10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 1, 2015.

oTransition 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 x  No o

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 x  No o

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

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

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 September 4, 2015
Common Stock, $.02 par value per share	8,713,366

CHEROKEE INC.

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets August 1, 2015 and January 31, 2015	3
Consolidated Statements of Income Three and six month periods ended August 1, 2015 and August 2, 2014	4
Consolidated Statements of Comprehensive Income Three and six month periods ended August 1, 2015 and August 2, 2014	5
Consolidated Statement of Stockholders’ Equity Six month period ended August 1, 2015	6
Consolidated Statements of Cash Flows Six month periods ended August 1, 2015 and August 2, 2014	7
Notes to Consolidated Financial Statements	8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	22
ITEM 4. Controls and Procedures	22
ITEM 5. Other Information	22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	23
ITEM 1A. Risk Factors	23
ITEM 6. Exhibits	30
Signatures	31
Certifications

2

Part 1. Financial Information

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CHEROKEE INC.

CONSOLIDATED BALANCE SHEETS

Unaudited

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

	August 1, 2015		January 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	9,797	$	7,581
Receivables	8,317		7,425
Income taxes receivable	1,291		919
Prepaid expenses and other current assets	446		431
Deferred tax asset	412		412
Total current assets	20,263		16,768
Trademarks, net	40,706		39,821
Deferred tax asset	272		858
Property and equipment, net	1,251		1,165
Other assets	44		48
Total assets	$	62,536	$	58,660
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued payables	$	1,624	$	1,720
Current portion of long term debt	7,308		7,308
Income taxes payable	—		—
Deferred revenue—current	38		17
Accrued compensation payable	556		1,430
Total current liabilities	9,526		10,475
Long term liabilities:
Long term debt	14,182		17,836
Income taxes payable	399		391
Other non-current	356		121
Total liabilities	24,463		28,823
Commitments and Contingencies
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, 8,713,366 issued and outstanding at August 1, 2015 and 8,558,411 issued and outstanding at January 31, 2015	174		171
Additional paid-in capital	26,756		24,024
Retained earnings	11,143		5,642
Total stockholders’ equity	38,073		29,837
Total liabilities and stockholders’ equity	$	62,536	$	58,660

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

3

CHEROKEE INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

(amounts in thousands, except per share amounts)

	Three Months ended						Six Months ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Royalty revenues	$	8,482		$	8,764		$	18,712		$	18,725
Selling, general and administrative expenses	5,131			4,818			9,361			9,380
Amortization of trademarks	211			233			421			466
Operating income	3,140			3,713			8,930			8,879
Other income (expense):
Interest (expense)	(165		)	(212		)	(340		)	(452		)
Interest income and other income (expense), net	(2		)	—			(2		)	—
Total other income (expense), net	(167		)	(212		)	(342		)	(452		)
Income before provision for income taxes	2,973			3,501			8,588			8,427
Income tax provision	1,045			1,249			3,087			2,583
Net income	$	1,928		$	2,252		$	5,501		$	5,844
Basic earnings per share	$	0.22		$	0.27		$	0.64		$	0.70
Diluted earnings per share	$	0.22		$	0.27		$	0.62		$	0.69
Weighted average shares outstanding:
Basic	8,691			8,414			8,631			8,405
Diluted	8,951			8,457			8,875			8,439
Dividends declared per share	$	0.00		$	0.05		$	0.00		$	0.10

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

4

CHEROKEE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(amounts in thousands)

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Net income	$	1,928	$	2,252	$	5,501	$	5,844
Other comprehensive income	—		—		—		—
Comprehensive income	$	1,928	$	2,252	$	5,501	$	5,844

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

5

CHEROKEE INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(amounts in thousands)

	Common Stock			Additional Paid-in		Retained
	Shares	Par Value		Capital		Earnings		Total
Balance at January 31, 2015	8,558	$	171	$	24,024	$	5,642	$	29,837
Stock-based compensation	—	—		943		—		943
Tax effect from stock option exercises	—	—		138		—		138
Stock option exercises and equity issuances, net of tax	155	3		1,651		—		1,654
Net income	—	—		—		5,501		5,501
Balance at August 1, 2015	8,713	$	174	$	26,756	$	11,143	$	38,073

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

6

CHEROKEE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(amounts in thousands)

	Six Months Ended
	August 1, 2015			August 2, 2014
Operating activities
Net income	$	5,501		$	5,844
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	206			209
Amortization of trademarks	421			466
Deferred income taxes	(68		)	371
Reversal of uncertain tax liabilities	—			(736		)
Stock-based compensation	943			424
Excess tax benefit from share-based payment arrangements	(240		)	(9		)
Other, net	257			19
Changes in operating assets and liabilities:
Receivables	(892		)	(2,112		)
Prepaids and other current assets	(15		)	(196		)
Income taxes receivable and payable, net	426			290
Accounts payable and other accrued payables	(96		)	(478		)
Deferred revenue	21			(39		)
Accrued compensation	(1,077		)	267
Net cash provided by operating activities	5,387			4,320
Investing activities
Purchase of property and equipment	(292		)	(371		)
Purchases of trademarks, including registration and renewal cost	(1,306		)	(46		)
Net cash used in investing activities	(1,598		)	(417		)
Financing activities
Payments of JPMorgan Term Loan	(3,672		)	(3,355		)
Proceeds from exercise of stock options	1,859			320
Excess tax benefit from share-based payment arrangements	240			9
Dividends	—			(420		)
Net cash used in financing activities	(1,573		)	(3,446		)
Increase (decrease) in cash and cash equivalents	2,216			457
Cash and cash equivalents at beginning of period	7,581			3,634
Cash and cash equivalents at end of period	$	9,797		$	4,091
Cash paid during period for:
Income taxes	$	2,551		$	2,719
Interest	319			433
Non-cash financing activities:
Accrued and declared dividends	$	—		$	422

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

7

CHEROKEE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of August 1, 2015 and for the three and six month periods ended August 1, 2015 and August 2, 2014 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and Article 10 of Regulation S-X. These consolidated financial statements include the accounts of Cherokee Inc. (“Cherokee” or the “Company”) and its subsidiaries and have not been audited by independent registered public accountants, but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee are necessary for a fair statement of the financial position and the results of operations for the periods presented.  All material intercompany accounts and transactions have been eliminated during the consolidation process. The accompanying consolidated balance sheet as of January 31, 2015 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.  The results of operations for the three and six month periods ended August 1, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2016.  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 31, 2015.

As used herein, the term “First Quarter” refers to the three months ended May 2, 2015; the term “Second Quarter” refers to the three months ended August 1, 2015; the term “Six Months” refers to the six months ended August 1, 2015;  the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; and the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014.

(2)   Summary of Significant Accounting Policies

Receivables

Receivables are reported at amounts the Company expects to be collected, net of allowance for doubtful accounts.

Allowance for Doubtful Accounts

The Company records its allowance for doubtful accounts based upon its assessment of various factors, such as: historical experience, age of accounts receivable balances, credit quality of the Company’s licensees, current economic conditions, bankruptcy, and other factors that may affect the Company’s licensees’ ability to pay. There was no allowance for doubtful accounts as of August 1, 2015 or January 31, 2015.

Recent Accounting Pronouncements

In May 2014, the FASB issued new guidance surrounding revenue from contracts with customers noting that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date for all entities by one year. This guidance is effective for fiscal periods beginning after December 15, 2017. The anticipated impact of the adoption of this guidance on the Company is still being evaluated.

In August 2014, the Financial Accounting Standards Board issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016. The adoption of this guidance will not impact the Company’s consolidated financial statements or related disclosures.

In February 2015, the Financial Accounting Standards Board issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal periods beginning after December 15, 2015, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.

Use of Estimates

On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, stock based compensation and income taxes. The Company bases its estimates on historical and anticipated results, trends and on various other assumptions that it believes are reasonable under the circumstances, including assumptions as to 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.

8

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased and money market funds purchased with an original maturity date of three months or less to be cash equivalents.  At August 1, 2015 and January 31, 2015, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation (“FDIC”) limits.

Revenue Recognition and Deferred Revenue

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collection is reasonably assured. Revenues from royalty and brand representation agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from the Company’s licensees.

The Company’s royalty revenue recognition policy provides for recognition of royalties in the quarter earned. The Company’s agreement with Target Corporation (“Target”) for the Cherokee brand in the U.S. accounts for the majority of the Company’s historical revenues and is structured to provide royalty rate reductions once certain cumulative levels of retail sales are achieved by Target. With respect to Target’s sales in the U.S. of Cherokee branded products other than in the school uniforms category and adult products sold on Target’s website, revenue is recognized by applying the reduced contractual royalty rates prospectively to point of sale data after defined sales thresholds are exceeded. The royalty rate reductions do not apply retroactively to sales since the beginning of the fiscal year. As a result, the Company’s royalty revenues as a percentage of Target’s retail sales in the U.S. are highest at the beginning of each fiscal year and decrease during the fiscal year as Target exceeds sales thresholds as set forth in the Company’s agreement with Target. The amount of Cherokee brand royalty revenue earned by the Company from Target in any quarter is dependent not only on Target’s retail sales of Cherokee branded products in the U.S. in each quarter, but also on the royalty rate then in effect after considering Target’s cumulative level of retail sales for Cherokee branded products in the U.S. for the fiscal year. Historically, with Target, this has caused the Company’s first quarter to be the Company’s highest revenue and most profitable quarter and the Company’s fourth quarter to be the Company’s lowest revenue and least profitable quarter. However, such historical patterns may vary in the future depending upon the terms of any new license agreements, retail sales volumes achieved in each quarter from Target and revenues the Company receives from Target or other licensees that may or may not be subject to reduced royalty rates based upon cumulative sales, including with respect to the Company’s Liz Lange and Completely Me by Liz Lange brands, Cherokee brand in the school uniforms category, Cherokee adult products sold on Target’s website, and the Hawk and Tony Hawk brands.

In order to ensure that Cherokee’s licensees are appropriately reporting and calculating royalties owed to Cherokee, all of Cherokee’s license agreements include audit rights to allow Cherokee to validate the amount of the royalties paid. Any revenue resulting from these audits, or other audits, is recognized in the financial statement of the current reporting period.

Deferred Financing Costs and Debt Discount

Deferred financing costs and debt discounts are capitalized and amortized into interest expense over the life of the debt.

Foreign Withholding Taxes

Licensing revenue is recognized gross of withholding taxes that are remitted by the Company’s licensees directly to their local tax authorities.

Property and Equipment

Property and equipment consist of the following:

	August 1, 2015			January 31, 2015
Computer Equipment	$	523		$	426
Software	79			62
Furniture and Store Fixtures	1,633			1,457
Leasehold Improvements	415			413
Less: Accumulated depreciation	(1,399		)	(1,193		)
Property and Equipment, net	$	1,251		$	1,165

9

Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are written off, and the resulting gains or losses are included in current operations. Depreciation is provided on a straight line basis over the estimated useful life of the related asset.

Computers and related equipment and software are depreciated over three years. Furniture and store fixtures are depreciated over the shorter of seven years, or the remaining term of the licensee agreement. Leasehold improvements are depreciated over the shorter of five years, or the remaining life of the lease term.  Depreciation expense was $111 and $206 for the three and six month periods ended August 1, 2015 and $107 and $209 for the three and six month periods ended August 2, 2014, respectively.

Earnings Per Share Computation (amounts in thousands, including share amounts)

The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three month periods ended August 1, 2015 and August 2, 2014:

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Numerator:
Net income-numerator for net income per common share and net income per common share assuming dilution	$	1,928	$	2,252	$	5,501	$	5,844
Denominator:
Denominator for net income per common share — weighted average shares	8,691		8,414		8,631		8,405
Effect of dilutive securities:
Stock options	260		43		244		34
Denominator for net income per common share, assuming dilution:
Adjusted weighted average shares and assumed exercises	8,951		8,457		8,875		8,439

The computation for diluted number of shares excludes unexercised stock options which are anti-dilutive. There were 193 and 129 anti-dilutive shares for the three and six month periods ended August 1, 2015, respectively, and 961 and 884 anti-dilutive shares for each of the three and six months periods ended August 2, 2014.

Basic earnings per share (“EPS”) is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to the computation for basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

Significant Contracts

The terms of the Company’s relationship with Target as of the date of this report are set forth in a restated license agreement with Target, which was entered into effective as of February 1, 2008 and amended (i) on January 31, 2013 to add the category of school uniforms, (ii) on April 3, 2013 to provide for a fixed royalty rate of 2% for sales of Cherokee branded products in the category of adult merchandise sold on Target’s website (target.com) in Fiscal 2015 and in future periods and (iii) on January 6, 2014 to reflect Target’s election to renew the agreement through January 31, 2017 and to provide that Target can renew the agreement for successive two (2) year periods, provided that it satisfies the minimum guaranteed royalty payment of $10,500 for the preceding fiscal year (the “Restated Target Agreement”). The Restated Target Agreement grants Target the exclusive right in the United States to use the Cherokee trademarks in various specified categories of merchandise. On September 3, 2015, Target orally informed the Company that the Restated Target Agreement would not be renewed and will terminate at the end of its current term, which expires January 31, 2017.  The non-renewal was confirmed in writing on September 4, 2015.  The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration.

10

Under the current terms of the Restated Target Agreement, the minimum annual guaranteed royalty for Target is $10,500 and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum guaranteed royalty of $800). Under the Restated Target Agreement, Target has agreed to pay royalties based on a percentage of Target’s net sales of Cherokee branded merchandise during each fiscal year which percentage varies according to the volume of sales of merchandise other than for sales of Cherokee branded products in the school uniforms category and, beginning in Fiscal 2015, other than for sales of Cherokee branded products in the adult merchandise category that are made on Target’s website. The Company assumed a separate license agreement with Target for the Liz Lange brand in connection with the Company’s acquisition of the assets in September 2012.

