NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Description of the Company and Basis of Presentation
Tillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 238 stores, in 33 states as of May 1, 2021. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.
The Tillys concept began in 1982, when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984, the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.
The consolidated financial statements include the accounts of Tilly's Inc. and WOJT. All intercompany accounts and transactions have been eliminated in consolidation.
As used in these Notes to the Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "World of Jeans and Tops", "WOJT", "we", "our", "us" and "Tillys" refer to WOJT before our initial public offering, and to Tilly's, Inc. and its subsidiary after our initial public offering.
We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q as is permitted by SEC rules and regulations.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the thirteen week periods ended May 1, 2021 are not necessarily indicative of results to be expected for the full fiscal year, especially in light of the favorable circumstances surrounding federal stimulus checks and atypical back-to-school timing that occurred during the first quarter of fiscal 2021. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 ("fiscal 2020").
Fiscal Periods
Our fiscal year ends on the Saturday closest to January 31. References to fiscal 2021 refer to the fiscal year ending January 29,
2022. References to the fiscal quarter or first three months ended May 1, 2021 and May 2, 2020 refer to the thirteen week periods ended as of those dates, respectively.
Impact of the COVID-19 Pandemic on our Business
As of the date of filing this Quarterly Report on Form 10-Q (this "Report"), there remain many uncertainties regarding the ongoing COVID-19 pandemic (the "pandemic"), including the anticipated duration and severity of the pandemic, particularly in light of ongoing vaccination efforts and emerging variant strains of the virus. To date, the pandemic has had far-reaching impacts on many aspects of the operations of the Company, directly and indirectly, including on consumer behavior, store traffic, operational capabilities and our operations generally, timing of deliveries, demands on our information technology and e-commerce capabilities, inventory and expense management, managing our workforce, our storefront configurations and operations upon reopening, and our people, which have materially disrupted our business and the market generally. The scope and nature of these impacts continue to evolve. While the scope and severity of the adverse impacts of the pandemic have shown signs of reduction in recent months, the pandemic resulted in, and may in the future result in, regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, had, and may in the future continue to have, material adverse impacts on our business, financial condition and results of
operations. This situation is continually evolving, and additional impacts may arise that we are not aware of currently, or current impacts may become magnified.
Note 2: Summary of Significant Accounting Policies
Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
Revenue Recognition
Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Operations.
The following table summarizes net sales from our retail stores and e-commerce (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
|
|
|
Retail stores
|
$
|
127,675
|
|
|
$
|
46,953
|
|
|
|
|
|
E-commerce
|
35,482
|
|
|
30,336
|
|
|
|
|
|
Total net sales
|
$
|
163,157
|
|
|
$
|
77,289
|
|
|
|
|
|
The following table summarizes the percentage of net sales by department:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
|
|
|
Mens
|
36
|
%
|
|
34
|
%
|
|
|
|
|
Womens
|
29
|
%
|
|
27
|
%
|
|
|
|
|
Accessories
|
14
|
%
|
|
15
|
%
|
|
|
|
|
Footwear
|
12
|
%
|
|
14
|
%
|
|
|
|
|
Boys
|
4
|
%
|
|
5
|
%
|
|
|
|
|
Girls
|
4
|
%
|
|
5
|
%
|
|
|
|
|
Outdoor
|
1
|
%
|
|
—
|
%
|
|
|
|
|
Total net sales
|
100
|
%
|
|
100
|
%
|
|
|
|
|
The following table summarizes the percentage of net sales by third-party and proprietary branded merchandise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
|
|
|
Third-party
|
71
|
%
|
|
75
|
%
|
|
|
|
|
Proprietary
|
29
|
%
|
|
25
|
%
|
|
|
|
|
Total net sales
|
100
|
%
|
|
100
|
%
|
|
|
|
|
We accrue for estimated sales returns by customers based on historical sales return results. As of May 1, 2021, January 30, 2021 and May 2, 2020, our reserve for sales returns was $2.2 million, $1.4 million and $1.7 million, respectively.
We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. The customer liability balance was $8.4 million, $9.6 million and $8.1 million as of May 1, 2021, January 30, 2021 and May 2, 2020, respectively, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift
card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Revenue recognized from gift cards was $3.8 million and $2.7 million for the thirteen week periods ended May 1, 2021 and May 2, 2020, respectively. For the thirteen weeks ended May 1, 2021 and May 2, 2020, the opening gift card balance was $9.6 million and $9.3 million, respectively, of which $2.3 million and $1.9 million respectively, was recognized as revenue during the period.
