UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 4, 2018
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM  _______________ TO __________________

 

COMMISSION FILE NUMBER: 0-14818

 

TRANS WORLD ENTERTAINMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

New York		14-1541629
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer
		Identification Number)

 

38 Corporate Circle

Albany, New York 12203

(Address of principal executive offices, including zip code)

 

(518) 452-1242

(Registrant’s telephone number, including area code)

 

Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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  x No  o

 

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

Large accelerated filer  o		Accelerated filer  o		Non-accelerated filer  o
Smaller reporting company  x

 

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

(§240.12b-1 of this chapter). 

Emerging growth company     o

 

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

 

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

 

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

 

Common Stock, $.01 par value,

36,225,824 shares outstanding as of August 4, 2018

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

	Form 10-Q
	Page No.
PART I. FINANCIAL INFORMATION
Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at August 4, 2018, February 3, 2018 and July 29, 2017	3
Condensed Consolidated Statements of Operations – Thirteen and Twenty-Six Weeks Ended August 4, 2018 and July 29, 2017	4
Condensed Consolidated Statements of Comprehensive Loss – Thirteen and Twenty-Six Weeks Ended August 4, 2018 and July 29, 2017	5
Condensed Consolidated Statements of Cash Flows – Twenty-Six Weeks Ended August 4, 2018 and July 29, 2017	6
Notes to Interim Condensed Consolidated Financial Statements	7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	25
Item 4 – Controls and Procedures	25
PART II.  OTHER INFORMATION
Item 1 – Legal Proceedings	26
Item 1A- Risk Factors	26
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3 – Defaults Upon Senior Securities	26
Item 4 – Mine Safety Disclosures	26
Item 5 – Other Information	26
Item 6 – Exhibits	27
Signatures	28

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

Item 1 – Interim Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

(unaudited)

 

		August 4,				February 3,				July 29,
		2018				2018				2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	4,477			$	31,326			$	13,985
Restricted cash			4,116				1,505				1,502
Accounts receivable			6,509				4,469				6,445
Merchandise inventory			114,920				109,377				126,687
Prepaid expenses and other assets			8,937				6,976				7,024
Total current assets			138,959				153,653				155,643
Restricted cash			6,147				10,675				10,682
Fixed assets, net			12,648				13,546				43,876
Goodwill			39,191				39,191				39,191
Intangible assets, net			22,023				23,967				25,914
Other assets			6,119				7,139				8,033
TOTAL ASSETS		$	225,087			$	248,171			$	283,339
LIABILITIES
CURRENT LIABILITIES
Accounts payable		$	34,200			$	41,780			$	37,169
Short-term borrowings			6,341				—				—
Accrued expenses and other current liabilities			9,508				11,038				9,688
Deferred revenue			6,810				8,464				7,732
Total current liabilities			56,859				61,282				54,589
Contingent consideration			—				—				2,115
Other long-term liabilities			26,533				29,131				29,175
TOTAL LIABILITIES			83,392				90,413				85,879
SHAREHOLDERS’ EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)			—				—				—
Common stock ($0.01 par value; 200,000,000 shares authorized; 64,386,671, 64,305,171 and 64,255,171 shares issued, respectively)			644				643				643
Additional paid-in capital			342,710				341,103				339,624
Treasury stock at cost (28,160,847, 28,156,601 and 28,138,116 shares, respectively)			(230,149	)			(230,145	)			(230,145	)
Accumulated other comprehensive loss			(1,008	)			(998	)			(793	)
Retained earnings			29,498				47,155				88,131
TOTAL SHAREHOLDERS’ EQUITY			141,695				157,758				197,460
TOTAL LIABILITIES AND EQUITY		$	225,087			$	248,171			$	283,339

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 4,				July 29,				August 4,				July 29,
		2018				2017				2018				2017
Net sales		$	101,039			$	100,914			$	196,271			$	201,665
Other revenue			1,135				1,565				2,506				2,781
Total revenue			102,174				102,479				198,777				204,446
Cost of sales			70,001				67,309				134,916				132,971
Gross profit			32,173				35,170				63,861				71,475
Selling, general and administrative expenses			41,562				40,539				81,409				82,051
Loss from operations			(9,389	)			(5,369	)			(17,548	)			(10,576	)
Interest expense			103				59				166				115
Loss (gain) on insurance proceeds			—				129				—				(8,706	)
Other income			(49	)			(43	)			(128	)			(57	)
Loss before income tax expense			(9,443	)			(5,514	)			(17,586	)			(1,928	)
Income tax expense			67				51				71				105
Net loss		$	(9,510	)		$	(5,565	)		$	(17,657	)		$	(2,033	)
BASIC AND DILUTED LOSS PER COMMON SHARE:
Basic and diluted loss per common share		$	(0.26	)		$	(0.15	)		$	(0.49	)		$	(0.06	)
Weighted average number of common shares outstanding – basic and diluted			36,352				36,179				36,295				36,179