In connection with the acquisition of the “Hawk” and “Tony Hawk” signature apparel brands and related trademarks (the “Hawk Acquisition”), Cherokee and Kohl’s Department Stores (“Kohl’s”) entered into an amended license agreement. Pursuant to such amendment, Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk branded apparel and related products in the United States and has agreed to pay Cherokee an annual royalty rate for its sales of Hawk branded signature apparel and related products in the United States subject to a minimum annual guaranteed royalty of $4,800 for four years.

Stock-Based Compensation

Effective July 16, 2013, the Company’s stockholders approved the 2013 Stock Incentive Award Plan (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 authorized to be issued (i) 700,000 additional shares of common stock, and (ii) 102,483 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 such shares of common 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 options to certain executives as a material inducement for employment. The Company accounts for stock options under authoritative guidance, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values.

The Company estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the consolidated statements of income. The compensation expense recognized for all stock-based awards is net of estimated forfeitures over the award’s service period.

Stock-based compensation expense recognized in selling, general and administrative expenses for stock options for the Six Months was $943, as compared to $424 for the comparable period in the prior year.

A summary of all activity for the Company’s stock options for the Six Months is as follows:

					Weighted
					Average
					Remaining
			Weighted		Contractual	Aggregate
			Average		Term	Intrinsic
	Shares		Price		(in years)	Value
Outstanding, at January 31, 2015	1,185,767		$	15.89	3.49	$	2,910
Granted	335,000		$	22.79
Exercised/cancellations for net settlements	(261,097	)	17.06
Expired/forfeited	(146,667	)	$	17.33
Outstanding, at August 1, 2015	1,113,003		$	17.50	4.56	$	11,159
Vested and Exercisable at August 1, 2015	550,161		$	15.50	3.18	$	6,616

11

As of August 1, 2015, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2,665, which is expected to be recognized over a weighted average period of approximately 2.48 years. The total fair value of all options which vested during the Six Months was $603.

Restricted Stock and Restricted Stock Units

In 2013, the Compensation Committee of the Company’s board of directors (the “Board of Directors”) granted certain performance-based equity awards to executives under the Company’s 2006 Stock Plan.

The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s Common Stock on February 1, 2013, or $13.95, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $15.35 for Fiscal 2014, (ii) $16.88 for Fiscal 2015 and (iii) $18.57 for the Company’s fiscal year ending in 2016.  The average share price will be calculated as the average of all market closing prices during the January preceding 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, 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 met for Fiscal 2015, which resulted in the vesting of two thirds of the shares subject to each award

Since the vesting of these performance-based equity awards are subject to market based performance conditions, the fair value of these awards were 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 grant and calculates the fair market value for the performance 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.

Pursuant to a compensation program for non-employee directors adopted by the Compensation Committee, at the meeting of the Board of Directors held immediately following the annual stockholder meeting in June each year, each non-employee member of the Board of Directors must make an election regarding the percentage, up to 100%, of his annual compensation for service on the Board of Directors to be paid in equity, in the form of restricted stock units (“RSU’s”). All of the RSU’s issuable under this program in June 2014 were approved and granted on July 28, 2014. The RSU’s awarded to the non-employee directors are subject to the terms of the 2013 Plan and RSU agreements that provide for quarterly vesting over a one year service period of August 4, 2014 through August 3, 2015, subject to acceleration of vesting upon the earlier to occur of the following: (i) a change in control of the Company, (ii) the death of the recipient or (iii) the recipient’s failure to be re-elected to the Board of Directors in any election in which the recipient stands for re-election. The fair value of these awards was measured on the effective date of grant using the price of the Company’s common stock. At the Board meeting held immediately following the annual stockholder meeting in June 2015, all of the non-employee directors elected to take all of their annual compensation for service on the Board in cash for the following year.

In June 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs and stock options to each member of the Board of Directors and to each of the Company’s executive officers under the 2013 Plan. All of the equity awards approved at that meeting vest in equal annual installments over three years, such that the full grants shall be vested on the 3rd anniversary of the grant date. The fair value of the RSU awards was measured on the effective date of grant using the price of the Company’s common stock.

In August 2014, the Compensation Committee of the Company’s Board of Directors granted a sales-based performance-based equity award to an employee under the 2013 Plan, which vests in five increments dependent upon achievement of certain annual sales targets. The fair value of this award was measured on the effective date of grant using the price of the Company’s common stock.

Stock-based compensation expense for shares of restricted stock and performance stock units for the Six Months was $488 compared to $96 for the comparable period in the prior year.

	Number of Shares		Weighted Average Grant-Date Fair Value
Unvested stock at January 31, 2015	76,936		$	13.02
Granted	160,000		22.94
Vested	(20,789	)	15.44
Forfeited	—		—
Unvested stock at August 1, 2015	216,147		$	20.13

12

As of August 1, 2015, total unrecognized stock-based compensation expense related to restricted stock and performance stock units was approximately $231, which is expected to be recognized over a weighted average period of approximately 2.4 years.

Trademarks

The Company holds various trademarks including Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others, in connection with numerous categories of apparel and other goods. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in a number of other countries. The Company also holds trademark applications for Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Sideout, Sideout Sport, Carole Little, Chorus Line, Saint Tropez-West, All That Jazz, and others in numerous countries. The Company intends to renew these registrations, as appropriate, prior to expiration. The Company monitors on an ongoing basis unauthorized uses of the Company’s trademarks, and relies primarily upon a combination of trademark, copyright, know-how, trade secrets, and contractual restrictions to protect the Company’s intellectual property rights both domestically and internationally.

Trademark registration and renewal fees are capitalized and are amortized on a straight-line basis over the estimated useful lives of the assets. Trademark acquisitions are capitalized and are either amortized on a straight-line basis over the estimated useful lives of the assets, or are capitalized as indefinite-lived assets, if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to Cherokee. Trademarks are evaluated for the possibility of impairment at least annually.

Acquisition of Everyday California® Lifestyle Brand

On May 14, 2015, Cherokee consummated an asset purchase agreement with Everyday California Holdings, LLC, under which it acquired various assets related to the Everyday California® Lifestyle Brand and related trademarks. The consideration for the assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal years 2017 and 2018.

Trademarks consist of the following:

	August 1, 2015			January 31, 2015
Acquired Trademarks	$	49,255		$	47,994
Other Trademarks	8,666			8,621
Accumulated amortization	(17,215		)	(16,794		)
Total	$	40,706		$	39,821

Fair Value of Financial Instruments

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

Level 3: Unobservable inputs for which there is little or no market data, which require the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities

The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these instruments. Long-term debt approximates fair value due to the variable rate nature of the debt.

The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in business are written off in the period identified since they will no longer generate any positive cash flows for the Company. Periodically, long-lived assets that will continue to be used by the Company need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses involve management judgment. In the event the projected undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written down to their estimated fair value, in accordance with authoritative guidance. The estimated undiscounted cash flows used for this nonrecurring fair value measurement are considered a Level 3 input, which consist of unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

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Income Taxes

Income tax expense of $1,045 was recognized for the Second Quarter, resulting in an effective tax rate of 35.1% in the Second Quarter, as compared to 35.7% in the second quarter of last year and compared to 32.4% for the full year of Fiscal 2015. The effective tax rate for the Second Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits.

The amount of unrecognized tax benefits was approximately $449 and $449, respectively, at August 1, 2015 and January 31, 2015. At August 1, 2015, approximately $296 of unrecognized tax benefits would, if recognized, affect the 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 consolidated statements of income. The total amount of interest and penalties recognized in the consolidated statements of income for the Second Quarter was $5 as compared with $1 in the second quarter of last year. As of August 1, 2015 and January 31, 2015, respectively, the total amount of accrued interest and penalties included in the liability for unrecognized tax benefits was $94 and $84.

The Company has unrecognized tax benefits pertaining to the issue of its taxability in various state tax jurisdictions.  It is reasonably possible that the amount of unrecognized tax benefits may decrease within the next 12 months as a result of the Company’s interaction with these various state tax jurisdictions.  The Company anticipates that the total amount of unrecognized tax benefits may decrease in the next 12 months by approximately $449.

The Company files income tax returns in the U.S. federal and California and certain other state jurisdictions. For federal income tax purposes, the fiscal 2012 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 2011 and later tax years remain open for examination by the tax authorities under a four year statute of limitations.

Marketing and Advertising

Generally, the Company’s “Direct to Retail” licensees fund their own advertising programs. Cherokee’s marketing, advertising and promotional costs totaled $730 and $664 for the six month periods ended August 1, 2015 and August 2, 2014, respectively. These costs are expensed as incurred and were accounted for as selling, general and administrative expenses.

The Company provides marketing expense money to certain large licensees based upon sales criteria to help them build the Company’s licensed brands in their respective territories, thus providing an identifiable benefit to Cherokee. The amounts paid for such marketing expenses during the six month periods ended August 1, 2015 and August 2, 2014 were $332 and $118, respectively, and are included in the total marketing, advertising and promotional costs.

Deferred Rent and Lease Incentives

When a lease includes lease incentives (such as a rent abatement) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent and lease incentives in the accompanying consolidated balance sheets. For leasehold allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income over the term of the lease.

Comprehensive Income

Authoritative guidance establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the three months ended August 1, 2015 and August 2, 2014, the Company has no comprehensive income components and accordingly, net income equals comprehensive income.

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Treasury Stock

Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, and the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company records such excess as an increase in additional paid-in capital.

Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.

(3)    Debt

Credit Agreement with JPMorgan Chase

On September 4, 2012, and in connection with the acquisition of the “Liz Lange” and “Completely Me by Liz Lange” brands, Cherokee and JPMorgan Chase (or “JPMorgan”) entered into a credit agreement (as amended, the “Credit Agreement”), which was amended on January 31, 2013 in connection with the Company’s acquisition of rights related to the Cherokee brand in the school uniforms category and was further amended on January 10, 2014 in connection with the Hawk Acquisition. Effective January 10, 2014, Cherokee and JPMorgan entered into amendments to each of (i) the Credit Agreement, (ii) the existing term note, which was originally issued by Cherokee in favor of JPMorgan as of September 4, 2012 and previously amended by the parties effective January 31, 2013 (as amended, the “2013 Term Note”) and (iii) the line of credit note, which was issued by Cherokee in favor of JPMorgan as of September 4, 2012 (as amended, the “Revolver”). In addition, pursuant to the Credit Agreement, JPMorgan issued to Cherokee a new term note (the “2014 Term Note” and, together with the foregoing amendments, the “Loan Agreement Amendments”) in the principal sum equal to the purchase price in the Hawk Acquisition, or $19,000. The 2014 Term Note bears interest equal to either: (i) an adjusted annual LIBOR rate reset monthly, bimonthly or quarterly, plus 2.75% or 3.00% depending on the applicable senior funded debt ratio or (ii) JPMorgan’s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the one month LIBOR rate plus 2.5%. Pursuant to the Credit Agreement, the definition of “senior funded debt ratio” requires that Cherokee not exceed a ratio equal to (i) 2.50 to 1.00 until the fiscal quarter ending October 31, 2014, (ii) 2.25 to 1.00 from the fiscal quarter ending January 31, 2015 until the fiscal quarter ending January 31, 2016, and (iii) 2.00 to 1.00 thereafter. Prior to the effectiveness of the January 2014 amendment to the Credit Agreement, such limitation on Cherokee’s senior funded debt ratio was fixed at 2.00 to 1.00 for all periods. In addition, pursuant to the Loan Agreement Amendments, the interest rate that applies to the 2013 Term Note and to the Revolver was amended to equal either: (i) an adjusted annual LIBOR rate reset monthly, bimonthly or quarterly, plus 2.25% or 2.5% depending on the applicable senior funded debt ratio or (ii) the JPMorgan’s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the 1 month LIBOR Rate plus 2.5%.

Following the issuance of the 2014 Term Note, Cherokee’s total borrowings under the Credit Agreement (collectively, the “Loan”) is evidenced by (i) the 2013 Term Note, which was issued in the principal amount of $16,600 and is payable on a quarterly basis through August 2017 and of which $7,975 was outstanding as of August 1, 2015, (ii) the Revolver, which provides Cherokee with a revolving line of credit in the principal amount of $2,000, none of which is outstanding as of August 1, 2015 and (iii) the 2014 Term Loan, which was issued in the principal amount of $19,000 and is payable on a quarterly basis through November 2018 and of which approximately $13,617 is outstanding as of August 1, 2015. Cherokee paid an upfront fee equal to $95 in connection with the issuance of the 2014 Term Loan.

Consistent with the existing terms of the Credit Agreement, the Loan is secured by continuing security agreements, trademark security agreements and continuing guarantees executed by Cherokee and its subsidiaries, as applicable. In addition, the Credit Agreement includes various restrictions and covenants regarding the operation of Cherokee’s business, including covenants that require Cherokee to obtain JPMorgan’s consent in certain circumstances before Cherokee can: (i) incur additional indebtedness, (ii) make acquisitions, mergers or consolidations in excess of $5,000 on an aggregate basis following the Hawk Acquisition, (iii) issue any equity securities other than pursuant to Cherokee’s employee equity incentive plans or programs and (iv) repurchase or redeem any outstanding shares of common stock or pay dividends or other distributions, other than stock dividends, to Cherokee’s stockholders. The Credit Agreement also imposes financial covenants, including: (i) a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 and (ii) a limitation of Cherokee’s “senior funded debt ratio” as described above. Further, Cherokee has granted a security interest in favor of JPMorgan in all of Cherokee’s assets (including trademarks) as collateral for the Loan. In the event of a default under the Credit Agreement, JPMorgan has the right to terminate its obligations under the Credit Agreement, accelerate the payment on any unpaid balance of the Credit Agreement and exercise its other rights, including foreclosing on Cherokee’s assets under the security agreements. As of August 1, 2015, the Company was in compliance with these financial covenants.

Target’s election not to renew the Restated Target Agreement triggered an event of default under the Credit Agreement, but JPMorgan and the Company have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the Credit Agreement solely with respect to such event of default through October 12, 2015.  The Company intends to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to the Company.

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(4) Commitments and Contingencies

Trademark Indemnities

Cherokee 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 the range of estimated losses that it could incur related to such indemnifications.

Litigation

Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. 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 results of operations and financial position. The Company may also be involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s financial position or results of operations. No material amounts were accrued as of August 1, 2015 or January 31, 2015 related to any of the Company’s legal proceedings.

