FRED’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

	For the Thirteen Weeks Ended
	May 4, 2019			May 5, 2018
Net sales	$	318,951		$	336,399
Cost of goods sold		244,352			247,329
Gross profit		74,599			89,070

Depreciation and amortization		5,055			8,300
Impairment expense		297			—
Selling, general and administrative expenses		96,036			100,941
Total selling, general and administrative expenses		101,388			109,241
Operating loss		(26,789	)		(20,171	)

Interest expense		2,754			1,988
Loss before income taxes		(29,543	)		(22,159	)

Provision for income taxes		—			(196	)
Loss from continuing operations		(29,543	)		(21,963	)
Loss from discontinued operations, net of tax		(4,397	)		(48	)
Net loss	$	(33,940	)	$	(22,011	)

Net loss per share - basic
Continuing operations	$	(0.84	)	$	(0.60	)
Discontinued operations		(0.12	)		(0.00	)
Total loss per common share - basic	$	(0.96	)	$	(0.60	)

Net loss per share - diluted
Continuing operations	$	(0.84	)	$	(0.60	)
Discontinued operations		(0.12	)		(0.00	)
Total loss per common share - diluted	$	(0.96	)	$	(0.60	)

Weighted average common shares outstanding
Basic		35,211			36,485
Effect of dilutive stock options		—			—
Diluted		35,211			36,485

Thirteen Weeks Ended Twenty-Six Weeks Ended
August 4, July 29, August 4, July 29,
2018 2017 2018 2017
Net sales $ 419,658 $ 438,527 $ 856,771 $ 902,699
Cost of goods sold 319,193 315,780 644,699 651,386
Gross profit 100,465 122,747 212,072 251,313

Depreciation and amortization 9,812 10,665 19,842 21,543
Selling, general and administrative expenses 112,086 139,712 231,726 292,604
Operating loss (21,433 ) (27,630 ) (39,496 ) (62,834 )

Interest expense 1,720 1,437 3,708 2,724
Loss before income taxes (23,153 ) (29,067 ) (43,204 ) (65,558 )

Provision (benefit) for income taxes (229 ) (150 ) (425 ) 1,129
Net loss from continuing operations $ (22,924 ) $ (28,917 ) $ (42,779 ) $ (66,687 )
Net loss from discontinued operations (9,380 ) (600 ) (11,536 ) 709
Net Loss $ (32,304 ) $ (29,517 ) $ (54,315 ) $ (65,978 )

Net (loss) income per share - basic
Continuing operations $ (0.62 ) $ (0.77 ) $ (1.17 ) $ (1.78 )
Discontinued operations (0.26 ) (0.02 ) (0.32 ) 0.02
Total loss per common share - basic $ (0.88 ) $ (0.79 ) $ (1.48 ) $ (1.76 )

Net (loss) income per share - diluted
Continuing operations $ (0.62 ) $ (0.77 ) $ (1.17 ) $ (1.78 )
Discontinued operations (0.26 ) (0.02 ) (0.32 ) 0.02
Total loss per common share - diluted $ (0.88 ) $ (0.79 ) $ (1.48 ) $ (1.76 )

Weighted average shares outstanding
Basic 36,687 37,461 36,586 37,408
Effect of dilutive stock options — — — —
Diluted 36,687 37,461 36,586 37,408

See accompanying notes to condensed consolidated financial statements.

FRED’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)

	For the Thirteen Weeks Ended
	May 4, 2019			May 5, 2018
Comprehensive loss:
Net loss	$	(33,940	)	$	(22,011	)
Other comprehensive expense, net of tax
Postretirement plan adjustment		(4	)		—
Comprehensive loss	$	(33,944	)	$	(22,011	)

Thirteen Weeks Ended Twenty-Six Weeks Ended
August 4, July 29, August 4, July 29,
2018 2017 2018 2017
Net loss $ (32,304 ) $ (29,517 ) $ (54,315 ) $ (65,978 )
Other comprehensive income (expense), net of tax postretirement plan adjustment — — — —

Comprehensive loss $ (32,304 ) $ (29,517 ) $ (54,315 ) $ (65,978 )

See accompanying notes to condensed consolidated financial statements.

FRED’S, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)

															Accumulated
															Other
	Common Stock					Treasury Stock						Retained			Comprehensive
	Shares			Amount		Shares			Amount			Earnings			Income			Total
Balance, February 2, 2019		38,788,689			127,182		(3,800,000	)		(10,823	)		48,547			559			165,465
Restricted stock grants, net of cancellations		273,283			—		—			—			—			—			—
Issuance of shares, other		—			—		—			—			—			—			—
Retired shares under employee stock ownership plan		(981	)		—		—			—			—			—			—
Repurchased and cancelled shares		—			—		—			—			—			—			—
Stock-based compensation		—			523		—			—			—			—			523
Adjustment for postretirement benefits (net of tax)		—			—		—			—			—			(4	)		(4	)
Cumulative effect of adopted accounting standard		—			—		—			—			(37,437	)		—			(37,437	)
Net loss		—			—		—			—			(33,940	)		—			(33,940	)
Balance, May 4, 2019		39,060,991			127,705		(3,800,000	)		(10,823	)		(22,830	)		555			94,607

														Accumulated
														Other
	Common Stock				Treasury Stock						Retained			Comprehensive
	Shares		Amount		Shares			Amount			Earnings			Income		Total
Balance, February 3, 2018		38,366,517		123,950		(1,242,000	)		(4,975	)		61,514			559		181,048
Restricted stock grants and cancellations		32,517		—		—			—			—			—		—
Retired shares under employee stock purchase plan		—		—		—			—			—			—		—
Repurchased and cancelled shares		—		—		—			—			—			—		—
Stock-based compensation		—		1,248		—			—			—			—		1,248
Adjustment for postretirement benefits (net of tax)		—		—		—			—			—			—		—
Purchase of Treasury Stock		—		—		—			—			—			—		—
Net loss		—		—		—			—			(22,011	)		—		(22,011	)
Balance, May 5, 2018		38,399,034		125,198		(1,242,000	)		(4,975	)		39,503			559		160,285

See accompanying notes to condensed consolidated financial statements.

FRED’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Twenty Six Weeks Ended						Thirteen Weeks Ended
	August 4, 2018			July 29, 2017			May 4, 2019			May 5, 2018
Cash flows from operating activities:
Net loss	$	(42,779	)	$	(66,687	)	$	(29,543	)	$	(21,963	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		19,842			21,577			5,104			8,314
Net loss (gain) on asset disposition		(383	)		(124	)
Provision for store closures and asset impairment		164			2,199
Net gain on asset disposition								310			13
Asset impairments								284			—
Stock-based compensation		2,245			3,030			522			1,246
Provision (recovery) for uncollectible receivables		95			(308	)
LIFO reserve decrease		171			(1,359	)
(Recovery) for uncollectible receivables								1,010			(330	)
LIFO reserve increase								(1,509	)		(530	)
Deferred income tax benefit		(12	)		985			(15	)		—
Amortization of debt issuance costs		123			91			225			123
Changes in operating assets and liabilities, net of effects of business sold:
Changes in operating assets and liabilities, net of effects of business acquired:
(Increase) decrease in operating assets:
Trade and non-trade receivables		2,973			6,686			(519	)		5,734
Insurance receivables		—			(45	)
Inventories		15,022			11,233			26,566			(13,316	)
Other assets		(1,928	)		6,421			(93,814	)		(475	)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses		(8,178	)		8,150			24,567			8,869
Income taxes receivable		981			(28	)		10			1,197
Other noncurrent liabilities		(4,305	)		9,107			52,636			(1,638	)
Net cash provided by (used in) operating activities of continuing operations		(15,969	)		928
Net cash used in operating activities of continuing operations								(14,166	)		(12,756	)

Cash flows from investing activities of continuing operations:
Capital expenditures		(4,921	)		(7,278	)		(1,444	)		(2,468	)
Proceeds from asset dispositions		1,421			1,272			90			—
Asset acquisitions, net (primarily intangibles)		—			(1,853	)
Net cash provided by (used in) investing activities of continuing operations		(3,500	)		(7,859	)		(1,354	)		(2,468	)

Cash flows from financing activities of continuing operations:
Payments of indebtedness and capital lease obligations		(32	)		(29	)		(17	)		(16	)
Proceeds from revolving line of credit		378,204			464,443			215,211			228,043
Payments on revolving line of credit		(382,576	)		(453,774	)		(193,186	)		(219,460	)
Debt issuance costs		(293	)		(457	)		(260	)		(256	)
Payments from exercise of stock options and employee stock purchase plan		(149	)		(167	)
(Distributions to)/contribution from subsidiary		23,523			1,381
Cash dividends paid		—			(4,564	)
Net cash provided by financing activities of continuing operations		18,677			6,833
Proceeds (payments) from exercise of stock options and employee stock purchase plan								—			(31	)
Transfer (to) from discontinued operations								(4,397	)		6,767
Net cash (used in ) provided by financing activities of continuing operations								17,351			15,047

Decrease in cash and cash equivalents		(792	)		(98	)		1,831			(177	)

Cash flow from discontinued operations
Cash flows from operating activities of discontinued operations, net		(15,384	)		1,632			(4,397	)		6,449
Cash flows from investing activities of discontinued operations, net		38,907			(251	)
Cash flows from financing activities of discontinued operations, net		(23,523	)		(1,381	)		4,397			(6,767	)
Net decrease in cash and cash equivalents		(792	)		(98	)
Net increase (decrease) in cash and cash equivalents								1,831			(495	)
								—
Cash and cash equivalents, beginning of year		6,573			5,830			5,353			6,573
Cash and cash equivalents of discontinued operations/held for sale operations, beginning of year		—			—
Net decrease in cash and cash equivalents		(792	)		(98	)
Less: cash and cash equivalents of discontinued/held for sale operations at end of period		—			—
Cash and cash equivalents, end of period	$	5,781		$	5,732
Net increase (decrease) in cash and cash equivalents								1,831			(495	)
Cash and cash equivalents, end of year							$	7,184		$	6,078

Supplemental disclosures of cash flow information:
Interest paid		3,481			2,724			1,114			6,297
Income taxes refunded		(430	)		(1,396	)		—			(1,721	)

See accompanying notes to condensed consolidated financial statements.

FRED’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

Fred’s, Inc. and its subsidiaries (“Fred’s”, ~~“Fred’s Pharmacy”,~~ “We”, “Our”, “Us” or the “Company”) ~~operate,~~operated, as of ~~August~~May 4, ~~2018, 593~~2019, 556 discount general merchandise stores in fifteen states in the Southeastern United States. ~~Included in~~Our mission is to improve the ~~count~~lives of ~~discount general merchandise stores are 12 franchised locations.~~ customers by selling products that deliver value and convenience to the communities we serve. There are ~~347~~169 full service pharmacy departments located within our discount general merchandise stores, including one within franchised locations.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. The accompanying financial statements reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position in conformity with GAAP. The accompanying financial statements should be read in conjunction with the Notes to the Consolidated Financial Statements for the fiscal year ended February ~~3, 2018~~2, 2019 included in our Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission (the “SEC”) on May ~~4, 2018.~~3, 2019.

We meet the SEC’s definition of a “Smaller Reporting Company,” and therefore qualify for the SEC’s reduced disclosure requirements for smaller reporting companies.

During the second quarter of fiscal year 2018, the Company completed the sale of its specialty pharmacy business for a cash purchase price of $40.0 million (plus an additional $5.5 million for inventory). During the fourth quarter of ~~2017,~~fiscal 2018, Fred’s completed its sale of certain prescription files and the related data and records, retail pharmaceutical inventory and certain other assets from 179 of the Company’s retail pharmacy stores for a cash purchase price of approximately $176.7 million. The results of operations for both businesses have been presented as discontinued operations in accordance with Accounting Standards Codification (“ASC” Topic 205-20) ASC 205-20- Results of Operations – Discontinued operations for all periods presented. See Note 2: Assets Held for Sale and Discontinued Operations for additional information.

In addition, during the fourth quarter of 2018, Fred’s Board of Directors (the “Board”) approved a plan to actively market its ~~specialty pharmacy business.~~headquarters building located in Memphis, TN. The specialty pharmacy business met the criteria for “Assets held for Sale” in accordance with Accounting Standards Codification (“ASC”) Topic 360 (ASC 360), Property, Plant and Equipment as of February 3, 2018. The Specialty Pharmacy assets and liabilities arebuilding has been reflected as ~~“Assets Held-for-Sale”~~Assets Held for Sale on the consolidated balance sheets in ~~this report in~~ accordance with ASC ~~360. In addition, the results of operations~~360 – Assets held for ~~the specialty pharmacy business have been presented in this report as discontinued operations in accordance with ASC 205-20, Results of Operations –~~sale. See Note 2: Assets Held for Sale and Discontinued Operations for ~~all periods presented.~~ additional information.

Excluding the “Assets ~~Held-for-Sale”~~Held for Sale and Discontinued Operations” subsection, amounts and percentages for all periods discussed below reflect the results of operations and financial condition from Fred’s continuing operations.

On May 4, 2018, Fred’s entered into an Asset Purchase Agreement (“the Specialty Asset Purchase Agreement”) with Advance Care Scripts, Inc. (“the Specialty Buyer”), pursuant to which the Specialty Buyer agreed to purchase certain specialty pharmacy assets of certain subsidiaries of Fred’s, National Pharmaceutical Network, Inc. and Reeves-Sain Drug Store, Inc. (collectively referred to as “Entrust”), consisting of three pharmacy locations, pharmaceutical inventory, and related intellectual property. The Specialty Buyer paid Fred’s $40.0 million for the purchased assets (plus up to an additional $5.5 million for inventory). On June 1, 2018, the sale of the specialty pharmacy assets was completed. See Note 2: Assets Held for Sale and Discontinued Operations for additional information.

~~Certain prior year amounts have been reclassified to conform to the 2018 presentation. Such reclassifications had no effect on previously reported net loss.~~

The results of operations for the ~~thirteen week and twenty-six week periods~~thirteen-week period ended ~~August~~May 4, ~~2018~~2019 are not necessarily indicative of the results to be expected for the full fiscal year.

All references in this Quarterly Report on Form 10-Q to 2017 and 2018 refer to the Company’s fiscal years ended February 3, 2018 and ending February 2, 2019, respectively.

Going Concern

As discussed in our Annual Report on Form 10-K for fiscal year 2018 filed with SEC on May 3, 2019, the Company has experienced significant net losses and negative cash flows from operating activities in recent years and cannot offer assurance that such losses and negative cash flows will not continue for the foreseeable future. For the fiscal years ended February 2, 2019 and February 3, 2018, the Company incurred net losses of $136.2 million and $144.5 million, respectively, and our net cash flows used in operating activities were $91.7 million and $44.7 million, respectively. For the thirteen-week periods ended May 4, 2019 and May 5, 2018, the Company incurred net losses of $33.9 million and $22.0 million, respectively, and our net cash flows used in operating activities were $14.2 million and $12.8 million, respectively. Furthermore, the Company has limited availability under its Revolving Credit Agreement (as defined below), which along with cash from operations has traditionally been the Company’s primary source of working capital. As of May 4 , 2019, the Company had outstanding borrowings of $81.3 million under our Revolving Credit Agreement and excess availability of $33.0 million. Under our Revolving Credit Agreement, we have a financial covenant to maintain at all times excess availability of at least 10% of the commitments, and if excess availability falls below such threshold ($21.0 million at May 4, 2019), it would constitute an event of default under the Revolving Credit Agreement. The Company’s failure to comply with the financial covenants and other obligations under the Revolving Credit Agreement would result in an event of default, which if not cured or waived, may permit acceleration of our indebtedness and other remedies. If our indebtedness is accelerated, whether due to the Revolver EODs described in Note 10 or otherwise, the Company cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all, which could have a material

adverse effect on the Company’s business, results of operations and financial condition and could impact our ability to continue as a going concern. Furthermore, our Revolving Credit Agreement has a maturity date of April 9, 2020, and we can provide no assurance that we will be able to renew or refinance such facility on terms acceptable to us or at all. The foregoing conditions raise substantial doubt about the Company’s ability to continue as a going concern.

As further described in Note 10 below, on May 15, 2019, the Company and certain of its subsidiaries entered into the Forbearance Agreement, Eighth Amendment to Credit Agreement and Fourth Amendment to Amended and Restated Addendum to Credit Agreement (the “Forbearance Agreement and Eighth Amendment”) in response to certain events of default identified by our lenders. As a result of the Forbearance Agreement and Eighth Amendment, the lenders under the Revolving Credit Agreement have agreed, subject to the satisfaction of certain conditions, to not take any action to accelerate our indebtedness or exercise other remedies with respect to the Revolver EODs until July 22, 2019, but there can be no assurance that such lenders will not do so on or after such date or if the conditions in the Forbearance Agreement and Eighth Amendment are not met in the future. We are in discussions with potential financing sources relating to the condition in the Forbearance Agreement and Eighth Amendment to obtain a signed commitment letter for a refinancing of all loans under the Revolving Credit Agreement. There can be no assurance that we will obtain such a commitment letter or complete a refinancing by the deadlines in the Forbearance Agreement and Eighth Amendment or at all.

The Company has evaluated its plans to alleviate this doubt, including engaging PJ Solomon in April 2019 to assist the Company in evaluating its strategic alternatives. In addition, while we analyze these strategic alternatives, the Company is also assessing potential alternative financing arrangements and undertaking a number of operational measures that we believe will enhance our cash position and improve our profitability, including, among other things:

Completed the closure of 159 stores as of June 1, 2019 and liquidated inventory located at those stores;

Closing an additional 104 stores by the end of June 2019 and liquidating the inventory located at those stores;

Sales events at our other stores;

Attempting to renegotiate leases with our landlords to more favorable terms;

Reducing general and administrative expenses by eliminating corporate position and expenses; and

Reducing capital expenditures associated with certain information technology and real estate projects.

The accompanying consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

Recent Accounting ~~Pronouncements~~Pronouncements.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.This ASU provides companies with the option to reclassify tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”) within Accumulated Other Comprehensive Income into Retained Earnings. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company ~~is currently evaluating~~adopted the ~~effect this~~ ASU ~~will~~during the thirteen weeks ended May 4, 2019, however, the adoption did not have ~~on its~~a material impact to our financial position, results of operations ~~and~~or the cash flows.

