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EX-32.2 - EX-32.2 - CHEROKEE INCchke-20171028ex322124f53.htm
EX-32.1 - EX-32.1 - CHEROKEE INCchke-20171028ex32168228d.htm
EX-31.2 - EX-31.2 - CHEROKEE INCchke-20171028ex312c32e94.htm
EX-31.1 - EX-31.1 - CHEROKEE INCchke-20171028ex3117b02bf.htm
EX-4.2 - EX-4.2 - CHEROKEE INCchke-20171028ex42659dc55.htm

 

 

 

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 October 28, 2017.

 

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 0-18640

 


 

CHEROKEE INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

95-4182437

(State or other jurisdiction of Incorporation or organization)

 

(IRS employer identification number)

 

 

 

5990 Sepulveda Boulevard, Sherman Oaks, CA

 

91411

(Address of principal executive offices)

 

Zip Code

 

Registrant’s telephone number, including area code  (818) 908-9868

 


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒  No ☐

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

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(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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.

 

 

 

 

Class

 

Outstanding at December 1, 2017

Common Stock, $.02 par value per share

 

13,951,066

 

 


 

CHEROKEE INC.

 

TABLE OF CONTENTS

 

 

 

PART I. FINANCIAL INFORMATION 

    

 

 

 

 

ITEM 1. Condensed Consolidated Financial Statements  

 

 

 

 

 

Condensed Consolidated Balance Sheets
October 28, 2017 and January 28, 2017
 

 

3

 

 

 

Condensed Consolidated Statements of Operations
Three and nine month periods ended October 28, 2017 and October 29, 2016
 

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income
Three and nine month periods ended October 28, 2017 and October 29, 2016
 

 

5

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity
Nine month period ended October 28, 2017
 

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows
Nine month periods ended October 28, 2017 and October 29, 2016
 

 

7

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

8

 

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

22

 

 

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 

 

36

 

 

 

ITEM 4. Controls and Procedures 

 

38

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

ITEM 1. Legal Proceedings 

 

39

 

 

 

ITEM 1A. Risk Factors 

 

40

 

 

 

ITEM 5. Other Information 

 

55

 

 

 

ITEM 6. Exhibits 

 

56

 

 

 

SIGNATURES 

 

58

 

 

 

 

 

 

 

 

2


 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CHEROKEE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

October 28,

    

January 28,

 

 

 

2017

 

2017

 

 

 

(Unaudited)

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,589

 

$

8,378

 

Receivables

 

 

13,202

 

 

21,873

 

Other receivables

 

 

1,661

 

 

3,292

 

Income taxes receivable

 

 

3,892

 

 

1,020

 

Inventory, net

 

 

1,189

 

 

1,567

 

Prepaid expenses and other current assets

 

 

2,037

 

 

5,010

 

Total current assets

 

 

26,570

 

 

41,140

 

Intangible assets, net

 

 

105,606

 

 

106,193

 

Goodwill

 

 

15,645

 

 

15,794

 

Deferred tax asset

 

 

 —

 

 

 —

 

Property and equipment, net

 

 

1,125

 

 

1,311

 

Other assets

 

 

30

 

 

1,578

 

Total assets

 

$

148,976

 

$

166,016

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and other accrued payables

 

$

14,745

 

$

26,736

 

Current portion of long term debt

 

 

45,036

 

 

1,241

 

Related party Ravich loan

 

 

1,500

 

 

3,896

 

Deferred revenue—current

 

 

2,087

 

 

7,015

 

Accrued compensation payable

 

 

553

 

 

935

 

Income taxes payable—current

 

 

 —

 

 

347

 

Total current liabilities

 

 

63,921

 

 

40,170

 

Long term liabilities:

 

 

 

 

 

 

 

Deferred tax liability

 

 

9,637

 

 

7,718

 

Income taxes payable—non-current

 

 

 4,041

 

 

3,041

 

Long term debt

 

 

 —

 

 

41,595

 

Other non-current

 

 

3,150

 

 

1,174

 

Total liabilities

 

 

80,749

 

 

93,698

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock, $.02 par value, 1,000,000 shares authorized, none issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $.02 par value, 20,000,000 shares authorized, 13,951,066 shares issued and outstanding at October 28, 2017 and 12,951,284 issued and outstanding at January 28, 2017

 

 

279

 

 

259

 

Additional paid-in capital

 

 

72,938

 

 

66,612

 

Retained earnings (accumulated deficit)

 

 

(4,990)

 

 

5,414

 

Accumulated other comprehensive income

 

 

 —

 

 

33

 

Total stockholders’ equity

 

 

68,227

 

 

72,318

 

Total liabilities and stockholders’ equity

 

$

148,976

 

$

166,016

 

 

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

3


 

 

CHEROKEE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(amounts in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

 

    

2017

    

2016

    

2017

    

2016

 

Royalty revenues

 

$

7,882

 

$

6,495

 

$

22,734

 

$

25,646

 

Indirect product sales

 

 

3,155

 

 

 —

 

 

13,373

 

 

 —

 

Total revenues

 

 

11,037

 

 

6,495

 

 

36,107

 

 

25,646

 

Cost of goods sold

 

 

2,321

 

 

 —

 

 

10,159

 

 

 —

 

Gross profit

 

 

8,716

 

 

6,495

 

 

25,948

 

 

25,646

 

Selling, general and administrative expenses

 

 

10,191

 

 

7,476

 

 

29,884

 

 

