UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

__________________________________________________

FORM 10-Q

__________________________________________________


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

For the quarterly period ended ~~October 31, 2020~~May 1, 2021


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

Commission file number: 001-35535

__________________________________________________

TILLY’S, INC.

(Exact name of Registrant as specified in its charter)

__________________________________________________


Delaware						45-2164791
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

10 Whatney

Irvine, CA 92618

(Address of principal executive offices)

(949) 609-5599

(Registrant’s telephone number, including area code)

__________________________________________________

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.001 par value per share	TLYS	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically 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 and post such files). Yes ☒ No ☐

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

Large accelerated filer

☐

Accelerated Filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

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

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

As of ~~December 9, 2020,~~June 7, 2021, the registrant had the following shares of common stock outstanding:


Class A common stock $0.001 par value			~~22,474,839~~22,860,403
Class B common stock $0.001 par value			7,306,108

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TILLY’S, INC.

FORM 10-Q

For the Quarterly Period Ended ~~October 31, 2020~~May 1, 2021

Index


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	76
	Consolidated Balance Sheets as of ~~October~~May 1, 2021, January 3 ~~1, 2020, February 1, 2020 and~~ ~~November~~30, 2021 and May 2,~~, 2019~~ 2020	76
	Consolidated Statements of ~~Income (Loss)~~Operations for the Thirteen ~~and Thirty-Nine~~ Weeks Ended ~~October~~May 1, 2021 a 3 1,nd May 2, 2020 ~~and~~ ~~November~~2 ~~, 2019~~	87
	Consolidated Statements of Comprehensive Income (Loss) for the Thirteen ~~and Thirty-Nine~~ Weeks Ended ~~October~~May 1, 2021 and May 2, 3 1, 2020 ~~and~~ ~~November~~2 ~~, 2019~~	98
	Consolidated Statement of Stockholders’ Equity as of ~~October~~May 1, 2021 a nd 3 1,May 2, 2020 ~~and~~ ~~November~~2 ~~, 2019~~	109
	Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~Thirteen Weeks Ended ~~October~~ 3 May 1, ~~2020 and~~ ~~November~~2021 and May 2,~~, 2019~~ 2020	1210
	Notes to the Consolidated Financial Statements	1311

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2522

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3430

Item 4.	Controls and Procedures	3430

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3531

Item 1A.	Risk Factors	3531

Item 6.	Exhibits	3632

	Signatures	3733

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~~EXPLANATORY NOTE~~

As of the date of filing of this Quarterly Report on Form 10-Q (this “Report”), there continue to be many uncertainties regarding the current novel coronavirus (“COVID-19”) pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic, and the extent of local and worldwide economic, social, and political disruption it may continue to cause. To date, and as described throughout this Report, the COVID-19 pandemic has had far-reaching adverse impacts on many aspects of the business of Tilly’s, Inc. (the “Company, “we,” “our” or “us”), both directly and indirectly, including on our operations generally, consumer behavior, store traffic, demands on our information technology and e-commerce capabilities, inventory and expense management, production capabilities, timing of deliveries, managing our workforce, our store configurations and operations upon reopening, and the market generally. The scope and nature of these impacts continue to evolve each day. The COVID-19 pandemic has resulted in, and may continue to result in, regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, material adverse impacts on our business, financial condition and results of operations. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

In light of these uncertainties, for purposes of this Report, except where otherwise indicated, the descriptions of our business, our strategies, our risk factors, and any other forward-looking statements, including regarding us, our business and the market generally, do not reflect the potential impact of the COVID-19 pandemic or our responses thereto. In addition, the disclosures contained in this Report are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. For further information, please see “Risk Factors” within our most recently filed Annual Report on Form 10-K and “Forward-Looking Statements” below.

For more information on the recent and anticipated impacts of the COVID-19 pandemic on our business and our actions taken in response thereto, please see "Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Known or Anticipated Trends".

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Forward-Looking Statements

This Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this Report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “might”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, comparable store sales, operating income, earnings per share, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

•the impacts of the ~~COVID-19~~ pandemic generally, and on our operations, ~~or our~~ future financial or operational ~~results, including with respect to~~ results;

•our ability to ~~reopen~~adapt to downward trends in traffic for our stores and ~~keep stores open, e-commerce operations, cash and liquidity, payroll and inventory management, and~~changes in our ~~ability to realize any cost savings and manage expected capital expenditures;~~customers' purchasing patterns;

•our ability to successfully open new stores and profitably operate our existing stores;

•our ability to attract customers to our e-commerce website;

•our ability to efficiently utilize our e-commerce fulfillment center;

•effectively adapting to new challenges associated with our expansion into new geographic markets;

•our ability to establish, maintain and enhance a strong brand image;

•generating adequate cash from our existing stores to support our growth;

•identifying and responding to new and changing customer fashion preferences and fashion-related trends;

•competing effectively in an environment of intense competition both in stores and online;

•~~containing the increase in the cost of mailing catalogs, paper and printing;~~

•the success of the malls, power centers, neighborhood and lifestyle centers, outlet centers and street-front locations in which our stores are located;

•our ability to attract customers in the various retail venues and geographies in which our stores are located;

•~~our ability to adapt to downward trends in traffic for our stores and changes in our customers' purchasing patterns;~~

•adapting to declines in consumer confidence and decreases in consumer spending;

•our ability to adapt to significant changes in sales due to the seasonality of our business;

•our ability to compete in social media marketing platforms;

•price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold;

•natural disasters, unusually adverse weather conditions, port delays, boycotts, epidemics, pandemics, acts of war, terrorism, civil unrest, and other unanticipated events;

•~~changes in the competitive environment in our industry and the markets we serve, including increased competition from other retailers;~~

•our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices;

•increases in costs of energy, transportation or utility costs and in the costs of labor and employment;

•our ability to balance proprietary branded merchandise with the third-party branded merchandise we sell;

•adjusting to increasing costs of mailing catalogs, paper and printing;

•most of our merchandise is made in foreign countries, making price and availability of our merchandise susceptible to international trade conditions;

•failure of our vendors and their manufacturing sources to use acceptable labor or other practices;

•our dependence upon key executive management or our inability to hire or retain the talent required for our business;

•our ability to effectively adapt to ~~growth in~~ our ~~business and any~~ planned expansion;

•failure of our information technology systems to support our current and growing ~~business;~~business, before and after our planned upgrades;

•disruptions in our supply chain and distribution center;

•our indebtedness and lease obligations, including restrictions on our operations contained therein;

•our reliance upon independent third-party transportation providers for certain of our product shipments;

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•our ability to increase comparable store sales or sales per square foot, which may cause our operations and stock price to be volatile;

•disruptions to our information systems in the ordinary course of business or as a result of systems upgrades;

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•our inability to protect our trademarks or other intellectual property rights;

•~~epidemics, pandemics, acts of war, terrorism or civil unrest;~~

•the impact of governmental laws and regulations and the outcomes of legal proceedings;

•our ability to secure ~~the personal financial information of~~ our ~~customers~~data and comply with the security standards for the credit card industry;

•our failure to maintain adequate internal controls over our financial and management systems; and

•continuing costs incurred as a result of being a public company.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

See “Risk Factors” within our most recent Annual Report on Form 10-K for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this Report and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the disclosures and forward-looking statements included in this Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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Part I. Financial Information

Item 1. Financial Statements (Unaudited)

TILLY’S, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


		October 31, 2020		February 1, 2020		November 2, 2019			May 1, 2021		January 30, 2021		May 2, 2020
ASSETS	ASSETS							ASSETS
Current assets:	Current assets:							Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	99,309	$	70,137	$	67,596	Cash and cash equivalents	$	81,015	$	76,184	$	65,133
Marketable securities	Marketable securities	25,987		69,780		62,476		Marketable securities	76,633		64,955		45,981
Receivables	Receivables	11,397		7,485		9,060		Receivables	9,701		8,724		13,421
Merchandise inventories	Merchandise inventories	65,936		56,901		70,337		Merchandise inventories	65,341		55,698		67,650
Prepaid expenses and other current assets	Prepaid expenses and other current assets	5,557		4,561		6,499		Prepaid expenses and other current assets	4,956		6,595		2,092
Total current assets	Total current assets	208,186		208,864		215,968		Total current assets	237,646		212,156		194,277
Operating lease assets	Operating lease assets	235,369		263,649		255,776		Operating lease assets	219,918		227,881		252,554
Property and equipment, net	Property and equipment, net	54,756		66,176		70,568		Property and equipment, net	54,139		52,639		61,941
Other assets	Other assets	9,150		7,951		2,521		Other assets	12,530		12,797		7,422
Total assets	Total assets	$	507,461	$	546,640	$	544,833	Total assets	$	524,233	$	505,473	$	516,194
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:							Current liabilities:
Accounts payable	Accounts payable	$	36,245	$	20,562	$	37,461	Accounts payable	$	35,860	$	24,983	$	24,837
Accrued expenses	Accrued expenses	21,984		20,755		19,482		Accrued expenses	29,110		30,682		13,591
Line of credit								Line of credit	0		0		23,675
Deferred revenue	Deferred revenue	11,051		11,761		8,521		Deferred revenue	12,913		13,492		10,719
Accrued compensation and benefits	Accrued compensation and benefits	10,096		7,190		7,487		Accrued compensation and benefits	14,489		9,899		5,098
Dividends payable		0		29,677		0

Current portion of operating lease liabilities	Current portion of operating lease liabilities	62,747		55,321		54,512		Current portion of operating lease liabilities	53,633		54,503		65,595
Total current liabilities	Total current liabilities	142,123		145,266		127,463		Total current liabilities	146,005		133,559		143,515
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	214,052		240,755		234,885		Noncurrent operating lease liabilities	203,627		211,292		229,127
Other	Other	80		718		942		Other	0		0		558
Total liabilities	Total liabilities	356,255		386,739		363,290		Total liabilities	349,632		344,851		373,200
Commitments and contingencies (Notes 2 and 5)	Commitments and contingencies (Notes 2 and 5)							Commitments and contingencies (Notes 2 and 5)	0		0		0
Stockholders’ equity:	Stockholders’ equity:							Stockholders’ equity:
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,474, 22,323 and 22,077 shares issued and outstanding, respectively		22		22		22
Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,406 and 7,526 shares issued and outstanding, respectively		8		8		8
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,837, 22,477 and 22,363 shares issued and outstanding, respectively								Common stock (Class A), $0.001 par value; 100,000 shares authorized; 22,837, 22,477 and 22,363 shares issued and outstanding, respectively	23		22		22
Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,306 and 7,366 shares issued and outstanding, respectively								Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,306, 7,306 and 7,366 shares issued and outstanding, respectively	7		8		8
Preferred stock, $0.001 par value; 10,000 shares authorized; 0 shares issued or outstanding	Preferred stock, $0.001 par value; 10,000 shares authorized; 0 shares issued or outstanding	0		0		0		Preferred stock, $0.001 par value; 10,000 shares authorized; 0 shares issued or outstanding	0		0		0
Additional paid-in capital	Additional paid-in capital	154,894		153,377		151,711		Additional paid-in capital	158,454		155,437		153,878
(Accumulated deficit) Retained earnings		(3,736)		6,280		29,684
Retained earnings (Accumulated deficit)								Retained earnings (Accumulated deficit)	16,094		5,135		(11,115)
Accumulated other comprehensive income	Accumulated other comprehensive income	18		214		118		Accumulated other comprehensive income	23		20		201
Total stockholders’ equity	Total stockholders’ equity	151,206		159,901		181,543		Total stockholders’ equity	174,601		160,622		142,994
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	507,461	$	546,640	$	544,833	Total liabilities and stockholders’ equity	$	524,233	$	505,473	$	516,194

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Thirteen Weeks Ended
	May 1, 2021		May 2, 2020
Net sales	$	163,157	$	77,289
Cost of goods sold (includes buying, distribution, and occupancy costs)	108,318		75,695
Gross profit	54,839		1,594
Selling, general and administrative expenses	39,965		29,995
Operating income (loss)	14,874		(28,401)
Other (expense) income, net	(115)		409
Income (loss) before income taxes	14,759		(27,992)
Income tax expense (benefit)	3,800		(10,597)
Net income (loss)	$	10,959	$	(17,395)
Basic earnings (loss) per share of Class A and Class B common stock	$	0.37	$	(0.59)
Diluted earnings (loss) per share of Class A and Class B common stock	$	0.36	$	(0.59)
Weighted average basic shares outstanding	29,878		29,677
Weighted average diluted shares outstanding	30,529		29,677

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In ~~thousands, except per share data)~~thousands)

(Unaudited)

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 31,
2020 November 2,
2019 October 31,
2020 November 2,
2019
Net sales $ 140,275 $ 154,780 $ 353,409 $ 446,821
Cost of goods sold (includes buying, distribution, and occupancy costs) 99,615 107,609 269,481 312,247
Gross profit 40,660 47,171 83,928 134,574
Selling, general and administrative expenses 37,122 39,467 101,082 114,614
Operating income (loss) 3,538 7,704 (17,154) 19,960
Other (expense) income, net (28) 911 692 2,312
Income (loss) before income taxes 3,510 8,615 (16,462) 22,272
Income tax expense (benefit) 1,397 2,227 (6,446) 5,923
Net income (loss) $ 2,113 $ 6,388 $ (10,016) $ 16,349
Basic income (loss) per share of Class A and Class B common stock $ 0.07 $ 0.22 $ (0.34) $ 0.55
Diluted income (loss) per share of Class A and Class B common stock $ 0.07 $ 0.21 $ (0.34) $ 0.55
Weighted average basic shares outstanding 29,708 29,529 29,693 29,501
Weighted average diluted shares outstanding 29,810 29,759 29,693 29,745


	Thirteen Weeks Ended
	May 1, 2021		May 2, 2020
Net income (loss)	$	10,959	$	(17,395)
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on available-for-sale securities, net of tax	3		(13)
Other comprehensive income (loss), net of tax	3		(13)
Comprehensive income (loss)	$	10,962	$	(17,408)

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

CONSOLIDATED ~~STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~(In thousands)~~

