UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended |
or
or | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________ |
Commission File Number0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
TRANS WORLD ENTERTAINMENT CORPORATION |
(Exact Name of Registrant as Specified in its Charter)
New York | 14-1541629 | |
State or Other Jurisdiction of Incorporation or Organization | I.R.S. Employer Identification No. | |
38 Corporate Circle Albany, New York | 12203 | |
Address of Principal Executive Offices | Zip Code |
(518) 452-1242
Registrant’s Telephone Number, Including Area Code
(518) 452-1242 |
Registrant’s Telephone Number, Including Area Code |
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | TWMC | NASDAQ Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be fil735edfiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero | Accelerated filero |
Non-accelerated filero | Smaller reporting companyx |
Emerging growth companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Nox
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yeso Noo
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value,
36,258,8391,816,061 shares outstanding as of May 4,September 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
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 1 -– Interim Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
(unaudited)
August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 3,635 | $ | 4,355 | $ | 4,477 | ||||||
Restricted cash | 950 | 4,126 | 4,116 | |||||||||
Accounts receivable | 5,281 | 5,383 | 6,509 | |||||||||
Merchandise inventory | 89,785 | 94,842 | 114,920 | |||||||||
Prepaid expenses and other assets | 4,642 | 6,657 | 8,937 | |||||||||
Total current assets | 104,293 | 115,363 | 138,959 | |||||||||
Restricted cash | 5,345 | 5,745 | 6,147 | |||||||||
Fixed assets, net | 7,605 | 7,529 | 12,648 | |||||||||
Operating lease right-of-use assets | 24,704 | — | — | |||||||||
Goodwill | — | — | 39,191 | |||||||||
Intangible assets, net | 3,096 | 3,668 | 22,023 | |||||||||
Other assets | 5,130 | 5,708 | 6,119 | |||||||||
TOTAL ASSETS | 150,173 | 138,013 | 225,087 | |||||||||
LIABILITIES | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | $ | 29,044 | $ | 34,329 | $ | 34,200 | ||||||
Short-term borrowings | 12,086 | — | 6,341 | |||||||||
Accrued expenses and other current liabilities | 5,617 | 8,132 | 9,508 | |||||||||
Deferred revenue | 5,974 | 6,955 | 6,810 | |||||||||
Current portion of operating lease liabilities | 9,266 | — | — | |||||||||
Total current liabilities | 61,987 | 49,416 | 56,859 | |||||||||
Operating lease liabilites | 18,684 | — | — | |||||||||
Other long-term liabilites | 21,537 | 24,867 | 26,533 | |||||||||
TOTAL LIABILITIES | 102,208 | 74,283 | 83,392 | |||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) | — | — | — | |||||||||
Common stock ($0.01 par value; 200,000,000 shares authorized; 3,223,898, 3,221,834 and 3,219,334 shares issued, respectively) | 32 | 32 | 32 | |||||||||
Additional paid-in capital | 344,983 | 344,826 | 343,322 | |||||||||
Treasury stock at cost (1,409,317, 1,408,892 and 1,408,043 shares, respectively) | (230,168 | ) | (230,166 | ) | (230,149 | ) | ||||||
Accumulated other comprehensive loss | (725 | ) | (735 | ) | (1,008 | ) | ||||||
(Accumulated deficit) Retained earnings | (66,157 | ) | (50,227 | ) | 29,498 | |||||||
TOTAL SHAREHOLDERS’ EQUITY | 47,965 | 63,730 | 141,695 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 150,173 | $ | 138,013 | $ | 225,087 |
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
3 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
May 4, 2019 | February 2, 2019 | May 5, 2018 | ||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 3,822 | $ | 4,355 | $ | 14,509 | ||||||
Restricted cash | 950 | 4,126 | 4,113 | |||||||||
Accounts receivable | 4,600 | 5,383 | 6,620 | |||||||||
Merchandise inventory | 88,487 | 94,842 | 110,677 | |||||||||
Prepaid expenses and other current assets | 4,769 | 6,657 | 7,418 | |||||||||
Total current assets | 102,628 | 115,363 | 143,337 | |||||||||
Restricted cash | 5,545 | 5,745 | 6,354 | |||||||||
Fixed assets, net | 7,673 | 7,529 | 13,138 | |||||||||
Operating lease right-of-use assets | 26,067 | - | - | |||||||||
Goodwill | - | - | 39,191 | |||||||||
Intangible assets, net | 3,382 | 3,668 | 22,995 | |||||||||
Other assets | 5,727 | 5,708 | 6,760 | |||||||||
TOTAL ASSETS | $ | 151,022 | $ | 138,013 | $ | 231,775 | ||||||
LIABILITIES | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | $ | 28,925 | $ | 34,329 | $ | 36,894 | ||||||
Short-term borrowings | 3,072 | - | - | |||||||||
Accrued expenses and other current liabilities | 5,743 | 8,132 | 9,900 | |||||||||
Deferred revenue | 6,128 | 6,955 | 7,473 | |||||||||
Current portion of operating lease liabilities | 9,179 | - | - | |||||||||
Total current liabilities | 53,047 | 49,416 | 54,267 | |||||||||
Operating lease liabilities | 20,411 | - | - | |||||||||
Other long-term liabilities | 21,553 | 24,867 | 27,059 | |||||||||
TOTAL LIABILITIES | 95,011 | 74,283 | 81,326 | |||||||||
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; 64,436,671, 64,436,671 and 64,369,171 shares issued, respectively) | 644 | 644 | 643 | |||||||||
Additional paid-in capital | 344,292 | 344,214 | 341,946 | |||||||||
Treasury stock at cost (28,177,832, 28,177,832 and 28,156,601 shares, respectively) | (230,166) | (230,166) | (230,145) | |||||||||
Accumulated other comprehensive loss | (730) | (735) | (1,003) | |||||||||
(Accumulated deficit) Retained earnings | (58,029) | (50,227) | 39,008 | |||||||||
TOTAL SHAREHOLDERS’ EQUITY | 56,011 | 63,730 | 150,449 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 151,022 | $ | 138,013 | $ | 231,775 |
(in thousands, except per share data)
(unaudited)
Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Net sales | $ | 75,152 | $ | 101,039 | $ | 154,508 | $ | 196,271 | ||||||||
Other revenue | 852 | 1,135 | 1,646 | 2,506 | ||||||||||||
Total revenue | 76,004 | 102,174 | 156,154 | 198,777 | ||||||||||||
Cost of sales | 50,888 | 70,001 | 105,648 | 134,916 | ||||||||||||
Gross profit | 25,116 | 32,173 | 50,506 | 63,861 | ||||||||||||
Selling, general and administrative expenses | 32,517 | 41,562 | 65,548 | 81,409 | ||||||||||||
Loss from operations | (7,401 | ) | (9,389 | ) | (15,042 | ) | (17,548 | ) | ||||||||
Interest expense | 194 | 103 | 326 | 166 | ||||||||||||
Other loss (income) | 462 | (49 | ) | 419 | (128 | ) | ||||||||||
Loss before income tax expense | (8,057 | ) | (9,443 | ) | (15,787 | ) | (17,586 | ) | ||||||||
Income tax expense | 71 | 67 | 143 | 71 | ||||||||||||
Net loss | $ | (8,128 | ) | $ | (9,510 | ) | $ | (15,930 | ) | $ | (17,657 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE: | ||||||||||||||||
Basic and diluted loss per common share | $ | (4.48 | ) | $ | (5.23 | ) | $ | (8.77 | ) | $ | (9.73 | ) | ||||
Weighted average number of common shares outstanding – basic and diluted | 1,816 | 1,818 | 1,816 | 1,815 |
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
4 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE LOSS
(amounts in thousands)
(unaudited)
Thirteen Weeks Ended | ||||||||
May 4, 2019 | May 5, 2018 | |||||||
Net sales | $ | 79,289 | $ | 95,232 | ||||
Other revenue | 861 | 1,371 | ||||||
Total revenue | 80,150 | 96,603 | ||||||
Cost of sales | 54,760 | 64,915 | ||||||
Gross profit | 25,390 | 31,688 | ||||||
Selling, general and administrative expenses | 33,031 | 39,846 | ||||||
Loss from operations | (7,641) | (8,158) | ||||||
Interest expense | 132 | 64 | ||||||
Other income | (43) | (79) | ||||||
Loss before income tax expense | (7,730) | (8,143) | ||||||
Income tax expense | 72 | 4 | ||||||
Net loss | (7,802) | (8,147) | ||||||
BASIC AND DILUTED INCOME PER SHARE: | ||||||||
