Kaspien Holdings Inc. - FORM 10-K

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EX-4.2 - EXHIBIT 4.2 - Kaspien Holdings Inc.	ex4_2.htm
EX-32 - EXHIBIT 32 - Kaspien Holdings Inc.	ex32.htm
EX-31.2 - EXHIBIT 31.2 - Kaspien Holdings Inc.	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Kaspien Holdings Inc.	ex31_1.htm
EX-23 - EXHIBIT 23 - Kaspien Holdings Inc.	ex23.htm
EX-21 - EXHIBIT 21 - Kaspien Holdings Inc.	ex21.htm
EX-10.17 - EXHIBIT 10.17 - Kaspien Holdings Inc.	ex10_17.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2020

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 No.

2818 N. Sullivan Rd. Ste 30 Spokane, WA 99216		12203
Address of Principal Executive Offices		Zip Code

(855) 300-2710

Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

38 Corporate Circle

Albany, NY 12203

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	TWMC	NASDAQ Stock Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 such files). Yes ☒ No ☐

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

Large accelerated 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 Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 2, 2019, the last business day of the Company’s most recently completed second fiscal quarter, 1,816,061 shares of the Registrant’s Common Stock were issued and outstanding. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrant’s Common Stock on August 2, 2019, was $10,569,475. As of May 29, 2020, there were 1,825,198 shares of Common Stock issued and outstanding.

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

DOCUMENTS INCORPORATED BY REFERENCE:

None.

PART I

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This document includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to the Trans World Entertainment Corporation’s (“the Company’s”) future prospects, developments and business strategies. The statements contained in this document that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties.

We have used the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, and similar terms and phrases, including references to assumptions, in this document to identify forward-looking statements. These forward-looking statements are made based on management’s expectations and beliefs concerning future events and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control, that could cause actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause actual results to differ materially from the Company’s forward-looking statements.

• continued operating losses;

• impact of the novel coronavirus identified as “COVID-19” on our business and operating results;

• the ability of the Company to satisfy its liabilities and to continue as a going concern;

• our ability to realize the benefits of recent divestitures;

• maintaining etailz’s segment relationship with Amazon;

• decline in the Company’s stock price;

• the limited public float and trading volume for our Common Stock;

• new product introductions;

• advancements in technology;

• dependence on key employees, the ability to hire new employees and pay competitive wages;

• the Company’s level of debt and related restrictions and limitations;

• future cash flows;

• vendor terms;

• interest rate fluctuations;

• access to third party digital marketplaces;

• adverse publicity;

• product liability claims;

• changes in laws and regulations;

• breach of data security;

• increase in Amazon Marketplace fulfillment and storage fees;

• the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and other sections of this Annual Report on Form 10-K

The reader should keep in mind that any forward-looking statement made by us in this document, or elsewhere, pertains only as of the date on which we make it. New risks and uncertainties come up from time-to-time and it is impossible for us to predict these events or how they may affect us. In light of these risks and uncertainties, you should keep in mind that any forward-looking statements made in this report or elsewhere might not occur.

In addition, the preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions. These estimates and assumptions affect:

•

the reported amounts and timing of revenue and expenses,

•

the reported amounts and classification of assets and liabilities, and

•

the disclosure of contingent assets and liabilities.

Actual results may vary from our estimates and assumptions. These estimates and assumptions are based on historical results, assumptions that we make, as well as assumptions by third parties.

Reverse Stock Split

On August 15, 2019, we completed a 1-for-20 reverse stock split of our outstanding Common Stock. As a result of this stock split, our issued and outstanding Common Stock decreased from 36,291,620 to 1,814,581 shares. Accordingly, all share and per share information contained in this report has been restated to retroactively show the effect of this stock split.

Item 1.

BUSINESS

Company Background

Trans World Entertainment Corporation, which, together with its consolidated subsidiaries, is referred to herein as the “Company”, “we”, “us” and “our”, was incorporated in New York in 1972. We own 100% of the outstanding Common Stock of Trans World NY Sub, Inc. (f/k/a Record Town, Inc.) and etailz, Inc. See below for additional information.

Our Reportable Segments

During 2019, the Company operated our business in two segments:

etailz Segment (“etailz”)

etailz provides a platform of software and services to empower brands to grow their online distribution channels on digital marketplaces such as Amazon, Walmart, eBay, among others. The Company helps brands achieve their online retail goals through its innovative and proprietary technology, tailored strategies and mutually beneficial partnerships.

For Your Entertainment Segment (“fye”)

The fye segment operates retail stores and two e-commerce sites selling entertainment products, including trend, video, music, electronics and related products in the United States.

As of February 1, 2020, the fye segment operated 200 stores primarily in malls totaling approximately 1.1 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands predominantly under the For Your Entertainment brand.

The fye segment operates two retail web sites, www.fye.com and www.secondspin.com. fye.com carries entertainment products, including trend, video, music, electronics and related products. SecondSpin.com is a leading seller of used CDs, DVDs, and Blu-Ray online and carries one of the largest catalogs of used media available online.

On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of 2428391 Ontario Inc. o/a Sunrise Records (“Sunrise Records”) pursuant to an Asset Purchase Agreement (as amended, the “Asset Purchase Agreement”) dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records. (the “FYE Transaction”).

All of our financial information for fiscal 2019 includes the fye segment. For pro forma information, see Note 13 of the Notes to the Consolidated Financial Statements.

Business Overview

etailz Segment

etailz provides a platform of software and services to empower brands to grow their online distribution channel on digital marketplaces such as Amazon, Walmart, and eBay, among others. etailz empowers brands to achieve their online retail goals through its innovative, proprietary technology, tailored strategies and mutually beneficial partnerships.

etailz is positioning itself to be a brand’s ultimate online growth partner and are guided by six core principles:

Partner Obsession	Insights Driven
Simplicity	Innovation
Results	Ownership

A high-level overview of the etailz platform is shown in Figure 1.

Figure 1: etailz platform of products and services

Partners

etailz’s partners include brands, suppliers, distributors, liquidators, and affiliates such as venture capital firms and marketing agencies. At the end of fiscal 2019 and following its vendor rationalization effort, etailz had 1,039 partners.

Tailored Solutions

etailz’s customizable solutions for its partners include, but are not limited to, scaling the market, growing beyond Amazon, protecting a brand, expanding globally, converting more customers, and launching new products. etailz uses its platform to customize solutions to cater to partner needs.

Partnership Models

etailz works with partners in three different partnership models:

Retail as a Service: In this model, etailz buys inventory and sells it on marketplaces such as Amazon, Walmart and eBay as a third-party seller. Additionally, etailz supports dropship integrations with various suppliers and distributors and incubates its own brands. At the end of fiscal 2019, etailz had a total of 6 incubated brands – Jump Off Joe, Brilliant Bee, Big Betty, Domestic Corner, Coy Beauty and Keto. In Retail as a Service, etailz’ business model is the same as that of a wholesale retailer.

Agency as a Service: In this model, etailz serves as an extension of a partner’s e-commerce team providing full service and managed services in the areas of inventory management, marketing management, creative, brand control, tax, compliance and other marketplace growth services. etailz charges a subscription fee and receives a percentage of the revenue generated.

Software as a Service: In this model, etailz provides partners access to software through its platform of proprietary technology to empower partners to self-manage their marketplace channel. etailz charges a subscription fee and receives a percentage of the transaction.

By offering a platform of software and services, etailz intends to diversify its risk and leverage its assets to capture more market share.

The “Agency as a Service” and “Software as a Service” models are collectively called “Subscriptions.”

Technology and Integrations

etailz’s marketplace growth platform of software and services is a one stop shop insights driven platform across the categories of brand protection, logistics, inventory management, pricing, digital marketing, creative, tax and compliance among others, all accessible through a centralized portal. The platform has been developed over a period of 12 years and over $800 million in revenue has been processed through the platform.

The platform uses an insight driven approach to digital marketplace retailing using proprietary software. Using data collected from marketplaces, optimal inventory thresholds and purchasing trends are calculated within its advanced inventory management software developed in-house. etailz also has proprietary software related to pricing, advertisement management, marketplace seller tracking and channel auditing.

Additionally, the platform can be extended to various software and service providers, thereby enabling a network of partner integrations. As of January 31, 2019, etailz had formed a strategic partnership with third party logistics provider, Deliverr and tax provider – TaxCloud. In 2020, etailz intends to expand this to companies: MyFBAPrep and VantageBP among others.

The platform lends itself to network effects. The more partners etailz has on its platform, the more data and insights it can collect. The more insights it gets, more products and services it can serve its partners and more marketplace integrations it can support. The more marketplace providers that can be integrated, the more partners etailz can acquire. This facilitates rapid scale.

Business Environment

Digital marketplaces allow consumers to shop from a variety of merchants in one place and have become an integral part of many brand manufacturers’ businesses.

In the US, total estimated e-commerce sales for 2020 are projected at $604 billion, an increase of 9% from 2019. e-commerce sales in 2019 accounted for 11% of total retail sales as compared to 10% of total retail sales for 2018. Top marketplaces in the US include Amazon.com (2.3 billion visits per month), eBay.com (600 million visits per month) and Walmart.com (450 million visits per month). In 2019, Amazon represented 47% of U.S. retail e-commerce sales. Amazon’s third-party business is growing faster than its first party business . As of 2019, the compound annual growth rate for Amazon’s third-party business was 52%, compared to 25% for its retail business.

There are several drivers of this growth including consumer preference for convenience, selection, personalization, opportunities, the ability to price compare, and delivery speed that are only found via e-commerce.

Globally, e-commerce sales are growing faster than physical store sales. According to global retail e-commerce statistics, e-commerce sales are projected to grow to $6.5 trillion, or 22% of total retail, by 2023 from $3.5 trillion in 2019, or 14.1 of total retail. At the end of 2019, China represented 54% of total global e-commerce sales, followed by the US at 16% and United Kingdom at 4%.

Globally, etailz sells on marketplaces in the United States (amazon.com, walmart.com, ebay.com, google.com, sears.com, jet.com, pricefalls.com, overstock.com, and wish.com ), the United Kingdom (amazon.uk), Germany (amazon.de) Canada (amazon.ca) and India (amazon.in). In 2020, etailz intends to expand its selling to marketplaces in Japan and Mexico.

Competition and Strategic Positioning

etailz operates in a category within e-commerce called “Marketplace Growth Software and Services”. Businesses in this category provide services to brands and other sellers to facilitate growth on marketplaces. The market is very fragmented, and most providers are focused on a few focus areas where sellers have support needs. Subcategories in this market include: Account and Marketing Services, Supply Chain and Logistics Providers, Manufacturers and Product Suppliers, Legal Services and Accounting, Tax and Financial Services. In the Account and Marketing Services subcategory, services are further divided into retail services, agency services and software services. This is analogous to etailz’s business models – Retail as a Service, Agency as a Service and Software as a Service.

etailz positions itself as a comprehensive and fully customizable platform of software and services tailored towards online marketplace growth. etailz’s core focus is on the Account and Marketing Services subcategory and competes in this subcategory with Software Providers, Agencies and Retailers.

Revenue Distribution

etailz’s primary source of revenue is through its “Retail as a Service” business, specifically as a third-party seller on the Amazon US marketplace (96% of net revenue in fiscal 2019). The remaining revenue is generated from other marketplaces including Amazon International, Walmart and eBay.

Approximately 66% of total etailz’s revenue in fiscal 2019 was generated by four major categories: health & personal care; home/kitchen/grocery; tools/office/outdoor; and pets & sporting goods.

In October 2019, etailz put increased focus on its subscription business (“Agency as a Service” and “Software as a Service”). As of January 31, 2020, the total number of subscription partners was 31 generating less than 1% of net revenue in fiscal 2019. etailz expects continued growth in the subscription business in fiscal 2020.

Employees

As of February 1, 2020, etailz employed approximately 155 people, of whom approximately 148 were employed on a full-time basis. At the end of fiscal 2019, etailz had department heads in the areas of marketing, operations, sales, account management, human resources, accounting, FP&A, warehouse operations, compliance, and engineering.

Customer Acquisition

etailz acquires its partners through a combination of brand building, inbound digital marketing, and outbound sales, as well as using its proprietary data platform to identify brands that would be good strategic fits for its services. etailz utilizes content marketing to strengthen its visibility within the industry. etailz’s public relations efforts consist of press releases, articles in industry publications, and articles on its website to build its brand.

In addition, etailz regularly runs advertisements on popular ad platforms such as Google, Facebook, Twitter and LinkedIn to bring leads into its sales funnels.

Trademarks

The trademark etailz is registered with the U.S. Patent and Trademark Office and is owned by etailz. We believe that our rights to this trademark is adequately protected. We hold no material patents, licenses, franchises, or concessions; however, our established trademark is essential to maintaining our competitive position.

Available Information

The Company’s headquarters are located at 2818 N. Sullivan Road, Suite 130, Spokane Valley, WA 99216, and its telephone number is (855)-300-2710. The Company’s corporate website address is www.twec.com. The Company makes available, free of charge, its Exchange Act Reports (Forms 10-K, 10-Q, 8-K and any amendments thereto) on its web site as soon as practical after the reports are filed with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. This information can be obtained from the site http://www.sec.gov. The Company’s Common Stock, $0.01 par value, is listed on the NASDAQ Capital Market under the trading symbol “TWMC”.

Item 1A.

RISK FACTORS

The following is a discussion of certain factors, which could affect the financial results of the Company.

Risks Related to Our Business and Industry

If we cannot successfully implement our business strategy our growth and profitability could be adversely impacted.

Our future results will depend, among other things, on our success in implementing our business strategy.

During the third quarter of 2019, based on recurring losses from operations, the expectation of continuing operating losses for the foreseeable future, and uncertainty with respect to any available future funding, the Company concluded that there was substantial doubt about the Company’s ability to continue as a going concern. As a response, the Company pursued several strategic initiatives towards its strategy of shifting its focus solely to the operation of etailz, improving profitability and meeting future liquidity needs and capital requirements. The following initiatives were completed during the first quarter of 2020:

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The sale of the For Your Entertainment (fye) business;

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The establishment of a new secured $25 million revolving credit facility (the “New Credit Facility”) with Encina Business Credit, LLC (“Encina”);

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The execution of a separate subordinated loan agreement for etailz, Inc. (the “Subordinated Loan”); and

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The receipt by etailz, Inc. of loan proceeds pursuant to the Paycheck Protection Plan (the “PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act.

