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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-31390
06 - 1195422
(Commission File Number)
(I.R.S. Employer Identification No.)

(Registrant, State of Incorporation or Organization, Address of Principal Executive Officers and Telephone Number)
CHRISTOPHER & BANKS CORPORATION
(a Delaware corporation)
2400 Xenium Lane North
Plymouth, Minnesota 55441
763-551-5000
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  YES  ☐  NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  þ  YES  ☐  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
Accelerated filer ¨
Non-accelerated filer  ý
Smaller reporting company ý
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐  YES þ  NO

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date.
Class
 
Outstanding at
September 6, 2019
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, par value $.01 per share
 
38,333,716
 
CBKC
 
OTCQX



Table of Contents

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands)
 
 
August 3, 2019
 
February 2, 2019
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,242

 
$
10,239

Accounts receivable
 
3,471

 
2,767

Merchandise inventories
 
48,718

 
41,039

Prepaid expenses and other current assets
 
3,894

 
3,372

Income taxes receivable
 
294

 
268

Total current assets
 
58,619

 
57,685

Non-current assets:
 
 
 
 
Property, equipment and improvements, net
 
27,925

 
31,643

Operating lease assets
 
121,782

 

Deferred income taxes
 
499

 
499

Other assets
 
668

 
1,276

Total non-current assets
 
150,874

 
33,418

Total assets
 
$
209,493

 
$
91,103

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
27,098

 
$
17,834

Short-term borrowings
 
3,450

 

Current portion of long-term lease liabilities
 
28,258

 

Accrued salaries, wages and related expenses
 
5,139

 
4,954

Accrued liabilities and other current liabilities
 
19,507

 
25,894

Total current liabilities
 
83,452

 
48,682

Non-current liabilities:
 
 
 
 
Deferred lease incentives
 

 
6,267

Long-term lease liabilities
 
111,968

 
6,661

Other non-current liabilities
 
2,013

 
8,970

Total non-current liabilities
 
113,981

 
21,898

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock — $0.01 par value, 1,000 shares authorized, none outstanding
 

 

Common stock — $0.01 par value, 74,000 shares authorized, 48,639 and 48,365 shares issued, and 38,336 and 38,386 shares outstanding at August 3, 2019 and February 2, 2019, respectively
 
451

 
481

Additional paid-in capital
 
129,118

 
128,714

Retained earnings
 
(4,634
)
 
4,137

Common stock held in treasury, 10,303 and 9,979 shares at cost at August 3, 2019 and February 2, 2019
 
(112,875
)
 
(112,809
)
Total stockholders’ equity
 
12,060

 
20,523

Total liabilities and stockholders’ equity
 
$
209,493

 
$
91,103


See Notes to Condensed Consolidated Financial Statements

2

Table of Contents

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(amounts in thousands, except per share data)
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
 
August 3,
 
August 4,
 
August 3,
 
August 4,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
83,443

 
$
87,418

 
$
166,663

 
$
173,319

Merchandise, buying and occupancy costs
 
58,969

 
62,546

 
116,575

 
121,103

Gross profit
 
24,474

 
24,872

 
50,088

 
52,216

Other operating expenses:
 
 

 
 
 
 
 
 
Selling, general and administrative
 
27,754

 
29,675

 
56,942

 
59,422

Depreciation and amortization
 
2,199

 
2,518

 
4,581

 
5,334

Impairment of store assets
 
311

 

 
311

 

Total other operating expenses
 
30,264

 
32,193

 
61,834

 
64,756

Operating loss
 
(5,790
)
 
(7,321
)
 
(11,746
)
 
(12,540
)
Interest expense, net
 
(111
)
 
(42
)
 
(267
)
 
(99
)
Loss before income taxes
 
(5,901
)
 
(7,363
)
 
(12,013
)
 
(12,639
)
Income tax provision
 
40

 
63

 
80

 
106

Net loss
 
$
(5,941
)
 
$
(7,426
)
 
$
(12,093
)
 
$
(12,745
)
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
 

 

 

 

Comprehensive loss
 
$
(5,941
)
 
$
(7,426
)
 
$
(12,093
)
 
$
(12,745
)
 
 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
 
Net loss
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.32
)
 
$
(0.34
)
Basic shares outstanding
 
37,440

 
37,458

 
37,686

 
37,381

 
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
 
Net loss
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.32
)
 
$
(0.34
)
Diluted shares outstanding
 
37,440

 
37,458

 
37,686

 
37,381

 

See Notes to Condensed Consolidated Financial Statements


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Table of Contents

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(amounts in thousands)
 
Thirteen Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
May 4, 2019
10,161

 
$
(112,873
)
 
38,193

 
$
463

 
$
128,964

 
$
1,307

 
$
17,861

Total comprehensive loss

 

 

 

 

 
(5,941
)
 
(5,941
)
Issuance of restricted stock, net of forfeitures

 

 
285

 
2

 
(6
)
 

 
(4
)
Stock-based compensation expense

 

 

 

 
160

 

 
160

Acquisition of common stock held in treasury, at cost
142

 
(2
)
 
(142
)
 
(14
)
 

 

 
(16
)
August 3, 2019
10,303

 
$
(112,875
)
 
38,336

 
$
451

 
$
129,118

 
$
(4,634
)
 
$
12,060



Twenty-six Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
February 2, 2019
9,979

 
$
(112,809
)
 
38,386

 
$
481

 
$
128,714

 
$
4,137

 
$
20,523

Total comprehensive loss

 

 

 

 

 
(12,093
)
 
(12,093
)
Issuance of restricted stock, net of forfeitures

 

 
274

 
2

 
(9
)
 

 
(7
)
Stock-based compensation expense

 

 

 

 
413

 

 
413

Acquisition of common stock held in treasury, at cost
324

 
(66
)
 
(324
)
 
(32
)
 

 

 
(98
)
Cumulative effect of accounting change

 

 

 

 

 
3,322

 
3,322

August 3, 2019
10,303

 
$
(112,875
)
 
38,336

 
$
451

 
$
129,118

 
$
(4,634
)
 
$
12,060


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Table of Contents

Thirteen Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
May 5, 2018
9,791

 
$
(112,711
)
 
38,078

 
$
478

 
$
127,993

 
$
31,658

 
$
47,418

Total comprehensive loss

 

 

 

 

 
(7,426
)
 
(7,426
)
Issuance of restricted stock, net of forfeitures

 

 
354

 
3

 
(10
)
 

 
(7
)
Stock-based compensation expense

 

 

 

 
253

 

 
253

August 4, 2018
9,791

 
$
(112,711
)
 
38,432

 
$
481

 
$
128,236

 
$
24,232

 
$
40,238



Twenty-six Weeks Ended
 
Treasury
 
Common Stock
 
 
 
 
 
 
 
Shares
Held
 
Amount
Held
 
Shares
Outstanding
 
Amount
Outstanding
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
February 3, 2018
9,791

 
$
(112,711
)
 
37,834

 
$
475

 
$
127,652

 
$
34,993

 
$
50,409

Total comprehensive loss

 

 

 

 

 
(12,745
)
 
(12,745
)
Issuance of restricted stock, net of forfeitures

 

 
598

 
6

 
(20
)
 

 
(14
)
Stock-based compensation expense

 

 

 

 
604

 

 
604

Cumulative effect of accounting change

 

 

 

 

 
1,984

 
1,984

August 4, 2018
9,791

 
$
(112,711
)
 
38,432

 
$
481

 
$
128,236

 
$
24,232

 
$
40,238



See Notes to Condensed Consolidated Financial Statements

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Table of Contents


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
 
 
Twenty-six Weeks Ended
 
 
August 3, 2019
 
August 4, 2018
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(12,093
)
 
$
(12,745
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
4,581

 
5,334

Impairment of store assets
 
311

 

Amortization of financing costs
 
30

 
31

Lease expense
 
12,867

 

Deferred lease-related liabilities
 

 
(486
)
Stock-based compensation expense
 
413

 
604

Changes in operating assets and liabilities:
 
 

 
 
Accounts receivable
 
(704
)
 
(882
)
Merchandise inventories
 
(7,680
)
 
1,178

Prepaid expenses and other assets
 
(505
)
 
(1,579
)
Income taxes receivable
 
(26
)
 
