0000930413-16-009048.txt : 20161228 0000930413-16-009048.hdr.sgml : 20161228 20161228161121 ACCESSION NUMBER: 0000930413-16-009048 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20161017 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20161228 DATE AS OF CHANGE: 20161228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000795212 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 141541629 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14818 FILM NUMBER: 162072739 BUSINESS ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 BUSINESS PHONE: 5184521242 MAIL ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD MUSIC CORP DATE OF NAME CHANGE: 19920703 8-K/A 1 c86796_8ka.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 17, 2016

TRANS WORLD ENTERTAINMENT CORPORATION

(Exact name of registrant as specified in its charter)

New York	0-14818	14-1541629
(State or other jurisdiction of incorporation or organization)	(Commission file number)	(I.R.S. Employer Identification No.)

38 Corporate Circle,
Albany, New York 12203

(Address of principal executive offices)

(518) 452-1242

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 9.01.

Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The audited financial statements of etailz as of December 31, 2015 and 2014 and for the periods ended December 31, 2015, December 31, 2014 and December 31, 2013 are filed herewith as Exhibit 99.2 to this Form 8-K/A.

The consent of Moss Adams LLP, etailz’s independent auditors, is attached hereto as Exhibit 23.1 to this Form 8-K/A.

The unaudited interim financial statements of etailz as of June 30, 2016 and 2015 and for the periods then ended are filed herewith as Exhibit 99.4 to this Form 8-K/A.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed combined financial information of the Company, giving effect to the Acquisition, as of the year ended January 30, 2016 and for the six months ended July 30, 2016, are filed herewith as Exhibit 99.3.

Exhibit No.	Description

23.1	Consent of Moss Adams LLP, independent auditors of etailz, Inc.

99.2	Audited financial statements of etailz as of December 31, 2015 and 2014 and for the periods ended December 31, 2015, December 31, 2014 and December 31, 2013.

99.3	Unaudited pro forma condensed combined financial information of the Company and etailz for the year ended January 30, 2016 and for the six months ended July 30, 2016

99.4	Unaudited interim financial statements of etailz as of June 30, 2016 and 2015 and for the periods then ended.

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 hereunto duly authorized.

Dated: December 28, 2016	TRANS WORLD ENTERTAINMENT CORPORATION

	By:	/s/ John Anderson
		Name: John Anderson
		Title: Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description

23.1	Consent of Moss Adams LLP, independent auditors of etailz, Inc.

99.2	Audited financial statements of etailz as of December 31, 2015 and 2014 and for the periods ended December 31, 2015, December 31, 2014 and December 31, 2013.

99.3	Unaudited pro forma condensed combined financial information of the Company for the year ended January 30, 2016 and for the six months ended July 30, 2016

99.4	Unaudited interim financial statements of etailz as of June 30, 2016 and 2015 and for the periods then ended.

EX-23.1 2 c86796_ex23-1.htm

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements on Form S-1 (No. 333-194933) and Form S-8 (Nos. 33-40399, 33-51094, 33-51516, 33-59319, 333-75231, 333-81685, 333-101532 and 333-128210) of Trans World Entertainment Corporation of our report dated December 28, 2016 relating to the financial statements of etailz, Inc as of December 31, 2015 and 2014, and for each of the three years in the period ended December 31, 2015, appearing in this Amendment No. 1 to the Current Report on Form 8-K of Trans World Entertainment Corporation dated December 28, 2016.

/s/ Moss Adams LLP
Spokane, Washington
December 28, 2016

EX-99.2 3 c86796_ex99-2.htm

Exhibit 99.2

CONTENTS

		PAGE

report of independent auditors		1-2

FINANCIAL STATEMENTS

Balance sheets		3-4

Statements of income		5

Statements of stockholders’ equity		6

Statements of cash flows		7-8

Notes to financial statements		9-19

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors

etailz, inc.

Report on the Financial Statements

We have audited the accompanying financial statements of etailz, inc. (Company), which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

REPORT OF INDEPENDENT AUDITORS

(continued)

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of etailz, inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three the years in the period ended December 31, 2015 in accordance with accounting principles generally accepted in the United States of America.

Spokane, Washington

December 28, 2016

etailz, inc.

BALANCE SHEETS

ASSETS
	December 31,
	2015			2014

CURRENT ASSETS
Cash	$	395,750		$	78,259
Accounts receivable		998,310			1,117,161
Inventories, net		13,467,916			7,468,037
Inventory in transit		418,974			13,913
Inventory deposits		639,756			432,378
Prepaid and other current assets		216,173			156,125
Current deferred tax assets		229,001			152,216

Total current assets		16,365,880			9,418,089

PROPERTY AND EQUIPMENT
Computers		54,864			55,036
Furniture		16,283			1,775
Leasehold improvements		166,106			47,338
Accumulated depreciation and amortization		(90,244	)		(53,191	)

Total property and equipment, net		147,009			50,958

LONG-TERM ASSETS
Software and websites, net of accumulated amortization		516,205			375,429
Long-term deferred tax assets, net		-			66,367

Total assets	$	17,029,094		$	9,910,843

etailz, inc

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY
	December 31,
	2015		2014

CURRENT LIABILITIES
Checks in excess of bank balance	$	376,005	$	506,155
Line of credit, current		3,236,590		-
Accounts payable		4,673,781		2,945,485
Credit cards payable		955,736		838,630
Sales returns		584,580		448,670
Sales tax payable		837,820		226,133
Payroll liabilities		131,213		92,140
Other accrued expenses		370,221		116,665
Income taxes payable		321,156		435,288

Total current liabilities		11,487,102		5,609,166

LONG-TERM LIABILITIES
Line of credit, noncurrent		-		700,000
Long-term deferred tax liabilities, net		79,074		-
Other liabilities		35,940		21,778

Total long-term liabilities		115,014		721,778

COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5)

STOCKHOLDERS’ EQUITY
Preferred stock, no par value; 50,000,000 shares authorized; none issued or outstanding		-		-
Common stock, no par value; 50,000,000 shares authorized; 991,698 issued and outstanding		1,563,000		1,563,000
Additional paid-in capital		366,296		366,296
Retained earnings		3,497,682		1,650,603

Total stockholders’ equity		5,426,978		3,579,899

Total liabilities and stockholders’ equity	$	17,029,094	$	9,910,843

See accompanying notes.

etailz, inc.