(5) Segment Reporting

Authoritative guidance requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies reportable segments based on how management internally evaluates separate financial information, business activities and management responsibility.

The Company operates in a single business segment, the marketing and licensing of brand names and trademarks for apparel, footwear and accessories. Cherokee’s marketing and licensing activities extend to brands which the Company owns and to brands owned by others. Cherokee’s operating activities relating to owned and represented brands are identical and are performed by a single group of marketing professionals. While Cherokee’s principal operations are in the United States, the Company also derives royalty revenues from some of the Company’s licensees that are located all around the world. Revenues by geographic area based upon the licensees’ country of domicile consisted of the following:

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
U.S. and Canada	$	6,069	$	6,092	$	13,809	$	13,663
Asia	936		932		1,805		1,804
Latin America	608		795		1,153		1,443
All Others	762		654		1,434		1,189
United Kingdom and Europe	107		291		511		626
Total	$	8,482	$	8,764	$	18,712	$	18,725

Long-lived tangible assets have been located in the U.S., United Kingdom, Mexico and Asia with net values of approximately $926, $0, $267 and $58 as of August 1, 2015 and net values of approximately $794, $0, $299 and $72 as of January 31, 2015.

(6) Subsequent Events

On September 3, 2015, Target orally informed the Company that it would not renew the Restated Target Agreement which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration. Target’s election not to renew the Restated Target Agreement triggered an event of default under the Credit Agreement, but JPMorgan and the Company have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the Credit Agreement solely with respect to such event of default through October 12, 2015.  The Company intends to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to the Company.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) should be read together with the unaudited condensed consolidated financial statements and the related notes included in this report. For additional context with which to understand our financial condition and results of operations, refer to the MD&A for the fiscal year ended January 31, 2015 contained in our 2015 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on April 16, 2015, as well as the consolidated financial statements and notes contained therein (collectively, our “Annual Report”).  In addition to historical information, the following discussion and analysis contains forward-looking statements based upon our current views, expectations and assumptions that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking statements due to a number of factors, including, among others, the risks described in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date we file this report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

As used in this discussion and analysis, “Cherokee”, the “Company”, “we”, “us” and “our” refer to Cherokee Inc. and its consolidated subsidiaries, unless the context indicates or requires otherwise. Additionally, as used herein, the term “First Quarter” refers to the three months ended May 2, 2015; the term “Second Quarter” refers to the three months ended August 1, 2015; the term “Six Months” refers to the six months ended August 1, 2015;  the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; and the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014.

We have a 52- or 53-week fiscal year ending on the Saturday nearest to January 31, which aligns us with our retail licensees who generally also operate and plan using such a fiscal year. This results in a 53-week fiscal year approximately every four or five years. Each of Fiscal 2015, Fiscal 2014 and Fiscal 2013 was a 52-week, 52-week and 53-week fiscal year, respectively. Certain of our international licensees report royalties to us for quarterly and annual periods that may differ from ours. We do not believe that the varying quarterly or annual period ending dates from our international licensees have a material impact upon our reported financial results, as these international licensees maintain comparable annual periods in which they report retail sales and royalties to us on a year-to-year basis.

Overview

Cherokee is a global marketer and manager of a portfolio of fashion and lifestyle brands it owns or represents, licensing the Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Sideout, Carole Little, Everyday California and àle by alessandra brands and related trademarks and other brands in multiple consumer product categories and sectors. We are one of the leading global licensors of style focused lifestyle brands for apparel, footwear, home and accessories. As part of our business strategy, we frequently evaluate other brands and trademarks for acquisition into our portfolio. We enter into license agreements with recognizable retail partners in their respective global locations to provide them the rights to design, manufacture and sell products bearing our brands and to provide them our proprietary 360-degree platform. Cherokee provides its licensees with a proprietary 360-degree platform that seamlessly integrates with the DTR model. Our retail responsiveness process and 360-degree unique value proposition have allowed for Cherokee to address the growing power of the consumer and the present and future needs of the retailers that are selling our portfolio of lifestyle brands. Based on consumer research, retail insights and brand insights that are constantly being measured, evaluated and incorporated into our 360-degree platform, we believe Cherokee has become a key strategic partner to our licensees. We refer to this strategy as our “Direct to Retail” or “DTR” licensing model. As of August 1, 2015, we had thirty-one continuing license agreements covering both domestic and international markets, thirteen of which pertained to the Cherokee brand.

We derive revenues from licensing our trademarks to retailers all over the world. Our current retail licensee relationships cover over fifty countries and over 8,000 retail stores and online businesses and include relationships with Target, Kohl’s, RT Mart, Comercial Mexicana, TJ Maxx, Nishimatsuya, Sears Canada and Argos. Our two most significant licensees are Target Corporation (“Target”) and Kohl’s Illinois, Inc. (“Kohl’s”).

Recent Developments

On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The restated Target license agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration.

Target’s election not to renew the license agreement for the Cherokee brand in the U.S. triggered an event of default under our credit agreement with JPMorgan, but we and JPMorgan have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the credit agreement solely with respect to such event of default through October 12, 2015.  We intend to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to us.

Critical Accounting Policies and Estimates

There has been no material change to our critical accounting policies and estimates from the information provided in our Annual Report.

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments 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, including those related to revenue recognition, deferred taxes, impairment of long-lived assets, contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates.

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We consider accounting policies relating to the following areas to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

·Revenue recognition;

·Provision for income taxes and deferred taxes;

·Impairment of long-lived assets;

·Contingencies and litigation; and

·Accounting for stock-based compensation.

You should refer to our Annual Report for a discussion of our policies on revenue recognition, deferred taxes, impairment of long-lived assets, contingencies and litigation and accounting for stock-based compensation.

Results of Operations

The following table sets forth for the periods indicated certain of our consolidated financial data.

(amounts in thousands)	Three Months ended August 1, 2015			Three Months ended August 2, 2014			Six Months ended August 1, 2015		Six Months ended August 2, 2014
Royalty revenues	$	8,482		$	8,764		18,712		18,725
Selling, general, administrative and amortization expenses	5,342			5,051			9,782		9,846
Operating income	3,140			3,713			8,930		8,879
Interest (expense) and other income/expense, net	(167		)	(212		)	(342	)	(452	)
Income tax provision	1,045			1,249			3,087		2,583
Net income	$	1,928		$	2,252		5,501		5,844

Revenues

In the three and six month periods ended August 1, 2015, our revenues totaled $8.5 million and $18.7 million, respectively, as compared to $8.8 million and $18.7 million in the three and six month periods ended August 2, 2014. Revenues for the second quarter and six month periods ended August 1, 2015 and August 2, 2014 were primarily generated from licensing our trademarks to retailers and to a lesser extent wholesalers and our share of licensing revenues from brand representation licensing agreements with other brand owners. The decrease in revenues was principally due to the strengthening of the U.S. dollar and the transition and timing around the launches of Sears Canada and Argos.  We are transitioning in Canada from Target Canada to Sears Canada for our Cherokee and Liz Lange brands and from Tesco to Argos in the United Kingdom for our Cherokee brand. We expect revenues from these new licensees to begin during the third quarter of Fiscal 2016 for Argos and during the first quarter of Fiscal 2017 for Sears Canada.

Total worldwide retail sales of merchandise bearing the Cherokee brand totaled $302 million and $632 million and approximately $321 million and $663 million in the second quarter and six month periods of Fiscal 2016 and Fiscal 2015, respectively.

Because we do not have direct oversight over our licensees, we may not have all the information necessary to determine or predict the specific reasons why revenue may increase or decrease in any given period. Given our contractual royalty rate reductions as certain sales volume thresholds are achieved for Cherokee branded products and Hawk and Tony Hawk branded products in various product categories in the U.S., we expect that our first quarter will continue to be our highest revenue and profitability quarter and our fourth quarter will continue to be our lowest revenue and profitability quarter.

The following table sets forth our revenues by brand for the three and six months ended August 1, 2015 and August 2, 2014.

	Three Months ended August 1, 2015				Three Months ended August 2, 2014				Six Months ended August 1, 2015				Six Months ended August 2, 2014
(dollar amounts in thousands) Royalty Revenue	Royalty Revenue		% of Total Revenue		Royalty Revenue		% of Total Revenue		Royalty Revenue		% of Total Revenue		Royalty Revenue		% of Total Revenue
Cherokee Brand Royalty Revenues	$	6,148	72	%	$	6,568	75	%	$	14,092	75	%	$	14,464	77	%
Hawk Brand Royalty Revenues	1,335		16	%	1,209		14	%	2,550		14	%	2,449		13	%
Liz Lange Brand Royalty Revenues	729		9	%	814		9	%	1,400		8	%	1,463		8	%
All Other Brand Revenues	270		3	%	173		2	%	670		3	%	349		2	%
Total Royalty Revenue	$	8,482	100	%	$	8,764	100	%	$	18,712	100	%	$	18,725	100	%

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Geographic Revenues

The following table sets forth our geographic licensing revenues for the three and six months ended August 1, 2015 and August 2, 2014.

	Three Months Ended August 1, 2015				Three Months Ended August 2, 2014				Six Months Ended August 1, 2015				Six Months Ended August 2, 2014
	Royalty Revenue		% of Total Revenue		Royalty Revenue		% of Total Revenue		Royalty Revenue		% of Total Revenue		Royalty Revenue		% of Total Revenue
U.S. and Canada	$	6,069	72	%	$	6,092	70	%	$	13,809	74	%	$	13,663	73	%
Asia	936		11	%	932		11	%	1,805		9	%	1,804		10	%
Latin America	608		7	%	795		9	%	1,153		6	%	1,443		8	%
All Others	762		9	%	654		7	%	1,434		8	%	1,189		6	%
United Kingdom and Europe	107		1	%	291		3	%	511		3	%	626		3	%
Total	$	8,482	100	%	$	8,764	100	%	$	18,712	100	%	$	18,725	100	%

U.S. and Canada

Target

Target currently has approximately 1,790 stores in the United States. Retail sales of Cherokee branded products at Target in the U.S. were slightly higher in the Second Quarter at approximately $230 million from $229 million in the second quarter of last year. Target pays royalty revenues to us based on a percentage of its sales of Cherokee branded products pursuant to our license agreement with Target. The license agreement is structured to provide royalty rate reductions for Target after it has achieved certain levels of retail sales of Cherokee branded products in certain product categories in the U.S. during each fiscal year. Target also pays fixed royalty rates for Target’s sales of Cherokee branded products in the adult merchandise category that are made by Target through its website (target.com) and sales of Cherokee branded products in the category of school uniforms. In addition, Target pays a fixed percentage of net sales of its products bearing the Liz Lange brand in the U.S.

Under the current terms of the restated Target agreement, the minimum annual guaranteed royalty for Target is $10.5 million and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum annual guaranteed royalty of $0.8 million).

Royalty revenues from our Cherokee brand at Target U.S., which excludes sales of Cherokee branded products in Canada and Cherokee branded products sold in the school uniforms category were $3.6 million and $9.0 million in the Second Quarter and Six Months, which accounted for 43%, and 48%, respectively, of our consolidated revenues for such periods. Royalty revenues from our Cherokee brand at Target were $3.6 million and $9.1 million for the second quarter and six months of last year, which accounted for 41%, and 48%, respectively, of our consolidated revenues during such periods. On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The restated Target license agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration.

Kohl’s

Kohl’s currently has approximately 1,200 stores in the United States. Retail sales of Hawk or Tony Hawk branded products at Kohl’s totaled $22.4 million and $41.2 million in the Second Quarter and Six Months, compared to $28.0 million and $53.8 million in the second quarter and six months of last year.

Because retails sales did not exceed the contractual minimum guarantees, royalty revenues from our Hawk brand at Kohl’s remained flat at $1.2 million and $2.4 million in the Second Quarter and Six Months, which accounted for 14% and 13% of our consolidated revenues for such periods.

United Kingdom and Europe

We terminated our license agreement with Tesco as of January 31, 2015 and entered into a new license agreement with Argos, a subsidiary of Home Retail Group plc, which launched a broad assortment of Cherokee lifestyle products online, in catalog and in more than 750 Argos stores across the United Kingdom and Ireland in late July 2015. We expect revenues from Argos licensees to begin during the third quarter of Fiscal 2016.

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Latin America, Asia and others

Other international royalty revenues in the Second Quarter decreased to $2.4 million from $2.7 million in the second quarter of Fiscal 2015, representing a 9.7% decrease. Other international royalty revenues in the Six Months decreased to $4.9 million from $5.1 million in the first six months of Fiscal 2015, representing a 3.1% decrease.  The decreases were principally due to the strengthening of the U.S. dollar. This total includes licensees for Japan, China, Mexico, South Africa, Peru, Israel, Chile, India, and other territories. In local currencies, the majority of these licensees had growth in retail sales for the Six Months.

The majority of our international licensees are required to pay the royalty revenues owed to us in U.S. dollars. As a consequence, any weakening of the U.S. dollar benefits us in that the total royalty revenues reported from our international licensees increases when the dollar weakens against such foreign currencies. Conversely, any strengthening of the U.S. dollar against an international licensee’s foreign currency results in lower royalty revenues from such licensee. As the U.S. dollar strengthened, the estimated cumulative effect on our revenues of changes to applicable foreign currency exchange rates during the Second Quarter and Six Months in comparison to the second quarter and six months of Fiscal 2015 was an approximate $0.2 million decrease and an approximate $0.4 million decrease, respectively.

Selling, General and Administrative

The following table sets forth additional detail information regarding the components for selling, general and administrative expenses for the three and six months ended August 1, 2015 and August 2, 2014.