~~In October 2016, the FASB issued ASU 2016-16,~~~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory~~. ASU 2016-16 requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. The guidance must be applied using the modified retrospective basis. This update is effective for the Company at the beginning of fiscal 2018. The Company has adopted the provisions of ASU 2016-16 and it has had no impact on its financial statements.

In February 2016, the FASB ~~issued~~established ASU No. 2016-02Leases (Topic 842)~~. The amendments in the ASU are designed~~, which requires lessees to ~~increase transparency~~recognize a right-of-use (ROU) asset and ~~comparability among organizations by recognizing~~a lease ~~assets and lease liabilities~~liability on ~~the~~their balance sheet ~~and disclosing key information about leasing arrangements. The amendments in this ASU are effective~~ for ~~the annual reporting periods beginning after December 15, 2018, including the interim periods within that reporting period. Early adoption is permitted. The Company has identified~~ all leases, ~~impacted by this pronouncement. Currently, the Company is evaluating different software available to maintain all~~including operating leases, ~~in compliance~~ with ~~this pronouncement. The Company has established~~ a ~~committee to ensure compliance with this standard upon adoption in 2019. The Company does not plan to early adopt and expects material changes to the financial position created at the inception~~term of ~~compliance with this standard. The Company will continue to evaluate the impact the guidance will have on the Company’s financial position, results of operations and cash flows.~~

greater than 12 months. In ~~August 2015,~~July 2018, the FASB issued ASU ~~2015-14, Revenue from Contracts with Customers (Topic 606), an update~~2018-11 which added a transition option permitting entities to ~~ASU 2014-09. This ASU amends ASU 2014-09 to defer~~apply the ~~effective~~provisions of the new standard at its adoption date ~~by one year for annual~~instead of the earliest comparative period presented in the condensed consolidated financial statements. Under this transition option, comparative reporting ~~periods beginning after December 15, 2017. Subsequently,~~would not be required, and the ~~FASB has also issued accounting standards updates which clarify~~provisions of the guidance. This ASU removes inconsistencies, complexities and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and capital markets by providing a single comprehensive principles-based model with additional disclosures regarding uncertainties. The principles-based revenue recognition model has a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. In transition, the ASU maystandard would be applied ~~retrospectively~~prospectively to ~~each prior period presented or retrospectively with the cumulative~~leases in effect ~~recognized as of~~at the date of adoption. We adopted the new standard on February 3, 2019 and elected to use the optional transition method provided by ASU 2018-11. An adjustment to beginning retained earnings of $37.4 million was required related to the impairment of ROU at adoption. See Note 8-Leases for further discussion of the adoption Topic 842.

The Company ~~has evaluated~~also elected the package of practical expedients permitted under the transition guidance within the new standard. The following practical expedients were applied when implementing the new standard:

•

We did not reassess whether any expired or existing contracts are or contain a lease. Additionally, we did not reassess the lease classification for any expired or existing leases, or initial direct costs for any existing leases.

We elected not to separate lease components from nonlease components and instead elected to account for each separate lease component and the nonlease component associated with it as a single lease component recognized on the condensed consolidated balance sheet. This election was made for all classes of underlying assets.

We elected the short-term lease exception for all classes of underlying assets. The cost of these leases have been recognized on a straight-line basis over the lease term and are not recognized in the ROU asset and lease liability balances.

We elected the land easement exception to maintain the current accounting treatment of existing contracts and ~~has implemented this~~did not reassess whether those contracts met the definition of a lease.

The adoption of the new standard ~~and there was no~~had a material impact on our condensed consolidated balance sheet for the addition of lease assets and liabilities, primarily related to real estate operating leases. The adoption of the ~~Company’s statement of position,~~new standard did not have a material impact on our results of operations or ~~statement of~~ cash ~~flow.~~flows.

Revenue Recognition

Sales

The vast majority of Fred’s contracts with customers are made at the point of sale (POS) in the retail stores, and the performance obligation is the transfer of merchandise which is satisfied at POS when customer pays for merchandise and title transfers to them.

340B Revenues

We evaluated principal versus agent considerations with regards to the 340B Direct program under ASC 606. Because Fred’s is primarily responsible for fulfilling the promise to provide the 340B Direct prescription drugs and assumes control of and risk for inventory prior to transfer of goods to the customer, including pricing apart from when determined by federal mandate, Fred’s recognizes revenue on a gross basis as principal for the 340B Direct program.

Gift Card and Breakage

When customers purchase gift cards, the sale is not recognized until the card is redeemed. The gift cards are not always fully redeemed and as such, the Company recognizes breakage. Based on the results from our historical breakage model, the Company defines the likelihood of redemption as remote after three years of no activity.

Layaway Plans

Store layaways are agreements with our customers to provide or deliver goods for a specified price at a future date. Layaway programs run annually for a duration of less than one year and are most popular during the Christmas seasons. Under the Company’s layaway plan, the customer is obligated to pay only the amount equivalent to the value of the good plus sales tax. The Company does not assess a layaway fee or interest but requires an upfront deposit. The customer does not take delivery of the merchandise until the full value is collected.

Our performance obligation is the transfer of merchandise which is satisfied at the point of customer pick-up, not at transaction initiation. Any payments received prior to customer pick-up are considered advance payments and deferred and recognized when the performance obligation is satisfied. Layaway sales are deferred when the customer transaction is initiated and are recognized as revenue when the layaway merchandise is transferred.

Disaggregated Revenues

In the following table, consolidated sales are disaggregated by major merchandising category.

	Thirteen Weeks Ended		Twently Six Weeks Ended		For the Thirteen Weeks Ended
(in thousands)	August 4, 2018		August 4, 2018
					May 4, 2019		May 5, 2018
Pharmacy		216,471		489,195	$	104,651	$	103,969
Consumables		125,466		261,908		114,332		136,520
Household Goods and Softlines		95,338		190,124		95,990		92,902
Franchise		2,649		5,656		3,978		3,007
Total		439,924		946,883
Total Sales Mix					$	318,951	$	336,399

~~Termination of Rite Aid Asset Purchase Agreement~~10

On December 19, 2016, Fred’s and its wholly-owned subsidiary, AFAE, LLC (“AFAE”), entered into an Asset Purchase Agreement (the “Rite Aid Asset Purchase Agreement”) with Rite Aid Corporation (“Rite Aid”) and Walgreens Boots Alliance, Inc. (“Walgreens”), pursuant to which AFAE agreed to purchase 865 stores, certain intellectual property and other tangible assets (collectively, the “Assets”) and to assume certain liabilities for a cash purchase price of $950 million (the “Rite Aid Transaction”). Pursuant to Section 8.01(g) of the Rite Aid Asset Purchase Agreement, each of AFAE, Walgreens or Rite Aid was permitted to terminate the Asset Purchase Agreement upon the termination of that certain Agreement and Plan of Merger, dated as of October 27, 2015, among Walgreens, Rite Aid and the other parties thereto (as amended, the “Merger Agreement”).

On June 29, 2017, the Merger Agreement was terminated and, accordingly, the Rite Aid Asset Purchase Agreement was also terminated, effective immediately. In connection with the termination of the Rite Aid Asset Purchase Agreement, the Company received a termination fee payment of $25 million on June 30, 2017, which was recorded in selling, general and administrative expenses to offset the expenses incurred.

~~See Note 11: Indebtedness for additional information relating to the termination of the Rite Aid Asset Purchase Agreement.~~

NOTE 2: ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

~~As discussed in Note 1, during~~During the fourth quarter of 2017, Fred’s Board of Directors approved a plan to actively market its specialty pharmacy ~~business. Accordingly, the specialty pharmacy~~ business ~~met the criteria for “Assets Held-for-Sale” in accordance with ASC~~

360 as of February 3, 2018. The specialty pharmacy assets and liabilities were reflected as “held for sale” on the consolidated balance sheets in accordance with ASC 360 at February 3, 2018. In addition, the results of operations for the specialty pharmacy business have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented.

The results of the specialty pharmacy business were previously allocated to the Pharmacy segment within the sales mix. The specialty pharmacy recorded a loss from discontinued operations, net of tax, of $9.4 million and $0.6 million for the second quarter of 2018 and 2017; respectively, and a loss from discontinued operations, net of tax, of $11.5 million and net income from operations of $0.7 million, for the first six months of 2018 and 2017; respectively.

Certain corporate overhead and other costs previously allocated to the specialty pharmacy for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.

~~As discussed in Note 1: Basis of Presentation, on~~(“Entrust”). On May 4, 2018, Fred’s entered into the Specialty Asset Purchase Agreement with ~~the~~ Advanced Care Scripts, Inc., a Florida corporation (“Specialty ~~Buyer,~~Buyer”) and an affiliate of CVS Health Corporation, pursuant to which, the Buyer agreed to purchase Entrust, consisting of three pharmacy locations, pharmaceutical inventory, and related intellectual property. The Specialty Buyer paid Fred’s $40.0 million for the purchased assets (plus up to an additional $5.5 million for inventory). On June 1, 2018, the sale of the ~~specialty pharmacy~~Entrust assets was completed. The results of operations for the Entrust business have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented.

On September 7, 2018 the Company, entered into an Asset Purchase Agreement with Walgreen Co., an Illinois corporation. On October 23, 2018, the Company entered into an amendment to the Asset Purchase Agreement (the “Amendment”). Under the Asset Purchase Agreement, as amended by the Amendment (the “Amended WBA Asset Purchase Agreement”), the Company agreed to sell certain prescription files and related data and records, retail pharmaceutical inventory, and certain other assets from 179 of the Company’s 346 retail pharmacy stores (such assets from such 179 retail pharmacy stores collectively referred to as “Retail Pharmacy”) for a cash purchase price of approximately $157 million plus an amount equal to the value of the inventory included in the Retail Pharmacy assets up to an approximately $35 million cap, in each case subject to certain adjustments.

As of the end of the fourth quarter of fiscal 2018, the Company had closed the transactions contemplated by the Amended WBA Asset Purchase Agreement, and the Company received cash proceeds of approximately $156.1 million, plus approximately $20.6 million for the inventory sold in the transaction, in each case after adjustment as described in the Amended WBA Asset Purchase Agreement. The Company recorded a gain of $145.7 million related to the Retail Pharmacy sale. The Company used the proceeds received in the transaction to pay down the Company’s existing indebtedness and for general corporate purposes.

During the fourth quarter of 2018, the Board approved a plan to actively market its headquarters building located in Memphis, TN. As a result, the Company has reclassified the headquarters building to assets held for sale in accordance with ASC 360 – Assets held for sale. The building has been reclassified to held for sale on the consolidated balance sheet and the depreciation associated with the asset has concluded. The Company has assessed the fair value of the building base on the selling price of other assets within the surrounding area. The market price is reasonable in relation to the current selling price of similar assets on the market.

Summarized Discontinued Operations Financial Information

The following table provides a reconciliation of the carrying amounts of major classes of assets and liabilities which are included in assets and liabilities ~~held for sale~~held-for-sale in the accompanying consolidated balance sheet for each of the periods presented:

August 4, February 3,
2018 2018
(in thousands) (unaudited)
Current assets:
Accounts Receivable, net $ — $ 15,983
Inventories 0 3,756
Other non-trade receivables 0 152
Prepaid expenses and other current assets 0 12
Total current assets held-for-sale $ — $ 19,903
Property and equipment, less accumulated depreciation and amortization $ — $ 1,036
Goodwill 0 30,609
Intangible assets, net 0 9,533
Other noncurrent assets, net 0 539
Total noncurrent assets held-for-sale $ 0 $ 41,717

Current liabilities:
Accounts payable $ — $ 22,045
Accrued expenses and other 0 4,527
Total current liabilities held-for-sale $ — $ 26,572

Deferred income taxes $ — $ —
Other noncurrent liabilities — 48
Total noncurrent liabilities held-for-sale $ — $ 48

	Headquarters Building
	May 4,		February 2,
(in thousands)	2019		2019
Property and equipment, less accumulated depreciation and amortization		4,839		4,839
Total noncurrent assets held-for-sale	$	4,839	$	4,839

The following ~~table summarizes~~tables summarize the results of discontinued operations for the thirteen ~~and twenty six~~ weeks ended ~~August~~May 4, 2019 and May 5, 2018, ~~and July 29, 2017:~~respectively:

Discontinued Operations - Entrust

	For the thirteen weeks ended
(in thousands)	May 4, 2019		May 5, 2018
Revenues	$	—	$	69,846
Cost of Goods Sold		—		67,470
Gross Margin		—		2,377
Depreciation and amortization		—		608
Selling, general and administrative expenses		—		3,924
Loss from discontinued operations before income taxes		—		(2,155	)
Loss from discontinued operations, net of tax	$	—	$	(2,155	)

For the Thirteen
Weeks Ended For the Twenty Six
Weeks Ended
(unaudited) (unaudited)
August 4, July 29, August 4, July 29,
(in thousands) 2018 2017 2018 2017
Revenues $ 20,266 $ 69,310 $ 90,112 $ 137,458
Cost of Goods Sold 20,984 66,058 88,454 129,860
Gross Profit (718 ) 3,252 1,658 7,598
Depreciation and amortization 188 631 796 1,379
Selling, general and administrative expenses 8,474 3,094 12,398 5,660
Income (loss) from discontinued operations before Income taxes (9,380 ) (473 ) (11,536 ) 559
Income tax expense (benefit) — 127 — (150 )
Income (loss) from discontinued operations, net of tax (9,380 ) (600 ) (11,536 ) 709

Discontinued Operations - Retail Pharmacy

	For the thirteen weeks ended
(in thousands)	May 4, 2019			May 5, 2018
Revenues	$	—		$	100,715
Cost of Goods Sold		2,337			78,178
Gross Margin		(2,337	)		22,537
Depreciation and amortization		49			1,730
Selling, general and administrative expenses		2,012			18,700
Income (Loss) from discontinued operations before income taxes		(4,397	)		2,107
Income from discontinued operations, net of tax	$	(4,397	)	$	2,107

Total Discontinued Operations

	For the thirteen weeks ended
(in thousands)	May 4, 2019			May 5, 2018
Revenues	$	—		$	170,561
Cost of Goods Sold		2,337			145,647
Gross Margin		(2,337	)		24,914
Depreciation and amortization		49			2,338
Selling, general and administrative expenses		2,012			22,623
Loss from discontinued operations before income taxes		(4,397	)		(48	)
Income (loss) from discontinued operations, net of tax	$	(4,397	)	$	(48	)

NOTE 3: INVENTORIES

Merchandise inventories are valued at the lower of cost or market using the retail first-in, first-out (FIFO) inventory method for goods in our stores and the cost FIFO inventory method for goods in our distribution centers. The retail inventory method is a reverse mark-up, averaging method which has been widely used in the retail industry for many years. This method calculates a cost-to-retail ratio that is applied to the retail value of inventory to determine the cost value of inventory and the resulting cost of goods sold and gross margin. The assumptions that the retail inventory method provides for valuation at lower of cost or market and the inherent uncertainties therein are discussed in the following paragraphs. In order to assure valuation at the lower of cost or market, the retail value of our inventory is adjusted on a consistent basis to reflect current market conditions. These adjustments include increases to the retail value of inventory for initial markups to set the selling price of goods or additional markups to adjust pricing for inflation and decreases to the retail value of inventory for markdowns associated with promotional, seasonal or other declines in the market value. Because these adjustments are made on a consistent basis and are based on current prevailing market conditions, they approximate the carrying value of the inventory at net realizable value (market value). Therefore, after applying the cost to retail ratio, the cost value of our inventory is stated at the lower of cost or market as is prescribed by GAAP.

Because the approximation of net realizable value (market value) under the retail inventory method is based on estimates such as markups, markdowns and inventory losses (shrink), there exists an inherent uncertainty in the final determination of inventory cost and gross margin. In order to mitigate that uncertainty, the Company has a formal review process, conducted by product class which considers such variables as current market trends, seasonality, weather patterns and age of merchandise to ensure that markdowns are taken currently, or a markdown reserve is established to cover future anticipated markdowns on a particular product class. This review also considers current pricing trends and inflation to ensure that markups are taken if necessary. The estimation of inventory losses (shrink) is a significant element in approximating the carrying value of inventory at net realizable value, and as such the following paragraph describes our estimation method as well as the steps we take to mitigate the risk of this estimate in the determination of the cost value of inventory.

The Company calculates inventory losses (shrink) based on actual inventory losses occurring as a result of physical inventory counts during each fiscal period and estimated inventory losses occurring between yearly physical inventory counts. The estimate for shrink occurring in the interim period between physical counts is calculated on a store-specific basis and is based on history, as well as performance on the most recent physical count. It is calculated by multiplying each store’s shrink rate, which is based on the previously mentioned factors, by the interim period’s sales for each store. Additionally, the overall estimate for shrink is adjusted at the corporate level to a three-year historical average to ensure that the overall shrink estimate is the most accurate approximation of shrink based on the Company’s overall history of shrink. The three-year historical estimate is calculated by dividing the “book to physical” inventory adjustments for the trailing 36 months by the related sales for the same period. In order to reduce the uncertainty inherent in the shrink calculation, the Company first performs the calculation at the lowest practical level (by store) using the most current performance indicators. This ensures a more reliable number, as opposed to using a higher level aggregation or percentage method. The ~~second~~third portion of the calculation ensures that the extreme negative or positive performance of any particular store or group of stores does not skew the overall estimation of shrink. This portion of the calculation removes additional uncertainty by eliminating short-term peaks and valleys that could otherwise cause the underlying carrying cost of inventory to fluctuate unnecessarily. The methodology that we have applied in estimating shrink has resulted in variability that is not material to our financial statements.

Management believes that the Company’s retail inventory method provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market. For pharmacy inventories, which were approximately ~~$29.8~~$12.0 million and ~~$31.6~~$13.2 million at ~~August~~May 4, ~~2018~~2019 and February ~~3, 2018,~~2, 2019, respectively, cost was determined using the retail last-in, first-out (LIFO) inventory method in which inventory cost is maintained using the retail inventory method, then adjusted by application of the Producer Price Index published by the U.S. Department of Labor for cumulative annual periods. The current cost of inventories exceeded LIFO cost by approximately ~~$54.2~~$27.3 million at ~~August~~May 4, ~~2018~~2019 and ~~$53.9~~$28.8 million at February ~~3, 2018.~~

2, 2019.

