UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~May~~August 0403, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21196

Destination Maternity Corporation

(Exact name of registrant as specified in its charter)

Delaware	13-3045573
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
232 Strawbridge Drive Moorestown, New Jersey	08057
(Address of principal executive offices)	(Zip code)

(856) 291-9700

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	DEST	NASDAQ

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a1) of the Exchange Act ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value — 14,~~339~~226,~~786~~121 shares outstanding as of ~~June~~September 3, 2019

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2530
Item 4.	Controls and Procedures	2631
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	2732
Item 1A.	Risk Factors	2732
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2733
Item 6.	Exhibits	28
Item 5.	Other Information	34
Signatures		29
Item 6.	Exhibits	35
Signatures		36

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

	May 4, 2019			February 2, 2019
	August 3, 2019			February 2, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,193		$	1,154
Cash	$	1,142		$	1,154
Trade receivables, net		87,~~807~~012			7,945
Inventories		7267,~~133~~691			70,872
Prepaid expenses and other current assets		9,~~855~~961			9,407
Total current assets		9185,~~988~~806			89,378
Property and equipment, net of accumulated depreciation and amortization of $108,556 and $106,479		50,510			51,483
Property and equipment, net of accumulated depreciation and amortization of $111,181 and $106,479		48,215			51,483
Operating lease assets		~~128~~125,~~065~~283			—
Deferred income taxes		3,~~314~~967			2,671
Other non-current assets		1,~~918~~868			2,642
Total assets	$	~~275~~265,~~795~~139		$	146,174
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit borrowings	$	2623,~~200~~300		$	20,400
Current portion of long-term debt		43,~~257~~841			4,372
Accounts payable		21,~~355~~477			21,854
Operating lease liabilities		3230,~~327~~301			—
Accrued expenses and other current liabilities		24,~~608~~226			31,056
Total current liabilities		~~108~~103,~~747~~145			77,682
Long-term debt		2221,~~294~~343			21,784
Operating lease and other non-current liabilities		119,938			19,557
Operating leases and other non-current liabilities		119,225			19,557
Total liabilities		~~250~~243,~~979~~713			119,023
Commitments and contingencies (Note 16)
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, 1,656,381 shares authorized, none outstanding		—			—
Common stock, $.01 par value; 20,000,000 shares authorized, 14,375,658 and 14,416,500 shares issued and outstanding		144			144
Common stock, $.01 par value; 20,000,000 shares authorized, 14,227,184 and 14,416,500 shares issued and outstanding		142			144
Additional paid-in capital		107,~~785~~932			107,675
Accumulated deficit		(8386,~~039~~574	)		(80,594	)
Accumulated other comprehensive loss		(74	)		(74	)
Total stockholders’ equity		2421,~~816~~426			27,151
Total liabilities and stockholders’ equity	$	~~275~~265,~~795~~139		$	146,174

The accompanying notes are an integral part of these consolidated financial statements.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Six Months Ended
	May 4, 2019			May 5, 2018
	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
Net sales	$	9484,~~213~~901		$	~~103~~96,~~227~~395		$	179,114		$	199,622
Cost of goods sold		4241,~~616~~253			4746,~~824~~530			83,869			94,354
Gross profit		5143,~~597~~648			5549,~~403~~865			95,245			105,268
Selling, general and administrative expenses		4845,~~490~~153			5150,~~857~~095			93,643			101,952
Store closing, asset impairment and asset disposal expenses		~~869~~778			~~969~~672			1,647			1,641
Other charges		662			1,150
Other (income) charges, net		(119	)		1,923			543			3,073
Operating income		1,576			1,427
Operating loss		(2,164	)		(2,825	)		(588	)		(1,398	)
Interest expense, net		1,~~415~~340			1,~~157~~144			2,755			2,301
Income before income taxes		161			270
Loss before income taxes		(3,504	)		(3,969	)		(3,343	)		(3,699	)
Income tax provision		31			56			62			112
Net income	$	130		$	214
Net loss	$	(3,535	)	$	(4,025	)	$	(3,405	)	$	(3,811	)
Net income per share— Basic	$	0.01		$	0.02
Net loss per share— Basic	$	(0.25	)	$	(0.29	)	$	(0.25	)	$	(0.28	)
Average shares outstanding— Basic		13,~~825~~871			13,~~839~~823			13,848			13,831
Net income per share— Diluted	$	0.01		$	0.02
Net loss per share— Diluted	$	(0.25	)	$	(0.29	)	$	(0.25	)	$	(0.28	)
Average shares outstanding— Diluted		13,~~901~~871			13,~~963~~823			13,848			13,831

The accompanying notes are an integral part of these consolidated financial statements.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three Months Ended						Six Months Ended
	May 4, 2019			May 5, 2018
	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
Net income	$	130		$	214
Net loss	$	(3,535	)	$	(4,025	)	$	(3,405	)	$	(3,811	)
Foreign currency translation adjustments		—			—(2	)		—			(2	)
Comprehensive income	$	130		$	214
Comprehensive loss	$	(3,535	)	$	(4,027	)	$	(3,405	)	$	(3,813	)

The accompanying notes are an integral part of these consolidated financial statements.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock												Accumulated
	Number of Shares			Amount			Additional Paid-in Capital			Accumulated Deficit			Other Comprehensive Loss			Total
Balance as of February 2, 2019		14,417		$	144		$	107,675		$	(80,594	)	$	(74	)	$	27,151
Adoption of ASC 842 - Leases		—			—			—			(2,576	)		—			(2,576	)
Net income		—			—			—			130			—			130
Net loss		—			—			—			130			—			130
Dividends forfeited		—			—			—			1			—			1
Stock-based compensation		75			1			143			—			—			144
Repurchase and retirement of common stock		(116	)		(1	)		(33	)		—			—			(34	)
Balance as of May 4, 2019		14,376		$	144		$	107,785		$	(83,039	)	$	(74	)	$	24,816
Net loss		—			—			—			(3,535	)		—			(3,535	)
Stock-based compensation		6			0			146			—			—			146
Repurchase and retirement of common stock		(155	)		(2	)		1			—			—			(1	)
Balance as of August 3, 2019		14,227		$	142		$	107,932		$	(86,574	)	$	(74	)	$	21,426
Balance as of February 3, 2018		14,684		$	147		$	106,865		$	(66,274	)	$	(70	)	$	40,668
Net income		—			—			—			214			—			214
Net loss		—			—			—			214			—			214
Dividends forfeited		—			—			—			1			—			1
Stock-based compensation		383			4			324			—			—			328
Repurchase and retirement of common stock		(62	)		(1	)		(18	)		—			—			(19	)
Balance as of May 5, 2018		15,005		$	150		$	107,171		$	(66,059	)	$	(70	)	$	41,192
Net loss		—			—			—			(4,025	)		—			(4,025	)
Foreign currency translation adjustments		—			—			—			—			(2	)		(2	)
Dividends forfeited		—			—			—			3			—			3
Stock-based compensation		60			—			256			—			—			256
Exercise of stock options, net		—			—			1			—			—			1
Repurchase and retirement of common stock		(260	)		(2	)		(8	)		—			—			(10	)
Balance as of August 4, 2018		14,805		$	148		$	107,420		$	(70,081	)	$	(72	)	$	37,415

The accompanying notes are an integral part of these consolidated financial statements.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	Six Months Ended
	May 4, 2019			May 5, 2018
	August 3, 2019			August 4, 2018
Operating Activities
Net income	$	130		$	214
Net loss	$	(3,405	)	$	(3,811	)
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		36,~~553~~992			47,~~050~~961
Stock-based compensation expense		~~144~~290			~~328~~584
Loss on impairment of long-lived assets		~~562~~1,172			~~887~~1,519
Loss on disposal of assets		~~188~~259			1368
Grow NJ award benefit		(~~643~~1,296	)		(~~707~~1,412	)
Amortization of deferred financing costs		~~177~~346			~~165~~336
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables		~~(862~~933	)		(~~2,197~~145	)
Inventories		(13,~~261~~181	)		43,~~837~~503
Prepaid expenses and other current assets		(~~448~~554	)		~~(252~~479	)
Operating leases and other non-current assets		68,~~317~~583			~~(14~~12	)
Decrease in:
Accounts payable, accrued expenses, operating leases and other current liabilities		(4,~~931~~822	)		(91,~~031~~831	)
Operating leases and other non-current liabilities		(710,~~522~~262	)		(~~752~~1,417	)
Net cash used in operating activities		(4,596	)		(2,459	)
Net cash provided by operating activities		1,417			5,846
Investing Activities
Capital expenditures		(23,~~478~~780	)		(12,~~141~~579	)
Net cash used in investing activities		(23,~~478~~780	)		(12,~~141~~579	)
Financing Activities
Decrease in cash overdraft		1,106			(1,980	)
Increase (decrease) in cash overdraft		759			(2,657	)
Increase in line of credit borrowings		5,800			7,200
Increase (decrease) in line of credit borrowings		2,900			(700	)
Proceeds from long-term debt		1,802			—2,500
Repayment of long-term debt		(13,~~562~~075	)		(12,~~151~~537	)
Deferred financing costs paid		—			(80160	)
Withholding taxes on stock-based compensation paid in connection with repurchase of common stock		(3335	)		(1929	)
Net cash provided by financing activities		7,113			3,970
Net cash provided by (used in) financing activities		2,351			(3,583	)
Effect of exchange rate changes on cash and cash equivalents		—			—(2	)
Net Increase in Cash and Cash Equivalents		39			370
Net Decrease in Cash and Cash Equivalents		(12	)		(318	)
Cash and Cash Equivalents, Beginning of Period		1,154			1,635
Cash and Cash Equivalents, End of Period	$	1,~~193~~142		$	21,~~005~~317
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	12,~~218~~367		$	~~968~~1,965
Cash received for income taxes	$	(198	)	$	—
Cash (received) paid for income taxes	$	(177	)	$	118

The accompanying notes are an integral part of these consolidated financial statements.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements for the three and six months ended ~~May~~August 43, 2019 and ~~May~~August 54, 2018 have been prepared in accordance with the requirements for Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures have been condensed or omitted. See the Company’s Annual Report on Form 10-K as of and for the year ended February 2, 2019 for Destination Maternity Corporation and subsidiaries (the “Company” or “Destination Maternity”) as filed with the Securities and Exchange Commission (“SEC”) for additional disclosures, including a summary of the Company’s accounting policies.

In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. Since the Company’s operations are seasonal, the interim operating results of the Company may not be indicative of operating results for the full year. ~~Certain prior year amounts have been reclassified to conform to current year presentation.~~

The Company operates on a 52/53-week fiscal year ending on the Saturday nearest January 31 of each year. References to the Company’s fiscal 2019 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 3, 2019 and will end February 1, 2020. References to the Company’s fiscal 2018 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 4, 2018 and ended February 2, 2019.

2. ~~EARNINGS~~GOING ~~PER SHARE (“EPS”)~~CONCERN

~~Basic~~As ~~net~~of ~~income~~August ~~per~~3, ~~share~~2019, ~~(“Basic~~the ~~EPS”)~~Company iswas ~~computed~~in bycompliance ~~dividing~~with ~~net~~all ~~income~~covenants byunder the ~~weighted~~Credit ~~average~~Facility ~~number~~and ofTerm ~~common~~Loan ~~shares~~Agreement. ~~outstanding~~However, ~~excluding~~the ~~restricted~~lender ~~stock~~under ~~awards~~the ~~for~~Credit Facility has imposed additional availability reserves which will increase over time. Based on the ~~restrictions~~Company’s ~~have~~current ~~not~~operating ~~lapsed. Diluted~~plan, ~~net~~the ~~income~~Company ~~per~~anticipates ~~share~~significant ~~(“Diluted~~liquidity ~~EPS”)~~constraints, isand ~~computed~~considering bythese ~~dividing~~liquidity ~~net~~concerns, ~~income~~there byis no assurance that the ~~weighted~~Company ~~average~~will ~~number~~be able to remain in compliance. If any event of ~~common~~default ~~shares~~is ~~outstanding,~~triggered ~~after~~and ~~giving~~the ~~effect~~Company todoes not obtain a waiver from its lenders, the ~~potential~~lenders ~~dilution~~can, ifamong ~~applicable~~other things, ~~from~~accelerate the ~~assumed~~entire ~~lapse~~outstanding amount of ~~restrictions~~the ondebt, ~~restricted~~which ~~stock~~could ~~and~~result ~~restricted~~in ~~stock~~the ~~unit~~Company ~~(“RSU”)~~needing ~~awards,~~to ~~and~~seek ~~from~~bankruptcy ~~shares~~protection ofto ~~common~~protect ~~stock~~stakeholder ~~resulting~~value. ~~from~~These factors raise substantial doubt regarding the ~~assumed~~Company’s ~~exercise~~ability to continue as a going concern. The Company is, with the assistance of ~~outstanding~~strategic ~~stock~~advisors ~~options~~including Greenhill & Co., ~~Common~~LLC, ~~shares~~exploring ~~issuable~~various potential strategic and financial alternatives and is engaged in ~~connection~~ongoing discussions with its lenders. Such strategic and financial alternatives include, among other things, a sale of the ~~award~~company or certain of ~~performance~~its assets and consideration of out-~~based~~of-court ~~restricted~~restructurings ~~stock~~as ~~units~~well ~~(“PRSUs”)~~as ~~are~~bankruptcy ~~excluded~~court ~~from~~proceedings ~~the~~to ~~calculation~~effectuate ofany ~~EPS~~such ~~until~~sale or to recapitalize or restructure the ~~PRSUs~~Company’s ~~performance~~indebtedness ~~conditions~~and other obligations. There are ~~achieved~~no assurances that such alternatives will be available on terms acceptable to the Company, or at all. In an effort to reduce costs and better position the ~~shares~~Company infor ~~respect~~operational ofprofitability the ~~PRSUs~~Company ~~become~~has ~~issuable~~adopted ~~(see~~a ~~Note~~plan ~~14)~~to close approximately 50 underperforming stores as their leases expire over the next six months. The Company has also made provisions to have sufficient inventory available through the anticipated duration of the Company’s exploration of financial and strategic alternatives.

~~The~~3. ~~following~~EARNINGS ~~tables~~PER ~~summarize~~SHARE ~~the Basic EPS and Diluted EPS calculations~~ (~~in thousands, except per share amounts~~“EPS”):

	Three Months Ended
	May 4, 2019						May 5, 2018
	Net Income		Shares		EPS		Net Income		Shares		EPS
Basic EPS	$	130		13,825	$	0.01	$	214		13,839	$	0.02
Incremental shares from the assumed exercise of outstanding stock options		—		—		—		—		—		—
Incremental shares from the assumed lapse of restrictions on restricted stock and RSU awards		—		76		—		—		124		—
Diluted EPS	$	130		13,901	$	0.01	$	214		13,963	$	0.02

Basic net income (loss) (or earnings) per share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding, excluding restricted stock awards for which the restrictions have not lapsed. Diluted net income (loss) (or earnings) per share (“Diluted EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding, after giving effect to the potential dilution, if applicable, from the assumed lapse of restrictions on restricted stock and restricted stock unit (“RSU”) awards, and from shares of common stock resulting from the assumed exercise of outstanding stock options. Common shares issuable in connection with the award of performance-based restricted stock units (“PRSUs”) are excluded from the calculation of EPS until the PRSUs’ performance conditions are achieved and the shares in respect of the PRSUs become issuable (see Note 14).

Stock options and unvested restricted stock totaling 959,000 shares of the Company’s common stock were outstanding as of May 4, 2019, of which 610,000 shares were excluded from the calculation of Diluted EPS as the effect would have been antidilutive.