Basic and diluted loss per common share | $ | (0.21) | $ | (0.22) | ||||
Weighted average number of common shares outstanding – basic and diluted | 36,322 | 36,237 |
Thirteen Weeks ended | Twenty-six Weeks Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Net loss | $ | (8,128 | ) | $ | (9,510 | ) | $ | (15,930 | ) | $ | (17,657 | ) | ||||
Amortization of pension gain | 5 | 5 | 10 | 10 | ||||||||||||
Comprehensive loss | $ | (8,123 | ) | $ | (9,505 | ) | $ | (15,920 | ) | $ | (17,647 | ) |
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
5 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSSHAREHOLDERS’ EQUITY
(amountsdollars and shares in thousands)(unaudited)
Thirteen Weeks Ended | ||||||||
May 4, 2019 | May 5, 2018 | |||||||
Net loss | ($7,802) | ($8,147) | ||||||
Amortization of pension gain | 5 | 5 | ||||||
Comprehensive loss | ($7,797) | ($8,142) |
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)
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.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars and shares in thousands)
Thirteen Weeks Ended May 4, 2019 | ||||||||||||||||||||||||||||||||
Number of shares outstanding | Accumulated | Retained | ||||||||||||||||||||||||||||||
Additional | Treasury | Other | Earnings | |||||||||||||||||||||||||||||
Common | Treasury | Common | Paid-in | Stock | Comprehensive | (Accumulated | Shareholders’ | |||||||||||||||||||||||||
Shares | Shares | Stock | Capital | At Cost | Loss | Deficit) | Equity | |||||||||||||||||||||||||
Balance as of February 2, 2019 | 64,437 | (28,178 | ) | $ | 644 | $ | 344,214 | $ | (230,166 | ) | $ | (735 | ) | $ | (50,227 | ) | $ | 63,730 | ||||||||||||||
Net Loss | - | - | - | - | - | - | (7,802 | ) | (7,802 | ) | ||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 5 | - | 5 | ||||||||||||||||||||||||
Amortization of unearned compensation/restricted stock amortization | - | - | - | 78 | - | - | - | 78 | ||||||||||||||||||||||||
Balance as of May 4, 2019 | 64,437 | $ | (28,178 | ) | $ | 644 | $ | 344,292 | $ | (230,166 | ) | $ | (730 | ) | $ | (58,029 | ) | $ | 56,011 |
Thirteen Weeks Ended May 5, 2018 | ||||||||||||||||||||||||||||||||
Number of shares outstanding | Accumulated | Retained | ||||||||||||||||||||||||||||||
Additional | Treasury | Other | Earnings | |||||||||||||||||||||||||||||
Common | Treasury | Common | Paid-in | Stock | Comprehensive | (Accumulated | Shareholders’ | |||||||||||||||||||||||||
Shares | Shares | Stock | Capital | At Cost | Loss | Deficit) | Equity | |||||||||||||||||||||||||
Balance as of February 3, 2018 | 64,305 | (28,157 | ) | $ | 643 | $ | 341,103 | $ | (230,145 | ) | $ | (998 | ) | $ | 47,611 | $ | 158,214 | |||||||||||||||
Adjustment for adoption of accounting standard, ASU 2014-09 | - | - | - | - | - | - | (456 | ) | (456 | ) | ||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | (8,147 | ) | (8,147 | ) | ||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (5 | ) | - | (5 | ) | ||||||||||||||||||||||
Common stock issued-new grants | 64 | - | - | 80 | - | - | - | 80 | ||||||||||||||||||||||||
Amortization of unearned compensation/restricted stock amortization | - | - | - | 763 | - | - | - | 763 | ||||||||||||||||||||||||
Balance as of May 5, 2018 | 64,369 | $ | (28,157 | ) | $ | 643 | $ | 341,946 | $ | (230,145 | ) | $ | (1,003 | ) | $ | 39,008 | $ | 150,449 |
7 |
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)(unaudited)
Thirteen Weeks Ended | ||||||||
May 4, | May 5, | |||||||
2019 | 2018 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income loss | $ | (7,802) | $ | (8,147) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation of fixed assets | 695 | 1,261 | ||||||
Amortization of intangible assets | 286 | 972 | ||||||
Stock-based compensation | 78 | 843 | ||||||
Loss on disposal of fixed assets | 3 | 10 | ||||||
Change in cash surrender value | (145) | 51 | ||||||
Changes in operating assets and liabilities that provide (use) cash: | ||||||||
Accounts receivable | 783 | (2,151) | ||||||
Merchandise inventory | 6,355 | (1,300) | ||||||
Prepaid expenses and other current assets | 1,141 | (442) | ||||||
Other long-term assets | 2,059 | (126) | ||||||
Accounts payable | (5,404) | (4,886) | ||||||
Accrued expenses and other current liabilities | (956) | 362 | ||||||
Deferred revenue | (827) | (991) | ||||||
Other long-term liabilities | (2,448) | (2,077) | ||||||
Net cash used in operating activities | (6,182) | (16,621) | ||||||
INVESTING ACTIVITIES: | ||||||||
Purchases of fixed assets | (842) | (863) | ||||||
Capital distributions from joint venture | 43 | 454 | ||||||
Net cash used in investing activities | (799) | (409) | ||||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from long term borrowings | 3,072 | - | ||||||
Payments to etailz shareholders | - | (1,500) | ||||||
Net cash provided by (used in) financing activities | 3,072 | (1,500) | ||||||
Net decrease in cash, cash equivalents, and restricted cash | (3,909) | (18,530) | ||||||
Cash, cash equivalents, and restricted cash, beginning of period | 14,226 | 43,506 | ||||||
Cash, cash equivalents, and restricted cash, end of period | $ | 10,317 | $ | 24,976 |
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
May 4,August 3, 2019 and May 5,August 4, 2018
Note 1. Nature of Operations
Trans World Entertainment Corporation and subsidiaries (“the Company”) is a specialty retailer of entertainment products, including trend, video, music, electronics and related products in the United States. 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 May 4,August 3, 2019, the fye segment operated 206 stores totaling approximately 1.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature for both segments, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.
Liquidity and Cash Flows:
The Company’s primary sources of liquidity are its borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our 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 $7.8$15.9 million and $8.1$17.7 million for the thirteentwenty-six weeks ended May 4,August 3, 2019 and May 5,August 4, 2018, respectively, and has an accumulated deficit of $58.0$66.2 million at May 4,August 3, 2019. In addition, net cash used in operating activities for the thirteentwenty-six weeks ended May 4,August 3, 2019 was $6.2$15.0 million. Net cash used in operating activities for the thirteentwenty-six weeks ended May 5,August 4, 2018 was $16.6$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 $10.4$18.0 million for the first quarter of fiscaltwenty-six weeks ended August 3, 2019 as compared to the first quarter of fiscaltwenty-six weeks ended August 3, 2018. We anticipate continued improvement in cash flows fromused in operations for the remainder of the fiscal 2019. At May 4,August 3, 2019, we had cash and cash equivalents of $3.8$3.6 million, net working capital of $49.6$42.3 million, and short-term borrowings in the amount of $3.1$12.1 million on our revolving credit facility, as further discussed in footnote 8. This compares to $14.5$4.5 million in cash and cash equivalents, net working capital of $89.1$82.1 million, and noshort-term borrowings in the amount of $6.3 million on the Company’s revolving credit facility at May 5,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. See note 8 in the interim condensed consolidated financial statements for additional information.
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.
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. Similarly, if our common stock is delisted from the NASDAQ Global Market, it may also limit our ability to raise additional funds.
The unaudited condensed consolidated financial statements for the thirteen and twenty-six weeks ended May 4,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.
