Kaspien Holdings Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2019
OR
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)

38 Corporate Circle

Albany, New York 12203

(Address of principal executive offices, including zip code)

(518) 452-1242

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: None

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

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 o No x

Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Act).

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o    No x

As of August 3, 2018, 36,225,824 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 3, 2018 as reported on the Global tier of The NASDAQ Stock Market, Inc. was $21,287,726. Shares of Common Stock held by the Company’s controlling shareholder, who controlled approximately 39% of the outstanding Common Stock, have been excluded for purposes of this computation. Because of such shareholder’s control, shares owned by other officers, directors and 5% shareholders have not been excluded from the computation. As of March 29, 2019, there were 36,258,839 shares of Common Stock issued and outstanding.

APPLICABLE ONLY TO REGISTRANTS 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 o    No o

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.

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’s 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:

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.

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 Record Town, Inc. and etailz, Inc. See below for additional information.

Our Reportable Segments

We operate our business in two segments:

For Your Entertainment Segment (“fye”)

The Company’s fye segment operates retail stores and two e-commerce sites and continues to be one of the largest specialty retailers of entertainment products, including trend, video, music, electronics and related products in the United States.

Stores and Store Concepts

As of February 2, 2019, the fye segment operated 210 stores totaling approximately 1.2 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands predominantly under the For Your Entertainment brand.

Mall stores. The Company operated 193 traditional mall-based stores as of February 2, 2019. Mall stores average about 5,200 square feet and carry a full complement of entertainment products, including trend, video, music, electronics, and related products.

Video only stores. The Company operated 5 video only stores as of February 2, 2019, under the Suncoast Motion Pictures brand. These stores specialize in the sale of video and related product. They average about 2,500 square feet.

Freestanding Stores. The Company operated 12 freestanding stores predominantly under the fye brand. They carry a full complement of entertainment products, including trend, video, music, electronics, and related products and are located in freestanding, strip center and downtown locations. The freestanding stores average approximately 12,700 square feet.

Retail Web Sites

The fye segment operates two retail web sites, www.fye.com and www.secondspin.com. fye.com is our flagship site and 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. 

etailz Segment (“etailz”)

etailz is a leading online marketplace retail expert. etailz uses a data driven approach to digital marketplace retailing utilizing proprietary software and e-commerce insight to identify new distributors and wholesalers, isolate emerging product trends, and optimize price positioning and inventory purchase decisions.

etailz Retail Partnerships

Fulfilled by Amazon Global. etailz is a leading Amazon marketplace retailer that partners with brands and employs advanced technology and strategies to grow sales both domestically and internationally.

Additional Marketplace Opportunities. etailz partners with companies to expand their brand on eBay, Jet and Walmart.

Drop Ship. Drop ship arrangements allow etailz to offer partners’ entire catalog across marketplaces, expanding their brand presence and capturing additional sales.

Merchandise Categories

fye Segment

Net sales by merchandise category as a percentage of total net sales for fiscal 2018 and 2017 were as follows:

etailz Segment

etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Approximately 60% of total etailz revenue was generated by four major categories: health & personal care; home/kitchen/grocery; tools/office/outdoor; and baby.

Business Environment

fye Segment

Video and music accounted for approximately 45% of the segment’s net sales in fiscal 2018 versus approximately 50% of net sales in fiscal 2017. Physical media sales have suffered from the shift of content to digital distribution, media streaming and online retailers that offer entertainment products to consumers and collectively have gained a larger share of the market.

etailz Segment

The Company’s etailz segment operates as a third party e-commerce market place (“Digital Marketplace”) reseller. Digital Marketplaces are e-commerce platforms where online retailers enable third party sellers access to their website and customer base to sell various merchandise. Digital marketplaces allow consumers to shop from a variety of merchants in one place and have become an integral part of many e-commerce sellers’ businesses, including Amazon.com, Walmart.com, Jet.com, and ebay.

E-commerce sales are growing faster than physical store sales. According to the U.S. retail e-commerce sales statistics, total estimated e-commerce sales for 2019 are projected at $560.7 billion, an increase of 11% from 2018, while e-commerce sales in 2018 accounted for 10% of total retail sales as compared to 9% of total retail sales for 2017.

During fiscal 2018, in response to the general decline in operating results, management implemented the following strategic initiatives, operational efficiencies and other considerations directed towards improving the etailz segment’s performance, operations, and cash flow:

Vendor Rationalization and Remediation

Using a profit driven approach, the Company determined there was an opportunity to rationalize and remediate its vendor portfolio to improve profitability, streamline core operations and improve efficiencies. Rationalization and remediation activities included terminating unprofitable vendors and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.

SG&A Rationalization

During the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth quarter of fiscal 2018, in addition to changes in senior management. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

Working Capital Optimization

The segment is in the process of implementing strategies that will enhance sales, improve inventory turns and decrease Amazon storage fees.

Competition

fye Segment

The specialty entertainment retail industry is intensely competitive and subject to rapid changes in consumer preferences. We compete with mass merchants, consumer electronics stores, lifestyle retailers and online retailers. Our media products are also distributed through other methods such as digital delivery. We also compete with sellers of pre-owned and value media products. Additionally, we compete with other forms of entertainment activities, including casual and mobile games, movies, television, theater, sporting events and family entertainment centers.

We compete with Walmart, Inc.; Target Corporation; Amazon.com, Inc. (“Amazon”); and Best Buy Co., Inc., among others.

The Company has diversified its products and taken other measures to position itself competitively within its industry. The Company believes it effectively competes in the following ways:

etailz Segment

etailz competes with other third-party marketplace sellers using a data driven approach to digital marketplace retailing utilizing proprietary software and e-commerce 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.

Seasonality

The Company’s business is seasonal, with its fourth fiscal quarter constituting the Company’s peak selling period. In fiscal 2018, fourth quarter revenue accounted for approximately 30% of annual total revenue. In anticipation of increased sales activity in the fourth fiscal quarter, the Company purchases additional inventory and hires seasonal associates to supplement its core store sales and distribution center staff. If, for any reason, the Company’s net sales were below seasonal norms during the fourth fiscal quarter, the Company’s operating results could be adversely affected. During the fourth quarter of fiscal 2018, fye comparable store sales (as defined within Key Performance Indicators of Item 7) increased 2.8% compared to the same quarter last year. etailz sales declined 8.3% for the fourth fiscal quarter of 2018 compared to the same quarter last year and adversely affected annual results. Quarterly sales can also be affected by the timing of new product releases, new store openings or closings and the performance of existing stores.

Advertising

fye Segment

The Company makes use of visual displays including in-store signage and external banners. The Company employs a marketing strategy including email blasts and social networking. Certain vendors from whom the Company purchases merchandise offer advertising allowances, of varying duration and amount, to promote their merchandise.

etailz Segment

etailz utilizes social media and content marketing to strengthen its visibility within the industry and locally. The segment’s Facebook, Instagram, LinkedIn, Pinterest, and Twitter accounts have a strong and engaged following. etailz public relations efforts consist of press releases, articles in industry publications, and articles on our website. In addition, etailz hosts conferences for its partners which strengthens its presence within the industry and establishes etailz as a leader in online marketplace retail.

Within in its marketing division, etailz offers advertising services to its partners including social media ads, influencer campaigns, and marketplace advertising.

Suppliers and Purchasing

fye Segment

The fye segment purchases inventory from approximately 460 suppliers. In fiscal 2018, 37% of fye purchases were made from ten suppliers including Universal Studio Home Entertainment, Paramount Video , Buena Vista Home Video, SONY Music, Twentieth Century Fox Home Entertainment, Warner/Elektra/Atlantic, Universal Music Group Distribution, Funko LLC, Warner Home Video, and Alliance Entertainment.

etailz Segment

During fiscal 2018, etailz purchased inventory from various suppliers in numerous product categories, primarily through the Amazon Marketplace. In fiscal 2018, no individual supplier exceeded 10% of etailz revenue.

The Company does not have material long-term purchase contracts; rather, it purchases products from its suppliers on an order-by-order basis. Historically, the Company 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.

Trade Customs and Practices

Under current trade practices with large suppliers, retailers of music and video products are generally entitled to return unsold merchandise they have purchased in exchange for other merchandise carried by the suppliers. The largest music suppliers charge a related merchandise return penalty or return handling fee. Most manufacturers and distributors of video products do not charge a return penalty or handling fee. Under current trade practices with large suppliers, retailers of trend, electronics, video games and related products may receive markdown support from suppliers to help clear discontinued or slow turning merchandise. Merchandise return policies and other trade practices have not changed significantly in recent years. The Company generally adapts its purchasing policies to changes in the policies of its largest suppliers.