~~(Unaudited)~~

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 31,
2020 November 2,
2019 October 31,
2020 November 2,
2019
Net income (loss) $ 2,113 $ 6,388 $ (10,016) $ 16,349
Other comprehensive (loss) income, net of tax:
Net change in unrealized (loss) gain on available-for-sale securities, net of tax 17 (119) (196) (108)
Other comprehensive (loss) income, net of tax 17 (119) (196) (108)
Comprehensive income (loss) $ 2,130 $ 6,269 $ (10,212) $ 16,241

~~The accompanying notes are an integral part of these consolidated financial statements.~~

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~~TILLY’S, INC.~~

~~CONSOLIDATED~~ STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


		Number of Shares													Number of Shares
		Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity			Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at August 1, 2020		22,414	7,366	$	30	$	154,386	$	(5,849)	$	1	$	148,568
Balance at January 30, 2021														Balance at January 30, 2021	22,477	7,306	$	30	$	155,437	$	5,135	$	20	$	160,622
Net income	Net income	—	—	—		—		2,113		—		2,113		Net income	—	—	—		—		10,959		—		10,959

Class B common stock converted to Class A common stock		60	(60)

Share-based compensation expense	Share-based compensation expense	—	—	—		508		—		—		508		Share-based compensation expense	—	—	—		366		—		—		366

Exercises of stock options														Exercises of stock options	360	—	—		2,651		—		—		2,651
Net change in unrealized gain on available-for-sale securities	Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		17		17		Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		3		3
Balance at October 31, 2020		22,474	7,306	$	30	$	154,894	$	(3,736)	$	18	$	151,206
Balance at May 1, 2021														Balance at May 1, 2021	22,837	7,306	$	30	$	158,454	$	16,094	$	23	$	174,601

Number of Shares
Common
Stock
(Class A) Common
Stock
(Class B) Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Stockholders’
Equity
Balance at August 3, 2019 21,980 7,586 $ 30 $ 150,877 $ 23,296 $ 237 $ 174,440
Net income — — — — 6,388 — 6,388
Class B common stock converted to Class A common stock 60 (60) — — — — —
Share-based compensation expense — — — 573 — — 573
Exercises of stock options 37 — — 261 — — 261
Net change in unrealized gain on available-for-sale securities — — — — — (119) (119)
Balance at November 2, 2019 22,077 7,526 $ 30 $ 151,711 $ 29,684 $ 118 $ 181,543


	Number of Shares
	Common Stock (Class A)	Common Stock (Class B)	Common Stock		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at February 1, 2020	22,323	7,406	$	30	$	153,377	$	6,280	$	214	$	159,901
Net loss	—	—	—		—		(17,395)		—		(17,395)

Class B common stock converted to Class A common stock	40	(40)	—		—		—		—		—
Share-based compensation expense	—	—	—		501		—		—		501

Net change in unrealized gain on available-for-sale securities	—	—	—		—		—		(13)		(13)
Balance at May 2, 2020	22,363	7,366	$	30	$	153,878	$	(11,115)	$	201	$	142,994

The accompanying notes are an integral part of these consolidated financial statements.

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~~TILLY’S, INC.~~

~~CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (continued)~~

~~(In thousands)~~

~~(Unaudited)~~

Number of Shares
Common
Stock
(Class A) Common
Stock
(Class B) Common
Stock Additional
Paid-in
Capital (Accumulated Deficit) Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Stockholders’
Equity
Balance at February 1, 2020 22,323 7,406 $ 30 $ 153,377 $ 6,280 $ 214 $ 159,901
Net loss — — — — (10,016) — (10,016)
Restricted stock 51 — — — — — —
Class B common stock converted to Class A common stock 100 (100) — — — — —
Share-based compensation expense — — — 1,517 — — 1,517
Net change in unrealized gain on available-for-sale securities — — — — — (196) (196)
Balance at October 31, 2020 22,474 7,306 $ 30 $ 154,894 $ (3,736) $ 18 $ 151,206

Number of Shares
Common
Stock
(Class A) Common
Stock
(Class B) Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Stockholders’
Equity
Balance at February 2, 2019 21,642 7,844 $ 29 $ 149,737 $ 13,335 $ 226 $ 163,327
Net income — — — — 16,349 — 16,349
Restricted stock 70 — — — — — —
Taxes paid in lieu of shares issued for stock-based compensation (8) — — (85) — — (85)
Class B common stock converted to Class A common stock
318 (318) — — — — —
Share-based compensation expense — — — 1,648 — — 1,648
Exercises of stock options 55 — 1 411 — — 412
Net change in unrealized gain on available-for-sale securities — — — — — (108) (108)
Balance at November 2, 2019 22,077 7,526 $ 30 $ 151,711 $ 29,684 $ 118 $ 181,543

~~The accompanying notes are an integral part of these consolidated financial statements.~~

119

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TILLY’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


		Thirty-Nine Weeks Ended					Thirteen Weeks Ended
		October 31, 2020		November 2, 2019			May 1, 2021		May 2, 2020
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net (loss) income		$	(10,016)	$	16,349
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Net income (loss)						Net income (loss)	$	10,959	$	(17,395)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:						Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	14,571		15,330		Depreciation and amortization	4,324		5,024
Insurance proceeds from casualty loss						Insurance proceeds from casualty loss	117		0
Share-based compensation expense	Share-based compensation expense	1,517		1,648		Share-based compensation expense	366		501
Impairment of long-lived assets	Impairment of long-lived assets	929		0		Impairment of long-lived assets	0		333
Loss on disposal of assets	Loss on disposal of assets	67		584		Loss on disposal of assets	62		0
Gain on sales and maturities of marketable securities	Gain on sales and maturities of marketable securities	(685)		(1,391)		Gain on sales and maturities of marketable securities	(29)		(330)
Deferred income taxes	Deferred income taxes	(1,142)		(470)		Deferred income taxes	285		591
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Receivables	Receivables	(3,912)		1,716		Receivables	250		(5,936)
Merchandise inventories	Merchandise inventories	(9,035)		(14,528)		Merchandise inventories	(9,760)		(10,749)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	1,912		(1,045)		Prepaid expenses and other current assets	1,615		2,411
Accounts payable	Accounts payable	16,130		12,901		Accounts payable	10,617		4,661
Accrued expenses	Accrued expenses	2,392		(1,740)		Accrued expenses	(1,745)		(5,284)
Deferred revenue	Deferred revenue	(710)		(1,852)		Deferred revenue	(579)		(1,042)
Accrued compensation and benefits	Accrued compensation and benefits	2,906		(1,443)		Accrued compensation and benefits	4,590		(2,092)
Operating lease liabilities	Operating lease liabilities	6,109		(1,555)		Operating lease liabilities	(1,795)		9,741
Net cash provided by operating activities		21,033		24,504
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	19,277		(19,566)
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchases of property and equipment	Purchases of property and equipment	(6,395)		(10,636)		Purchases of property and equipment	(5,492)		(3,548)

Proceeds from sale of property and equipment						Proceeds from sale of property and equipment	10		0
Insurance proceeds from casualty loss						Insurance proceeds from casualty loss	29		0
Purchases of marketable securities	Purchases of marketable securities	(30,946)		(96,810)		Purchases of marketable securities	(36,644)		(5,996)
Maturities of marketable securities	Maturities of marketable securities	75,157		111,504		Maturities of marketable securities	25,000		30,108
Net cash provided by investing activities		37,816		4,058
Net cash (used in) provided by investing activities						Net cash (used in) provided by investing activities	(17,097)		20,564
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Proceeds from line of credit	Proceeds from line of credit	23,675		0		Proceeds from line of credit	0		23,675
Repayment of line of credit		(23,675)		0
Dividends paid	Dividends paid	(29,677)		(29,453)		Dividends paid	0		(29,677)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	0		412		Proceeds from exercise of stock options	2,651		0
Taxes paid in lieu of shares issued for share-based compensation		0		(85)
Net cash used in financing activities		(29,677)		(29,126)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	2,651		(6,002)
Change in cash and cash equivalents	Change in cash and cash equivalents	29,172		(564)		Change in cash and cash equivalents	4,831		(5,004)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	70,137		68,160		Cash and cash equivalents, beginning of period	76,184		70,137
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	99,309	$	67,596	Cash and cash equivalents, end of period	$	81,015	$	65,133
Supplemental disclosures of cash flow information	Supplemental disclosures of cash flow information					Supplemental disclosures of cash flow information
Interest paid	Interest paid	$	182	$	13	Interest paid	$	0	$	67
Income taxes paid		$	857	$	9,028
Income taxes paid (refunded)						Income taxes paid (refunded)	$	3,683	$	(42)
Supplemental disclosure of non-cash activities	Supplemental disclosure of non-cash activities					Supplemental disclosure of non-cash activities
Unpaid purchases of property and equipment	Unpaid purchases of property and equipment	$	2,246	$	4,239	Unpaid purchases of property and equipment	$	2,936	$	2,066
Leased assets obtained in exchange for new operating lease liabilities	Leased assets obtained in exchange for new operating lease liabilities	$	11,999	$	328,795	Leased assets obtained in exchange for new operating lease liabilities	$	4,621	$	1,896

The accompanying notes are an integral part of these consolidated financial statements.

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TILLY’S, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of the Company and Basis of Presentation

Tillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 238 stores, ~~including 1 RSQ-branded pop-up store and one RSQ Skate store,~~ in 33 states as of ~~October 31, 2020.~~May 1, 2021. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.

The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984, the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.

The consolidated financial statements include the accounts of Tilly's Inc. and WOJT. All intercompany accounts and transactions have been eliminated in consolidation.

As used in these Notes to the Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "World of Jeans and Tops", "WOJT", "we", "our", "us" and "Tillys" refer to WOJT before our initial public offering, and to Tilly's, Inc. and its subsidiary after our initial public offering.

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q as is permitted by SEC rules and regulations.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the thirteen ~~and thirty-nine~~ week periods ended ~~October 31, 2020~~May 1, 2021 are not necessarily indicative of results to be expected for the full fiscal year, especially in light of the ~~uncertainties~~favorable circumstances surrounding federal stimulus checks and atypical back-to-school timing that occurred during the ~~impacts~~first quarter of ~~the COVID-19 pandemic.~~fiscal 2021. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020~~January 30, 2021 ("fiscal ~~2019"~~2020").

Fiscal Periods

Our fiscal year ends on the Saturday closest to January 31. References to fiscal ~~2020~~2021 refer to the fiscal year ending January ~~30, 2021.~~29,
2022. References to the fiscal ~~quarters~~quarter or first ~~nine~~three months ended ~~October 31,~~May 1, 2021 and May 2, 2020 ~~and November 2, 2019~~ refer to the thirteen ~~and thirty-nine~~ week periods ended as of those dates, respectively.

Impact of the COVID-19 Pandemic on our Business

As of the date of filing this Quarterly Report on Form 10-Q (this "Report"), there remain many uncertainties regarding the ongoing COVID-19 pandemic (the "pandemic"), including the anticipated duration and severity of the pandemic, particularly in light of ongoing vaccination efforts and emerging variant strains of the virus. To date, the pandemic has had far-reaching impacts on many aspects of the operations of the Company, directly and indirectly, including on consumer behavior, store traffic, operational capabilities and our operations generally, timing of deliveries, demands on our information technology and e-commerce capabilities, inventory and expense management, managing our workforce, our storefront configurations and operations upon reopening, and our people, which have materially disrupted our business and the market generally. The scope and nature of these impacts continue to evolve. While the scope and severity of the adverse impacts of the pandemic have shown signs of reduction in recent months, the pandemic resulted in, and may in the future result in, regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, had, and may in the future continue to have, material adverse impacts on our business, financial condition and results of

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operations. This situation is continually evolving, and additional impacts may arise that we are not aware of currently, or current impacts may become magnified.

Note 2: Summary of Significant Accounting Policies

Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020.~~January 30, 2021.

Revenue Recognition

Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of ~~Income (Loss).~~

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Operations.

The following table summarizes net sales from our retail stores and e-commerce (in thousands):


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended
		October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019			May 1, 2021		May 2, 2020
Retail stores	Retail stores	$	104,546	$	132,067	$	235,358	$	381,621	Retail stores	$	127,675	$	46,953
E-commerce	E-commerce	35,729		22,713		118,051		65,200		E-commerce	35,482		30,336
Total net sales	Total net sales	$	140,275	$	154,780	$	353,409	$	446,821	Total net sales	$	163,157	$	77,289

The following table summarizes the percentage of net sales by department:


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended
		October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019			May 1, 2021		May 2, 2020
Mens	Mens	36	%	35	%	35	%	34	%	Mens	36	%	34	%
Womens	Womens	26	%	23	%	27	%	25	%	Womens	29	%	27	%
Accessories	Accessories	16	%	19	%	16	%	18	%	Accessories	14	%	15	%
Footwear	Footwear	12	%	12	%	13	%	13	%	Footwear	12	%	14	%
Boys	Boys	5	%	7	%	5	%	6	%	Boys	4	%	5	%
Girls	Girls	4	%	4	%	4	%	4	%	Girls	4	%	5	%
Outdoor	Outdoor	1	%	0	%	0	%	0	%	Outdoor	1	%	0	%
Total net sales	Total net sales	100	%	100	%	100	%	100	%	Total net sales	100	%	100	%

The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended
		October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019			May 1, 2021		May 2, 2020
Third-party	Third-party	73	%	75	%	75	%	74	%	Third-party	71	%	75	%
Proprietary	Proprietary	27	%	25	%	25	%	26	%	Proprietary	29	%	25	%
Total net sales	Total net sales	100	%	100	%	100	%	100	%	Total net sales	100	%	100	%

We accrue for estimated sales returns by customers based on historical sales return results. As of ~~October 31,~~May 1, 2021, January 30, 2021 and May 2, 2020, ~~February 1, 2020 and November 2, 2019,~~ our reserve for sales returns was ~~$1.5~~$2.2 million, $1.4 million and ~~$1.3~~$1.7 million, respectively.