19,366

 

Amortization of intangible assets

 

 

204

 

 

229

 

 

673

 

 

683

 

Restructuring charges

 

 

 —

 

 

 —

 

 

121

 

 

 —

 

Operating (loss) income

 

 

(1,679)

 

 

(1,210)

 

 

(4,730)

 

 

5,597

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,706)

 

 

(152)

 

 

(4,806)

 

 

(514)

 

Other income (expense), net

 

 

(24)

 

 

 —

 

 

(203)

 

 

78

 

Total other expense, net

 

 

(1,730)

 

 

(152)

 

 

(5,009)

 

 

(436)

 

(Loss) income before income taxes

 

 

(3,409)

 

 

(1,362)

 

 

(9,739)

 

 

5,161

 

Income tax (benefit)  provision

 

 

(889)

 

 

(489)

 

 

665

 

 

1,936

 

Net (loss) income

 

$

(2,520)

 

$

(873)

 

$

(10,404)

 

$

3,225

 

Net (loss) income per common share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(0.18)

 

$

(0.10)

 

$

(0.79)

 

$

0.37

 

Diluted (loss) earnings per share

 

$

(0.18)

 

$

(0.10)

 

$

(0.79)

 

$

0.37

 

Weighted average common shares outstanding attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,792

 

 

8,713

 

 

13,244

 

 

8,719

 

Diluted

 

 

13,792

 

 

8,713

 

 

13,244

 

 

8,759

 

 

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

4


 

CHEROKEE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Unaudited

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 28,

    

October 29,

 

October 28,

    

October 29,

 

 

    

2017

    

2016

    

2017

    

2016

 

Net (loss) income

 

$

(2,520)

 

$

(873)

 

$

(10,404)

 

$

3,225

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(78)

 

 

 —

 

 

(33)

 

 

 —

 

Other comprehensive (loss) income:

 

 

(78)

 

 

 —

 

 

(33)

 

 

 —

 

Comprehensive (loss) income

 

$

(2,598)

 

$

(873)

 

$

(10,437)

 

$

3,225

 

 

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

5


 

CHEROKEE INC.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Retained Earnings

 

Other

 

 

 

 

 

 

Common Stock

 

Paid-in

 

(Accumulated Deficit)

 

Comprehensive

 

 

 

 

 

    

Shares

    

Par Value

    

Capital

    

Earnings

    

Income

    

Total

 

Balance at January 28, 2017

 

12,951

 

$

259

 

$

66,612

 

$

5,414

 

$

33

 

$

72,318

 

Stock-based compensation

 

 —

 

 

 —

 

 

1,640

 

 

 —

 

 

 —

 

 

1,640

 

Equity issuances, net of tax

 

1,000

 

 

20

 

 

3,982

 

 

 —

 

 

 —

 

 

4,002

 

Stock warrants

 

 —

 

 

 —

 

 

704

 

 

 —

 

 

 —

 

 

704

 

Foreign currency

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(33)

 

 

(33)

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(10,404)

 

 

 —

 

 

(10,404)

 

Balance at October 28, 2017

 

13,951

 

$

279

 

$

72,938

 

$

(4,990)

 

$

 —

 

$

68,227

 

 

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

6


 

CHEROKEE INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

October 28, 2017

    

October 29, 2016

 

Operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(10,404)

 

$

3,225

 

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

 

 

 

 

 

 

 

Depreciation

 

 

560

 

 

393

 

Bad debt expense

 

 

193

 

 

 —

 

Amortization of intangible assets

 

 

673

 

 

683

 

Amortization of debt discounts/deferred financing fees

 

 

720

 

 

 —

 

Deferred income taxes

 

 

1,919

 

 

(495)

 

Stock-based compensation

 

 

1,640

 

 

1,792

 

Warrants

 

 

704

 

 

 —

 

Other, net

 

 

209

 

 

39

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

6,799

 

 

663

 

Other receivables

 

 

1,690

 

 

 —

 

Prepaids and other current assets

 

 

2,584

 

 

(68)

 

Income taxes receivable and payable, net

 

 

(2,219)

 

 

136

 

Inventories

 

 

378

 

 

 —

 

Accounts payable and other accrued payables

 

 

(10,254)

 

 

2,748

 

Deferred revenue

 

 

(3,082)

 

 

(26)

 

Accrued compensation

 

 

(382)

 

 

(441)

 

Net cash (used in) provided by operating activities

 

 

(8,272)

 

 

8,649

 

Investing activities:

 

 

 

 

 

 

 

Purchases of trademarks, including registration and renewal cost

 

 

(86)

 

 

(47)

 

Purchases of property and equipment

 

 

(400)

 

 

(366)

 

Net cash used in investing activities

 

 

(486)

 

 

(413)

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from Cerberus loan

 

 

5,000

 

 

 —

 

Payments of Cerberus loan

 

 

(1,200)

 

 

 —

 

Payments of debt related costs

 

 

(300)

 

 

 

 

Payments of Ravich loan

 

 

(2,500)

 

 

 —

 

Payments of JPMorgan Term Notes

 

 

 —

 

 

(6,408)

 

Issuance of common stock, net

 

 

4,002

 

 

(171)

 

Purchase and retirement of common stock

 

 

 —

 

 

(734)

 

Net cash provided by (used in) financing activities

 

 

5,002

 

 

(7,313)

 

Effect of exchange rate changes on cash

 

 

(33)

 

 

 —

 