(46
)
Accounts payable
 
9,286

 
3,021

Accrued liabilities
 
(2,964
)
 
(5,757
)
Lease liabilities
 
(13,634
)
 

Other liabilities
 
(230
)
 
(59
)
Net cash used in operating activities
 
(10,348
)
 
(11,386
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, equipment and improvements
 
(996
)
 
(1,722
)
Proceeds from sale of assets
 

 
13,329

Net cash (used in) provided by investing activities
 
(996
)
 
11,607

Cash flows from financing activities:
 
 
 
 
Shares redeemed for payroll taxes
 
(5
)
 
(13
)
Proceeds from short-term borrowings
 
12,650

 
9,100

Payments of short-term borrowings
 
(9,200
)
 
(9,100
)
Payments of deferred financing costs
 

 
(171
)
Acquisition of common stock held in treasury, at cost
 
(98
)
 

Net cash provided by (used in) financing activities
 
3,347

 
(184
)
Net (decrease) increase in cash and cash equivalents
 
(7,997
)
 
37

Cash and cash equivalents at beginning of period
 
10,239

 
23,077

Cash and cash equivalents at end of period
 
$
2,242

 
$
23,114

Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
267

 
$
100

Income taxes paid
 
$
198

 
$
130

Accrued purchases of equipment and improvements
 
$
98

 
$
143

 

See Notes to Condensed Consolidated Financial Statements


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Table of Contents

CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — Basis of Presentation
 
The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC"). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements, except the Condensed Consolidated Balance Sheet as of February 2, 2019 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
 
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of August 3, 2019, August 4, 2018 and for all periods presented.
 
Recently issued accounting pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting the updated provisions.

Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The Company adopted the new standard, ASC 842, Leases, and all related amendments on February 3, 2019 using the "Comparatives Under 840 Option" for all leases in which we applied the previous standard, ASC 840, Leases, and recognized the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of February 3, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carryforward the historical lease classification. In addition, we elected certain practical expedients and accounting policies including the lessee practical expedient to not separate lease components. We made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize those lease payments in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term. Adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of $134.9 million and $153.9 million, respectively, as of February 3, 2019. The operating lease asset recorded at adoption of the standard represents the capitalization of operating lease assets and the reclassification of prepaid rent and leasehold acquisition costs, offset by the reclassification of straight-line rent accruals, tenant improvement allowances and vacant space reserves. At adoption, we recorded an adjustment to retained earnings of $3.3 million, which includes the recognition of the deferred gain on the sale-leaseback transaction of our corporate headquarters facility. Additional information and disclosures required by the new standard are contained in Note 9 - Leases.

In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements, in which registrants must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. As of the first quarter of Fiscal 2019, the Company has adopted all relevant disclosure requirements, including the shareholders’ equity interim disclosures.

We reviewed all other significant newly-issued accounting pronouncements and concluded they are either not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.


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Table of Contents

NOTE 2 — Revenue
 
Merchandise sales
We sell merchandise through our brick and mortar and eCommerce sales channels. Revenues are recognized when control of the promised merchandise is transferred to our customers. Within our brick and mortar sales channel, control is transferred at the point of sale. Within our eCommerce sales channel, control is transferred upon delivery of the merchandise to our customers. Shipping revenues associated with the eCommerce channel are recognized upon the completion of the delivery. The revenue recorded reflects the consideration that we expect to receive in exchange for our merchandise. The Company has elected, as an accounting policy, to exclude from the transaction price all taxes assessed by governmental authorities imposed on merchandise sales.
Right of return
As part of our merchandise sales, we offer customers a right of return on merchandise that lapses, after a specified period of time, based on the original purchase date. The Company estimates the amount of sales that may be returned by our customers and records this estimate as a reduction of revenue in the period in which the related revenues are recognized. We utilize historical and industry data to estimate the total return liability. Conversely, the reduction in revenue results in a corresponding reduction in merchandise, buying and occupancy costs which results in a contract asset for the anticipated merchandise returned. The total reduction in revenue from estimated returns was $1.2 million and as of both August 3, 2019 and February 2, 2019, this amount is included within accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Friendship rewards program
The Company established the Friendship Rewards Program as a loyalty program where customers earn points towards future discount certificates based on their purchase activity. We have identified the additional benefits received from this program as a separate performance obligation within a sales contract in the form of the discount certificates earned by customers. Accordingly, we assess any incremental discounts issued to our customers through the program and allocate a portion of the transaction price associated with merchandise sales from loyalty program members to the future discounts earned. The transaction price allocated to future discounts is recorded as deferred revenue until the discounts are used or forfeited. In addition, the Company estimates breakage on the points earned within the program that will not be used by customers for future discounts. The Company estimates breakage based on the historical redemption rate and considers industry trends. Breakage is recorded as a reduction to the deferred revenue associated with the program. As of August 3, 2019, and February 2, 2019, the Company recorded $4.2 million and $3.8 million, respectively, in deferred revenue associated with the program, which is included in accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Gift card revenue
The Company sells gift cards to customers which can be redeemed for merchandise within our brick and mortar and eCommerce sales channels. Gift cards are recorded as deferred revenue when issued and are subsequently recorded as revenue upon redemption. The Company estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as revenue in proportion to the rate of gift card redemptions by vintage. As of August 3, 2019, and February 2, 2019, the Company had $2.6 million and $4.6 million, respectively, of deferred revenue associated with the issuance of gift cards. The deferred gift card revenue is included in accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Private label credit card
The Company offers a private label credit card ("PLCC") which bears the Christopher and Banks brand name offered under an agreement with Comenity Bank. Pursuant to this agreement, there are several obligations on behalf of Comenity Bank that impact the recording of revenue.
In connection with extending the term of the agreement, the Company received a signing bonus. We have determined that the benefits associated with signing the agreement are recognized over time throughout its term. This is the most accurate depiction of the transfer of services as the customer receives and consumes the benefits by obtaining and having the ability to use financing through Comenity Bank for purchases within our brick and mortar and eCommerce sales channels throughout the agreement's term. The deferred signing bonus is included in other liabilities and is being recognized in net sales ratably over the term of the contract.


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The other revenue based on customer usage of the card is recognized in net sales in the periods in which the related customer transaction occurs. As of August 3, 2019 and February 2, 2019, the Company had $1.5 million recorded as deferred revenue associated with the signing bonus, of which $0.3 million is included in accrued liabilities and other current liabilities and the remaining $1.2 million is included in other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company recorded $0.1 million into revenue for the thirteen and twenty-six-week periods ended August 3, 2019 and August 4, 2018, respectively, associated with the signing bonus.
The Company records revenue associated with royalties received for purchases made using the PLCC. Royalty revenue is recognized based on the total amount to which we have a right to invoice in accordance with the practical expedient included in ASC 606. Accordingly, royalty revenue is recognized in the period in which the related purchases are recognized.
The Company receives a performance bonus based on the total amount of new PLCC accounts that are opened during the year. We have determined that this is a form of variable consideration. Variable consideration is recorded if, in the Company’s judgment, it is probable that a significant future reversal of revenue under the contract will not occur.
Disaggregation of revenue
The following table provides information about disaggregated revenue by sales channel. All revenue illustrated below is included within our one reportable segment.
 
 
Thirteen Weeks Ended
 
 
Twenty-six Weeks Ended
 
 
 
August 3, 2019
 
August 4, 2018
 
 
August 3, 2019
 
August 4, 2018
 
Brick and mortar stores
 
$
65,595

 
$
66,715

 
 
$
130,647

 
$
134,770

 
eCommerce sales
 
16,698

 
19,216

1 
 
35,598

 
38,010

1 
Other
 
1,150

 
1,487

 
 
418

 
539

 
Net sales
 
$
83,443

 
$
87,418

 
 
$
166,663

 
$
173,319

 

(1) 
Includes approximately $2.4 million and $4.7 million of 2018 revenues for the thirteen and twenty-six week periods ended, respectively, from orders placed in store and fulfilled from another location. For 2019, similar sales are included in brick and mortar stores.

Amounts included within other revenue relate to revenues earned from our private label credit card, net of any revenue adjustments and accruals.