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 4,				July 29,				August 4,				July 29,
		2018				2017				2018				2017
Net loss		($	9,510	)		($	5,565	)		($	17,657	)		($	2,033	)
Amortization of pension loss			(5	)			(5	)			(10	)			(10	)
Comprehensive loss		($	9,515	)		($	5,570	)		($	17,667	)		($	2,043	)

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Twenty-six Weeks Ended
		August 4,				July 29,
		2018				2017
OPERATING ACTIVITIES:
Net loss		($	17,657	)		($	2,033	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of fixed assets			2,563				4,932
Amortization of intangible assets			1,944				1,943
Stock based compensation			1,603				1,550
Adjustment to contingent consideration			—				(1,437	)
Loss on disposal of fixed assets			135				448
Change in cash surrender value			(44	)			(137	)
Gain on life insurance asset			—				(8,706	)
Changes in operating assets and liabilities that provide (use) cash:
Accounts receivable			(2,040	)			640
Merchandise inventory			(5,543	)			(683	)
Prepaid expenses and other current assets			(1,961	)			1,247
Other long-term assets			(73	)			(720	)
Accounts payable			(7,580	)			(15,138	)
Accrued expenses and other current liabilities			(30	)			(1,010	)
Deferred revenue			(1,654	)			(1,497	)
Other long-term liabilities			(2,607	)			98
Net cash used in operating activities			(32,944	)			(20,503	)
INVESTING ACTIVITIES:
Purchases of fixed assets			(1,800	)			(4,166	)
Proceeds from company owned life insurance			—				14,336
Investment in joint venture			—				(2,575	)
Capital distributions from joint venture			1,137				—
Net cash (used in) provided by investing activities			(663	)			7,595
FINANCING ACTIVITIES:
Proceeds from short term borrowings			6,341				—
Payments to etailz shareholders			(1,500	)			(5,000	)
Net cash provided by (used in) financing activities			4,841				(5,000	)
Net decrease in cash, cash equivalents, and restricted cash			(28,766	)			(17,908	)
Cash, cash equivalents, and restricted cash, beginning of period			43,506				44,077
Cash, cash equivalents, and restricted cash, end of period		$	14,740			$	26,169

 

See Accompanying Notes to Interim Condensed Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

August 4, 2018 and July 29, 2017

 

Note 1. Nature of Operations

 

Trans World Entertainment Corporation and subsidiaries (“the Company”) operates in two reportable segments: fye and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com. As of August 4, 2018, the fye segment operated 241 stores totaling approximately 1.3 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.

 

Liquidity and Cash Flows:

 

The Company’s primary sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility. The Company’s cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns, the related terms on the purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments and anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed in note 8 in the interim condensed consolidated financial statements.

 

In connection with the preparation of these unaudited interim condensed consolidated financial statements, the Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these financial statements are issued.

 

Note 2. Basis of Presentation

 

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

 

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

The accompanying interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes as of and for the year ended February 3, 2018 contained in the Company’s Annual Report on Form 10-K filed May 4, 2018. The results of operations for the thirteen and twenty-six weeks ended August 4, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year ending February 2, 2019. 

 

The Company’s significant accounting policies are described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal year ended February 3, 2018.

 

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

 

Recently Adopted Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. On February 4, 2018, the Company adopted ASU No. 2014-09 using the modified retrospective approach. The adoption of this ASU impacted the timing of revenue recognition for gift card breakage. Prior to adoption of ASU No. 2014-09, gift card breakage was recognized at the point gift card redemption became remote. In accordance with this ASU, the Company will recognize gift card breakage in proportion to the pattern of rights exercised by the customer. The adoption of this ASU also impacted presentation of our condensed consolidated financial statements related to sales return reserves. The cumulative effect of initially applying ASU No. 2014-09 was a $0.5 million decrease to the opening balance of retained earnings as of February 4, 2018. The comparative prior period information continues to be reported under the accounting standards in effect during those periods.

 

Note 3. Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of this ASU is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. The new standard requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. The new standard will be effective for the Company’s fiscal year beginning February 3, 2019, and requires the modified retrospective method of adoption. Management is progressing with implementation and continuing to evaluate the effect to the Company’s Consolidated Financial Statements and disclosures. Given the nature of the operating leases for the Company’s home office, distribution center, and retail stores, the Company expects an increase to the carrying value of its assets and liabilities.

 

Note 4. Goodwill and Other Intangible Assets

 

Our goodwill results from our acquisition of etailz and represents the excess purchase price over the net identifiable assets acquired. All of our goodwill is associated with etailz, a separate reporting unit, and there is no goodwill associated with our other reporting unit, fye. Goodwill is not amortized and we are required to evaluate our goodwill for impairment at least annually or whenever indicators of impairment are present. Our annual test is completed during the fourth fiscal quarter, and interim tests are conducted when circumstances indicate the carrying value of the goodwill or other intangible assets may not be recoverable. 

 

Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is possible that these judgments and estimates could change in future periods.