STATEMENTS OF INCOME

	Years Ended December 31,
	2015		2014		2013

Net sales	$	93,291,877	$	59,680,693	$	27,007,154

Cost of sales		68,799,552		44,255,552		19,603,184

Gross profit		24,492,325		15,425,141		7,403,970

Selling, general, and administrative expenses		21,059,433		13,833,035		6,644,869

Operating income		3,432,892		1,592,106		759,101

Other expense
Interest expense		80,819		29,429		32,268
Other expense		115,500		81,661		24,113

		196,319		111,090		56,381

Income before income taxes		3,236,573		1,481,016		702,720

Income tax expense		1,389,494		507,129		242,012

Net income	$	1,847,079	$	973,887	$	460,708

5	See accompanying notes.

etailz, inc.

STATEMENTS OF STOCKHOLDERS’ EQUITY

	Preferred Stock (Shares)		Preferred Stock (Amount)		Common Stock (Shares)		Common Stock (Amount)		Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity

Balance, January 1, 2013		-	$	-		893,000	$	288,000	$	-	$	216,008	$	504,008

Sale of stock for cash		-		-		96,763		1,250,000		-		-		1,250,000

Net income		-		-		-		-		-		460,708		460,708

Balance, December 31, 2013		-		-		989,763		1,538,000		-		676,716		2,214,716

Share-based compensation		-		-		-		-		366,296		-		366,296

Sale of stock for cash		-		-		1,935		25,000		-		-		25,000

Net income		-		-		-		-		-		973,887		973,887

Balance, December 31, 2014		-		-		991,698		1,563,000		366,296		1,650,603		3,579,899

Net income		-		-		-		-		-		1,847,079		1,847,079

Balance, December 31, 2015		-	$	-		991,698	$	1,563,000	$	366,296	$	3,497,682	$	5,426,978

6	See accompanying notes.

etailz, inc.

STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2015			2014			2013

CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers	$	93,546,638		$	59,245,141		$	26,886,274
Cash paid to suppliers and employees		(93,680,907	)		(61,412,748	)		(26,171,057	)
Interest paid		(80,819	)		(29,429	)		(32,268	)
Income tax paid		(1,434,970	)		(538,671	)		32,146

Net cash from operating activities		(1,650,058	)		(2,735,707	)		715,095

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(172,650	)		(51,037	)		(217,890	)
Purchase of software and websites		(30,059	)		(13,861	)		-
Capitalization of internal software and website development costs		(236,182	)		(195,980	)		-

Net cash from investing activities		(438,891	)		(260,878	)		(217,890	)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in checks in excess of bank balance		(130,150	)		506,155			-
Draws on line of credit		45,938,681			4,488,943			-
Repayments of line of credit		(43,402,091	)		(3,788,943	)		-
Proceeds from issuance of common stock		-			25,000			1,250,000

Net cash from financing activities		2,406,440			1,231,155			1,250,000

NET CHANGE IN CASH		317,491			(1,765,430	)		1,747,205

CASH at beginning of year		78,259			1,843,689			96,484

CASH at end of year	$	395,750		$	78,259		$	1,843,689

etailz, inc.

STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2015			2014			2013

RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Net income	$	1,847,079		$	973,887		$	460,708
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		189,032			108,622			45,026
Deferred income taxes		68,656			(194,159	)		(33,881	)
Loss on disposal of property and equipment and software and websites, net		13,032			11,992			-
Share-based compensation		-			366,296			-
Increase in reserves for inventory obsolescence and sales returns		438,480			687,449			310,627
Change in assets and liabilities
Accounts receivable		118,851			(614,695	)		(347,314	)
Inventories (including in-transit)		(6,707,510	)		(5,471,950	)		(1,718,792	)
Deposits and other current assets		(267,426	)		(218,407	)		(288,518	)
Accounts and credit cards payable		(114,132	)		162,617			308,039
Other accrued expenses		1,845,402			1,147,205			1,908,180
Income taxes payable		918,478			305,436			71,020

Net cash from operating activities	$	(1,650,058	)	$	(2,735,707	)	$	715,095

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Transfer from software in development to software and websites	$	447,329		$	33,888		$	127,469

See accompanying notes.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Nature of business operations – etailz, inc. (Company or etailz) was established in 2008 and is an online retailer and developer of consumer products. The Company is headquartered and operates a retail store in Spokane, Washington.

Recent accounting pronouncements – Accounting Standards Update (ASU) No. 2016-02 establishes a new lease accounting model for lessees. Under the new guidance, which becomes effective January 1, 2020, for calendar-year nonpublic entities, lessees will be required to recognize right-of-use assets and liabilities for most leases having lease terms of 12 months or more. However, lease expense will be recognized on the income statement in a manner similar to existing requirements.

ASU No. 2014-09 provides sweeping new, globally applicable converged guidance concerning recognition and measurement of revenue. In addition, significant additional disclosures are required about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new rules, under accounting principles generally accepted in the United States of America (GAAP), which become effective for nonpublic entities in calendar year 2019, will replace virtually all existing revenue guidance, including most industry-specific guidance.

The Company is currently evaluating the impact of these ASUs and has not yet implemented them.

Foreign currency – The Company buys and sells certain products internationally. In these cases, the transactions are generally denominated in the local currency. All income statement transactions are immediately remeasured into U.S. dollars. The remeasurement of the related foreign receivables, payables and cash into U.S. dollars creates remeasurement gains and losses that are included in earnings as a component of other expense. The Company recognized net remeasurement losses of $116,931, $66,588, and $24,995 during the years ended December 31, 2015, 2014, and 2013, respectively.

Reclassifications - Certain reclassifications have been made to previously issued financial statements to conform with the presentation of these financial statements. Total equity and net income are unchanged due to these reclassifications.

Comprehensive income – Net income was equal to comprehensive income for each of the years presented.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

Accounts receivable – Accounts receivable are primarily comprised of merchant receivables, which are stated at the amount the Company expects to collect. An allowance for doubtful accounts is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Receivables are typically paid within 10 days of the underlying transactions. Receivables not paid within the contractually agreed upon timeframe are considered delinquent. Delinquent receivables are written off based on individual credit evaluation, specific circumstances of the customer, and management’s discretion. The Company did not have an allowance for doubtful accounts at December 31, 2015 or 2014, as management expects all accounts to be collected. Actual write offs were insignificant for all periods presented.

Inventories – Inventories are comprised of consumer products to be sold and are stated at the lower of cost or net realizable value, calculated on average cost, which approximates the first-in, first-out method. The Company provides for obsolescence and net realizable value adjustments by recording a reserve. At December 31, 2015 and 2014, the reserve for obsolescence and net realizable value adjustments was $900,000 and $600,000, respectively.