The Company has historically included an estimate of inbound freight and certain general and administrative costs in merchandise inventory as prescribed by GAAP. These costs include activities surrounding the procurement and storage of merchandise inventory such as merchandise planning and buying, warehousing, accounting, information technology and human resources, as well as inbound freight. The total amount of procurement and storage costs and inbound freight, inclusive of the accelerated recognition of freight capitalization expense, included in merchandise inventory at ~~August~~May 4, ~~2018~~2019 is ~~$18.7~~$14.9 million, with the corresponding amount of ~~$17.3~~$21.3 million at February ~~3, 2018.~~2, 2019.

~~During 2016, the Company recorded impairment charges for inventory clearance of product that management identified as low-productive and does not fit our go-forwardmodel. The Company recorded a below-cost inventory adjustment in accordance with FASB Accounting Standards Codification (“ASC”) 330, “~~~~Inventory~~,” of approximately $13.0 million (including $1.6 million, for the accelerated recognition of freight capitalization expense) in cost of goods sold to value inventory at the lower of cost or market on inventory identified as low-productive. At the beginning of 2018, there was $1.8 million (including $0.1 million, for the accelerated recognition of freight capitalization expense) of impairment charges remaining for inventory clearance of product related to 2016 strategic initiatives. During the first six months of 2018, the Company utilized $1.8 million of existing impairment charges related to the 2016 initiatives (including $0.1 million for the accelerated recognition of freight capitalization expense). No amounts remain related to the 2016 initiatives.

~~During the third quarter of 2017, the Company recorded impairment charges for inventory clearance of product that management identified as low-productive and does not fit our go-forwardmodel. The Company recorded a below-cost inventory adjustment in accordance with FASB Accounting Standards Codification (“ASC”) 330, “~~~~Inventory~~,” of approximately $15.6 million (including $1.3 million, for the accelerated recognition of freight capitalization expense) in cost of goods sold to value inventory at the lower of cost or market on inventory identified as low-productive. At the beginning of 2018, there was $4.3 million (including $1.0 million, for the accelerated recognition of freight capitalization expense) of impairment charges remaining for inventory clearance of product related to the 2017 initiatives. During the first six months of 2018, the Company utilized $3.5 million of existing impairment charges related to the 2017 initiatives (including $0.9 million, for the accelerated recognition of freight capitalization expense) leaving $0.8 million remaining.

~~The following table illustrates the inventory impairment charges related to the inventory clearance initiatives discussed in the previous paragraph (in millions):~~

Balance at
February 03, 2018 Additions Utilization Ending Balance
August 4, 2018

Inventory markdown on low-productive inventory (2016 initiatives) $ 1.7 — (1.7 ) $ —
Inventory provision for freight capitalization expense (2016 initiatives) 0.1 — (0.1 ) —
Inventory markdown on low-productive inventory (2017 initiatives) 3.3 — (2.6 ) 0.7
Inventory provision for freight capitalization expense (2017 initiatives) 1.0 — (0.9 ) 0.1
Total $ 6.1 $ — $ (5.3 ) $ 0.8

NOTE 4: STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans in accordance with FASB ASC 718 “~~Compensation~~“Compensation – Stock Compensation.” Under FASB ASC 718, stock-based compensation expense is based on awards ultimately expected to vest, and therefore has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and will be revised in subsequent periods if actual forfeitures differ from those estimates.

FASB ASC 718 also requires the benefits of income tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required prior to FASB ASC 718. ~~A summary~~For a discussion of the Company’s stock-based compensation ~~(a component~~plans, refer to “Note 9 – Equity Incentive Plans” of ~~selling, general~~the Company’s Annual Report on Form 10-K for the year ended February 2, 2019. Stock based compensation expense was $0.5 million and ~~administrative expenses) and related income tax benefit is as follows:~~

Thirteen Weeks Ended Twenty Six Weeks
(in thousands) August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Continuing Operations
Stock option expense $ 239 $ 382 $ 494 $ 865
Restricted stock expense 759 1,427 1,750 1,966
ESPP expense — 93 — 185
Total stock-based compensation $ 998 $ 1,902 $ 2,244 $ 3,016

Income tax benefit on stock-based compensation $ 12 $ 538 $ 27 $ 777

Thirteen Weeks Ended Twenty Six Weeks
(in thousands) August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Discontinued Operations
Stock option expense $ 15 $ 60 $ 35 $ 104
Restricted stock expense 12 21 25 48
Total stock-based compensation $ 27 $ 81 $ 60 $ 152

Income tax benefit on stock-based compensation $ — $ — $ — $ 14

~~The fair value of each option granted during~~$1.2 million for the thirteen weeks ended May 4, 2019 and ~~twenty-six week periods ended August 4,~~May 5, 2018, ~~and July 29, 2017 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:~~

Thirteen Weeks Ended Twenty Six Weeks Ended
Continuing Operations August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Stock Options
Expected volatility 0.0 % 44.1 % 0.0 % 41.3 %
Risk-free interest rate 0.0 % 2.0 % 0.0 % 2.1 %
Expected option life (in years) 0 5.84 0 5.84
Expected dividend yield 0.00 % 1.88 % 0.00 % 1.86 %

Weighted average fair value at grant date $ — $ 4.92 $ — $ 4.28

Thirteen Weeks Ended Twenty Six Weeks Ended
Discontinued Operations August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Stock Options
Expected volatility 0.0 % 43.1 % 0.0 % 43.1 %
Risk-free interest rate 0.0 % 2.2 % 0.0 % 2.2 %
Expected option life (in years) 0 5.84 0 5.84
Expected dividend yield 0.00 % 1.85 % 0.00 % 1.85 %

Weighted average fair value at grant date $ — $ 5.30 $ — $ 4.89

Thirteen Weeks Ended Twenty Six Weeks Ended
August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017

Employee Stock Purchase Plan
Expected volatility 0.0 % 98.8 % 0.0 % 80.3 %
Risk-free interest rate 0.0 % 1.0 % 0.0 % 1.0 %
Expected option life (in years) 0.00 0.50 0.00 0.38
Expected dividend yield 0.00 % 0.78 % 0.00 % 0.59 %

Weighted average fair value at grant date $ — $ 7.67 $ — $ 6.31

~~The following is a summary of the methodology applied to develop each assumption:~~

~~Expected Volatility~~ - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of our stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates weekly market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility may increase compensation expense.respectively.

~~Risk-free Interest Rate~~ - This is the yield of a U.S. Treasury zero-coupon bond issue effective at the grant date with a remaining term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

~~Expected Lives~~ - This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted have a maximum term of seven to ten years. An increase in the expected life will increase compensation expense.

~~Dividend Yield~~ ~~– This is based on the historical yield for a period equivalent to the expected life of the option. An increase in the dividend yield will decrease compensation expense.~~

Employee Stock Purchase Plan

The 2004 Employee Stock Purchase Plan ~~(“ESPP”)~~ (the “2004 Plan”), which was approved by Fred’s shareholders, permits eligible employees to purchase shares of our common stock through payroll deductions at the lower of 85% of the fair market value of the stock at the time of grant, or 85% of the fair market value at the time of exercise. ~~During the fourth quarter of~~In 2017, ~~management~~Management and the Board ~~of Directors suspended~~decided to suspend purchases through the ESPP effective December 31, 2017. ~~The ESPP suspension resulted in 0~~As such, there has been no additional shares issued ~~during~~under the ~~twenty-six weeks ended August 4, 2018.~~ ESPP plan in fiscal 2019. There ~~are~~were 1,410,928 shares approved to be issued under the 2004 Plan ~~and~~ as of ~~August~~May 4, ~~2018, there were~~2019 and 595,681 shares were available.

Stock Options

The following table summarizes stock option activity during the ~~twenty-six~~thirteen weeks ended ~~August~~May 4, ~~2018:~~2019:

Continuing Operations Options Weighted-
Average
Exercise Price Weighted-Average Contractual Life
(years) Aggregate
Intrinsic Value
(000s)

Outstanding at February 3, 2018 1,171,825 $ 13.12 5.1 $ —
Granted — —
Cancelled (509,474 ) 12.27
Exercised — —
Outstanding at August 4, 2018 662,351 $ 13.77 4.7 —

Exercisable at August 4, 2018 450,611 $ 14.66 4.5 —

Discontinued Operations Options Weighted-
Average
Exercise Price Weighted-Average Contractual Life
(years) Aggregate
Intrinsic Value
(000s)

Outstanding at February 3, 2018 167,375 $ 14.23 5.4 $ —
Granted — —
Cancelled (158,984 ) 14.17
Exercised — —
Outstanding at August 4, 2018 8,391 $ 15.44 4.7 —

Exercisable at August 4, 2018 3,356 $ 15.44 4.5 —

	Options			Weighted- Average Exercise Price		Weighted- Averaged Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at February 2, 2019		596,125		$	13.97		3.91	$	—
Granted		—			—
Forfeited / Cancelled		(85,682	)		13.36
Exercised		—			—
Outstanding at May 4, 2019		510,443		$	14.10		4.40	$	—
Exercisable at May 4, 2019		423,778		$	14.54		4.40	$	—

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Fred’s closing stock price on the last trading day of the period ended ~~August~~May 4, ~~2018~~2019, and the exercise price of the option multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that date. As of August 4, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for continuing operations was approximately $1.2 million, which is expected to be recognized over a weighted average period of approximately 3.0 years. As of August 4, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for discontinued operations was approximately $0.07 million, which is expected to be recognized over a weighted average period of approximately 0.2 years. The total fair value of options vested during the twenty-six weeks ended August 4, 2018 for continuing operations was $205.5 thousand. The total fair value of options vested during the twenty-six weeks ended August 4, 2018 for discontinued operations was $10.3 thousand

Restricted Stock

The following table summarizes restricted stock activity during the ~~twenty-six~~thirteen weeks ended ~~August~~May 4, ~~2018:~~2019:

Continuing Operations Number of
Shares Weighted-
Average Grant
Date Fair Value

Non-vested Restricted Stock at February 3, 2018 653,895 $ 10.14
Granted 222,836 2.74
Forfeited / Cancelled (109,400 ) 10.69
Vested (370,392 ) 7.54
Non-vested Restricted Stock at August 4, 2018 396,939 $ 7.59

Discontinued Operations Number of
Shares Weighted-
Average Grant
Date Fair Value

Non-vested Restricted Stock at February 3, 2018 11,194 $ 15.35
Granted — —
Forfeited / Cancelled (8,862 ) 15.35
Vested (2,332 ) 15.44
Non-vested Restricted Stock at August 4, 2018 — $ —

	Shares			Weighted- Average Grant Date Fair Value
Non-vested Restricted Stock at February 2, 2019		694,123		$	3.82
Granted		336,680			2.77
Forfeited / Cancelled		(63,417	)		5.01
Vested		(7,813	)		14.97
Non-vested Restricted Stock at May 4, 2019		959,573		$	3.32

~~For continuing operations, the~~The aggregate pre-tax intrinsic value of restricted stock outstanding as of ~~August~~May 4, ~~2018~~2019 is ~~$0.8~~$0.9 million with a weighted average remaining contractual life of ~~7.3~~8.4 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding stock is approximately $1.6 million, which is expected to be recognized over a weighted average period of approximately 3.6 years. The total fair value of restricted stock awards that vested during the twenty-six weeks ended August 4, 2018 was $2.8 million.

For discontinued operations, there was no aggregate pre-tax intrinsic value of restricted stock outstanding as of August 4, 2018, no weighted average remaining contractual life, and no unrecognized compensation expense related to the outstanding stock The total fair value of restricted stock awards related to discontinued operations that vested during the twenty-six weeks ended August 4, 2018 was $0.04 million.

NOTE 5: FAIR VALUE MEASUREMENTS

Fair value is defined asthe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Level 1, defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

●

~~Level 1, defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.~~

Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

●

~~Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.~~

Level 3, defined as unobservable inputs for the asset or liability, which are based on an entity’s own assumptions as there is little, if any, observable activity in identical assets or liabilities.

●

~~Level 3, defined as unobservable inputs for the asset or liability, which are based on an entity’s own assumptions as there is little, if any, observable activity in identical assets or liabilities.~~

Due to their short-term nature, the Company’s financial instruments, which include cash and cash equivalents, receivables and accounts payable, are presented on the condensed consolidated balance sheets at a reasonable estimate of their fair value as of ~~August~~May 4, ~~2018~~2019 and February 3, 2018. There were $149.1 million and $153.4 million of borrowings on the Company’s revolving line of credit as of August 4, 2018 and February 3, 2018, respectively. Refer to Note 11 – Indebtedness.2, 2019. The fair value of the revolving lines of credit and our mortgage loans are estimatedusing Level 2 inputs based on the Company’s current incremental borrowing rate for comparable borrowing ~~arrangements~~.arrangements.

The table below details the fair value and carrying values for the revolving line of credit, notes payable and mortgage loans as of the following dates:

									May 4, 2019				February 2, 2019
	August 4, 2018				February 3, 2018
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
(dollars in thousands)									Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving line of credit	$	149,053	$	149,053	$	153,431	$	153,431	$	80,631	$	80,631	$	58,575	$	58,573
Mortgage loans on land & buildings		1,546		1,638		1,579		1,684		1,429		1,684		1,512		1,684
Notes Payable		13,000		12,228		13,000		12,421
Notes payable										13,000		12,361		13,000		12,333
Total										95,060		94,676		73,087		72,590

NOTE 6: PROPERTY AND EQUIPMENT

Property and equipment are carried at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of assets. Improvements to leased premises are amortized using the straight-line method over the shorter of the initial term of the lease or the useful life of the improvement. Leasehold improvements added late in the lease term are amortized over the shorter of the remaining term of the lease (including the upcoming renewal option if the renewal is reasonably assured) or the useful life of the improvement. Assets under capital leases are amortized in accordance with the Company’s normal depreciation policy for owned assets or over the lease term (regardless of renewal options), if shorter, and the charge to earnings is included in depreciation expense in the consolidated financial statements. Gains or losses on the sale of assets are recorded as a component of selling, general and administrative expenses.

The following illustrates the breakdown of the major categories within property and equipment (in thousands):

(in thousands)
							(in thousands)
Property and equipment, at cost:	August 4, 2018			February 3, 2018			May 4, 2019			February 2, 2019
Buildings and building improvements	$	117,659		$	119,039		$	101,014		$	101,220
Leasehold improvements		87,889			86,402			84,013			85,148
Automobiles and vehicles		3,838			4,525			3,751			3,751
Furniture, fixtures and equipment		287,908			286,962			277,006			278,793
		497,294			496,928			465,784			468,911
Less: Accumulated depreciation and amortization		(399,697	)		(390,633	)		(412,961	)		(413,228	)
		97,597			106,295			52,823			55,683
Construction in progress		1,860			590			3,490			2,790
Land		8,470			8,581			7,873			7,873
Total Property and equipment, at depreciated cost	$	107,927		$	115,466		$	64,186		$	66,346

NOTE 6:7: EXIT AND DISPOSAL ACTIVITIES

Fixed Assets

The Company’s policy is to review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure impairment losses of fixed assets and leasehold improvementsas the amount by which the carrying amount of a long-lived asset exceeds its fair value as prescribed by FASB ASC 360,“Impairment or Disposal of Long-Lived Assets.” If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The fair value is based on estimated market values for similar assets or other reasonable estimates of fair market value based upon a discounted cash flow model, which are considered Level 3 inputs.

~~In 2015,~~During the thirteen weeks ended May 4, 2019, the Company recorded $0.3 million in impairment ~~charges for fixed assets and leasehold improvements~~expense related to 2014 and 2015 planned store closures. In 2016, the Company utilized all of the impairment charges related to the 2015 store closures and $0.2 million related to the 2014 store closures, leaving $0.5 million of impairment charges. None of the remaining $0.5 million impairment charges were utilized as of August 4, 2018.

During fiscal 2016, the Company recorded impairment charges of $3.6 million for fixed asset impairments related to the corporate headquarters. None of the impairment charges relating to the corporate headquarters were utilized as of August 4, 2018.

In the second quarter of 2017, in association with the planned closure of additional underperforming stores and pharmacies, the Company recorded charges in the amount of $0.8 million in selling, general and administrative expense for the impairment of fixed assets associated with the closing stores and pharmacies and $1.4 million for the accelerated recognition of amortization of intangible assets associated with the closing pharmacies. None of these charges were utilized as of August 4, 2018.

~~In the fourth quarter of 2017, the Company recorded a charge of $1.1 millionin selling, general and administrative expense for~~ the impairment of fixed assets associated with several underperforming and closing store locations.~~None~~ The impairment charge is included in impairment expense on the condensed consolidated statement of ~~the impairment charges relating to these assets were utilized as ofAugust 4, 2018~~.operations.

~~Inventory~~NOTE 8: LEASES

The Company’s lease portfolio consists of operating leases for its retail store locations, vehicles, trailers, distribution center space, and equipment. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the assets. The Company’s leases have remaining lease terms of approximately 1 year to 10 years, which may include the option to renew the lease if the Company is reasonably certain to exercise the options. The Company does not include renewal options in its determination of the lease term unless the renewals are deemed to be reasonably certain to be exercised at lease commencement.

~~As discussed~~Leases with an initial term in ~~Note 3 - Inventories, we adjust inventory values~~excess of 12 months are recognized on the condensed consolidated balance sheet based on the present value of the lease payments over the defined lease term at the lease commencement date. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet and instead are recognized on a ~~consistent~~straight-line basis ~~to reflect current market conditions. In accordance with FASB ASC 330,~~~~“Inventories,”~~ ~~we write down inventory to net realizable value~~over the lease term. Certain lease agreements include lease payments that are based on an index or rate while others are based on a percentage of retail sales over contractual levels. Variable lease payments that are not based on an index or rate are excluded from right-of-use-assets and lease liabilities and are recognized in the period in which ~~conditions giving rise to~~ the ~~write-downs are first recognized.~~obligation for those payments occurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive financial covenants.

