UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~November~~August 2, ~~2013~~2014



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

Commission file number 001-35634

THE WET SEAL, INC.

(Exact name of registrant as specified in its charter)



Delaware	33-0415940
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
26972 Burbank, Foothill Ranch, CA	92610
(Address of principal executive offices)	(Zip Code)

(949) 699-3900

(Registrant’s telephone number, including area code)

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 ý No ¨

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

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



Large accelerated filer:	¨		Accelerated filer:	ý
Non-accelerated filer:	¨	(Do not check if a smaller reporting company)	Smaller reporting company:	¨

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

The number of shares outstanding of the registrant’s Class A common stock, par value $0.10 per share, at ~~November 29, 2013,~~September 5, 2014, was ~~84,722,419.~~84,309,311. There were no shares outstanding of the registrant’s Class B common stock, par value $0.10 per share, at ~~November 29, 2013.~~September 5, 2014.

Table of Contents

THE WET SEAL, INC.

FORM 10-Q

Table of Contents




		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets (Unaudited) as of ~~November~~August 2, ~~2013,~~2014, February 2,1, 2014 and August 3, 2013 ~~and October 27, 2012~~	1
	Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 3926 Weeks Ended ~~November~~August 2, ~~2013~~2014 and ~~October 27, 2012~~August 3, 2013	2
	Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the 13 and 26 Weeks Ended August 2, 2014 and August 3, 2013	3
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the 3926 Weeks Ended ~~November~~August 2, ~~2013~~2014 and ~~October 27, 2012~~August 3, 2013	34
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 3926 Weeks Ended ~~November~~August 2, ~~2013~~2014 and ~~October 27, 2012~~August 3, 2013	56
	Notes to Condensed Consolidated Financial Statements (Unaudited)	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1825
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3039
Item 4.	Controls and Procedures	3040

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3141
Item 1A.	Risk Factors	3241
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3347
Item 3.	Defaults Upon Senior Securities	3347
Item 4.	Mine Safety Disclosures	3347
Item 5.	Other Information	3347
Item 6.	Exhibits	3448
SIGNATURES		3549
EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1 EXHIBIT 32.2 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

Table of Contents

PART I. Financial Information

Item 1. Financial Statements (Unaudited)

THE WET SEAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	November 2, 2013			February 2, 2013			October 27, 2012			August 2, 2014			February 1, 2014			August 3, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	30,084		$	42,279		$	126,343		$	40,274		$	38,772		$	27,773
Short-term investments	35,812			67,694			—			—			7,386			51,948
Income tax receivables	141			286			660			—			141			141
Other receivables	2,680			1,738			1,462			2,403			3,230			975
Merchandise inventories	42,587			33,788			46,193			38,382			31,209			40,910
Prepaid expenses and other current assets	13,289			13,443			5,669			13,983			12,742			13,803
Deferred tax assets	—			—			20,133
Total current assets	124,593			159,228			200,460			95,042			93,480			135,550
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements	87,970			90,666			102,462			52,768			78,097			91,480
Furniture, fixtures and equipment	65,066			62,486			66,512			52,283			60,143			64,345
	153,036			153,152			168,974			105,051			138,240			155,825
Less accumulated depreciation and amortization	(88,117		)	(88,927		)	(95,146		)	(68,150		)	(81,951		)	(89,812		)
Net equipment and leasehold improvements	64,919			64,225			73,828			36,901			56,289			66,013
OTHER ASSETS:
Deferred tax assets	—			—			41,766
Other assets	2,003			3,053			3,069			1,520			1,970			3,016
Total other assets	2,003			3,053			44,835			1,520			1,970			3,016
TOTAL ASSETS	$	191,515		$	226,506		$	319,123		$	133,463		$	151,739		$	204,579
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of convertible debt										$	6,450		$	—		$	—
Accounts payable – merchandise	$	24,623		$	16,978		$	28,128		23,401			18,530			24,401
Accounts payable – other	11,361			18,116			13,369			7,780			8,814			10,410
Accrued liabilities	24,203			26,347			24,000			19,507			20,704			24,826
Current portion of deferred rent	3,909			2,289			2,456			3,640			3,508			2,952
Total current liabilities	64,096			63,730			67,953			60,778			51,556			62,589
LONG-TERM LIABILITIES:
Warrants and Embedded derivatives										2,757			—			—
Senior convertible debt, net of discount of $4,830, at August 2, 2014										15,720			—			—
Deferred rent	31,092			32,136			33,378			29,481			31,066			31,171
Other long-term liabilities	1,796			1,908			1,820			—			1,784			1,834
Total long-term liabilities	32,888			34,044			35,198			47,958			32,850			33,005
Total liabilities	96,984			97,774			103,151			108,736			84,406			95,594
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY:
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 84,730,594 shares issued and 84,724,419 outstanding at November 2, 2013; 90,541,144 shares issued and 89,730,376 shares outstanding at February 2, 2013; and 90,072,035 shares issued and 89,727,234 shares outstanding at October 27, 2012	8,473			9,054			9,007
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 84,860,314 shares issued and 84,508,622 shares outstanding at August 2, 2014; 84,730,594 shares issued and 84,695,369 shares outstanding at February 1, 2014; and 91,188,299 shares issued and 84,702,041 shares outstanding at August 3, 2013										8,486			8,473			9,119
Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding	—			—			—			—			—			—
Paid-in capital	216,512			239,698			240,712			218,036			216,944			241,012
Accumulated deficit	(130,323		)	(119,481		)	(33,671		)	(201,654		)	(157,864		)	(115,413		)
Treasury stock, 6,175 shares, 810,768 shares, and 344,801 shares, at cost, at November 2, 2013, February 2, 2013, and October 27, 2012, respectively	(4		)	(412		)	(72		)
Treasury stock, 351,692 shares, 35,225 shares and 6,486,258 shares, at cost, at August 2, 2014, February 1, 2014, and August 3, 2013, respectively										(141		)	(68		)	(25,606		)
Accumulated other comprehensive loss	(127		)	(127		)	(4		)	—			(152		)	(127		)
Total stockholders’ equity	94,531			128,732			215,972			24,727			67,333			108,985
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	191,515		$	226,506		$	319,123		$	133,463		$	151,739		$	204,579

See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended						26 Weeks Ended
	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012			August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
Net sales	$	127,664		$	135,537		$	405,358		$	418,743		$	121,176		$	137,249		$	237,904		$	277,694
Cost of sales	98,715			109,492			293,526			318,293			94,812			96,597			188,409			194,811
Gross margin	28,949			26,045			111,832			100,450			26,364			40,652			49,495			82,883
Selling, general, and administrative expenses	38,743			44,405			115,592			126,215			36,901			39,412			74,398			76,849
Asset impairment	5,061			6,456			6,919			19,035			12,740			262			20,058			1,858
Operating loss	(14,855		)	(24,816		)	(10,679		)	(44,800		)
Operating (loss) income													(23,277		)	978			(44,961		)	4,176
Interest income	49			35			150			108			64			53			95			101
Interest expense	(55		)	(45		)	(163		)	(136		)	(1,263		)	(54		)	(1,716		)	(108		)
Interest expense, net	(6		)	(10		)	(13		)	(28		)	(1,199		)	(1		)	(1,621		)	(7		)
Loss before provision (benefit) for income taxes	(14,861		)	(24,826		)	(10,692		)	(44,828		)
Provision (benefit) for income taxes	49			(10,047		)	150			(17,407		)
Net loss	$	(14,910	)	$	(14,779	)	$	(10,842	)	$	(27,421	)
Net loss per share, basic	$	(0.18	)	$	(0.17	)	$	(0.13	)	$	(0.31	)
Net loss per share, diluted	$	(0.18	)	$	(0.17	)	$	(0.13	)	$	(0.31	)
Gain on warrants and derivatives liabilities													2,496			—			2,935			—
(Loss) income before provision for income taxes													(21,980		)	977			(43,647		)	4,169
Provision for income taxes													29			19			143			101
Net (loss) income													$	(22,009	)	$	958		$	(43,790	)	$	4,068
Net (loss) income per share, basic													$	(0.26	)	$	0.01		$	(0.52	)	$	0.05
Net (loss) income per share, diluted													$	(0.26	)	$	0.01		$	(0.52	)	$	0.05
Weighted-average shares outstanding, basic	83,729,646			88,877,993			86,028,985			88,650,011			84,189,702			85,800,626			84,144,741			87,178,655
Weighted-average shares outstanding, diluted	83,729,646			88,877,993			86,028,985			88,650,011			84,189,702			85,975,029			84,144,741			87,243,412

See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)



	13 Weeks Ended					26 Weeks Ended
	August 2, 2014			August 3, 2013		August 2, 2014			August 3, 2013
Net (loss) income	$	(22,009	)	$	958	$	(43,790	)	$	4,068
Other comprehensive gain:
Gain on settlement of Supplemental Employee Retirement Plan Liability (1)	152			—		152			—
Comprehensive (loss) income	$	(21,857	)	$	958	$	(43,638	)	$	4,068

(1) Amounts are shown net of income taxes. Due to the Company's valuation allowance, there is no tax impact. The entire Accumulated Other Comprehensive Loss ("AOCL") balance related to the SERP liability. As such, the amount transferred out of AOCL in the current quarter relates entirely to the retirement of the SERP liability.

See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)


	Common Stock								Paid-In Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Common Stock						Paid-In Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Class A					Class B																		Class A			Class B
	Shares		Par Value			Shares	Par Value																	Shares	Par Value		Shares	Par Value
Balance at February 2, 2013	90,541,144		$	9,054		—	$	—	$	239,698		$	(119,481	)	$	(412	)	$	(127	)	$	128,732
Balance at February 1, 2014																								84,730,594	$	8,473	—	$	—	$	216,944		$	(157,864	)	$	(68	)	$	(152	)	$	67,333
Net loss	—		—			—	—		—			(10,842		)	—			—			(10,842		)	—	—		—	—		—			(43,790		)	—			—			(43,790		)
Stock issued pursuant to long-term incentive plans	496,292		50			—	—		(50		)	—			—			—			—			129,720	13		—	—		(13		)	—			—			—			—
Stock-based compensation	—		—			—	—		1,212			—			—			—			1,212			—	—		—	—		1,105			—			—			—			1,105
Exercise of stock options	210,528		21			—	—		726			—			—			—			747
Settlement of SERP liability																								—	—		—	—		—			—			—			152			152
Repurchase of common stock	—		—			—	—		—			—			(25,318		)	—			(25,318		)	—	—		—	—		—			—			(73		)	—			(73		)
Retirement of treasury stock	(6,517,370	)	(652		)	—	—		(25,074		)	—			25,726			—			—
Balance at November 2, 2013	84,730,594		$	8,473		—	$	—	$	216,512		$	(130,323	)	$	(4	)	$	(127	)	$	94,531
Balance at August 2, 2014																								84,860,314	$	8,486	—	$	—	$	218,036		$	(201,654	)	$	(141	)	$	—		$	24,727

See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

Common Stock
Paid-In
Capital

Accumulated
Deficit

Treasury
Stock

Accumulated
Other
Comprehensive
Loss

Total
Stockholders’
Equity
Class A Class B
Shares Par Value Shares Par Value
Balance at January 28, 2012 90,660,347
$ 9,066
—
$ —
$ 239,000
$ (6,250 ) $ (740 ) $ (4 ) $ 241,072
Net loss —
—
—
—
—
(27,421 ) —
—
(27,421 )
Stock issued pursuant to long-term incentive plans 651,367
65
—
—
(65 ) —
—
—
—
Stock-based compensation —
—
—
—
2,596
—
—
—
2,596
Exercise of stock options 6,001
1
—
—
18
—
—
—
19
Repurchase of common stock —
—
—
—
—
—
(294 ) —
(294 )
Retirement of treasury stock (1,245,680 ) (125 ) —
—
(837 ) —
962
—
—
Balance at October 27, 2012 90,072,035
$ 9,007
—
$ —
$ 240,712
$ (33,671 ) $ (72 ) $ (4 ) $ 215,972

~~See notes to condensed consolidated financial statements.~~

~~Table of Contents~~

~~THE WET SEAL, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(In thousands)~~

~~(Unaudited)~~

39 Weeks Ended
November 2, 2013 October 27, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,842 ) $ (27,421 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 10,198
13,531
Amortization of premium on investments 123
—
Amortization of deferred financing costs 81
81
Loss on disposal of equipment and leasehold improvements 83
550
Asset impairment 6,919
19,035
Deferred income taxes —
(17,986 )
Stock-based compensation 1,212
2,596
Changes in operating assets and liabilities:
Income tax receivables 145
(460 )
Other receivables 79
(17 )
Merchandise inventories (8,799 ) (14,359 )
Prepaid expenses and other current assets 73
(1,180 )
Other non-current assets 29
(7 )
Accounts payable and accrued liabilities (3,295 ) 11,767
Deferred rent 576
182
Other long-term liabilities (112 ) (104 )
Net cash used in operating activities (3,530 ) (13,792 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (15,853 ) (16,775 )
Investment in marketable securities (9,500 ) —
Proceeds from maturity of marketable securities 41,259
—
Net cash provided by (used in) investing activities 15,906
(16,775 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 747
19
Repurchase of common stock (25,318 ) (294 )
Net cash used in financing activities (24,571 ) (275 )
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,195 ) (30,842 )
CASH AND CASH EQUIVALENTS, beginning of period 42,279
157,185
CASH AND CASH EQUIVALENTS, end of period $ 30,084
$ 126,343
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 57
$ 57
Income taxes $ 267
$ 865
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Retirement of treasury shares $ 25,726
$ 962
Purchase of equipment and leasehold improvements unpaid at end of period $ 4,170
$ 3,366



	Common Stock						Paid-In Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Class A			Class B
	Shares	Par Value		Shares	Par Value
Balance at February 2, 2013	90,541,144	$	9,054	—	$	—	$	239,698		$	(119,481	)	$	(412	)	$	(127	)	$	128,732
Net income	—	—		—	—		—			4,068			—			—			4,068
Stock issued pursuant to long-term incentive plans	496,292	50		—	—		(50		)	—			—			—			—
Stock-based compensation	—	—		—	—		845			—			—			—			845
Exercise of stock options	150,863	15		—	—		519			—			—			—			534
Repurchase of common stock	—	—		—	—		—			—			(25,194		)	$	—		(25,194		)
Balance at August 3, 2013	91,188,299	$	9,119	—	$	—	$	241,012		$	(115,413	)	$	(25,606	)	$	(127	)	$	108,985

See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	26 Weeks Ended
	August 2, 2014			August 3, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(43,790	)	$	4,068
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	5,499			6,775
Amortization of debt discount	861			—
Amortization of premium on investments	6			112
Amortization of deferred financing costs	263			54
Gain on warrants and derivatives liabilities	(2,935		)	—
Gain on settlement of SERP liability	(696		)	—
Gain on termination of Arden B loyalty program	(237		)	—
Loss on disposal of equipment and leasehold improvements	36			47
Asset impairment	20,058			1,858
Stock-based compensation	1,105			845
Changes in operating assets and liabilities:
Income tax receivables	141			145
Other receivables	827			763
Merchandise inventories	(7,173		)	(7,122		)
Prepaid expenses and other current assets	(721		)	(414		)
Other non-current assets	1,551			37
Accounts payable and accrued liabilities	3,878			(3,409		)
Deferred rent	(1,453		)	(302		)
Other long-term liabilities	(1,156		)	(74		)
Net cash (used in) provided by operating activities	(23,936		)	3,383
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements	(7,026		)	(8,863		)
Proceeds from disposal of equipment and leasehold improvements	23			—
Investment in marketable securities	—			(9,500		)
Proceeds from maturity of marketable securities	7,380			25,134
Net cash provided by investing activities	377			6,771
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	—			534
Repurchase of common stock	(73		)	(25,194		)
Payment of deferred financing costs	(1,866		)	—
Proceeds from issuance of senior convertible notes	27,000			—
Net cash provided by (used in) financing activities	25,061			(24,660		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	1,502			(14,506		)
CASH AND CASH EQUIVALENTS, beginning of period	38,772			42,279
CASH AND CASH EQUIVALENTS, end of period	$	40,274		$	27,773
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	596		$	37
Income taxes	$	195		$	420
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Purchase of equipment and leasehold improvements unpaid at end of period	$	1,089		$	3,733
Debt issuance costs unpaid at end of period	$	18		—
Initial fair value of warrants liability	$	3,610		—
Initial fair value of embedded derivatives liability	$	2,081		—

See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)

NOTE 1 – Summary of Significant Accounting Policies

Basis of Presentation

The information set forth in these condensed consolidated financial statements as of and for the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~,2014, and ~~October 27, 2012~~August 3, 2013 (collectively, the “Interim Financial Statements”), is unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and footnote disclosures normally included in The Wet Seal, Inc. (the “Company”) annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February ~~2, 2013~~.1, 2014. All references in this Quarterly Report on Form 10-Q to “fiscal 2013” and “fiscal 2014” mean the fiscal years ended February 1, 2014 and ending January 31, 2015, respectively.

In the opinion of management, the Interim Financial Statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company’s financial position and results of operations and cash flows in all material respects as of the dates and for the periods presented. The results of operations presented in the Interim Financial Statements are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015.

On April 24, 2014, the Company committed to a plan to wind down the operations of its Arden B brand (the "Plan") due to the long-term financial under-performance of the business. As of August 2, 2014, the Company operated 51 Arden B stores. As of August 3, 2014, 30 of the Arden B stores became Wet Seal Plus stores, 18 of the Arden B stores became Wet Seal stores, one of the Arden B stores continues to operate under the Arden B name but will transition to carrying Wet Seal product, and the 2 remaining stores continued to operate as Arden B stores until their closure in August 2014. The Company anticipates closing down the Arden B website in the third fiscal quarter of 2014. As of August 2, 2014, the Company has evaluated the applicable accounting guidance for discontinued operations due to the wind down of the Arden B operations and concluded that for the second quarter of fiscal 2014, the Arden B segment should be reported as part of the results from continuing operations. Arden B cash flows will cease by the end of the third quarter and the Company will not have any significant continuing involvement with the Arden B segment, and therefore, the Arden B segment will meet the conditions to be reported as a discontinued operation beginning in the third quarter of fiscal 2014. The Company maintains its intellectual property rights in the Arden B brand and affiliated trademarks and is exploring opportunities to preserve or monetize those rights.

In fiscal 2013 and the 26 weeks ended August 2, 2014, the Company incurred net losses of $38.4 million and $43.8 million and negative cash flow from operations of $17.6 million and $23.9 million, respectively. As of August 2, 2014, the Company had cash and cash equivalents of $40.3 million. In March 2014, the Company increased its liquidity through the senior convertible notes placement described in Note 4, "Senior Convertible Notes and Warrants." In addition, the Company has a $35.0 million senior revolving credit facility with $28.7 million of availability as of August 2, 2014. The Company’s total available liquidity as of August 2, 2014 was $69.0 million, including cash and cash equivalents and availability on the Company’s senior revolving credit facility.

In September 2014, the Company announced that it had entered into a securities purchase agreement to sell shares of its Class A common stock to a limited number of accredited investors in a private placement. Subject to the fulfillment of the closing conditions, the Company expects to receive at the closing gross proceeds from the placement of approximately $18.5 million and net proceeds of approximately $17.2 million to $17.7 million. Also in September 2014, the Company announced that, subject to applicable regulatory approvals, it intends to conduct a rights offering which, if subscribed, will allow the Company to raise equity capital through the sale of shares of its Class A common stock to its stockholders. The Company currently anticipates that the size of the rights offering will be between $25.0 and $30.0 million. The agreement for the private placement provides that the placement is to close concurrently with the closing of the rights offering. Subject to conditions, the Company currently expects that these transactions will close sometime in the fourth fiscal quarter of the current fiscal year. A number of factors may cause delays or difficulties and the closings for such transactions are subject to conditions, some of which are outside of the Company’s control. See Note 10, "Subsequent Events."

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

the securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification of the securities under the securities laws of such state or jurisdiction.

The Company has historically financed its operations primarily from internally generated cash flows. These interim financial statements have been prepared on a basis of management’s belief that based on current forecasts, the Company believes that cash flows from operations, working capital, cash reserves, availability under its senior revolving credit facility and the anticipated proceeds from the private placement and the intended rights offering noted above will be sufficient to meet its operating and capital expenditure needs for the next twelve months in the normal course of business and do not include any adjustments that might result from uncertainties. If the Company is unable to complete the private placement and the intended rights offering, return to positive same-store sales growth and improve its gross margins in the future, and it then continues to experience negative cash flow from operations, the Company may deplete all of its cash reserves and be required to access most, if not all, of the senior revolving credit facility, and would potentially require other sources of financing to fund its operations, which sources might not be available, or if available, may not be on terms acceptable to the Company. In addition, the Company may need to take various actions, such as down-sizing, which could include exit costs, or reducing or delaying capital expenditures, strategic investments or other actions, and the Company's business could be materially and adversely affected and could raise substantial doubt about the Company’s ability to continue as a going concern. In this event, it could have an adverse impact on the Company's relationships with its merchandise vendors, lenders and other creditors.

On August 18, 2014, the Company received a letter from Nasdaq (the “Notice”) notifying the Company that the closing bid price of the Company’s common stock was below the $1.00 minimum bid price requirement for 30 consecutive business days and, as a result, the Company no longer complies with the minimum bid price requirement for continued listing on Nasdaq. The Notice also stated that the Company has been provided an initial cure period of 180 calendar days, or until February ~~1, 2014~~.17, 2015, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days prior to February 17, 2015. If the Company does not regain compliance by February 17, 2015, it may be eligible for additional time. To qualify, the Company must submit, no later than February 17, 2015, an on-line transfer application. The Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second cure period by effecting a reverse stock split, if necessary. As part of its review process, Nasdaq will make a determination of whether they believe that the Company will be able to cure this deficiency. Should Nasdaq conclude that the Company will not be able to cure the deficiency, or should the Company determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that the Company's securities will be subject to delisting.

If the Company's securities are delisted and the Company cannot obtain listing for the securities on another established market or exchange, its stock’s liquidity could suffer, and it would likely experience reduced investor interest. Such factors may result in a decrease in the Company's stock’s trading price. Delisting may also make it more difficult for the Company to issue additional securities or to secure financing. Furthermore, if the Company's common stock is not listed on the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or other eligible market, it would be an event of default under its Exchange Note which would enable the holder of the Exchange Note to demand that it redeem all or any portion of the convertible notes (including all accrued and unpaid interest and all interest that would have accrued through March 27, 2017, the maturity date), in cash pursuant to the terms of the notes. If an event of default under the Exchange Note occurs, the Company's available cash could be seriously depleted and its financial condition would be materially and adversely affected.

Significant Accounting Policies

Long-Lived Assets

The Company evaluates the carrying value of long-lived assets for impairment quarterly or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the estimated undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

carrying value and the estimated fair value of the assets, based on discounted estimated future cash flows using the Company’s weighted average cost of capital. With regard to store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, the Company considers the assets at each individual store to represent an asset group. In addition, the Company has considered the relevant valuation techniques that could be applied without undue cost and effort and has determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.

The Company conducts its quarterly impairment evaluation at the individual store level using the guidance under applicable accounting standards. The quarterly analysis includes the Company's estimates of future cash flows using only the cash inflows and outflows that are directly related to each store over the remaining lease term. Key assumptions made by the Company and included within the cash flow estimates are future sales and gross margin projections. The Company determines the future sales and gross margin projections by considering each store's recent and historical performance, the Company's overall performance trends and projections and the potential impact of strategic initiatives on future performance.