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 State of New York. The reverse stock split was reflected on the Nasdaq Capital Market (“Nasdaq”) beginning with the opening of trading on August 15, 2019. The primary purpose of the reverse stock split, which was 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 give 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 and outstanding shares of the 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 in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.
9 |
The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended February 2, 2019 contained in the Company’s Annual Report on Form 10-K filed May 14, 2019.
The results of operations for the thirteen and twenty-six weeks ended May 4,August 3, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 1, 2020.
As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a significant accounting policy. With the exception of goodwill, the Company’s significant accounting policies are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal year ended February 2, 2019.
Note 3. Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842). Lessees are required to recognize a right-of-use asset and a lease liability 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 straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a frontloaded expense pattern (similar to capital leases under the prior accounting standard).
The Company adopted this new accounting standard on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases greater than one year. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the 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 flows.
The following is a discussion of the Company’s lease policy under the new lease accounting standard:
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and excludereduced by lease incentives. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet and lease expense is recognized on a straight-line basis over the term of the short-term lease.
For real estate leases, the Company accounts for lease components and non-lease components as a single lease component. Certain real estate leases require additional payments based on reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities.
10 |
We elected the following practical expedients permitted underthe leasestandard: 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 overthe lease term.term. As of May 4,August 3, 2019, 157 leases were154 leaseswere short-term in nature and were exempt from being recorded on the balance sheet.
The Company leases its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016, and expires on December 31, 2020. Under the lease, accounted for as an operating lease, the Company is responsible for monthly payments in the amount of $103 thousand aper month. Under the terms of the lease agreement, the Company is also responsible for property taxes and other operating costs with respect to the premises.
11 |
Impact of New Lease Standard on Balance Sheet Line Items
As a result of applying the new lease standard using a modified retrospective method, the following adjustments were made to accounts on the condensed consolidated balance sheet as of February 3, 2019:
Impact of Change in Accounting Policy | Impact of Change in Accounting Policy | |||||||||||||||||||||||
As Reported February 2, 2019 | Adjustments | Adjusted February 3, 2019 | As Reported February 2, 2019 | Adjustments | Adjusted February 3, 2019 | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
CURRENT ASSETS | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,355 | $ | - | $ | 4,355 | $ | 4,355 | $ | — | $ | 4,355 | ||||||||||||
Restricted cash | 4,126 | - | 4,126 | 4,126 | — | 4,126 | ||||||||||||||||||
Accounts receivable | 5,383 | - | 5,383 | 5,383 | — | 5,383 | ||||||||||||||||||
Merchandise inventory | 94,842 | - | 94,842 | 94,842 | — | 94,842 | ||||||||||||||||||
Prepaid expenses and other current assets | 6,657 | (748) | 5,909 | 6,657 | (748 | ) | 5,909 | |||||||||||||||||
Total current assets | 115,363 | (748) | 114,615 | 115,363 | (748 | ) | 114,615 | |||||||||||||||||
Restricted cash | 5,745 | - | 5,745 | 5,745 | — | 5,745 | ||||||||||||||||||
Fixed assets, net | 7,529 | - | 7,529 | 7,529 | — | 7,529 | ||||||||||||||||||
Operating lease right-of-use assets | - | 28,044 | 28,044 | — | 28,044 | 28,044 | ||||||||||||||||||
Intangible assets, net | 3,668 | - | 3,668 | 3,668 | — | 3,668 | ||||||||||||||||||
Other assets | 5,708 | - | 5,708 | 5,708 | — | 5,708 | ||||||||||||||||||
TOTAL ASSETS | $ | 138,013 | $ | 27,296 | $ | 165,309 | $ | 138,013 | $ | 27,296 | $ | 165,309 | ||||||||||||
LIABILITIES | ||||||||||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||||||||||
Accounts payable | $ | 34,329 | $ | - | $ | 34,329 | $ | 34,329 | $ | — | $ | 34,329 | ||||||||||||
Accrued expenses and other current liabilities | 8,132 | (1,319) | 6,813 | 8,132 | (1,319 | ) | 6,813 | |||||||||||||||||
Deferred revenue | 6,955 | - | 6,955 | 6,955 | — | 6,955 | ||||||||||||||||||
Current portion of operating lease liabilities | - | 9,064 | 9,064 | |||||||||||||||||||||
Current portion of operating lease liabilites | — | 9,064 | 9,064 | |||||||||||||||||||||
Total current liabilities | 49,416 | 7,745 | 57,161 | 49,416 | 7,745 | 57,161 | ||||||||||||||||||
Operating lease liabilities | - | 22,728 | 22,728 | — | 22,728 | 22,728 | ||||||||||||||||||
Other long-term liabilities | 24,867 | (3,177) | 21,690 | 24,867 | (3,177 | ) | 21,690 | |||||||||||||||||
TOTAL LIABILITIES | 74,283 | 27,296 | 101,579 | 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; 64,436,671, 64,436,671 and 64,369,171 shares issued, respectively) | 644 | - | 644 | |||||||||||||||||||||
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 | 344,214 | - | 344,214 | 344,826 | — | 344,826 | ||||||||||||||||||
Treasury stock at cost (28,177,832, 28,177,832 and 28,156,601 shares, respectively) | (230,166) | - | (230,166) | |||||||||||||||||||||
Treasury stock at cost (1,408,892 and 1,408,892 shares) | (230,166 | ) | — | (230,166 | ) | |||||||||||||||||||
Accumulated other comprehensive loss | (735) | - | (735) | (735 | ) | — | (735 | ) | ||||||||||||||||
(Accumulated deficit) Retained earnings | (50,227) | - | (50,227) | |||||||||||||||||||||
Accumulated deficit | (50,227 | ) | — | (50,227 | ) | |||||||||||||||||||
TOTAL SHAREHOLDERS’ EQUITY | 63,730 | - | 63,730 | 63,730 | — | 63,730 | ||||||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 138,013 | $ | 27,296 | $ | 165,309 | $ | 138,013 | $ | 27,296 | $ | 165,309 |
12 |
The following table is a summary of the Company’s components of net lease cost for the three monthsthirteen and twenty-six week periods ended May 4,August 3, 2019:
Lease Cost
(amounts in thousands) | Classification | Three Months Ended May 4, 2019 | ||||||
Operating lease cost | Selling, general and administrative expense (SG&A) | $ | 4,627 | |||||
Variable lease cost | Selling, general and administrative expense (SG&A) | 125 | ||||||
Net lease cost | $ | 4,752 | ||||||
As of May 4, 2019, future lease payments were as follows: | ||||||||
(amounts in thousands) | Operating Leases | |||||||
2019 (remaining nine months) | $ | 7,859 | ||||||
2020 | 10,544 | |||||||
2021 | 7,057 | |||||||
2022 | 2,923 | |||||||
2023 | 2,069 | |||||||
Thereafter | 2,071 | |||||||
Total lease payments | 32,966 | |||||||
Less: amounts representing interest | (2,933) | |||||||
Present value of lease liabilities | $ | 29,590 | ||||||
Lease term and discount rate are as follows: | ||||||||
May 4, 2019 | ||||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 1.4 | |||||||
Weighted-average discount rate | ||||||||
Operating leases | 5 | % | ||||||
Other information: | ||||||||
Three Months Ended | ||||||||
(amounts in thousands) | May 4, | |||||||
2019 | ||||||||
Cash paid for amounts included in the measurement of these liabilities | ||||||||
Operating cash flows from operating leases | $ | 2,202 | ||||||
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 |
(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 leases | 1.4 | |||
Weighted-average discount rate | ||||
Operating leases | 5 | % | ||
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 |
13 |
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 May 4,August 3, 2019 consisted of the following (amounts in thousands):
May 4, 2019 | ||||||||||||||||||||