~~Lease Termination~~

~~For lease obligations related to closed stores, we record~~As most of the Company’s leases do not provide an implicit rate the Company uses its incremental borrowing rate for equipment leases. The incremental borrowing rate is estimated, ~~future liability associated~~based on borrowings, that are consistent with the ~~rental obligation on~~respective lease terms. The rate applied to real estates leases includes a range of rates between the ~~cease use date (when~~incremental borrowing rate and the ~~stores were closed). The lease obligations are established at~~rate used to estimate the ~~cease use date for~~company’s fair market value overall, in determining the present value of ~~any remaining~~lease payments. Operating lease right-of-use assets are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, “Property, Plant, and Equipment - Overall,” to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize.

The following tables summarizes the Company’s operating lease ~~obligations, net~~assets and lease liabilities as of ~~estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by FASB ASC 420, “~~~~Exit or Disposal Cost Obligations~~.” Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimates of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.May 4, 2019:

		($ in thousands)
Operating Leases	Classification
Operating lease assets	Other long-term asset		96,966
Operating lease liabilities - Current	Other current liabilities		(34,959	)
Operating lease liabilities - Non-current	Other long-term liabilities		(97,809	)
Total operating lease liabilities			(35,802	)

Information regarding the ~~first quarter of 2017,~~weighted-average remaining lease term and the Company recorded a lease liability relating to the 39 underperforming store closures in fiscal 2017 of $8.2 million. Additional $0.2 million reserve was recorded in the fourth quarter of 2017 and $2.1 million of reserve was utilized during the year, leaving $6.3 million reserve balanceweighted-average discount rate for operating leases as of ~~February 3, 2018. In the first half of 2018, the Company utilized $1.2 million, leaving $5.1 million reserve balance~~May 4, 2019 is as ~~of August 4, 2018.~~follows:

Weighted Average Remaining Lease Term (in years)
Operating leases	4.77
Weighted Average Discount Rate
Operating leases		9.85	%

The following table ~~illustrates~~summarizes the ~~exit and inventory related to store closures, inventory strategic initiatives along with the~~Company’s operating lease ~~liability related to the planned store closures discussed~~costs as of May 4, 2019:

As of May 4, 2019, maturities of lease liabilities were as follows:


	($ in thousands)
Remainder of 2019	$	33,831
2020		37,789
2021		29,669
2022		22,496
2023		15,218
Thereafter		23,857
Less imputed interest		(32,495	)
Present value of operating lease liabilities		130,364

As previously disclosed in the ~~previous paragraphs (in millions):~~

Balance at
February 3, 2018 Additions Utilization Ending Balance
August 4, 2018

Impairment charge for the disposal of fixed assets for 2014 planned closures $ 0.5 $ 0.5
Impairment charge for the disposal of fixed assets for corporate office 3.6 3.6
Impairment charge for the disposal of fixed assets for 2017 planned closures 0.8 0.8
Impairment charge for the disposal of intangible assets for 2017 planned closures 1.4 1.4
Impairment charge for the write down of fixed assets for underperforming stores 1.1 1.1
Subtotal $ 7.4 $ — $ — $ 7.4
Lease contract termination liability, 2017 closures 6.3 (1.2 ) 5.1
Total $ 13.7 $ — $ (1.2 ) $ 12.5

~~NOTE 7: ACCUMULATED OTHER COMPREHENSIVE INCOME~~

~~Comprehensive income consists~~Company’s Annual Report on Form 10-K for the year ended February 2, 2019 and in accordance with ASC 840, future minimum lease payments under non-cancellable operating leases were as follows as of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income pursuant to GAAP. The Company’s accumulated other comprehensive income includes the unrecognized prior service costs, transition obligations and actuarial gains/losses associated with our post-retirement benefit plan.February 2, 2019:

	($ in thousands)
2019	$	40,667
2020		35,189
2021		30,090
2022		23,376
2023		15,789
Thereafter		24,077
Total minimum lease payments		169,188

The ~~following table illustrates the activity in accumulated other comprehensive income:~~

Thirteen Weeks Ended Year Ended
(in thousands) August 4, 2018 July 29, 2017 February 03, 2018

Accumulated other comprehensive income $ 559 $ 466 $ 466
Amortization of post-retirement benefit — — 93
Ending balance $ 559 $ 466 $ 559

~~NOTE 9: RELATED PARTY TRANSACTIONS~~

~~On April 10, 2015, the Company completed the acquisition~~above future minimum lease payments include amounts for leases that were signed prior to February 2, 2019 for stores that were not open as of ~~Reeves-Sain Drug Store, Inc., a provider of retail~~February 2, 2019 and specialty pharmaceutical services. As part of the total consideration for the purchase, Fred’s provided notes payable totaling $13.0 million to the sellers of Reeves-Sain Drug Store, Inc., who became employees of Fred’s as part of the acquisition. As of May 5, 2018, the sellers were former employees. The notes payable are due in three equal installments toexclude contingent rentals that may be paid under certain store leases based on ~~January 31~~^sta percentage of ~~2021, 2022 and 2023 and are subordinate~~sales in excess of stipulated amounts.

The following represents supplemental noncash activity pertaining to the Company’s ~~revolving line~~operating lease arrangements as of ~~credit. This amount is reflected in “Long Term Portion of Indebtedness” on the Balance Sheet.~~May 4, 2019:

	($ in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		12,420
Right-of-use assets obtained in exchange for new operating lease liabilities		(34,939	)

NOTE ~~10:~~9: LEGAL CONTINGENCIES

On October 15, 2015, a lawsuit entitled Southern Independent Bank v. Fred’s, Inc. was filed in the U.S. District Court, Middle District of Alabama. The complaint ~~includes~~included allegations made by the plaintiff on behalf of itself and financial institutions similarly situated (“alleged class of financial institutions”) that the Company was negligent in failing to use reasonable care in obtaining, retaining, securing and deleting the personal and financial information of customers who use debit cards issued by the plaintiff and alleged class of financial institutions to make purchases at Fred’s stores. The complaint also ~~includes~~included allegations that the Company made negligent misrepresentations that the Company possessed and maintained adequate data security measures and systems that were sufficient to protect the personal and financial information of shoppers using debit cards issued by the plaintiff and alleged class of financial institutions. The complaint seeks monetary damages and equitable relief to be proved at trial as well as attorneys’ fees and costs. The Company has denied the allegations and has filed a motion to dismiss all claims. This motion has since been denied, and the Company filed a motion to reconsider by certifying the question to the Alabama Supreme Court for clarity. However, the Company’s motion was denied, and the Company has now completed discovery and is moving to trial. A motion for class certification is currently pending beforeOn March 13, 2019, the U.S. District Court, Middle District of ~~Alabama. Future costs or liabilities related to the incident may have a material adverse effect on the Company.~~Alabama, denied plaintiff’s motion for class certification. The Company ~~has not made an accrual for future losses related to these claims at this time as~~and Southern Independent Bank entered into a Confidential Settlement Agreement and Release on June 5, 2019, and the ~~future losses are not considered probable. The Company has~~parties filed a ~~cyber liability policy~~stipulated dismissal with ~~a $10 million limit and $100,000 deductible.~~the U.S. District Court, Middle District of Alabama, on June 17, 2019.

On July 27, 2016, a lawsuit entitled The State of Mississippi v. Fred’s Inc., et al was filed in the Chancery Court of Desoto County, Mississippi, Third Judicial District. The complaint alleges that the Company fraudulently reported their usual and customary prices to Mississippi’s Division of Medicaid in order to receive higher reimbursements for prescription drugs. The complaint seeks declaratory and monetary relief for the profits alleged to have been unfairly earned as well as attorney costs. The Company denies these allegations and believes it acted appropriately in its dealings with the Mississippi Division of Medicaid. The Company successfully filed a Motion to Transfer to Desoto County Circuit Court. The State filed a Petition for Interlocutory Appeal with the Mississippi Supreme Court, but the Mississippi Supreme Court ruled in our favor and the case is now proceeding in Circuit Court. A hearing on the Company’s motion to dismiss was held in Circuit Court on March 28, 2019, and the Court issued an order on June 11, 2019 dismissing certain of the State’s fraud claims but giving the State thirty days to file an amended complaint with respect to such claims. Future costs and liabilities related to this case may have a material adverse effect on the Company; however, the Company has not made an accrual for future losses related to these claims as it is not possible at this time to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of any potential loss. The Company has multiple insurance policies which the Company believes will limit its potential exposure.

On September 29, 2016, the Company reported to the Office of Civil Rights (“OCR”) that an unencrypted laptop containing clinical and demographic data for 9,624 individuals had been stolen from an employee’s vehicle while the vehicle was parked at the employee’s residence. On January 13, 2017, the OCR opened an investigation into the incident. The Company has fully complied with the investigation and timely responded to all requests for information from the OCR. The Company ~~has not~~ received ~~any response~~several supplemental requests for information from the OCR ~~at this time.~~during the third and fourth fiscal quarters of 2018, as well as two additional requests during the first fiscal quarter of 2019, to which the Company has timely responded. Future costs and liabilities related to this case may have a material adverse effect on the Company; however, the Company has not made an accrual for future losses related to these claims as future losses are not considered probable and an estimate is unavailable.

On March 30, 2017, a lawsuit entitled Tiffany Taylor, individually and on behalf of others similarly situated, v. Fred’s, Inc. and Fred’s Stores of Tennessee, Inc. was filed in the United Stated District Court for the Northern District of Alabama Southern ~~Division.~~Division (the “Taylor Complaint”). The ~~complaint~~Taylor Complaint alleges that the Company wrongfully and willfully violated the Fair and Accurate Credit Transactions Act (“FACTA”). On April 11, 2017, a lawsuit entitled Melanie Wallace, Sascha Feliciano, and Heather Tyler, on behalf of themselves and all others similarly situated, v. Fred’s Stores of Tennessee, Inc. was filed in the Superior Court of Fulton County in the state of Georgia. The complaint alleges that the Company wrongfully and willfully violated FACTA. On April 13, 2017, a lawsuit entitled Lillie Williams and Cussetta Journey, on behalf of themselves and all others similarly situated, v. Fred’s Stores of Tennessee, Inc. was filed in the Superior Court of Fulton County in the state of Georgia. The complaint also alleges that the Company wrongfully and willfully violated FACTA. The complaints are filed as ~~Class Actions,~~class actions, with the class being open for five (5) years before the date the complaint was filed. The complaint seeks statutory damages, attorney’s fees, punitive damages, an injunctive order, and other such relief that the court may deem just and equitable. The Company filed a Motion to Dismiss the Taylor ~~complaint,~~Complaint, and this Motion has been granted by the Court. Plaintiff’s counsel has appealed the Taylor ~~complaint,~~Complaint, which appeal is pending before the 11^th Circuit Court of Appeals. The Company filed, and the Court granted Motions to Remove and Motions to Transfer the Williams and Wallace matters to the U.S. District Court for the Northern District of Alabama. Since the Williams and Wallace matters were removed and transferred to the U.S. District Court for the Northern District of Alabama, the Company has filed a Motion to Consolidate the Williams and Wallace matters. When the court granted the Company’s motion to dismiss in the Taylor case, the court simultaneously denied the Motion to Consolidate, in light of the dismissal in Taylor. In the Wallace and Williams actions, the District Court entered an order staying both cases until the U.S Court of Appeals for the 11^th Circuit decides on the appeal. Oral argument for the appeal was heard before the Court of Appeals for the 11^th Circuit at the end of January 2019, and we await the Court’s ruling. Future costs and liabilities related to this case may have a material adverse effect on the Company; however, the Company has not made an accrual for future losses related to these claims as future losses are not considered probable and an estimate is unavailable.

On March 3, 2018, a lawsuit entitled Abel Eddington and Judy Hudson, individually and on behalf of all others similarly situated, v. Fred’s Inc., and Fred’s Stores of Tennessee, Inc. was filed in the United States District Court Eastern District of Texas, Marshall Division. The complaint ~~alleges~~alleged that the Company committed various Federal and state wage and hours violations. The complaint iswas filed as ~~Class Action~~class action and ~~seeks~~sought back wages, attorneys’ fees, and all other damages allowable by law. The Company ~~denies~~denied these allegations and believes it acted appropriately in its wage and hour calculations and payments. Future costs and liabilities related to this case may have a material adverse effect on the Company; however, the Company has not made an accrual for future losses related to these claims as future losses are not considered probable, and an estimate is unavailable. The Company ~~has multiple insurance policies which~~and the ~~Company believes will limit its potential exposure.~~named plaintiffs have settled the case, and the settlement is currently being administered.

On March 16, 2018, a lawsuit entitled Roxie Whitley , individually and as next friend of Baby Z.B.D., and Chris and Diane Denson, individually and as next friends of Baby L.D.L., on behalf of themselves and all others similarly situated, v. Purdue Pharma L.P.; Purdue Pharma, Inc.; The Purdue Frederick Company, Inc.; McKesson Corporation; Cardinal Health, Inc.; AmeriSourceBergen Corporation; Teva Pharmaceutical Industries, Ltd.; Teva Pharmaceuticals USA, Inc.; Cephalon, Inc.; Johnson & Johnson; Janssen Pharmaceuticals, Inc.; Ortho-McNeil-Janssen Pharmaceuticals, Inc. n/k/a Janssen Pharmaceuticals, Inc.; Janssen Pharmaceuticals, Inc. n/k/a Janssen Pharmaceuticals, Inc.; Endo Health Solutions Inc.; Endo Pharmaceuticals, Inc; Allergan PLC; Watson Pharmaceuticals, Inc. n/k/a Actavis, Inc.; Watson Laboratories, Inc.; Actavis LLC; Actavis Pharma, Inc. f/k/a Watson Pharma, Inc.; and Fred’s Stores of Tennessee, Inc. was filed in the Circuit Court of Fayette County, Tennessee for the 25^th Judicial District at Somerville. The complaint fails to allege any wrong-doing by the Company. The Complaint is filed as a class action seeking various remedies allowed under Federal and state laws. The Company denies any purported wrong-doing. On May 9, 2018, the Company filed a Motion to Dismiss for Lack of Standing, a Motion to Dismiss Plaintiff’s Product Liability Causes of Action, a Motion to Dismiss for Statute of Limitations, and a Motion to Dismiss for Failure to State a Claim on which Relief may be Sought (collectively, the “May 9, 2018 Motions”). The Court has not ruled on the May 9, 2018 Motions. On May 9, 2018 this matter was transferred to the United States District Court for the Northern District of Ohio as part of the National Prescription Opiate Litigation Multidistrict Litigation. Future costs and liabilities related to this case may have a material adverse effect on the Company; however, the Company has not made an accrual for future losses related to these claims as future losses are not considered probable, and an estimate is unavailable. The Company has multiple insurance policies which the Company believes will limit its potential exposure.

In addition to the matters disclosed above, the Company is party to several pending legal proceedings and claims arising in the normal course of business. Although the outcomes of these proceedings and claims against the Company cannot be determined with certainty, management of the Company is of the opinion that these proceedings and claims should not have a material adverse effect on the Company’s financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial statements as a whole.

NOTE ~~11:~~10: INDEBTEDNESS

Revolving Credit Agreement

On April 9, 2015, the Company entered into a Revolving Loan and Credit Agreement ~~(the “Agreement”~~(as amended as of October 23, 2015, December 28, 2016, January 27, 2017, July 31, 2017, August 22, 2017, April 5, 2018, August 23, 2018 and May 15, 2019, and as supplemented by the Addendum (as defined below), the “Revolving Credit Agreement”) with Regions Bank and Bank of America, ~~to replace~~N.A. As of May 4, 2019, the Company’s previous revolving credit facility. The proceeds were used to refinance amounts outstanding under the prior credit and to support acquisitions and the Company’s working capital needs. TheRevolving Credit Agreement ~~initially~~ provided for ~~a $150.0~~ aggregate loan commitments of $210.0 million ~~secured revolving line of credit, including a sublimit for letters of credit~~ and ~~swingline loans. The Agreement, which expires~~matures on April 9, 2020, was amended effective January 30, 2017 to increase the loan commitment from $150.0 million to $225.0 million. On July 31, 2017 the Company amended the Agreement and related security agreement to: (i) increase the revolving loan commitment from $225 million to $270 million, (ii) increase the pharmacy scripts advance rate, (iii) revise the excess availability requirements for certain acquisitions, and (iv) add Bank of America as a co-collateral agent.2020. Draws are limited to the lesser of the commitment amount or the borrowing base, which is periodically determined by reference to the value of certain receivables, inventory and scripts, less applicable reserves. The Company may choose to borrow at a spread to either LIBOR or a Base Rate. For LIBOR loans the spread ~~ranges from 1.75% to 2.25%~~is 4.25% and for Base Rate loans the spread ~~ranges from 0.75% to 1.25%~~is 3.25%. ~~The spread depends on the level of excess availability.~~ Commitment fees on the unused portion of the credit line are 37.5 basis points. The Agreement included an up-front credit facility fee which is being amortized over the Agreement term. ~~There~~

As of May 4, 2019, outstanding borrowings under our Revolving Credit Agreement were ~~$149.1~~$81.3 million, ~~of borrowings outstanding and $51.7~~$17.5 million ~~net~~ of ~~borrowings and~~ letters of credit ~~remaining available~~were outstanding, and excess availability was $33.0 million (based on a borrowing base of $156.8 million at such time). Under the Revolving Credit Agreement, the Company has a financial covenant to maintain at all times excess availability of at least 10% of the commitments, and if excess availability falls below such threshold ($21.0 million at May 4, 2019), it would constitute an event of default under the ~~Agreement at August 4, 2018.~~

Revolving Credit Agreement.

~~On August 23, 2018,~~

The Revolving Credit Agreement contains restrictive covenants that, among other things, limit the Company’s ability and the ability of the Company’s subsidiaries to: (i) incur additional indebtedness or issue certain preferred shares; (ii) pay dividends, redeem stock or make other distributions; (iii) make acquisitions, investments and loans; (iv) create liens; (v) transfer or sell assets; (vi) merge, consolidate or sell, lease, transfer or otherwise dispose of all or substantially all of the Company’s assets; (vii) enter into hedging arrangement; and (viii) enter into certain transactions with the Company’s affiliates.

These restrictions could limit the Company’s ability to plan for, or react to, market conditions or meet extraordinary capital needs or could otherwise restrict our activities. These restrictions could also adversely affect the Company’s ability to finance future operations or capital needs or to engage in other business activities that would be in the Company’s interest.