3.DESTINATION ~~TRADE~~MATERNITY ~~RECEIVABLES~~CORPORATION AND SUBSIDIARIES

~~Trade~~NOTES ~~receivables~~TO ~~are~~CONSOLIDATED ~~recorded~~FINANCIAL ~~based~~STATEMENTS on revenue recognized for sales of the Company’s merchandise and for other revenue earned by the Company through its marketing partnership programs and international franchise agreements, and are non-interest bearing. The Company evaluates the collectability of trade receivables based on a combination of factors, including aging of trade receivables, write-off experience, analysis of historical trends and expectations of future performance. An allowance for doubtful accounts is recorded for the amount of trade receivables that are considered unlikely to be collected. When the Company’s collection efforts are unsuccessful, uncollectible trade receivables are charged against the allowance for doubtful accounts. As of May 4, 2019 and February 2, 2019, the Company’s trade receivables were net of allowance for doubtful accounts of $166,000 and $166,000, respectively. (Continued)

~~4. INVENTORIES~~(unaudited)

The following tables summarize the Basic EPS and Diluted EPS calculations (in thousands, except per share amounts):

	Three Months Ended
	August 3, 2019								August 4, 2018
	Net Loss			Shares		EPS			Net Loss			Shares		EPS

Basic and Diluted EPS	$	(3,535	)		13,871	$	(0.25	)	$	(4,025	)		13,823	$	(0.29	)

	Six Months Ended
	August 3, 2019								August 4, 2018
	Net Loss			Shares		EPS			Net Loss			Shares		EPS

Basic and Diluted EPS	$	(3,405	)		13,848	$	(0.25	)	$	(3,811	)		13,831	$	(0.28	)

In addition to PRSUs, for the three and six months ended August 3, 2019 and August 4, 2018 stock options and unvested restricted stock totaling approximately 707,000 and 538,000 shares, respectively, were excluded from the calculation of Diluted EPS as their effect would have been antidilutive. Stock options and unvested restricted stock totaling approximately 717,000 and 1,696,000 shares of the Company’s common stock were outstanding as of August 3, 2019 and August 4, 2018, respectively, but were not included in the computation of Diluted EPS for the three and six months ended August 3, 2019 and August 4, 2018 due to the Company’s net loss. Had the Company reported a profit for the three and six months ended August 3, 2019 and August 4, 2018 the weighted average number of dilutive shares outstanding for computation of Diluted EPS would have been approximately 13,872,000, 13,887,000, 14,284,000 and 14,124,000 shares, respectively.

4.	TRADE RECEIVABLES

Trade receivables are recorded based on revenue recognized for sales of the Company’s merchandise and for other revenue earned by the Company through its marketing partnership programs and international franchise agreements, and are non-interest bearing. The Company evaluates the collectability of trade receivables based on a combination of factors, including aging of trade receivables, write-off experience, analysis of historical trends and expectations of future performance. An allowance for doubtful accounts is recorded for trade receivables that are considered unlikely to be collected. When the Company’s collection efforts are unsuccessful, uncollectible trade receivables are charged against the allowance for doubtful accounts. As of August 3, 2019, and February 2, 2019 the Company’s trade receivables were net of allowance for doubtful accounts of $166,000 and $166,000, respectively.

5.	INVENTORIES

Inventories were comprised of the following (in thousands):

	May 4, 2019		February 2, 2019
	August 3, 2019		February 2, 2019
Finished goods	$	7167,~~992~~479	$	70,660
Work-in-progress		4634		148
Raw materials		95178		64
Total	$	72,133	$	70,872
	$	67,691	$	70,872

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities were comprised of the following (in thousands):

	May 4, 2019		February 2, 2019
Employee compensation and benefits	$	4,376	$	6,741
Insurance, primarily self-insurance reserves		3,125		3,049
Sales and use taxes		3,086		2,737
Accrued expenses		3,073		4,561
Gift certificates and store credits		2,915		3,464
Product return reserve		2,530		2,078
Deferred revenue		1,713		2,435
Audit and legal		1,463		1,341
Deferred rent		—		3,101
Other		2,327		1,549
Total	$	24,608	$	31,056

6. LINE OF CREDIT

After completion of a debt refinancing on February 1, 2018, the Company has in place a $50,000,000 senior secured revolving credit facility (the “Credit Facility”), which was entered into in conjunction with the issuance of the Company’s $25,000,000 Term Loan (as defined below) (see Note 7). Proceeds from advances under the Credit Facility, subject to certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, and other general corporate purposes.

DESTINATION ~~The~~MATERNITY ~~Credit~~CORPORATION ~~Facility,~~AND ~~which~~SUBSIDIARIES matures on January 31, 2023, contains various affirmative and negative covenants and representations and warranties, including the requirement that the Company maintain Excess Availability (as defined in the related Credit Agreement) of more than the greater of 10% of the Combined Loan Caps (as defined in the related Credit Agreement) and $7,000,000. In the event that the outstanding balance of the Term Loan exceeds the Term Loan Borrowing Base (as defined in the related Term Loan Agreement), then a reserve will be imposed against availability under the Credit Facility. The Credit Facility is secured by a security interest in the Company’s trade receivables, inventory, letter of credit rights, cash, intangibles and certain other assets. The interest rate on outstanding borrowings is equal to, at the Company’s election, either 1) the lender’s base rate plus 0.50% or 2) a LIBOR rate plus 1.0%. The Company also pays an unused line fee under the Credit Facility of 0.25% per annum.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

6.	ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities were comprised of the following (in thousands):

	August 3, 2019		February 2, 2019

Employee compensation and benefits	$	5,890	$	6,741
Insurance, primarily self-insurance reserves		3,164		3,049
Gift certificates and store credits		2,812		3,464
Sales and use taxes		2,757		2,737
Accrued expenses		2,045		4,561
Deferred revenue		1,914		2,435
Product return reserve		1,834		2,078
Audit and legal		1,410		1,341
Other		2,400		1,549
Deferred rent		—		3,101
	$	24,226	$	31,056

7.	LINE OF CREDIT

After completion of a debt refinancing on February 1, 2018 the Company has in place a $50,000,000 senior secured revolving credit facility (the “Credit Facility”), which was entered into in connection with the issuance of the Company’s $25,000,000 Term Loan (as defined below) (see Note 7). Proceeds from advances under the Credit Facility, subject to certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, and other general corporate purposes.

The Credit Facility, which matures on January 31, 2023, contains various affirmative and negative covenants and representations and warranties including the requirement that the Company maintain Excess Availability (as defined in the related Credit Agreement) of more than the greater of 10% of the Combined Loan Caps (as defined in the related Credit Agreement) and $7,000,000. In the event the outstanding balance of the Term Loan exceeds the Term Loan Borrowing Base (as defined in the related Term Loan Agreement) then a reserve will be imposed against availability under the Credit Facility. The Credit Facility is secured by a security interest in the Company’s trade receivables, inventory, letter of credit rights, cash, intangibles and certain other assets. The interest rate on outstanding borrowings is equal to, at the Company’s election, either 1) the lender’s base rate plus 0.50% or 2) a LIBOR rate plus 1.0%. The Company also pays an unused line fee under the Credit Facility of 0.25% per annum.

Any amounts outstanding under the Credit Facility may be accelerated and become due and payable immediately and all loan and letter of credit commitments thereunder may be terminated upon an event of default and expiration of any applicable cure period. Events of default include: 1) nonpayment of obligations due under the subject loan agreement and related loan documents, 2) cross-defaults to other indebtedness and documents, 3) failure to perform any covenant or agreement contained in the subject loan agreement, 4) material misrepresentations, 5) failure to pay, or certain other defaults under, other material indebtedness of the Company, 6) certain bankruptcy or insolvency events, 7) a change of control, 8) indictments of the Company or senior management in a material forfeiture action, 9) default under certain material contracts to the extent such termination or default has or could reasonably be expected to have a material adverse effect, and 10) customary ERISA defaults, among others.

In connection with the original execution and subsequent amendments of the Credit Facility, the Company ~~has~~ incurred deferred financing costs of $1,281,000. These deferred financing costs are being amortized over the term of the Credit Facility agreement and are included in “interest expense, net” in the consolidated statements of operations.

As of ~~May~~August 43, 2019, the Company had $2623,~~200~~300,000 in outstanding borrowings under the Credit Facility, $6,297,000 in letters of credit and $105,~~128~~169,000 of availability based on the Company’s Borrowing Base formula and availability reserve requirements. As of ~~May~~August 54, 2018, the Company had $157,~~200~~300,000 in outstanding borrowings under the previous Credit Facility, $7,327,000 in letters of credit and $2019,~~223~~044,000 of availability. For the three months ended ~~May~~August 43, 2019 and ~~May~~August 54, 2018 borrowings had a weighted interest rate of 4.5337% and 34.6013% per annum, respectively. ~~During~~ For the ~~three~~six months ended ~~May~~August 43, 2019 and ~~May~~August 54, 2018 ~~the~~borrowings ~~Company’s~~had ~~average~~a ~~levels~~weighted ofinterest ~~direct~~rate ~~borrowings~~of ~~were~~4.45% ~~$27,509,000~~ and ~~$19~~3.97% per annum,~~436,000,~~ respectively,. During ~~and~~ the ~~Company’s~~six ~~maximum~~months ~~borrowings~~ended ~~were~~August ~~$32~~3,~~300,000~~ 2019 and ~~$27~~August 4,~~400,000,~~ ~~respectively.~~

7. LONG-TERM DEBT

On February 1, 2018 (the “Closing Date”), the Company has entered into a Term Loan Credit Agreement (the “Term Loan Agreement”) which provides for a term loan of up to $25,000,000 and matures on January 31, 2023 (the “Term Loan”). On the Closing Date, the Company borrowed $22,500,000. The Term Loan provided for an additional loan of $2,500,000, which could be borrowed at the Company’s discretion within a period of 45 days after delivery to the lender of the Company’s first quarter fiscal 2018 financial statements and satisfaction of certain other requirements. The Company met these requirements and borrowed the additional $2,500,000 on July 16, 2018.

The interest rate on the Term Loan is equal to a LIBOR rate plus 9.0%. The Company is required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $312,500 which commenced on July 31, 2018, with the remaining outstanding balance payable on the maturity date. There is a minimum excess availability requirement of the greater of 10% of the Combined Loan Cap, as defined in the Term Loan Agreement, or $7,000,000. Additionally, the Term Loan can be prepaid at the Company’s option subject to certain restrictions and subject to a prepayment premium as follows: 1) if the prepayment occurs on or prior to the second anniversary of the Closing Date, the greater of a) interest on the prepayment that would otherwise have been paid with the 24 month period following the Closing Date minus actual interest payments made through the prepayment date and b) 2% of the prepayment and 2) 2% of the prepayment amount, if paid between the second and third anniversary of the Closing Date.

~~The~~DESTINATION ~~Term~~MATERNITY ~~Loan~~CORPORATION isAND ~~secured~~SUBSIDIARIES by a security interest in substantially all of the assets of the Company, including accounts receivable, inventory, equipment, letter of credit rights, cash, intellectual property and other intangibles, and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the Credit Facility Lender. The Term Loan Agreement prohibits the payment of dividends or share repurchases by the Company for three years and imposes certain restrictions on the Company’s ability to, among other things, incur additional indebtedness and enter into other various types of transactions.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

2018 the Company’s average levels of direct borrowings were $26,904,000 and $16,356,000, respectively, and the Company’s maximum borrowings were $32,300,000 and $27,400,000, respectively.

8.	LONG-TERM DEBT

On February 1, 2018 (the “Closing Date”) the Company entered into a Term Loan Credit Agreement (the “Term Loan Agreement”) which provides for a term loan of up to $25,000,000 and matures on January 31, 2023 (the “Term Loan”). On the Closing Date the Company borrowed $22,500,000. The Term Loan provided for an additional loan of $2,500,000 which could be borrowed at the Company’s discretion within a period of 45 days after delivery to the lender of the Company’s first quarter fiscal 2018 financial statements and satisfaction of certain other requirements. The Company met these requirements and borrowed the additional $2,500,000 on July 16, 2018.

The interest rate on the Term Loan is equal to a LIBOR rate plus 9.0%. The Company is required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $312,500 which commenced on July 31, 2018, with the remaining outstanding balance payable on the maturity date. There is a minimum excess availability requirement of the greater of 10% of the Combined Loan Cap, as defined in the Term Loan Agreement, or $7,000,000. Additionally, the Term Loan can be prepaid at the Company's option subject to certain restrictions and subject to a prepayment premium as follows: 1) if the prepayment occurs on or prior to the second anniversary of the Closing Date, the greater of a) interest on the prepayment that would otherwise have been paid with the 24 month period following the Closing Date minus actual interest payments made through the prepayment date and b) 2% of the prepayment and 2) 2% of the prepayment amount if paid between the second and third anniversary of the Closing Date.

The Term Loan is secured by a security interest in substantially all of the assets of the Company, including accounts receivable, inventory, equipment, letter of credit rights, cash, intellectual property and other intangibles, and certain other assets. The security interest granted to the Term Lenders is, in certain respects, subordinate to the security interest granted to the Credit Facility Lender. The Term Loan Agreement prohibits the payment of dividends or share repurchases by the Company for three years and imposes certain restrictions on the Company's ability to, among other things, incur additional indebtedness and enter into other various types of transactions.

There were $2,455,000 of deferred financing costs incurred in connection with the Term Loan. These deferred financing costs are reflected as a direct deduction from the Term Loan liability in the consolidated balance sheets and are being amortized over the term of the Term Loan Agreement. The amortization is included in “interest expense, net” in the consolidated statements of operations.

As of ~~May~~August 43, 2019, and ~~May~~August 54, 2018, there was $23,~~750~~438,000 and $2224,~~500~~688,000, respectively, of principal outstanding under the Term Loan.

On February 22, 2019, the Company entered into a 24-month, $1,802,000 software development financing arrangement. The note has monthly payments of $81,648 with an interest rate of 8.16%. As of ~~May~~August 43, 2019, there was $1,~~593~~379,000 of principal outstanding.

As of ~~May~~August 43, 2019, and ~~May~~August 54, 2018, there was $21,~~149~~349,000 and $54,~~284~~510,000, respectively, outstanding under a five-year equipment financing arrangement with the Company’s Credit Facility bank. The equipment note bears annual interest at 3.38%, with payments of $272,000 (including interest) due monthly through December 2019. The equipment note is collateralized by substantially all of the material handling equipment at the Company’s distribution facility in Florence, New Jersey. Any amounts outstanding under the equipment note may be accelerated and become due and payable immediately upon an event of default and expiration of any applicable cure period. The specified events of default are substantially the same as those in the Credit Facility agreement (see Note 67).

OnIn June 6, 2017, the Company received $3,401,000 in proceeds from a three-year financing arrangement in the form of a sale and leaseback for certain furniture, fixtures and software. Monthly payments under the leaseback arrangement ~~are~~were $123,000 for the first 24 months and $48,000 for months 25 to 36. At the end of the leaseback term, the Company has the option to extend the lease for an additional year or to repurchase the financed property for a price to be agreed ~~upon~~. As of ~~May~~August 43, 2019, and ~~May~~August 53, 2018, there was $1935,~~114,~~000 and $21,~~287~~988,000, respectively, of principal outstanding under this financing arrangement.