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We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. The customer liability balance was ~~$7.4~~$8.4 million, ~~$9.3~~$9.6 million and ~~$6.4~~$8.1 million as of ~~October 31,~~May 1, 2021, January 30, 2021 and May 2, 2020, ~~February 1, 2020 and November 2, 2019,~~ respectively, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift

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card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Revenue recognized from gift cards was ~~$2.7~~$3.8 million and ~~$8.1~~$2.7 million for the thirteen ~~and thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~respectively, and $3.0 million and $11.0 million for the thirteen and thirty-nine week periods ended November 2, 2019,~~ respectively. For the thirteen weeks ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~and November 2, 2019,~~ the opening gift card balance was ~~$7.7~~$9.6 million and ~~$6.6~~$9.3 million, respectively, of which ~~$1.2~~$2.3 million and $1.4 million, respectively, was recognized as revenue during the period. For the thirty-nine weeks ended October 31, 2020 and November 2, 2019, the opening gift card balance was $9.3 million and $8.7 million, respectively, of which $3.7 million and $4.6$1.9 million respectively, was recognized as revenue during the period.

We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns ~~awards~~an award that may be ~~redeemed for~~used towards the purchase of merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. Our loyalty program ~~includes the ability for~~allows customers to redeem their awards instantly ~~rather than~~or build up to ~~an award~~additional awards over time. We currently expire unredeemed awards and accumulated partial points 365 days after the last purchase activity. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was ~~$3.6~~$4.5 million, ~~$2.4~~$3.9 million and ~~$2.1~~$2.6 million as of ~~October 31,~~May 1, 2021, January 30, 2021 and May 2, 2020, ~~February 1, 2020 and November 2, 2019,~~ respectively. The value of points redeemed through our loyalty program was ~~$1.9~~$2.1 million and ~~$4.2~~$0.9 million for the thirteen ~~and thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~respectively, and $2.0 million and $3.7 million for the thirteen and thirty-nine week periods ended November 2, 2019,~~ respectively. For the thirteen weeks ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~and November 2, 2019,~~ the opening loyalty program balance was ~~$1.7~~$3.9 million and ~~$1.8~~$2.4 million, respectively, of which ~~$0.5~~$0.9 million and less than $0.1 million, respectively, was recognized as revenue during the period. For the thirty-nine weeks ended October 31, 2020 and November 2, 2019, the opening loyalty program balance was $2.4 million and $1.7 million, respectively, of which $1.6 million and $0.4 million, respectively, was recognized as revenue during the period.

Leases

We conduct all of our retail sales and corporate operations in leased facilities. Lease terms for our stores are generally for ten years (subject to elective extensions) and provide for escalations in base rents. Many of our store leases contain one or more options to renew the lease at our sole discretion. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised.

Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. Certain leases provide for additional rent based on a percentage of sales and annual rent increases generally based upon the Consumer Price Index. In addition, most of our store leases are net leases, which typically require us to be responsible for certain property operating expenses, including property taxes, insurance, common area maintenance, in addition to base rent. Many of our store leases contain certain co-tenancy provisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.

In response to stores being closed to the public as a result of the COVID-19 pandemic, we ~~have~~ elected to withhold payment of our contractual lease obligations with respect to certain stores for the periods we were ~~and are~~ unable to operate such stores. ~~As of October 31, 2020, withheld contractual lease payments totaled $12.4 million in the aggregate.~~ We ~~are currently in the process of~~have substantially completed negotiating ~~COVID-19-related~~COVID-19 related lease concessions for ~~these stores.~~most of our stores, with less than 10 stores and $0.8 million of withheld rents remaining unresolved as of May 1, 2021. These agreements have generally resulted in a combination of rent abatements and/or rent deferrals. With respect to all of our stores, we continue to have ongoing conversations with our landlords generally regarding what we believe to be commercially reasonable lease concessions given the current environment. We have reached agreements in full or in principle with respect to lease concessions covering approximately 90% of our total stores at this time. These agreements have generally resulted in a combination of rent abatements and/or rent deferrals. We have considered the Financial Accounting Standards Board's (“FASB”) recent guidance regarding COVID-19 lease concessions and have elected to account for the lease concessions that have been granted as lease modifications.

We lease approximately 172,000 square feet of office and warehouse space (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. ~~The~~Our lease ~~expires~~began in January 1, 2003 and terminates on December 31, 2027. During each of the thirteen ~~and~~

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~~thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~and November 2, 2019,~~ we incurred rent expense of $0.5 million ~~and $1.6 million, respectively,~~ related to this lease.

We lease approximately 26,000 square feet of office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. During each of the thirteen ~~and thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021, and May 2, 2020, ~~and November 2, 2019,~~ we incurred rent expense of $0.1 million ~~and $0.3 million, respectively,~~ related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease ~~expires~~began on June 29, 2012 and terminates on June 30, 2022.

We lease approximately 81,000 square feet of office and warehouse space (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commerce distribution center. During each of the thirteen ~~and thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~and November 2, 2019,~~ we incurred rent expense of $0.2 million ~~and $0.7 million, respectively,~~ related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease ~~expires~~began on November 1, 2011 and terminates on October 31, 2021. We are in the process of renegotiating this lease.

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The maturity of operating lease liabilities as of ~~October 31, 2020~~May 1, 2021 were as follows (in thousands):


Fiscal Year	Fiscal Year			Fiscal Year	Related Party		Other		Total
2020		$	25,619
2021	2021	63,700		2021	$	2,297	$	49,874	$	52,171
2022	2022	57,131		2022	2,246		61,829		64,075
2023	2023	48,687		2023	2,168		51,111		53,279
2024	2024	37,940		2024	2,233		40,218		42,451
2025				2025	2,300		30,968		33,268
Thereafter	Thereafter	82,030		Thereafter	4,393		58,919		63,312
Total minimum lease payments	Total minimum lease payments	315,107		Total minimum lease payments	15,637		292,919		308,556
Less: Amount representing interest	Less: Amount representing interest	38,308		Less: Amount representing interest	1,954		49,342		51,296
Present value of operating lease liabilities	Present value of operating lease liabilities	$	276,799	Present value of operating lease liabilities	$	13,683	$	243,577	$	257,260

As of ~~October 31, 2020,~~May 1, 2021, additional operating lease contracts that have not yet commenced are approximately ~~$8.6~~$1.2 million. Further, additional operating lease contract modifications executed subsequent to the balance sheet date, but prior to the report date, are approximately ~~$4.7~~$3.8 million.

Lease expense for the thirteen ~~and thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021 and May 2, 2020 ~~and November 2, 2019~~ was as follows (in thousands):

Thirteen Weeks Ended
October 31, 2020 Thirteen Weeks Ended
November 2, 2019
Cost of goods sold SG&A Total Cost of goods sold SG&A Total
Fixed operating lease expense $ 14,829 $ 409 $ 15,238 $ 15,634 $ 381 $ 16,015
Variable lease expense 4,663 12 4,675 4,379 14 4,393
Total lease expense $ 19,492 $ 421 $ 19,913 $ 20,013 $ 395 $ 20,408

Thirty-Nine Weeks Ended
October 31, 2020 Thirty-Nine Weeks Ended
November 2, 2019
Cost of goods sold SG&A Total Cost of goods sold SG&A Total
Fixed operating lease expense $ 45,229 $ 1,212 $ 46,441 $ 46,575 $ 1,147 $ 47,722
Variable lease expense 12,907 62 12,969 12,324 55 12,379
Total lease expense $ 58,136 $ 1,274 $ 59,410 $ 58,899 $ 1,202 $ 60,101

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For the thirteen and thirty-nine weeks ended November 2, 2019, we corrected an immaterial error of $2.9 million and $9.2 million, respectively, which consisted solely of an understatement of amounts disclosed for fixed operating lease expense and an overstatement of amounts disclosed for variable lease expense with no changes in reported total lease expense.


	Thirteen Weeks Ended May 1, 2021						Thirteen Weeks Ended May 2, 2020
	Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	$	15,217	$	410	$	15,627	$	15,514	$	401	$	15,915
Variable lease expense (credit)	3,899		(11)		3,888		3,819		22		3,841
Total lease expense	$	19,116	$	399	$	19,515	$	19,333	$	423	$	19,756

Supplemental lease information for the thirteen weeks ended ~~October 31,~~May 1, 2021 and May 2, 2020 was as follows:


~~Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)~~			~~$36,694~~
~~Weighted average remaining lease term (in years)~~			~~5.8 years~~
~~Weighted average interest rate~~ ~~(1)~~			~~4.64%~~


	Thirteen Weeks Ended May 1, 2021	Thirteen Weeks Ended May 2, 2020
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)	$17,168	$5,615
Weighted average remaining lease term (in years)	5.6 years	6.0 years
Weighted average interest rate (1)	6.49%	4.01%

(1) Since our leases do not provide an implicit rate, we used anour incremental borrowing rate ("IBR") on date of adoption, at lease inception, or lease modification in determining the present value of future minimum payments. From our adoption of ASC 842 during Q1 FY2019 through Q2 FY2020, the IBR used was obtained from our financial institution. Beginning in Q3 FY2020, the IBR used was obtained from an independent third-party valuation firm.

Income Taxes

Our income tax ~~benefit~~expense was ~~$6.4~~$3.8 million, or ~~39.2%~~25.7% of ~~loss before taxes,~~pre-tax income, compared to income tax ~~expense~~benefit of ~~$5.9~~$(10.6) million, or ~~26.6%~~37.9% of ~~income before taxes~~pre-tax loss, for the ~~thirty-nine~~thirteen weeks ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~and November 2, 2019,~~ respectively. The ~~increase~~decrease in the effective income tax rate is primarily due to the ~~anticipated~~ benefit realized during the prior year from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted on March 27, 2020, which provides for net operating losses in fiscal 2020 to be carried back to earlier tax years ~~with~~which were subject to higher income tax rates than the current year. As a result of the operating losses being carried back, an income tax receivable of $1.8 million is included in receivables on the accompanying Consolidated Balance Sheet as of October 31,fiscal 2020.

New Accounting Standards Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2016-13 will become effective for us in the first quarter of fiscal 2023, with early adoption permitted and must be adopted using the modified retrospective method. We expect the new rules to apply to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, ~~Income Taxes~~ ~~(Topic 740)~~: Simplifying the Accounting for Income Taxes~~. The new rules reduce complexity by removing specific exceptions to general~~ ("ASU 2019-12"), which enhances and simplifies various aspects of income tax accounting ~~methodology including an exception for interim periods showing operating losses in excess of anticipated operating losses for the year.~~guidance. The ~~new rules will be~~guidance is effective for usannual periods

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after December 15, 2020. The Company adopted ASU 2019-12 in the first quarter of fiscal 2021. ~~We are currently evaluating the~~The impact this guidance ~~may have~~has on our consolidated financial statements and related ~~disclosures.~~disclosures is immaterial.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference ~~LIBOR~~London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.

Note 3: Marketable Securities

Marketable securities as of ~~October 31, 2020~~May 1, 2021 consisted of commercial paper, classified as available-for-sale, and fixed income securities, classified as held-to-maturity as we have the intent and ability to hold them to maturity. Our investments in commercial paper and fixed income securities are recorded at fair value and amortized cost, respectively, which approximates fair value. All of our marketable securities are less than one year from maturity.

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The following table summarizes our investments in marketable securities at ~~October 31,~~May 1, 2021, January 30, 2021 and May 2, 2020 ~~February 1, 2020 and November 2, 2019~~ (in thousands):


		October 31, 2020				May 1, 2021
		Cost or Amortized Cost		Gross Unrealized Holding Gains			Estimated Fair Value			Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	Commercial paper	$	24,950	$	25		$	24,975	Commercial paper	$	69,938	$	32	$	(1)	$	69,969
Fixed income securities	Fixed income securities	1,012		0			1,012		Fixed income securities	6,664		0		0		6,664
Total marketable securities									Total marketable securities	$	76,602	$	32	$	(1)	$	76,633
		$	25,962	$	25		$	25,987
										January 30, 2021
										Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper									Commercial paper	$	64,928	$	28	$	(1)	$	64,955

Total marketable securities									Total marketable securities	$	64,928	$	28	$	(1)	$	64,955

		February 1, 2020				May 2, 2020
		Cost or Amortized Cost		Gross Unrealized Holding Gains			Estimated Fair Value			Cost or Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Commercial paper	Commercial paper	$	54,463	$	293		$	54,756	Commercial paper	$	34,698	$	275	$	0	$	34,973
Fixed income securities	Fixed income securities	15,024		0			15,024		Fixed income securities	11,008		0		0		11,008
		$	69,487	$	293		$	69,780

		November 2, 2019
		Cost or Amortized Cost		Gross Unrealized Holding Gains			Estimated Fair Value
Commercial paper		$	39,586	$	162		$	39,748
Fixed income securities		22,728		0			22,728
		$	62,314	$	162		$	62,476
Total marketable securities									Total marketable securities	$	45,706	$	275	$	0	$	45,981

We recognized gains on investments for commercial paper that matured during the thirteen ~~and thirty-nine~~ week periods ended ~~October 31, 2020~~May 1, 2021 and ~~November~~May 2, ~~2019.~~2020. Upon recognition of the gains, we reclassified these amounts out of Accumulated Other Comprehensive Income and into “Other income, net” on the Consolidated Statements of ~~Income (Loss).~~Operations.

The following table summarizes our gains on investments for commercial paper (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 31,
2020 November 2,
2019 October 31,
2020 November 2,
2019
Gains on investments $ 0 $ 428 $ 554 $ 1,026


	Thirteen Weeks Ended
	May 1, 2021		May 2, 2020
Gains on investments	$	29	$	252

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Note 4: ~~Line of~~Asset-Backed Credit Facility

~~As of October 31,~~On November 9, 2020 (the “Closing Date”), we entered into an asset-backed credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association ("Bank"), as lender, administrative agent and collateral agent (the “Agent”). The Credit Agreement replaced our ~~previous~~then-existing amended and restated credit agreement ~~(as~~(the “Prior Credit Agreement”), dated as of May 3, 2012, as amended, with the ~~"Prior~~Agent.