Employees

As of February 2, 2019, the Company employed approximately 2,200 people, of whom approximately 1,000 were employed on a full-time basis. Others were employed on a part-time basis.

fye Segment

The fye segment had approximately 800 full-time employees and approximately 1,200 part-time employees. The fye segment hires seasonal sales and distribution center employees during its fourth quarter peak selling season to ensure continued levels of personalized customer service and in-stock position. Assistant store managers, store managers, district managers and regional managers are eligible to receive incentive compensation based on the sales and/or profitability of stores for which they are responsible. Sales support managers are generally eligible to receive incentive compensation based on achieving Company performance targets. None of the Company’s employees are covered by collective bargaining agreements and management believes that the Company enjoys favorable relations with its employees.

etailz segment

During the fourth quarter of 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth

quarter of fiscal 2018, in addition to changes in senior management. After the reduction in force, as of February 2, 2019, the etailz segment employed 189 full-time and 15 part-time employees.

Trademarks

The trademarks, for your entertainment (fye), etailz, and Suncoast Motion Pictures are registered with the U.S. Patent and Trademark Office and are owned by the Company. We believe that our rights to these trademarks are adequately protected. We hold no material patents, licenses, franchises or concessions; however, our established trademarks and trade names are essential to maintaining our competitive position in the entertainment retail industry.

Information Systems

fye Segment

The Company’s inventory management systems and point-of-sale technology show daily sales and in-store stock by title by store. The systems use this data to automatically generate replenishment shipments to each store from our distribution centers, enabling each store to carry a merchandise assortment uniquely tailored to its own sales mix and rate of sale. Call lists and reservation system also provide our buying staff with information to determine order size and inventory management for store-by-store inventory allocation.

To support most operations, the Company uses a large-scale computing environment with a state-of-the-art storage area network, a wired and wireless corporate network installed at regional headquarters, and a secure virtual private network to access and provide services to computing assets located in stores, distribution centers and satellite offices, and to the mobile workforce.

An Oracle based point-of-sale system has been enhanced to facilitate trade-in transactions, including automatic lookup of trade-in prices and printing of machine-readable bar codes to facilitate in-store restocking of pre-owned products. In addition, our central database of all pre-owned products allows us to actively manage the pricing and product availability of our pre-owned products across our store base and reallocate our pre-owned products as necessary.

etailz segment

etailz has a data driven approach to digital marketplace retail utilizing proprietary software. Using data collected from the marketplaces, optimal inventory thresholds and purchasing trends are calculated within their advanced inventory management software developed in-house. etailz also has proprietary software related to pricing, marketing, and marketplace seller information. To support most operations, etailz uses cloud computing services and a secure network to provide computing services.  

Available Information

The Company’s headquarters are located at 38 Corporate Circle, Albany, New York 12203, and its telephone number is (518) 452-1242. 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 Global Market under the trading

symbol “TWMC”. The Company’s fiscal year end is the Saturday closest to January 31. The fiscal 2018 (“fiscal 2018”) year ended on February 2, 2019 and fiscal 2017 (“fiscal 2017”) year ended February 3, 2018. Fiscal 2018 consisted of 52 weeks and fiscal 2017 consisted of 53 weeks.

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

The Company’s results of operations are affected by the continued declines in the physical video and music industries.

Physical media sales have suffered from the shift of content to digital distribution, streaming and online retailers that offer entertainment products at discounted prices and collectively have gained a larger share of the market. Physical video and music represent approximately 45% of sales and have been impacted by new distribution channels, including digital distribution, streaming and internet fulfillment.

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. There can be no assurance that we will be successful in implementing our business strategy or that the strategy will be successful in sustaining acceptable levels of sales growth and profitability.

During fiscal 2018, in response to the general decline in operating results, management implemented the following strategic initiatives, operational efficiencies and other considerations directed towards improving the etailz segment’s performance, operations, and cash flow:

Vendor Rationalization and Remediation

Using a profit driven approach, the Company determined there was an opportunity to rationalize and remediate its vendor portfolio to improve profitability, streamline core operations and improve efficiencies. Rationalization and remediation activities included terminating unprofitable vendors and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.

SG&A Rationalization

During the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth quarter of fiscal 2018. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

Working Capital Optimization

The segment is in the process of implementing strategies that will enhance sales, improve inventory turns and decrease Amazon storage fees.

The Company’s results of operations may suffer if the Company does not accurately predict consumer acceptance of new products or distribution technologies or adapt to a shift to multichannel experience.

The entertainment industry is characterized by changing technology, evolving format standards, and new and enhanced product introductions. These characteristics require the Company to respond quickly to technological

changes and understand the impact of these changes on customers’ preferences. If the Company is unable to participate in new product or distribution technologies, its results of operations may suffer. Specifically, CD and DVD formats have experienced a continuous decline as digital forms of music and video content have become more prevalent. If the Company does not timely adapt to these changing technologies and sufficiently shift to other merchandise categories, operating results could significantly suffer.

In addition, multichannel retailing is rapidly evolving with the increasing use of computers, tablets, mobile phones and other devices to shop in stores and online and the increased use of social media as a means of interacting with our customers and enhancing their shopping experiences. If we are unable to adapt to the growth of multichannel retailing, and keep pace with the changing expectations of our customers and new developments by our competitors, customer experience could be negatively affected, resulting in a loss of customer confidence and satisfaction, and lost sales, which could adversely affect our reputation and results of operations.

Increased competition from existing retailers, including internet retailers, could adversely affect the Company’s results of operations.

The Company competes with a wide variety of entertainment retailers, including mass merchandisers, consumer electronics outlets, internet retailers and independent operators, some of whom have greater financial and other resources than the Company and frequently sell their product at discounted prices or with added value.

In addition, the Company’s success depends on our ability to positively differentiate ourselves from other retailers. The retail business is highly competitive. In the past, the Company has been able to compete by differentiating our customer shopping experience, by creating an attractive value proposition through a careful combination of price, merchandise assortment, convenience, customer service and marketing efforts. Customer perceptions regarding our stores, our in-stock position and deep assortment of product are also factors in our ability to compete. No single competitive factor is dominant, and actions by our competitors on any of these factors could have an adverse effect on our sales, gross profit and expenses. If we fail to continue to positively differentiate ourselves from our competitors, our results of operations could be adversely affected.

The ability to attract customers to our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in consumer traffic in those malls could adversely affect the Company’s results of operations.

In order to generate customer traffic, we depend heavily on locating many of our stores in prominent locations within shopping malls. Sales at these stores are derived from the volume of traffic in those malls. Our stores benefit from the ability of a mall’s other tenants to generate consumer traffic in the vicinity of our stores. Our sales volume and mall traffic generally may be adversely affected by, among other things, economic downturns in a particular area, competition from e-commerce retailers, non-mall retailers and other malls, increases in gasoline prices, fluctuations in exchange rates in border or tourism-oriented locations and the closing or decline in popularity of other stores in the malls in which we are located. An uncertain economic outlook could curtail new shopping mall development, decrease shopping mall traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely. A reduction in mall traffic as a result of these or any other factors could have a material adverse effect on our business, results of operations and financial condition.

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, such as our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. A downturn in the economy affects specialty retailers disproportionately, as consumers may prioritize reductions in discretionary spending, which could have a direct impact on purchases of our merchandise 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 our 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. If we were to borrow against our senior 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. The Company believes that the combination of its cash and cash equivalents on hand, cash flow received from operations, funds available under the Company’s credit facility and short-term vendor financing will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next twelve months. If these sources of liquidity do not satisfy the Company’s requirements, the Company may need to seek additional financing. 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, regional and national economic conditions; competition; actions taken by our competitors; consumer trends and preferences; new product introductions and changes in our product mix; timing and effectiveness of promotional events and weather. fye’s annual comparable store sales may decline further than they did in fiscal 2018. Also, they may vary from quarter to quarter as our business is highly seasonal in nature. Our highest sales and operating income historically occur during the fourth fiscal quarter, which is due in part to the holiday selling season. The fourth fiscal quarter generated approximately 30% of our

total revenue for fiscal 2018. Any decrease in our fourth fiscal quarter sales, whether due to a slow holiday selling season, unseasonable weather conditions, economic conditions or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year. 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.

Failure to open new stores or renew existing leases in profitable stores may limit our earnings.