(Decrease) increase  in cash and cash equivalents

 

 

(3,789)

 

 

923

 

Cash and cash equivalents at beginning of period

 

 

8,378

 

 

6,534

 

Cash and cash equivalents at end of period

 

$

4,589

 

$

7,457

 

Cash paid during period for:

 

 

 

 

 

 

 

Income taxes

 

$

1,039

 

$

2,367

 

Interest

 

$

3,607

 

$

477

 

 

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

7


 

CHEROKEE INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

(amounts in thousands, except percentages, share and per share amounts)

 

(1)   Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of October 28, 2017 and for the three and nine month periods ended October 28, 2017 and October 29, 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Article 10 of Regulation S-X. The accompanying condensed consolidated financial statements include the accounts of Cherokee Inc. and its consolidated subsidiaries (referred to collectively as “Cherokee Global Brands” or the “Company” unless the context indicates or requires otherwise) and include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee Global Brands are necessary for a fair statement of the Company’s financial condition and the results of operations for the periods presented. All intercompany accounts and transactions have been eliminated during the consolidation process. The accompanying consolidated balance sheet as of January 28, 2017 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP for an audited balance sheet. The Company’s financial condition and results of operations as of or for the three and nine month periods ended October 28, 2017 are not necessarily indicative of the financial condition or results to be expected as of or for the fiscal year ending February 3, 2018 or any other date or period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (“Annual Report”).

 

As used herein, “Third Quarter” refers to the three month period ended October 28, 2017; “Nine Months” refers to the nine month period ended October 28, 2017; “Fiscal 2019” refers to the fiscal year ending February 2, 2019; “Fiscal 2018” refers to the fiscal year ending February 3, 2018; “Fiscal 2017” refers to the fiscal year ended January 28, 2017; and “Fiscal 2016” refers to the fiscal year ended January 30, 2016.

 

Liquidity and Going Concern

 

The accompanying condensed consolidated financial statements have been prepared on the going concern basis of accounting, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As described in Note 8, the Company has entered into the Cerberus Credit Facility with Cerberus (each as defined below), pursuant to which the Company has borrowed $45,000 under a term loan facility, which the Company drew down in December 2016, and $5,000 under a revolving credit facility, which the Company drew down in the first quarter of Fiscal 2018. As of October 28, 2017, the Company had $48,400 in principal amount of outstanding indebtedness owed under the Cerberus Credit Facility.

 

As of October 28, 2017, the Company was not in compliance with certain of its financial covenants set forth in the Cerberus Credit Facility (see Notes 8 and 11) and there is substantial doubt about the Company’s ability to continue as a going concern.  Such compliance failure subjected the Company to significant risks as of October 28, 2017 and through the effective date of the November Cerberus Amendment (as defined below). These risks included Cerberus’s right to terminate its obligations under the Cerberus Credit Facility, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under applicable law, including foreclosing on the Company’s and/or its subsidiaries assets that serve as collateral for the borrowed amounts. If any of these rights had been exercised, the Company’s financial condition and ability to continue operations would have been materially jeopardized.

 

However, subsequent to October 28, 2017, the Company and Cerberus agreed to the terms of an amendment to the Cerberus Credit Facility (the “November Cerberus Amendment”), which, as of its effectiveness, waived the compliance failures described above and amended certain terms of the Cerberus Credit Facility. As a result, as of the date of this report, the Company believes it is in compliance with the Cerberus Credit Facility.  During the fourth quarter

8


 

of Fiscal 2018 we will further evaluate our ability to meet our obligations as they come due over the next 12 months from year end and the successful amendment of the Cerberus Credit Facility is a critical part of management’s plans to meet its obligations as they come due. 

 

(2)   Summary of Significant Accounting Policies

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. During Fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption is permitted for fiscal periods beginning after December 15, 2016. The Company is primarily engaged in the business of marketing and licensing the brands it owns or represents, as well as marketing and franchising the Flip Flop Shops brand.  These royalty revenues are recognized when earned. To date, the Company has performed a preliminary detailed review of key contracts and compared historical accounting policies and practices to the new standard. Based upon the preliminary results of our evaluation, the adoption of the new revenue recognition standard may impact the recognition of minimum guarantees earned under our royalty contracts. The Company plans to adopt this guidance using the modified retrospective method beginning in the first quarter of Fiscal 2019 and is continuing to evaluate the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

In May 2017, the FASB issued authoritative guidance to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation, in the event of a change to the terms or conditions of a share-based payment award. Under the new guidance, an entity should account for the effects of a modification unless all of the following are met:

·

The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique, the entity is not required to estimate the value immediately before and after the modification.

·

The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

·

The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

The new guidance does not change the current disclosure requirements. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and should be applied prospectively to awards modified after the adoption date. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.    

Use of Estimates

 

The preparation of the accompanying condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and assumptions, including those related to allowance for doubtful accounts, revenue recognition, deferred revenue, income taxes,

9


 

valuation of intangible assets, impairment of long-lived assets, contingencies and litigation and stock-based compensation. Management bases its estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including expectations about future events. These estimates form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.