Weighted Average Amortization Period (in months) | Original Gross Carrying Amount | Accumulated Impairment | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||
Vendor relationships | 120 | $ | 19,100 | $ | 13,822 | $ | 4,427 | $ | 851 | |||||||||||
Technology | 60 | 6,700 | 2,587 | 3,175 | 938 | |||||||||||||||
Trade names and trademarks | 60 | 3,200 | - | 1,607 | 1,593 | |||||||||||||||
$ | 29,000 | $ | 16,409 | $ | 9,209 | $ | 3,382 |
The changes in net intangibles and goodwill from February 2, 2019 to May 4, 2019 were as follows:
(amounts in thousands) | February 2, 2019 | Impairment Expense | Amortization Expense | May 4, 2019 | ||||||||||||
Amortized intangible assets: | ||||||||||||||||
Vendor relationships | $ | 880 | $ | - | $ | 29 | $ | 851 | ||||||||
Technology | 1,035 | - | 97 | 938 | ||||||||||||
Trade names and trademarks | 1,753 | - | 160 | 1,593 | ||||||||||||
Net amortized intangible assets | $ | 3,668 | $ | - | $ | 286 | $ | 3,382 |
Amortization expense of intangible assets for the thirteen weeks ended May 4, 2019 and May 5, 2018 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: | 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: | 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 | Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||||||||||||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||||||||
Vendor relationships | $ | 29 | $ | 477 | $ | 29 | $ | 477 | $ | 58 | $ | 954 | ||||||||||||||||||
Technology | 97 | 335 | 97 | 335 | 194 | 670 | ||||||||||||||||||||||||
Trade names and trademarks | 160 | 160 | 160 | 160 | 320 | 320 | ||||||||||||||||||||||||
Total amortization expense | $ | 286 | $ | 972 | $ | 286 | $ | 972 | $ | 572 | $ | 1,944 |
14 |
Estimated amortization expense for the remainder of fiscal 2019 and the five succeeding fiscal years and thereafter is as follows:
Year | Annual Amortization | Annual Amortization | ||||||
(amounts in thousands) | (amounts in thousands) | |||||||
2019 | $857 | $ | 572 | |||||
2020 | 1,143 | 1,143 | ||||||
2021 | 847 | 847 | ||||||
2022 | 115 | 115 | ||||||
2023 | 115 | 115 | ||||||
2024 | 115 | 115 | ||||||
Thereafter | 190 | 189 |
Note 5. Depreciation and Amortization
Depreciation and amortization included in selling, general and administrative expenses of the interim condensed consolidated statements of operations for the thirteen weeks ended May 4,August 3, 2019 and May 5,August 4, 2018 was $1.0$1.1 million and $2.2$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 $1.2 million decrease was primarily due to a $4.1 million net decrease in carrying value of fixed assets and a $16.4 million net decrease in carrying value of intangible assets, resulting from impairment charges recorded during the fourth quarter of fiscal 2018. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019.
15 |
Note 6. Segment Data
As described in Note 1 to the interim condensed consolidated financial statements, we operate in two reportable segments as shown in the following table:
Thirteen Weeks Ended | ||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | ||||||
Total Revenue | ||||||||
fye | $ | 45,018 | $ | 54,063 | ||||
etailz | 35,132 | 42,540 | ||||||
Total Company | $ | 80,150 | $ | 96,603 | ||||
Gross Profit | ||||||||
fye | $ | 17,502 | $ | 22,271 | ||||
etailz | 7,888 | 9,417 | ||||||
Total Company | $ | 25,390 | $ | 31,688 | ||||
Loss From Operations | ||||||||
fye | $ | (6,100) | $ | (5,372) | ||||
etailz | (1,541) | (2,786) | ||||||
Total Company | $ | (7,641) | $ | (8,158) | ||||
Total Assets | ||||||||
fye | $ | 118,734 | $ | 132,461 | ||||
etailz | 32,288 | 99,314 | ||||||
Total Company | $ | 151,022 | $ | 231,775 |
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 May 4,August 3, 2019, the Company had restricted cash of $1.0 million and $5.5$5.3 million reported in current assets and other assets on the accompanying interim condensed consolidated balance sheet, respectively. As of May 5,August 4, 2018, the Company had restricted cash of $4.1 million and $6.3$6.1 million reported in current assets and other assets on the accompanying interim condensed consolidated balance sheet, respectively.
During The decrease in these restricted cash balances during the first quartertwenty-six weeks ended August 3, 2019, was primarily due to the return of fiscal 2019, the $3.2 million earn-out escrow balance was returned to the Company as a result of the etailz segment not achieving the earnings target, as described in the amended etailz acquisition share purchase agreement. During the thirteen weeks ended May 5, 2018, the Company paid out $1.5 million of the
The restricted cash toreported as of August 3, 2019, as described in the etailz shareholders per the termsparagraph above, is comprised entirely of the original etailz acquisition share purchase agreement.
In addition, as a result of$6.3 million rabbi trust, which resulted from the death of itsthe Company’s former Chairman, the Company holds $6.5 million in a rabbi trust, of which $1.0 million is classified as restricted cash in current assets and $5.5 million is classified as restricted cash in other assets on the accompanying interim condensed consolidated balance sheet as of May 4, 2019. Chairman.
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A summary of cash, cash equivalents and restricted cash is as follows (amounts in thousands):
August 3, | February 2, | August 4, | ||||||||||||||||||||||
May 4, 2019 | February 2, 2019 | May 5, 2018 | 2019 | 2019 | 2018 | |||||||||||||||||||
Cash and cash equivalents | $ | 3,822 | $ | 4,355 | $ | 14,509 | $ | 3,635 | $ | 4,355 | $ | 4,477 | ||||||||||||
Restricted cash | 6,495 | 9,871 | 10,467 | 6,295 | 9,871 | 10,263 | ||||||||||||||||||
Total cash, cash equivalents and restricted cash | $ | 10,317 | $ | 14,226 | $ | 24,976 | $ | 9,930 | $ | 14,226 | $ | 14,740 |
Note 8. Short Term Borrowings
In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on receivables 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. During fiscal 2018, the Company exercised the right to increase its availability to $60 million subject to the same limitations noted above.
The Credit Facility contains customary 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 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on unused commitments.
As of May 4,August 3, 2019, borrowings under the Credit Facility were $3.1 million. As$12.1 million as compared to $6.3 million as of May 5, 2018, the Company did not have any borrowings under the Credit Facility.August 4, 2018. The Company had $23.1$16.1 million available for borrowing as of May 4,August 3, 2019.
As of May 4,August 3, 2019, the Company did not have any outstanding letters of credit. As of May 5,August 4, 2018, the Company had $1.2$1.1 million in outstanding letters of credit related to an import purchase.
The Company records short term borrowings at cost, in which the carrying value approximates fair value due to its short term maturity.
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Note 9. Stock Based Compensation
As of May 4,August 3, 2019, there was approximately $0.5 million$435 thousand of unrecognized compensation cost related to stock option awards comprised of the following: $0.4 million$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 1.2 years;9 months, and $0.1 million$105 thousand was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 3.43.1 years.
The Company has outstanding awards under three employee stock award plans, the 2005 Long Term Incentive and Share Award Plan, the Amended and Restated 2005 Long Term Incentive and Share Award Plan (the “Old Plans”); and the 2005 Long Term Incentive and Share Award Plan (as amended and restated April 5, 2017 (the “New Plan”). Collectively, these plans are referred to herein as the Stock Award Plans. Additionally, the Company had a stock award plan for non-employee directors (the “1990 Plan”). The Company no longer issues stock options under the Old Plans or the 1990 Plan.
Equity awards authorized for issuance under the New Plan total 5.0 million.250 thousand. As of May 4,August 3, 2019, of the awards authorized for issuance under the Stock Award Plans, 2.8 millionapproximately 130 thousand were granted and are outstanding, 2.0 million102 thousand of which were vested and exercisable. Shares available for future grants of options and other share based awards under the New Plan at May 4,August 3, 2019 were 4.4 million.219 thousand.