The Company's evaluations during the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013 included impairment testing of 70, 101, 40, 59, 5638 and ~~101~~47 stores and resulted in 63, 93, 23, 32, 292 and 808 stores being impaired, respectively, as their projected future cash flows were not sufficient to recover the net carrying value of their assets. ~~As such,~~Due to the Company's plan to wind down the Arden B brand, during the quarter ended May 3, 2014, it tested all Arden B stores with carrying value and the corporate assets associated with the Arden B website, which was also impaired as of May 3, 2014. The Company recorded the following non-cash charges ~~related to its retail stores~~ within asset impairment in the condensed consolidated statements of operations to write down the carrying values of ~~these~~impaired stores' long-lived assets to their estimated fair values (in thousands except for number of stores):

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~~THE WET SEAL, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~For the 39 weeks ended November 2, 2013, and October 27, 2012~~

~~(Unaudited)~~


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				26 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012		August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Aggregate carrying value of all long-lived assets impaired	$	5,718	$	6,456	$	7,817	$	19,313	$	13,108	$	262	$	20,549	$	2,135
Less: Impairment charges	5,061		6,456		6,919		19,035
Less: Impairment charges - stores									12,740		262		19,674		1,858
Impairment charges - corporate									—		—		384		—
Aggregate fair value of all long-lived assets impaired	$	657	$	—	$	898	$	278	$	368	$	—	$	491	$	277
Number of stores with asset impairment	23		29		32		80		63		2		93		8

Of the 177 stores that were tested and determined not ~~determined~~ to be impaired during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, 94 could be deemed to be at risk of future impairment. When making this determination, the Company considered the potential impact that reasonably possible changes to sales and gross margin performance versus the Company's current projections for these stores could have on their current estimated cash flows. Of the $12.7 million in impairment charges for the 13 weeks ended August 2, 2014, $0.1 million was for Arden B stores.

As noted above, the Company considers the ~~positive~~potential impact expected from its strategic initiatives when determining the key assumptions to use within the projected cash flows for each store during its quarterly analysis. If the Company is not able to achieve its projected key financial metrics, and the strategic initiatives being implemented do not result in significant improvements in the Company's current financial performance trend, the Company may incur additional impairment in the future for those stores tested and not deemed to be impaired in its most recent quarterly analysis, as well as for additional stores not tested in its most recent quarterly analysis.

Capitalized interest included in equipment and leasehold improvements, net, totaled less than $0.1 million during the 13 and 26 weeks ended August 2, 2014.

Warrants for Common Stock and Embedded Derivatives

The Company’s common stock warrants and embedded derivatives have been bifurcated from the debt host and are classified as liabilities on the condensed consolidated balance sheet. The Company records the warrants and embedded derivatives liabilities at fair value and adjusts the carrying values to their estimated fair value at each reporting date, with the increases or decreases in

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

the fair values at each reporting date recorded as a gain or (loss) in the condensed consolidated statements of operations. Refer to Note 4, "Senior Convertible Notes and Warrants" and Note 5, "Fair Value Measurements and Disclosures."

Income Taxes

The Company accounts for income taxes in accordance with applicable accounting standards which require that the Company recognize deferred tax assets, which include net operating loss carryforwards (NOLs) and tax credits, and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax expense or benefit results from the change in net deferred tax assets or deferred tax liabilities. Such guidance requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Due to the Company's three-year cumulative operating losses, the Company established a valuation allowance against all of its deferred tax assets in fiscal 2012. In addition, the Company discontinued recording income tax benefits in the condensed consolidated statements of operations. The Company will not record income tax benefits until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. The Company remains in a cumulative three-year operating loss position and realization of its deferred income tax assets is not deemed to be more likely than not. Prospectively, as the Company continues to evaluate available evidence, it is possible that the Company may deem some or all of its deferred income tax assets to be realizable.

The Company has approximately $~~121.4~~165.0 million of federal NOLs available to offset taxable income in fiscal ~~2013~~2014 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. It is possible that the contemplated private placement and intended rights offering described in Note 10, "Subsequent Events," if completed, may result in additional ownership changes for purposes of Section 382. The Company's effective tax ~~rate~~rates for the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, ~~was~~were approximately negative ~~0.3%~~0.1% and negative ~~1.4%~~0.3%, respectively, despite its net loss. ~~This~~These effective ~~rate is~~rates are due to certain state income taxes for fiscal ~~2013~~2014 that are not based on consolidated net income. The Company expects a negative ~~1.2%~~0.3% effective income tax rate for fiscal ~~2013~~.2014, although a number of factors could cause its actual effective tax rate for fiscal 2014 to differ.

Other Comprehensive Income

Other comprehensive income refers to gains and losses that are recorded as an element of stockholders' equity but are excluded from net loss. ~~The Company's~~Employers are required to recognize the over or under funded status of defined benefit plans and other postretirement plans in the statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive ~~loss for~~(loss) income. Other comprehensive (loss) income in the ~~13 and 39 weeks ended November 2, 2013, and~~ ~~October 27, 2012~~ ~~was equal~~condensed consolidated balance sheets is zero, due to the ~~Company's net loss.~~settlement of the Company’s supplemental employee retirement plan liability. Refer to Note 2, Stock-Based Compensation and Supplemental Employee Retirement Plan.

Recent Accounting Pronouncements

In ~~February 2013,~~April 2014, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued amended guidance on the ~~disclosure~~presentation of ~~accumulated other comprehensive income. The amendments in this update require~~financial statements and reporting discontinued operations and disclosures of disposals of components of an entity within property, plant and equipment. This guidance amends the definition of a discontinued operation and requires entities to ~~provide~~disclose additional information about disposal transactions that do not meet the ~~amounts reclassified from accumulated other comprehensive income by component.~~ discontinued-operations criteria. The effective date is for disposals that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014. Early adoption is permitted. As discussed under "Basis of Presentation" above, the Company evaluated its wind down of the Arden B brand under the existing discontinued operations guidance and did not elect early adoption of this amended guidance.

In ~~addition,~~May 2014, the FASB issued a new accounting standard which amends the existing accounting standards for revenue recognition. This new standard is based on principles that govern the recognition of revenue at an amount to which an entity expects to be entitled when products are transferred to customers. The Company is required to ~~present, either~~adopt this new standard for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The new revenue accounting standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Based on the ~~face~~Company’s evaluation of this standard, adoption is not expected to have a material impact on the ~~income statement or in the notes, significant amounts reclassified from accumulated other~~Company’s consolidated financial statements.

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)

~~comprehensive income~~In June 2014, the FASB issued a new stock compensation accounting standard, which requires an entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. Under this new standard, the performance target should not be reflected in estimating the grant-date fair value of the award, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the ~~statement~~period(s) for which the requisite service has already been rendered; if the performance target becomes probable of ~~operations.~~being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest, and should be adjusted to reflect those awards that ultimately vest. The Company ~~adopted~~is required to adopt this ~~guidance,~~new standard for annual and interim periods beginning after December 15, 2015. The Company does not expect the adoption of this new standard to have a material impact on its consolidated financial statements.

In August 2014, the FASB issued a new accounting standard which ~~did not~~requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company expects to adopt this new standard for the fiscal year ending February 3, 2018 and the Company will continue to assess the impact on its ~~condensed~~ consolidated financial statements.

NOTE 2 – Stock-Based Compensation and Supplemental Employee Retirement Plan

The Company ~~had~~has one stock incentive plan under which shares were available for grant at ~~November~~August 2, ~~2013~~2014: the 2005 Stock Incentive Plan (the “2005 Plan”). The Company previously granted share awards under its 1996 Long-Term Incentive Plan (the “1996 Plan”) ~~and the 2000 Stock Incentive Plan (the “2000 Plan”)~~ that remain unvested and/or unexercised as of ~~November~~August 2, ~~2013~~2014; ~~however,~~ the 1996 Plan expired during fiscal 2006, ~~and the 2000 Plan expired during fiscal 2009,~~ and no further share awards may be granted under the 1996 ~~Plan and 2000~~ Plan. The 2005 ~~Plan, the 2000~~ Plan and the 1996 Plan are collectively referred to as the “Plans.”

The 2005 Plan permits the granting of options, restricted common stock, performance ~~shares~~share awards, restricted and performance stock units, or other equity-based awards to the Company’s employees, officers, directors, and consultants. The Company believes the granting of equity-based awards helps to align the interests of its employees, officers and directors with those of its stockholders. The Company has a practice of issuing new shares to satisfy stock option exercises, as well as for restricted stock, performance share grants and other awards made or settled in the form of Company stock. The 2005 Plan was approved by the Company’s stockholders on January 10, 2005, as amended with stockholder approval on July 20, 2005, for the issuance of incentive awards covering 12,500,000 shares of Class A common stock. Additionally, an amended and restated 2005 Plan was approved by the Company’s stockholders on May 19, 2010, which increased the incentive awards capacity to 17,500,000 shares of Class A common stock. The Company amended the 2005 Plan in August 2014 to permit the grant of up to 4,000,000 shares as inducement grants. Refer to Note 10, Subsequent Events. An aggregate of 22,557,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of ~~November~~August 2, ~~2013~~2014, ~~4,411,479~~2,052,826 shares were available for future grants under the 2005 Plan.

Stock Options

The Plans provide that the per-share exercise price of a stock option may not be less than the fair market value of the Company’s Class A common stock on the date the option is granted. Under the Plans, outstanding options vest over periods ranging from three to five years from the grant date and expire from five to ten years after the grant date. Certain stock option and other equity-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data, the implied volatility of market-traded options and other factors to estimate the expected price volatility, option lives, and forfeiture rates.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and the estimated life of the option. The following weighted-average assumptions were used to estimate the fair value of options granted during the periods indicated using the Black-Scholes option-pricing model:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				26 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012		August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Dividend Yield	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%
Expected Volatility	40.73	%	46.47	%	40.89	%	48.58	%	41.66	%	40.73	%	41.66	%	40.92	%
Risk-Free Interest Rate	1.00	%	0.47	%	0.63	%	0.48	%	1.00	%	0.70	%	1.02	%	0.56	%
Expected Life of Options (in Years)	3.3		3.3		3.3		3.3		3.3		3.3		3.3		3.3

At ~~November~~August 2, ~~2013~~2014, there was $~~0.4~~0.5 million of total unrecognized compensation expense related to nonvested stock options under the Company’s share-based payment plans, which will be recognized over an average period of ~~1.8~~2.4 years, representing the remaining vesting periods of such options through fiscal ~~2016.~~2017.

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)

The following table summarizes the Company’s stock option activities with respect to its Plans for the 3926 weeks ended ~~November~~August 2, ~~2013~~2014 (aggregate intrinsic value in thousands):


Options	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value		Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at February 2, 2013	1,564,167		$	4.29
Outstanding at February 1, 2014								882,333		$	3.82
Granted	180,000		$	3.78				1,445,246		$	1.51
Exercised	(210,528	)	$	3.55				—		$	—
Canceled	(656,171	)	$	4.90				(281,732	)	$	4.12
Outstanding at November 2, 2013	877,468		$	3.92	3.17	$	70
Vested and expected to vest in the future at November 2, 2013	817,397		$	3.93	3.10	$	64
Exercisable at November 2, 2013	540,856		$	4.01	2.73	$	39
Outstanding at August 2, 2014								2,045,847		$	2.15	4.22	$	—
Vested and expected to vest in the future at August 2, 2014								1,674,654		$	2.26	4.12	$	—
Exercisable at August 2, 2014								385,723		$	3.74	2.77	$	—

Options vested and expected to vest in the future is comprised of all options outstanding at ~~November~~August 2, ~~2013~~2014, net of estimated forfeitures. Additional information regarding stock options outstanding as of ~~November~~August 2, ~~2013~~2014, is as follows:

Options Outstanding Options Exercisable
Range of Exercise Prices
Number
Outstanding
as of
November 2, 2013

Weighted-
Average
Remaining
Contractual Life
(in years)

Weighted-
Average
Exercise
Price Per
Share

Number
Exercisable
as of
November 2, 2013

Weighted-
Average
Exercise
Price Per
Share
$ 2.66 - $  4.15 618,468
3.26 $ 3.49
368,526
$ 3.51
$ 4.19 -  $ 6.82 256,000
2.97 $ 4.88
169,330
$ 4.98
$ 10.95 -   $ 10.95 3,000
0.09 $ 10.95
3,000
$ 10.95
$ 2.66 - $ 10.95 877,468
3.17 $ 3.92
540,856
$ 4.01



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding as of August 2, 2014	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price Per Share		Number Exercisable as of August 2, 2014	Weighted- Average Exercise Price Per Share
$ 0.92 - $ 1.52	1,440,246	4.72	$	1.51	—	$	—
$ 2.26 - $ 3.43	206,001	2.65	$	2.95	115,998	$	3.03
$ 3.44 - $ 4.97	399,600	3.19	$	4.05	269,725	$	4.05
$ 0.92 - $ 4.97	2,045,847	4.22	$	2.15	385,723	$	3.74

The weighted-average grant-date fair value of options granted during the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, was $~~1.13~~0.29, $0.27, $1.37 and $1.13, ~~$0.94~~respectively. No options were exercised during the 13 and ~~$1.08, respectively.~~26 weeks ended August 2, 2014. The total intrinsic values for options exercised during the 13 and 3926 weeks ended ~~November 2,~~August 3, 2013, was $0.2 millionand ~~October 27, 2012, was less than~~ $~~0.1 million, $0.2 million, none, and less than~~ ~~$0.1~~0.2 million, respectively.

Cash received from option exercises under the Plans for the 3926 weeks ended ~~November 2,~~August 3, 2013~~, and~~ ~~October 27, 2012~~, was $~~0.7~~0.5 million ~~and less than~~ ~~$0.1 million, respectively.~~. The Company did not realize tax benefits for the tax deductions from option exercises as it must first utilize its regular NOL prior to realizing the excess tax benefits.

Restricted Common Stock, Restricted Stock Units, Performance Share Awards, and Performance Stock Units

Under the 2005 Plan, the Company grants directors, certain executives and other key employees restricted common stock and restricted stock units with vesting contingent upon completion of specified service periods ranging from one to three years. ~~The~~In fiscal 2013, the Company also ~~grants~~granted certain executives ~~and other key employees~~ performance share awards and performance stock units with vesting contingent upon a combination of specified service periods and the Company’s achievement of a specified corporate performance ~~objectives. Restricted~~objective. The performance share awards and performance stock units ~~and~~granted in fiscal 2013 were subsequently forfeited due to the failure to achieve the performance metric. As of August 2, 2014, there were no performance share awards or performance stock units outstanding under the 2005 Plan. Restricted stock units awarded to employees represent the right to receive one share of the Company's Class A common stock upon vesting.

During the 3926 weeks ended ~~November~~August 2, ~~2013~~2014, the Company granted ~~, and~~ 1,476,513~~October 27, 2012~~ restricted stock units to certain employees under the Plans with a weighted-average grant-date fair value of $1.50 per share. During the 26 weeks ended August 3, 2013, the Company granted 234,759 ~~and~~ ~~401,370~~ shares ~~respectively,~~ of restricted common stock to certain employees and directors under the ~~Plans. The weighted-average grant-date fair value of the restricted common stock granted during the~~ ~~39 weeks ended November 2, 2013, and~~ ~~October 27, 2012, was~~ ~~$3.03~~ ~~and~~ ~~$3.22~~ ~~per share, respectively. Additionally, the Company granted~~ ~~249,338~~ ~~restricted stock units to certain employees during the~~ ~~39 weeks ended November 2, 2013~~Plans, with a weighted-average grant-date fair value of ~~$3.67~~$3.03 per share.

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)

~~During the~~ ~~39 weeks ended November 2, 2013, the Company granted~~ ~~261,533~~ ~~performance share awards under the 2005 Plan, with a grant-date fair value of~~ ~~$2.95~~ ~~per share. Additionally, the Company granted~~ ~~183,758~~ ~~performance stock units to certain employees during the~~ ~~39 weeks ended November 2, 2013, with a weighted-average grant-date fair value of~~ ~~$3.09~~ ~~per share, with the opportunity of an additional~~ ~~32,375~~ performance stock units to be earned if certain corporate performance objectives are achieved, which are not included in the total outstanding share awards below. During the 13 weeks ended November 2, 2013, the Company reversed the previously recorded performance stock awards and units expense due to declines in corporate performance objectives.

The fair value of nonvested restricted common stock awards ~~restricted stock units, performance share awards~~ and ~~performance~~restricted stock units is equal to the ~~specified grant date~~ price of the Company’s Class A common stock on the grant date. The following table summarizes activity with respect to the Company’s restricted common stock ~~restricted stock units, performance share awards~~ and ~~performance~~restricted stock units during the 3926 weeks ended ~~November~~August 2, ~~2013~~2014:


Restricted Common Stock, Restricted Stock Units, Performance Share Awards, and Performance Stock Units	Number of Shares		Weighted-Average Grant-Date Fair Value
Nonvested at February 2, 2013	644,492		$	2.89
Restricted Common Stock and Restricted Stock Units					Number of Shares		Weighted-Average Grant-Date Fair Value
Nonvested at February 1, 2014					899,939		$	3.06
Granted	929,388		$	3.19	1,476,513		$	1.50
Vested	(115,119	)	$	3.14	(207,972	)	$	2.72
Forfeited	(56,992	)	$	3.11	(84,376	)	$	2.42
Nonvested at November 2, 2013	1,401,769		$	3.06
Nonvested at August 2, 2014					2,084,104		$	2.02

At ~~November~~August 2, ~~2013~~2014, there was $~~2.1~~2.8 million of total unrecognized compensation expense related to nonvested restricted common stock ~~restricted stock units, performance share awards,~~ and ~~performance~~restricted stock units under the ~~Company’s share-based payment plans, of which~~ ~~$1.3 million~~ ~~is for restricted common stock and performance stock awards, and~~ ~~$0.8 million~~ ~~is for restricted and performance stock units.~~Plans. That cost is expected to be recognized over a weighted-average period of ~~2.1~~2.0 ~~years. These estimates utilize subjective assumptions, which depend upon achievement~~years, representing the remaining vesting periods of a combination of specified service periods and performance objectives. The number of shares to vest, and the related stock-based compensation expense to be incurred, may differ dependent upon actual performance objectives achieved. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the expense that will ultimately be recognized by the Company in its condensed consolidated statements of operations.such stock awards through fiscal 2017.

The following tables summarize stock-based compensation recorded in the condensed consolidated statements of operations (in thousands):


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				26 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012		August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Stock options	$	89	$	175	$	211	$	1,055	$	62	$	73	$	81	$	122
Restricted and performance stock awards and units	278		430		1,001		1,541
Restricted stock awards and units									399		328		1,024		622
Performance share awards and units									—		75		—		101
Stock-based compensation	$	367	$	605	$	1,212	$	2,596	$	461	$	476	$	1,105	$	845


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				26 weeks ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012		August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Cost of sales	$	117	$	86	$	239	$	221	$	59	$	72	$	76	$	122
Selling, general, and administrative expenses	250		519		973		2,375		402		404		1,029		723
Stock-based compensation	$	367	$	605	$	1,212	$	2,596	$	461	$	476	$	1,105	$	845

Supplemental Employee Retirement Plan

The Company maintained a defined benefit Supplemental Employee Retirement Plan (the “SERP”) for a former Chairman of the Board of Directors of the Company. The Company funded the SERP in prior years through contributions to a trust fund known as a “Rabbi” trust. Funds were held in a Rabbi trust for the SERP consisting of a life insurance policy reported at cash surrender value. On May 21, 2014, the Company surrendered the life insurance policy for its cash value of $1.4 million, settled its SERP plan liability by transferring the obligation to a transferee in exchange for a cash payment of $1.1 million to the transferee, and recognized a gain of $0.7 million as a result of such transfer, which is included in the selling, general, and administrative expenses line in the condensed consolidated statements of operations.

1013

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)

NOTE 3 – Senior Revolving Credit Facility

~~On February 3, 2011, the~~The Company ~~renewed, via amendment and restatement, its~~maintains a $35.0 million senior revolving credit facility ~~with its existing lender~~ (the “Facility”), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in February 2016. Under the Facility, the Company is subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting the ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase its Class A common stock, close stores, and dispose of assets, without the lender’s consent. The ability of the Company to borrow and request the issuance of letters of credit is subject to the requirement that the Company maintain an excess of the borrowing base over the outstanding credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lender’s prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as the “Base Rate”, plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if the Company elects, either the one, two, three or six months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. The Company also incurs fees on outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 23.0% of the applicable LIBOR margin for commercial letters of credit. Additionally, the Company is subject to commitment fees at an annual rate of 0.25% on the unused portion of the line of credit under the Facility.

Borrowings under the Facility are secured by cash, cash equivalents, investments, receivables and inventory held by the Company and ~~two~~three of its wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet Seal Catalog, Inc., each of which may be a borrower under the Facility, and Wet Seal GC, LLC, which is a guarantor of the obligations owing under the Facility.

At ~~November~~August 2, ~~2013~~2014, the amount outstanding under the Facility consisted of $~~2.0~~4.5 million in ~~open~~ documentary letters of credit related to merchandise purchases and $~~1.7~~1.8 million in ~~outstanding~~ standby letters of credit, and the Company had $~~31.3~~28.7 million available under the Facility for cash advances and/or the issuance of additional letters of ~~credit.~~credit, subject to the borrowing limitations noted above.

On March 20, 2014, the Company amended the terms of the Facility in order to permit the issuance of the senior convertible notes and warrants and for the amortization of the senior convertible notes described in Note 4, "Senior Convertible Notes and Warrants." On September 2, 2014, the Company executed a letter agreement with the agent and sole lender under the Facility pursuant to which the agent and such lender consented to the exchange of senior convertible notes and warrants as described in Note 10, "Subsequent Events."

At ~~November~~August 2, ~~2013~~2014, the Company was in compliance with all covenant requirements under the Facility.

NOTE 4 – Senior Convertible Notes and Warrants

On March 26, 2014, the Company sold $27.0 million of senior convertible notes and issued warrants to purchase up to 8,804,348 shares of the Company's Class A common stock in a private placement to a single institutional investor with proceeds to the Company, net of $1.9 million of deferred financing costs, of $25.1 million. The Company intends to use the proceeds for general corporate purposes. On September 3, 2014, the Company entered into an Amendment, Consent and Exchange Agreement (the “Exchange Agreement”) whereby the Company agreed to issue a new convertible senior note in principal amount equal to $27 million (the “Exchange Note”) in exchange for the initial note and a new warrant to purchase up to 8,804,348 shares of the Company's Class A Common Stock in exchange for the initial warrants (the “Exchange Warrant”). See Note 10, "Subsequent Events."

The senior convertible notes bear interest at a rate of 6% per year, subject to certain adjustments, and mature in March 2017. The senior convertible notes are convertible, at the holder's option, into shares of the Company's Class A common stock at a price of $1.84 per share, subject to customary adjustments. Interest on the senior convertible notes is payable monthly and the principal amount of the senior convertible notes will amortize monthly with payments beginning September 26, 2014. The installment amount due under the Exchange Note for each month during a six-month time period beginning on September 26, 2014 is $700,000, which is $350,000 higher than the installment amount due under the initial note, and if the Company distributes rights to its stockholders pursuant to a rights offering before March 31, 2015, with proceeds to the Company of not less than $11.5 million, then such amortization payments shall equal $1,050,000 for each such installment date during such 6-month period. On March 26, 2015, the Company’s scheduled amortization payment will be $350,000. For each of the subsequent 12 installment dates, the Company’s scheduled amortization payment will be an amount equal to $1,000,000. For each of the final 12 installment dates, the

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

Company’s scheduled principal amortization payment will be an amount equal to the lesser of $1,075,000 and the remaining principal amount outstanding on such installment date.

The following table shows amortization payments by fiscal year as of August 2, 2014 under the terms of the initial notes and as of September 3, 2014 under the terms of the Exchange Note (in thousands):



Fiscal Year	As of August 2, 2014 under the initial note		As of September 3, 2014 under the Exchange Note (1)
2014	$	1,750	$	3,500
2015	10,700		11,050
2016	12,750		12,450
2017	1,800		—

(1) If the Company distributes rights to its stockholders pursuant to a rights offering before March 31, 2015, with proceeds to the Company of not less than $11.5 million, the Company will need to make an additional payment at that time of $350,000 times the number of payments made prior to the rights offering and an additional $350,000 for any further payments due through February 26, 2015.

Monthly interest and principal payments may be settled in cash or shares of the Company's Class A common stock, at its option, subject to certain conditions including: (i) the daily dollar trading volume of the Company's common stock for the average of the daily weighted average prices during the twenty (20) day trading period prior to the payment shall be at least $1.0 million; (ii) the daily dollar trading volume of the Company's common stock for each trading day during the ten (10) trading day period ending on the trading day immediately prior to the applicable date of determination shall be at least $0.5 million; and (iii) on each trading day during the twenty (20) day trading period prior to the payment, the weighted average price of the Company's common stock equals or exceeds $1.00. Also subject to certain conditions, at any time from and after April 26, 2015, solely if the Company is making the scheduled amortization payment for such scheduled amortization date in shares of common stock, the holder may accelerate a limited amount of scheduled amortization payments.

