SEC Info - Tilly’s, Inc. - ‘10-K’ for 1/28/23

ASSETS

Current assets:

Cash and cash equivalents

i 73,526

i 42,201

Marketable securities

i 39,753

i 97,027

Receivables

i 9,240

i 6,705

Merchandise inventories

i 62,117

i 65,645

Prepaid expenses and other current assets

i 17,762

i 16,400

Total current assets

i 202,398

i 227,978

Operating lease assets

i 212,845

i 216,508

Property and equipment, net

i 50,635

i 47,530

Deferred tax assets

i 8,497

i 11,446

Other assets

i 1,377

i 1,361

Total assets

i 475,752

i 504,823

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

i 15,956

i 28,144

Accrued expenses

i 15,889

i 19,073

Deferred revenue

i 16,103

i 17,096

Accrued compensation and benefits

i 8,183

i 17,056

Current portion of operating lease liabilities

i 48,864

i 51,504

Current portion of operating lease liabilities, related party

i 2,839

i 2,533

Other liabilities

i 470

i 761

Total current liabilities

i 108,304

i 136,167

Noncurrent portion of operating lease liabilities

i 167,913

i 171,965

Noncurrent portion of operating lease liabilities, related party

i 22,388

i 21,000

Other

i 349

i 978

Total long-term liabilities

i 190,650

i 193,943

Total liabilities

i 298,954

i 330,110

Commitments and contingencies (Note 10)

Stockholders’ equity:

Common stock (Class A), $ i i 0.001 / par value; i i 100,000 / shares authorized; i i 22,562 / and i i 23,719 / shares issued and outstanding, respectively

i 23

i 24

Common stock (Class B), $ i i 0.001 / par value; i i 35,000 / shares authorized; i i 7,306 / and i i 7,306 / shares issued and outstanding, respectively

i 7

Preferred stock, $ i i 0.001 / par value; i i 10,000 / shares authorized, i i i i no / / / shares issued or outstanding

i —

Additional paid-in capital

i 170,033

i 166,929

Retained earnings

i 6,530

i 7,754

Accumulated other comprehensive income (loss)

i 205

( i 1)

Total stockholders’ equity

i 176,798

i 174,713

Total liabilities and stockholders’ equity

i 475,752

i 504,823

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

Tilly’s, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

Fiscal Year Ended

Net sales

i 672,280

i 775,694

i 531,329

Cost of goods sold (includes buying, distribution, and occupancy costs)

i 465,916

i 496,083

i 386,326

Rent expense, related party

i 3,616

i 2,948

i 2,813

Total cost of goods sold (includes buying, distribution, and occupancy costs)

i 469,532

i 499,031

i 389,139

Gross profit

i 202,748

i 276,663

i 142,190

Selling, general and administrative expenses

i 191,028

i 188,527

i 144,701

Rent expense, related party

i 533

i 541

i 529

Total selling, general and administrative expenses

i 191,561

i 189,068

i 145,230

Operating income (loss)

i 11,187

i 87,595

( i 3,040)

Other income (expense), net

i 1,980

( i 594)

i 581

Income (loss) before income taxes

i 13,167

i 87,001

( i 2,459)

Income tax expense (benefit)

i 3,490

i 22,752

( i 1,314)

Net income (loss)

i 9,677

i 64,249

( i 1,145)

Basic earnings (loss) per share of Class A and Class B common stock

i 0.32

i 2.10

( i 0.04)

Diluted earnings (loss) per share of Class A and Class B common stock

i 0.32

i 2.06

( i 0.04)

Weighted average basic shares outstanding

i 30,115

i 30,560

i 29,697

Weighted average diluted shares outstanding

i 30,323

i 31,118

i 29,697

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

Tilly’s, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

Fiscal Years Ended

Net income (loss)

i 9,677

i 64,249

( i 1,145)

Other comprehensive gain (loss), net of tax:

Net change in unrealized gains (losses) on available-for-sale securities

i 206

( i 21)

( i 194)

Other comprehensive gain (loss), net of tax

i 206

( i 21)

( i 194)

Comprehensive income (loss)

i 9,883

i 64,228

( i 1,339)

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

Tilly’s, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

Number of Shares

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholders’
Equity

Common
Stock
(Class A)

Common
Stock
(Class B)

Balance at February 1, 2020

i 22,323

i 7,406

i 30

i 153,377

i 6,280

i 214

i 159,901

Net loss

—

( i 1,145)

—

( i 1,145)

Class B common stock converted to Class A common stock

i 100

( i 100)

—

Share-based compensation expense

—

i 2,036

—

i 2,036

Restricted stock

i 51

—

Exercise of stock options

i 3

—

i 24

—

i 24

Net change in unrealized losses on available-for-sale securities

—

( i 194)

Balance at January 30, 2021

i 22,477

i 7,306

i 30

i 155,437

i 5,135

i 20

i 160,622

Net income

—

i 64,249

—

i 64,249

Dividends paid ($ i 2.00 per share)

—

( i 61,630)

—

( i 61,630)

Share-based compensation expense

—

i 1,920

—

i 1,920

Restricted stock

i 20

—

Exercise of stock options

i 1,222

—

i 1

i 9,572

—

i 9,573

Net change in unrealized losses on available-for-sale securities

—

( i 21)

Balance at January 29, 2022

i 23,719

i 7,306

i 31

i 166,929

i 7,754

( i 1)

i 174,713

Net income

—

i 9,677

—

i 9,677

Share-based compensation expense

—

i 2,267

—

i 2,267

Restricted stock

i 63

—

Exercise of stock options

i 38

—

i —

i 176

—

i 176

Short swing profit settlement

—

i 661

—

i 661

Repurchase of common stock

( i 1,258)

—

( i 1)

—

( i 10,901)

—

( i 10,902)

Net change in unrealized gains on available-for-sale securities

—

i 206

Balance at January 28, 2023

i 22,562

i 7,306

i 30

i 170,033

i 6,530

i 205

i 176,798

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

Tilly’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

Fiscal Year Ended

Cash flows from operating activities

Net income (loss)

i 9,677

i 64,249

( i 1,145)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Depreciation and amortization

i 14,134

i 16,836

i 19,055

Insurance proceeds from casualty loss

i 23

i 117

i —

Share-based compensation expense

i 2,267

i 1,920

i 2,036

Impairment of assets

i 17

i 136

i 955

Loss on disposal of assets

i 92

i 74

i 87

Gain on sales and maturities of marketable securities

( i 466)

( i 132)

( i 714)

Deferred income taxes

i 2,949

i 503

( i 4,949)

Changes in operating assets and liabilities:

Receivables

i 1,710

i 4,023

i 96

Merchandise inventories

i 3,505

( i 10,064)

i 1,203

Prepaid expenses and other assets

( i 1,487)

( i 10,275)

( i 1,722)

Accounts payable

( i 12,194)

i 3,168

i 5,020

Accrued expenses

( i 5,396)

( i 10,194)

i 10,600

Accrued compensation and benefits

( i 8,873)

i 7,157

i 2,709

Operating lease liabilities

( i 5,231)

( i 7,008)

i 3,141

Deferred revenue

( i 993)

i 3,604

i 1,731

Other liabilities

( i 1,149)

( i 712)

i 794

Net cash (used in) provided by operating activities

( i 1,415)

i 63,402

i 38,897

Cash flows from investing activities

Proceeds from maturities of marketable securities

i 147,271

i 130,352

i 86,170

Purchases of marketable securities

( i 89,349)

( i 162,321)

( i 80,896)

Purchases of property and equipment

( i 15,123)

( i 13,425)

( i 8,471)

Proceeds from sale of property and equipment

i 6

i 37

i —

Insurance proceeds from casualty loss

i —

i 29

i —

Net cash provided by (used in) investing activities

i 42,805

( i 45,328)

( i 3,197)

Cash flows from financing activities

Share repurchases

( i 10,902)

i —

Short swing profit settlement

i 661

i —

Proceeds from line of credit

i —

i 23,675

Repayment of line of credit

i —

( i 23,675)

Dividends paid

i —

( i 61,630)

( i 29,677)

Proceeds from exercise of stock options

i 176

i 9,573

i 24

Net cash used in financing activities

( i 10,065)

( i 52,057)

( i 29,653)

Change in cash and cash equivalents

i 31,325

( i 33,983)

i 6,047

Cash and cash equivalents, beginning of period

i 42,201

i 76,184

i 70,137

Cash and cash equivalents, end of period

i 73,526

i 42,201

i 76,184

Supplemental disclosures of cash flow information

Interest paid

i —

i 1

i 140

Income taxes paid

i 1,467

i 38,504

i 1,034

Supplemental disclosure of non-cash activities

Unpaid purchases of property and equipment

i 3,298

i 1,080

i 2,503

Operating lease liabilities arising from obtaining operating lease assets

i 46,092

i 22,641

i 14,290

Operating lease liabilities arising from obtaining operating lease assets, related party

i 4,386

i 11,980

i —

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

Tilly’s, Inc.

Notes to the Consolidated Financial Statements

Note 1: i Description of the Company and Basis of Presentation

Tillys is a leading destination specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls with an extensive selection of iconic global, emerging, and proprietary brands rooted in an active, outdoor and social lifestyle. Tillys is headquartered in Irvine, California and we operated i 249 stores in i 33 states as of January 28, 2023. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.

The Tillys concept began in 1982 when our co-founders, Hezy Shaked and Tilly Levine, opened their first store in Orange County, California. Since 1984, the business has been conducted through World of Jeans & Tops, a California corporation, or “WOJT”, which operates under the name “Tillys”. In May 2011, Tilly’s, Inc., a Delaware corporation, was formed solely for the purpose of reorganizing the corporate structure of WOJT in preparation for an initial public offering. As part of the initial public offering in May 2012, WOJT became a wholly owned subsidiary of Tilly's, Inc.

The consolidated financial statements include the accounts of Tilly's Inc. and WOJT. All intercompany accounts and transactions have been eliminated in consolidation.

As used in these Notes to the Consolidated Financial Statements, except where the context otherwise requires or where otherwise indicated, the terms "the Company", "we", "our", "us" and "Tillys" refer to Tilly's, Inc. and its subsidiary, WOJT.

Fiscal Year

Our fiscal year ends on the Saturday closest to January 31. Fiscal years 2022, 2021 and 2020 ended on January 28, 2023, January 29, 2022 and January 30, 2021, respectively. Fiscal years 2022, 2021 and 2020 each included 52 weeks.

Segment Reporting

Accounting principles generally accepted in the United States (“GAAP”) has established guidance for reporting information about our operating segments, including disclosures related to our products and services, geographic areas and major customers. We identify our operating segments based on how our business is managed and evaluated. Our operating segments have been aggregated into i one reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers and economic characteristics. All of our identifiable assets are in the United States.

Note 2: i Summary of Significant Accounting Policies

Cash and Cash Equivalents

We consider all short-term investments with an initial maturity of i 90 days or less when purchased to be cash equivalents.

/ i

Marketable Securities

Marketable debt securities are classified as available-for-sale or held-to-maturity and are carried at fair value or amortized cost plus accrued income, respectively. Unrealized holding gains and losses, net of income taxes, on available-for-sale debt securities are reflected as a separate component of stockholders’ equity until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis. We classify all marketable securities within current assets on our accompanying Consolidated Balance Sheets.

Merchandise Inventories

Merchandise inventories are comprised of finished goods offered for sale at our retail stores and online. Inventories are stated at the lower of cost or net realizable value using the retail inventory method. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. We believe that the retail inventory method approximates cost. Shipping and handling costs for merchandise shipped to customers of $ i 19.5 million, $ i 20.0 million and $ i 20.6 million in fiscal years 2022, 2021 and 2020, respectively, are included in cost of goods sold in the accompanying Consolidated Statements of Operations.

We review our inventory levels to identify slow-moving merchandise and generally use markdowns to clear this merchandise. At any given time, merchandise inventories include items that have been marked down to management’s best estimate of their fair market value at retail price, with a proportionate write-down to the cost of the inventory. Our management bases the decision to mark down merchandise primarily upon its current sell-through rate and the age of the item, among other factors. These markdowns may have an adverse impact on earnings, depending on the extent and amount of inventory affected. Markdowns are recorded as an increase to cost of goods sold in the accompanying Consolidated Statements of Operations. Total markdowns, including permanent and promotional markdowns, on a cost basis were $ i 58.7 million, $ i 52.5 million, and

$ i 46.5 million in fiscal years 2022, 2021, and 2020, respectively. As of the end of fiscal 2022 and 2021, total accrued markdowns on the balance sheet were $ i 2.3 million and $ i 1.4 million, respectively.

We also record an inventory shrinkage reserve calculated as a percentage of net sales for estimated merchandise losses for the period between the last physical inventory count and the balance sheet date. These estimates are based on historical percentages and can be affected by changes in merchandise mix and changes in shrinkage trends. We perform physical inventory counts at least once per year for the entire chain of stores and our distribution and fulfillment centers, and adjust the inventory shrinkage reserve accordingly. If actual physical inventory losses differ significantly from the estimate, our results of operations could be adversely impacted. The inventory shrinkage reserve reduces the value of total inventory and is a component of inventories on the Consolidated Balance Sheets. The inventory shrinkage reserve at January 28, 2023 and January 29, 2022 was not material.