Contract balances

The following table provides information about contract assets and liabilities from contracts with customers (in thousands):
 
 
Contract Liabilities
 
 
August 3, 2019
 
February 2, 2019
 
 
Current
 
Non-Current
 
Current
 
Non-Current
Right of return
 
$
1,215

 
$

 
$
1,176

 
$

Friendship Rewards Program
 
4,169

 

 
3,768

 

Gift card revenue
 
2,637

 

 
4,646

 

Private label credit card
 
274

 
1,210

 
274

 
1,348

Total
 
$
8,295

 
$
1,210

 
$
9,864

 
$
1,348


The Company recognized revenue of $1.4 million and $1.5 million in the thirteen-week periods ended August 3, 2019 and August 4, 2018, respectively, related to contract liabilities recorded at the beginning of the period. The Company recognized revenue of $3.1 million and $3.4 million in the twenty-six-week periods ended August 3, 2019 and August 4, 2018, respectively, related to contract liabilities recorded at the beginning of the period. Such revenues were comprised of the redemption and forfeiture of Friendship Rewards Program discount certificates, redemption of gift cards, and amortization of the PLCC signing bonus. As of August 3, 2019, and February 2, 2019, the Company did not have any material contract assets.
For the thirteen and twenty-six-week periods ended August 3, 2019 and August 4, 2018, the Company did not recognize any revenue resulting from changes in the estimated variable consideration to be received associated with performance obligations satisfied or partially satisfied in prior periods.

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Transaction price allocated to remaining performance obligations
The following table includes the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied as of August 3, 2019:
 
 
Remainder of
 
 
 
 
 
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
Private label credit card
 
$
137

 
$
274

 
$
1,073

Total
 
$
137

 
$
274

 
$
1,073


Contract Costs
The Company has not incurred any costs to obtain or fulfill a contract.

NOTE 3 — Property, Equipment and Improvements, Net
 
Property, equipment and improvements, net consisted of the following (in thousands):
Description
 
August 3, 2019
 
February 2, 2019
Store leasehold improvements
 
$
50,071

 
$
50,305

Store furniture and fixtures
 
70,442

 
70,815

Corporate office and distribution center furniture, fixtures and equipment
 
6,220

 
6,179

Computer and point of sale hardware and software
 
33,631

 
33,098

Construction in progress
 
91

 
419

Total property, equipment and improvements, gross
 
160,455

 
160,816

Less accumulated depreciation and amortization
 
(132,530
)
 
(129,173
)
Total property, equipment and improvements, net
 
$
27,925

 
$
31,643

 
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future cash flows (undiscounted and without interest charges). If the sum of the estimated future cash flows is less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which is typically based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis is depreciated over the remaining useful life of that asset.

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For long-lived assets deployed at store locations, we review for impairment at the individual store level.

Our impairment loss calculations involve uncertainty because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including estimating useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

Due to declining sales and continued operating losses, the Company performed an impairment analysis during the period ended August 3, 2019. Leasehold improvements, store furniture and fixtures at certain under-performing stores, and stores identified for closure were analyzed for impairment. As a result of this analysis, the Company recorded a $0.3 million long-lived asset impairment during the thirteen and twenty-six week periods ended August 3, 2019. The Company recorded no long-lived asset impairment during the thirteen and twenty-six week periods ended August 4, 2018.


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Sale-Leaseback

On April 27, 2018, the Company completed the sale of and entered into an agreement to leaseback its corporate headquarters facility, which includes its distribution center, in Plymouth, Minnesota. The agreement provided for the sale of the facility for a purchase price of $13.7 million and the subsequent leaseback of the facility for a 15-year period. The lease is classified as an operating lease. As a result of this transaction, the Company recorded a deferred gain of $7.7 million. During Fiscal 2018, the Company recognized the deferred gain on a straight-line basis over the term of the lease.  At the beginning of Fiscal 2019, the remaining $7.3 million of the deferred gain was recorded as an adjustment to retained earnings with the adoption of ASC 842, Leases.

As part of the transaction, the Company deposited $1.7 million in escrow for certain repairs to the building. As of August 3, 2019, and February 2, 2019, $0.8 million remained in escrow for repairs to the building. This amount is considered to be restricted cash and is included within cash and cash equivalents on the Condensed Consolidated Balance Sheet.
 
NOTE 4 — Accrued Liabilities
 
Accrued liabilities and other current liabilities consisted of the following (in thousands):
 
 
August 3, 2019
 
February 2, 2019
Gift card and store credit liabilities
 
$
2,637

 
$
4,646

Accrued Friendship Rewards Program loyalty liability
 
4,169

 
3,768

Accrued income, sales and other taxes payable
 
1,200

 
911

Accrued occupancy-related expenses
 
645

 
3,700

Sales return reserve
 
1,215

 
1,176

eCommerce obligations
 
4,842

 
6,194

Other accrued liabilities
 
4,799

 
5,499

Total accrued liabilities and other current liabilities
 
$
19,507

 
$
25,894


NOTE 5 — Credit Facility
 
The Company is party to an amended and restated credit agreement ("the Credit Facility") with Wells Fargo Bank, National Association ("Wells Fargo"), as lender. On August 3, 2018, the Company entered into a second amendment ("Second Amendment") to the Credit Facility.
 
The Second Amendment, among other changes, (i) extended the term of the Credit Facility to August 3, 2023; and (ii) supplemented the existing $50.0 million revolving Credit Facility by adding a new $5.0 million revolving "first-in, last-out" tranche credit facility (the "FILO Facility"), subject to borrowing base restrictions applicable to the FILO Facility. The Company must draw under the FILO Facility before making any borrowings under the revolving Credit Facility.
 
Loans under the FILO Facility will bear interest based on quarterly excess available under the Borrowing Base as defined in the Credit Facility. The interest rate under the FILO Facility will be either (i) the London Interbank Offered Rate ("LIBOR") plus 3.00% for FILO loans that are LIBOR loans; or (ii) 2.00% above the Base Rate for FILO loans that are Base Rate loans as such terms are defined in the Credit Facility. Borrowings under the Credit Facility will generally accrue interest at a rate ranging from 1.50% to 1.75% over the LIBOR or 0.50% to 0.75% over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such terms are defined in the Credit Facility. The Company has the ability to select between the LIBOR or prime based rate at the time of the cash advance. The Credit Facility has an unused commitment fee of 0.25%.

In addition to these changes, the Second Amendment eliminates availability against the Company's real property, which was the subject of a sale-leaseback transaction on April 27, 2018. The Company expensed approximately $30 thousand of deferred financing costs during the twenty-six week period ended August 3, 2019 in connection with the Credit Agreement. The deferred financing costs have been combined with the balance of the deferred financing costs remaining from the prior amendment on September 8, 2014. Deferred financing costs are included in other assets on the Condensed Consolidated Balance Sheet and are being amortized as interest expense over the related term of the Second Amendment.


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The Credit Facility contains customary events of default and various affirmative and negative covenants. The sole financial covenant contained in the Credit Facility requires the Company to maintain Availability at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. The Company was in compliance with all financial covenants and other financial provisions of the Credit Facility as of August 3, 2019.

The Company's obligations under the Credit Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company's subsidiaries.
 
There were $3.5 million and zero in outstanding borrowings under the Credit Facility as of August 3, 2019 and February 2, 2019, respectively. The capped borrowing base at August 3, 2019 was approximately $39.8 million. As of August 3, 2019, the Company had open on-demand letters of credit of approximately $11.1 million. Accordingly, after reducing the capped borrowing base, current borrowings of $3.5 million, open letters of credit and the required minimum availability of the greater of $3.0 million, or $3.4 million (10.0% of the revolving loan cap), the net availability of revolving credit loans under the Credit Facility was approximately $21.8 million at August 3, 2019.

NOTE 6 — Income Taxes

For the thirteen weeks ended August 3, 2019, the Company recorded income tax expense of $40 thousand, or an effective tax rate of (0.7)%, versus income tax expense of $63 thousand, or an effective tax rate of (0.9)% for the same period of Fiscal 2018. For the twenty-six weeks ended August 3, 2019, the Company recorded income tax expense of $80 thousand, or an effective rate of (0.7)%, versus income tax expense of $106 thousand, or an effective rate of (0.8)%, for the same period of Fiscal 2018. The income tax provisions for the Fiscal 2019 and 2018 periods are primarily driven by state taxes.