Historically, the Company’s growth has come from adding stores. The Company opens new stores if it finds desirable locations and is able to negotiate suitable lease terms for profitability. A lack of new store growth may impact the Company’s ability to increase sales and earnings. During fiscal 2018, the Company did not open any new stores and closed 50 stores with expiring leases. The Company regularly renews leases at existing locations if those stores are profitable. Failure to renew these leases may impact the Company’s earnings. See Item 2: Properties, for timing of lease expirations.

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

The Company is dependent on its vendors to supply merchandise in a timely and efficient manner. If a vendor 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.

Approximately 37% of fye segment’s purchases come from ten major suppliers. As is standard in its industry, the Company does not maintain long-term contracts with its suppliers but instead makes purchases on an order-by-order basis. If the Company fails to maintain customary trade terms or enjoy positive vendor relations, it could have an adverse effect on the Company’s results of operations.

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 supplier exceeded 10% of etailz purchases.

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 continued 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.

The Company’s results of operations are affected by the availability of new products.

The Company’s business is affected by the release of “hit” music and video titles, which can create fluctuations in sales. It is not possible to determine the timing of these fluctuations or the future availability of hit titles. The Company is dependent upon the major music and movie producers to continue to produce hit products. To the extent that new hit releases are not available, or not available at prices attractive to consumers, or, if manufacturers fail to introduce or delay the introduction of new products, the Company’s results of operations may be adversely affected.

If the Company’s vendors fail to provide marketing and merchandising support at historical levels, the Company’s results of operations could be adversely affected.

The manufacturers of entertainment products have typically provided retailers with significant marketing and merchandising support for their products. As part of this support, the Company receives cooperative advertising and other allowances from these vendors. These allowances enable the Company to actively promote and merchandise the products it sells at its stores and on its websites. If the Company’s vendors fail to provide this support at historical levels, the Company’s results of operations could be negatively impacted.

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 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 store and distribution center locations, 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 could result in increased risks to the Company associated with the potential financial distress or insolvency of 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 customer, employee and business data is critical to us. Our business, like that of most retailers, involves the receipt and transmission of customers’ personal information, consumer preferences and transmission of the payment card information, as well as 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.

Our success, in particular our ability to successfully manage inventory levels and process customer transactions, largely depends upon the efficient operation of our computer hardware and software systems. We use management information systems to track inventory at the store level and aggregate daily sales information, communicate customer information and process purchasing card transactions, process shipments of goods and report financial information.

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 trademarks, service marks, copyrights, patents, 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 a large number of qualified team members. Many of those team members are employed in entry-level or part-time positions with historically high turnover rates. 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, customer service levels 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 Global 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 could be materially and adversely affected if our distribution center is disrupted.

We operate a distribution center in Albany, New York. We ship approximately 82% of our fye segment merchandise inventory through our distribution center. If our distribution center is destroyed or disrupted for any reason, including weather, fire, labor, or other issues we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes to reopen or replace the distribution center.

We maintain business interruption insurance to protect us from the costs relating to matters such as a shutdown, but our insurance may not be sufficient, or the insurance proceeds may not be timely paid to us, in the event of a shutdown.

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

We are heavily dependent upon our labor workforce in the geographic areas where we conduct our business. Our compensation packages are designed to provide benefits commensurate with our level of expected service. However, within our retail and logistics operations, 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 and overall unemployment levels. Changes in any of these factors, including a shortage of available workforce in areas in which we operate, could interfere with our ability to adequately service our customers or to open suitable locations 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.  A considerable amount of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate may increase our operating expenses.  Furthermore, inconsistent increases in state and or city minimum wage requirements limit our ability to increase prices across all markets and channels.  Additionally, we are self-insured with respect to our health care coverage in the U.S. and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre-defined stop loss coverage, which helps limit the cost of large claims. 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, 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.”

Certain of our strategies, including product innovations and expanding our exclusive offerings, may present greater risks.

We are continuously assessing opportunities to improve store productivity and complementary products and services related to our core business, including product innovations and exclusive offerings. We may expend both capital and personnel resources on such business opportunities which may or may not be successful. There can be no assurance that we will be able to develop product innovations and exclusive offerings to a point where they will become profitable or generate positive cash flow.

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. Goodwill is not amortized but is evaluated annually for impairment.

During fiscal 2018, as a result of triggering events, the Company performed impairment tests on its fixed assets and intangible assets, and concluded that both its fixed assets and intangible assets were partially impaired. Additionally, as a result of the annual impairment review, the Company determined that goodwill was fully impaired during 2018. The Company recorded impairment losses of approximately $4.1 million and $16.4 million for the fixed assets and intangible assets, respectively. The Company recorded an impairment loss of $39.2 million for goodwill.

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 of 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.

We maintain an asset-based revolving credit agreement with Wells Fargo Bank, N.A., which provides for a senior secured revolving credit facility (“ABL Facility”) of up to $75 million. The ABL Facility contains various representations, warranties and restrictive covenants that, among other things and subject to specified circumstances and exceptions, restrict our ability to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to at least 10% of the loan cap must be maintained under the ABL Facility. The ABL Facility does not otherwise contain financial maintenance covenants. These restrictions could (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest.

The ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control. Additionally, we cannot be assured that our borrowing relationship with our lenders will continue or that our lenders will remain able to support their commitments to us in the future.  If our lenders fail to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.

Risks Related to Ownership of Our Common Stock.

The Robert J. Higgins TWMC Trust (the “Trust”) owns approximately 39% of the outstanding Common Stock. Therefore, the trustees have significant influence and control over the outcome of any vote of the Company’s Shareholders.

The Robert J. Higgins TWMC Trust owns approximately 39% of the outstanding Common Stock and there are no limitations on the Trust acquiring shares in the future. Accordingly, the trustees have significant influence over the election of our directors, the appointment of new management and the approval of actions requiring shareholder approval, such as adopting amendments to our articles of incorporation and approving mergers or sales of all or substantially all of our assets. Such concentration of ownership and substantial voting influence may have the effect of delaying or preventing a change of control, even if a change of control is in the best interest of all shareholders. There may be instances in which the interest of the Trust may conflict or be perceived as being in conflict with the interest of a holder of our securities or the interest of the Company. W. Michael Reickert, a member of the Board of Directors of the Company, is a trustee of the Trust.

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 music and the home video industry. Changes in our comparable store net sales could also affect the price of our Common Stock. Failure to meet market expectations, particularly with respect to comparable store sales, 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 Global Market, 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 the NASDAQ Global Market (“the NASDAQ”), which imposes continued listing requirements with respect to listed shares. On January 15, 2019, we received a letter from the NASDAQ stating that we are not in compliance with NASDAQ Listing Rule 5450(a)(1) because the closing bid price of our common stock was below the required minimum of $1.00 per share for the previous 30 consecutive business days.  In accordance with NASDAQ Listing Rules, we have a period of 180 calendar days, or until July 15, 2019, to regain compliance with the minimum bid price requirement. If at any time before July 15, 2019 the closing bid price of our common stock is at least $1.00 per share for a minimum of 10 consecutive business days, NASDAQ will provide us with written confirmation that we have regained compliance with the minimum bid price requirement and this matter will be closed.   If we are unable to demonstrate compliance with Rule 5450(a)(1) by July 15, 2019, we can submit a request for an additional 180-day period to regain compliance with the minimum bid price requirement.

There can be no assurance, however, that we will be able to regain compliance with the minimum bid price requirement or that we will otherwise be in compliance with other NASDAQ listing criteria. If we fail to regain and 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, 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 stockholder’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 stockholder to liquidate.

Item 1B. UNRESOLVED SEC COMMENTS

None.

Item 2. PROPERTIES

Retail Stores

As of February 2, 2019, the fye segment leased and operated 210 stores some of which have renewal options. 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:

As leases expire, the Company will evaluate the decision to exercise renewal rights or obtain new leases for the same or similar locations based on store profitability.

Corporate Offices and Distribution Center Facilities

As of February 2, 2019, we leased the following office and distribution facilities:

The Company believes that it has adequate distribution facilities to meet the Company’s current business needs. Shipments from the Albany distribution facility to the fye segment’s retail stores provide approximately 82% of merchandise shipment requirements to stores. Stores are serviced by common carriers chosen on the basis of geography and rate considerations. The balance of the stores’ merchandise requirements is satisfied through direct shipments from vendors. The Spokane, WA distribution center supports the distribution to outside distribution facilities for sale on third-party marketplaces.