Notwithstanding the foregoing, the ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the strategic initiative to reposition etailz as a platform of software and services, the availability of future funding, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company, and overcoming the impact of the COVID-19 pandemic.

There can be no assurance that we will be successful in further implementing our business strategy or that the strategy, including the completed initiatives, will be successful in sustaining acceptable levels of sales growth and profitability. As a result, the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of filing of this Annual Report on Form 10-K. In addition, the proceeds from the PPP Loan are subject to audit and there is a risk of repayment.

A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect our business.

Our business, results of operations, and financial condition may be materially adversely impacted if a public health outbreak, including the recent COVID-19 pandemic, interferes with our ability, or the ability of our employees, contractors, suppliers, and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business.

The COVID-19 pandemic has adversely affected and may continue to adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations. As a result, our ability to fund through public or private equity offerings, debt financings, and through other means at acceptable terms, if at all, may be disrupted, in the event our financing needs for the foreseeable future are not able to be met by our New Credit Facility, balances of cash, cash equivalents and cash generated from operations.

In addition, the continuation of the COVID-19 pandemic and various governmental responses in the United States has adversely affected and may continue to adversely affect our business operations, including our ability to carry on business development activities, restrictions in business-related travel, delays or disruptions in our on-going projects, and unavailability of the employees of the Company or third-parties with whom we conduct business, due to illness or quarantines, among others. Our business was negatively impacted by disruptions in our supply chain, which limited our ability to source merchandise, and limits on products fulfillment placed by Amazon. The extent to which COVID-19 could impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, and will depend on many factors, including the duration of the outbreak, the effect of travel restrictions and social distancing efforts in the United States and other countries, the scope and length of business closures or business disruptions, and the actions taken by governments to contain and treat the disease. As such, we cannot presently predict the scope and extent of any potential business shutdowns or disruptions. Possible effects may include, but are not limited to, disruption to our customers and revenue, absenteeism in our labor workforce, unavailability of products and supplies used in our operations, shutdowns that may be mandated or requested by governmental authorities, and a decline in the value of our assets, including various long-lived assets.

Continued increases in Amazon Marketplace fulfillment and storage fees could have an adverse impact on our profit margin and results of operations.

etailz utilizes Amazon’s Freight by Amazon (“FBA”) platform to store their products at the Amazon fulfillment center and to pack and distribute these products to customers. If Amazon continues to increase its FBA fees, our profit margin for the etailz segment could be adversely affected.

The Company’s business is influenced by general economic conditions.

The Company’s performance is subject to general economic conditions and their impact on levels of discretionary consumer spending. General economic conditions impacting discretionary consumer spending include, among others, wages and employment, consumer debt, reductions in net worth, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors.

Consumer purchases of discretionary items generally decline during recessionary periods and other periods where disposable income is adversely affected. A downturn in the economy affects retailers disproportionately, as consumers may prioritize reductions in discretionary spending, which could have a direct impact on purchases of our products and services and adversely impact our results of operations. In addition, reduced consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have a negative impact on gross profit.

Disruption of global capital and credit markets may have a material adverse effect on the Company’s liquidity and capital resources.

Distress in the financial markets has in the past and can in the future result in extreme volatility in security prices, diminished liquidity and credit availability. There can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy or that our capital resources will at all times be sufficient to satisfy our liquidity needs.

Because of our floating rate credit facility, we may be adversely affected by interest rate changes.

Our financial position may be affected by fluctuations in interest rates, as the New Credit Facility is subject to floating interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. As we borrow against our credit facility, a significant increase in interest rates could have an adverse effect on our financial position and results of operations.

The Company is dependent upon access to capital, including bank credit facilities and short-term vendor financing, for its liquidity needs.

The Company must have sufficient sources of liquidity to fund its working capital requirements and indebtedness. Based on its recurring losses from operations, expectation of continuing operating losses, and uncertainty with respect to any available future funding, the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of filing of this Annual Report on Form 10-K.

The future availability of financing will depend on a variety of factors, such as economic and market conditions, the availability of credit and the Company’s credit rating, as well as the Company’s reputation with potential lenders. These factors could materially adversely affect the Company’s ability to fund its working capital requirements, costs of borrowing, and the Company’s financial position and results of operations would be adversely impacted.

Historically, we have experienced declines and we may continue to experience fluctuation in our level of sales and results from operations.

A variety of factors has historically affected, and will continue to affect, our sales results and profit margins. These factors include general economic conditions; competition; actions taken by our competitors; consumer trends and preferences; access to third party marketplaces; and new product introductions and changes in our product mix.

There is no assurance that we will achieve positive levels of sales and earnings growth, and any decline in our future growth or performance could have a material adverse effect on our business and results of operations.

The ability of the Company to satisfy its liabilities and to continue as a going concern will continue to be dependent on the implementation of several items, the success of which is not certain.

The Company has suffered recurring losses from operations and the Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, all of which are limited. Therefore, the ability of the Company to meet its liabilities and to continue as a going concern is dependent on, among other things, improved profitability, the continued implementation of the strategic initiative to reposition etailz as a platform of software and services, the availability of future funding, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company, and overcoming the impact of the COVID-19 pandemic.

A change in one or more of the Company’s partners’ policies or the Company’s relationship with those partners could adversely affect the Company’s results of operations.

The Company is dependent on its partners to supply merchandise in a timely and efficient manner. If a partner fails to deliver on its commitments, whether due to financial difficulties or other reasons, the Company could experience merchandise shortages that could lead to lost sales.

Historically, the etailz segment has not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply. No individual partner exceeded 10% of etailz purchases in fiscal 2019.

etailz revenue is dependent upon maintaining etailz’s relationship with Amazon and failure to do so, or any restrictions on our ability to offer products on the Amazon Marketplace, could have an adverse impact on our business, financial condition and results of operations.

etailz generates substantially all of its revenue through the Amazon Marketplace. Therefore, we depend in large part on our relationship with Amazon for the growth of the etailz segment. In particular, we depend on our ability to offer products on the Amazon Marketplace. We also depend on Amazon for the timely delivery of products to customers. Any adverse change in our relationship with Amazon, including restrictions on the ability to offer products or termination of the relationship, could adversely affect the continued growth of our etailz segment and our financial condition and results of operations.

Parties with whom the Company does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.

The Company is a party to contracts, transactions and business relationships with various third parties, including partners, vendors, suppliers, service providers and lenders, pursuant to which such third parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties to provide essential products, services or other benefits, including with respect to merchandise, advertising, software development and support, logistics, other agreements for goods and services in order to operate the Company’s business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Economic, industry and market conditions, including as a result of the COVID-19 pandemic, could result in increased risks to the Company associated with the potential financial distress or insolvency of such third parties. The Company is not currently able to accurately determine the extent and scope of the impact of the COVID-19 pandemic on such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of operations.

Breach of data security could harm our business and standing with our customers.

The protection of our partner, employee and business data is critical to us. Our business, like that of most companies, involves confidential information about our employees, our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of all such data, including confidential information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means, including deceiving our employees or third-party service providers. The methods used to obtain unauthorized access, disable or degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect. We have implemented and regularly review and update our control systems, processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any security breach involving the misappropriation, loss or other unauthorized disclosure of customer payment card or personal information or employee personal or confidential information, whether by us or our vendors, could damage our reputation, expose us to risk of litigation and liability, disrupt our operations, harm our business and have an adverse impact upon our net sales and profitability. As the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business, compliance with those requirements could also result in additional costs. Further, if we are unable to comply with the security standards established by banks and the credit card industry, we may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect our retail operations.

Our hardware and software systems are vulnerable to damage, theft or intrusion that could harm our business.

Any failure of our computer hardware or software systems that causes an interruption in our operations or a decrease in inventory tracking could result in reduced net sales and profitability. Additionally, if any data intrusion, security breach, misappropriation or theft were to occur, we could incur significant costs in responding to such event, including responding to any resulting claims, litigation or investigations, which could harm our operating results.

Our inability or failure to protect our intellectual property rights, or any claimed infringement by us of third-party intellectual rights, could have a negative impact on our operating results.

Our trademark, trade secrets and other intellectual property, including proprietary software, are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could cause a decline in our revenue. In addition, any infringement or other intellectual property claim made against us could be time-consuming to address, result in costly litigation, cause product delays, require us to enter into royalty or licensing agreements or result in our loss of ownership or use of the intellectual property.

Loss of key personnel or the inability to attract, train and retain qualified employees could adversely affect the Company’s results of operations.

The Company believes that its future prospects depend, to a significant extent, on the services of its executive officers. Our future success will also depend on our ability to attract and retain qualified key personnel. The loss of the services of certain of the Company’s executive officers and other key management personnel could adversely affect the Company’s results of operations.

In addition to our executive officers, the Company’s business is dependent on our ability to attract, train and retain qualified team members. Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, health care costs and changing demographics. If we are unable to attract and retain adequate numbers of qualified team members, our operations and support functions could suffer. Those factors, together with increased wage and benefit costs, could adversely affect our results of operations.

Failure to comply with legal and regulatory requirements could adversely affect the Company’s results of operations.

The Company’s business is subject to a wide array of laws and regulations. Significant legislative changes that impact our relationship with our workforce (none of which is represented by unions) could increase our expenses and adversely affect our operations. Examples of possible legislative changes impacting our relationship with our workforce include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining units are negotiated or imposed, minimum wage requirements, health care mandates, and changes in overtime regulations.

Our policies, procedures and internal controls are designed to comply with all applicable laws and regulations, including those imposed by the Securities and Exchange Commission and the NASDAQ Capital Market, as well as applicable employment laws. Additional legal and regulatory requirements increase the complexity of the regulatory environment in which we operate and the related cost of compliance. Failure to comply with such laws and regulations may result in damage to our reputation, financial condition and market price of our stock.

We may face difficulties in meeting our labor needs to effectively operate our business.

We are heavily dependent upon our labor workforce. Our compensation packages are designed to provide benefits commensurate with our level of expected service. However, we face the challenge of filling many positions at wage scales that are appropriate to the industry and competitive factors. We also face other risks in meeting our labor needs, including competition for qualified personnel, overall unemployment levels, and increased costs associated with complying with regulations relating to COVID-19. Changes in any of these factors, including a shortage of available workforce, could interfere with our ability to adequately service our customers and could result in increasing labor costs.

Our business could be adversely affected by increased labor costs, including costs related to an increase in minimum wage and health care.

Labor is one of the primary components in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, health care, or other employee benefits costs may adversely impact our operating expenses. Additionally, there is no assurance that future health care legislation will not adversely impact our results or operations.

Litigation may adversely affect our business, financial condition and results of operations.

Our business is subject to the risk of litigation by employees, consumers, partners, suppliers, competitors, stockholders, government agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. We may incur losses relating to these claims, and in addition, these proceedings could cause us to incur costs and may require us to devote resources to defend against these claims that could adversely affect our results of operations. For a description of current legal proceedings, see “Part I, Item 3, Legal Proceedings.”

An impairment of the carrying value of fixed assets, intangible assets and goodwill has negatively affected and may in the future negatively affect our financial results.

Because we have grown in part through acquisitions, goodwill and other acquired intangible assets have represented a substantial portion of our total assets.

Under generally accepted accounting principles, we assess our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

During fiscal 2019, as a result of triggering events, the Company performed impairment tests on the fixed assets and operating lease right-of-use assets of the fye segment and concluded that both were fully impaired. The Company recorded impairment losses of approximately $23.2 million for fixed assets and operating lease right-of-use assets of the fye segment.

During fiscal 2019, the Company fully impaired its vendor relationships and the Company recognized an impairment loss of $0.8 million.

In the future, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of our long-lived assets may result in additional impairments to our fixed assets and intangible assets. Any reduction in or impairment of the value of fixed assets or intangible assets will result in a charge against earnings, which could have an adverse impact on our reported results of operations and financial condition.

The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect our business.

Natural disasters, including earthquakes, hurricanes, floods, and tornadoes may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from suppliers for sale to our customers. Public health issues, such as flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or customer demand. Our ability to mitigate the adverse effect of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster. We may be required to suspend operations in some or all our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.

The terms of our asset-based revolving credit agreement impose certain restrictions on us that may impair our ability to respond to changing business and economic conditions, which could have a significant adverse impact on our business. Additionally, our business could suffer if our ability to acquire financing is reduced or eliminated.

On February 20, 2020, etailz entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina, as administrative agent, under which the lenders committed to provide up to $25 million in loans under a three-year, secured revolving credit facility (the “New Credit Facility”).

Among other things, the Loan Agreement limits etailz’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets. The Loan Agreement also requires etailz to comply with a financial maintenance covenant.

The Loan Agreement contains customary events (including our Subordinated Debt) of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, customary ERISA defaults, certain events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, change in control, cessation of business or the liquidation of material assets of the borrowers and guarantors under the New Credit Facility taken as a whole, the occurrence of an uninsured loss to a material portion of collateral and failure of the obligations under the New Credit Facility to constitute senior indebtedness under any applicable subordination or intercreditor agreements, including our Subordinated Debt.

As of February 1, 2020, the Company had borrowings of $13.1 million under its previous credit facility with Wells Fargo. On February 20, 2020, in conjunction with the FYE Transaction, the Company fully satisfied its obligations under the Credit Facility.

Risks Related to Ownership of Our Common Stock.

The ownership of our Common Stock is extremely concentrated, and entities affiliated with members of our Board of Directors have significant influence and control over the outcome of any vote of the Company’s Shareholders and may have competing interests.