Property and Equipment, net

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Equipment is depreciated over five to i seven years. Furniture and fixtures are depreciated over i five years. Computer software is depreciated over i three years. Leasehold improvements and the cost of acquiring leasehold rights are amortized over the lesser of the term of the lease or the estimated useful life of the improvement. The cost of assets sold or retired and the related accumulated depreciation is removed from the accounts with any resulting gain or loss included in net (loss) income in the accompanying Consolidated Statements of Operations.

Repairs and maintenance costs are charged directly to expense as incurred. Major renewals, replacements and improvements that substantially extend the useful life of an asset are capitalized and depreciated.

i Impairment of Long-Lived Assets

Impairments are recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amounts may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in business strategies. An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates the weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, and operating lease assets, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance. Refer to "Note 11: Fair Value Measurements", for further information.

Operating Leases

We conduct all of our retail sales and corporate operations in leased facilities. Lease terms for our stores are generally i ten years in duration (subject to extensions) and provide for escalations in base rents periodically. Many of our store leases contain one or more options to renew the lease at our sole discretion. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised.

Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. Certain leases provide for additional rent based on a percentage of sales and annual rent increases generally based upon the Consumer Price Index. In addition, most of our store leases are net leases, which typically require us to be responsible for certain property operating expenses, including property taxes, insurance, common area maintenance, in addition to base rent. Many of our store leases contain certain co-tenancy provisions that permit us to pay rent based on a pre-determined percentage of sales when the occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.

Refer to "Note 9: Leases" for further information.

Revenue Recognition

Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns and taxes collected from our customers. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Amounts related to

shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the accompanying Consolidated Statements of Operations. For fiscal years 2022, 2021 and 2020, shipping and handling fee revenue included in net sales was $ i 4.0 million, $ i 5.8 million, and $ i 5.4 million, respectively.

We accrue for estimated sales returns by customers based on historical sales return results. As of January 28, 2023 and January 29, 2022, our reserve for sales returns was $ i 1.6 million and $ i 1.9 million, respectively.

We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. The customer liability balance was $ i 11.1 million as of January 28, 2023 and $ i 11.2 million as of January 29, 2022, and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Revenue recognized from gift cards was $ i 16.7 million, $ i 17.2 million and $ i 14.7 million for fiscal years 2022, 2021, and 2020, respectively. For fiscal years 2022, 2021, and 2020, the opening gift card balances were $ i 11.2 million, $ i 9.6 million, and $ i 9.3 million, respectively, of which $ i 6.1 million, $ i 5.3 million, and $ i 5.0 million, respectively, were recognized as revenue during the period.

The following table summarizes net sales from our retail stores and e-commerce (in thousands):

Fiscal Year Ended

Retail stores

i 531,150

i 609,744

i 357,896

E-commerce

i 141,130

i 165,950

i 173,433

Total net sales

i 672,280

i 775,694

i 531,329

The following table summarizes the percent of net sales by department:

Fiscal Year Ended

Mens

i 37

i 36

Womens

i 26

i 27

Accessories

i 16

i 15

Footwear

i 12

i 11

i 12

Boys

i 4

i 5

Girls

i 4

Outdoor

i 1

Total net sales

i 100

The following table summarizes the percent of net sales by third-party and proprietary branded merchandise:

Fiscal Year Ended

Third-party

i 68

i 70

i 74

Proprietary

i 32

i 30

i 26

Total net sales

i 100

Loyalty Program

We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns an award that may be used towards the purchase of merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. Our loyalty program allows customers to redeem their awards instantly or build up to additional awards over time. During the first quarter of fiscal 2022, we modified our expiration policy related to unredeemed awards and accumulated partial points from expiration at 365 days after the customer's last purchase activity to expiration at 365 days after the customer's original purchase date. As a result of this modification in expiration policy, the estimated liability

was reduced by $0.5 million during the first quarter of fiscal 2022. A liability is estimated based on the standalone selling price of points earned and expected future redemptions. The deferred revenue for this program was $ i 5.0 million as of January 28, 2023 and $ i 5.9 million as of January 29, 2022. The value of points redeemed through our loyalty program was $ i 8.8 million, $ i 10.5 million and $ i 6.5 million during fiscal years 2022, 2021, and 2020, respectively. For fiscal years 2022, 2021 and 2020, the opening loyalty program balances were $ i 5.9 million, $ i 3.9 million, and $ i 2.4 million, respectively, of which $ i 5.9 million, $ i 3.5 million, and $ i 1.8 million, respectively, were recognized as revenue during the period.

Cost of Goods Sold

Cost of goods sold includes product costs and buying, distribution and occupancy costs as follows:

•Costs of products sold include:

•freight expenses associated with merchandise received from our vendors into our distribution centers;

•vendor allowances;

•cash discounts on payments to merchandise vendors;

•physical inventory losses; and

•markdowns of inventory.

•Buying, distribution and occupancy costs include:

•payroll, benefit costs, and incentive compensation for merchandising personnel;

•temporary employment services

•customer shipping and handling expenses;

•costs associated with operating our distribution and fulfillment centers, including payroll and benefit costs for our distribution center, occupancy costs, and depreciation;

•freight expenses associated with shipping merchandise inventories to or from our distribution and e-com fulfillment centers and to our e-commerce customers and between store locations, and;

•store occupancy costs, including rent, maintenance, utilities, property taxes, business licenses, security costs and depreciation.

Selling, General and Administrative Expenses

•Payroll, benefit costs and incentive compensation for store, regional, e-commerce and corporate employees;

•Occupancy and maintenance costs of corporate office facilities;

•Depreciation related to corporate office assets;

•Advertising and marketing costs, net of reimbursement from vendors;

•Tender costs, including costs associated with credit and debit card interchange fees;

•Long-lived asset impairment charges;

•Legal provisions;

•Other administrative costs such as supplies, consulting, audit and tax preparation fees, travel and lodging; and

•Charitable contributions.

Store Pre-opening Costs

Store pre-opening costs consist primarily of occupancy costs, which are included in cost of goods sold, and payroll expenses, which are included in selling, general and administrative expenses, in the accompanying Consolidated Statements of Operations.

Advertising

We expense advertising costs as incurred, except for direct-mail advertising expenses which are recognized at the time of mailing. Advertising costs include such things as production and distribution of print and digital catalogs; print, online and mobile advertising costs; radio advertisements; and grand openings and other events. Advertising expense, which is classified in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations, was $ i 23.2 million, $ i 24.5 million and $ i 20.5 million in fiscal years 2022, 2021 and 2020, respectively.

i Share-Based Compensation

We apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation (“ASC 718”), for accounting for equity instruments exchanged for employee services. Under the provisions of this standard, share-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of award and related share-based compensation expense. Refer to “Note 12: Share-Based Compensation”, for further information.