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

 

Identifiable intangible assets as of August 4, 2018 consisted of the following ($ in thousands):

 

		August 4, 2018
		Weighted Average Amortization Period (in months)				Original Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Vendor relationships			120			$	19,100			$	3,442			$	15,658
Technology			60				6,700				2,408				4,292
Trade names and trademarks			60				3,200				1,127				2,073
						$	29,000			$	6,977			$	22,023

 

The changes in net intangibles and goodwill from February 3, 2018 to August 4, 2018 were as follows:

   

($ in thousands)						February 3, 2018				Amortization				August 4, 2018
Amortized intangible assets:
Vendor relationships						$	16,612			$	954			$	15,658
Technology							4,962				670				4,292
Trade names and trademarks							2,393				320				2,073
Net amortized intangible assets						$	23,967			$	1,944			$	22,023
Unamortized intangible assets:
Goodwill						$	39,191			$	—			$	39,191
Total unamortized intangible assets						$	39,191			$	—			$	39,191

 

Amortization expense of intangible assets for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017 consisted of the following:

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
($ in thousands)		August 4, 2018				July 29, 2017				August 4, 2018				July 29, 2017
Amortized intangible assets:
Vendor relationships		$	477			$	470			$	954			$	953
Technology			335				335				670				670
Trade names and trademarks			160				160				320				320
Total amortization expense		$	972			$	965			$	1,944			$	1,943

Estimated amortization expense for the remainder of fiscal 2018 and the five succeeding fiscal years and thereafter is as follows:

 

Year			Annual Amortization
($ in thousands)
2018			$	1,946
2019				3,890
2020				3,890
2021				3,325
2022				1,910
2023				1,910
Thereafter				5,152

 

Note 5. Depreciation and Amortization

 

Depreciation and amortization included in the condensed consolidated statements of operations is as follows:

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 4,				July 29,				August 4,				July 29,
($ in thousands)		2018				2017				2018				2017
Cost of sales		$	—			$	157			$	—			$	311
Selling, general and administrative expenses			2,274				3,341				4,507				6,564
Total		$	2,274			$	3,498			$	4,507			$	6,875

 

Note 6. Segment Data

 

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

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
($ in thousands)		August 4, 2018				July 29, 2017				August 4, 2018				July 29, 2017
Total Revenue
fye		$	50,545			$	58,958			$	104,608			$	123,902
etailz			51,629				43,521				94,169				80,544
Total Company		$	102,174			$	102,479			$	198,777			$	204,446
Gross Profit
fye		$	20,634			$	25,085			$	42,905			$	51,995
etailz			11,539				10,085				20,956				19,480
Total Company		$	32,173			$	35,170			$	63,861			$	71,475
Income (Loss) From Operations
fye		$	(6,629	)		$	(5,467	)		$	(12,001	)		$	(9,853	)
etailz			(2,760	)			98				(5,547	)			(723	)
Total Company		$	(9,389	)		$	(5,369	)		$	(17,548	)		$	(10,576	)
Total Assets As of August 4, 2018 and As of July 29, 2017
										August 4, 2018				July 29, 2017
fye										$	121,750			$	184,250
etailz											103,337				99,089
Total Company										$	225,087			$	283,339

Note 7. Restricted Cash

 

As of August 4, 2018, the Company had restricted cash of $4.1 million and $6.2 million reported in current and other assets on the accompanying condensed consolidated balance sheet, respectively. As of July 29, 2017, the Company had restricted cash of $1.5 million and $10.7 million reported in current and other assets on the accompanying condensed consolidated balance sheet, respectively.

 

In connection with the acquisition of etailz and under the terms of the amended and restated share purchase agreement, the Company designated $3.2 million of the restricted cash to equal the maximum earn-out amount that could be paid to the selling shareholders of etailz in accordance with the share purchase agreement, which is classified as restricted cash in current assets as of August 4, 2018 on the accompanying interim condensed consolidated balance sheet.

 

In addition, as a result of the death of its former Chairman, the Company holds $7.1 million in a rabbi trust, of which $0.9 million is classified as restricted cash in current assets and $6.2 million is classified as restricted cash in other assets of August 4, 2018 on the accompanying interim condensed consolidated balance sheet.

 

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

 

		August 4,				February 3,				July 29,
		2018				2018				2017
Cash and cash equivalents		$	4,477			$	31,326			$	13,985
Restricted cash			10,263				12,180				12,184
Total cash, cash equivalents and restricted cash		$	14,740			$	43,506			$	26,169

 

During the twenty-six weeks ended August 4, 2018, the Company paid out $1.5 million of the restricted cash to the etailz shareholders per the terms of the original etailz acquisition share purchase agreement.

 

Note 8. Short Term Borrowings

 

In January 2017, the Company entered into a $50 million asset based credit facility (“Credit Facility”) which amended the previous credit facility. The principal amount of all outstanding loans under the Credit Facility, together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company. The Credit Facility contains a provision to increase availability to $75 million during October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on receivables and inventory levels.

 

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of dividends and share repurchases to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment. The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. As of August 4, 2018, the Company was compliant with all covenants.

 

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the

Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on unused commitments.