8. LEASES

The Company has entered into operating leases for all of its retail locations, distribution center and corporate office. Many of these leases include one or more renewal options which can extend the lease for up to an additional 15 years. In the event we are reasonably certain that an option to extend a lease will be exercised, we use the expected expiration date to determine the operating lease right-of-use asset and lease liability. We also have short-term leases that can be terminated by the Company or by the landlord with notification periods as short as 30 days, which are excluded from the operating lease liability. Some of our leases provide for rental payments based solely on a percent of retail sales which are treated as variable lease expenses and not included as part of the operating lease liability. Most leases include payments for lease components such as minimum rent, non-lease components such as common area maintenance and not-lease components such as real estate taxes and insurance. Finance leases were not material as of May 4, 2019 and the three-month period then ended.

For the three months ended May 4, 2019, the components of lease expense were as follows (in thousands):

Fixed operating lease expense (1)	$	8,743
Variable operating lease expense		3,893
Total operating lease expense	$	12,636
(1) Includes short-term leases.

For the three months ended May 5, 2018, rent expense, including related occupancy costs such as insurance and maintenance paid to landlords, for non-cancellable operating leases amounted to $12.8 million.

The following table presents the operating lease balances within the Consolidated Balance Sheet, weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of May 4, 2019 ($ in thousands):

Lease Assets and Liabilities	Classification
Assets:
Operating lease ROU assets	Operating lease assets	$	128,065
Liabilities:
Current:
Operating lease liabilities	Operating lease liabilities	$	32,327
Long-term:
Operating lease liabilities	Operating lease and other non-current liabilities		119,636
Total undiscounted operating lease liabilities		$	151,963
Weighted average remaining lease term		6.4 years
Weighted average discount rate			7.40	%

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

~~The~~NOTES ~~following~~TO ~~table~~CONSOLIDATED ~~presents~~FINANCIAL ~~the~~STATEMENTS ~~maturity of the Company’s operating lease liabilities as of May 4, 2019~~ (~~in thousands~~Continued):

Remainder of Fiscal 2019	$	32,864
2020		34,750
2021		28,555
2022		24,128
2023		20,969
Thereafter		53,693
Total operating lease payments		194,959
Less: Imputed interest		42,996
Total operating lease liabilities	$	151,963

(unaudited)

~~The following table presents future minimum lease payments as previously disclosed in our 2018 Annual Report on Form 10-K determined using the previous lease accounting standard~~9. LEASES

2019	$	36,417
2020		29,682
2021		21,142
2022		21,698
2023		15,995
Thereafter		48,462
Total operating lease liabilities	$	173,396

The Company has operating leases for its retail locations, distribution center and corporate office. Many of these leases include one or more renewal options which can extend the lease for up to an additional 15 years. In the event we are reasonably certain that an option to extend a lease will be exercised, we use the expected expiration date to determine the operating lease right-of-use asset and lease liability. We also have short-term leases that can be terminated by the Company or by the landlord with notification periods as short as 30 days, which are excluded from the operating lease liability. Some of our leases provide for rental payments based solely on a percent of retail sales which are treated as variable lease expenses and not included as part of the operating lease liability. Most leases include payments for lease components such as minimum rent, non-lease components such as common area maintenance and not-lease components such as real estate taxes and insurance. Finance leases were not material as of August 3, 2019 and the three and six-month periods then ended.

~~Supplemental~~For ~~cash~~the ~~flow~~three ~~information~~and ~~related~~six tomonths ~~the~~ended ~~Company’s~~August ~~operating~~3, ~~leases~~2019, ~~for~~ the ~~three~~components ~~months~~of ~~ended~~lease ~~May~~expense 4,were ~~2019~~as follows (in thousands):

Cash paid for amounts included in the measurement of operating lease liabilities	$	11,994
	Three Months Ended		Six Months Ended
ROU assets obtained in exchange for operating lease liability		1,829
Fixed operating lease expense (1)	$	8,773	$	17,517
Variable operating lease expense		3,723		7,615
Total operating lease expense	$	12,496	$	25,132
(1) Includes short-term leases

9.The ~~FAIR~~following ~~VALUE~~table ~~MEASUREMENTS~~presents the operating lease balances within the Consolidated Balance Sheet, weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of August 3, 2019 ($ in thousands):

Lease Assets and Liabilities	Classification
Assets:
Operating lease ROU assets	Operating lease assets	$	125,283

Liabilities:
Current:
Operating lease liabilities	Operating lease liabilities	$	30,301
Long-term:
Operating lease liabilities	Operating lease and other non-current liabilities		118,925
Total undiscounted operating lease liabilities		$	149,226

Weighted average remaining lease term		6.3 years
Weighted average discount rate			7.41	%

The following table presents the maturity of the Company’s operating lease liabilities as of August 3, 2019 (in thousands):

Remainder of Fiscal 2019	$	22,140
2020	$	36,719
2021	$	30,545
2022	$	25,229
2023	$	21,216
Thereafter	$	54,794
Total operating lease payments		190,643
Less: Imputed interest		41,417
Total operating lease liabilities	$	149,226

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Supplemental cash flow information related to the Company’s operating leases for the three and six months ended August 3, 2019 (in thousands):

	Three Months Ended		Six Months Ended
Cash paid for amounts included in the measurement of operating lease liabilities	$	11,572	$	23,565
ROU assets obtained in exchange for operating lease liability		6,014		7,844

10.	FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework for measuring fair value focused on exit price and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements as follows:

•

Level 1 – Quoted market prices in active markets for identical assets or liabilities

•

Level 2 – Observable market-based inputs or inputs that are corroborated by observable market data

•

Level 3 – Unobservable inputs that are not corroborated by market data

12 The carrying values of trade receivables and accounts payable approximate fair value due to the short-term nature of those instruments.

AtThe ~~both~~Company’s ~~May~~Credit 4Facility has variable interest rates that are tied to market indices. As of August 3, 2019, and February 2, 2019, the Company had ~~cash~~$23,300,000 ~~equivalents~~and of $420,400,000., ~~The~~respectively, ~~Company’s cash equivalents consist~~ of ~~investments~~direct inborrowings ~~money~~outstanding ~~market~~under ~~funds~~the ~~for~~Credit ~~which~~Facility. The ~~the~~ carrying value ~~approximates~~of ~~fair~~the ~~value~~Company’s ~~(based~~Credit onFacility ~~Level~~borrowings 1approximates ~~inputs)~~fair ~~due~~value toas the ~~short-term~~variable ~~nature~~interest ofrates ~~those~~approximate ~~instruments.~~current ~~The~~market ~~carrying~~rates, ~~values~~which ofthe ~~trade~~Company ~~receivables~~considers ~~and accounts payable approximate fair value due~~ to ~~the~~be ~~short-term~~Level ~~nature~~2 ~~of those instruments~~inputs.

The Company’s ~~Credit~~Term ~~Facility~~Loan, ~~has~~which ~~variable~~represents ~~interest~~a ~~rates~~significant ~~that~~majority ~~are~~of ~~tied~~the toCompany’s ~~market~~long-term ~~indices. As of May 4~~debt, ~~2019~~bears ~~and~~interest ~~February~~at 2,variable ~~2019~~rates, ~~the~~which ~~Company~~adjust ~~had~~based ~~$26,200,000~~on ~~and~~market ~~$20,400,000~~conditions ~~respectively,~~with ofa ~~direct~~minimum ~~borrowings~~annual ~~outstanding~~rate ~~under~~of ~~the Credit Facility~~9. 00%. The carrying value of the Company’s ~~Credit~~Term ~~Facility~~Loan ~~borrowings~~ approximates fair value as the variable interest rates approximate current market rates for similar instruments available to companies with comparable credit quality, which the Company considers to be Level 2 inputs. The fair value of the Company’s fixed-rate equipment notes was determined using a discounted cash flow analysis based on interest rates currently available to the Company, which the Company considers to be Level 2 inputs. The difference between the carrying value and fair value of long-term debt held by the Company with a fixed rate of interest is not material.

The Company’s Term Loan, which represents a significant majority of the Company’s long-term debt, bears interest at variable rates, which adjust based on market conditions with a minimum annual rate of 911.~~00%.~~ ~~The~~NET carrying value of the Company’s Term Loan approximates fair value as the variable interest rates approximate current market rates for similar instruments available to companies with comparable credit quality, which the Company considers to be Level 2 inputs. The fair value of the Company’s fixed-rate equipment notes were determined using a discounted cash flow analysis based on interest rates currently available to the Company, which the Company considers to be Level 2 inputs. The difference between the carrying value and fair value of long-term debt held by the Company with a fixed rate of interest is not material.SALES

10. NET SALES

The following disaggregates the Company’s net sales by major source (in thousands):

	Three Months Ended				Six Months Ended
	May 4, 2019		May 5, 2018
	August 3, 2019		August 4, 2018		August 3, 2019		August 4, 2018
Retail stores	$	5649,~~464~~746	$	6258,~~987~~641	$	106,214	$	121,629
Leased departments		98,~~348~~169		9,~~989~~892		17,517		19,881
Total retail locations		6557,~~812~~915		7268,~~976~~533		123,731		141,510
E-commerce		22,672		25,482
Ecommerce		20,989		23,003		43,495		48,485
Marketing partnerships		4,~~580~~509		34,~~935~~191		9,088		8,126
Wholesale and franchise		1,~~150~~488		~~834~~668		2,800		1,501
Total net sales	$	9484,~~213~~901	$	~~103~~96,~~227~~395	$	179,114	$	199,622

11. OTHER CHARGES

Over the last several years the Company has engaged in a series of management and organizational changes and, in connection therewith, retained consulting firms to review its costs and business strategy associated with such management and organizational changes. The Company’s Board of Directors authorized changes to the Company’s chief executive function, including, most recently, the May 23, 2018 appointment of Marla Ryan as Chief Executive Officer, who replaced Melissa Payner-Gregor who had served as interim Chief Executive Officer since January 2, 2018. Ronald Masciantonio, the Company’s Chief Administrative Officer, resigned from his position on June 4, 2018. David Stern, the Company’s former Chief Financial Officer, departed the Company effective at the close of business on August 10, 2018. On January 19, 2019, Dave J. Helkey was appointed Chief Operating Officer and Chief Financial Officer. The Company also paid one-time retention bonuses with service conditions to certain key management personnel which are being recorded over the service period, while reducing its overall headcount to create a more efficient and effective operating structure. During the three months ended May 4, 2019 and May 5, 2018, the Company incurred $662,000 and $264,000, respectively, of charges related to these management and organizational changes.

In the first quarter of fiscal 2018, the Company received notification from a stockholder group of their intent to nominate a slate of alternative nominees for election to the Company’s Board of Directors at the Annual Meeting of Stockholders that was held on May 23, 2018 (the “Proxy Solicitation”). At the 2018 Annual Meeting of Stockholders the Company’s stockholders replaced the incumbent board in its entirety and elected Holly N. Alden, Christopher B. Morgan, Marla A Ryan and Anne-Charlotte Windal as the Company’s new Board of Directors. During the three months ended May 5, 2018, the Company incurred $886,000 of charges related to the Proxy Solicitation.

A summary of charges incurred in connection with management and organizational changes and the proxy solicitation is as follows (in thousands):

	Three Months Ended
	May 4, 2019		May 5, 2018
Management and organizational changes	$	662	$	264
Proxy solicitation		—		886
Total other charges	$	662	$	1,150

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

~~12.~~NOTES ~~GOVERNMENT~~TO ~~INCENTIVES~~CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

12.	OTHER INCOME AND CHARGES, NET

In January 2019, a ship carrying five containers of Company merchandise experienced a fire while in transit to a domestic port. The merchandise was subsequently received and inspected, and it was determined that three of the containers of merchandise were a total loss. The Company insures merchandise in transit at average selling price and has received a payment for merchandise in the three damaged containers in the amount of $2,546,000. For the three months ended August 3, 2019 the Company recorded other income in the amount of $1,917,000 which represents the amount by which the $2,546,000 payment received exceeded the carrying value of the damaged merchandise (the “Insurance Claim”). The remaining two containers of merchandise are still in the process of being inspected.

In the first quarter of fiscal 2018 the Company received notification from a stockholder group of their intent to nominate a slate of alternative nominees for election to the Company’s Board of Directors at the Annual Meeting of Stockholders that was held on May 23, 2018 (the “Proxy Solicitation”). At the Company’s 2018 Annual Meeting of Stockholders the Company’s stockholders replaced the incumbent board in its entirety and elected the Company’s new Board of Directors. During the three and six months ended August 4, 2018 the Company incurred $1,256,000 and $2,142,000 of charges related to the Proxy Solicitation.

A summary of other income and charges is as follows (in thousands):

	Three Months Ended					Six Months Ended
	August 3, 2019			August 4, 2018		August 3, 2019			August 4, 2018

Insurance claim	$	(1,917	)	$	—	$	(1,917	)	$	—
Management and organizational changes		1,798			667		2,460			931
Proxy solicitation		—			1,256		—			2,142
Total other (income) charges, net	$	(119	)	$	1,923	$	543		$	3,073

13.	GOVERNMENT INCENTIVES

In fiscal 2015, the Company completed the relocation of its corporate headquarters and distribution operations from Philadelphia, Pennsylvania to southern New Jersey. To partially offset the costs of these relocations, the Board of the New Jersey Economic Development Authority (“NJEDA”) approved the Company for an incentive package of up to $40,000,000 in benefits under the Grow New Jersey Assistance Program (“Grow NJ”) in the form of transferrable income tax credits over a ten-year period from the State of New Jersey. The award provides annually over a ten-year period up to $7,000 per eligible new full-time job, as defined under Grow NJ, with a requirement that at least 100 eligible jobs be created and subject to an annual award limit of $4,000,000.

The Grow NJ award requires an annual compliance report that includes certification of average annual employment figures after the end of each fiscal year. After the end of the ten-year Grow NJ award earnings period there is a five-year compliance period during which the Company must maintain the average of its annual eligible jobs certified during the preceding ten years or a pro-rata amount up to one-tenth of the previously awarded income tax credits would be subject to recapture and repayment to the State of New Jersey annually during the five-year compliance period. The Company believes the likelihood of any recapture and repayment is remote.

The annual benefit from the Grow NJ award available to the Company is expected to significantly exceed the Company’s annual income tax liability to the State of New Jersey. In order to maximize the realizable value of the incentive package, the Company entered into an agreement with a third party to sell up to 100% of the annual income tax credits awarded to the Company. The Company recognizes its Grow NJ award on an annual basis for each fiscal year based on the realizable value of the award earned and expected to be received, primarily from the sale of the income tax credits, net of any associated costs. The Grow NJ award is reflected in the Company’s consolidated financial statements as a reduction to the costs incurred by the Company in connection with the relocations. The expected realizable amount of the Grow NJ award is included in the consolidated balance sheet in deferred income taxes. As of May 4, 2019, the Company had recorded a deferred tax asset of $3,314,000 related to the NJ Grow award. Of this amount, $2,671,000 relates to the annual award earned in fiscal 2018, the cash proceeds of which are expected to be received during fiscal 2019. In December 2018, the Company received $2,829,000 cash proceeds, net of costs, from the receipt and subsequent sale of the tax credit certificate earned for fiscal 2017. During the three months ended May 4, 2019, the Company recognized a cost reduction related to the Grow NJ award in the amount of $617,000, as compared to the three months ended May 5, 2018 in which the Company recognized $710,000.

13. INCOME TAXES

Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, requires that a valuation allowance be recorded to reduce deferred tax assets when it is more likely than not that the tax benefit of the deferred tax assets will not be realized. In situations where a three-year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. In fiscal 2016 the Company’s financial results reflected a three-year cumulative loss and consequently, in fiscal 2016 the Company recorded a non-cash charge as a valuation allowance against substantially all of its deferred tax assets. Three-year cumulative losses have continued since fiscal 2016, and the Company continues to record a valuation allowance against its deferred tax assets.