Income Taxes

 

Income tax (benefit) expense of ($889) and $665 was recognized for the Third Quarter and the Nine Months, respectively, resulting in an effective tax rate of (26.1)%  and 6.8% in the Third Quarter and the Nine Months, respectively, compared to (35.9)% and 37.5% in the three and nine months ended October 29, 2016, respectively, and compared to (69.8)% for the full year of Fiscal 2017. The effective tax rate for the Third Quarter and the Nine Months differ from the statutory rate due to the effect of certain permanent nondeductible expenses, the change in valuation allowance recorded against certain foreign deferred tax assets, unrecognized tax benefits, amortization of tax deductible goodwill acquired in the Hi-Tec Acquisition (as defined in Note 3) that is not an available source of income to realize deferred tax assets, foreign tax rate differential, the apportionment of income among state jurisdictions, and the benefit of certain tax credits. The difference in the effective tax rate for the Third Quarter and the Nine Months in comparison to Fiscal 2017 was primarily due to nondeductible transaction costs related to the Hi-Tec Acquisition.  Since the transaction costs exceeded the Fiscal 2017 pretax book loss, the result was a significant fluctuation in the Fiscal 2017 effective tax rate.

In accordance with authoritative guidance, interest and penalties related to unrecognized tax benefits are included within the provision for taxes in the condensed consolidated statements of operations. The total amount of interest and penalties recognized in the consolidated statements of operations for the Third Quarter  and the Nine Months were $35 and $99, respectively, compared to $0 in each of the third quarter and the nine months of Fiscal 2017. As of October 28, 2017 and January 28, 2017, the total amount of accrued interest and penalties included in the liability for unrecognized tax benefits was $275 and $167, respectively.

 

The Company files income tax returns in the U.S. federal, California and certain other state jurisdictions, as well as in the Netherlands and other foreign jurisdictions. For U.S federal and Netherlands income tax purposes, the fiscal year ended February 1, 2014 and later tax years remain open for examination by the tax authorities under the normal three-year statute of limitations. For state tax purposes, the fiscal year ended February 2, 2013 and later tax years remain open for examination by the tax authorities under a four-year statute of limitations.

 

 

(3)   Business Combinations

 

On December 7, 2016, the Company closed under a Share Purchase Agreement (“SPA”) with Hi-Tec International Holdings BV (“Hi-Tec Holdings”) and simultaneous Asset Purchase Agreements (“APAs”) with various third parties, pursuant to which Cherokee Global Brands acquired all of the issued and outstanding equity interests of Hi-Tec Holdings for $87,252 in cash, excluding non-interest bearing liabilities assumed and capitalized transaction costs (the “Hi-tec Acquisition”). The Company has accounted for this transaction under ASC 805 as amended by Accounting Standards Update 2017-01.

For the year ended January 28, 2017, the Company also incurred restructuring charges of $3,782 related to the Hi-Tec Acquisition. Restructuring charges consisted of severance, contract termination and other restructuring-related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under the contract for their remaining terms without economic benefit to the Company. A liability for lease obligations is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease

10


 

rentals reduced by estimated sublease rentals. A liability for other restructuring-related costs is measured at its fair value in the period in which the liability is incurred.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring Charges Accrued

    

As of
January 28, 2017

 

Payments in the Nine Months Ended October 28, 2017

 

 

As of
October 28, 2017

Contract termination costs

 

$

386

 

 

(331)

 

 

$

55

Leases, net of sublease

 

 

1,920

 

 

(794)

 

 

 

1,126

Severance costs

 

 

1,270

 

 

(524)

 

 

 

746

Service costs

 

 

206

 

 

(164)

 

 

 

42

Total Restructuring costs identified

 

$

3,782

 

 

(1,813)

 

 

$

1,969

 

 

 

 

 

 

 

 

 

 

 

 

The assets and liabilities recorded in the preliminary purchase price allocation for the Hi-Tec Acquisition are provisional, as the Company has not yet obtained all available information necessary to finalize the measurement of such assets and liabilities.  During the nine month period ended October 28, 2017, the Company recorded a working capital adjustment to goodwill of $149.  The measurement of acquired deferred income taxes has not been finalized as the Company is currently in the process of obtaining the necessary information to complete the analysis related to acquired net operating loss carryforwards, including the finalization of the assessment of available tax planning strategies.  In addition, the Company is also waiting on information related to certain pre-acquisition income tax filing positions of Hi-Tec in various taxing jurisdictions that will assist the Company in finalizing the amounts to record for the acquired deferred income taxes. The Company is also waiting on information to assist the Company in finalizing the recording of any assumed uncertain income tax positions. The Company is also finalizing the required working capital true-up in accordance with the SPA, and finalizing the settlement statements in relation to the APA’s. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition.  

(4)   Property and Equipment

 

 

 

 

Property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

October 28, 2017

    

January 28, 2017

 

Computer Equipment

 

$

661

 

$

633

 

Software

 

 

297

 

 

156

 

Furniture and Fixtures

 

 

1,985

 

 

2,006

 

Leasehold Improvements

 

 

727

 

 

520

 

Work in Process

 

 

 —

 

 

128

 

Less: Accumulated depreciation

 

 

(2,545)

 

 

(2,132)

 

Property and Equipment, net

 

$

1,125

 

$

1,311

 

 

Computers and related equipment and software are depreciated over three years. Furniture and store fixtures are depreciated over the shorter of five to seven years, or the remaining term of the corresponding license agreement. Leasehold improvements are depreciated over the shorter of five years, or the remaining life of the applicable lease term. Depreciation expense was $156 and $560 for the three and nine month periods ended October 28, 2017, respectively,  and $137 and $393 for the three and nine month period ended October 29, 2016, respectively.