The Robert J. Higgins TWMC Trust (the “Trust”) owns approximately 39.1% of the outstanding Common Stock and Neil Subin owns approximately 16.5% of the outstanding Common Stock, and as a result can control the outcome of most actions requiring shareholder approval. In addition, entities affiliated with each of the Trust and Mr. Subin, as well as one of our directors, Mr. Simpson, and certain of his affiliated entities, entered into a voting agreement (as described in “Related Party Transactions”) and agreed to how their respective shares of the Company’s Common Stock held by the parties (which total approximately 60% ) will be voted with respect to (i) amending the Articles of Incorporation of the Company to set the size of the Board of Directors of the Company at three directors, (ii) the designation, election, removal, and replacement of members of the Board and (iii) how shares of the Company’s capital stock held by the parties to the voting agreement will be voted on a Sale of the Company (as defined in the voting agreement) with respect to which there is a shareholder vote or some other action to take place during the ninety (90) days immediately following the date of the voting agreement. Pursuant to the voting agreement, Messrs. Marcus and Simpson were appointed as directors of the Company, and Mr. Reickert, a trustee of the Trust, remained as a director of the Company. Mr. Subin was also granted board observer rights. Entities affiliated with the Trust and Messrs. Marcus and Simpson are also lenders under our subordinated loan and security agreement, have received warrants to purchase shares of the Company’s Common Stock and received contingent value rights (“CVRs”) representing the contractual right to receive cash payments from the Company in an amount equal, in the aggregate, to 19.9% of the proceeds received by the Company in respect of certain intercompany indebtedness owing to it by etailz and/or its equity interest in etailz, each as described in “Related Party Transactions”. As a result, there may be instances in which the interest of Mr. Reickert, the Trust and its affiliated entities, Messrs. Marcus and Subin and their respective affiliated entities, and Mr. Simpson and his affiliated entities may conflict or be perceived as being in conflict with the interest of a holder of our securities or the interest of the Company.

The Company’s stock price has experienced and could continue to experience volatility and could decline, resulting in a substantial loss on your investment.

Our stock price has experienced, and could continue to experience in the future, substantial volatility as a result of many factors, including global economic conditions, broad market fluctuations and public perception of the prospects for the industries in which we operate and the value of our assets. As a result of the FYE Transaction, we are reliant on the performance of etailz, and a failure to meet market expectations, particularly with respect to net revenues, operating margins and earnings per share, would likely result in a further decline in the market price of our stock.

If we do not meet the continued listing standards of the NASDAQ, our Common Stock could be delisted from trading, which could limit investors’ ability to make transactions in our Common Stock and subject us to additional trading restrictions.

Our common stock is listed on NASDAQ, which imposes continued listing requirements with respect to listed shares. On August 15, 2019, the Company effected a reverse stock split of its outstanding shares of Common Stock at a ratio of one-for-twenty pursuant to a Certificate of Amendment to the Company’s Certificate of Incorporation filed with the Secretary of State of the State of New York. The reverse stock split was reflected on NASDAQ beginning with the opening of trading on August 15, 2019. The primary purpose of the reverse stock split, which was approved by the Company’s shareholders at the Company’s Annual Stockholders Meeting on June 27, 2019, was to enable the Company to comply with the $1.00 minimum bid price requirement for continued listing on NASDAQ. There can be no assurance that we will be able to maintain compliance with the minimum bid price requirement or that we will otherwise be in compliance with other NASDAQ listing criteria. If we fail to maintain compliance with the minimum bid requirement or to meet the other applicable continued listing requirements in the future and NASDAQ determines to delist our Common Stock, the delisting could adversely affect the market price and liquidity of our Common Stock and reduce our ability to raise additional capital.

The limited public float and trading volume for our Common Stock may have an adverse impact and cause significant fluctuation of market price.

Historically, ownership of a significant portion of our outstanding shares of Common Stock has been concentrated in a small number of stockholders. Consequently, our Common Stock has a relatively small float and low average daily trading volume, which could affect a shareholder’s ability to sell our stock or the price at which it can be sold. In addition, future sales of substantial amounts of our Common Stock in the public market by those larger stockholders, or the perception that these sales could occur, may adversely impact the market price of the stock and our stock could be difficult for a shareholder to liquidate.

The Company intends to continue to undertake one or more corporate initiatives to reduce costs which may include deregistering the Company’s Common Stock under the Exchange Act.

Given the Company’s liquidity position, the Company intends to continue to undertake one or more corporate initiatives to reduce costs going forward. We currently incur significant expenses in connection with complying with public company reporting requirements and, as a listed company, we have an obligation to continue to comply with the applicable reporting requirements. As part of its consideration of all available strategic alternatives for the Company, the Board will consider whether, and may conclude that, deregistering our Common Stock, and therefore eliminating the significant expenses associated with complying with public company reporting requirements, is in the best interests of our shareholders. If the Company determines to deregister its Common Stock, following such deregistration, we would no longer be a reporting company and we would cease to file annual, quarterly, current, and other reports and documents with the Securities and Exchange Commission as soon as we are permitted to do so under applicable laws, rules and regulations. In such event, our shareholders would have significantly less information about the Company and our business, operations, and financial performance than they have currently. Additionally, termination of our obligation to publicly disclose financial and other information about the Company following the deregistration of our Common Stock under the Exchange Act would make it more difficult (or even impossible) for shareholders to sell shares of Common Stock held by them. Trading in our Common Stock would only occur, if at all, in privately negotiated sales and potentially on an OTC market, if one or more brokers chooses to make a market for our Common Stock on any such market and complies with applicable regulatory requirements. There could be no assurances regarding any such private trading or OTC market trading.

Item 1B.

UNRESOLVED SEC COMMENTS

None.

Item 2.

PROPERTIES

Retail Stores

As of February 1, 2020, the fye segment leased and operated 200 stores. The majority of the leases provide for the payment of fixed monthly rent and expenses for maintenance, property taxes and insurance, while others provide for the payment of monthly rent based on a percentage of sales. Certain leases provide for additional rent based on store sales in excess of specified levels. The following table lists the leases due to expire in each of the fiscal years shown as of the fiscal year-end, assuming any renewal options are not exercised:

Year	No. of Leases	Year	No. of Leases

2020	164	2023	3

2021	27	2024	2

2022	3	2025 and beyond	1

On February 20, 2020, as part of the FYE Transaction, Sunrise Records assumed the obligation under the leases for all stores, Albany, NY offices and distribution center.

Corporate Offices and Distribution Center Facilities

As of February 1, 2020, we leased the following office and distribution facilities:

Location	Square Footage	Owned or Leased	Use
fye
Albany, NY	39,800	Leased	Office administration
Albany, NY	141,500	Leased	Distribution center

etailz
Spokane, WA	30,700	Leased	Office administration
Spokane, WA	32,000	Leased	Distribution center

On February 20, 2020, as part of the FYE Transaction, Sunrise Records assumed the obligation under the leases for all stores, Albany, NY offices and distribution center.

The Spokane, WA distribution center supports the distribution to outside distribution facilities for sale on third-party marketplaces for etailz.

Item 3.

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

There are two pending class actions. The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017 (the “Spack Action”). The Spack Action alleges that the Company misclassified Store Managers (“SMs”) as exempt nationwide. It also alleges that Trans World improperly calculated overtime for Senior Assistant Managers (“SAMs”) nationwide, and that both SMs and SAMs worked “off-the-clock.” It also alleges violations of New Jersey and Pennsylvania State Law with respect to calculating overtime for SAMs. The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide misclassification claim on behalf of SMs. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.

The Company has reached a preliminary settlement with the plaintiffs for both store manager class actions. The Company reserved $425,000 for the settlement as of February 2, 2020.

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information: The Company’s Common Stock trades on the NASDAQ Capital Market under the symbol “TWMC.” As of May 29, 2020, there were 225 shareholders of record. The following table sets forth high and low last reported sale prices for each fiscal quarter during the period from February 4, 2018 through May 29, 2020.

	Closing Sales Prices

	High		Low
2018
1^st Quarter	$	36.00	$	20.00
2^nd Quarter	$	27.00	$	17.00
3^rd Quarter	$	22.80	$	13.00
4^th Quarter	$	25.80	$	11.40

2019
1^st Quarter	$	12.48	$	5.77
2^nd Quarter	$	8.01	$	5.00
3^d Quarter	$	6.08	$	2.74
4^th Quarter	$	6.98	$	1.92


2020
1^st Quarter	$	5.35	$	2.39
2nd Quarter (through May 29, 2020)	$	5.14	$	3.62

On May 29, 2020, the last trading date in May the reported sale price on the Common Stock on the NASDAQ Capital Market was $4.80. On August 15, 2019, the Company completed a 1-for-20 reverse stock split of outstanding Common Stock. All closing prices have been adjusted to reflect the reverse stock split.

Dividend Policy: The Company did not pay cash dividends in fiscal 2019 and fiscal 2018. The declaration and payment of any dividends is at the sole discretion of the board of directors and is not guaranteed.

Issuer Purchases of Equity Securities during the Quarter Ended February 1, 2020

During the three-month period ended February 1, 2020, the Company did not repurchase any shares under the share repurchase program.

Item 6.

SELECTED CONSOLIDATED FINANCIAL DATA

Not required under the requirements of a Smaller Reporting Company.

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations provide information that the Company’s management believes necessary to achieve an understanding of its financial condition 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 for the Company’s products and services; general economic factors in markets where the Company’s products and services are sold; and other factors including, but not limited to: cost of goods, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, interest rates, customer preferences, unemployment, labor costs, inflation, fuel and energy prices, weather patterns, climate change, catastrophic events, competitive pressures and insurance costs discussed in the Company’s filings with the Securities and Exchange Commission.

FYE Transaction

On February 20, 2020, the Company consummated the sale of substantially all of the assets and certain of the liabilities relating to fye to a subsidiary of Sunrise Records pursuant to an Asset Purchase Agreement dated January 23, 2020, by and among the Company, Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, 2428392 Inc., and Sunrise Records.

Following the FYE Transaction, etailz is the Company’s only operating segment. However, all of our financial information for fiscal 2019 includes the fye segment. For pro forma information, see Note 13 of the Notes to the Consolidated Financial Statements.

Impact of COVID-19

To date, as a direct result of COVID-19, most of our employees are working remotely. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, reserves and allowances, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international customers and markets, which are highly uncertain and cannot be predicted at this time. Management is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity.

In response to the rapidly evolving COVID-19 pandemic, we activated our business continuity program, led by our Executive Team in conjunction with Human Resources, to help us manage the situation. In mid-March, we transitioned our corporate office staff to work 100% remotely. This process was aided through the implementation of a flexible work from home policy rolled out to the organization in fiscal 2019, having a companywide communication platform for instant messaging and video conferencing, and cloud-based critical business applications. However, while our business is not dependent on physical office locations nor travel, having a 100% remote workforce does present increased operational risk. Our leadership team believes we have the necessary controls in place to mitigate these impacts and allow the team to continue to operate effectively remotely as long as required by State guidelines.

While e-commerce has largely benefited from the closure of brick-and-mortar locations as consumer spending has been pushed online to marketplaces such as Amazon and Walmart, the industry nor our organization has been immune to the impact to our supply chains. For instance, in March, Amazon reduced replenishment in their fulfillment centers to essential items which limited a significant percentage of SKUs carried by etailz and a number of etailz’ partners shut their warehouses or suffered limited processing capacity due to COVID-19. While Amazon has since lifted restrictions and the leadership team executed contingency plans to mitigate the adverse impact from these restrictions, this highlights the fluid nature of COVID-19 across supply chains.

Additionally, since the beginning of the pandemic, tens of millions of Americans have lost their jobs, significantly increasing the risk of near-term economic contraction in the United States that may affect e-commerce sales. The risk of a second wave or increased numbers of positive COVID-19 cases also presents further risk to supply chains. Leadership is actively monitoring the situation and potential impacts on its financial condition, liquidity, operations and workforce but the full extent of the impact is still highly uncertain.

Key Performance Indicators

Management monitors a number of key performance indicators to evaluate its performance, including:

Net Sales and Comparable Store Net Sales: The etailz segment measures total year over year sales growth. etailz measures its sales performance through several key performance indicators including: number of partners and active product listings and sales per listing.

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 product category

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

Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges. SG&A expenses also include fixed assets write-offs associated with store closures, if any, and miscellaneous income and expense items, other than interest.

Balance Sheet and Ratios: The Company views cash, merchandise inventory, accounts payable leverage, and working capital as key indicators of its financial position. See “Liquidity and Capital Resources” for further discussion of these items.

Fiscal Year Ended February 1, 2020 (“fiscal 2019”)

Compared to Fiscal Year Ended February 2, 2019 (“fiscal 2018”)

The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2019 and fiscal 2018 ended February 1, 2020 and February 2, 2019, respectively. Both fiscal 2019 and fiscal 2018 had 52 weeks.

Segment Highlights:

(amounts in thousands)	Fiscal Year Ended February 1, 2020			Fiscal Year Ended February 2, 2019
Total Revenue
etailz	$	133,216		$	186,900
fye		192,719			231,290
Total Company	$	325,935		$	418,190

Gross Profit
etailz	$	30,393		$	38,815
fye		65,706			89,259
Total Company	$	96,099		$	128,074

Loss From Operations
etailz	$	(6,405	)	$	(72,351	)
fye		(50,770	)		(24,455	)
Total Company	$	(57,175	)	$	(96,806	)

Reconciliation of etailz Loss From Operations to etailz Adjusted Loss From Operations
etailz Loss From Operations	$	(6,405	)	$	(72,351	)
Acquisition related intangible amortization expenses		1,143			3,890
Acquisition related compensation expenses		66			3,821
Asset impairment charges		765			57,712
etailz Adjusted Loss From Operations ⁽¹⁾	$	(4,431	)	$	(6,928	)

(1)

In addition to the results of operations determined in accordance with generally accepted accounting principles in the United States (“GAAP”), we reported non-GAAP etailz adjusted operating loss as shown above. The Company believes that adjusted loss from operations as per the segment disclosure, when considered together with its GAAP financial results, provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges. This measure is not a recognized measure of financial performance under GAAP, and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP.

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

					2019 vs. 2018
	2019		2018		$			%
(amounts in thousands)
etailz net sales	$	133,216	$	186,900	$	(53,684	)	(28.7	%)
fye net sales		188,777		226,097		(37,320	)	(16.5	%)
Other revenue ⁽¹⁾		3,942		5,193		(1,251	)	(24.1	%)
Total revenue	$	325,935	$	418,190	$	(92,255	)	(22.1	%)

1.	Other revenue is comprised of third-party commission income and management fees related to the fye segment.

Total revenue decreased 22.1% to $325.9 million compared to $418.2 million in fiscal 2018.

etailz Segment

etailz recorded sales of $133.2 million for fiscal 2019 compared to $186.9 million for fiscal 2018, a decline of 28.7%. etailz net sales were impacted by the partner rationalization and remediation strategic initiative. Rationalization and remediation activities included terminating unprofitable partners and improving partner relationships through negotiations focused on improvements to gross margins and supply chain efficiencies. As a result of the initiative, etailz deactivated 1,060 partners. The average number of partners during fiscal 2019 was 1,177. The average number of active listings during 2019 were 12,838 as compared to 20,655 during 2018. Sales per listing increased 21% to $191 during 2019 as compared to $158 during 2018.

etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art.

fye Segment

The 16.5% net sales decline from the prior year is primarily due to a 13.8% decline in average stores in operation and a 4.7% decline in comparable store net sales.