(amounts in thousands)	Three Months ended August 1, 2015		Three Months ended August 2, 2014		Six Months ended August 1, 2015		Six Months ended August 2, 2014
Personnel expenses (including salaries, taxes, benefits, consultants and bonus)	$	2,273	$	2,562	$	4,465	$	5,228
Corporate expenses	1,597		1,035		2,367		2,041
Marketing expenses	622		664		1,019		990
Product development expenses	169		215		361		488
Non cash stock compensation	359		234		943		424
Depreciation and amortization	322		341		627		675
Total selling, general, administrative and amortization expenses	$	5,342	$	5,051	$	9,782	$	9,846

Selling, general and administrative expenses, including amortization of trademarks, were $5.3 million and $9.8 million for the Second Quarter and Six Month period of Fiscal 2016, respectfully, compared to $5.1 million and $9.8 million for the second quarter and six month period of Fiscal 2015, representing an increase of $0.2 million for the quarter. The increase in selling, general, and administrative expenses for the quarter is due primarily to an increase in professional fees related to the protection of intellectual property, legal and due diligence costs related to potential acquisitions and stock based compensation. For the Six Month period, the increased professional fees and stock based compensation were offset by decreases in personnel expenses, with the result that total expenses remained relatively flat from the prior year.

Interest and Other Income

Our interest expense for the Second Quarter and Six Months was $0.2 million and $0.3 million compared to $0.2 million and $0.5 million for the second quarter and first six months of Fiscal 2015.

Tax Provision

During the Second Quarter and Six Months, we recorded a tax provision of $1.0 million and $3.1 million, which equates to an effective tax rate of 35.1% and 35.9%, as compared to a tax provision of $1.2 million and $2.6 million, and an effective tax rate of 35.7% and 30.7% recorded for the second quarter and first six months of last year. The effective tax rate for the Second Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits.

Net Income

During the Second Quarter and Six Months, our net income was $1.9 million and $5.5 million, or $0.22 and $0.62 per diluted share, respectively, compared to $2.3 million and $5.8 million, or $0.27 and $0.69 per diluted share, respectively, for the second quarter and first six months of last year.

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Liquidity and Capital Resources

Cash Flows.  On August 1, 2015, we had cash and cash equivalents of $9.8 million, which represented an increase of $2.2 million from January 31, 2015.

During the Six Months, cash provided by our operations was $5.4 million, compared to $4.3 million for the first six months of Fiscal 2015. The increase of $1.1 million during the Six Months was primarily due to the changes in:  (i) reversal of uncertain tax liabilities as there were none in the Six Months, as compared to an increase of $0.7 million in the first six months of Fiscal 2015 (ii) accounts receivable increased by $0.9 million in the Six Months, as compared to an increase of $2.1 million in the same period in the prior year, which was primarily due to the increase in royalty revenues from the Tony Hawk brand in Fiscal 2015; (iii) accrued compensation, which decreased by $1.1 million in the Six Months as compared to an increase of $0.3 million in the first six months of last year, which we attributed primarily to accruals for vesting of stock awards in the prior year as well as variances in bonus accruals.

Cash used by investing activities during the Six Months was $1.6 million, which consisted of capital expenditures of property and equipment and trademark registration and renewal costs, as well as a trademark acquisition.  In comparison, during the first six months of Fiscal 2015, cash used by investing activities was $0.4 million, which consisted of capital expenditures of property and equipment and trademark registration and renewal costs.

Cash used in financing activities was $1.6 million during the Six Months, which consisted of principal payments of $3.7 million on our term loan with JP Morgan, partially offset by proceeds from exercise of stock options of $1.9 million and excess tax benefit from share-based payment arrangements of $0.2 million.  In comparison, during the first six months of Fiscal 2015, cash used in financing activities was $3.5 million, which consisted of principal payments of $3.4 million for the term loan with JP Morgan and dividend payments of $0.4 million, partially offset by proceeds from exercise of stock options of $0.3 million.

Uses of Liquidity. Our cash requirements over the next twelve months are primarily to fund our operations and working capital, to make payments of principal and interest under our credit facility with JPMorgan, at our discretion and subject to the terms of the credit facility, to repurchase shares of our common stock or pay dividends as determined by our board of directors (the “Board of Directors”), and, to a lesser extent, to fund capital expenditures. The declaration and payment of any future dividends or repurchases of our common stock are subject to negative covenants contained in our credit facility and, assuming the satisfaction or waiver by JPMorgan of such covenants, would be made solely at the discretion of our Board of Directors and would be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant by our Board of Directors. Additionally, should an established and marketable brand or similar equity property become available on favorable terms, we would consider using our liquidity to fund such an acquisition opportunity.

Sources of Liquidity.  We expect our primary sources of liquidity to be cash flow generated from operations, cash and cash equivalents currently on hand, and funds made available to us pursuant to the revolving line of credit issued by JPMorgan. We believe our cash flow from operations, together with our cash and cash equivalents currently on hand and access to funds pursuant to the revolving line of credit, will be sufficient to meet our working capital, capital expenditure and other commitments and otherwise support our operations for the next twelve months.

Target’s election not to renew the license agreement for the Cherokee brand in the U.S. triggered an event of default under our credit agreement with JPMorgan, but we and JPMorgan have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the credit agreement solely with respect to such event of default through October 12, 2015.  We intend to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to us.

In the event that we are not able to obtain a waiver, JP Morgan has rights under the credit agreement which include accelerating payment of the outstanding balance of the loan.  We currently do not have sufficient cash to repay the loan balance in full and would have to seek alternatives to repay the remaining loan balance which could include refinancing the balance with another lender, obtaining proceeds from the sale of our equity securities or the sale of assets.  No assurance can be given that we will be successful in repaying the bank loan should JP Morgan accelerate the facility.

We cannot predict our revenues and cash flow that will be generated from operations in future periods with certainty, and our revenues and cash flows could be materially lower than we expect. If our revenues and cash flows are lower than we anticipate, or if our expenses are higher than we anticipate, then we may not have sufficient cash available to fund our planned operations and we could fall out of compliance with the terms of our credit facility or our other contractual commitments. In that case, we may need to take steps to reduce expenditures by scaling back operations and reducing staff related to these activities. See “Risk Factors” in Item 1A of Part II of this quarterly report on Form 10-Q.

As of August 1, 2015, we were not the guarantor of any other material third-party obligations and did not have any irrevocable repurchase obligations.

Seasonality

We have agreed to certain contractual royalty rate reductions with our two most significant licensees, Target and Kohl’s, for sales of certain Cherokee branded products and Hawk and Tony Hawk branded products in various product categories in the U.S. in each fiscal year, which apply for future sales during the applicable fiscal year as certain sales volume thresholds are achieved. Historically, this has caused our first quarter to be our highest revenue and profitability quarter and our fourth quarter to be our lowest revenue and profitability quarter. However, such historical patterns and seasonal trends may vary significantly in future periods, depending upon retail sales volumes achieved in each quarter by Target and Kohl’s, the revenues we receive from Target and our other licensees that are not subject to reduced royalty rates based upon cumulative sales, and the terms of any new license agreements.

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Inflation and Changing Prices

The rate of inflation over the past several years has not had a material effect on our revenues and profits. Since most of our future revenues will be based upon a percentage of sales by our licensees of products bearing our owned or represented trademarks, we do not anticipate that short term future inflation will have a material impact, positive or negative, on future financial results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates and foreign currency exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest

From time to time we invest our excess cash in interest bearing temporary investments of high quality issuers. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in our consolidated balance sheet and do not represent a material interest rate risk to us. In relation to our credit facility with JPMorgan, a 100 basis point increase in the interest rate would have had an immaterial impact on interest expense for the period ended August 1, 2015.

Foreign Currency

We conduct business in various parts of the world. As most of our international licensees are required to pay the royalty revenues owed to us in U.S. dollars, we are exposed to fluctuations in the exchange rates of the foreign currencies in countries in which our licensees do business when they are converted to the U.S. dollar, and significant fluctuations in exchange rates could materially impact our results of operations and cash flow. For the Six Months, revenues from international licensing activities comprised 28% of our total revenues.  A hypothetical 10% strengthening of the U.S. dollar relative to the foreign currencies of countries where our licensees operate would have negatively affected our revenues by approximately $0.5 million for the Six Months, which represents 3% of the total revenues reported. As the U.S. dollar strengthened, the estimated cumulative effect on our revenues of changes to applicable foreign currency exchange rates during the Second Quarter in comparison to the second quarter of Fiscal 2015 was an approximate $0.4 million decrease. Such change is not considered to represent a material effect on our results of operations or cash flow.

ITEM 4. CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of August 1, 2015.

(b)   Changes in Internal Control Over Financial Reporting.  During our most recent fiscal quarter, there were no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 5. OTHER INFORMATION

On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The restated Target license agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration.

Target’s election not to renew the license agreement for the Cherokee brand in the U.S. triggered an event of default under our credit agreement with JPMorgan, but we and JPMorgan have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the credit agreement solely with respect to such event of default through October 12, 2015.  We intend to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to us.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that could harm our business. We are not currently aware of any such legal proceedings or claims to which we or our wholly owned subsidiaries are a party that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information contained herein or incorporated herein by reference, the risks and uncertainties and other factors described below could have a material adverse effect on our business, financial condition, results of operations and share price and could also cause our future business, financial condition and results of operations to differ materially from the results contemplated by any forward-looking statement we may make herein, in any other document we file with the Securities and Exchange Commission, or in any press release or other written or oral statement we may make. Please also see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Statements” for additional risks and uncertainties applicable to us. The risks described below and elsewhere in this Quarterly Report are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations.

Our business is subject to intense competition.

Royalties paid to us under our licensing agreements are generally based on a percentage of our licensee’s net sales of licensed products. Cherokee, Carole Little and Sideout brand footwear, apparel, and accessories, together with merchandise bearing our Liz Lange, Completely Me by Liz Lange, Hawk and Tony Hawk brands, all of which are manufactured and sold by both domestic and international wholesalers and retail licensees, are subject to extensive competition by numerous domestic and foreign companies. Such competitors with respect to the Cherokee brand include Polo Ralph Lauren, Tommy Hilfiger, Liz Claiborne, and private label brands (developed by retailers) such as Faded Glory, Arizona, Merona, and Route 66. Factors which shape the competitive environment include quality of garment construction and design, brand name, style and color selection, price, fashion and other trends, avenue of purchase (including in stores and online), and the manufacturer’s ability to respond quickly to the retailer on a national basis. In recognition of what we believe is an increasing trend towards consolidation of retailers and what appears to be a de-emphasis by retailers on the manufacture of private label merchandise, our business plan in the United States focuses on creating strategic alliances with major retailers for their sale of products bearing our brands through the licensing of our trademarks directly to retailers. Therefore, our degree of success is dependent on the strength of our brands, consumer acceptance of and desire for our brands, and our licensees’ ability to design, manufacture and sell products bearing our brands and to respond to ever-changing consumer demands. Failures with respect to any of these factors could have a material adverse effect on our business prospects, financial condition, results of operations and liquidity. We cannot control the level of consumer acceptance of our brands and changing preferences and trends may lead customers to purchase other products. Further, we cannot control the level of resources that our licensees commit to supporting our brands, and our licensees may choose to support other brands to the detriment of our brands because our license agreements generally do not prevent our licensees from licensing from our competitors. In addition, we complete with other companies owning established trademarks, which have entered into, and could continue to enter into, similar arrangements with retailers in the U.S. and internationally, including with our existing retail partners, thereby competing with us for consumer attention and limited floor and rack space in the same stores in which our branded products are sold.

We are subject to risks related to the retail business that are applicable to our licensees.

There are numerous risks and other factors applicable to the businesses of retailers (including our licensees) that can impact the sale of products that bear our brands. Any decline in sales by one or more of our licensees can adversely affect our revenues.

Factors that may adversely affect our licensees and their sales of products bearing our brands include the following, among others: (i) weather, environmental or other conditions that may impact consumer shopping activity in retail stores; (ii) consumer preferences regarding fashion trends and styles, which can be region-dependent and subject to rapid and significant fluctuations; (iii) consumer preferences regarding where to shop; (iv) the growth of online shopping and the ability of our licensees to market and sell our branded products through these avenues; (v) changes in the availability or cost of capital in light of the financial condition and capital requirements of our licensees; (vi) shifts in the seasonality of shopping patterns; (vii) declining retail prices; (viii) labor strikes or other interruptions that impact supply chains and transport vendors, such as the recent labor strikes impacting ports in California and the Pacific Northwest and products that move through these channels; (ix) the impact of excess retail capacity; (x) changes in the cost of accepting various payment methods and changes in the rate of utilization of these payment methods; (xi) material acquisitions or dispositions; (xii) investments in new business strategies; (xiii) the success or failure of significant new business ventures or technologies; (xiv) actions taken or omitted to be taken by legislative, regulatory, judicial and other governmental authorities and officials; (xv) security breaches; (xvi) natural disasters, the outbreak of war, acts of terrorism or other significant national or international events; and (xvii) the other risks discussed in this Item 1A. For example, we believe that sales of Cherokee branded products at Target in the United States after the fourth quarter of Fiscal 2014 were adversely impacted following Target’s announcement of unauthorized access to payment card data in U.S. stores, which resulted in lower revenues to Cherokee than we otherwise may have received from Target absent such announcement.

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We rely on the accuracy of our licensees’ retail sales reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenues could be delayed or inaccurately reported.

Most of our revenues are generated from retailers who license our brands for manufacture and sale of products bearing our brands in their stores and on their websites. Under our existing agreements, these licensees pay us licensing fees based in part on the retail value of products sold. We rely on our licensees to accurately report the retail sales in collecting our license fees, preparing our financial reports, projections and budgets, and directing our sales and marketing efforts. All of our license agreements permit us to audit our licensees. If any of our licensee reports understate the retail sales of products they sell, we may not collect and recognize revenues to which we are entitled, or may endure significant expense to obtain compliance.

Our business is dependent on the success of our Direct to Retail licensing model.