 

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(5)   Intangible Assets

 

Intangible assets consisted of the following:

 

 

 

 

 

 

 

 

 

    

October 28, 2017

    

January 28, 2017

 

Acquired Trademarks

 

$

114,695

 

$

114,695

 

Other Trademarks

 

 

8,876

 

 

8,787

 

Franchise Agreements

 

 

1,300

 

 

1,300

 

Total Intangible Assets, gross

 

 

124,871

 

 

124,782

 

Accumulated amortization

 

 

(19,265)

 

 

(18,588)

 

Total Intangible Assets, net

 

$

105,606

 

$

106,193

 

 

 

 

 

 

 

 

 

Goodwill

 

 

15,645

 

 

15,794

 

 

 

 

(6)   (Loss) Earnings Per Share

 

The following table provides a reconciliation of the numerator and denominator of the basic and diluted (loss) earnings per share (“EPS”) computations for the three and nine month periods ended October 28, 2017 and October 29, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

October 28, 2017

    

October 29, 2016

    

October 28, 2017

    

October 29, 2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income-numerator for net  (loss) earnings per common share and net (loss) earnings per common share assuming dilution

 

$

(2,520)

 

$

(873)

 

$

(10,404)

 

$

3,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for net (loss) earnings per common share — weighted average shares

 

 

13,792

 

 

8,713

 

 

13,244

 

 

8,719

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 —

 

 

 —

 

 

 —

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for net  (loss) earningsper common share, assuming dilution:

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted-average shares and assumed exercises

 

 

13,792

 

 

8,713

 

 

13,244

 

 

8,759

 

 

The computation for the diluted number of shares excludes unvested restricted stock units, unexercised stock options and unexercised warrants that are anti-dilutive. There were 3,231 and 2,080 anti-dilutive shares for the three and nine month periods ended October 28, 2017, respectively, and 1,020 and 720 anti-dilutive shares for the three and nine month periods ended October 29, 2016, respectively.

 

(7)   Capitalization

 

Stock-Based Compensation

 

Effective July 16, 2013, the Company’s stockholders approved the 2013 Stock Incentive Plan and effective June 6, 2016, the Company’s stockholders approved the amendment and restatement of such plan (as amended and restated, the “2013 Plan”). The 2013 Plan serves as the successor to the 2006 Incentive Award Plan (which includes the 2003 Incentive Award Plan as amended by the adoption of the 2006 Incentive Award Plan) (the “2006 Plan”). The 2013 Plan authorizes to be issued (i) 1,200,000 additional shares of common stock, and (ii) 205,486 shares of common stock previously reserved but unissued under the 2006 Plan. No future grants will be awarded under the 2006 Plan, but outstanding awards previously granted under the 2006 Plan continue to be governed by its terms. Any shares of common

12


 

stock that are subject to outstanding awards under the 2006 Plan which are forfeited, terminate or expire unexercised and would otherwise have been returned to the share reserve under the 2006 Plan will be available for issuance as common stock under the 2013 Plan. The 2013 Plan provides for the issuance of equity‑based awards to officers, other employees and directors.

Stock Options

 

Stock options issued to employees are granted at the market price on the date of grant, generally vest over a three-year period, and generally expire seven to ten years from the date of grant. The Company issues new shares of common stock upon exercise of stock options. The Company has also granted non-plan stock options to certain executives as a material inducement for employment. The Company estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model.

 

Stock-based compensation expense recognized in selling, general and administrative expenses for stock options for the Third Quarter and Nine Months was $220 and  $685, respectively, compared to $245 and $792 for the third quarter and nine months ended October 29, 2016, respectively.

 

The following table summarizes activity for the Company’s stock options in the Nine Months:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

Weighted

 

Contractual

 

Aggregate

 

 

 

 

 

Average

 

Term

 

Intrinsic

 

 

    

Shares

    

Price

    

(in years)

    

Value

 

Outstanding, at January 28, 2017

 

1,092,502

 

$

16.59

 

3.66

 

 —

 

Granted

 

66,000

 

 

5.60

 

 

 

 

 

Exercised

 

 —

 

 

 —

 

 

 

 

 

Canceled/forfeited

 

(111,333)

 

 

18.21

 

 

 

 

 

Outstanding, at October 28, 2017

 

1,047,169

 

 

15.73

 

3.34

 

 —

 

Vested and Exercisable at October 28, 2017

 

743,498

 

$

16.47

 

2.83

 

 —

 

 

As of October 28, 2017, total unrecognized stock-based compensation expense related to unvested stock options was approximately $852, which is expected to be recognized over a weighted average period of approximately 1.41 years. The total fair value of all stock options that vested during the Nine Months was $870.

 

Performance Stock Units and Restricted Stock Units

 

In April 2016, the compensation committee of the Company’s board of directors granted certain performance-based equity awards (“performance stock units”) to executives under the 2013 Plan.

 

The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s common stock on April 5, 2016, or $16.89, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $18.58 for Fiscal 2017, (ii) $20.44 for Fiscal 2018 and (iii) $22.48 for Fiscal 2019. The average share price is to be calculated as the average of all market closing prices during the January preceding the applicable fiscal year end. If a target is met at the end of a fiscal year, one third of the shares subject to the award will vest. If the stock price target is not met at the end of a fiscal year, the relevant portion of the shares subject to the award will not vest but will roll over to the following fiscal year. The executive must continue to be employed by the Company through the relevant vesting dates to be eligible for vesting. The target average share price was not achieved for Fiscal 2017.