Common Stock Share Repurchases

We may repurchase shares of our common stock from time to time pursuant to authorizations approved by our Board of Directors. As permitted under Delaware corporation law, shares repurchased are retired, and accordingly, are not presented separately as treasury stock in the consolidated financial statements. Instead, the value of repurchased shares is deducted from retained earnings.

Income Taxes

We accrue income taxes payable or refundable and recognize deferred tax assets and liabilities based on differences between GAAP and tax bases of assets and liabilities. We measure deferred tax assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse, and recognize the effect of a change in enacted rates in the period of enactment.

i Earnings per Share

Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to restricted stock and outstanding options to purchase common stock. Refer to “Note 15: Earnings (Loss) Per Share”, for further information.

i Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and short-term investments. At January 28, 2023 and January 29, 2022, and at various times throughout these years, we had cash in financial institutions in excess of the $ i i 250,000 / amount insured by the Federal Deposit Insurance Corporation. We typically invest our cash in highly rated, short-term commercial paper, interest-bearing money market funds, municipal bonds and certificates of deposit.

i Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Reclassification of Prior Year Presentation

Certain reclassifications have been made between selling, general and administrative expenses and rent expense, related party to conform to the current year presentation. The reclassifications did not impact previously reported gross profit, total selling, general and administrative expenses or net income.

New Accounting Standards Not Yet Adopted

In November 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses which amends ("ASU") No. 2016-13 Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), and modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2019-11 will become effective for us in the first quarter of fiscal 2023, with early adoption permitted and must be adopted using the modified retrospective method. We expect the new rules to apply to our fixed income securities recorded at amortized cost and classified as held-to-maturity and our trade receivables. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures.

Note 3: i Marketable Securities

Marketable securities as of January 28, 2023 consisted of commercial paper, classified as available-for-sale, and fixed income securities, classified as held-to-maturity, as we have the intent and ability to hold them to maturity. Our investments in

commercial paper and fixed income securities are recorded at fair value and amortized cost, respectively, which approximates fair value. All of our marketable securities are less than one year from maturity.

The following table summarizes investments in marketable securities at January 28, 2023 and January 29, 2022 (in thousands):

January 28, 2023

Cost or
Amortized Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Estimated Fair Value

Commercial paper

i 29,570

i 180

i —

i 29,750

Fixed income securities

i 10,003

i —

i 10,003

Total marketable securities

i 39,573

i 180

i —

i 39,753

January 29, 2022

Cost or
Amortized Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Estimated Fair Value

Commercial paper

i 64,235

i 9

( i 11)

i 64,233

Fixed income securities

i 32,794

i —

i 32,794

Total marketable securities

i 97,029

i 9

( i 11)

i 97,027

For fiscal years 2022, 2021 and 2020, we recognized gains on investments for commercial paper of $ i 0.4 million, $ i 0.1 million and $ i 0.6 million, respectively, which matured during the period. In determining those gains, we used the actual cost of the securities sold. Upon recognition of the gains, we reclassified these amounts out of accumulated other comprehensive income (loss) and into other income (expense), net, on the accompanying Consolidated Statements of Operations.

Note 4: i Receivables

At January 28, 2023 and January 29, 2022, receivables consisted of the following (in thousands):


	January 28, 2023		January 29, 2022
Tenant allowances due from landlords	$	i 4,667	$	i 2,692
Credit and debit card receivables	i 2,555		i 1,367

CARES Act employee retention credit	i 74		i 1,313
Other	i 1,944		i 1,333

Total receivables	$	i 9,240	$	i 6,705

We establish a receivable for amounts we expect to collect. We make estimates for the allowance for doubtful accounts against receivables for any potential uncollectible amounts.

For fiscal years 2022 and 2021, the allowance is zero.

Note 5: i Prepaid Expenses and Other Current Assets

At January 28, 2023 and January 29, 2022, prepaid expenses and other current assets consisted of the following (in thousands):


	January 28, 2023		January 29, 2022
Prepaid income taxes	$	i 10,589	$	i 9,756
Prepaid insurance	i 2,288		i 2,585
Prepaid maintenance	i 2,223		i 1,896
Prepaid rent	i 2,023		i 1,406
Other	i 639		i 757
Total prepaid expenses and other current assets	$	i 17,762	$	i 16,400

Note 6: i Property and Equipment

At January 28, 2023 and January 29, 2022, property and equipment consisted of the following (in thousands):


	January 28, 2023		January 29, 2022
Leasehold improvements	$	i 158,511	$	i 150,239
Furniture and fixtures	i 47,571		i 46,397
Computer hardware and software	i 42,903		i 41,414
Machinery and equipment	i 34,263		i 33,550
Vehicles	i 2,190		i 2,187
Construction in progress	i 6,214		i 3,615
Property and equipment, gross	i 291,652		i 277,402
Accumulated depreciation	( i 241,017)		( i 229,872)
Property and equipment, net	$	i 50,635	$	i 47,530

Depreciation expense related to property and equipment was $ i 14.1 million, $ i 16.8 million and $ i 19.1 million in fiscal years 2022, 2021 and 2020, respectively.

Impairments are recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amounts may not be recoverable. We recorded non-cash impairment charges of less than $ i 0.1 million, $ i 0.1 million and $ i 1.0 million in selling, general and administrative expenses in fiscal years 2022, 2021 and 2020, respectively, to write down the carrying value of long-lived assets to their estimated fair values. Refer to "Note 11: Fair Value Measurements", for further information. If we are not able to achieve our projected key financial metrics, we may incur additional impairment in the future for long-lived assets.

Note 7: i Accrued Expenses

At January 28, 2023 and January 29, 2022, accrued expenses consisted of the following (in thousands):


	January 28, 2023		January 29, 2022
Accrued construction	$	i 3,293	$	i 1,080
Sales and use taxes payable	i 2,219		i 2,650
Merchandise returns	i 1,643		i 1,852
Accrued freight	i 1,091		i 3,924

Other	i 7,643		i 9,567
Total accrued expenses	$	i 15,889	$	i 19,073

Note 8: i Credit Agreement

New Credit Agreement

On January 20, 2022, we entered into a senior secured credit agreement (the "Credit Agreement") and revolving line of credit note (the "Note") with Wells Fargo Bank, National Association (the “Bank”). The Credit Agreement provides for a senior secured revolving credit facility (“Revolving Facility”) of up to $ i 25.0 million (“Revolving Commitment”) consisting of revolving loans, letters of credit and swing line loans, with a sub-limit on letters of credit outstanding at any time of $ i 15.0 million. The Revolving Facility matures on January 20, 2024. The payment and performance in full of the secured obligations under the Revolving Facility are secured by a lien on and security interest in all of the assets of our company.