The Company is occasionally required to prepay for certain inventories. In these situations, the prepayment is recorded as a deposit until the risks and rewards of ownership have been transferred to etailz. Inventory in-transit is recorded if this transfer occurs at the time of shipment.

Property and equipment – Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. The useful lives for depreciation purposes range from three to five years for computers and equipment. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful life. Depreciation and amortization expense was $63,567, $34,612, and $12,110 for the years ended December 31, 2015, 2014, and 2013, respectively, and is included with selling, general, and administrative expenses.

Valuation of long-lived assets – The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews assets for impairment whenever events or changes in circumstances have indicated the carrying amount of its assets might not be recoverable. Impaired assets are reported at the lower of cost or fair value. As of December 31, 2015 and 2014, no long-lived assets were impaired.

Software and websites, net – The Company capitalizes third party and internal costs incurred to develop websites and internal-use computer software. Internal and external costs incurred in connection with development of upgrades or enhancements that result in additional functionality are also capitalized. These capitalized costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally three years. Purchased software is capitalized and amortized over its estimated useful life.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

Software and websites, net (continued) – The following table summarizes software and websites at December 31:

	2015			2014

Purchased software	$	51,851		$	21,791
Third party website development costs		-			30,280
Internally developed software and websites		638,795			191,466
Software in development		38,048			249,196
Less accumulated amortization		(212,489	)		(117,304	)

	$	516,205		$	375,429

The Company determined internal costs of $236,181, $195,979, and $176,217 during the years ended December 31, 2015, 2014, and 2013, respectively, to be in the application development stage and have, therefore, been capitalized as internally developed software and websites. All ineligible costs are expensed as incurred.

Amortization expense of capitalized internally developed software and websites was $110,440, $65,005, and $21,920 for the years ended December 31, 2015, 2014, and 2013, respectively. Amortization expense of purchased software and third party development costs was $15,025, $9,005, and $10,996 for the years ended December 31, 2015, 2014, and 2013, respectively.

Deferred rent – Certain of the Company’s operating leases contain lease incentives and predetermined fixed escalations of the base rental rate during the original term of the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent. The balance of deferred rent was $71,883 and $32,235 at December 31, 2015 and 2014, respectively, and is presented as an other long-term liability on the balance sheet.

Stock warrants – The Company accounts for stock warrants under the provisions of the fair value based measurement method, which requires the recognition of compensation expense based on the fair value of warrants on the grant date. Compensation expense is being recognized on a straight-line basis over the total requisite service period of each award.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

Revenue recognition – Revenue is recognized from product sales, which includes shipping revenue, net of estimated returns, upon shipment of products to customers. The Company records its reserve for estimated future returns based on historical experience and current trends.

The majority of product sales are shipped from the Amazon.com’s various fulfillment centers. Certain vendors are also used to ship products directly to customers on the Company’s behalf. The Company acts as principal in these transactions, as orders are initiated directly through the e-commerce businesses that are operated by the Company or through Amazon.com; title to the goods are taken by the Company at the shipping point and have the economic risk related to collection, customer care, and returns. Revenue is then recognized when title and significant risks of ownership passes to the customer. For drop-shipping services, revenue is recorded at gross as a principal and recorded as revenues from product sales.

For retail sales, revenue is recorded at the point of sale.

Advertising – The Company’s policy is to expense advertising costs as incurred. Advertising expenses were $223,492, $131,036, and $142,031 for the years ended December 31, 2015, 2014, and 2013, respectively.

Shipping and handling – The Company includes shipping and handling costs and fulfillment fees from third parties in cost of sales.

Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Concentrations – At various times during the year, the Company had cash balances maintained with one financial institution in excess of federally insured limits.

The Company sells the majority of its product through Amazon.com’s website. The Company may be susceptible to any negative changes to Amazon.com’s website or online marketplace.

During 2015, 2014, and 2013, substantially all the Company’s revenue and accounts receivable was attributable to sales through Amazon.com and its affiliates.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

Income taxes – Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statements and tax basis of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than not some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company adheres to the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740-10, Income Taxes, relating to accounting for uncertain tax positions. The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to income tax matters in income tax expense.

Sales taxes – The Company remits sales taxes to various taxing jurisdictions as a result of revenue earned from the sale of products to its customers. Specific sales tax rates applicable to the Company’s products vary by taxing jurisdiction. The Company records sales tax as a current liability at the time the revenue is earned. The liability is relieved upon the remittance of the sales tax owed to the various taxing jurisdictions. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenue and expenses.

Subsequent events – Subsequent events are events or transactions that occur after the date of the balance sheet but before the financial statements are issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the date of the balance sheet and before the financial statements are issued.

The Company has evaluated subsequent events through December 28, 2016, which is the date the financial statements are available to be issued.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 2 – Line of Credit

On November 25, 2014, the Company entered into a line of credit agreement with Chase Bank, N.A. (Bank), expiring December 31, 2016. Accordingly, the outstanding balance at December 31, 2014, is presented as long-term, while the outstanding balance at December 31, 2015, is presented as short-term. The line of credit is subject to a borrowing base of 50% of inventory and 80% of accounts receivable. Maximum borrowings are $5,000,000, adjusting to accommodate the Company’s increased activity during the holiday months, so that $9,000,000 in borrowings are available to the Company from October 1 to February 1. The Company may select the interest rate for each advance at the LIBOR plus 1.5%, or the prime rate less 1.25% (2.25% at December 31, 2015).

The line of credit agreement between the Bank and the Company contain certain financial covenants that are required to be met by the Company. Subsequent to the balance sheet date, the line of credit was paid off. See Note 9.

Note 3 – Operating Leases

The Company has operating leases for its office, retail, and warehouse spaces with various maturities through May 2019.

Rent expense under these leases was $334,460, $176,551, and $110,851 for the years ended December 31, 2015, 2014, and 2013, respectively.