We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns an award that may be used towards the purchase of merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. Our loyalty program allows customers to redeem their awards instantly or build up to additional awards over time. We currently expire unredeemed awards and accumulated partial points 365 days after the last purchase activity. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was $4.5 million, $3.9 million and $2.6 million as of May 1, 2021, January 30, 2021 and May 2, 2020, respectively. The value of points redeemed through our loyalty program was $2.1 million and $0.9 million for the thirteen week periods ended May 1, 2021 and May 2, 2020, respectively. For the thirteen weeks ended May 1, 2021 and May 2, 2020, the opening loyalty program balance was $3.9 million and $2.4 million, respectively, of which $0.9 million and less than $0.1 million, respectively, was recognized as revenue during the period.
Leases
We conduct all of our retail sales and corporate operations in leased facilities. Lease terms for our stores are generally for ten years (subject to elective extensions) and provide for escalations in base rents. Many of our store leases contain one or more options to renew the lease at our sole discretion. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised.
Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. Certain leases provide for additional rent based on a percentage of sales and annual rent increases generally based upon the Consumer Price Index. In addition, most of our store leases are net leases, which typically require us to be responsible for certain property operating expenses, including property taxes, insurance, common area maintenance, in addition to base rent. Many of our store leases contain certain co-tenancy provisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.
In response to stores being closed to the public as a result of the COVID-19 pandemic, we elected to withhold payment of our contractual lease obligations with respect to certain stores for the periods we were unable to operate such stores. We have substantially completed negotiating COVID-19 related lease concessions for most of our stores, with less than 10 stores and $0.8 million of withheld rents remaining unresolved as of May 1, 2021. These agreements have generally resulted in a combination of rent abatements and/or rent deferrals. With respect to all of our stores, we continue to have ongoing conversations with our landlords generally regarding what we believe to be commercially reasonable lease concessions given the current environment. We have considered the Financial Accounting Standards Board's (“FASB”) recent guidance regarding COVID-19 lease concessions and have elected to account for the lease concessions that have been granted as lease modifications.
We lease approximately 172,000 square feet of office and warehouse space (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. Our lease began in January 1, 2003 and terminates on December 31, 2027. During each of the thirteen week periods ended May 1, 2021 and May 2, 2020, we incurred rent expense of $0.5 million related to this lease.
We lease approximately 26,000 square feet of office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. During each of the thirteen week periods ended May 1, 2021, and May 2, 2020, we incurred rent expense of $0.1 million related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease began on June 29, 2012 and terminates on June 30, 2022.
We lease approximately 81,000 square feet of office and warehouse space (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commerce distribution center. During each of the thirteen week periods ended May 1, 2021 and May 2, 2020, we incurred rent expense of $0.2 million related to this lease. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, with the adjustment not to be below 3% nor exceed 7% in any one annual increase. The lease began on November 1, 2011 and terminates on October 31, 2021. We are in the process of renegotiating this lease.
The maturity of operating lease liabilities as of May 1, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Related Party
|
Other
|
Total
|
2021
|
$
|
2,297
|
|
$
|
49,874
|
|
$
|
52,171
|
|
2022
|
2,246
|
|
61,829
|
|
64,075
|
|
2023
|
2,168
|
|
51,111
|
|
53,279
|
|
2024
|
2,233
|
|
40,218
|
|
42,451
|
|
2025
|
2,300
|
|
30,968
|
|
33,268
|
|
Thereafter
|
4,393
|
|
58,919
|
|
63,312
|
|
Total minimum lease payments
|
15,637
|
|
292,919
|
|
308,556
|
|
Less: Amount representing interest
|
1,954
|
|
49,342
|
|
51,296
|
|
Present value of operating lease liabilities
|
$
|
13,683
|
|
$
|
243,577
|
|
$
|
257,260
|
|
As of May 1, 2021, additional operating lease contracts that have not yet commenced are approximately $1.2 million. Further, additional operating lease contract modifications executed subsequent to the balance sheet date, but prior to the report date, are approximately $3.8 million.