The Credit ~~Agreement") with Wells Fargo Bank, N.A. (the "Bank") provided~~Agreement provides for ~~a $25.0~~an asset-based, senior secured revolving credit facility of up to $65.0 million consisting of revolving ~~line~~loans, letters of credit and swing line loans provided by lenders, with a ~~maturity~~sub limit on credit outstanding at any time of $10.0 million and a sub limit for swing line loans of $7.5 million.The Credit Agreement also includes an uncommitted accordion feature whereby we may increase the revolving commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions.The revolving facility matures on November 9, 2023. The payment and performance in full of the secured obligations under the revolving facility are secured by a lien on and security interest in all of the assets of our Company.

The maximum borrowings permitted under the revolving facility is equal to the lesser of (x) the revolving commitment and (y) the borrowing base. The borrowing base is equal to (a) 90% of the borrower's eligible credit card receivables, plus (b) 90% of the cost of the borrower's eligible inventory, less inventory reserves established by the Agent, and adjusted by the appraised value of such eligible inventory, plus (c) 90% of the cost of the borrower's eligible in-transit inventory, less inventory reserves established by the Agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the Agent. As of the Closing Date, we were eligible to borrow up to a total of $40.1 million under the revolving facility. As of the Closing Date, we had 0 outstanding borrowings under the Credit Agreement and the only utilization of the letters of credit sub limit under the Credit Agreement was a $2.0 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on the Closing Date to the Credit Agreement.

The unused portion of the revolving commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. Borrowings under the revolving facility bear interest at a rate per annum that ranges from the LIBOR rate plus 2.0% to the LIBOR rate plus 2.25%, or the base rate plus 1.0% to the base rate plus 1.25%, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. We may elect to apply either the LIBOR rate or base rate interest to borrowings at our discretion, other than in the case of swing line loans, to which the base rate shall apply.

Under the Credit Agreement, we are subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the Closing Date, we are prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the Closing Date, we are allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of ~~January 31, 2023.~~any such payment and after giving effect thereto and certain minimum availability and minimum projected availability tests are satisfied.

In connection with the entry into the Credit Agreement, on November 9, 2020, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Agent, and (ii) a guaranty by us in favor of the Agent. The security agreement and the guaranty replaced (i) the general pledge agreement, dated as of May 3, 2012, by us in favor of the bank, (ii) the continuing guaranty by us in favor of the Agent, dated May 3, 2012, and (iii) the amended and restated security agreement with respect to equipment and the amended and restated security agreement with respect to rights to payment and inventory, in each case, dated as of May 3, 2012.

As of May 1, 2021, we were in compliance with all of our covenants, were eligible to borrow up to a total of $48.5 million, and had 0 outstanding borrowings under the Credit Agreement.

The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. No borrowings were outstanding under the Prior Credit Agreement as of the Closing Date. The interest rate charged on borrowings under the Prior Credit Agreement was selected at our discretion at the time of draw between ~~the London Interbank Offered Rate ("LIBOR"),~~LIBOR plus 0.75%, or at the Bank’s prime rate. The agreement allowed for the declaration and payment of dividends or distributions to stockholders, subject to certain limitations. On February 12, 2020 and February 27, 2019, we paid a special cash dividend of $1.00 per share to all holders of record of issued and outstanding shares of both our Class A and Class B common stock. The line of creditPrior Credit Agreement was secured by substantially all of our assets. ~~As a sub-feature under the Prior Credit Agreement, the Bank could also issue stand-by and/or commercial letters of credit up to $15.0 million.~~

In March 2020, we borrowed $23.7 million under our ~~revolving credit facility,~~Prior Credit Agreement, which represented the maximum borrowings permitted ~~thereunder. In~~thereunder, and which were subsequently repaid in September ~~2020, we repaid all of the borrowings under the revolving credit facility and, as a result, we had no debt outstanding under the revolving credit facility as of October 31,~~ 2020.

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debt, capitalized lease payments, interest expense and rent expense; (iv) minimum eligible inventory, cash, cash equivalents and marketable securities totaling $50.0 million as of the end of each quarter; and (v) not more than $50.0 million in allowable investments in fixed assets in any fiscal year. In addition, pursuant to the terms of our revolving credit facility, we are required to pay any and all indebtedness, obligations, assessments and taxes when due, subject to certain limitations.

As of October 31, 2020, we were not in compliance with our covenants under our the Prior Credit Agreement, with respect to (i) the financial covenants related to our Fixed Coverage Ratio, Funded Debt to EBITDAR Ratio and minimum profitability, and (ii) the covenant that we pay any and all contractual store lease obligations when due on the basis of our non-payment of certain of our contractual rental obligations pursuant to our store leases during the COVID-19 pandemic, including for those stores closed to the public during June and July 2020. As of October 31, 2020, our Fixed Coverage Ratio was 0.7 to 1.0, our Funded Debt to EBITDAR Ratio was 5.2 and income before income taxes on a trailing 12-month basis was $(7.4) million. The Bank provided a limited waiver with respect to all of the violations noted above.

In September 2020, we increased the standby letter of credit from $1.3 million to $2.0 million. The standby letter of credit was established for security against insurance claims as required by our workers' compensation insurance policy. There has been 0 activity or borrowings under this letter of credit since its inception.

On November 9, 2020, we entered into a credit agreement (the "New Credit Agreement") with the Bank, which replaced the Prior Credit Agreement which was terminated concurrently therewith. See "Note 9: Subsequent Events" for more information.

Note 5: Commitments and Contingencies

From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.

~~Juan~~Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. ~~30-2017-00948710-CU-OE-CXC.~~30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act ("PAGA") against us seeking penalties on behalf of himself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We requested the plaintiff to dismiss the class action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. In June 2018, the plaintiff's class action complaint was dismissed. The parties mediated the PAGA case with a well-respected mediator in March 2020. Although the case did not settle at the mediation, the parties have agreed to continue their settlement discussions with the assistance of the mediator. The court has not yet issued a trial date. By agreement between co-defendant BaronHR and Tilly's, BaronHR is required to indemnify ~~Tilly's~~us for all of ~~Tilly's~~our losses and expenses incurred in connection with this matter. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ~~Accounting Standards Codification, or~~ ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.

Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405. In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hour laws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court granted our demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against us and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative class members did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written order sustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed an appeal of the order to the California Court of Appeal. In February 2019, the Court of Appeal issued an opinion overturning the trial court’s decision, holding that the plaintiff’s allegations stated a claim. In March 2019, we filed a petition for review with the California Supreme Court seeking its discretionary review of the Court of Appeal’s decision. The California Supreme Court declined to review the Court of Appeal’s decision. Since the case was remanded back to the trial court, the parties have been engaged in discovery. In March 2020, the plaintiff filed a motion for class certification. In July 2020, we filed our opposition to the motion for class certification. In September 2020, the plaintiff filed her reply brief in support of the motion for class certification. In October 2020, the court denied ~~plaintiff’s~~plaintiff's motion for class certification. In December 2020, the plaintiff filed a notice of appeal of the court's order denying her motion for class certification. We have defended this case vigorously, and will continue to do

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so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.

Note 6: Fair Value Measurements

We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:

•Level 1 – Quoted prices in active markets for identical assets and liabilities.

•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3 – Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as ~~either~~ available-for-sale, ~~or held-to-maturity securities,~~ and certain cash equivalents, specifically money market securities, and commercial ~~paper and bonds.~~paper. The money

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market accounts are valued based on quoted market prices in active markets. The marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party entities.

From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for impairment using Company specific assumptions which would fall within Level 3 of the fair value hierarchy.

Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.

During the thirteen ~~and thirty-nine~~ week periods ended ~~October 31,~~May 1, 2021 and May 2, 2020, ~~and November 2, 2019,~~ we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of ~~October 31,~~May 1, 2021, January 30, 2021 and May 2, 2020, ~~February 1, 2020 and November 2, 2019,~~ we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

Financial Assets

We have categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):


		October 31, 2020						February 1, 2020						November 2, 2019							May 1, 2021						January 30, 2021						May 2, 2020
		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3			Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Cash equivalents (1):	Cash equivalents (1):																			Cash equivalents (1):
Money market securities	Money market securities	$	93,045	$	0	$	0	$	58,614	$	0	$	0	$	62,340	$	0	$	0	Money market securities	$	70,477	$	0	$	0	$	67,115	$	0	$	0	$	62,906	$	0	$	0
Commercial paper		0		0		0		0		0		0		0		0		0

Marketable securities:	Marketable securities:																			Marketable securities:
Commercial paper	Commercial paper	$	0	$	24,975	$	0	$	0	$	54,756	$	0	$	0	$	39,748	$	0	Commercial paper	$	0	$	69,969	$	0	$	0	$	64,955	$	0	$	0	$	34,973	$	0
Fixed income securities		0		1,012		0		0		15,024		0		0		22,728		0

(1) Excluding cash.

Impairment of Long-Lived Assets

An impairment is recorded on a long-lived asset used in operations whenever events or changes in circumstances indicate that the net carrying amounts for such asset may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets, a decision to relocate or permanently close a store, or significant changes in our business strategies.

An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on

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the discounted cash flows of the assets using a rate that approximates our weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures, computer hardware and software, and operating lease assets, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.

On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. During the ~~thirty-nine~~thirteen weeks ended ~~October 31, 2020,~~May 1, 2021, based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that ~~fourteen~~NaN of our stores would not be able to generate sufficient cash flows over the remaining term of the related lease to recover our investment in the respective store. As a result, we recorded 0 impairment charges ~~of approximately $0.9 million~~ to write-down the carrying value of certain long-lived store assets to their estimated fair values.

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 31,
2020 November 2,
2019 October 31,
2020 November 2,
2019
($ in thousands)
Carrying value of assets with impairment $26 * $929 *
Fair value of assets impaired $0 * $0 *
Number of stores tested for impairment 34 3 52 4
Number of stores with impairment 2 0 12 0

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Thirteen Weeks Ended

May 1,
2021

May 2,
2020

($ in thousands)

Carrying value of assets with impairment

$536

Fair value of assets impaired

$203

Number of stores tested for impairment

Number of stores with impairment

* Not applicable

Note 7: Share-Based Compensation

The Tilly's, Inc. 2012 Second Amended and Restated Equity and Incentive Plan, as amended in June 2020 (the "2012 Plan"), authorizes up to 6,613,900 shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of ~~October 31, 2020,~~May 1, 2021, there were ~~2,560,506~~2,305,536 shares available for future issuance under the 2012 Plan.

Stock Options

We grant stock options to certain employees that give them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The non qualified options vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire ten years from the date of grant.

The following table summarizes the stock option activity for the ~~thirty-nine~~thirteen weeks ended ~~October 31, 2020~~May 1, 2021 (aggregate intrinsic value in thousands):

Stock
Options Grant Date
Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual
Life (in Years) Aggregate
Intrinsic
Value (1)
Outstanding at February 1, 2020 1,993,187 $ 9.50
Granted 671,900 $ 4.38
Forfeited (49,687) $ 7.83
Expired (18,126) $ 12.22
Outstanding at October 31, 2020 2,597,274 $ 8.19 7.1 $ 1,239
Exercisable at October 31, 2020 1,310,880 $ 9.03 5.3 $ 41


	Stock Options	Grant Date Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value (1)
Outstanding at January 31, 2021	2,602,212	$	8.19
Granted	503,700	$	10.74
Exercised	(359,907)	$	7.37
Forfeited	(246,718)	$	9.33
Expired	(32,000)	$	16.26
Outstanding at May 1, 2021	2,467,287	$	8.61	7.2	$	9,019
Exercisable at May 1, 2021	1,272,206	$	9.00	5.3	$	4,453

(1)Intrinsic value for stock options is defined as the difference between the market price of our Class A common stock on the last business day of the fiscal period and the weighted average exercise price of in-the-money stock options outstanding at the end of the fiscal period. The market value per share was ~~$6.14~~$12.06 at ~~October 31, 2020.~~May 1, 2021.

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The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We account for forfeitures as they occur. We will issue shares of Class A common stock when the options are exercised.

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The fair values of stock options granted during the thirteen ~~and thirty-nine~~ weeks ended ~~October 31,~~May 1, 2021 and May 2, 2020 ~~and November 2, 2019~~ were estimated on the grant date using the following assumptions:


		Thirteen Weeks Ended		Thirty-Nine Weeks Ended			Thirteen Weeks Ended
		October 31, 2020	November 2, 2019	October 31, 2020	November 2, 2019		May 1, 2021	May 2, 2020
Weighted average grant-date fair value per option granted	Weighted average grant-date fair value per option granted	$4.04	$4.52	$2.19	$5.10	Weighted average grant-date fair value per option granted	$5.64	$2.05
Expected option term (1)	Expected option term (1)	5.7 years	5.0 years	5.3 years	5.0 years	Expected option term (1)	5.4 years	5.3 years
Weighted average expected volatility factor (2)	Weighted average expected volatility factor (2)	59.9%	54.5%	57.5%	53.8%	Weighted average expected volatility factor (2)	59.9%	57.3%
Weighted average risk-free interest rate (3)	Weighted average risk-free interest rate (3)	0.3%	1.6%	0.4%	2.1%	Weighted average risk-free interest rate (3)	0.9%	0.4%
Expected annual dividend yield (4)	Expected annual dividend yield (4)	—%	—%	0%	0%	Expected annual dividend yield (4)	0%	0%

(1)The expected option term of the awards represents the estimated time that options are expected to be outstanding based upon historical option data.

(2)Stock volatility for each grant is measured using the historical daily price changes of our common stock over the most recent period equal to the expected option term of the awards.

(3)The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.

(4)We do not currently have a dividend ~~policy and we do not anticipate paying any additional cash dividends on our common stock at this time.~~policy.

Restricted Stock Awards

Restricted stock awards ("RSAs") represent restricted shares of our common stock issued upon the date of grant in which the recipient's rights in the stock are restricted until the shares are vested. Under the 2012 Plan, we grant RSAs to independent members of our Board of Directors. RSAs granted to our Board of Directors vest at a rate of 50% on each of the first two anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vesting dates. We determine the fair value of RSAs based upon the closing price of our Class A common stock on the date of grant.