Item 3. LEGAL PROCEEDINGS

The Company is subject to various 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 or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company.

Loyalty Memberships and Magazine Subscriptions Class Action

On November 14, 2018, three consumers filed a putative class action complaint against Trans World Entertainment Corporation and Synapse Group, Inc. in the United States District Court for the District of Massachusetts Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions. The complaint alleges, among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without obtaining the consumers’ consent. The complaint seeks statutory and actual damages.

The Company has filed a motion to dismiss the case which remains pending; however the court has already dismissed the plaintiffs’ only claim under federal law. The court has not yet decided the rest of the motion, but has indicated its preliminary agreement with significant portions of that motion, including that the case should not be able to proceed as a class action. The Company believes it has meritorious defenses to the plaintiffs’ claims and, if the court does not grant the Company’s motion to dismiss in full, the Company intends to vigorously defend the action.

Store Manager Class Actions

There are two pending class actions. The first, Spack v. Trans World Entertainment Corp. was originally filed in the District of New Jersey, April 2017(the “Spack Action”). The Spack Action alleges that Trans World misclassified Store Managers as exempt nationwide. It also alleges violations of New Jersey and Pennsylvania State Law with respect to the Trans World’s use of the fluctuating workweek method to pay Senior Assistant Managers at stores located in those two states, and that managers and assistant managers worked “off-the-clock.” The second, Roper v. Trans World Entertainment Corp., was filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide misclassification claim on behalf of Store Managers. Both actions were consolidated into the Northern District of New York, with the Spack Action being the lead case.

Plaintiffs moved for conditional certification, June 2018 and partially granted in January 2019. The opt-in period for the collective that was certified closed on April 6, 2019. Once the scope of the conditionally certified collective is known, opt-in discovery relating to that collective will commence. Company plans to move to decertify that collective. The Company believes the case is without merit.

Item 4. Mine Safety Disclosures

None.

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 Global Market under the symbol “TWMC.” As of March 29, 2019, there were 278 shareholders of record. The following table sets forth high and low last reported sale prices for each fiscal quarter during the period from January 30, 2017 through March 29, 2019.

On March 29, 2019, the last trading date in March, the reported sale price on the Common Stock on the NASDAQ Global Market was $0.42.

Dividend Policy: The Company did not pay cash dividends in fiscal 2018 and fiscal 2017. The declaration and payment of any dividends is at the sole discretion of the board of directors and is not guaranteed. The Company’s amended credit facility contains certain restrictions related to the payment of cash dividends, including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment.

Issuer Purchases of Equity Securities during the Quarter Ended February 2, 2019

During the three month period ended February 2, 2019, the Company did not repurchase any shares under the share repurchase program.

The Company’s amended credit facility contains certain restrictions related to share repurchases, including limiting the amount of repurchases to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the share repurchase transaction.

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 merchandise, including the entry or exit of non-traditional retailers of the Company’s merchandise to or from its markets; releases by the music and video, industries of an increased or decreased number of “hit releases” general economic factors in markets where the Company’s merchandise is 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 Segment

The U.S. entertainment retailing industry is a mature industry and continues to experience declines. Physical video and music represent 45% of sales and both categories have been impacted by new distribution channels, including digital distribution and internet fulfillment. As a result, the Company has had negative comparable store sales on an annual basis for the past five fiscal years. To mitigate or lessen the impact these changes have had, the Company has focused on the following areas in an effort to improve its business:

Evolve the fye Brand Customer Experience.

The Company is evolving the fye brand experience by diversifying its merchandise assortment and enhancing its merchandise presentation as it continues its strategy towards becoming the most compelling entertainment and pop culture centric engagement in the marketplace. In addition, the Company offers personalized customer service in its stores guided by a commitment to approach every customer with gratitude, humility and respect.

Store Portfolio Evaluation

The Company’s real estate strategy is to maintain a core group of profitable locations, while evaluating opportunities for new locations in new and existing malls.

During fiscal year 2018 and fiscal year 2017, the Company closed 50 and 25 stores, respectively. The Company closes stores when minimum operating thresholds are not achieved or upon lease expiration when either renewal is not available or management determines that renewal is not in the Company’s best interest. The Company has signed short-term lease agreements for desirable locations, which enables us to negotiate rents that are responsive to the then-current sales environment. The Company has 158 stores with leases expiring during fiscal 2019. We will continue to close stores that do not meet our profitability goals, a process which could result in further asset impairments and store closure costs. A continued reduction in the number of stores would lower total sales.

The Company believes that there is near-term opportunity for improving the productivity of existing stores. The environment in which our stores operate is intensely competitive and includes internet-based retailers and mass merchants. We believe a specialty retailer that can differentiate itself by offering a distinctive assortment and customer experience, and that can operate efficiently, will be better positioned to maintain its market share.

Therefore, we remain dedicated to enhancing our merchandise assortment through introducing additional product lines, improving the operational efficiency of our stores and offering our customers a rewarding shopping experience guided by an approach to engage every customer with gratitude, humility and respect.

Expanding Customer Base

To strengthen customer loyalty, the fye stores offer its customers the option of signing up for a Backstage Pass card which provides an additional 10% discount off of everyday selling prices on nearly all products in addition to other value added benefits members receive through the program in exchange for a membership fee. The Company also hosts events to provide various segments of customers an opportunity to experience entertainment and shop for unique and exclusive products based on their particular interests. 

etailz Segment

On October 17, 2016, the Company acquired all of the issued and outstanding capital stock of etailz, Inc., an innovative and leading digital marketplace retail expert. etailz uses a data driven approach to digital marketplace retailing utilizing proprietary software and e-commerce 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.

During fiscal 2018, in response to the general decline in operating results, management implemented certain strategic initiatives, operational efficiencies and other considerations directed towards improving the segment’s performance, operations, and cash flow:

Vendor Rationalization and Remediation

Using a profit driven approach, management determined there was an opportunity to rationalize and remediate its vendor portfolio to improve profitability, streamline core operations and improve efficiencies. Rationalization and remediation activities included terminating unprofitable vendors and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.

SG&A Rationalization

During the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth quarter of fiscal 2018. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

Working Capital Optimization

etailz is in the process of implementing strategies that will enhance sales, improve inventory turns and decrease Amazon storage fees.

Key Performance Indicators

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

Net Sales and Comparable Store Net Sales: The fye segment measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the beginning of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store sales if the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or

downsizing. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz segment measures total year over year sales growth by product category.

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, merchandise inventory per square foot, inventory leverage, 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 2, 2019 (“fiscal 2018”)

Compared to Fiscal Year Ended February 2, 2018 (“fiscal 2017”)

The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2018, and 2017 ended February 2, 2019 and February 3, 2018, respectively. Fiscal 2018 had 52 weeks and fiscal 2017 had 53 weeks. The 53rd week in fiscal 2017 contributed approximately 1% to net sales.

Segment Highlights:

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

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

Total revenue decreased 5.6% to $418.2 million compared to $442.9 million in fiscal 2017.

fye Segment

The 13.9% net sales decline from the prior year is primarily due to an 11.1% decline in average stores in operation and a 2.0% decline in comparable store net sales. Stores closed in fiscal 2018 and fiscal 2017 recorded sales of $26.5 million and $14.9 million, respectively. Total product units sold for fiscal 2018 decreased 18.5% while the average retail price for units sold increased 3.3%.

Net fye sales by merchandise category for fiscal 2018 and fiscal 2017 were as follows:

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 5.1% on a comparable store sales basis in fiscal 2018 and represented 41.5% of the Company’s total net sales in fiscal 2018 versus 37.3% in fiscal 2017. The Company continues to take advantage of opportunities to strengthen its selection and shift product mix to growing categories of entertainment-related merchandise. The Company grew 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 8.8% 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. According to the Industry Dashboard, during the period equivalent to the Company’s fiscal 2018, total industry video sales declined 12.8%.

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 8.6% on a comparable store sale basis in fiscal 2018.

Electronics

fye stores offer a selection of complementary portable electronics and accessories to support our entertainment products. The electronics category increased 5.0% on a comparable store sales basis. Electronics represented 13.3% of the Company’s total net sales in fiscal 2018 versus 12.5% in fiscal 2017.

etailz Segment

etailz recorded sales of $186.9 million for fiscal 2018 compared to $174.5 million for fiscal 2017. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art.