In Direct to Retail licensing, we grant retailers a license to use our trademarks on certain categories of merchandise. In many cases, the licensee is responsible for designing and manufacturing the merchandise, although we typically collaborate with our licensees’ product development staff and merchandisers on design direction, packaging, marketing, and other aspects pertaining to the products sold with our trademarks. Over the past two decades, the Direct to Retail licensing model has become more widely accepted by many retailers worldwide, and our business plan is largely based on the continued success of this model with our current licensees and with new retailers we may solicit to license our brands in new territories and additional product categories as we seek to expand our business. Although we believe there are increasing trends towards consolidation of retailers and de-emphasis on the manufacture of private label merchandise, which would support the growth of our Direct to Retail licensing model, this belief may turn out to be wrong. If our current or potential future retail licensees do not perceive our Direct to Retail licensing model to be advantageous to them, then they may move away from this model and instead embrace alternatives, such as purchasing from wholesalers or manufacturing private label products. Such a change in perception could occur for a variety of reasons, including reasons based on retailers’ beliefs or expectations that do not turn out to be accurate.

Our business is largely dependent on royalties from Target.

Royalty revenues from our Cherokee brand at Target accounted for greater than 40% of our consolidated revenues during each of Fiscal 2015, Fiscal 2014, and Fiscal 2013. On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The restated Target license agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration. We could suffer substantially decreased royalty revenues and cash flow if Target were to reduce its sales of Cherokee branded products prior to expiration of its license, even if Target continues to pay the minimum annual royalty of $10.5 million required under our license agreement with Target. Replacing the royalty payments received from Target will be a significant challenge, and we might not be successful in doing so. If we are not successful in replacing the Target royalty payments with payments from other partners, the termination of this license agreement, which currently extends through January 31, 2017, will have a material adverse effect upon our revenues and cash flow. In addition, in September 2012 we expanded our relationship with Target as a result of our assumption of an additional license agreement with Target for the Liz Lange brand, which we assumed in connection with our acquisition of assets related to such brand.  While the license agreement with Target for the Liz Lange brand remains in place at this time, there can be no assurance that Target will renew the license. We acquired the Liz Lange brand in part based upon our expectation that revenues from Target for this brand would grow in future periods, although such revenue growth may never occur. As a result of our reliance on Target at least through Fiscal 2017, our continued success is dependent on various factors affecting Target’s business, including, for example, perceptions of Target by consumers in the United States. For example, we believe that sales of Cherokee branded products at Target in the United States after the fourth quarter of Fiscal 2014 were adversely impacted following Target’s announcement of unauthorized access to payment card data in U.S. stores.

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Revenues from our Hawk and Tony Hawk brands depend on Kohl’s.

In January 2014, we acquired the Hawk and Tony Hawk brands. Concurrently with this acquisition, we entered into a retail license agreement with Kohl’s , pursuant to which Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk-branded apparel and related products in the United States. We agreed to this exclusive license in part based upon our expectation that revenues from Kohl’s for such brands will grow in future periods, although this expectation may turn out to be wrong and such revenue growth may never occur beyond the $4.8 million minimum annual royalty guaranteed under the license agreement.  We have recently entered into a new agreement to license the Hawk and Tony Hawk brands with Sports Direct in the United Kingdom, but we do not expect to generate any material revenue from this license in Fiscal 2016.

The failure of our licensees to sell products bearing our brands or to pay us royalties for such products could result in a decline in our results of operations.

Our revenues are dependent on royalty payments made to us under our licensing agreements. Although the licensing agreements for our brands in most cases provide for guaranteed minimum royalty payments to us, the failure of our licensees to satisfy their obligations under these agreements or their inability to grow or maintain their businesses could cause our revenues to suffer. Further, while we are substantially dependent on our relationships with Target and Kohl’s, the concurrent failure by several of our other material licensees to meet their financial obligations to us could materially and adversely impact our results of operation and our financial condition.

Our business may be negatively impacted by general economic conditions.

Our performance is subject to worldwide economic conditions and its corresponding impact on levels of consumer spending, which may affect our licensees’ sales. It is difficult to predict future levels of consumer spending and any such predictions are inherently uncertain. Many factors affect the level of consumer spending in the apparel industries, including, among others, prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. During periods of economic uncertainty, we may not be able to maintain or increase our revenues. As a result, our operating results may be materially affected by trends in the United States or global economy.

The worldwide apparel industry is heavily influenced by general economic cycles. Purchases of apparel, footwear and accessories tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income typically declines. As a result, the risks associated with our business are generally more acute during periods of economic slowdown or recession. In addition to decreased consumer spending generally, these periods may be accompanied by decreased demand for, or additional downward pricing pressure on, the products carrying our brands. Accordingly, any prolonged economic slowdown or a lengthy or severe recession with respect to either the U.S. or the global economy is likely to have a material adverse effect on our results of operations, financial condition and business prospects.

We are subject to additional risks associated with our international licensees.

We market and license our brands outside the United States. Many of our licensees are located outside the United States. As a key component of our business strategy, we intend to expand our international sales as well as the support we provide our international licensees. During the first six months of Fiscal 2016, greater than 25% of our revenues were derived from our international licensees. We face numerous risks in doing business outside the United States, including: (i) unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements; (ii) tariffs, trade protection measures, import or export licensing requirements, trade embargos, and other trade barriers; (iii) difficulties in attracting and retaining qualified personnel to manage foreign licensees; (iv) competition from foreign companies; (v) longer accounts receivable collection cycles and difficulties in collecting accounts receivable; (vi) less effective and less predictable protection and enforcement of our intellectual property; (vii) changes in the political or economic condition of a specific country or region, particularly in emerging markets; (viii) fluctuations in the value of foreign currency versus the U.S. dollar and the cost of currency exchange; (ix) potentially adverse tax consequences; and (x) cultural differences in the conduct of business. Any one or more of such factors could cause our future international sales to decline or could cause us to fail to execute on our business strategy involving international expansion. In addition, our business practices in international markets are subject to the requirements of the Foreign Corrupt Practices Act, any violation of which could subject us to significant fines, criminal sanctions and other penalties.

Additionally, and because the majority of our international revenue is denominated in U.S. dollars, fluctuations in the value of the U.S. dollar relative to the foreign currencies of our international licensees’ operations may negatively impact our royalty revenues. The main foreign currencies we encounter in our operations are the Mexican Peso, the EURO, the Great British Pound, the South African Rand, the Japanese Yen, the Chinese Yuan, and the Canadian Dollar. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

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Our business and the success of our products could be harmed if we are unable to maintain the strength of our brands.

Our success to date has been due in large part to the strength of our brands. If we are unable to timely and appropriately respond to changing consumer demand, the strength of our brands may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider one or more of our brands to be outdated or associate one or more of our brands with styles that are no longer popular. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.

We are dependent on our intellectual property, and we cannot assure you that we will be able to successfully protect our rights or that we will not become involved in costly legal proceedings regarding our intellectual property.

We hold various trademarks for our brands, including Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Everyday California, Sideout and Carole Little and others in connection with apparel, footwear, home and accessories. These trademarks are vital to the success and future growth of our business. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in numerous other countries and we also hold trademark applications for these brands in a number of other countries, although the laws of many countries may not protect our intellectual property rights to the same extent as the laws of the United States. These actions taken by us to establish and protect our trademarks and other proprietary rights might not prevent imitation of our products, infringement of our intellectual property rights by unauthorized parties or other challenges to our intellectual property ownership, or prevent the loss of licensing revenue or other damages caused thereby. If any of these events occurs, our business prospects, financial condition, results of operations and liquidity could be materially harmed. In the future, we may be required to assert infringement claims against third parties, and one or more parties may assert infringement claims against us. Any resulting litigation could result in significant expense and divert the efforts of our management personnel whether or not such litigation is determined in our favor. Further, if any adverse ruling in any such matter occurs, any resulting limitations in our ability to market or license our brands could have a material adverse effect on our business, financial condition and results of operations.

We may become involved in other litigation and administrative proceedings that may materially affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including commercial, employment, class action, whistleblower and other litigation and claims, as well as governmental and other regulatory investigations, audits and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, the results of any of these actions or legal costs around these actions could have a material adverse effect on our business, results of operations or financial condition.

We are dependent on our key management personnel.

Our success is highly dependent upon the continued services of our key executives, including, Henry Stupp, our Chief Executive Officer and a member of our Board or Directors, Howard Siegel, our President and Chief Operating Officer, and Jason Boling, our Chief Financial Officer. We have a limited number of employees and Mr. Stupp’s and our other executives’ leadership and experience in the apparel licensing industry is important to the successful implementation of our business and marketing strategy. We do not carry key person life insurance covering any of our executives. The loss of the services of Mr. Stupp or our other key executives could have a material adverse effect on our business prospects, financial condition, results of operations and liquidity.

We may encounter difficulties in connection with acquisitions or other strategic transactions and we may not realize the expected benefits from these transactions.

We regularly evaluate opportunities to acquire or represent new brands. During the past three years, we have consummated four acquisitions: our acquisition of the Liz Lange brands in September 2012; our acquisition of various rights to the Cherokee brand in the category of school uniforms in January 2013; our acquisition of the Hawk and Tony Hawk signature apparel brands in January 2014; and our acquisition of the Everyday California Lifestyle brand in May 2015. In addition, in February 2013, we commenced a relationship with Alessandra Ambrosio to market and represent her brand àle by alessandra. We expect to continue to consider opportunities to acquire or make investments in other brands or to engage in other strategic transactions that could enhance our portfolio of products and services or expand the breadth of our markets. Our history of acquiring and integrating acquisitions is limited, and we may not be successful in realizing the expected benefits from an acquisition. Future success depends, in part, upon our ability to manage an expanded portfolio of brands, which could pose substantial challenges for management. Acquisitions and other strategic transactions can involve numerous risks and potential difficulties, including, among others: (i) problems assimilating the brands; (ii) significant future charges relating the amortization of intangible assets; (iii) problems maintaining and enforcing standards, procedures, controls, policies and information systems; (iv) difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel, and inability to retain key employees of any acquired businesses; (v) unanticipated costs associated with an acquisition, including accounting and legal charges, capital expenditures, and transaction expenses; (vi) diversion of management’s attention from our core business or our existing brand portfolio; (vii) adverse effects on existing business relationships with our partners; and (viii) risks associated with entering markets in which we have no or limited prior experience. Accordingly, our recent acquisitions as well as any future transaction that we pursue could have a material adverse effect on our business, results of operations, financial condition and prospects.

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In addition, future acquisitions may also require us to obtain additional equity or debt financing, which may not be available when needed, on favorable terms or at all. If we finance future acquisitions or other strategic transactions by issuing equity or convertible debt securities, our existing stockholders would be diluted. If we finance future acquisitions or other strategic transactions by issuing debt, we may become over-levered and our ability to operate our business may be restricted by the agreements governing the debt. In addition, we may experience or incur contingent liabilities, amortization expenses or write-offs of goodwill or trademarks in connection with such transactions. Any of these effects could harm our operating results or financial condition.

We have incurred a significant amount of indebtedness to pay the cash consideration for our recent acquisitions. Our level of indebtedness, and covenant restrictions under such indebtedness, could adversely affect our operations and liquidity.

In order to fund our acquisition of the Liz Lange brands, we entered into a credit facility with JPMorgan on September 4, 2012. We initially increased the size of our credit facility on January 31, 2013 in connection with our acquisition of rights related to the Cherokee brand in the school uniforms category. We further increased the size of our credit facility on January 10, 2014 in connection with our acquisition of various assets related to the Hawk and Tony Hawk signature apparel brands.

The size of our credit facility currently totals $37.6 million, of which approximately $22 million was outstanding as of August 1, 2015, and is evidenced by (i) two five-year term notes, which were issued on January 31, 2013 and January 10, 2014 in the principal amounts of $16.6 million and $19 million, respectively, and (ii) a three-year revolving line of credit, pursuant to which we may borrow up to $2 million in principal.

Target’s election not to renew the license agreement for the Cherokee brand in the U.S. triggered an event of default under our credit agreement with JPMorgan, but we and JPMorgan have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the credit agreement solely with respect to such event of default through October 12, 2015.  We intend to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to us.

Our indebtedness under the credit facility could adversely affect our operations and liquidity, by, among other things: making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because we may not have sufficient cash flows to make our scheduled debt payments; causing us to use a larger portion of our cash flow to fund interest and principal payments, thereby reducing the availability of cash to fund working capital, product development and capital expenditures and other business activities; making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market or industry conditions; and limiting our ability to borrow additional monies in the future to fund working capital, product development, capital expenditures and other general corporate purposes.

In addition, the terms of our indebtedness contain various restrictions and covenants regarding the operation of our business, including covenants that require us to obtain JPMorgan’s consent before we can: (i) incur additional indebtedness, (ii) consummate acquisitions, mergers or consolidations, (iii) issue any equity securities other than pursuant to our employee equity incentive plans or programs, or (iv) repurchase or redeem any outstanding shares of common stock or pay dividends or other distributions, other than stock dividends, to our stockholders. The credit facility also imposes financial covenants, including a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 and a limitation of our “senior funded debt ratio” to not exceed a ratio equal to (i) 2.25 to 1.00 through our fiscal quarter ending January 31, 2016, and (ii) 2.00 to 1.00 thereafter. Further, as collateral for the credit facility, we granted a security interest in favor of JPMorgan in all of our assets (including trademarks), and our indebtedness is guaranteed by Cherokee’s wholly owned subsidiaries. In the event of a default under the credit facility, JPMorgan has the right to terminate its obligations under the credit facility, accelerate the payment on any unpaid balance of the credit facility and exercise its other rights including foreclosing on our assets under the related security agreements. Our failure to comply with the terms of our indebtedness could result in a material adverse effect to our business, including our financial condition and our liquidity.

Our future capital needs may be uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

Our capital requirements in future periods may be uncertain and could depend upon many factors, including: acceptance of, and demand for, our brands; the costs of developing new brands; the extent to which we invest in new brands; the number and timing of acquisitions and other strategic transactions; the costs associated with our expansion, if any; and the costs of litigation and enforcement activities to defend our trademarks. In the future, we may need to raise additional funds, and such funds may not be available when needed, on favorable terms, or at all. Furthermore, if we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders, and if we incur additional debt to raise funds, we may become over-levered and our ability to operate our business may be restricted by the agreements governing the debt. Moreover, we may incur substantial costs in pursuing future capital transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. If we cannot raise funds when needed and on acceptable terms, or at all, we may not be able to develop or enhance our products and services, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations, and financial condition.

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Our strategic and marketing initiatives may not be successful.