14. EQUITY AWARD PLANS

In January 2006, the stockholders of the Company approved the adoption of the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”) and, subsequently, have approved amendments to increase the number of issuable shares under the 2005 Plan. Under the 2005 Plan, employees, directors, consultants and other individuals who provide services to the Company may be granted awards in the form of stock options, stock appreciation rights, restricted stock, RSUs or deferred stock units. Up to 3,550,000 shares of the Company’s common stock may be issued in respect of awards under the 2005 Plan, as amended, with no more than 2,250,000 of those shares permitted to be issued in respect of restricted stock, RSUs, or deferred stock units granted under the 2005 Plan. Awards of stock options to purchase the Company’s common stock will have exercise prices as determined by the Compensation Committee of the Board of Directors but such exercise prices may not be lower than the fair market value of the stock on the date of grant.

~~ratably~~DESTINATION ~~over~~MATERNITY ~~four-year~~CORPORATION ~~periods~~AND ~~and~~SUBSIDIARIES generally expire ten years from the date of grant, and restricted stock and time-based RSU awards issued under the 2005 Plan generally have restrictions that lapse ratably over periods ranging from one to four years however, awards with respect to up to 177,500 shares of our common stock may be granted under the 2005 Plan with a vesting period of less than one year. Performance-based awards issued under the 2005 Plan generally vest based upon the achievement of pre-established performance goals over a specified three-year period. The number of shares of our common stock that may be earned in respect of performance-based awards may be greater or less than the target number of shares granted based on the actual performance achieved. The non-executive chairman of the Company’s Board of Directors is granted 6,000 shares of restricted stock on an annual basis and each non-employee director, other than the non-executive chairman, and Christopher B. Morgan, of the Company’s Board of Directors is eligible for a grant of 4,000 shares of restricted stock on an annual basis, in each case that will generally vest one year from the date of grant. The Company issues new shares of common stock upon exercise of vested stock options. As of May 4, 2019, there were 834,231 shares of the Company’s common stock available for grants of awards under the 2005 Plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

expected to be received, primarily from the sale of the income tax credits, net of any associated costs. The Grow NJ award is reflected in the Company’s consolidated financial statements as a reduction to the costs incurred by the Company in connection with the relocations. The expected realizable amount of the Grow NJ award is included in the consolidated balance sheet in deferred income taxes. As of August 3, 2019, the Company had recorded a deferred tax asset of $3,967,000 related to the NJ Grow award. Of this amount, $2,671,000 relates to the annual award earned in fiscal 2018, the cash proceeds of which are expected to be received during fiscal 2019. In December 2018, the Company received $2,829,000 cash proceeds, net of costs, from the receipt and subsequent sales of the tax credit certificate earned for fiscal 2017. During the three and six months ended August 3, 2019, the Company recognized the cost reduction related to the Grow NJ award in the amount of $580,000 and $1,196,000, respectively, as compared to the three and six months ended August 4, 2018 in which the Company recognized $710,000 and $1,285,000 respectively.

14.	INCOME TAXES

Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, requires that a valuation allowance be recorded to reduce deferred tax assets when it is more likely than not that the tax benefit of the deferred tax assets will not be realized. In situations where a three-year cumulative loss condition exists, accounting standards limit the ability to consider projections of future results as positive evidence to assess the realizability of deferred tax assets. In fiscal 2016 the Company’s financial results reflected a three-year cumulative loss and consequently, in fiscal 2016 the Company recorded a non-cash charge as a valuation allowance against substantially all its deferred tax assets. Three-year cumulative losses have continued since fiscal 2016 and the Company continues to record a valuation allowance against its deferred tax assets.

15.	EQUITY AWARD PLANS

In January 2006, the stockholders of the Company approved the adoption of the Amended and Restated 2005 Equity Incentive Plan (the “2005 Plan”) and, subsequently, have approved amendments to increase the number of issuable shares under the 2005 Plan. Under the 2005 Plan, employees, directors, consultants and other individuals who provide services to the Company may be granted awards in the form of stock options, stock appreciation rights, restricted stock, RSU’s or deferred stock units. Up to 3,550,000 shares of the Company’s common stock may be issued in respect of awards under the 2005 Plan, as amended, with no more than 2,250,000 of those shares permitted to be issued in respect of restricted stock, RSU’s, or deferred stock units granted under the 2005 Plan. Awards of stock options to purchase the Company’s common stock will have exercise prices as determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”), but such exercise prices may not be lower than the fair market value of the stock on the date of grant.

No stock options have been granted by the Company with an exercise price less than the fair market value of the Company’s common stock on the date of grant for any of the periods presented. The majority of the stock options issued under the 2005 Plan vest ratably over four-year periods and generally expire ten years from the date of grant, and restricted stock and time-based RSU awards issued under the 2005 Plan generally have restrictions that lapse ratably over periods ranging from one to four years however, awards with respect to up to 177,500 shares of our common stock may be granted under the 2005 Plan with a vesting period of less than one year. Performance-based awards issued under the 2005 Plan generally vest based upon the achievement of pre-established performance goals over a specified three-year period. The number of shares of our common stock that may be earned in respect of performance-based awards may be greater or less than the target number of shares granted based on the actual performance achieved. The non-executive chairman of the Company’s Board of Directors is granted 6,000 shares of restricted stock on an annual basis and each non-employee director, other than the non-executive chairman, of the Company’s Board of Directors is eligible for a grant of 4,000 shares of restricted stock on an annual basis, in each case that will generally vest one year from the date of grant. The Company issues new shares of common stock upon exercise of vested stock options. As of August 3, 2019, there were 1,057,485 shares of the Company’s common stock available for grants of awards under the 2005 Plan.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Stock option activity for all plans was as follows:

	Outstanding Stock Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Life		Aggregate Intrinsic Value (in thousands)
Balance as of February 2, 2019	439			$	6.06
Granted	45			2.33
Exercised		—			—
Forfeited		(41117	)	~~4.17~~	4.33
Expired		—			—
Balance as of May 4, 2019		443		$	5.85	8.3			—
Balance as of August 3, 2019		367		$	6.15		8.0		—
Exercisable as of May 4, 2019	161			$	9.75		6.7		—
Exercisable as of August 3, 2019		151		$	9.68		6.5		—

The following table summarizes information about stock options outstanding as of ~~May~~August 43, 2019:

	Stock Options Outstanding										~~Stock Options Exercisable~~		Stock Options Exercisable
Range of Exercise Prices	Number Outstanding (in thousands)		~~Weighted Average Remaining Life~~		Weighted Average Remaining Life		~~Weighted Average Exercise Price~~		Weighted Average Exercise Price		~~Number Exercisable (in thousands)~~		Number Exercisable (in thousands)		~~Weighted Average Exercise Price~~		Weighted Average Exercise Price
$ 2.33 to $ 5.00	~~237~~	180		~~9.2~~		9.0	$	~~2.63~~	$	2.64		43		43	$	~~2.65~~	$	2.65
5.01 to 10.00	~~134~~	121		~~8.3~~		8.2		~~6.32~~		6.19	48			42		~~7.49~~		7.49
10.01 to 31.38	72	66		~~5.2~~		4.9		~~15.53~~		15.61	70			66		~~15.69~~		15.61
$ 2.33 to $31.38	~~443~~	367		~~8.3~~		8.0	$	~~5.85~~	$	6.15		~~161~~		151	$	~~9.75~~	$	9.68

The following table summarizes information about restricted stock and RSU activity for the 2005 Plan and includes grants of 113,326 PRSUs which is the number of shares of common stock that would be delivered upon vesting assuming that the target level of performance is achieved. If performance was achieved at the maximum level, 226,652 shares of common stock would be delivered in respect of such PRSU’s.

	Outstanding Restricted Shares (in thousands)			Weighted Average Grant Date Fair Value
Unvested as of February 2, 2019		606		$	3.34
Granted		7581			2.4536
Vested		(6483	)		2.7285
Forfeited		(~~100~~254	)		2.6889
Unvested as of May 4, 2019		517		$	3.26
Unvested as of August 3, 2019		350		$	3.53

1516. RECENT ACCOUNTING PRONOUNCEMENTS

15. RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), referred to hereafter as ASC 842. ASC 842 affects any entity that enters ~~into~~ a lease, as that term is defined, and its guidance supersedes Topic 840, Leases. As it substantively relates to the Company, ASC 842 requires lessees to recognize a right-of-use asset (“ROU asset”) and a lease liability, initially measured at the present value of the lease payments, in the consolidated balance sheet.

On February 3, 2019, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements in effect at the beginning of the period of adoption. Results for periods beginning February 3, 2019 are presented under ASC 842, ~~and~~ prior period amounts were not restated and continue to be reported under the Company’s historical method of lease accounting, ASC 840, Leases. Adoption of ASC 842 had a material impact of the Company’s balance sheet as the result of recognizing ROU assets and lease liabilities for operating leases. There was no material impact to our consolidated statement of operations or cash flows and there was no impact to covenant compliance under our current debt agreements. Accounting for finance leases remained substantially unchanged. For leases that commenced prior to the effective date of ASC 842 the Company adopted practical expedients that allowed for retention of its previous assessment of the following: (i) whether a contract contained a lease, (ii) lease classification and (iii) initial direct costs. The Company also elected not to recognize ROU assets and lease liabilities for leases with a term of 12 months or less and to account for leases which have both lease and non-lease components as a single component.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Leases. Adoption of ASC 842 had a material impact of the Company’s balance sheet as the result of recognizing ROU assets and lease liabilities for operating leases. There was no material impact to our consolidated statement of operations or cash flows and there was no impact to covenant compliance under our current debt agreements. Accounting for finance leases remained substantially unchanged. For leases that commenced prior to the effective date of ASC 842 the Company adopted practical expedients that allowed for retention of its previous assessment of the following: (i) whether a contract contained a lease, (ii) lease classification and (iii) initial direct costs. The Company also elected not to recognize ROU assets and lease liabilities for leases with a term of 12 months or less and to account for leases which have both lease and non-lease components as a single component.

At the date of adoption, the Company recorded operating lease ROU assets of $135 million, operating lease liabilities of $159 million, primarily related to its retail real estate, distribution center and corporate office and a $2.6 million adjustment to accumulated deficit resulting from the impairment of certain operating lease ROU assets. Refer to Note 8. Leases for additional disclosures required by ASC 842.

The Company determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement of the lease based on the net present value of the fixed lease payments over the lease term. The lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise the option. ROU assets include prepaid lease payments, lease incentives received and capitalized lease costs. As the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases is recognized as depreciation and interest expense over the lease term.

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company adopted ASU 2018-15 effective February 3, 2019, and the adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

1617. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is named as a defendant in legal actions arising from normal business activities. Litigation is inherently unpredictable, and although the amount of any liability that could arise with respect to currently pending actions cannot be accurately predicted, the Company does not believe that the resolution of any pending action will have a material adverse effect on its financial position, results of operations or liquidity.

~~The~~On ~~Company~~September ~~has~~16, ~~recently~~2019, ~~gained~~we ~~access~~adopted a plan to ~~inspect~~close ~~inventory~~approximately ~~subject~~50 tounderperforming astores ~~potential~~as ~~loss~~their ~~that~~leases ~~occurred~~expire ~~while~~over the ~~inventory~~next ~~was~~six inmonths ~~transit~~ to ~~the~~reduce ~~Company’s~~costs ~~distribution~~and ~~center.~~better ~~While~~position ~~still~~the inCompany ~~the~~for ~~process~~operational ofprofitability. ~~evaluating~~In connection with the ~~inventory~~store closures, the Company ~~believes~~expects ~~that~~to itincur ~~has~~estimated ~~insurance~~pre-tax ~~coverage~~charges inranging ~~place~~from an aggregate of $0.7 million to ~~cover~~$1.0 ~~any~~million, ~~potential~~including ~~loss~~costs associated with lease terminations, ~~should~~asset ~~such~~impairments aand ~~loss~~employee ~~occur~~severance.

16In January 2019, a ship carrying five containers of Company merchandise experienced a fire while in transit to a domestic port. The merchandise was subsequently received and inspected, and it was determined that three of the containers of merchandise were a total loss. The Company insures merchandise in transit at average selling price and has received a payment for merchandise in the three damaged containers. The remaining two containers of merchandise are still in the process of being inspected. The Company believes that its insurance coverage is adequate to cover any potential loss, should such a loss occur.

17~~. SEGMENT AND ENTERPRISE WIDE DISCLOSURES~~

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

18.	SEGMENT AND ENTERPRISE WIDE DISCLOSURES

Operating Segment. For purposes of the disclosure requirements for segments of a business enterprise, the Company has determined that its business is comprised of one operating segment: the design, manufacture and sale of maternity apparel and related accessories. While the Company offers a wide range of products for sale, the substantial portion of its products are initially distributed through the same distribution facilities, many of the Company’s products are manufactured at common contract manufacturer production facilities, the Company’s products are marketed through a common marketing department, and these products are sold to a similar customer base consisting of expectant mothers.

Geographic Information. Geographic revenue information is allocated based on the country in which the products or services are sold, and in the case of international franchise revenues, on the location of the customer. Information concerning the Company’s operations by geographic area was as follows (in thousands):

Three Months Ended

Six Months Ended

May 4, 2019

May 5, 2018

August 3, 2019

August 4, 2018

August 3, 2019

August 4, 2018

Net Sales

United States

9081,~~646~~227

9891,~~250~~800

171,873

190,051

Foreign

3,~~567~~674

4,~~977~~595

7,241

9,571

	May 4, 2019		February 2, 2019
	August 3, 2019		February 2, 2019
Long-Lived Assets
United States	$	4947,~~995~~806	$	51,068
Foreign		~~1,078~~963		1,228

Major Customers. For the periods presented, the Company did not have any one customer who represented more than 10% of its net sales.

1819. INTEREST EXPENSE, NET

Interest expense, net was comprised of the following (in thousands):

	Three Months Ended						Six Months Ended
	May 4, 2019			May 5, 2018
	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
Interest expense	$	1,~~416~~341		$	1,~~158~~145		$	2,757		$	2,303
Interest income		(1	)		(1	)		(2	)		(2	)
Interest expense, net	$	1,~~415~~340		$	1,~~157~~144		$	2,755		$	2,301

1718

Item 2.

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

We operate on a 52/53-week fiscal year ending on the Saturday nearest January 31 of each year. References in this discussion to our fiscal 2019 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 3, 2019 and will end February 1, 2020. References to our fiscal 2018 refer to the 52-week fiscal year, or periods within such fiscal year, which began February 4, 2018 and ended February 2, 2019.