The Company’s failure to comply with obligations under the Revolving Credit Agreement would result in an event of default, which if not cured or waived, may permit acceleration of the Company’s indebtedness and other remedies. If our indebtedness is accelerated, the Company cannot be certain that it would have sufficient funds available to pay the accelerated indebtedness or that the Company will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all, which could impact our ability to continue as a going concern.

Recent Developments Relating to the Revolving Credit Agreement

On April 15, 2019, Bank of America, N.A. imposed an additional reserve of $20.0 million under our Revolving Credit Agreement in connection with the announced planned closures of 159 stores and related matters, which reduced our excess availability at such time to $37.9 million, and the administrative agent declared an “Account Control Event” under our Revolving Credit Agreement in connection with such Closures and exercised control over our collection accounts.

As referenced above in Note 1 under the heading “–Going Concern,” the audit report prepared by our auditors with respect to the financial statements in our Annual Report on Form 10-K, filed on May 3, 2019, with the SEC, includes an explanatory paragraph indicating that there is substantial doubt about Fred’s ability to continue as a going concern. The receipt of this explanatory paragraph with respect to Fred’s financial statements for the year ended February 2, 2019 resulted in a breach of a covenant under the Revolving Credit Agreement that requires annual financial statements accompanied by an unqualified audit report to be delivered to the lenders within 120 days of fiscal year end and a breach of this covenant constituted an event of default under the Revolving Credit Agreement (the “Going Concern Event of Default”). In addition, Fred’s lenders under the Revolving Credit Agreement have indicated to Fred’s their belief that certain other events of default occurred under the Revolving Credit Agreement in connection with the Closures, the inventory sales at certain stores and the timing of delivery, and content, of a borrowing base certificate due under the Revolving Credit Agreement (such purported events of default, together with the Going Concern Event of Default, are referred to herein as the “Revolver EODs”).

An event of default, which is not cured or waived, would permit, among other remedies, acceleration of Fred’s indebtedness under the Revolving Credit Agreement and the addition, at the option of the Required Lenders (as defined in the Revolving Credit Agreement), of 200 basis points to the applicable interest rate with respect to all loans under the Revolving Credit Agreement. As a result of the Forbearance Agreement and Eighth Amendment, the lenders under the Revolving Credit Agreement have agreed, subject to the satisfaction of certain conditions, to not take any action to accelerate our indebtedness or exercise other remedies with respect to the Revolver EODs until July 22, 2019 , but there can be no assurance that such lenders will not do so on or after such date or if the conditions in the Forbearance Agreement and Eighth Amendment are not met in the future. If the Company’s indebtedness is accelerated, whether due to the Revolver EODs or otherwise, the Company cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. As a result, the Company has classified the outstanding borrowings under the Revolving Credit Agreement as short-term, even though the maturity date is beyond twelve months from our balance sheet date.

Recent Amendments Affecting Revolving Credit Agreement

On May 15, 2019, the Company and certain of its subsidiaries entered into the ~~Seventh~~Forbear ance Agreement and Eighth Amendment. The Forbearance Agreement and Eighth Amendment toamends the Revolving Credit Agreement ~~Second Amendment to~~and the Amended and Restated Addendum to Credit Agreement, dated as of January 27, 2017 , as amended as of July 31, 2017, August 23, 2018 and ~~Second Amendment to Security Agreement (the “Amendment”~~October 15, 2018 (the “Addendum”). Among other ~~changes,~~things, the Forbearance Agreement and Eighth Amendment ~~decreases,~~provided for: (i) the Company and certain of its subsidiaries’ stipulation of the occurrence of certain events of default under the Revolving Credit Agreement and the Addendum, including as the result of the commencement of 159 store closures, issues with timing and accuracy of a borrowing base certificate and the failure to deliver an annual audit report without a “going concern” or similar qualification; (ii) an agreement to forbear from exercising remedies under the Revolving Credit Agreement with respect to (a) the stipulated events of default and (b) the additional planned closure of 104 stores, in each case, until July 22, 2019, subject to the s atisfaction of certain conditions; (iii) requirements for the Company and certain of its subsidiaries to comply with certain conditions, including (a) working with a turnaround consultant, (b) providing certain deliverables including weekly cash flow forecasts and inventory reports, (c) requiring that collections, disbursements and inventory receipts are within 15% of forecasted amounts for any two week period, (d) maintaining certain levels of inventory at certain continuing stores and (e) obtaining a sign ed commitment letter or letters by June 21, 2019 for a refinancing of all loans under the ~~Company’s request,~~Revolving Credit Agreement by July 22, 2019, with the ~~revolving loan~~failure to comply with such conditions resulting in the early termination of the forbearance period; (iv) an agreement to release certain reserves upon receipt of such commitment letter or letters; (v) a reduction of

commitments from ~~$270.0~~$210 million to ~~$210.0~~$150 million, ~~permits certain sale-leaseback transactions, allows transfers of properties~~and additional reductions to ~~non-Loan Party (as defined~~$125 million on June 15, 2019 and to $100 million on July 6, 2019; (vi) a change in the ~~Credit Agreement) subsidiaries for financing~~availability requirements to 10% of commitments, allowing availability requirements to decrease with the commitment reductions; (vii) an increase of the interest rate by 200 basis points; and ~~allows for the assumption of debt and financing for such transactions, permits~~(viii) a consent to the sale of certain real ~~estate, other than distribution centers for fair market value and adds repurchases and redemption~~estate. We are in discussions with potential financing sources relating to the ~~definition~~condition in the Forbearance Agreement and Eighth Amendment to obtain a signed commitment letter for a refinancing of ~~restricted payments, which are limited~~all loans under the ~~restricted payments covenant..~~

~~On December 19, 2016, the Company entered into~~Revolving Credit Agreement. There can be no assurance that we will obtain such a commitment letter ~~with respect to~~or complete a senior secured asset based loan facility (the “ABL Commitment Letter”), and a commitment letter with respect to a term loan facility (the “Term Loan Commitment Letter”); and on January 18, 2017, the Company entered into an amended and restated ABL Commitment Letter (the “Amended and Restated ABL Commitment Letter”). The Amended and Restated ABL Commitment Letter and the Term Loan Commitment Letter were entered into with lenders who agreed to provide $1.65 billion of debt financing to be usedrefinancing by the ~~Company to fund its proposed acquisition of 865 stores, certain intellectual property and certain other tangible assets of Rite Aid Corporation.~~

On June 9, 2017, the Company amended and restated the Amended and Restated ABL Commitment (the “Second Amended and Restated ABL Commitment Letter”), and the Term Loan Commitment Letter (the “Amended and Restated Term Loan Commitment Letter”) for the purpose of increasing the aggregate committed debt financing available thereunder to $2.2 billion.

Upon termination of the Rite Aid Asset Purchase Agreement, as discussed in Note 1 above, the Company terminated the Second Amended and Restated ABL Commitment Letter and the Amended and Restated Term Loan Commitment Letter. In connection with such termination, the Company incurred applicable termination fees contemplated by the Second Amended and Restated ABL Commitment Letter and Amended and Restated Term Loan Commitment Letter, which were paiddeadlines in the ~~third quarter of 2017.~~

In connection with the aforementioned commitment letters, the Company incurred approximately $30 million of debt issuance costs. These costs are reflected in SG&A in the Statement of Operations. The $25 million termination fee paid by Walgreens, on June 30, 2017, discussed in Note 1: Basis of Presentation, partially offset these costs.

~~During the second~~Forbearance Agreement and third quarter of fiscal 2007, the Company acquired the land and buildings, occupied by seven Fred's stores which we had previously leased. In consideration for the seven properties, the Company assumed debt that has fixed interest rates from 6.31% to 7.40%. Mortgages remain on two locations with a combined balance of $1.5 million outstandingEighth Amendment or at ~~August 4, 2018. The weighted average interest rate on mortgages outstanding at August 4, 2018 was 7.40%. The debt is collateralized by the land and buildings.~~

all.

NOTE ~~12:~~11: INCOME TAXES

The Company accounts for its income taxes in accordance with FASB ASC 740 “Income Taxes.” .” Pursuant to FASB ASC 740, the Company must consider all positive and negative evidence regarding the realization of deferred tax assets including past operating results and future sources of taxable income. A cumulative loss in recent years is a significant piece of negative evidence when evaluating the need for a valuation allowance. Under the provisions of FASB ASC 740, the Company determined that a full valuation allowance is needed given the cumulative loss in recent years.

~~NOTE 13: SUBSEQUENT EVENT~~

On September 7, 2018, the Company entered into an Asset Purchase Agreement (the “WBA Asset Purchase Agreement”) with Walgreen Co., pursuant to which Walgreens has agreed to purchase certain prescription files and related data and records, retail pharmaceutical inventory and other assets from 185 of the Company’s retail pharmacy stores for a cash purchase price of $165 million plus an amount equal to the value of the related pharmacy inventory (the “WBA Transaction”). The consummation of the WBA Transaction is expected to occur in a series of closings, as more fully described in the WBA Asset Purchase Agreement, a copy of which was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 10, 2018. The proceeds received in the WBA Transaction will be used to pay down the Company’s existing indebtedness or for general corporate purposes. The closings of the WBA Transaction are subject to conditions customary for transactions of this type, including (i) the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended , (ii) the absence of certain legal impediments to the WBA Transaction, (iii) the accuracy of the parties’ representations and warranties and (iv) the parties’ compliance with their respective obligations.20

Item 2:

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

~~Other than statements based on historical facts, many of the matters discussed~~Comments in this Quarterly Report on Form 10-Q ~~relate to events which we expect or anticipate may occur in~~that are not historical facts are forward-looking statements within the ~~future. Such statements are defined as “forward-looking statements” under~~meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 (the “Reform Act”), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996). The Reform Act created a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Fred’s Inc. (“Fred’s” or the “Company”) intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions.

The words “outlook”, “guidance”, “may”, “should”, “could”, “believe”, “anticipate”, “project”, “plan”, “expect”, “estimate”, “objective”, “forecast”, “goal”, “intend”, “will likely result”, or “will continue” and similar expressions generally identify forward-looking statements. All forward-looking statements are inherently uncertain, and concern matters that involve risks and ~~other factors~~uncertainties that ~~may~~could cause ~~the~~ actual ~~performance of the Company~~results to differ materially from those projected in the forward-looking statements.

A reader can identify forward-looking statements because they are not limited to historical facts or they use such words as “outlook,” “guidance,” “may,” “should,” “could,” “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “committed,” “continue,” or “will likely result” and similar expressions that concern the Company’s strategy, plans, intentions or beliefs about future occurrences or results.

Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. Forward-looking statements include, but are not limited to, statements about future financial and operating results, the Company’s plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales growth, comparable sales, earnings and performance, shareholder value, capital expenditures, cash flows, demand for products, share repurchases, strategic initiatives, including those relating to store closures and acquisitions and dispositions by the Company and the expected impact of such transactions on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts. Although we believe that the expectations, opinions, projections and comments reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties and other factors could materially affect our ability to achieve the results either expressed or implied by these ~~statements. Therefore,~~ forward-looking statements ~~should be evaluated in the context of these uncertainties and risks,~~ including, but not limited ~~to:~~to risks and uncertainties associated with: (i) the competitive nature of the industries in which we operate; (ii) our turnaround plan and the implementation of our strategic ~~plan,~~initiatives, and ~~its~~their impact on our sales, costs and operations; (iii) our store closures and the related sales of inventory and real estate issues; (iv) our divestitures; (v) utilizing our existing and new stores and the extent of our pharmacy department presence in new and existing stores; ~~(iv)~~(vi) conditions affecting the retail sector as a whole; (vii) our reliance on a single supplier of pharmaceutical products; ~~(v)~~(viii) our pharmaceutical drug pricing; ~~(vi)~~(ix) reimbursement rates and the terms of our agreements with pharmacy benefit management companies; ~~(vii)~~(x) consolidation in the healthcare industry; (xi) our private brands; ~~(viii)~~(xii) the seasonality of our business and the impact of adverse weather conditions; ~~(ix)~~(xiii) operational, supply chain and distribution difficulties; ~~(x)~~(xiv) merchandise supply and pricing; ~~(xi)~~(xv) consumer demand and product mix; ~~(xii)~~(xvi) delayed openings and operating new stores and distribution facilities; ~~(xiii)~~(xvii) our employees; ~~(xiv)~~(xviii) risks relating to payment processing; ~~(xv)~~(xix) our computer ~~system,~~systems, and the processes supported by our information technology infrastructure; ~~(xvi)~~(xx) our ability to protect the ~~person~~personal information of our customers and employees; ~~(xvii)~~(xxi) cyber-attacks; ~~(xviii)~~(xxii) changes in governmental regulations; ~~(xix)~~(xxiii) the outcome of legal proceedings, including claims of product liability; ~~(xx)~~(xxiv) insurance costs; ~~(xxi)~~(xxv) tax assessments and unclaimed property audits; ~~(xxii)~~(xxvi) current economic conditions; ~~(xxiii) changes in third-party reimbursements; (xxiv)~~(xxvii) our indebtedness and our ability to satisfy our debt obligations and obtain forbearance or waivers for any defaults; (xxviii) the terms of our existing and future indebtedness, including the covenants set forth in the documents governing such indebtedness; ~~(xxv)~~(xxix) any acquisitions we may pursue and the ability to effectively integrate ~~any~~ businesses that we acquire; ~~(xxvi)~~(xxx) our ability to remediate the material weaknesses in our internal controls over financial reporting and otherwise maintain effective internal controls over financial reporting; (xxxi) our largest stockholder holding a significant percentage of our outstanding equity; (xxxii) our ability to pay ~~dividends;~~dividends and/or repurchase shares of our Class A voting common stock; (xxxiii) our ability to attract and ~~(xxvii)~~retain talented executives; (xxxiv) any strategic alternatives that we decide to pursue, if any; (xxxv) our ability to continue as a going concern; (xxxvi) our ability to meet all applicable Nasdaq requirements and (xxxvii) the factors listed under Item 1A: “Risk Factors” in our Annual Report on Form 10-K filed on May 3, 2019 with the Securities and Exchange Commission, under Part II, Item 1A: “Risk Factors” in this Quarterly Report on Form 10-Q, and in any subsequent quarterly filings on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements ~~regarding the pending WBA Asset Purchase Agreement, the transactions contemplated thereby, the possible timing and effects thereof, and the ability~~speak only as of the ~~parties~~date made. The Company undertakes no obligation to ~~complete~~release revisions to these forward-looking statements to reflect events or circumstances after the ~~transactions consider~~date hereof or to reflect the ~~various closing conditions~~occurrence of unforeseen events, except as required to ~~which such transactions are subject.~~

be reported under the rules and regulations of the Securities and Exchange Commission.

Consequently, all forward-looking statements are qualified by this cautionary statement. Readers should not place undue reliance on any forward-looking statements. ~~We undertake no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.~~

GENERAL

Executive Overview

As of ~~August~~May 4, ~~2018,~~2019, Fred’s and its subsidiaries ~~operate 593~~operated 556 general merchandise and pharmacy stores, including 1211 franchised locations. Our customers are value-oriented, budget-conscious, and often live in rural areas without access to large discount retailers, making our offerings a significant value-add. Our mission is to improve the lives of customers by selling products that deliver value and convenience to the communities we serve. With a unique store ~~formats~~format and ~~strategies~~strategy that ~~combine~~combines the best elements of a value-focused retailer with a ~~healthcare-focused~~ drug store, Fred’s stores offer more than 14,000 frequently purchased items that address the everyday needs of its customers. This includes nationally recognized brands, proprietary Fred’s label products, and a full range of value-priced ~~selections.~~selections, along with closeout merchandise throughout the store. The Company has two distribution centers in Memphis, Tennessee, and Dublin, Georgia.

Our competitive model is built on two key differentiators. The first is our discount merchandise offerings, which include a diverse array of value-priced staple and discretionary products including toys, pet accessories, hardware, appliances and home furnishings, among others. This differentiates us from the traditional drug channel. The second is our convenience offerings including food, candy, paper, chemicals, tobacco, beer and wine, along with over-the-counter drug and health & beauty products. Our assortment and pricing strategies enable us to compete across industries. In sum, we are a one-stop-shop whose customized cross-sector offerings differentiate us from competitors across industries.

Going Concern

As discussed in our Annual Report on Form 10-K, filed May 3, 2019 with Securities and Exchange Commission, the audit report prepared by our auditors with respect to the financial statements includes an explanatory paragraph expressing uncertainty as to our ability to continue as a “going concern.” We have concluded that the circumstances described in “Liquidity and Capital Resources” below, as well as in Note 1 to the Condensed Consolidated Financial Statements included in Part I of this Form 10-Q continue to raise substantial doubt about our ability to continue as a going concern as of May 4, 2019.

Progress on Turnaround and Strategic Initiatives

Fred’s continued to execute its turnaround strategy during the first fiscal quarter of 2019, and the team remains focused on creating value through execution of the following strategic initiatives:

~~During~~Closing underperforming stores;

Reducing selling, general and administrative expenses;

Driving traffic;

Improving assortment and optimizing inventory levels;

Generating free cash flow;

Monetizing non-core assets; and

Reducing debt levels.

On April 11, 2019, the ~~fourth quarter of 2017, Fred’s~~Company announced that the Board ~~of Directors~~had approved a plan to ~~actively market its specialty pharmacy business for sale. As a~~close 159 underperforming stores (the “Closures”). The decision to close these stores was the result of ~~this~~a comprehensive evaluation of the Company’s store portfolio, which examined historical and recent store performance and the timing of lease expirations, among other factors. The Company completed the closure of these stores by June 1, 2019.

On April 11, 2019, the Company also announced that it had retained PJ Solomon to assist the Board in undertaking a comprehensive review of the full range of strategic alternatives available to the Company, which may include an evaluation of the Company’s current operating plan, as well as potential alternatives to maximize value, including, among other things, a sale, merger, a consolidation or business combination, further store closures, asset divestitures, financing transactions or restructurings.