Future minimum lease commitments are as follows:

Years ending December 31,
2016	$	503,883
2017		764,500
2018		453,992
2019		308,330
	$	2,030,705

The company has the option to terminate one of its leases in November 2017 and again in November 2018. The table above assumes the Company does not elect to terminate its lease early.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 4 – Income Taxes

The components of income tax expense consist of the following for the years ended December 31:

	2015		2014			2013

Current tax expense	$	1,320,838	$	701,288		$	275,893
Deferred tax expense (benefit)		68,656		(194,159	)		(33,881	)
Income tax expense	$	1,389,494	$	507,129		$	242,012

The effective tax rate differs from the statutory tax rate as follows for the years ended December 31:

	2015		2014		2013

Income tax expense at statutory rate	$	1,100,434	$	503,546	$	328,925
Effect of state income taxes, net		245,063		-		-
Other		43,997		3,583		3,087
Income tax expense	$	1,389,494	$	507,129	$	242,012

The Company’s total deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for federal income tax purposes.

The significant components of the Company’s net deferred tax asset are as follows at December 31:

	2015			2014

Current deferred tax assets
Reserve for returns and allowances	$	211,610		$	152,216
Other		17,391			-

Current deferred tax asset		229,001			152,216

Long-term deferred tax assets (liabilities), net
Stock warrants		124,541			124,541
Property and equipment		(203,615	)		(58,174	)

Long-term deferred tax asset (liability), net		(79,074	)		66,367

Net deferred tax asset	$	149,927		$	218,583

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 4 – Income Taxes (continued)

The Company does not have any material uncertain tax positions. As of December 31, 2015 and 2014, there is no accrued interest or penalties recorded in the financial statements.

Note 5 – Stockholders’ Equity

Capital structure – The capital structure of the Company consists of the following:

Common stock – The Company has authorized 50,000,000 shares; 991,698 shares issued and outstanding at December 31, 2015 and 2014, with no par value.

Preferred stock – The Company has authorized 50,000,000 shares; no shares issued and outstanding at December 31, 2015 and 2014, with no par value.

Holders of preferred stock shall have preferential rights and privileges to holders of common stock with regard to dividends, redemptions, liquidations, and other as provided by the Board of Directors in establishing particular series of preferred stock. As of December 31, 2015 and 2014, no particular series of preferred stock has been established by the Board of Directors.

Stock warrants – The Company’s executive management, from time to time, grant certain parties warrants to purchase shares of the Company’s common stock at fixed prices with the approval of the Board of Directors. The warrants vest immediately and expire 5 to 10 years from the date of issuance.

Put options – During 2013, and in connection with the stock sales, the Company executed two put option agreements with 10-year terms, which allow certain stockholders the right to require the Company to repurchase 98,698 shares of common stock upon the occurrence of a triggering event. The triggering events are: (1) the adoption by the Company of a plan of liquidation or dissolution; or (2) a sale, merger, consolidation, or other transaction or series of transactions within a period of twelve (12) consecutive months resulting in a change in control of the Company. The put option agreement defines a change in control as an event where the stockholders of the Company immediately before the transaction do not retain substantially the same proportions of their share ownership of the Company’s voting stock immediately after the transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company.

Subsequent to a triggering event, the Company will be required to repurchase the shares from the stockholders at $12.92 per share, upon the proper and timely exercise of the put options. Although a triggering event occurred subsequent to year-end, (see Note 9), the put option was not exercised because it was more beneficial for the holder to sell its shares of common stock. Accordingly, no liability has been recorded related to this settlement.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 6 – Share-Based Compensation

The following table summarizes the Company’s stock warrants outstanding and exercisable at December 31, 2015:

Exercise Price		Number of Warrants Outstanding		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Weighted- Average Grant Date Fair Value

$	1.00		191,625		3.94	$	-	$	-
	1.50		65,000		5.05		-		-
	6.23		21,849		6.39		-		-
	8.36		20,000		7.06		-		-
	12.92		58,050		4.00		-		-

			356,524		4.48	$	3.77	$	1.03

The weighted-average grant date fair value of warrants issued in 2014 was $6.31, and total shared-based compensation expense was $366,296.

In determining the fair value of stock warrants granted during the year ended December 31, 2014, the following assumptions were used in the Black-Scholes option-pricing model:

Estimated per share value of common stock	$	12.92
Risk-free interest rate		4.50%
Contractual term		5 years
Dividend rate		None
Volatility		50%
Forfeiture rate		0%

Summaries of the assumptions shown above are as follows:

Estimated per-share value of common stock – The Company based its estimated per-share value of common stock on a third party sale in 2014.

Risk-free interest rate – The Company bases the risk-free interest rate on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term.

Contractual term – As stated in the executed warrant agreements.

Dividend rate – The Company has not declared or paid dividends in the past and does not currently expect to do so in the foreseeable future.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 6 – Share-Based Compensation (continued)

Volatility – There is minimal trading activity in etailz stock and as such, volatility represents management’s best estimate of future volatility based on reviewing the average volatility of stock prices for similar publicly traded companies.

Forfeiture rate – As all warrants were immediately vested, no forfeiture rate was applied.

Note 7 – Employee Benefit Plan

Effective January 1, 2015, the Company implemented a defined contribution 401(k) plan (Plan) covering substantially all employees. Employees are eligible after one year, with a minimum of 1,000 hours worked, and may elect to defer compensation subject to the Internal Revenue Service allowable contribution limit. The Company matches up to 6% of employee compensation, as defined by the Plan document, which was $111,633 for the year ended December 31, 2015.

Note 8 – Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and nonobservable inputs:

Level 1	Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.

Level 2	Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

	·	Quoted prices for similar assets or liabilities in active markets;
	·	Quoted prices for identical or similar assets in non-active markets;
	·	Inputs other than quoted prices that are observable for the asset or liability; and
	·	Inputs that are derived principally from or corroborated by other observable market data.

Level 3

Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 8 – Fair Value Measurements (continued)

The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

Our financial instruments include cash, accounts receivable, line of credit, accounts and credit cards payable, sales tax payable, payroll liabilities, and accrued expenses and liabilities. The fair values of these items approximated carrying values because of the short-term nature of the instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy.

Note 9 – Subsequent events

Effective October 17, 2016, Trans World Entertainment Corporation, a public entity traded on the NASDAQ acquired all of the outstanding shares of etailz for approximately $75,000,000, which includes contingent consideration.

EX-99.3 4 c86796_ex99-3.htm

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On October 17, 2016, Trans World Entertainment Corporation (the “Company”) acquired (the “Acquisition”) all of the issued and outstanding capital stock of Etailz Inc. (“etailz”) pursuant to a share purchase agreement (the “Purchase Agreement”) by and among the Company, etailz, the equity holders of etailz (each a “seller” and, collectively, the “sellers”) and Thomas C. Simpson, as the sellers’ representative. Etailz, a leading digital marketplace retailer operating both domestically and internationally, uses a data driven approach to digital marketplace retailing utilizing proprietary software and ecommerce insight coupled with a direct customer relationship engagement to identify new distributors and wholesalers, isolate emerging product trends, and optimize price positioning and inventory purchase decisions.