Net fye sales by merchandise category for fiscal 2019 and fiscal 2018 were as follows:

( dollar amounts in thousands)	2019 Net Sales		% Total			2018 Net Sales		% Total			Total $ Net Sales Change			Total % Net Sales Change			Comparable Store % Net Sales Change

Trend/Lifestyle	$	85,901		45.5	%	$	93,830		41.5	%	$	(7,929	)		(8.5	%)		6.6	%
Video		45,957		24.3	%		62,403		27.6	%		(16,446	)		(26.4	%)		(17.8	%)
Music		31,630		16.8	%		39,793		17.6	%		(8,163	)		(20.5	%)		(9.2	%)
Electronics		25,289		13.4	%		30,071		13.3	%		(4,782	)		(15.9	%)		(12.6	%)
Total	$	188,777		100.0	%	$	226,097		100.0	%	$	(37,320	)		(16.5	%)		(4.7	%)

Trend/lifestyle

fye stores offer a selection of trend/lifestyle products that primarily relate to theatrical releases, music, and gaming. The trend/lifestyle category increased 6.6% on a comparable store sales basis in fiscal 2019 and represented 45.5% of the Company’s total net sales in fiscal 2019 versus 41.5% in fiscal 2018. The Company grew sales in this category by strengthening its assortment of consumables and collectables, as well as by improving the product presentation and value proposition.

Video

fye stores offer a wide range of new and used DVDs, Blu-rays, and 4Ks in all of its stores. Total net sales for the video category declined 17.8% on a comparable store sales basis in fiscal 2018. Video sales were negatively impacted by industry wide declines in physical video due to digital options.

Music

fye stores offer a wide range of new and used CDs, music DVDs and vinyl across most music genres, including new releases from current artists as well as an extensive catalog of music from past periods and artists. Total net sales in the music category declined 9.2% on a comparable store sale basis in fiscal 2019.

Electronics

fye stores offer a selection of complementary portable electronics and accessories to support our entertainment products. The electronics category decreased 12.6% on a comparable store sales basis.

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

(amounts in thousands)	2019		2018		$			%
etailz gross profit	$	30,393	$	38,815	$	(8,422	)	(21.7	%)
fye gross profit		65,706		89,259		(23,553	)	(26.4	%)
Total gross profit	$	96,099	$	128,074	$	(31,975	)	(25.0	%)

etailz gross profit as a % of etailz revenue	22.8	%	20.8	%
fye gross profit as a % of fye revenue	34.1	%	38.6	%
Total gross profit as a % of total revenue	29.5	%	30.6	%

Gross profit decreased 25.0% to $96.1 million compared to $128.1 million in fiscal 2018 due lower gross profit as a percentage of sales for fye.

etailz Segment

etailz gross profit as a percentage of revenue was 22.8% in fiscal 2019 as compared to 20.8% in fiscal 2018. The increase in the gross profit rate was primarily due the rationalization and remediation activities including terminating unprofitable vendors and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.

fye Segment

Gross profit as a percentage of sales was 34.1% in fiscal 2019 as compared to 38.6% in fiscal 2018. The decline in the gross profit rate was primarily due to the write-down of inventory to the fair value based on the FYE Transaction.

Selling, General and Administrative Expenses.

The following table sets forth a year-over-year comparison of the Company’s SG&A expenses:

	2019			2018			$			%

etailz SG&A before depreciation and amortization		33,734			48,965			(15,231	)	-31.1	%
As a % of total etailz revenue		18.0	%		28.1	%				-10.0	%

fye SG&A before depreciation and amortization	$	84,094		$	107,141		$	(23,047	)	-21.5	%
As a % of total fye revenue		58.9	%		46.3	%				12.6	%

Depreciation and amortization⁽¹⁾		11,463			9,116			2,347		25.7	%


Total SG&A	$	129,291		$	165,222		$	(35,931	)	-21.7	%

As a % of total revenue		39.7	%		37.3	%

(1) During fiscal 2019, the Company recorded $7.0 million of amortization of right-of-use-assets upon the adoption of ASC 842.

etailz Segment

etailz SG&A, excluding depreciation and amortization, expenses decreased $15.2 million, or 31.1%, primarily due to a 30% reduction in force implemented during the fourth quarter of fiscal 2018 and lower commissions due to lower sales. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

fye Segment

SG&A, excluding depreciation and amortization, decreased $23.0 million, or 21.5%, primarily due to lower expenses from fewer stores in operation. The increase in the rate as a percentage of fye revenue was primarily due to the comparable sales decline and increased corporate home office expenses to support strategic growth initiatives.

Depreciation and amortization expense. Consolidated depreciation and amortization expense increased $2.3 million primarily due to amortization of right to use assets partially offset by the impairment charges recorded during the fourth quarter of fiscal 2018, as well as further impairment recorded during the third quarter of 2019, which reduced the net carrying value of the long-lived assets.

Asset Impairment Charges

etailz Segment

During fiscal 2019, the Company fully impaired its vendor relationships and the Company recognized an impairment loss of $0.8 million.

During fiscal 2018, the Company concluded, based on continued operating losses for the etailz segment driven by lower than expected operating results culminating in the fourth quarter of fiscal 2018 that a triggering event had occurred, and pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) , Property, Plant, and Equipment, an evaluation of the etailz fixed assets and intangible assets for impairment was required. Fixed assets related to internally developed technology at etailz were written down to their estimated fair values at the end of fiscal 2018, resulting in the recognition of asset impairment charges of $2.1 million. Intangible assets related to technology and vendor relationships were written down to their estimated fair values at the end of fiscal 2018 resulting in the recognition of asset impairment charges of $16.4 million.

During fiscal 2018, as a result of the annual impairment review pursuant to FASB ASC 350, Intangibles—Goodwill and Other, the Company performed its impairment test over goodwill. Based on the Company’s annual impairment test, it was determined that the goodwill balance was fully impaired, and the Company recognized an impairment loss of $39.2 million.

fye Segment

During fiscal 2019 and fiscal 2018, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected sales, that triggering events had occurred in each respective fiscal year, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the fye fixed assets for impairment was required. Fixed assets and operating lease right-of-use assets, primarily at the Company’s retail store locations, as well as certain fixed assets at the corporate location, consisting of the home office and the Albany distribution center, where impairment was determined to exist, were written down to their estimated fair values as of the end of fiscal 2019 and fiscal 2018, resulting in the recording of asset impairment charges of $23.2 million and $1.9 million, respectively. Based on the fair value as determined attributable to the fixed assets and operating lease right-of-use assets in contemplation of the sale of the fye segment, it was determined that the fixed assets and operating right-of-use assets were fully impaired.

Interest Expense. Interest expense in fiscal 2019 was $0.9 million, compared to $0.7 million in fiscal 2018.

Other Loss (Income). Other loss was $0.4 million in fiscal 2019 compared to income of $0.2 million in fiscal 2018.

Income Tax Expense. The following table sets forth a year-over-year comparison of the Company’s income tax expense:

(amounts in thousands)							2019 vs. 2018
	2019			2018				$

Income tax expense	$	321		$	80		$	241

Effective tax rate		(0.5	%)		(0.1	%)

The fiscal 2019 and fiscal 2018 income tax expense includes state taxes and the accrual of interest on the reserve for uncertain tax positions.

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

(amounts in thousands)							2019 vs. 2018
	2019			2018				$

Net loss	$	(58,744	)	$	(97,382	)	$	38,638

Net loss as a percentage of total revenue		(18.0	%)		(23.3	%)

Net loss was $58.7 million for fiscal 2019, compared to $97.4 million for fiscal 2018. Included in the results for fiscal 2019 and fiscal 2018 are non-cash impairment charges of $24.0 million and $59.7 million, respectively, as a result of recording impairment against certain fixed assets and right to use assets in the fye segment and impairment against fixed assets, intangible assets, and goodwill in the etailz segment. The decrease in net loss was primarily due to a decrease in asset impairment charges.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Flows:

The consolidated financial statements for the year ended February 1, 2020 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and satisfy liabilities and commitments in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the continued implementation of the strategic initiative to reposition etailz as a platform of software and services, the availability of future funding, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company, and overcoming the impact of the COVID-19 pandemic.

The audited consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company incurred net losses of $58.7 million and $97.4 million for the fiscal 2019 and fiscal 2018, respectively, and has an accumulated deficit of $109.0 million at February 1, 2020. In addition, net cash used in operating activities during fiscal 2019 was $15.8 million. Net cash used in operating activities during fiscal 2018 was $25.5 million.

During the third quarter of fiscal 2019, based on recurring losses from operations, the expectation of continuing operating losses, and uncertainty with respect to any available future funding, the Company concluded that there was substantial doubt about the Company’s ability to continue as a going concern. As a response, the Company pursued several strategic initiatives towards its strategy of shifting its focus solely to the operation of etailz, improving profitability and meeting future liquidity needs and capital requirements. These following initiatives were completed during the first quarter of fiscal 2020 include:

•

The sale of the For Your Entertainment (fye) business;

•

The establishment of a new secured $25 million revolving credit facility with Encina:

•

The execution of a separate subordinated loan agreement for etailz, Inc. (the “Subordinated Loan”); and

•

The receipt by etailz, Inc. of loan proceeds pursuant to the Paycheck Protection Plan under the Coronavirus Aid, Relief, and Economic Security Act. For additional details, see Note 1 of the Notes to the Consolidated Financial Statements.

The Company’s primary sources of liquidity are its borrowing capacity under its New Credit Facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate etailz, including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; successful implementation of our strategy and planned activities; and our ability to overcome the impact of the COVID-19 pandemic.

In addition to the aforementioned current sources of existing working capital, the Company is continuing its efforts to generate additional sales and increase margins. There can be no assurance that any of the initiatives or strategic alternatives will be implemented, successful or consummated.

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

(amounts in thousands)		2019			2018			2019 vs. 2018
Operating Cash Flows		$	(15,827	)	$	(25,518	)	$	9,691
Investing Cash Flows			(2,696	)		(2,342	)		(354	)
Financing Cash Flows			13,149			(1,420	)		14,569

Capital Expenditures			(2,823	)		(3,689	)		866

End of Period Balances:
Cash, Cash Equivalents, and Restricted Cash	⁽¹⁾		8,852			14,226			(5,374	)
Merchandise Inventory			67,958			94,842			(26,884	)
Working Capital			22,126			65,947			(43,821	)

⁽¹⁾	Cash and cash equivalents per Consolidated Balance Sheets	$	2,977	$	4,355
	Add: Restricted cash		5,875		9,871
	Cash, cash equivalents, and restricted cash	$	8,852	$	14,226

During fiscal 2019, cash used in operations was $15.8 million compared to $25.5 million in fiscal 2018. During 2019, cash used in operations consisted primarily of a net loss of $58.7 million offset by non-cash charges, including the $24.0 million impairment of long lived-assets, the $12.7 inventory net realizable adjustment and $11.5 million in depreciation and amortization and changes in operating assets and liabilities of $6.5 million. During fiscal 2018, cashed used in operations consisted primarily of a net loss of $97.4 million offset by the non-cash charges, including $59.7 million impairment of long-lived assets and $9.1 million in depreciation and amortization and changes in operating assets and liabilities of $0.2 million. See the Consolidated Statement of Cash Flows for further detail.

The Company monitors various statistics to measure its management of inventory, including inventory turnover (annual cost of sales divided by average merchandise inventory balances), and accounts payable leverage (accounts payable divided by merchandise inventory). Inventory turnover measures the Company’s ability to sell merchandise and how many times it is replaced in a year. This ratio is important in determining the need for markdowns and planning future inventory levels and assessing customer response to our merchandise. For the etailz segment, inventory turnover in fiscal 2019 and in fiscal 2018 was 5.0 and 5.2, respectively. Accounts payable leverage measures the percentage of inventory being funded by the Company’s product vendors. The percentage is important in determining the Company’s ability to fund its business. Accounts payable leverage on inventory for the etailz segment was 32.7% as of February 1, 2020 compared with 22.7% as of February 2, 2019.

Cash used in investing activities was $2.7 million in fiscal 2019, compared to cash flows used in investing activities of $2.3 million in fiscal 2018. During fiscal 2019, cash used in operating investing activities primarily consisted of capital expenditures. During fiscal 2018, cash used in investing activities consisted of $1.4 million in capital distributions received from the joint venture, more than offset by $3.7 million in capital expenditures.

The Company has historically financed its capital expenditures through borrowings under its revolving credit facility and cash flow from operations. The Company anticipates capital spending of approximately $1.5 million in fiscal 2020.

Cash provided by financing activities was $13.1 million in fiscal 2019, compared to cash used in financing activities of $1.4 million in fiscal 2018. In fiscal 2019, cash provided by financing activities consisted of net proceeds from short term borrowings. In fiscal 2018, cash used in financing activities was primarily comprised of a $1.5 million payment paid to the etailz shareholders in connection with the share purchase agreement signed during the acquisition of etailz during fiscal 2016.

Off-Balance Sheet Arrangements. The Company has no off-balance sheet arrangements as defined by Item 303 (a) (4) of Regulation S-K.

Related Party Transactions.

Prior to the consummation of the FYE Transaction, the Company leased its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016 and expires on December 31, 2020.

Under the lease accounted for as an operating lease, the Company paid $1.2 million in both fiscal 2019 and fiscal 2018, which were included in selling, general and administrative expenses in the Statement of Operations. As of February 1, 2020, the Company owed $1.1 million on the operating lease liability, which is included in the current portion of operating lease liabilities on the Balance Sheet. Under the terms of the lease agreement, the Company is responsible for property taxes and other operating costs with respect to the premises.

On February 20, 2020, as part of the FYE Transaction, the Company assigned the rights and obligations of the lease to Sunrise Records.

