NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
October 28, 2017 and October 29, 2016
Note 1. Nature of Operations
Trans World Entertainment Corporation and subsidiaries (“the
Company”) operates in two reportable segments: fye and etailz. The fye segment operates a chain of retail entertainment stores
and e-commerce sites,
www.fye.com
and
www.secondspin.com
. As of October 28, 2017, the fye segment operated 268 stores
totaling approximately 1.5 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The
etailz segment is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace.
The Company’s business is seasonal in nature, with the peak selling period being the holiday season which falls in the Company’s
fourth fiscal quarter.
Liquidity and Cash Flows:
The Company’s primary
sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility. The Company’s
cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and associated earnings and losses
in those periods, timing of merchandise inventory purchases and the related terms of those purchases, as well as merchandise inventory
returns and capital expenditures. Management believes it will have adequate resources to fund its cash needs for the foreseeable
future, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and
commitments.
Management anticipates any cash requirements
due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed in note
9 in the interim condensed consolidated financial statements.
In connection with the preparation of these interim condensed consolidated
financial statements, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate,
which raised substantial doubt as to the entity’s ability to continue as a going concern within one year after the date of
the issuance, or the date of availability, of the interim condensed consolidated financial statements to be issued, noting that
there did not appear to be evidence of substantial doubt of the entity’s ability to continue as a going concern.
Note 2. Basis of Presentation
The accompanying interim condensed consolidated
financial statements consist of Trans World Entertainment Corporation, Record Town, Inc. (“Record Town”), Record Town’s
subsidiaries and etailz, Inc., all of which are wholly-owned. All intercompany accounts and transactions have been eliminated.
The interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these interim
condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are
necessary for the fair presentation of such financial statements. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Certain information and footnote disclosures normally included in the financial statements prepared
in accordance with U.S. GAAP have been condensed or omitted pursuant
to rules and regulations applicable to interim financial statements.
The accompanying interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended January 28, 2017 contained
in the Company’s Annual Report on Form 10-K filed April 13, 2017. The results of operations for the thirteen and thirty-nine
weeks ended October 28, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year ending February
3, 2018.
The Company’s significant accounting policies
are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal
year ended January 28, 2017.
There have been no material changes to the accounting
policies applied to our consolidated results and footnote disclosures.
Note 3. Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective
for the Company’s fiscal year beginning February 4, 2018. Based upon our preliminary assessment, we do not expect the adoption
of this ASU will have a material impact on our consolidated financial statements. The Company has determined that the adoption
of this ASU will impact the timing of revenue recognition for gift card breakage. Gift card breakage is currently recognized at
the point gift card redemption becomes remote. In accordance with this ASU, the Company will recognize gift card breakage in proportion
to the pattern of rights exercised by the customer. Additionally, the Company has assessed and determined that our revenue recognition
practices related to our current vendor-direct sales arrangements, for which the Company is the principal and recorded on a gross
basis, will remain unchanged upon adoption. Based upon our preliminary assessment of potential impacts to the presentation of our
consolidated financial statements primarily related to sales return reserves, our customer loyalty program, and certain other promotional
programs, the Company expects to use a modified retrospective approach upon adoption of this ASU during the first quarter of fiscal
2018. The Company is continuing to evaluate the impact of the ASU’s expanded disclosure requirements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”,
which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of this ASU is that an entity should
recognize the rights and obligations resulting from leases as assets and liabilities. The new standard requires qualitative and
specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more
about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. The new standard
will be effective for the Company’s fiscal year beginning February 3, 2019, and requires the modified retrospective method
of adoption. Early adoption is permitted. The Company is in the process of determining the method and timing of adoption and assessing
the impact of ASU 2016-02 on its consolidated financial statements. Given the nature of the operating leases for the Company’s
home office, distribution center, and stores, the Company expects an increase to the carrying value of its assets and liabilities.
In January 2017, the FASB issued ASU 2017-04, “Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required
to test goodwill for impairment
by eliminating step two from the goodwill impairment test whereby
a goodwill impairment loss is determined by comparing the implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. Rather, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value. ASU 2017-04 is effective for the Company in fiscal 2020, applied on a prospective
basis, and early adoption is allowed for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017.