The unaudited condensed consolidated balance sheet at October 29, 2016 is presented in this exhibit consistent with the Company’s most recently filed Form 10-Q dated December 8, 2016, which reflects the preliminary acquisition of etailz consummated on October 17, 2016.

The following unaudited pro forma condensed combined statements of operations for the year ended January 30, 2016 and six months ended July 30, 2016 combine the historical results of operations of the Company and etailz, giving effect to the Acquisition as if it occurred on February 1, 2015. The unaudited pro forma condensed combined statement of operations for the year ended January 30, 2016, utilizes the consolidated historical results of the Company for the year ended January 30, 2016 and the historical results of etailz for the fiscal year ended December 31, 2015. The unaudited pro forma condensed combined statement of operations for the six months ended July 30, 2016, utilizes the consolidated historical results of the Company for the six months ended July 30, 2016 and the historical results of etailz for the six-months ended June 30, 2016.

The pro forma adjustments do not reflect any operating efficiencies or inefficiencies which may result from the Acquisition. Therefore, the unaudited pro forma condensed combined financial information is not necessarily indicative of results that would have been achieved had the business been combined during the periods presented and should not be taken as representative of future consolidated operating results. In addition, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of revenues and expenses during the reporting periods. These estimates and assumptions are preliminary and have been made solely for purposes of developing this pro forma information. Actual results could differ, perhaps materially, from these estimates and assumptions.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except per share and share amounts)

	October 29,
	2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$4,708
Merchandise inventory		157,827
Other current assets		13,903
Total current assets		176,438

Net fixed assets		41,902
Goodwill		39,800
Net intangible assets		28,737
Restricted cash		16,100
Other assets		10,272
TOTAL ASSETS		$313,249

LIABILITIES
CURRENT LIABILITIES:
Accounts payable		$61,956
Notes payable		5,936
Accrued expenses and other current liabilities		9,116
Deferred revenue		7,813
Current portion of capital lease obligations		---
Total current liabilities		84,821

Contingent consideration		10,381

Other long-term liabilities		28,927
TOTAL LIABILITIES		124,129

SHAREHOLDERS’ EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)		---

Common stock ($0.01 par value; 200,000,000 shares authorized; 64,252,671 shares issued)		643

Additional paid-in capital		337,439

Treasury stock at cost (28,137,283 shares)		(230,144	)
Accumulated other comprehensive loss		(658	)
Retained earnings		81,840
TOTAL SHAREHOLDERS’ EQUITY		189,120
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$313,249

Unaudited Proforma Condensed Combined Statements of Operations

Twelve Months Ended January 30, 2016

	January 30,			December 31,		Proforma				Proforma
	2016			2015		Adjustments			Note 2	Combined
	Trans World				Etailz
Total revenue	$	334,661		$	93,292		-			$	427,953
Cost of sales		204,089			68,800		-				272,889
Gross profit		130,572			24,492		-				155,064
Selling, general and administrative expenses		126,002			21,059		7,518		(1)		154,579
Income from operations		4,570			3,433		(7,518	)			485
Interest expense		1,860			81		142		(2)		2,083
Other expense (income)		(160	)		116		-				(45	)
Income (loss) before income taxes		2,870			3,236		(7,660	)			(1,553	)
Income tax expense (income)		181			1,389		(1,389	)	(3)		181
NET INCOME (LOSS)	$	2,689		$	1,847	$	(6,271	)		$	(1,735	)

BASIC INCOME PER SHARE:
Basic income (loss) per share		$0.09					($1.09	)			($0.05	)

Weighted average number of common shares outstanding – basic		31,167					5,731		(4)		36,898

DILUTED INCOME PER SHARE:

Diluted income (loss) per share		$0.09					($1.09	)			($0.05	)

Weighted average number of common shares outstanding – diluted		31,323					5,731		(4)		37,054

Unaudited Proforma Condensed Combined Statements of Operations

Six Months Ended July 30, 2016

	July 30, 2016			Six-months ended June 30, 2016		Proforma Adjustments			Note 2	Proforma Combined
	Trans World			Etailz
Total revenue	$	140,078		$	56,327	$	-			$	196,405
Cost of sales		82,551			41,385		-				123,936
Gross profit		57,527			14,942		-				72,469
Selling, general and administrative expenses		62,734			13,040		3,759		(1)		79,533
Income from operations		(5,207	)		1,902		(3,759	)			(7,064	)
Interest expense		345			36		71		(2)		452
Other income		(1,017	)		39		-				(978	)
Income (loss) before income taxes		(4,535	)		1,827		(3,830	)			(6,538	)
Income tax expense (income)		95			784		(784	)	(3)		95
NET INCOME (loss)	$	(4,630	)	$	1,043	$	(3,046	)		$	(6,633	)

BASIC AND DILUTED INCOME PER SHARE:
Basic and diluted income (loss) per share		($0.15	)				($0.53	)			($0.18	)

Weighted average number of common shares outstanding – basic and diluted		30,576					5,731		(4)		36,307

Notes to Unaudited Pro Forma Condensed Combined Financial Information

1.	Basis of Pro Forma Presentation

The unaudited pro forma condensed combined financial information was prepared in accordance with U.S. GAAP and pursuant to SEC Regulation S-X Article 11, and presents the pro forma results of operations of the combined companies based upon the historical information after giving effect to the acquisition and adjustments described in these notes. The unaudited pro forma condensed combined statements of operations for the fiscal year ended January 30, 2016 and the six months ended July 30, 2016 are presented as if the acquisition had occurred on February 1, 2015.

The historical results of the Company have been derived from its financial statements contained in its Annual Report on Form 10-K for the year ended January 30, 2016 and the Company’s unaudited consolidated financial statements and related notes thereto contained in its Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2016. The historical results of etailz for the year ended December 31, 2015 have been derived from its audited financial statements which have been included in Exhibit 99.2 to the Form 8-K/A and its interim financial statements as of June 30, 2016 and 2015 which have been included in Exhibit 99.4 to the Form 8-K/A.

Overview of the Accounting for the Acquisition

The business combination is reflected in the unaudited pro forma condensed combined financial information as being accounted for under the acquisition method in accordance with ASC 805, Business Combinations, with Trans World being treated as the accounting acquirer. ASC 805 requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired to be recorded as goodwill. In addition, ASC 805 establishes that the common stock issued to affect the business combination be measured at the closing date of the business combination at the then current market price.