Borrowings under the Revolving Facility bear interest at a rate per annum equal to the daily simple Secured Overnight Financing Rate ("SOFR") plus i 0.75%. Amounts available to be drawn under outstanding letters of credit accrue fees in an amount equal to i 1.00% per annum. The unused portion of the Revolving Commitment is not subject to a commitment fee.

repurchases of the equity interests of the Company only if the Company’s cash on hand, net of any amounts outstanding under the Credit Agreement, is less than $ i 50.0 million after giving effect to such dividends, distributions, redemptions or repurchases).

In connection with the entry into the Credit Agreement, on January 20, 2022, we entered into certain ancillary agreements, including (i) a security agreement in favor of the Bank (ii) the Guaranty entered into by the Company, and (iii) a third party pledge agreement entered into by the Company in favor of the Bank. The security agreement, the guaranty and the pledge agreement replaced (i) the guaranty by the Company in favor of the Bank, dated November 9, 2020, and (ii) the security agreement dated as of November 9, 2020, between the Company and the Bank, which were both terminated concurrently with the termination of the Prior Credit Agreement (as defined below).

As of January 28, 2023, we were in compliance with all of our covenants and had i no outstanding borrowings under the Credit Agreement.

Prior Credit Agreement

The Credit Agreement replaced our previously existing asset-backed credit agreement (the “Prior Credit Agreement”), dated as of November 9, 2020, as amended, with the Bank, which had revolving commitments of up to $ i 65.0 million, a sub-limit on letters of credit of $ i 10.0 million and a sub-limit for swing-line loans of $ i 7.5 million.

The Prior Credit Agreement was terminated concurrently with the entry into the Credit Agreement. The maximum borrowings permitted under the Prior Credit Agreement was equal to the lesser of (x) the revolving commitment and (y) the borrowing base. The borrowing base was equal to (a) i 90% of the borrower's eligible credit card receivables, plus (b) i 90% of the cost of the borrower's eligible inventory, less inventory reserves established by the agent, and adjusted by the appraised value of such eligible inventory, plus (c) i 90% of the cost of the borrower's eligible in-transit inventory, less inventory reserves established by the agent, and adjusted by the appraised value of such eligible in-transit inventory (not to exceed i 10% of the total amount of all eligible inventory included in the borrowing base) less (d) reserves established by the agent. As of the date the Prior Credit Agreement was terminated, we had no outstanding borrowings under the Credit Agreement, and the only utilization of the letters of credit sub-limit under the Credit Agreement was a $ i 2.025 million irrevocable standby letter of credit, which was previously issued under the Prior Credit Agreement and was transferred on such date to the Credit Agreement.

The unused portion of the revolving commitment under the Prior Credit Agreement accrued a commitment fee, which ranged from i 0.375% to i 0.50% per annum, based on the average daily borrowing capacity under the revolving facility over the applicable fiscal quarter. Borrowings under the Prior Credit Agreement bear interest at a rate per annum that ranged from the LIBOR rate plus i 2.0% to the LIBOR rate plus i 2.25%, or the base rate plus i 1.0% to the base rate plus i 1.25%, based on the average daily borrowing capacity under the Prior Credit Agreement over the applicable fiscal quarter. We were allowed to elect to apply either the LIBOR rate or base rate interest to borrowings at our discretion, other than in the case of swing line loans, to which the base rate shall apply.

Under the Prior Credit Agreement, we were subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to availability, and customary events of default. Prior to the first anniversary of the closing date, we were prohibited from declaring or paying any cash dividends to our respective stockholders or repurchasing of our own common stock. After the first anniversary of the closing date, we were allowed to declare and pay cash dividends to our respective stockholders and repurchase our own common stock, provided, among other things, no default or event of default exists as of the date of any such payment and after giving effect thereto, certain minimum availability and minimum projected availability tests are satisfied.

Note 9: i Leases

We conduct all of our retail sales and corporate operations in leased facilities. Lease terms generally range up to i ten years in duration (subject to elective extensions) and provide for escalations in base rents. Many of our store leases contain one or more options to renew the lease at our sole discretion. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised.

occupancy of the retail center falls below minimums established in the lease. For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense on a straight-line basis. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable.

Operating leases

We lease office and warehouse space (10 and 12 Whatney, Irvine, California) from a company that is owned by the co-founders of Tillys. The lease expires on December 31, 2027. We incurred rent expense of $ i 2.1 million, in each of the fiscal years 2022, 2021 and 2020, related to this lease.

We lease office and warehouse space (11 Whatney, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We incurred rent expense of $ i 0.5 million, $ i 0.4 million, and $ i 0.4 million in fiscal years 2022, 2021 and 2020, respectively, related to this lease. The lease deposits were $ i 0.2 million and less than $ i 0.1 million, as of January 28, 2023 and January 29, 2022, respectively, as a component of other assets on the Consolidated Balance Sheets. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed i 7%, but a minimum of i 3%, in any one annual increase. The lease began on June 29, 2012 and was set to terminate on June 30, 2022. During June 2022, this lease was amended to, among other things, extend the term for an additional i 10-year term and adjust the annual payment increases. Pursuant to the amended lease agreement, the lease payments adjust annually based upon the greater of i 5% or the Consumer Price Index, and the lease now terminates on June 30, 2032.

We lease a building (17 Pasteur, Irvine, California) from a company that is owned by one of the co-founders of Tillys. We use this property as our e-commerce fulfillment center. We incurred rent expense of $ i 1.5 million, $ i 1.0 million and $ i 0.9 million in fiscal years 2022, 2021 and 2020, respectively, related to this lease. The lease deposits were $ i 0.7 million and $ i 0.4 million, as of January 28, 2023 and January 29, 2022, respectively, as a component of other assets on the Consolidated Balance Sheets. Pursuant to the lease agreement, the lease payment adjusts annually based upon the Los Angeles/Anaheim/Riverside Urban Consumer Price Index, not to exceed i 7%, but a minimum of i 3%, in any one annual increase. The lease began on November 1, 2011 with a i 10-year term and ended on i October 31, 2021. During October 2021, this lease was amended to extend the term for an additional period of i 10 years and now terminates on October 31, 2031. Pursuant to the amended lease agreement, the lease payment adjusts annually based upon the greater of i 5% or the Consumer Price Index.