In connection with the Exchange Agreement, the Company issued the Exchange Warrants to purchase up to 8,804,348 shares of the Company's Class A common stock. The warrants will be exercisable beginning six months and one day after issuance through March 4, 2020 at $1.76 per share, which is $0.36 less than the initial exercise price of the initial warrants, subject to potential future adjustments.

The senior convertible notes were initially recorded net of a discount of $5.7 million, reflecting the fair value of the warrants and embedded derivatives within the senior convertible notes on the issuance date. Refer to Note 5, "Fair Value Measurements and Disclosures." for further detail on the fair value of the warrants and derivatives. The $5.7 million debt discount will be amortized through interest expense on the condensed consolidated statements of operations, using the effective interest method, over the term of the senior convertible notes. The Company incurred $1.9 million of deferred financing costs through August 2, 2014 and, net of $0.3 million of amortization to date, has included the current portion of $0.6 million in "prepaid expenses and other current assets" and the non-current portion of $1.0 million in "other assets" in the condensed consolidated balance sheets as of August 2, 2014. These costs will be amortized through interest expense on the condensed consolidated statements of operations over the term of the senior convertible notes.

The $5.7 million fair values of the warrants and embedded derivatives, which require bifurcation from the debt host, were recorded within long-term liabilities on the condensed consolidated balance sheets. The embedded derivatives are comprised of the conversion option, redemption in the case of an event of default and redemption in the case of a change in control features of the senior convertible note. The warrants and embedded derivatives are marked to market quarterly, with any change recorded as an adjustment to the carrying value of these liabilities and the gain or (loss) on warrants and derivatives liabilities recorded in the condensed consolidated statements of operations. The fair value of the warrants and embedded derivatives from the issuance date to the end of the quarter ended August 2, 2014, declined $2.9 million. Accordingly, this amount was recorded as a gain on warrants and derivatives liabilities in the condensed consolidated statements of operations. Refer to Note 5, "Fair Value Measurements and Disclosures."

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

NOTE 45 – Fair Value Measurements and Disclosures

Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company's own credit risk.

Inputs used in measuring fair value are prioritized into a three-level hierarchy based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

~~Table of Contents~~

~~THE WET SEAL, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~For the 39 weeks ended November 2, 2013, and October 27, 2012~~

~~(Unaudited)~~

The following tables present information on the Company’s financial instruments (in thousands):

Carrying
Amount as of
November 2, 2013

Fair Value Measurements
at Reporting Date Using
Level 1 Level 2 Level 3
Financial assets:
Cash $ 16,098
$ 16,098
$ —
$ —
Money market funds 13,986
—
13,986
—
Cash and cash equivalents 30,084

Certificates of deposit 5,490
—
5,476
—
US treasury securities 4,994
—
5,000
—
US government agency securities 25,328
—
25,303
—
Short-term investments 35,812

Tenant allowances receivable 1,029
—
—
1,029



	Carrying Amount as of August 2, 2014		Fair Value Measurements at Reporting Date Using
	Carrying Amount as of August 2, 2014		Level 1		Level 2		Level 3
Financial assets:
Money market funds	$	22,033	$	—	$	22,033	$	—
Cash equivalents	22,033

Financial liability:
Senior convertible notes	$	22,170	$	—	$	—	$	22,170

Carrying
Amount as of
February 2, 2013

Fair Value Measurements
at Reporting Date Using
Level 1 Level 2 Level 3
Financial assets:
Cash $ 5,612
$ 5,612
$ —
$ —
Money market funds 36,667
—
36,667
—
Cash and cash equivalents 42,279

Certificates of deposit 5,053
—
5,047
—
US treasury securities 19,991
—
19,991
—
US government agency securities 42,650
—
42,592
—
Short-term investments 67,694
—
—
—

Long-term tenant allowances receivable 960
—
—
960


	Carrying Amount as of October 27, 2012		Fair Value Measurements at Reporting Date Using						Carrying Amount as of February 1, 2014		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3				Level 1		Level 2		Level 3
Financial assets:
Cash	$	21,992	$	21,992	$	—	$	—
Money market funds	104,351		—		104,351		—		$	22,427	$	—	$	22,427	$	—
Cash and cash equivalents	126,343
Cash equivalents									22,427

Long-term tenant allowances receivable	938		—		—		938
Certificates of deposits									3,084		—		3,079		—
US government securities									4,302		—		4,300		—
Short-term investments									$	7,386

1216

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)



	Carrying Amount as of August 3, 2013		Fair Value Measurements at Reporting Date Using
	Carrying Amount as of August 3, 2013		Level 1		Level 2		Level 3
Financial assets:
Money market funds	$	9,233	$	—	$	9,233	$	—
Cash equivalents	9,233

Certificates of deposit	7,613		—		7,596		—
US treasury securities	9,991		—		9,999		—
US government securities	34,344		—		34,319		—
Short-term investments	51,948

Long-term tenant allowances receivable	$	1,005	$	—	$	—	$	1,005

Cash ~~and cash~~ equivalents are carried at either cost or amortized cost, which approximates fair value, due to their short term maturities. The Company's money market funds are valued at $1, which is generally the net asset value of these funds and are represented at Level 2. Units are redeemable on a daily basis and redemption requests generally can be received the same day as the effective date. The Company’s short-term investments consist of interest-bearing bonds of various U.S. Government agencies, U.S. treasury securities and certificates of deposit, have maturities that are less than one year and are carried at amortized cost plus accrued income. Short-term investments are carried at amortized cost due to the Company’s intent to hold to maturity. The fair value of the Company’s short-term investments was determined based on quoted prices for similar instruments in active markets. The carrying value of the senior convertible notes at August 2, 2014 is net of the unamortized discount of $4,830. The fair value of the senior convertible notes was determined using a discounted cash flow analysis with Level 3 inputs of comparable yields from various high yield debt indices made up of companies with similar size, industry, credit rating and debt maturities. The carrying amount of the senior convertible notes translates to a yield of 21.5%, which is within the range of comparable yields for debt securities with similar terms and issuer credit profiles and the Company has therefore assumed that the carrying value approximates fair value. The Company believes the carrying amounts of other receivables and accounts payable approximate fair value. The fair value of the tenant allowances receivable was determined by discounting ~~them~~ to present value using an incremental borrowing rate of 9.26%, at the time of recording, over their five year collection period. As of ~~November~~August 2, ~~2013,~~2014 and February 1, 2014, they are included in other receivables within the condensed consolidated balance ~~sheet.~~sheets.

On a non-recurring basis, the Company measures certain of its long-lived assets at fair value based on Level 3 inputs consisting of, but not limited to, projected sales growth, estimated gross margins, projected operating costs and an estimated weighted-average cost of capital. As of August 2, 2014, sales projections are based on current trend with annual improvement up to a maximum 3.0% increase in annual sales. Gross margin projections assume annual merchandise margin improvement up to historical peak merchandise margins and occupancy costs are based on lease terms. Projected operating costs are based on the current trend and maintaining consistent percentage of sales ratios for future periods. The weighted-average cost of capital is based on the Company's cost of debt and equity weighted in proportion to the amounts of debt and equity. For the 13 weeks ended August 2, 2014, the Company's weighted-average cost of capital was 19.5%. During the 13 and 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013, the Company recorded ~~$5.1~~$12.7 million,, ~~$6.9~~ $20.1 million,, ~~$6.5~~ $0.3 million and ~~$19.0~~$1.9 million of impairment charges, respectively, in the accompanying condensed consolidated statements of operations. Refer to Note 1, “Summary of Significant Accounting Policies.”

Recurring Fair Value Measurements

Warrants Liability

The warrants to purchase the Company's Class A common stock are required to be measured at fair value each reporting period. Refer to Note 4, "Senior Convertible Notes and Warrants." The fair value of the warrants was estimated using the Black-Scholes option-pricing model as of August 2, 2014. The Company uses historical data to estimate the expected price volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect as of August 2, 2014.

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

As of August 2, 2014, the following assumptions were used to estimate the fair value of the warrants using the Black-Scholes option-pricing model. As of March 26, 2014, the fair value of the warrants was estimated using a Monte Carlo simulation model that requires Level 3 inputs, which are highly subjective. The following significant assumptions were used as of August 2, 2014 and March 26, 2014:



	August 2, 2014			March 26, 2014
Stock price	$	0.90		$	1.16
Exercise price	$	2.12		$	2.12
Exercise price floor	$	1.76		$	1.76
Expected volatility	51.93		%	54.00		%
Expected term (in years)	5.2			5.5
Risk free interest rate	1.72		%	1.86		%
Expected dividend yield	—		%	—		%

The following table presents the activity recorded for the warrants liability since inception (in thousands):



	August 2, 2014
Beginning balance as of March 26, 2014	$	3,610
Less: Gain from change in fair value	264
Balance as of May 3, 2014	3,346
Less: Gain from change in fair value	1,409
Balance as of August 2, 2014	$	1,937

Derivatives Liability

The embedded derivatives liability is required to be measured at fair value each reporting period. Refer to Note 4, "Senior Convertible Notes and Warrants." The fair value of the embedded derivatives was estimated using a binomial lattice model, incorporating the “with-and-without” method to bifurcate the embedded derivatives, which requires Level 3 inputs that are highly subjective and determined using the following significant assumptions:



	August 2, 2014			March 26, 2014
Stock price	$	0.90		$	1.16
Conversion price	1.84			1.84
Expected volatility	51.93		%	52.0		%
Expected term (in years)	2.7			3.0
Risk free interest rate	0.81		%	0.89		%
Expected dividend yield	—		%	—		%
Bond yield	4.1		%	4.2		%
Recovery rate	45.0		%	45.0		%

The following table presents the activity recorded for the derivative liability since inception (in thousands):



	August 2, 2014
Beginning balance as of March 26, 2014	$	2,081
Less: Gain from change in fair value	175
Balance as of May 3, 2014	$	1,906
Less: Gain from change in fair value	1,087
Balance as of August 2, 2014	$	819

Table of Contents

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

Changes in the fair value of the warrants and derivatives liabilities are included in gain on warrants and derivatives liabilities in the accompanying condensed consolidated statement of operations. It is possible that even small changes in any of the above assumptions could have a significant impact on the Company's financial results.

NOTE 56 – Net ~~Loss~~(Loss) Income Per Share

Net ~~loss~~(loss) income per share, basic, is computed based on the weighted-average number of common shares outstanding for the period, including consideration of the two-class method with respect to certain of the Company’s other equity securities (see below). Net ~~loss~~(loss) income per share, diluted, is computed based on the weighted-average number of common and potentially dilutive common equivalent shares outstanding for the period, also with consideration given to the two-class method.

While the Company historically has paid no cash dividends, participants in the Company’s equity compensation plans who were granted restricted stock and performance shares are allowed to receive cash dividends paid on unvested restricted stock and unvested performance shares. Holders of the Company's notes and warrants are entitled to participation in any dividends, and therefore the notes and warrants are participating securities. The Company’s unvested restricted stock and unvested performance shares also qualify as participating securities and are included in the computation of earnings per share pursuant to the two-class method. Restricted and performance stock units are not participating securities.

For the dilutive computation, under the two-class method, determination of whether the unvested share-based payment awards are dilutive is based on the application of the “treasury stock” method and whether the performance criteria has been met. For the dilutive computation of the warrants, under the two-class method, determination of the weighted average number of warrants not yet converted will be added to the basic weighted average number of shares whenever the period’s average price is higher than the exercise price of $2.12 per share as of August 2, 2014. As of September 3, 2014, the exercise price of the warrants is $1.76 per share. The "treasury stock" method will be applied to determine the incremental number of convertible shares that are assumed to be converted into common stock. The warrants will only have a dilutive effect when they are “in the money." As of August 2, 2014, the warrants were not exercisable until September 2014 and therefore, they have not been included in the table below. As of September 3, 2014, the warrants are not exercisable until March 2015. The dilutive effect of the senior convertible notes, including the interest, is included in the diluted share calculation based on the "if-converted method." Interest charges applicable to the convertible debt are added back as an adjustment to the numerator, net of tax. The payment of the principal and interest of the notes is presumed to be settled in common stock (versus cash) and the potentially issued shares resulting from this settlement are included in the diluted share calculation.

For the 13 and 3926 weeks ended ~~November~~August 2, ~~2013, and~~ ~~October 27, 2012~~,2014, the Company incurred a net loss and there was no dilutive effect of any unvested share-based payment ~~awards.~~awards, warrants or senior convertible notes.

The following tables summarize the allocation of undistributed earnings among common stock and other participating securities for the 13 and 26 weeks ended August 3, 2013 using the two-class method and reconciles the weighted average common shares used in the computation of basic and diluted earnings per share (in thousands, except share data):



	13 Weeks Ended						26 Weeks Ended
	August 3, 2013						August 3, 2013
	Net Income			Shares	Per Share Amount		Net Income			Shares	Per Share Amount
Net income per share, basic:
Net income	$	958					$	4,068
Less: Undistributed earnings allocable to participating securities	(12		)				(46		)
Net income per share, basic	$	946		85,800,626	$	0.01	$	4,022		87,178,655	$	0.05
Net income per share, diluted:
Net income	$	958					$	4,068
Less: Undistributed earnings allocable to participating securities	(12		)				(46		)
Effect of dilutive securities				174,403						64,757
Net income per share, diluted	$	946		85,975,029	$	0.01	4,022			87,243,412	$	0.05

Table of Contents

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

The computations of net ~~loss~~(loss) income per share, diluted, excluded the following potentially dilutive securities exercisable into Class A common stock for the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, respectively, because their effect would have been anti-dilutive.


	13 Weeks Ended		39 Weeks Ended		13 Weeks Ended		26 Weeks Ended
	November 2, 2013	October 27, 2012	November 2, 2013	October 27, 2012	August 2, 2014	August 3, 2013	August 2, 2014	August 3, 2013
Stock options outstanding	567,225	2,592,016	471,806	2,592,419	2,045,847	237,977	2,045,847	487,735
Unvested restricted and performance stock awards and units	1,389,281	838,225	1,290,574	1,560,491	1,826,269	1,366,185	1,529,929	1,171,813
Interest on convertible debt					3,071,316	—	2,193,797	—
Senior convertible notes weighted-average shares outstanding					14,673,913	—	10,481,366	—
Total	1,956,506	3,430,241	1,762,380	4,152,910	21,617,345	1,604,162	16,250,939	1,659,548

NOTE 67 – Commitments and Contingencies

Litigation

On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of the Company's current and former employees who were employed and paid by the Company from September 29, 2004 through the present. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs sought

~~Table of Contents~~

~~THE WET SEAL, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~For the 39 weeks ended November 2, 2013, and October 27, 2012~~

~~(Unaudited)~~

reimbursement for alleged uniform and business expenses, injunctive relief, restitution, civil penalties, interest, and attorney's fees and costs. On August 16, 2011, the court denied Plaintiffs' Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower court's ruling. On January 23, 2013, the California Supreme Court denied Plaintiffs' petition for review. On February 4, 2013, the Court of Appeals issued an order to send the case back to the trial court to proceed on behalf of only the three named plaintiffs and not as a class action. In October 2013, the Company entered into confidential settlement agreements that resolved the matter.

On April 24, 2009, the U.S. Equal Employment Opportunity Commission (the “EEOC”) requested information and records relevant to several charges of discrimination by the Company against employees of the Company. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. On November 14, 2012, the Company reached resolution with the EEOC and several of the individual complainants that concluded the EEOC's investigation. Between November 2012 and March 2013, the Company paid approximately ~~$0.8 million~~ to settle with individual complainants. The Company also agreed to programmatic initiatives that are consistent with the Company's diversity plan. The Company will report progress on its initiatives and results periodically to the EEOC. Claimants with whom the Company did not enter into a settlement had an opportunity to bring a private lawsuit within ninety days from the date they received their November 26, 2012 right-to-sue notice from the EEOC, however, that time period is tolled for those individuals who are putative class members in a race discrimination class action filed on July 12, 2012 in the United States District Court for the Central District of California with respect to any race discrimination claims they have that are within the scope of the putative class action (see below). On December 12, 2012, the EEOC issued a "for cause" finding related to certain allegations made by one complainant, who is the lead plaintiff in the above-referenced class action.

On May 9, 2011, a complaint was filed in the Superior Court of the State of California for the County of Alameda on behalf of certain of the Company's current and former employees who were employed and paid by the Company from May 9, 2007 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs are seeking statutory penalties, civil penalties, injunctive relief, and attorneys' fees and costs. On February 3, 2012, the court granted the ~~Company's~~Company’s motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted the Company's motion to compel arbitration. Plaintiffs appealed and oral argument was heard on September 23, 2013. On November 15, 2013, the Court of Appeals issued an order ~~affirming~~in which it affirmed in part and reversed in part the trial ~~court's~~court’s order ~~compelling individual arbitration, but reversing~~granting the Company’s motion to compel arbitration. Specifically, the Court of Appeal affirmed the trial ~~court's~~court’s order compelling arbitration of ~~Plaintiffs'~~individual claims but held that the Private Attorney General ~~Act~~Action (PAGA) ~~claims on an individual basis.~~claim can only be brought as a representative action. The Company ~~intends to appeal the decision~~filed a petition for review to the California Supreme ~~Court.~~Court that was denied on February 11, 2014. The matter was remitted to the Superior Court for additional proceedings and on April 29, 2014, the Superior Court granted the Company’s motion and issued an order to stay the case. On May 20, 2014, Plaintiffs filed a Request for Clarification of the Superior Court’s order staying the case, On June 12, 2014, the Superior Court denied Plaintiffs’ request and reaffirmed that a stay is in effect. On June 26, 2014, Plaintiffs filed a Petition for Writ of Mandate with the Court of Appeals requesting that the stay of non-arbitral claims be lifted. On August 5, 2014, the Court of Appeals issued an order denying Plaintiffs’ Writ. A hearing to review the status of the stay took place in Superior Court on August 26, 2014 during which the Court continued the stay for an additional 90 days in order for the parties to proceed with arbitration of the individual claims. The parties are in the process of initiating arbitration proceedings. In ~~a concurrent proceeding,~~addition, on July 18, 2012, the Company received notice that Plaintiffs filed charges with the National Labor Relations Board (NLRB) under Section 7 of the National Labor Relations Board Act based on the arbitration agreements Plaintiffs signed upon their hiring with the Company. Plaintiffs alleged that the ~~Company's~~Company’s arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against the Company. On September 20, 2012, the NLRB dismissed ~~Plaintiffs'~~Plaintiffs claims.

On October 27, 2011, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of the ~~Company's~~Company’s current and former employees who were employed in California during the time period from October 27, 2007 through the present. The Company was named as a defendant. Plaintiffs are seeking unpaid wages, civil and statutory penalties, restitution, injunctive relief, interest, and attorneys' fees and costs. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On March 28, 2012, the court entered an Order denying the ~~Company's~~Company’s motion to compel arbitration. On September 21, 2012, the Company filed a notice of appeal that is ~~currently pending.~~

On July 12, 2012, a complaint was filed in United States District Court for the Central District of California on behalf of certain of the Company's current and former African American retail store employees. The Company was named as a defendant. The complaint alleged various violations under 42 U.S.C. § 1981, including allegations that the Company engaged in disparate treatment discrimination of those African American current and former employees in promotion to management positions and against African American store management employees with respect to compensation and termination from 2008 through the present. Plaintiffs also alleged retaliation. Plaintiffs also sought reinstatement or instatement of Plaintiffs and class members to their alleged rightful employment positions, lost pay and benefits allegedly sustained by Plaintiffs and class members, compensatory damages for emotional distress, front pay, punitive damages, attorneys' fees, and interest. On May 8, 2013, the Company and Class Representatives filed papers memorializing an amicable resolution to the case pending final court approval. The Settlement Agreement provides for a cash payment of ~~$7.5 million~~ ~~and also includes programmatic relief under which the Company agrees to post open positions, implement new selection criteria and interview protocols, revamp its annual~~

~~Table of Contents~~

~~THE WET SEAL, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~For the 39 weeks ended November 2, 2013, and October 27, 2012~~

~~(Unaudited)~~

performance reviews and compensation structure, add regional human resource directors, implement more diversity and inclusion communications and training for field and corporate office employees, and enhance its investigations training and processes. The Company has also reflected its commitment to use diverse models in its marketing and to partnerships with organizations dedicated to the advancement and well-being of African Americans and other diverse groups. On June 12, 2013, the court granted preliminary approval of the settlement and in June 2013 the Company issued payment to the settlement administrator for $7.5 million. The final approval hearing was held on November 18, 2013 and a decision is currentlystill pending.

As of ~~November~~August 2, ~~2013~~2014, the Company has accrued less than $~~0.2~~0.1 million for loss contingencies in connection with the litigation matters enumerated above and ~~certain~~ other pending legal ~~matters, which is included in accounts payable - other on the condensed consolidated balance sheet. Some of these contingency matters include or may include insurance recovery.~~matters. The Company is vigorously defending the pending matters and will continue to evaluate its potential exposure and estimated costs as these matters progress. Future developments may require the Company to ~~adjust the amount of this~~record accrual for these matters, or other legal matters, which ~~if increased,~~ could have a material negative effect on ~~the Company's~~its results of operations or financial condition.

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

From time to time, the Company is involved in other litigation matters relating to claims arising out of its operations in the normal course of business. The Company believes that, in the event of a settlement or an adverse judgment on certain of these claims, insurance may cover a portion of such losses. However, ~~the outcome of the Company's litigation~~certain matters ~~cannot be accurately predicted and there may be existing matters or matters that~~could arise for which the Company does not have insurance coverage or for which insurance provides only partial coverage. ~~Such outcome~~These matters could have a material negative effect on ~~the Company's~~its results of operations or financial condition.

NOTE 78 – Segment Reporting

The Company operates exclusively in the retail apparel industry in which it sells apparel and accessory items, primarily through mall-based chains of retail stores, to female consumers with a young, active lifestyle. The Company has identified two operating segments (“Wet Seal” and “Arden B”). E-commerce operations for Wet Seal and Arden B are included in their respective operating segments. Refer to Note 1, “Summary of Significant Accounting Policies.”