The following table summarizes stock award activity during the thirteentwenty-six weeks ended May 4,August 3, 2019:
Employee and Director Stock Award Plans | Employee and Director Stock Award Plans | |||||||||||||||||||||||||||||||||||||||
Number of Shares Subject To Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Other Share Awards (1) | Weighted Average Grant Fair Value | Number of Shares Subject To Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Other Share Awards(1) | Weighted Average Grant Fair Value | |||||||||||||||||||||||||||||||
Balance February 2, 2019 | 2,778,414 | $ | 2.75 | 5.8 | 271,411 | $ | 1.68 | 138,921 | $ | 55.00 | 5.8 | 13,571 | $ | 33.60 | ||||||||||||||||||||||||||
Granted | - | - | - | - | - | — | — | — | — | — | ||||||||||||||||||||||||||||||
Canceled | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Cancelled/Forfeited | (8,975 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||
Exercised | - | - | - | - | - | — | — | — | (2,064 | ) | 30.76 | |||||||||||||||||||||||||||||
Balance May 4, 2019 | 2,778,414 | $ | 2.75 | 5.5 | 271,411 | $ | 1.68 | |||||||||||||||||||||||||||||||||
Exercisable May 4, 2019 | 2,017,164 | $ | 3.02 | 4.5 | 132,661 | $ | 2.77 | |||||||||||||||||||||||||||||||||
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 May 4,August 3, 2019, all stock awards outstanding and exercisable had a grant price higher than the market price of the stock and had no intrinsic value.
Note 10. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss that the Company reports in the interim condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan. Comprehensive loss consists of net loss and the amortization of pension gainscosts associated with Company’s defined benefit plan for the thirteen and twenty-six weeks ended May 4,August 3, 2019 and May 5,August 4, 2018.
Note 11. Defined Benefit Plan
The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certaina 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 thirteentwenty-six weeks ended May 4,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 2019.
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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 | ||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | ||||||
Service cost | $14 | $14 | ||||||
Interest cost | 142 | 140 | ||||||
Amortization of net gain(1) | (5) | (5) | ||||||
Net periodic pension cost | $151 | $149 |
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 |
The amortization of net gain is related to a director retirement plan previously provided by the Company. |
Note 12. Basic and Diluted Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common 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 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 twenty-six week periods ended May 4,August 3, 2019 and May 5,August 4, 2018, the impact of all outstanding stock awards was not considered because the Company reported a net losses in both periodsloss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share wasis the same. Total anti-dilutive stock awards for the thirteen and twenty-six weeks ended May 4,August 3, 2019 and May 5, 2018 were approximately 3.0 million130 thousand shares, as compared to 155 thousand shares and 2.6 million145 thousand shares, respectively.respectively, for the thirteen and twenty-six weeks ended 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 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'sCompany’s deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable income in its conclusion of the need for a full valuation allowance. Any reversal of the Company’s valuation allowance will favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future. The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending February 1, 2020. The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of February 2, 2019, the
Company had a net operating loss carry forward of $253.5 million for federal income tax purposes and approximately $289.0 million for state income tax purposes that expire at various times through 2038 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.
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Note 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
There are two pending class actions. The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”). The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide. It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers “SAMs” nationwide, and that both SMs and SAMs worked “off-the-clock.” It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs. The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide misclassification claim on behalf of 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.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Management’s Discussion and Analysis of Financial Condition and
Results of OperationsMay 4,
August 3, 2019 and May 5,August 4, 2018
Overview
Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships, general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the fiscal year ended February 2, 2019.
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 May 4,August 3, 2019, the fye segment operated 206 stores totaling approximately 1.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature for both segments, with the peak selling period 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 Sales and Comparable Store Net Sales: The fye segment measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the beginning of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store sales if the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or downsizing. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz segment measures total year over year sales growth by product category and evaluates product sales by supplier.
Cost of Sales and Gross Profit: Gross profit is calculated based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales levels, mix of products sold, vendor discounts and allowances, shrinkage, obsolescence and distribution costs. Distribution expenses include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs associated with product returns to vendors.
Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges. SG&A expenses also include fixed assets write-offs associated with store closures, if any, and miscellaneous income and expense items, other than interest.
Balance Sheet and Ratios: The Company views cash and working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Cash Flows section for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Twenty-six Weeks Ended May 4,August 3, 2019
Compared to the Thirteen and Twenty-six Weeks Ended May 5,August 4, 2018
Segment Highlights:Highlights(amounts in thousands):
Thirteen Weeks Ended | ||||||||
(amounts in thousands) | ||||||||
May 4, 2019 | May 5, 2018 | |||||||
Total Revenue | ||||||||
fye | $ | 45,018 | $ | 54,063 | ||||
etailz | 35,132 | 42,540 | ||||||
Total Company | $ | 80,150 | $ | 96,603 | ||||
Gross Profit | ||||||||
fye | $ | 17,502 | $ | 22,271 | ||||
etailz | 7,888 | 9,417 | ||||||
Total Company | $ | 25,390 | $ | 31,688 | ||||
Loss From Operations | ||||||||
fye | $ | (6,100 | ) | $ | (5,372 | ) | ||
etailz | (1,541 | ) | (2,786 | ) | ||||
Total Company | $ | (7,641 | ) | $ | (8,158 | ) | ||
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations | ||||||||
etailz loss from operations | $ | (1,541 | ) | $ | (2,786 | ) | ||
Acquisition related amortization and compensation expenses(1) | 352 | 2,093 | ||||||
etailz adjusted loss from operations(2) | $ | (1,189 | ) | $ | (693 | ) |
Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Total Revenue | ||||||||||||||||
fye | $ | 41,744 | $ | 50,545 | $ | 86,762 | $ | 104,608 | ||||||||
etailz | 34,260 | 51,629 | 69,392 | 94,169 | ||||||||||||
Total Company | $ | 76,004 | $ | 102,174 | $ | 156,154 | $ | 198,777 | ||||||||
Gross Profit | ||||||||||||||||
fye | $ | 17,013 | $ | 20,634 | $ | 34,515 | $ | 42,905 | ||||||||
etailz | 8,103 | 11,539 | 15,991 | 20,956 | ||||||||||||
Total Company | $ | 25,116 | $ | 32,173 | $ | 50,506 | $ | 63,861 | ||||||||
Loss From Operations | ||||||||||||||||
fye | $ | (6,655 | ) | $ | (6,629 | ) | $ | (12,755 | ) | $ | (12,001 | ) | ||||
etailz | (746 | ) | (2,760 | ) | (2,287 | ) | (5,547 | ) | ||||||||
Total Company | $ | (7,401 | ) | $ | (9,389 | ) | $ | (15,042 | ) | $ | (17,548 | ) | ||||
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations | ||||||||||||||||
etailz loss from operations | $ | (746 | ) | $ | (2,760 | ) | $ | (2,287 | ) | $ | (5,547 | ) | ||||
Acquisition related amortization and compensation expenses (1) | 286 | 2,090 | 638 | 4,184 | ||||||||||||
etailz adjusted loss from operations(2) | $ | (460 | ) | $ | (670 | ) | $ | (1,649 | ) | $ | (1,363 | ) |
(1)For the 13 weeks ended May 4,August 3, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $286 thousand. For the 26 weeks ended August 3, 2019, acquisition related expenses consisted of amortization expense of intangible assets of $572 thousand and compensation expensesexpense of $66 thousand. For the 13 weeks ended May 5,August 4, 2018, acquisition related expenses consisted of amortization expense of intangible assets of $972 thousand and compensation expense of $1,118 thousand. For the 26 weeks ended August 4, 2018, acquisition related expenses consisted of $1,121amortization 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 | Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(amounts in thousands) | Comp | August 3, 2019 | August 4, 2018 | $ | % | Comp Store Net Sales | August 3, 2019 | August 4, 2018 | $ | % | Comp Store Net Sales | ||||||||||||||||||||||||||||||||||||||||||||||
May 4, 2019 | May 5, 2018 | $ | % | Store Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||
fye revenue | $ | 45,018 | $ | 54,063 | $ | (9,045 | ) | -16.7% | 0.0% | $ | 41,744 | 50,545 | $ | (8,801 | ) | -17.4 | % | -1.2 | % | $ | 86,762 | 104,608 | $ | (17,846 | ) | -17.1 | % | -0.6 | % | ||||||||||||||||||||||||||||
etailz revenue | 35,132 | 42,540 | (7,408 | ) | -17.4% | 34,260 | 51,629 | (17,369 | ) | -33.6 | % | 69,392 | 94,169 | (24,777 | ) | -26.3 | % | ||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 80,150 | $ | 96,603 | $ | (16,453 | ) | -17.0% | $ | 76,004 | $ | 102,174 | $ | (26,170 | ) | -25.6 | % | $ | 156,154 | $ | 198,777 | $ | (42,623 | ) | -21.4 | % |
Total revenue decreased 17.0% to $80.2 million25.6% and 21.4% for the thirteen and twenty-six weeks ended May 4,August 3, 2019 as compared to $96.6 million in the same period last year.