On October 17, 2016, the Company completed the purchase of all of the issued and outstanding shares of etailz, Inc. (“etailz”), an innovative and leading digital marketplace retail expert. The Company paid $32.3 million in cash, issued 5.7 million shares of TWMC stock at closing to the shareholders of etailz as consideration for their shares and paid $4.3 million in cash advances to settle obligations of the selling shareholders. Based on the fair value of $3.56 per share on the acquisition date, the shares had a value of $20.4 million. An earn-out of up to a maximum of $14.6 million will be payable in fiscal 2018 and fiscal 2019 subject to the achievement by etailz of $6 million in operating income in fiscal 2017 and $7.5 million in fiscal 2018 as outlined in the share purchase agreement. In connection with the acquisition, the Company assumed the liability for etailz’s employee retention bonus plan, of which $1.9 million was due and payable at closing and funded as part of the cash advances and the remaining $2.3 million will be earned over a two year service period. The acquisition and related costs were funded primarily from the Company’s cash on hand and short term borrowings under its revolving credit facility. The acquisition was accounted for using the purchase method of accounting. As of October 29, 2016, the preliminary purchase accounting has not yet been finalized due primarily to the proximity of the closing date of the acquisition to the filing date of this quarterly report and the pending receipt of the final valuation for certain assets, including identifiable intangible assets.

The acquisition date fair value of the consideration for the above acquisition consisted of the following as of October 17, 2016 (in thousands):

Cash consideration	$	36,600
Fair value of stock consideration		20,415
Fair value of contingent consideration		10,381
Fair value of indemnification consideration held in escrow		1,500
Fair value of purchase consideration	$	68,896

The excess of purchase consideration paid over the fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill recognized is not deductible for income tax purposes.

The following table summarizes the preliminary allocation of the aggregate purchase price to the estimated fair value of the net assets acquired:

	($ in thousands)
		October 17, 2016
Assets Acquired
Cash and Cash Equivalents		$	1,800
Accounts receivable			1,533
Prepaid expenses and other current assets			6,603
Inventory			14,669
Property and equipment, net			649
Other long term-assets			12
Acquired intangible assets:
Trade names			3,200
Technology			6,700
Customer relationships			19,000
Unfavorable lease valuation			(125	)
Goodwill			39,800
Total assets acquired		$	93,841
Liabilities Assumed
Accounts payable		$	4,227
Debt			5,289
Other current liabilities			7,927
Deferred taxes			7,502
Total liabilities assumed		$	24,945
Net assets acquired		$	68,896

The Company recognized total acquisition related costs of $2.2 million for the thirteen and thirty-nine weeks ended October 29, 2016. These costs are included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.

2.	Pro Forma Adjustments

The preliminary amortization expense for the intangible assets acquired from etailz is as follows (in thousands):

(1)	Selling, general and administrative expenses- the following table summarizes the items included in SG&A:

		For the Year Ended		For the Six Months Ended
		January 30,		July 30,
	Note	2016		2016
Intangible amortization	(a)		3,880		1,940
Equity compensation	(b)		2,488		1,244
Incentive compensation	(c)		1,150		575
Total adjustment		$	7,518	$	3,759

(a)					Amortization Expense
	Weighted Average Amortization Period (in months)		Preliminary Fair Value		For the Year Ended January 30, 2016		For the Six Months Ended July 30, 2016

Vendor Relationships		120	$	19,000	$	1,900	$	950
Technology		60		6,700		1,340		670
Trade names and trademarks		60		3,200		640		320
				28,900		3,880		1,940

	(b) Adjustment reflects equity-based compensation expense of approximately $2.5 million and $1.2 million for the year ended January 30, 2016 and six months ended July 30, 2016, respectively, based on the grant date fair value as of 10/17/16, associated with restricted stock awards granted to a key etailz employee in connection with the acquisition.

	(c) Adjustment reflects compensation expense of approximately $1.2 million and $0.6 million for the year ended January 30, 2016 and six months ended July 30, 2016, respectively, associated with incentive compensation granted to key etailz employees in connection with the acquisition.

(2)	Interest expense - adjustment reflects interest expense of approximately $142,000 and $71,000 for the year ended January 30, 2016 and six months ended July 30, 2016, respectively, associated with the assumption of

	$4.7 million in debt in connection with the acquisition with a variable rate of 3.0%.

(3)	Income tax expense (benefit) – Adjustment reflects the reversal of income tax expense recorded by etailz that would be offset by deductions at the consolidated level.

(4)	Basic and diluted weighted-average common shares outstanding – The adjustments to basic and diluted weighted-average common shares outstanding reflect the acquisition as if it had occurred on February 1, 2015 (in shares).

EX-99.4 5 c86796_ex99-4.htm

Exhibit 99.4

CONTENTS

	PAGE

FINANCIAL STATEMENTS (UNAUDITED)

Balance sheets	1-2

Statements of income	3

Statements of stockholders’ equity	4

Statements of cash flows	5-6

Notes to financial statements	7-16

etailz, inc.

BALANCE SHEETS (UNAUDITED)

ASSETS

	June 30, 2016			December 31, 2015

CURRENT ASSETS
Cash	$	169,569		$	395,750
Accounts receivable		979,917			998,310
Inventories, net		12,215,049			13,467,916
Inventory in transit		301,361			418,974
Inventory deposits		468,036			639,756
Prepaid and other current assets		303,875			216,173
Current deferred tax assets		280,329			229,001

Total current assets		14,718,136			16,365,880

PROPERTY AND EQUIPMENT
Computers		75,476			54,864
Furniture		8,674			16,283
Leasehold improvements		192,648			166,106
Accumulated depreciation and amortization		(122,586	)		(90,244	)

Total property and equipment, net		154,212			147,009

LONG-TERM ASSETS
Software and websites, net of accumulated amortization		521,024			516,205

Total assets	$	15,393,372		$	17,029,094

etailz, inc

BALANCE SHEETS (UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	June 30, 2016		December 31, 2015

CURRENT LIABILITIES
Checks in excess of bank balance	$	1,591,704	$	376,005
Line of credit, current		2,109,688		3,236,590
Accounts payable		3,351,551		4,673,781
Credit cards payable		327,444		955,736
Sales returns		369,339		584,580
Sales tax payable		496,690		837,820
Payroll liabilities		105,825		131,213
Other accrued expenses		273,834		370,221
Income tax payable		87,712		321,156

Total current liabilities		8,713,787		11,487,102

LONG-TERM LIABILITIES
Long-term deferred tax liabilities, net		192,592		79,074
Other liabilities		16,715		35,940

Total long-term liabilities		209,307		115,014

COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5)

STOCKHOLDERS’ EQUITY
Preferred stock, no par value; 50,000,000 shares authorized; none issued or outstanding		-		-
Common stock, no par value; 50,000,000 shares authorized; 991,698 issued and outstanding		1,563,000		1,563,000
Additional paid-in capital		366,296		366,296
Retained earnings		4,540,982		3,497,682

Total stockholders’ equity		6,470,278		5,426,978

Total liabilities and stockholders’ equity	$	15,393,372	$	17,029,094

etailz, inc.

STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015

Net sales	$	28,846,698	$	20,693,332	$	56,327,017	$	40,218,160

Cost of sales		21,324,257		15,210,190		41,385,024		29,717,607

Gross profit		7,522,441		5,483,142		14,941,993		10,500,553

Selling, general, and administrative expenses		6,725,485		4,691,857		13,039,863		9,155,284

Operating income		796,956		791,285		1,902,130		1,345,269

Other expense
Interest expense		17,851		18,866		35,569		26,984
Other expense (income)		40,487		20,588		39,354		52,951

		58,338		39,454		74,923		79,935

Income before income taxes		738,618		751,831		1,827,207		1,265,334

Income tax expense		317,097		322,769		783,907		542,514

Net income	$	421,521	$	429,062	$	1,043,300	$	722,820

etailz, inc.

STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

	Preferred Stock (Shares)		Preferred Stock (Amount)		Common Stock (Shares)		Common Stock (Amount)		Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity

Balance, January 1, 2015		-	$	-		991,698	$	1,563,000	$	366,296	$	1,650,603	$	3,579,899

Net income		-		-		-		-		-		1,847,079		1,847,079

Balance, December 31, 2015		-		-		991,698		1,563,000		366,296		3,497,682		5,426,978

Net income		-		-		-		-		-		1,043,300		1,043,300

Balance, June 30, 2016		-	$	-		991,698	$	1,563,000	$	366,296	$	4,540,982	$	6,470,278

etailz, inc.

STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers	$	56,130,169		$	39,459,574
Cash paid to suppliers and employees		(55,281,967	)		(41,590,399	)
Interest paid		(35,569	)		(26,984	)
Income tax paid		(955,161	)		(853,811	)

Net cash from operating activities		(142,528	)		(3,011,620	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(54,220	)		(148,317	)
Purchase of software and websites		-			(27,900	)
Capitalization of internal software and website development costs		(118,230	)		(138,497	)

Net cash from investing activities		(172,450	)		(314,714	)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in checks in excess of bank balance		1,215,699			282,481
Draws on line of credit		28,393,787			18,259,630
Repayments of line of credit		(29,520,689	)		(15,205,864	)

Net cash from financing activities		88,797			3,336,247

NET CHANGE IN CASH		(226,181	)		9,913

CASH at beginning of year		395,750			78,259

CASH at end of year	$	169,569		$	88,172

etailz, inc.

STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
	2016			2015

RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Net income	$	1,043,300		$	722,820
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		160,428			81,151
Deferred income taxes		62,190			122,148
Increase in reserves for inventory obsolescence and sales returns		254,759			(93,518	)
Change in assets and liabilities
Accounts receivable		18,393			(590,068	)
Inventories (including in-transit)		900,480			(2,256,150	)
Deposits and other current assets		84,018			(171,878	)
Accounts and credit cards payable		(233,444	)		(433,445	)
Other accrued expenses		(1,950,522	)		(676,348	)
Income taxes payable		(482,130	)		283,668

Net cash from operating activities	$	(142,528	)	$	(3,011,620	)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Transfer from software in development to software and websites	$	85,893		$	127,123

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Basis of presentation – The balance sheets as of June 30, 2016 and 2015, the statements of income for both the three and six months ended June 30, 2016 and 2015, and the statements of cash flows for the six months ended June 30, 2016 and 2015 are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented have been made.

Due to the seasonal nature of the Company’s business, the results of operations for the three and six months ended June 30, 2016 and 2015 are not indicative of the operating results that may be expected for the year ending December 31, 2016 and 2015.

The Company is currently evaluating the impact of these ASUs and has not yet implemented them.

Foreign currency – The Company buys and sells certain products internationally. In these cases, the transactions are generally denominated in the local currency. All income statement transactions are immediately remeasured into U.S. dollars. The remeasurement of the related foreign receivables, payables and cash into U.S. dollars creates remeasurement gains and losses that are included in earnings as a component of other expense. The Company recognized net remeasurement losses (gains) of $6,256 and $12,913 during the three months ended June 30, 2016 and 2015, respectively and ($9,334) and $43,842 during the six months ended June 30, 2016 and 2015, respectively.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

Reclassifications – Certain reclassifications have been made to previously issued financial statements to conform with the presentation of these financial statements. Total equity and net income are unchanged due to these reclassifications.

Comprehensive income – Net income was equal to comprehensive income for each of the periods presented.

Accounts receivable – Accounts receivable are primarily comprised of merchant receivables, which are stated at the amount the Company expects to collect. An allowance for doubtful accounts is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Receivables are typically paid within 10 days of the underlying transactions. Receivables not paid within the contractually agreed upon timeframe are considered delinquent. Delinquent receivables are written off based on individual credit evaluation, specific circumstances of the customer, and management’s discretion. The Company did not have an allowance for doubtful accounts at June 30, 2016 or December 31, 2015, as management expects all accounts to be collected. Actual write offs were insignificant for all periods presented.

Inventories – Inventories are comprised of consumer products to be sold and are stated at the lower of cost or net realizable value, calculated on average cost, which approximates the first-in, first-out method. The Company provides for obsolescence and net realizable value adjustments by recording a reserve. At June 30, 2016 and December 31, 2015, the reserve for obsolescence and net realizable value adjustments was $470,000 and $900,000, respectively.

Property and equipment – Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. The useful lives for depreciation purposes range from three to five years for computers and equipment. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful life. Depreciation and amortization expense was $17,970 and $17,916 for the three month periods ended June 30, 2016 and 2015, respectively, and $47,017 and $33,028 for the six month periods ended June 30, 2016 and 2015, respectively, and is included with selling, general, and administrative expenses.