We sublease a portion of our office space, approximately i 5,887 square feet, in the 17 Pasteur Irvine, California facility to Tilly's Life Center, ("TLC"), a related party and a charitable organization. The lease term is for i five years and terminates on January 31, 2027. Sublease income is recognized on a straight-line basis over the sublease agreement and is recorded as an offset within the selling, general and administrative section in the Consolidated Statements of Operations.

The maturity of operating lease liabilities as of January 28, 2023 were as follows (in thousands):

Fiscal Year

Related
Party

Other

Total

Sublease Income

2023

i 3,932

i 61,445

i 65,377

i 90

2024

i 4,085

i 51,625

i 55,710

i 95

2025

i 4,244

i 42,078

i 46,322

i 99

2026

i 4,411

i 30,787

i 35,198

i 104

2027

i 4,167

i 23,515

i 27,682

i —

Thereafter

i 9,324

i 50,172

i 59,496

i —

Total minimum lease payments

i 30,163

i 259,622

i 289,785

i 388

Less: Amount representing interest

i 4,936

i 42,845

i 47,781

—

Present value of operating lease liabilities

i 25,227

i 216,777

i 242,004

i 388

As of January 28, 2023, additional operating lease contracts that have not yet commenced are approximately $1.3 million. Further, additional operating lease contracts and modifications executed subsequent to the balance sheet date, but prior to the report date, are approximately $ i 9.4 million.

Lease expense for fiscal years 2022, 2021 and 2020 was as follows (in thousands):

Fiscal Year Ended

January 28, 2023

January 29, 2022

January 30, 2021

COGS

SG&A

Total

COGS

SG&A

Total

COGS

SG&A

Total

Fixed operating lease expense

i 63,252

i 1,317

i 64,569

i 60,718

i 1,285

i 62,003

i 60,840

i 1,249

i 62,089

Variable lease expense

i 16,605

i 44

i 16,649

i 18,078

i 28

i 18,106

i 16,301

i 1

i 16,302

Total lease expense

i 79,857

i 1,361

i 81,218

i 78,796

i 1,313

i 80,109

i 77,141

i 1,250

i 78,391

For the fiscal years ended January 29, 2022, and January 30, 2021 we corrected an immaterial error of $ i 375 thousand and $ i 374 thousand, respectively, which consisted solely of a reclassification of fixed operating lease expense from SG&A to cost of goods sold, in the table above.

Supplemental lease information for the year ended January 28, 2023, January 29, 2022 and January 30, 2021 was as follows:

Fiscal Year Ended

Cash paid for amounts included in the measurement of operating lease liabilities (in thousands)

69,839

i 69,210

i 64,326

Weighted average remaining lease term (in years)

i 5.71 years

i 5.65 years

i 5.66 years

Weighted average interest rate (1)

i 6.33

i 6.13

i 6.52

(1) Since our leases do not provide an implicit rate, we used our incremental borrowing rate ("IBR") on date of adoption, at lease inception, or lease modification, in determining the present value of future minimum payments.

Note 10: i Commitments and Contingencies

Indemnifications, Commitments, and Guarantees

During the normal course of business, we have made certain indemnifications, commitments, and guarantees under which we may be required to make payments for certain transactions. These indemnifications include, but are not limited to, those given to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnifications to our directors and officers to the maximum extent permitted under the laws of the state of Delaware. The majority of these indemnifications, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make, and their duration may be indefinite. We have not recorded any liability for these indemnifications, commitments, and guarantees in the accompanying Consolidated Balance Sheets.

Purchase Obligations

At January 28, 2023, our future minimum payments under agreements to purchase services primarily for software maintenance aggregated to $ i 2.9 million, payable as follows: $ i 2.1 million in fiscal 2023, $ i 0.5 million in fiscal 2024, $ i 0.2 million in fiscal 2025, and $ i 0.1 million in fiscal 2026.

Legal Proceedings

From time to time, we may become involved in lawsuits and other claims arising from our ordinary course of business. We establish loss provisions for matters in which losses are probable and can be reasonably estimated. For some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of the uncertainties related to the occurrence, amount and range of loss on any pending litigation or claim. Because of the unpredictable nature of these matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or that the ultimate outcome of any of the matters threatened or pending against us, including those disclosed below, will not have a material adverse effect on our financial condition, results of operations or cash flows.

Juan Carlos Gonzales, on behalf of himself and all others similarly situated, v. Tilly’s Inc. et al, Superior Court of California, County of Orange, Case No. 30-2017-00948710-CU-OE-CXC. In October 2017, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest and attorneys’ fees and costs. In December 2017, we filed an answer to the complaint, denying all of the claims and asserting various defenses. In April 2018, the plaintiff filed a separate action under the Private Attorneys General Act ("PAGA") against us seeking penalties on behalf of himself and other allegedly aggrieved employees for the same alleged violations of California's wage and hour laws. We requested the plaintiff to dismiss the class

action claims based on an existing class action waiver in an arbitration agreement which plaintiff signed with our co-defendant, BaronHR, the staffing company that employed plaintiff to work at the Company. In June 2018, the plaintiff's class action complaint was dismissed. The parties mediated the PAGA case with a well-respected mediator in March 2020. The case did not settle during mediation nor during ensuing negotiations. The court has not yet issued a trial date; the next status conference is set for August 2023. By agreement between co-defendant BaronHR and Tilly's, BaronHR is required to indemnify us for all of our losses and expenses incurred in connection with this matter. To reduce our indemnifiable losses and expenses in this matter, we have requested that BaronHR enforce its arbitration agreement in light of recent developments in applicable case law, and move to compel the individual PAGA claim to arbitration and dismiss the representative PAGA claims. We have defended this case vigorously, and will continue to do so. We believe that a loss is currently not probable or estimable under FASB Accounting Standards Codification ("ASC") 450, “Contingencies,” and no accrual has been made with regard to this matter.

Allison B. Johnson, on behalf of herself and others similarly situated, v. World of Jeans & Tops, Inc. dba Tilly’s et al, Superior Court of California, County of Fresno, Case No. 22CECG03658. In November 2022, the plaintiff filed a putative class action against us, alleging various violations of California’s wage and hour laws. The complaint seeks class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In January 2023, we filed an answer to the complaint in which we denied all of the claims and asserted various defenses. In March 2023, plaintiff stipulated to individual arbitration in the putative class action lawsuit as a result of a signed arbitration agreement with us, and agreed to dismiss her class claims. In January 2023, the plaintiff filed a representative action pursuant to PAGA, Allison B. Johnson v. World of Jeans & Tops, Inc. dba Tilly's et al, Superior Court of California, County of Fresno, Case No. 23CECG00266, against us seeking penalties on behalf of herself and other allegedly aggrieved employees for the same alleged violations of California's wage and hour laws as alleged in her class action. The plaintiff served her PAGA complaint in April 2023. We are at the preliminary stages of investigating the allegations made in the complaints and intend to defend these cases vigorously. We believe that a loss is currently not probable or estimable under ASC 450, “Contingencies,” and no accrual has been made with regard to this matter.