~~The following table summarizes the status~~A summary of non-vested ~~RSA changes~~RSAs at May 1, 2021 and January 30, 2021 is presented below:


	Restricted Stock	Weighted Average Grant-Date Fair Value
Nonvested at May 1, 2021 and January 30, 2021	71,548	$	6.71

There were no RSAs granted, vested, or forfeited during the ~~thirty-nine~~thirteen weeks ended ~~October 31, 2020:~~

Restricted
Stock Weighted
Average
Grant-Date
Fair Value
Nonvested at February 1, 2020 51,920 $ 9.24
Granted 50,956 $ 6.28
Vested (31,328) $ 10.21
Nonvested at October 31, 2020 71,548 $ 6.71
May 1, 2021.

Share-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the requisite service period. The following table summarizes share-based compensation expense recorded in the Consolidated Statements of ~~Income (Loss)~~Operations (in thousands):


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended
		October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019			May 1, 2021		May 2, 2020
Cost of goods sold(1)	Cost of goods sold(1)	$	147	$	129	$	434	$	337	Cost of goods sold(1)	$	(38)	$	146
Selling, general and administrative expenses	Selling, general and administrative expenses	361		444		1,083		1,311		Selling, general and administrative expenses	404		355
Total share-based compensation expense	Total share-based compensation expense	$	508	$	573	$	1,517	$	1,648	Total share-based compensation expense	$	366	$	501

(1)

~~Table~~Current period share-based compensation expense attributed to cost of ~~Contents~~goods sold was exceeded by related forfeiture credits due to the departure of the Company's prior Chief Merchandising Officer effective March 19, 2021.

At ~~October 31, 2020,~~May 1, 2021, there was ~~$4.2~~$5.1 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stock. This cost has a weighted average remaining recognition period of ~~2.6~~3.1 years.

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Note 8: ~~Income~~Earnings (Loss) Per Share

~~Income~~Earnings (loss) per share is computed under the provisions of ASC 260, Earnings Per Share. Basic income (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method, whereby proceeds from such exercise, unamortized compensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by us to purchase the common shares at the average market price during the period. Potentially dilutive shares of common stock represent outstanding stock options and RSAs.

The components of basic and diluted ~~income~~earnings (loss) per share were as follows (in thousands, except per share amounts):


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended
		October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019			May 1, 2021		May 2, 2020
Net income (loss)	Net income (loss)	$	2,113	$	6,388	$	(10,016)	$	16,349	Net income (loss)	$	10,959	$	(17,395)
Weighted average basic shares outstanding	Weighted average basic shares outstanding	29,708		29,529		29,693		29,501		Weighted average basic shares outstanding	29,878		29,677
Dilutive effect of stock options and restricted stock	Dilutive effect of stock options and restricted stock	102		230		0		244		Dilutive effect of stock options and restricted stock	651		0
Weighted average shares for diluted income per share		29,810		29,759		29,693		29,745
Basic income (loss) per share of Class A and Class B common stock		$	0.07	$	0.22	$	(0.34)	$	0.55
Diluted income (loss) per share of Class A and Class B common stock		$	0.07	$	0.21	$	(0.34)	$	0.55
Weighted average shares for diluted earnings per share										Weighted average shares for diluted earnings per share	30,529		29,677
Basic earnings (loss) per share of Class A and Class B common stock										Basic earnings (loss) per share of Class A and Class B common stock	$	0.37	$	(0.59)
Diluted earnings (loss) per share of Class A and Class B common stock										Diluted earnings (loss) per share of Class A and Class B common stock	$	0.36	$	(0.59)

The following stock options have been excluded from the calculation of diluted ~~income~~earnings (loss) per share as the effect of including these stock options would have been anti-dilutive (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 31,
2020 November 2,
2019 October 31,
2020 November 2,
2019
Stock options 1,503 1,652 2,597 1,652
Restricted stock 0 11 72 0
Total 1,503 1,663 2,669 1,652

Thirteen Weeks Ended

May 1,
2021

May 2,
2020

Stock options

1,204

~~Note 9: Subsequent Events~~

On November 9, 2020, we entered into a credit agreement (the “New Credit Agreement”) with the Bank, which replaced the Prior Credit Agreement which was terminated concurrently therewith. No borrowings were outstanding under the Prior Credit Agreement as of the closing date or as of December 1, 2020.

The New Credit Agreement provides for an asset-based, senior secured revolving credit facility of up to $65.0 million consisting of revolving loans, letters of credit and swing line loans provided by lenders, with a sub limit on letters of credit outstanding at any time of $10.0 million and a sub limit for swing line loans of $7.5 million. The New Credit Agreement also includes an uncommitted accordion feature whereby we may increase the revolving commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions. The revolving facility matures on November 9, 2023. The payment and performance in full of the secured obligations under the revolving facility are secured by a lien on and security interest in all of the assets of our company.

The maximum borrowings permitted under the revolving facility is equal to the lesser of (x) the revolving commitment and (y) the borrowing base. The borrowing base is equal to (a) 90% of the borrowers’ eligible credit card receivables, plus (b) 90% of the cost of the borrowers’ eligible inventory, less inventory reserves established by the agent, and adjusted by the appraised value of such eligible inventory, plus (c) 90% of the cost of the borrowers’ eligible in-transit inventory, less inventory reserves established by the agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the agent. As of the closing date, we were eligible to borrow up to a total of $40.1 million under the revolving facility. As of the closing date, we had 0 outstanding borrowings under the New Credit Agreement and the only utilization of the letters of credit sub limit under the New

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Credit Agreement was a $2.025 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on the closing date to the New Credit Agreement.

Under the New Credit Agreement, we are subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the closing date, we are prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the closing date, we are allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto and certain minimum availability and minimum projected availability tests are satisfied.

In connection with the entry into the New Credit Agreement, on November 9, 2020, we entered into certain ancillary agreements, including (i) a security agreement in favor of the agent, and (ii) a guaranty by us in favor of the agent. The security agreement and the guaranty replaced (i) the general pledge agreement, dated as of May 3, 2012, by us in favor of the bank, (ii) the continuing guaranty by us in favor of the agent, dated May 3, 2012, and (iii) the amended and restated security agreement with respect to equipment and the amended and restated security agreement with respect to rights to payment and inventory, in each case, dated as of May 3, 2012, by us in favor of the bank, which were all terminated concurrently with the termination of the Prior Credit Agreement.

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

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Tilly’s, Inc. included in Part I Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020.~~January 30, 2021. As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “the Company”, “World of Jeans & Tops”, “we”, “our”, “us”, "Tillys" and “Tilly’s” refer to Tilly’s, Inc. and its subsidiary.

Overview

Tillys is a destination specialty retailer of casual apparel, footwear, accessories and ~~accessories~~hardgoods for young men, young women, boys and girls. We ~~offer~~believe we bring together an ~~extensive assortment~~unparalleled selection of iconic global, emerging, and proprietary brands rooted in an active and ~~social~~outdoor lifestyle. The Tillys ~~started operations~~concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened our first store in Orange County, California. As of ~~October 31, 2020,~~May 1, 2021, we operated 238 stores ~~including one RSQ-branded pop-up store and one RSQ Skate store~~ in 33 states, averaging approximately 7,400 square feet per store, compared to ~~232~~239 total stores ~~including one RSQ-branded pop-up store,~~ last year at this time, all of which were ~~open~~temporarily closed to the public ~~without restrictions on operating hours~~beginning March 18, 2020 and ~~customer traffic.~~through the end of the first quarter of fiscal 2020 in response to the COVID-19 pandemic. We also sell our products through our e-commerce website, www.tillys.com.

Known or Anticipated Trends

As ~~described elsewhere~~of the date of filing this Quarterly Report on Form 10-Q (this "Report"), there remain many uncertainties regarding the ongoing COVID-19 pandemic (the "pandemic"), including the anticipated duration and severity of the pandemic, particularly in ~~this Report,~~light of ongoing vaccination efforts and emerging variant strains of the ~~COVID-19~~virus. To date, the pandemic has had far-reaching ~~adverse~~ impacts on many aspects of ~~our business, both~~the operations of the Company, directly and indirectly, including on ~~our operations generally,~~ consumer behavior, store traffic, operational capabilities and our operations generally, timing of deliveries, demands on our information technology and e-commerce capabilities, inventory and expense management, ~~production capabilities, timing of deliveries,~~ managing our workforce, our ~~store~~storefront configurations and operations upon reopening, and our people, which have materially disrupted our business and the market generally. The scope and nature of these impacts continue to ~~evolve each day. The following is a summary of additional updates regarding our business subsequent to~~evolve. While the ~~end~~scope and severity of the ~~fiscal quarter ended October 31, 2020 (unless otherwise stated, the information provided is through December 1, 2020):~~

•~~Quarter-to-Date Comparable Net Sales Results through December 1, 2020~~:

Our quarter-to-date comparable net sales for the fourth quarter of fiscal 2020 through December 1, 2020, were $56.0 million, a slight decrease of $0.3 million or 0.6%, compared to $56.3 million through December 3, 2019, which is the comparable fiscal date last year.

•Comparable net sales from physical stores, including all periods of store closures, were $36.7 million, a decrease of $6.1 million or 14.2%, compared to $42.8 million for the comparable period last year. Store traffic decreased by 29% compared to the corresponding period of last year, partially offset by a high single-digit percentage increase in conversion rate and a low double-digit percentage increase in average transaction value.

•~~Net sales from e-commerce were $19.3 million, an increase of $5.7 million or 42.4%, compared to $13.5 million for the comparable period last year.~~

•The results of operations noted above thus far in the fourth quarter of fiscal 2020 are not necessarily indicative of results to be expected for the fourth quarter as a whole, especially in light of the uncertainties surrounding theadverse impacts of the ~~COVID-19~~ pandemic have shown signs of reduction in recent months, the pandemic resulted in, and may in the future result in, regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including ~~but not limited to our ability to continue operating some or all~~the inability of our ~~stores or e-commerce, significant restrictions on store customer traffic~~suppliers and ~~operating hours, anticipated reductions in consumer spending,~~service providers to deliver materials and ~~higher unemployment compared to last year's fourth quarter.~~

•~~Cash/Liquidity~~:

As of December 2, 2020, cash on hand, cash equivalents, and marketable securities totaled $138.6 million, including an aggregate of $4.4 million of withheld store lease payments and no debt outstanding, compared to $143.7 million and no withheld store lease payments or debt outstanding as of December 4, 2019, which is the comparable fiscal date last year. Based on all available current information, we believe the combination of our cash, marketable securities, and credit facility availability will be sufficient to support our operations for at least the next twelve months.

•~~Inventory Management~~:

~~Merchandise inventories as of the end of the third quarter of fiscal 2020 were 7.4% below comparable inventory levels as of the end of the third quarter of fiscal 2019~~services on a ~~per square foot basis. In anticipation of a much more unpredictable~~timely basis, or at all, severe market volatility, liquidity disruptions, and challenging holiday season this year, we have reduced our future inventory commitments for physical stores significantly for the remainder of fiscal 2020. As a result, we currently expect our future inventories per square foot to remain at or below prior year levels for the remainder of fiscal 2020. However, there can be no guarantee that our inventory management efforts will be sufficient to keep our inventory levels consistent with the level of any net sales declinesoverall economic instability, which, in many cases, had, and may in the ~~future.~~

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•~~Capital Expenditures~~:

We opened two new stores during fiscal 2020, one in each of October and November. We currently anticipate total capital expenditures for fiscal 2020 for new stores and continuing customer-facing and other information technology enhancements to be approximately $8 million. We currently expect to open 7 new stores during fiscal 2021 which were originally signed and planned for opening during fiscal 2020, but were deferred upon agreement with the respective landlords. We currently expect total capital expenditures for fiscal 2021 not to exceed $20 million.

~~The COVID-19 pandemic, and certain of the measures taken by us in response to it, have had, and we expect will~~future continue to have, material adverse impacts on our ~~current~~ business, financial condition and results of ~~operations,~~operations. This situation is continually evolving, and additional impacts may ~~create additional risks for us. While~~arise that we ~~anticipate that~~are not aware of currently, or current impacts may become magnified.

Since the ~~foregoing impacts are temporary,~~second week of April 2021, we have experienced a significant shift in our sales mix back towards in-store sales as compared to e-commerce sales, which we expect may be due to the recent increases in vaccination rates and fewer pandemic-related restrictions. However, e-commerce remains a larger percentage of our total net sales compared to pre-pandemic levels. This trend may continue, but given the continuing unpredictable nature of the overall retail environment, including the ongoing uncertainty regarding how the pandemic may progress, the uncertainty concerning how much of our first quarter performance was influenced by the federal stimulus checks and atypical back-to-school timing, and whether or not there will be a more typical back-to-school period this year, we cannot reliably predict the specific duration for which we may be impacted, and we may experience additional or further impacts from the COVID-19 pandemic, and/or elect or need to take additional measures as the information available to us continues to develop, includingfuture business trends with respect to our employees, inventory receipts, store leases, and relationships with our third-party vendors, particularly in light of the recent significant increases in the number of COVID-19 cases across the United States, and corresponding actions that have been taken or that may be taken in response thereto. We expect to continue to assess the evolving impact of the COVID-19 pandemic on our consumers, employees, supply chain, and operations, and intend to adjust our responses accordingly. The extent to which the COVID-19 pandemic and our response thereto may impact our business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. See also “Risk Factors” within our most recently filed Annual Report on Form 10-K.any certainty.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are net sales, comparable store sales, gross profit, selling, general and administrative expenses and operating income.

Net Sales

Net sales reflect revenue from the sale of our merchandise at store locations and through e-commerce, net of sales taxes. Store sales are reflected in sales when the merchandise is received by the customer. For e-commerce sales, we recognize revenue, and the related cost of goods sold at the time the merchandise is shipped to the customer. Net sales also include shipping and handling fees for e-commerce shipments that have been shipped to the customer. Net sales are net of returns on sales during the period as well as an estimate of returns expected in the future stemming from current period sales. We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as "breakage"). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Net sales are also adjusted for the unredeemed awards and accumulated partial points on our customer loyalty program.