As of August 3, 2019, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed to remain related to certain state tax benefits. As of February 2, 2019, the Company has gross federal and state net operating loss ("NOL") carryforwards of approximately $145.5 million and $73.6 million, respectively. A portion of the federal net operating loss carryforwards will begin to expire in 2032 while the other portion can be carried forward indefinitely. The state net operating loss carryforwards have carryforward periods of 5 to 20 years and begin to expire in the current year. The Company also has federal tax credits of $859 thousand which will begin to expire in 2030 and gross charitable contribution carryforwards of $726 thousand that will begin to expire in 2020.

Sections 382 and 383 of the Internal Revenue Code limit the annual utilization of certain tax attributes, including net operating loss carryforwards, incurred prior to a change in ownership. If the Company were to experience an ownership change, as defined by Sections 382 and 383, its ability to utilize its tax attributes could be substantially limited. Depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant number of its accumulated NOLs.

The Company's liability for unrecognized tax benefits associated with uncertain tax provisions is recorded within the Condensed Consolidated Balance Sheets in Other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. We do not expect any significant changes to the amount of unrecognized tax benefits in the next twelve months.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax years before Fiscal 2011. The Company does not have any ongoing income tax audits that are anticipated to have a material impact on the financial statements.


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NOTE 7 — Earnings Per Share
 
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) shown on the face of the accompanying Condensed Consolidated Statement of Operations:
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
 
August 3,
 
August 4,
 
August 3,
 
August 4,
 
 
2019
 
2018
 
2019
 
2018
Numerator (in thousands):
 
 
 
 
 
 
 
 
Net loss attributable to Christopher & Banks Corporation
 
$
(5,941
)
 
$
(7,426
)
 
$
(12,093
)
 
$
(12,745
)
Denominator (in thousands):
 
 

 
 

 
 
 
 
Weighted average common shares outstanding - basic
 
37,440

 
37,458

 
37,686

 
37,381

Dilutive shares
 

 

 

 

Weighted average common and common equivalent shares outstanding - diluted
 
37,440

 
37,458

 
37,686

 
37,381

Net loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.32
)
 
$
(0.34
)
Diluted
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.32
)
 
$
(0.34
)
 
Total stock options of approximately 4.8 million and 4.3 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen-week periods ended August 3, 2019 and August 4, 2018, as they were anti-dilutive. Total stock options of approximately 4.7 million and 4.0 million were excluded from the shares used in the computation of diluted earnings per share for the twenty-six-week periods ended August 3, 2019 and August 4, 2018, as they were anti-dilutive.
 
NOTE 8 — Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable
Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.

Assets that are Measured at Fair Value on a Non-recurring Basis:
 
The following table summarizes certain information for non-financial assets for the twenty-six weeks ended August 3, 2019 and the fiscal year ended February 2, 2019, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. 
 
 
Twenty-six Weeks Ended
 
Fiscal Year Ended
Long-Lived Assets Held and Used (in thousands):
 
August 3, 2019
 
February 2, 2019
Carrying value
 
$
510

 
$
4,829

Fair value measured using Level 3 inputs
 
199

 
445

Impairment charge
 
$
311

 
$
4,384

 
Approximately $0.2 million of the Fiscal 2019 impairment charge reduced the carrying value of operating lease assets. The remainder of the Fiscal 2019 and 2018 impairment charges reduced the carrying value of fixed assets.


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All of the fair value measurements included in the table above were based on significant unobservable inputs (Level 3). The Company determines fair value for measuring assets on a non-recurring basis using a discounted cash flow approach as discussed in Note 3, Property, Plant and Equipment. In determining future cash flows, the Company uses its best estimate of future operating results, which requires the use of significant estimates and assumptions, including estimated sales, merchandise margin and expense levels, and the selection of an appropriate discount rate; therefore, differences in the estimates or assumptions could produce significantly different results. General economic uncertainty impacting the retail industry and continuation of recent trends in company performance makes it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.

Fixed asset fair values were derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group is expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the case of assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.

n
NOTE 9 — Leases

The Company leases its store locations and vehicles under operating leases. The store lease terms, including rental period, renewal options, escalation clauses and rent as a percentage of sales, vary among the leases. Most store leases require the Company to pay real estate taxes and common area maintenance charges. In addition, we have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets.
 
Maturities of our lease liabilities as of August 3, 2019 are as follows:
(in thousands)
 
Lease Liabilities(1)
Remainder of 2019
 
$
19,479

2020
 
31,824

2021
 
26,201

2022
 
22,946

2023
 
22,170

Thereafter
 
45,568

Total lease payments
 
168,188

Less: Imputed interest
 
(27,962
)
Present value of lease liabilities
 
140,226

Less: Current lease liabilities
 
(28,258
)
Long-term lease liabilities
 
$
111,968


(1) 
Includes retail stores and the corporate headquarters facility, including the distribution center.

Maturities of our lease liabilities as of February 2, 2019 (under ASC 840, Leases) were as follows:
(in thousands)
 
Lease Liabilities(1)
2019
 
$
36,965

2020
 
25,887

2021
 
21,386

2022
 
18,439

2023
 
17,811

Thereafter
 
38,827

Total lease payments
 
$
159,315


(1) 
Includes retail stores and the corporate headquarters facility, including the distribution center.

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The weighted average remaining lease terms and discount rates for all leases as of August 3, 2019 were as follows:
Remaining lease term and discount rate:
 
August 3, 2019
Weighted average remaining lease term (years)
 
6.0

Weighted average discount rate
 
6.0
%

Operating expense for the thirteen weeks ended August 3, 2019 totaled approximately $10.2 million, with $0.5 million of that amount representing operating lease variable rent that was recorded in cost of sales. In addition, all but $20 thousand of the $9.7 million of non-variable operating lease rent is included in cost of sales. $20 thousand of operating lease expense is included in selling, general and administrative expenses. For the thirteen weeks ended August 3, 2019, cash lease payments were $11.2 million, and right of use assets obtained in exchange for lease liabilities were $0.5 million.

Operating expense for the twenty-six weeks ended August 3, 2019 totaled approximately $20.6 million, with $0.9 million of that amount representing operating lease variable rent that was recorded in cost of sales. In addition, all but $52 thousand of the $19.7 million of non-variable operating lease expense is included in cost of sales. $52 thousand of operating lease expense is included in selling, general and administrative expenses. For the twenty-six weeks ended August 3, 2019, cash lease payments were $21.3 million, and right of use assets obtained in exchange for lease liabilities were $2.6 million.

NOTE 10 — Legal Proceedings
 
We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue a potential loss contingency.

On August 14, 2019, Mark Gottlieb, a Company stockholder, filed a purported class action lawsuit against Jonathan Duskin; Seth Johnson; Keri Jones; Kent Kleeberger; William Sharpe, III; Joel Waller and Laura Weil (the "Named Directors"), B. Riley FBR, Inc. and B. Riley Financial Inc., in the Court of Chancery in the State of Delaware, on behalf of himself and all stockholders who held shares as of December 20, 2018. The lawsuit alleges that the Named Directors breached their duty of loyalty in connection with the Company's rejection in December of 2018, of an unsolicited bid to acquire the Company. The lawsuit further alleges that the B. Riley firms aided and abetted the asserted breach of the duty of loyalty by the Named Directors. The Company believes the Complaint is without merit. The Named Directors, and the Company on their behalf, together with the B. Riley firms, intend to defend the lawsuit vigorously.

The ultimate resolution of legal matters can be inherently uncertain and, for some matters, we may be 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 these uncertainties. We do not, however, currently believe that the resolution of any pending matter will have a material adverse effect on our financial position, results of operations or liquidity.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and our unaudited Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude.
 
Executive Overview
 
We are a specialty retailer of privately branded women's apparel and accessories. We offer our customer an assortment of unique, classic and versatile clothing that fits her everyday needs at a good value.
 
We operate an integrated, omni-channel platform that provides our customer the ability to shop when and where she wants, including online or at our retail and outlet stores. This approach allows our customers to browse, purchase, return, or exchange our merchandise through the channel that is optimal for her.
 

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As of August 3, 2019, we operated 455 stores in 44 states, including 310 Missy, Petite, Women ("MPW") stores, 80 outlet stores, 34 Christopher & Banks ("CB") stores, and 31 C.J. Banks ("CJ") stores. Our CB brand offers unique fashions and accessories featuring exclusively designed assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our MPW concept and outlet stores offer an assortment of both CB and CJ apparel servicing the Missy, Petite and Women-sized customer in one location.
 
Strategic Priorities
 
Our overall business strategy is to build sustainable, long-term revenue growth and consistent profitability through the following strategic initiatives:

Enhance the customer shopping experience;
Improve marketing and promotional effectiveness;
Leverage omni-channel capabilities;
Build loyalty and grow our customer file;
Optimize our real estate portfolio; and
Right-size our cost structure.

Enhance the Customer Shopping Experience

We are committed to enhancing our customer's shopping experience by providing a well curated product assortment that is presented in a way that is easier for her to shop. We are focused on improving the flow and depth of our inventory buys which are intended to help her build an outfit and drive units per transaction. Additionally, we have recently launched a new Style and Selling model to support our store associates in providing even better service and importantly drive sales.

Improve Marketing and Promotional Effectiveness

Our goals include executing disciplined markdown management, leveraging improved analytics to inform what types and depth of promotions and targeted offers are used and to increase our return on marketing investments.

Leverage Omni-Channel Capabilities

Our integrated, omni-channel strategy is designed to provide customers with a seamless retail experience, allowing her to shop whenever, however and wherever she chooses. In January of 2018, we launched “Buy online, ship to store,” and in November of 2018, we launched “Buy online, ship from store.” As of August 2019, we are fulfilling eCommerce orders from approximately 220 of our stores. We launched “Buy online, pick up in store” during the first quarter of Fiscal 2019. These flexible fulfillment options not only meet a customer need, they allow us to better leverage our inventory across our chain.

Build Loyalty and Grow our Customer File

We have a very loyal customer base that is highly engaged. Our uniquely designed product, our value positioning and our customer service are key differentiators for us and contribute to the loyalty of our customers with approximately 90% of our active customers participating in our loyalty rewards program.

We continue to focus on maximizing the benefits of our customer relationship management (“CRM”) database, Friendship Rewards Loyalty Program (“Friendship Rewards”), and private-label credit card program to strengthen engagement with our customers. Our Friendship Rewards program, in conjunction with our CRM system, allows us to personalize communications and customize our offers. We continue to leverage our direct and digital marketing channels to encourage additional customer visits and increased spending per visit.

To grow our active customer file, we intend to reallocate our marketing spend in an effort to drive acquisition of new customers, reactivate lapsed customers, and also capitalize on market disruptions. In addition, we intend to refresh our Friendship Rewards program and to continue to leverage that program. Finally, we plan to capitalize on our unique positioning in the market to drive engagement with customers on a grass roots level.


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Table of Contents

Optimize our Real Estate Portfolio

Between 2011 and 2015 we consolidated our store formats and reduced our store count by 33% in an effort to improve store productivity. Additionally, approximately 44% of our stores have a potential lease action arising during Fiscal 2019 and 57% before the end of Fiscal 2020. This should provide us with flexibility to close underperforming stores and the opportunity to renegotiate occupancy costs where applicable. To this end, we engaged a leading national third-party real estate consulting firm during the first quarter to assist us in lease restructuring and to accelerate and increase occupancy cost savings.

Right-size our Cost Structure

We intend to take a holistic approach in driving cost reductions. To help us in accomplishing this we have hired a third-party, non-merchandise procurement specialist to assist us in analyzing relationships and negotiating cost reductions. In addition, we intend to continue to aggressively negotiate rent reductions, optimize our marketing spend, review and reduce our corporate overhead and reduce our shipping and fulfillment expense.

Performance Measures

Management evaluates our financial results based on the following key measures of performance:

Comparable sales
Comparable sales is a measure that highlights the sales performance of our store channel and eCommerce channel by measuring the changes in sales over the comparable, prior-year period of equivalent length.

Our comparable sales calculation includes merchandise sales for:
Stores operating for at least 13 full months;
Stores relocated within the same center; and
eCommerce sales.

Our comparable sales calculation excludes:
Stores converted to the MPW format for 13 full months post conversion.

We believe our eCommerce operations are interdependent with our brick-and-mortar store sales and, as such, we believe that reporting combined store and eCommerce comparable sales is a more appropriate presentation. Our customers are able to browse merchandise in one channel and consummate a transaction in a different channel. At the same time, our customers have the option to return merchandise to a store or our third-party distribution center, regardless of the original channel used for purchase.

Comparable sales measures can vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

Other performance metrics
To supplement our comparable sales performance measure, we also monitor changes in net sales, net sales per store, net sales per gross square foot, gross profit, gross margin rate, operating income, cash, inventory and liquidity.
 

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Second Quarter Fiscal 2019 Results of Operations
 
The following table presents selected consolidated financial data for the second quarter of Fiscal 2019 compared to the second quarter of Fiscal 2018:
 
 
Thirteen Weeks Ended
 
Net Change
 
Percent of Net Sales
(dollars in thousands)
 
August 3, 2019
 
August 4, 2018
 
Amount
 
Percent
 
August 3, 2019
 
August 4, 2018
Net sales
 
$
83,443

 
$
87,418

 
$
(3,975
)
 
(4.5
)%
 
100.0
 %
 
100.0
 %
Merchandise, buying and occupancy costs
 
58,969

 
62,546

 
(3,577
)
 
(5.7
)%
 
70.7
 %
 
71.5
 %
Gross profit
 
24,474

 
24,872

 
(398
)
 
(1.6
)%
 
29.3
 %
 
28.5
 %
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
27,754

 
29,675

 
(1,921
)
 
(6.5
)%
 
33.3
 %
 
33.9
 %
Depreciation and amortization
 
2,199

 
2,518

 
(319
)
 
(12.7
)%
 
2.6
 %
 
2.9
 %
Impairment of store assets
 
311

 

 
311

 
 %
 
0.4
 %
 
 %
Total other operating expenses
 
30,264

 
32,193

 
(1,929
)
 
(6.0
)%
 
36.3
 %
 
36.8
 %
Operating loss
 
(5,790
)
 
(7,321
)
 
1,531

 
(20.9
)%
 
(6.9
)%
 
(8.4
)%
Interest expense, net
 
(111
)
 
(42
)
 
(69
)
 
164.3
 %
 
(0.1
)%
 
 %
Loss before income taxes
 
(5,901
)
 
(7,363
)
 
1,462

 
(19.9
)%
 
(7.1
)%
 
(8.4
)%
Income tax provision
 
40

 
63

 
(23
)
 
(36.5
)%
 
 %
 
0.1
 %
Net loss
 
$
(5,941
)
 
$
(7,426
)
 
$
1,485

 
(20.0
)%
 
(7.1
)%
 
(8.5
)%

 
 
Thirteen Weeks Ended
Rate trends as a percentage of net sales
 
August 3, 2019
 
August 4, 2018
Gross margin
 
29.3
 %
 
28.5
 %
Selling, general, and administrative
 
33.3
 %
 
33.9
 %
Depreciation and amortization
 
2.6
 %
 
2.9
 %
Operating loss
 
(6.9
)%
 
(8.4
)%

Second Quarter Fiscal 2019 Summary
Net sales declined 4.5% compared to the same period last year due to declines in average unit retail, units per transaction, and average number of stores. These declines were partially offset by an increase in the number of transactions.
Comparable sales decreased 4.1% following a 0.8% increase in the same period last year.
eCommerce sales decreased 1.3% following a 16.4% increase in the same period last year.
Gross margin rate improved 88 basis points compared to last year's second quarter primarily due to increased merchandise margin, partially offset by higher shipping costs related to our ship from store initiative.
SG&A expense was $1.9 million, or 6.5%, less than last year's second quarter due to lower expenses for compensation, medical benefits, professional services and eCommerce, and the sale of a claim regarding credit card interchange fees.
Net loss totaled $5.9 million, or a $(0.16) loss per share, compared to a net loss for the prior year's second quarter of $7.4 million, or a $(0.20) loss per share.
As of August 3, 2019, we held $2.2 million of cash and cash equivalents, compared to $2.6 million as of May 4, 2019. Bank borrowings were $3.5 million as of the end of the second quarter versus $3.0 million at the end of the first quarter.


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Table of Contents

Net Sales
 
The components of the 4.5% net sales decrease in the second quarter Fiscal 2019 compared to the second quarter of Fiscal 2018 were as follows:
 
 
Thirteen Weeks Ended
Sales driver change components
 
August 3, 2019
Number of transactions
 
2.1
 %
Units per transaction
 
(2.9
)%
Average unit retail
 
(3.5
)%
Other sales
 
(0.2
)%
Total sales driver change
 
(4.5
)%
 
 
 
Thirteen Weeks Ended
Comparable sales
 
August 3, 2019
Comparable sales
 
(4.1
)%

Net sales decreased primarily due to a 3.5% decrease in average unit retail and a 2.9% decline in units per transaction. These decreases were partially offset by a 2.1% increase in the number of transactions.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:
 
 
Thirteen Weeks Ended
Store metrics
 
August 3, 2019
Net sales per store % change
 
(4.2
)%
Net sales per square foot % change
 
(5.0
)%

Net sales per store and net sales per square foot for the second quarter of Fiscal 2019 each declined primarily from the 3.5% reduction in average dollar spend per transaction and a 2.9% reduction in units per transaction, partially offset by a 2.1% increase in the number of transactions from the second quarter of the prior year.

Store count, openings, closings, and square footage for our stores were as follows:
 
 
Store Count
 
Square Footage (1)
 
 
May 4,
 
 
 
 
 
MPW
 
August 3,
 
Avg Store
 
August 3,
 
May 4,
Stores by Format
 
2019
 
Open
 
Close
 
Conversions
 
2019
 
Count
 
2019
 
2019
MPW
 
313

 
1

 
(3
)
 
(1
)
 
310

 
311

 
1,227

 
1,234

Outlet
 
81

 

 
(1
)
 

 
80

 
80

 
321

 
325

Christopher and Banks
 
33

 
1

 

 

 
34

 
34

 
112

 
109

C.J. Banks
 
30

 
1

 

 

 
31

 
31

 
111

 
109

Total Stores
 
457

 
3

 
(4
)
 
(1
)
 
455

 
456

 
1,771

 
1,777

(1) 
Square footage presented in thousands

Average store count in the second quarter of Fiscal 2019 was 456 stores compared to an average store count of 462 stores in the second quarter of Fiscal 2018, a decrease of 1.3%. Average square footage in the second quarter of Fiscal 2019 decreased 0.5% compared to the second quarter of Fiscal 2018.

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Table of Contents


Gross Profit

Gross margin rate improved 88 basis points compared to the same period last year primarily due to increased merchandise margin, partially offset by higher shipping costs related to our ship from store initiative.

Selling, General, and Administrative (“SG&A”) Expenses
 
SG&A expense decreased by $1.9 million due to lower expenses for compensation, medical benefits, professional services and eCommerce, and the sale of a claim regarding credit card interchange fees. As a percent of net sales, SG&A decreased approximately 0.6%.
 
Depreciation and Amortization

Depreciation and amortization expense decreased primarily due to the sale-leaseback of the corporate facility in April 2018, a decrease in average store count and lower depreciation due to impairment charges on store-related fixed assets taken in the third and fourth quarters of Fiscal 2018, as well as in the second quarter of Fiscal 2019.

Operating Loss

Our operating loss decreased $1.5 million in the second quarter of Fiscal 2019 compared to the second quarter of Fiscal 2018 primarily due to the $1.9 million decrease in SG&A expenses and the $0.3 million decrease in depreciation expense, partially offset by the $0.3 million impairment charge and the $0.4 million decrease in gross profit.
 
Interest expense, net

The increase in net interest expense was due to a higher level of average borrowings from our Credit Facility during the second quarter of Fiscal 2019 compared to the comparable quarter of Fiscal 2018.
 
Income Tax Provision
 
Income tax expense recorded for the thirteen weeks ended August 3, 2019 was $40 thousand compared to income tax expense of $63 thousand for the same period of Fiscal 2018. Our effective tax rate was (0.7)% for the thirteen weeks ended August 3, 2019 compared to (0.9)% in the same period last year.
 
Net earnings

Our net loss decrease in the second quarter of Fiscal 2019 compared to our net loss in the second quarter of 2018 was primarily due to the decrease in SG&A and depreciation expenses, partially offset by the impairment charge and decrease in gross profit.


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Table of Contents

First Half Fiscal 2019 Result of Operations

The following table presents selected consolidated financial data for the first half of Fiscal 2019 compared to the first half of Fiscal 2018:
 
 
Twenty-six Weeks Ended
 
Net Change
 
Percent of Net Sales
(dollars in thousands)
 
August 3, 2019
 
August 4, 2018
 
Amount
 
Percent
 
August 3, 2019
 
August 4, 2018
Net sales
 
$
166,663

 
$
173,319

 
$
(6,656
)
 
(3.9
)%
 
100.0
 %
 
100.0
 %
Merchandise, buying and occupancy costs
 
116,575

 
121,103

 
(4,528
)
 
(3.7
)%
 
69.9
 %
 
69.9
 %
Gross profit
 
50,088

 
52,216

 
(2,128
)
 
(4.1
)%
 
30.1
 %
 
30.1
 %
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
56,942

 
59,422

 
(2,480
)
 
(4.2
)%
 
34.2
 %
 
34.3
 %
Depreciation and amortization
 
4,581

 
5,334

 
(753
)
 
(14.1
)%
 
2.7
 %
 
3.1
 %
Impairment of store assets
 
311

 

 
311

 
 %
 
0.2
 %
 
 %
Total other operating expenses
 
61,834

 
64,756

 
(2,922
)
 
(4.5
)%
 
37.1
 %
 
37.4
 %
Operating loss
 
(11,746
)
 
(12,540
)
 
794

 
(6.3
)%
 
(7.0
)%
 
(7.2
)%
Interest expense, net
 
(267
)
 
(99
)
 
(168
)
 
169.7
 %
 
(0.2
)%
 
(0.1
)%
Loss before income taxes
 
(12,013
)
 
(12,639
)
 
626

 
(5.0
)%
 
(7.2
)%
 
(7.3
)%
Income tax provision
 
80

 
106

 
(26
)
 
(24.5
)%
 
 %
 
0.1
 %
Net loss
 
$
(12,093
)
 
$
(12,745
)
 
$
652

 
(5.1
)%
 
(7.3
)%
 
(7.4
)%

 
 
Twenty-six Weeks Ended
Rate trends as a percentage of net sales
 
August 3, 2019
 
August 4, 2018
Gross margin
 
30.1
 %
 
30.1
 %
Selling, general, and administrative
 
34.2
 %
 
34.3
 %
Depreciation and amortization
 
2.7
 %
 
3.1
 %
Operating loss
 
(7.0
)%
 
(7.2
)%

First Half Fiscal 2019 Summary
Net sales decreased 3.9% compared to the same period last year primarily due to declines in average unit retail, units per transaction and average number of stores. These declines were partially offset by increases in the number of transactions.
Comparable sales decreased 3.9% following a 0.9% decrease in the same period last year.
eCommerce sales increased 4.8% following a 9.1% increase in the same period last year.
Gross margin percentage improved 7 basis points compared to the same period last year as increased merchandise margin was offset by higher shipping costs relating to our ship from store initiative.
SG&A expense was $2.5 million, or 4.2%, less than last year's first half due to lower expenses for corporate and store compensation, medical benefits, professional services and eCommerce, and the sale of a claim regarding credit card interchange fees in the second quarter. These expense decreases were partially offset by increases in insurance and recruiting and training expenses.
Net loss for the first half totaled $12.1 million, or $(0.32) loss per share, compared to a net loss for the prior year's first half of $12.7 million, or a $(0.34) loss per share.
As of August 3, 2019, we held $2.2 million of cash and cash equivalents, compared to $10.2 million as of February 2, 2019. Bank borrowings were $3.5 million as of the end of the second quarter versus zero at February 2, 2019.


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Net Sales
 
The components of the 3.9% net sales decrease in the first half of Fiscal 2019 compared to the first half of Fiscal 2018 were as follows:
 
 
Twenty-six Weeks Ended
Sales driver change components
 
August 3, 2019
Number of transactions
 
0.7
 %
Units per transaction
 
(0.5
)%
Average unit retail
 
(4.3
)%
Other sales
 
0.2
 %
Total sales driver change
 
(3.9
)%

 
 
Twenty-six Weeks Ended
Comparable sales
 
August 3, 2019
Comparable sales
 
(3.9
)%

Net sales decreased primarily due to a 4.3% decrease in average unit retail and a 0.5% decline in units per transaction. These decreases were partially offset by a 0.7% increase in the number of transactions.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:
 
 
Twenty-six Weeks Ended
Store metrics
 
August 3, 2019
Net sales per store % change
 
(5.2
)%
Net sales per square foot % change
 
(5.9
)%

Net sales per store and net sales per square foot for the first half of Fiscal 2019 each declined primarily from the 4.3% reduction of average dollar spend per transaction and 0.5% reduction in units per transaction, partially offset by a 0.7% increase in the number of transactions from the first half of the prior year.

Store count, openings, closings, and square footage for our stores were as follows:
 
 
Store Count
 
Square Footage (1)
 
 
February 2,
 
 
 
 
 
MPW
 
August 3,
 
Avg Store
 
August 3,
 
February 2,
Stores by Format
 
2019
 
Open
 
Close
 
Conversions
 
2019
 
Count
 
2019
 
2019
MPW
 
312

 
2

 
(3
)
 
(1
)
 
310

 
312

 
1,227

 
1,227

Outlet
 
80

 
1

 
(1
)
 

 
80

 
81

 
321

 
321

Christopher and Banks
 
33

 
1

 

 

 
34

 
33

 
112

 
109

C.J. Banks
 
30

 
1

 

 

 
31

 
30

 
111

 
109

Total Stores
 
455

 
5

 
(4
)
 
(1
)
 
455

 
456

 
1,771

 
1,766

(1) 
Square footage presented in thousands

Average store count in the first half of Fiscal 2019 was 456 stores compared to an average store count of 462 stores in the first half of Fiscal 2018, a decrease of 1.3%. Average square footage in the first half of Fiscal 2019 decreased 0.5% compared to the first half of Fiscal 2018.


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Table of Contents

Gross Profit

Gross margin percentage improved 7 basis points compared to the same period last year as increased merchandise margin was offset by higher shipping costs related to our ship from store initiative.
 
Selling, General, and Administrative (“SG&A”) Expenses
 
SG&A expense decreased by $2.5 million due to lower expenses for corporate and store compensation, medical benefits, professional services and eCommerce, and the sale of a claim regarding credit card interchange fees in the second quarter. These expenses were partially offset by increases in insurance and recruiting and training expenses. As a percent of net sales, SG&A increased by approximately 0.5%.

Depreciation and Amortization

Depreciation and amortization expense decreased primarily due to the sale-leaseback of the corporate facility in April 2018, a 0.5% decrease in average store count and lower depreciation due to impairment charges on store-related fixed assets taken in the third and fourth quarters of Fiscal 2018, as well as in the second quarter of Fiscal 2019.

Operating Loss

Our operating loss decreased 6.3% in the first half of Fiscal 2019 compared to the first half of Fiscal 2018 as the $2.5 million decline in SG&A expense and $0.8 million decline in depreciation expense was partially offset by the $2.1 million decline in gross profit and the $0.3 million asset impairment charge.

Interest expense, net

The increase in net interest expense was due to a higher level of average borrowings from our Credit Facility during the first half of Fiscal 2019 compared to the comparable half of Fiscal 2018.
 
Income Tax Provision
 
Income tax expense recorded for the twenty-six weeks ended August 3, 2019 was $80 thousand compared to income tax expense of $106 thousand for the same period of Fiscal 2018. Our effective tax rate was (0.7)% for the twenty-six weeks ended August 3, 2019 compared to (0.8)% in the same period last year.

Net earnings

Our net loss decrease in the first half of Fiscal 2019 compared to our net loss in the first half of Fiscal 2018 was primarily due to net sales and gross margin decreases, along with the store asset impairment charge, partially offset by lower SG&A and depreciation expenses.

Fiscal 2019 Outlook
 
Based on the strong top line results third quarter-to-date, the Company is maintaining its Fiscal 2019 guidance. 

For the full year of Fiscal 2019, the Company expects:
Net sales to be flat to up 2% as the result of expanded omni-channel capabilities, enhancements to the overall product assortment, and more impactful marketing promotions intended to drive customer file growth;
Gross margin expansion of 100 to 200 basis points as a result of improved inventory management, including supply chain and omni-channel initiatives, greater disciplines around promotions and the continued reduction of occupancy costs; the gross margin guidance reflects the impact of recently announced tariffs;
SG&A as a percentage of sales to decline 100 to 150 basis points due to ongoing cost reduction initiatives; and
To end the fiscal year with positive cash and no outstanding borrowings under its Credit Facility.


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Table of Contents

Liquidity and Capital Resources
 
Cash flow and liquidity
 
Summary
 
We expect to operate our business and execute our strategic initiatives principally with funds generated from operations and from our Credit Facility, subject to compliance with a financial covenant and other terms of the Company's Credit Facility with Wells Fargo Bank N.A ("Wells Fargo").

As of August 3, 2019, our bank borrowings totaled $3.5 million, with $21.8 million of availability under the Company's Credit Facility. Our cash and cash equivalents balance as of August 3, 2019 was $2.2 million, compared to $10.2 million as of February 2, 2019.

Cash Flows
 
The following table summarizes our cash flows from operating, investing, and financing activities for the first half of Fiscal 2019 compared to the first half of 2018:
 
 
Twenty-six Weeks Ended
(in thousands)
 
August 3, 2019
 
August 4, 2018
Net cash used in operating activities
 
$
(10,348
)
 
$
(11,386
)
Net cash (used in) provided by investing activities
 
(996
)
 
11,607

Net cash provided by (used in) financing activities
 
3,347

 
(184
)
Net (decrease) increase in cash and cash equivalents
 
$
(7,997
)
 
$
37

 
Operating Activities
 
The $1.0 million decrease in cash used in operating activities in the first half of Fiscal 2019 compared to the first half of Fiscal 2018 was primarily due to changes in working capital. The positive effect of these items was partially offset by changes in non-cash lease-related items. Working capital fluctuations are a reflection of seasonal patterns and a change in the timing of accounts payable and payroll accruals.

Investing Activities
 
Cash used in investing activities for the current period was $1.0 million as compared to an increase of cash of $11.6 million last year. The $12.6 million change is primarily attributable to proceeds of $13.3 million from the sale of the corporate facility as part of a sale-leaseback transaction in April 2018. Capital expenditures for the first half of Fiscal 2019 were approximately $1.0 million, which primarily reflected investments in technology associated with our eCommerce initiatives and merchandising capabilities, and expenditures supporting new stores.
 
Financing Activities

The increase in cash provided by financing activities between Fiscal 2019 and 2018 was due to net borrowings of $3.5 million on the Company's Credit Facility during the second quarter of Fiscal 2019 and was, partially offset by repurchases of the Company's common stock.

Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents and our Credit Facility are our most significant sources of liquidity. We believe that our sources of liquidity will be sufficient to sustain operations and to finance anticipated capital investments and strategic initiatives over the next twelve months. However, in the event our liquidity is not sufficient to meet our operating needs, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing facilities or obtain additional financing, if necessary, on favorable terms.


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Table of Contents

The Credit Facility with Wells Fargo was most recently amended and extended on August 3, 2018. The current expiration date is August 3, 2023. The Credit Facility amendment in 2018 supplemented the Company’s existing $50.0 million revolving Credit Facility by adding a new $5.0 million revolving “first-in, last-out” (“FILO Facility”) tranche, subject to the borrowing base restrictions applicable to the FILO Facility.

In addition to these changes, the amendment eliminates availability against the Company’s real property, which was the subject of a sale-leaseback transaction during Fiscal 2018.

The capped borrowing base at August 3, 2019 was approximately $39.8 million. As of August 3, 2019, the Company had open on-demand letters of credit of approximately $11.1 million. Accordingly, after reducing the capped borrowing base for current borrowings of $3.5 million, open letters of credit and the required minimum availability of the greater of $3.0 million, or $3.4 million (10.0% of the revolving loan cap), the net availability of revolving credit loans under the Credit Facility was approximately $21.8 million at August 3, 2019.

See Note 5 - Credit Facility for additional details regarding our Credit Facility.

Exchange Listing

As previously disclosed, the Company received notice from the New York Stock Exchange (the “NYSE”) on April 17, 2019 that the Company was not in compliance with certain NYSE listing standards which require minimum market capitalization to be in excess of $15.0 million over a 30-day consecutive trading period.  The Company exercised its right to seek review of this determination by a Committee of the Board of Directors of the Exchange and a hearing before that Committee was scheduled for July 18, 2019. Following discussions with representatives of the NYSE, on July 17, 2019, the Company withdrew its appeal given its current market capitalization was below $15.0 million. In connection therewith, trading in the Company’s common stock on the NYSE was suspended following the close of the NYSE market on Wednesday, July 17, 2019. On July 18, 2019, the Company’s common stock began trading on the OTC Markets Group under the symbol “CBKC”.  On July 17, 2019, the NYSE filed a Form 25 with the Securities & Exchange Commission to effect the formal delisting of the Company’s common stock from the NYSE, which became effective July 29, 2019. The Form 25 filing did not cause the removal of any shares of the Company’s common stock from registration under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company remains subject to the periodic reporting requirements of the Exchange Act.  The Company believes that the delisting of its common stock from the NYSE, as well as the related process leading up to delisting, has had a negative impact on the Company’s common stock market price as well as on the liquidity of its common stock.

Sourcing

There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the thirteen and twenty-six week periods ended August 3, 2019 compared to the Fiscal 2018 year ended February 2, 2019.

Quarterly Results and Seasonality
 
Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, and shifts in the timing of certain holidays and shifts in the timing of promotional events.
 
Inflation
 
We do not believe that inflation had a material effect on our results of operations for the twenty-six-week period ended August 3, 2019.
 
Forward-Looking Statements
 
We may make forward-looking statements reflecting our current views with respect to future events and financial performance. These forward-looking statements, which may be included in reports filed under the Exchange Act, in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A - Risk Factors of our Annual Report on Form
10-K for the fiscal year ended February 2, 2019, which could cause actual results to differ materially from historical results or those anticipated.


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Table of Contents

The words or phrases “will likely result,” “are expected to,” “estimate,” “project,” “believe,” “expect,” “should,” “anticipate,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular, we desire to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, we wish to advise readers that the factors listed in Item 1A of our Annual Report on Form
10-K for the fiscal year ended February 2, 2019, as well as other factors, could affect our performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed in the quarterly report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
For a discussion of our exposure to, and management of our market risks, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. There have been no material changes to our exposure to, and management of our market risks in the thirteen and twenty-six week periods ended August 3, 2019

ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
 
The Company carried out an evaluation as of the end of the period covered by this report (the “Evaluation Date”), under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of August 3, 2019 the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
 
Changes in Internal Controls
 
There were no significant changes in our internal controls that could materially affect our disclosure controls and procedures subsequent to the Evaluation Date. Furthermore, there was no change in our internal control over financial reporting during the quarter ended August 3, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.






PART II

ITEM 1. LEGAL PROCEEDINGS
 
We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue a potential loss contingency.


26

Table of Contents

On August 14, 2019, Mark Gottlieb, a Company stockholder, filed a purported class action proceeding against Jonathan Duskin; Seth Johnson; Keri Jones; Kent Kleeberger; William Sharpe, III; Joel Waller and Laura Weil (the "Named Directors"), B. Riley FBR, Inc. and B. Riley Financial Inc., in the Court of Chancery in the State of Delaware, on behalf of himself and all stockholders who held shares as of December 20, 2018. The lawsuit alleges that the Named Directors breached their duty of loyalty in connection with the Company's rejection in December of 2018, of an unsolicited bid to acquire the Company. The lawsuit further alleges that the B. Riley firms aided and abetted the asserted breach of the duty of loyalty by the Named Directors. The Company believes the Complaint is without merit. The Named Directors, and the Company on their behalf, together with the B. Riley firms, intend to defend the lawsuit vigorously.

The ultimate resolution of legal matters can be inherently uncertain and, for some matters, we may be 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 these uncertainties. We do not, however, currently believe that the resolution of any pending matter will have a material adverse effect on our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

In addition to the other information discussed in this report, the risk factors described in “Part I, Item 1A. Risk Factors” in our 2018 Annual Report on Form 10-K for the fiscal period ended February 2, 2019, should be considered as they could materially affect our business, financial condition or operating results. These are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition or operating results. In addition to the risks described in our 2018 Annual Report on Form 10-K, we also note the following:

We do not meet the requirements for continued qualification for trading on the OTCQX Marketplace of the OTC Markets Group.

Our current stock is currently traded on the OTCQX Marketplace of the OTC Markets Group. On July 24, 2019, we were notified that our market capitalization has stayed below $5 million for more than 30 consecutive calendar days and thus no longer meets the requirements for continued qualification for the OTCQX per the "OTCQX Rules for U.S. Companies" (the "Rules"), section 3.2.b.2. To remain eligible for trading on the OTCQX U.S. tier under this section of the Rules, the Company must have (i) a minimum bid price of $0.10 per share as of the close of business for at least one of every 30 consecutive calendar days; (ii) a market capitalization of at least $5 million for at least one of every 30 consecutive calendar days; and (iii) at least two Market Makers publishing price quotations on OTC Link ATS within 90 days of the Company joining the OTCQX (the "Requirements"). The OTC Markets Group has given the Company a cure period of until January 20, 2020 to regain compliance with this section of the Rules. If the Company is unable to cure the deficiency within the timeframe provided, the Company will be moved to the OTC Pink Market.

On August 26, 2019, we were notified by the OTCQX that our bid price has closed below $0.10 for more than 30 consecutive days and thus no longer meets the requirements for continued qualification under section 3.2.b.1 of the Rules. To remain eligible for trading on the OTCQX U.S. tier, the Company must meet the Requirements. The OTC Markets Group is giving the Company a cure period of until February 20, 2020 to regain compliance with this section of the Rules. If the Company is unable to cure the deficiency within the timeframe provided, the Company will be moved to the OTC Pink Market.

If the Company's stock were to begin trading on the OTC Pink Market it could, among other things: reduce the liquidity and possibly even the market price of our common stock; and result in limited availability for market quotations for our common stock.


27

Table of Contents

Changes in U.S. trade policies, including the imposition of tariffs on apparel or accessories and a potential resulting trade war, could have a material adverse impact on our business.

Most of our merchandise is produced in foreign countries, primarily in China, making the price and availability of our merchandise susceptible to international trade risks and other international conditions. The imposition of tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries. Recently, the current U.S. administration and China have imposed significant tariffs on goods imported from the other's country, and more recently, the United States announced a plan to impose the additional tariffs on apparel and accessories. These recently announced tariffs as well as additional tariffs or trade restrictions that are implemented by the United States or other countries, could have a significant adverse impact on the cost of our goods, the prices at which we offer them for sale and our overall financial performance. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact the cost of and demand for our products, our overall costs, our customers, our suppliers and the world economy, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table sets forth information concerning purchases of our common stock for the quarter ended August 3, 2019:
 
 
 
 
 
 
Total Number of
 
Maximum Number of
 
 
 
 
 
 
Shares Purchased as
 
Shares that May Yet
 
 
Total Number of
 
 
 
Part of Publicly
 
Be Purchased Under
 
 
Shares
 
Average Price
 
Announced Plans or
 
the Plans or
Period
 
Purchased (1)
 
Paid per Share
 
Programs
 
Programs
5/5/19 - 6/1/19
 
2,126

 
$
0.25

 

 
$

6/2/2019 - 7/6/2019
 
2,126

 
0.14

 

 

7/7/2019 - 8/3/2019
 
11,571

 
0.11

 

 

Total
 
15,823

 
 

 

 


(1) 
The shares of common stock in this column represent shares surrendered to us by stock plan participants in order to satisfy minimum withholding tax obligations related to the vesting of restricted stock awards.

The following table summarizes information in connection with purchases made by, or on behalf of, the Company or any
affiliated purchaser of the Company, of shares of the Company’s common stock during the 13-week period ended August 3, 2019.

Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
5/5/19 - 6/1/19