Information for the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, for the two reportable segments is set forth below (in thousands, except percentages):



13 Weeks Ended August 2, 2014	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	108,722		$	12,454		$	—		$	121,176
Percentage of consolidated net sales	90		%	10		%	—		%	100		%
Operating loss	$	(15,562	)	$	(947	)	$	(6,768	)	$	(23,277	)
Depreciation and amortization expense	$	1,980		$	53		$	527		$	2,560
Interest income	$	—		$	—		$	64		$	64
Interest expense	$	—		$	—		$	(1,263	)	$	(1,263	)
Gain on warrants and derivatives liabilities	$	—		$	—		$	2,496		$	2,496
Loss before provision for income taxes	$	(15,562	)	$	(947	)	$	(5,471	)	$	(21,980	)


13 Weeks Ended November 2, 2013	Wet Seal			Arden B			Corporate and Unallocated			Total
13 Weeks Ended August 3, 2013													Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	114,878		$	12,786		$	—		$	127,664		$	120,567		$	16,682		$	—		$	137,249
Percentage of consolidated net sales	90		%	10		%	—		%	100		%	88		%	12		%	—			100		%
Operating loss	$	(4,575	)	$	(2,427	)	$	(7,853	)	$	(14,855	)
Operating income (loss)													$	8,950		$	491		$	(8,463	)	$	978
Depreciation and amortization expense	$	2,615		$	304		$	504		$	3,423		$	2,732		$	322		$	383		$	3,437
Interest income	$	—		$	—		$	49		$	49		$	—		$	—		$	53		$	53
Interest expense	$	—		$	—		$	(55	)	$	(55	)	$	—		$	—		$	(54	)	$	(54	)
Loss before provision for income taxes	$	(4,575	)	$	(2,427	)	$	(7,859	)	$	(14,861	)
Income (loss) before provision for income taxes													$	8,950		$	491		$	(8,464	)	$	977

13 Weeks Ended October 27, 2012 Wet Seal Arden B
Corporate
and
Unallocated
Total
Net sales $ 117,892
$ 17,645
$ —
$ 135,537
Percentage of consolidated net sales 87 % 13 % — % 100 %
Operating loss $ (8,747 ) $ (3,733 ) $ (12,336 ) $ (24,816 )
Depreciation and amortization expense $ 3,442
$ 404
$ 422
$ 4,268
Interest income $ —
$ —
$ 35
$ 35
Interest expense $ —
$ —
$ (45 ) $ (45 )
Loss before benefit for income taxes $ (8,747 ) $ (3,733 ) $ (12,346 ) $ (24,826 )

1521

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 3926 weeks ended ~~November~~August 2, ~~2013,~~2014, and ~~October 27, 2012~~August 3, 2013

(Unaudited)


39 Weeks Ended November 2, 2013	Wet Seal			Arden B			Corporate and Unallocated			Total
26 Weeks Ended August 2, 2014													Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	358,245		$	47,113		$	—		$	405,358		$	212,031		$	25,873		$	—		$	237,904
Percentage of consolidated net sales	88		%	12		%	—		%	100		%	89		%	11		%	—		%	100		%
Operating income (loss)	$	13,928		$	(1,380	)	$	(23,227	)	$	(10,679	)
Operating loss													$	(23,947	)	$	(5,579	)	$	(15,435	)	$	(44,961	)
Depreciation and amortization expense	$	7,934		$	882		$	1,382		$	10,198		$	4,229		$	217		$	1,053		$	5,499
Interest income	$	—		$	—		$	150		$	150		$	—		$	—		$	95		$	95
Interest expense	$	—		$	—		$	(163	)	$	(163	)	$	—		$	—		$	(1,716	)	$	(1,716	)
Income (loss) before provision for income taxes	$	13,928		$	(1,380	)	$	(23,240	)	$	(10,692	)
Gain on warrants and derivatives liabilities													$	—		$	—		$	2,935		$	2,935
Loss before provision for income taxes													$	(23,947	)	$	(5,579	)	$	(14,121	)	$	(43,647	)


39 Weeks Ended October 27, 2012	Wet Seal			Arden B			Corporate and Unallocated			Total
26 Weeks Ended August 3, 2013													Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	357,806		$	60,937		$	—		$	418,743		$	243,367		$	34,327		$	—		$	277,694
Percentage of consolidated net sales	85		%	15		%	—		%	100		%	88		%	12		%	—			100		%
Operating loss	$	(8,003	)	$	(6,614	)	$	(30,183	)	$	(44,800	)
Operating income (loss)													$	18,502		$	1,048		$	(15,374	)	$	4,176
Depreciation and amortization expense	$	11,022		$	1,314		$	1,195		$	13,531		$	5,317		$	581		$	877		$	6,775
Interest income	$	—		$	—		$	108		$	108		$	—		$	—		$	101		$	101
Interest expense	$	—		$	—		$	(136	)	$	(136	)	$	—		$	—		$	(108	)	$	(108	)
Loss before benefit for income taxes	$	(8,003	)	$	(6,614	)	$	(30,211	)	$	(44,828	)
Income (loss) before provision for income taxes													$	18,502		$	1,048		$	(15,381	)	$	4,169

The “Corporate and Unallocated” column is presented to allow for reconciliation of segment contribution to consolidated operating (loss) income, ~~(loss),~~ interest income, interest expense, gain on warrants and derivatives liabilities and (loss) income ~~(loss)~~ before provision ~~(benefit)~~ for income taxes. Wet Seal and Arden B segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income and expense. The application of accounting policies for segment reporting is consistent with the application of accounting policies for corporate reporting.

Wet Seal operating (loss) income ~~(loss)~~ during the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, includes $~~4.8~~12.6 million, $16.8 million, $~~6.1 million~~, ~~$5.8~~0.3 million and $~~16.3~~1.4 million, respectively, of asset impairment charges.

Arden B operating ~~loss~~(loss) income during the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, includes $0.1 million, $2.9 million, ~~$0.3 million~~none, ~~$0.8 million, $0.7 million~~ and $~~2.7~~0.5 million, respectively, of asset impairment charges. Arden B operating loss during the 13 and 26 weeks ended August 2, 2014, include $0.4 million and $1.0 million, respectively, of costs to wind down the Arden B business and a $0.2 million gain on the termination of the Arden B loyalty program.

Corporate expenses during the 3913 and 26 weeks ended ~~November~~August 2, 2014, include a $0.7 million gain on the retirement of the SERP liability. Corporate expenses during the 26 weeks ended August 2, 2014, include a $0.5 million benefit for miscellaneous non-recurring other income and $0.4 million in asset impairment charges. Corporate expenses during the 26 Weeks Ended August 3, 2013, include a $3.5 million benefit to adjust a loss contingency ~~charges for several~~related to legal matters. ~~Corporate expenses during the 13 and 39 weeks ended October 27, 2012, include~~ ~~$0.1 million~~ and $2.0 million, respectively, of severance costs resulting from the departure of the Company's previous chief executive officer. Corporate expenses during the 13 and 39 weeks ended October 27, 2012, included $2.1 million in professional fees to defend against a shareholder proxy solicitation to replace a majority of the Company’s board members. The proxy solicitation ultimately led to an agreement to replace four of the Company’s seven board members during October 2012.

NOTE 89 – Treasury Stock

~~On February 1, 2013, the Company's Board of Directors authorized a program to repurchase up to~~ ~~$25.0 million~~ of the outstanding shares of its Class A common stock, to be executed through open market or privately negotiated transactions. The timing and number of shares repurchased was to be determined by the Company’s management based on its evaluation of market conditions and other factors.

During the 3926 weeks ended ~~November~~August 2, ~~2013~~2014, the Company ~~repurchased~~tendered ~~5,565,873~~43,183 shares of its Class A common stock ~~at a weighted average market price of~~ ~~$4.48~~ ~~per share, for a total cost, including commissions, of~~ ~~$25.0 million, representing full execution of the stock repurchase program. Additionally, the Company tendered~~ ~~90,703~~ ~~shares of its Class A common stock~~

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~~THE WET SEAL, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~For the 39 weeks ended November 2, 2013, and October 27, 2012~~

~~(Unaudited)~~

upon restricted stock vesting to satisfy employee withholding tax obligations for a total cost of $~~0.3~~0.1 million, as well as ~~56,201~~273,284 shares reacquired by the Company, at no cost, upon employee forfeitures of stock-based compensation.

~~Effective~~

Table of Contents

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August ~~22,~~2, 2014, and August 3, 2013

(Unaudited)

NOTE 10 - Subsequent Events

On September 3, 2014, the Company ~~retired~~ ~~6,517,370~~announced that it has entered into a securities purchase agreement to sell shares of its Class A common stock ~~held~~to a limited number of accredited investors in ~~treasury. In accordance~~a private placement. Subject to the satisfaction of closing conditions, the Company expects to receive at the closing gross proceeds from the placement of approximately $18.5 million and net proceeds of approximately $17.2 million to $17.7 million.

Investors in the private placement have agreed to purchase shares of Class A common stock at a per share price equal to the lesser of $1.01, 87.5% of the volume weighted-average price for the 20 consecutive trading day period prior to when the price is set, or if the Company commences a rights offering to its shareholders at a subscription price which is lower than the foregoing, at such a lesser price. Each investor will also receive a discount to the per share purchase price of four percent, but in no event greater than $0.04 per share. The Company has the right to terminate the anticipated closing of the sale if the volume weighted-average price for its common stock for a 15 consecutive trading day period is below $0.80, subject to investors receiving a cash payment equal to the discount to the per share purchase price of four percent, but in no event greater than $0.04 per share. The closing of the private placement is subject to customary closing conditions, including, but not limited to, the concurrent closing of the intended rights offering, the effectiveness of a registration statement providing for the resale of the shares of common stock which the Company issues in the private placement and the Company having received approval from its shareholders pursuant to the NASDAQ listing requirements with ~~Delaware law~~respect to the issuance of all the common stock to be issued in the private placement. The Company intends to actively pursue the steps necessary to fulfill such closing conditions, although some of the conditions are outside of the Company's control.

Also on September 3, 2014, the Company announced that, subject to applicable regulatory approvals, it intends to conduct a rights offering which will allow the Company to raise equity capital through the sale of shares of its Class A common stock to its stockholders. The Company currently anticipates that the size of the rights offering will be between $25.0 and ~~the~~$30.0 million. Additional terms of the ~~Company’s certificate~~rights will be determined by the Company at a later date. The agreement for the private placement provides that it will close concurrently with the closing of ~~incorporation, upon retirement,~~the rights offering. Subject to conditions, the Company currently expects that these transactions will close sometime in the fourth fiscal quarter of the current fiscal year, although the Company could experience delays or difficulties. If the Company's contemplated rights offering is not consummated within 180 days of the date of the securities purchase agreement and the securities purchase agreement for the private placement has not been previously terminated pursuant to its terms, the purchasers have the right to elect to proceed with the private placement.

The distribution of the rights and the commencement of the rights offering may occur only after a registration statement to be filed by the Company with the Securities and Exchange Commission ("SEC") becomes effective. Nothing in this Form 10-Q shall constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any offer, solicitation or sale of the securities in any state or jurisdiction in which such ~~treasury shares resumed~~offer, solicitation or sale would be unlawful prior to the ~~status~~registration or qualification of ~~authorized~~the securities under the securities laws of such state or jurisdiction.

On September 3, 2014, the Company entered into the Exchange Agreement with the investor in its senior convertible notes (see Note 4, "Senior Convertible Notes and ~~unissued~~Warrants"), pursuant to which the investor agreed to, among other things, the transactions contemplated by the private placement and rights offering described above, and the Company agreed to issue the Exchange Note in exchange for the initial note and the Exchange Warrant to purchase up to 8,804,348 shares of ~~Company Class A common stock.~~Common Stock in exchange for the initial warrants. The Exchange Note is convertible into shares of Common Stock and is entitled to earn interest, which may be paid in cash or in shares of Common Stock. The Exchange Warrant is exercisable into shares of Common Stock.

The Exchange Note and the Exchange Warrant are identical in all material respects to the initial notes and the initial warrants, respectively, except:

The Exchange Note clarifies what certifications must be made by the Company upon payment of interest in shares of common stock;

The Investor’s “maximum percentage” in each of the Exchange Note and the Exchange Warrant was increased from 4.99% to 9.99%;

Changes to the installment amount due under the Exchange Note as described in Note 4, "Senior Convertible Notes and Warrants;"

The initial exercise price of the Exchange Warrant is $1.76 per share, which is $0.36 less than the initial exercise price of the initial warrant, and adjusts on stock splits, combinations or similar events but not on certain dilutive issuances

1723

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THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended August 2, 2014, and August 3, 2013

(Unaudited)

provided for in the initial notes. The Exchange Warrant becomes exercisable six months and one day after its issuance;

The Exchange Note and the Exchange Warrant limit the Investors’ right to participate in a rights offering by the Company during a certain limited time period.

On September 2, 2014, the Company executed a consent agreement with the agent under its senior revolving credit facility (see Note 3, "Senior Revolving Credit Facility") whereby the agent and lenders under the senior revolving credit facility (a) consented to (i) the replacement of the Company's senior convertible notes and warrants (see Note 4, "Senior Convertible Notes and Warrants") with the Exchange Note and Exchange Warrant as described above and (ii) the consummation of the rights offering and the related equity issuances and the other transactions contemplated by the private placement as described above, (b) agree that any reference in the credit agreement and the other loan documents to the "Senior Convertible Notes and Warrants" shall be deemed to refer to the Exchange Note and Exchange Warrant and acknowledge and agree that the indebtedness evidenced by the Exchange Note and Exchange Warrant constitutes "Permitted Indebtedness", and (c) agree that the related equity issuance and the issuances of equity interests in connection with the rights offering shall not be deemed to be a "Prepayment Event" under the credit agreement; provided that, in the event that a cash dominion event shall have occurred and be continuing at the time of receipt by the Company of any proceeds from the related equity issuance and the issuances of equity interests in connection with the rights offering, the Company shall cause such proceeds to be deposited in the concentration account as required under the credit agreement evidencing the senior revolving credit facility.

On August 27, 2014, Company’s Board of Directors voted to approve John D. Goodman’s Severance Agreement and Release with the Company (the “Severance Agreement”). Pursuant to such agreement, Mr. Goodman’s employment with the Company ended on August 26, 2014, at which time he resigned as the Company’s Chief Executive Officer (and principal executive officer) and from all other positions with the Company, including his position as a director on the Board of Directors. Subject to the terms of the Severance Agreement, Mr. Goodman will receive (i) a cash payment in the aggregate amount of $819,200 (less required legal deductions), payable within ten (10) business days of the date of the Severance Agreement, and (ii) the immediate vesting of 100,000 shares of restricted stock previously issued to Mr. Goodman that were unvested immediately prior to the execution of the Severance Agreement. In consideration for these payments and benefits, Mr. Goodman agreed to a general release of potential claims, acknowledged the forfeiture of 377,953 shares of restricted stock units and 161,699 shares of restricted stock and affirmed certain confidentiality obligations. Pursuant to the Severance Agreement, Mr. Goodman also agreed to reasonably cooperate with the Company on transition matters.

In addition, on August 27, 2014, the Company’s Board of Directors voted to appoint Mr. Edmond S. Thomas to serve as the Company's Chief Executive Officer and to serve as a member of the Board of Directors. Mr. Thomas’s appointments were effective on September 8, 2014, which was the date that his full-time employment with the Company commenced.

Table of Contents

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto. The following discussion and analysis contains forward-looking statements. Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, and/or which include words such as “believes,” “plans,” “intends,” “anticipates,” “estimates,” “expects,” “may,” “will,” or similar expressions. In addition, any statements concerning future financial performance, ongoing strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the industry in which we do business, among other things. These statements are not guarantees of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended February ~~2, 2013~~1, 2014, in our other filings with the Securities and Exchange Commission, and elsewhere in this Quarterly Report on Form 10-Q. All forward-looking statements included in this Quarterly Report speak only as of the date of this Quarterly Report.

All references to “we,” “our,” “us,” and “the Company” in this Quarterly Report on Form 10-Q mean The Wet Seal, Inc. and its wholly owned subsidiaries.

~~Fiscal 2013 consists of 52 weeks versus 53 weeks~~ All references in this Quarterly Report on Form 10-Q to “fiscal 2013” and “fiscal 2014” mean the fiscal ~~2012~~years ended February 1, 2014 and therefore, net sales and operating results for the full year fiscal 2013 will reflect the impact of one less selling week than fiscal 2012. In addition, due to the 53rd week in fiscal 2012, comparable store sales for the ~~13 and 39 weeks ended November 2, 2013, respectively, are compared to the 13 and 39 weeks ended November 3, 2012.~~ending January 31, 2015, respectively.

Executive Overview

We are a national multi-channel specialty retailer ~~operating stores~~ selling ~~fashionable and contemporary~~fashion apparel and accessory items designed for female customers aged 13 to 3927 years ~~old. We operate~~old through our stores and e-commerce websites. In the first and second quarters of fiscal 2014, we operated two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B.” At ~~November~~August 2, ~~2013~~2014, we had ~~530~~531 retail stores in 47 states and Puerto Rico. Of the ~~530~~531 stores, there were ~~471~~480 Wet Seal stores and 5951 Arden B stores. Our merchandise can also be purchased online through the websites of each of our chains.

On April 24, 2014, we committed to a plan to wind down the operations of our Arden B brand (the "Plan") due to the long-term financial under-performance of the business. As of August 2, 2014, we operated 51 Arden B stores. As of August 3, 2014, 30 of the Arden B stores became Wet Seal Plus stores, 18 of the Arden B stores became Wet Seal stores, one of the Arden B stores continues to operate under the Arden B name, but will transition to carrying Wet Seal product, and the 2 remaining stores continued to operate as Arden B stores until their closure in August 2014. We anticipate closing down the Arden B website in the third fiscal quarter of 2014. As of August 2, 2014, we have evaluated the applicable accounting guidance for discontinued operations due to the wind down of the Arden B operations and concluded that for the second quarter of fiscal 2014, the Arden B segment should be reported as part of the results from continuing operations. Arden B cash flows will cease by the end of the third quarter and we will not have any significant continuing involvement with the Arden B segment and, therefore, the Arden B segment will meet the conditions to be reported as a discontinued operation beginning in the third quarter of fiscal 2014. We maintain our intellectual property rights in the Arden B brand and affiliated trademarks and are exploring opportunities to preserve or monetize those rights.

The total amount of charges incurred in our condensed consolidated statement of operations during the 13 and 26 weeks ended August 2, 2014, in connection with the winding down of the Arden B brand, including charges for employee severance and retention plans, transitioning the stores from Arden B to Wet Seal merchandise, lease amendment and early termination fees, and non-cash asset impairments, was $0.5 million and $4.3 million, respectively. We estimate the amount of charges to our condensed consolidated statement of operations that will result in future cash expenditures during the remainder of 2014 fiscal year, comprised of a store employee retention plan and lease amendment and early termination fees, will be approximately $0.4 million. As of August 2, 2014, we also estimate that we will incur future cash expenditures during fiscal 2014 and 2015 of approximately $0.3 million that will not affect our condensed consolidated statement of operations, which are comprised of reimbursements to landlords of unamortized tenant allowances upon our early termination of certain leases for former Arden B store locations.

We consider the following to be key performance indicators in evaluating our performance:

Comparable store sales—For purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal division’s frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or

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relocated with a resulting square footage change of less than 20% are maintained in the comparable store base with no interruption. However, stores that are closed for ~~four~~three or more days in a fiscal month, due to remodel, relocation or other reasons, are removed from the comparable store base for that fiscal month as well as for the comparable fiscal month in the following fiscal year. ~~In addition, due to~~Beginning with the ~~53rd week~~first quarter of fiscal 2014, we began including ecommerce sales in ~~fiscal 2012,~~our comparable store sales ~~for~~results and have revised the ~~13 and 39 weeks ended November 2,~~second quarter of fiscal 2013~~, respectively, are compared~~ comparable store sales results included herein to ~~the 13 and 39 weeks ended November 3, 2012.~~also include e-commerce sales. Comparable store sales results are important in achieving operating leverage on expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash and working capital.

Average transaction counts—We consider the trend in the average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset the decrease, if any, in the average dollar sale per transaction, we will generate increases in our comparable store sales.

Gross margins—We analyze the components of gross margin, specifically cumulative mark-on, markups, markdowns, inventory shrink, buying costs, distribution costs and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.

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Operating (loss) income ~~(loss)~~—We view operating (loss) income ~~(loss)~~ as a key indicator of our financial success. The key drivers of operating (loss) income ~~(loss)~~ are comparable store sales, gross margins and the changes we experience in operating costs.

Cash flow and liquidity (working capital)—We evaluate cash flow from operations, capital expenditures, liquidity and working capital to determine our short-term operational and long-term capital financing needs.

Business Segments

We currently report our results as two reportable segments representing our two retail divisions. Although the two operating segments have many similarities in their products, production processes, distribution methods, and regulatory environment, there are differences in most of these areas and distinct differences in their economic characteristics. As a result, we consider these segments to be two distinct reportable segments. As discussed further in the Executive Overview, we are winding down the Arden B business.

Wet Seal. Wet Seal is a junior apparel brand for girls ~~and young women~~ who seek ~~fashionable clothing~~fashion apparel and accessories at ~~a value,~~affordable prices, with a target customer age range of ~~teens~~13 to ~~early twenties.~~23 years old. Wet Seal seeks to provide its customer base with a balance of trend right and fashion basic apparel and accessories that are ~~affordably priced.~~budget-friendly.

Arden B. Arden B is a fashion brand at ~~value price points~~affordable prices for the contemporary woman. Arden B targets customers aged 2524 to 3934 years old and seeks to deliver differentiated contemporary fashion, dresses, sportswear separates and accessories for ~~any occasion~~many occasions of the customers’ ~~lifestyle.~~lifestyles.

We maintain a Web-based store located at www.wetseal.com, offering Wet Seal merchandise comparable to that carried in our ~~stores, to customers over the Internet.~~stores. We also maintain a Web-based store located at www.ardenb.com, offering Arden B merchandise comparable to that carried in our ~~stores, to customers over the Internet.~~stores. Our e-commerce stores are designed to serve as an extension of the in-store experience and offer an expanded selection of merchandise, with the goal of growing both e-commerce and in-store sales. We continue to develop our Wet Seal ~~and Arden B websites~~website to increase ~~their~~its effectiveness in marketing our ~~brands.~~brand. We do not consider our Web-based business to be a distinct reportable segment. The Wet Seal and Arden B reportable segments include, in addition to data from their respective stores, data from their respective e-commerce operations.

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Current Trends and Outlook

Our soft sales trends that started in the second half of 2013 continued through our second fiscal quarter of 2014, with continued softness in mall traffic, an intense promotional environment throughout the specialty retail apparel segment, weakness in retail trends and in fast fashion merchandise in general, and challenging economic conditions, especially for our middle and lower-middle income target customers, contributing negatively to our retail sales. Our comparable store sales ~~increased 0.8%~~decreased 12.4% during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, driven by ~~a 1.7%~~an 11.1% comparable store sales ~~increase~~decrease in our Wet Seal division ~~offset by~~and a ~~6.7%~~22.8% comparable store sales decrease in our Arden B ~~division. During the quarter we achieved a consolidated~~division during its wind down. Our comparable store sales ~~increase~~declines, along with merchandise margin weakness from efforts to compete in the current promotional environment, has resulted in significant operating losses and ~~significantly improved merchandise margins versus the prior year quarter, despite a challenging retail environment. We noted a declining trend~~use of cash in ~~comparable store sales over the course~~operating activities in each of the ~~third~~past four fiscal ~~2013 quarter, after late August. As we proceed through the holiday season, we are maintaining an appropriate mix of regular~~quarters. See Liquidity and promotional pricing and remaining focused on inventory management. As of November 2, 2013, inventory dollars per square foot were down approximately 3% versus the prior year at Wet Seal and down approximately 20% versus the prior year at Arden B. Additionally, we continue to exercise control over costs, resulting in a decrease in selling, general and administrative expenses versus the prior year quarter.Capital Resources herein for further discussion.

The Wet Seal division's comparable store sales increase was primarily driven by an increase in transaction volume, partially offset by a decrease in average dollar sales per transaction, which was driven by a decrease in units purchased per customer offset by an increase in average unit selling price. The Arden B division comparable store sales decrease was primarily ~~driven by~~attributable to a decrease in transaction volume and a decrease in average dollar sales per transaction, which was driven by a decrease in ~~units purchased per customer,~~average unit selling price, partially offset by an increase in units purchased per customer. The Arden B division comparable store sales decrease was primarily attributable to a decrease in transaction volume and a decrease in average dollar sales per transaction, which was driven by a decrease in average unit selling ~~price.~~price from wind-down clearance events, partially offset by an increase in units purchased per customer.

Our combined e-commerce net sales compared to the prior year quarter, which is ~~not a factor~~included in calculating our comparable store sales, ~~declined approximately 19%~~increased 11.4% for the 13 weeks ended ~~November~~August 2, ~~2013~~2014, including a 25.1% increase at Wet Seal and a 24.6% decrease at Arden B due to the wind down of the Arden B business. Since the implementation of our new Demandware ecommerce platform in November 2013, we have shown improved mobile traffic and mobile conversion rates compared to ~~an increase~~periods before implementation. Improving the mobile shopping experience for our customers continues to be a key element of 8.7% in the 13 weeks ended October 27, 2012. Through more disciplined management of promotional pricing, we generated an improved e-commerce merchandise margin rate versus the prior year quarter. However, the transition to a new e-commerce platform during the third fiscal 2013 quarter negatively impacted sales results. The re-platform was completed in late October 2013 and is now enabling customers to view content and execute transactions more efficiently on both desktop and mobile or tablet devices.our ecommerce growth strategy.