 

As of August 4, 2018, borrowings under the credit facility were $6.3 million. There were no borrowings under the credit facility as of July 29, 2017. The Company had $29.9 million and $37.0 million available for borrowing as of August 4, 2018 and July 29, 2017, respectively.

 

As of August 4, 2018, the Company had $1.1 million in outstanding letters of credit related to an import purchase. As of July 29, 2017 the Company did not have any outstanding letters of credit.

 

The Company records short term borrowings at cost, in which the carrying value approximates fair value due to its short term maturity.

 

Note 9. Stock Based Compensation

 

As of August 4, 2018, there was approximately $2.2 million of unrecognized compensation cost related to stock option awards comprised of the following: $0.8 million was related to stock option awards listed in the table below and expected to be recognized as expense over a weighted average period of 2.4 years; $0.2 million was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 4.0 years; and $1.2 million was related to restricted shares issued in connection with the acquisition of etailz, as discussed further below, and expected to be recognized as expense over the next six months.

 

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

 

Equity awards authorized for issuance under the New Plan total 5.0 million. As of August 4, 2018, of the awards authorized for issuance under the Stock Award Plans, 3.0 million were granted and are outstanding, 1.6 million of which were vested and exercisable. Shares available for future grants of options and other share based awards under the New Plan at August 4, 2018 were 4.4 million.

 

The following table summarizes stock award activity during the twenty-six weeks ended August 4, 2018:

 

		Number of Shares Subject To Option				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Other Share Awards (1)				Weighted Average Grant Fair Value
Balance February 3, 2018			2,585,914			$	3.06				7.2				183,427			$	3.22
Granted			505,000				0.98				10.0				135,484				0.98
Forfeited			—				—				—				—				—
Canceled			(110,000	)			3.29				—				—				—
Exercised			—				—				—				(17,500	)			3.53
Balance August 4, 2018			2,980,914			$	2.70				7.3				301,411			$	2.35
Exercisable August 4, 2018			1,584,539			$	3.25				5.9				128,911			$	2.85

 

(1)

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

 

As of August 4, 2018, all stock awards outstanding and exercisable had a grant price higher than the market price of the stock and had no intrinsic value.

In connection with the acquisition of etailz, the Company issued 1,572,552 restricted shares of Company stock to a key etailz employee, with a grant date fair value of $3.56 per share. These shares vest ratably through January 2019. During the thirteen and twenty-six weeks ended August 4, 2018, the Company recognized $0.6 million and $1.2 million of compensation cost related to these shares, respectively. As of August 4, 2018, there was approximately $1.2 million of unrecognized compensation cost related to these restricted shares that is expected to be recognized as expense over the next six months.

 

Note 10. Accumulated Other Comprehensive Loss

 

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

 

Note 11. Defined Benefit Plan

 

The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for a limited number of executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. During the twenty-six weeks ended August 4, 2018, the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.2 million in benefits relating to the SERP during fiscal 2018.

 

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

 

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

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 4,				July 29,				August 4,				July 29,
($ in thousands)		2018				2017				2018				2017
Service cost		$	14			$	16			$	28			$	32
Interest cost			140				139				280				278
Amortization of pension costs			—				4				—				8
Amortization of net gain (1)			(5	)			(9	)			(10	)			(18	)
Net periodic pension cost		$	149			$	150			$	298			$	300

 

(1)	The amortization of net gain is related to a director retirement plan previously provided by the Company.

 

Note 12. Basic and Diluted Loss Per Share

 

Basic income per share is calculated by dividing net income by the weighted average common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is computed by dividing net income by the sum of the weighted average shares outstanding and

additional common shares that would have been outstanding if the dilutive potential common shares had been issued for the Company’s common stock awards from the Company’s Stock Award Plans.

 

For the thirteen and twenty-six week periods ended August 4, 2018 and July 29, 2017, the impact of all outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Total anti-dilutive stock awards for the thirteen and twenty-six weeks ended August 4, 2018 were approximately 3.1 million shares and 2.9 million shares, respectively, as compared to 3.1 million shares and 2.7 million shares, respectively, for the thirteen and twenty-six weeks ended July 29, 2017.

 

Note 13. Income Taxes

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based on available objective evidence, management concluded that a full valuation allowance should continue to be recorded against the Company’s deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable income in its conclusion of the need for a full valuation allowance. Any reversal of the Company’s valuation allowance will favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future. The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending February 2, 2019. The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of February 3, 2018, the Company had a net operating loss carry forward of $208.3 million for federal income tax purposes and approximately $273.4 million for state income tax purposes that expire at various times through 2037 and are subject to certain limitations and statutory expiration periods. The Company has also recorded $0.1 million of deferred tax liability relating to the etailz segment that relates to state income tax returns that do not allow consolidated filing. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.