The Company has not set a timetable for completion of the evaluation process. As previously disclosed, no decision ~~Fred’s reclassified its specialty pharmacy business from continuing operations to discontinued operations in accordance with ASC 205-20,~~~~Presentation of Financial Statements – Discontinued Operations~~~~. The specialty pharmacy business~~ has been ~~reported~~made to pursue any specific strategic transaction or any other strategic alternative, and there can be no assurance that the Board’s exploration of strategic alternatives will result in the completion of any transaction or other alternative. The Company does not intend to discuss or disclose developments with respect to this process unless and until the Board has approved a specific transaction, or otherwise deems further disclosure is appropriate or if disclosure is required by applicable law.

Further, as ~~discontinued operations~~announced on May 16, 2019, the Company announced that the Board had approved a plan to close an additional 104 underperforming stores. The decision to close these additional stores is the result of the Company’s continued evaluation of its store portfolio, including historical and recent store performance and the timing of lease expirations, among other factors. The Company intends to close these additional stores by the end of June 2019.

Front Store

During the first fiscal quarter of 2019, we continued our efforts to make improvements to the front store that we believe will result in better operating performance going forward, including:

Continued reductions in our ~~Consolidated Statements of Income,~~workforce and ~~the related assets and liabilities have been presented as held-for-sale~~other operating expenses, which should result in the Consolidated Balance Sheets. These changes have been applied to all periods presented. Unless otherwise noted, amounts, percentages and discussion for all periods included below reflect the results of operations and financial condition from Fred’s continuing operations. Refer to Note 2 to Fred’s consolidated financial statements for additional information on discontinued operations.

~~Progress on Turnaround~~

Through the second fiscal quarter, Fred’s continued executing its turnaround strategy. The team remains committed to delivering long-term growth and value creation and is continuing to focus on driving traffic, reducinglower selling, general and administrative expenses ~~generating free~~on a go forward basis;

��

Continued reductions in unproductive inventory and optimization of merchandise selection throughout the front store.

Continued focus of our “Fred’s Rewards Club” loyalty program, which now has over one million members and allows for more targeted marketing of our customers.

Retail Pharmacy

During the first fiscal quarter of 2019, we also continued to pursue the sale of our remaining pharmacy assets as part of our previously announced plan to unlock shareholder value by monetizing non-core assets. Within our remaining retail pharmacy portfolio, we continue to focus on execution of the following key initiatives:

Continued reduction in operating expenses for the retail pharmacy business;

Continued aggressive inventory management by reducing inventory levels and analyzing the profitability of every script filled while delivering excellent care to patients;

Expanding our 340B program to help customers and healthcare partners gain access to more affordable drugs; and

Deepening relationships with payors to gain access to new networks, resulting in the potential to drive increased traffic and more prescriptions.

Customer Experience

To enhance our customer’s experience, we have implemented holistic, store-wide assessments of productivity and customer traffic to identify key customer priorities and tailor our offerings accordingly. To increase our customer touch-points and mobilize our value offerings, we launched a fully integrated smartphone application in 2017, which sends targeted coupons and discount offerings to customers, which we expect will increase return trips. The application also includes “My Prescriptions”, a summary of users’ prescriptions on file with Fred’s, Quick Fill, allowing customers to efficiently refill prescriptions and obtain the medicine they need, Rx Transfer, which allows patients to easily transfer prescriptions from another pharmacy to Fred’s pharmacy, as well as a store locator. We continue to implement our “Fred’s Rewards Club” loyalty program, which now has over one million members.

In 2019, we continue to focus on improving trends in Front Store and Retail Pharmacy sales and gross margin and reducing inventory and expenses throughout the business, all with the goal of improving cash flow and ~~lowering~~reducing debt.

~~Some key actions already being taken that support the Company’s key focus points include:~~

●

~~Continued reductions in our workforce which should result in savings on a go forward basis;~~

●

Implementation of zero-based budgeting, which is becoming the foundation of all selling, general and administrative expense reduction initiatives. Lowering selling general and administrative expenses will allow Fred’s to generate free cash flow, repay debt, and reinvest in the business to drive growth and improve profitability;

●

~~Implementation of new processes to mitigate the risk of building slower turning inventory in the future; and~~

●

~~Continued expansion of beer and wine, designed to increase traffic and increase transaction size~~

~~Strategic Initiatives~~

Fred’s has furthered its efforts to turn around the Company and the team remains committed to accelerating its strategy going forward. Efforts remain squarely focused on the following key priorities:

●

~~Driving traffic into stores;~~

●

~~Reducing selling, general and administrative expenses;~~

●

~~Generating free cash flow; and~~

●

~~Repayment of debt~~

~~Front Store~~

~~We continue to make changes to Front Store that we believe will contribute to growth over 2018 and beyond. We are encouraged by the results of changes implemented thus far which include:~~

●

~~The tobacco category supply chain, replenishment technology, pricing, assortment and marketing have all been improved, resulting in positive trends in this category;~~

●

Rolled out the high-traffic category of beer to approximately 248 stores and wine to approximately 75 stores and are on track to complete the rollout to the remaining stores where beer and wine sales are allowed in 2018;

●

~~Continued expansion of lottery into more stores, designed to serve as a traffic driver;~~

●

~~Greater assortment of private label brands; and~~

●

~~Increased sourcing of products directly from suppliers, relying less on distributors.~~

~~Retail Pharmacy~~

The Retail Pharmacy business continued its improvement initiatives during the first quarter, with increases in generic dispensing rate and year over year decreases in selling, general and administrative expenses. Retail Pharmacy is also continuing its focus on improving margins and reducing inventory levels.

~~As Fred’s works to continue the improvements in Retail Pharmacy, the team is focused on the execution of key initiatives, including:~~

●

~~Expanding its 340B program in an effort to help customers and healthcare partners gain access to more affordable drugs;~~

●

~~Deepening relationships with payors to gain access to new networks, resulting in the potential to drive increased traffic and more prescriptions; and~~

●

~~Continuing aggressive inventory management by reducing inventory levels and analyzing the profitability of every script filled while delivering excellent care to patients.~~

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with GAAP. The critical accounting matters that are particularly important to the portrayal of the Company’s financial condition and results of operations, and require some of management’s most difficult, subjective and complex judgments, are described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018.~~2, 2019. The preparation of condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to inventories, income taxes, insurance reserves, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

RESULTS OF OPERATIONS

Thirteen Weeks Ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017~~May 5, 2018

Sales

Net sales for the ~~second~~first quarter of ~~2018~~2019 decreased to ~~$419.7~~$319.0 million from ~~$438.5~~$336.4 million in ~~2017,~~2018, a year-over-year decrease of ~~$18.9~~$17.4 million or ~~4.3%~~5.2%. On a comparable store basis, sales decreased ~~3.5% compared to a 3.0% decrease in~~8.5% from the same period last year.

General merchandise (non-pharmacy) sales for the ~~second~~first quarter of ~~2018~~2019 decreased ~~6.7%~~7.8% to ~~$220.8~~$214.3 million from ~~$236.6~~$232.4 million in ~~2017.~~2018. This was driven by a decrease in Consumables sales, which decreased by 16.3% from the ~~closure~~same period last year primarily driven by the reduction in store traffic impacted by the continued out-of-stock position in certain inventory categories.

Pharmacy department sales were 32.8% of ~~underperforming stores~~total sales in the first quarter of ~~2017.~~

~~Pharmacy department sales were 46.8% of total sales in the second quarter of 2018~~2019 compared to ~~45.3%~~30.9% of total sales in the comparable period of the prior ~~year and continue to rank as the largest sales category within the Company.~~year. The total sales for the ~~second~~first quarter of ~~2018~~2019 in this department ~~decreased 1.2%~~increased 0.7% from the ~~second~~first quarter of ~~2017.~~

2018.

The Company had 1211 franchised locations at ~~August~~May 4, 2019 and May 5, 2018, ~~and 14 franchised locations as of July 29, 2017.~~respectively. Sales to our franchised locations during the quarter were ~~$2.6~~$4.0 million ~~(0.6%~~(1.2% of sales) compared to ~~$3.3~~$3.0 million ~~(0.7%~~(1.2% of sales) in the comparable period of ~~2017.~~2018. The Company does not intend to expand its franchise network.

The following table provides a comparison of the sales mix for the thirteen weeks ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017.~~May 5, 2018.

	Thirteen Weeks Ended						Thirteen Weeks Ended
	August 4, 2018			July 29, 2017			May 4, 2019			May 5, 2018
Pharmacy		46.8	%		45.3	%		32.8	%		30.9	%
Consumables		29.9	%		29.1	%		35.8	%		40.6	%
Household Goods and Softlines		22.7	%		24.9	%		30.1	%		27.6	%
Franchise		0.6	%		0.7	%		1.2	%		0.9	%
Total Sales Mix		100.0	%		100.0	%		100.0	%		100.0	%

For the ~~second~~first quarter of ~~2018,~~2019, comparable store customer traffic, ~~decreased 4.3%~~as determined by the number of transactions, increased 7.3% from the prior period, while the average customer ~~ticket~~transaction size was ~~$24.11~~$20.19 for the ~~quarter.~~quarter compared to $20.01 for the same period in the prior year.

Gross Profit

Gross profit for the ~~second~~first quarter decreased to ~~$100.5~~$74.6 million in 2019 from $89.1 million in 2018, ~~from $122.7 million in 2017,~~ a decrease of ~~$22.2~~$14.5 million or ~~18.2%~~16.2%. The gross profit decrease for the quarter was primarily driven ~~primarily~~ by ~~a sales decline related to~~ the ~~closure of 39 underperforming stores.~~ chain wide discount initiative at both the closing stores as well as the go-forward store locations. Gross margin for the quarter, measured as a percentage of net sales, decreased to ~~23.9%~~23.4% in ~~2018~~2019 from ~~28.0%~~26.5% in the same quarter last year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the ~~second~~first quarter, including depreciation and amortization, decreased to ~~$121.9~~$101.4 million in 2019 (31.8% of sales) from $109.2 million in 2018 ~~(29.0% of sales) from $150.4 million in 2017 (34.3%~~(32.5% of sales). This decrease was primarily attributable to ~~the inclusion in 2017 of higher professional~~cost containment measures and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores, expenses related to store closures and the development and implementation of the Company’s growth strategy.workforce reduction.

Operating Loss

Operating loss for the ~~second~~first quarter of ~~2018~~2019 was ~~$21.4~~$26.8 million, or ~~5.1%~~8.4% of sales, compared to an operating loss of ~~$27.6~~$20.2 million in ~~2017~~2018, or ~~6.3%~~6.0% of sales. This ~~decrease reflects~~increase was driven primarily by the ~~impact of cost containment measures offset by lower gross profit~~reduction in the ~~quarter.~~volume of sales for the quarter ended 2019 compared to the same period in 2018.

Interest Expense, Net

Net interest expense for the ~~second~~first quarter of ~~2018~~2019 totaled ~~$1.7~~$2.8 million, or ~~0.4%~~0.9% of sales, compared to ~~$1.4~~$2.0 million, or ~~0.3%~~0.6% of sales, in the same period of the prior ~~year.~~

~~Income Taxes~~

~~The effective income tax rate for both the second quarter of 2018 and 2017 was less than 0.1%. The rate in both periods was impacted~~year, due primarily ~~by a valuation allowance against the Company’s deferred tax asset recorded in 2017.~~

~~Net Loss~~

~~Net loss for the second quarter of 2018 was $32.3 million or $0.88 per share compared~~ to a net loss of $29.5 million or $0.79 per share for the second quarter of 2017, an increase of $2.8 million. While selling, general and administrative expenses were comparatively lower in the quarter, the decrease in net sales is the primary contributing factor in the increase in net loss.

~~Twenty-Six Weeks Ended August 4, 2018 and July 29, 2017~~

~~Sales~~

Net sales for the first six months of 2018 decreased to $856.8 million from $902.7 million during the same period in 2017, a year-over-year decrease of $45.9 million or 5.1%. On a comparable store basis, sales decreased 3.7% compared to a 3.6% decrease in the same period last year.

General merchandise (non-pharmacy) sales for the first six months of 2018 decreased 7.2% to $452.0 million from $487.1 million in 2017. This was driven by sales decreases in general merchandise departments such as home furnishings, domestics, electronics and lawn and garden, partially offset by sales increases in beverages and tobacco.

The Company’s pharmacy department sales for the first six months were 46.6% of total sales in 2018 compared to 45.2% of total sales in the prior year and continue to rank as the largest sales category within the Company. The total sales in this department decreased 2.2% over 2017.

The Company had 12 franchised locations at August 4, 2018 and 14 franchised locations at July 29, 2017. Sales to our franchised locations for the first six months of 2018 were $5.7 million (0.7% of sales) compared to $7.4 million (0.8% of sales) in the prior year. The Company does not intend to expand its franchise network.

~~The following table provides a comparison of the sales mix for the twenty-six weeks ended August 4, 2018 and July 27, 2017.~~

Twenty-Six Weeks Ended
August 4,
2018 July 29,
2017
Pharmacy 46.6 % 45.2 %
Consumables 30.5 % 29.3 %
Household Goods and Softlines 22.2 % 24.7 %
Franchise 0.7 % 0.8 %
Total Sales Mix 100.0 % 100.0 %

~~For the first six months of 2018, comparable store customer traffic decreased 3.3% over the prior period, while the average customer ticket was $23.86 for the twenty-six week period.~~

~~Gross Profit~~

Gross profit for the first six months decreased to $212.1 million in 2018 from $251.3 million in 2017, a decrease of $39.2 million or 15.6%. The gross profit decrease was partially driven by a sales decline related to the closure of 39 underperforming stores and partially by the increase in promotional activity to drive traffic and reduce inventory. Gross margin for the first six months, measured as a percentage of net sales, decreased to 24.8% in 2018 from 27.8% in the same period last year.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses for the first six months, including depreciation and amortization, decreased to $251.6 million in 2018 (29.4% of sales) from $314.1 million in 2017 (34.8% of sales). The decrease in expenses is primarily driven by headcount reductions of approximately 13% over the same period last fiscal year, resulting in lower employee-related expenses. The impact of professional fees incurred in 2017 related to the attempted Rite Aid acquisition and in closing 39 underperforming stores, were not repeated in 2018.

~~Operating Loss~~

Operating loss for the first six months was $39.5 million in 2018 (4.6% of sales) compared to an operating loss of $62.8 million in 2017 (7.0% of sales). The decrease in operating loss in the period was primarily driven by the inclusionincreased borrowings in the first ~~half~~quarter of ~~2017 of $62.6 million in selling, general and administrative expenses, which was partially offset by a $39.2 million decrease in gross profit.~~ 2019.

~~Interest Expense, Net~~

~~Net interest expense for the first six months of 2018 totaled $3.7 million or 0.4% of sales compared to $2.7 million or 0.3% of sales in the same period of the prior year.~~

Income Taxes

The effective income tax rate for the first ~~six months~~quarter of ~~2018~~2019 was ~~0.1%~~0.0% compared to ~~0.2%~~0.9% in the ~~same period~~first quarter of ~~2017. The low rate is due to the impact of the valuation allowance against the Company’s deferred tax asset, which was recorded in 2017.~~2018.

Net Loss

Net loss from continuing operations for the first ~~six months~~quarter of 2019 was ~~$54.3~~$29.5 million ($~~1.48 loss~~0.84 per share) ~~in 2018~~ compared to a net loss of ~~$66.0~~$22.0 million ($~~1.76 loss~~0.60 per share) ~~in 2017.~~for the first quarter of 2018, a decline of $9.7 million. The ~~improvement~~increase in net loss was ~~mainly driven by~~primarily attributable to decline in the ~~operating loss, as detailed above.~~ sales volume during the period ended May 4, 2019 compared to prior year.

LIQUIDITY AND CAPITAL RESOURCES

The ~~net loss~~Company’s principal capital requirements generally include remodeling and improving existing stores and pharmacies, maintaining stores and distribution centers, and the ongoing investment in information systems. Fred's primary sources of working capital have traditionally been cash flow from ~~discontinued~~ operations ~~was $11.5~~and borrowings under its Revolving Credit Agreement (as defined below). The Company had working capital of $27.8 million and $101.2 million for the ~~first six months~~period ended May 4, 2019 and February 2, 2019, respectively. Working capital fluctuates in relation to profitability, working capital initiatives, seasonal inventory levels, and the level of ~~2018 compared to net income~~store openings and closings. Working capital for the period ended May 4, 2019 decreased $38.9 million from ~~continuing operations of $0.7 million in~~ the ~~first six months of 2017, the impact of which offset the improvement in net loss from continuing operations.~~

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Due~~year-ended February 2, 2019 primarily due to the ~~seasonality of our business, inventories are generally lower at our fiscal year-end than at each quarter-end~~operational needs of the ~~following year.~~Company.

We incur losses caused by wind and flood damage, which consist primarily of losses of inventory and fixed assets and interruption of business. Insurance proceeds received related to fixed assets are included in cash flows from investing activities and proceeds related to inventory losses and business interruption are included in cash flows from operating activities.

Net cash used in operating activities totaled ~~$16.0~~$14.2 million during the ~~twenty-six~~thirteen week period ended ~~August~~May 4, ~~2018 compared to net cash provided by operating activities of $0.9~~2019 and $12.8 million in the same period of the prior year. Cash used in by operating activities inwas driven by the ~~first six months of 2018 primarily resulted from a~~net loss and partially offset by the decrease in ~~accounts payable and other liability balances and increases in other operating assets.~~

inventory.

Net cash used in investing activities totaled ~~$3.5~~$1.4 million during the ~~twenty-six~~thirteen week period ended ~~August~~May 4, ~~2018~~2019 and ~~$7.9~~$2.5 million in the same period of the prior year. Purchases of capital assets infor the ~~first half of 2018 totaled $4.9~~three months ended May 4, 2019 were $1.4 million compared to ~~$7.3~~$2.5 million during the same period in ~~2017.~~

2018.

Net cash provided by financing activities totaled ~~$18.7~~$17.4 million during the ~~twenty-six~~thirteen week period ended ~~August~~May 4, ~~2018~~2019 as compared to ~~$6.8~~$15.0 million in the same period of the prior year. The cash flows provided by financing activities ~~during the 2018 period~~ includes net ~~payments~~borrowings of ~~$4.4~~$22.0 million and $8.6 million on our revolving line of credit for thirteen-week period ended 2019 and 2018, respectively.

