UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2017

OR

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

 

COMMISSION FILE NUMBER: Commission File Number 0-14818

 

TRANS WORLD ENTERTAINMENT CORPORATION

(Exact name of registrant as specified in its charter)

New York14-1541629
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer
Identification Number)

 

38 Corporate Circle(Exact Name of Registrant as Specified in its Charter)

Albany, New York 12203

New York14-1541629
State or Other Jurisdiction of
Incorporation or Organization		I.R.S. Employer Identification No.
38 Corporate Circle
Albany, New York		12203
Address of Principal Executive OfficesZip Code

(

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

Former Name, Former Address of principal executive offices, including zip code)and Former Fiscal Year, if Changed Since Last Report

 

(518) 452-1242

(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:

 

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

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

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

 

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

Large accelerated fileroAccelerated filerxNon-accelerated filer  o
Non-accelerated fileroSmaller reporting companyox
 Emerging growth companyo

 

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

Emerging growth company     o

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

 

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

Common Stock, $.01 par value,

36,208,8441,816,061 shares outstanding as of October 28, 2017September 13, 2019

 

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 Form 10-Q
Page No.
   
PART I. FINANCIAL INFORMATION 
  
Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited) 
Condensed Consolidated Balance Sheets at October 28, 2017,August 3, 2019, February 2, 2019 and August 4, 20183 
January 28, 2017 and October 29, 20163
  
Condensed Consolidated Statements of Operations – Thirteen and Twenty-Six Weeks Ended August 3, 2019 and August 4, 20184 
Thirteen and Thirty-nine Weeks Ended October 28, 2017 and October 29, 20164
  
Condensed Consolidated Statements of Comprehensive Income (Loss)Loss – Thirteen and Twenty-Six Weeks Ended August 3, 2019 and August 4, 20185
 
Condensed Consolidated Statements of Shareholders’ Equity – Thirteen and Thirty-nineTwenty-Six Weeks Ended October 28, 2017August 3, 2019 and October 29, 2016August 4, 201856
  
Condensed Consolidated Statements of Cash Flows – Twenty-Six Weeks Ended August 3, 2019 and August 4, 20187 
Thirty-nine Weeks Ended October 28, 2017 and October 29, 20166
  
Notes to Interim Condensed Consolidated Financial Statements78
  
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations1821
  
Item 3 – Quantitative and Qualitative Disclosures about Market Risk29
  
Item 4 – Controls and Procedures29
  
PART II. OTHER INFORMATION 
  
Item 1 – Legal Proceedings30
  
Item 1A- Risk Factors30
  
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds3031
  
Item 3 – Defaults Upon Senior Securities3031
  
Item 4 – Mine Safety Disclosures3031
  
Item 5 – Other Information3031
  
Item 6 – Exhibits31
  
Signatures32
2

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

Item 1 – Interim Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

(unaudited)

 

 October 28, January 28, October 29, 
 2017  2017  2016  August 3,
2019		  February 2,
2019		  August 4,
2018		 
ASSETS                        
CURRENT ASSETS                        
Cash and cash equivalents $3,924  $27,974  $4,708  $3,635  $4,355  $4,477 
Restricted cash  1,503   -   -   950   4,126   4,116 
Accounts receivable  5,281   5,383   6,509 
Merchandise inventory  144,754   126,004   157,827   89,785   94,842   114,920 
Prepaid expenses and other assets  13,184   15,356   13,903   4,642   6,657   8,937 
Total current assets  163,365   169,334   176,438   104,293   115,363   138,959 
                        
Restricted cash  10,731   16,103   16,100   5,345   5,745   6,147 
Net fixed assets  43,472   45,097   41,902 
Fixed assets, net  7,605   7,529   12,648 
Operating lease right-of-use assets  24,704   —   — 
Goodwill  39,191   39,191   39,800   —   —   39,191 
Net intangible assets  24,940   27,857   28,737 
Intangible assets, net  3,096   3,668   22,023 
Other assets  7,247   10,228   10,272   5,130   5,708   6,119 
TOTAL ASSETS $288,946  $307,810  $313,249   150,173   138,013   225,087 
                        
LIABILITIES                        
CURRENT LIABILITIES                        
Accounts payable $45,378  $52,307  $61,956  $29,044  $34,329  $34,200 
Short-term borrowings  5,000   -   5,936   12,086   —   6,341 
Accrued expenses and other current liabilities  9,805   9,198   9,116   5,617   8,132   9,508 
Deferred revenue  7,231   9,228   7,813   5,974   6,955   6,810 
Current portion of operating lease liabilities  9,266   —   — 
Total current liabilities  67,414   70,733   84,821   61,987   49,416   56,859 
                        
Contingent consideration  2,115   8,552   10,381 
Other long-term liabilities  29,236   30,589   28,927 
Operating lease liabilites  18,684   —   — 
Other long-term liabilites  21,537   24,867   26,533 
TOTAL LIABILITIES  98,765   109,874   124,129   102,208   74,283   83,392 
                        
SHAREHOLDERS’ EQUITY                        
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)  -   -   -   —   —   — 
            
Common stock ($0.01 par value; 200,000,000 shares authorized; 64,255,171, 64,252,671 and 64,252,671 shares issued, respectively)  643   643   643 
            
Common stock ($0.01 par value; 200,000,000 shares authorized;
3,223,898, 3,221,834 and 3,219,334 shares issued,
respectively)		  32   32   32 
Additional paid-in capital  340,391   338,075   337,439   344,983   344,826   343,322 
            
Treasury stock at cost (28,138,116, 28,137,283 and 28,137,283 shares, respectively)  (230,144)  (230,144)  (230,144)
            
Treasury stock at cost (1,409,317, 1,408,892 and 1,408,043
shares, respectively)		  (230,168)  (230,166)  (230,149)
Accumulated other comprehensive loss  (788)  (802)  (658)  (725)  (735)  (1,008)
            
Retained earnings  80,079   90,164   81,840 
(Accumulated deficit) Retained earnings  (66,157)  (50,227)  29,498 
TOTAL SHAREHOLDERS’ EQUITY  190,181   197,936   189,120   47,965   63,730   141,695 
TOTAL LIABILITIES AND EQUITY $288,946  $307,810  $313,249 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $150,173  $138,013  $225,087 

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

3

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)data)

(unaudited)

 

 Thirteen Weeks Ended  Thirty-nine Weeks Ended 
 October 28, October 29, October 28, October 29, 
 2017  2016  2017  2016  Thirteen Weeks Ended  Twenty-six Weeks Ended 
          August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
Net sales $91,817  $65,039  $293,482  $203,127  $75,152  $101,039  $154,508  $196,271 
Other revenue  1,184   1,242   3,964   3,232   852   1,135   1,646   2,506 
Total revenue  93,001   66,281   297,446   206,359   76,004   102,174   156,154   198,777 
                                
Cost of sales  61,420   39,409   194,390   121,960   50,888   70,001   105,648   134,916 
Gross profit  31,581   26,872   103,056   84,399   25,116   32,173   50,506   63,861 
Selling, general and administrative expenses  40,558   34,680   122,763   97,415   32,517   41,562   65,548   81,409 
Income from joint venture  (866)  -   (1,038)  - 
Loss from operations  (8,111)  (7,808)  (18,669)  (13,016)  (7,401)  (9,389)  (15,042)  (17,548)
                                
Interest expense  83   179   200   523   194   103   326   166 
Other income  (59)  (51)  (8,824)  (1,068)
                
Other loss (income)  462   (49)  419   (128)
Loss before income tax expense  (8,135)  (7,936)  (10,045)  (12,471)  (8,057)  (9,443)  (15,787)  (17,586)
Income tax (benefit) expense  (64)  (7,452)  40   (7,358)
Income tax expense  71   67   143   71 
Net loss $(8,071) $(484) $(10,085) $(5,113) $(8,128) $(9,510) $(15,930) $(17,657)
BASIC AND DILUTED LOSS PER SHARE:                
Basic and diluted loss per common share $(4.48) $(5.23) $(8.77) $(9.73)
                                
BASIC AND DILUTED LOSS PER SHARE:                
Basic and diluted loss per share $(0.22) $(0.02) $(0.28) $(0.17)
Weighted average number of common shares outstanding – basic and diluted  36,190   31,434   36,181   30,854   1,816   1,818   1,816   1,815 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

4

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

(in thousands)

(unaudited)

 

 Thirteen Weeks Ended  Thirty-nine Weeks Ended 
 October 28, October 29, October 28, October 29,  Thirteen Weeks ended  Twenty-six Weeks Ended 
 2017 2016  2017 2016  August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
                  
Net loss $(8,071) $(484) $(10,085) $(5,113) $(8,128) $(9,510) $(15,930) $(17,657)
                                
Amortization of pension costs  (5)  51   (15)  154 
Amortization of pension gain  5   5   10   10 
                
Comprehensive loss $(8,076) $(433) $(10,100) $(4,959) $(8,123) $(9,505) $(15,920) $(17,647)

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

5

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars and shares in thousands)

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

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

  As of or for the 
  Thirty-nine Weeks Ended 
  October 28, 2017  October 29, 2016 
OPERATING ACTIVITIES:        
Net loss ($10,085) ($5,113)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation of fixed assets  7,558   5,436 
Amortization of intangible assets  2,917   174 
Amortization of lease valuations, net  (12)  - 
Deferred tax benefit  -   (7,502)
Long term incentive compensation  2,314   670 
Adjustment to contingent consideration  (1,437)  - 
Loss on disposal of fixed assets  459   703 
Gain on sale of investments  -   (800)
Increase in cash surrender value  (227)  (790)
Gain on insurance proceeds  (8,733)  - 
Changes in operating assets and liabilities:        
Merchandise inventory  (18,750)  (23,111)
Prepaid expenses and other current assets  2,172   (5,311)
Other assets  (497)  6,359 
Accounts payable  (6,929)  5,281 
Accrued expenses, deferred revenue and other current liabilities  (1,390)  (8,345)
Other long-term liabilities  (1,307)  2,470
Net cash used in operations  (33,947)  (29,879)
         