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

Gross profit decreased 11.0% to $128.1 million compared to $143.9 million in fiscal 2017 primarily due to the closure of 50 stores.

fye Segment

Gross profit as a percentage of sales was 38.6% in fiscal 2018 as compared to 38.8% in fiscal 2017. The slight decline in rate was due to higher inventory markdowns to sell off seasonal and slow moving merchandise and liquidation sales for closed stores.

etailz Segment

etailz gross profit as a percentage of revenue was 20.8% in fiscal 2018 as compared to 22.7% in fiscal 2017. The decline in the gross profit rate was primarily due to higher marketplace fulfillment and warehousing fees.

Selling, General and Administrative Expenses.

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

Total SG&A expenses decreased $2.7 million.

fye Segment

SG&A, excluding depreciation and amortization, decreased $7.8 million, or 6.8%, primarily as a result of lower expenses due to 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.

etailz Segment

etailz SG&A, excluding depreciation and amortization, expenses increased $9.5 million, or 24.1%, primarily as a result of investments in product identification and sourcing, technology, and platform diversification, in addition to an increase in marketplace commissions as a result of higher sales.

Depreciation and amortization expense. Consolidated depreciation and amortization expense decreased $4.4 million primarily due to the $29.1 million net decrease in carrying value of fixed assets, resulting from impairment charges recorded for the fye segment, during the fourth quarter of fiscal 2017.

Asset Impairment Charges

fye Segment

During fiscal 2018, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth quarter sales that a triggering event had occurred, and pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment, an evaluation of the fye fixed assets for impairment was required. Fixed 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 2018, resulting in the recording of asset impairment charges of $1.9 million. Estimated fair values for fixed assets at these locations, including store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

During fiscal 2017, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth quarter sales that a triggering event had occurred, and pursuant to FASB ASC 360, Property, Plant, and Equipment, an evaluation of the fye fixed assets for impairment was required. Fixed 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 2017, resulting in the recording of asset impairment charges of $29.1 million. Estimated fair values for fixed assets at these locations, including store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

etailz Segment

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 FASB ASC 360, 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.

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.

Interest Expense. Interest expense in fiscal 2018 was $0.7 million, compared to $0.3 million in fiscal 2017.

Other Income. Other income was $0.2 million in fiscal 2018 compared to $8.9 million in fiscal 2017. Other income for fiscal 2018 was comprised of interest income earned on escrow accounts. Other income for fiscal 2017 consisted primarily of a gain on insurance proceeds related to the death of the Company’s former Chairman.

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

The fiscal 2018 income tax expense includes state taxes, adjustments to the reserve for uncertain tax positions, and the accrual of interest. The fiscal 2017 income tax benefit of the alternative minimum tax credit receivable is partially offset by state taxes, adjustments to the reserve for uncertain tax positions, and the accrual of interest.

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

Net loss was $97.4 million for fiscal 2018, compared to $42.6 million for fiscal 2017. Included in the results for fiscal 2018 and fiscal 2017 are non-cash charges of $59.7 million and $29.1 million, respectively, as a result of recording impairment against certain fixed assets in the fye segment and impairment against fixed assets, intangible assets, and goodwill in the etailz segment. The increase in net loss was primarily due to an increase in asset impairment charges, combined with the decline in fye sales and an overall lower gross profit rate.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Flows:

The Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and changes in our strategy or our planned activities.

The Company incurred net losses of $97.4 million and $42.6 million for the years ended February 2, 2019 and February 3, 2018, respectively, and has an accumulated deficit of $50.2 million at February 2, 2019. In addition, net cash used in operating activities for the year ended February 2, 2019 was $25.5 million.

A noted above, the Company experienced negative cash flows from operations during fiscal 2018 and 2017 and we expect to continue to incur net losses in the foreseeable future. We implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiency and conserving working capital needed to support the growth of our etailz segment. As a result of the initiative, we expect that annual expenses will be reduced by $4.0 to $5.0 million.

At February 2, 2019, we had cash and cash equivalents of $4.4 million, net working capital of $65.9 million, and no outstanding borrowings on our revolving credit facility, as further discussed below. This compares to $31.3 million in cash and cash equivalents and net working capital of $92.8 million at February 3, 2018. We anticipate an improvement in cash flows from operations for fiscal 2019.

In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company. During fiscal 2018, the Company exercised the right to increase its

availability to $60 million subject to the same limitations noted above. The Company had $30 million available for borrowing under the Credit Facility as of February 2, 2019.

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on unused commitments.

As of February 2, 2019 and as of February 3, 2018, the Company did not have any borrowings under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2018 and fiscal 2017 were $35.7 million and $11.7 million, respectively. As of February 2, 2019 and February 3, 2018, the Company had no outstanding letters of credit. The Company had $30 million and $41 million available for borrowing under the Credit Facility as of February 2, 2019 and February 3, 2018, respectively.

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of dividends to $5 million annually, and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment. On October 29, 2018, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company exceeding the permitted number of store closures and related inventory dispositions.

The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. As of February 2, 2019, the Company was compliant with all covenants. On May 3, 2019, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late delivery of the Annual Financial Statements.

In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well continuing our efforts to generate additional sales and increase margins. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should we require such additional funds. If the Company is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely affected.

Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional funds. Similarly, if our common stock is delisted from the NASDAQ Global Market, it may also limit our ability to raise additional funds.

The consolidated financial statements for the fiscal year ended February 2, 2019 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the etailz segment and the availability of future funding. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

During fiscal 2018, cash used in operations was $25.5 million, primarily due to a net loss of $97.4 million, adding back depreciation and amortization of $9.1 million, a loss on impairment of goodwill and long lived assets of $59.7 million, non-cash compensation of $3.0 million, and a decrease in merchandise inventory of $14.5 million, less an increase in accounts receivable of $0.9 million, the reduction in accounts payable of $7.5 million, the reduction of accrued expenses and other current liabilities of $1.1 million, and the reduction in deferred revenue and other long-term liabilities of $1.5 million and $4.0 million, respectively. During fiscal 2017, cash used in operations was $13 thousand primarily due to a net loss of $42.6 million, adding back depreciation and amortization of $14.1 million, a loss due to fixed assets impairment of $29.1 million, non-cash compensation of $3.1 million, decrease in merchandise inventory of $16.9 million, and a decrease in accounts receivable and other current assets of $3.9 million, less the adjustment to the contingent consideration liability of $3.3 million, the gain on insurance proceeds of $8.7 million, and reductions in accounts payable and deferred revenue of $10.5 million and $1.3 million, respectively.

The Company monitors various statistics to measure its management of inventory, including inventory turnover (annual cost of sales divided by average merchandise inventory balances), inventory investment per square foot (merchandise inventory divided by total store square footage) and inventory 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 fye segment, inventory turnover in fiscal 2018 and in fiscal 2017 was 1.6 and 1.5, respectively. For the etailz segment, inventory turnover in fiscal 2018 and in fiscal 2017 was 5.2 and 5.3, respectively. Inventory investment per square foot measures the productivity of the inventory. It is important in determining if the Company has the appropriate level of inventory to meet customer demands while controlling its investment in inventory. Inventory investment per square foot in the fye segment was $60 per square foot at the end of fiscal 2018, same level as at the end of fiscal 2017. 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 fye segment was 41.0% as of

February 2, 2019 compared with 44.0% as of February 3, 2018. Accounts payable leverage on inventory for the etailz segment was 22.7% as of February 2, 2019 compared with 16.6% as of February 3, 2018.

Cash used in investing activities was $2.3 million in fiscal 2018, compared to cash flows provided by investing activities of $4.5 million in fiscal 2017. During fiscal 2018, cash used in investing activities consisted of $1.4 million in capital distributions received from the joint venture, less $3.7 million in capital expenditures. During fiscal 2017, cash provided by investing activities consisted of Company owned life insurance proceeds of $14.4 million, and $1.1 million in capital distributions received from the joint venture, less $8.4 million in capital expenditures, and a $2.6 million investment in a joint venture.

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 $3 million in fiscal 2019, as the Company has made the majority of its planned capital investments.

Cash used in financing activities was $1.4 million in fiscal 2018, compared to $5.0 million in fiscal 2017. In fiscal 2018 and fiscal 2017, cash used in financing activities was primarily comprised of $1.5 million and $5.0 million payments, respectively, 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.

The Company leases its 181,300 square foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016, and expires on December 31, 2020. Under the lease accounted for as an operating lease, the Company paid $1.2 million in both fiscal 2018 and fiscal 2017. Under the terms of the lease agreement, the Company is responsible for property taxes and other operating costs with respect to the premises.