 

13


 

Since the vesting of these performance stock units is subject to market based performance conditions, the fair value of these awards was measured on the date of grant using the Monte Carlo simulation model for each vesting tranche. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award and calculates the fair market value for the performance stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions and the resulting fair value of the award.

 

Stock-based compensation expense recognized in selling, general and administrative expenses for restricted stock units and performance stock units for the Third Quarter and Nine Months was $327 and $955, respectively, compared to $296 and $1,000 for the third quarter and nine months ended October 29, 2016.

 

The following table summarizes activity for the Company’s restricted stock units and performance stock units in the Nine Months:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant-Date

 

 

    

Shares

    

Fair Value

 

Unvested stock at January 28, 2017

 

157,169

 

$

19.71

 

Granted

 

 —

 

 

 —

 

Vested

 

(55,334)

 

 

22.71

 

Forfeited

 

(7,500)

 

 

19.52

 

Unvested stock at October 28, 2017

 

94,335

 

$

17.96

 

 

As of October 28, 2017, total unrecognized stock-based compensation expense related to restricted stock units and performance stock units was approximately $862, which is expected to be recognized over a weighted average period of approximately 0.80 years.

August 2017 Financing

On August 11, 2017, the Company and several investors, including certain of the Company’s directors, officers and large stockholders, entered into common stock purchase agreements (the “Purchase Agreements”) to effect certain equity financings required by the August Cerberus Amendment, as described in Note 8. Pursuant to the terms of the Purchase Agreements, the investors agreed to purchase, and the Company agreed to issue and sell, an aggregate of 947,870 shares of the Company’s common stock in a private placement financing at a per share purchase price of $4.22 for net cash proceeds to the Company of approximately $4,000 (the “August 2017 Financing”). The August 2017 Financing closed on August 17, 2017.

 

In addition, pursuant to the terms of the Purchase Agreements, certain investors agreed to participate in certain subsequent equity financings (the “Committed Financings”), such that, if the Company notified any such investor on or before March 5, 2018 of a failure to meet a certain liquidity covenant set forth in the August Cerberus Amendment (see Note 8), then such investor would be obligated to purchase in a private placement financing additional shares of the Company’s common stock as requested at a per share purchase price equal to the lower of $4.22, 90% of the average closing price of the Company’s common stock for the 20 days prior to the date of the Company’s notification, or the closing price of the Company’s common stock on the day prior to the Company’s notification, subject to certain other conditions and caps, including that the aggregate number of shares issuable in the August 2017 Financing and the Committed Financings could not exceed 19.9% of the total number of shares of the Company’s common stock outstanding as of August 11, 2017. The maximum aggregate value of the commitments from all investors for the Committed Financings was approximately $5,500. As described in Note 11, the requirement to effect the Committed Financings has been eliminated from the Cerberus Credit Facility as of the effectiveness of the November Cerberus Amendment, and as a result, we do not expect to effect any Committed Financings.

 

14


 

Pursuant to the terms of the Purchase Agreements, and in consideration for the agreement of certain investors to participate in the Committed Financings, the Company issued to such investors certain warrants to purchase shares of the Company’s common stock, as further described under “Warrants” below.

 

Certain terms of the August 2017 Financing and the Committed Financing with respect to each of the Company’s directors, officers, large stockholders and other investors participating therein are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

 

    

Aggregate

    

 

 

 

 

 

 

No. of Shares

 

Aggregate

 

Purchase Price

 

 

 

 

 

 

 

Subject to

 

Purchase Price

 

of Shares That

 

 

 

 

 

No. of Share

 

Warrant

 

of Shares

 

May Be

 

 

 

Name of Investor,

 

Purchased in

 

Issued in

 

Purchased in

 

Purchased in

 

Aggregate

Relationship with the

 

Concurrent

 

Concurrent

 

Concurrent

 

Committed

 

Purchase Price

Company

 

Financing

 

Financing

 

Financing

 

Financings

 

of all Shares(1)

Jess Ravich, Director

 

473,934

 

237,834

 

$

2,000

 

$

4,015

 

$

6,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert Galvin, Chairman of the Board

 

23,697

 

5,924

 

$

100

 

$

100

 

$

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Howard Siegel, President, Chief Operating Officer

 

23,697

 

 —

 

$

100

 

$

 —

 

$

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cove Street Capital, LLC Significant Stockholder

 

236,967

 

59,241

 

$

1,000

 

$

1,000

 

$

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Investors

 

189,575

 

23,696

 

$

800

 

$

400

 

$

1,200


(1)Assumes the purchase by each investor of its maximum commitment in the Committed Financings. However, as described above and in Note 11, the requirement to effect the Committed Financings has been eliminated as of the  effectiveness of the November Cerberus Amendment, and as a result, the Company does not expect to effect any Committed Financings.

 

Warrants

Warrants Issued in Connection with Hi-Tec Acquisition

As of October 28, 2017, the Company had outstanding a warrant to purchase up to 120,000 shares of the Company’s common stock, which was issued on November 28, 2016 in connection with a customer license agreement for the Hi-Tec brand. The shares subject to the warrant vest in five tranches of 20,000 shares each corresponding to the five-year initial term of the related license agreement, plus a sixth tranche that vests only if the license agreement is renewed for a subsequent five-year period. The sixth tranche is assigned no value until such time as the related contingency is resolved. For the year ended January 28, 2017, the Company determined the fair value of this warrant to be $567. During the three and nine month periods ended October 28, 2017, the Company recognized contra-revenue and APIC of $13 and $39, respectively, related to the amortization of deferred expense related to this warrant.