fye Segment
The following table sets forth a period over period comparison of net fye sales by merchandise category:
Thirteen Weeks Ended | Change | Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | $ | % | Comp Store Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(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 | |||||||||||||||||||||||||||||||||||||||||||||||||
fye net sales | $ | 44,157 | 52,692 | $ | (8,535 | ) | -16.2% | 0.0% | $ | 40,892 | 49,410 | $ | (8,518 | ) | -17.2 | % | -1.2 | % | $ | 85,116 | 102,102 | $ | (16,986 | ) | -16.6 | % | -0.6 | % | ||||||||||||||||||||||||||||||||
Other revenue | 861 | 1,371 | (510 | ) | -37.2% | 852 | 1,135 | (283 | ) | -24.9 | % | 1,646 | 2,506 | (860 | ) | -34.3 | % | |||||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 45,018 | $54,063 | $ | (9,045 | ) | -16.7% | $ | 41,744 | $ | 50,545 | $ | (8,801 | ) | -17.4 | % | $ | 86,762 | $ | 104,608 | $ | (17,846 | ) | -17.1 | % | |||||||||||||||||||||||||||||||||||
As a % of FYE net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trend/Lifestyle | 42.8% | 37.8% | 7.3% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As a % of fye net sales | As a % of fye net sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trend / Lifestyle | 46.8 | % | 40.9 | % | 9.6 | % | 44.7 | % | 39.3 | % | 9.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Video | 28.3% | 31.8% | -8.0% | 24.3 | % | 29.0 | % | -16.1 | % | 26.4 | % | 30.5 | % | -11.6 | % | |||||||||||||||||||||||||||||||||||||||||||||
Music | 17.9% | 18.7% | -0.1% | 17.5 | % | 18.4 | % | -7.8 | % | 17.7 | % | 18.5 | % | -3.9 | % | |||||||||||||||||||||||||||||||||||||||||||||
Electronics | 11.0% | 11.7% | -4.3% | 11.4 | % | 11.7 | % | -0.1 | % | 11.2 | % | 11.7 | % | -2.3 | % | |||||||||||||||||||||||||||||||||||||||||||||
Store Count: | 206 | 253 | (47 | ) | -18.6% | 206 | 241 | (35 | ) | -14.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Total Square footage | 1,145 | 1,394 | (249 | ) | -17.9% | 1,145 | 1,339 | (194 | ) | -14.5 | % |
fye net sales.Net sales.sales decreased 17.2% and 16.6% during the thirteen weeks and twenty-six weeks ended August 3, 2019 as compared to the same period last year. The 16.2%decline in net sales declineresulted from the prior year is primarily due to an 18.6%a 14.5% decline in total stores in operation.operation and a 1.2% and 0.6% decline in comparable store net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively.
Trend/lifestyle:Lifestyle:
fye stores offer a selection of trend/lifestyle products that primarily relate to theatrical, music, and gaming releases. TheComparable store net sales in the trend/lifestyle category increased 7.3% on a comparable store sales basis9.6% and 9.5% during the thirteen and twenty-six weeks ended May 4, 2019. The trend/August 3, 2019, respectively. Trend/lifestyle categoryproducts represented 42.8%46.8% and 44.7% of the Company’s total net sales for the thirteen and twenty-six weeks ended May 4,August 3, 2019, versus 37.8%respectively, compared to 40.9% and 39.3% in the comparable quarterperiods last year. The Company continues to take advantage of opportunities to strengthen its selection and shift product mix to growing categories of entertainment-related merchandise. The Company grew comparable store sales in this category by strengthening its assortment of consumables and collectables, as well as by improving the product presentation and value proposition.
Video:
Comparable store net sales in the video category decreased 8.0%16.1% and 11.6% during the thirteen weeksand twenty-six week periods ended May 4, 2019.August 3, 2019, respectively. The video category represented 28.3%24.3% and 26.4% of total net sales for the thirteen and twenty-six weeks ended May 4,August 3, 2019, respectively, compared to 31.8%29.0% and 30.5% in the comparable quarterperiods last year as the fye segment is shifting its product mixdue to growing categories of entertainment and pop culture related merchandise.continued industry-wide decline in physical media sales.
Music:
Comparable store netDuring the thirteen and twenty-six weeks ended August 3, 2019, music sales in the music categorycomparable stores decreased 0.1% during7.8% and 3.9%, respectively, versus the thirteen and twenty-six weeks ended MayAugust 4, 2019.2018. The music category represented 17.9%17.5% and 17.7% of total net sales for the thirteen and twenty-six weeks ended May 5, 2018August 3, 2019, respectively, compared to 18.7%18.4% and 18.5% for the thirteen and twenty-six weeks ended August 4, 2018 due to continued industry-wide decline in the comparable quarter last year.physical media sales.
Electronics:
Comparable store net sales in the electronics category decreased 4.3%0.1% and 2.3% during the thirteen and twenty-six weeks ended May 4, 2019.August 3, 2019, respectively. Electronics net sales represented 11.0%11.4% and 11.2% of total net sales for the thirteen and twenty-six weeks ended MayAugust 4, 2019, respectively, compared to 11.7% of total net sales for both the thirteen and twenty-six weeks in the comparable quarterperiods last year.
Other Revenue.Other revenue, which was primarily related to commissions and fees earned from third parties for the fye segment, was approximately $0.9 million and $1.4$1.6 million for the thirteen and twenty-six weeks ended May 4,August 3, 2019, respectively, compared to $1.1 million and May 5, 2018, respectively.$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 revenuereported sales of $34.3 million and $69.4 million for the thirteen and twenty-six weeks ended May 4,August 3, 2019, was $35.1 million,respectively compared to $42.5$51.6 million and $94.2 million sales for the same 13 week period in the prior fiscal year.thirteen and twenty-six weeks ended August 4, 2018. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the thirteentwenty-six weeks ended May 4,August 3, 2019, etailz sold approximately 25,000 SKUs from over 1,450approximately 1,500 suppliers, compared to approximately 31,000 SKUs from overapproximately 2,200 suppliers during the thirteentwenty-six weeks ended May 5,August 4, 2018. The decline in sales was attributable to the vendor remediation performance improvement plan which was implemented during the fourth quarter of 2018 for the etailz segment, as discussed in Note 1 to the interim condensed consolidated financial statements.
Gross Profit.The following table sets forth a year-over-year comparison of the Company’s gross profit:Gross Profit:
Thirteen Weeks Ended | Change | Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | ||||||||||||||||||||||||||||||||||||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | $ | % | August 3, 2019 | August 4, 2018 | $ | % | August 3, 2019 | August 4, 2018 | $ | % | |||||||||||||||||||||||||||||||||||
fye gross profit | $ | 17,502 | $ | 22,271 | $ | (4,769 | ) | -21.4% | $ | 17,013 | $ | 20,634 | $ | (3,621 | ) | -17.5 | % | $ | 34,515 | $ | 42,905 | $ | (8,390 | ) | -19.6 | % | |||||||||||||||||||||
etailz gross profit | 7,888 | 9,417 | (1,529 | ) | -16.2% | 8,103 | 11,539 | (3,436 | ) | -29.8 | % | 15,991 | 20,956 | (4,965 | ) | -23.7 | % | ||||||||||||||||||||||||||||||
Total gross profit | $ | 25,390 | $ | 31,688 | $ | (6,298 | ) | -19.9% | $ | 25,116 | $ | 32,173 | $ | (7,057 | ) | -21.9 | % | $ | 50,506 | $ | 63,861 | $ | (13,355 | ) | -20.9 | % | |||||||||||||||||||||
fye gross profit as a % of fye revenue | 38.9% | 41.2% | 40.8 | % | 40.8 | % | 39.8 | % | 41.0 | % | |||||||||||||||||||||||||||||||||||||
etailz gross profit as a % of etailz revenue | 22.5% | 22.1% | 23.7 | % | 22.3 | % | 23.0 | % | 22.3 | % | |||||||||||||||||||||||||||||||||||||
Total gross profit as a % of total revenue | 31.7% | 32.8% | 33.0 | % | 31.5 | % | 32.3 | % | 32.1 | % |
Gross profit decreased $6.3 million21.9% to $25.4$25.1 million for the thirteen weeks ended May 4,August 3, 2019 compared to $31.7$32.2 million for the thirteen weeks ended May 5,August 4, 2018. For the twenty-six weeks ended August 3, 2019, gross profit decreased 20.9% to $50.5 million compared to $63.9 million for the comparable period last year.