INVESTING ACTIVITIES:        
Acquisition of a business  -   (36,600)
Purchases of fixed assets  (6,392)  (16,726)
Proceeds from company owned life insurance and SERP death benefits  14,363   - 
Investment in joint venture  (2,575)  - 
Proceeds from sale of investments  -   1,600 
Purchases of investments  -   (500)
Capital distributions from joint venture  632   - 
Net cash provided by (used in) investing activities  6,028   (52,226)
         
FINANCING ACTIVITIES:        
Exercise of long term equity awards  -   39 
Payments to shareholders  (5,000)  - 
Payments of long term borrowings  -   (4,727)
Proceeds from short term borrowings  5,000   5,936 
Purchase of treasury stock  -   (2,646)
Net cash provided by (used in) financing activities  -   (1,398)
         
Net decrease in cash and cash equivalents  (27,919)  (83,503)
Cash, cash equivalents, and restricted cash, beginning of year  44,077   104,311 
Cash, cash equivalents, and restricted cash, end of year $16,158  $20,808 
         
Supplemental disclosures and non-cash investing and financing activities:        
         
Interest paid $200  $523 
         
Fair value of assets acquired, including cash acquired  -   93,152 
Liabilities assumed  -   (24,256)
Net assets acquired  -   68,896 
Less: Contingent consideration not yet paid  -   (10,381)
Less: Fair value of shares issued as consideration  -   (20,415)
Less: Indemnity liability not yet paid  -   (1,500)
Acquisition of a business $-  $36,600 
Issuance of restricted performance based awards / deferred / restricted shares under deferred / restricted stock agreements  -   6,074 
  Twenty-six Weeks Ended 
  August 3,  August 4, 
  2019  2018 
OPERATING ACTIVITIES:        
Net loss $(15,930) $(17,657)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation of fixed assets  1,460   2,563 
Amortization of intangible assets  572   1,944 
Stock-based compensation  154   1,603 
Write down of investment  500   — 
Loss on disposal of fixed assets  5   135 
Change in cash surrender value  (175)  (44)
Changes in operating assets and liabilities that provide (use) cash:        
Accounts receivable  102   (2,040)
Merchandise inventory  5,057   (5,543)
Prepaid expenses and other current assets  1,267   (1,961)
Other long-term assets  3,472   (73)
Accounts payable  (5,285)  (7,580)
Accrued expenses and other current liabilities  (995)  (30)
Deferred revenue  (981)  (1,654)
Other long-term liabilities  (4,185)  (2,607)
Net cash used in operating activities  (14,962)  (32,944)
         
INVESTING ACTIVITIES:        
Purchases of fixed assets  (1,541)  (1,800)
Capital distributions from joint venture  121   1,137 
Net cash used in investing activities  (1,420)  (663)
         
FINANCING ACTIVITIES:        
Proceeds from short term borrowings  12,086   6,341 
Payments to etailz shareholders  —   (1,500)
Net cash provided by financing activities  12,086   4,841 
         
Net decrease in cash, cash equivalents, and restricted cash  (4,296)  (28,766)
Cash, cash equivalents, and restricted cash, beginning of period  14,226   43,506 
Cash, cash equivalents, and restricted cash, end of period $9,930  $14,740 

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

67

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

October 28, 2017August 3, 2019 and October 29, 2016August 4, 2018

 

Note 1. Nature of Operations

 

Trans World Entertainment Corporation and subsidiaries (“the Company”) operates in two reportable segments: fye and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites,www.fye.comandwww.secondspin.com. As of October 28, 2017,August 3, 2019, the fye segment operated 268206 stores totaling approximately 1.51.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature for both segments, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.

 

Liquidity and Cash Flows:

 

The Company’s primary sources of working capitalliquidity are cash provided by operations andits borrowing capacity under its revolving credit facility. The Company’sfacility, available cash flows fluctuateand cash equivalents, and to a lesser extent, cash generated from quarteroperations. Our cash requirements relate primarily to quarter dueworking capital needed to various items,operate our business, including seasonalityfunding operating expenses, the purchase of sales and associated earnings and losses in those periods, timing of merchandise inventory purchases and the related terms of those purchases, as well as merchandise inventory returns and capital expenditures. Management believes itOur ability to achieve profitability and meet future liquidity needs and capital requirements will have adequate resources to fund its cash needsdepend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and changes in our strategy or our planned activities.

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

As disclosed in the Company’s Annual Report on Form 10-K filed May 14, 2019, the Company experienced negative cash flows from operations during fiscal 2018 and 2017, and we expect to continue to incur net losses in the foreseeable future, including itsfuture. We implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiency and conserving working capital spending, its seasonal increaseneeded to support the growth of our etailz segment (the “performance improvement plan”). As a result of the initiative, and disciplined inventory management in merchandise inventorythe fye segment, the Company was able to reduce cash used in operations by $18.0 million for the twenty-six weeks ended August 3, 2019 as compared to the twenty-six weeks ended August 3, 2018. We anticipate continued improvement in cash flows used in operations for the remainder of the fiscal 2019. At August 3, 2019, we had cash and other operating cash requirementsequivalents of $3.6 million, net working capital of $42.3 million, and commitments.short-term borrowings in the amount of $12.1 million on our revolving credit facility, as further discussed in footnote 8. This compares to $4.5 million in cash and cash equivalents, net working capital of $82.1 million, and short-term borrowings in the amount of $6.3 million on the Company’s revolving credit facility at August 4, 2018.

 

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

 

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

8

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

The unaudited condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 2019 were prepared on the basis of a going concern which contemplates that the Company conducted an evaluation aswill be able to whether there were conditionsrealize assets and events, considereddischarge liabilities in the aggregate, which raised substantial doubt asnormal course of business. The ability of the Company to the entity’s abilitymeet its liabilities and to continue as a going concern within one year afteris dependent on improved profitability, the dateperformance improvement plan implemented for the etailz segment and the availability of future funding. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Reverse Stock Split

On August 15, 2019, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-twenty pursuant to a Certificate of Amendment to the Company’s Certificate of Incorporation filed with the Secretary of State of the issuance, orState of New York. The reverse stock split was reflected on the dateNasdaq Capital Market (“Nasdaq”) beginning with the opening of availability,trading on August 15, 2019. The primary purpose of the reverse stock split, which was approved by the Company’s stockholders at the Company’s Annual Stockholders Meeting on June 27, 2019, was to enable the Company to regain compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq. Pursuant to the reverse stock split, every twenty shares of the Company’s issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of the common stock. Unless otherwise indicated, all share and per share amounts of the common stock included in the accompanying interim condensed consolidated financial statements have been retrospectively adjusted to begive effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. Amounts of common stock resulting from the reverse stock split were rounded up to the nearest whole share. The reverse stock split affected all issued noting that there did not appear to be evidence of substantial doubtand outstanding shares of the entity’s ability to continue as a going concern.Company’s common stock, and the respective numbers of shares of common stock underlying outstanding stock options, and the Company’s equity incentive plans were proportionately adjusted.

 

Note 2. Basis of Presentation

 

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

 

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

7

in accordance with U.S. GAAPaccounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.

9

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended January 28, 2017February 2, 2019 contained in the Company’s Annual Report on Form 10-K filed April 13, 2017. May 14, 2019.

The results of operations for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017August 3, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 3, 2018.1, 2020. 

 

TheAs goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a significant accounting policy. With the exception of goodwill, the Company’s significant accounting policies are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal year ended January 28, 2017.

There have been no material changes to the accounting policies applied to our consolidated results and footnote disclosures.February 2, 2019.

 

Note 3. RecentRecently Adopted Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company’s fiscal year beginning February 4, 2018. Based upon our preliminary assessment, we do not expect the adoption of this ASU will have a material impact on our consolidated financial statements. The Company has determined that the adoption of this ASU will impact the timing of revenue recognition for gift card breakage. Gift card breakage is currently recognized at the point gift card redemption becomes remote. In accordance with this ASU, the Company will recognize gift card breakage in proportion to the pattern of rights exercised by the customer. Additionally, the Company has assessed and determined that our revenue recognition practices related to our current vendor-direct sales arrangements, for which the Company is the principal and recorded on a gross basis, will remain unchanged upon adoption. Based upon our preliminary assessment of potential impacts to the presentation of our consolidated financial statements primarily related to sales return reserves, our customer loyalty program, and certain other promotional programs, the Company expects to use a modified retrospective approach upon adoption of this ASU during the first quarter of fiscal 2018. The Company is continuing to evaluate the impact of the ASU’s expanded disclosure requirements upon adoption.