Lease expense for the thirteen week periods ended May 1, 2021 and May 2, 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
May 1, 2021
|
|
Thirteen Weeks Ended
May 2, 2020
|
|
|
Cost of goods sold
|
|
SG&A
|
|
Total
|
|
Cost of goods sold
|
|
SG&A
|
|
Total
|
Fixed operating lease expense
|
|
$
|
15,217
|
|
|
$
|
410
|
|
|
$
|
15,627
|
|
|
$
|
15,514
|
|
|
$
|
401
|
|
|
$
|
15,915
|
|
Variable lease expense (credit)
|
|
3,899
|
|
|
(11)
|
|
|
3,888
|
|
|
3,819
|
|
|
22
|
|
|
3,841
|
|
Total lease expense
|
|
$
|
19,116
|
|
|
$
|
399
|
|
|
$
|
19,515
|
|
|
$
|
19,333
|
|
|
$
|
423
|
|
|
$
|
19,756
|
|
Supplemental lease information for the thirteen weeks ended May 1, 2021 and May 2, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
May 1, 2021
|
Thirteen Weeks Ended
May 2, 2020
|
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)
|
$17,168
|
$5,615
|
Weighted average remaining lease term (in years)
|
5.6 years
|
6.0 years
|
Weighted average interest rate (1)
|
6.49%
|
4.01%
|
(1) Since our leases do not provide an implicit rate, we used our incremental borrowing rate ("IBR") on date of adoption, at lease inception, or lease modification in determining the present value of future minimum payments.
Income Taxes
Our income tax expense was $3.8 million, or 25.7% of pre-tax income, compared to income tax benefit of $(10.6) million, or 37.9% of pre-tax loss, for the thirteen weeks ended May 1, 2021 and May 2, 2020, respectively. The decrease in the effective income tax rate is primarily due to the benefit realized during the prior year from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted on March 27, 2020, which provides for net operating losses in fiscal 2020 to be carried back to earlier tax years which were subject to higher income tax rates than fiscal 2020.
New Accounting Standards Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2016-13 will become effective for us in the first quarter of fiscal 2023, with early adoption permitted and must be adopted using the modified retrospective method. We expect the new rules to apply to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which enhances and simplifies various aspects of income tax accounting guidance. The guidance is effective for annual periods
after December 15, 2020. The Company adopted ASU 2019-12 in the first quarter of fiscal 2021. The impact this guidance has on our consolidated financial statements and related disclosures is immaterial.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.
Note 3: Marketable Securities
Marketable securities as of May 1, 2021 consisted of commercial paper, classified as available-for-sale, and fixed income securities, classified as held-to-maturity as we have the intent and ability to hold them to maturity. Our investments in commercial paper and fixed income securities are recorded at fair value and amortized cost, respectively, which approximates fair value. All of our marketable securities are less than one year from maturity.
The following table summarizes our investments in marketable securities at May 1, 2021, January 30, 2021 and May 2, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2021
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Holding Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Estimated
Fair Value
|
Commercial paper
|
$
|
69,938
|
|
|
$
|
32
|
|
|
$
|
(1)
|
|
|
$
|
69,969
|
|
Fixed income securities
|
6,664
|
|
|
—
|
|
|
—
|
|
|
6,664
|
|
Total marketable securities
|
$
|
76,602
|
|
|
$
|
32
|
|
|
$
|
(1)
|
|
|
$
|
76,633
|
|
|
|
|
|
|
|
|
|
|
January 30, 2021
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Holding Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Estimated
Fair Value
|
Commercial paper
|
$
|
64,928
|
|
|
$
|
28
|
|
|
$
|
(1)
|
|
|
$
|
64,955
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
$
|
64,928
|
|
|
$
|
28
|
|
|
$
|
(1)
|
|
|
$
|
64,955
|
|
|
|
|
|
|
|
|
|
|
May 2, 2020
|
|
Cost or
Amortized Cost
|
|
Gross Unrealized
Holding Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Estimated
Fair Value
|
Commercial paper
|
$
|
34,698
|
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
34,973
|
|
Fixed income securities
|
11,008
|
|
|
—
|
|
|
—
|
|
|
11,008
|
|
Total marketable securities
|
$
|
45,706
|
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
45,981
|
|
We recognized gains on investments for commercial paper that matured during the thirteen week periods ended May 1, 2021 and May 2, 2020. Upon recognition of the gains, we reclassified these amounts out of Accumulated Other Comprehensive Income and into “Other income, net” on the Consolidated Statements of Operations.