Forward-Looking Statements

Some of the information in this report, including the information incorporated by reference (as well as information included in oral statements or other written statements made or to be made by us), contains 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 (the “Exchange Act”). The forward-looking statements involve ~~a number of~~ risks and uncertainties. The following factors, among others, in some cases have affected, and in the future, could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: our cash runway and availability to access our revolving credit facility, our ability to consummate a strategic or financial transaction, the effectiveness of our cost reduction initiatives, our ability to raise additional capital, our ability to continue to comply with our debt covenants, our ability to continue to operate as a going concern, our ability to maintain our relationships on the same terms with our customers, vendors, suppliers, landlords, and employees, the possibility that we may need to seek bankruptcy protection, the strength or weakness of the retail industry in general and of apparel purchases in particular, our ability to successfully manage our various business initiatives, ~~the success of~~ our ~~international business and its expansion, our~~ ability to successfully manage, retain and expand our leased department and international franchise relationships and marketing partnerships, future sales trends in our various sales channels, unusual weather patterns, changes in consumer spending patterns, raw material price increases, overall economic conditions and other factors affecting consumer confidence, demographics and other macroeconomic factors that may impact the level of spending for maternity apparel (such as fluctuations in pregnancy rates and birth rates), ~~expense savings initiatives,~~ our ability to anticipate and respond to fashion trends and consumer preferences, unanticipated fluctuations in our operating results, the impact of competition and fluctuations in the price, availability and quality of raw materials and contracted products, availability of suitable store locations, ~~continued availability of capital through equity and debt financing,~~ our ability to ~~hire,~~ develop and ~~retain senior management and sales associates, our ability to develop and~~ source merchandise, our ability to receive production from foreign sources on a timely basis, ~~our compliance with applicable financial and other covenants under our financing arrangements,~~ the trading liquidity of our common stock, changes in market interest rates, our compliance with certain tax incentive and abatement programs, war or acts of terrorism and other factors referenced in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K, including those set forth under the caption “Risk Factors.”

In addition, these forward-looking statements necessarily depend upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included in this report do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “pro forma,” “anticipates,” “intends,” “continues,” “could,” “estimates,” “plans,” “potential,” “predicts,” “goal,” “objective,” or the negative of any of these terms, or comparable terminology, or by discussions of our outlook, plans, goals, strategy or intentions. Forward-looking statements speak only as of the date made. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we assume no obligation to update any of these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting these forward-looking statements.

Presentation of Financial Information

Comparable sales figures represent sales at retail locations (which does not include licensed brand or international franchise relationships) that have been in operation by us for at least 13 full months, as well as Internet sales. Our comparable sales figures generally do not include: 1) retail locations which change location type or format, 2) retail locations which are expanded, contracted or relocated if the square footage of the retail location has changed by 20% or more, or, if in the judgment of management, such expansion, contraction or relocation materially alters the comparability of the retail location (either with respect to the manner of its operation or otherwise), 3) in the case of relocations only, retail locations which are not in the same immediate geographical vicinity (such as, without limitation, the same mall, the same part of a mall, or the same street) after the relocation, 4) retail locations that have temporarily closed for any reason for 30 days or more, or 5) retail locations which, in the judgment of management, have undergone other significant changes which materially alter the comparability of the retail location (either with respect to the manner of its operation or otherwise) (such as, for example only, in the case of closure of retail locations in connection with the cessation of a leased department relationship where the manner of operation of such retail location has been materially altered prior to closure, or in the case of construction in, on or near a retail location, which significantly interferes with the customer traffic, visibility or operation of a retail location). Comparable sales exclude the 53^rd week of sales for 53-week fiscal years. In the 52-week fiscal year subsequent to a 53-week fiscal year, we exclude the sales in the non-comparable week from the comparable sales calculation. There may be variations in the way in which other retailers calculate comparable sales. As a result, data in this quarterly report regarding our comparable sales may not be comparable to similar data made available by other retailers.

1819

Use of Non-GAAP Measures

In assessing the performance of our business, we consider a variety of operational and financial measures. The key measures for determining how our business is performing are net income (loss) determined in accordance with GAAP (“net income (loss)”) and the corresponding net income (loss), (or earnings (loss)) per share (diluted), net income (loss) before certain charges or credits, when applicable, such as other charges, loss on extinguishment of debt, and certain infrequent income tax adjustments (“adjusted net income (loss)”) and the corresponding earnings (loss) per share (diluted), Adjusted EBITDA (as defined below), Adjusted EBITDA before other charges, net sales, and comparable sales. Adjusted EBITDA represents operating income (loss) before deduction for the following non-cash charges: 1) depreciation and amortization expense, 2) loss on impairment of tangible and intangible assets, 3) loss on disposal of assets, and 4) stock-based compensation expense.

Our management believes that each of the non-GAAP financial measures presented by us provides useful information about our results of operations and/or financial position to both investors and management. Each non-GAAP financial measure is provided because management believes it is an important measure of financial performance used in the retail industry to measure operating results, to determine the value of companies within the industry and to define standards for borrowing from institutional lenders. We use each of these non-GAAP financial measures as a measure of our performance. In addition, certain of our cash and equity incentive compensation plans are based on our level of achievement of Adjusted EBITDA before other charges, which is substantially identical to our non-GAAP financial measure of Adjusted EBITDA before certain other deductions.

We provide these various non-GAAP financial measures to investors to assist them in performing their analysis of our historical operating results. Each of these non-GAAP financial measures reflects a measure of our operating results before consideration of certain charges and consequently, none of these measures should be construed as an alternative to net income (loss) or operating income (loss) as an indicator of our operating performance, or as an alternative to cash flows from operating activities as a measure of our liquidity, as determined in accordance with GAAP. We may calculate each of these non-GAAP financial measures differently than other companies.

With respect to the non-GAAP financial measures discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures in this Quarterly Report.

Overview

We are the leading designer and retailer of maternity apparel in the United States with ~~998~~937 retail locations, including ~~452~~446 stores in the United States, Canada and Puerto Rico, and ~~546~~491 leased departments located within department stores and baby specialty stores throughout North America. We also sell merchandise on the Internet, primarily through our Motherhood.com, APeaInThePod.com and Destinationmaternity.com websites. We also sell our merchandise through our Canadian website, MotherhoodCanada.ca, through Amazon.com in the United States, and through websites of certain of our retail partners, including Macys.com. We have store franchise and product supply relationships in South Korea, Mexico and Israel. As of ~~May~~August 43, 2019, we have ~~184~~120 international franchised locations, including 98 stand-alone stores operated under one of our retail nameplates and ~~175~~112 shop-in-shop locations.

Insurance Claim

Management and Organizational Changes

We have engaged in a series of management and organizational changes over the last several years. Through these actions, we are attempting to identify further opportunities to become more profitable in the near future, by increasing both revenue and gross margins while reducing expenses. ~~During the three months ended May 4, 2019 and May 5, 2018, we recognized $0.7 million and $0.3 million, respectively, of charges related to management and organizational changes.~~

During the six months ended August 3, 2019 and August 4, 2018 we recognized $2.5 million and $0.9 million, respectively, of charges related to management and organizational changes.

Proxy Solicitation

In the first quarter of fiscal 2018, we received notification from a stockholder group of the nomination of a slate of alternative nominees for election to our Board of Directors at the 2018 Annual Meeting of Stockholders that was held on May 23, 2018 (the “Proxy Solicitation”). At our 2018 Annual Meeting of Stockholders the Company’s stockholders replaced the incumbent board in its entirety and elected ~~Holly~~a ~~N. Alden, Christopher B. Morgan, Marla A. Ryan and Anne-Charlotte Windal as our~~ new Board of Directors. During the ~~three~~six months ended ~~May~~August 54, 2018, we incurred $02.91 million of charges related to the Proxy Solicitation.

19Presented below is a summary of our results for the second quarter and first six months of fiscal 2019 regarding each of the key measures noted below:

~~First~~Second Quarter Fiscal 2019 Financial Results

• Net sales for the ~~first~~second quarter of fiscal 2019 decreased 811.79% to $9484.29 million from $~~103~~96.24 million for the ~~first~~second quarter of fiscal 2018.

- Comparable sales for the ~~first~~second quarter of fiscal 2019 decreased 710.25%, compared to a comparable sales ~~decrease~~increase of 0.1.2% for the ~~first~~second quarter of fiscal 2018.

• Net ~~income~~loss for the ~~first~~second quarter of fiscal 2019 was $03.15 million, or $0.0125 per share (diluted), compared to net ~~income~~loss of $04.20 million, or $0.0229 per share (diluted), for the ~~first~~second quarter of fiscal 2018.

- Net ~~income~~loss for the ~~first~~second quarter of fiscal 2019 includes a $01.5 million of ~~other~~income, ~~charges~~net of tax, related to the Insurance Claim, a $1.4 million, net of tax, charge related to management and organizational changes and a $0.8 ~~Net~~million, non-cash income tax charge related to the change in valuation allowance against net deferred tax assets. Net loss for the ~~first~~second quarter of fiscal 2018 includes ~~other~~a ~~charges~~$1.4 million, net of tax, charge related to the Proxy Solicitation and management and organizational changes and a $01.90 million, non-cash income tax charge related to a change in the valuation allowance against net ofdeferred tax assets.

~~and~~- aAdjusted net loss for the second quarter of fiscal 2019 was $02.18 million, ~~non-cash~~or ~~income~~$0.20 ~~tax~~per ~~benefit~~share ~~related~~(diluted), compared to athe ~~change~~comparably inadjusted net loss for the ~~valuation~~second ~~allowance~~quarter ~~against~~of ~~net~~fiscal ~~deferred~~2018 ~~tax~~of ~~assets~~$1.6 million, or $0.11 per share (diluted).

-• Adjusted ~~net~~EBITDA ~~income~~was $2.1 million for the ~~first~~second quarter of fiscal 2019, ~~was~~an $0increase of 3.6% ~~million,~~compared orto $02.040 ~~per~~million ~~share~~of ~~(diluted),~~adjusted ~~compared~~EBITDA tofor the second quarter of fiscal 2018.

~~comparably~~- ~~adjusted~~Adjusted ~~net~~EBITDA ~~income~~before other charges was $2.0 million for the ~~first~~second quarter of fiscal ~~2018~~2019, a decrease of 49.8% compared to $14.0 million, orof ~~$0.07~~adjusted ~~per~~EBITDA ~~share~~before ~~(diluted)~~other charges for the second quarter of fiscal 2018.

•First ~~Adjusted~~Six ~~EBITDA~~Months ~~was $6.0 million for the first quarter~~ of ~~fiscal~~Fiscal 2019, ~~compared~~Financial toResults ~~$6.7 million of Adjusted EBITDA for the first quarter of fiscal 2018.~~

-• ~~Adjusted~~Net ~~EBITDA~~sales ~~before other charges was $6.7 million~~ for the first ~~quarter~~six months of fiscal 2019, adecreased ~~decrease of 15~~10.3% ~~compared~~ to $7179.91 million offrom ~~Adjusted~~$199.6 ~~EBITDA~~million ~~before other charges~~ for the first ~~quarter~~six months of fiscal 2018.

Comparable sales for the first six months of fiscal 2019 decreased 8.7% compared to a comparable sales increase of 0.5% for the first six months of fiscal 2018.

•	Net loss for the first six months of fiscal 2019 was $3.4 million, or $0.25 per share (diluted), compared to a net loss of $3.8 million, or $0.28 per share (diluted), for the first six months of fiscal 2018.

Net loss for the first six months of fiscal 2019 includes $1.5 million of income, net of tax, related to the Insurance Claim, a 1.9 million, net of tax, charge related to management and organizational changes and a $0.8 million, non-cash income tax charge related to a change in the valuation allowance against net deferred tax assets. Net loss for the first six months of fiscal 2018 includes a $2.3 million, net of tax, charge related to the Proxy Solicitation and management and organizational changes and a $0.9 million, non-cash income tax charge related to a change in the valuation allowance against net deferred tax assets.

Adjusted net loss for the first six months of fiscal 2019 was $2.2 million, or $0.16 per share (diluted), compared to the comparably adjusted net loss for the first six months of fiscal 2018 of $0.6 million, or $0.04 per share (diluted).

•	Adjusted EBITDA was $8.1 million for the first six months of fiscal 2019, a decrease of 7.0% compared to $8.7 million of adjusted EBITDA for the first six months of fiscal 2018.

Adjusted EBITDA before other charges was $8.7 million for the first six months of fiscal 2019, a decrease of 26.6% compared to $11.8 million of adjusted EBITDA before other charges for the first six months of fiscal 2018.

Results of Operations

The following table sets forth certain operating data as a percentage of net sales and as a percentage change for the three and six months ended ~~May~~August 43, 2019 and ~~May~~August 54, 2018:

	% of Net Sales (1)						~~% Change Period to Period Favorable (Unfavorable)~~						% Change Period to Period Favorable (Unfavorable)
	Three Months Ended						~~Three~~Six Months Ended ~~May 4, 2019 vs.~~						Three Months Ended August 3, 2019 vs.			Six Months Ended August 3, 2019 vs.
	May 4, 2019			May 5, 2018			May 5, 2018
	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018			August 4, 2018			August 4, 2018
Net sales		100.0	%		100.0	%		(8100.70	)%		100.0	%		(11.9	)%		(10.3	)%
Cost of goods sold (2)		4548.26			4648.3			1046.98			47.3			11.3			11.1
Gross profit		5451.84			5351.7			(653.92	)		52.7			(12.5	)		(9.5	)
Selling, general and administrative expenses (3)		5153.52			5052.20			652.53			51.1			9.9			8.1
Store closing, asset impairment and disposal expenses		0.9			0.9			10.3
Store closing, asset impairment and asset disposal expenses		0.9			0.7			0.9			0.8			(15.8	)		(0.4	)
Other charges, net		0.7			1.1			42.4
Other (income) charges, net		(0.1	)		2.0			0.3			1.5			106.2			82.3
Operating income		1.8			1.5			10.4
Operating income (loss)		(2.5	)		(2.9	)		(0.3	)		(0.7	)		(23.4	)		(57.9	)
Interest expense, net		1.56			1.12			~~(22~~1.35	)		1.2			(17.1	)		(19.7	)
Income before income taxes		0.2			0.3			(40.4	)
Income (loss) before income taxes		(4.1	)		(4.1	)		(1.9	)		(1.9	)		(11.7	)		(9.6	)
Income tax provision		0.0			0.1			440.60			0.1			44.6			44.6
Net income		0.1	%		0.2	%		(39.3	)%
Net income (loss)		(4.2	)%		(4.2	)%		(1.9	)%		(1.9	)%		(12.2	)%		(10.7	)%

(1) Components may not add to ~~the exact~~ total ~~amount~~ due to rounding.

(2)

“Cost of goods sold” includes merchandise costs (including customs duty expenses), expenses related to inventory shrinkage, product related corporate expenses (including expenses related to our payroll, benefit costs and operating expenses of our buying departments), inventory reserves (including lower of cost or net realizable value reserves), inbound freight charges, purchasing and receiving costs, inspection costs, distribution center costs (including occupancy expenses and equipment depreciation), internal transfer costs, and the other costs of our distribution network, partially offset by the allocable amount of our Grow NJ benefit.

(3)

“Selling, general and administrative expenses” includes advertising and marketing expenses, corporate administrative expenses, corporate headquarters occupancy expenses, store expenses (including store payroll and store occupancy expenses), and store opening expenses, partially offset by the allocable amount of our Grow NJ benefit.

20The following tables set forth certain information concerning the number of our retail locations and international franchised locations for the periods indicated:

The following tables set forth certain information concerning the number of our retail locations and international franchised locations for the periods indicated.