 

In February 2016, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases”, which will replace most existingLeases (Topic 842). Lessees are required to recognize a right-of-use asset and a lease accounting guidanceliability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases result in U.S. GAAP. The core principle of this ASU is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. The new standard requires qualitative and specific quantitative disclosuresstraight-line expense (similar to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. The new standard will be effective for the Company’s fiscal year beginning February 3, 2019, and requires the modified retrospective method of adoption. Early adoption is permitted. The Company is in the process of determining the method and timing of adoption and assessing the impact of ASU 2016-02 on its consolidated financial statements. Given the nature of the operating leases forunder the Company’s home office, distribution center, and stores,prior accounting standard) while finance leases result in a frontloaded expense pattern (similar to capital leases under the Company expects an increase to the carrying value of its assets and liabilities.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment

8

by eliminating step two from the goodwill impairment test whereby a goodwill impairment loss is determined by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Rather, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for the Company in fiscal 2020, applied on a prospective basis, and early adoption is allowed for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which is intended to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost in an entity’s financial statements by requiring the service cost component be disaggregated from other components of net benefit costs and presented in the same line item or items as other compensation costs for the employees. Additionally, only the service cost component of net benefit cost is eligible for capitalization when applicable. ASU 2017-07 is effective for the Company’s fiscal year beginning February 3, 2019, and must be applied retrospectively. ASU 2017-07 is permitted for early adoption, but only at the beginning of an annual period for which financial statements have not been issued or made available for issuance. The Company is currently evaluating the impact that this ASU will have on its reporting and asset recognition.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provided clarity as to what changes to the terms or conditions of share-based payment awards require an entity to apply modificationprior accounting in Topic 718. ASU 2017-09 is effective for the Company for interim and annual periods in fiscal year beginning February 3, 2019, with early adoption permitted and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date.

Note 4. Acquisition and Investment

Business Combination-etailz

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

 

The Company paid $32.3 millionadopted this new accounting standard on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases greater than one year. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward the existing lease classification. The Company does not engage in any Lessor transactions, and as a Lessee, the Company does not have any finance leases. As a result, the new standard had a material impact on the unaudited condensed consolidated balance sheet, but did not materially impact the Company’s consolidated operating results and did not materially impact the Company’s cash issued 5.7 million sharesflows.

The following is a discussion of Trans World Entertainment Corporation stock (TWMC Stock)the Company’s lease policy under the new lease accounting standard:

The Company determines if an arrangement contains a lease at closingthe inception of a contract. Right-of-use assets represent the Company’s right to the shareholders of etailz (the selling shareholders) as considerationuse an underlying asset for the selling shareholders’ ownership,lease term and paid $4.3 million in cash advanceslease liabilities represent the Company’s obligation to settle obligationsmake lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the selling shareholders. Basedremaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and reduced by lease incentives. Leases with an initial term of 12 months or less are not recorded on the fair valueconsolidated balance sheet and lease expense is recognized on a straight-line basis over the term of $3.56 per share of TWMC Stock on the acquisition date, the shares had a value of $20.4 million. An earn-out of up to a maximum of $14.6 million would be payable in fiscal 2018 and fiscal 2019 subject to the achievement by etailz of $6.0 million in operating income in fiscal 2017 and $7.5 million in fiscal 2018 as outlined in the share purchase agreement prior to its amendment as discussed in the following paragraph. In connection with the acquisition,short-term lease.

For real estate leases, the Company assumed the liability of the selling shareholdersaccounts for etailz’s employee retention bonus plan, oflease components and non-lease components as a single lease component. Certain real estate leases require additional payments based on reimbursement for real estate taxes, common area maintenance and insurance, which $1.9 million was dueare expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and payable at closing and funded asinsurance. These fixed payments are considered part of the cash advanceslease payment and the remaining $2.3 million will be earned over a two year service period. The acquisition and related costs were funded primarily from the Company’s cash on hand and short term borrowings under its revolving credit facility. The acquisition was accounted for using the purchase method of accounting.

During the Company’s second quarter, the share purchase agreement with the selling shareholders of etailz was amended to provide that $11.5 million be released from the earnout escrow account and the $3.1 million

9

remaining in the earnout escrow account may be payable in cash to the selling shareholders in 2019, subject to the achievement by etailz of operating income in excess of $15.5 million during the twenty-four month period ending February 2, 2019. In the event that etailz achieves operating income in excess of $13.5 million, but less than $15.5 million, an earnout of $1.6 million would be payable in 2019. If etailz operating income is below $13.5 million, the $3.1 million escrow would be returned to the Company.

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

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

The results of operations of etailz are reported in the Company’s etailz segment and have been included in the consolidated results of operations of the Company from the date of acquisition. The following unaudited pro forma financial information for the thirteenright-of-use assets and thirty-nine weeks ended October 29, 2016, presents consolidated information as if the etailz acquisition had occurred on February 1, 2016. Because of different fiscal period ends, and in order to present results for comparable periods, the unaudited pro forma consolidated financial information for the thirty-nine weeks ended October 29, 2016, combines (i) the Company’s historical statement of operations for the thirty-nine weeks ended October 29, 2016, and (ii) etailz historical statement of income for the period from January 1, 2016 through August 31, 2016 and October 1, 2016 through October 16, 2016. The unaudited pro forma financial information for the thirteen weeks ended October 29, 2016, combines (i) the Company’s historical statement of operations for the thirteen weeks ended October 29, 2016; and (ii) etailz historical statement of income for the period from July 1, 2016 through August 31, 2016 and October 1, 2016 through October 16, 2016. The unaudited pro forma financial information is presented after giving effect to certain adjustments for acquisition-related costs, depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, and related income tax effects. The unaudited pro forma financial information is based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma financial information does not purport to present what the Company’s results of operations would actually have been if the aforementioned transaction had in fact occurred on such date or at the beginning of the period indicated, nor does it project the Company’s financial position or results of operations at any future date or for any future period.lease liabilities.

  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  October 29,
2016		  October 29,
2016		 
         
Pro forma total revenue $90,655  $287,060 
Pro forma net loss  (6,945)  (13,513)
         
Pro forma basic and diluted loss per share $(0.19) $(0.37)
         
Pro forma weighted average number of common shares outstanding – basic and diluted  36,157   36,257 
10

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

On April 11, 2017,

The Company leases its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016, and expires on December 31, 2020. Under the lease, accounted for as an operating lease, the Company entered into an agreement with another partyis responsible for the purpose of acquiring and selling certain retail merchandise. etailz holds a 50% economic interest in the arrangement as of October 28, 2017. The initial cash investment was $2.6 million dollars. During the thirty-nine weeks ended October 28, 2017, the Company received distributionsmonthly payments in the amount of $1.7 million from$103 thousand per month. Under the joint venture, of which $0.7 million was a return of capital and $1.0 million was the Company’s share of joint venture income. The remaining investment of $1.9 million was included in other assets in the interim condensed consolidated balance sheets as of October 28, 2017.

Note 5. Goodwill and Other Intangible Assets

Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excessterms of the purchase price overlease agreement, the fair value of the net tangible and identifiable intangible assets acquired in each business combination.

Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. GoodwillCompany is also responsible for property taxes and other long-lived assets are reviewed for impairment if circumstances indicate thatoperating costs with respect to the carrying amount may not be recoverable.

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

Identifiable intangible assets as of October 28, 2017 consisted of the following (in thousands, except weighted-average amortization period):premises.

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  October 28, 2017
  Amortization
Period
(in months)		  Gross
Carrying
Amount		  Accumulated
Amortization		  Net Carrying
Amount		 
                 
Vendor relationships  120  $19,100  $2,010  $17,090 
Technology  60   6,700   1,403   5,297 
Trade names and trademarks  60   3,200   647   2,553 
      $29,000  $4,060  $24,940 
                 
The changes in net intangibles and goodwill from January 28, 2017 to October 28, 2017 were as follows:
                 
(in thousands)      January 28,
2017		   Amortization   October 28, 2017 
Amortized intangible assets:                
Vendor relationships     $18,522  $1,432  $17,090 
Technology      6,302   1,005   5,297 
Trade names and trademarks      3,033   480   2,553 
Net amortized intangible assets     $27,857  $2,917  $24,940 
                 
Unamortized intangible assets:                
Goodwill     $39,191   -  $39,191 
Total unamortized intangible assets     $39,191   -  $39,191 

Impact of New Lease Standard on Balance Sheet Line Items

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

 

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

Lease Cost

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

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

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

Lease term and discount rate are as follows:

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

Other information:

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

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

(amounts in thousands)   
    
2019 $24,426 
2020  8,393 
2021  5,239 
2022  1,881 
2023  1,137 
Thereafter  1,060 
Total minimum lease payments $42,136 
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Note 4. Intangible Assets

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

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

Identifiable intangible assets as of August 3, 2019 consisted of the following:

  August 3, 2019 
(amounts in thousands) Weighted
Average
Amortization
Period
(in months)		 Original
Gross
Carrying
Amount		  Accumulated
Impairment		  Accumulated
Amortization		  Net Carrying
Amount		 
                   
Vendor relationships 120 $19,100  $13,822  $4,456  $822 
Technology 60  6,700   2,587   3,272   841 
Trade names and trademarks 60  3,200   —   1,767   1,433 
    $29,000  $16,409  $9,495  $3,096 
                   
The changes in net intangibles from February 2, 2019 to August 3, 2019 were as follows: 
                   
(amounts in thousands)   February 2,
2019		  Impairment
Expense		  Amortization
Expense		  August 3,
2019		 
                   
Amortized intangible assets:                  
Vendor relationships   $880  $—  $58  $822 
Technology    1,035   —   194   841 
Trade names and trademarks    1,753   —   320   1,433 
Net amortized intangible assets   $3,668  $—  $572  $3,096 
         
Amortization expense of intangible assets for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 consisted of the following:
         
    Thirteen Weeks Ended  Twenty-six Weeks Ended 
(amounts in thousands)   August 3,
2019		  August 4,
2018		  August 3,
2019		  August 4,
2018		 
                   
Amortized intangible assets:                  
Vendor relationships   $29  $477  $58  $954 
Technology    97   335   194   670 
Trade names and trademarks    160   160   320   320 
Total amortization expense   $286  $972  $572  $1,944 
14

Estimated amortization expense for the remainder of fiscal 20172019 and the five succeeding fiscal years and thereafter is as follows:

 

Year Annual
Amortization		 
( in thousands)   
2017 $971 
2018  3,890 
2019  3,890 
2020  3,890 
2021  3,325 
2022  1,910 
Thereafter  7,064 
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Year Annual
Amortization		 
(amounts in thousands)    
2019 $572 
2020  1,143 
2021  847 
2022  115 
2023  115 
2024  115 
Thereafter  189 

Note 6.5. Depreciation and Amortization

Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations isfor the thirteen weeks ended August 3, 2019 and August 4, 2018 was $1.1 million and $2.3 million, respectively. Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the twenty-six weeks ended August 3, 2019 and August 4, 2018 was $2.0 million and $4.5 million, respectively. The decrease was primarily due to a $4.1 million net decrease in carrying value of fixed assets and a $16.4 million net decrease in carrying value of intangible assets, resulting from impairment charges recorded during the fourth quarter of fiscal 2018. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as follows:of and for the year ended February 2, 2019.