The following table summarizes our gains on investments for commercial paper (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
|
|
|
Gains on investments
|
$
|
29
|
|
|
$
|
252
|
|
|
|
|
|
Note 4: Asset-Backed Credit Facility
On November 9, 2020 (the “Closing Date”), we entered into an asset-backed credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association ("Bank"), as lender, administrative agent and collateral agent (the “Agent”). The Credit Agreement replaced our then-existing amended and restated credit agreement (the “Prior Credit Agreement”), dated as of May 3, 2012, as amended, with the Agent.
The Credit Agreement provides for an asset-based, senior secured revolving credit facility of up to $65.0 million consisting of revolving loans, letters of credit and swing line loans provided by lenders, with a sub limit on credit outstanding at any time of $10.0 million and a sub limit for swing line loans of $7.5 million. The Credit Agreement also includes an uncommitted accordion feature whereby we may increase the revolving commitment by an aggregate amount not to exceed $12.5 million, subject to certain conditions. The revolving facility matures on November 9, 2023. The payment and performance in full of the secured obligations under the revolving facility are secured by a lien on and security interest in all of the assets of our Company.
The maximum borrowings permitted under the revolving facility is equal to the lesser of (x) the revolving commitment and (y) the borrowing base. The borrowing base is equal to (a) 90% of the borrower's eligible credit card receivables, plus (b) 90% of the cost of the borrower's eligible inventory, less inventory reserves established by the Agent, and adjusted by the appraised value of such eligible inventory, plus (c) 90% of the cost of the borrower's eligible in-transit inventory, less inventory reserves established by the Agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the Agent. As of the Closing Date, we were eligible to borrow up to a total of $40.1 million under the revolving facility. As of the Closing Date, we had no outstanding borrowings under the Credit Agreement and the only utilization of the letters of credit sub limit under the Credit Agreement was a $2.0 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on the Closing Date to the Credit Agreement.
The unused portion of the revolving commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. Borrowings under the revolving facility bear interest at a rate per annum that ranges from the LIBOR rate plus 2.0% to the LIBOR rate plus 2.25%, or the base rate plus 1.0% to the base rate plus 1.25%, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. We may elect to apply either the LIBOR rate or base rate interest to borrowings at our discretion, other than in the case of swing line loans, to which the base rate shall apply.
Under the Credit Agreement, we are subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the Closing Date, we are prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the Closing Date, we are allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto and certain minimum availability and minimum projected availability tests are satisfied.
In connection with the entry into the Credit Agreement, on November 9, 2020, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Agent, and (ii) a guaranty by us in favor of the Agent. The security agreement and the guaranty replaced (i) the general pledge agreement, dated as of May 3, 2012, by us in favor of the bank, (ii) the continuing guaranty by us in favor of the Agent, dated May 3, 2012, and (iii) the amended and restated security agreement with respect to equipment and the amended and restated security agreement with respect to rights to payment and inventory, in each case, dated as of May 3, 2012.
As of May 1, 2021, we were in compliance with all of our covenants, were eligible to borrow up to a total of $48.5 million, and had no outstanding borrowings under the Credit Agreement.
The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. No borrowings were outstanding under the Prior Credit Agreement as of the Closing Date. The interest rate charged on borrowings under the Prior Credit Agreement was selected at our discretion at the time of draw between LIBOR plus 0.75%, or at the Bank’s prime rate. The Prior Credit Agreement was secured by substantially all of our assets. In March 2020, we borrowed $23.7 million under our Prior Credit Agreement, which represented the maximum borrowings permitted thereunder, and which were subsequently repaid in September 2020.
Note 5: Commitments and Contingencies
From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.
Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. 30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act ("PAGA") against us seeking penalties on behalf of himself and other similarly situated employees for the same alleged violations of California's wage and hour laws. We requested the plaintiff to dismiss the class action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. In June 2018, the plaintiff's class action complaint was dismissed. The parties mediated the PAGA case with a well-respected mediator in March 2020. Although the case did not settle at the mediation, the parties have agreed to continue their settlement discussions with the assistance of the mediator. The court has not yet issued a trial date. By agreement between co-defendant BaronHR and Tilly's, BaronHR is required to indemnify us for all of our losses and expenses incurred in connection with this matter. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.