Note 11: i Fair Value Measurements

We determine fair value based on a three-level valuation hierarchy as described below. Fair value is defined as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The three-level hierarchy of inputs used to determine fair value is as follows:

•Level 1 – Quoted prices in active markets for identical assets and liabilities.

•Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3 – Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We measure certain financial assets at fair value on a recurring basis, including our marketable securities which are classified as available-for-sale securities, and certain cash equivalents, specifically money market securities, commercial paper, municipal bonds and certificates of deposits. The money market accounts are valued based on quoted market prices in active markets. The available-for-sale marketable securities are valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party entities.

From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets for impairments using Company-specific assumptions which would fall within Level 3 of the fair-value hierarchy.

Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.

We did not make any transfers between Level 1 and Level 2 financial assets during fiscal years 2022, 2021 and 2020. Furthermore, as of January 28, 2023 and January 29, 2022, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

Financial Assets

i In accordance with the provisions of ASC 820, Fair Value Measurement, we categorized our financial assets based on the priority of the inputs to the valuation technique for the instruments as follows (in thousands):

January 28, 2023

January 29, 2022

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Cash equivalents (1):

Money market securities

i 51,756

i —

i 32,764

i —

Commercial paper

—

i 19,871

—

i 4,999

—

Marketable securities:

Commercial paper

i —

i i 29,750 /

i —

i 64,233

i —

(1) Excludes cash

Impairment of Long-Lived Assets

On at least a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. Based on Level 3 inputs of historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover our investment in the respective stores. i As a result, we recorded a non-recurring, non-cash impairment charges of approximately less than $ i 0.1 million, $ i 0.1 million and $ i 1.0 million in fiscal years 2022, 2021 and 2020, respectively, to write-down the carrying value of certain long-lived store assets to their estimated fair values. /

Fiscal Year Ended

($ in thousands)

Carrying value of assets with impairment

i 17

i 136

i 955

Fair value of assets impaired

i —

Number of stores tested for impairment

i 14

i 13

i 56

Number of stores with impairment

i 4

i 1

i 12

Note 12: i Share-Based Compensation

The Tilly's, Inc. Second Amended and Restated 2012 Equity and Incentive Award Plan (the "2012 Plan") authorizes up to i 6,613,900 shares for issuance of options, shares or rights to acquire our Class A common stock and allows for, among other things, operating income and comparable store sales growth targets as additional performance goals that may be used in connection with performance-based awards granted under the 2012 Plan. As of January 28, 2023, there were i 1,863,595 shares available for future issuance under the 2012 Plan.

Options

We grant stock options to certain employees that gives them the right to acquire our Class A common stock under the 2012 Plan. The exercise price of options granted is equal to the closing price per share of our stock at the date of grant. The non-qualified options vest at a rate of i 25% on each of the first four anniversaries of the grant date provided that the award recipient continues to be employed by us through each of those vesting dates, and expire i ten years from the date of grant.

The following table summarizes our stock option activity for fiscal year 2022:

Stock
Options

Grant Date
Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Life (in Years)

Aggregate
Intrinsic
Value (1)

($ in thousands)

Outstanding at January 29, 2022

i 1,570,211

i 9.02

Granted

i 522,500

i 9.37

Exercised

( i 38,500)

i 4.56

Forfeited

( i 120,500)

i 9.65

Expired

( i 60,468)

i 14.63

Outstanding at January 28, 2023

i 1,873,243

i 8.99

i 7.3

i 1,996

Exercisable at January 28, 2023

i 739,043

i 9.70

i 5.5

i 693

(1)Intrinsic value for stock options is defined as the difference between the market price of our Class A common stock on the last business day of the fiscal year and the weighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period. The market value per share was $ i 8.70 at January 28, 2023.

The total intrinsic value of options exercised in fiscal years 2022, 2021 and 2020 was $ i 0.2 million, $ i 8.4 million and less than $ i 0.1 million, respectively.

The total fair value of options vested in fiscal years 2022, 2021 and 2020 was $ i 1.8 million, $ i 1.4 million and $ i 1.7 million, respectively.

The total proceeds received from the exercise of stock options in fiscal years 2022, 2021 and 2020 was $ i 0.2 million, $ i 9.6 million and less than $ i 0.1 million, respectively. The tax benefit realized from stock options exercised in fiscal years 2022, 2021 and 2020 was less than $ i 0.1 million, $ i 2.3 million and $ i 0.0 million, respectively.

The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term and our expected annual dividend yield, if any. We account for forfeitures as they occur. We will issue shares of Class A common stock when the options are exercised.

The fair values of stock options granted in fiscal years 2022, 2021 and 2020 were estimated on the grant dates using the following assumptions:

Fiscal Year Ended

Weighted average grant-date fair value per option granted

$ i 4.94

$ i 5.74

$ i 2.23

Expected option term (1)

i 5.2 years

i 5.4 years

i 5.3 years

Expected volatility factor (2)

i 58.6

i 59.9

i 57.5

Risk-free interest rate (3)

i 2.4

i 0.9

i 0.4

Expected annual dividend yield (4)

i —

(1)The expected option term of the awards represents the estimated time that options are expected to be outstanding based upon historical option data.

(2)Stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock over the most recent period equal to the expected option term of the awards.

(3)The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.

(4)We do not have a dividend policy and we do not anticipate paying any additional cash dividends on our common stock at this time.

Restricted Stock

Restricted stock awards ("RSAs") represent restricted shares issued upon the date of grant in which the recipient's rights in the stock are restricted until the shares are vested, whereas restricted stock units represent shares issuable in the future upon vesting. Under the 2012 Plan, we grant RSAs to independent members of our Board of Directors and restricted stock units to certain employees. RSAs granted to Board members vest at a rate of i 50% on each of the first two anniversaries of the grant date provided that the respective award recipient continues to serve on our Board of Directors through each of those vesting dates.

The restricted stock units granted to certain employees vest at a rate of i 25% on each of the first four anniversaries of the grant date provided that the respective recipient continues to be employed by us through each of those vesting dates. We determine the fair value of restricted stock underlying the RSAs and restricted stock units based upon the closing price of our Class A common stock on the date of grant.

i A summary of the status of non-vested restricted stock as of January 28, 2023 and changes during fiscal year 2022 are presented below:


	Shares	Weighted- Average Grant-Date Fair Value
Nonvested at January 29, 2022	i 45,464	$	i 10.56
Granted	i 63,492	$	i 7.56
Vested	( i 35,472)	$	i 9.02

Nonvested at January 28, 2023	i 73,484	$	i 8.71

The weighted-average grant-date fair value of restricted stock granted during the years ended January 29, 2022 and January 30, 2021 was $ i 16.01 and $ i 6.28, respectively.