Store Openings and Closures

For fiscal ~~2013~~2014, we currently expect to open 269 new Wet Seal stores, primarily ~~to replace~~in outlet and off-mall centers, and close approximately 1948 stores ~~that will be closing~~ upon lease expiration in fiscal ~~2013, with openings primarily in outlet centers, in which we have historically~~

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~~experienced stronger sales productivity and profitability versus our mall-based stores. We currently plan~~2014. Of the 48 stores expected to close, ~~approximately 5~~33 are Wet Seal stores, and 15 are Arden B transition stores temporarily operating as Wet Seal or Wet Seal Plus stores. In August 2014, we converted 30 Arden B stores into Wet Seal Plus stores, 18 Arden B stores into Wet Seal stores and 1 of the Arden B stores continues to operate under the Arden B name, but will sell Wet Seal product, and the 2 remaining stores continued to operate as Arden B stores until their closure in ~~fiscal 2013 upon lease expiration, as we focus efforts on improving merchandising and marketing strategies in that business.~~August 2014.

AtExcluding the Arden B stores that were converted to Wet Seal or Wet Seal Plus stores, at Wet Seal, we opened ~~ten~~4 new stores and closed ~~three~~2 stores during the 13 weeks ended ~~November~~August 2, ~~2013~~2014. At Arden B, we closed ~~two~~3 stores during the 13 weeks ended ~~November~~August 2, ~~2013~~2014.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our condensed consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1, "Summary of Significant Accounting Policies" and in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended February ~~2, 2013~~1, 2014.

The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our condensed consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

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We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, merchandise inventories, long-lived assets, stock-based compensation, accounting for income taxes, legal loss contingencies, insurance reserves and ~~insurance reserves.~~warrants and embedded derivatives liabilities. There have been no significant additions to or modifications of the application of the critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended February ~~2, 2013~~1, 2014, except for the following updates for our critical accounting policies for long-lived assets, accounting for income taxes, ~~and~~ legal loss ~~contingencies.~~contingencies and warrants and embedded derivatives liabilities.

Long-Lived Assets

We evaluate the carrying value of long-lived assets for impairment quarterly or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. During the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, we recorded ~~$5.1~~$12.7 million,, ~~$6.9~~ $20.1 million,, ~~$6.5~~ $0.3 million and $~~19.0~~1.9 million, respectively, of impairment charges. Additional information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this report.

Accounting for Income Taxes

We have approximately ~~$121.4~~$165.0 million of federal NOLs available to offset taxable income in fiscal ~~2013~~2014 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. Our effective tax ~~rate~~rates for the 13 and 3926 weeks ended ~~November~~August 2, ~~2013~~2014, ~~was~~were approximately negative ~~0.3%~~0.1% and ~~negative 1.4%~~0.3%, respectively, despite our net loss. ~~This~~These effective ~~rate is~~rates are due to certain state income taxes for fiscal ~~2013~~2014 that are not based on consolidated net income. We expect a negative ~~1.2%~~0.3% effective income tax rate for fiscal ~~2013~~.2014, although a number of factors could cause our actual effective tax rate for fiscal 2014 to differ from our expected effective tax rate. Additional information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this report.

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Legal Loss Contingencies

We are subject to the possibility of various legal losses. We consider the likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. As of ~~November~~August 2, ~~2013~~2014, we have accrued ~~$0.2~~less than $0.1 million for loss contingencies in connection with the litigation matters discussed in Note 6,7, "Commitments and Contingencies," to the condensed consolidated financial statements included elsewhere in this report. Future developments may require us to adjust the amount of this accrual, which, if increased, could have a material adverse effect on our results of operations or financial condition.

Warrants and Embedded Derivatives Liabilities

During the first quarter of 2014, we issued $27.0 million of senior convertible notes and warrants to purchase up to 8,804,348 shares of our Class A common stock to a single institutional investor, with proceeds to us, net of $1.9 million of deferred financing costs, of $25.1 million. The senior convertible notes were initially recorded net of a discount of $5.6 million, reflecting the fair value of the warrants and embedded derivatives within the senior convertible notes on the issuance date. The $5.6 million debt discount will be amortized through interest expense on the consolidated statements of operations, using the effective interest method, over the term of the senior convertible notes. The $1.9 million of deferred financing costs will be amortized through interest expense on our condensed consolidated statements of operations over the term of the senior convertible notes.

The $5.6 million fair value of the warrants and embedded derivatives are recorded within long-term liabilities on the condensed consolidated balance sheets. The warrants and embedded derivatives are marked to market quarterly, with any change recorded as an adjustment to the carrying value of these liabilities and the gain or (loss) on warrants and derivatives liabilities recorded in the condensed consolidated statements of operations. The change in the value of the warrants and embedded derivatives liabilities from time to time cannot be predicted and may be significant, which could have a significant effect on our financial results. Events that could cause the valuation to change include changes in our stock price and the risk free interest rate. The fair value of the

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warrants and embedded derivatives from the issuance date to the end of the second quarter declined $2.9 million. Accordingly, this amount was recorded as a gain on warrants and derivatives liabilities in our condensed consolidated statements of operations.

The initial senior convertible note and warrants were exchanged in September 2014 for the Exchange Note and the Exchange Warrant as more fully described under Management's Discussion and Analysis - Liquidity and Capital Resources - Subsequent Events.

Recent Accounting Pronouncements

The information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this report.

Results of Operations

The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with the table below:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				26 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012		August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	77.3		80.8		72.4		76.0		78.2		70.4		79.2		70.2
Gross margin	22.7		19.2		27.6		24.0		21.8		29.6		20.8		29.8
Selling, general, and administrative expenses	30.3		32.8		28.5		30.1		30.5		28.7		31.3		27.7
Asset impairment	4.0		4.7		1.7		4.6		10.5		0.2		8.4		0.6
Operating loss	(11.6	)	(18.3	)	(2.6	)	(10.7	)
Operating (loss) income									(19.2	)	0.7		(18.9	)	1.5
Interest expense, net	—		—		—		—		(1.0	)	—		(0.7	)	—
Loss before provision (benefit) for income taxes	(11.6	)	(18.3	)	(2.6	)	(10.7	)
Provision (benefit) for income taxes	0.1		(7.4	)	0.1		(4.2	)
Net loss	(11.7	)%	(10.9	)%	(2.7	)%	(6.5	)%
Gain on warrants and derivatives liabilities									2.1		—		1.2		—
(Loss) income before provision for income taxes									(18.1	)	0.7		(18.4	)	1.5
Provision for income taxes									—		—		0.1		—
Net (loss) income									(18.1	)%	0.7	%	(18.5	)%	1.5	%

Thirteen Weeks Ended ~~November~~August 2, ~~2013~~2014, Compared to Thirteen Weeks Ended ~~October 27, 2012~~August 3, 2013

Net sales


	13 Weeks Ended November 2, 2013		Change From Prior Fiscal Period					13 Weeks Ended October 27, 2012		13 Weeks Ended August 2, 2014		Change From Prior Fiscal Period					13 Weeks Ended August 3, 2013
			($ in millions)									($ in millions)
Net sales	$	127.7	$	(7.8	)	(5.8	)%	$	135.5	$	121.2	$	(16.0	)	(11.7	)%	$	137.2
Comparable store sales increase						0.8	%
Comparable store sales decrease															(12.4	)%

Net sales for the 13 weeks ended ~~November~~August 2, ~~2013~~2014 decreased primarily as a result of the following:

A comparable store sales decrease of ~~$2.8 million due to the retail calendar shift,~~12.4%, which ~~replaced a higher volume August back to school week in fiscal 2012 with a lower volume late October week in fiscal 2013;~~

~~A decrease~~included impact of ~~18.9%~~an internet sales increase of 11.4%, or ~~$1.7~~$0.8 million, ~~in net sales for our e-commerce business compared~~ to ~~the prior~~$8.1 million this year ~~quarter, which is not a factor in calculating our comparable store sales; and~~from $7.3 million last year, partially offset by;

~~A decrease~~An increase in number of stores open, from ~~553~~525 stores as of ~~October 27, 2012~~August 3, 2013, to ~~530~~531 stores as of ~~November~~August 2, ~~2013~~2014.

The comparable store sales ~~increase~~decrease during the 13 weeks ended ~~November~~August 2, ~~2013~~2014 was due to a ~~5.0% increase~~5.5% decrease in comparable store average transactions ~~partially offset by~~and a ~~4.1%~~7.1% decrease in comparable store average dollar ~~sales~~sale per transaction. Comparable store average dollar ~~sales~~sale per transaction decreased mainly due to a ~~5.0%~~10.2% decrease in average unit retail prices, partially offset by a 2.8% increase in the number of units purchased per ~~customer, partially offset by a 0.6% increase in average unit retail prices.~~customer.

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Cost of sales


	13 Weeks Ended November 2, 2013			Change From Prior Fiscal Period					13 Weeks Ended October 27, 2012			13 Weeks Ended August 2, 2014			Change From Prior Fiscal Period					13 Weeks Ended August 3, 2013
				($ in millions)											($ in millions)
Cost of sales	$	98.7		$	(10.8	)	(9.8	)%	$	109.5		$	94.8		$	(1.8	)	(1.9	)%	$	96.6
Percentage of net sales	77.3		%				(350 bps)		80.8		%	78.2		%				780 bps		70.4		%

Cost of sales includes the cost of merchandise; markdowns; inventory shortages; inventory valuation adjustments; inbound freight; payroll expenses associated with buying, planning and allocation; processing, receiving and other warehouse costs; rent and other occupancy costs; and depreciation and amortization expense associated with our stores and distribution center.

Cost of sales during the second quarter of fiscal 2014 when expressed as a percentage of net sales ~~decreased~~increased due primarily to ~~an increase~~a decrease in merchandise margin of ~~350~~560 basis points as a result of ~~lower~~higher markdown rates in both the Wet Seal and Arden B ~~divisions. The decline in cost of sales was additionally driven by a decline in sales, partially offset by a slight~~divisions and an increase in occupancy costs as a ~~result~~percentage of ~~higher new store pre-opening costs as compared~~net sales of 210 basis points, primarily due to the ~~prior year quarter.~~

deleveraging effect of our comparable store sales decline.

Selling, general, and administrative expenses (SG&A)


	13 Weeks Ended November 2, 2013			Change From Prior Fiscal Period					13 Weeks Ended October 27, 2012			13 Weeks Ended August 2, 2014			Change From Prior Fiscal Period					13 Weeks Ended August 3, 2013
				($ in millions)											($ in millions)
Selling, general, and administrative expenses	$	38.7		$	(5.7	)	(12.8	)%	$	44.4		$	36.9		$	(2.5	)	(6.3	)%	$	39.4
Percentage of net sales	30.3		%				(250 bps)		32.8		%	30.5		%				180 bps		28.7		%

Our SG&A expenses are comprised of two components. Selling expenses include store and field support costs, including personnel, advertising and merchandise delivery costs, as well as e-commerce processing costs. General and administrative expenses include the cost of corporate functions such as executives, legal, finance and accounting, information systems, human resources, real estate and construction, marketing, loss prevention and other centralized services.

Selling expenses decreased ~~$0.9~~$0.7 million ~~from~~to $29.8 million in the ~~prior year to $30.6 million.~~second quarter of fiscal 2014. As a percentage of net sales, selling expenses were ~~24.0%~~24.6% of net sales, or 70240 basis points higher than athe comparable prior year ~~ago.~~period.

The following contributed to the current quarter decrease in selling expenses:

A $0.7 million decrease in store and field ~~payroll costs~~wages and benefits due to ~~fewer stores during the quarter;~~controlled store payroll hours;

A ~~$0.1~~$0.5 million decrease in ~~internet order fulfillment costs as a result of lower e-commerce transaction volume;~~

~~A $0.1 million decrease in merchandise delivery costs~~inventory service due to ~~lower units shipped;~~a physical inventory count conducted in the prior year period but not the current year period; and

A $0.1 million net decrease in other selling expenses.

The decreases in selling expenses were partially offset by the following ~~increase:~~increases:

A ~~$0.1~~$0.4 million increase in advertising and marketing expenditures due to efforts to build our e-commerce business; and

A $0.2 million increase in store ~~supplies.~~and field bonuses primarily due to store employee retention bonuses for the Arden B stores transitioning to Wet Seal and Wet Seal Plus stores.

General and administrative expenses decreased ~~$4.8~~$1.8 million from the prior year quarter, to ~~$8.1~~$7.1 million. As a percentage of net sales, general and administrative expenses were ~~6.3%~~5.9%, or ~~320~~60 basis points lower than a year ago.

The following contributed to the current quarter decrease in general and administrative expenses:

A ~~$2.1~~$0.8 million decrease in ~~legal fees associated with various legal matters~~other general and administrative expenses related to the $0.7 million gain on the settlement of the SERP liability and $0.1 million in ~~the prior year quarter, including $1.0 million associated with employee-related matters;~~

~~A $2.1 million decrease in professional fees associated with the proxy solicitation in the prior year quarter;~~other miscellaneous income;

A $0.5 million decrease in ~~corporate incentive~~legal fees and legal settlement charges due to resolving litigation in the prior year;

A $0.3 million decrease in bonuses due to ~~bonus expense reversals, as a result of declining~~ operating performance; and

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A $0.4 million decrease in ~~board of directors’~~various expenses including corporate wages and benefits, audit fees, ~~for a cash payment to our previous Chairman of the Board for additional services provided~~ and ~~for new directors added to the board in the prior year quarter;~~

~~A $0.2 million decrease in stock compensation due to employee performance share award expense reversals, as a result of declining operating performance;~~

~~A $0.1 million decrease in recruiting fees associated with recruiting fees for the open chief executive officer search in the prior year quarter; and~~

~~A $0.1 million decrease in severance costs resulting from the departure of the previous chief executive officer in the prior year quarter.~~reduced travel.

The decreases in general and administrative expenses were partially offset by the ~~following increases:~~following:

~~A $0.3 million increase in corporate wages due to filled positions and an increase in the number~~

Table of ~~certain human resource positions;~~Contents

A $0.2 million increase in ~~computer maintenance costs;~~

~~A $0.1 million increase~~depreciation primarily due to recently placed in ~~insurance expenses;~~service internet re-platforming software and

~~A $0.1 million net increase in other general and administrative expenses.~~

hardware.

Asset impairment


	13 Weeks Ended November 2, 2013			Change From Prior Fiscal Period					13 Weeks Ended October 27, 2012			13 Weeks Ended August 2, 2014			Change From Prior Fiscal Period				13 Weeks Ended August 3, 2013
	($ in millions)											($ in millions)
Asset impairment	$	5.1		$	(1.4	)	(21.6	)%	$	6.5		$	12.7		$	12.4	4,133.3	%	$	0.3
Percentage of net sales	4.0		%				(70 bps)		4.7		%	10.5		%			1030 bps		0.2		%

Based on our quarterly assessments of the carrying value of long-lived assets, during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, and ~~October 27, 2012~~August 3, 2013, we identified certain retail stores and corporate assets with carrying values of their assets, including leasehold improvements, furniture, fixtures, and equipment, in excess of such ~~stores'~~assets' respective forecasted undiscounted cash flows. Accordingly, during the second quarter of fiscal 2014 we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $~~5.1~~12.7 million ~~and~~ ~~$6.5~~compared to charges of $0.3 million~~, respectively.~~ in the second quarter of fiscal 2013. Of the $12.7 million in impairment charges for the 13 Weeks Ended August 2, 2014, $0.1 million was for Arden B stores.

Interest expense, net

We incurred interest expense, net, of ~~less than $0.1~~$1.2 million during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, and less than $0.1 million during the 13 weeks ended ~~October 27, 2012~~August 3, 2013~~, primarily from~~. The increase in interest expense was due to the ~~amortization of~~interest expense and deferred financing ~~costs, partially offset by earnings from investments~~cost amortization for our senior convertible debt and warrants.

Gain on warrants and derivatives liabilities

We recorded a non-cash gain of $2.5 million for the decrease in ~~cash~~fair value of our warrants and ~~cash equivalents and short-term investments.~~derivatives liabilities in the second quarter of fiscal 2014.

Provision ~~(benefit)~~ for income taxes

13 Weeks Ended November 2, 2013
Change From
Prior Fiscal Period
13 Weeks Ended October 27, 2012
($ in millions)
Provision (benefit) for income taxes $ 0.1
$ 10.1
100.5 % $ (10.0 )



	13 Weeks Ended August 2, 2014		Change From Prior Fiscal Period				13 Weeks Ended August 3, 2013
			($ in thousands)
Provision for income taxes	$	29	$	10	52.6	%	$	19

~~Realization~~As a result of our evaluation of the realizability of our net deferred ~~income~~ tax assets as of February 2, 2013, we concluded, based upon review of all evidence, that it was ~~deemed not to be~~ more likely than not ~~due to~~that our ~~three-year cumulative operating losses,~~deferred tax assets will not be realized and we ~~established~~recorded a valuation allowance against ~~all of~~ our deferred tax ~~assets in the fourth quarter of fiscal 2012.~~assets. Accordingly, we did not record a tax benefit for pretax losses during the 13 weeks ended ~~November~~August 2, ~~2013~~2014. We recognized a provision for income taxes that resulted in an effective tax rate of negative ~~0.3%~~0.1% during the 13 weeks ended ~~November~~August 2, ~~2013~~2014 for federal and state income taxes. This effective rate is due to certain state income taxes for fiscal ~~2013~~2014 that are not based on consolidated net income. We have net operating loss carryforwards (NOLs) available, subject to certain limitations, to offset our regular taxable income.

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Segment Information

The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a segment. In the tables below, Wet Seal and Arden B reportable segments include data from their respective stores and e-commerce operations. Operating segment results include net sales, cost of sales, asset impairment and store closure costs, and other direct store and field management expenses, with no allocation of corporate overhead, interest income or expense.

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Wet Seal:


(In thousands, except percentages, sales per square foot and number of stores data)	13 Weeks Ended November 2, 2013			13 Weeks Ended October 27, 2012			13 Weeks Ended August 2, 2014			13 Weeks Ended August 3, 2013
Net sales	$	114,878		$	117,892		$	108,722		$	120,567
Percentage of consolidated net sales	90		%	87		%	90		%	88		%
Comparable store sales percentage increase (decrease) compared to the prior year	1.7		%	(13.5		)%
Operating loss	$	(4,575	)	$	(8,747	)
Comparable store sales percentage (decrease) increase compared to the prior year							(11.1		)%	3.8		%
Operating (loss) income							$	(15,562	)	$	8,950
Sales per square foot	$	58		$	59		$	53		$	62
Number of stores as of period end	471			472			480			464
Square footage as of period end	1,881			1,885			1,906			1,859

The net sales decrease in the current quarter was attributable to an 11.1% decrease in comparable store sales, which decrease includes the impact of a ~~decrease of $2.7 million due to the retail calendar shift, a $1.3 million decrease~~25.1% increase in net sales in our e-commerce ~~business and a slight~~business. This decrease was partially offset by an increase in the number of stores compared to the prior year ~~partially offset by a~~ comparable ~~store sales increase.~~period. The comparable store sales ~~increase~~decrease during the 13 weeks ended ~~November~~August 2, ~~2013~~2014 was due to ~~an increase~~a decrease of 5.7% in comparable store average transactions ~~partially offset by~~and a ~~3.9%~~5.5% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreased mainly due to a ~~5.1%~~7.9% decrease in average unit retail prices, partially offset by a 2.0% increase in the number of units purchased per ~~customer, partially offset by a 1.1% increase in average unit retail prices.~~customer.

Wet Seal ~~generated~~incurred an operating loss of ~~4.0%~~14.3% of net sales during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, compared to operating ~~loss~~income of 7.4% of net sales during the 13 weeks ended ~~October 27, 2012~~August 3, 2013. This decrease was due primarily to the decline in comparable stores sales, a ~~decrease~~540 bps decline in merchandise margin due to higher markdown rates, the deleveraging effect of our comparable store sales decline on occupancy and other fixed costs and an increase in asset impairment charges of ~~$1.0~~$12.6 million during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, compared to the 13 weeks ended ~~October 27, 2012~~August 3, 2013, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. ~~Additionally, the decrease was attributable to an increase in merchandise margin as a result of lower markdown rates.~~

Arden B:


(In thousands, except percentages, sales per square foot and number of stores data)	13 Weeks Ended November 2, 2013			13 Weeks Ended October 27, 2012			13 Weeks Ended August 2, 2014			13 Weeks Ended August 3, 2013
Net sales	$	12,786		$	17,645		$	12,454		$	16,682
Percentage of consolidated net sales	10		%	13		%	10		%	12		%
Comparable store sales percentage decrease compared to the prior year	(6.7		)%	(13.8		)%
Operating loss	$	(2,427	)	$	(3,733	)
Comparable store sales percentage (decrease) increase compared to the prior year							(22.8		)%	1.3		%
Operating (loss) income							$	(947	)	$	491
Sales per square foot	$	61		$	63		$	60		$	76
Number of stores as of period end	59			81			51			61
Square footage as of period end	183			251			162			189

The net sales decrease in the current quarter was ~~primarily~~ attributable to our winding down of the Arden B business leading to a decrease of 22.8% in comparable store sales, which included the impact of a 24.6% decrease in net sales in our e-commerce business, and a decrease in the number of stores compared to the prior ~~year, a decrease of $0.1 million due to the retail calendar shift and a $0.4 million decrease in net sales in our e-commerce business.~~year. The comparable store sales decrease during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, was due to a ~~5.3%~~2.4% decrease in comparable store average transactions and a ~~1.5%~~20.8% decrease in comparable store average dollar sales per transaction. The decrease in the comparable store average dollar sales per transaction resulted from a ~~3.9%~~38.0% decrease in ~~units purchased per customer,~~our average unit retail prices from wind-down clearance activities, partially offset by an increase of ~~2.8%~~27.4% in ~~our average unit retail prices.~~units purchased per customer.

Arden B ~~generated~~incurred an operating loss of ~~19.0%~~7.6% of net sales during the 13 weeks ended ~~November~~August 2, ~~2013~~2014, compared to operating ~~loss~~income of ~~21.2%~~2.9% of net sales during the 13 weeks ended ~~October 27, 2012~~August 3, 2013. This loss is attributable to a 25.3% decrease ~~was due primarily to an increase~~in sales, a 710 bps decline in merchandise margin ~~as a result of lower~~due to higher markdown rates, the deleveraging effect of our comparable store sales decline on occupancy and ~~a decrease in occupancy~~other fixed costs, ~~due to a decrease in~~

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~~minimum rent due to the termination of certain high rent Arden B store leases late in fiscal 2012. Additionally, the decrease was attributable to a decrease~~an increase in asset impairment charges of ~~$0.4~~$0.1 million during the 13 weeks ended ~~November~~August 2, ~~2013~~,2014, compared to the 13 weeks ended ~~October 27, 2012~~,August 3, 2013, to write down the carrying value of long-lived assets that were identified during our quarterly impairment ~~evaluations.~~evaluations, and $0.4 million of costs to wind down the Arden B business, partially offset by a $0.2 million gain on the termination of the Arden B loyalty program.

~~Thirty-Nine~~

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Twenty-Six Weeks Ended ~~November~~August 2, ~~2013~~,2014, Compared to ~~Thirty-Nine~~Twenty-Six Weeks Ended ~~October 27, 2012~~August 3, 2013

Net sales


	39 Weeks Ended November 2, 2013		Change From Prior Fiscal Period					39 Weeks Ended October 27, 2012		26 Weeks Ended August 2, 2014		Change From Prior Fiscal Period					26 Weeks Ended August 3, 2013
			($ in millions)									($ in millions)
Net sales	$	405.4	$	(13.3	)	(3.2	)%	$	418.7	$	237.9	$	(39.8	)	(14.3	)%	$	277.7
Comparable store sales increase						0.4	%
Comparable store sales decrease															(14.7	)%

Net sales for the 3926 weeks ended ~~November~~August 2, ~~2013~~2014 decreased primarily as a result of the following:

A comparable store sales decrease of ~~$1.4~~14.7%, which included impact of an internet sales increase of 6.3%, or $1.0 million, ~~due~~ to ~~the retail calendar shift, which replaced a higher volume late January week in fiscal 2012 with a lower volume late October week in fiscal 2013;~~$16.7 million this year from $15.7 million last year, partially offset by;

~~A decrease~~An increase in number of stores open, from ~~553~~525 stores as of ~~October 27, 2012~~August 3, 2013, to ~~530~~531 stores as of ~~November~~August 2, ~~2013~~2014~~; and~~.