In March 2017, the FASB issued ASU 2017-07, “Compensation
- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost,” which is intended to improve the presentation of net periodic pension cost and net periodic post-retirement benefit
cost in an entity’s financial statements by requiring the service cost component be disaggregated from other components of
net benefit costs and presented in the same line item or items as other compensation costs for the employees. Additionally, only
the service cost component of net benefit cost is eligible for capitalization when applicable. ASU 2017-07 is effective for the
Company’s fiscal year beginning February 3, 2019, and must be applied retrospectively. ASU 2017-07 is permitted for early
adoption, but only at the beginning of an annual period for which financial statements have not been issued or made available for
issuance. The Company is currently evaluating the impact that this ASU will have on its reporting and asset recognition.
In May 2017, the FASB issued ASU 2017-09, “Compensation -
Stock Compensation (Topic 718): Scope of Modification Accounting,” which provided clarity as to what changes to the terms
or conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective
for the Company for interim and annual periods in fiscal year beginning February 3, 2019, with early adoption permitted and is
applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date.
Note 4. Acquisition and Investment
Business Combination-etailz
On October 17, 2016, the Company completed
the purchase of all of the issued and outstanding shares of etailz, Inc. (etailz), an innovative and leading digital marketplace
retailer. etailz operates both domestically and internationally. They use a data driven approach to digital marketplace retailing
utilizing proprietary software and ecommerce insight coupled with a direct customer relationship engagement to identify new distributors
and wholesalers, isolate emerging product trends, and optimize price positioning and inventory purchase decisions.
The Company paid $32.3 million in cash, issued
5.7 million shares of Trans World Entertainment Corporation stock (TWMC Stock) at closing to the shareholders of etailz (the selling
shareholders) as consideration for the selling shareholders’ ownership, and paid $4.3 million in cash advances to settle
obligations of the selling shareholders. Based on the fair value of $3.56 per share of TWMC Stock on the acquisition date, the
shares had a value of $20.4 million. An earn-out of up to a maximum of $14.6 million would be payable in fiscal 2018 and fiscal
2019 subject to the achievement by etailz of $6.0 million in operating income in fiscal 2017 and $7.5 million in fiscal 2018 as
outlined in the share purchase agreement prior to its amendment as discussed in the following paragraph. In connection with the
acquisition, the Company assumed the liability of the selling shareholders for etailz’s employee retention bonus plan, of
which $1.9 million was due and payable at closing and funded as part of the cash advances and the remaining $2.3 million will be
earned over a two year service period. The acquisition and related costs were funded primarily from the Company’s cash on
hand and short term borrowings under its revolving credit facility. The acquisition was accounted for using the purchase method
of accounting.
During the Company’s second quarter, the share purchase agreement
with the selling shareholders of etailz was amended to provide that $11.5 million be released from the earnout escrow account and
the $3.1 million
remaining in the earnout escrow account may be payable in cash to
the selling shareholders in 2019, subject to the achievement by etailz of operating income in excess of $15.5 million during the
twenty-four month period ending February 2, 2019. In the event that etailz achieves operating income in excess of $13.5 million,
but less than $15.5 million, an earnout of $1.6 million would be payable in 2019. If etailz operating income is below $13.5 million,
the $3.1 million escrow would be returned to the Company.
The amount released from escrow was disbursed during the Company’s
second quarter as follows: $5.0 million to the Company for future investment to support growth initiatives, $5.0 million to the
selling shareholders, and $1.5 million to the Company (to be allocated to increase the maximum amount available under the etailz
employee retention bonus plan from $4.2 million to $5.7 million).
During the Company’s second quarter, the Company recorded
a $1.4 million benefit related to its contingent consideration liability. The decrease in the value of the contingent consideration
liability resulted from the actual financial results of etailz and the amendment of the earnout agreement as described in the paragraph
above. This benefit is recorded in selling, general, and administrative expenses in the Company’s condensed consolidated
statements of operations.