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Our business is seasonal and as a result our revenues fluctuate from quarter to quarter. In addition, our revenues in any given quarter can be affected by a number of factors including the timing of holidays and weather patterns. The third and fourth quarters of the fiscal year, which include the back-to-school and holiday sales seasons, have historically produced stronger sales and disproportionately stronger operating results than have the first two quarters of the fiscal year.

Comparable Store Sales

Comparable store sales is a measure that indicates the change in year-over-year comparable store sales which allows us to evaluate how our store base is performing. Numerous factors affect our comparable store sales, including:

•overall economic trends;

•our ability to attract traffic to our stores and e-commerce platform;

•our ability to identify and respond effectively to consumer preferences and fashion trends;

•competition;

•the timing of our releases of new and seasonal styles;

•changes in our product mix;

•pricing;

•the level of customer service that we provide in stores and through our e-commerce platform;

•our ability to source and distribute products efficiently;

•calendar shifts of holiday or seasonal periods;

•the number and timing of new store openings and the relative proportion of new stores to mature stores; and

•the timing and success of promotional and advertising efforts.

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Historically, our comparable store sales are sales from our e-commerce platform and stores open at least 12 full fiscal months as of the end of the current reporting period. However, as a result of the COVID-19 pandemic, our comparable store sales this fiscal year are defined as sales from our e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates of last year. A remodeled, relocated or refreshed store is included in comparable store sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% and the store was not closed for remodel for more than five days in any fiscal month. We include sales from our e-commerce platform as part of comparable store sales as we manage and analyze our business on a single omni-channel basis and have substantially integrated our investments and operations for our stores and e-commerce platform to give our customers seamless access and increased ease of shopping. Comparable store sales exclude gift card breakage income and e-commerce shipping and handling fee revenue. Some of our competitors and other retailers may calculate comparable or “same store” sales differently than we do. As a result, data in this report regarding our comparable store sales may not be comparable to similar data made available by other retailers.

Gross Profit

Gross profit is equal to our net sales less our cost of goods sold. Cost of goods sold reflects the direct cost of purchased merchandise as well as buying, distribution and occupancy costs. Buying costs include compensation and benefit expense for our internal buying organization. Distribution costs include costs for receiving, processing and warehousing our store merchandise, and shipping of merchandise to or from our distribution and e-commerce fulfillment centers and to our e-commerce customers and between store locations. Occupancy costs include the rent, common area maintenance, utilities, property taxes, security and depreciation costs of all store locations. These costs are significant and can be expected to continue to increase as our company grows. The components of our reported cost of goods sold may not be comparable to those of other retail companies.

We regularly analyze the components of gross profit as well as gross profit as a percentage of net sales. Specifically we look at the initial markup on purchases, markdowns and reserves, shrinkage, buying costs, distribution costs and occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the buying, distribution and occupancy components of cost of goods sold could have an adverse impact on our gross profit and results of operations.

Gross profit is also impacted by shifts in the proportion of sales of proprietary branded products compared to third-party branded products, as well as by sales mix shifts within and between brands and between major product departments such as mens apparel, womens apparel, footwear or accessories. A substantial shift in the mix of products could have a material impact on our results of operations. In addition, gross profit and gross profit as a percentage of net sales have historically been higher in the third and fourth quarters of the fiscal year, as these periods include the back-to-school and winter holiday selling seasons. In those periods, various costs, such as occupancy costs, generally do not increase in proportion to the seasonal sales increase.

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Selling, General and Administrative Expenses

Our selling, general and administrative, or SG&A, expenses are composed of store selling expenses and corporate-level general and administrative expenses. Store selling expenses include store and regional support costs, including personnel, advertising and debit and credit card processing costs, e-commerce receiving and processing costs and store supplies costs. General and administrative expenses include the payroll and support costs of corporate functions such as executive management, legal, accounting, information systems, human resources, impairment charges and other centralized services. Store selling expenses generally vary proportionately with net sales and store growth. In contrast, general and administrative expenses are generally not directly proportional to net sales and store growth, but will be expected to increase over time to support the needs of our growing company. SG&A expenses as a percentage of net sales are usually higher in lower volume periods and lower in higher volume periods.

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Operating Income (Loss)

Operating income (loss) equals gross profit less SG&A expenses. Operating income (loss) excludes interest income, interest expense and income taxes. Operating income (loss) percentage measures operating income (loss) as a percentage of our net sales.

We believe that drawing specific conclusions from comparative financial performance against fiscal 2020 results may be misleading given the various impacts of the COVID-19 pandemic. Further, it is challenging to predict future performance trends with any certainty due to many continuing unknowable factors in the current environment. These factors include but are not limited to:

•how the pandemic may continue to impact consumer habits;

•how the continuation or cessation of federal or state/local stimulus payments may continue to impact consumer spending;

•how store performance will compare relative to fiscal 2020 or fiscal 2019 over a longer period of time, particularly against last year’s strong results upon the initial reopening of stores which occurred on a staggered basis over several months;

•how our e-commerce business will perform relative to the significant increases in e-commerce net sales we experienced during the varying periods of store closures during fiscal 2020;

•whether or not we will have a more typical back-to-school season this year, which typically begins in late July; and

•whether any of the first quarter business we did in traditional back-to-school product categories will represent a pull-forward of normal back-to-school spending or if these first quarter sales will be incremental to the normal back-to-school season.

The extent to which the COVID-19 pandemic and our response thereto may impact our business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. For more details, see Item 1A. “Risk Factors - Risks Related to Our Business” within our most recently filed Annual Report on Form 10-K.

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Results of Operations

The following tables summarize key components of our unaudited results of operations for the periods indicated, both in dollars (in thousands) and as a percentage of our net ~~sales.~~sales:


		Thirteen Weeks Ended						Thirty-Nine Weeks Ended							Thirteen Weeks Ended
		October 31, 2020			November 2, 2019			October 31, 2020			November 2, 2019				May 1, 2021			May 2, 2020

Statements of Operations Data:	Statements of Operations Data:													Statements of Operations Data:
Net sales	Net sales	$	140,275		$	154,780		$	353,409		$	446,821		Net sales	$	163,157		$	77,289
Cost of goods sold	Cost of goods sold	99,615			107,609			269,481			312,247			Cost of goods sold	108,318			75,695
Gross profit	Gross profit	40,660			47,171			83,928			134,574			Gross profit	54,839			1,594
Selling, general and administrative expenses	Selling, general and administrative expenses	37,122			39,467			101,082			114,614			Selling, general and administrative expenses	39,965			29,995
Operating income (loss)	Operating income (loss)	3,538			7,704			(17,154)			19,960			Operating income (loss)	14,874			(28,401)
Other income, net		(28)			911			692			2,312
Other (expense) income, net														Other (expense) income, net	(115)			409
Income (loss) before income taxes	Income (loss) before income taxes	3,510			8,615			(16,462)			22,272			Income (loss) before income taxes	14,759			(27,992)
Income tax expense (benefit)	Income tax expense (benefit)	1,397			2,227			(6,446)			5,923			Income tax expense (benefit)	3,800			(10,597)
Net income (loss)	Net income (loss)	$	2,113		$	6,388		$	(10,016)		$	16,349		Net income (loss)	$	10,959		$	(17,395)

Percentage of Net Sales:	Percentage of Net Sales:													Percentage of Net Sales:
Net sales	Net sales	100.0		%	100.0		%	100.0		%	100.0		%	Net sales	100.0		%	100.0		%
Cost of goods sold	Cost of goods sold	71.0		%	69.5		%	76.3		%	69.9		%	Cost of goods sold	66.4		%	97.9		%
Gross profit	Gross profit	29.0		%	30.5		%	23.7		%	30.1		%	Gross profit	33.6		%	2.1		%
Selling, general and administrative expenses	Selling, general and administrative expenses	26.5		%	25.5		%	28.6		%	25.7		%	Selling, general and administrative expenses	24.5		%	38.8		%
Operating income (loss)	Operating income (loss)	2.5		%	5.0		%	(4.9)		%	4.5		%	Operating income (loss)	9.1		%	(36.7)		%
Other income, net		0.0		%	0.6		%	0.2		%	0.5		%
Other (expense) income, net														Other (expense) income, net	(0.1)		%	0.5		%
Income (loss) before income taxes	Income (loss) before income taxes	2.5		%	5.6		%	(4.7)		%	5.0		%	Income (loss) before income taxes	9.0		%	(36.2)		%
Income tax expense (benefit)	Income tax expense (benefit)	1.0		%	1.4		%	(1.8)		%	1.3		%	Income tax expense (benefit)	2.3		%	(13.7)		%
Net income (loss)	Net income (loss)	1.5		%	4.1		%	(2.8)		%	3.7		%	Net income (loss)	6.7		%	(22.5)		%

The following table presents store operating data for the periods indicated:


		Thirteen Weeks Ended						Thirty-Nine Weeks Ended							Thirteen Weeks Ended
		October 31, 2020			November 2, 2019			October 31, 2020			November 2, 2019				May 1, 2021			May 2, 2020
Operating Data:	Operating Data:													Operating Data:
Stores operating at end of period	Stores operating at end of period	238			232			238			232			Stores operating at end of period	238			239
Comparable store sales change (1)	Comparable store sales change (1)	(1.4)		%	3.1		%	4.3		%	2.0		%	Comparable store sales change (1)	7.5		%	8.6		%
Total square feet at end of period (in thousands)	Total square feet at end of period (in thousands)	1,753			1,732			1,753			1,732			Total square feet at end of period (in thousands)	1,753			1,768
Average net sales per retail store (in thousands) (2)		$	439		$	571		$	987		$	1,661
Average net sales per brick-and mortar store (in thousands) (2)														Average net sales per brick-and mortar store (in thousands) (2)	$	535		$	196
Average net sales per square foot (2)	Average net sales per square foot (2)	$	60		$	77		$	134		$	223		Average net sales per square foot (2)	$	73		$	27
E-commerce revenues (in thousands) (3)	E-commerce revenues (in thousands) (3)	$	35,729		$	22,713		$	118,051		$	65,200		E-commerce revenues (in thousands) (3)	$	35,482		$	30,336
E-commerce revenues as a percentage of net sales	E-commerce revenues as a percentage of net sales	25.5		%	14.7		%	33.4		%	14.6		%	E-commerce revenues as a percentage of net sales	21.7		%	39.2		%

(1)~~During fiscal 2019, our comparable~~Comparable store ~~sales are~~ sales from our e-commerce platform and stores open at least 12 full fiscal months as of the end of the current reporting period. However, as a result of the COVID-19 pandemic, our comparable store sales ~~for fiscal 2020~~ are defined as sales from our e-commerce platform and stores open on a daily basis compared to the same respective fiscal dates last year. A remodeled or relocated store is included in comparable store sales, both during and after construction, if the square footage of the store used to sell merchandise was not changed by more than 20% and the store was not closed for remodel for more than five days in any fiscal month. ~~Comparable store sales~~We include sales ~~through~~from our e-commerce platform ~~but~~as part of our comparable store sales as we manage and analyze our business as a single omni-channel and have substantially integrated our investments and operations for our stores and e-commerce platform to give our customers seamless access and increased ease or shopping. Comparable store sales exclude gift card breakage income, ~~deferred revenue on loyalty program~~ and e-commerce shipping and handling fee revenue.

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(2)The number of stores and the amount of square footage reflect the number of days during the period that stores were open. E-commerce sales, e-commerce shipping and handling fee revenue and gift card breakage are excluded from net sales in deriving average net sales per retail store.

(3)E-commerce revenues include e-commerce sales and e-commerce shipping and handling fee revenue.

~~Third~~

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First Quarter (13 Weeks) Ended ~~October 31, 2020~~May 1, 2021 Compared to ~~Third~~First Quarter (13 Weeks) Ended ~~November~~May 2, ~~2019~~2020

Net Sales

Net sales were ~~$140.3~~$163.2 million, ~~a decrease~~an increase of ~~$14.5~~$85.9 million, or ~~9.4%~~111.1%, compared to ~~$154.8~~$77.3 million for the corresponding period last year. These results were negatively influenced by the delayed back-to-school dates this year, restrictions on store customer traffic and operating hours, and the government-mandated closure of 33 California stores for a portion of the third quarter. Compared to the respective fiscal months of last year, August net sales decreased by 35%, followed by a 22% increase in September net sales and a 10% increase in October net sales.

•Net sales from physical stores were ~~$104.6~~$127.7 million, ~~a decrease~~an increase of ~~$27.5~~$80.7 million or ~~20.8%~~171.9%, compared to ~~$132.1~~$47.0 million ~~for~~last year, primarily due to the ~~corresponding period~~closure of all stores during the latter half of the first quarter last ~~year. Store traffic decreased by 34% compared to last year's third quarter, partially offset by~~year as a ~~low double-digit percentage increase in conversion rate and a high single-digit percentage increase in average transaction value.~~result of the COVID-19 pandemic. Net sales from stores represented ~~74.5%~~78.3% of total net sales compared to ~~85.3%~~60.8% of total net sales ~~for the corresponding period~~ last year. The Company ended the ~~third~~first quarter ~~of fiscal 2020~~ with 238 total stores ~~including one RSQ-branded pop-up store and one RSQ Skate store, all~~(all of which were ~~open~~open) compared to 239 total stores at the ~~public with restrictions on operating hours and customer traffic in light~~end of the ~~ongoing pandemic. This compares to 232 total stores, including one RSQ-branded pop-up store, all~~first quarter last year (all of which were ~~open without restrictions, for~~mandatorily closed). During the ~~corresponding period last year.~~first quarter of fiscal 2021, we opened two new stores and permanently closed two stores.

•Net sales from e-commerce were ~~$35.7~~$35.5 million, an increase of ~~$13.0~~$5.1 million or ~~57.3%~~17.0%, compared to ~~approximately $22.7~~$30.3 million ~~for the corresponding period~~ last year. E-commerce net sales represented ~~25.5%~~21.7% of total net sales compared to ~~14.7% for the corresponding period~~39.2% of total net sales last year.