The Board regularly reviews the Company’s dividend plans to ensure that they are consistent with the Company’s earnings performance, financial condition, need for capital and other relevant factors.

On December 6, 2017, the Company announced the cancellation of quarterly cash dividends, thus no dividends were paid during period ended May 4, 2019. Our ability to begin paying dividends again in the future will depend upon, among other things, our future earnings, cash flows and restrictive covenants under our Revolving Credit Agreement and under any future credit agreements to which we may be a party.

On August 27, 2007, the Board approved a plan that authorized stock repurchases of up to 4.0 million shares of the Company’s common stock. Under the plan, the Company was authorized to repurchase its common stock in the open market or through privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest.

On December 6, 2017, the Company announced the amendment of the share repurchase program described above. The amended program allowed for the repurchase of up to 3.8 million shares of the Company’s outstanding voting common stock. The Company repurchased approximately 2.6 million shares in the fourth quarter of 2018 and completed this repurchase program on January 24, 2019.

On January 30, 2019, the Company announced that it had approved a new share repurchase program in order to acquire up to 3.5 million shares of the Company’s common stock. Under the new program, the common stock may be purchased through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases on the open market, block trades or in privately negotiated transactions. The amount and timing of any purchases will depend on a number of factors, including trading price, trading volume, compliance with debt agreements and general market conditions. No assurance can be given that any particular amount of common stock will be repurchased. This new repurchase program is valid for up to two years and may be modified, extended or terminated by the Board at any time. As of the date hereof, no shares have been repurchased under this new program.

Cash and cash equivalents were $7.2 million as of May 4, 2019 compared to $5.4 million as of February 2, 2019.

Revolving Credit Agreement

On April 9, 2015, the Company entered into a Revolving Loan and Credit Agreement (as amended as of October 23, 2015, December 28, 2016, January 27, 2017, July 31, 2017, August 22, 2017, April 5, 2018, August 23, 2018 and May 15, 2019, and as supplemented by the Addendum (as defined below), the “Revolving Credit Agreement”) with Regions Bank and Bank of America, N.A. As of May 4, 2019, the Revolving Credit Agreement provided for aggregate loan commitments of $210.0 million and matures on April 9, 2020. Draws are limited to the lesser of the commitment amount or the borrowing base, which is periodically determined by reference to the value of certain receivables, inventory and scripts, less applicable reserves. The Company may choose to borrow at a spread to either LIBOR or a Base Rate. For LIBOR loans the spread is 4.25% and for Base Rate loans the spread is 3.25%. Commitment fees on the unused portion of the credit line are 37.5 basis points. The Agreement included an up-front credit facility fee which is being amortized over the Agreement term.

As of May 4, 2019, outstanding borrowings under our Revolving Credit Agreement were $81.3 million, $17.5 million of letters of credit were outstanding, and excess availability was $33.0 million (based on a borrowing base of $156.8 million at such time). Under the Revolving Credit Agreement, the Company has a financial covenant to maintain at all times excess availability of at least 10% of the commitments, and if excess availability falls below such threshold ($21.0 million at May 4, 2019), it would constitute an event of default under the Revolving Credit Agreement. As of June 17, 2019, outstanding borrowings under our Revolving Credit Agreement were $51.1 million, $17.5 million of letters of credit were outstanding, excess availability was $20.6 million (based on a borrowing base of $114.2 million at such time), and our excess availability covenant was $12.5 million.

consolidate or sell, lease, transfer or otherwise dispose of all or substantially all of the Company’s assets; (vii) enter into hedging arrangement; and (viii) enter into certain transactions with the Company’s affiliates.

These restrictions could limit the Company’s ability to plan for or react to market conditions or meet extraordinary capital needs or could otherwise restrict our activities. These restrictions could also adversely affect the Company’s ability to finance future operations or capital needs or to engage in other business activities that would be in the Company’s interest.

Recent Developments Relating to the Revolving Credit Agreement

On April 15, 2019, Bank of America, N.A. imposed a reserve of an additional $20.0 million under our Revolving Credit Agreement in connection with the announced planned closures of 159 stores and related matters, which reduced our excess availability at such time to $37.9 million, and the administrative agent declared an Account Control Event in connection with such closures and exercised control over our collection accounts.

As referenced below under the heading “–Going Concern,” the audit report prepared by our auditors with respect to the financial statements in our Annual Report on Form 10-K, filed on May 3, 2019 with the SEC, includes an explanatory paragraph indicating that there is substantial doubt about Fred’s ability to continue as a going concern. The receipt of this explanatory paragraph with respect to Fred’s financial statements for the year ended February 2, 2019 resulted in a breach of a covenant under the Revolving Credit Agreement that requires annual financial statements accompanied by an unqualified audit report to be delivered to the lenders within 120 days of fiscal year end and a breach of this covenant constituted an event of default under the Revolving Credit Agreement (the “Going Concern Event of Default”). In addition, Fred’s lenders under the Revolving Credit Agreement have indicated to Fred’s their belief that certain other events of default occurred under the Revolving Credit Agreement in connection with the Closures, the inventory sales at certain stores and the timing of delivery, and content, of a borrowing base certificate due under the Revolving Credit Agreement (such purported events of default, together with the Going Concern Event of Default, are referred to herein as the “Revolver EODs”).

An event of default, which is not cured or waived, would permit, among other remedies, acceleration of Fred’s indebtedness under the Revolving Credit Agreement and the addition, at the option of the Required Lenders (as defined in the Revolving Credit Agreement), of 200 basis points to the applicable interest rate with respect to all loans under the Revolving Credit Agreement. As a result of the Forbearance Agreement and Eighth Amendment, the lenders under the Revolving Credit Agreement have agreed, subject to the satisfaction of certain conditions, to not take any action to accelerate our indebtedness, or exercise other remedies with respect to the Revolver EODs until July 22, 2019, but there can be no assurance that such lenders will not do so on or after such date or if the conditions in the Forbearance Agreement and Eighth Amendment are not met in the future. If our indebtedness is accelerated, whether due to the Revolver EODs or otherwise, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. As a result of the foregoing, the Company has classified the outstanding borrowings under the Revolving Credit Agreement as short-term, even though the maturity date is beyond twelve months from our balance sheet date.

Recent Amendments Affecting Revolving Credit Agreement

On May 15, 2019 , the Company and certain of its subsidiaries entered into the Forbearance Agreement, Eighth Amendment to Credit Agreement and Fourth Amendment to Amended and Restated Addendum to Credit Agreement (the “Forbearance Agreement and Eighth Amendment”). The Forbearance Agreement and Eighth Amendment amends the Revolving Credit Agreement and the Amended and Restated Addendum to Credit Agreement, dated as of January 27, 2017, as amended as of July 31, 2017, August 23, 2018 and October 15, 2018 (the “Addendum”). Among other things, the Forbearance Agreement and Eighth Amendment provided for: (i) the Company and certain of its subsidiaries’ stipulation of the occurrence of certain events of default under the Revolving Credit Agreement and the Addendum, including as the result of the commencement of 159 store closures, issues with timing and accuracy of a borrowing base certificate and the failure to deliver an annual audit report without a “going concern” or similar qualification; (ii) an agreement to forbear from exercising remedies under the Revolving Credit Agreement with respect to (a) the stipulated events of default and (b) the additional planned closure of 104 stores, in each case, until July 22, 2019, subject to the satisfaction of certain conditions; (iii) requirements for the Company and certain of its subsidiaries to comply with certain conditions, including (a) working with a turnaround consultant, (b) providing certain deliverables including weekly cash flow forecasts and inventory reports, (c) requiring that collections, disbursements and inventory receipts are within 15% of forecasted amounts for any two week period, (d) maintaining certain levels of inventory at certain continuing stores and (e) obtaining a signed commitment letter or letters by June 21, 2019 for a refinancing of all loans under the Revolving Credit Agreement by July 22, 2019, with the failure to comply with such conditions resulting in the early termination of the forbearance period; (iv) an agreement to release certain reserves upon receipt of such commitment letter or letters; (v) a reduction of

commitments from $210 million to $150 million, and additional reductions to $125 million on June 15, 2019 and to $100 million on July 6, 2019; (vi) a change in the availability requirements to 10% of commitments, allowing availability requirements to decrease with the commitment reductions; (vii) an increase of the interest rate by 200 basis points; and (viii) a consent to the sale of certain real estate. We are in discussions with potential financing sources relating to the condition in the Forbearance Agreement and Eighth Amendment to obtain a signed commitment letter for a refinancing of all loans under the Revolving Credit Agreement. There can be no assurance that we will obtain such a commitment letter or complete a refinancing by the deadlines in the Forbearance Agreement and Eighth Amendment or at all.

Going Concern

The Company has experienced significant net losses and negative cash flows from operating activities in recent years, and we cannot assure you that such losses and negative cash flows will not continue for the foreseeable future. For the fiscal years ended February 2, 2019 and February 3, 2018, we incurred net losses of $137.2 million and $144.5 million, respectively, and our net cash flows used in operating activities were $91.5 million and $44.7 million, respectively. For the thirteen week periods ended May 4 , 2019 and May 5, 2018, the Company incurred net losses of $36.1 million and $22.01 million, respectively, and our net cash flows used in operating activities were $14.2 million and $12.8 million, respectively. Furthermore, the Company had limited availability under its Revolving Credit Agreement, which along with cash from operations had traditionally been the Company’s primary source of working capital. As of May 4, 2019, the Company had outstanding borrowings of ~~$10.7~~$81.3 million under our Revolving Credit Agreement and excess availability of $33.0 million. Under our Revolving Credit Agreement, we have a financial covenant to maintain at all times excess availability of at least 10% of the commitments, and if excess availability falls below such threshold ($21.0 million at May 4, 2019), it would constitute an event of default under the Revolving Credit Agreement. The Company’s failure to comply with the financial covenants and other obligations under the Revolving Credit Agreement would result in ~~2017.~~

an event of default, which if not cured or waived, may permit acceleration of our indebtedness and other remedies. If our indebtedness is accelerated, whether due to the Revolver EODs or otherwise, the Company cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all, which could have a material adverse effect on the Company’s business, results of operations and financial condition and could impact our ability to continue as a going concern. Furthermore, our Revolving Credit Agreement has a maturity date of April 9, 2020, and we can prov ide no assurance that we will be able to renew or refinance such facility on terms acceptable to us or at all. The foregoing conditions raise substantial doubt about the Company’s ability to continue as a going concern. As further described in Note 10 above, on May 15, 2019, the Company and certain of its subsidiaries entered into the Forbearance Agreement, Eighth Amendment to Credit Agreement and Fourth Amendment to Amended and Restated Addendum to Credit Agreement (the “Forbearance Agreement and Eighth Amendment”) in response to certain events of default identified by our lenders. As a result of the Forbearance Agreement and Eighth Amendment, the lenders under the Revolving Credit Agreement have agreed, subject to the satisfaction of certain conditions, not to take any action to accelerate our indebtedness or exercise other remedies with respect to the Revolver EODs until July 22, 2019, but there can be no assurance that such lenders will not do so on or after such date or if the conditions in the Forbearance Agreement and Eighth Amendment are not met.

The Company ~~believes~~has evaluated its plans to alleviate this doubt, including engaging PJ Solomon in April 2019 to assist the Company in evaluating its strategic alternatives. In addition, while we analyze these strategic alternatives, the Company is also assessing potential alternative financing arrangements and undertaking a number of operational measures that ~~sufficient~~we believe will enhance our cash position and improve our profitability, including, among other things:

Completed the closure of 159 stores as of June 1, 2019 and liquidated inventory located at those stores;

Closing an additional 104 stores by the end of June 2019 and liquidating the inventory located at those stores;

Sales events at our other stores;

Attempting to renegotiate leases with our landlords to more favorable terms;

Reducing general and administrative expenses by eliminating corporate positions and expenses; and

Reducing capital ~~resources are available~~expenditures associated with certain information technology and real estate projects

The Company can provide no assurance, however, regarding the outcome of its evaluation of strategic alternatives, that alternative financing will be on terms acceptable to us or at all, or that the operational measures being undertaken by the Company will be successful in ~~both the short-term and long-term through currently available cash, amounts available under the revolving line of credit and cash generated from future operations to sustain~~improving the Company’s ~~operations and~~financial performance, in which case the Company may be unable to ~~fund our strategic plans.~~ continue as a going concern.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company has no holdings of derivative financial or commodity instruments as of August 4, 2018. The Company is exposed to financial market risks, including changes in interest rates, primarily related to the effect of interest rate changes on borrowings outstanding under our revolving line of credit. Borrowings under the Agreement bear interest at rates ranging from 1.75% to 2.25% plus LIBOR or 0.75% to 1.25% plus the Base Rate depending on excess availability. Our potential additional interest expense over one year that would result fromWe are a ~~hypothetical~~smaller reporting company and unfavorable change of 100 basis points in short term interest rates would be in the range of $0.03 to $0.05 of pretax earnings per share assuming borrowing levels of $125.0 million to $175.0 million throughout 2018. All of the Company’s business is transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company, and they are not ~~expected~~required to inprovide the ~~foreseeable future.~~information under this item.

Item 4.

CONTROLS AND PROCEDURES

~~(a)Conclusion Regarding~~In accordance with Rules 13a-15 and 15d-15 under the ~~Effectiveness~~Securities Exchange Act of ~~Disclosure Controls and Procedures~~.~~As of the end of the period covered by this report,~~1934, as amended (the “Exchange Act”) the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the ~~Securities and~~ Exchange ~~Act~~Act) as of ~~1934, as amended (the “Exchange Act”)).~~the end of the period covered by this Quarterly Report on Form 10-Q. Based onupon that evaluation, ~~the~~our Chief Executive Officer and ~~the~~ Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Additionally, they concluded thatas of May 4, 2019, our disclosure controls and procedures ~~are designed~~were not effective due to ~~ensure that information required~~the existence of material weaknesses in our internal controls over financial reporting as discussed in more detail in our Annual Report on Form 10-K for the year ended February 2, 2019. Management has continued to ~~be disclosed by~~monitor the ~~Company~~implementation of the remediation plan described in the ~~reports~~Annual Report on Form 10-K for the year ended February 2, 2019, as described below.

Management Plan to Remediate Material Weaknesses

In order to remediate the documented material weakness, management continues to implement the following corrective measures:

(a)

We have hired additional staff to properly segregate treasury duties;

(b)

We recently hired a heavily-experienced Senior Vice President and Controller to fill a vacancy created during the fourth quarter of 2018.

(c)

In December 2018, we hired a Director of SEC Reporting and Technical Pronouncements to provide oversight and technical expertise to supervisory and other accounting staff related to unusual and complex transactions, relevant new accounting pronouncements, as well as support of the proper execution of our internal controls over financial reporting.

(d)

We are developing a plan to manage the impact of personnel turnover by enhancing the business understanding and relevant knowledge possessed by those responsible for ensuring proper management review and effective financial reporting controls.

(e)

We are developing a plan to improve the periodic financial close and reporting process through the use of a detailed financial close plan and expanded reporting of financial data to our senior management.

Management is committed to improving our internal control processes and believes that the ~~Company is~~measures described above should remediate the material weaknesses identified and strengthen internal control over financial reporting. As we continue to evaluate and improve internal control over financial reporting, additional measures to remediate the material weaknesses or modifications to certain of the remediation procedures described above may be necessary. We expect to complete the required remedial actions during 2019. While senior management and our Audit Committee are closely monitoring the implementation of these remediation plans, we cannot provide any assurance that these remediation efforts will be successful or that internal control over financial reporting will be effective as a result of these efforts. Until the remediation steps set forth above are fully implemented and operating for a sufficient period of time, the material weaknesses that exist as of May 4, 2019 may continue to file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.exist.

~~(b)~~Changes in Internal Control over Financial ~~Reporting.~~ ~~There have been~~Reporting

Other than the implementation of new controls related to the adoption of the new leasing standard, there was no ~~changes during the quarter ended August 4, 2018~~change in ~~the Company’s~~ internal control over financial reporting (as defined in ~~Exchange Act~~ Rule 13a-15(f)) or Rule 15d-15(f) under the Exchange Act) that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, ~~the Company’s~~our internal control over financial ~~reporting.~~reporting during the period ended May 4, 2019.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, see Note ~~10 (Legal Contingencies)~~9 - Legal Contingencies - of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors.

The risk factors listed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended ~~January 28, 2017,~~February 2, 2019, should be considered with the information provided elsewhere in this Quarterly Report on Form 10-Q, which could materially adversely affect the business, financial condition or results of operations. ~~There~~Other than the risk factor included below, and updates elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors as previously disclosed in such Annual Report on Form 10-K.

If we fail to meet all applicable Nasdaq Global Select Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment and adversely affect our ability to raise needed funds.

Our common stock is listed on the Nasdaq Global Select Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On June 18, 2019, we received notice from The Nasdaq Stock Market (“Nasdaq”) that as of June 17, 2019, the closing bid price for our common stock on the Nasdaq Global Select Market was below $1.00 for the last 30 consecutive business days and that we are therefore not in compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). This notification of noncompliance has no immediate effect on the listing or trading of our common stock on Nasdaq.

The notice indicates that pursuant to Nasdaq Listing Rule 5810(c)(3)(A), we will have 180 calendar days, until December 16, 2019, to regain compliance. For us to regain compliance with the minimum bid price requirement, our common stock must have a closing bid price of $1.00 or more for 10 consecutive business days. Under certain circumstances, however, to ensure that a company can sustain long-term compliance, Nasdaq may require the closing bid price to equal or to exceed the $1.00 minimum bid price requirement for more than 10 consecutive business days before determining that the company complies. Our common stock will continue to trade on Nasdaq under the symbol FRED during this 180-day period.

If we do not regain compliance during the initial 180-day compliance period, we may be eligible for an additional 180-day compliance period to regain compliance if we elect to transfer to the Nasdaq Capital Market. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period. If it appears to Nasdaq that we will not be able to cure the deficiency, or the Company is otherwise not eligible, however, Nasdaq would notify us that our securities would be subject to delisting. If we were to receive such a notification, we could appeal Nasdaq’s determination to delist our securities, but there can be no assurance Nasdaq would grant our request for continued listing.