	Three Months Ended
	August 3, 2019									August 4, 2018
Retail Locations	Stores			Leased Departments			Total Retail Locations			Stores			Leased Departments			Total Retail Locations

Beginning of period		452			546			998			484			634			1,118
Opened		—			—			—			2			1			3
Closed		(6	)		(55	)		(61	)		(6	)		(1	)		(7	)
End of period		446			491			937			480			634			1,114

	Three Months Ended
	May 4, 2019									May 5, 2018
Retail Locations	Stores			Leased Departments			Total Retail Locations			Stores			Leased Departments			Total Retail Locations
Beginning of period		458			554			1,012			487			637			1,124
Opened		1			—			1			—			—			—
Closed		(7	)		(8	)		(15	)		(3	)		(3	)		(6	)
End of period		452			546			998			484			634			1,118

	Three Months Ended
	Six Months Ended
	May 4, 2019									May 5, 2018
	August 3, 2019									August 4, 2018
International Franchised Locations	Stores			Shop-in- Shop Locations			Total International Franchised Locations			Stores			Shop-in- Shop Locations			Total International Franchised Locations
Retail Locations	Stores			Leased Departments			Total Retail Locations			Stores			Leased Departments			Total Retail Locations
Beginning of period		9458			~~175~~554			~~184~~1,012			15487			~~173~~637			~~188~~1,124
Opened		—1			—			—1			—2			—1			—3
Closed		—(13	)		—(63	)		—(76	)		(29	)		—(4	)		(213	)
End of period		9446			~~175~~491			~~184~~937			13480			~~173~~634			~~186~~1,114

Three Months Ended May 4, 2019 and May 5, 2018

	Three Months Ended
	August 3, 2019									August 4, 2018
International Franchised Locations	Stores			Shop-in- Shop Locations			Total International Franchised Locations			Stores			Shop-in- Shop Locations			Total International Franchised Locations

Beginning of period		9			175			184			13			173			186
Opened		—			—			—			—			6			6
Closed		(1	)		(63	)		(64	)		(2	)		(2	)		(4	)
End of period		8			112			120			11			177			188

Net Sales. Our net sales for the first quarter of fiscal 2019 decreased by 8.7%, or $9.0 million, to $94.2 million from $103.2 million for the first quarter of fiscal 2018. Comparable sales for the first quarter of fiscal 2019 decreased 7.2%, compared to a comparable sales decrease of 0.1% for the first quarter of fiscal 2018. The decrease in total reported sales for the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018, resulted primarily from the closure of underperforming retail and lease locations and a decline in store traffic, partially offset by an increase is average selling price.

	Six Months Ended
	August 3, 2019									August 4, 2018
International Franchised Locations	Stores			Shop-in- Shop Locations			Total International Franchised Locations			Stores			Shop-in- Shop Locations			Total International Franchised Locations

Beginning of period		9			175			184			15			173			188
Opened		—			—			—			—			6			6
Closed		(1	)		(63	)		(64	)		(4	)		(2	)		(6	)
End of period		8			112			120			11			177			188

~~Gross~~Three ~~Profit. Our~~Months ~~gross~~Ended ~~profit~~August ~~for the first quarter of fiscal 2019 decreased by 6.9%, or $~~3~~.8 million~~, to2019 ~~$51.6~~and ~~million~~August ~~from $55.~~4 ~~million for the first quarter of fiscal 2018~~, ~~and our gross profit as a percentage of net sales (gross margin) for the first quarter of fiscal 2019, was 54.8% compared to 53.7% for the first quarter of fiscal~~ 2018~~. The~~ decrease in gross profit for the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018, was due to our lower sales volume as a result of the closure of underperforming retail and lease locations and a decline in comparable store sales. The year-over-year increase in gross margin is primarily a result of a decrease in markdown and promotional activity.

~~Selling,~~Net ~~General and Administrative Expenses~~Sales. ~~Our~~Net ~~selling,~~sales ~~general and administrative expenses~~ for the ~~first~~second quarter of fiscal 2019 decreased by 611.59%, or $311.45 million, to $4884.59 million from $5196.94 million for the ~~first~~second quarter of fiscal 2018. AsComparable ~~a percentage of net~~ sales, ~~selling,~~for ~~general~~the ~~and~~second ~~administrative~~quarter ~~expenses~~of ~~increased~~fiscal to2019 51decreased 10.5% ~~for~~compared ~~the~~to ~~first~~a ~~quarter~~comparable ofsales ~~fiscal~~increase ~~2019~~of ~~from 50~~1.2% for the ~~first~~second quarter of fiscal 2018. ~~This~~The decrease in ~~expense~~total reported sales for the second quarter ~~primarily~~of ~~reflects~~fiscal ~~reductions~~2019 incompared ~~employee~~to ~~costs~~the ~~and~~second ~~occupancy~~quarter ~~expenses~~of ~~resulting~~fiscal 2018, resulted primarily from the closure of underperforming ~~stores~~retail and ~~ongoing~~lease ~~expense~~locations ~~reduction~~and ~~initiatives.~~a ~~The~~decline ~~increase~~ in ~~expense~~store astraffic. aThe ~~percent~~decline ofin comparable sales ~~reflects~~is the ~~unfavorable~~result ~~leverage~~of ~~from~~a ~~our~~11.9% ~~decreased~~decrease ~~sales~~in ~~due~~comparable tostore ~~the~~sales ~~relatively~~and ~~fixed~~an ~~nature~~6.4% ofdecrease ~~our~~in ~~expenses~~ecommerce sales.

Store Closing, Asset Impairment and Asset Disposal Expenses. Our store closing, asset impairment and asset disposal expenses, including $0.4 million in right-of-use asset impairment, was $0.9 million for the first quarter of fiscal 2019 compared to $1.0 million for the first quarter of fiscal 2018.23

~~Other~~Gross ~~Charges, Net~~Profit. InGross profit for the ~~first~~second quarter of fiscal 2019 decreased by 12.5%, weor ~~incurred~~$6.2 ~~other~~million, ~~charges~~to of$43.6 million from $049.79 million ~~which~~for isthe ~~primarily~~second ~~consulting~~quarter ~~fees~~of fiscal 2018, and ~~personnel~~our ~~costs~~gross ~~related~~profit toas ~~our~~a ~~management~~percentage ~~and~~of ~~organizational~~net ~~change~~sales ~~initiatives.~~(gross Inmargin) for the ~~first~~second quarter of fiscal ~~2018~~2019 wewas ~~incurred~~51.4% ~~other~~compared ~~charges~~to ~~of $1~~51.17% ~~million~~for ~~which~~the ~~includes~~second $0quarter of fiscal 2018.8 The ~~million~~decrease in gross profit for ~~legal~~the ~~and~~second ~~advisory~~quarter ~~fees~~of ~~related~~fiscal 2019 compared to the ~~proxy~~second ~~solicitation~~quarter ~~and~~of $0fiscal 2018 was primarily due to our lower sales volume as a result of the factors discussed above.3 ~~million~~The year-over-year decrease in ~~personnel~~gross ~~costs~~margin ~~related~~is toa ~~our~~result ~~management~~of a decrease in gross margin on full price merchandise partially offset by a reduction in sales of markdown merchandise as a percentage of total sales and ~~organizational~~an ~~change~~increase ~~initiatives~~in gross margin on markdown merchandise sales.

~~Operating~~Selling, ~~Income. We~~General ~~had~~and ~~operating~~Administrative ~~income~~Expenses. Selling, ofgeneral ~~$1.6~~and ~~million~~administrative expenses for the ~~first~~second quarter of fiscal 2019 decreased by 9.9%, ~~compared~~or $4.9 million, to ~~operating~~$45.2 ~~income~~million offrom $150.4 1 million for the ~~first~~second quarter of fiscal 2018. ~~The~~As $0a percentage of net sales, selling, general and administrative expenses increased to 53.2% ~~million~~for ~~increase~~the insecond ~~operating~~quarter ~~income~~of isfiscal 2019 from 52.0% for the ~~result~~second quarter of afiscal $32018.4 ~~million~~This decrease in ~~selling,~~expense ~~general~~for ~~and~~the ~~administrative~~quarter ~~expenses~~primarily ~~and~~reflects areductions ~~$0.5~~in ~~million~~employee ~~decrease~~costs inand ~~other~~occupancy ~~charges~~expenses ~~partially~~resulting ~~offset~~from bythe aclosure ~~$3.8~~of ~~million~~underperforming ~~reduction~~stores inand ~~gross~~ongoing ~~profit~~expense reduction initiatives.

21Store Closing, Asset Impairment and Asset Disposal Expenses. Store closing, asset impairment and asset disposal expenses, including $0.6 million in right-of-use asset impairment, increased for the second quarter of fiscal 2019 by $0.1 million, to $0.8 million from $0.7 million for the second quarter of fiscal 2018, reflecting higher lease termination costs.

Other ~~Interest~~Income ~~Expense~~and Charges, Net. ~~Net~~In ~~interest~~the ~~expense~~second quarter of fiscal 2019 we received net other income of $0.1 million which includes approximately $1.49 million ~~for~~of insurance proceeds in excess of the ~~first~~carrying ~~quarter~~value of ~~fiscal~~merchandise ~~2019~~inventory that was damaged while in transit partially offset by $01.28 million ~~higher~~in ~~than~~personnel costs and consulting expenses related to our management and organizational change initiatives. In the ~~first~~second quarter of fiscal 2018 we incurred other charges of $1.9 ~~This~~million ~~increase~~which isincludes approximately $1.2 million to reimburse a stockholder for amounts incurred to nominate the ~~result~~slate of analternative ~~increase~~directors inat ~~both~~the ~~interest~~2018 ~~rates~~Annual Meeting of Stockholders and $0.7 million in personnel costs related to our ~~average~~management ~~debt~~and ~~outstanding.~~organizational change initiatives.

~~Income~~Operating ~~Tax~~Loss. We ~~Provision~~had an operating loss of $2. ~~For~~2 million for the ~~first~~second quarter of fiscal 2019 ~~and~~compared ~~fiscal~~to ~~2018,~~an ~~our~~operating ~~income~~loss ~~tax~~of ~~provision~~$2.8 ~~was~~million ~~$31,000~~for ~~and~~the ~~$56,000,~~second ~~respectively~~quarter of fiscal 2018. ~~These~~ ~~tax~~The ~~provisions~~$0.6 ~~primarily~~million ~~represent~~decrease ~~minimum~~in ~~state~~operating ~~income~~loss ~~taxes~~reflects a $4. ~~Since~~9 ~~fiscal~~million ~~2016~~reduction in selling, wegeneral ~~have~~and ~~been~~administrative ~~recording~~expenses ~~full~~and ~~valuation~~a ~~allowances~~$2.0 ~~against~~million ~~our~~decrease ~~deferred~~in ~~tax~~other ~~assets~~income and charges, ~~primarily~~partially ~~net~~offset ~~operating~~by ~~loss~~a ~~carryforwards~~6. 2 million reduction in gross profit.

~~Net~~Interest ~~Income~~Expense, Net. Net ~~income~~interest ~~for~~expense ~~the first quarter~~ of ~~fiscal 2019 was~~ $0.1 ~~million, or $0~~.013 ~~per share (diluted), compared to net income of $0.2~~ million, ~~or $0.02 per share (diluted),~~ for the ~~first~~second quarter of fiscal ~~2018. Net income for the first quarter of fiscal~~ 2019 ~~includes~~was ~~other charges of~~ $0.5 2 million, ~~net~~higher ofthan ~~tax, related to management and organizational changes. Net income for~~ the ~~first~~second quarter of fiscal 2018 ~~includes a $0~~.1 ~~million~~This ~~non-cash~~increase ~~income~~is ~~tax~~the ~~charge~~result ~~related~~of toan aincrease ~~change~~ in ~~the~~interest ~~valuation~~rates ~~allowance against deferred tax assets~~ and ~~other~~an ~~charges~~increase ofin ~~$0.8~~our ~~million,~~average ~~net~~debt ~~of tax~~outstanding.

~~Our~~Income ~~average~~Tax ~~diluted~~Provision. For ~~shares~~the ~~outstanding~~second quarter of ~~13.9 million~~fiscal 2019 and fiscal 2018 our income tax provision was ~~comparable~~$31 tothousand ~~the~~and ~~14.0~~$56 ~~million~~thousand, ~~average~~respectively. These ~~diluted~~tax ~~shares~~provisions ~~for~~primarily ~~the~~represent ~~first~~minimum ~~quarter~~state ofincome taxes. Since fiscal ~~2018.~~2016 we have been recording valuation allowances to reduce deferred tax assets, primarily net operating loss carryforwards.

~~The~~Net ~~following~~Loss. Net isloss afor ~~reconciliation~~the second quarter of ~~net~~fiscal ~~income~~2019 ~~and~~was ~~net~~$3.5 ~~income~~million, or $0.25 per share (diluted), ~~(“Diluted~~compared ~~EPS”)~~ to ~~adjusted~~ net ~~income~~loss ~~and~~of ~~adjusted~~$4.0 ~~Diluted~~million, ~~EPS~~or $0.29 per share (diluted), for the ~~three~~second ~~months~~quarter ~~ended~~of ~~May~~fiscal 4,2018. Net loss for the second quarter of fiscal 2019 includes a $0.8 million non-cash income tax charge related to a change in the valuation allowance against net deferred tax assets and ~~May~~other 5income of $0.1 million, ~~2018~~net ~~(in~~of ~~thousands~~tax, ~~except~~related ~~per~~to ~~share~~the ~~amounts):~~Insurance Claim and management and organizational changes.

	Three Months Ended
	May 4, 2019							May 5, 2018
	Net Income			Diluted Shares		Diluted EPS		Net Income			Diluted Shares		Diluted EPS
As reported	$	130			13,901	$	0.01	$	214			13,963	$	0.02
Other charges		662			—				1,150			—
Income tax effect of other charges (1)		(154	)		—				(273	)		—
Deferred tax valuation allowance related to cumulative losses		(30	)		—				(67	)		—
As adjusted	$	607			13,901	$	0.04	$	1,024			13,963	$	0.07

Our average diluted shares outstanding of 13.9 million was comparable to the 13.8 million average diluted shares for the second quarter of fiscal 2018.

Following is a reconciliation of net loss and net loss per share (diluted) (“Diluted EPS”) to adjusted net loss and adjusted Diluted EPS for the three months ended August 3, 2019 and August 4, 2018 (in thousands, except per share amounts):

	Three Months Ended
	August 3, 2019								August 4, 2018
	Net Loss			Diluted Shares		Diluted EPS			Net Loss			Diluted Shares		Diluted EPS

As reported	$	(3,535	)		13,871	$	(0.25	)	$	(4,025	)		13,823	$	(0.29	)
Other (income) charges, net		(119	)		—					1,923			—
Income tax effect of other (income) charges, net (1)		28			—					(474	)		—
Deferred tax valuation allowance related to cumulative losses		824			—					991			—
As adjusted	$	(2,803	)		13,871	$	(0.20	)	$	(1,585	)		13,823	$	(0.11	)

(1)	Income tax effect of other charges represents the differences in income tax provision calculated with and without the specified items of pretax expense or (income).

~~The~~Following ~~following~~ is a reconciliation of net ~~income~~loss to Adjusted EBITDA and Adjusted EBITDA before other charges for the ~~first~~second quarter of fiscal 2019 and 2018 (in thousands):

	Three Months Ended
	May 4, 2019			May 5, 2018
	August 3, 2019			August 4, 2018
Net income	$	130		$	214
Net loss	$	(3,535	)	$	(4,025	)
Income tax provision		31			56
Interest expense, net		1,~~415~~340			1,~~157~~144
Operating income		1,576			1,427
Operating loss		(2,164	)		(2,825	)
Depreciation and amortization expense		3,~~553~~438			43,~~050~~910
Loss on impairment of long-lived assets		~~562~~610			~~887~~632
Loss on disposal of assets		~~188~~71			1355
Stock-based compensation expense		~~144~~147			~~328~~256
Adjusted EBITDA		62,~~023~~102			62,~~705~~028
Other charges		662			1,150
Other (income) charges, net		(119	)		1,923
Adjusted EBITDA before other charges	$	6,685		$	7,855
Adjusted EBITDA before other (income) charges	$	1,983		$	3,951

Six Months Ended August 3, 2019 and August 4, 2018

Net Sales. Net sales for the six months of fiscal 2019 decreased by 10.3%, or $20.5 million, to $179.1 million from $199.6 million for the first six months of fiscal 2018. Comparable sales for the first six months of fiscal 2019 decreased 8.7% compared to a comparable sales increase of 0.5% for the first six months of fiscal 2018. The decrease in total reported sales for the first six months of fiscal 2019 compared to the first six months of fiscal 2018 resulted primarily from a decrease in comparable store sales, ecommerce sales and the closure of underperforming stores. The decrease in fiscal 2019 comparable sales reflect a decrease in ecommerce sales of 9.6% and a decrease in comparable store sales of 8.4%.