Sara Neblett, the wife of Josh Neblett, former CEO of etailz, was employed with the Company as the Vice President of Partner Care of etailz until January 2019. During fiscal 2018 and fiscal 2017, Ms. Neblett received $169,125 and $165,250, respectively, in regular cash compensation. In addition, during fiscal 2018, Ms. Neblett received approximately $1.0 million under the terms of the etailz acquisition agreement.

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. The average cost method attaches a cost to each item and is a blended average of the original purchase price and those of subsequent purchases or other cost adjustments throughout the life cycle of that item.

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.

Shrink expense, including obsolescence was $3.4 million and $5.4 million in fiscal 2018 and fiscal 2017, respectively. As a rate to net sales, this equaled 0.8% and 1.2% for fiscal 2018 and fiscal 2017, respectively.  

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 $0.4 million in both fiscal 2018 and fiscal 2017.

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

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

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.

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 reporting unit level.

During fiscal 2018 and fiscal 2017, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth quarter 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 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 2018 and fiscal 2017, resulting in the recording of asset impairment charges of $1.9 million and $29.1 million, respectively. Estimated fair values for fixed assets at these locations, including store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

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 FASB ASC 360, 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.

Recently Issued Accounting Pronouncements.

The information set forth above may be found under Notes to Consolidated Statements, Note 2, which is incorporated herein by reference.

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 13 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 2, 2019.

Changes in Controls and Procedures: As of February 2, 2019, there have been no changes in the Company’s internal controls over financial reporting that occurred during fiscal 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 9B. Other Information

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

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 28, 2019, which information is incorporated by reference.

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.

Item 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the information to be included in the Proxy Statement to be filed pursuant to Regulation 14A with the SEC on or about May 28, 2019, which information is incorporated by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Certain information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 28, 2019, which information is incorporated by reference.

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 2, 2019:

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this item is incorporated by reference from the information to be included in the Proxy Statement for our 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the SEC on or about May 28, 2019, which information is incorporated by reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated by reference from the information to be included in the Proxy Statement to be filed pursuant to Regulation 14A with the SEC on or about May 28, 2019, which information is incorporated by reference.

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

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.

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.

TRANS WORLD ENTERTAINMENT CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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 2, 2019 and February 3, 2018, 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 2, 2019, 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 2, 2019 and February 3, 2018, and the results of its operations and its cash flows for each of the fiscal years in the two-year period ended February 2, 2019, in conformity with U.S. generally accepted accounting principles.

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
May 14, 2019

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

See Accompanying Notes to Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share and share amounts)

See Accompanying Notes to Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

See Accompanying Notes to Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars and shares in thousands)

See Accompanying Notes to Consolidated Financial Statements.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

See Accompanying Notes to Consolidated Financial Statements.

Index to Notes to Consolidated Financial Statements

Note Number and Description

Note No.

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations: Trans World Entertainment Corporation and subsidiaries (“the Company”) operates in two reportable segments: fye and etailz. The fye segment is a specialty retailer of entertainment products, including trend, video, music, electronics and related products in the United States. The fye segment operates a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com. As of February 2, 2019, the fye segment operated 210 stores totaling approximately 1.2 million square feet in the United States, the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature, with the peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.

Liquidity: The Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs; and changes in our strategy or our planned activities.

The Company incurred net losses of $97.4 million and $42.6 million for the years ended February 2, 2019 and February 3, 2018, respectively, and has an accumulated deficit of $50.2 million at February 2, 2019. In addition, net cash used in operating activities for the year ended February 2, 2019 was $25.5 million.

A noted above, the Company experienced negative cash flows from operations during fiscal 2018 and 2017 and we expect to continue to incur net losses in the foreseeable future. We implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiency and conserving working capital needed to support the growth of our etailz segment (the “performance improvement plan”). As a result of the initiative, we expect that annual expenses will be reduced by $4.0 to $5.0 million.

At February 2, 2019, we had cash and cash equivalents of $4.4 million, net working capital of $65.9 million, and no outstanding borrowings on our revolving credit facility, as further discussed below. This compares to $31.3 million in cash and cash equivalents and net working capital of $92.8 million at February 3, 2018. We anticipate an improvement in cash flows from operations for fiscal year 2019.

In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company. During fiscal 2018, the Company exercised the right to increase its availability to $60 million subject to the same limitations noted above. The Company had $30 million available for borrowing under the Credit Facility as of February 2, 2019.

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of dividends to $5 million annually, and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment. On October 29, 2018, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company exceeding the permitted number of store closures and related inventory dispositions.

The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. As of February 2, 2019, the Company was compliant with all covenants. On May 3, 2019, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late delivery of the Annual Financial Statements.

In addition to the aforementioned current sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well continuing our efforts to generate additional sales and increase margins. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should we require such additional funds. If the Company is unable to improve its operations, it may be required to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely affected.

Furthermore, broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds, should we require such additional funds. Similarly, if our common stock is delisted from the NASDAQ Global Market, it may also limit our ability to raise additional funds.

The consolidated financial statements for the fiscal year ended February 2, 2019 were prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the etailz segment and the availability of future funding. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Basis of Presentation: The consolidated financial statements consist of Trans World Entertainment Corporation, its wholly-owned subsidiaries, Record Town, Inc. (“Record Town”), Record Town’s subsidiaries and etailz, Inc. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including those related to merchandise inventory and return costs; valuation of goodwill and long-lived assets, income taxes, accounting for gift card liabilities, retirement plan obligation, and other long-term liabilities that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Items Affecting Comparability: The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2018 and fiscal 2017 ended February 2, 2019 and February 3, 2018, respectively. Fiscal 2018 had 52 weeks and fiscal 2017 had 53 weeks.

Concentration of Business Risks: The fye segment purchases inventory from approximately 460 suppliers. In fiscal 2018, 37% of fye purchases were made from ten suppliers including Universal Studio Home

Entertainment, Paramount Video, Buena Vista Home Video, SONY Music, Twentieth Century Fox Home Entertainment, Warner/Elektra/Atlantic, Universal Music Group Distribution, Funko LLC, Warner Home Video, and Alliance Entertainment.

The etailz segment purchases various inventory from numerous suppliers. The segment does not have material long-term purchase contracts; rather, it purchases products from its suppliers on an order-by-order basis. 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.

etailz generates substantially all of its revenue through the Amazon Marketplace. Therefore, the segment depends in large part on its relationship with Amazon for its continued growth. In particular, the etailz segment depends on its ability to offer products on the Amazon Marketplace and on its timely delivery of products to customers.

During fiscal 2018, in response to the general decline in operating results, management implemented certain vendor remediation initiatives directed towards improving the segment’s performance, operations, and cash flow, including terminating unprofitable vendors and preparing for vendor negotiations, significant reduction in pay-in-advance terms, and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.

Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash: Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in Restricted Cash on the Company’s consolidated balance sheet.

Concentration of Credit Risks: The Company maintains centralized cash management and investment programs whereby excess cash balances are invested in short-term money market funds. The Company’s investments consist of short-term investment grade securities consistent with its investment guidelines. These guidelines include the provision that sufficient liquidity will be maintained to meet anticipated cash flow needs. The Company maintains these investments, all of which are classified as cash equivalents due to their short term nature, with Wells Fargo Securities, LLC. The Company limits the amount of credit exposure with any one financial institution and believes that no significant concentration of credit risk exists with respect to cash investments.

Accounts Receivable: Accounts receivable for the fye segment are primarily comprised of receivables due from commissions due from third parties. For the etailz segment, accounts receivable are comprised of receivables due from Amazon. There are no provisions for uncollectible amounts from retail sales of merchandise inventory since payment is received at the time of sale.

Merchandise Inventory and Return Costs: Merchandise inventory is stated at the lower of cost or net realizable value under the average cost method. Inventory valuation requires significant judgment and estimates, including obsolescence, shrink and any adjustments to net realizable value, if market value is lower than cost. 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 store 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 vendors for credit against other purchases from these vendors. Certain vendors reduce the credit with a 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 all merchandise return charges in cost of sales.

Fixed Assets and Depreciation: Fixed assets are recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method. The estimated useful lives are as follows:

Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs are expensed as incurred.

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

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

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.

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 reporting unit level.

During fiscal 2018 and fiscal 2017, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth quarter 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 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 2018 and fiscal 2017, resulting in the recording of asset impairment charges of $1.9 million and $29.1 million, respectively. Estimated fair values for fixed assets at these locations, including store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows

over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently applied.