Directors Jonathan Marcus, Thomas Simpson, and Michael Reickert are the chief executive officer of Alimco Re Ltd. (“Alimco”), the managing member of Kick-Start III, LLC and Kick-Start IV, LLC (“Kick-Start”), and a trustee of the Robert J. Higgins TWMC Trust (the “Trust”), an affiliate of RJHDC, LLC (“RJHDC” and together with Alimco and Kick-Start, “Related Party Entities”), respectively. The Related Party Entities are parties to the following agreements with the Company entered into on March 30, 2020:

•

Subordinated Loan and Security Agreement, pursuant to which the Related Party Entities made a $5.2 million secured term loan ($2.7 million from Alimco, $0.5 million from Kick-Start, and $2.0 million from RJHDC) to etailz with a scheduled maturity date of May 22, 2023, interest accruing at the rate of twelve percent (12%) per annum and compounded on the last day of each calendar quarter by becoming a part of the principal amount, and secured by a second priority security interest in substantially all of the assets of the Company and etailz;

•

Common Stock Purchase Warrants (“Warrants”), pursuant to which the Company issued warrants to purchase up to 244,532 shares of Common Stock to the Related Party Entities (127,208 shares for Alimco, 23,401 shares for Kick-Start, and 93,923 shares for RJHDC), subject to adjustment in accordance with the terms of the Warrants, at an exercise price of $0.01 per share;

•

Contingent Value Rights Agreement (the “CVR Agreement”), pursuant to which the Related Party Entities received contingent value rights (“CVRs”) representing the contractual right to receive cash payments from the Company in an amount equal, in the aggregate, to 19.9% of the proceeds (10.35% for Alimco, 1.90% for Kick-Start, and 7.64% for RJHDC) received by the Company in respect of certain intercompany indebtedness owing to it by etailz and/or its equity interest in etailz; and

•

Voting Agreement (the “Voting Agreement”), pursuant to which the Related Party Entities, the Trust, Mr. Simpson and their respective related entities agreed to how their respective shares of the Company’s capital stock held by the parties will be voted with respect to (i) amending the Articles of Incorporation of the Company to set the size of the Board of Directors of the Company at three directors, (ii) the designation, election, removal, and replacement of members of the Board and (iii) how shares of the Company’s capital stock held by the parties to the Voting Agreement will be voted on a Sale of the Company (as defined in the Voting Agreement) with respect to which there is a shareholder vote or some other action to take place during the ninety (90) days immediately following the date of the Voting Agreement. Pursuant to the Voting Agreement, Messrs. Marcus and Simpson were appointed as directors of the Company, and Mr. Reickert, a trustee of the Trust, remained as a director of the Company. Mr. Subin was also granted board observer rights.

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 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. Note 1 of the Notes to the Consolidated Financial Statements in this report includes a summary of the significant accounting policies and methods used by the Company in the preparation of its consolidated financial statements. Management believes that of the Company’s significant accounting policies and estimates, the following involve a higher degree of judgment or complexity:

Merchandise Inventory and Return Costs. Merchandise inventory is stated at the lower of cost or net realizable value under the average cost method. In the current year, the Company recorded a $12.7 million inventory adjustment to net realizable value based on the sale of its fye business after the balance street date. Inventory valuation requires significant judgment and estimates, including obsolescence, shrink and any adjustments to net realizable value, if net realizable value is lower than cost. Inherent in the entertainment products industry is the risk of obsolete inventory. Typically, newer media releases generate a higher product demand. Some media vendors offer credits to reduce the cost of products that are selling more slowly, thus allowing for a reduction in the selling price and reducing the possibility for items to become obsolete. For all merchandise categories, the Company records obsolescence and any adjustments to net realizable value (if lower than cost) based on current and anticipated demand, customer preferences, and market conditions. The provision for inventory shrink is estimated as a percentage of sales for the period from the last date a physical inventory was performed to the end of the fiscal year. Such estimates are based on historical results and trends and the shrink results from the last physical inventory. Physical inventories are taken at least annually for all stores and the distribution center throughout the year and inventory records are adjusted accordingly.

The Company is generally entitled to return merchandise purchased from major music and video vendors for credit against other purchases from these vendors. Certain vendors reduce the credit with a per unit merchandise return charge which varies depending on the type of merchandise being returned. Certain other vendors charge a handling fee based on units returned. The Company records merchandise return charges in cost of sales. The Company incurred merchandise return charges of $0.1 million and $0.4 million in fiscal 2019 and fiscal 2018, respectively.

Shrink expense, including obsolescence was $2.5 million and $3.4 million in fiscal 2019 and fiscal 2018, respectively. As a rate to net sales, this equaled 0.8% for fiscal 2019 and 2018.

Long-Lived Assets other than Goodwill: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally measured based on discounted estimated future cash flows. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less disposition costs. For the purpose of the asset impairment test, the fye segment has two asset groupings – corporate and store level assets. For the purposes of the asset impairment test, the etailz segment has one asset grouping, which is the same as the etailz segment.

During fiscal 2019 and fiscal 2018, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected sales that triggering events had occurred in each respective fiscal year, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the fye fixed assets for impairment was required. Fixed assets and operating lease right-of-use assets, primarily at the Company’s retail store locations, as well as certain fixed assets at the corporate location, consisting of the home office and the Albany distribution center, where impairment was determined to exist were written down to their estimated fair values as of the end of fiscal 2019 and fiscal 2018, resulting in the recording of asset impairment charges of $23.2 million and $1.9 million, respectively. Based on the fair value as determined attributable to the fixed assets and operating lease right-of-use assets in contemplation of the fye segment, it was determined that as of the end of fiscal 2019, the fixed assets and operating lease right-of-use assets were fully impaired.

During fiscal 2019 and fiscal 2018, the Company concluded, based on continued operating losses for the etailz segment that a triggering event had occurred, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the etailz fixed assets and intangible assets for impairment was required. For fiscal 2019, intangible assets related to vendor relationships were fully impaired resulting in the recognition of asset impairment charges of $0.8 million. For fiscal 2018, fixed assets related to internally developed technology at etailz were written down to their estimated fair values resulting in the recognition of asset impairment charges of $2.1 million and intangible assets related to technology and vendor relationships were written down to their estimated fair values resulting in the recognition of asset impairment charges of $16.4 million.

Recently Issued Accounting Pronouncements.

The information set forth above may be found under Notes to Consolidated Statements, Note 2.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under the requirements of a Smaller Reporting Company.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The index to the Company’s Consolidated Financial Statements is included in Item 15, and the Consolidated Financial Statements follow the signature page to this report and are incorporated herein by reference.

The quarterly results of operations are included herein in Note 14 of Notes to the Consolidated Financial Statements in this report.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.

CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures: Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that the Company’s disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and as of the end of the period covered by this annual report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit, under the Exchange Act, is recorded, processed, summarized, as appropriate, to allow timely decisions regarding required disclosure and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management including the principal executive officer and principal financial officer.

Management’s Report on Internal Control Over Financial Reporting: Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d – 15(f) under the Exchange Act, as amended). Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on our evaluation under the framework in Internal Control-Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of February 1, 2020.

Changes in Controls and Procedures: As of February 1, 2020, there have been no changes in the Company’s internal controls over financial reporting that occurred during fiscal 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

Item 9B.

OTHER INFORMATION

No events have occurred which would require disclosure under this Item 9B.

PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The biographies of each of the member of our Board of Directors (the “Board”) contain applicable information regarding the person’s service as a director, business and other professional experience, director positions held currently or at any time during the last five years, and the experiences, qualifications, attributes or skills that caused the Board to determine that the person should serve as a director for the Company. The Company believes that the backgrounds and qualifications of its directors, considered as a group, should provide the Company and the Board with diverse business and professional capabilities, along with the experience, knowledge and other abilities that will allow the Board to fulfill its responsibilities. See “Related Party Transactions” for additional information regarding certain relationships between our directors and the Company.

Jonathan Marcus, has been the Chief Executive Officer of Alimco Financial Corporation since March 2019. Prior to March 2019, Mr. Marcus was a managing member and co-founder of Broadbill Partners, L.P., a fund focused on special situations and distressed securities. Prior to Broadbill’s inception in 2011, he was the chief investment officer of Cypress Management, L.P., the predecessor fund to Broadbill, which he founded in 1995 to specialize in investing in distressed securities. Jon’s career also includes extensive investment banking and financial advisory work at Prudential-Bache Securities and Credit Suisse First Boston, with a substantial focus advising financially troubled companies or their creditors. Jon currently serves on the boards of directors of Alimco and Anacomp, Inc.

W. Michael Reickert, has been the managing member of Independent Family Office, LLC since 2005. Prior to founding Independent Family Office in 2005, Mr. Reickert was employed by The Ayco Company, LP. From 1986 to 2004 in various positions, including Executive Vice President. Mr. Reickert provides the Board with financial and investment expertise. Mr. Reickert is a trustee of the Robert J. Higgins TWMC Trust, which is our largest shareholder, and is also trustee of various other trusts.

Tom Simpson, has been the Chief Executive Officer of Ignite Northwest since July 2019. Prior to Ignite, Mr. Simpson was self-employed as Principal of Northwest Venture Associates. Previously, he was Co-Founder and Executive Chairman of etailz prior to being acquired by the Company in 2016. Mr. Simpson provides the Board with over 35 years of experience as an investment banker, venture capitalist, angel investor and entrepreneur, including his role as founder of etailz. In addition to his role with Ignite, he is President of the Spokane Angel Alliance, Managing Member of Kick-Start angel investment funds and currently serves on the boards of Medcurity, Oddjobbers, Reenue, Spiceology, Sportscope and Vaagen Timbers.

Information About Our Executive Officers

The Company’s executive officers are identified below:

Kunal Chopra has been the Principal Executive Officer of the Company since March 2020 and Chief Executive Officer of etailz since September 2019. Prior to joining etailz, Mr. Chopra was General Manager – Worldwide Learning for Microsoft from April 2018. From August 2016 through April 2018, Mr. Chopra served as General Manager – Amazon Fashion. Prior to joining Amazon, Mr. Chopra served as Chief Operating Officer of Unikrn from March 2015 through August 2016.

Edwin Sapienza has been Chief Financial Officer of the Company since October 2018. Prior to being named Chief Financial Officer, Mr. Sapienza was the Company’s Vice President – Strategy, Secretary and Treasurer since 2012, and has continued in those roles, in addition to serving as Chief Financial Officer. Mr. Sapienza joined the Company in 1993 as a staff accountant.

Compensation of Directors

The following table sets forth information regarding compensation of directors for the fiscal year ended February 1, 2020:

Name	Fees Earned or Paid in Cash ($)⁽¹⁾		Stock Awards ($)		Option Awards ($)⁽²⁾⁽⁴⁾		All Other Compensation ($)		Total Compensation ($)
Martin Hanaka⁽³⁾		120,361		—		—		—		120,361
Jeff Hastings		50,962		—		2,520		—		53,482
Robert Marks		123,000		—		—		—		123,000
Michael Nahl		187,500		—		—		—		187,500
W. Michael Reickert		174,000		—		—		—		174,000
Michael B. Solow		232,508		—		—		—		232,508

(1)	Fees earned reflect the amount of cash received for the annual retainer, Board and committee meeting fees . Fees earned for Mr. Solow reflect an annual retainer of $50,000 for his role as Chairman of the Board.

(2)

Amount represents the grant date fair value as computed in accordance with Accounting Standards Codification Topic 718, relating to the grant of stock options to Mr. Hastings in 2019. See Note 9 to the Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K for the assumptions made in determining the value. Effective August 8, 2019, 15,000 stock options were awarded to Mr. Hastings.

(3)	Mr. Hanaka did not stand for re-election at the 2019 Shareholders’ Annual Meeting. Upon his exit from the Board, Mr. Hanaka received payment of his deferred income in the form of cash and shares.

(4)	As of June 15, 2020, Mr. Hanaka, Mr. Nahl, Mr. Reickert, Mr. Hastings and Mr. Marks each held options to purchase 15,000 shares.

Cash Compensation. Each director who is not a salaried employee of the Company receives a $12,500 retainer per annum plus a $2,000 attendance fee for each Board meeting attended and a $1,000 attendance fee for each committee meeting attended, except that the compensation for telephone conference meetings is $1,000 and $500 for Board and committee telephone conference meetings, respectively. A committee chairperson receives an additional $5,000 retainer per year and the Audit Committee chairperson receives a $15,000 annual retainer. The Chairman of the Board receives an annual retainer of $50,000. The Company may, in its discretion, determine to pay all or a portion of any annual retainer in shares of Common Stock in lieu of cash and to make discretionary grants of Common Stock to non-employee directors from time to time. The Company has not elected to pay the annual retainer in shares or make discretionary grants during the past three years.

Additional Compensation. Currently, each director is eligible to participate in the Amended and Restated 2005 Long Term Incentive Plan. During the 2019 fiscal year, options to purchase 15,000 Company shares were granted to Mr. Hastings.

Prior to fiscal 2019, on or about May 1 of each year, non-employee directors have been entitled to receive grants of vested shares of Common Stock representing $80,000 in market value of stock on the grant date for service over the prior twelve months. They were entitled to elect to receive cash instead of shares of Common Stock to the extent they met a share ownership requirement (shares having a value at least equal to 4x the annual retainer).

Effective for amounts otherwise payable on or about May 1, 2019 and thereafter, in lieu of annual grants of shares having a fair market value of $80,000 on the date of grant, each non-employee director will be entitled to receive annual payments of $80,000 in cash, provided they are serving as a director on the applicable payment date. Except to the extent a timely deferral election was made by the non-employee director, the amount payable in May of 2019 was made in a single lump sum in May of 2019. Payments to non-employee directors for periods beginning after May 1, 2019 will generally be made in $20,000 increments paid quarterly in arrears on or about August 1, November 1, February 1 and May 1, provided they are serving as a director on the payment date and they did not make a timely deferral election. To the extent a non-employee director made a timely election to defer payments until separation from service with the Company, such payments will be made upon separation from service, together with interest on the deferred amounts computed at a rate equal to 120% of the applicable long-term federal rate (within the meaning of Section 1274(d) of the Internal Revenue Code of 1986, as amended) as in effect from time to time.

Code of Ethics

We have adopted the Trans World Entertainment Corporation Code of Ethics that applies to all officers, directors, employees and consultants of the Company. The Code of Ethics is intended to comply with Item 406 of Regulation S-K of the Securities Exchange Act of 1934 and with applicable rules of The NASDAQ Stock Market, Inc. Our Code of Ethics is posted on our Internet website under the “Corporate” page. Our Internet website address is www.twec.com. To the extent required by the rules of the SEC and NASDAQ, we will disclose amendments and waivers relating to our Code of Ethics in the same place on our website.