fye Segment
fye gross profit as a percentage of total revenue for the thirteen and twenty-six weeks ended May 4,August 3, 2019 was 38.9%40.8% and 39.8%, respectively, compared to 41.2%40.8% and 41.0% for the thirteen weeks ended May 5, 2018. The decline in rate was primarily driven by aggressive actions to clear holiday merchandise.comparable periods last year.
etailz Segment
etailz gross profit as a percentage of total revenue for the thirteen and twenty-six weeks ended May 4,August 3, 2019 was 22.5% versus 22.1%23.7% and 23.0%, respectively, compared to 22.3% for both the thirteen and twenty-six weeks for the thirteen weeks ended May 5, 2018.comparable periods last year. The 40 basis points increase in the gross profit rate was a result of the performance improvement plan implemented during the fourth quarter of 2018. See Note 1 above for the description of the etailz segment performance improvement plan.
SG&A Expenses. The following table sets forth a period over period comparison of the Company’s SG&A expenses:
Thirteen Weeks Ended | Change | |||||||||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | $ | % | ||||||||||||
fye SG&A, excluding depreciation and amortization | $ | 23,030 | $ | 26,489 | $ | (3,459 | ) | -13.1% | ||||||||
As a % of total fye revenue | 51.2% | 49.0% | ||||||||||||||
etailz SG&A, excluding depreciation and amortization | 9,021 | 11,124 | (1) | (2,103 | ) | -18.9% | ||||||||||
As a % of total etailz revenue | 25.7% | 26.1% | ||||||||||||||
Depreciation and amortization | 980 | 2,233 | (1,253 | ) | -56.1% | |||||||||||
Total SG&A expenses | $ | 33,031 | $ | 39,846 | $ | (6,815 | ) | -17.1% |
(1)There was no income from the Company’s joint venture during the first fiscal quarter of 2019. As a result, due to the immaterial nature of the joint venture income, last year’s income from the Company’s joint venture in the amount of $233 thousand was included within SG&A expenses in order to conform to the current year presentation for SG&A expenses.
Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | Change | |||||||||||||||||||||||||||||
(amounts in thousands) | August 3, 2019 | August 4, 2018 | $ | % | August 3, 2019 | August 4, 2018 | $ | % | ||||||||||||||||||||||||
fye SG&A, excluding depreciation and amortization | $ | 23,052 | $ | 26,103 | ($ | 3,051 | ) | -11.7 | % | $ | 46,082 | $ | 52,592 | ($ | 6,510 | ) | -12.4 | % | ||||||||||||||
As a % of total fye revenue | 55.2 | % | 51.6 | % | 53.1 | % | 50.3 | % | ||||||||||||||||||||||||
etailz SG&A, excluding depreciation and amortization | 8,413 | 13,185 | (4,772 | ) | -36.2 | % | 17,434 | 24,310 | (6,876 | ) | -28.3 | % | ||||||||||||||||||||
As a % of total etailz revenue | 24.6 | % | 25.5 | % | 25.1 | % | 25.8 | % | ||||||||||||||||||||||||
Depreciation and amortization | 1,052 | 2,274 | (1,222 | ) | -53.7 | % | 2,032 | 4,507 | (2,475 | ) | -54.9 | % | ||||||||||||||||||||
Total SG&A | $ | 32,517 | $ | 41,562 | ($ | 9,045 | ) | -21.8 | % | $ | 65,548 | $ | 81,409 | ($ | 15,861 | ) | -19.5 | % | ||||||||||||||
As a % of total revenue | 42.8 | % | 40.7 | % | 42.0 | % | 41.0 | % |
SG&A expenses decreased $6.8$9.0 million or 17.1%.and $15.9 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively.
fye Segment
fye SG&A, expenses, excluding depreciation and amortization expenses, decreased $3.5$3.1 million, or 13.1%.11.7%, and $6.5 million, or 12.4%, for the thirteen and twenty-six weeks ended August 3, 2019, respectively. As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and twenty-six weeks ended August 3, 2019 were 51.2%55.2% and 53.1%, respectively, compared to 49.0%51.6% and 50.3% for the same quarterperiods last year. The decline in SG&A expenses was due to lower sales primarily as a result of fewer stores in operation and other expense saving initiatives implemented in the fourth quarter of 2018.operation. The increase in SG&A expenses as a percentage of revenue was due to an increase in healthcare costsoutside consulting and outside consultingprofessional fees.
etailz Segment
etailz SG&A, expenses, excluding depreciation and amortization expenses, decreased $2.1$4.8 million and $6.9 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 3, 2019 were 24.6% and 25.1%, respectively, compared to 25.5% and 25.8% for the same periods last year. The decrease was primarily due to expense reduction initiatives implemented in the fourth quarter of 2018.
Depreciation and Amortization Expense.amortization.Consolidated depreciation and amortization expense decreased $1.3$1.2 million and $2.5 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively, primarily due to a $4.1the $29.1 million net decrease in the carrying value of fixed assets and a $16.4 million net decrease in the carrying value of intangible assets, resulting from impairment charges recorded for the fye segment, during the fourth quarter of fiscal 2018. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019.
Interest Expense. Interest expense was approximately $132$194 thousand and $326 thousand during the thirteen and twenty-six weeks ended May 4,August 3, 2019, compared to $64 thousandrespectively. Interest expense consisted primarily of interest payments resulted from borrowings under the Company’s credit facility and unused commitment fees. Interest expense during the thirteen and twenty-six weeks ended May 5, 2018.August 4, 2018 was $103 thousand and $166 thousand, respectively. The increase in interest expense was due to borrowings under the credit facility as discussed in Note 8 to the interim condensed consolidated financial statements.
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Other Loss (Income). As of August 3, 2019, other loss (income) consisted of the following:
Other Income. Other income was $43 thousand dollars during the thirteen weeks ended May 4, 2019 compared to $79 thousand dollars in the same period last year.
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 Tax Expense. Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the Company’sCompany's deferred tax assets As a result, thereassets. There were
insignificant tax expense amounts recorded during the thirteen and twenty-six weeks ended May 4,August 3, 2019 and May 5, 2018.comparative periods last year.
Net Loss. The following table sets forth a period over period comparison of the Company’s net loss:
Thirteen Weeks Ended | ||||||||||||
May 4, 2019 | May 5, 2018 | Change | ||||||||||
Loss before income tax | ($7,730) | ($8,143) | $413 | |||||||||
Income tax expense | 72 | 4 | 68 | |||||||||
Net loss | ($7,802) | ($8,147) | $345 |
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:
The Company’s primary sources of liquidity are its borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our 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 $7.8$15.9 million and $8.1$17.7 million for the thirteentwenty-six weeks ended May 4,August 3, 2019 and May 5,August 4, 2018, respectively, and has an accumulated deficit of $58.0$66.2 million at May 4,August 3, 2019. In addition, net cash used in operating activities for the thirteentwenty-six weeks ended May 4,August 3, 2019 was $6.2$15.0 million. Net cash used in operating activities for the thirteentwenty-six weeks ended May 5,August 4, 2018 was $16.6$32.9 million.