The results of operations of etailz are reported in the Company’s
etailz segment and have been included in the consolidated results of operations of the Company from the date of acquisition. The
following unaudited pro forma financial information for the thirteen and thirty-nine weeks ended October 29, 2016, presents consolidated
information as if the etailz acquisition had occurred on February 1, 2016. Because of different fiscal period ends, and in order
to present results for comparable periods, the unaudited pro forma consolidated financial information for the thirty-nine weeks
ended October 29, 2016, combines (i) the Company’s historical statement of operations for the thirty-nine weeks ended October
29, 2016, and (ii) etailz historical statement of income for the period from January 1, 2016 through August 31, 2016 and October
1, 2016 through October 16, 2016. The unaudited pro forma financial information for the thirteen weeks ended October 29, 2016,
combines (i) the Company’s historical statement of operations for the thirteen weeks ended October 29, 2016; and (ii) etailz
historical statement of income for the period from July 1, 2016 through August 31, 2016 and October 1, 2016 through October 16,
2016. The unaudited pro forma financial information is presented after giving effect to certain adjustments for acquisition-related
costs, depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, and related income
tax effects. The unaudited pro forma financial information is based upon currently available information and upon certain assumptions
that the Company believes are reasonable under the circumstances. The unaudited pro forma financial information does not purport
to present what the Company’s results of operations would actually have been if the aforementioned transaction had in fact
occurred on such date or at the beginning of the period indicated, nor does it project the Company’s financial position or
results of operations at any future date or for any future period.
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 29,
2016
|
|
|
October 29,
2016
|
|
|
|
|
|
|
|
|
|
|
Pro forma total revenue
|
|
$
|
90,655
|
|
|
$
|
287,060
|
|
Pro forma net loss
|
|
|
(6,945
|
)
|
|
|
(13,513
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss per share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average number of common shares outstanding – basic and diluted
|
|
|
36,157
|
|
|
|
36,257
|
|
Joint Venture
On April 11, 2017, the Company entered
into an agreement with another party for the purpose of acquiring and selling certain retail merchandise. etailz holds a 50%
economic interest in the arrangement as of October 28, 2017. The initial cash investment was $2.6 million dollars. During the thirty-nine weeks ended October 28, 2017, the Company received distributions in the amount of $1.7
million from the joint venture, of which $0.7 million was a return of capital and $1.0 million was the Company’s share
of joint venture income. The remaining investment of $1.9 million was included in other assets in the interim condensed consolidated balance sheets as of October
28, 2017.
Note 5. Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite
useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
Determining the fair value of a reporting unit
requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and
future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment if circumstances indicate
that the carrying amount may not be recoverable.
We are continuing to amortize certain vendor relationships, technology,
and trade names and trademarks that have finite lives.
Identifiable intangible assets as of October 28, 2017 consisted
of the following (in thousands, except weighted-average amortization period):
|
|
October 28, 2017
|
|
|
Amortization
Period
(in
months)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
|
120
|
|
|
$
|
19,100
|
|
|
$
|
2,010
|
|
|
$
|
17,090
|
|
Technology
|
|
|
60
|
|
|
|
6,700
|
|
|
|
1,403
|
|
|
|
5,297
|
|
Trade names and trademarks
|
|
|
60
|
|
|
|
3,200
|
|
|
|
647
|
|
|
|
2,553
|
|
|
|
|
|
|
|
$
|
29,000
|
|
|
$
|
4,060
|
|
|
$
|
24,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in net intangibles and goodwill from January 28, 2017 to October 28, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
January
28,
2017
|
|
|
|
Amortization
|
|
|
|
October
28, 2017
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
|
|
|
|
$
|
18,522
|
|
|
$
|
1,432
|
|
|
$
|
17,090
|
|
Technology
|
|
|
|
|
|
|
6,302
|
|
|
|
1,005
|
|
|
|
5,297
|
|
Trade names and trademarks
|
|
|
|
|
|
|
3,033
|
|
|
|
480
|
|
|
|
2,553
|
|
Net amortized intangible assets
|
|
|
|
|
|
$
|
27,857
|
|
|
$
|
2,917
|
|
|
$
|
24,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
39,191
|
|
|
|
-
|
|
|
$
|
39,191
|
|
Total unamortized intangible assets
|
|
|
|
|
|
$
|
39,191
|
|
|
|
-
|
|
|
$
|
39,191
|
|
Estimated amortization expense for the remainder of fiscal 2017
and the five succeeding fiscal years and thereafter is as follows:
Year
|
|
Annual
Amortization
|
|
( in thousands)
|
|
|
|
2017
|
|
$
|
971
|
|
2018
|
|
|
3,890
|
|
2019
|
|
|
3,890
|
|
2020
|
|
|
3,890
|
|
2021
|
|
|
3,325
|
|
2022
|
|
|
1,910
|
|
Thereafter
|
|
|
7,064
|
|
Note 6. Depreciation and Amortization
Depreciation and amortization included in the
condensed consolidated statements of operations is as follows:
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 28,
|
|
|
October 29,
|
|
|
October 28,
|
|
|
October 29,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Cost of sales
|
|
$
|
163
|
|
|
$
|
104
|
|
|
$
|
474
|
|
|
$
|
301
|
|
Selling, general and administrative expenses
|
|
|
3,425
|
|
|
|
2,222
|
|
|
|
9,989
|
|
|
|
5,309
|
|
Total
|
|
$
|
3,588
|
|
|
$
|
2,326
|
|
|
$
|
10,463
|
|
|
$
|
5,610
|
|
Note 7. Segment Data
As described in Note 1 to
the interim condensed consolidated financial statements, we operate in two reportable segments as shown in the following table.