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 FASB ASC 360, 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.

Conditional Asset Retirement Obligations: The Company records the fair value of an asset retirement obligation (“ARO”) as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the asset. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to its initial measurement, the ARO is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.

Commitments and Contingencies: 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 or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company.

Revenue Recognition:

Retail Sales

The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer (point of sale). Internet sales include shipping revenue and are recorded upon shipment to the customer. The Company records shipping and handling costs in cost of sales. Additionally, estimated sales returns are calculated based on expected returns.

Membership Fee Revenue

The Company recognizes membership fee revenue over the term of the membership, which is typically 12 months for the Company’s Platinum Backstage Pass membership, and 24 months for the Company’s Backstage Pass VIP membership. For the Company’s Platinum Backstage Pass program, the contractual term of the program is 12 months, in which revenue is recognized over that service period. For the Company’s Backstage Pass VIP program, the term of the program is indefinite until a customer cancels the membership. The Company estimates 24 months as the service period based on historical cancellation patterns and recognizes revenue over that service period. Membership in each program provides customers with merchandise discounts and exclusive member-only offers. Total membership fees related to the loyalty programs collected in advance, net of estimated refunds, were as follows: cash received from customers during fiscal 2018 and 2017 was $13.7 million and $16.9 million, respectively. Membership fee revenue recognized was $15.0 million and $17.9 million during fiscal 2018 and 2017, respectively, and recognized on a straight-line basis over the service period. The remaining performance obligation associated with the membership programs was $4.8 million and $6.1 million as of the end of fiscal 2018 and fiscal 2017, respectively. Membership fee revenue is included in Net Sales in the Company’s Consolidated Statements of Operations.

Deferred membership revenue is included in Deferred Revenue in the Company’s Consolidated Balance Sheets.

Other Revenue

The Company recognizes revenue related to commissions earned from third parties. The Company assesses the principal versus agent considerations depending on control of the good or service before it is transferred to the customer. As the Company is the agent and does not have control of the specified good or service, the Company recognizes the fee or commission to which the Company expects to be entitled for the agency service. Commissions earned from third parties were $5.0 million and $5.3 million during fiscal 2018 and fiscal 2017, respectively, and are included in Other Revenue in the Company’s Consolidated Statements of Operations.

Gift Cards

The Company offers gift cards for sale, which is included in deferred revenue in the Consolidated Balance Sheets. When gift cards are redeemed at the store level, revenue is recorded and the related liability is reduced. Breakage is estimated based on proportion to the pattern of rights exercised by the customer. The Company has the ability to reasonably and reliably estimate the gift card liability based on historical experience with redemption rates associated with a large volume of homogeneous transactions. The Company issued $1.9 million and $2.8 million in gift cards for fiscal 2018 and fiscal 2017, respectively. The Company recognized in revenue for redeemed gift cards of $1.9 million and $2.8 million for fiscal 2018 and fiscal 2017, respectively. The Company recorded breakage on its gift cards for fiscal 2018 and fiscal 2017 in the amount of $0.2 million and $0.4 million, respectively. Gift card breakage is recorded as Other Revenue in the Company’s Consolidated Statements of Operations. The remaining performance obligation associated with our gift cards was $2.0 million and $2.2 million as of the end of fiscal 2018 and fiscal 2017, respectively.

Cost of Sales: In addition to the cost of product, the Company includes in cost of sales those costs associated with purchasing, receiving, shipping, online marketplace fulfillment fees, inspecting and warehousing product, and depreciation related to distribution operations. Also included are costs associated with the return of product to vendors. Cost of sales further includes the cost of inventory shrink losses and obsolescence and the benefit of vendor allowances and discounts.

Selling, General and Administrative Expenses: Included in SG&A expenses are payroll and related costs, store operating costs, occupancy charges, Amazon fees, professional and service fees, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations). Selling, general and administrative expenses also include fixed asset write offs associated with store closures, if any, and miscellaneous income and expense items, other than interest. 

Advertising Costs and Vendor Allowances: The fye segment often receives allowances from its vendors to fund in-store displays, print and radio advertising, and other promotional events. Vendor advertising allowances which exceed specific, incremental and identifiable costs incurred in relation to the advertising and promotions offered by the Company to its vendors are classified as a reduction in the purchase price of merchandise inventory. Accordingly, advertising and sales promotion costs are charged to operations, offset by direct vendor reimbursements, as incurred. Total advertising expense, excluding vendor allowances, was $2.2 million and $3.1 million in fiscal 2018 and fiscal 2017, respectively. In the aggregate, vendor allowances supporting the fye segment’s advertising and promotion are included as a reduction of SG&A expenses, and reimbursements of such costs were $2.1 million and $2.8 million in fiscal 2018 and 2017, respectively. Advertising costs for the etailz segment primarily consist of Amazon marketing expenses which were $1.7 million and $1.2 million in fiscal 2018 and fiscal 2017, respectively.

Lease Accounting: The Company’s calculation of straight-line rent expense includes the impact of escalating rents for the lease period and includes any period during which the Company is not obligated to pay rent while the store is being constructed (“rent holiday”). The Company accounts for step rent provisions, escalation clauses and other lease concessions by recognizing these amounts on a straight line basis over the initial lease term. The Company capitalizes leasehold improvements funded by tenant improvement allowances, depreciating them over the term of the related leases. The tenant improvement allowances are recorded as deferred rent within other long-term liabilities in the Consolidated Balance Sheets and are amortized as a reduction in rent expense over the life of the related leases.

Store Closing Costs: Management periodically considers the closing of underperforming stores. In the event of a store closing, reserves are established at the time a liability is incurred for the present value of any remaining lease obligations, net of estimated sublease income, and other exit costs. Store closings are not considered discontinued operations and as such, closings do not represent a significant change on the Company’s operations and financial results.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense (benefit) in the Consolidated Statements of Operations.

Stock-Based Compensation: Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The Company measures stock-based compensation cost at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis (net of estimated forfeitures) over the option’s requisite service period. The Company recognizes compensation expense based on estimated grant date fair value using the Black-Scholes option-pricing model. Tax benefits, if any, resulting from tax deductions in excess of the compensation cost recognized for those options are to be classified and reported as both an operating cash outflow and financing cash inflow.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and a pension actuarial income (loss) adjustment that is recognized in other comprehensive income (loss) (see Note 9).

Income (Loss) Per Share: Basic and diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding for the period. During fiscal 2018 and fiscal 2017, the impact of all outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share for fiscal 2018 and fiscal 2017 was the same. Total anti-dilutive stock awards for fiscal 2018 was approximately 2.9 million shares as compared to 2.6 million shares for fiscal 2017.

Fair Value of Financial Instruments: Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:

The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying value of life insurance policies included in other assets approximates fair value based on estimates received from insurance companies and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards. The Company had no Level 3 financial assets or liabilities at February 2, 2019 or at February 3, 2018.

Recently Adopted Accounting Pronouncements

In June 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. On February 4, 2018, the Company adopted Topic 606 using the modified retrospective approach. The new standard states that revenue is recognized when performance obligations are satisfied by transferring goods or services to the customer in an amount that the entity expects to collect in exchange for those goods or services. The satisfaction of a performance obligation with a single customer may occur at a point in time or may occur over time. The significant majority of the Company’s revenue is recognized at a point in time, generally when a customer purchases and takes possession of merchandise through the stores or when merchandise purchased through our e-commerce websites is shipped to a customer. Revenues do not include sales taxes or other taxes collected from customers. The Company has arrangements with customers where the performance obligations are satisfied over time, which primarily relate to the loyalty programs and gift card liabilities. The adoption of Topic 606 impacted the timing of revenue recognition for gift card breakage. Prior to adoption of Topic 606, gift card breakage was recognized at the point gift card redemption became remote. In accordance with the Topic 606, the Company recognizes gift card breakage in proportion to the pattern of rights exercised by the customer. The adoption of Topic 606 also impacted the presentation of the Consolidated Balance Sheets related to sales return reserves to be recorded on a gross basis, consisting of a separate right of return asset and liability. The Company’s evaluation of Topic 606 included a review of certain third-party arrangements to determine whether the Company acts as principal or agent in such arrangements, and such evaluation did not result in any material changes in gross versus net presentation as a result of the adoption of the new standard. The cumulative effect of initially applying Topic 606 was a $0.3 million increase to the opening balance of inventory, a $0.3 million increase to the opening balance of accrued expenses and other liabilities, a $0.5 million increase to the opening balance of deferred revenue, and a $0.5 million decrease to the opening balance of retained earnings as of February 4, 2018. The comparative prior period information continues to be reported under the accounting standards in effect during those periods.