  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  October 28,  October 29,  October 28,  October 29, 
  2017  2016  2017  2016 
  (in thousands)  (in thousands) 
Cost of sales $163  $104  $474  $301 
Selling, general and administrative expenses  3,425   2,222   9,989   5,309 
Total $3,588  $2,326  $10,463  $5,610 

15

Note 7.6. Segment Data

 

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

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

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

Note 7. Restricted Cash

As of August 3, 2019, the Company had restricted cash of $1.0 million and $5.3 million reported in current assets and other assets on the accompanying condensed consolidated balance sheet, respectively. As of August 4, 2018, the Company had restricted cash of $4.1 million and $6.1 million reported in current assets and other assets on the accompanying condensed consolidated balance sheet, respectively. The decrease in these restricted cash balances during the twenty-six weeks ended August 3, 2019, was primarily due to the return of the $3.2 million earn-out escrow balance to the Company as a result of the etailz are includedsegment not achieving the earnings target, as described in the consolidated results for all periods presented for fiscal 2017. For periods presented for fiscal 2016, results foramended etailz are included in consolidated results from October 17, 2016 through October 29, 2016.acquisition share purchase agreement.

 

  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
(in thousands) October 28, 2017  October 29, 2016  October 28, 2017  October 29, 2016 
Total Revenue                
fye $52,105  $62,457  $176,006  $202,535 
etailz  40,896   3,824  $121,440  $3,824 
Total Company $93,001  $66,281  $297,446  $206,359 
                 
Gross Profit                
fye $21,347  $25,932  $73,342  $83,459 
etailz  10,234   940   29,714   940 
Total Company $31,581  $26,872  $103,056  $84,399 
                 
Loss From Operations                
fye $(7,858) $(5,083) $(17,703) $(10,291)
etailz  (253)  (2,725)  (966)  (2,725)
Total Company $(8,111) $(7,808) $(18,669) $(13,016)
                 
Total Assets                
fye         $186,869  $222,362 
etailz          102,077   90,887 
Total Company         $288,946  $313,249 

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

1316

Note 8. Restricted Cash

As of October 28, 2017 and October 29, 2016, the Company had restricted cash of $12.2 million and $16.1 million, respectively.

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

In addition, as a result of the death of its former Chairman, the Company received $7.5 million which is held in a rabbi trust and was classified as restricted cash on the accompanying condensed consolidated balance sheet as of October 28, 2017.

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

 

 October 28, January 28, October 29,  August 3, February 2, August 4, 
 2017  2017  2016  2019  2019  2018 
Cash and cash equivalents $3,924  $27,974  $4,708  $3,635  $4,355  $4,477 
Restricted cash  12,234   16,103   16,100   6,295   9,871   10,263 
Total cash, cash equivalents and restricted cash $16,158  $44,077  $20,808  $9,930  $14,226  $14,740 

 

Note 9. Line of Credit8. Short Term Borrowings

 

In January 2017, the Company entered into a $50 million asset basedamended and restated its revolving credit facility (“Credit Facility”) which amended. The Credit Facility provides for commitments of $50 million subject to increase up to $75 million during the previous credit facility.months of October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on merchandisereceivables and inventory levels. The principal amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company. The Credit Facility contains a provision to increase availability up to $75 million during October to December of each year, as needed. During the third quarter of fiscal 2017,2018, the Company exercised the right to increase its availability to $60 million subject to the same limitations noted above.

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment.

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

 

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 2.25%1.75% to 2.75%2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.25%1.00%. In addition, a commitment fee ranging from 0.375% to 0.50%of 0.25% is also payable on unused commitments.

 

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrenceAs of additional indebtedness and acquisitions, covenants around the net number of store closings, and restrictions related to the payment of cash dividends, including limiting the amount of dividends and share repurchases to $5.0 million annually and not allowingAugust 3, 2019, borrowings under the amended facilityCredit Facility were $12.1 million as compared to $6.3 million as of August 4, 2018. The Company had $16.1 million available for the six months before or six months after the dividend payment.borrowing as of August 3, 2019.

 

As of October 28, 2017,August 3, 2019, the Company did not have any outstanding letters of credit. As of August 4, 2018, the Company had $5.0$1.1 million in outstanding letters of credit related to an import purchase.

The Company records short term borrowings underat cost, in which the revolving credit facility and $49.0 million was available for borrowing. As of October 29, 2016, the Company had $5.9 million in outstanding borrowings under the revolving credit facility and $53.7 million was available for borrowing. The weighted average interest rate on total, LIBO Rate and Prime Rate, outstanding borrowings for the thirteen week period ended October 28, 2017 and October 29, 2016 was 2.69% and 3.73%, respectively.carrying value approximates fair value due to its short term maturity.

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Note 10.9. Stock Based Compensation

 

As of October 28, 2017,August 3, 2019, there was approximately $0.9 million$435 thousand of unrecognized compensation cost related to stock option awards that iscomprised of the following: $330 thousand was related to stock option awards listed in the table below and expected to be recognized as expense over a weighted average period of 2.79 months, and $105 thousand was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 3.1 years.

 

As of October 28,The Company has outstanding awards under three employee stock award plans, the 2005 Long Term Incentive and Share Award Plan, the Amended and Restated 2005 Long Term Incentive and Share Award Plan (the “Old Plans”); and the 2005 Long Term Incentive and Share Award Plan (as amended and restated April 5, 2017 (the “New Plan”). Collectively, these plans are referred to herein as the Stock Award Plans. Additionally, the Company had a stock award plan for non-employee directors (the “1990 Plan”). The Company no longer issues stock options under the Old Plans or the 1990 Plan.

Equity awards authorized for issuance under the Company’s current long term equity incentive plans totaled 5.0 million shares. There are certain authorized stock awards for whichNew Plan total 250 thousand. As of August 3, 2019, of the Company no longer grants awards. Of these awards authorized for issuance 2.6 million sharesunder the Stock Award Plans, approximately 130 thousand were granted and are outstanding, 1.5 million shares102 thousand of which were vested and exercisable. AwardsShares available for future grants at October 28, 2017 were 5.0 million shares.

The table below outlines the assumptions that the Company used to estimate the fair value of stockoptions and other share based awards granted duringunder the thirty-nine weeks ended October 28, 2017:New Plan at August 3, 2019 were 219 thousand.

Dividend yield0%
Expected stock price volatility40.0%-40.6%
Risk-free interest rate1.74%-1.83%
Expected award life (in years)5.64-5.71
Weighted average fair value per share of awards granted during the period$0.74

 

The following table summarizes stock award activity during the thirty-ninetwenty-six weeks ended October 28, 2017:August 3, 2019:

 

  Number of
Shares
Subject
To Option		 Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contractual
Term		 Other
Share
Awards (1)		 Weighted
Average
Grant Fair
Value
Balance January 28, 2017  2,459,564  $3.58   7.3   170,927  $3.87 
Granted  620,000   1.84   -   65,000   1.85 
Forfeited  (288,750)  3.07   -   -   - 
Cancelled  (164,150)  5.43   -   (5,000)  3.53 
Exercised  -   -   -   (52,500)  3.50 
Balance October 28, 2017  2,626,664  $3.11   7.2   178,427  $3.26 
                     
Exercisable October 28, 2017  1,361,164  $3.32   5.8   63,427  $4.50 
  Employee and Director Stock Award Plans 
  Number of
Shares
Subject To
Option		  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		  Other
Share
Awards(1)		  Weighted
Average
Grant Fair
Value		 
Balance February 2, 2019  138,921  $55.00   5.8   13,571  $33.60 
Granted  —   —   —   —   — 
Cancelled/Forfeited  (8,975)  —   —   —   — 
Exercised  —   —   —   (2,064)  30.76 
Balance August 3, 2019  129,946  $54.79   5.2   11,507  $34.19 
Exercisable August 3, 2019  102,196  $59.68   4.4   6,132  $52.38 

 

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

 

As of October 28, 2017, the intrinsic value ofAugust 3, 2019, all stock awards outstanding was approximately $1 thousand. Alland exercisable options had an exercise price below the closing stock price as of October 28, 2017.

In connection with the acquisition of etailz, the Company issued 1,572,552 restricted shares of Company stock to a key etailz employee, with a grant date fair valueprice higher than the market price of $3.56 per share. These shares vest ratably through January 2019. As of October 28, 2017, the Company recognized $2.6 million of compensation cost related to these shares, of which $1.9 million was recorded in fiscal 2017. As of October 28, 2017, there was approximately $3.0 million of unrecognized compensation cost related to these restricted shares that is expected to be recognized as expense over the next 15 months.stock and had no intrinsic value.