Results for etailz are included in the consolidated results for all periods presented for fiscal 2017. For periods presented for
fiscal 2016, results for etailz are included in consolidated results from October 17, 2016 through October 29, 2016.
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
(in thousands)
|
|
October 28, 2017
|
|
|
October 29, 2016
|
|
|
October 28, 2017
|
|
|
October 29, 2016
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
52,105
|
|
|
$
|
62,457
|
|
|
$
|
176,006
|
|
|
$
|
202,535
|
|
etailz
|
|
|
40,896
|
|
|
|
3,824
|
|
|
$
|
121,440
|
|
|
$
|
3,824
|
|
Total Company
|
|
$
|
93,001
|
|
|
$
|
66,281
|
|
|
$
|
297,446
|
|
|
$
|
206,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
21,347
|
|
|
$
|
25,932
|
|
|
$
|
73,342
|
|
|
$
|
83,459
|
|
etailz
|
|
|
10,234
|
|
|
|
940
|
|
|
|
29,714
|
|
|
|
940
|
|
Total Company
|
|
$
|
31,581
|
|
|
$
|
26,872
|
|
|
$
|
103,056
|
|
|
$
|
84,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
(7,858
|
)
|
|
$
|
(5,083
|
)
|
|
$
|
(17,703
|
)
|
|
$
|
(10,291
|
)
|
etailz
|
|
|
(253
|
)
|
|
|
(2,725
|
)
|
|
|
(966
|
)
|
|
|
(2,725
|
)
|
Total Company
|
|
$
|
(8,111
|
)
|
|
$
|
(7,808
|
)
|
|
$
|
(18,669
|
)
|
|
$
|
(13,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
|
|
|
|
|
|
|
|
$
|
186,869
|
|
|
$
|
222,362
|
|
etailz
|
|
|
|
|
|
|
|
|
|
|
102,077
|
|
|
|
90,887
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
$
|
288,946
|
|
|
$
|
313,249
|
|
Note 8. Restricted Cash
As of October 28, 2017 and October 29, 2016, the Company had restricted
cash of $12.2 million and $16.1 million, respectively.
In connection with the acquisition of etailz and under the terms
of the share purchase agreement, as amended (see Note 4), the Company designated $1.5 million of the restricted cash to be made
available to satisfy any indemnification claims within 18 months from the date of acquisition and $3.2 million of the restricted
cash to equal the maximum earn-out amount that could be paid to the selling shareholders of etailz in accordance with the share
purchase agreement, as amended.
In addition, as a result of the death of its former Chairman, the
Company received $7.5 million which is held in a rabbi trust and was classified as restricted cash on the accompanying condensed
consolidated balance sheet as of October 28, 2017.
A summary of cash, cash equivalents and restricted cash is as follows
(in thousands):
|
|
October 28,
|
|
|
January 28,
|
|
|
October 29,
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
3,924
|
|
|
$
|
27,974
|
|
|
$
|
4,708
|
|
Restricted cash
|
|
|
12,234
|
|
|
|
16,103
|
|
|
|
16,100
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
16,158
|
|
|
$
|
44,077
|
|
|
$
|
20,808
|
|
Note 9. Line of Credit
In January 2017, the Company entered into a $50 million asset based
credit facility (“Credit Facility”) which amended the previous credit facility. The availability under the Credit Facility
is subject to limitations based on merchandise inventory levels. The principal amount of all outstanding loans under the Credit
Facility, together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant
to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company.
The Credit Facility contains a provision to increase availability up to $75 million during October to December of each year, as
needed. During the third quarter of fiscal 2017, the Company exercised the right to increase its availability to $60 million subject
to the same limitations noted above.
Interest under the Credit Facility will accrue, at the election
of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the
level of availability, with the Applicable Margin for LIBO Rate loans ranging from 2.25% to 2.75% and the Applicable Margin for
Prime Rate loans ranging from 0.75% to 1.25%. In addition, a commitment fee ranging from 0.375% to 0.50% is also payable on unused
commitments.