In recent periods, we have invested significant funds and management time in furtherance of our global strategic and marketing initiatives, which are designed to strengthen our brands, assist our licensees in generating increased sales of Cherokee branded products and products bearing our other brands and build value for our stockholders over the long term. We expect to continue and, in some cases, expand such initiatives in future periods. While we are hopeful that our efforts in executing on these initiatives will expand our business and build stockholder value over the long term, we may not be successful in doing so and such initiatives may not result in the intended benefits. Any failure by us to execute on our strategic initiatives, or the failure of such initiatives to cause our revenues to grow, could have a materially adverse impact on our operating results and financial performance.

We may not pay dividends regularly or at all in the future.

The determination regarding the payment of dividends is subject to the discretion of our Board of Directors, and therefore we may not pay any dividends in future periods, whether or not we generate sufficient cash to do so. In addition, pursuant to our credit facility with JPMorgan, we are prohibited from paying dividends without JPMorgan’s consent and in the event that we would be in violation of our covenant regarding our “fixed charge coverage ratio” after giving effect to any proposed dividend or are otherwise then in default of such agreement.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems, including our Enterprise Resource Planning system, to manage our operations, which subjects us to inherent costs and risks associated with maintaining, upgrading, replacing and changing these systems, including impairment of our information technology, potential disruption of our internal control systems, substantial capital expenditures, demands on management time and other risks of delays or difficulties in upgrading, transitioning to new systems or of integrating new systems into our current systems.

Our business and operations would suffer in the event of cybersecurity and other system failures.

Despite the implementation of security measures, our internal computer systems and those of our licensees are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Although we have not experienced any such cybersecurity or system failure, accident or breach to date, some of our licensees, including Target, have experienced such events. If such an event were to occur to our internal systems, it could result in a material disruption of our operations, substantial costs to rectify or correct the failure, if possible, loss of or damage to our data or applications, inappropriate disclosure of confidential or proprietary information, or the incurrence of other material liabilities. If additional such events were to occur to our licensees’ systems, our royalty revenues could be reduced or disrupted due to decreased sales of our branded products as a result of reputational damage or diversion of costs and other resources from selling products bearing our brands. Any of these events could severely harm our business, results of operations and prospects.

The trading price of our stock may be volatile and shares of our common stock are relatively illiquid.

The trading price of our common stock is likely to be subject to fluctuations as a result of various factors impacting our business, including (i) our financial results, (ii) announcements by us, our retail partners or by our competitors, as applicable, regarding or affecting the retail environment either domestically or internationally, our existing license agreements, our existing brand representations, new license agreements, new brand representations or acquisition, strategic alliances or other transactions, (iii) recruitment or departure of key personnel, (iv) changes in the estimates of our financial results or changes in the recommendations of any securities analysts that elect to follow our common stock, and (v) market conditions in the retail industry and the economy as a whole.

Further, as a result of our relatively small public float, our common stock may be less liquid than the common stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common shares may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

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Our Certificate of Incorporation allows our Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock.

Our Certificate of Incorporation allows our Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock, without action by our stockholders. Subject to the approval of JPMorgan pursuant to our credit facility, such shares of preferred stock may be issued on terms determined by our Board of Directors in its discretion, and may have rights, privileges and preferences superior to those of our common stock. For instance, such shares of preferred stock could have liquidation rights that are senior to the liquidation preference applicable to our common stock, could have superior voting or conversion rights, which could adversely affect the voting power of the holders of our common stock, or could have other terms that negatively impact the voting control or other rights of our common stockholders. Additionally, the ownership interest of holders of our common stock would be diluted following the issuance of any shares of our preferred stock.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

We are subject to income taxes in the United States. Our effective income tax rates could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, or by changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities, where these authorities may evaluate and disagree with our judgments regarding our tax provisions. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Based on the results of an audit or litigation, a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made could result. In addition, changes in tax rules may adversely affect our future reported financial results or the way we conduct our business.

We previously identified material weaknesses in our internal control over financial reporting which could, if repeated, result in material misstatements in our financial statements.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management has previously identified material weaknesses in our internal control over financial reporting as of the end of Fiscal 2013 and during the first three quarters of Fiscal 2014. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. During Fiscal 2014, we developed and implemented a remediation plan that was designed to address these material weaknesses. While we believe our remedial measures have sufficiently addressed our previously identified material weaknesses, it is possible that additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future. In this case, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and litigation.

In addition, while we believe we have strengthened our controls and procedures, our current controls and procedures may not be adequate in future periods to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements. If we fail to maintain the adequacy of our internal controls in accordance with applicable standards, we may be unable to conclude in future periods that our internal control over financial reporting is effective in ensuring the reliability of our financial reports. If we cannot produce reliable financial reports, our business and financial condition could be harmed, investors could lose confidence in our reported financial information and the market price of our common stock could decline significantly. Moreover, our reputation with lenders, retailers, investors, securities analysts and others may be adversely affected.

Compliance with changing securities laws, regulations and financial reporting standards will increase our costs and pose challenges for our management team.

Existing, changing and new laws, regulations, listing requirements and other standards relating to corporate governance and public disclosure create uncertainty for public companies and significantly increase the costs and risks associated with operating as a publicly traded company in the United States. Our management team devotes significant time and financial resources to comply with existing and evolving standards for public companies. Further, the SEC has passed, promulgated and proposed new rules on a variety of subjects including, for example, with respect to the preparation and filing of our financial statements. The existence of new and proposed laws and regulations relating to our financial reporting or that impose additional or more stringent compliance requirements on us could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers. In addition, in order to comply with existing and any new or additional requirements, we may need to add additional accounting staff, engage consultants or change our internal practices, standards and policies, which could significantly increase our costs and divert the time and attention of our management team away from revenue generating activities. Notwithstanding our efforts, it is possible in future periods that our financial and other public reporting may not be considered timely, accurate or complete. If reporting delays or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC, which could adversely affect our financial results or result in a loss of investor confidence in the reliability of our financial information and other public disclosures, and could materially and adversely affect the market price of our common stock.

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ITEM 6.  EXHIBITS

(a) Exhibits

Exhibit Number	Description of Exhibit
10.1	Employment Agreement, dated July 23, 2015, between Cherokee Inc. and Howard Siegel (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2015).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at August 1, 2015 and January 31, 2015; (ii) Consolidated Statement of Operations for the three and six months ended August 1, 2015 and August 2, 2014, 2013; (iii) Condensed Consolidated Statement of Stockholders’ Equity for the six months ended August 1, 2015; (iv) Consolidated Statements of Cash Flows for the six months ended August 1, 2015 and August 2, 2014; and (v) Notes to Condensed Consolidated Financial Statements, tagged as block of text.

*              Filed herewith.

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SIGNATURES

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

Dated: September 10, 2015
	CHEROKEE INC.
	By:	/s/ Henry Stupp
		Henry Stupp
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Jason Boling
		Jason Boling
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Henry Stupp, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of Cherokee Inc.;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: September 10, 2015	By:	/s/ Henry Stupp
		Henry Stupp
		Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jason Boling, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of Cherokee Inc.;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: September 10, 2015	By:	/s/ Jason Boling
		Jason Boling
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Cherokee Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i)  the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended August 1, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 10, 2015	By:	/s/ Henry Stupp
		Henry Stupp
		Chief Executive Officer
		(Principal Executive Officer)

This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Cherokee Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended August 1, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 10, 2015	By:	/s/ Jason Boling
		Jason Boling
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

XML

Summary of Significant Accounting Policies

6 Months Ended

Aug. 01, 2015

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(2)   Summary of Significant Accounting Policies

Receivables

Receivables are reported at amounts the Company expects to be collected, net of allowance for doubtful accounts.

Allowance for Doubtful Accounts

The Company records its allowance for doubtful accounts based upon its assessment of various factors, such as: historical experience, age of accounts receivable balances, credit quality of the Company’s licensees, current economic conditions, bankruptcy, and other factors that may affect the Company’s licensees’ ability to pay. There was no allowance for doubtful accounts as of August 1, 2015 or January 31, 2015.

Recent Accounting Pronouncements

In May 2014, the FASB issued new guidance surrounding revenue from contracts with customers noting that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date for all entities by one year. This guidance is effective for fiscal periods beginning after December 15, 2017. The anticipated impact of the adoption of this guidance on the Company is still being evaluated.

In August 2014, the Financial Accounting Standards Board issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016. The adoption of this guidance will not impact the Company’s consolidated financial statements or related disclosures.

In February 2015, the Financial Accounting Standards Board issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal periods beginning after December 15, 2015, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.

Use of Estimates

On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, stock based compensation and income taxes. The Company bases its estimates on historical and anticipated results, trends and on various other assumptions that it believes are reasonable under the circumstances, including assumptions as to 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.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased and money market funds purchased with an original maturity date of three months or less to be cash equivalents.  At August 1, 2015 and January 31, 2015, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation (“FDIC”) limits.

Revenue Recognition and Deferred Revenue

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collection is reasonably assured. Revenues from royalty and brand representation agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from the Company’s licensees.

The Company’s royalty revenue recognition policy provides for recognition of royalties in the quarter earned. The Company’s agreement with Target Corporation (“Target”) for the Cherokee brand in the U.S. accounts for the majority of the Company’s historical revenues and is structured to provide royalty rate reductions once certain cumulative levels of retail sales are achieved by Target. With respect to Target’s sales in the U.S. of Cherokee branded products other than in the school uniforms category and adult products sold on Target’s website, revenue is recognized by applying the reduced contractual royalty rates prospectively to point of sale data after defined sales thresholds are exceeded. The royalty rate reductions do not apply retroactively to sales since the beginning of the fiscal year. As a result, the Company’s royalty revenues as a percentage of Target’s retail sales in the U.S. are highest at the beginning of each fiscal year and decrease during the fiscal year as Target exceeds sales thresholds as set forth in the Company’s agreement with Target. The amount of Cherokee brand royalty revenue earned by the Company from Target in any quarter is dependent not only on Target’s retail sales of Cherokee branded products in the U.S. in each quarter, but also on the royalty rate then in effect after considering Target’s cumulative level of retail sales for Cherokee branded products in the U.S. for the fiscal year. Historically, with Target, this has caused the Company’s first quarter to be the Company’s highest revenue and most profitable quarter and the Company’s fourth quarter to be the Company’s lowest revenue and least profitable quarter. However, such historical patterns may vary in the future depending upon the terms of any new license agreements, retail sales volumes achieved in each quarter from Target and revenues the Company receives from Target or other licensees that may or may not be subject to reduced royalty rates based upon cumulative sales, including with respect to the Company’s Liz Lange and Completely Me by Liz Lange brands, Cherokee brand in the school uniforms category, Cherokee adult products sold on Target’s website, and the Hawk and Tony Hawk brands.

In order to ensure that Cherokee’s licensees are appropriately reporting and calculating royalties owed to Cherokee, all of Cherokee’s license agreements include audit rights to allow Cherokee to validate the amount of the royalties paid. Any revenue resulting from these audits, or other audits, is recognized in the financial statement of the current reporting period.

Deferred Financing Costs and Debt Discount

Deferred financing costs and debt discounts are capitalized and amortized into interest expense over the life of the debt.

Foreign Withholding Taxes

Licensing revenue is recognized gross of withholding taxes that are remitted by the Company’s licensees directly to their local tax authorities.

Property and Equipment

Property and equipment consist of the following:

	August 1, 2015			January 31, 2015
Computer Equipment	$	523		$	426
Software	79			62
Furniture and Store Fixtures	1,633			1,457
Leasehold Improvements	415			413
Less: Accumulated depreciation	(1,399		)	(1,193		)
Property and Equipment, net	$	1,251		$	1,165

Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are written off, and the resulting gains or losses are included in current operations. Depreciation is provided on a straight line basis over the estimated useful life of the related asset.

Computers and related equipment and software are depreciated over three years. Furniture and store fixtures are depreciated over the shorter of seven years, or the remaining term of the licensee agreement. Leasehold improvements are depreciated over the shorter of five years, or the remaining life of the lease term.  Depreciation expense was $111 and $206 for the three and six month periods ended August 1, 2015 and $107 and $209 for the three and six month periods ended August 2, 2014, respectively.

Earnings Per Share Computation (amounts in thousands, including share amounts)

The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three month periods ended August 1, 2015 and August 2, 2014:

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Numerator:
Net income-numerator for net income per common share and net income per common share assuming dilution	$	1,928	$	2,252	$	5,501	$	5,844
Denominator:
Denominator for net income per common share — weighted average shares	8,691		8,414		8,631		8,405
Effect of dilutive securities:
Stock options	260		43		244		34
Denominator for net income per common share, assuming dilution:
Adjusted weighted average shares and assumed exercises	8,951		8,457		8,875		8,439

The computation for diluted number of shares excludes unexercised stock options which are anti-dilutive. There were 193 and 129 anti-dilutive shares for the three and six month periods ended August 1, 2015, respectively, and 961 and 884 anti-dilutive shares for each of the three and six months periods ended August 2, 2014.

Basic earnings per share (“EPS”) is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to the computation for basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

Significant Contracts

The terms of the Company’s relationship with Target as of the date of this report are set forth in a restated license agreement with Target, which was entered into effective as of February 1, 2008 and amended (i) on January 31, 2013 to add the category of school uniforms, (ii) on April 3, 2013 to provide for a fixed royalty rate of 2% for sales of Cherokee branded products in the category of adult merchandise sold on Target’s website (target.com) in Fiscal 2015 and in future periods and (iii) on January 6, 2014 to reflect Target’s election to renew the agreement through January 31, 2017 and to provide that Target can renew the agreement for successive two (2) year periods, provided that it satisfies the minimum guaranteed royalty payment of $10,500 for the preceding fiscal year (the “Restated Target Agreement”). The Restated Target Agreement grants Target the exclusive right in the United States to use the Cherokee trademarks in various specified categories of merchandise. On September 3, 2015, Target orally informed the Company that the Restated Target Agreement would not be renewed and will terminate at the end of its current term, which expires January 31, 2017.  The non-renewal was confirmed in writing on September 4, 2015.  The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration.