15

Note 11.10. Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss that the Company reports in the condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan. Comprehensive loss consists of net loss and the amortization of pension costs (gain) associated with Company’s defined benefit plan for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017August 3, 2019 and October 29, 2016.August 4, 2018.

 

Note 12.11. Defined Benefit Plan

 

The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for a limited number of executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. During the thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.2 million in benefits relating to the SERP during fiscal 2017.2019.

18

The measurement date for the SERP is the fiscal year end, using actuarial techniques which reflect estimates for mortality, turnover and expected retirement. In addition, management makes assumptions concerning future salary increases. Discount rates are generally established as of the measurement date using theoretical bond models that select high-grade corporate bonds with maturities or coupons that correlate to the expected payouts of the applicable liabilities.

 

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

 

  Thirteen Weeks Ended Thirty-nine Weeks Ended
  October 28, October 29, October 28, October 29,
  2017  2016  2017  2016 
  (in thousands) (in thousands)
Service cost $16  $15  $48  $45 
Interest cost  139   137   417   411 
Amortization of prior service costs  4   55   12   166 
Amortization of net gain(1)  (9)  (4)  (27)  (12)
Net periodic pension cost $150  $203  $450  $610 

  Thirteen Weeks Ended  Twenty-six Weeks Ended 
  August 3,  August 4,  August 3,  August 4, 
(amounts in thousands) 2019  2018  2019  2018 
       
Service cost $14  $14  $28  $28 
Interest cost  142   140   284   280 
Amortization of net gain(1)  (5)  (5)  (10)  (10)
Net periodic pension cost $151  $149  $302  $298 
(1)The amortization of net gain is related to a director retirement plan previously provided by the Company.

 

Note 13.12. Basic and Diluted Loss Per Share

 

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

 

For the thirteen and thirty-ninetwenty-six week periods ended October 28, 2017August 3, 2019 and October 29, 2016,August 4, 2018, the impact of all outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Total anti-dilutive stock awards for both,the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019 were approximately 2.6 million130 thousand shares, as

16

compared to 1.9 million155 thousand shares and 1.8 million145 thousand shares, respectively, for the thirteen and thirty-ninetwenty-six weeks ended October 29, 2016.August 4, 2018. See note 1 in the interim condensed consolidated financial statements for information on the reverse stock split effected by the Company during the current reporting period.

 

Note 14.13. Income Taxes

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based on available objective evidence, management concluded that a full valuation allowance should continue to be recorded against the Company’s deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable income in its conclusion of the need for a full valuation allowance. Any reversal of the Company’s valuation allowance will favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future. The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending February 3, 2018.1, 2020. The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of January 28, 2017,February 2, 2019, the Company had a net operating loss carry forward of $181.4$253.5 million for federal income tax purposes and approximately $243$289.0 million for state income tax purposes that expire at various times through 20362038 and are subject to certain limitations and statutory expiration periods. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.

19

Note 15.14. Commitments and Contingencies

 

Legal Proceedings

 

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

Loyalty Memberships and Magazine Subscriptions Class Action

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

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

 

Store Manager Class Actions

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

Specifically, Carolactions. The first, Spack filed a complaint againstv. Trans World Entertainment Corporation (Trans World)Corp. was originally filed in the United States District Court, District of New Jersey, on April 20, 2017 (Case No.: 3:17-cv-02687-BRM-LHG) alleging(the “Spack Action”). The Spack Action alleges that she is entitled to unpaid compensation for overtime under the federal Fair Labor Standards Act (FLSA). She brings a nationwide collective action under the FLSA on behalf of allCompany misclassified Store Managers and(“SMs”) as exempt nationwide. It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers. SheManagers “SAMs” nationwide, and that both SMs and SAMs worked “off-the-clock.” It also brings class action claims underalleges violations of New Jersey and Pennsylvania law on behalf of all persons who worked as Store Managers in New Jersey or Senior Assistant Managers in Pennsylvania.

On May 19, 2017, NatashaState Law with respect to calculating overtime for SAMs. The second, Roper filed a complaint againstv. Trans World Entertainment Corp., was filed in the U.S. District Court for the Northern District of New York, (Case No.: 1:17-cv-0553-TJM-CFH) in which sheMay 2017 (the “Roper Action”). The Roper Action also alleges that she is entitled to unpaid compensation for overtime under the FLSA. Ms. Roper bringsasserts a nationwide collective action under the FLSAmisclassification claim on behalf of all similarly situated Store Managers. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.

Plaintiffs moved for conditional certification of a collective of SMs in June 2018, and that motion was partially granted in January 2019. The opt-in period for the collective that was certified was closed on April 6, 2019. Opt-in discovery relating to that potential collective has commenced.The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to vigorously defend the action.

1720

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

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

Results of Operations

October 28, 2017August 3, 2019 and October 29, 2016August 4, 2018

 

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships, general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the fiscal year ended January 28, 2017.February 2, 2019.

 

The Company operates in two reportable segments: fye and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites,www.fye.comandwww.secondspin.com. As of October 28, 2017,August 3, 2019, the fye segment operated 268206 stores totaling approximately 1.51.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. fye stores offer predominantly entertainment products. The etailz segment is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature for both segments, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.

 

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

 

Net salesSales and comparable store net sales:Comparable Store Net Sales: The fye segment measures and reports the rate of change in comparable store net sales.sales change. A store is included in comparable store net sales calculations at the beginning of its thirteenth full month of operation. Stores relocated/relocated, expanded or downsized are excluded from comparable store net sales if the change in square footage is greater than 20%. until the thirteenth full month following relocation, expansion or downsizing. Closed stores that were open for at least thirteen months are included in comparable stores netstore sales through the month immediately preceding the month of closing. Stores that are temporarily closed are excluded from the calculation of comparable stores sales for the applicable periods in the year of closure and the subsequent year. Included in comparable store net sales are sales from the fye segment websites. The fye segment further analyzes net sales by store format and by product category. The etailz segment measures total year over year performance in net sales.sales growth by product category and evaluates product sales by supplier.

18

Cost of Sales and Gross Profit: Gross profit is calculated based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by thenet sales levels, mix of products sold, byvendor discounts negotiated with vendors, discounts offered to customers, and fulfillment fees paid to Amazon. The Company records itsallowances, shrinkage, obsolescence and distribution and product shrink expenses in cost of sales.costs. Distribution expenses include those costs associated with receiving, shipping, inspecting and& warehousing productmerchandise, Amazon fulfillment fees, and costs associated with product returns to vendors. Warehousing cost of sales also includes obsolescence costs and is reduced by the benefit of vendor allowances, net of direct reimbursements of expense.

 

Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, Amazon commissions, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations, as disclosed in Note 6 to the condensed consolidated financial statements). Selling, general and administrativecharges. SG&A expenses also include fixed asset write offsassets write-offs associated with store closures, and change in square footage, if any, gift card breakage, and etailz related amortizationmiscellaneous income and compensation costs.expense items, other than interest.

 

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

1921

RESULTS OF OPERATIONS

 

Thirteen and Thirty-nineTwenty-six Weeks Ended October 28, 2017August 3, 2019

Compared to the Thirteen and Thirty-nineTwenty-six Weeks Ended October 29, 2016August 4, 2018

 

Segment Highlights:Highlights(amounts in thousands):

etailz results included in

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

(1) For the tables below are for the period when etailz was acquired, therefore, etailz results are only included in the thirteen and thirty-nine13 weeks ended October 28, 2017.

  Thirteen Weeks Ended Thirty-nine Weeks Ended
  October 28, 2017 October 29, 2016 October 28, 2017 October 29, 2016
Total Revenue                
fye $52,105  $62,457  $176,006  $202,535 
etailz  40,896   3,824   121,440   3,824 
Total Company $93,001  $66,281  $297,446  $206,359 
                 
Gross Profit                
fye $21,347  $25,932  $73,342  $83,459 
etailz  10,234   940   29,714   940 
Total Company $31,581  $26,872  $103,056  $84,399 
                 
Loss From Operations                
fye $(7,858) $(5,083) $(17,703) $(10,291)
etailz  (253)  (2,725)  (966)  (2,725)
Total Company $(8,111) $(7,808) $(18,669) $(13,016)
                 
Reconciliation of etailz Loss from Operations to etailz Adjusted Income (Loss) from Operations
etailz loss from operations $(253) $(2,725) $(966) $(2,725)
Acquisition related transaction expenses  -   2,228   -   2,228 
Acquisition related amortization and compensation expenses (1)  2,087  $303   4,613   303 
etailz adjusted income (loss) from operations (2) $1,834  $(194) $3,647  $(194)

(1)AcquisitionAugust 3, 2019, acquisition related expenses for the thirteen weeks ended October 28, 2017 consisted of amortization expense of intangible assets of $1 million and compensation expense of $1.1 million. Acquisition$286 thousand. For the 26 weeks ended August 3, 2019, acquisition related expenses for the thirty-nine weeks ended October 28, 2017 consisted of amortization expense of intangible assets of $2.9 million$572 thousand and compensation expense of $3.1million, net$66 thousand. For the 13 weeks ended August 4, 2018, acquisition related expenses consisted of a $1.4 million benefit resulted from a contingent consideration liability adjustment.

amortization expense of intangible assets of $972 thousand and compensation expense of $1,118 thousand. For the 26 weeks ended August 4, 2018, acquisition related expenses consisted of amortization expense of intangible assets of $1,944 thousand and compensation expense of $2,240 thousand.