~~A decrease of 5.7%, or $1.4 million, in net sales for our e-commerce business compared to the prior year, which is not a factor in calculating our comparable store sales.~~

The comparable store sales ~~increase~~decrease during the 3926 weeks ended ~~November~~August 2, ~~2013~~2014 was due to ~~a 2.3% increase~~an 8.6% decrease in comparable store average transactions ~~partially offset by~~and a ~~1.8%~~6.7% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreased mainly due to a ~~2.7%~~9.5% decrease in average unit retail prices, partially offset by a 2.8% increase in the number of units purchased per ~~customer, partially offset by a 0.7% increase in average unit retail prices.~~

customer.

Cost of sales


	39 Weeks Ended November 2, 2013			Change From Prior Fiscal Period					39 Weeks Ended October 27, 2012			26 Weeks Ended August 2, 2014			Change From Prior Fiscal Period					26 Weeks Ended August 3, 2013
				($ in millions)											($ in millions)
Cost of sales	$	293.5		$	(24.8	)	(7.8	)%	$	318.3		$	188.4		$	(6.4	)	(3.3	)%	$	194.8
Percentage of net sales	72.4		%				(360 bps)		76.0		%	79.2		%				900 bps		70.2		%

Cost of sales for the 26 weeks ended August 2, 2014, as a percentage of net sales, ~~decreased~~increased due primarily to ~~an increase~~a decrease in merchandise margin of ~~270~~530 basis points as a result of ~~lower~~higher markdown rates in both the Wet Seal and Arden B divisions ~~as compared to the prior year,~~ and ~~a decrease~~an increase in occupancy costs as a ~~result~~percentage of ~~a decrease in depreciation for stores impaired in the prior year and a decrease in minimum rent related~~net sales of 340 basis points, primarily due to the ~~termination~~deleveraging effect of ~~certain expensive Arden B~~our comparable store ~~leases in late fiscal 2012.~~

sales decline.

Selling, general, and administrative expenses (SG&A)


	39 Weeks Ended November 2, 2013			Change From Prior Fiscal Period					39 Weeks Ended October 27, 2012			26 Weeks Ended August 2, 2014			Change From Prior Fiscal Period					26 Weeks Ended August 3, 2013
				($ in millions)											($ in millions)
Selling, general, and administrative expenses	$	115.6		$	(10.6	)	(8.4	)%	$	126.2		$	74.4		$	(2.4	)	(3.2	)%	$	76.8
Percentage of net sales	28.5		%				(160 bps)		30.1		%	31.3		%				360 bps		27.7		%

Selling expenses decreased ~~$2.9~~$2.3 million from the prior year to ~~$91.3~~$58.3 million. As a percentage of net sales, selling expenses were ~~22.5%,~~24.5% of net sales, or ~~flat compared to the prior year.~~260 basis points higher than a year ago.

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The following contributed to the current year decrease in selling expenses:

A ~~$2.1~~$1.9 million decrease in store and field ~~payroll costs~~wages and benefits due to ~~fewer stores in the current year;~~reduced store payroll hours;

A ~~$0.4~~$0.5 million decrease in ~~advertising and marketing expenditures~~inventory service due to ~~less in-store signage and window banner costs~~a physical inventory count conducted in the prior year period but not the current ~~year;~~year period;

A ~~$0.4~~$0.3 million decrease in ~~merchandise delivery costs due to lower units shipped and freight~~ credit ~~received;~~card fees;

A $0.3 million decrease in store ~~supplies;~~and field meeting expenses; and

A $0.1 million decrease in store and field ~~travel and meeting expenses.~~bonuses due to operating performance.

The decreases in selling expenses were partially offset by the ~~following increases:~~following:

A ~~$0.3~~$0.4 million increase in ~~internet order fulfillment costs as a result of increased shipping~~advertising and ~~handling costs~~marketing expenditures due to ~~higher~~efforts to build our e-commerce ~~transaction volume;~~business;

A $0.2 million increase in merchandise delivery costs;

A $0.1 million increase in store and field travel due to open positions; and

A $0.1 million ~~net~~ increase in ~~other selling expenses.~~store supplies due to an increase in store openings versus the prior year.

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General and administrative expenses decreased ~~$7.7~~$0.1 million from the comparable prior year period, to ~~$24.3~~$16.1 million. As a percentage of net sales, general and administrative expenses were ~~6.0%~~6.9%, or ~~160~~110 basis points ~~lower~~higher than a year ago.

The following contributed to the current year decrease in general and administrative expenses:

A ~~$3.5~~$1.2 million decrease in ~~legal costs due~~other general and administrative expenses related to the ~~recording~~$0.7 million gain on the settlement of ~~a $3.5~~the SERP liability, $0.4 million ~~benefit related to certain~~of miscellaneous other income, and $0.1 million in insurance ~~recoveries;~~proceeds;

A ~~$2.1~~$0.7 million decrease in ~~professional fees associated with the proxy solicitation in the prior year;~~bonuses due to operating performance; and

A ~~$2.0 million decrease in severance costs resulting from the departure of the previous chief executive officer in the prior year;~~

~~A $1.0 million decrease in stock compensation due to higher executive stock compensation in the prior year for the previous chief executive officer and previous president and chief operating officer;~~

Acombined $0.4 million decrease in ~~board of directors’ fees for~~consulting expenses, corporate deferred rent due to a ~~cash payment to our previous Chairman of the Board for additional services provided~~favorable lease renewal, and ~~for new directors added to the board in the prior year; and~~

~~A $0.1 million decrease in recruiting fees primarily associated with the additional recruiting fees for the open chief executive officer search in the prior year.~~corporate travel.

The decreases in general and administrative expenses were partially offset by the ~~following increases:~~following:

A ~~$0.4~~$1.2 million increase in legal fees and legal settlement charges due to a prior year $3.5 million benefit to adjust loss contingency for several legal matters, offset by $2.3 million decrease in ~~miscellaneous income as~~legal fees, driven mainly by resolving significant employment litigation in the prior ~~year included a refund from a factoring company for adjustments to prior years' payments to merchandise vendors;~~year;

A $0.3 million increase in ~~computer maintenance costs;~~depreciation primarily due to recently placed in service internet software and hardware platform;

A $0.2 million increase in ~~consulting fees;~~stock compensation due a to the accelerated vesting of former director's restricted stock units; and

A ~~$0.2~~$0.5 million increase in various expenses including computer maintenance, audit fees, insurance, ~~expenses;~~

~~A $0.2 million net increase in~~and other general and administrative ~~expenses; and~~

~~A $0.1 million increase in travel and meeting~~ expenses.

Asset impairment


	39 Weeks Ended November 2, 2013			Change From Prior Fiscal Period					39 Weeks Ended October 27, 2012			26 Weeks Ended August 2, 2014			Change From Prior Fiscal Period				26 Weeks Ended August 3, 2013
	($ in millions)											($ in millions)
Asset impairment	$	6.9		$	(12.1	)	(63.7	)%	$	19.0		$	20.1		$	18.2	957.9	%	$	1.9
Percentage of net sales	1.7		%				(290 bps)		4.6		%	8.4		%			780 bps		0.6		%

Based on our quarterly assessments of the carrying value of long-lived assets, during the 3926 weeks ended ~~November~~August 2, ~~2013~~,2014, and ~~October 27, 2012~~August 3, 2013, we identified certain retail stores and corporate assets with carrying values of their assets, including leasehold improvements, furniture, fixtures, and equipment, in excess of such ~~stores'~~assets' respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of ~~$6.9~~$20.1 million and $1.9 million, respectively. Of the $20.1 million in impairment charges for the 26 weeks ended August 2, 2014, $3.3 million was for Arden B stores and the Arden B website.~~$19.0 million, respectively.~~

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Interest expense, net

We incurred interest expense, net, of $1.6 million during the 26 weeks ended August 2, 2014, and less than $0.1 million during the 3926 weeks ended ~~November 2, 2013~~,August 3, 2013. The increase in interest expense was due to the interest expense and~~October 27, 2012, primarily from the amortization of~~ deferred financing ~~costs, partially offset by earnings from investments~~cost amortization for our senior convertible debt and warrants.

Gain on warrants and derivatives liabilities

We recorded a non-cash gain of $2.9 million for the decrease in ~~cash~~fair value of our warrants and ~~cash equivalents and short-term investments.~~derivatives liabilities during the 26 weeks ended August 2, 2014.

Provision ~~(benefit)~~ for income taxes

39 Weeks Ended November 2, 2013 Change From
Prior Fiscal Period 39 Weeks Ended October 27, 2012
($ in millions)
Provision (benefit) for income taxes $ 0.2
$ 17.6
100.9 % $ (17.4 )



	26 Weeks Ended August 2, 2014		Change From Prior Fiscal Period				26 Weeks Ended August 3, 2013
			($ in millions)
Provision for income taxes	$	0.1	$	—	—	%	$	0.1

~~Realization~~As a result of our evaluation of the realizability of our net deferred ~~income~~ tax assets as of February 2, 2013, we concluded, based upon review of all evidence, that it was ~~deemed not to be~~ more likely than not ~~due to~~that our ~~three-year cumulative operating losses,~~deferred tax assets will not be realized and we ~~established~~recorded a valuation allowance against ~~all of~~ our deferred tax ~~assets in the fourth quarter of fiscal 2012.~~assets. Accordingly, we did not record a tax benefit for pretax losses during the 3926 weeks ended ~~November~~August 2, ~~2013~~.2014. We recognized a provision for income taxes that resulted in an effective tax rate of negative ~~1.4%~~0.3% during the 3926 weeks ended ~~November~~August 2, ~~2013~~2014 for federal and state income taxes. This effective rate is due to certain state income

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taxes for fiscal ~~2013~~2014 that are not based on consolidated net income. We have net operating loss carryforwards (NOLs) available, subject to certain limitations, to offset our regular taxable income.

Segment Information

Wet Seal:


(In thousands, except percentages, sales per square foot and number of stores data)	39 Weeks Ended November 2, 2013			39 Weeks Ended October 27, 2012			26 Weeks Ended August 2, 2014			26 Weeks Ended August 3, 2013
Net sales	$	358,245		$	357,806		$	212,031		$	243,367
Percentage of consolidated net sales	88		%	85		%	89		%	88		%
Comparable store sales percentage increase (decrease) compared to the prior year	0.6		%	(10.5		)%
Operating income (loss)	$	13,928		$	(8,003	)
Comparable store sales percentage (decrease) increase compared to the prior year							(13.8		)%	0.3		%
Operating (loss) income							$	(23,947	)	$	18,502
Sales per square foot	$	183		$	180		$	104		$	124
Number of stores as of period end	471			472			480			464
Square footage as of period end	1,881			1,885			1,906			1,859

The net sales ~~increase~~decrease during the 26 weeks ended August 2, 2014 was attributable to a 13.8% decrease in comparable store sales, ~~increase, partially offset by~~which included impact of a ~~decrease of $1.2 million due to the retail calendar shift, a $0.8 million decrease~~15.9% increase in net sales in our e-commerce ~~business and a slight~~business. This decrease was partially offset by an increase in the number of stores compared to the prior ~~year.~~year comparable period. The comparable store sales ~~increase~~decrease during the 3926 weeks ended ~~November~~August 2, ~~2013~~2014 was due to ~~an increase~~a decrease of ~~2.4%~~8.5% in comparable store average transactions ~~partially offset by~~and a ~~1.7%~~5.9% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreased mainly due to an 8.2% decrease in average unit retail prices, partially offset by a ~~2.6% decrease~~2.4% increase in the number of units purchased per ~~customer, partially offset by a 0.6% increase in average unit retail prices.~~customer.

Wet Seal ~~generated~~incurred an operating ~~income~~loss of ~~3.9%~~11.3% of net sales during the 3926 weeks ended ~~November~~August 2, ~~2013~~,2014, compared to an operating ~~loss~~income of ~~2.2%~~7.6% of net sales during the 3926 weeks ended ~~October 27, 2012~~.August 3, 2013. This ~~increase~~decrease was due primarily to the decline in comparable stores sales, a ~~decrease~~510 bps decline in merchandise margin due to higher markdown rates, the deleveraging effect of our comparable store sales decline on occupancy and other fixed costs and an increase in asset impairment charges of ~~$10.2~~$16.8 million during the 3926 weeks ended ~~November~~August 2, ~~2013~~,2014, compared to the 3926 weeks ended ~~October 27, 2012~~,August 3, 2013, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. Additionally, the increase was attributable to the increase in merchandise margin as a result of lower markdown rates and a decrease in occupancy costs due to a reduction in store depreciation as a result of stores impaired in the prior year.

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Arden B:


(In thousands, except percentages, sales per square foot and number of stores data)	39 Weeks Ended November 2, 2013			39 Weeks Ended October 27, 2012			26 Weeks Ended August 2, 2014			26 Weeks Ended August 3, 2013
Net sales	$	47,113		$	60,937		$	25,873		$	34,327
Percentage of consolidated net sales	12		%	15		%	11		%	12		%
Comparable store sales percentage decrease compared to the prior year	(1.0		)%	(12.2		)%
Operating loss	$	(1,380	)	$	(6,614	)
Comparable store sales percentage (decrease) increase compared to the prior year							(21.0		)%	0.8		%
Operating (loss) income							$	(5,579	)	$	1,048
Sales per square foot	$	219		$	214		$	128		$	157
Number of stores as of period end	59			81			51			61
Square footage as of period end	183			251			162			189

The net sales decrease during the 26 weeks ended August 2, 2014 was ~~primarily~~ attributable to our winding down of the Arden B business leading to a ~~$0.2 million~~ decrease ~~due to the retail calendar shift,~~of 21.0% in comparable store sales, which included impact of a 22.3% decrease in our e-commerce business, as well as a decrease in the number of stores compared to the prior ~~year and a $0.6 million decrease in net sales in our e-commerce business.~~year. The comparable store sales decrease during the 3926 weeks ended ~~November~~August 2, ~~2013~~,2014, was due to a ~~1.4%~~9.9% decrease in comparable store average transactions and a 12.3% decrease in comparable store average dollar sales per ~~transaction, partially offset by an increase of 0.3%~~transaction. The decrease in the comparable ~~store average transactions. Comparable~~ store average dollar sales per transaction ~~decreased mainly due to~~resulted from a ~~7.8%~~24.7% decrease in ~~the number of units purchased per customer,~~our average unit retail prices from wind-down clearance activities, partially offset by a ~~7.0%~~16.1% increase in ~~average unit retail prices.~~units purchased per customer.

Arden B incurred an operating loss of ~~2.9%~~21.6% of net sales during the 3926 weeks ended ~~November~~August 2, ~~2013~~,2014, compared to operating ~~loss~~income of ~~10.9%~~3.1% of net sales during the 3926 weeks ended ~~October 27, 2012~~.August 3, 2013. This loss is attributable to a 24.6% decrease ~~was due primarily to an increase~~in sales, a 680 bps decline in merchandise margin ~~as a result of lower~~due to higher markdown rates associated with wind down, the deleveraging effect of our comparable store sales decline on occupancy and ~~a decrease~~other fixed costs, an increase in occupancy costs due to a decrease in depreciation for stores impaired since the prior year and a decrease in minimum rent due to the termination of certain high rent Arden B store leases late in fiscal 2012. Additionally, during the ~~39 weeks ended November 2, 2013~~ ~~and~~ ~~October 27, 2012, operating loss included~~ asset impairment charges of ~~$0.8~~$3.3 million ~~and $2.7 million, respectively,~~during the 26 weeks ended August 2, 2014, compared to the 26 weeks ended August 3, 2013, to write down the carrying value of ~~long-lived~~long-

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lived assets that were identified during our quarterly impairment ~~evaluations.~~

evaluations, and $1.0 million of costs to wind down the Arden B business, partially offset by a $0.2 million gain on the termination of the Arden B loyalty program.

Liquidity and Capital Resources

In fiscal 2013 and the 26 weeks ended August 2, 2014, we incurred net losses of $38.4 million and $43.8 million and negative cash flow from operations of $17.6 million and $23.9 million, respectively. As of August 2, 2014, we had cash and cash equivalents of $40.3 million. In March 2014 we increased our liquidity through the senior convertible notes placement described in the Senior Convertible Notes and Warrants section below. In addition, we have a $35.0 million senior revolving credit facility with $28.7 million of availability as of August 2, 2014. Including cash and cash equivalents and availability on our senior revolving credit facility, our total available liquidity as of August 2, 2014 was $69.0 million.

As more fully described in the Subsequent Events section below, in September 2014, we announced that we had entered into a securities purchase agreement to sell shares of our Class A common stock to a limited number of accredited investors in a private placement. Subject to the satisfaction of the closing of the placement, we expect to receive at the closing gross proceeds from the placement of approximately $18.5 million and net proceeds of approximately $17.2 million to $17.7 million. Also in September 2014, we announced that, subject to applicable regulatory approvals, we intend to conduct a rights offering which is intended to enable us to raise equity capital through the sale of shares of our Class A common stock to our stockholders. We currently anticipate that the size of the rights offering will be between $25.0 and $30.0 million. The distribution of the rights and the commencement of the rights offering may occur only after a registration statement to be filed by us with the SEC becomes effective. The securities purchase agreement for the private placement provides that it and the intended rights offering are to close concurrently. Our intention is to proceed with the rights offering and to close the both transactions sometime in the fourth fiscal quarter of the current fiscal year, although a number of factors may cause delays or unexpected difficulties and such closings are subject to conditions, some of which are outside of our control.

We have historically financed our operations primarily from internally generated cash flows. These interim financial statements have been prepared on a basis of management’s belief that based on current forecasts, we believe that cash flows from operations, working capital, cash reserves, availability under our senior revolving credit facility and proceeds from the private placement and the intended rights offering noted above will be sufficient to meet our operating and capital expenditure needs for the next twelve months in the normal course of business and do not include any adjustments that might result from uncertainties. If we are unable to complete the private placement and the intended rights offering, return to positive same-store sales growth and improve our gross margins in the future, and we then continue to experience negative cash flow from operations, we may deplete all of our cash reserves and be required to access most, if not all, of the senior revolving credit facility, and would potentially require other sources of financing to fund our operations, which sources might not be available, or if available, may not be on terms acceptable to us. In addition, we may need to take various actions, such as down-sizing, which could include exit costs, or reducing or delaying capital expenditures, strategic investments or other actions, and our business could be materially and adversely affected and could raise substantial doubt about our ability to continue as a going concern. In this event, it could have an adverse impact on our relationships with our merchandise vendors, lenders and other creditors.

Cash Flows for the 3926 Weeks Ended ~~November~~August 2, ~~2013~~
2014

39 Weeks Ended November 2, 2013 39 Weeks Ended October 27, 2012
(In thousands)
Net cash used in operating activities $ (3,530 ) $ (13,792 )
Net cash provided by (used in) investing activities 15,906
(16,775 )
Net cash used in financing activities (24,571 ) (275 )
Net decrease in cash and cash equivalents (12,195 ) (30,842 )
Cash and cash equivalents, beginning of period 42,279
157,185
Cash and cash equivalents, end of period $ 30,084
$ 126,343



	26 Weeks Ended August 2, 2014			26 Weeks Ended August 3, 2013
	(In thousands)
Net cash (used in) provided by operating activities	$	(23,936	)	$	3,383
Net cash provided by investing activities	377			6,771
Net cash provided by (used in) financing activities	25,061			(24,660		)
Net increase (decrease) in cash and cash equivalents	1,502			(14,506		)
Cash and cash equivalents, beginning of period	38,772			42,279
Cash and cash equivalents, end of period	$	40,274		$	27,773

For the 3926 weeks ended ~~November~~August 2, ~~2013~~2014, cash used in operating activities was comprised of a net loss of $~~10.8~~43.8 million, ~~and~~ net cash used in changes in other operating assets and liabilities of $~~11.3~~4.1 million, non-cash benefit from the gain on warrants and derivatives liabilities of $2.9 million, gain on settlement of SERP liability of $0.7 million, and gain on termination of Arden B loyalty program of $0.2 million, partially offset by net non-cash charges, primarily asset impairment, depreciation and amortization, ~~asset impairment, deferred income taxes,~~ and stock-based compensation, of ~~$18.6~~$27.8 million.

For the 3926 weeks ended ~~November~~August 2, ~~2013~~2014, net cash provided by investing activities was comprised of ~~$41.3~~$7.4 million of proceeds from maturity of investment securities, ~~partially~~ offset by ~~$9.5 million of investment of cash from money market funds into short-term investments and $15.9~~$7.0 million of capital expenditures, primarily for construction of new Wet Seal stores, the remodeling of existing Wet Seal stores upon lease renewals ~~and/or store relocations~~ and ~~construction of new Wet Seal stores.~~costs to relocate our data center. Capital expenditures that remain unpaid as of ~~November~~August 2, ~~2013~~2014, have ~~increased $2.0~~decreased $2.6 million since the end of fiscal ~~2012.~~2013. We expect to pay nearly all of the balance of such amounts during the remainder of fiscal ~~2013~~.2014.

For the 3926 weeks ended ~~November~~August 2, ~~2013~~2014, net cash ~~used in~~provided by financing activities was comprised ~~primarily~~ of ~~$25.3~~$27.0 million ~~used to repurchase 5,565,873~~in proceeds from the issuance of senior convertible notes, partially offset by $1.9 million of convertible debt issuance costs and $0.1 million for 43,183 shares of our Class A common stock ~~under a $25.0 million share repurchase program and 90,703~~

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~~shares of our Class A common stock~~tendered to satisfy employee withholding tax obligations upon restricted stock ~~vestings, slightly offset by $0.7 million of proceeds from the exercise of stock options.~~vesting.

Senior Revolving Credit Facility

~~On February 3, 2011, we renewed, via amendment and restatement, our~~We currently have a $35.0 million senior revolving credit facility ~~with our existing lender~~ (the “Facility”), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in February 2016. Under the Facility, we are subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting our ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase our common stock, close stores and dispose of assets, without the lender’s consent. Our ability to borrow and request the issuance of letters of credit is subject to the requirement that we maintain an excess of the borrowing base over the outstanding credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lender’s prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as the “Base Rate,” plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if we elect, either the one, two, three or six months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. We also incur fees on outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 23.0% of the applicable LIBOR margin for commercial letters of credit. Additionally, we are subject to commitment fees at an annual rate of 0.25% on the unused portion of the line of credit under the Facility.

Borrowings under the Facility are secured by cash, cash equivalents, investments, receivables and inventory held by us and three of our wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet Seal Catalog, Inc., each of which may be a borrower under the Facility, and Wet Seal GC, LLC, which is a guarantor of the obligations owing under the Facility.

At ~~November~~August 2, ~~2013~~2014, the amount outstanding under the Facility consisted of ~~$2.0~~$4.5 million in ~~open~~ documentary letters of credit related to merchandise purchases and ~~$1.7~~$1.8 million in ~~outstanding~~ standby letters of credit. At ~~November~~August 2, ~~2013~~2014, we had ~~$31.3~~$28.7 million available for cash advances and/or for the issuance of additional letters of credit, subject to the borrowing limitations noted above, and we were in compliance with all covenant requirements under the Facility.

~~We believe~~On March 20, 2014, we amended the terms of the Facility in order to permit the issuance of the senior convertible notes and warrants and for the amortization of the senior convertible notes described below in the Senior Convertible Notes and Warrants section. On September 2, 2014, we executed a letter agreement with the agent and sole lender under the Facility pursuant to which the agent and such lender consented to the exchange of senior convertible notes and warrants as described in the "Subsequent Events" section below.

Senior Convertible Notes and Warrants

On March 26, 2014, we consummated the sale of $27.0 million of senior convertible notes as well as warrants to purchase up to 8,804,348 shares of our Class A common stock in a private placement to a single institutional investor with proceeds, net of $1.9 million of debt issuance costs, of $25.1 million to us. On September 3, 2014, we entered into an agreement to exchange the initial senior convertible note (the “Initial Note”) for a new senior convertible note, which we refer to as the “Exchange Note”. References herein to the senior convertible note refer to the Exchange Note.