As disclosed in the Company’sCompany'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 $10.4$18.0 million for the first quarter of fiscaltwenty-six weeks ended August 3, 2019 as compared to the first quarter of fiscaltwenty-six weeks ended August 3, 2018. We anticipate continued improvement in cash flows fromused in operations for the remainder of the fiscal 2019. At May 4,August 3, 2019, we had cash and cash equivalents of $3.8$3.6 million, net working capital of $49.6$42.3 million, and short-term borrowings in the amount of $3.1$12.1 million on our revolving credit facility, as further discussed in footnote 8 toin the interim condensed consolidated financial statements included elsewhere in this Form 10-Q.statements. This compares to $14.5$4.5 million in cash and cash equivalents, net working capital of $89.1$82.1 million, and noshort-term borrowings in the amount of $6.3 million on the Company’s revolving credit facility at May 5,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. See note 8 in the interim condensed consolidated financial statements included elsewhere in this Form 10-Q for additional information.
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. Similarly, if our common stock is delisted from the NASDAQ Global Market, it may also limit our ability to raise additional funds.
The unaudited condensed consolidated financial statements for the thirteen and twenty-six weeks ended May 4,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 | Change | ||||||||||||||||||||||||||
As of or for the Thirteen Weeks Ended | Change | Twenty-six Weeks Ended | |||||||||||||||||||||||||
(amounts in thousands) | May 4, 2019 | May 5, 2018 | $ | (amounts in thousands) | August 3, 2019 | August 4, 2018 | $ | ||||||||||||||||||||
Operating Cash Flows | (6,182) | (16,621) | 10,439 | Operating Cash Flows | (14,962 | ) | (32,944 | ) | 17,982 | ||||||||||||||||||
Investing Cash Flows | (799) | (409) | (390) | Investing Cash Flows | (1,420 | ) | (663 | ) | (757 | ) | |||||||||||||||||
Financing Cash Flows | 3,072 | (1,500) | 4,572 | Financing Cash Flows | 12,086 | 4,841 | 7,245 | ||||||||||||||||||||
Capital Expenditures | (1) | (842) | (863) | 21 | Capital Expenditures | (1) | (1,541 | ) | (1,800 | ) | 259 | ||||||||||||||||
Cash, Cash Equivalents, and Restricted Cash | (2) | 10,317 | 24,976 | (14,659) | Cash, Cash Equivalents, and Restricted Cash | (2) | 9,930 | 14,740 | (4,810 | ) | |||||||||||||||||
Merchandise Inventory | 88,487 | 110,677 | (22,190) | Merchandise Inventory | 89,785 | 114,920 | (25,135 | ) | |||||||||||||||||||
Working Capital | 49,581 | 89,070 | (39,489) | Working Capital | 42,306 | 82,100 | (39,794 | ) | |||||||||||||||||||
(1) | Included in Investing Cash Flows | Included in Investing Cash Flows | |||||||||||||||||||||||||
(2) | Cash and cash equivalents per condensed consolidated balance sheets | $ | 3,822 | $ | 14,509 | Cash and cash equivalents per condensed consolidated balance sheets | $ | 3,635 | $ | 4,477 | |||||||||||||||||
Add: restricted cash | 6,495 | 10,467 | Add: restricted cash | 6,295 | 10,263 | ||||||||||||||||||||||
Cash, cash equivalents, and restricted cash | $ | 10,317 | $ | 24,976 | Cash, cash equivalents, and restricted cash | $ | 9,930 | $ | 14,740 |
Cash used in operations was $6.2$15.0 million for the twenty-six weeks ended August 3, 2019, primarily due to a net loss of $7.8$15.9 million, adding back depreciation and amortization of $2.0 million, a $5.4$5.1 million seasonal reduction of accounts payable, a $1.0 million decrease in accrued expenses and other current liabilities and a $2.5 million decrease in other long term liabilities, offset by a $0.8 million decrease in accounts receivable, a $6.4 million decrease in inventory, a $1.1$1.3 million decrease in prepaid expenses and other current assets, and a $2.1$4.0 million decrease in other long-term assets.assets, less a reduction in accounts payable, accrued expenses and other current liabilities, deferred revenue, and other long-term liabilities of $5.3 million $1.0 million, $1.0 million, and $4.2 million, respectively. The Company’sCompany's merchandise inventory and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for merchandise inventory purchased during the prior year’syear's holiday season.
Cash used in investing activities was $0.8$1.4 million for the thirteentwenty-six weeks ended May 4,August 3, 2019, which consisted primarily consisted of capital expenditures. Cash used in investing activities was $0.4 million for the thirteen weeks ended May 5, 2018, which consisted of $0.9 million in capital expenditures, offset by a $0.5 million of capital distributions from the joint venture.
Cash provided by financing activities was $3.1 million for the thirteentwenty-six weeks ended May 4,August 3, 2019, which was comprised entirely of $12.1 million proceeds from short-term borrowings. Cash used in financing activities was $1.5 million for the thirteen weeks ended May 5, 2018, which was comprised entirely of a payment to etailz shareholders as per the original etailz acquisition share purchase agreement.
Capital Expenditures.During the thirteen and twenty-six weeks ended May 4,August 3, 2019, respectively, the Company made capital expenditures of $0.8 million.$0.7 million and $1.5 million, respectively. The Company currently plans to spend approximately $3.9 million for capital expenditures 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 February 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. As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a critical accounting policy. With the exception of goodwill, there have been no material changes or modifications to the critical accounting policies since February 2, 2019.
Recent Accounting Pronouncements:
The information set forth under Note 2,3, 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 loss for the etailz segment and SG&A excluding depreciation and amortization expenses, for each reporting segment. A non-GAAP measure is not a recognized measure of financial performance under GAAP in the United States, and should not be considered as a substitute for SG&A expenses, operating earnings, net earnings from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. Non-GAAP items are provided because management believes that, when reconciled from the
GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance.
The Company calculates etailz adjusted loss from operations to evaluate its own operating performance and as an integral part of its planning process. The Company presents etailz adjusted loss from operations as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.
The Company calculates SG&A expenses, excluding depreciation and amortization expenses, for each reporting segment to evaluate its own operating performance and as an integral part of its planning process. The Company presents SG&A expenses, excluding depreciation and amortization expenses, as a supplemental measure because it believes such a measure provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.
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 revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its credit facility can be variable. If interest rates on the Company’s revolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, interest expense would be increased by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019.
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 May 4,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.There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company. As a result, the liability for the cases listed below is remote.
Loyalty Memberships and Magazine Subscriptions Class Action
On November 14, 2018, three consumers filed a punitive class action complaint against the Company and Synapse Group, Inc. in the United States District Court for the District of Massachusetts, Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions. The complaint alleged, among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without obtaining the consumers’ consent. The complaint sought to represent a nationwide class of “all persons in the United States” who were enrolled in and/or charged for Backstage Pass VIP memberships and/or magazine subscriptions, and to obtain statutory and actual damages on their behalf.
On April 11, 2019, the plaintiffs voluntarily dismissed their lawsuit. On May 8, 2019, two of the plaintiffs from the dismissed lawsuit filed a similar punitive class action in Massachusetts state court (Civ. Act. No. 197CV00331, Mass. Super. Ct. Hampden Cty.), based on the same allegations, but this time seeking to represent only a class of “FYE customers in Massachusetts” who were charged for VIP Backstage Pass Memberships and/or magazine subscriptions. The Company believes it has meritorious defenses to the plaintiffs’ claims and, if the new case is not dismissed in full, the Company intends to vigorously defend the action.
Store Manager Class Actions
There are two pending class actions. The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”). The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide. It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers “SAMs” nationwide, and that both SMs and SAMs worked “off-the-clock.” It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs. The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide misclassification claim on behalf of 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.
Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
30 |
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Mine Safety Disclosure
Not Applicable.
None.
(A) Exhibits -
Description | ||
3.9 | Certificate of Amendment to the Certificate of Incorporation. | |
10.1 | Offer 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) |
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
By: /s/ Michael Feurer | ||
Michael Feurer | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: /s/ Edwin Sapienza | ||
Edwin Sapienza | ||
Chief Financial Officer | ||
(Principal and Chief Accounting Officer) |