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

 

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

 

 Thirteen Weeks Ended Change Thirty-nine Weeks Ended Change Thirteen Weeks Ended Change     Twenty-six Weeks Ended  Change    
(amounts in thousands) August 3,
2019		 August 4,
2018		 $  %  Comp
Store Net
Sales		  August 3,
2019		 August 4,
2018		  $  %  Comp
Store Net
Sales		 
 October 28,
2017		 October 29,
2016		 $ % October 28,
2017		 October 29,
2016		 $ %                     
(in thousands)                 
fye revenue $52,105  $62,457  $(10,352)  -16.6% $176,006  $202,535  $(26,529)  -13.1% $41,744  50,545 $(8,801)  -17.4%  -1.2% $86,762  104,608  $(17,846)  -17.1%  -0.6%
etailz revenue  40,896   3,824   37,072   n/a   121,440   3,824   117,616   n/a   34,260  51,629  (17,369)  -33.6%      69,392  94,169   (24,777)  -26.3%    
Total revenue $93,001  $66,281  $26,720   40.3% $297,446  $206,359  $91,087   44.1% $76,004 $102,174 $(26,170)  -25.6%     $156,154 $198,777  $(42,623)  -21.4%    

 

Total revenue increased 40.3%decreased 25.6% and 44.1%21.4% for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017August 3, 2019 as compared to the same period last year. The increase was driven by $40.9 million and $121.4 million in revenue for the thirteen and thirty-nine weeks ended October 28, 2017 as a result of the acquisition of etailz in October 2016, which offsets the decline in fye revenue.

2022

fye Segment

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

 

 Thirteen Weeks Ended Change    Thirty-nine Weeks Ended Change    Thirteen Weeks Ended  Change     Twenty-six Weeks Ended  Change    
(amounts in thousands,
except store count)		(amounts in thousands,
except store count)		August 3,
2019		  August 4,
2018		  $  %  Comp
Store Net
Sales		  August 3,
2019		  August 4,
2018		  $  %  Comp
Store Net
Sales		 
 October 28,
2017		 October 29,
2016		 $ % Comp
Store Net
Sales		 October 28,
2017		 October 29,
2016		 $ % Comp
Store Net
Sales		                     
(in thousands, except store data)
fye net sales $50,921   61,215  $(10,294)  -16.8%  -11.0% $172,042   199,303  $(27,261)  -13.7%  -8.0% $40,892   49,410  $(8,518)  -17.2%  -1.2% $85,116   102,102  $(16,986)  -16.6%  -0.6%
Other revenue  1,184   1,242   (58)  (4.7%)      3,964   3,232   732   22.6%      852   1,135   (283)  -24.9%      1,646   2,506   (860)  -34.3%    
Total revenue $52,105  $62,457  $(10,352)  -16.6%     $176,006  $202,535  $(26,529)  -13.1%     $41,744  $50,545  $(8,801)  -17.4%     $86,762  $104,608  $(17,846)  -17.1%    
                                                                                
As a % of fye net sales                                        As a % of fye net sales                              
                                        
Lifestyle  38.0%  32.3%          0.2%  35.4%  28.6%          9.2%
Trend / Lifestyle  46.8%  40.9%          9.6%  44.7%  39.3%          9.5%
Video  32.3%  35.2%          -15.4%  32.9%  37.3%          -15.8%  24.3%  29.0%          -16.1%  26.4%  30.5%          -11.6%
Music  18.9%  21.7%          -23.0%  20.4%  23.8%          -20.6%  17.5%  18.4%          -7.8%  17.7%  18.5%          -3.9%
Electronics  10.4%  10.1%          -4.3%  10.8%  9.4%          4.3%  11.4%  11.7%          -0.1%  11.2%  11.7%          -2.3%
Video Games  0.4%  0.7%          -41.0%  0.5%  0.9%          -43.9%
                                                                                
Store Count:                      268   294   (26)  -8.8%                          206   241   (35)  -14.5%    
Total Square footage (in thousands)            1,491   1,649   (158)  -9.6%    
                                        
Total Square footage                      1,145   1,339   (194)  -14.5%    

 

Netfye net sales. Net sales decreased 16.8%17.2% and 13.7%16.6% during the thirteen weeks and thirty-ninetwenty-six weeks ended October 28, 2017, respectively,August 3, 2019 as compared to the same period last year. The decline in net sales resulted from an 8.8%a 14.5% decline in total stores in operation for the thirty-nine weeks ended October 28, 2017 as compared to the same period last year, and an 11.0%a 1.2% and 8.0%0.6% decline in comparable store net sales for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively.

Trend/Lifestyle:

Comparable store net sales in the trend/lifestyle (trend) category increased 0.2%9.6% and 9.5% during the thirteen and twenty-six weeks ended October 28, 2017. During the thirty-nine weeks ended October 28, 2017, August 3, 2019, respectively. Trend/lifestyle category increased 9.2%. Lifestyle products represented 38.0%46.8% and 35.4%44.7% of total net sales for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively, compared to 32.3%40.9% and 28.6%39.3% in the comparable periods last year. The Company is focused on identifying, creatingcontinues to take advantage of opportunities to strengthen its selection and delivering merchandise that differentiates its customer experience and brand with unique and engaging products.

Media Categories:

Media categories, which consist of Video and Music, continue to experience industry wide declines due to non-physical options. As a result, the fye segment is shifting itsshift product mix to growing categories of entertainment and pop culture related merchandise, which is categorized as Lifestyle.entertainment-related merchandise.

Video:

Comparable store sales in the video category decreased 15.4%16.1% and 15.8%11.6% during the thirteen and thirty-ninetwenty-six week periods ended October 28, 2017,August 3, 2019, respectively. The video category represented 32.3%24.3% and 32.9%26.4% of total net sales for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively, compared to 35.2%29.0% and 37.3%30.5% in the comparable periods last year.year due to continued industry-wide decline in physical media sales.

 

Music:

During the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, music sales in comparable stores decreased 23.0%7.8% and 20.6%3.9%, respectively, versus the thirteen and thirty-ninetwenty-six weeks ended October 29, 2016.August 4, 2018. The music category represented 18.9%17.5% and 20.4%17.7% of total net sales for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively, compared to 21.7%18.4% and 23.8%18.5% for the thirteen and thirty-ninetwenty-six weeks ended October 29, 2016.August 4, 2018 due to continued industry-wide decline in physical media sales.

21

 

Electronics:

Comparable store net sales in the electronics category decreased 4.3%0.1% and increased 4.3%2.3% during the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017, respectively due to lower average retail prices.August 3, 2019, respectively. Electronics net sales represented 10.4%11.4% and 10.8%11.2% of total net sales for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 4, 2019, respectively, compared to 10.1%11.7% of total net sales for both the thirteen and 9.4%twenty-six weeks in the comparable periods last year.

23

Other Revenue.Other revenue, which was primarily related to commissions and fees earned from third parties for the fye segment, was approximately $1.2$0.9 million and $4.0$1.6 million for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively, compared to $1.2$1.1 million and $3.2$2.5 million in the comparable periods last year. The decline in other revenue was primarily due to lower number of stores in operation.

 

etailz Segment

etailz reported $40.9sales of $34.3 million and $121.4$69.4 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively compared to $51.6 million and $94.2 million sales for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017, respectively.August 4, 2018. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the twenty-six weeks ended August 3, 2019, etailz sold approximately 25,000 SKUs from approximately 1,500 suppliers, compared to approximately 31,000 SKUs from approximately 2,200 suppliers during the twenty-six weeks ended August 4, 2018. The decline in sales was attributable to the vendor remediation performance improvement plan which was implemented during the fourth quarter of 2018 for the etailz segment, as discussed in Note 1 to the interim condensed consolidated financial statements.

22

Gross Profit.The following table sets forth a year-over-year comparison of the Company’s gross profit:Gross Profit:

 

 Thirteen Weeks ended Thirty-nine Weeks Ended Thirteen Weeks Ended  Change  Twenty-six Weeks Ended  Change 
     Change     Change
 October 28,
2017		 October 29,
2016		 $ % October 28,
2017		 October 29,
2016		 $ %
(amounts in thousands) August 3,
2019		  August 4,
2018		  $  %  August 3,
2019		  August 4,
2018		  $  % 
 (in thousands)     (in thousands)                     
fye gross profit $21,347  $25,932  ($4,585)  -17.7% $73,342  $83,459  ($10,117)  -12.1% $17,013  $20,634  $(3,621)  -17.5% $34,515  $42,905  $(8,390)  -19.6%
etailz gross profit  10,234   940  $9,294   n/a   29,714   940  $28,774   n/a   8,103   11,539   (3,436)  -29.8%  15,991   20,956   (4,965)  -23.7%
Total gross profit $31,581  $26,872  $4,709   17.5% $103,056  $84,399  $18,657   22.1% $25,116  $32,173  $(7,057)  -21.9% $50,506  $63,861  $(13,355)  -20.9%
                                
fye gross profit as a % of fye revenue  41.0%  41.5%          41.7%  41.2%          40.8%  40.8%          39.8%  41.0%        
etailz gross profit as a % of etailz revenue  25.0%  24.6%          24.5%  24.6%          23.7%  22.3%          23.0%  22.3%        
Total gross profit as a % of total revenue  34.0%  40.5%          34.6%  40.9%          33.0%  31.5%          32.3%  32.1%        

 

Gross profit increased 17.5%decreased 21.9% to $31.6$25.1 million for the thirteen weeks ended October 28, 2017August 3, 2019 compared to $26.9$32.2 million for the thirteen weeks ended October 29, 2016.August 4, 2018. For the thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, gross profit increased 22.1%decreased 20.9% to $103.1$50.5 million compared to $84.4$63.9 million for the comparable period last year. The increase in gross profit is primarily the result of the acquisition of etailz in October 2016, which offset the decline in fye gross profit.