The Exchange Note bears interest at a rate of 6% per year, subject to certain adjustments, and matures in March 2017. The senior convertible notes are convertible, at the holder's option, into shares of our Class A common stock at a price of $1.84 per share, subject to customary adjustments. Interest on the senior convertible notes is payable monthly and the principal amount of the senior convertible notes will ~~have sufficient~~amortize monthly with payments beginning September 26, 2014. The installment amount due under the Exchange Note each month during a six-month time period beginning on September 26, 2014 is $700,000, which is $350,000 higher than the installment amount due under the Initial Note, and if we distribute rights to our stockholders pursuant to a rights offering before March 31, 2015 with proceeds to us of not less than $11.5 million, then such amortization payments shall equal $1,050,000 for each such installment date during such 6-month period. On March 26, 2015, our scheduled amortization

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payment will be $350,000. For each of the subsequent 12 installment dates, our scheduled amortization payment will be an amount equal to $1,000,000. For each of the final 12 installment dates, our scheduled amortization payment will be an amount equal to the lesser of $1,075,000 and the remaining principal amount outstanding on such installment date. Monthly interest and principal payments may be settled in cash ~~and credit availability~~or shares of our Class A common stock, at our option, subject to ~~meet~~certain conditions including: (i) the daily dollar trading volume of our ~~operating and capital requirements~~common stock for the average of the daily weighted average prices during the twenty (20) day trading period prior to the payment shall be at least $1.0 million; (ii) the ~~next 12 months.~~daily dollar trading volume of our common stock for each trading day during the ten (10) trading day period ending on the trading day immediately prior to the applicable date of determination shall be at least $0.5 million; and (iii) on each trading day during the twenty (20) day trading period prior to the payment, the weighted average price of our common stock equals or exceeds $1.00. Also subject to certain conditions, at any time from and after April 26, 2015, solely if we are making the scheduled amortization payment for such scheduled amortization date in shares of common stock, the holder may accelerate a limited amount of scheduled amortization payments. The Exchange Note does not permit prepayments pursuant to its terms.

The ~~financial performance~~senior convertible notes contain various covenants, including covenants limiting our ability to incur additional indebtedness, restricting liens, restricting certain payments, preventing cash dividends and distributions, and other covenants and terms which limit our flexibility. In addition, events of default under the senior convertible notes include customary defaults for such agreements, such as cross defaults under other indebtedness, breaches by us of covenants contained in the notes and the related securities purchase agreement and warrants, the suspension or failure of our ~~business is~~shares of Common Stock to be listed on an eligible trading market or exchange, and other defaults. Upon an event of default, the holder of the senior convertible notes may elect to require us to redeem all or any portion of the notes (including all accrued and unpaid interest and all interest that would have accrued through March 27, 2017, the maturity date), in cash, at a price equal to the greater of: (i) 115% of the amount being redeemed, and (ii) the product of (A) 100% of the amount being redeemed, and (B) the quotient determined by dividing (x) the highest closing sale price of the common stock on any trading day during the period beginning on the date immediately before the event of default and ending on the date of redemption, by (z) the lowest conversion price in effect during such period. The occurrence of an event of default and the acceleration of the indebtedness thereunder would adversely ~~affected during periods~~affect our liquidity and our ability to fund operations could be materially adversely impacted. See Part II, Item 1A. Risk Factors for a discussion of ~~declining consumers spending, tightened consumer credit~~various risks concerning the Exchange Note.

In connection with the sale of the senior convertible notes, we issued warrants to purchase up to 8,804,348 shares of our Class A common stock. On September 3, 2014, we exchanged these warrants for the Exchange Warrant, which will be exercisable beginning six months and ~~low consumer confidence~~one day after issuance through September 27, 2019 at $1.76 per share, subject to potential future adjustments.

The senior convertible notes were initially recorded net of a discount of $5.7 million, reflecting the fair value of the warrants and embedded derivatives within the senior convertible notes on the issuance date. The $5.7 million debt discount will be amortized through interest expense on the condensed consolidated statements of operations, using the effective interest method, over the term of the senior convertible notes. We incurred $1.9 million of deferred financing costs through August 2, 2014, and, net of $0.3 million of amortization to date, have included the current portion of $0.6 million in "prepaid expenses and other current assets" and the non-current portion of $1.0 million in "other assets" in the ~~United States. Increasing fuel prices~~condensed consolidated balance sheets as of August 2, 2014. These costs will be amortized through interest expense on the condensed consolidated statements of operations over the term of the senior convertible notes.

The $5.7 million fair value of the warrants and ~~commodity costs may also cause a shift in consumer demand away~~embedded derivatives, which require bifurcation from the ~~retail clothing products~~debt host, was recorded within long-term liabilities on the condensed consolidated balance sheets. The embedded derivatives are comprised of the conversion option, redemption in the case of an event of default and redemption in the case of a change in control features of the senior convertible note. The warrants and embedded derivatives are marked to market quarterly, with any change recorded as an adjustment to the carrying value of these liabilities and the gain or (loss) on warrants and derivatives liabilities recorded in the condensed consolidated statements of operations. The fair value of the warrants and embedded derivatives from the issuance date to the end of the quarter ended August 2, 2014, declined $2.9 million. Accordingly, this amount was recorded as a gain on warrants and derivatives liabilities in the condensed consolidated statements of operations.

On September 3, 2014, we entered into an agreement with the holder of the senior convertible notes and warrants to exchange them for new senior convertible notes and warrants that are identical in all material respects to the initial senior convertible notes and warrants, except for the terms as described in the "Subsequent Events" section below.

Subsequent Events

On September 3, 2014, we announced that we ~~offer. There~~have entered into a securities purchase agreement to sell shares of our Class A common stock to a limited number of accredited investors in a private placement. Subject to the closing conditions in

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the securities purchase agreement, we expect to receive at the closing gross proceeds from the placement of approximately $18.5 million and net proceeds of approximately $17.2 million to $17.7 million. Investors in the private placement have agreed to purchase shares of Class A common stock at a per share price equal to the lesser of $1.01, 87.5% of the volume weighted-average price for the 20 consecutive trading day period prior to when the price is set, or if we commence a rights offering to our shareholders at a subscription price which is lower than the foregoing, at such a lesser price. Each investor will also receive a discount to the per share purchase price of four percent, but in no event greater than $0.04 per share. We have the right to terminate the anticipated closing of the sale if the volume weighted-average price for our common stock for a 15 consecutive trading day period is below $0.80, subject to investors receiving a cash payment equal to the discount to the per share purchase price of four percent, but in no event greater than $0.04 per share. The closing of the private placement is subject to customary closing conditions, including, but not limited to, the concurrent closing of the intended rights offering, the effectiveness of a registration statement providing for the resale of the shares of common stock which we issue in the private placement and our having received approval from our shareholders pursuant to the NASDAQ listing requirements with respect to the issuance of all the common stock to be issued in the private placement. We intend to actively pursue the steps necessary to fulfill such closing conditions, although some of the conditions are ~~no guarantees~~outside of our control.

Also on September 3, 2014, we announced that, ~~government or other initiatives~~subject to applicable regulatory approvals, we intend to conduct a rights offering which, if completed, will ~~limit~~allow us to raise equity capital through the ~~duration or severity~~sale of shares of our Class A common stock to our stockholders. We currently anticipate that the size of the rights offering will be between $25.0 and $30.0 million. Additional terms of the rights will be determined at a later date. The securities purchase agreement provides that the private placement is to close concurrently with the rights offering. Subject to conditions, we currently expect that these transactions will close sometime in the fourth fiscal quarter of the current ~~economic challenges~~fiscal year, although we could experience delays or ~~stabilize factors~~difficulties. If our contemplated rights offering is not consummated within 180 days of the date of the securities purchase agreement and the securities purchase agreement for the private placement has not been previously terminated in accordance with its terms, the purchasers have the right to elect to proceed with the private placement.

The distribution of the rights and the commencement of the rights offering may occur only after a registration statement to be filed by us with the SEC becomes effective. Nothing in this Form 10-Q shall constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any offer, solicitation or sale of the securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification of the securities under the securities laws of such state or jurisdiction.

See Part II, Item 1A. Risk Factors for additional disclosures regarding certain risks and uncertainties concerning the intended rights offering and the private placement.

On September 3, 2014, we entered into an Amendment, Consent and Exchange Agreement (the “Exchange Agreement”) with the investor in our senior convertible notes (see "Senior Convertible Notes and Warrants" section above), pursuant to which the investor agreed to, among other things, the transactions contemplated by the private placement and rights offering described above and we agreed to issue a convertible senior note in principal amount equal to $27 million (the “Exchange Note”) in exchange for the initial notes and a warrant to purchase up to 8,804,348 shares of Common Stock in exchange for the initial warrants (the “Exchange Warrant”). The Exchange Note is convertible into shares of Common Stock, and is entitled to earn interest which may be paid in cash or in shares of Common Stock. The Exchange Warrant is exercisable into shares of Common Stock.

The Exchange Note and the Exchange Warrant are identical in all material respects to the initial notes and the initial warrants, respectively, except:

The Exchange Note clarifies what certifications must be made by us upon payment of interest in shares of common stock;

The Investor’s “maximum percentage” in each of the Exchange Note and the Exchange Warrant was increased from 4.99% to 9.99%;

The installment amount due under the Exchange Note each month during a six-month time period beginning on September 26, 2014 is $700,000, which is $350,000 higher than the installment amount due under the initial notes, and if we distribute rights to its stockholders pursuant to a rights offering before March 31, 2015 with proceeds to us of not less than $11.5 million, then such amortization payments shall equal $1,050,000 for each such installment date during such 6-month period. On March 26, 2015, our scheduled amortization payment will be $350,000. For each of the subsequent 12 installment dates, our scheduled amortization payment will be an amount equal to $1,000,000. For each of the final 12 installment dates, our scheduled amortization payment will be an amount equal to the lesser of $1,075,000 and the remaining principal amount outstanding on such installment date;

The initial exercise price of the Exchange Warrant is $1.76 per share, which is $0.36 less than the initial exercise price of the Initial Warrant, and adjusts on stock splits, combinations or similar events but not on certain dilutive issuances

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provided for in the Initial Notes. The Exchange Warrant becomes exercisable six months and one day after its issuance;

The Exchange Note and the Exchange Warrant limit the investors’ right to participate in a rights offering by us during a certain limited time period.

On September 2, 2014, we executed a consent agreement with the agent under our senior revolving credit facility (see "Senior Revolving Credit Facility" section above) whereby the agent and lenders under the senior revolving credit facility (a) consented to (i) the replacement of our senior convertible notes and warrants (see "Senior Convertible Notes and Warrants" section above) with the Exchange Note and Exchange Warrant as described above and (ii) the consummation of the rights offering and the related equity issuances and the other transactions contemplated by the private placement as described above, (b) agree that ~~affect our sales~~any reference in the credit agreement and ~~profitability. Continuing adverse economic trends could affect~~the other loan documents to the "Senior Convertible Notes and Warrants" shall be deemed to refer to the Exchanged Note and Exchange Warrant and acknowledge and agree that the indebtedness evidenced by the Exchange Note and Exchange Warrant constitutes "Permitted Indebtedness", and (c) agree that the related equity issuance and the issuances of equity interests in connection with the rights offering shall not be deemed to be a "Prepayment Event" under the credit agreement; provided that, in the event that a cash dominion event shall have occurred and be continuing at the time of receipt by us ~~more significantly than companies~~of any proceeds from the related equity issuance and the issuances of equity interests in ~~other industries.~~connection with the rights offering, we shall cause such proceeds to be deposited in the concentration account as required under the credit agreement evidencing the senior revolving credit facility.

Capital Expenditures

We estimate that, in fiscal ~~2013~~,2014, capital expenditures will be approximately ~~$24.0~~$11.0 million to ~~$25.0~~$11.5 million, of which approximately ~~$15.0~~$6.1 million to ~~$16.0~~$6.5 million is expected to be for the remodeling and/or relocation of existing Wet Seal stores upon lease renewals and the construction of new Wet Seal ~~stores.~~stores and approximately $0.6 million is expected for the conversion of Arden B stores to Wet Seal stores under our Plan to wind down the operations of the Arden B brand. We anticipate receiving approximately ~~$2.0~~$1.3 million in tenant improvement allowances from landlords, resulting in net capital expenditures of approximately ~~$22.0~~$9.7 million to ~~$23.0~~$10.2 million.

Seasonality and Inflation

Our business is seasonal in nature, with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending during September, historically accounting for a ~~significant portion~~large percentage of our annual sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of slightly less than 30% of our annual net sales.

We do not believe that inflation has had a material effect on our results of operations during the past three years. However, we began to experience ~~merchandise~~ cost pressures in the fourth quarter of fiscal 2010 and saw further cost increases through ~~fiscal 2011 and most of~~ fiscal 2012 as a result of rising commodity prices, primarily for cotton, increased labor costs, due to labor shortages in China, from which a majority of our merchandise is sourced by our vendors, and increasing fuel costs. ~~Although cotton prices~~Costs for merchandise sourced in China have

~~Table~~ stabilized and we did not experience material cost increases in fiscal 2013 or through the first two quarters of ~~Contents~~

~~stabilized,~~fiscal 2014. However, the ~~other sourcing cost pressures are expected~~value of China's currency relative to ~~continue through fiscal 2013.~~the dollar has risen steadily since 2010. The continued rising value of the currency in China relative to the U.S. dollar may ~~also~~ have an adverse impact on future product costs. ~~In response to the~~When we do incur cost increases, we leverage our large vendor base to lower costs ~~are identifying~~where possible and we identify new vendors and ~~are assessing~~assess ongoing promotional strategies in efforts to maintain or improve upon historical merchandise margin levels. We cannot be certain that our business will not be affected by inflation in the future.

Off-Balance Sheet Arrangements

As of ~~November~~August 2, ~~2013~~2014, we are not a party to any off-balance sheet arrangements, except for operating ~~lease~~leases and purchase obligations and other commitments, as referenced in our Form 10-K for the fiscal year ended February ~~2, 2013~~1, 2014, under Note 6,7, “Commitments and Contingencies” and “Other Off-Balance Sheet Arrangements,”~~and as referenced in this Quarterly Report on Form 10-Q under~~ ~~Note 6, “Commitments and Contingencies”~~ to the condensed consolidated financial statements included elsewhere in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

To the extent that we borrow under the Facility, we are exposed to market risk related to changes in interest rates. At ~~November~~August 2, ~~2013~~2014, no borrowings were outstanding under the Facility. At ~~November~~August 2, ~~2013~~2014, the weighted average interest rate on borrowings under the Facility would be 1.85%. if we had any outstanding borrowings. Based upon a sensitivity analysis as of ~~November~~August 2, ~~2013~~2014,

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if we had average outstanding borrowings of $1.0 million during ~~third~~second quarter of fiscal ~~2013,~~2014, a 50 basis point increase in interest rates would have had an immaterial impact ~~for the~~ ~~third quarter~~ ~~of fiscal~~ ~~2013~~.

~~As of~~ ~~November 2, 2013, we are not a party to any derivative~~on reported financial ~~instruments.~~results.

Foreign Currency Exchange Rate Risk

We contract for and settle all purchases in U.S. dollars. We only purchase a modest amount of goods directly from international vendors. Thus, we consider the effect of currency rate changes to be indirect and we believe the effect of a major shift in currency exchange rates on short-term results would be minimal, as a hypothetical 10.0% change in the foreign exchange rate of the Chinese currency against the U.S. dollar as of ~~November~~August 2, ~~2013~~2014, would not materially affect our results of operations or cash flows. Over a longer period, the cumulative year-to-year impact of such changes, especially the exchange rate of the Chinese currency against the U.S. dollar, could be significant, albeit indirectly, through increased charges in U.S. dollars from our vendors that source their products internationally.

Embedded Derivatives

For additional information relating to our derivative instruments, see Note 5, "Fair Value Measurements and Disclosures."

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). These disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures are also designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely decisions regarding required disclosures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of ~~November~~August 2, ~~2013~~2014.

Our management, including our chief executive officer and chief financial officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended ~~November~~August 2, ~~2013~~2014, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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PART II. Other Information

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Item 1. Legal Proceedings

On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of our current and former employees who were employed and paid by us from September 29, 2004 through the present. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs sought reimbursement for alleged uniform and business expenses, injunctive relief, restitution, civil penalties, interest, and attorney's fees and costs. On August 16, 2011, the court denied Plaintiffs' Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower court's ruling. On January 23, 2013, the California Supreme Court denied Plaintiffs' petition for review. On February 4, 2013, the Court of Appeals issued an order to send the case back to the trial court to proceed on behalf of only the three named plaintiffs and not as a class action. In October 2013, we entered into confidential settlement agreements that resolved the matter.

On April 24, 2009, the U.S. Equal Employment Opportunity Commission (the “EEOC”) requested information and records relevant to several charges of discrimination by us against employees. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. On November 14, 2012, we reached resolution with the EEOC and several of the individual complainants that concluded the EEOC's investigation. Between November 2012 and March 2013, we paid approximately $0.8 million to settle with individual complainants. We also agreed to programmatic initiatives that are consistent with our diversity plan. We will report progress on its initiatives and results periodically to the EEOC. Claimants with whom we did not enter into a settlement had an opportunity to bring a private lawsuit within ninety days from the date they received their November 26, 2012 right-to-sue notice from the EEOC, however, that time period is tolled for those individuals who are putative class members in a race discrimination class action filed on July 12, 2012 in the United States District Court for the Central District of California with respect to any race discrimination claims they have that are within the scope of the putative class action (see below). On December 12, 2012, the EEOC issued a "for cause" finding related to certain allegations made by one complainant, who is the lead plaintiff in the above-referenced class action.

On May 9, 2011, a complaint was filed in the Superior Court of the State of California for the County of Alameda on behalf of certain of our current and former employees who were employed and paid by us from May 9, 2007 through the present. We were named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs are seeking statutory penalties, civil penalties, injunctive relief, and attorneys' fees and costs. On February 3, 2012, the court granted usour motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted usour motion to compel arbitration. Plaintiffs appealed and oral argument was heard on September 23, 2013. On November 15, 2013, the Court of Appeals issued an order ~~affirming~~in which it affirmed in part and reversed in part the ~~trail court's~~trial court’s order ~~compelling individual arbitration, but reversing~~granting our motion to compel arbitration. Specifically, the ~~trail court's~~Court of Appeal affirmed the trial court’s order compelling arbitration of ~~Plaintiffs'~~individual claims but held that the Private Attorney General ~~Act~~Action (PAGA) ~~claims on an individual basis.~~claim can only be brought as a representative action. We ~~intend to appeal the decision~~filed a petition for review to the California Supreme ~~Court.~~Court that was denied on February 11, 2014. The matter was remitted to the Superior Court for additional proceedings and on April 29, 2014, the Superior Court granted our motion and issued an order to stay the case. On May 20, 2014, Plaintiffs filed a Request for Clarification of the Superior Court’s order staying the case, On June 12, 2014, the Superior Court denied Plaintiffs’ request and reaffirmed that a stay is in effect. On June 26, 2014, Plaintiffs filed a Petition for Writ of Mandate with the Court of Appeals requesting that the stay of non-arbitral claims be lifted. On August 5, 2014, the Court of Appeals issued an order denying Plaintiffs’ Writ. A hearing to review the status of the stay took place in Superior Court on August 26, 2014 during which the Court continued the stay for an additional 90 days in order for the parties to proceed with arbitration of the individual claims. The parties are in the process of initiating arbitration proceedings. In ~~a concurrent proceeding,~~addition, on July 18, 2012, we received notice that Plaintiffs filed charges with the National Labor Relations Board (NLRB) under Section 7 of the National Labor Relations Board Act based on the arbitration agreements Plaintiffs signed upon their hiring with us. Plaintiffs alleged that our arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against us. On September 20, 2012, the NLRB dismissed ~~Plaintiffs'~~Plaintiffs claims.

On October 27, 2011, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of our current and former employees who were employed in California during the time period from October 27, 2007 through the present. We were named as a defendant. Plaintiffs are seeking unpaid wages, civil and statutory penalties, restitution, injunctive relief, interest, and attorneys' fees and costs. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On March 28, 2012, the court entered an Order denying our motion to compel arbitration. On September 21, 2012, we filed a notice of appeal that is ~~currently pending.~~

On July 12, 2012, a complaint was filed in United States District Court for the Central District of California on behalf of certain of our current and former African American retail store employees. We were named as a defendant. The complaint alleged various violations under 42 U.S.C. § 1981, including allegations that we engaged in disparate treatment discrimination of those African American current and former employees in promotion to management positions and against African American store management employees with respect to compensation and termination from 2008 through the present. Plaintiffs also alleged retaliation. Plaintiffs also sought reinstatement or instatement of Plaintiffs and class members to their alleged rightful

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employment positions, lost pay and benefits allegedly sustained by Plaintiffs and class members, compensatory damages for emotional distress, front pay, punitive damages, attorneys' fees, and interest. On May 8, 2013, we filed papers memorializing an amicable resolution to the case pending final court approval. The Settlement Agreement provides for a cash payment of $7.5 million and also includes programmatic relief under which we agree to post open positions, implement new selection criteria and interview protocols, revamp our annual performance reviews and compensation structure, add regional human resources directors, implement more diversity and inclusion communications and training for field and corporate office employees, and enhance our investigations training and processes. We have also reflected our commitment to use diverse models in our marketing and to partnerships with organizations dedicated to the advancement and well-being of African Americans and other diverse groups. On June 12, 2013, the court granted preliminary approval of the settlement and in June 2013 we issued payment to the settlement administrator for $7.5 million. The final approval hearing was held on November 18, 2013 and a decision is currentlystill pending.

As of ~~November~~August 2, ~~2013~~2014, we have accrued less than $~~0.2~~0.1 million for loss contingencies in connection with the ~~litigation~~ matters enumerated above and ~~certain~~ other pending legal ~~matters, which is included in accounts payable - other on the condensed consolidated balance sheet. Some of these contingency matters include or may include insurance recovery.~~matters. We are vigorously defending the pending matters and will continue to evaluate ~~our~~its potential exposure and estimated costs as these matters progress. Future developments may require us to ~~adjust the amount of this~~record accrual for these matters, or other legal matters, which ~~if increased,~~ could have a material negative effect on ~~our~~its results of operations or financial condition.

From time to time, we are involved in other litigation matters relating to claims arising out of our operations in the normal course of business. We believe that, in the event of a settlement or an adverse judgment on certain of these claims, insurance may cover a portion of such losses. However, ~~the outcome of these litigation~~certain matters ~~cannot be accurately predicted and there may be existing matters or matters that~~could arise for which we do not have insurance coverage or for which insurance provides only partial coverage. ~~Such outcome~~These matters could have a material negative effect on our results of operations or financial condition.

Item 1A. Risk Factors

Our business, financial condition and results of operations are subject to a number of factors, risks and uncertainties. There ~~are~~have been no material changes to the risk factors ~~previously~~as disclosed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 and Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2014 filed with the SEC except as set forth below. The disclosures in our Annual Report on Form 10-K, Quarterly Report on Form 10-Q and below, and in other reports and filings are not necessarily a definitive list of all factors that may affect our business, financial condition and future results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. Investors should carefully consider these risks as well as other information we include or incorporate by reference in this Quarterly Report on Form 10-Q.

We have a recent history of losses, expect to incur further losses and may not return to or sustain profitability in the future.

In fiscal 2013 and the 26 weeks ended August 2, ~~2013.~~2014, we incurred net losses of $38.4 million and $43.8 million and negative cash flows from operations of $17.6 million and $23.9 million, respectively. As we have previously disclosed, we have experienced

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poor comparable store sales, and a number of factors are negatively impacting us and our industry. In addition, we expect to continue to report losses for the third fiscal quarter of the current fiscal year. Additionally, we may not return to profitability in future periods, our revenues could further decline or grow more slowly than we expect, and we may incur significant losses in the future for a number of reasons.

Our liquidity has been adversely impacted by our losses and we cannot assure you that we will have sufficient liquidity going forward if our assumptions prove incorrect.