Gross Profit

Gross profit was ~~$40.7~~$54.8 million, ~~a decrease~~an increase of ~~$6.5~~$53.2 million or ~~13.8%~~3,340.3%, compared to ~~$47.2~~$1.6 million for the corresponding period last year. Gross margin, or gross profit as a percentage of net sales, was ~~29.0%~~33.6% compared to ~~30.5%~~2.1% for the corresponding period last year. Product margins improved 70930 basis points as a percentage of net sales primarily due to ~~improved full-price selling on e-commerce and reduced markdowns overall compared~~the prior year impact of an estimated inventory reserve of $4.7 million recorded during last year's store shutdown period which represented 600 basis points of the comparative increase. Setting aside the prior year inventory reserve impact, the remaining product margin improvement of 330 basis points was primarily attributable to ~~last year.~~a lower total markdown rate. Buying, distribution and occupancy costs ~~deleveraged~~improved by ~~220~~2220 basis points collectively, despite increasing by $1.5 million in total, due to leveraging these costs against ~~lower total sales. Distribution~~a much higher level of net sales this year compared to last year's store shutdown period. Occupancy costs ~~deleveraged 120~~improved by 1700 basis points as a percentage of net sales ~~primarily due~~and were reduced by $0.5 million compared to ~~an increase in e-commerce shipping costs of $1.5 million resulting from a greater volume of e-commerce orders. Occupancy costs deleveraged 110~~last year. Distribution expenses improved by 450 basis points as a percentage of net sales despite ~~being reduced~~increasing by ~~$1.0~~$1.6 million. Buying costs ~~leveraged 10~~improved by 70 basis points as a percentage of net sales despite increasing by $0.5 million.

Selling, General and Administrative Expenses

SG&A expenses were ~~$37.1~~$40.0 million, or ~~26.5%~~24.5% of net sales, compared to ~~$39.5~~$30.0 million, or ~~25.5%~~38.8% of net sales, for the corresponding period last year. The components of the SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:
% $ millions Primarily Attributable to
(0.7)% $(2.7) Decrease in store payroll and benefits primarily due to temporary store closures related to COVID-19 and reduced staffing levels upon reopening of stores.
1.9% 2.3 Increase in marketing and fulfillment costs associated with e-commerce net sales growth.
1.2% 1.7 Sales tax assessment received from the State of California after quarter end, relating to the 2015-2017 period (currently disputed by the Company)
(0.9)% (1.2) Payroll tax credit from the Coronavirus Aid, Relief, and Economic Stimulus Act (the "CARES Act")
(0.5)% (2.4) Net change in all other SG&A expenses.
1.0% $(2.3) Total


%	$ millions	Primarily Attributable to
(4.7)%	$6.2	Increase in store payroll and related benefits due to operating all stores for the entirety of this year’s first quarter.
0.9%	1.5	Corporate bonus accruals due to exceeding our budgeted targets thus far in fiscal 2021.
(1.2)%	1.2	Increase in marketing costs associated with e-commerce net sales growth.
(2.4)%	1.2	Increase in corporate payroll and related benefits due to being fully staffed this year compared to significant furloughs and temporary management pay reductions during last year's store shutdown period.
(0.1)%	0.8	Increase in credit card fees associated with significantly higher net sales.
(1.0)%	(1.6)	Reversal of sales tax assessment accrual from the State of California, relating to the 2015-2017 period recorded during the third quarter of fiscal 2020.
(5.8)%	0.7	Net change in all other SG&A expenses.
(14.3)%	$10.0	Total

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Operating Income (Loss)

Operating income was ~~$3.5~~$14.9 million, or ~~2.5%~~9.1% of net sales, compared to an operating ~~income~~loss of ~~$7.7~~$(28.4) million, or ~~5.0%~~(36.7)% of net sales, for the corresponding period last year. The ~~decrease~~increase in operating income was primarily due to the ~~impact of the COVID-19 pandemic~~factors noted above.

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Income Tax Expense (Benefit)

Income tax expense was ~~$1.4~~$3.8 million, or ~~39.8%~~25.7% of income before taxes, compared to ~~$2.2~~an income tax benefit of $(10.6) million, or ~~25.9%~~37.9% of ~~income~~loss before taxes, for the corresponding period last year. Income tax expense for both periods includes certain discrete items associated with stock-based award activity. The ~~increase~~decrease in the effective income tax rate ~~for fiscal 2020~~ is primarily due to the anticipated benefit from the ~~CARES~~Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), discussed in further detail below, which provides for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates than ~~the current year.~~fiscal 2020.

Net Income (Loss) and Income (Loss) Per Diluted Share

Net income was ~~$2.1~~$11.0 million, or ~~$0.07~~$0.36 per diluted share, compared to a net ~~income~~loss of ~~$6.4~~$(17.4) million, or ~~$0.21~~$(0.59) per ~~diluted~~ share, ~~for the corresponding period last year as result of the factors noted above.~~

~~Thirty-Nine Weeks Ended October 31, 2020 Compared to Thirty-Nine Weeks Ended November 2, 2019~~

~~Net Sales~~

~~Net sales were $353.4 million, a decrease of $93.4 million, or 20.9%, compared to $446.8 million~~ for the corresponding period last year primarily as a result of the ~~various periods of store closures resulting from the impact of the COVID-19 pandemic.~~

•Net sales from physical stores were $235.3 million, a decrease of $146.3 million or 38.3%, compared to $381.6 million for the corresponding period last year. In terms of total available store operating days in fiscal 2020, physical stores were open for 50% of the first quarter, 65% of the second quarter, and 94% of the third quarter. Net sales from stores represented 66.6% of total net sales compared to 85.4% of total net sales for the corresponding period last year.

•Net sales from e-commerce were $118.1 million, an increase of $52.9 million or 81.1% compared to approximately $65.2 million for the corresponding period last year. E-commerce net sales represented 33.4% of total net sales compared to 14.6% for the corresponding period last year.

~~Gross Profit~~

Gross profit was $83.9 million, a decrease of $50.6 million, or 37.6%, compared to $134.6 million for the corresponding period last year. Gross margin, or gross profit as a percentage of net sales, was 23.7% compared to 30.1% for the corresponding period last year. Product margins were flat compared to the corresponding period last year. Occupancy costs deleveraged 400 basis points as a percentage of net sales, despite being reduced by $1.8 million compared to and having six additional stores compared to the corresponding period last year.Distribution costs deleveraged 220 basis points as a percentage of net sales primarily due to an increase in e-commerce shipping charges of $5.4 million resulting from a greater volume of e-commerce orders.~~Buying costs deleveraged 20 basis points as a percentage of net sales.~~

~~Selling, General and Administrative Expenses~~

SG&A expenses were $101.1 million, a decrease of $13.5 million, or 11.8%, compared to $114.6 million for the corresponding period last year. As a percentage of net sales, SG&A expenses were 28.6% compared to 25.7% for the corresponding period last year. The components of the SG&A variances, both in terms of percentage of net sales and total dollars, were as follows:
% $ millions Primarily Attributable to
(1.3)% $(16.3) Decrease in store payroll and benefits primarily due to temporary store closures related to COVID-19 and reduced staffing levels upon reopening of stores.
2.8% 7.4 Increase in marketing and fulfillment costs associated with e-commerce net sales growth.
1.4% (4.6) Net change in all other SG&A expenses.
2.9% $(13.5) Total

~~Operating (Loss) Income~~

Operating loss was $(17.2) million, or (4.9)% of net sales, compared to operating income of $20.0 million, or 4.5% of net sales, for the corresponding period last year. The decrease in operating results was primarily attributable to the significant COVID-19 pandemic impacts on our business asfactors noted above.

~~Income Tax (Benefit) Expense~~

Income tax benefit was $(6.4) million, or 39.2% of loss before taxes, compared to income tax expense of $5.9 million, or 26.6% of income before taxes, for the corresponding period last year. Income tax (benefit) expense for both periods includes certain discrete items associated with employee stock-based award activity. The increase in the effective income tax rate for fiscal 2020 is primarily due to the anticipated benefit from the CARES Act, as noted above.

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~~Net (Loss) Income and (Loss) Income Per Share~~

Net loss was $(10.0) million, or $(0.34) per diluted share, compared to net income of $16.3 million, or $0.55 per diluted share, for the corresponding period last year, primarily due to the significant COVID-19 pandemic impacts on our business noted above.

Liquidity and Capital Resources

Our business relies on cash flows from operating activities as well as cash on hand as our primary sources of liquidity. We currently expect to finance company operations, store growth and remodels with existing cash on hand, marketable securities and cash flows from operations.

In addition to cash and cash equivalents and marketable securities, the most significant components of our working capital are merchandise inventories, accounts payable and accrued expenses. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and our responses thereto (including such actions we have taken or may take in the future as disclosed elsewhere in this Report), weWe believe that cash flows from operating activities, our cash and marketable securities on hand, and credit facility availability will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months from the filing of this Report. If cash flows from operations are not sufficient or available to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our stockholders.

Working Capital

Working capital at ~~October 31, 2020,~~May 1, 2021, was ~~$66.1~~$91.6 million compared to ~~$63.6~~$78.6 million at ~~February 1, 2020, a decrease~~January 30, 2021, an increase of ~~$2.5~~$13.0 million. The changes in our working capital during the first ~~three quarters~~quarter of fiscal ~~2020~~2021 were as follows:


$ millions			Description
$~~63.6~~78.6			Working capital at ~~February 1, 2020~~January 30, 2021


~~2.5~~16.5			Increase in ~~working capital~~cash, cash equivalents, and marketable securities, primarily due to higher net income.
(1.2)			Decrease primarily due to timing of accounts payables, net of increase in inventories.
(4.6)			Decrease primarily due to timing of accrued compensation and benefits and corporate bonus accrual.
2.3			Increase primarily due to timing of accounts payable payments.
$~~66.1~~91.6			Working capital at ~~October 31, 2020~~May 1, 2021

~~Line of~~Asset-Backed Credit

As of October 31, 2020, our previous amended and restated credit agreement ( as amended, the "Prior Credit Agreement") with Wells Fargo Bank, N.A. (the "Bank") provided for a $25.0 million revolving line of credit with a maturity date of January 31, 2023. The interest rate charged on borrowings was selected at our discretion at the time of draw between the London Interbank Offered Rate ("LIBOR"), plus 0.75%, or at the Bank’s prime rate. The agreement allowed for the declaration and payment of dividends or distributions to stockholders, subject to certain limitations. On February 12, 2020 and February 27, 2019, we paid a special cash dividend of $1.00 per share to all holders of record of issued and outstanding shares of both our Class A and Class B common stock. The line of credit was secured by substantially all of our assets. As a sub-feature under the Prior Credit Agreement, the Bank could also issue stand-by and/or commercial letters of credit up to $15.0 million.

In March 2020, we borrowed $23.7 million under our revolving credit facility, which represented the maximum borrowings permitted thereunder. In September 2020, we repaid all of the borrowings under the revolving credit facility, and as a result, we had no debt outstanding under the revolving credit facility as of October 31, 2020.

We were required to maintain certain financial and non-financial covenants in accordance with the line of credit. The financial covenants required certain levels of profitability, leverage and assets, such as: (i) income before income taxes not less than $1.0 million, calculated at the end of each fiscal quarter on a trailing 12-month basis; (ii) a maximum "Funded Debt to EBITDAR" ratio of 4.00 to 1.0, calculated at the end of each fiscal quarter on a trailing 12-month basis, defined as the sum of total debt, capital leases and annual rent expense multiplied by six divided by the sum of net income, interest expense, taxes, depreciation, amortization and annual rent expense; (iii) a minimum "Fixed Charge Coverage Ratio" not less than 1.25 to 1.0, calculated at the end of each fiscal quarter on a trailing 12-month basis, with the ratio defined as (a) EBITDAR minus cash taxes, dividends, distributions, redemptions and repurchases of equity interest, divided by (b) the aggregate of the current maturity of long-term debt, capitalized lease payments, interest expense and rent expense; (iv) minimum eligible inventory, cash, cash equivalents and marketable securities totaling $50.0 million as of the end of each quarter; and (v) not more than $50.0 million in allowable investments in fixed assets in any fiscal year. In addition, pursuant to the terms of our revolving credit facility, we are required to pay any and all indebtedness, obligations, assessments and taxes when due, subject to certain limitations.

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As of October 31, 2020, we were not in compliance with our covenants under the Prior Credit Agreement, with respect to (i) the financial covenants related to our Fixed Coverage Ratio, Funded Debt to EBITDAR Ratio and minimum profitability, and (ii) the covenant that we pay any and all contractual store lease obligations when due on the basis of our non-payment of certain of our contractual rental obligations pursuant to our store leases during the COVID-19 pandemic, including for those stores closed to the public during June and July 2020. As of October 31, 2020, our Fixed Coverage Ratio was 0.7 to 1.0, our Funded Debt to EBITDAR Ratio was 5.2 and income before income taxes on a trailing 12-month basis was $(7.4) million. The Bank provided a limited waiver with respect to all of the violations noted above.

In September 2020, we increased the standby letter of credit from $1.3 million to $2.0 million. The standby letter of credit was established for security against insurance claims as required by our workers' compensation insurance policy. There has been no activity or borrowings under this letter of credit since its inception. Facility

On November 9, 2020 (the “Closing Date”), we entered into a credit agreement (the ~~"New Credit Agreement"~~“Credit Agreement”) with ~~the~~Wells Fargo Bank, ~~which replaced the Prior~~National Association ("Bank"), as lender, administrative agent and collateral agent (the “Agent”). The Credit Agreement ~~which was terminated concurrently therewith. No borrowings were outstanding under the Prior~~replaced our existing amended and restated credit agreement (the “Prior Credit ~~Agreement~~Agreement”), dated as of May 3, 2012, as amended, with the ~~closing date or as of December 1, 2020.~~Agent.