 

Warrants Issued in August 2017 Financing

 

On August 17, 2017 and in connection with the August 2017 Financing, the Company issued to certain of the investors in such financing warrants to purchase up to an aggregate of 326,695 shares of the Company’s common stock at an exercise price of $4.22 per share. The warrants are exercisable at any time from March 5, 2018 until the seven-year anniversary of the initial issuance date, may be exercised in cash or on a “cashless” basis, and are subject to customary adjustments in the event of stock dividends or other distributions, stock splits, or mergers, reclassifications or similar transactions. As of October 28, 2017, the Company determined the fair value of these warrants to be $665, using a Black Scholes option pricing model. During the three and nine month periods ended October 28, 2017, the Company recognized warrant expense and additional paid in capital of $665. Warrant expense was recorded in our Selling, General and Administrative expenses.

 

15


 

(8)   Debt

 

Cerberus Credit Facility

On December 7, 2016, in connection with the closing of the Hi-Tec Acquisition, the Company entered into a senior secured credit facility with Cerberus Business Finance, LLC (“Cerberus”), as administrative agent and collateral agent for the lenders from time to time party thereto (such credit facility, the “Cerberus Credit Facility”), pursuant to which the Company is permitted to borrow (i) up to $5,000 under a revolving credit facility, and (ii) up to $45,000 under a term loan facility. Also on December 7, 2016 and in connection with the closing of the Hi-Tec Acquisition, the Company drew down a $45,000 term loan under the Cerberus Credit Facility and used a portion of these borrowings to fund the Hi-Tec Acquisition, including the repayment of substantially all of the outstanding indebtedness of Hi-Tec Holdings, and to repay all amounts owed under the Company’s former credit facility with JPMorgan Chase Bank, N.A. (“JPMorgan”). The Company used the remaining borrowings under the Cerberus Credit Facility for general working capital.  During the Nine Months, the Company drew down $5,000 under its revolving credit facility under the Cerberus Credit Facility, none of which was drawn during the Third Quarter.

The Cerberus Credit Facility is secured by a first priority lien on, and security in, substantially all of the assets of the Company and its subsidiaries, is guaranteed by the Company’s subsidiaries, and has a five-year term. The Cerberus Credit Facility bears interest at a rate per annum equal to either the rate of interest publicly announced from time to time by JPMorgan in New York, New York as its reference rate, base rate or prime rate or LIBOR plus, in each case, the applicable margin and subject to the applicable rate floor. Borrowings under the Cerberus Credit Facility are subject to certain maintenance and other fees as set forth therein. The terms of the Cerberus Credit Facility include financial covenants that set financial standards the Company is required to maintain and operating covenants that impose various restrictions and obligations regarding the operation of the Company’s business, including covenants that require the Company to obtain Cerberus’s consent before the Company can take certain specified actions. Events of default under the Cerberus Credit Facility include, among others, the following: any failure to make payments thereunder when due; the occurrence of certain bankruptcy events; any failure by the Company to meet certain revenue standards after the expiration or termination of any material contracts; the Company or any of its subsidiaries ceases to conduct any material part of their respective businesses; the imposition of penalties, remedies or liabilities on the Company or its subsidiaries in connection with certain criminal or regulatory actions or proceedings; and the occurrence of a change of control of the Company. If an event of default under the Cerberus Credit Facility occurs, subject to certain cure periods for certain events of default, Cerberus would have the right to terminate its obligations thereunder, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under applicable law, including foreclosing on the Company’s and/or its subsidiaries assets that serve as collateral for the borrowed amounts.

As of October 28, 2017, outstanding borrowings under the Cerberus Credit Facility were $48,400.  Outstanding borrowings are reflected on the accompanying condensed consolidated balance sheet net of unamortized deferred financing costs of $3,364, which will be amortized and recognized as interest expense through the maturity date of the borrowings. In addition, all outstanding borrowings under the Cerberus Credit Facility are reflected as current liabilities on the accompanying condensed consolidated balance sheet because, as of October 28, 2017, the Company was not in compliance with certain financial covenants set forth in the Cerberus Credit Facility, namely (i) the leverage ratio (as defined and calculated in the Cerberus Credit Facility), which was required to be 10.50 to 1.00, and (ii) the fixed charge coverage ratio (as defined and calculated in the Cerberus Credit Facility), which was required to be 0.35 to 1.00, and the Company does not currently have the cash on hand to repay all of the borrowings under the Cerberus Credit Facility.  However, subsequent to October 28, 2017, the Company and Cerberus have agreed to the terms of the November Cerberus Amendment, which, as of its effectiveness, waived these compliance failures and amended certain terms of the Cerberus Credit Facility. As a result, as of the date of this report, the Company believes it is in compliance with the Cerberus Credit Facility.

August 2017 Amendment

On August 11, 2017, the Company entered into an amendment to the Cerberus Credit Facility (the “August Cerberus Amendment”) relating to the Company’s noncompliance with certain covenants thereunder as of the end of the

16


 

first quarter of Fiscal 2018, namely (i) the Company’s failure to comply with certain reporting covenants under the Cerberus Credit Facility as a result of the Company’s late filing of the quarterly report for the first quarter of Fiscal 2018, and (ii) the Company’s failure to meet certain financial covenants set forth in the Cerberus Credit Facility as of April 29, 2017, including the required leverage ratio (as defined and calculated in the Cerberus Credit Facility) of 3.00 to 1.00 and the required fixed charge ratio (as defined and calculated in the Cerberus Credit Facility) of 1.50 to 1.00. Prior to the August Cerberus Amendment, Cerberus had agreed to forbear from exercising its rights or remedies under the Cerberus Credit Facility solely with respect to these events of default through August 11, 2017.