The Credit Facility contains customary affirmative and negative
covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions, covenants
around the net number of store closings, and restrictions related to the payment of cash dividends, including limiting the amount
of dividends and share repurchases to $5.0 million annually and not allowing borrowings under the amended facility for the six
months before or six months after the dividend payment.
As of October 28, 2017, the Company had $5.0
million in outstanding borrowings under the revolving credit facility and $49.0 million was available for borrowing. As of October
29, 2016, the Company had $5.9 million in outstanding borrowings under the revolving credit facility and $53.7 million was available
for borrowing. The weighted average interest rate on total, LIBO Rate and Prime Rate, outstanding borrowings for the thirteen week
period ended October 28, 2017 and October 29, 2016 was 2.69% and 3.73%, respectively.
Note 10. Stock Based Compensation
As of October 28, 2017, there was approximately $0.9 million of
unrecognized compensation cost related to stock awards that is expected to be recognized as expense over a weighted average period
of 2.7 years.
As of October 28, 2017, stock awards authorized
for issuance under the Company’s current long term equity incentive plans totaled 5.0 million shares. There are certain authorized
stock awards for which the Company no longer grants awards. Of these awards authorized for issuance, 2.6 million shares were granted
and are outstanding, 1.5 million shares of which were vested and exercisable. Awards available for future grants at October 28,
2017 were 5.0 million shares.
The table below outlines the assumptions that the Company used to
estimate the fair value of stock based awards granted during the thirty-nine weeks ended October 28, 2017:
Dividend yield
|
|
0%
|
Expected stock price volatility
|
|
40.0%-40.6%
|
Risk-free interest rate
|
|
1.74%-1.83%
|
Expected award life (in years)
|
|
5.64-5.71
|
Weighted average fair value per share of awards granted during the period
|
|
$0.74
|
The following table summarizes stock award activity during the thirty-nine
weeks ended October 28, 2017:
|
|
Number of
Shares
Subject
To Option
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Other
Share
Awards (1)
|
|
Weighted
Average
Grant Fair
Value
|
Balance January 28, 2017
|
|
|
2,459,564
|
|
|
$
|
3.58
|
|
|
|
7.3
|
|
|
|
170,927
|
|
|
$
|
3.87
|
|
Granted
|
|
|
620,000
|
|
|
|
1.84
|
|
|
|
-
|
|
|
|
65,000
|
|
|
|
1.85
|
|
Forfeited
|
|
|
(288,750
|
)
|
|
|
3.07
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(164,150
|
)
|
|
|
5.43
|
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
3.53
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(52,500
|
)
|
|
|
3.50
|
|
Balance October 28, 2017
|
|
|
2,626,664
|
|
|
$
|
3.11
|
|
|
|
7.2
|
|
|
|
178,427
|
|
|
$
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable October 28, 2017
|
|
|
1,361,164
|
|
|
$
|
3.32
|
|
|
|
5.8
|
|
|
|
63,427
|
|
|
$
|
4.50
|
|
|
(1)
|
Other Share Awards include deferred shares granted to Directors and restricted share units granted
to executive officers.
|
As of October 28, 2017, the intrinsic value
of stock awards outstanding was approximately $1 thousand. All exercisable options had an exercise price below the closing stock
price as of October 28, 2017.
In connection with the acquisition of etailz, the Company issued
1,572,552 restricted shares of Company stock to a key etailz employee, with a grant date fair value of $3.56 per share. These shares
vest ratably through January 2019. As of October 28, 2017, the Company recognized $2.6 million of compensation cost related to
these shares, of which $1.9 million was recorded in fiscal 2017. As of October 28, 2017, there was approximately $3.0 million of
unrecognized compensation cost related to these restricted shares that is expected to be recognized as expense over the next 15
months.
Note 11. Accumulated Other Comprehensive
Loss
Accumulated other comprehensive loss that the Company reports in
the condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability
and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plan. Comprehensive loss consists of
net loss and the amortization of pension costs (gain) associated with Company’s defined benefit plan for the thirteen and
thirty-nine weeks ended October 28, 2017 and October 29, 2016.
Note 12. Defined Benefit Plan
The Company maintains a non-qualified Supplemental Executive Retirement
Plan (“SERP”) for a limited number of executive officers of the Company. The SERP provides eligible executives defined
pension benefits that supplement benefits under other retirement arrangements. During the thirty-nine weeks ended October 28, 2017,
the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.2 million in benefits
relating to the SERP during fiscal 2017.