We are considering undertaking a reverse stock split, subject to stockholder approval and compliance with our debt agreements, in order to regain compliance with the minimum bid price requirement to allow for continued listing on the Nasdaq Global Select Market. If the reverse stock split is unsuccessful, we may seek to transfer to the Nasdaq Capital Market and thereby qualify for another 180-day compliance period. We cannot provide any assurances, however, that we will be able to regain compliance. In the event we are required to undertake a reverse stock split to regain compliance, the liquidity of our common stock may be adversely affected given the corresponding reduction in the number of shares that will be outstanding following the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales. Additionally, after a reverse stock split, the market price of our shares may decline.

If we fail to meet all applicable Nasdaq requirements in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and adversely affect our ability to obtain financing for the continuation of our operations. This delisting could also impair the value of your investment.

Item 2. Unregistered Sales of ~~Equity~~Equity Securities and Use of Proceeds.

On August 27, 2007, the Board of Directors approved a plan that authorized stock repurchases of up to 4.0 million shares of the Company’s common stock. Under the plan, the Company may repurchase its common stock in the open market or through privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest. On February 16, 2012, Fred’s Board authorized the expansion of the Company’s existing stock repurchase program by increasing the authorization to repurchase an additional 3.6 million shares or approximately 10% of the current outstanding shares. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors.

On December 6, 2017, the Company announced the amendment of the share repurchase program described above. The amended program ~~will allow~~allowed for the repurchase of up to 3.8 million shares of the Company’s outstanding ~~Class A~~ voting common ~~stock (the “common stock”).~~stock. The Company repurchased approximately 2.6 million shares in the fourth quarter of 2018 and completed this repurchase program on January 24, 2019.

On January 30, 2019, the Company announced that it had approved a new share repurchase program in order to acquire up to 3.5 million shares of the Company’s common stock. Under the ~~amended~~new program, the common stock may be purchased through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases on the open market, block trades or in privately negotiated transactions. The amount and timing of any purchases will depend on a number of factors, including trading price, trading volume and general market conditions. No assurance can be given that any particular amount of common stock will be repurchased. This new repurchase program is valid for up to two years and may be modified, extended or terminated by the Board at any time.As of ~~the date of~~May 4, 2019, no shares have been repurchased under this ~~filing, there were 2.6 million shares available for repurchase. No shares were repurchased in the twenty-six weeks ended August 4, 2018.~~new program.

~~Item 3.~~

Item 3. Defaults Upon Senior Securities.

~~Not applicable.~~No disclosure required. Please see the Company’s Form 8-K filed with the Securities and Exchange Commission filed on May 16, 2019.

~~Item 4.~~

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. ~~Item 5.~~

Other Information.

~~None.~~On June 18, 2019, the Company received notice from Nasdaq that as of June 17, 2019, the closing bid price for the Company’s common stock on the Nasdaq Global Select Market was below $1.00 for the last 30 consecutive business days and that the Company is therefore not in compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). This notification of noncompliance has no immediate effect on the listing or trading of the Company’s common stock on Nasdaq.

The notice indicates that pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company will have 180 calendar days, until December 16, 2019, to regain compliance. For the Company to regain compliance with the minimum bid price requirement, the Company’s common stock must have a closing bid price of $1.00 or more for 10 consecutive business days. Under certain circumstances, however, to ensure that a company can sustain long-term compliance, Nasdaq may require the closing bid price to equal or to exceed the $1.00 minimum bid price requirement for more than 10 consecutive business days before determining that the company complies. The Company’s common stock will continue to trade on Nasdaq under the symbol FRED during this 180-day period.

If the Company does not regain compliance during the initial 180-day compliance period, the Company may be eligible for an additional 180-day compliance period to regain compliance if it elects to transfer to the Nasdaq Capital Market. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and would need to provide written notice of its intention to cure the deficiency during the second compliance period. If it appears to Nasdaq that the Company will not be able to cure the deficiency, or the Company is otherwise not eligible, however, Nasdaq would notify the Company that its securities would be subject to delisting. If the Company were to receive such a notification, the Company could appeal Nasdaq’s determination to delist its securities, but there can be no assurance Nasdaq would grant the Company’s request for continued listing.

The Company is considering undertaking a reverse stock split, subject to shareholder approval and compliance with its debt agreements, in order to regain compliance with the minimum bid price requirement to allow for continued listing on the Nasdaq Global Select Market. If the reverse stock split is unsuccessful, the Company may seek to transfer to the Nasdaq Capital Market and thereby qualify for another 180-day compliance period. The Company cannot provide any assurances, however, that it will be able to regain compliance.

Item 6. ~~Exhibits.~~Exhibits.

Incorporation by Reference
Exhibit
Number
Exhibit Description Form SEC File No. Exhibit Filing Date

2.1 Asset Purchase Agreement, dated September 7, 2018, by and between Walgreen Co. and Fred’s Stores of Tennessee, Inc. 8-K 001-14565 2.1 September 10, 2018
2.2 Asset Purchase Agreement, dated May 4, 2018, by and among Advanced Care Scripts, Inc., Fred’s Stores of Tennessee, Inc., Fred’s, Inc., National Pharmaceutical Network, Inc., and Reeves-Sain Drug Store, Inc. d/b/a EntrustRX 8-K 001-14565
2.1

June 4, 2018

10.1
Separation Agreement and General Release, effective April 24, 2018, between Michael K. Bloom and Fred’s Inc.

8-K 001-14565 10.1
April 27, 2018

10.2
Separation Agreement and General Release, effective April 24, 2018, between Timothy Liebmann and Fred’s Inc.

8-K 001-14565 10.1
May 3, 2018

10.3 Separation Agreement and General Release, effective April 24, 2018, between Mary Louise Gardner and Fred’s Inc. 8-K 001-14565 10.2 May 3, 2018
10.4†
Separation Agreement and General Release, effective July 26, 2018, between Greg Froton and Fred’s Inc.

- - - -
10.5 Seventh Amendment to Credit Agreement, Second Amendment to Amended and Restated Addendum to Credit Agreement and Second Amendment to Security Agreement, dated as of August 23, 2018, by and among Fred’s, Inc. and certain of its subsidiaries, Regions Bank, in its capacity as administrative agent, co-collateral agent and lender, and Bank of America, N.A., in its capacity as co-collateral agent and lender. 8-K 001-14565 10.1 August 29, 2018
31.1†
Certification of Interim Chief Executive Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act.

- - - -
31.2†
Certification of Chief Financial Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act.

- - - -
32††
Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

- - - -
101.INS XBRL Instance Document - - - -
101.SCH XBRL Taxonomy Extension Schema - - - -
101.CAL XBRL Taxonomy Extension Calculation Linkbase - - - -
101.DEF XBRL Taxonomy Extension Definition Linkbase - - - -
101.LAB XBRL Taxonomy Extension Label Linkbase - - - -
101.PRE XBRL Taxonomy Extension Presentation Linkbase - - - -

Exhibit		Incorporation by Reference
Number	Exhibit Description	Form	SEC File No.	Exhibit	Filing Date

10.1	Forbearance Agreement, Eighth Amendment to Credit Agreement and Fourth Amendment to Amended and Restated Addendum to Credit Agreement, dated as of May 15, 2019, by and among Fred’s, Inc. and certain of its subsidiaries, Regions Bank, in its capacity as administrative agent, co-collateral agent and lender, and Bank of America, N.A., in its capacity as co-collateral agent and lender.	8-K	001-14565	10.1	May 16, 2019

31.1†	Certification of Chief Executive Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act .	—	—	—	—

31.2†	Certification of Chief Financial Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act.	—	—	—	—

32.1††	Certification of Chief Executive Officer pursuant to Rule 13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.	—	—	—	—
32.2††	Certification of Chief Financial Officer pursuant to Rule 13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.	.


101.INS	XBRL Instance Document	—	—	—	—
101.SCH	XBRL Taxonomy Extension Schema	—	—	—	—
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	—	—	—	—
101.DEF	XBRL Taxonomy Extension Definition Linkbase	—	—	—	—
101.LAB	XBRL Taxonomy Extension Label Linkbase	—	—	—	—
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	—	—	—	—

† Filed herewith.

†† Furnished herewith.

~~SIGNATURES~~SIGNAT

URES

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

		FRED’S, INC.

Date: ~~September~~June 18, ~~2018~~2019		/s/ Joseph M. Anto
	~~Interim~~	Chief Executive Officer ~~Executive Vice President and~~ ~~Chief Financial Officer~~

29 32

	August 4,			February 3,
	2018			2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,781		$	6,573
Inventories		263,982			279,175
Receivables, less allowance for doubtful accounts of $2,272 and $1,355, respectively		36,085			37,720
Other non-trade receivables		29,207			31,500
Current assets held for sale		—			19,903
Prepaid expenses and other current assets		11,049			10,055
Total current assets		346,104			384,926
Property and equipment, less accumulated depreciation and amortization		107,927			115,466
Intangible assets, net		46,187			54,888
Noncurrent assets held for sale		—			41,717
Other noncurrent assets, net		1,508			568
Total assets	$	501,726		$	597,565

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	117,933		$	129,213
Current portion of indebtedness		68			65
Accrued expenses and other		71,079			67,977
Current liabilities held for sale		—			26,572
Total current liabilities		189,080			223,827
Long-term portion of indebtedness		162,523			167,100
Noncurrent liabilities held for sale		—			48
Other noncurrent liabilities		21,236			25,542
Total liabilities		372,839			416,517
Commitments and contingencies (see Note 6-Long-Term Leases, Note 10-Other Commitments and Contingencies and Note 11-Indebtedness)
Shareholders’ equity:
Preferred stock, nonvoting, no par value, 10,000,000 shares authorized, none outstanding		—			—
Preferred stock, Series A junior participating nonvoting, no par value, 224,594 shares authorized, none outstanding		—			—
Preferred stock, Series B junior participating voting, $100 par value, 50,000 shares authorized, no shares issued or outstanding		—			—
Preferred stock, Series C junior participating voting, $60 par value, 50,000 shares authorized, no shares issued or outstanding		—			—
Common stock, Class A voting, no par value, 60,000,000 shares authorized, 37,260,158 and 38,366,517 shares issued and outstanding, respectively		126,105			123,950
Common stock, Class B nonvoting, no par value, 11,500,000 shares authorized, none outstanding		—			—
Treasury Stock, at cost; 1,242,000 shares at August 4, 2018 and at February 3, 2018		(4,975	)		(4,975	)
Retained earnings		7,198			61,514
Accumulated other comprehensive income		559			559
Total shareholders’ equity		128,887			181,048
Total liabilities and shareholders’ equity	$	501,726		$	597,565

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	August 4,			July 29,			August 4,			July 29,
	2018			2017			2018			2017
Net sales	$	419,658		$	438,527		$	856,771		$	902,699
Cost of goods sold		319,193			315,780			644,699			651,386
Gross profit		100,465			122,747			212,072			251,313

Depreciation and amortization		9,812			10,665			19,842			21,543
Selling, general and administrative expenses		112,086			139,712			231,726			292,604
Operating loss		(21,433	)		(27,630	)		(39,496	)		(62,834	)

Interest expense		1,720			1,437			3,708			2,724
Loss before income taxes		(23,153	)		(29,067	)		(43,204	)		(65,558	)

Provision (benefit) for income taxes		(229	)		(150	)		(425	)		1,129
Net loss from continuing operations	$	(22,924	)	$	(28,917	)	$	(42,779	)	$	(66,687	)
Net loss from discontinued operations		(9,380	)		(600	)		(11,536	)		709
Net Loss	$	(32,304	)	$	(29,517	)	$	(54,315	)	$	(65,978	)

Net (loss) income per share - basic
Continuing operations	$	(0.62	)	$	(0.77	)	$	(1.17	)	$	(1.78	)
Discontinued operations		(0.26	)		(0.02	)		(0.32	)		0.02
Total loss per common share - basic	$	(0.88	)	$	(0.79	)	$	(1.48	)	$	(1.76	)

Net (loss) income per share - diluted
Continuing operations	$	(0.62	)	$	(0.77	)	$	(1.17	)	$	(1.78	)
Discontinued operations		(0.26	)		(0.02	)		(0.32	)		0.02
Total loss per common share - diluted	$	(0.88	)	$	(0.79	)	$	(1.48	)	$	(1.76	)

Weighted average shares outstanding
Basic		36,687			37,461			36,586			37,408
Effect of dilutive stock options		—			—			—			—
Diluted		36,687			37,461			36,586			37,408

	For the Thirteen Weeks Ended						For the Twenty Six Weeks Ended
	(unaudited)						(unaudited)
	August 4,			July 29,			August 4,			July 29,
(in thousands)	2018			2017			2018			2017
Revenues	$	20,266		$	69,310		$	90,112		$	137,458
Cost of Goods Sold		20,984			66,058			88,454			129,860
Gross Profit		(718	)		3,252			1,658			7,598
Depreciation and amortization		188			631			796			1,379
Selling, general and administrative expenses		8,474			3,094			12,398			5,660
Income (loss) from discontinued operations before Income taxes		(9,380	)		(473	)		(11,536	)		559
Income tax expense (benefit)		—			127			—			(150	)
Income (loss) from discontinued operations, net of tax		(9,380	)		(600	)		(11,536	)		709

	Balance at February 03, 2018		Additions		Utilization			Ending Balance August 4, 2018

Inventory markdown on low-productive inventory (2016 initiatives)	$	1.7		—		(1.7	)	$	—
Inventory provision for freight capitalization expense (2016 initiatives)		0.1		—		(0.1	)		—
Inventory markdown on low-productive inventory (2017 initiatives)		3.3		—		(2.6	)		0.7
Inventory provision for freight capitalization expense (2017 initiatives)		1.0		—		(0.9	)		0.1
Total	$	6.1	$	—	$	(5.3	)	$	0.8

	Thirteen Weeks Ended				Twenty Six Weeks
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Continuing Operations
Stock option expense	$	239	$	382	$	494	$	865
Restricted stock expense		759		1,427		1,750		1,966
ESPP expense		—		93		—		185
Total stock-based compensation	$	998	$	1,902	$	2,244	$	3,016

Income tax benefit on stock-based compensation	$	12	$	538	$	27	$	777

Continuing Operations	Options			Weighted- Average Exercise Price		Weighted-Average Contractual Life (years)		Aggregate Intrinsic Value (000s)

Outstanding at February 3, 2018		1,171,825		$	13.12		5.1	$	—
Granted		—			—
Cancelled		(509,474	)		12.27
Exercised		—			—
Outstanding at August 4, 2018		662,351		$	13.77		4.7		—

Exercisable at August 4, 2018		450,611		$	14.66		4.5		—

Continuing Operations	Number of Shares			Weighted- Average Grant Date Fair Value

Non-vested Restricted Stock at February 3, 2018		653,895		$	10.14
Granted		222,836			2.74
Forfeited / Cancelled		(109,400	)		10.69
Vested		(370,392	)		7.54
Non-vested Restricted Stock at August 4, 2018		396,939		$	7.59

	Balance at February 3, 2018		Additions		Utilization			Ending Balance August 4, 2018

Impairment charge for the disposal of fixed assets for 2014 planned closures	$	0.5						$	0.5
Impairment charge for the disposal of fixed assets for corporate office		3.6							3.6
Impairment charge for the disposal of fixed assets for 2017 planned closures		0.8							0.8
Impairment charge for the disposal of intangible assets for 2017 planned closures		1.4							1.4
Impairment charge for the write down of fixed assets for underperforming stores		1.1							1.1
Subtotal	$	7.4	$	—	$	—		$	7.4
Lease contract termination liability, 2017 closures		6.3				(1.2	)		5.1
Total	$	13.7	$	—	$	(1.2	)	$	12.5

	Thirteen Weeks Ended				Year Ended
(in thousands)	August 4, 2018		July 29, 2017		February 03, 2018

Accumulated other comprehensive income	$	559	$	466	$	466
Amortization of post-retirement benefit		—		—		93
Ending balance	$	559	$	466	$	559

		Incorporation by Reference
Exhibit Number	Exhibit Description	Form	SEC File No.	Exhibit	Filing Date

2.1	Asset Purchase Agreement, dated September 7, 2018, by and between Walgreen Co. and Fred’s Stores of Tennessee, Inc.	8-K	001-14565	2.1	September 10, 2018
2.2	Asset Purchase Agreement, dated May 4, 2018, by and among Advanced Care Scripts, Inc., Fred’s Stores of Tennessee, Inc., Fred’s, Inc., National Pharmaceutical Network, Inc., and Reeves-Sain Drug Store, Inc. d/b/a EntrustRX	8-K	001-14565	2.1	June 4, 2018
10.1	Separation Agreement and General Release, effective April 24, 2018, between Michael K. Bloom and Fred’s Inc.	8-K	001-14565	10.1	April 27, 2018
10.2	Separation Agreement and General Release, effective April 24, 2018, between Timothy Liebmann and Fred’s Inc.	8-K	001-14565	10.1	May 3, 2018
10.3	Separation Agreement and General Release, effective April 24, 2018, between Mary Louise Gardner and Fred’s Inc.	8-K	001-14565	10.2	May 3, 2018
10.4†	Separation Agreement and General Release, effective July 26, 2018, between Greg Froton and Fred’s Inc.	-	-	-	-
10.5	Seventh Amendment to Credit Agreement, Second Amendment to Amended and Restated Addendum to Credit Agreement and Second Amendment to Security Agreement, dated as of August 23, 2018, by and among Fred’s, Inc. and certain of its subsidiaries, Regions Bank, in its capacity as administrative agent, co-collateral agent and lender, and Bank of America, N.A., in its capacity as co-collateral agent and lender.	8-K	001-14565	10.1	August 29, 2018
31.1†	Certification of Interim Chief Executive Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act.	-	-	-	-
31.2†	Certification of Chief Financial Officer pursuant to Exchange Rule 13a-14(a) of the Securities Exchange Act.	-	-	-	-
32††	Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.	-	-	-	-
101.INS	XBRL Instance Document	-	-	-	-
101.SCH	XBRL Taxonomy Extension Schema	-	-	-	-
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	-	-	-	-
101.DEF	XBRL Taxonomy Extension Definition Linkbase	-	-	-	-
101.LAB	XBRL Taxonomy Extension Label Linkbase	-	-	-	-
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	-	-	-	-

($ in thousands)

Operating lease cost

Short-term lease

Variable lease cost

Total lease cost