Skylar Ward, on behalf of herself and all others similarly situated, v. Tilly’s, Inc., Superior Court of California, County of Los Angeles, Case No. BC595405. In September 2015, the plaintiff filed a putative class action lawsuit against us alleging, among other things, various violations of California's wage and hour laws. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, and attorneys' fees. In June 2016, the court granted our demurrer to the plaintiff's complaint on the grounds that the plaintiff failed to state a cause of action against us and dismissed the complaint. Specifically, the court agreed with us that the plaintiff's cause of action for reporting-time pay fails as a matter of law as the plaintiff and other putative class members did not "report for work" with respect to certain shifts on which the plaintiff's claims are based. In November 2016, the court entered a written order sustaining our demurrer to the plaintiff's complaint and dismissing all of plaintiff’s causes of action with prejudice. In January 2017, the plaintiff filed an appeal of the order to the California Court of Appeal. In February 2019, the Court of Appeal issued an opinion overturning the trial court’s decision, holding that the plaintiff’s allegations stated a claim. In March 2019, we filed a petition for review with the California Supreme Court seeking its discretionary review of the Court of Appeal’s decision. The California Supreme Court declined to review the Court of Appeal’s decision. Since the case was remanded back to the trial court, the parties have been engaged in discovery. In March 2020, the plaintiff filed a motion for class certification. In July 2020, we filed our opposition to the motion for class certification. In September 2020, the plaintiff filed her reply brief in support of the motion for class certification. In October 2020, the court denied plaintiff's motion for class certification. In December 2020, the plaintiff filed a notice of appeal of the court's order denying her motion for class certification. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to the verdict.
Note 6: Fair Value Measurements
We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:
•Level 1 – Quoted prices in active markets for identical assets and liabilities.
•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 – Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale, and certain cash equivalents, specifically money market securities, and commercial paper. The money
market accounts are valued based on quoted market prices in active markets. The marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party entities.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for impairment using Company specific assumptions which would fall within Level 3 of the fair value hierarchy.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During the thirteen week periods ended May 1, 2021 and May 2, 2020, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, as of May 1, 2021, January 30, 2021 and May 2, 2020, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Financial Assets
We have categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):
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May 1, 2021
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January 30, 2021
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May 2, 2020
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Level 1
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Level 2
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Level 3
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Level 1
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Level 2
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Level 3
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Level 1
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Level 2
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Level 3
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Cash equivalents (1):
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Money market securities
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$
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70,477
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$
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—
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$
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—
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$
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67,115
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$
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—
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$
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—
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$
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62,906
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$
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—
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$
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—
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Marketable securities:
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Commercial paper
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$
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—
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$
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69,969
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$
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—
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$
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—
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$
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64,955
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$
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—
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$
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—
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$
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34,973
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$
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—
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(1) Excluding cash.
Impairment of Long-Lived Assets
An impairment is recorded on a long-lived asset used in operations whenever events or changes in circumstances indicate that the net carrying amounts for such asset may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets, a decision to relocate or permanently close a store, or significant changes in our business strategies.
An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates our weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures, computer hardware and software, and operating lease assets, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.
On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. During the thirteen weeks ended May 1, 2021, based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that none of our stores would not be able to generate sufficient cash flows over the remaining term of the related lease to recover our investment in the respective store. As a result, we recorded no impairment charges to write-down the carrying value of certain long-lived store assets to their estimated fair values.
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Thirteen Weeks Ended
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May 1,
2021
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May 2,
2020
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($ in thousands)
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Carrying value of assets with impairment
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*
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$536
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Fair value of assets impaired
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*
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$203
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Number of stores tested for impairment
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9
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12
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Number of stores with impairment
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—
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5
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* Not applicable
Note 7: Share-Based Compensation
The Tilly's, Inc. 2012 Second Amended and Restated Equity and Incentive Plan, as amended in June 2020 (the "2012 Plan"), authorizes up to 6,613,900 shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of May 1, 2021, there were 2,305,536 shares available for future issuance under the 2012 Plan.
Stock Options
We grant stock options to certain employees that give them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The non qualified options vest at a rate of 25% on each of the first four anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire ten years from the date of grant.
The following table summarizes the stock option activity for the thirteen weeks ended May 1, 2021 (aggregate intrinsic value in thousands):
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Stock
Options
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Grant Date
Weighted
Average
Exercise Price
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Weighted
Average
Remaining
Contractual
Life (in Years)
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Aggregate
Intrinsic
Value (1)
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Outstanding at January 31, 2021
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2,602,212
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$
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8.19
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Granted
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503,700
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$
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10.74
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Exercised
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(359,907)
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$
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7.37
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Forfeited
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(246,718)
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$
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9.33
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Expired
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(32,000)
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$
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16.26
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Outstanding at May 1, 2021
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2,467,287
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$
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8.61
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7.2
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$
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9,019
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Exercisable at May 1, 2021
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1,272,206
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$
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9.00
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5.3
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$
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4,453
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(1)Intrinsic value for stock options is defined as the difference between the market price of our Class A common stock on the last business day of the fiscal period and the weighted average exercise price of in-the-money stock options outstanding at the end of the fiscal period. The market value per share was $12.06 at May 1, 2021.