The ~~New~~ Credit Agreement provides for an asset-based, senior secured revolving credit facility of up to $65.0 million consisting of revolving loans, letters of credit and swing line loans provided by lenders, with a sub limit on ~~letters of~~ credit outstanding at any time of $10.0 million and a sub limit for swing line loans of $7.5 million.The ~~credit agreement~~Credit Agreement also includes an uncommitted accordion feature whereby we may increase the revolving commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions.The revolving facility matures on November 9, 2023. The payment and performance in full of the secured obligations under the revolving facility are secured by a lien on and security interest in all of the assets of our ~~company.~~Company.

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value of such eligible inventory, plus (c) 90% of the cost of the ~~borrowers’~~borrower's eligible in-transit inventory, less inventory reserves established by the ~~agent,~~Agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the ~~agent.~~Agent. As of the ~~closing date,~~Closing Date, we were eligible to borrow up to a total of $40.1 million under the revolving facility. As of the ~~closing date,~~Closing Date, we had no outstanding borrowings under the ~~New~~ Credit Agreement and the only utilization of the letters of credit sub limit under the ~~New~~ Credit Agreement was a ~~$2.025~~$2.0 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on the ~~closing date~~Closing Date to the ~~New~~ Credit Agreement.

Under the ~~New~~ Credit Agreement, we are subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the ~~closing date,~~Closing Date, we are prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the ~~closing date,~~Closing Date, we are allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto and certain minimum availability and minimum projected availability tests are satisfied.

In connection with the entry into the ~~New~~ Credit Agreement, on November 9, 2020, we entered into certain ancillary agreements, including (i) a security agreement in favor of the ~~agent,~~Agent, and (ii) a guaranty by us in favor of the ~~agent.~~Agent. The security agreement and the guaranty replaced (i) the general pledge agreement, dated as of May 3, 2012, by us in favor of the bank, (ii) the continuing guaranty by us in favor of the ~~agent,~~Agent, dated May 3, 2012, and (iii) the amended and restated security agreement with respect to equipment and the amended and restated security agreement with respect to rights to payment and inventory, in each case, dated as of May 3, ~~2012, by us in favor of the bank, which were all~~2012.

The Prior Credit Agreement was terminated concurrently with the ~~termination of~~entry into the ~~Prior~~ Credit Agreement. ~~In addition, on November 8, 2020, we and the agent entered into a limited waiver letter, pursuant to which the agent waived compliance with certain covenants~~No borrowings were outstanding under the Prior Credit Agreement ~~for~~as of the ~~fiscal quarter ending October 31,~~Closing Date. The interest rate charged on borrowings under the Prior Credit Agreement was selected at our discretion at the time of draw between LIBOR plus 0.75%, or at the Bank’s prime rate. The Prior Credit Agreement was secured by substantially all of our assets. In March 2020, we borrowed $23.7 million under our Prior Credit Agreement, which represented the maximum borrowings permitted thereunder, and which were subsequently repaid in September 2020.

As of May 1, 2021, we were in compliance with all of our covenants, were eligible to borrow up to a total of $48.5 million and had no outstanding borrowings under the Credit Agreement.

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Impact of CARES Act on Company Liquidity

On March 27, 2020, the CARES Act, was signed into law. The CARES Act ~~which was signed into law on March 27, 2020,~~ includes ~~among other things,~~tax provisions ~~relating~~applicable to businesses, such as net operating losses, enhanced interest deductibility, optional deferral of deposits of payroll taxes, a refundable employee retention payroll tax ~~credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax~~ credit ~~refunds, modifications~~and changes to the ~~net interest deduction limitations and technical corrections to tax~~ depreciation ~~methods~~rules for qualified improvement property. ~~We continue~~As of May 1, 2021, pursuant to ~~examine the impacts~~ the CARES Act, ~~may~~we have ~~on our business. We anticipate that we may benefit from~~deferred the ~~net operating loss carryback provision, which may enable us to recover certain income taxes paid during prior tax years, and~~deposit of certain payroll taxes, applied for certain tax ~~deferrals. Due to the uncertainty surrounding the COVID-19 pandemic~~credits and ~~its impacts~~accelerated depreciation on our business, we cannot estimate any specific tax benefits from the CARES Act at this time beyond the income tax benefit for the third quarter of fiscal 2020 disclosed above within "Income Tax (Benefit)/Expense".qualified improvement property.

Cash Flow Analysis

A summary of operating, investing and financing activities for the ~~thirty-nine~~thirteen weeks of fiscal ~~2020~~2021 compared to the ~~thirty-nine~~thirteen weeks of fiscal ~~2019~~2020 is shown in the following table (in thousands):

Thirty-Nine Weeks Ended
October 31,
2020 November 2,
2019
Net cash provided by operating activities $ 21,033 $ 24,504
Net cash provided by investing activities 37,816 4,058
Net cash used in financing activities (29,677) (29,126)
Net increase (decrease) in cash and cash equivalents $ 29,172 $ (564)


	Thirteen Weeks Ended
	May 1, 2021		May 2, 2020
Net cash provided by (used in) operating activities	$	19,277	$	(19,566)
Net cash (used in) provided by investing activities	(17,097)		20,564
Net cash provided by (used in) financing activities	2,651		(6,002)
Net increase (decrease) in cash and cash equivalents	$	4,831	$	(5,004)

Net Cash Provided by (Used in) Operating Activities

Operating activities consist primarily of net income (loss) ~~income~~ adjusted for non-cash items, plus the effect on cash of changes during the period in our assets and liabilities.

Net cash flows provided by operating activities were ~~$21.0~~$19.3 million this year compared to ~~$24.5~~$19.6 million used in operating activities last year. The ~~$3.5~~$38.8 million ~~decrease~~increase in cash provided by operating activities was primarily due to ~~lower~~higher net sales ~~associated with~~in fiscal 2021 due to the ~~temporary~~ closure of ~~some or~~ all stores during the latter half of ~~our stores in response to~~ the ~~COVID-19 pandemic throughout the~~first quarter ~~and reduced net sales from reopened stores compared to~~ last year as a result of ~~significant declines~~the COVID-19 pandemic. Other variances include a decrease in ~~customer traffic,~~accounts receivable and increases in accrued compensation and benefits and accounts payable, partially offset by ~~the timing of accounts payable payments and payments associated with accrued expenses and~~a decrease in operating lease liabilities.

Net Cash (Used In) Provided By Investing Activities

Cash flows from investing activities consist primarily of capital expenditures and maturities and purchases of marketable securities.

Net cash ~~provided by~~used in investing activities was ~~$37.8~~$17.1 million this year compared to ~~$4.1~~$20.6 million provided by investing activities last year. Net cash used in investing activities in the first quarter of fiscal 2021 consisted of purchases of marketable securities of $36.6 million and capital expenditures totaling $5.5 million, partially offset by the maturities of marketable securities of $25.0 million. Net cash provided by investing activities induring the first ~~three quarters~~quarter of fiscal 2020 consisted of proceeds from the maturities of marketable securities of ~~$75.2~~$30.1 million, partially offset by purchases of marketable securities of ~~$30.9~~$6.0 million and capital expenditures totaling $6.4 million. Net cash provided by investing activities during the first three quarters of fiscal 2019 consisted of proceeds from the maturities of marketable securities of $111.5 million, partially offset by purchases of marketable securities of $96.8 million and capital expenditures totaling $10.6$3.5 million.

Net Cash ~~Used in~~Provided by (Used in) Financing Activities

Financing activities primarily consist of cash dividend payments, borrowings and repayments of our line of credit, taxes paid in lieu of shares issued for share based compensation and proceeds from employee exercises of stock options.

Net cash ~~used in~~provided by financing activities was ~~$29.7~~$2.7 million this year compared to ~~$29.1~~$6.0 million used in financing activities last year. Financing activities in the first ~~three quarters~~quarter of fiscal 2021 consisted of proceeds from the exercise of stock options of $2.7 million. Financing activities in the first quarter of fiscal 2020 consisted of dividends paid of $29.7 million and $23.7 million in both borrowings and repayments under our line of credit. Financing activities in the first three quarters of fiscal 2019 consisted of dividends paid of $29.5 million and taxes paid in lieu of shares issued for share-based compensation of $0.1 million partially offset by ~~$0.4~~$23.7 million ~~in proceeds from stock option exercises.~~of borrowings under the Prior Credit Agreement.

Contractual Obligations

As of ~~October 31, 2020,~~May 1, 2021, there were no material changes to our contractual obligations as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020.~~

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January 30, 2021.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, except for purchase obligations and our revolving credit facility.

Critical Accounting Policies and Estimates

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The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates. As noted elsewhere in this Report, the COVID-19 pandemic has had significant, adverse impacts on our business and the economy generally, making estimates and assumptions about future events far more difficult, if not impossible. A summary of our significant accounting policies is included in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020.~~January 30, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of ~~October 31, 2020,~~May 1, 2021, there were no material changes in the market risks described in the “Quantitative and Qualitative Disclosure of Market Risks” section of our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020.~~January 30, 2021.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Disclosure Committee, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~October 31, 2020.~~May 1, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of ~~October 31, 2020,~~May 1, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Part II. Other Information

Item 1. Legal Proceedings

The information contained in “Note 5: Commitments and Contingencies” to our consolidated financial statements included in this Report is incorporated by reference into this Item.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. In addition to the other information set forth in this Quarterly Report on Form 10-Q, please refer to the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020~~January 30, 2021 for a detailed discussion of the risks that affect our business. ~~Except as supplemented by the additional risk factor below, there have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.~~

~~We remain subject to a number of material risks related to the ongoing COVID-19 pandemic, and our performance upon reopening our stores may not be indicative of our future performance.~~

The COVID-19 pandemic is ongoing and our business may be further materially and adversely affected by its impacts, including the occurrence of a “second wave” or periods of increased spread of COVID-19 in markets in which we operate, new or additional restrictions imposed by federal, state, and local governments in response to the COVID-19 pandemic, or changes in consumer spending or purchasing habits resulting from economic and other effects of the COVID-19 pandemic on our customers. These impacts are likely to affect our business more significantly the longer we are exposed to the risks posed by the COVID-19 pandemic, and especially in the event of a “second wave”. In addition, reopening stores that have been closed as a result of government response to COVID-19 may subject us to additional risks, including with respect to reduced store traffic and profitability relative to corresponding operating costs, additional costs or liabilities related to implementing and complying with health and safety measures or other restrictions and increased risks of infection for our customers and employees. To date, we have had to significantly alter certain aspects of our operations during the COVID-19 pandemic, including imposing significant restrictions on customer traffic, reducing store operating hours, and implementing various health and safety measures. These alterations to our operations may continue to adversely affect our customers’ in-store experiences, our sales and our operations.

As a result of the foregoing, we cannot predict with certainty our future customer traffic, our comparable store net sales results, our overall financial performance, the pace at which additional stores may be able to reopen, or whether reopened stores will be allowed to remain open in the future, nor can we ensure that the results upon reopening our stores will be indicative of our future performance.

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Item 6. Exhibits


Exhibit No.						Description of Exhibit




~~10.1~~10.1*						~~Credit Agreement, dated November 9, 2020, by and among World of Jeans & Tops, Tilly’s,~~Promotion Letter between Tilly's, Inc. and ~~Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 16, 2020)~~.

~~10.2~~ Robert Goodwin						~~Security Agreement,~~ dated November 9, 2020, by and among World of Jeans & Tops, Tilly’s, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 16, 2020).

~~10.3~~						~~Guaranty, dated November 9, 2020, of Tilly’s, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on November 16, 2020).~~February 25, 2021

31.1*						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**						Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						Interactive data files from Tilly’s, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~October 31, 2020,~~May 1, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of ~~Income (Loss);~~Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statement of Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*			Filed herewith.


**			Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

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


		Tilly’s, Inc.
Date:	~~December 9, 2020~~June 8, 2021
		/s/ Edmond Thomas
		Edmond Thomas
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date:	~~December 9, 2020~~June 8, 2021
		/s/ Michael Henry
		Michael Henry
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)

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	Thirteen Weeks Ended October 31, 2020						Thirteen Weeks Ended November 2, 2019
	Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	$	14,829	$	409	$	15,238	$	15,634	$	381	$	16,015
Variable lease expense	4,663		12		4,675		4,379		14		4,393
Total lease expense	$	19,492	$	421	$	19,913	$	20,013	$	395	$	20,408


	Thirty-Nine Weeks Ended October 31, 2020						Thirty-Nine Weeks Ended November 2, 2019
	Cost of goods sold		SG&A		Total		Cost of goods sold		SG&A		Total
Fixed operating lease expense	$	45,229	$	1,212	$	46,441	$	46,575	$	1,147	$	47,722
Variable lease expense	12,907		62		12,969		12,324		55		12,379
Total lease expense	$	58,136	$	1,274	$	59,410	$	58,899	$	1,202	$	60,101


	Restricted Stock	Weighted Average Grant-Date Fair Value
Nonvested at February 1, 2020	51,920	$	9.24
Granted	50,956	$	6.28
Vested	(31,328)	$	10.21

Nonvested at October 31, 2020	71,548	$	6.71


%	$ millions	Primarily Attributable to
(0.7)%	$(2.7)	Decrease in store payroll and benefits primarily due to temporary store closures related to COVID-19 and reduced staffing levels upon reopening of stores.
1.9%	2.3	Increase in marketing and fulfillment costs associated with e-commerce net sales growth.
1.2%	1.7	Sales tax assessment received from the State of California after quarter end, relating to the 2015-2017 period (currently disputed by the Company)
(0.9)%	(1.2)	Payroll tax credit from the Coronavirus Aid, Relief, and Economic Stimulus Act (the "CARES Act")
(0.5)%	(2.4)	Net change in all other SG&A expenses.
1.0%	$(2.3)	Total


%	$ millions	Primarily Attributable to
(1.3)%	$(16.3)	Decrease in store payroll and benefits primarily due to temporary store closures related to COVID-19 and reduced staffing levels upon reopening of stores.
2.8%	7.4	Increase in marketing and fulfillment costs associated with e-commerce net sales growth.
1.4%	(4.6)	Net change in all other SG&A expenses.
2.9%	$(13.5)	Total