Gross Profit. Gross profit for the first six months of fiscal 2019 decreased by 9.5%, or $10.0 million, to $95.2 million from $105.3 million for the first six months of fiscal 2018, and our gross margin for the first six months of fiscal 2019 was 53.2% compared to 52.7% for the first six months of fiscal 2018. The decrease in gross profit for the first six months of fiscal 2019 compared to the first six months of fiscal 2018 was primarily due to our lower sales volume as a result of the factors discussed above. The year-over-year increase in gross margin is the result of a decrease in promotions and markdowns.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the first six months of fiscal 2018 decreased by 8.1%, or $8.3 million, to $93.6 million from $102.0 million for the first six months of fiscal 2018. As a percentage of net sales, selling, general and administrative expenses increased to 52.3% for the first six months of fiscal 2019 from 51.1% for the first six months of fiscal 2018. The decrease in expense for the first six months of fiscal 2019 primarily reflects reductions in employee costs and occupancy expenses resulting from the closure of underperforming stores and ongoing expense reduction initiatives.

Store Closing, Asset Impairment and Asset Disposal Expenses. Store closing, asset impairment and asset disposal expenses, including $1.0 million in right-of-use asset impairment, was $1.6 million for the first six months of fiscal 2019 which is comparable to the first six months of fiscal 2018.

Other Income and Charges, Net. In the first six months of fiscal 2019 we incurred net other charges of $0.5 million, $1.9 million of income related to the Insurance Claim and $2.4 million of charges related to management and organizational changes. In the first six months of fiscal 2018 we incurred other charges of $3.1 million, $2.1 million related to the Proxy Solicitation and $0.9 million related to management and organizational changes.

Operating Loss. We had an operating loss of $0.6 million for the first six months of fiscal 2019 compared to an operating loss of $1.4 million for the first six months of fiscal 2018. The $0.8 million decrease in operating loss is the result of an $8.3 million reduction in selling, general and administrative expenses and a $2.5 million decrease in other income and charges partially, offset by lower gross profit as a result of the decline in sales volume.

Interest Expense, Net. Net interest expense for the first six months of fiscal 2019 increased to $2.8 million from $2.3 million for the first six months of fiscal 2018. This increase was due to our higher effective borrowing rate and an increase in our average debt outstanding.

Income Tax Provision. For the first six months of fiscal 2019 and fiscal 2018, respectively, our income tax provision was $62 thousand and $112 thousand. These tax provisions primarily represent minimum state income taxes. Since fiscal 2016 we have been recording valuation allowances to reduce deferred tax assets, primarily net operating loss carryforwards.

Net Loss. Net loss for the first six months of fiscal 2019 was $3.4 million, or $0.25 per share (diluted), compared to a net loss of $3.8 million, or $0.28 per share (diluted), for the first six months of fiscal 2018. Net loss for the first six months of fiscal 2019 includes other income and charges of $0.4 million, net of tax related to the Insurance Claim and management and organizational changes and a $0.8 million non-cash income-tax charge related to a change in the valuation allowance against net deferred tax assets. Net loss for the first six months of fiscal 2018 includes other charges of $2.3 million, net of tax related to the Proxy Solicitation and management and organizational changes and a $0.9 million non-cash income-tax charge related to a change in the valuation allowance against net deferred tax assets.

Average diluted shares of common stock outstanding were 13.8 million for both the first six months of fiscal 2019 and fiscal 2018.

Following is a reconciliation of net loss and Diluted EPS to adjusted net income (loss) and adjusted Diluted EPS for the six months ended August 3, 2019 and August 4, 2018 (in thousands, except per share amounts):

	Six Months Ended
	August 3, 2019								August 4, 2018
	Net Loss			Diluted Shares		Diluted EPS			Net Income			Diluted Shares		Diluted EPS

As reported	$	(3,405	)		13,848	$	(0.25	)	$	(3,811	)		13,831	$	(0.28	)
Other (income) charges, net		543			—					3,073			—
Income tax effect of other (income) charges, net (1)		(127	)		—					(746	)		—
Deferred tax valuation allowance related to cumulative losses		793			—					924			—
As adjusted	$	(2,195	)		13,848	$	(0.16	)	$	(560	)		13,831	$	(0.04	)

(1)	Income tax effect of other charges represents the differences in income tax provision calculated with and without specified items of pretax expense or (income).

Following is a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA before other charges and effect of change in accounting principle for the six months ended August 3, 2019 and August 4, 2018 (in thousands):

	Six Months Ended
	August 3, 2019			August 4, 2018

Net loss	$	(3,405	)	$	(3,811	)
Income tax provision		62			112
Interest expense, net		2,755			2,301
Operating loss		(588	)		(1,398	)
Depreciation and amortization expense		6,992			7,960
Loss on impairment of long-lived assets		1,172			1,519
Loss on disposal of assets		259			68
Stock-based compensation expense		290			584
Adjusted EBITDA		8,125			8,733
Other (income) charges, net		543			3,073
Adjusted EBITDA before other (income) charges	$	8,668		$	11,806

Seasonality

Our business, like that of many other retailers, is seasonal. Our quarterly net sales have historically been highest in the peak Spring selling season, which will generally occur during the calendar months of March through May, in our first fiscal quarter and the early part of our ~~third~~second fiscal quarter. Given the typically higher sales level in that timeframe and the relatively fixed nature of most of our operating expenses, we have historically generated a significant percentage of our full year operating income during this period. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may be subject to substantial fluctuation depending upon, among other things, increases or decreases in comparable sales, the timing of new store openings and closings, new leased department openings and closings, net sales and profitability contributed by new stores and leased departments, the timing of the fulfillment of purchase orders under our product and license arrangements, adverse weather conditions, shifts in the timing of certain holidays and promotions, changes in inventory and production levels and the timing of deliveries of inventory, and changes in our merchandise mix.

subject to substantial fluctuation depending upon, among other things, increases or decreases in comparable sales, the timing of new store openings and closings, new leased department openings and closings, net sales and profitability contributed by new stores and leased departments, the timing of the fulfillment of purchase orders under our product and license arrangements, adverse weather conditions, shifts in the timing of certain holidays and promotions, changes in inventory and production levels and the timing of deliveries of inventory, and changes in our merchandise mix.

Liquidity and Capital Resources

Based on the Company’s current operating plan, the Company faces significant liquidity constraints. We currently have no committed sources of additional capital funding and there is no assurance that additional funding will be available to us in the future. These factors raise substantial doubt about our ability to continue as a going concern, and we may be forced to curtail or cease altogether our operations. Our ability to continue as a going concern will depend upon our ability to accomplish one or more of the following: significantly reduce our costs, engage in a strategic alternative, which includes the potential sale of the business or certain of its assets, and/or raise additional capital in the very near term. The Company has engaged financial advisors to assist us in exploring financial and strategic alternatives. In an effort to reduce costs and better position the Company for operational profitability, on September 16, 2019, the Company adopted a plan to close approximately 50 underperforming stores. The Company has made provisions to have sufficient inventory available through the anticipated duration of the Company’s exploration of financial and strategic opportunities. If we are unable to accomplish one or more of these alternatives in the near term, we may not be able to continue to be able to service our debt, and the lenders could declare an event of default under our Term Loan Agreement and/or Credit Facility, which could result in us having to seek bankruptcy protection. In the event of a bankruptcy, our stockholders may lose their entire investment in our company. As a result, our primary goal in the near-term is to successfully complete the review of strategic alternatives and consummate a transaction or series of transactions to allow us to continue our operations. Our ability to identify and complete such a strategic alternative is highly speculative.

Our cash needs have primarily been for 1) capital expenditures, including (i) leasehold improvements, fixtures and equipment for new stores, store relocations and remodels of our existing stores, and (ii) investment in information systems and technology, 2) debt service, including principal prepayments, and 3) working capital, including inventory to support our business. We have historically financed our capital requirements from cash flows from operations, borrowings under our credit facilities or available cash balances.

Cash and cash equivalents were unchanged during the first ~~quarter~~six months of fiscal 2019, compared to ana ~~increase~~decrease of $0.43 million for the first ~~quarter~~six months of fiscal 2018.

Cash ~~used~~provided inby operations was $41.64 million for the first ~~quarter~~six months of fiscal 2019, as compared to $2.5.8 million of cash ~~used~~provided inby operations for the first ~~quarter~~six months of fiscal 2018. This ~~increase~~decrease of approximately $24.14 million in cash ~~used~~provided inby operations compared to the prior period is primarily the result of achanges ~~$2.8~~in ~~million~~the ~~decrease~~timing inof ~~accrued~~payments ~~expenses~~related into ~~fiscal~~employee ~~2019~~compensation ~~compared~~and tobenefits ~~fiscal~~and ~~2018~~operating ~~related~~expenses in addition to ~~the~~a ~~amount~~$1.6 ~~and~~million ~~timing~~reduction ofin ~~payments~~non-cash ofexpenses ~~employee~~related ~~compensation~~to depreciation, amortization and ~~related~~asset ~~benefits~~impairment. Our working capital changes, quarterly net income (loss) and cash flow adjustments may fluctuate significantly, and net cash provided by or used in operating activities for any interim period is not necessarily indicative of the results that may be achieved for a full fiscal year.

During the first ~~quarter~~six months of fiscal 2019, we borrowed $52.89 million against our line of credit to provide working capital, make periodic payments on our equipment loans and fund capital expenditures. Capital expenditures for the first ~~quarter~~six months of fiscal 2019 totaled $23.58 million, including $01.30 million for improvements to new and existing stores and $2.28 million for information systems. We expect to use borrowings under our ~~existing~~ $50.0 million senior secured revolving credit facility (the “Credit Facility”) to fund a portion of our capital requirements from time to time during the remainder of ~~our 2019~~ fiscal ~~year~~2019.

OnDuring ~~February~~the 1,second ~~2018~~quarter ~~(the~~of ~~“Closing~~fiscal ~~Date”)~~2019, we ~~entered~~received ~~into~~ a ~~Term Loan Credit Agreement (the “Term Loan Agreement”) which provides for a term loan of up to~~ $252.05 million ~~(the~~payment ~~“Term~~from ~~Loan”). On~~ the ~~Closing~~Insurance ~~Date~~Claim weresulting ~~borrowed~~from ~~$22.5~~merchandise ~~million~~that ~~against~~was ~~the~~damaged ~~Term~~while ~~Loan.~~in ~~In July 2018, we borrowed an additional $2~~transit.5 ~~million~~The ~~under~~Insurance ~~our~~Claim ~~Term~~is ~~Loan~~still ~~increasing~~in the ~~balance~~process toof ~~$25.0~~being ~~million,~~finalized ~~the~~and ~~full~~could ~~amount~~result ~~permitted~~in tothe beCompany ~~outstanding~~realizing ~~under~~additional ~~the~~income ~~agreement~~or expense.

~~The~~On ~~Term~~February ~~Loan matures on January 31~~1, ~~2023~~2018 (the “~~Maturity~~Closing Date”)~~. There~~ iswe aentered ~~minimum~~into ~~excess~~a ~~availability requirement of the greater of 10% of the combined loan cap, as defined in the~~ Term Loan Credit Agreement, ~~or $7.0 million. The interest rate on~~ (the “Term Loan isAgreement”) ~~equal~~which toprovides for a ~~LIBOR~~term ~~rate~~loan ~~plus~~of ~~9.0%. We~~up ~~began~~ to ~~make minimum payments of~~ $025.30 million ~~each quarter commencing on July 31, 2018, with~~ (the ~~remaining outstanding balance payable on the Maturity Date. The~~ “Term Loan ~~can be prepaid at our option, subject to certain restrictions and subject to a prepayment premium as follows: 1~~”). On ~~if prepayment occurs on or prior to~~ the ~~third anniversary of the~~ Closing Date, ~~the~~we ~~greater~~borrowed of$22.5 a)million ~~interest~~against on the ~~prepayment~~Term ~~that~~Loan. ~~would~~In ~~otherwise~~July ~~have~~2018, ~~been~~we ~~paid~~borrowed ~~with~~an ~~the~~additional 24$2.5 ~~month~~million ~~period~~under ~~following~~our ~~the~~Term ~~Closing~~Loan ~~Date~~increasing ~~minus actual interest payments made through~~ the ~~prepayment~~balance ~~date~~to ~~and~~$25.0 ~~b) 2% of the prepayment~~million, ~~and 2) 2% of~~ the ~~prepayment~~full amount ifpermitted ~~paid~~under ~~between~~ the ~~second and third anniversary of the Closing Date~~agreement.

The Term Loan matures on January 31, 2023 (the “Maturity Date”). There is a minimum excess availability requirement of the greater of 10% of the combined loan cap, as defined in the Term Loan Agreement, or $7.0 million. The interest rate on the Term Loan is equal to a LIBOR rate plus 9.0%. We are required to make minimum payments of $0.3 million each quarter commencing on July 31, 2018, with the remaining outstanding balance payable on the Maturity Date. The Term Loan can be prepaid at our option, subject to certain restrictions and subject to a prepayment premium as follows: 1) if prepayment occurs on or prior to the second anniversary of the Closing Date, the greater of a) interest on the prepayment that would otherwise have been paid with the 24 month period following the Closing Date minus actual interest payments made through the prepayment date and b) 2% of the prepayment, and 2) 2% of the prepayment amount if paid between the second and third anniversary of the Closing Date.

In conjunction with entering into the Term Loan Agreement, on February 1, 2018 we also amended and restated our credit facility (the “Credit Facility”). This amendment, among other things, reduced the borrowing amount under the Credit Facility from $70.0 million to $50.0 million, extended the Termination Date to January 31, 2023 and reduced or eliminated certain availability reserves.

As of August 3, 2019, we had $23.3 million in borrowings and $6.3 million in letters of credit outstanding under the Credit Facility with $5.2 million of availability. As of August 4, 2018, we had $7.3 million of borrowings and $7.3 million in letters of credit with $19.0 million of availability. For the first six of fiscal 2019 our borrowings had a weighted interest rate of 4.45% per annum, our average level of borrowing was $26.9 million and our maximum borrowing at any time was $32.3 million. For the first six of fiscal 2018 our borrowings had a weighted interest rate of 3.97% per annum our average level of direct borrowings was $16.4 million and our maximum borrowings at any time were $27.4 million.