 

fye Segment

Total

fye gross profit as a percentage of total revenue for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017August 3, 2019 was 41.0%40.8% and 41.7%39.8%, respectively, compared to 41.5%40.8% and 41.2%41.0% for the comparable periods last year.

 

etailz Segment

etailz reported gross profit of $10.2 million and $29.7 million for the thirteen and thirty-nine weeks ended October 28, 2017. etailz gross profit as a percentage of total revenue was 25.0% and 24.5% for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017, respectively.August 3, 2019 was 23.7% and 23.0%, respectively, compared to 22.3% for both the thirteen and twenty-six weeks for the comparable periods last year. The increase in the gross profit rate was a result of the performance improvement plan implemented during the fourth quarter of 2018. See Note 1 for the description of the etailz segment performance improvement plan.

24

 

SG&A Expenses.The following table sets forth a period over period comparison of the Company’s SG&A expenses:

23
  Thirteen Weeks ended Thirty-nine Weeks Ended
        Change        Change
  October 28,
2017		 October 29,
2016		 $ % October 28,
2017		 October 29,
2016		 $ %
  (in thousands)        (in thousands)       
fye SG&A, excluding depreciation, amortization, and acquistion related transaction costs $26,790  $28,968  $(2,178)  -7.5% $84,102  $88,616  ($4,514)  -5.1%
As a % of total FYE revenue  51.4%  46.4%      5.0%  47.8%  43.8%      4.0%
                                 
etailz SG&A, excluding depreciation, amortization, and acquistion related compensation expenses  9,225   959   8,266   n/a   26,964   959   26,005   n/a 
etailz acquisition related compensation expenses,  net of a contingency adjustment  1,118   303   815   n/a   1,708   303   1,405   n/a 
                                 
Depreciation and amortization  3,425   2,222   1,203   54.1%  9,989   5,309   4,680   88.2%
etailz acquisition related transaction costs  -   2,228   (2,228)  n/a   -   2,228   (2,228)  n/a 
                                 
Total SG&A $40,558  $34,680  $5,878   16.9% $122,763  $97,415  $25,348   26.0%
                                 
As a % of total revenue  43.6%  52.3%          41.3%  47.2%        

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

 

SG&A expenses increased $5.9decreased $9.0 million and $15.9 million for the thirteen and twenty-six weeks ended October 28, 2017 due to expenses for etailz, acquisition related compensation expenses, and higher depreciation and amortization expenses, offset slightly by lower fye expenses. SG&A expenses increased $25.3 million for the thirty-nine weeks ended October 28, 2017 due to expenses for etailz, acquisition related compensation expenses, and higher depreciation and amortization expenses, offset slightly by lower fye expenses, and a benefit recorded to the Company’s contingent consideration.August 3, 2019, respectively.

 

fye Segment

fye SG&A, excluding depreciation and amortization and acquisition related transaction costsexpenses, decreased $2.2$3.1 million, or 7.5%11.7%, and $4.5$6.5 million, or 5.1%12.4%, for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively. As a percentage of fye revenue, SG&A expenses excluding depreciation, amortization, and acquisition related transaction costsin the fye segment for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017August 3, 2019 were 51.4%55.2% and 47.8%53.1%, respectively, compared to 46.4%51.6% and 43.8%50.3% for the same periodperiods last year. The decline in SG&A expenses was due to lower sales primarily as a result of fewer stores in operation. The increase in the rateSG&A expenses as a percentage of revenue was primarily due to the comp sales declinean increase in outside consulting and expenses to support the upgrading of the Company’s digital and data capability, including the re-platforming of fye.com.professional fees.

 

etailz Segment

etailz reported SG&A, excluding depreciation and amortization and acquisition related compensation expenses, of $9.2decreased $4.8 million and $27.0$6.9 million for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 3, 2019 were 24.6% and 25.1%, respectively, whichcompared to 25.5% and 25.8% for the same periods last year. The decrease was primarily includes commission fees and payroll costs.due to expense reduction initiatives implemented in the fourth quarter of 2018.

 

Depreciation and Amortization.amortization.Consolidated depreciation and amortization expense increaseddecreased $1.2 million and $4.7$2.5 million for the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017, respectively. Amortization of intangibles, as described in Note 5 to the condensed consolidated financial statements, increased $0.8 million and $2.8 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Depreciation expense increased $0.4 million and $1.9 million for the thirteen and thirty-nine weeks ended October 28, 2017,August 3, 2019, respectively, primarily due to the fye segment’s investments$29.1 million net decrease in technology enhancements, newcarrying value of fixed assets and remodeled stores and the chain wide rollout of new marketplace fixtures to supportintangible assets, resulting from impairment charges recorded for the fye segment’s shiftsegment, during the fourth quarter of fiscal 2018. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in merchandising assortmentthe Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019.

Interest Expense. Interest expense was $194 thousand and $326 thousand during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Interest expense consisted primarily of interest payments resulted from media categoriesborrowings under the Company’s credit facility and unused commitment fees. Interest expense during the thirteen and twenty-six weeks ended August 4, 2018 was $103 thousand and $166 thousand, respectively. The increase in interest expense was due to its lifestyle category.borrowings under the credit facility as discussed in Note 8 to the interim condensed consolidated financial statements.

2425

Other Loss (Income). As of August 3, 2019, other loss (income) consisted of the following:

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

Income from Joint Venture.etailz segment is a party to a Joint Venture Agreement as described in Note 4 to the Company’s condensed consolidated financial statements. Income from the joint venture was $866 thousand and $1,038 thousand for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.

InterestTax Expense.Interest expense was $83 thousand and $200 thousand during the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Interest expense consisted primarily of unused commitment fees and the amortization of fees related to the Company’s credit facility. Interest expense during the thirteen and thirty-nine weeks ended October 29, 2016 was $179 thousand and $523 thousand, respectively. The reduction in interest expense was due to lower commitment fees and lower interest rates resulted from the amendment of the credit facility as discussed in Note 9 to the interim condensed consolidated financial statements.

Gain (Loss) on Insurance Proceeds.The gain on insurance proceeds related to the death of the Company’s former Chairman was $8.7 million during the thirty-nine weeks ended October 28, 2017, which consisted of an $8.8 million gain recorded during the first fiscal quarter of 2017 and a loss of $129 thousand recorded during the second fiscal quarter of 2017.

Other Income. Other income was $59 thousand and $91 thousand during the thirteen and thirty-nine weeks ended October 28, 2017, respectively, compared to $51 thousand and $1.1 million for the same periods last year. Other income for the thirty-nine weeks ended October 29, 2016 included an $800 thousand gain on the sale of an investment.

Income Tax Expense. During the third quarter of fiscal 2016, in connection with the acquisition of etailz, the Company recognized a tax benefit of $7.5 million related to the reduction of its valuation allowance equivalent to the net deferred tax liabilities recorded on the etailz opening balance sheet.  In assessing the realizability of the net deferred tax assets at the time of the acquisition of etailz, management considered whether it is more likely than not that some portion or all of the remaining deferred tax assets will not be realizable. Management considered the scheduled reversal of taxable temporary differences, projected future taxable income when combining Trans World Entertainment projected income or loss with etailz projected income or loss, and tax planning strategies when making this assessment.  Based on the available objective evidence, management concluded that a full valuation allowance should be recorded against itsthe Company's deferred tax assets net of the deferred tax liabilities recorded in connection with the etailz acquisition. As a result, thereassets. There were insignificant tax expense (benefit) amounts recorded during the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017.August 3, 2019 and comparative periods last year.

25

Net Loss. The following table sets forth a period over period comparison of the Company’s net loss:

 

  Thirteen Weeks Ended   Thirty-nine Weeks Ended 
        Change        Change 
  October 28,
2017		  October 29,
2016		  $   October 28,
2017		  October 29,
2016		  $ 
  (in thousands)      (in thousands)    
Loss before income tax $(8,135) $(7,936) $(199)  $(10,045) $(12,471) $2,426 
Income tax expense (benefit)  (64)  (7,452)  7,388    40   (7,358)  7,398 
Net loss $(8,071) $(484) $(7,587)  $(10,085) $(5,113) $(4,972)

For the thirteen and thirty-nine weeks ended October 28, 2017, the Company’s net loss increased $7.6 million and $5.0 million, respectively. The increase in net loss was primarily due to the income tax benefit recorded in the third quarter of 2016.

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

 

LIQUIDITY

 

Liquidity and Cash Flows:

 

In connection with the preparation of the condensed consolidated financial statements, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued, noting that there did not appear to be evidence of substantial doubt of the entity’s ability to continue as a going concern.

The Company’s primary sources of working capitalliquidity are cash provided by operations andits borrowing capacity under its revolving credit facility. The Company’sfacility, available cash flows fluctuateand cash equivalents, and to a lesser extent, cash generated from quarteroperations. Our cash requirements relate primarily to quarter dueworking capital needed to various items,operate our business, including seasonalityfunding operating expenses, the purchase of sales and earnings, merchandise inventory purchases and returns, the related terms on the purchases and capital expenditures. Management believes itOur ability to achieve profitability and meet future liquidity needs and capital requirements will have adequate resources to fund its cash needsdepend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and changes in our strategy or our planned activities.

The Company incurred net losses of $15.9 million and $17.7 million for the foreseeable future, including its capital spending, its seasonal increasetwenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, and has an accumulated deficit of $66.2 million at August 3, 2019. In addition, net cash used in merchandise inventory and other operating activities for the twenty-six weeks ended August 3, 2019 was $15.0 million. Net cash requirements and commitments.used in operating activities for the twenty-six weeks ended August 4, 2018 was $32.9 million.