The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We account for forfeitures as they occur. We will issue shares of Class A common stock when the options are exercised.
The fair values of stock options granted during the thirteen weeks ended May 1, 2021 and May 2, 2020 were estimated on the grant date using the following assumptions:
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Thirteen Weeks Ended
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May 1,
2021
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May 2,
2020
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Weighted average grant-date fair value per option granted
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$5.64
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$2.05
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Expected option term (1)
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5.4 years
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5.3 years
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Weighted average expected volatility factor (2)
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59.9%
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57.3%
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Weighted average risk-free interest rate (3)
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0.9%
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0.4%
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Expected annual dividend yield (4)
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—%
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—%
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(1)The expected option term of the awards represents the estimated time that options are expected to be outstanding based upon historical option data.
(2)Stock volatility for each grant is measured using the historical daily price changes of our common stock over the most recent period equal to the expected option term of the awards.
(3)The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.
(4)We do not currently have a dividend policy.
Restricted Stock Awards
Restricted stock awards ("RSAs") represent restricted shares of our common stock issued upon the date of grant in which the recipient's rights in the stock are restricted until the shares are vested. Under the 2012 Plan, we grant RSAs to independent members of our Board of Directors. RSAs granted to our Board of Directors vest at a rate of 50% on each of the first two anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vesting dates. We determine the fair value of RSAs based upon the closing price of our Class A common stock on the date of grant.
A summary of non-vested RSAs at May 1, 2021 and January 30, 2021 is presented below:
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Restricted
Stock
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Weighted
Average
Grant-Date
Fair Value
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Nonvested at May 1, 2021 and January 30, 2021
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71,548
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$
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6.71
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There were no RSAs granted, vested, or forfeited during the thirteen weeks ended May 1, 2021.
Share-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the requisite service period. The following table summarizes share-based compensation expense recorded in the Consolidated Statements of Operations (in thousands):
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|
Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
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|
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Cost of goods sold (1)
|
$
|
(38)
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|
|
$
|
146
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|
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|
Selling, general and administrative expenses
|
404
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|
|
355
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|
|
Total share-based compensation expense
|
$
|
366
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|
|
$
|
501
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(1)Current period share-based compensation expense attributed to cost of goods sold was exceeded by related forfeiture credits due to the departure of the Company's prior Chief Merchandising Officer effective March 19, 2021.
At May 1, 2021, there was $5.1 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stock. This cost has a weighted average remaining recognition period of 3.1 years.
Note 8: Earnings (Loss) Per Share
Earnings (loss) per share is computed under the provisions of ASC 260, Earnings Per Share. Basic income (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method, whereby proceeds from such exercise, unamortized compensation and hypothetical excess tax benefits, if any, on share-based awards are assumed to be used by us to purchase the common shares at the average market price during the period. Potentially dilutive shares of common stock represent outstanding stock options and RSAs.
The components of basic and diluted earnings (loss) per share were as follows (in thousands, except per share amounts):
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|
Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
|
|
|
Net income (loss)
|
$
|
10,959
|
|
|
$
|
(17,395)
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|
|
|
|
|
Weighted average basic shares outstanding
|
29,878
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|
|
29,677
|
|
|
|
|
|
Dilutive effect of stock options and restricted stock
|
651
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|
|
—
|
|
|
|
|
|
Weighted average shares for diluted earnings per share
|
30,529
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|
|
29,677
|
|
|
|
|
|
Basic earnings (loss) per share of Class A and Class B common stock
|
$
|
0.37
|
|
|
$
|
(0.59)
|
|
|
|
|
|
Diluted earnings (loss) per share of Class A and Class B common stock
|
$
|
0.36
|
|
|
$
|
(0.59)
|
|
|
|
|
|
The following stock options have been excluded from the calculation of diluted earnings (loss) per share as the effect of including these stock options would have been anti-dilutive (in thousands):
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Thirteen Weeks Ended
|
|
|
|
May 1,
2021
|
|
May 2,
2020
|
|
|
|
|
Stock options
|
1,204
|
|
|
—
|
|
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