The August Cerberus Amendment included a waiver of all events of default under the Cerberus Credit Facility relating to the first quarter of Fiscal 2018 as described above and amended certain terms thereof, including, along with certain other administrative amendments, the following: (i) the required leverage ratio (as defined and calculated in the Cerberus Credit Facility) was amended to 16.00 to 1.00 through July 31, 2017, 10.50 to 1.00 through October 31, 2017, and decreasing ratios at the end of each of the Company’s fiscal quarters thereafter as set forth therein; (ii) the required fixed charge coverage ratio (as defined and calculated in the Cerberus Credit Facility) was amended to 0.25 to 1.00 through July 31, 2017, 0.35 to 1.00 through October 31, 2017, and increasing ratios at the end of each of the Company’s fiscal quarters thereafter as set forth therein; and (iii) the Company agreed to a new liquidity covenant that required the Company to maintain an amount of unrestricted cash on-hand, together with the availability under the revolving credit facility of the Cerberus Credit Facility, of no less than $3,000. The August Cerberus Amendment also provided that, if at any time the new liquidity covenant was not satisfied and Cerberus submitted a written capital demand, the Company would be required to complete a Committed Financing, as described in Note 7, resulting in net cash proceeds to the Company of the amount requested by Cerberus in such demand, subject to an aggregate maximum of approximately $5,500 and certain additional conditions.

 

As a condition to effectiveness of the August Cerberus Amendment, the Company was required to: (i) complete the August 2017 Financing, as described in Note 7, and (ii) obtain a firm commitment from one or more investors to fund one or more Committed Financings if required on or before March 5, 2018, which is also described in Note 7.

 

November 2017 Amendment

 

Subsequent to October 28, 2017, the Company and Cerberus agreed to the terms of the November Cerberus Amendment, which waived all compliance failures relating to the second quarter of Fiscal 2018 and amended certain terms of the Cerberus Credit Facility, including the amended covenants agreed to in the August Cerberus Amendment. As a result, as of the effectiveness of the November Cerberus Amendment, the amended covenants agreed to in the August Cerberus Amendment, as described above, are no longer applicable. See Note 11 for more information.

 

Related Party Ravich Loan

On December 7, 2016, in connection with the closing of the Hi-Tec Acquisition, the Company obtained an unsecured receivables funding loan for $5,000 from Jess Ravich, one of the Company’s directors (such loan, the “Ravich Loan”). The Ravich Loan bears interest at a rate of 9.5% per annum and is subject to a fee equal to 2.5% of the principal amount of the loan, or $125, which was paid upon the funding of the Ravich Loan. The outstanding principal and accrued interest under the Ravich Loan was due and payable 180 days after the closing of the Hi-Tec Acquisition, or on June 5, 2017, which the Company and the lender of the Ravich Loan agreed on June 5, 2017 to extend to July 31, 2017, and subsequently agreed on August 11, 2017 to further extend to February 28, 2018. Events of default under the Ravich Loan include, among others, any failure to make payments thereunder when due; any failure to make payments under certain of the Company’s other indebtedness when due; and the occurrence of certain bankruptcy events. If an event of default under the Ravich Loan occurs, subject to certain cure periods for certain events of default, Mr. Ravich would have the right to terminate his obligations thereunder, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other rights or remedies he may have under applicable law. The proceeds of the Ravich Loan were used to fund a portion of the purchase price for the Hi-Tec Acquisition. The Company expects that certain accounts receivable assets that are expected to be collected in the ordinary course of business will be used to repay the Ravich Loan. As of October 28, 2017, outstanding borrowings under the Ravich Loan were approximately $1,500. See Note 11 for more information about the terms of the November Cerberus Amendment.

17


 

(9)   Commitments and Contingencies

 

Trademark Indemnities

 

Cherokee Global Brands indemnifies certain customers against liability arising from third‑party claims of intellectual property rights infringement related to the Company’s trademarks. These indemnities appear in the licensing agreements with the Company’s customers, are not limited in amount or duration and generally survive the expiration of the contracts. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, the Company is unable to determine a range of estimated losses that it could incur related to such indemnifications.

Litigation Reserves

 

From time to time, the Company may become involved in various legal proceedings and other similar matters incidental to the Company’s business, the resolution of which is not presently expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity. Estimated reserves for contingent liabilities, including threatened or pending litigation, are recorded as liabilities in the accompanying condensed consolidated balance sheets when the outcome of these matters is deemed probable and the liability is reasonably estimable.

The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the expected probable favorable or unfavorable outcome of each claim. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the Company's results of operations and financial condition. No material amounts were accrued as of October 28, 2017 or January 28, 2017 related to any of the Company’s legal proceedings.

 

(10)   Segment Reporting and Geographic Information

 

The following table reconciles segment activity to the accompanying condensed consolidated statements of operations for the three and nine months ended October 28, 2017 and the accompanying condensed consolidated balance sheet as of October 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cherokee Global Brands
Segment

 

Hi-Tec
Segment

 

Consolidated

 

 

 

 

 

 

 

Three months ended October 28, 2017