The measurement date
for the SERP is the fiscal year end, using actuarial techniques which reflect estimates for mortality, turnover and expected retirement.
In addition, management makes assumptions concerning future salary increases. Discount rates are generally established as of the
measurement date using theoretical bond models that select high-grade corporate bonds with maturities or coupons that correlate
to the expected payouts of the applicable liabilities.
The following represents the components of
the net periodic pension cost related to the Company’s SERP for the respective periods:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
October 28,
|
|
October 29,
|
|
October 28,
|
|
October 29,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
(in thousands)
|
Service cost
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
48
|
|
|
$
|
45
|
|
Interest cost
|
|
|
139
|
|
|
|
137
|
|
|
|
417
|
|
|
|
411
|
|
Amortization of prior service costs
|
|
|
4
|
|
|
|
55
|
|
|
|
12
|
|
|
|
166
|
|
Amortization of net gain
(1)
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
(27
|
)
|
|
|
(12
|
)
|
Net periodic pension cost
|
|
$
|
150
|
|
|
$
|
203
|
|
|
$
|
450
|
|
|
$
|
610
|
|
(1)
|
The amortization of net gain is related to a director retirement plan previously provided by the Company.
|
Note 13. Basic and Diluted Loss Per Share
Basic income per share is calculated by dividing net income by the
weighted average common shares outstanding for the period. Diluted income per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance
of common stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is computed by dividing
net income (loss) by the sum of the weighted average shares outstanding and additional common shares that would have been outstanding
if the dilutive potential common shares had been issued for the Company’s common stock awards from the Company’s Stock
Award Plans.
For the thirteen and thirty-nine week periods
ended October 28, 2017 and October 29, 2016, the impact of all outstanding stock awards was not considered because the Company
reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Total anti-dilutive
stock awards for both, thirteen and thirty-nine weeks ended October 28, 2017, were approximately 2.6 million shares as
compared to 1.9 million shares and 1.8 million
shares, respectively, for the thirteen and thirty-nine weeks ended October 29, 2016.
Note 14. Income Taxes
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent on the generation of future taxable income. Management considers the scheduled
reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment.
Based on available objective evidence, management concluded that a full valuation allowance should continue to be recorded against
the Company’s deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against
the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future taxable
income in its conclusion of the need for a full valuation allowance. Any reversal of the Company’s valuation allowance will
favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether or when
that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation
allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future.
The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable
income and current taxes payable, if any, for the year ending February 3, 2018. The deferred tax impact resulting from the
utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance.
As of January 28, 2017, the Company had a net operating loss carry forward of $181.4 million for federal income tax purposes and
approximately $243 million for state income tax purposes that expire at various times through 2036 and are subject to certain limitations
and statutory expiration periods.
Note 15. Commitments and Contingencies
Legal Proceedings
The Company is subject to legal proceedings
and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be
no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available
at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect
on the results of operations and financial condition of the Company.
Store Manager Class Actions
Two former Store Managers filed actions alleging
claims of entitlement to unpaid compensation for overtime. In one action, the plaintiff seeks to represent a class of allegedly
similarly situated employees who performed the same position (Store Manager and Senior Assistant Manager) while the other plaintiff
seeks to represent a class of allegedly similarly situated employees who performed the same position (Store Manager).
Specifically, Carol Spack filed a complaint
against Trans World Entertainment Corporation (Trans World) in the United States District Court, District of New Jersey, on April
20, 2017 (Case No.: 3:17-cv-02687-BRM-LHG) alleging that she is entitled to unpaid compensation for overtime under the federal
Fair Labor Standards Act (FLSA). She brings a nationwide collective action under the FLSA on behalf of all Store Managers and Senior
Assistant Managers. She also brings class action claims under New Jersey and Pennsylvania law on behalf of all persons who worked
as Store Managers in New Jersey or Senior Assistant Managers in Pennsylvania.
On May 19, 2017, Natasha Roper filed a complaint
against Trans World in the U.S. District Court for the Northern District of New York (Case No.: 1:17-cv-0553-TJM-CFH) in which
she also alleges that she is entitled to unpaid compensation for overtime under the FLSA. Ms. Roper brings a nationwide collective
action under the FLSA on behalf of all similarly situated Store Managers.
TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
PART 1. FINANCIAL INFORMATION