Guidelines for Evaluating Independence of Directors

The Board has determined that all of the directors are independent directors in accordance with the standards of the NASDAQ Stock Market and as described below. The Nominating and Corporate Governance Committee as well as the Board annually reviews relationships that directors may have with the Company to make a determination of whether there are any material relationships that would preclude a director from being independent.

The standards relied upon by the Board in affirmatively determining whether a director is “independent,” in compliance with the rules of the NASDAQ Stock Market, are comprised of those objective standards set forth in the NASDAQ rules. The Board is responsible for ensuring that independent directors do not have a material relationship with the Company or its affiliates or any executive officer of the Company or his or her affiliates.

The Audit Committee

The Board has an Audit Committee whose current members are: Jonathan Marcus (Chairman), Mr. Reickert, and Mr. Simpson. The members of the Audit Committee, in the opinion of the Board, are “independent” (as defined under the standards of the NASDAQ Stock Market) of management and free of any relationship that would interfere with their exercise of independent judgment as members of the Audit Committee. Mr. Marcus is the Chairman of the Audit Committee, and the Board has determined that he is both independent and qualified as an Audit Committee financial expert as such term is defined under the rules and regulations promulgated by the Securities and Exchange Commission. The Audit Committee, which consisted of Jeff Hastings, Rob Marks, Michael Nahl and Mike Solow through March 31,2020, held four meetings during the 2019 fiscal year. The Audit Committee’s responsibilities consist of the selection, appointment and authorization of independent accountants, reviewing the scope of the audit conducted by such accountants, as well as the audit itself, and reviewing the Company’s audit activities and matters concerning financial reporting, accounting and audit procedures, related party transactions and policies generally. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Board of Directors has adopted a written charter for the Audit Committee, a copy of which is attached as Appendix A to the 2018 Proxy Statement.

The Compensation Committee

The Board of Directors has a Compensation Committee, consisting solely of independent Directors, whose current members are: Mike Reickert (Chairman), Jonathan Marcus and Tom Simpson. The Compensation Committee which consisted of Jeff Hastings, Rob Marks, Michael Nahl and Mike Solow through March 31,2020, held two meetings during the 2019 fiscal year. The Compensation Committee formulates and gives effect to policies concerning salary, compensation, stock options and other matters concerning employment with the Company. The processes and procedures used for the consideration and determination of executive compensation are described in the section of this Proxy Statement captioned “Compensation Discussion and Analysis.” The Board of Directors has adopted a written charter for the Compensation Committee, a copy of which is attached as Appendix B to the 2019 Proxy Statement.

The Nominating and Corporate Governance Committee

The Board of Directors has a Nominating and Corporate Governance Committee, consisting solely of independent Directors, whose current members are: Tom Simpson (Chairman), Jonathan Marcus and Mike Reickert. The Nominating and Corporate Governance Committee, which consisted of Jeff Hastings, Rob Marks, Michael Nahl and Mike Solow through March 31,2020, held five meetings during the 2019 fiscal year. The Nominating Committee develops qualification criteria for Board members; interviews and screens individuals qualified to become Board members in order to make recommendations to the Board; and oversees the evaluation of executive management. The Committee seeks to select a Board that is strong in its collective knowledge of and diversity of skills and experience concerning retail operations, accounting and finance, management and leadership, vision and strategy, risk assessment and corporate governance. The Board of Directors has adopted a written charter for the Nominating and Corporate Governance Committee, a copy of which is attached as Appendix C to the 2019 Proxy Statement.

The Nominating and Corporate Governance Committee will consider nominations submitted by shareholders. To recommend a nominee, a shareholder should write to the Company’s Secretary. See “Submission of Shareholder Proposals” in this Proxy Statement. Any recommendation must include (i) the name and address of the candidate, (ii) a brief biographical description, including his or her occupation for at least the last five years, and a statement of the qualifications of the candidate, taking into account the qualification requirements summarized above, and (iii) the candidate’s signed consent to be named in the Proxy Statement and to serve as a Director if elected. The Nominating and Corporate Governance Committee may seek additional biographical and background information from any candidate which, to be considered, must be received on a timely basis.

The process followed by the Nominating and Corporate Governance Committee to identify and evaluate candidates includes requests to Board members and others for recommendations, including a search firm or outside consultant, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by members of the Nominating and Corporate Governance Committee and the Board. Assuming the appropriate biographical and background material is provided for candidates submitted by shareholders, the Nominating and Corporate Governance Committee will evaluate those candidates by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by Board members. While the Company does not have a formal diversity policy for Board of Director membership, the Nominating and Corporate Governance Committee and the Board of Directors, as a whole, seeks nominees or candidates to serve as directors that represent a variety of backgrounds and experience that will enhance the quality of the Board of Director’s deliberations and decisions. The Nominating and Corporate Governance Committee considers, among other factors, diversity with respect to viewpoint, skills and experience in its evaluation of candidates for Board of Director membership. Such diversity considerations are discussed by the Nominating and Corporate Governance Committee in connection with the general qualifications of each potential nominee.

Item 11.

EXECUTIVE COMPENSATION

Introduction

This section describes the material elements of compensation for the Company’s executive officers identified in the Summary Compensation Table below (who are referred to below as the “named executive officers” or “NEOs”), the process by which such elements are determined and established by the Compensation Committee for the respective individuals and the principles and considerations underlying such determinations.

Compensation Objectives and Approach

The objectives of our compensation programs are to attract, motivate, retain and reward executives and employees who will make substantial contributions toward the Company meeting the financial, operational and strategic objectives that we believe will build value for the Company’s shareholders. In an effort to achieve these objectives, the key elements of such programs consist of base salary, annual performance-based cash bonuses and share-based compensation.

The Compensation Committee’s compensation determinations regarding the named executive officers are reviewed by the full Board. Generally, these determinations are made annually and occur at the Compensation Committee’s regular meeting of each fiscal year occurring in April, at which cash bonuses and share-based awards, if any, relating to the named executive officers’ performance during the preceding fiscal year are granted, and any base salary adjustments for the current year are implemented. In preparation for these meetings, the Chief Executive Officer meets with the Compensation Committee Chairman to present his preliminary compensation proposals relating to the named executive officers to be addressed in the April meeting, based on the planned full-year financial results for the Company and its subsidiaries.

The Compensation Committee reviews and approves each element of compensation for the named executive officers. In establishing the levels and components of compensation for the named executive officers, the Compensation Committee, as a threshold matter, evaluates the overall performance of the Company for the year.

Key elements considered in the Compensation Committee’s performance evaluations include corporate performance, the officer’s contributions to such performance and the officer’s other accomplishments for the benefit of the Company during such period. In these evaluations, the Compensation Committee does not apply rigid formulas with respect to amount of compensation paid or the allocation between cash and non-cash compensation, and reviews long-term financial performance, as well as financial performance for the previous year. Such evaluations also take into account the nature, scope and level of the named executive officer’s responsibilities and the officer’s level of experience, past levels of compensation and changes in such levels, tenure with the Company and other opportunities potentially available to such officer. In addition, the members of the Compensation Committee interact with each of the named executive officers in connection with regular meetings of the Board, which provides the Compensation Committee with an additional basis for evaluating such officer and his performance. Based on all of these general evaluative factors and the additional factors described below, the Compensation Committee makes its assessments and determines the components and levels of compensation for each such officer.

Management meets with members of the Compensation Committee to assist the Compensation Committee in making compensation decisions regarding our named executive officers and also to discuss with the Compensation Committee its recommendations for other executives. We believe that since our management has extensive knowledge regarding our business, they are in a position to provide valuable input. Specifically, our Chief Executive Officer provides input relevant to setting performance goals and certifies to the Compensation Committee the level of achievement of our performance targets under our Executive Officer Bonus Plan and The Trans World Entertainment 2005 Long Term Incentive and Share Award Plan (As Amended and Restated on April 5, 2017) (the “2005 Plan”).

Compensation Committee-Assessment of Risk

Each year, the Compensation Committee reviews the Company’s compensation programs to assess risk in the Company’s compensation programs. As part of its consideration, the Compensation Committee considers any potential risks that could arise from the Company’s compensation policies and practices and the extent to which any of those risks would be reasonably likely to have a material adverse effect on the Company. The Compensation Committee considers all facets of the compensation programs, their underlying assumptions, and the objectives those programs were designed to achieve. Some of the factors the Compensation Committee considers to minimize potential risks are the balance between cash and stock awards, the various time frames associated with earning of awards (seasonal, annual and multi-year vesting) and the different performance metrics associated with the incentive awards for each of the Company’s businesses and corporate associates. After that review, the Compensation Committee has determined that the Company’s compensation programs for fiscal 2019 did not incentivize its associates, including senior executives, to take unnecessary and excessive risks that could jeopardize the future of the Company and would be adverse to the best interests of its shareholders.

The Company has sought to structure its overall compensation program to contain an appropriate mix of long-term and short-term incentives that balance risk and potential reward in a manner that is appropriate to the circumstances and in the best interest of the Company’s shareholders. In particular, equity-based awards are structured to vest generally over a number of years, which encourages employees to focus on long-term results. Moreover, both annual incentive bonus and performance-based equity awards are subject to discretionary reduction if determined appropriate by the Compensation Committee. The Company believes that these factors reduce any incentive that employees may have to take inappropriate risks. Accordingly, the Company believes that its compensation policies and practices encourage and incentivize the employees to improve results in a disciplined, focused manner, with a view toward long-term success.

Cash Compensation

The Company pays base salaries at levels it believes will attract and retain key employees and ensure that our compensation program is competitive. Base salaries for the named executive officers are established by the Compensation Committee and reviewed by such Compensation Committee for potential adjustment on an annual basis, based on the considerations described in the preceding section. The base salary amounts paid to the named executive officers during the 2019 fiscal year are shown in the “Summary Compensation Table”.

The annual incentive bonus plan, the results of which are shown in the Summary Compensation Table in the Non-Equity Incentive Plan Compensation column, provides for a cash bonus, dependent upon the level of achievement of the stated corporate goals, calculated as a percentage of the officer’s base salary, with higher ranked executive officers being compensated at a higher percentage of base salary. The Compensation Committee approves the target annual incentive award for the Chief Executive Officer and, for each officer below the Chief Executive Officer level, bases the target in part on the Chief Executive Officer’s recommendations. At the target level of bonus for fiscal year 2019, the Chief Executive Officer would receive 100% of his base salary and the other NEOs would receive 60% of their salary. For the 2019 fiscal year, the performance goal adopted for annual bonuses was based on limiting losses before interest, taxes, depreciation and amortization (“EBITDA”) to not more than $6.0 million or achieving sales of at least $375 million. Since the Company’s loss before interest, taxes, depreciation and amortization and its sales did not achieve the target thresholds, incentives were not earned under the annual incentive bonus plan. During 2019, as required by their Severance, Retention and Restrictive Covenant Agreements with the Company, Mr. Sapienza received a guaranteed bonus of $100,000 and a retention bonus of $133,000 and Mr. Eisenberg received a retention bonus of $100,000.

Share-Based Compensation

The Company believes that a component of its officers’ compensation should consist of share-based incentive compensation, which appreciates or depreciates in value in relation to the market price of our Common Stock. Accordingly, the Compensation Committee has in recent years made, and intends in the future to continue to make, grants of share-based awards to the named executive officers and other key employees in such amounts as the Compensation Committee believes will accomplish the objectives of our compensation programs. As discussed below, the holder’s ability to realize any financial benefit from these awards typically requires the fulfillment of substantial vesting requirements that are performance contingency-related in some cases and time-related in others. Accordingly, the Company believes that these awards provide substantial benefit to the Company in creating appropriate performance incentives and in facilitating the long-term retention of employees who add significant value.

Retirement and Other Benefits

The Company’s benefits program includes retirement plans and group insurance plans. The objective of the program is to provide named executive officers with reasonable and competitive levels of protection against the four contingencies (retirement, death, disability and ill health) which could interrupt their employment and/or income received as an active employee. Retirement plans, including the supplemental executive retirement plan, are designed to provide a competitive level of retirement income to named executive officers and to reward them for continued service with the Company. The retirement program consists of a supplemental executive retirement plan and the 401(k) plan.

The group insurance program consists of life, disability and health insurance benefit plans that cover all full-time management and administrative employees and the supplemental long-term disability plan, which covers the named executive officers and other officers.

Other Compensation

The Company continues to maintain modest executive benefits and perquisites for officers; however, the Compensation Committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites if it deems it advisable. See the Summary Compensation Table for a summary of such benefits.

Deductibility of Compensation Expenses

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a public corporation for annual compensation over $1 million for each of its “covered employees” (i.e., the chief executive officer, chief financial officer and certain other current or former executive officers). Prior to the amendment of Section 162(m) in December of 2017, the deductibility of some types of compensation for named executive officers (other than the chief financial officer) depended upon whether the named executive officer’s receipt of compensation was deferred until after the executive terminated employment with the Company or on whether such compensation qualified as “performance-based compensation” under Section 162(m). In general, the exceptions for deferred compensation and performance-based compensation were repealed effective for years beginning after December 31, 2017. The Compensation Committee has generally sought to satisfy the requirements necessary to allow the compensation of its named executive officers to be deductible under Section 162(m) of the Internal Revenue Code, but it has retained the discretion to approve compensation that is not deductible under Section 162(m). In making future compensation decisions, the Compensation Committee intends to take into account any available grandfather provisions under the amendments to Section 162(m). However, the Compensation Committee believes that its primary responsibility is to provide a compensation program that will attract, retain and reward the executive talent necessary to the success of the Company. Consequently, the Compensation Committee recognizes that the loss of a tax deduction could be necessary or advisable in some circumstances due to the restrictions of Section 162(m).

Summary Compensation Table

The following table sets forth information regarding compensation earned by our Chief Executive Officer and two other most highly compensated Executive Officers for the fiscal year ended February 1, 2020.