Under the current terms of the Restated Target Agreement, the minimum annual guaranteed royalty for Target is $10,500 and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum guaranteed royalty of $800). Under the Restated Target Agreement, Target has agreed to pay royalties based on a percentage of Target’s net sales of Cherokee branded merchandise during each fiscal year which percentage varies according to the volume of sales of merchandise other than for sales of Cherokee branded products in the school uniforms category and, beginning in Fiscal 2015, other than for sales of Cherokee branded products in the adult merchandise category that are made on Target’s website. The Company assumed a separate license agreement with Target for the Liz Lange brand in connection with the Company’s acquisition of the assets in September 2012.

In connection with the acquisition of the “Hawk” and “Tony Hawk” signature apparel brands and related trademarks (the “Hawk Acquisition”), Cherokee and Kohl’s Department Stores (“Kohl’s”) entered into an amended license agreement. Pursuant to such amendment, Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk branded apparel and related products in the United States and has agreed to pay Cherokee an annual royalty rate for its sales of Hawk branded signature apparel and related products in the United States subject to a minimum annual guaranteed royalty of $4,800 for four years.

Stock-Based Compensation

Effective July 16, 2013, the Company’s stockholders approved the 2013 Stock Incentive Award Plan (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 authorized to be issued (i) 700,000 additional shares of common stock, and (ii) 102,483 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 such shares of common 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 options to certain executives as a material inducement for employment. The Company accounts for stock options under authoritative guidance, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values.

The Company estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the consolidated statements of income. The compensation expense recognized for all stock-based awards is net of estimated forfeitures over the award’s service period.

Stock-based compensation expense recognized in selling, general and administrative expenses for stock options for the Six Months was $943, as compared to $424 for the comparable period in the prior year.

A summary of all activity for the Company’s stock options for the Six Months is as follows:

					Weighted
					Average
					Remaining
			Weighted		Contractual	Aggregate
			Average		Term	Intrinsic
	Shares		Price		(in years)	Value
Outstanding, at January 31, 2015	1,185,767		$	15.89	3.49	$	2,910
Granted	335,000		$	22.79
Exercised/cancellations for net settlements	(261,097	)	17.06
Expired/forfeited	(146,667	)	$	17.33
Outstanding, at August 1, 2015	1,113,003		$	17.50	4.56	$	11,159
Vested and Exercisable at August 1, 2015	550,161		$	15.50	3.18	$	6,616

As of August 1, 2015, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2,665, which is expected to be recognized over a weighted average period of approximately 2.48 years. The total fair value of all options which vested during the Six Months was $603.

Restricted Stock and Restricted Stock Units

In 2013, the Compensation Committee of the Company’s board of directors (the “Board of Directors”) granted certain performance-based equity awards to executives under the Company’s 2006 Stock Plan.

The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s Common Stock on February 1, 2013, or $13.95, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $15.35 for Fiscal 2014, (ii) $16.88 for Fiscal 2015 and (iii) $18.57 for the Company’s fiscal year ending in 2016.  The average share price will be calculated as the average of all market closing prices during the January preceding 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, 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 met for Fiscal 2015, which resulted in the vesting of two thirds of the shares subject to each award

Since the vesting of these performance-based equity awards are subject to market based performance conditions, the fair value of these awards were 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 grant and calculates the fair market value for the performance 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.

Pursuant to a compensation program for non-employee directors adopted by the Compensation Committee, at the meeting of the Board of Directors held immediately following the annual stockholder meeting in June each year, each non-employee member of the Board of Directors must make an election regarding the percentage, up to 100%, of his annual compensation for service on the Board of Directors to be paid in equity, in the form of restricted stock units (“RSU’s”). All of the RSU’s issuable under this program in June 2014 were approved and granted on July 28, 2014. The RSU’s awarded to the non-employee directors are subject to the terms of the 2013 Plan and RSU agreements that provide for quarterly vesting over a one year service period of August 4, 2014 through August 3, 2015, subject to acceleration of vesting upon the earlier to occur of the following: (i) a change in control of the Company, (ii) the death of the recipient or (iii) the recipient’s failure to be re-elected to the Board of Directors in any election in which the recipient stands for re-election.The fair value of these awards was measured on the effective date of grant using the price of the Company’s common stock. At the Board meeting held immediately following the annual stockholder meeting in June 2015, all of the non-employee directors elected to take all of their annual compensation for service on the Board in cash for the following year.

In June 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs and stock options to each member of the Board of Directors and to each of the Company’s executive officers under the 2013 Plan. All of the equity awards approved at that meeting vest in equal annual installments over three years, such that the full grants shall be vested on the 3rd anniversary of the grant date. The fair value of the RSU awards was measured on the effective date of grant using the price of the Company’s common stock.

In August 2014, the Compensation Committee of the Company’s Board of Directors granted a sales-based performance-based equity award to an employee under the 2013 Plan, which vests in five increments dependent upon achievement of certain annual sales targets. The fair value of this award was measured on the effective date of grant using the price of the Company’s common stock.

Stock-based compensation expense for shares of restricted stock and performance stock units for the Six Months was $488 compared to $96 for the comparable period in the prior year.

	Number of Shares		Weighted Average Grant-Date Fair Value
Unvested stock at January 31, 2015	76,936		$	13.02
Granted	160,000		22.94
Vested	(20,789	)	15.44
Forfeited	—		—
Unvested stock at August 1, 2015	216,147		$	20.13

As of August 1, 2015, total unrecognized stock-based compensation expense related to restricted stock and performance stock units was approximately $231, which is expected to be recognized over a weighted average period of approximately 2.4 years.

Trademarks

The Company holds various trademarks including Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others, in connection with numerous categories of apparel and other goods. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in a number of other countries. The Company also holds trademark applications for Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Sideout, Sideout Sport, Carole Little, Chorus Line, Saint Tropez-West, All That Jazz, and others in numerous countries. The Company intends to renew these registrations, as appropriate, prior to expiration. The Company monitors on an ongoing basis unauthorized uses of the Company’s trademarks, and relies primarily upon a combination of trademark, copyright, know-how, trade secrets, and contractual restrictions to protect the Company’s intellectual property rights both domestically and internationally.

Trademark registration and renewal fees are capitalized and are amortized on a straight-line basis over the estimated useful lives of the assets. Trademark acquisitions are capitalized and are either amortized on a straight-line basis over the estimated useful lives of the assets, or are capitalized as indefinite-lived assets, if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to Cherokee. Trademarks are evaluated for the possibility of impairment at least annually.

Acquisition of Everyday California® Lifestyle Brand

On May 14, 2015, Cherokee consummated an asset purchase agreement with Everyday California Holdings, LLC, under which it acquired various assets related to the Everyday California® Lifestyle Brand and related trademarks. The consideration for the assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal years 2017 and 2018.

Trademarks consist of the following:

	August 1, 2015			January 31, 2015
Acquired Trademarks	$	49,255		$	47,994
Other Trademarks	8,666			8,621
Accumulated amortization	(17,215		)	(16,794		)
Total	$	40,706		$	39,821

Fair Value of Financial Instruments

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

Level 3: Unobservable inputs for which there is little or no market data, which require the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities

The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these instruments. Long-term debt approximates fair value due to the variable rate nature of the debt.

The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in business are written off in the period identified since they will no longer generate any positive cash flows for the Company. Periodically, long-lived assets that will continue to be used by the Company need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses involve management judgment. In the event the projected undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written down to their estimated fair value, in accordance with authoritative guidance. The estimated undiscounted cash flows used for this nonrecurring fair value measurement are considered a Level 3 input, which consist of unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

Income Taxes

Income tax expense of $1,045 was recognized for the Second Quarter, resulting in an effective tax rate of 35.1% in the Second Quarter, as compared to 35.7% in the second quarter of last year and compared to 32.4% for the full year of Fiscal 2015. The effective tax rate for the Second Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits.

The amount of unrecognized tax benefits was approximately $449 and $449, respectively, at August 1, 2015 and January 31, 2015. At August 1, 2015, approximately $296 of unrecognized tax benefits would, if recognized, affect the 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 consolidated statements of income. The total amount of interest and penalties recognized in the consolidated statements of income for the Second Quarter was $5 as compared with $1 in the second quarter of last year. As of August 1, 2015 and January 31, 2015, respectively, the total amount of accrued interest and penalties included in the liability for unrecognized tax benefits was $94 and $84.

The Company has unrecognized tax benefits pertaining to the issue of its taxability in various state tax jurisdictions.  It is reasonably possible that the amount of unrecognized tax benefits may decrease within the next 12 months as a result of the Company’s interaction with these various state tax jurisdictions.  The Company anticipates that the total amount of unrecognized tax benefits may decrease in the next 12 months by approximately $449.

The Company files income tax returns in the U.S. federal and California and certain other state jurisdictions. For federal income tax purposes, the fiscal 2012 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 2011 and later tax years remain open for examination by the tax authorities under a four year statute of limitations.

Marketing and Advertising

Generally, the Company’s “Direct to Retail” licensees fund their own advertising programs. Cherokee’s marketing, advertising and promotional costs totaled $730 and $664 for the six month periods ended August 1, 2015 and August 2, 2014, respectively. These costs are expensed as incurred and were accounted for as selling, general and administrative expenses.

The Company provides marketing expense money to certain large licensees based upon sales criteria to help them build the Company’s licensed brands in their respective territories, thus providing an identifiable benefit to Cherokee. The amounts paid for such marketing expenses during the six month periods ended August 1, 2015 and August 2, 2014 were $332 and $118, respectively, and are included in the total marketing, advertising and promotional costs.

Deferred Rent and Lease Incentives

When a lease includes lease incentives (such as a rent abatement) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent and lease incentives in the accompanying consolidated balance sheets. For leasehold allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income over the term of the lease.

Comprehensive Income

Authoritative guidance establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the three months ended August 1, 2015 and August 2, 2014, the Company has no comprehensive income components and accordingly, net income equals comprehensive income.

Treasury Stock

Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, and the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company records such excess as an increase in additional paid-in capital.

Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.

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Segment Reporting (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014	Aug. 01, 2015	Aug. 02, 2014	Jan. 31, 2015
Segment Reporting
Revenues	$ 8,482	$ 8,764	$ 18,712	$ 18,725
Long-lived tangible assets	1,251		1,251		$ 1,165
U.S. and Canada
Segment Reporting
Revenues	6,069	6,092	13,809	13,663
Asia
Segment Reporting
Revenues	936	932	1,805	1,804
Long-lived tangible assets	58		58		72
Latin America
Segment Reporting
Revenues	608	795	1,153	1,443
All Others
Segment Reporting
Revenues	762	654	1,434	1,189
United Kingdom and Europe
Segment Reporting
Revenues	107	$ 291	511	$ 626
United States
Segment Reporting
Long-lived tangible assets	926		926		794
United Kingdom
Segment Reporting
Long-lived tangible assets	0		0		0
Mexico
Segment Reporting
Long-lived tangible assets	$ 267		$ 267		$ 299

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Basis of Presentation

6 Months Ended

Aug. 01, 2015

Basis of Presentation

Basis of Presentation

(1)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of August 1, 2015 and for the three and six month periods ended August 1, 2015 and August 2, 2014 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and Article 10 of Regulation S-X. These consolidated financial statements include the accounts of Cherokee Inc. (“Cherokee” or the “Company”) and its subsidiaries and have not been audited by independent registered public accountants, but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee are necessary for a fair statement of the financial position and the results of operations for the periods presented.  All material intercompany accounts and transactions have been eliminated during the consolidation process. The accompanying consolidated balance sheet as of January 31, 2015 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.  The results of operations for the three and six month periods ended August 1, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2016.  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 31, 2015.

As used herein, the term “First Quarter” refers to the three months ended May 2, 2015; the term “Second Quarter” refers to the three months ended August 1, 2015; the term “Six Months” refers to the six months ended August 1, 2015;  the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; and the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014.

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Aug. 01, 2015	Jan. 31, 2015
Current assets:
Cash and cash equivalents	$ 9,797	$ 7,581
Receivables	8,317	7,425
Income taxes receivable	1,291	919
Prepaid expenses and other current assets	446	431
Deferred tax asset	412	412
Total current assets	20,263	16,768
Trademarks, net	40,706	39,821
Deferred tax asset	272	858
Property and equipment, net	1,251	1,165
Other assets	44	48
Total assets	62,536	58,660
Current liabilities:
Accounts payable and other accrued payables	1,624	1,720
Current portion of long term debt	7,308	7,308
Deferred revenue-current	38	17
Accrued compensation payable	556	1,430
Total current liabilities	9,526	10,475
Long term liabilities:
Long term debt	14,182	17,836
Income taxes payable	399	391
Other non-current	356	121
Total liabilities	$ 24,463	$ 28,823
Commitments and Contingencies
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, 8,713,366 issued and outstanding at August 1, 2015 and 8,558,411 issued and outstanding at January 31, 2015	$ 174	$ 171
Additional paid-in capital	26,756	24,024
Retained earnings	11,143	5,642
Total stockholders' equity	38,073	29,837
Total liabilities and stockholders' equity	$ 62,536	$ 58,660

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - 6 months ended Aug. 01, 2015 - USD ($) shares in Thousands, $ in Thousands	Common Stock	Additional Paid-in Capital	Retained Earnings (Deficit)	Total
Balance at Jan. 31, 2015	$ 171	$ 24,024	$ 5,642	$ 29,837
Balance (in shares) at Jan. 31, 2015	8,558
Increase (Decrease) in Stockholders' Equity
Stock-based compensation		943		943
Tax effect from stock option exercises		138		138
Stock option exercises and equity issuances, net of tax	$ 3	1,651		1,654
Stock option exercises and equity issuances, net of tax (in shares)	155
Net income			5,501	5,501
Balance at Aug. 01, 2015	$ 174	$ 26,756	$ 11,143	$ 38,073
Balance (in shares) at Aug. 01, 2015	8,713