 

As disclosed in the Company's Annual Report on Form 10-K filed May 14, 2019, the Company experienced negative cash flows from operations during fiscal 2018 and 2017, and we expect to continue to incur net losses in the foreseeable future. We implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiency and conserving working capital needed to support the growth of our etailz segment (the “performance improvement plan”). As a result of the initiative, and disciplined inventory management in the fye segment, the Company was able to reduce cash used in operations by $18.0 million for the twenty-six weeks ended August 3, 2019 as compared to the twenty-six weeks ended August 3, 2018. We anticipate continued improvement in cash flows used in operations for the remainder of the fiscal 2019. At August 3, 2019, we had cash and cash equivalents of $3.6 million, net working capital of $42.3 million, and short-term borrowings in the amount of $12.1 million on our revolving credit facility, as further discussed in footnote 8 in the interim condensed consolidated financial statements. This compares to $4.5 million in cash and cash equivalents, net working capital of $82.1 million, and short-term borrowings in the amount of $6.3 million on the Company’s revolving credit facility at August 4, 2018.

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Management anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, discussedfacility. See note 8 in Note 9 to the Company’s interim condensed consolidated financial statements.statements for additional information.

26

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

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

The unaudited condensed consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 2019 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the etailz segment and the availability of future funding. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

 

      As of or for the
Thirty-nine Weeks Ended		  Change 
  (in thousands)    October 28,
2017		   October 29,
2016		   $ 
  Operating Cash Flows    (33,947)  (29,879)  (4,068)
  Investing Cash Flows    6,028   (52,226)  58,254 
  Financing Cash Flows    -   (1,398)  1,398 
                 
  Capital Expenditures (1)  (6,392)  (16,726)  10,334 
  Purchases of business, net of cash acquired (1)  -   (36,600)  36,600 
  Cash, Cash Equivalents, and Restricted Cash (2)  16,158   20,808   (4,650)
  Merchandise Inventory    144,754   157,827   (13,073)
  Working Capital    95,951   91,617   4,334 
                 
                 
(1) Included in Investing Cash Flows              
                 
(2) Cash and cash equivalents per condensed consolidated balance sheets   $3,924  $4,708  $(784)
  Add: restricted cash    12,234   16,100   (3,866)
  Cash, cash equivalents, and restricted cash   $16,158  $20,808  $(4,650)

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

 

Cash used in operations was $34.0$15.0 million for the thirty-ninetwenty-six weeks ended October 28, 2017August 3, 2019, primarily due to a net loss of $10.1$15.9 million, adding back depreciation and amortization of $10.5$2.0 million, a $5.1 million seasonal decrease in inventory, a $1.3 million decrease in prepaid expenses and non-cash compensation of $2.3other current assets, and a $4.0 million decrease in other long-term assets, less seasonable increase in merchandise inventory of $18.7 million, the adjustment to the contingent consideration liability of $1.4 million, the gain on insurance proceeds of $8.7 million, and reductionsa reduction in accounts payable, accrued expenses and other current liabilities, deferred revenue, and other long-term liabilities of $6.9$5.3 million $1.0 million, $1.0 million, and $2.9$4.2 million, respectively.

Cash provided by investing activities was $6.0 million for the thirty-nine weeks ended October 28, 2017, which consisted of Company owned life insurance The Company's merchandise inventory and SERP benefits proceeds of $14.4 million, less $6.4 million in capital expenditures, and a $2.6 million investment in a joint venture.

Cash provided by financing activities was comprised of $5.0 million proceeds from short-term borrowings. Cash used in financing activities was comprised of $5.0 million payment to the etailz shareholders in connection with the amendment to the share purchase agreement.

In January 2017, the Company entered into a $50 million asset based credit facility (“Credit Facility”) which amended the previous credit facility. The availability under the Credit Facility is subject to limitations based on inventory levels. The principal amount of all outstanding loans under the Credit Facility, together with any accrued but unpaid interest,accounts payable are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are securedinfluenced by the assetsseasonality of its business. A significant reduction of accounts payable occurs annually in the Company. The Credit Facility contains a provision to increase availability to $75 millionfiscal first quarter, reflecting payments for merchandise inventory purchased during October to December of each year, as needed. During the third quarter of fiscal 2017, the Company exercised the right to increase its borrowing base to $60 million, subject to the same limitations noted above.prior year's holiday season.

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 2.25% to 2.75% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.25%. In addition, a commitment fee ranging from 0.375% to 0.50% is also payable on unused commitments.

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions, covenants around the net

27

number of store closings, and restrictions related to the payment of cash dividends, including limiting the amount of dividends and share repurchases to $5.0Cash used in investing activities was $1.4 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment.twenty-six weeks ended August 3, 2019, which consisted primarily of capital expenditures.

 

Refer to footnote 9 inCash provided by financing activities for the interim condensed consolidated financial statements for further information regarding the Company’s Credit Facility.twenty-six weeks ended August 3, 2019, was comprised of $12.1 million proceeds from short-term borrowings.

 

Capital Expenditures.During the thirteen and thirty-ninetwenty-six weeks ended October 28, 2017,August 3, 2019, respectively, the Company made capital expenditures of $2.2$0.7 million and $6.4$1.5 million, respectively. The Company’s planned annual fiscal 2017Company currently plans to spend approximately $3.9 million for capital expenditures is approximately $8.0 million.during fiscal 2019.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K as of and for the year ended January 28, 2017February 2, 2019 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements. ThereAs goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a critical accounting policy. With the exception of goodwill, there have been no material changes or modifications to the critical accounting policies since January 28, 2017.February 2, 2019.

 

Recent Accounting Pronouncements:

 

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

 

Non-GAAP Measures:

 

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

 

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

 

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

28

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

 

The Company does not hold any financial instruments that expose it to significant market risk and does not engage in hedging activities. To the extent the Company borrows under its Credit Facility,revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its Credit Facilitycredit facility can be variable.Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 2.25% to 2.75% and the Applicable Margin for Base Rate loans ranging from 0.75% to 1.25%.variable. If interest rates on the Company’s Credit Facilityrevolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, income before income taxesinterest expense would be reducedincreased by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended January 28, 2017. The Company does not currently hold any derivative instruments.February 2, 2019.

 

Item 4 – Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of October 28, 2017,August 3, 2019, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b)Changes in internal controls.   The acquisition of etailz was significantThere have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company and was consummated effective October 17, 2016. Upon consummation of the acquisition, etailz became a consolidated subsidiary of the Company. As of October 28, 2017 etailz operations are fully incorporated within the Company, includingCompany’s internal controls over financial reporting.

29

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1 – Legal Proceedings

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

Loyalty Memberships and Magazine Subscriptions Class Action

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

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

 

Store Manager Class Actions

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

Specifically, Carolactions. The first, Spack filed a complaint againstv. Trans World Entertainment Corporation (Trans World)Corp. was originally filed in the United States District Court, District of New Jersey, on April 20, 2017 (Case No.: 3:17-cv-02687-BRM-LHG) alleging(the “Spack Action”). The Spack Action alleges that she is entitled to unpaid compensation for overtime under the federal Fair Labor Standards Act (FLSA). She brings a nationwide collective action under the FLSA on behalf of allCompany misclassified Store Managers and(“SMs”) as exempt nationwide. It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers. SheManagers “SAMs” nationwide, and that both SMs and SAMs worked “off-the-clock.” It also brings class action claims underalleges violations of New Jersey and Pennsylvania law on behalf of all persons who worked as Store Managers in New Jersey or Senior Assistant Managers in Pennsylvania.

On May 19, 2017, NatashaState Law with respect to calculating overtime for SAMs. The second, Roper filed a complaint againstv. Trans World Entertainment Corp., was filed in the U.S. District Court for the Northern District of New York, (Case No.: 1:17-cv-0553-TJM-CFH) in which sheMay 2017 (the “Roper Action”). The Roper Action also alleges that she is entitled to unpaid compensation for overtime under the FLSA. Ms. Roper bringsasserts a nationwide collective action under the FLSAmisclassification claim on behalf of all similarly situated Store Managers. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.

Plaintiffs moved for conditional certification of a collective of SMs in June 2018, and that motion was partially granted in January 2019. The opt-in period for the collective that was certified was closed on April 6, 2019. Opt-in discovery relating to that potential collective has commenced.The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to vigorously defend the action.

 

Item 1A – Risk Factors

Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the year ended January 28, 2017.February 2, 2019.

30

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

None.

 

Item 3 – Defaults Upon Senior Securities

None.

 

Item 4 – Mine Safety Disclosure

Not Applicable.

 

Item 5 – Other Information

None.

30

Item 6 - Exhibits

 

(A) Exhibits -

(A) Exhibits -
Exhibit No.		 Description
3.9Certificate of Amendment to the Certificate of Incorporation.
10.1Offer Letter by and between Trans World Entertainment Corporation and Kunal Chopra, dated July 5, 2019.
31.1 Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document (furnished herewith)
   
101.SCH XBRL Taxonomy Extension Schema (furnished herewith)
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase (furnished herewith)
   
101.DEF XBRL Taxonomy Extension Definition Linkbase (furnished herewith)
   
101.LAB XBRL Taxonomy Extension Label Linkbase (furnished herewith)
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase (furnished herewith)
31

SIGNATURES

 

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

 

TRANS WORLD ENTERTAINMENT CORPORATION

 

December 7, 2017September 17, 2019By: /s/ Michael Feurer 
 Michael Feurer 
 Chief Executive Officer 
 (Principal Executive Officer) 
   
December 7, 2017September 17, 2019By: /s/ John AndersonEdwin Sapienza 
 John AndersonEdwin Sapienza 
 Chief Financial Officer 
 (Principal and Chief Accounting Officer) 
32