 

Note 14. Commitments and Contingencies

 

Legal Proceedings

 

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

 

Store Manager Class Actions

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

Specifically, Carol Spack filed a complaint against Trans World Entertainment Corporation (Trans World) in the United States District Court, District of New Jersey, on April 20, 2017 (Case No.: 3:17-cv-02687-BRM-LHG) alleging that she is entitled to unpaid compensation for overtime under the Federal Fair Labor Standards Act (FLSA). She brings a nationwide collective action under the FLSA on behalf of all Store Managers and Senior Assistant Managers. She also brings class action claims under New Jersey and Pennsylvania law on behalf of all persons who worked as Store Managers in New Jersey or Senior Assistant Managers in Pennsylvania.

 

On May 19, 2017, Natasha Roper filed a complaint against Trans World in the U.S. District Court for the Northern District of New York (Case No.: 1:17-cv-0553-TJM-CFH) in which she also alleges that she is entitled to unpaid compensation for overtime under the FLSA. Ms. Roper brings a nationwide collective action under the FLSA on behalf of all similarly situated Store Managers.

 

Legal matters are defended and handled in the ordinary course of business. The Company has not established an accrual for the matters noted above as a loss is not considered to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation will have a material adverse impact on our results of operations, financial position, or cash flows.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

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

Results of Operations

August 4, 2018 and July 29, 2017

 

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships, general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the interim condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018.

 

The Company operates in two reportable segments: fye and etailz. The fye segment operates a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com. As of August 4, 2018, the fye segment operated 241 stores totaling approximately 1.3 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. fye stores offer predominantly entertainment products. The etailz segment is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature, for both segments, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.

 

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

 

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

 

Cost of Sales and Gross Profit: Gross profit is calculated based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales levels, mix of products sold, vendor discounts and allowances, shrinkage, obsolescence and distribution costs. Distribution expenses include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs associated with product returns to vendors.

 

Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges (excluding

those related to distribution operations, see Note 5 to the Condensed Consolidated Financial Statements in this Form 10-Q). SG&A expenses also include fixed assets write-offs associated with store closures, if any, and miscellaneous income and expense items, other than interest.

 

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

RESULTS OF OPERATIONS

 

Thirteen and Twenty-six Weeks Ended August 4, 2018

Compared to the Thirteen and Twenty-six Weeks Ended July 29, 2017

 

Segment Highlights ($ in thousands):

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 4, 2018				July 29, 2017				August 4, 2018				July 29, 2017
Total Revenue
fye		$	50,545			$	58,958			$	104,608			$	123,902
etailz			51,629				43,521				94,169				80,544
Total Company		$	102,174			$	102,479			$	198,777			$	204,446
Gross Profit
fye		$	20,634			$	25,085			$	42,905			$	51,995
etailz			11,539				10,085				20,956				19,480
Total Company		$	32,173			$	35,170			$	63,861			$	71,475
Income (Loss) From Operations
fye		$	(6,629	)		$	(5,467	)		$	(12,001	)		$	(9,853	)
etailz			(2,760	)			98				(5,547	)			(723	)
Total Company		$	(9,389	)		$	(5,369	)		$	(17,548	)		$	(10,576	)
Reconciliation of etailz Income (Loss) from Operations to etailz Adjusted Income (Loss) from Operations
etailz income (loss) fom operations		$	(2,760	)		$	98			$	(5,547	)		$	(723	)
Acquisition related intangibles amortization			972				965				1,944				1,943
Acquisition related compensation expense, net of contingency benefit			1,118				(319	)			2,240				583
etailz adjusted income (loss) from operations (1)		$	(670	)		$	744			$	(1,363	)		$	1,803

 

⁽¹⁾ In addition to the results of operations determined in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we reported non-GAAP adjusted operating income for the etailz segment as shown above.

 

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

 

		Thirteen Weeks Ended								Change								Twenty-six Weeks Ended								Change
		August 4, 2018				July 29, 2017				$				%				August 4, 2018				July 29,  2017				$				%
($ in thousands)
fye revenue		$	50,545				58,958			$	(8,413	)			-14.3	%		$	104,608				123,902			$	(19,294	)			-15.6	%
etailz revenue			51,629				43,521				8,108				18.6	%			94,169				80,544				13,625				16.9	%
Total revenue		$	102,174			$	102,479			$	(305	)			-0.3	%		$	198,777			$	204,446			$	(5,669	)			-2.8	%

 

Total revenue decreased 0.3% and 2.8% for the thirteen and twenty-six weeks ended August 4, 2018 as compared to the same period last year.

fye Segment

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

 

		Thirteen Weeks Ended								Change												Twenty-six Weeks Ended								Change
		August 4, 2018				July 29,  2017				$				%				Comp Store Net Sales				August 4, 2018				July 29, 2017				$				%				Comp Store Net Sales
($ in thousands)
fye net sales		$	49,410			$	57,393			$	(7,983	)			-13.9	%			-6.7	%		$	102,102			$	121,121			$	(19,019	)			-15.7	%			-7.6	%
Other revenue			1,135				1,565				(430	)			-27.5	%							2,506				2,781				(275	)			-9.9	%
Total revenue		$	50,545			$	58,958			$	(8,413	)			-14.3	%						$	104,608			$	123,902			$	(19,294	)			-15.6	%
As a % of fye net sales
Trend/Lifestyle			40.9	%			37.0	%											-1.7	%			39.3	%			34.6	%											0.4	%
Video (1)			29.0	%			31.2	%											-9.9	%			30.5	%			33.6	%											-12.6	%
Music			18.4	%			20.6	%											-14.4	%			18.5	%			21.1	%											-17.4	%
Electronics			11.7	%			11.2	%											1.4	%			11.7	%			10.7	%											2.3	%
			100.0	%			100.0	%															100.0	%			100.0	%
Store Count:																							241				269				(28	)			-10.4	%
Total Square footage																							1,338,638				1,497,500				(158,862	)			-10.6	%

 

(1)

Includes Video Games category, which represented 0.1% of fye fiscal second quarter net sales. Fiscal 2017 data was adjusted to include this immaterial reclassification.

 

Net sales. Net sales decreased 13.9% and 15.7% during the thirteen weeks and twenty-six weeks ended August 4, 2018 as compared to the same period last year. The decline in net sales resulted from a 10.4% decline in total stores in operation and a 6.7% and 7.6% decline in comparable store net sales for the thirteen and twenty-six weeks ended August 4, 2018, respectively.

 

Trend/Lifestyle:

Comparable store net sales in the trend/lifestyle category decreased 1.7% during the thirteen weeks ended August 4, 2018 and increased 0.4% for the twenty-six weeks ended August 4, 2018, impacted by fidget spinners sales which represented 4% of sales in the second quarter last year. Trend/lifestyle products represented 40.9% and 39.3% of total net sales for the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to 37.0% and 34.6% in the comparable periods last year. The Company continues to take advantage of opportunities to strengthen its selection and shift product mix to growing categories of entertainment-related merchandise.

 

Video:

Comparable store sales in the video category decreased 9.9% and 12.6% during the thirteen and twenty-six week periods ended August 4, 2018, respectively. The video category represented 29.0% and 30.5% of total net sales for the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to 31.2% and 33.6% in the comparable periods last year due to continued industry-wide decline in physical media sales

 

Music:

During the thirteen and twenty-six weeks ended August 4, 2018, music sales in comparable stores decreased 14.4% and 17.4%, respectively, versus the thirteen and twenty-six weeks ended July 29, 2017. The music category represented 18.4% and 18.5% of total net sales for the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to 20.6% and 21.1% for the thirteen and twenty-six weeks ended July 29, 2017 due to continued industry-wide decline in physical media sales.

Electronics:

Comparable store net sales in the electronics category increased 1.4% and 2.3% during the thirteen and twenty-six weeks ended August 4, 2018, respectively. Electronics net sales represented 11.7% of total net sales for both the thirteen and twenty-six weeks ended August 4, 2018, compared to 11.2% and 10.7% in the comparable periods last year.

 

Other Revenue. Other revenue, which was primarily related to commissions and fees earned from third parties, was approximately $1.1 million and $2.5 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to $1.6 million and $2.8 million in the comparable periods last year. The decline in other revenue was primarily due to lower number of stores in operation.

 

etailz Segment

etailz reported sales of $51.6 million and $94.2 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively compared to $43.5 million and $80.5 million sales for the thirteen and twenty-six weeks ended July 29, 2017. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the twenty-six weeks ended August 4, 2018, etailz sold approximately 31,000 SKUs from approximately 2,200 suppliers, compared to approximately 21,000 SKUs from approximately 1,700 suppliers during the twenty-six weeks ended July 29, 2017.

 

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

 

		Thirteen Weeks Ended								Change								Twenty-six Weeks Ended								Change
		August 4, 2018				July 29, 2017				$				%				August 4, 2018				July 29, 2017				$				%
($ in thousands)
fye gross profit		$	20,634			$	25,085			$	(4,451	)			-17.7	%		$	42,905			$	51,995			$	(9,090	)			-17.5	%
etailz gross profit			11,539				10,085				1,454				14.4	%			20,956				19,480				1,476				7.6	%
Total gross profit		$	32,173			$	35,170			$	(2,997	)			-8.5	%		$	63,861			$	71,475			$	(7,614	)			-10.7	%
fye gross profit as a % of fye revenue			40.8	%			42.5	%											41.0	%			42.0	%
etailz gross profit as a % of etailz revenue			22.3	%			23.2	%											22.3	%			24.2	%
Total gross profit as a % of total revenue			31.5	%			34.3	%											32.1	%			35.0	%

Gross profit decreased 8.5% to $32.2 million for the thirteen weeks ended August 4, 2018 compared to $35.2 million for the thirteen weeks ended July 29, 2017. For the twenty-six weeks ended August 4, 2018, gross profit decreased 10.7% to $63.9 million compared to $71.5 million for the comparable period last year.

 

fye Segment

fye gross profit as a percentage of total revenue for the thirteen and twenty-six weeks ended August 4, 2018 was 40.8% and 41.0%, respectively, compared to 42.5% and 42.0% for the comparable periods last year. The decline in rate was primarily driven by a higher number of closing stores during the quarter this year, and higher gross margin related to fidget spinners last year.