Segment Information: The Company operates in two reportable segments: fye and etailz. Operating earnings (loss) by operating segment, is defined as income (loss) from operations, net interest expense, other income, and income taxes. Total Revenue, Gross Profit, and Loss From Operations by reportable segment in U.S. dollars were as follows:

Note 2. Recently Issued Accounting Pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term

longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for on February 3, 2019 with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company will adopt the new standard on February 3, 2019 and use the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before February 3, 2019.

The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits management not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. Management does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

The Company expects that this standard will have a material effect on its consolidated financial statements. While the Company continues to assess all of the effects of adoption, management currently believes the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on the consolidated balance sheet for the retail stores, distribution centers, home office operating leases; and; (2) providing significant new disclosures about our leasing activities.

The new standard also provides practical expedients for an entity’s ongoing accounting. Management currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition, which represents approximately 158 retail stores, or 75%, of the total number of retail stores in operation at February 3, 2019. Management also currently expects to elect the practical expedient to not separate lease and non-lease components for all of its leases.

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 does not expect that this standard will have a material effect on its consolidated financial statements.

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. The Company does not expect that this standard will have a material effect on its consolidated financial statements.

Note 3. Goodwill and Other Intangible Assets

Goodwill is not amortized, but is evaluated 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 the etailz acquisition.

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.

During fiscal 2018, the Company concluded, based on continued operating losses for the etailz segment driven by lower than expected operating results culminating in the fourth quarter of fiscal 2018 that a triggering event had occurred, and an evaluation of intangible assets for impairment was required. Intangible assets related to technology and vendor relationships were written down to their estimated fair value at the end of fiscal 2018 resulting in the recognition of asset impairment charges of $16.4 million. As a result of the annual goodwill impairment review, it was determined that the goodwill balance was fully impaired, and the Company recognized an impairment loss of $39.2 million.

The Company continues to amortize certain vendor relationships, technology, and trade names and trademarks that have finite lives.

Identifiable intangible assets as of February 2, 2019 consisted of the following:

The changes in net intangibles and goodwill from February 3, 2018 to February 2, 2019 were as follows:

Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows (amounts in thousands):

Note 4. Fixed Assets

Fixed assets consist of the following:

Depreciation of fixed assets is included in the Consolidated Statements of Operations as follows:

Depreciation expense related to the Company’s distribution center facility and related equipment is included in cost of sales. All other depreciation of fixed assets is included in SG&A expenses. As noted within Footnote 1, the Company recorded $4.1 million and $29.1 million in fixed asset impairment during fiscal 2018 and fiscal 2017, respectively.

Note 5. Restricted Cash

As of February 2, 2019 and February 3, 2018, the Company had restricted cash of $9.9 million and $12.2 million, respectively.

Restricted cash balance at the end of fiscal 2018 consisted of $3.2 million related to the earn-out amount that could be paid to the selling shareholders of etailz in accordance with the share purchase agreement created during the acquisition of etailz in fiscal 2016; and a $6.7 million rabbi trust, that resulted from the death of the Company’s former Chairman, of which $1.0 million was classified as restricted cash in current assets and $5.7 million was classified as restricted cash as a long-term asset.

Restricted cash balance at the end of fiscal 2017 consisted of $1.5 million held to satisfy any indemnification claims within 18 months from the date of etailz acquisition; $3.2 million earn-out amount that could be paid to the selling shareholders of etailz in accordance with the share purchase agreement resulted from the etailz acquisition; and a $7.5 million rabbi trust, that resulted from the death of the Company’s former Chairman.

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

Subsequent to the close of fiscal 2018, during the first quarter of fiscal 2019, the $3.2 million earn-out escrow balance was returned to the Company as a result of the etailz segment not achieving the earnings target, as described in the etailz share purchase agreement.

Note 6. Credit Facility

In January 2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company. During fiscal 2018, the Company exercised the right to increase its availability to $60 million subject to the same limitations noted above.

The Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment. On October 29, 2018, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company to exceed the permitted number of store closures and related inventory dispositions.

The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. As of February 2, 2019, the Company was compliant with all covenants. On May 3, 2019, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late delivery of the Annual Financial Statements.

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on unused commitments.

As of February 2, 2019 and as of February 3, 2018, the Company did not have any borrowings under the Credit Facility. Peak borrowings under the Credit Facility during fiscal 2018 and fiscal 2017 were $35.7 million and $11.7 million, respectively. As of February 2, 2019 and February 3, 2018, the Company had no outstanding letters of credit. The Company had $30 million and $41 million available for borrowing under the Credit Facility as of February 2, 2019 and February 3, 2018, respectively.

Note 7. Leases

The Company conducts all of its operations from leased premises that include retail stores, distribution centers, and administrative offices. At February 2, 2019, the Company leased 210 stores under operating leases, many of which contain renewal options and escalation clauses, for periods ranging from one to ten years. Most store leases also provide for payment of operating expenses and real estate taxes. Some also provide for contingent rent based on percentage of sales over a certain sales volume. During fiscal 2018 and fiscal 2017, the Company recorded minimum rentals of $21.7 million and $25.0 million, respectively, and did not record any contingent rentals. In addition, the Company currently leases 2 distribution centers and 2 administrative offices.

Future minimum rental payments required under all leases that have initial or remaining non-cancelable lease terms at February 2, 2019, are as follows (amounts in thousands):

In addition to the obligations in the table above, a number of the Company’s stores have leases which have rent payments based on the store’s sales volume in lieu of fixed minimum rent payments. During fiscal 2018 and fiscal 2017, minimum rent payments based on a store’s sales volume were $0.5 million and $0.6 million, respectively.

Note 8. Shareholders’ Equity

The Company classifies repurchased shares as treasury stock on the Company’s Consolidated Balance Sheet. During 2013, the Company’s Board of Directors authorized a share repurchase program. There were no treasury stock repurchases under the share repurchase program during fiscal 2018 and fiscal 2017. As of February 2, 2019, the Company has approximately $12.2 million available for future purchases under its share repurchase program.

No cash dividends were paid in fiscal 2018 and fiscal 2017. The Company’s Credit Facility contains certain restrictions related to the payment of cash dividends, including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment.

Note 9. Benefit Plans

401(k) Savings Plan

Each segment of the Company offers a 401(k) Savings Plan to eligible employees meeting certain age and service requirements.

The fye segment offers a 401(k) plan which permits participants to contribute up to 80% of their salary, including bonuses, up to the maximum allowable by IRS regulations. The Company matches 50% of the first 6% of employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of four years of service. As of February 3, 2019, the fye segment suspended its matching contribution in response to one of the Company’s cost-cutting initiatives.

The etailz segment offers a 401(k) plan which permits participants to contribute up to the maximum allowable by IRS regulations. The Company matches 100% of the first 6% of employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of three years of service. All participant forfeitures of non-vested benefits are used to reduce the Company’s contributions or fees in future years.

Total expense related to the fye segment’s matching contributions was approximately $340,000 and $301,000 in fiscal 2018 and fiscal 2017, respectively. Total expense related to the etailz segment’s matching contributions was approximately $297,000 and $224,000 in fiscal 2018 and fiscal 2017, respectively.

Stock Award Plans

As of February 2, 2019, there was approximately $0.6 million of unrecognized compensation cost related to stock option awards comprised of the following: $0.5 million was related to stock option awards listed in the table below and expected to be recognized as expense over a weighted average period of 1.4 years and $0.1 million was related to restricted stock option awards expected to be recognized as expense over a weighted average period of 3.7 years.

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

Equity awards authorized for issuance under the New Plan total 5.0 million. As of February 2, 2019, of the awards authorized for issuance under the Stock Award Plans, 2.8 million were granted and are outstanding, 1.9 million of which were vested and exercisable. Shares available for future grants of options and other share based awards under the New Plan at February 2, 2019 were 4.4 million.

The fair values of the options granted have been estimated at the date of grant using the Black - Scholes option pricing model with the following assumptions:

The following table summarizes information about stock options outstanding under the Company’s Stock Award Plans as of February 2, 2019:

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value based on the Company’s closing common stock price of $0.59 as of February 2, 2019, which would have been received by the award holders had all award holders under the Stock Award Plans exercised their awards as of that date.

The following table summarizes stock option activity under the Stock Award Plans: