Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended May 5, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-28784

HOT TOPIC, INC.

(Exact name of registrant as specified in its charter)


CALIFORNIA		77-0198182
(State of incorporation)		(IRS Employer Identification No.)


18305 EAST SAN JOSE AVE., CITY OF INDUSTRY, CA		91748
(Address of principal executive offices)		(Zip Code)

(626) 839-4681

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: May 24, 2007 – 44,247,098 shares of common stock, no par value.

HOT TOPIC, INC.

INDEX TO FORM 10-Q


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets – May 5, 2007 and February 3, 2007		3

Condensed Consolidated Statements of Operations for the three months ended May 5, 2007 and April 29, 2006		4

Condensed Consolidated Statements of Cash Flows for the three months ended May 5, 2007 and April 29, 2006		5

Notes to Condensed Consolidated Financial Statements		6-14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 6.	Exhibits	34

SIGNATURES		35

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

Hot Topic, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)


	(Unaudited) May 5, 2007			February 3, 2007
Assets
Current assets:
Cash and cash equivalents	$	9,911		$	3,910
Short-term investments		39,260			51,580
Inventory		75,062			73,868
Prepaid expenses and other		13,621			14,435
Deferred tax assets		3,680			3,258

Total current assets		141,534			147,051

Property and equipment, net		165,970			166,726
Deposits and other		962			588
Deferred tax assets		4,059			3,906

Total assets	$	312,525		$	318,271


Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	21,587		$	15,862
Accrued liabilities		27,667			34,332
Income taxes payable		—			5,590

Total current liabilities		49,254			55,784

Deferred rent		40,117			40,674
Deferred compensation liability		762			356
Income taxes payable		1,258			—

Commitments and contingencies

Shareholders’ equity:
Preferred shares, no par value; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common shares, no par value; 150,000,000 shares authorized; 44,247,098 and 44,229,848 shares issued and outstanding at May 5, 2007 and February 3, 2007, respectively		108,410			107,088
Retained earnings		112,727			114,372
Accumulated other comprehensive loss		(3	)		(3	)

Total shareholders’ equity		221,134			221,457

Total liabilities and shareholders’ equity	$	312,525		$	318,271

See accompanying Notes to Condensed Consolidated Financial Statements.

Hot Topic, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended
	May 5, 2007			April 29, 2006
Net sales	$	157,282		$	154,041
Cost of goods sold, including buying, distribution and occupancy costs		105,695			105,784

Gross margin		51,587			48,257

Selling, general and administrative expenses		53,404			50,942

Loss from operations		(1,817	)		(2,685	)

Interest income, net		506			403

Loss before benefit for income taxes		(1,311	)		(2,282	)

Benefit for income taxes		(502	)		(874	)

Net loss	$	(809	)	$	(1,408	)

Loss per share:
Basic	$	(0.02	)	$	(0.03	)

Diluted	$	(0.02	)	$	(0.03	)

Shares used in computing loss per share:
Basic		44,245			44,065
Diluted		44,245			44,065

See accompanying Notes to Condensed Consolidated Financial Statements.

Hot Topic, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended
	May 5, 2007			April 29, 2006
OPERATING ACTIVITIES
Net loss	$	(809	)	$	(1,408	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		9,930			9,201
Stock-based compensation		1,251			1,324
Loss on disposal of fixed assets		95			25
Impairment of long-lived assets		158			—
Deferred taxes		(637	)		(376	)
Gift card breakage		(170	)		(149	)
Changes in operating assets and liabilities:
Inventory		(1,194	)		(11,204	)
Prepaid expenses and other current assets		814			(350	)
Deposits and other assets		(373	)		(1	)
Accounts payable		5,724			9,398
Accrued liabilities		(6,127	)		(3,011	)
Deferred rent		(557	)		575
Income taxes payable		(5,168	)		(5,787	)

Net cash provided by (used in) operating activities		2,937			(1,763	)

INVESTING ACTIVITIES
Purchases of property and equipment		(9,428	)		(11,217	)
Proceeds from sale of short-term investments		22,300			8,541
Purchases of short-term investments		(9,980	)		(6,271	)

Net cash provided by (used in) investing activities		2,892			(8,947	)

FINANCING ACTIVITIES
Payments on capital lease obligations		—			(197	)
Excess tax benefit from stock-based compensation		62			165
Proceeds from employee stock purchases and exercise of stock options		110			1,762

Net cash provided by financing activities		172			1,730

Increase (decrease) in cash and cash equivalents		6,001			(8,980	)
Cash and cash equivalents at beginning of year		3,910			9,673

Cash and cash equivalents at end of period	$	9,911		$	693


SUPPLEMENTAL INFORMATION
Cash paid during the period for interest	$	—		$	—

Cash paid during the period for income taxes	$	5,687		$	7,781

See accompanying Notes to Condensed Consolidated Financial Statements.

HOT TOPIC, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Organization and Basis of Presentation

We are a mall-based specialty retailer operating the Hot Topic and Torrid concepts. At our Hot Topic stores, we sell a selection of music/pop culture-licensed and music/pop culture-influenced apparel, accessories and gift items for young men and women principally between the ages of 12 and 22. At our Torrid stores, we sell apparel, lingerie, shoes and accessories designed for various lifestyles for plus-size females between the ages of 15 and 29. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. At the end of the first quarter of fiscal 2007 (May 5, 2007, in the 52-week fiscal year ending February 2, 2008), we operated 695 Hot Topic stores throughout the United States and Puerto Rico and 131 Torrid stores in 34 states. We also sell merchandise on two websites, www.hottopic.com and www.torrid.com, which reflect the Hot Topic and Torrid store concepts and sell merchandise similar to that sold in the respective stores. We have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts. Throughout this report, the terms “our”, “we” and “us” refer to Hot Topic, Inc. and its subsidiaries.

The information set forth in these financial statements is unaudited except for the February 3, 2007 condensed consolidated balance sheet. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, all adjustments, consisting only of normal recurring entries, necessary for a fair presentation have been included.

NOTE 2. Stock-Based Compensation

Stock Plan Activity

Under our 1996 Equity Incentive Plan, we granted stock options, stock bonuses and other awards to our employees, directors and consultants as deemed appropriate by the Board of Directors (the “Board”). On June 14, 2006, the 1996 Equity Incentive Plan expired and was replaced with the 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan was approved by the Board on March 17, 2006 and by our shareholders on June 13, 2006. Upon expiration of the 1996 Equity Incentive Plan, 732,456 shares out of an aggregate of 18,300,000 shares of common stock that were authorized for grant remained available for grant and unissued.

The 2006 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of equity compensation to our employees, consultants and directors as deemed appropriate by the Board. Both incentive and non-statutory stock options granted by us under the 2006 Plan must carry an exercise price of at least 100% of the fair market value of the stock on the date of grant. Options granted may be subject to different vesting terms as determined by the Board and the maximum term of options granted is 10 years. In addition, the maximum number of shares of common

stock available for future issuance may not exceed the sum of (a) the number of unallocated shares of common stock remaining available for issuance under the 1996 Incentive plan as of June 13, 2006, (b) an additional 2,350,000 shares and (c) the number of shares subject to stock awards as of June 13, 2006 under the 1996 Incentive Plan pursuant to the terms of the 1996 Incentive Plan. As of May 5, 2007, 1,326,007 shares were available for future grants. All awards to date under the 2006 Plan have been granted to our employees and none have been granted to consultants.

In March 2006, we granted restricted stock unit awards under the 1996 Equity Incentive Plan to certain members of our management. None of these awards have vested and no shares have been issued pursuant to the grants. These awards provide for the issuance of up to 474,000 shares of our common stock, with vesting and issuance contingent upon achieving performance goals for fiscal 2008 based upon our operating income for that fiscal year; and prior to vesting (or termination without vesting), the units will constitute an agreement by us to issue shares to the extent performance goals are ultimately met. The market value of our common stock as of the grant date of these restricted stock unit awards was $13.90. Compensation expense for these awards is required to be recorded over the three-year term of the award, based on the market value as of the grant date, with actual amounts expensed dependent upon the likelihood from period to period of vesting of such awards at the end of fiscal 2008. As of May 5, 2007, it is our best estimate that none of these awards will be earned at the end of the three-year term. Thus, in aggregate, we have not recognized any compensation expense during the three months ended May 5, 2007 for these restricted stock unit awards.

Upon the Board’s approval in March 2007, we granted restricted stock unit awards under the 2006 Plan to certain members of our management. This grant is substantially similar to the grant under the 1996 Equity Incentive Plan. None of these awards have vested and no shares have been issued pursuant to the grants. These awards provide for the issuance of up to 600,000 shares of our common stock, with vesting and issuance contingent upon achieving performance goals for fiscal 2009 based upon our operating income for that fiscal year; and prior to vesting (or termination without vesting), the units will constitute an agreement by us to issue shares to the extent performance goals are ultimately met. The market value of our common stock as of the grant date of these restricted stock unit awards was $11.31. Compensation expense for these awards is required to be recorded over the three-year term of the award, based on the market value as of the grant date, with actual amounts expensed dependent upon the likelihood from period to period of vesting of such awards at the end of fiscal 2009. As of May 5, 2007, it is our best estimate that 50% of these awards will be earned at the end of the three-year term. As a result, we recognized $283,000 as compensation expense in the first quarter of fiscal 2007 for these restricted stock unit awards.

Under our 1996 Non-Employee Directors’ Stock Option Plan, we may grant and have granted stock options and other awards to non-employee directors. The exercise price of options granted under this plan shall be determined by the Board at the date of grant and shall not be lower than (i) 100% of the fair market value of our common stock on the date of grant for incentive stock options, (ii) 85% of the fair market value of our common stock on the date of grant for non-statutory stock options and (iii) 110% of the fair market value of our common stock on the date of grant for persons possessing 10% or more of the total combined voting power of all classes of stock. Unless the Board declares otherwise, options vest over four years and generally expire ten years from the date of grant. An aggregate of 720,000 shares of common stock may be issued pursuant to this plan. As of May 5, 2007, 23,264 shares were available for future grants. No options under this plan have been granted to consultants.

In June 2006, we granted 11,842 shares of restricted common stock to non-employee directors under the 1996 Equity Incentive Plan, and we made additional restricted stock grants to non-employee

directors in fiscal 2005. Restricted shares generally vest in the year subsequent to the grant year. All awarded common shares remain restricted (i.e., not transferable by the holders) until such time as the recipient is no longer a member of our Board of Directors. The value of these grants is expensed over the vesting period. During the three months ended May 5, 2007, $39,000, all of which relates to the fiscal 2006 grant, has been expensed. During fiscal 2005, non-employee directors were granted 7,496 shares of restricted stock. The associated expense of $39,000, all of which related to the fiscal 2005 grant, was expensed during the three months ended April 29, 2006.

The following table summarizes stock options outstanding under all of our plans as of May 5, 2007, as well as activity through the first quarter then ended:


	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at February 3, 2007	5,955,355		$	15.50

Granted	1,044,500		$	11.33
Exercised	(17,250	)	$	2.83
Forfeited or expired	(87,588	)	$	18.02

Outstanding at May 5, 2007	6,895,017		$	14.87	6.79	$	5,690

Exercisable at May 5, 2007	4,885,974		$	15.91	5.72	$	5,665

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the three months ended May 5, 2007 and April 29, 2006 are provided in the following table (in thousands):


	Three Months Ended
	May 5, 2007		April 29, 2006
Proceeds from stock options exercised	$	49	$	1,762
Tax benefit related to stock options exercised	$	62	$	165
Intrinsic value of stock options exercised	$	154	$	431

In June 1996, the Board of Directors adopted the Employee Stock Purchase Plan (the “Stock Purchase Plan”). The Stock Purchase Plan provides for the issuance of up to 1,350,000 shares of common stock to our employees. All eligible employees are granted identical rights to purchase common stock for each Board authorized offering under the Stock Purchase Plan. Rights granted pursuant to any offering under the Stock Purchase Plan terminate immediately upon cessation of an employee’s employment for any reason. In general, an employee may reduce contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Employees receive a 15% discount on shares purchased under the Stock Purchase Plan. Rights granted under the Stock Purchase Plan are not transferable and may be exercised only by the person to whom such rights are granted. The initial offering

under the Stock Purchase Plan commenced October 24, 1996 and terminated December 31, 1996. Subsequent offerings occur every six months commencing January 1, 1997. At May 5, 2007, 1,086,960 shares could still be sold to employees under the plan. Compensation expense for the three months ended May 5, 2007 was $43,000 to account for the fair value of the rights granted to participants under the plan at the beginning of the then-current offering.

Accounting for Stock-Based Compensation Expense

Effective January 29, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payments,” (“SFAS 123R”) which addresses the accounting for stock-based payment transactions whereby an entity receives employee services in exchange for equity instruments, including stock options. SFAS 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and instead generally requires that such transactions be accounted for using a fair value based method. We have elected the modified prospective transition method as permitted under SFAS 123R, and accordingly prior periods have not been restated to reflect the impact of SFAS 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on January 29, 2006. Stock-based compensation for awards granted prior to January 29, 2006 is based upon the grant-date fair value of such compensation as determined under the pro forma provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

The effect of recording stock-based compensation for the three months ended May 5, 2007 was as follows:


	Three Months Ended
	May 5, 2007			April 29, 2006
Stock-based compensation by type of award:
Employee stock options and awards	$	924,557		$	1,017,656
Restricted stock units		282,750			274,525
Employee stock purchase plan		43,296			31,500

Total stock-based compensation expense	$	1,250,603		$	1,323,681
Tax effect on stock-based compensation expense		(421,588	)		(375,460	)

Net effect on net income	$	829,015		$	948,221

Effect on earnings per share:
Basic and diluted	$	0.02		$	0.02

For the three months ended May 5, 2007 and April 29, 2006, $209,000 and $182,000, respectively, of stock and equity awards compensation expense was recorded as a component of cost of goods sold and the remainder, $1,042,000 and $1,142,000, respectively, was charged to selling, general and administrative expense.

The incremental stock-based compensation expense resulting from the adoption of SFAS 123R includes expense related to stock options granted prior to, but not yet vested as of January 29, 2006. As of May 5, 2007, we had $11.5 million of unrecognized expense related to non-vested stock-based compensation, which is expected to be recognized over a weighted average period of 3.39 years.

Calculation of Fair Value of Options

We use a Black-Scholes option valuation model to determine the fair value of stock-based compensation under SFAS 123R, consistent with that used by us previously for pro forma disclosures under SFAS 123. The Black-Scholes model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of an award is generally no less than the option vesting period and is based on our historical experience. Expected volatility is based upon the historical volatility of our stock price. The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term equal to the option’s expected life. We use a dividend yield of zero in the Black-Scholes option valuation model, as we do not anticipate paying cash dividends in the foreseeable future.

The following weighted average assumptions were used for stock options granted:


	Three Months Ended
	May 5, 2007		April 29, 2006
Risk free interest rate	5	%	5	%
Expected life	5	years	5	years
Expected volatility	47	%	48	%
Expected dividend yield	0	%	0	%

Weighted average fair value at grant date	$ 5.39		$ 5.18

NOTE 3. Earnings Per Share

We compute earnings per share pursuant to SFAS No. 128 “Earnings Per Share.” Basic earnings per share is computed based on the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed based on the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents outstanding for the period.

A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share is as follows (in thousands, except per share amounts):


	Three Months Ended
	May 5, 2007			April 29, 2006
Basic earnings computation:
Numerator	$	(809	)	$	(1,408	)

Denominator:
Weighted average common shares outstanding		44,245			44,065
Incremental shares from assumed conversion of options		—			—

Total shares		44,245			44,065

Basic loss per share	$	(0.02	)	$	(0.03	)
Diluted loss per share	$	(0.02	)	$	(0.03	)

The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive:


	Three Months Ended
	May 5, 2007	April 29, 2006
Anti-dilutive options	5,097,943	4,564,136

The calculation of dilutive shares also excludes the 600,000 and 474,000 restricted stock unit awards granted to certain members of our management in March 2007 and March 2006, respectively, as they are contingent upon achieving certain fiscal 2009 and 2008, respectively, performance goals.

NOTE 4. Comprehensive Loss

Comprehensive loss for the three months ended May 5, 2007 and April 29, 2006 is as follows (in thousands):


	Three Months Ended
	May 5, 2007			April 29, 2006
Comprehensive loss
Net loss	$	(809	)	$	(1,408	)
Unrealized loss on marketable securities, net		—			(1	)

Total comprehensive loss	$	(809	)	$	(1,409	)

NOTE 5. Deferred Compensation Plan

In August 2006, we adopted the Hot Topic Inc. Management Deferred Compensation Plan (the “Deferred Compensation Plan”) for the purpose of providing highly compensated employees and members of our Board of Directors a program to meet their financial planning needs. The Deferred

Compensation Plan provides participants with the opportunity to defer up to 80% of their base salary and up to 100% of their annual earned bonus, all of which, together with the associated investment returns, are 100% vested from the outset. The plan, which is designed to be exempt from most provisions of the Employee Retirement Security Act of 1974, is informally funded by us in order to preserve the tax-deferred savings advantages of a non-qualified plan. As such, all deferrals and associated earnings are general unsecured obligations of Hot Topic, Inc. held as an asset within a ‘rabbi trust’ on our condensed consolidated balance sheets. We do not currently contribute to the plan. As of May 5, 2007, assets and associated liabilities of the Deferred Compensation Plan were $718,000 and $762,000, respectively, and are included in other non-current assets and non-current liabilities, respectively, in our condensed consolidated balance sheets.

NOTE 6. Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment review include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management.

In the event future store performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges. Based on our review at May 5, 2007, we recorded an impairment charge of $158,000, which is included in selling, general and administrative expenses for the first quarter in our condensed consolidated statements of operations. No impairment charges were recorded during the three months ended April 29, 2006.

NOTE 7. Bank Credit Agreement

We maintain an unsecured bank credit agreement of $5.0 million. The credit agreement will expire in August 2007, and we expect to renew the credit agreement under similar terms. Letters of credit are issued under the credit agreement, which are primarily used for inventory purchases. There were letters of credit for $270,000 and $80,000 outstanding at May 5, 2007 and February 3, 2007, respectively.

NOTE 8. Commitments and Contingencies

Litigation

violation of law. In January 2007, the court granted final approval of the settlement terms. Under the settlement agreement, we will pay (during the first two quarters of fiscal 2007) an estimated aggregate of approximately $250,000 to cover certain attorneys’ fees and claims administration costs; and we have provided class members who opted in to the settlement class a coupon to receive 20% off on a single purchase of up to $100 in our Hot Topic or Torrid stores. We accrued amounts to account for the settlement during our third quarter of 2006 following agreement on the settlement terms. In April 2007, the case was dismissed with prejudice, and we do not expect any further activity with respect to the matter.

We are involved in other matters of litigation that arise in the ordinary course of business. We do not currently believe that the case referenced above, or any other litigation in which we are currently involved, will have a material adverse effect on our overall financial condition.

Indemnities, Commitments and Guarantees

During the ordinary course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of California. We have issued guarantees in the form of letters of credit as security for some merchandise shipments from overseas. There were letters of credit for $270,000 and $80,000 outstanding at May 5, 2007 and February 3, 2007, respectively. The durations of these indemnities, commitments and guarantees vary. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated financial statements.

NOTE 9. Impact of Recently Issued Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for the uncertainty in recognizing income taxes in an organization in accordance with FASB Statement No. 109 by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions. FIN 48 requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the effective date to be recognized both upon the adoption of FIN 48 and in subsequent periods. For additional information on the adoption of FIN 48, see Note 10 below.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to provide enhanced disclosure regarding instruments in the level 3 category, including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact adoption may have on our financial condition or results of operations.

NOTE 10. Adoption of FIN 48

On February 4, 2007, we adopted the provisions of FIN 48. Differences between the amount recognized in our condensed consolidated financial statements prior to the adoption of FIN 48 and the amounts reported as a result of adoption have been accounted for as a cumulative effect adjustment recorded to our February 4, 2007 beginning retained earnings balance. The adoption of FIN 48 decreased our February 4, 2007 balance of retained earnings and increased our liability for unrecognized tax benefits by $0.8 million, of which $0.1 million related to interest and $0.1 million related to penalties.

As of the adoption date, the total liability for income tax associated with unrecognized tax benefits was $1.5 million, all of which, if recognized, would affect our effective tax rate. As of May 5, 2007, the liability for income tax associated with uncertain tax positions did not materially change.

Our continuing practice is to recognize interest and penalties related to unrecognized tax benefits in tax expense. At May 5, 2007, we accrued $0.3 million of interest and penalties related to uncertain tax positions. The provision for interest and penalties related to uncertain tax positions during the first quarter of fiscal 2007 was not material.

We operate stores throughout the United States and Puerto Rico, and as a result, we file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before fiscal 2002. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe our reserves for income taxes represent the most probable outcome. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances.

We anticipate that our total amount of liability for unrecognized tax benefits may change due to the settlement of audits and the expiration of statute of limitations in the next 12 months. As such, we have classified tax reserves of $0.3 million as a current liability.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by these sections, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, expected financial results, the profitability of future sales of our products, new store openings and new store concepts. All forward-looking statements included in this report are based on information available to us as of the date hereof and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include but are not limited to the items discussed under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2 and “Risk Factors” in Part II, Item 1A.

OVERVIEW

We are a mall-based specialty retailer operating the Hot Topic and Torrid concepts. At our Hot Topic stores, we sell a selection of music/pop culture-licensed and music/pop culture-influenced apparel, accessories and gift items for young men and women principally between the ages of 12 and 22. At our Torrid stores, we sell apparel, lingerie, shoes and accessories designed for various lifestyles for plus-size females between the ages of 15 and 29. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. At the end of the first quarter of fiscal 2007 (May 5, 2007 in the 52-week fiscal year ending February 2, 2008), we operated 695 Hot Topic stores throughout the United States and Puerto Rico and 131 Torrid stores in 34 states. We also sell merchandise on two websites, www.hottopic.com and www.torrid.com, which reflect the Hot Topic and Torrid store concepts and sell merchandise similar to that sold in the respective stores. Throughout this report, the terms “our”, “we” and “us” refer to Hot Topic, Inc. and its subsidiaries.

Since our Hot Topic division focuses on music/pop culture-licensed and music/pop culture-inspired trends, we have adopted a teen customer-focused strategy which includes immersing ourselves into the rock music and pop culture scene, identifying products that are inspired by these scenes, and creating an in-store environment that reflects our inspiration. Our feedback loop is integral to our strategy. We gain input from customers and store associates via reading customer comment cards and associate concert reports, visiting stores, allowing direct email communication with stores and observing focus groups. We believe this direct engagement with customers provides a competitive advantage over other mall-based fashion retailers.

Our Torrid division focuses on fashion forward apparel and accessories for plus-size women. Our target customers have a youthful attitude and desire to reflect current fashion trends in their dress. We continue to make significant progress in the development of our Torrid brand. Consistent marketing, growth of our loyalty program, divastyle®, in-store operational improvements and refocusing the assortment to more correctly reflect our customers’ attitudes and preferences all contribute to the growth of the brand.

At the end of the first quarter of fiscal 2007, our 695 Hot Topic stores and 131 Torrid stores compared to 671 Hot Topic stores and 123 Torrid stores at the end of the first quarter of fiscal 2006. During the first quarter of fiscal 2007, we opened a total of two Hot Topic stores and closed one Hot Topic store. We also remodeled or relocated 17 Hot Topic stores during the quarter; six of these remodels or relocations saw their square footage change by over 15%.

The discussion below includes references to “comparable stores.” We consider a store comparable after it has been open for 15 full months. If a store is relocated, or expanded by more than 15% in total square footage, it is removed from the comparable store base and, similar to new stores, becomes comparable after 15 full subsequent months. If a store is closed during a period, it is included in the computation of comparable store sales for that fiscal month, quarter and year-to-date period, only for the days in which the store was operating as compared to the full month in the comparable period.

Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to January 31. The fiscal year ending February 2, 2008 is a 52-week fiscal year, and fiscal year ended February 3, 2007 was a 53-week year.

The 53^rd week in fiscal 2006 caused a one-week shift in our 2007 fiscal calendar, referred to below as the Retail Calendar Shift, resulting in the end of the first quarter of fiscal 2007 being shifted later by one week relative to the quarter-ending date last fiscal year. If there are seasonal influences near quarter-end dates, year-over-year comparisons may be impacted by the Retail Calendar Shift. Our reported comparable store results for fiscal 2007, both in this report and in our other public disclosures, are being adjusted for the shift.

The following discussion of our results of operations, financial condition and liquidity and other matters should be read in conjunction with our Condensed Consolidated Financial Statements and the Notes related thereto.

RESULTS OF OPERATIONS

Three Months Ended May 5, 2007 Compared to the Three Months Ended April 29, 2006

The following table sets forth selected data from our statement of operations expressed as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with this table:


For the three months ended:	May 5, 2007		April 29, 2006
Net sales	100.0	%	100.0	%
Cost of goods sold (including buying, distribution and occupancy costs)	67.2		68.7

Gross margin	32.8		31.3
Selling, general and administrative expenses	34.0		33.1

Loss from operations	(1.2	)	(1.7	)
Interest income, net	0.3		0.2

Loss before benefit for income taxes	(0.9	)	(1.5	)
Benefit for income taxes	(0.3	)	(0.6	)

Net loss	(0.6	)%	(0.9	)%

Net sales increased $3.3 million, or 2.1%, to $157.3 million during the first quarter of fiscal 2007 from $154.0 million during the first quarter of fiscal 2006. The components of this $3.3 million increase in net sales are as follows:


Amount ($ millions)		Description
$ 3.3		Net sales from new Hot Topic stores opened since the first quarter of fiscal 2006 and Hot Topic stores not yet qualifying as comparable stores.

2.0		Net sales from new Torrid stores opened since the first quarter of fiscal 2006 and Torrid stores not yet qualifying as comparable stores.

1.2		Increase in Internet sales (hottopic.com and torrid.com).

0.3		Net sales from 12 expanded or relocated Hot Topic and Torrid stores not yet qualifying as comparable stores.

(3.5)		2.3% decrease in comparable store net sales in the first quarter of fiscal 2007 compared to the prior year quarter.


$ 3.3		Total

At the end of the first quarter of fiscal 2007, 735 of our 826 stores (Hot Topic and Torrid) were included in the comparable store base, compared to 638 of our 794 stores (Hot Topic and Torrid) open at the end of the first quarter of fiscal 2006. Sales of our Hot Topic division’s apparel and tee-shirts, as a percentage of total net sales, remained the same at 56% for the first quarter of fiscal 2007 and 2006.

Gross margin increased $3.3 million, or 6.9%, to $51.6 million during the first quarter of fiscal 2007 from $48.3 million during the first quarter of fiscal 2006. As a percentage of net sales, gross margin increased to 32.8% during the first quarter of fiscal 2007 from 31.3% in the first quarter of fiscal 2006.

The significant components of this 1.5% increase in gross margin as a percentage of net sales are as follows:


%		Description
2.2	%	Increase in merchandise margin primarily due to higher initial markup and lower freight-in expenses, partially offset by slightly higher markdowns.

0.5		Decrease in distribution expenses primarily due to lower outside temporary personnel expenses and lower freight expenses to stores.

(1.2	)	Increase in store occupancy and depreciation expenses, primarily due to the acceleration of depreciation related to our store remodel and relocation program and deleveraging store expenses over lower comparable store sales.


1.5	%	Total

Selling, general and administrative expenses increased $2.5 million, or 4.8%, to $53.4 million during the first quarter of fiscal 2007 compared to $50.9 million during the first quarter of fiscal 2006. The total dollar increase in selling, general and administrative expenses was primarily attributable to a 3.9% increase in the number of retail stores from 794 at the end of the first quarter of fiscal 2006 to 826 at the end of the first quarter of fiscal 2007 and the corresponding additional payroll and other expenses required to support these additional stores. As a percentage of net sales, selling, general and administrative expenses increased to 34.0% in the first quarter of fiscal 2007 compared to 33.1% in the first quarter of fiscal 2006. The significant components of the 0.9% increase in selling, general and administrative expenses as a percentage of net sales are as follows:


%		Description
0.6	%	Increase in other general and administrative expenses primarily due to support personnel and consulting fees for enhancements to computer systems.

0.5		Increase in store payroll expense due to deleveraging of payroll costs relative to our decrease in comparable store sales.

0.2		Increase in marketing expenses due to the delivery of a basic sign kit which stores can utilize for all promotions throughout the year, compared to the creation of signs on a monthly basis which spread the cost throughout fiscal 2006.

0.1		Increase in performance-based bonuses.

(0.1	)	Decrease in pre-opening expenses due to opening fewer stores in the first quarter of 2007 as compared to the first quarter of 2006.

(0.1	)	Decrease in other store expenses primarily due to store supplies, partially offset by an increase in utilities.

(0.2	)	Decrease in non-cash stock-based compensation expense allocated to selling, general and administrative expense in the first quarter of 2007.

(0.1	)	Decrease in depreciation and amortization primarily due to the drop off of fully depreciated software assets in the third quarter of 2006.


0.9	%	Total

Operating loss decreased $0.9 million to $1.8 million during the first quarter of fiscal 2007 from $2.7 million during the first quarter of fiscal 2006. As a percentage of net sales, operating loss was 1.2% in the first quarter of fiscal 2007 compared to 1.7% in the first quarter of fiscal 2006.

Net interest income as a percentage of sales was 0.3% in the first quarter of fiscal 2007 compared to 0.2% in the first quarter of fiscal 2006.

Income tax benefit was $0.5 million for the first quarter of fiscal 2007 compared to $0.9 million for the first quarter of fiscal 2006. The effective tax rate remained the same at 38.3% for the first quarter of fiscal 2007 and 2006.

LIQUIDITY AND CAPITAL RESOURCES

Historically and during the first quarter of fiscal 2007, our primary uses of cash have been to finance store openings and remodels and purchase merchandise inventories. In the past we have also made periodic repurchases of our common shares. During the quarter and consistent with recent years, we have satisfied our cash requirements principally from cash flows from operations, and to a lesser extent, proceeds from the exercise of stock options. We also maintain a $5.0 million unsecured credit agreement for issuing letters of credit, primarily for inventory purchases. There were letters of credit for $270,000 and $80,000 outstanding at May 5, 2007 and February 3, 2007, respectively.

Net cash flows provided by operating activities were $3.0 million in the first three months of fiscal 2007 compared to $1.8 million used in operating activities in the first three months of fiscal 2006. The $4.8 million increase in cash flows from operating activities in the first three months of fiscal 2007 compared to the first three months of fiscal 2006 was primarily attributable to a reduction in inventory, partially offset by decreases in accounts payable and accrued liabilities.

Net cash flows provided by investing activities were $2.9 million in the first three months of fiscal 2007 compared to net cash flows used in financing activities of $8.9 million in the first three months of fiscal 2006. The $11.8 million increase in the first three months of fiscal 2007 compared to the first three months of fiscal 2006 resulted principally from a $10.0 million increase in proceeds from the sale of short-term investments, net of purchases, along with a $1.8 million decrease in purchases of property and equipment.

Net cash flows provided by financing activities were $0.1 million and $1.7 million in the first three months of fiscal 2007 and 2006, respectively. The $1.6 million decrease in net cash flows in the first three months of fiscal 2007 compared to the first three months of fiscal 2006 resulted primarily from a $1.7 million decrease in proceeds from employee stock purchases and exercise of stock options.

The following table summarizes certain contractual obligations as of May 5, 2007, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:


	Payments due by period ($ in thousands)
Contractual obligations*	Total		Within 1 Year		2-3 Years		4-5 Years		More than 5 Years
Operating leases	$	351,117	$	54,853	$	104,972	$	91,018	$	100,274
Purchase obligations	$	80,494		80,494		—		—		—
Letters of credit and other obligations	$	1,460		1,460		—		—		—

Total contractual obligations	$	433,071	$	136,807	$	104,972	$	91,018	$	100,274

*	Excludes obligations arising from the adoption of FIN 48

We expect capital expenditures for fiscal 2007 to be approximately $45 to $50 million, which will relate primarily to the remodeling or relocating of Hot Topic stores and the opening of new Hot Topic and Torrid stores. The remainder of the expenditures will be primarily for improvements to our information technology and corporate infrastructure. We believe our current cash balances and cash generated from operations will be sufficient to fund our operations and planned expansion through at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate estimates, including those related primarily to inventories, long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. For a further discussion about the application of these and other accounting policies, refer to the notes included in our Annual Report on Form 10-K for the year ended February 3, 2007.

Inventories: Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail method. Under the retail method, inventory is stated at its current retail selling value, and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the purchase activity for the month. Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise. We record a charge to cost of goods sold for permanent markdowns. Inherent in the retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins. To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded. Physical inventories are conducted during the year to determine actual inventory on hand and shrinkage. We accrue our estimated inventory shrinkage for the period between the last physical count and current period end balance sheet date, thus, the difference between actual and estimated shrink amounts may cause fluctuations in quarterly results, but not for the fiscal year results.

Valuation of long-lived assets: In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment review include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. In the event future store performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges.

Revenue Recognition: Revenue is recognized at our retail store locations at the point at which the customer receives and pays for the merchandise at the register. For online sales, revenue is recognized at the time of shipment, which we refer to as the date of purchase by the customer. We continually monitor the volume of Internet sales during the last five days of each fiscal quarter, which is the estimated time goods are received by customers. Historically, Internet sales during this five-day period have been less than a half percent of total company sales each quarter. Although title and risk and rewards of ownership pass to the buyer upon receipt of the goods by the buyer, we utilize the shipping point as the difference has not historically been material. Should the volume of sales during any period increase, we will revise our policy accordingly. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of net sales.

We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed. Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods. While customer redemption patterns result in estimated gift card breakage, which approximates 5%, changes in our customers’ behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales.

Vendor Allowances: We receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and, for our Torrid division, new store openings. Allowances received from vendors related to damaged merchandise and new Torrid store openings are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold. Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received.

Stock-Based Payments: We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized over the requisite service periods of the awards. This option-pricing model requires the input of highly subjective assumptions, including the option’s expected life, price volatility of the underlying stock, risk free interest rate and expected dividend rate. As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

Self-Insurance: We are self-insured for certain losses related to medical and workers compensation although we maintain stop loss coverage with third party insurers to limit our total liability exposure. The estimate of our self-insurance liability involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not report as of the balance sheet date. When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Rent Expense: Rent expense under our operating leases typically provides for fixed non-contingent rent escalations. We recognize rent expense on a straight-line basis over the non-cancelable term of each lease, commencing when we take possession of the property. Construction allowances are recorded as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each lease.

Income Taxes: Current income tax expense is the amount of income taxes expected to be payable for the current year. The combined federal, state and local income tax expense is calculated using estimated effective annual tax rates. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable income and ongoing prudent and feasible tax planning in assessing the value of our deferred tax assets. Evaluating the value of these assets is necessarily based on our judgment. If we were to determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. If we subsequently were to determine that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made. We have recorded tax contingencies based on our estimates of current tax exposures and adjust our estimates as circumstances or regulations change.

In accordance with SFAS 123R, we recognize tax benefit upon expensing certain stock-based awards associated with our stock-based compensation plans, including nonqualified stock options and restricted stock unit awards. However, under current accounting standards we cannot recognize tax benefit currently for those stock-based compensation expenses associated with incentive stock options (also known as qualified stock options) and employee stock purchase plan rights. For qualified stock options that vested after our adoption of SFAS 123R, we recognize tax benefit only in the period when disqualifying dispositions of the underlying stock occur, and for qualified stock options that vested prior to our adoption of SFAS 123R, the tax benefit is recorded directly to additional paid-in capital.

INFLATION

We do not believe that inflation has had a material adverse effect on our net sales or results of operations. We have generally been able to pass along increased costs related to inflation through increases in selling prices.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are not a party to any derivative financial instruments. Our exposure to market risk primarily relates to changes in interest rates on our investments with maturities of less than three months (which are considered to be cash and cash equivalents) and short-term investments with maturities in excess of three months. Changes in interest rates affect the investment income earned on those investments.

Item 4.

Controls and Procedures

The management of the company maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

We have carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end our most recent fiscal quarter. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective as of the end of our most recent fiscal quarter. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

During the first quarter of fiscal 2007, we completed the conversion of our core merchandising system to the most current vendor release. The conversion was not made in response to any significant deficiency or material weakness in our internal controls.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In April 2006, a California resident filed a lawsuit against us in Superior Court of Los Angeles County, alleging that we violated California Civil Code Section 1747.08. That code section regulates when a retailer is permitted to obtain certain customer information in connection with credit card transactions. The case is alleged as a class action. In May 2006, we answered the complaint and denied all liability. In October 2006, the court gave preliminary approval to a settlement agreement between the plaintiff (on behalf of the purported class) and us, which agreement we entered into as opposed to incurring additional legal fees defending the claims. The settlement agreement set forth our position that complete defenses to the claims exist. Further, there was no admission of liability and no finding of violation of law. In January 2007, the court granted final approval of the settlement terms. Under the settlement agreement, we will pay (during the first two quarters of fiscal 2007) an estimated aggregate of approximately $250,000 to cover certain attorneys’ fees and claims administration costs; and we have provided class members who opted in to the settlement class a coupon to receive 20% off on a single purchase of up to $100 in our Hot Topic or Torrid stores. We accrued amounts to account for the settlement during our third quarter of 2006 following agreement on the settlement terms. In April 2007, the case was dismissed with prejudice, and we do not expect any further activity with respect to the matter.

We are involved in other matters of litigation that arise in the ordinary course of business. We do not currently believe that the cases referenced above, or any other litigation in which we are currently involved, will have a material adverse effect on our overall financial condition.

Item 1A.

Risk Factors

CERTAIN RISKS RELATED TO OUR BUSINESS

Before deciding to invest in Hot Topic, Inc. or to maintain or increase an investment in Hot Topic, Inc., readers should carefully consider the risks described below, in addition to the other information contained in our Annual Report on Form 10-K and in other filings with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The risks described below are not the only risks we face. Additional risks that are not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks actually occur, our business, financial condition and results of operations could be seriously harmed, and our stock price could decline. The risks described below include certain revisions to the risks set forth in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

Our growth strategy could create challenges we may not be able to adequately meet.

Our net sales have grown appreciably during the past several years, primarily as a result of the opening of new stores and, to a lesser extent, the introduction of new products. We intend to continue to pursue our growth strategy for the foreseeable future, and evolve our existing business as we grow; our future operating results will depend largely upon our ability to open and operate stores successfully and to profitably manage a larger business.

We currently anticipate opening approximately 35 stores, consisting of approximately 15 Hot Topic and approximately 20 Torrid stores, during fiscal 2007. We also plan to remodel or relocate approximately 60 to 80 existing stores during the fiscal year for broader implementation of our new Hot Topic store design and plan to close approximately 10 Hot Topic stores and 10 Torrid stores in fiscal 2007.

Operation of a greater number of new stores, moving or expanding store locations and expansion into new markets may present competitive and merchandising challenges that are different from those currently encountered by us in our existing stores and markets. There can be no assurance that our expansion will not adversely affect the individual financial performance of our existing stores or our overall results of operations. Similarly, there can be no assurance that remodeling or relocating existing stores will not adversely affect either the individual financial performance of the store prior to the change, or our overall results of operations. Further, there can be no assurance that we will successfully achieve our remodel or expansion targets or, if achieved, that planned remodel or expansion will result in profitable operations. Finally, as the number of stores increases, we may face risks associated with market saturation of our products and concepts.

Our growth strategy of new store openings could create challenges we may not be able to adequately meet.

Our net sales have grown appreciably during the past several years, primarily as a result of the opening of new stores and, to a lesser extent, the introduction of new products. Of our 826 stores opened as of May 5, 2007, 35 had been open for less than one full year. We intend to continue to pursue a growth strategy for the foreseeable future, and our future operating results will depend in part upon our ability to open and operate stores successfully and to profitably manage a larger business.

We currently anticipate opening a total of approximately 35 stores, consisting of 15 Hot Topic and 20 Torrid stores, during fiscal 2007, further increasing the number of stores we operate. As of May 5, 2007, two of those new Hot Topic stores were open and no new Torrid stores were open.

Operation of a greater number of new stores and expansion into new markets may present competitive and merchandising challenges that are different from those currently encountered by us in our existing stores and markets. In addition, as the number of stores increases, we may face risks associated with market saturation of our products and concepts. There can be no assurance that our expansion will not adversely affect the individual financial performance of our existing stores or our overall results of operations, or that new stores will achieve sales and profitability levels consistent with existing stores. Further, there can be no assurance that we will successfully achieve our expansion targets or, if achieved, that planned expansion will result in profitable operations.

This growth strategy requires improving our operations, and we may not be able to do this sufficiently to effectively prevent negative impact on our business and financial results.

In order to manage our planned expansion, among other things, we will need to locate suitable store sites, negotiate acceptable lease terms, obtain or maintain adequate capital resources on acceptable terms, source sufficient levels of inventory, hire and train store managers and sales associates, integrate new stores into our existing operations and maintain adequate distribution center space and information technology and other operations systems. Our opening of a second distribution center in Tennessee during fiscal 2005 was designed to address some of our growth challenges, but achieving and maintaining operating efficiencies in multiple distribution centers is subject to numerous risks and uncertainties.

We also need to continually evaluate the adequacy of our management information and distribution systems. Implementing new systems and changes made to existing systems could present challenges we do not anticipate and could negatively impact our business. We cannot anticipate all of the changing demands that our expanding and changing operations will impose on our business, systems and procedures, and our failure to adapt to such changing demands could have a material adverse effect on our results of operations and financial condition. Our failure to timely implement initiatives necessary to support our expanding and changing operations could also materially impact our business.

Expanding our operations to include an increasing number of Torrid stores and any other new concepts presents risks we have faced with the Hot Topic concept but also new risks due to differences in concept objectives and strategies.

Torrid is our first significant new venture, and the nature of the Torrid business differs in certain respects from that of the Hot Topic business. Our ability to expand into new concepts, and in particular our Torrid concept has not been fully tested; and starting and operating new concepts presents new and challenging risks and uncertainties. Specifically, the operation of Torrid stores and the sale of Torrid merchandise over the Internet are subject to numerous risks, including unanticipated operational problems; lack of experience; lack of customer acceptance; new vendor relationships; competition from existing and new retailers; and diversion of management’s attention from the Hot Topic concept. The Torrid concept involves implementation of a retail apparel concept which is subject to most of the same risks as the Hot Topic concept, as well as additional risks inherent in a concept that concentrates on apparel and fashion, including risks of difficulty in merchandising, uncertainty of customer acceptance, fluctuations in fashion trends and customer tastes, extreme competition with a less differentiated product offering and attendant markdown risks. We may not be able to generate continued customer interest in Torrid stores and products, and the Torrid concept may not be able to support the store or Internet sales format. There can be no assurance that the Torrid stores or website, or any future concept, will achieve sales and profitability levels that justify our investment.

The success of our business depends on establishing and maintaining good relationships with mall operators and developers, and problems with those relationships could make it more difficult for us to expand to certain sites or offer certain products.

Any restrictions on our ability to expand to new store sites, remodel or relocate stores where we feel it necessary or to offer a broad assortment of merchandise could have a material adverse effect on our business, results of operations and financial condition. If our relations with mall operators or developers become strained, or we otherwise encounter difficulties in leasing store sites, we may not grow as planned and may not reach certain revenue levels and other operating targets. Risks associated with these relationships are more acute given recent consolidation in that industry, and we have seen certain increases in expenses as a result of such consolidation that could continue.

Our comparable store sales are subject to fluctuation resulting from factors within and outside our control, and lower than expected comparable store sales could impact our business and our stock price.

A variety of factors affects our comparable store sales including, among others, the timing of new music releases and music/pop culture-related products; music and fashion trends; the general retail sales environment and the effect of the overall economic environment; our ability to efficiently source and distribute products; changes in our merchandise mix; ability to attain exclusivity and certain pop-culture related licenses; competition from other retailers; opening of new stores in existing markets and our ability to execute our business strategy efficiently. Our comparable store sales results have fluctuated significantly in the past and we believe that such fluctuations will continue. Our comparable store sales results were (2.3)% for the first quarter of fiscal 2007. The following table shows our comparable store sales results for other recent periods:


Fiscal Year	2006		2005		2004		2003
Total Year	(6.6	)%	(3.4	)%	(2.9	)%	7.4	%

1st Quarter	(9.6	)%	0.9	%	4.0	%	2.6	%
2nd Quarter	(5.5	)%	(3.5	)%	(2.1	)%	5.2	%
3rd Quarter	(6.8	)%	(6.2	)%	(4.2	)%	10.8	%
4th Quarter	(5.3	)%	(3.8	)%	(6.0	)%	8.5	%

Past comparable store sales results are not an indicator of future results, and there can be no assurance that our comparable store sales results will not decrease in the future. Changes in our comparable store sales results could cause our stock price to fluctuate substantially.

Our success relies on popularity with young people of music, pop culture, and fashion trends, and we may not be able to react to trends in a way to prevent declining popularity and sales of our products.

Our financial performance is largely dependent upon the continued popularity of alternative and rock music, the Internet and digital music, music videos and MTV and other music television networks among teenagers and college-age adults; the emergence of new artists and the success of music releases and music/pop culture-related products; the continuance of a significant level of teenage spending on music/pop culture-licensed and music/pop culture-influenced products; and our ability to anticipate and keep pace with the music, fashion and merchandise preferences of our customers. The popularity of particular types of music, artists, styles, trends and brands is subject to change. Our failure to anticipate, identify and react appropriately to changing trends could lead to, among other things, excess inventories and higher markdowns, which could have a material adverse effect on our results of operations and financial condition and on our image with customers. There can be no assurance that our new products will be met with the same level of acceptance as in the past or that the failure of any new products will not have an adverse material effect on our business, results of operations and financial condition.

Economic conditions could change in ways that reduce our sales or increase our expenses.

Certain economic conditions affect the level of consumer spending on merchandise we offer, including, among others, employment levels, salary and wage levels, interest rates, taxation and consumer confidence in future economic conditions. We are also dependent upon the continued popularity of malls as a shopping destination, the ability of mall anchor tenants and other attractions to generate customer traffic and the development of new malls. A slowdown in the United States economy or an uncertain economic outlook could lower consumer spending levels and cause a decrease in mall traffic or new mall development, each of which would adversely affect our growth, sales results and financial performance.

Recording impairment charges for certain underperforming Hot Topic and Torrid stores may negatively impact our future financial condition or results of operations, and closing stores might not have positive impact.

We recorded $0.2 million, $3.4 million and $1.7 million in impairment charges during the first three months of fiscal 2007, the year ended fiscal 2006 and the year ended fiscal 2005, respectively, based on review of certain underperforming stores. There can be no assurance that we will not incur future impairment charges for underperforming stores which could have a significant negative impact on our operating results. In addition, we closed four stores during fiscal 2006, consisting of three Hot Topic stores and one Torrid store. Although the stores closed in 2006 had been underperforming as compared with our other Hot Topic and Torrid stores, there is no assurance these store closures will have a significant positive impact on our operating results. We expect to close approximately 10 Hot Topic stores and 10 Torrid stores in fiscal 2007. We also expect to close additional stores in the future, which also could adversely affect our operating results.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or change the way we do business.

In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our associates, which would likely cause us to reexamine our entire wage structure for stores. Other laws related to employee benefits and treatment of employees, and privacy, could also negatively impact us such as by increasing benefits costs like medical expenses. Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws.

Timing and seasonal issues could negatively impact our financial performance for given periods.

Our quarterly results of operations may fluctuate materially depending on, among other things, the timing of store openings and related pre-opening and other startup expenses, net sales contributed by new stores, increases or decreases in comparable store sales, releases of new music and music/pop culture-related products, shifts in timing of certain holidays, changes in our merchandise mix and overall economic and political conditions.

Our business is also subject to seasonal influences, with heavier concentrations of sales during the back-to-school, Halloween and holiday (defined as the week of Thanksgiving through the first few days of January) seasons and other periods when schools are not in session. The holiday season has historically been our single most important selling season. We believe that the importance of the summer vacation and back-to-school seasons (which affect operating results in the second and third quarters) and to a lesser extent, the spring break season (which affects operating results in the first quarter) as well as Halloween (which affects operating results in the third quarter), all reduce our dependence on the holiday selling season, but this will not always be the case to the same degree. As is the case with many retailers of apparel, accessories and related merchandise, we typically experience lower net sales in the first fiscal quarter relative to other quarters.

We have many important vendor relationships, and our ability to get merchandise could be hurt by changes in those relationships and events harmful to our vendors could impact our results of operations.

Our financial performance depends on our ability to purchase desired merchandise in sufficient quantities at competitive prices. Although we have many sources of merchandise, substantially all of our music/pop culture-licensed products are available only from vendors that have exclusive license rights. In addition, small, specialized vendors, some of which create unique products primarily for us, supply certain of our products. Our smaller vendors generally have limited resources, production capacities and operating histories and some of our vendors have restricted the distribution of their merchandise in the past. We generally have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on acceptable terms in the future. Any inability to acquire suitable merchandise, or the loss of one or more key vendors, may have a material adverse effect on our business, results of operations and financial condition.

Technology and other risks associated with our Internet sales could hinder our overall financial performance.

We sell merchandise over the Internet through the websites www.hottopic.com and www.torrid.com. Our Internet operations are subject to numerous risks and pose risks to our overall business, including, among other things: hiring; retention and training of personnel to conduct the Internet operations; diversion of sales from our stores; rapid technological change and the need to invest in additional computer hardware and software to support sales; liability for online content; failure of computer hardware and software, including computer viruses, telecommunication failures, online security breaches and similar disruptions; governmental regulation; and credit card fraud. There can be no assurance that our Internet operations will achieve sales and profitability levels that justify our investment in them.

System security risk issues could disrupt our internal operations or information technology services provided to customers, and any such disruption could harm our revenue, increase our expenses, and harm our reputation and stock price.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions or cause shutdowns. As a result, we could incur significant expenses addressing problems created by security breaches of our network. Moreover, we could incur significant expenses in connection with system failures. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

We have made and plan to continue to make significant changes to information systems and software used in operation of our business, and we may not be able to effectively adopt changes in a way to prevent failures in our operations or negative impact on our financial performance and reporting.

Over the past several years, we have made improvements to existing hardware and software systems, as well as implemented new systems. For example, we have invested approximately $6 million dollars to enhance the functionality of our current Escalate software and to implement new financial and human resources systems software from Lawson Software. In addition, we invested approximately $10 million in the implementation of a new warehouse management software system, a new Internet order management software system and a new customer loyalty software system. We expect to significantly increase our reliance on these systems throughout fiscal 2007. If these information systems and software do not work effectively, we may experience delays or failures in our operations. These delays or failures could adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting and reporting and ability to properly forecast earnings and cash requirements. To manage growth of our operations and personnel, we will need to continue to improve our operational and financial systems, transaction processing and procedures and controls, and in doing so, we could incur substantial additional expenses.

Loss of key people or an inability to hire necessary and significant personnel could hurt our business.

Our financial performance depends largely on the efforts and abilities of senior management, especially Elizabeth McLaughlin, our Chief Executive Officer, who has been with us since 1993. However, the sudden loss of Ms. McLaughlin’s services or the services of other members of our

management team could have a material adverse effect on our business, results of operations and financial condition. Furthermore, there can be no assurance that Ms. McLaughlin and our existing management team will be able to manage our growth or that we will be able to attract and retain additional qualified personnel as needed in the future.

Decreased effectiveness of stock-based compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options as a component of our total employee compensation program in order to align employees’ interests with the interests of our shareholders, encourage employee retention and provide competitive compensation and benefit packages. In recent periods, our employee stock options have had exercise prices in excess of Hot Topic’s stock price, which reduces their value to employees and could affect our ability to retain present, or attract prospective employees. There are other forms of stock-based compensation available to us, but these are similarly less attractive when a company’s stock price is declining. In addition, in accordance with SFAS 123R, we began recording expenses for stock-based payments, including stock options, in the first quarter of fiscal 2006. As a result, we now incur increased compensation costs associated with our stock-based compensation programs. Moreover, difficulties relating to obtaining shareholder approval of equity compensation plans could make it harder or more expensive for us to grant stock-based payments to employees in the future. Like other companies, we review our equity compensation strategy in light of regulatory and competitive environments, and we may decide to reduce the total number of options granted, or the form of stock awards, to employees, or reduce the number of employees who receive stock-based payments. Due this change in our stock-based compensation strategy, we may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.

Our reliance on Federal Express, temporary employees and other mechanics of shipping of our merchandise creates distribution risks and uncertainties that could hurt our sales and business.

We recently changed our primary shipping service, for shipping merchandise and other materials to our stores, to Federal Express. Our reliance on Federal Express for shipments is subject to risks associated with FedEx’s ability to provide delivery services that adequately meet our shipping needs, as well as factors such as weather and transportation prices. It is also a new relationship for us, and there may be challenges and risks in integrating their services into our distribution program. There is also no assurance we will see benefits in terms of service or price from switching from United Parcel Service to Federal Express and there is some risk that the switch could end up more costly for us, or disruptive to our distribution efforts.

We are also dependent upon temporary associates to adequately staff our distribution centers; particularly during busy periods such as the holiday season and while multiple stores are opening. There can be no assurance that we will continue to receive adequate assistance from our temporary associates, or that there will continue to be sufficient sources of temporary associates.

We began operation of our second distribution center in Tennessee during the second quarter of 2005, and as a result we also now face risks and uncertainties associated with achieving and maintaining operating efficiencies in two distribution centers that are located approximately 2,000 miles apart. Additionally, certain products are imported and subject to delivery delays based on availability and port capacity.

There is a risk we could acquire merchandise without full rights to sell it, which could lead to disputes or litigation and hurt our financial performance and stock price.

We purchase licensed merchandise from a number of suppliers who hold manufacturing and distribution rights under the terms of certain licenses. We generally rely upon vendors’ representations concerning manufacturing and distribution rights and do not independently verify whether these vendors legally hold adequate rights to licensed properties they are manufacturing or distributing. If we acquire unlicensed merchandise, we could be obligated to remove such merchandise from our stores, incur costs associated with destruction of merchandise if the distributor is unwilling or unable to reimburse us, and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages. Any of these results could have a material adverse effect on our business, results of operations and financial condition.

We face intense competition, and an inability to adequately address it, or the success of our competitors, could limit or prevent our business growth and success.

The retail apparel and accessory industry is highly competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations and qualified associates and management personnel. Our Hot Topic stores currently compete with street alternative stores located primarily in metropolitan areas; with other mall-based teenage-focused retailers and their subsidiaries such as Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Anchor Blue, Charlotte Russe Inc., Claire’s Stores, Inc., Forever 21, Pacific Sunwear of California, Inc., Spencer Gifts, Inc., H&M, The Buckle, Wet Seal, Inc., Urban Outfitters, Inc. and Zumiez, Inc.; and, to a lesser extent, with music stores and mail order catalogs and websites. Torrid has additional competitors, such as Alloy, Inc., Charming Shoppes, Inc., Deb Shops, Delia’s Corp., Old Navy (a division of Gap Inc.) and plus-size departments in department stores and discount stores as well as numerous potential competitors who may begin or increase efforts to market and sell products competitive with Torrid products. Some of our competitors are larger and may have greater financial, marketing and other resources. Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our prices. Increased competition could have a material adverse effect on our business, results of operations and financial condition.

War, terrorism and other catastrophes could negatively impact our customers, places where we do business and our expenses, all of which could hurt our business.

The effects of war or acts of terrorism could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions and create further uncertainties. To the extent that such disruptions or uncertainties negatively impact shopping patterns and/or mall traffic, or adversely affect consumer confidence or the economy in general, our business, operating results and financial condition could be materially and adversely affected.

Our principal executive offices, a distribution center and a significant number of our stores are located in California. If we experience a sustained disruption in energy supplies, or if electricity and gas costs in California fluctuate dramatically, our results of operations could be materially and adversely affected. California is also subject to natural disasters such as earthquakes and floods. A significant natural disaster or other catastrophic event affecting our facilities could have a material adverse impact on our business, financial condition and operating results.

There are numerous risks that could cause our stock price to fluctuate substantially.

Our common stock is quoted on the Nasdaq Stock Market, which has experienced and is likely to experience in the future significant price and volume fluctuations, which could adversely affect our stock price without regard to our financial performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and comparable store sales; announcements by other apparel,

accessory and gift item retailers; the trading volume of our stock; changes in estimates of our performance by securities analysts; litigation; overall economic and political conditions; the condition of the financial markets; and other events or factors outside of our control could cause our stock price to fluctuate substantially.

Our charter documents and other circumstances could prevent a takeover or cause dilution of our existing shareholders, which could be detrimental to existing shareholders and hinder business success.

Our Articles of Incorporation and Bylaws contain provisions that may have the effect of delaying, deterring or preventing a takeover of Hot Topic, Inc. For instance, our Articles of Incorporation include certain “fair price provisions” generally prohibiting business combinations with controlling or significant shareholders unless certain minimum price or procedural requirements are satisfied, and our Bylaws prohibit shareholder action by written consent. Additionally, our Board of Directors has the authority to issue, without shareholder approval, up to 10,000,000 shares of “blank check” preferred stock having such rights, preferences and privileges as designated by the Board of Directors. The issuance of these shares could have a dilutive effect on certain shareholders, and potentially prohibit a takeover of Hot Topic, Inc. by requiring the preferred shareholders to approve such a transaction.

We also have a significant number of authorized and unissued shares of our common stock available under our Articles of Incorporation. These shares provide us with the flexibility to issue our common stock for future business and financial purposes including stock splits, raising capital and providing equity incentives to employees, officers and directors. However, the issuance of these shares could result in dilution to our shareholders.

We incur costs associated with regulatory compliance, and this cost could be significant.

There are numerous regulatory requirements for public companies, including the provisions of the Sarbanes-Oxley Act of 2002. With regard to the Sarbanes-Oxley Act, we have and will continue to incur significant expense as we continue to address the implications of applicable rules and our operations relative thereto, and as we work to respond to and comply with applicable requirements. Section 404 requires management to report on, and our independent auditors to attest to, our internal controls. Compliance with these rules could also result in continued diversion of management’s time and attention, which could be disruptive to normal business operations.

There are other regulations and standards associated with our business operations. For example, an independent standards-setting organization working with credit card companies has developed regulations concerning payment card account security throughout the transaction process, called the Payment Card Industry (PCI) Data Security Standard. All merchants and service providers that store, process and transmit payment card data are required to comply with the regulations as a condition to accepting credit cards. The organization is expected to start levying fines on companies that are non-compliant, and though we believe we are proceeding toward full compliance, there is no guarantee we will not incur fines or delays in our ability to comply.

If we do not satisfactorily or timely comply with these requirements, possible consequences could include sanction or investigation by regulatory authorities such as the Securities and Exchange Commission or the Nasdaq Stock Market; fines and penalties; incomplete or late filing of our periodic reports, including our annual report on Form 10-K; or civil or criminal liability. Our stock price and business could also be adversely affected.

There are litigation and other claims against us from time to time, which could distract management from our business activities, and could lead to adverse consequences to our business and financial condition.

As a growing company with expanding operations, we are increasingly involved from time to time with litigation and other claims against us. These arise primarily in the ordinary course of our business, and include employee claims, commercial disputes, intellectual property issues and product-oriented allegations. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time. Although we do not currently believe that the outcome of any current litigation and claims against us will have a material adverse effect on our overall financial condition, we have, in the past, incurred unexpected expense in connection with litigation matters. In the future, adverse settlements or resolutions may occur and negatively impact earnings, injunctions against us could have an adverse effect on our business by requiring us to do or prohibiting us from doing certain things, and other unexpected events could have a negative impact on us.

Item 6.

Exhibits


Exhibit Number		Description of Document
3.1		Amended and Restated Articles of Incorporation. (1)

3.2		Certificate of Amendment of Amended and Restated Articles of Incorporation. (2)

3.3		Amended and Restated Bylaws, as amended. (2)

4.1		Reference is made to Exhibits 3.1 and 3.2.

4.2		Specimen stock certificate. (1)

31.1		Certification, dated May 29, 2007, of Registrant’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification, dated May 29, 2007, of Registrant’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications, dated May 29, 2007, of Registrant’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350, as adopted).

(1)	Filed as an exhibit to Registrant’s Registration Statement on Form SB-2 (No. 333-5054-LA) and incorporated herein by reference.

(2)	Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				Hot Topic, Inc.
				(Registrant)

Date: May 29, 2007				/s/ Elizabeth McLaughlin
				Elizabeth McLaughlin
				Chief Executive Officer
				(Principal Executive Officer)

Date: May 29, 2007				/s/ James McGinty
				James McGinty
				Chief Financial Officer
				(Principal Financial
				And Accounting Officer)

Exhibit Index


Exhibit No.		Document
31.1		Certification, dated May 29, 2007, of Registrant’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification, dated May 29, 2007, of Registrant’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications, dated May 29, 2007, of Registrant’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C § 1350, as adopted).

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