 

etailz Segment

etailz gross profit as a percentage of total revenue for both the thirteen and twenty-six weeks ended August 4, 2018 was 22.3%, compared to 23.2% and 24.2% for the comparable periods last year. The decline in the gross profit rate was primarily due to higher marketplace fulfillment and warehousing fees.

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

 

		Thirteen Weeks Ended								Change								Twenty-six Weeks Ended								Change
($ in thousands)		August 4, 2018			July 29, 2017					$			%					August 4, 2018			July 29, 2017					$			%
fye SG&A, excluding depreciation and amortization		$	26,103			$	28,226			($	2,123	)			-7.5	%		$	52,592			$	57,321			($	4,729	)			-8.3	%
As a % of total fye revenue			51.6	%			47.9	%											50.3	%			46.3	%
etailz SG&A, excluding depreciation and amortization			13,185				8,972				4,213				47.0	%			24,310				18,166				6,144				33.8	%
As a % of total etailz revenue			25.2	%			20.6	%											25.9	%			21.8	%
Depreciation and amortization			2,274				3,341				(1,067	)			-31.9	%			4,507				6,564				(2,057	)			-31.3	%
Total SG&A		$	41,562			$	40,539			$	1,023				2.5	%		$	81,409			$	82,051			($	642	)			-0.8	%
As a % of total revenue			40.5	%			39.6	%											41.0	%			40.1	%

 

SG&A expenses increased $1.0 million and decreased $0.6 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.

 

fye Segment

fye SG&A, excluding depreciation and amortization expenses, decreased $2.1 million, or 7.5%, and $4.7 million, or 8.3%, for the thirteen and twenty-six weeks ended August 4, 2018, respectively. As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and twenty-six weeks ended August 4, 2018 were 51.6% and 50.3%, respectively, compared to 47.9% and 46.3% for the same period last year. The decline in SG&A expenses was due to fewer stores in operation. The increase in the rate was primarily due to the comparable sales decline.

 

etailz Segment

etailz SG&A, excluding depreciation and amortization expenses, increased $4.2 million and $6.1 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 4, 2018 were 25.2% and 25.9%, respectively, compared to 20.6% and 21.8% for the same period last year. The increase in SG&A expenses was due to investments in product identification and sourcing, technology, platform diversification, in addition to higher marketplace commissions on the higher sales.

 

Depreciation and amortization. Consolidated depreciation and amortization expense decreased $1.1 million and $2.1 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, primarily due to the $29.1 million net decrease in carrying value of fixed assets, resulting from impairment charges recorded for the fye segment, during the fourth quarter of fiscal 2017. For a discussion of the Company’s impairment charges, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018.

 

Income from Joint Venture. Income from joint venture was $83 thousand during the twenty-six weeks ended August 4, 2018.

 

Interest Expense. Interest expense was $103 thousand and $166 thousand during the thirteen and twenty-six weeks ended August 4, 2018, respectively. Interest expense consisted primarily of unused commitment fees and the amortization of fees related to the Company’s credit facility. Interest expense during the thirteen and twenty-six weeks ended July 29, 2017 was $59 thousand and $115 thousand, respectively. The increase in

interest expense was due to borrowings under the credit facility as discussed in Note 8 to the condensed consolidated financial statements.

 

Gain on Insurance Proceeds. During the twenty-six weeks ended July 29, 2017, the fye segment recorded an $8.7 million gain on insurance proceeds related to the death of the Company’s former Chairman.

 

Other Income. Other income was $49 thousand and $128 thousand during the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to $43 thousand and $57 thousand for the same periods last year.

 

Income Tax Expense. Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the Company’s deferred tax assets. There were insignificant tax expense amounts recorded during the thirteen and twenty-six weeks ended August 4, 2018 and comparative periods last year due to the losses recognized each period.

 

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

 

		Thirteen Weeks ended												Twenty-six Weeks ended
		August 4,				July 29,								August 4,				July 29,
($ in thousands)		2018				2017				Change				2018				2017				Change
Loss before income tax		$	(9,443	)		$	(5,514	)		$	(3,929	)		$	(17,586	)		$	(1,928	)		$	(15,658	)
Income tax expense			67				51				16				71				105				(34	)
Net loss		$	(9,510	)		$	(5,565	)		$	(3,945	)		$	(17,657	)		$	(2,033	)		$	(15,624	)

LIQUIDITY

 

Liquidity and Cash Flows:

 

The Company’s primary sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility. The Company’s cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns, the related terms on the purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs for the foreseeable future, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments.

 

Management anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed in note 8 in the interim condensed consolidated financial statements.

 

In connection with the preparation of these unaudited interim condensed consolidated financial statements, the Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these financial statements are issued.