Valuation of long-lived assets – The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews assets for impairment whenever events or changes in circumstances have indicated the carrying amount of its assets might not be recoverable. Impaired assets are reported at the lower of cost or fair value. As of June 30, 2016 and December 31, 2015, no long-lived assets were impaired.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

The following table summarizes software and websites at:

	June 30,			December 31,
	2016			2015

Purchased software	$	51,851		$	51,851
Internally developed software and websites		724,688			638,795
Software in development		70,385			38,048
Less accumulated amortization		(325,900	)		(212,489	)

	$	521,024		$	516,205

The Company determined internal costs of $69,944 and $81,779 during the three month periods ended June 30, 2016 and 2015, respectively, and $118,230 and $138,497 during the six month periods ended June 30, 2016 and 2015, respectively, to be in the application development stage and have, therefore, been capitalized as internally developed software and websites. All ineligible costs are expensed as incurred.

Amortization expense of capitalized internally developed software and websites was $55,237 and $23,867 during the three month periods ended June 30, 2016 and 2015, respectively, and $105,050 and $40,773 during the six month periods ended June 30, 2016 and 2015, respectively. Amortization expense of purchased software and third party development costs was $4,180 and $4,063 during the three month periods ended June 30, 2016 and 2015, respectively, and $8,361 and $7,350 during the six month periods ended June 30, 2016 and 2015, respectively.

Deferred rent – Certain of the Company’s operating leases contain lease incentives and predetermined fixed escalations of the base rental rate during the original term of the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent. The balance of deferred rent is presented as a long-term liability on the balance sheet.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

For retail sales, revenue is recorded at the point of sale.

Advertising – The Company’s policy is to expense advertising costs as incurred. Advertising expenses were $65,954 and $30,990 during the three month periods ended June 30, 2016 and 2015, respectively, and $109,631 and $58,411 during the six month periods ended June 30, 2016 and 2015, respectively.

Shipping and handling – The Company includes shipping and handling costs and fulfillment fees from third parties in cost of sales.

Concentrations – At various times during the year, the Company had cash balances maintained with one financial institution in excess of federally insured limits.

The Company sells the majority of its product through Amazon.com’s website. The Company may be susceptible to any negative changes to Amazon.com’s website or online marketplace.

Substantially all the Company’s revenue and accounts receivable is attributable to sales through Amazon.com and its affiliates.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies (continued)

The Company has evaluated subsequent events through December 28, 2016, which is the date the financial statements are available to be issued.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 2 – Line of Credit

On November 25, 2014, the Company entered into a line of credit agreement with Chase Bank, N.A. (Bank), expiring December 31, 2016. The line of credit is subject to a borrowing base of 50% of inventory and 80% of accounts receivable. Maximum borrowings are $5,000,000, adjusting to accommodate the Company’s increased activity during the holiday months, so that $9,000,000 in borrowings are available to the Company from October 1 to February 1. The Company may select the interest rate for each advance at the LIBOR plus 1.5%, or the prime rate less 1.25% (2.25% at June 30, 2016).

Note 3 – Operating Leases

The Company has operating leases for its office, retail, and warehouse spaces with various maturities through May 2019. Rent expense under these leases $112,059 and $82,862 during the three month periods ended June 30, 2016 and 2015, respectively, and $217,584 and $156,321 during the six month periods ended June 30, 2016 and 2015, respectively.

Future minimum lease commitments are as follows:

Remainder of 2016	$	295,226
2017		764,500
2018		453,992
2019		308,330

	$	1,822,048

The company has the option to terminate one of its leases in November 2017 and again in November 2018. The table above assumes the Company does not elect to terminate its lease early.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 4 – Income Taxes

At June 30, 2016 and December 31, 2015, the Company’s net deferred tax asset was $87,737 and $149,927, respectively. The components of the gross deferred tax assets and liabilities were primarily attributable to the reserve for returns and allowance, stock warrants and the book-tax basis differential in fixed assets. Management considered the need for a valuation allowance for each period and determined that no such allowance was required.

Income tax expense for the three and six month periods ended June 30, 2016 and 2015, is based on the Company’s estimate of the effective tax rate expected to be applicable for the full year. The difference between the anticipated income tax expense at the statutory federal rate of 34% and actual income tax expense for the periods presented was primarily attributable to net effect of state income taxes, certain permanent differences and the effect of federal research and development credits.

The Company does not have any material uncertain tax positions. As of June 30, 2016 and December 31, 2015, there is no accrued interest or penalties recorded in the financial statements.

Note 5 – Stockholders’ Equity

Capital structure – The capital structure of the Company consists of the following:

Common stock – The Company has authorized 50,000,000 shares; 991,698 shares issued and outstanding at June 30, 2016 and December 31, 2015, with no par value.

Preferred stock – The Company has authorized 50,000,000 shares; no shares issued or outstanding at June 30, 2016 and December 31, 2015, with no par value.

Holders of preferred stock shall have preferential rights and privileges to holders of common stock with regard to dividends, redemptions, liquidations, and other as provided by the Board of Directors in establishing particular series of preferred stock. As of June 30, 2016 and December 31, 2015, no particular series of preferred stock has been established by the Board of Directors.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 5 – Stockholders’ Equity (continued)

Note 6 – Share-Based Compensation

The following table summarizes the Company’s stock warrants outstanding and exercisable at June 30, 2016:

Exercise Price		Number of Warrants Outstanding		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Weighted- Average Grant Date Fair Value

$	1.00		191,625		3.44	$	-	$	-
	1.50		65,000		4.56		-		-
	6.23		21,849		5.89		-		-
	8.36		20,000		6.56		-		-
	12.92		58,050		3.50		-		-

			356,524		3.98	$	3.77	$	1.03

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 7 – Employee Benefit Plan

Note 8 – Fair Value Measurements

Level 1	Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.

Level 2	Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

	·	Quoted prices for similar assets or liabilities in active markets;
	·	Quoted prices for identical or similar assets in non-active markets;
	·	Inputs other than quoted prices that are observable for the asset or liability; and
	·	Inputs that are derived principally from or corroborated by other observable market data.

Level 3	Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

etailz, inc.

NOTES TO FINANCIAL STATEMENTS

Note 8 – Fair Value Measurements (continued)

Our financial instruments include cash, accounts receivable, line of credit, accounts and credit cards payable, sales tax payable, payroll liabilities and accrued expenses and liabilities. The fair values of these items approximated carrying values because of the short-term nature of the instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy.

Note 9 – Subsequent events