We have historically financed our operations primarily from internally generated cash flows and our liquidity has decreased over the last several quarters primarily as a result of the net losses we have incurred. In March 2014, we improved our liquidity through the issuance of convertible notes which we privately placed (and which we recently exchanged with the Exchange Note). We believe that our cash flow from operations, working capital, cash reserves, availability under our senior revolving credit facility and the anticipated proceeds from the private placement and the intended rights offering which we previously have disclosed will be sufficient to meet our operating and capital expenditures needs for the next 12 months in the normal course of business and do not include any adjustments that might result from uncertainties. If we are unable to complete the private placement and the intended rights offering, return to positive same-store sales growth and improve its gross margins in the future, and we continue to experience negative cash flow from operations, we may deplete all of our cash reserves and be required to access most, if not all, of the senior revolving credit facility, and would potentially require other sources of financing to fund its operations, which sources might not be available, or if available, may not be on terms acceptable to us. In addition, we may need to take various actions, such as down-sizing, which could include exit costs, or reducing or delaying capital expenditures, strategic investments or other actions, and our business could be materially and adversely affected and could raise substantial doubt about our ability to continue as a going concern. In this event, it could have an adverse impact on our relationships with our merchandise vendors, lenders and other creditors.

Our contemplated private placement is subject to terms and conditions, many of which are outside our control. In addition, the intended rights offering may be delayed. We may experience delays and difficulties with both of these transactions and no assurance can be given that the transactions will close. The failure to close the contemplated private placement and the intended rights offering would adversely impact our liquidity and our financial condition.

The closing of our contemplated private placement of our common stock is subject to customary closing conditions, including, but not limited to, the concurrent closing of the intended rights offering, the effectiveness of a registration statement providing for the resale of the shares of common stock which we issue in the private placement, our receiving approval from our stockholders pursuant to the NASDAQ listing requirements with respect to the issuance of all the common stock to be issued in the private placement, our representations and warranties being materially correct at closing, and the private placement closing within seven months of the date of the agreement. While we intend to actively pursue the steps necessary to fulfill our closing conditions, some of the conditions are outside of our control and it is possible that all of the closing conditions to the private placement will not be satisfied. The distribution of the rights and the commencement of the rights offering may occur only after a registration statement to be filed by us with the SEC becomes effective. We may experience delays and difficulties trying to complete the rights offering. In addition, the parties to the private placement have the right to terminate their obligation to consummate the placement in the event it does not close by April 3, 2015. The failure to close the contemplated private placement and the rights offering would adversely and materially impact our liquidity and financial conditions.

We could be required to make substantial cash payments upon an event of default or change of control under our Exchange Note.

The Exchange Note, which we also refer to as our convertible notes, provides for events of default including, among others, payment defaults, cross defaults, material breaches of any representations or warranties, breaches of covenants that are not cured within the applicable time period, failure to perform certain required activities in a timely manner, failure to comply with the requirements under the registration rights agreement described below, suspension from trading or failure of our common stock to be listed on an eligible market for certain periods and certain bankruptcy-type events involving us or a subsidiary.

Upon an event of default, a holder of the convertible notes may elect to require us to redeem all or any portion of the convertible notes (including all accrued and unpaid interest and all interest that would have accrued through March 27, 2017, the maturity date), in cash, at a price equal to the greater of: (i) 115% of the amount being redeemed, and (ii) the product of (A) 100% of the amount being redeemed, and (B) the quotient determined by dividing (x) the highest closing sale price of the common stock on any trading day during the period beginning on the date immediately before the event of default and ending on the date of redemption, by (z) the lowest conversion price in effect during such period.

In addition, under the terms of the convertible notes, in the event of transactions involving a change of control, the holder of a note will have the right to require us to redeem all or any portion of the convertible notes it holds (including all accrued and

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unpaid interest thereon), in cash, at a price equal to 115% of the amount of the convertible notes being redeemed, subject to formula details specified in the convertible notes.

If either an event of default or change of control occurs, our available cash could be seriously depleted and our ability to fund operations could be materially harmed.

The Exchange Note contains various covenants and restrictions which may limit our ability to operate our business and raise capital.

The Exchange Note imposes certain restrictive covenants on us which may impede our ability to operate our business or raise further funds in the capital markets. For example, so long as the convertible notes are outstanding, we cannot, and cannot permit any of our subsidiaries to:

incur, guarantee, assume or suffer to exist any indebtedness (other than permitted indebtedness under the convertible notes);

declare or pay cash dividends;

redeem or repurchase equity interests;

permit liens on our properties or assets (other than permitted liens under the convertible notes); and

repay certain indebtedness in cash if an event of default has occurred.

A breach of any of these covenants could result in a default under the convertible notes. If there is an event of default, a holder of the convertible notes may require us to redeem all or any portion of the convertible notes (including all accrued and unpaid interest and all interest that would have accrued through the maturity date) in cash, which could have a material adverse effect on our financial condition and cash flow.

We recently increased the amount of our required principal payments under our Exchange Note for the next six months. If we do not generate sufficient cash to service all of our debts, we may be forced to take other actions to satisfy our obligations.

In connection with the Exchange Note, we increased the installment amounts due under the Exchange Note each month during the six month period beginning on September 26, 2014. The new installment amount is $700,000, which is $350,000 higher than the installment amount due under the initial convertible notes, and if we distribute rights to our shareholders pursuant to a rights offering before March 31, 2015, with proceeds to us of not less than $11,500,000, then such amortization payments shall equal $1,050,000 for such installment date during such six month period. Our ability to service our debt will be adversely impacted if we do not close on the contemplated private placement and and raise funds through the rights offering and if we are unable to generate positive cash flows from operations in the future. We could also be forced to reduce or delay investments, sell assets, seek additional capital (which could include obtaining additional equity capital on terms that may be onerous or highly dilutive), and seek to restructure or refinance our debt. These alternatives may not be successful and may not permit us to meet our scheduled debt service obligations. Our failure to repay the principal amounts of our indebtedness when we are required to do so or to make other required payments under such facilities and debt instruments would constitute a default under the governing instruments for such indebtedness and could also lead to a default under the agreements governing our other indebtedness. If the repayment of our indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness.

We are not currently in compliance with the Nasdaq Global Select Market $1.00 minimum bid price requirement. If our common stock is delisted from this market or others, the market price and liquidity of our common stock and our ability to raise additional capital could adversely impacted. Furthermore, if our common stock is not listed on the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or other eligible market, it would be an event of default under our convertible notes.

Our common stock is currently listed on the Nasdaq Global Select Market (“Nasdaq”). Continued listing of a security on Nasdaq is conditioned upon compliance with various continued listing standards. There can be no assurance that we will continue to satisfy the requirements for maintaining listing on Nasdaq.

As previously reported, on August 18, 2014, we received a letter from Nasdaq (the “Notice”) notifying us that the closing bid price of our common stock was below the $1.00 minimum bid price requirement for 30 consecutive business days and, as a result, we no longer comply with the minimum bid price requirement for continued listing on Nasdaq. The Notice also stated that we have been provided an initial cure period of 180 calendar days, or until February 17, 2015, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days prior to February 17, 2015. If we do not regain compliance by February 17, 2015, we may be eligible for additional time. To qualify, we must submit, no later than February 17, 2015, an on-line transfer application. We will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing

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standards, with the exception of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the second cure period by effecting a reverse stock split, if necessary. As part of its review process, Nasdaq will make a determination of whether they believe that we will be able to cure this deficiency. Should Nasdaq conclude that we will not be able to cure the deficiency, or should we determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that our securities will be subject to delisting.

If we are delisted and cannot obtain listing on another established market or exchange, our stock’s liquidity could suffer, and we would likely experience reduced investor interest. Such factors may result in a decrease in our stock’s trading price. Delisting may also make it more difficult for us to issue additional securities or to secure financing. Furthermore, if our common stock is not listed on the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or other eligible market, it would be an event of default under our Exchange Note which would enable the holder the Exchange Note to demand that we redeem all or any portion of the convertible notes (including all accrued and unpaid interest and all interest that would have accrued through March 27, 2017, the maturity date), in cash pursuant to the terms of the notes. If an event of default under the Exchange Note occurs, our available cash could be seriously depleted and our financial condition would be materially and adversely affected.

Our stockholders may experience significant dilution.

As of August 2, 2014, we had approximately 19,809,783 and 8,804,348 shares of our common stock reserved or designated for future issuance pursuant to the convertible notes and for the exercise of warrants, respectively, subject to potential future anti-dilution adjustments. Although we have the option to settle the interest and principal payments on the convertible notes in cash and certain conversion and exercise restrictions are placed upon the holders of the convertible notes and warrants, the issuance of material amounts of common stock by us would cause our existing stockholders to experience significant dilution in their investment in our company. On September 3, 2014, we announced that we have entered into a Securities Purchase Agreement to sell additional shares of common stock, which sale, when completed, will result in the issuance of a significant number of additional shares of Common Stock and further dilution to the shareholders who are not purchasing shares thereunder. We also announced on September 3, 2014 that we intend to undertake a rights offering which could result in further dilution to those shareholders who do not purchase their respective pro rata share of the securities sold in the rights offering. In addition, if we obtain additional financing involving the issuance of equity securities or securities convertible into equity securities, our existing stockholders’ investment would be further diluted. Such dilution could cause the market price of our common stock to decline, which could impair our ability to raise additional financing.

Substantial leverage and debt service obligations may adversely affect our cash flows.

In connection with the sale of the initial convertible notes, we incurred indebtedness in the aggregate principal amount of $27 million. The degree to which we are leveraged could, among other things:

require us to dedicate a substantial portion of our future cash flows from operations and other capital resources to debt service;

make it difficult for us to obtain necessary financing in the future for working capital, acquisitions or other purposes on favorable terms, if at all;

make it more difficult for us to be acquired;

make us more vulnerable to industry downturns and competitive pressures; and

limit our flexibility in planning for, or reacting to, changes in our business.

Our ability to meet our debt service obligations (including interest or amortization payments on the convertible notes) will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. For example, while we currently intend to make interest or amortization payments on the convertible notes in cash, this intention may change depending on our financial condition and our stock price at the time of the applicable installment date. To the extent that we desire to make interest or amortization payments on the convertible notes through the issuance of shares of our common stock, we must be in compliance with certain equity conditions (including trading volume and stock price conditions), unless these conditions are waived by the holder, and such payments in shares will be limited to the extent that such payments would cause the holder to beneficially own in excess of 9.99% of the outstanding shares of our common stock at the time of such payment. If we are not permitted to deliver shares of common stock to repay the convertible notes due to a failure to satisfy any of the these conditions or the limitations on payment in our shares, we will be required to make such payments in cash, which could adversely affect our ability to fund operations due to the diversion of necessary cash flow to fund operations to utilization for note payments.

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Sales of a significant number of shares of our common stock or significant short sales of our stock, or the perception that such sales could occur, could depress the market price of our common stock and impair our ability to raise capital.

Sales of a substantial number of shares of our common stock or other equity-related securities, including any shares issued upon conversion of the Exchange Note, in payment of principal of and interest on the Exchange Note, or upon exercise of the Exchange Warrants, could depress the market price of our common stock. In addition, we anticipate issuing a significant number of shares pursuant to our recently announced private placement and intended rights offering, which could adversely impact the trading price of our common stock. If there are significant short sales of our stock, the price decline that could result from this activity may cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares, thereby contributing to sales of stock in the market. Such sales also may impair our ability to raise capital through the sale of additional equity securities in the future at a time and price that our management deems acceptable, if at all.

The accounting treatment for our convertible notes and warrants is complex and subject to judgments concerning the valuation of the warrants and the embedded derivative rights within the convertible notes. Fluctuations in the valuation of the warrants or these rights could cause us to take charges to our earnings and make our financial results unpredictable.

Our convertible notes issued on March 26, 2014 contained embedded derivative rights in accordance with accounting principles generally accepted in the United States, or GAAP. These derivative rights, or similar rights in convertible securities we may issue in the future, and the warrants need to be, or may need to be, separately valued as of the end of each accounting period in accordance with GAAP. Changes in the valuations of the warrants or these rights, the valuation methodology or the assumptions on which the valuations are based could cause us to take charges to our earnings, which would adversely impact our results of operations. Moreover, the methodologies, assumptions and related interpretations of accounting or regulatory authorities associated with these embedded derivatives are complex and in some cases uncertain, which could cause our accounting for these derivatives, and as a result, our financial results, to fluctuate. There is a risk that questions could arise from investors or regulatory authorities concerning the appropriate accounting treatment of these instruments, which could cause volatility in our financials until the warrants and embedded derivative rights expire, which in turn could adversely impact our results of operations, our reputation and our public stock price.

Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal or state income tax purposes is subject to limitations.

As previously disclosed by us, we have generated net operating losses (“NOLs”) in the past. However, Section 382 of the Internal Revenue Code (“Section 382”) contains provisions that may limit the availability of federal net operating loss carryforwards to be used to offset taxable income in any given year upon the occurrence of certain events, including significant changes in our stockholders' ownership interests in our company. Under Section 382, potential limitations on NOLs are triggered when there has been an “ownership change” (generally defined as a greater than 50% change (by value) in our stock ownership over a three-year period).

We incurred ownership changes in April 2005 and December 2006, which resulted in Section 382 limitations applying to NOLs generated prior to those dates, which were approximately $150.6 million. Despite these ownership changes, we may utilize all of our $165.0 million of NOLs as of February 1, 2014, to offset future taxable income. It is possible that the contemplated private placement and intended rights offering, if completed, may result in additional ownership changes for purposes of Section 382. Furthermore, other future transactions involving the sale or other transfer of our stock may result in additional ownership changes for purposes of Section 382. The occurrence of such additional ownership changes could limit our ability to utilize our remaining NOLs and possibly other tax attributes. Limitations imposed on our ability to use NOLs and other tax attributes to offset future taxable income could cause us to pay U.S. federal income taxes earlier than we otherwise would if such limitations were not in effect. Any further ownership change also could cause such NOLs and other tax attributes to expire unused, thereby reducing or eliminating the benefit of such NOLs and other tax attributes to us and adversely affecting our future cash flows.

In addition, we may determine that varying state laws with respect to NOL utilization may result in lower limits, or an inability to utilize NOLs in some states altogether, which could result in us incurring additional state income taxes. Through a series of legislative actions, the State of California suspended our ability to utilize NOLs to offset taxable income in fiscal 2008 through 2011. As a result, we incurred additional cash state income taxes in California. In the event that state law results in lower limits, or an inability to utilize loss carryforwards, or we become subject to federal alternative minimum tax, this could adversely affect our future cash flows.

There are risks associated with the implementation of our plans to wind-down our Arden B brand retail operations, including our ability to manage the associated closure and transition costs, our significant increase in the number of stores dedicated to Wet Seal Plus merchandise, the impact of the wind-down plan on our relationships with our employees, our major customers, vendors and landlords and unanticipated expenses and charges that may be incurred as a result of the wind-down.

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On April 24, 2014, we committed to a plan to wind down the operations of its Arden B brand (the "Plan") due to the long-term financial under-performance of the business. As of August 2, 2014, we operated 51 Arden B stores. As of August 3, 2014, 30 of the Arden B stores became Wet Seal Plus stores, 18 of the Arden B stores became Wet Seal stores, one of the Arden B stores continues to operate under the Arden B name but will sell Wet Seal product, and the 2 remaining stores continued to operate as Arden B stores until their closure in August 2014. We anticipate closing down the Arden B website in the third fiscal quarter of 2014.

The Arden B stores that were transitioned to Wet Seal stores operate in class A malls with higher occupancy costs. While we currently have Wet Seal stores in class A malls, the majority of our Wet Seal stores operate in class B and class C malls. There can be no assurance that we will be able to operate the Arden B stores that were transitioned to Wet Seal stores at the same or greater levels of profitability than when they were operated as Arden B stores.

Prior to the conversion of 30 Arden B stores to Wet Seal Plus stores, we had only two stores that carried exclusively Wet Seal Plus merchandise and they operate in off-mall locations with square footages that are smaller than the Arden B stores that have been converted to Wet Seal Plus merchandise. The transition to Wet Seal Plus merchandise in several Arden B stores represents a significant increase in the number of stores dedicated to Wet Seal Plus merchandise. We do not have long history of operating the Wet Seal Plus store concept and there can be no assurance that the Wet Seal Plus concept will be successful in the locations and sizes of the Arden B stores converted to Wet Seal Plus merchandise.

We estimate that the remaining amount of charges expected to be incurred to our condensed consolidated statement of operations in the third quarter of fiscal 2014 in connection with the winding down of the Arden B brand, including charges for employee severance and retention plans, transitioning the stores from Arden B to Wet Seal and Wet Seal Plus merchandise and non-cash asset impairments, is approximately $0.4 million. We estimate the amount of charges to our condensed consolidated statement of operations that will result in future cash expenditures during the remainder of 2014 fiscal year, comprised of a store employee retention plan and lease amendment and early termination fees, will be approximately $0.4 million. As of August 2, 2014, we also estimate that we will incur future cash expenditures during fiscal 2014 and 2015 of approximately $0.3 million that will not affect our condensed consolidated statement of operations, which are comprised of reimbursements to landlords of unamortized tenant allowances upon our early termination of certain leases for former Arden B store locations.

In addition, the wind-down activities involve numerous risks, including but not limited to:

Potential disruption of the operations of our Wet Seal brand and business and diversion of management attention from such business and operations;

Exposure to unknown, contingent or other liabilities in connection with the Arden B exit plan;

Negative impact on our business relationships, including relationships with our customers, suppliers, vendors, lessors, licensees and employees; and

Unintended negative consequences from changes to our business profile.

Any of these or other factors could impair or disrupt our ability to successfully implement the Arden B exit plan, and could increase costs associated with the wind-down activities, lengthen the wind-down period and materially and negatively impact our business, financial condition and results of operations. In addition, we may not be able to realize other business opportunities as we may be required to spend additional time and incur additional expense relating to the wind-down that otherwise would be used on the development and expansion of our Wet Seal brand.

We may face risks associated with the transition of our senior management, newly appointed chief executive officer and chief merchandising officer. In general, our success depends to a significant extent on the performance of our senior management, particularly personnel engaged in merchandising and store operations, and on our ability to identify, hire and retain additional key management personnel. We have had significant changes in management in the fiscal third quarter of 2014, the beginning of fiscal 2013 and during fiscal 2012, 2011, and 2010, and these changes may impact our ability to execute our business strategy.

On August 26, 2014, our previous chief executive officer resigned. Effective September 3, 2014, we appointed Ms. Christine Lee as our new chief merchandising officer and effective September 8, 2014, we appointed Mr. Edmond S. Thomas as our new chief executive officer. While Mr. Thomas immediately became involved in the day-to-day activities of our company and has previous experience as the chief executive officer of our company, we anticipate that we will experience a transition period before he is fully integrated into the organization. During this transition period, we may experience a disruption to our customer relationships, employee morale and/or business.

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


(a)	None.


(b)	None.


(c)	Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period
Total Number of
Shares Purchased

Average Price Paid per
Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
August 4, 2013 to August 31, 2013 31,306
$ 3.86
—
$ —
September 1, 2013 to October 5, 2013 981
$ 3.65
—
$ —
October 6, 2013 to November 2, 2013 —
$ —
—
$ —



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
May 4, 2014 to May 31, 2014	—	$	—	—	$	—
June 1, 2014 to July 5, 2014	2,175	$	0.86	—	$	—
July 6, 2014 to August 2, 2014	—	$	—	—	$	—

During the ~~third~~second quarter of fiscal ~~2013,~~2014, we tendered ~~32,287~~2,175 shares of our Class A common stock upon restricted stock vesting to satisfy employee withholding tax obligations, for a total cost of ~~approximately~~less than $0.1 million.

Item 3. Defaults Upon Senior Securities


(a)	None.


(b)	None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits



3.1	Restated Certificate of Incorporation of our company (incorporated by reference to Exhibit 3.1 of our company's Registration Statement on Form S-1 filed September 2, 1992).
3.1.1	Amendment to Restated Certificate of Incorporation of our company (incorporated by reference to Exhibit 3.1.1 of our company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002).
3.1.2	Amendment to Restated Certificate of Incorporation, as amended, of our company (incorporated by reference to Exhibit 3.1 of our company's Current Report on Form 8-K filed on January 18, 2005).
3.1.3	Amendment to Restated Certificate of Incorporation, as amended, of our company (incorporated by reference to Exhibit 3.1.3 of our company's Annual Report on Form 10-K for the fiscal year ended January 28, 2006).
3.2	Amended and Restated Bylaws of our company (incorporated by reference to Exhibit 3.1 of our company's Current Report on Form 8-K filed on May 29, 2009).
10.1	Offer Letter, dated July 25, 2014, entered into between the Company and Christine Lee on July 27, 2014 (incorporated by reference to Exhibit 10.1 of our company’s Current Report on Form 8-K filed on July 31, 2014).
10.2	Amended and Restated Change in Severance and Change in Control Plan (incorporated by reference to Exhibit 10.1 of our company’s Current Report on Form 8-K filed on August 26, 2014).
10.3	Employment Agreement, dated August 27, 2014, between the Company and Ed Thomas (incorporated by reference to Exhibit 10.1 of our company’s Current Report on Form 8-K filed on September 2, 2014).
10.4	Separation Agreement and General Release, dated August 26, 2014, between the Company and John Goodman (incorporated by reference to Exhibit 10.2 of our company’s Current Report on Form 8-K filed on September 2, 2014).
10.5	Securities Purchase Agreement, dated September 3, 2014, among the Company and the Purchasers party thereto (incorporated by reference to Exhibit 10.1 of our company’s Current Report on Form 8-K filed on September 4, 2014).
10.6	Form of Common Stock Purchase Warrant (the “Purchaser Warrant”) (incorporated by reference to Exhibit 10.2 of our company’s Current Report on Form 8-K filed on September 4, 2014).
10.7	Registration Rights Agreement, dated September 3, 2014, among the Company and the Holders party thereto (incorporated by reference to Exhibit 10.3 of our company’s Current Report on Form 8-K filed on September 4, 2014).
10.8	Amendment, Consent and Exchange Agreement, dated September 3, 2014, between the Company and the Holder party thereto (incorporated by reference to Exhibit 10.4 of our company’s Current Report on Form 8-K filed on September 4, 2014).
10.9	Form of Senior Convertible Note (incorporated by reference to Exhibit 10.5 of our company’s Current Report on Form 8-K filed on September 4, 2014).
10.10	Form of Common Stock Purchase Warrant (the “Exchange Warrant”) (incorporated by reference to Exhibit 10.6 of our company’s Current Report on Form 8-K filed on September 4, 2014).
10.11	Letter Agreement regarding director designee, dated September 3, 2014, between the Company and Clinton Group, Inc. (incorporated by reference to Exhibit 10.7 of our company’s Current Report on Form 8-K filed on September 4, 2014).
31.1	Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+	Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+	Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101~~+ 101.INS+*	~~Interactive data files (furnished electronically herewith pursuant to Rule 406T of Regulation S-T).~~XBRL Instance Document
101.SCH+*	XBRL Taxonomy Extension Schema Document
101.CAL+*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF+*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB+*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE+*	XBRL Taxonomy Extension Presentation Linkbase Document

+ This exhibit will not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to liability under that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference.

* Furnished electronically herewith pursuant to Rule 406T of Regulation S-T.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



	THE WET SEAL, INC.
	(REGISTRANT)
~~December 4, 2013~~September 11, 2014	By:	/s/ ~~John D. Goodman~~Edmond S. Thomas
		~~John D. Goodman~~Edmond S. Thomas
		Chief Executive Officer
~~December 4, 2013~~September 11, 2014	By:	/s/ Steven H. Benrubi
		Steven H. Benrubi
		Executive Vice President and Chief Financial Officer

3549



	Carrying Amount as of November 2, 2013		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
Financial assets:
Cash	$	16,098	$	16,098	$	—	$	—
Money market funds	13,986		—		13,986		—
Cash and cash equivalents	30,084

Certificates of deposit	5,490		—		5,476		—
US treasury securities	4,994		—		5,000		—
US government agency securities	25,328		—		25,303		—
Short-term investments	35,812

Tenant allowances receivable	1,029		—		—		1,029



	Carrying Amount as of February 2, 2013		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
Financial assets:
Cash	$	5,612	$	5,612	$	—	$	—
Money market funds	36,667		—		36,667		—
Cash and cash equivalents	42,279

Certificates of deposit	5,053		—		5,047		—
US treasury securities	19,991		—		19,991		—
US government agency securities	42,650		—		42,592		—
Short-term investments	67,694		—		—		—

Long-term tenant allowances receivable	960		—		—		960