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

 

			As of or for the
			Twenty-six Weeks Ended								Change
			August 4,				July 29,
	($ in thousands)		2018				2017				$
	Operating Cash Flows			(32,944	)			(20,503	)			(12,441	)
	Investing Cash Flows			(663	)			7,595				(8,258	)
	Financing Cash Flows			4,841				(5,000	)			9,841
	Capital Expenditures	(1)		(1,800	)			(4,166	)			2,366
	Cash, Cash Equivalents, and Restricted Cash	(2)		14,740				26,169				(11,429	)
	Merchandise Inventory			114,920				126,687				(11,767	)
	Working Capital			82,100				101,054				(18,954	)
(1)	Included in Investing Cash Flows
(2)	Cash and cash equivalents per interim condensed consolidated balance sheets		$	4,477			$	13,985			$	(9,508	)
	Add: restricted cash			10,263				12,184				(1,921	)
	Cash, cash equivalents, and restricted cash		$	14,740			$	26,169			$	(11,429	)

 

Cash used in operations was $32.9 million for the twenty-six weeks ended August 4, 2018, primarily due to a net loss of $17.7 million, adding back depreciation and amortization of $4.5 million and non-cash compensation of $1.6 million, less $2.0 million increase in accounts receivable, $5.5 million seasonal increase in inventory, $2.0 million increase in prepaid expenses, and reductions in accounts payable, deferred revenue, and other long-term liabilities of $7.6 million, $1.7 million, and $2.6 million, respectively. The Company’s merchandise inventory and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for merchandise inventory purchased during the prior year’s holiday season.

 

Cash used in investing activities was $0.7 million for the twenty-six weeks ended August 4, 2018, which consisted of $1.8 million in capital expenditures, offset by $1.1 million of capital distributions from the joint venture.

 

Cash provided by financing activities for the twenty-six weeks ended August 4, 2018, was comprised of $6.3 million proceeds from short-term borrowings, offset by a $1.5 million payment to the etailz shareholders as per the original etailz acquisition share purchase agreement.

 

Capital Expenditures. During the thirteen and twenty-six weeks ended August 4, 2018, respectively, the Company made capital expenditures of $0.9 million and $1.8 million, respectively. The Company currently plans to spend approximately $3.0 million for capital expenditures during fiscal 2018.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs and income taxes. Management bases its estimates and judgments on

historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K for the year ended February 3, 2018 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements. There have been no material changes or modifications to the policies since February 3, 2018.

 

Recent Accounting Pronouncements:

 

The information set forth under Note 2, Recently Adopted Accounting Pronouncements section, and Note 3, Recently Issued Accounting Pronouncements, contained in Item 1, “Notes to Interim Condensed Consolidated Financial Statements”, is incorporated herein by reference.

 

Non-GAAP Measures:

 

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

 

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

 

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

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

 

PART I – FINANCIAL INFORMATION

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

 

The Company does not hold any financial instruments that expose it to significant market risk and does not engage in hedging activities. To the extent the Company borrows under its revolving credit facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its credit facility can be variable. If interest rates on the Company’s revolving credit facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, income before income taxes would be reduced by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018.

 

Item 4 – Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of August 4, 2018, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in internal controls. There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1 – Legal Proceedings

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

 

Store Manager Class Actions

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

 

Specifically, Carol Spack filed a complaint against Trans World Entertainment Corporation (Trans World) in the United States District Court, District of New Jersey, on April 20, 2017 (Case No.: 3:17-cv-02687-BRM-LHG) alleging that she is entitled to unpaid compensation for overtime under the Federal Fair Labor Standards Act (FLSA). She brings a nationwide collective action under the FLSA on behalf of all Store Managers and Senior Assistant Managers. She also brings class action claims under New Jersey and Pennsylvania law on behalf of all persons who worked as Store Managers in New Jersey or Senior Assistant Managers in Pennsylvania.

 

On May 19, 2017, Natasha Roper filed a complaint against Trans World in the U.S. District Court for the Northern District of New York (Case No.: 1:17-cv-0553-TJM-CFH) in which she also alleges that she is entitled to unpaid compensation for overtime under the FLSA. Ms. Roper brings a nationwide collective action under the FLSA on behalf of all similarly situated Store Managers.

 

Item 1A – Risk Factors

Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the year ended February 3, 2018.

 

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

None.

 

Item 3 – Defaults Upon Senior Securities

None.

 

Item 4 – Mine Safety Disclosure

Not Applicable.

 

Item 5 – Other Information

None.

Item 6 - Exhibits

 

(A) Exhibits -
Exhibit No.	Description
31.1	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document (furnished herewith)
101.SCH	XBRL Taxonomy Extension Schema (furnished herewith)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase (furnished herewith)
101.DEF	XBRL Taxonomy Extension Definition Linkbase (furnished herewith)
101.LAB	XBRL Taxonomy Extension Label Linkbase (furnished herewith)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase (furnished herewith)

SIGNATURES

 

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

 

TRANS WORLD ENTERTAINMENT CORPORATION

 

September 18, 2018		By: /s/ Michael Feurer
		Michael Feurer
		Chief Executive Officer
		(Principal Executive Officer)
September 18, 2018		By: /s/ John Anderson
		John Anderson
		Chief Financial Officer
		(Principal and Chief Accounting Officer)