Name	Principal Position	Year	Salary ($)⁽¹⁾		Bonus ($)⁽²⁾		Stock Awards ($)⁽³⁾		Option Awards ($)⁽⁴⁾		Non-Equity Incentive Plan Compensation ($)		All Other Compensation ($)⁽⁶⁾		Total Compensation ($)
Michael Feurer ⁽⁵⁾	Former Chief Executive Officer	2019		700,000		—		—		—		—		11,750		711,750
		2018		700,000		—		49,000		73,500		—		15,361		837,861
Bruce J. Eisenberg⁽⁵⁾	Former Executive Vice	2019		425,000		100,000		—		—		—		—		525,000
	President—Real Estate	2018		425,000		—		—		17,115		—		—		442,115
Edwin J. Sapienza	Chief Financial Officer	2019		280,000		233,334		—		—		—		—		513,334
		2018		224,615		—		4,900		12,275		—		2,403		244,193

(1)	Salary represents amounts earned during fiscal year ended February 1, 2020.

(2)

Bonus for 2019 for Mr. Eisenberg represents the payment of a retention bonus pursuant to his Severance, Retention and Restrictive Covenant Agreement with the Company. For Mr. Sapienza, the bonus amount consists of a $133,334 retention bonus and a $100,000 guaranteed bonus paid pursuant to his Severance, Retention and Restrictive Covenant Agreement with the Company.

(3)

Amounts represent the grant date fair value, as computed in accordance with Accounting Standards Codification Topic 718, relating to restricted share units awarded to Mr. Feurer, and Mr. Sapienza in fiscal year 2018. See Note 9 to the Consolidated Financial Statements for the assumptions made in determining the value.

(4)

Amount represents the grant date fair value as computed in accordance with Accounting Standards Codification Topic 718, relating to the grant of stock options to the named executive officer in fiscal year 2019 and fiscal 2018. See Note 9 to the Consolidated Financial Statements for the assumptions made in determining the value.

(5)	Mr. Feurer’s employment terminated as of March 30, 2020. Mr. Eisenberg’s employment terminated as of February 28, 2020.

(6)	Includes the following payments made by the Company to the named executive officers:

Name	Year	Perquisites and Other Personal Benefits ($)		Insurance Premiums ($)		Company Contributions to Retirement and 401(K) Plans ($)		Death Benefits to Survivor ($)		Total ($)
Michael Feurer	2019		11,700		—		—				11,700
	2018		11,700		—		3,661		—		15,361
Bruce J. Eisenberg	2019		—		—		—		—		—
	2018		—		—		—		—		—
Edwin J. Sapienza	2019		—		—		—		—		—
	2018		—		—		2,403		—		2,403

Outstanding Equity Awards at Fiscal Year-End

The table below summarizes the named executive officers’ equity awards that were unvested or unexercised, as applicable, as of February 1, 2020.

		Option Awards							Number of
Name	Grant Date ⁽¹⁾	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date	Shares or Units of Stock That Have Not Vested (#)⁽²⁾
Michael Feurer ⁽³⁾	10/13/2014		15,000		—		70.00	10/13/2024		—
	4/14/2016		7,860		—		77.00	4/14/2026		—
	5/6/2016		3,750		1,250		76.20	5/6/2026		—
	5/1/2017		7,500		3,750		37.00	5/1/2027		1,250
	6/27/2018		1,875		5,625		19.60	6/27/2028		1,875
Bruce J. Eisenberg	5/6/2010		10,000		—		42.20	5/6/2020		—
	6/21/2013		2,500		—		97.40	6/21/2023		—
	6/3/2014		1,750		—		67.20	6/3/2024		—
	5/15/2015		1,750		—		77.60	5/15/2025		—
	5/6/2016		1,313		437		76.20	5/6/2026		—
	5/1/2017		875		875		37.00	5/1/2027		—
Edwin J. Sapienza	6/27/2018		438		1,313		19.60	6/27/2028		—
	3/1/2011		400		—		34.60	3/1/2021		—
	5/7/2012		500		—		50.60	5/7/2022		—
	6/21/2013		500		—		97.40	6/21/2023		—
	6/3/2014		375		—		67.20	6/21/2023		—
	4/1/2015		375		—		77.60	4/1/2026		—
	5/6/2016		282		93		76.20	5/6/2026		—
	5/1/2017		625		625		37.00	5/1/2027		125
	6/27/2018		313		937		19.60	6/27/2028		188
	10/23/2018		625		1,875		20.80	10/23/2028		750

(1)	Mr. Feurer’s, Mr. Eisenberg’s and Mr. Sapienza’s, options vested on February 20, 2020 upon the closing of the FYE Transaction.

(2)	Mr. Feurer’s and Mr. Sapienza’s Restricted Stock Units vested on February 20, 2020 upon the closing of the FYE Transaction.

(3)	Mr. Feurer’s employment terminated as of March 30, 2020. Mr. Eisenberg’s employment terminated as of February 28, 2020.

Pension Benefits

The Company maintains a non-qualified Supplemental Executive Retirement Plan (the “SERP”) for certain current and former executive officers of the Company. Mr. Eisenberg is the only one of our NEOs who participated in the SERP. The SERP, which is a nonqualified plan, provides eligible executives defined pension benefits that supplement benefits under other retirement arrangement. The annual benefit amount is equal to 50% of the average of the participant’s base compensation for the five years prior to retirement plus the average of the three largest bonus payments for the last five years prior to retirement, to the extent vested. Participants vest 35% after 10 years, 75% after 20 years and 100% upon retirement at age 65 after 20 years of service. The bonus portion of the benefit vests only if the participant is employed until age 65. In addition, the benefits become vested in full upon a change in control of the Company prior to the participant’s termination of employment or a termination of employment due to the participant’s death or disability. A change in control as defined under the SERP has not occurred. Additionally, all benefits under the SERP will be forfeited in the event of any of the following: competitive conduct or solicitation for employment or employment of company employees, in any case during the 5 years following termination or at any time while in receipt of benefits (these restrictions are waived in the event of a change in control); disclosure or use of confidential information; or termination for cause. Payments are made in equal installments over 20 years. The Company has established a rabbi trust whose purpose is to be a source of funds to pay benefits to participants in the SERP.

Potential Payments Upon Termination or Change of Control

Agreement with Mr. Sapienza

On February 26, 2019 we entered into a Severance, Retention and Restrictive Covenant Agreement with Mr. Sapienza. The Severance, Retention and Restrictive Covenant Agreements provide for a retention bonus payable to Mr. Sapienza in the amount of $200,000. One third of his retention bonus was paid to him on each of June 1, 2019, October 1, 2019, and March 1, 2020.

The Severance, Retention and Restrictive Covenant Agreement also provides that if his employment is terminated by the Company without cause or by him for good reason (as those terms are defined in the agreements), Mr. Sapienza will be entitled to the following: (i) the continuation of his base salary for a period of six (6) months from the date of termination, (ii) any unpaid portion of his retention bonus, (iii) any unpaid annual bonus that was earned (as determined by the Board in accordance with the applicable annual bonus plan) for the year preceding the year in which termination occurs, and (iv) payment for health insurance coverage for up to six months following termination at the same rate as the Company pays for health insurance coverage for its active employees (with the executive required to pay for any employee-paid portion of such coverage). Payment of these amounts is contingent on the executive signing (and not revoking within any statutory revocation period) a release of claims reasonably acceptable to the Company.

Mr. Sapienza’s agreement provides that his annual bonus for our fiscal year ending in 2020 will not be less than $100,000. It also provides that he will receive the minimum bonus if his employment is terminated by the Company without cause or by him for good reason prior to payment of the bonus.

The agreement also includes restrictive covenants under which Mr. Sapienza agrees to confidentiality provisions, non-competition and non-solicitation covenants that apply for six months after any termination of employment, and certain non-disparagement and cooperation covenants.

Equity Award Provisions

Pursuant to the terms of our 2005 Long Term Incentive and Share Award Plan and applicable award agreements, unvested equity awards vest upon death, disability or a change of control of the Company. All outstanding equity awards fully vested upon February 20, 2020, the date of the FYE Transaction.

Supplemental Executive Retirement Plan

Under the provisions of our SERP, Mr. Eisenberg would become fully vested in his pension benefit in the event of death, disability or a change of control of the Company. The FYE Transaction did not constitute a change in control for purposes of the SERP.

Other Executives

Mr. Feurer’s employment was terminated, effective on March 30, 2020. Under our employment agreement with Mr. Feurer, he received a lump sum payment in the amount of $570,000 and medical benefits for up to eighteen months following termination. Additional payments will begin six months after termination and will continue for 8 months for a total payment of $1,050,000. Mr. Feurer reaffirmed his covenants relating to non-competition, non-solicitation, confidentiality, and intellectual property. He also executed a release and agreed to non-disparagement and cooperation covenants.

Mr. Eisenberg’s employment was terminated, effective on February 28, 2020. Under our employment agreement with Mr. Eisenberg, he received a payment of $212,500, payable in weekly installments over six months, and medical benefits for up to six months following termination. Mr. Eisenberg reaffirmed his covenants relating to non-competition, non-solicitation, confidentiality and intellectual property. He also executed a release and agreed to non-disparagement and cooperation covenants.

CEO Pay Ratio

The Dodd–Frank Wall Street Reform and Consumer Protection Act requires companies to disclose the pay ratio of their Chief Executive Officer to their median employee. We identified our median employee taking into account all full-time, part-time, seasonal and temporary employees.

To identify the median employee from the Company’s employee population, we compared the amount of salary and wages paid to employees as reflected in payroll records for the 2019 calendar year as reported to the Internal Revenue Service on Form W-2 who were employed on February 2, 2019, excluding Mr. Feurer. We annualized compensation for employees hired in 2019 and employees who took an unpaid leave of absence during the year, but we did not annualize compensation for part-time, seasonal or temporary employees. No cost-of-living adjustments were made in identifying the median employee.

The 2019 annual total compensation of our Chief Executive Officer was $711,750 million, and the 2019 annual total compensation for the median employee was $17,346. The resulting ratio of our Chief Executive Officer’s pay to the pay of our median employee for fiscal year 2019 is 41.0 to 1. We believe it is noteworthy that given the nature of our business, a significant number of our employees are part-time, seasonal, or temporary employees.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

PRINCIPAL SHAREHOLDERS

The only persons known to the Board to be the beneficial owners of more than five percent of the outstanding shares of Common Stock as of June 15, 2020, are indicated below;

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
The Robert J. Higgins TWMC Trust 38 Corporate Circle Albany, New York 12203		713,986	⁽¹⁾		39.3	%
Neil S. Subin 3300 South Dixie Highway, Suite 1-365 West Palm Beach, 33405		300,084	⁽²⁾		16.5	%
Renaissance Technologies LLC 800 Third Avenue New York, New York 10022		99,399	⁽³⁾		5.5	%

(1)	Based on Form 5, filed February 21, 2017, by The Robert J Higgins TWMC Trust.

(2)

Based on Schedule 13D, filed April 9, 2020, on behalf of (i) Neil S. Subin (“Mr. Subin”); (ii) MILFAM LLC; (iii) Alimco Financial Corporation (“Alimco”); (iv) Alimco Re Ltd., a wholly-owned subsidiary of Alimco (“Alimco Re”); (v) Jonathan Marcus (“Mr. Marcus”); (vi) AMIL Of Ohio, LLC; (vii) Catherine C. Miller Irrevocable Trust dtd 3/26/91; (viii) Catherine C Miller Trust A-2; (ix) Catherine C Miller Trust A-3; (x) Catherine Miller Trust C; (xi) Kimberly S. Miller GST Trust dtd 12/17/1992; (xii) LIMFAM LLC; (xiii) Lloyd I. Miller Trust A-1; (xiv) Lloyd I. Miller, III Trust A-4; (xv) Lloyd I. Miller, III Irrevocable Trust dtd 12/31/91; (xvi) Lloyd I. Miller, III Revocable Trust dtd 01/07/97; (xvii) MILFAM I L.P.; (xviii) MILFAM II L.P.; (xix) MILFAM III LLC; and (xx) Susan F. Miller (such persons, trusts and entities named in items (i) through (xx), collectively, the “Reporting Persons”).

The Schedule 13D reported beneficial ownerships of the Reporting Persons following a transaction between Alimco Re, the Company and certain other parties in which, inter alia, (i) Alimco Re made a loan to a subsidiary of the Company, (ii) Alimco Re and certain other lenders received a warrant to purchase shares of Common Stock of the Company, and (iii) the Reporting Persons (other than Mr. Subin, MILFAM LLC, Alimco, and Mr. Marcus), and the Other Group Members entered into the voting agreement. Each of the loan, the warrants and the voting agreement are described in “Related Party Transactions”.

As a result of the provisions of the voting agreement, the Reporting Persons are members of a group (the “Group”) that also includes the Robert J. Higgins TWMC Trust; RJHDC, LLC; Mr. Thomas C. Simpson; Kick-Start I, LLC; Kick-Start III, LLC; and Kick-Start IV, LLC (such members of the group other than the Reporting Persons, the “Other Group Members”).

Some of the positions were previously reported on a Schedule 13G filed by Mr. Subin on December 31, 2018 with respect to securities held by certain entities owned by or trusts for the benefit of the family of the late Mr. Lloyd I. Miller, III (the “Miller Family”) and other entities (such entities and trusts, the “Miller Entities”) and a Schedule 13G filed by Alimco on February 13, 2019. Certain of the Miller Entities hold approximately 85% of the outstanding shares of common stock of Alimco. The Reporting Persons respectively disclaim the existence of, and membership in, a “group” under Section 13(d)(3) that may arise as a result of the Miller Entities’ interests in Alimco. The Reporting Persons disclaim beneficial ownership of any shares other than to the extent he, she or it may have a pecuniary interest therein.

The amount set forth represents the following shares of common stock with shared dispositive power: (i) 1,750 shares of common stock owned by AMIL of Ohio, LLC; (ii) 300 shares of common stock owned by Catherine C. Miller Irrevocable Trust DTD 3/26/91; (iii) 200 shares of common stock owned by Catherine C. Miller Trust A-2; (iv) 5,639 shares of common stock owned by Catherine C. Miller Trust A-3; (v) 22,448 shares of common stock owned by Catherine Miller Trust C; (vi) 300 shares of common stock owned by Kimberly S. Miller GST Trust DTD 12/17/1992; (vii) 26,105 shares of common stock owned by LIMFAM LLC; (viii) 1,359 shares of common stock owned by Lloyd I. Miller Trust A-1; (ix) 51,371 shares of common stock owned by Lloyd I. Miller, III Trust A-4; (x) 300 shares of common stock owned by Lloyd I. Miller, III Irrevocable Trust DTD 12/31/91; (xi) 59,490 shares of common stock owned by Lloyd I. Miller, III Revocable Trust DTD 01/07/97; (xii) 3,128 shares of common stock owned by MILFAM I L.P.; (xiii) 123,619 shares of common stock owned by MILFAM II L.P.; (xiv) 2,274 shares of common stock owned by MILFAM III LLC; and (xv) 1,801 shares of common stock owned by Susan F. Miller. Mr. Subin is the President and Manager of MILFAM LLC, which serves as manager, general partner, or investment advisor of a number of the foregoing entities formerly managed or advised by the late Lloyd I. Miller, III, and he also serves as trustee of a number of a number of the foregoing trusts for the benefit of the family of the late Mr. Lloyd I. Miller, III, consequently, he may be deemed the beneficial owner of the shares specified in clauses (i) through (xv) of the preceding sentence.

The Schedule 13D also discloses 1,340,024 shares of common stock with shared voting power. This amount represents the aggregate number of shares beneficially owned by the parties to the voting agreement, including 244,532 shares of common stock of the Company issuable upon exercise of warrants.

(3)	Based on Form 13G, filed on February 12, 2020, by Renaissance Technologies LLC, which is majority owned by Renaissance Technologies Holdings Corporation.

EQUITY OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the beneficial ownership of Common Stock as of June 15, 2020, by each director and named executive officer of the Company and all directors and executive officers as a group. All shares listed in the table are owned directly by the named individuals, unless otherwise indicated therein. The Company believes that the beneficial owners have sole voting and investment power over their shares, except as otherwise stated or as to shares owned by spouses.

Name	Positions With the Company	Age		Year First Elected as Director/ Officer		Direct Ownership			Shares that may be acquired within 60 days of June 15, 2020		Total Shares Beneficially Owned		Percent of Class
Jonathan Marcus	Director		60		2020		—			—		—		*
W. Michael Reickert	Director		56		2016		3,200	⁽¹⁾		750	⁽²⁾	3,950		*
Tom Simpson	Director		59		2020		57,000	⁽³⁾		—	⁽⁴⁾	57,000		3.1%
Kunal Chopra⁽⁷⁾	Chief Executive Officer – etailz		38		2020		—			—		—		*
Michael Feurer ⁽⁵⁾	Former Chief Executive Officer, Director		51		2014		11,441			42,858		54,299		3.0%
Edwin J. Sapienza	Chief Financial Officer		50		2018		1,500			7,525		9,025		*
Bruce J. Eisenberg ⁽⁶⁾	Former Executive Vice President-Real Estate		60		1995		—			—		—		*
All Directors and Executive Officers as a group (7 persons)							73,141			51,133		124,274		6.8%

*	Less than 1% of issued and outstanding Common Stock

(1)	Excludes 713,986 shares held in the Robert J Higgins TWMC Trust of which Mr. Reickert is a Trustee.

(2)	Excludes 202,067 warrants held by the RJHDC LLC.

(3)	Excludes 25 shares held by the wife of Tom Simpson. Also excludes 23,879 and 9,737 shares held by Kick Start III, LLC and Kick Start IV, LLC. Mr. Simpson holds an interest, manages and has voting control of Kick Start III and Kick Start IV, LLC.

(4)	Excludes 14,041 and 9,360 warrants held by Kick Start III, LLC and Kick Start IV, LLC. Mr. Simpson holds an interest, manages and has voting control of Kick Start III and Kick Start IV, LLC.

(5)	Mr. Feurer ceased to be a board member and his employment was terminated as of March 30, 2020.

(6)	Mr. Eisenberg’s employment was terminated as of February 28, 2020.

(7)	Mr. Chopra joined the Company as of September 3, 2019.

The following table contains information about the Company’s Common Stock that may be issued upon the exercise of options, warrants and rights under all of the Company’s equity compensation plans as of February 1, 2020:

Plan Category	Number of Shares to be Issued upon Exercise of Outstanding Options, Warrants and Rights⁽¹⁾		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Outstanding Options, Warrants and Rights)
Equity Compensation Plan Approved by Shareholders		140,708	$	52.11		213,125
Equity Compensation Plans and Agreements not Approved by Shareholders		---		---		---

⁽¹⁾	Includes 11,512 deferred shares which may be issued for no consideration.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

The rights and obligations related to the lease were sold as part of the FYE Transaction. On February 20, 2020, as part of the FYE Transaction, the Company assigned the rights and obligations of the lease to Sunrise Records.

•

Guidelines for Evaluating Independence of Directors

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to Independent Public Accounting Firms

Audit Fees. Audit fees include fees paid by the Company to KPMG LLP (“KPMG”) in connection with the annual audit of the Company’s consolidated financial statements and KPMG’s review of the Company’s interim financial statements. Audit fees also include fees for services performed by KPMG that are closely related to the audit and in many cases could only be provided by an independent public accounting firm. Such services include comfort letters related to SEC registration statements and certain reports relating to the Company’s regulatory filings. The aggregate fees billed to the Company by KPMG for audit services rendered to the Company and its subsidiaries for fiscal years 2019 and 2018 totaled $1.0 million and $0.8 million respectively.

Audit-Related Fees. Audit related fees include fees paid by the Company to KPMG in connection with audit related services, including audit services related to employee benefit plan audits. The aggregate fees billed to the Company by KPMG for audit related services rendered to the Company and its subsidiaries were $22,500 and $22,000 for fiscal years 2019 and 2018, respectively.

Other Fees. There were no other fees paid to KPMG in fiscal year 2018.

Tax Fees. Tax fees include corporate tax compliance and counsel and advisory services. SAXBST LLC was the Company’s primary tax advisor in fiscal year 2019. During fiscal year 2019 and 2018, tax fees paid to KPMG were $5,000 and $89,000, respectively.

Each year, the Company reviews its existing practices regarding the use of its independent accountants to provide non-audit and consulting services to ensure compliance with recent SEC proposals. The Company has a policy which provides that the Company’s independent public accounting firm may provide certain non-audit services which do not impair the firm’s independence. In that regard, the Audit Committee must pre-approve all audit services and non-audit services provided to the Company. This policy is administered by the Company’s senior financial management, which reports throughout the year to the Audit Committee.

PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a) (1) Financial Statements

The Consolidated Financial Statements and Notes are listed in the Index to Consolidated Financial Statements on page F-1 of this report.

15(a) (2) Financial Statement Schedules

Consolidated Financial Statement Schedules not filed herein have been omitted as they are not applicable or the required information or equivalent information has been included in the Consolidated Financial Statements or the notes thereto.

15(a) (3) Exhibits

Exhibits are as set forth in the “Index to Exhibits” which follows the Notes to the Consolidated Financial Statements and immediately precedes the exhibits filed.

Item 16.

Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TRANS WORLD ENTERTAINMENT CORPORATION

Date: June 15, 2020		By: /s/ Kunal Chopra
		Kunal Chopra Principal Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ Kunal Chopra		June 15, 2020
(Kunal Chopra)	Principal Executive Officer

/s/ Edwin Sapienza (Edwin Sapienza)	Chief Financial Officer (Principal Financial and Chief Accounting Officer)	June 15, 2020

/s/ Jonathan Marcus
(Jonathan Marcus)	Director	June 15, 2020

/s/ Michael Reickert
(Michael Reickert)	Director	June 15, 2020

/s/ Tom Simpson
(Tom Simpson)	Director	June 15, 2020

TRANS WORLD ENTERTAINMENT CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Form 10-K Page No.


Report of Independent Registered Public Accounting Firm	48

Consolidated Financial Statements

Consolidated Balance Sheets at February 1, 2020 and February 2, 2019	49

Consolidated Statements of Operations - fiscal years ended February 1, 2020 and February 2, 2019	50

Consolidated Statements of Comprehensive Loss - fiscal years ended February 1, 2020 and February 2, 2019	51

Consolidated Statements of Shareholders’ Equity - fiscal years ended February 1, 2020 and February 2, 2019	52

Consolidated Statements of Cash Flows - fiscal years ended February 1, 2020 and February 2, 2019	53

Notes to Consolidated Financial Statements	55

Index

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Trans World Entertainment Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Trans World Entertainment Corporation and subsidiaries (the Company) as of February 1, 2020 and February 2, 2019, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the fiscal years in the two‑year period ended February 1, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the fiscal years in the two‑year period ended February 1, 2020, in conformity with U.S. generally accepted accounting principles.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company continues to experience recurring losses and negative cash flows from operations, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of February 3, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 1994.

Albany, New York

June 15, 2020

Index

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

	February 1, 2020			February 2, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,977		$	4,355
Restricted cash		950			4,126
Accounts receivable		4,201			5,383
Merchandise inventory		67,958			94,842
Prepaid expenses and other current assets		3,979			6,657
Total current assets		80,065			115,363

Restricted cash		4,925			5,745
Fixed assets, net		2,190			7,529
Operating lease right-of-use assets		3,311			-
Intangible assets, net		1,760			3,668
Other assets		5,555			5,708
TOTAL ASSETS	$	97,806		$	138,013

LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	24,120		$	34,329
Short-term borrowings		13,149			-
Accrued expenses and other current liabilities		4,479			8,132
Deferred revenue		6,681			6,955
Current portion of operating lease liabilities		9,510			-
Total current liabilities		57,939			49,416

Operating lease liabilities		13,263			-
Other long-term liabilities		22,089			24,867
TOTAL LIABILITIES		93,291			74,283

SHAREHOLDERS’ EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)		-			-
Common stock ($0.01 par value; 200,000,000 shares authorized; 3,225,627 shares and 3,221,834 shares issued, respectively)		32			32
Additional paid-in capital		345,102			344,826
Treasury stock at cost (1,409,316 and 1,408,892 shares, respectively)		(230,169	)		(230,166	)
Accumulated other comprehensive loss		(1,479	)		(735	)
Accumulated deficit		(108,971	)		(50,227	)
TOTAL SHAREHOLDERS’ EQUITY		4,515			63,730
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	97,806		$	138,013

See Accompanying Notes to Consolidated Financial Statements.

Index

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Fiscal Year Ended
	February 1, 2020			February 2, 2019

Net sales	$	321,993			412,997
Other revenue		3,942			5,193
Total revenue		325,935			418,190

Cost of sales		229,836			290,116
Gross profit		96,099			128,074

Selling, general and administrative expenses		129,291			165,222
Gain on sale of asset		---			---
Asset impairment charges		23,983			59,658
Loss from operations		(57,175	)		(96,806	)
Interest expense		884			723
Other loss (income)		364			(227	)
Loss before income taxes		(58,423	)		(97,302	)
Income tax expense		321			80
Net loss	$	(58,744	)	$	(97,382	)

Basic and diluted loss per share	$	(32.35	)	$	(53.67	)

Weighted average number of shares outstanding - basic and diluted		1,816			1,814

See Accompanying Notes to Consolidated Financial Statements.

Index

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

	Fiscal Year Ended
	February 1, 2020			February 2, 2019

Net loss	$	(58,744	)	$	(97,382	)

Pension actuarial (loss) income adjustment		(744	)		263
Comprehensive loss	$	(59,488	)	$	(97,119	)

See Accompanying Notes to Consolidated Financial Statements.

Index

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars and shares in thousands)

	Common Shares		Treasury Shares			Common Stock		Additional Paid-in Capital		Treasury Stock At Cost			Accumulated Other Comprehensive Loss			Retained Earnings (Accumulaed Deficit)			Shareholders’ Equity
Balance as of February 3, 2018		3,215		(1,408	)	$	32	$	341,715	$	(230,145	)	$	(998	)	$	47,611		$	158,214
Decrease to opening balance of Retained Earnings as a result of applying ASU 2014-09		-		-			-		-		-			-			(456	)		(456	)
Net Loss		-		-			-		-		-			-			(97,382	)		(97,382	)
Pension actuarial income adjustment		-		-			-		-		-			263			-			263
Vested restricted shares		-		(1	)		-		-		(21	)		-			-			(21	)
Common stock issued-new grants		7		-			-		79		-			-			-			80
Amortization of unearned compensation/restricted stock amortization		-		-			-		3,032		-			-			-			3,032
Balance as of February 2, 2019		3,222		(1,409	)	$	32	$	344,826	$	(230,166	)	$	(735	)	$	(50,227	)	$	63,730
Net Loss		-		-			-		-		-			-			(58,744	)		(58,744	)
Pension actuarial loss adjustment		-		-			-		-		-			(744	)		-			(744	)
Vested restricted shares		4		-			-		3		(3	)		-			-			-
Amortization of unearned compensation/restricted stock amortization		-		-			-		273		-			-			-			273
Balance as of February 1, 2020		3,226	$	(1,409	)	$	32	$	345,102	$	(230,169	)	$	(1,479	)	$	(108,971	)	$	4,515

See Accompanying Notes to Consolidated Financial Statements.

Index

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Fiscal Year Ended
	February 1, 2020			February 2, 2019
OPERATING ACTIVITIES:
Net loss	$	(58,744	)	$	(97,382	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of fixed assets		3,330			5,226
Amortization of intangible assets		1,143			3,890
Amortization of right-of-use asset		6,990			-
Stock based compensation		276			3,032
Write down of investment		500			-
Treasury stock received for payment of withholding tax on exercises of RSUs		(3	)		(21	)
Adjustment to contingent consideration		-			(272	)
Loss on disposal of fixed assets		125			422
Inventory net realizable value adjustment		12,701			-
Loss on impairment of long lived assets		23,983			59,658
Change in cash surrender value		(329	)		78
Changes in operating assets and liabilities that provide (use) cash:
Accounts receivable		1,182			(914	)
Merchandise inventory		14,183			14,535
Prepaid expenses and other current assets		1,931			319
Other long-term assets		(913	)		6
Accounts payable		(10,209	)		(7,451	)
Accrued expenses and other current liabilities		(1,888	)		(1,134	)
Deferred revenue		(274	)		(1,509	)
Other long-term liabilities		(9,811	)		(4,001	)
Net cash used in operating activities		(15,827	)		(25,518	)

INVESTING ACTIVITIES:
Purchases of fixed assets		(2,823	)		(3,689	)
Capital distributions from joint venture		127			1,347
Net cash used in investing activities		(2,696	)		(2,342	)

FINANCING ACTIVITIES:
Exercise of equity awards, net of treasury shares received		-			80
Proceeds from short term borrowings		35,851			35,734
Payments of short term borrowings		(22,702	)

Kaspien Holdings Inc. - FORM 10-K - June 15, 2020

Attached files