The total fair value of restricted stock vested was $ i 0.3 million, $ i 0.7 million and $ i 0.2 million in fiscal years 2022, 2021 and 2020, respectively.

Share-based compensation expense associated with stock options and restricted stock is recognized on a straight-line basis over the requisite service period. i The following table summarizes share-based compensation recorded in the accompanying Consolidated Statements of Operations (in thousands):

Fiscal Year Ended

Cost of goods sold

i 269

i 193

i 584

Selling, general and administrative expenses

i 1,998

i 1,727

i 1,452

Total share-based compensation

i 2,267

i 1,920

i 2,036

Less: Income tax benefit

( i 496)

( i 239)

( i 537)

Total share-based compensation, net of tax

i 1,771

i 1,681

i 1,499

At January 28, 2023, there was $ i 4.0 million of total unrecognized share-based compensation expense related to unvested stock options and restricted stock awards. This cost has a weighted average remaining recognition period of i 2.4 years.

Note 13: i Retirement Savings Plan

The Tillys 401(k) Plan (the “401(k) Plan”) is a qualified plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan covers all employees that have attained age i 21 and completed at least i three months of employment tenure. Matching contributions to the 401(k) Plan by the Company may be made at the discretion of our Board of Directors. Total employer contributions to the 401(k) Plan totaled, $ i 1.2 million, $ i 0.9 million, and $ i 0.0 million in fiscal years 2022, 2021 and 2020, respectively.

Note 14: i Income Taxes

i The components of income tax expense (benefit) for fiscal years 2022, 2021 and 2020 were as follows (in thousands):

Fiscal Year Ended

Current:

Federal

( i 8)

i 16,147

i 2,279

State

i 622

i 6,094

i 1,284

i 614

i 22,241

i 3,563

Deferred:

Federal

i 2,308

i 709

( i 3,889)

State

i 568

( i 198)

( i 988)

i 2,876

i 511

( i 4,877)

Total income tax expense (benefit)

i 3,490

i 22,752

( i 1,314)

A reconciliation of income tax expense (benefit) to the amount computed at the federal statutory rate for fiscal years 2022, 2021 and 2020 is as follows (in thousands):

Fiscal Year Ended

Federal taxes at statutory rate

i 2,764

i 18,270

( i 516)

State and local income taxes, net of federal benefit

i 754

i 4,480

( i 132)

Nondeductible executive compensation

i 100

i 660

i —

Share-based compensation discrete items (1)

i 101

( i 828)

i 53

Tax credits

( i 231)

( i 137)

( i 166)

Enhanced contribution deduction

( i 147)

( i 92)

( i 77)

Return to provision adjustments

i 220

i 208

( i 582)

Other

( i 71)

i 191

i 106

Total income tax expense (benefit)

i 3,490

i 22,752

( i 1,314)

(1)This amount includes the impact of discrete items related to the expiration of stock options, exercises of stock options and the settlement of restricted stock that are recorded to income tax expense which represents share-based compensation cost previously recognized by us that was greater than the deduction allowed for income tax purposes based on the price of our common stock on the date of expiration, exercise or vesting.

Deferred income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and (b) operating loss and tax credit carry-forwards. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

Significant components of deferred tax assets and liabilities as of January 28, 2023 and January 29, 2022 were as follows (in thousands):


	January 28, 2023		January 29, 2022
Deferred tax assets:
Lease liability	$	i 63,562	$	i 64,754

Compensation and benefits	i 635		i 2,829
Inventories	i 2,120		i 2,056
Accrued expenses	i 1,307		i 1,807
Share-based compensation	i 984		i 727
Deferred revenue	i 1,530		i 640
Other	i 848		i 570
Total deferred tax assets	i 70,986		i 73,383
Deferred tax liabilities:
Lease asset	( i 54,200)		( i 54,991)
Property and equipment	( i 7,014)		( i 5,746)
Prepaid expenses	( i 1,202)		( i 1,200)
Marketable securities	( i 73)		i —

Total deferred tax liabilities	( i 62,489)		( i 61,937)
Net deferred tax asset	$	i 8,497	$	i 11,446

As of January 28, 2023 and January 29, 2022, there were no material federal and state net operating losses or tax credits carried forward.

Uncertain Tax Positions

As of January 28, 2023 and January 29, 2022, there were i i no / material unrecognized tax positions. We do not anticipate that there will be a material change in the balance of the unrecognized tax positions in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in income tax expense. We did i i i no / / t recognize any interest or penalties related to unrecognized tax positions during fiscal years 2022, 2021 and 2020.

We file income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. Fiscal years 2019 through 2021 remain subject to examination for federal tax purposes and fiscal years 2018 through 2021 remain subject to examination in significant state tax jurisdictions.

Note 15: Earnings (Loss) i Per Share

Our common stock consists of two classes: Class A and Class B. The Class A and Class B common stock have identical rights, except with respect to voting and conversion.

Basic net income per share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method, whereby proceeds from such exercise, and unamortized compensation expense, on share-based awards are assumed to be used by us to purchase the common shares at the average market price during the period. Potentially dilutive shares of common stock represent outstanding stock options and restricted stock awards.

The components of basic and diluted earnings per share of Class A and Class B common stock, in aggregate, for fiscal years 2022, 2021 and 2020 are as follows (in thousands, except per share amounts):

Fiscal Year Ended

Net income (loss)

i 9,677

i 64,249

( i 1,145)

Weighted average basic shares outstanding

i 30,115

i 30,560

i 29,697

Dilutive effect of stock options and restricted stock

i 208

i 558

i —

Weighted average shares for diluted earnings per share

i 30,323

i 31,118

i 29,697

Basic earnings (loss) per share of Class A and Class B common stock

i 0.32

i 2.10

( i 0.04)

Diluted earnings (loss) per share of Class A and Class B common stock

i 0.32

i 2.06

( i 0.04)

The earnings per share amounts are the same for Class A and Class B common stock, in aggregate, and individually for Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Shares of Class A and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders. Holders of Class A common stock are entitled to i one vote per share and holders of Class B common stock are entitled to i 10 votes per share.

i The following stock options and restricted stock have been excluded from the calculation of diluted earnings per share as the effect of including these stock options and restricted stock would have been anti-dilutive (in thousands):

Fiscal Year Ended