AsOn ofFebruary ~~May 4~~22, 2019, ~~we had $26.2 million in borrowings and $6.3 million in letters of credit outstanding under~~ the ~~Credit~~Company ~~Facility~~entered ~~with~~into ~~$10.1~~a ~~million of availability. As of May 5~~24-month, ~~2018, we had~~ $151.28 million ofsoftware ~~borrowings~~development ~~and~~financing $7arrangement.3 ~~million~~The innote ~~letters~~has ofmonthly ~~credit~~payments ~~with $20.2 million~~ of ~~availability. For the first quarter of fiscal 2019~~$81,648 ~~our~~with ~~borrowings~~an ~~had a weighted~~ interest rate of 48.5316%. ~~per~~As ~~annum, our average level~~ of ~~borrowing~~August ~~was $27.5 million and our maximum borrowing at any time was $32.~~3, ~~million. For the first quarter of fiscal 2018~~2019, ~~our~~there ~~borrowings had a weighted interest rate of 3.60% per annum our average level of direct borrowings~~ was $191.4 million ~~and~~of ~~our~~principal ~~maximum borrowings at any time were $27~~outstanding.4 ~~million.~~

On February 22, 2019, the Company entered into a 24-month, $1.8 million software development financing arrangement. The note has monthly payments of $81,648 with an interest rate of 8.16%. As of May 4, 2019, there was $1.6 million of principal outstanding. 28

As of ~~May~~August 43, 2019, and ~~May~~August 54, 2018, there was $2.1.3 million and $54.35 million, respectively, outstanding under a five-year equipment financing arrangement with our Credit Facility lender. The equipment note bears annual interest at 3.38%, with payments of $0.3 million (including interest) due monthly through December 2019. The equipment note is collateralized by substantially all of the material handling equipment at our distribution facility in Florence, New Jersey.

On June 6, 2017, we received $3.4 million in proceeds from a three-year financing arrangement in the form of a sale and leaseback for certain furniture, fixtures and software. Monthly payments under the leaseback arrangement are $0.1 million for the first 24 months and $48~~,000~~ thousand for months 25 to 36. At the end of the leaseback term, we have the option to extend the financing for an additional year or repurchase the property for a price to be agreed upon. All proceeds from the transaction were used to prepay a portion of our Term Loan. As of ~~May~~August 43, 2019, and ~~May~~August 54, 2018, respectively, there was $10.19 million and $2.30 million, ~~respectively,~~ of principal outstanding under the arrangement.

In connection with the relocation of our corporate headquarters and our distribution operations from Philadelphia, Pennsylvania to southern New Jersey, the Board of the NJEDA approved us for an incentive package of up to $4.0 million in annual benefits under Grow NJ in the form of transferrable income tax credits over a ten-year period from the State of New Jersey. The annual benefit amount available to us is based on an average of eligible jobs within the state and is expected to significantly exceed our annual income tax liability to New Jersey. In order to maximize the realizable value of our incentive package we have an agreement with a third party to sell up to 100% of the annual income tax credits awarded to us. For fiscal 2018 we qualified for $3.0 million in tax credits for which we expect to realize $2.7 million in cash proceeds during fiscal 2019. In December 2018 we received $2.8 million in proceeds, net of costs, from the sale of the tax credits we earned in fiscal 2017. For fiscal 2019 our average eligible jobs are expected to be lower than in fiscal 2018 and we project that we will receive approximately $2.97 million of transferrable tax credits with a pretax realizable value of approximately $2.64 million, subject to our compliance with the requirements under our Grow NJ award. Cost reductions from lower headcount are expected to more than offset any decline in the amount realized from our incentive package.

Based on our current operating plan, our management believes that our current cash and working capital positions, expected operating cash flows and available borrowing capacity, will be sufficient to fund our cash requirements for working capital and capital expenditures for at least the next 12 months. We have based this belief on assumptions that we believe are reasonable but may not be realized due to a variety of factors including lower than anticipated net sales or gross margins, increased expenses, continued or declining levels of economic or retail industry conditions, or other events, including those factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. As a result, we could use our available capital resources sooner than we currently expect. Furthermore, our operating plan may change, and we may need additional funds sooner than planned. If we are unable to obtain required funds from the aforementioned sources, we will likely need to seek other sources of financing which may not be on favorable terms., as well as defer, reduce or eliminate planned expenditures, which would likely impair our growth prospects and could otherwise negatively impact our business.

Contractual Obligations

There have been no material changes since February 2, 2019, outside of the ordinary course of business, to contractual obligations specified in the table of contractual obligations and commercial commitments in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

Off-Balance Sheet Financing Arrangements

We do not have any material off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require 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 our consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Our critical accounting policies are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. In conjunction with the adoption of ASU No. 2016-02, Leases (Topic 842) on February 3, 2019, we began recognizing a right-of-use asset and a lease liability, initially measured at the present value of the lease payments in the consolidated balance sheet. As of ~~May~~August 43, 2019, there were no other material changes in, or additions to, our critical accounting policies or in the assumptions or estimates we used to prepare the financial information appearing in this report.

Recent Accounting Pronouncements

Refer to Note 15 to the Consolidated Financial Statements for a description of recent accounting pronouncements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates. We have not entered into any market sensitive instruments for trading purposes. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. The range of changes presented reflects our view of changes that are reasonably possible over a one-year period.

As of ~~May~~August 43, 2019, we had cash and cash equivalents of $1.21 million. Our cash equivalents consist of investments in money market funds that bear interest at variable rates. A change in market interest rates earned on our investments impacts the interest income and cash flows but does not materially impact the fair market value of the financial instruments. Due to the low balance, average maturity and conservative nature of our investment portfolio, we believe a sudden change in interest rates would not have a material effect on the value of our investment portfolio. The impact on our future interest income resulting from changes in investment yields will depend largely on the gross amount of our investment portfolio at that time. However, based upon the conservative nature of our investment portfolio and current experience, we do not believe a decrease in investment yields would have a material negative effect on our interest income.

As of ~~May~~August 43, 2019, our indebtedness consisted of the $23.84 million outstanding under our Term Loan, the $43.97 million of principal balances of our equipment notes, and $2623.23 million outstanding under the Credit Facility. All of our indebtedness is denominated in United States dollars. The fair value of our indebtedness is referred to as the “debt value.” The equipment notes bear interest at a weighted fixed rate of 7.166%. Although a change in market interest rates would not affect the interest incurred or cash flow related to this fixed rate portion of our indebtedness, the debt value would be affected.

The Term Loan carries a variable interest rate that is tied to market indices with a minimum annual rate of 9.0%. The sensitivity analysis as it relates to this portion of our debt portfolio assumes an instantaneous 100 basis point move in interest rates above and below the minimum threshold, with all other variables held constant. The debt value of the Term Loan is approximately $23.84 million. A 100-basis point increase in market interest rates above the minimum threshold would result in additional annual interest expense on the Term Loan of approximately $0.2 million. A 100-basis point decline in market interest rates below the minimum threshold would have no effect on our annual interest expense on the Term Loan.

Our Credit Facility has variable interest rates that are tied to market indices. As of ~~May~~August 43, 2019, we had $2623.23 million of direct borrowings and $6.3 million of letters of credit outstanding under our Credit Facility. As of ~~May~~August 43, 2019, borrowings under the Credit Facility would have resulted in interest at a rate between 3.9472% and 6.00% per annum. Interest on any future borrowings under the Credit Facility would, to the extent of outstanding borrowings, be affected by changes in market interest rates. A change in market interest rates on the variable rate portion of our indebtedness would impact the interest expense incurred and cash flows.

The sensitivity analysis as it relates to the fixed rate portion of our indebtedness assumes an instantaneous 100 basis point move in interest rates from their levels as of ~~May~~August 43, 2019, with all other variables held constant. A 100-basis point increase in market interest rates would result in a decrease in the value of the debt by approximately $~~25,000~~31 thousand as of ~~May~~August 43, 2019. A 100-basis point decline in market interest rates would cause the debt value to increase by approximately $~~25,000~~31 thousand as of ~~May~~August 43, 2019.

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Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of ~~May~~August 43, 2019. Based on this evaluation, our Chief Executive Officer and Chief ~~Financial~~Accounting Officer have concluded that as of ~~May~~August 43, 2019, these controls and procedures were effective.

Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the fiscal quarter ended ~~May~~August 43, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

Based on the Company’s current operating plan, the Company is facing significant liquidity constraints. If we do not meet our payment obligations to third parties as they become due, we may be subject to litigation claims. From time to time, we are named as a defendant in legal actions arising from our normal business activities. Litigation is inherently unpredictable, and although the amount of any liability that could arise with respect to currently pending actions cannot be accurately predicted, we do not believe that the resolution of any pending action will have a material adverse effect on our financial position, results of operations or liquidity.

Item 1A.

Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed below and in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. The risks described below and in our Annual report on Form 10-K are not the only risks that we face. Additional risks not presently known to us or that we do not currently consider significant may also have an adverse effect on us. If any of the risks actually occur, our business, results of operations, cash flows or financial condition could be adversely impacted.

We have engaged financial advisors to explore financial and strategic alternatives, which could include a sale of the company and/or certain of its assets and/or bankruptcy.

We have engaged financial advisors to identify and evaluate possible financial and strategic alternatives and their implications for the Company. We are in ongoing discussions with our lenders and have begun preliminary discussions with third parties regarding such possible alternatives. No assurances can be given that any discussions or efforts will successfully result in any such transaction or guarantee any such transaction’s terms or timing. We may have to file for bankruptcy, including to consummate any strategic transaction that we may pursue. If we file for bankruptcy, it may cause disruption in supply from critical vendors required to continue operations, negatively impact sales and collections from customers, and negatively impact employee relations. Bankruptcy could also result in a significant decrease or total loss in value for all stakeholders.

The Company may not fully realize the projected cost savings and benefits from its cost reduction initiative.

The Company has implemented a number of cost reduction strategies, including adopting a plan to close approximately 50 retail stores. Although the Company expects the cost reduction initiatives plan to result in cost savings aimed at increasing profitability, operating leverage and free cash flow in the long term, there can be no assurance that these benefits will be realized. If the Company does not achieve projected savings as a result of these initiatives or incurs higher than expected or unanticipated costs in implementing these initiatives, its business, financial condition or results of operations could be adversely impacted.

Costs to close underperforming stores may be significant and may negatively impact our cash flows and our results of operations.

On September 16, 2019, we adopted a plan to close approximately 50 underperforming stores in order to reduce costs and better position the Company for operational profitability. All of our stores are leased, with original lease terms continuing for up to 10 years, and we can have significant annual rent and other amounts due under a lease. In closing underperforming stores, we are negotiating with landlords to mitigate the amount of remaining lease obligations. There is no assurance we will reach acceptable negotiated lease settlements. In connection with the store closures, the Company expects to incur significant exit costs that are expected to be recorded in the third and fourth quarters of fiscal 2019. The Company’s estimates of exit costs in connection with the store closures do not include any claims or demands which may be made by the landlords of the closed stores for unpaid rent or otherwise, and the actual charges may vary materially based on other factors, some of which may be beyond the Company’s control. While our goal in closing certain stores is to increase the productivity of our store portfolio in the long term, reductions in our overall number of stores will directly impact sales.

If we fail to comply with the covenants and other obligations under our Term Loan Agreement or Credit Facility, our lenders may be able to accelerate amounts owed and may foreclose upon the assets securing our obligations.

In February 2018, we entered into the Term Loan Agreement, pursuant to which we borrowed $25.0 million, and the revolving Credit Facility, pursuant to which, as of August 3, 2019, we have $23.3 million in outstanding borrowings. Under the Term Loan Agreement and the Credit Facility, we are subject to a variety of affirmative and negative covenants, including a requirement that the Company maintain Excess Availability of more than the greater of 10% of the Combined Loan Caps and $7 million. To secure our performance of our obligations under our Term Loan Agreement and Credit Facility, we granted a security interest in substantially all

of our assets. Our failure to comply with the terms of the Term Loan Agreement or Credit Facility could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our loan, coupled with prepayment penalties, potential foreclosure on our assets, and other adverse results. In addition, if we do not meet our payment obligations to third parties as they become due, we may be subject to litigation claims and our creditworthiness would be adversely affected. Even if we are successful in defending against these claims, litigation could result in substantial costs and would be a distraction to management and may have other unfavorable results that could further adversely impact our financial condition. The Company is engaged in ongoing discussions with its lenders.

There is substantial doubt about our ability to continue as a going concern.

The Company is facing significant liquidity constraints. Consequently, we may need to significantly reduce costs, engage in a strategic transaction and/or raise additional funds through financings or borrowings in order to continue as a going concern. Failure to reduce sufficient costs, engage in a strategic transaction, or raise additional funds could delay, reduce, or halt our operations. We currently have no committed sources of additional capital funding and there is no assurance that additional funding will be available to us in the future on acceptable terms, or at all. If adequate funding is not available, we may be forced to curtail or cease operations altogether or file for bankruptcy. In such event, our stockholders may lose their entire investment in our company. Our consolidated financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. You should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to shareholders, in the event of liquidation.

Doubts regarding our ability to continue as a going concern could have an adverse impact on our relationships with customers, vendors, suppliers, landlords, employees, and others, which in turn could materially adversely affect our business, results of operations and financial condition.

Doubts regarding our ability to continue as a going concern could result in the further loss of confidence by customers, vendors, suppliers, landlords, employees and others, which in turn could materially adversely affect our business, results of operations and financial condition. Concerns about our financial condition could adversely impact the payment terms we can obtain from some of our vendors and suppliers. Some landlords may refuse to lease sites to us or to renew existing store leases in light of the uncertainty regarding our ability to continue as a going concern. We depend on our ability to retain our key employees at all levels of our business and on our ability to attract new qualified personnel. If we are unable to retain our key employees and we do not succeed in attracting new qualified personnel as a result of the uncertainty regarding our ability to continue as a going concern, our business and results of operations could suffer. Doubts regarding our ability to continue as a going concern may adversely impact our customers’ perceptions of our business and our continued viability, which in turn could further negatively impact our revenues. Further declines in our revenues as a result of these perceptions or otherwise would have a material adverse impact our cash flows, results of operations and financial condition.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by us during the three- month period ~~February~~May 35, 2019 to ~~May~~August 43, ~~2019of~~2019 of our Common Stock that is registered by us pursuant to Section 12 of the Exchange Act:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program (2)		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (2)
February 3 to March 2, 2019		—	$	—		—		—
May 5 to June 1, 2019		459	$	1.25		—		—
March 3 to April 6, 2019		3,022		2.18		—		—
June 2 to July 6, 2019		—		—		—		—
April 7 to May 4, 2019		12,589		2.17		—		—
July 7 to August 3, 2019		—		—		—		—
Total		~~15,611~~459	$	21.1725		—		—

(1)	Represents shares of Common Stock reacquired by us from certain employees to satisfy income tax withholding obligations for such employees in connection with restricted stock awards that vested during the period.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

~~None~~Effective September 16, 2019, the annual base salary of Dave J. Helkey, Chief Financial Officer and Chief Operating Officer, will be $350,000, and he will receive additional specified relocation assistance.

2734

Item 6.

Exhibits

Exhibit No.		Description
3.1		Restated Certificate of Incorporation of the Company (Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, filed on December 15, 2008).
3.2		Bylaws of the Company, effective December 22, 2016 (Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018, filed on April 19, 2018).
31.1	*	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	**	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	**	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	*	XBRL Instance Document
101.SCH	*	XBRL Taxonomy Extension Schema Document
101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document

* filed herewith

** furnished herewith

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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.

	Destination Maternity Corporation
Date: June 12, 2019	By:	/s/ MARLA A. RYAN
Date: September 17, 2019	By:	/s/ LISA GAVALES
		Marla A. Ryan
		Lisa Gavales
		Chief Executive Officer
		Chair of the Office of the Chief Executive Officer
Date: June 12, 2019	By:	/s/ DAVE J. HELKEY
Date: September 17, 2019	By:	/s/ DAVE J. HELKEY
		Dave J. Helkey
		Chief Operating Officer & Chief Financial Officer

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Filing Compare · Destination Maternity Corp