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Summary of Significant Accounting Policies (Details 6) - Stock Options - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended	12 Months Ended
	Aug. 01, 2015	Jan. 31, 2015
Shares
Outstanding at the beginning of the period (in shares)	1,185,767
Granted (in shares)	335,000
Exercised/cancellations for net settlements (in shares)	(261,097)
Expired/forfeited (in shares)	(146,667)
Outstanding at the end of the period (in shares)	1,113,003	1,185,767
Vested and Exercisable at the end of the period (in shares)	550,161
Weighted Average Price
Outstanding at the beginning of the period (in dollars per share)	$ 15.89
Granted (in dollars per share)	22.79
Exercised (in dollars per share)	17.06
Canceled/forfeited (in dollars per share)	17.33
Outstanding at the end of the period (in dollars per share)	17.50	$ 15.89
Vested and Exercisable at the end of the period (in dollars per share)	$ 15.50
Weighted Average Remaining Contractual Term (in years)
Outstanding	4 years 6 months 22 days	3 years 5 months 27 days
Vested and Exercisable at the end of the period	3 years 2 months 5 days
Aggregate Intrinsic Value
Outstanding at the end of the period (in dollars)	$ 11,159	$ 2,910
Vested and Exercisable at the end of the period (in dollars)	6,616
Unrecognized stock-based compensation
Unrecognized stock-based compensation expense (in dollars)	$ 2,665
Weighted average period for recognition of unrecognized stock-based compensation expense	2 years 5 months 23 days
Total fair value of vested options (in dollars)	$ 603

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Summary of Significant Accounting Policies (Details 8) - USD ($) $ in Thousands	Aug. 01, 2015	Jan. 31, 2015
Trademarks
Trademarks, net	$ 40,706	$ 39,821
Trademarks
Trademarks
Accumulated amortization	(17,215)	(16,794)
Trademarks, net	40,706	39,821
Acquired Trademarks
Trademarks
Trademarks, gross	49,255	47,994
Other Trademarks
Trademarks
Trademarks, gross	$ 8,666	$ 8,621

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014
Operating activities:
Net income	$ 5,501	$ 5,844
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	206	209
Amortization of trademarks	421	466
Deferred income taxes	(68)	371
Reversal of uncertain tax liabilities		(736)
Stock-based compensation	943	424
Excess tax benefit from share-based payment arrangements	(240)	(9)
Other, net	257	19
Changes in operating assets and liabilities:
Receivables	(892)	(2,112)
Prepaids and other current assets	(15)	(196)
Income taxes receivable and payable, net	426	290
Accounts payable and other accrued payables	(96)	(478)
Deferred revenue	21	(39)
Accrued compensation	(1,077)	267
Net cash provided by operating activities	5,387	4,320
Investing activities:
Purchase of property and equipment	(292)	(371)
Purchases of trademarks, including registration and renewal cost	(1,306)	(46)
Net cash used in investing activities	(1,598)	(417)
Financing activities:
Payments of JPMorgan Term Loan	(3,672)	(3,355)
Proceeds from exercise of stock options	1,859	320
Excess tax benefit from share-based payment arrangements	240	9
Dividends		(420)
Net cash used in financing activities	(1,573)	(3,446)
Increase (decrease) in cash and cash equivalents	2,216	457
Cash and cash equivalents at beginning of period	7,581	3,634
Cash and cash equivalents at end of period	9,797	4,091
Cash paid during period for:
Income taxes	2,551	2,719
Interest	$ 319	433
Non-cash financing activities:
Accrued and declared dividends		$ 422

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Aug. 01, 2015	Jan. 31, 2015
CONSOLIDATED BALANCE SHEETS
Preferred stock, par value (in dollars per share)	$ 0.02	$ 0.02
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.02	$ 0.02
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	8,713,366	8,558,411
Common stock, shares outstanding	8,713,366	8,558,411

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Summary of Significant Accounting Policies (Details) - USD ($) $ in Thousands	Aug. 01, 2015	Jan. 31, 2015
Allowance for Doubtful Accounts
Allowance for doubtful accounts	$ 0	$ 0

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Document and Entity Information - shares	6 Months Ended
	Aug. 01, 2015	Sep. 04, 2015
Document and Entity Information
Entity Registrant Name	CHEROKEE INC
Entity Central Index Key	0000844161
Document Type	10-Q
Document Period End Date	Aug. 01, 2015
Amendment Flag	false
Current Fiscal Year End Date	--01-30
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		8,713,366
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2

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Summary of Significant Accounting Policies (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014	Aug. 01, 2015	Aug. 02, 2014	Jan. 31, 2015
Property and Equipment
Less: Accumulated depreciation	$ (1,399)		$ (1,399)		$ (1,193)
Property and Equipment, net	1,251		1,251		1,165
Depreciation expense	111	$ 107	206	$ 209
Computer Equipment
Property and Equipment
Property and Equipment, gross	523		$ 523		426
Estimated useful life			3 years
Software
Property and Equipment
Property and Equipment, gross	79		$ 79		62
Estimated useful life			3 years
Furniture and Store Fixtures
Property and Equipment
Property and Equipment, gross	1,633		$ 1,633		1,457
Furniture and Store Fixtures | Maximum
Property and Equipment
Estimated useful life			7 years
Leasehold Improvements
Property and Equipment
Property and Equipment, gross	$ 415		$ 415		$ 413
Leasehold Improvements | Maximum
Property and Equipment
Estimated useful life			5 years

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014	Aug. 01, 2015	Aug. 02, 2014
CONSOLIDATED STATEMENTS OF INCOME
Royalty revenues	$ 8,482	$ 8,764	$ 18,712	$ 18,725
Selling, general and administrative expenses	5,131	4,818	9,361	9,380
Amortization of trademarks	211	233	421	466
Operating income	3,140	3,713	8,930	8,879
Other income (expense):
Interest (expense)	(165)	(212)	(340)	(452)
Interest income and other income (expense), net	(2)		(2)
Total other income (expense), net	(167)	(212)	(342)	(452)
Income before provision for income taxes	2,973	3,501	8,588	8,427
Income tax provision	1,045	1,249	3,087	2,583
Net income	$ 1,928	$ 2,252	$ 5,501	$ 5,844
Basic earnings per share (in dollars per share)	$ 0.22	$ 0.27	$ 0.64	$ 0.70
Diluted earnings per share (in dollars per share)	$ 0.22	$ 0.27	$ 0.62	$ 0.69
Weighted average shares outstanding:
Basic (in shares)	8,691	8,414	8,631	8,405
Diluted (in shares)	8,951	8,457	8,875	8,439
Dividends declared per share (in dollars per share)	$ 0.00	$ 0.05	$ 0.00	$ 0.10

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Segment Reporting

6 Months Ended

Aug. 01, 2015

Segment Reporting

Segment Reporting

(5) Segment Reporting

Authoritative guidance requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies reportable segments based on how management internally evaluates separate financial information, business activities and management responsibility.

The Company operates in a single business segment, the marketing and licensing of brand names and trademarks for apparel, footwear and accessories. Cherokee’s marketing and licensing activities extend to brands which the Company owns and to brands owned by others. Cherokee’s operating activities relating to owned and represented brands are identical and are performed by a single group of marketing professionals. While Cherokee’s principal operations are in the United States, the Company also derives royalty revenues from some of the Company’s licensees that are located all around the world. Revenues by geographic area based upon the licensees’ country of domicile consisted of the following:

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
U.S. and Canada	$	6,069	$	6,092	$	13,809	$	13,663
Asia	936		932		1,805		1,804
Latin America	608		795		1,153		1,443
All Others	762		654		1,434		1,189
United Kingdom and Europe	107		291		511		626
Total	$	8,482	$	8,764	$	18,712	$	18,725

Long-lived tangible assets have been located in the U.S., United Kingdom, Mexico and Asia with net values of approximately $926, $0, $267 and $58 as of August 1, 2015 and net values of approximately $794, $0, $299 and $72 as of January 31, 2015.

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Commitments and Contingencies

6 Months Ended

Aug. 01, 2015

Commitments and Contingencies.

Commitments and Contingencies

(4) Commitments and Contingencies

Trademark Indemnities

Cherokee 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 the range of estimated losses that it could incur related to such indemnifications.

Litigation

Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. 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 results of operations and financial position. The Company may also be involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s financial position or results of operations. No material amounts were accrued as of August 1, 2015 or January 31, 2015 related to any of the Company’s legal proceedings.

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Summary of Significant Accounting Policies (Details 7) $ / shares in Units, $ in Thousands		1 Months Ended	6 Months Ended
	Jan. 31, 2015 $ / shares shares	Jun. 30, 2015	Aug. 01, 2015 USD ($) item $ / shares shares	Aug. 02, 2014 USD ($)	Feb. 01, 2013 $ / shares
Stock-Based Compensation
Closing share price (in dollars per share)					$ 13.95
Compensation expense (in dollars) | $			$ 943	$ 424
Performance-Based Equity Awards
Stock-Based Compensation
Target growth rate (as a percent)			10.00%
Target share price for fiscal year 2014 (in dollars per share)			$ 15.35
Target share price for fiscal year 2015 (in dollars per share)			16.88
Target share price for fiscal year ending in 2016 (in dollars per share)			$ 18.57
Award vesting percentage			33.33%
Percentage of shares vesting	66.67%
Number of increments in which award will vest | item			5
Restricted Stock Units | Non-employee Director
Stock-Based Compensation
Maximum percentage of compensation to be paid in equity			100.00%
Vesting period			1 year
Restricted Stock Units And Stock Options | Board of Directors and Executive Officers
Stock-Based Compensation
Vesting period		3 years
Restricted Stock and Performance Stock Units
Stock-Based Compensation
Compensation expense (in dollars) | $			$ 488	$ 96
Number of Shares
Unvested stock at the beginning of the period (in shares) | shares			76,936
Granted (in shares) | shares			160,000
Vested (in shares) | shares			(20,789)
Unvested stock at the end of the period (in shares) | shares	76,936		216,147
Weighted Average Grant-Date Fair Value
Unvested stock at the beginning of the period (in dollars per share)			$ 13.02
Granted (in dollars per share)			22.94
Vested (in dollars per share)			15.44
Unvested stock at the end of the period (in dollars per share)	$ 13.02		$ 20.13
Unrecognized stock-based compensation
Unrecognized stock-based compensation expense (in dollars) | $			$ 231
Weighted average period for recognition of unrecognized stock-based compensation expense			2 years 4 months 24 days

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Summary of Significant Accounting Policies (Details 3) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014	Aug. 01, 2015	Aug. 02, 2014
Numerator:
Net income-numerator for net income per common share and net income per common share assuming dilution	$ 1,928	$ 2,252	$ 5,501	$ 5,844
Denominator:
Denominator for net income per common share - weighted average shares	8,691	8,414	8,631	8,405
Effect of dilutive securities:
Stock options (in shares)	260	43	244	34
Denominator for net income per common share, assuming dilution:
Adjusted weighted average shares and assumed exercises	8,951	8,457	8,875	8,439
Anti-dilutive shares
Number of anti-dilutive shares	193	961	129	884

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Aug. 01, 2015

Summary of Significant Accounting Policies

Schedule of Property and equipment

	August 1, 2015			January 31, 2015
Computer Equipment	$	523		$	426
Software	79			62
Furniture and Store Fixtures	1,633			1,457
Leasehold Improvements	415			413
Less: Accumulated depreciation	(1,399		)	(1,193		)
Property and Equipment, net	$	1,251		$	1,165

Schedule of reconciliation of the numerator and denominator of the basic and diluted earnings per-share computations

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Numerator:
Net income-numerator for net income per common share and net income per common share assuming dilution	$	1,928	$	2,252	$	5,501	$	5,844
Denominator:
Denominator for net income per common share — weighted average shares	8,691		8,414		8,631		8,405
Effect of dilutive securities:
Stock options	260		43		244		34
Denominator for net income per common share, assuming dilution:
Adjusted weighted average shares and assumed exercises	8,951		8,457		8,875		8,439

Summary of activity for stock options

					Weighted
					Average
					Remaining
			Weighted		Contractual	Aggregate
			Average		Term	Intrinsic
	Shares		Price		(in years)	Value
Outstanding, at January 31, 2015	1,185,767		$	15.89	3.49	$	2,910
Granted	335,000		$	22.79
Exercised/cancellations for net settlements	(261,097	)	17.06
Expired/forfeited	(146,667	)	$	17.33
Outstanding, at August 1, 2015	1,113,003		$	17.50	4.56	$	11,159
Vested and Exercisable at August 1, 2015	550,161		$	15.50	3.18	$	6,616

Summary of information about restricted stock and performance stock units activity

	Number of Shares		Weighted Average Grant-Date Fair Value
Unvested stock at January 31, 2015	76,936		$	13.02
Granted	160,000		22.94
Vested	(20,789	)	15.44
Forfeited	—		—
Unvested stock at August 1, 2015	216,147		$	20.13

Schedule of Trademarks

	August 1, 2015			January 31, 2015
Acquired Trademarks	$	49,255		$	47,994
Other Trademarks	8,666			8,621
Accumulated amortization	(17,215		)	(16,794		)
Total	$	40,706		$	39,821

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Subsequent Events

6 Months Ended

Aug. 01, 2015

Subsequent Events

Subsequent Events

(6) Subsequent Events

On September 3, 2015, Target orally informed the Company that it would not renew the Restated Target Agreement which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration. Target’s election not to renew the Restated Target Agreement triggered an event of default under the Credit Agreement, but JPMorgan and the Company have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the Credit Agreement solely with respect to such event of default through October 12, 2015.  The Company intends to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to the Company.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Aug. 01, 2015

Summary of Significant Accounting Policies

Receivables

Receivables

Receivables are reported at amounts the Company expects to be collected, net of allowance for doubtful accounts.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

The Company records its allowance for doubtful accounts based upon its assessment of various factors, such as: historical experience, age of accounts receivable balances, credit quality of the Company’s licensees, current economic conditions, bankruptcy, and other factors that may affect the Company’s licensees’ ability to pay. There was no allowance for doubtful accounts as of August 1, 2015 or January 31, 2015.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the FASB issued new guidance surrounding revenue from contracts with customers noting that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date for all entities by one year. This guidance is effective for fiscal periods beginning after December 15, 2017. The anticipated impact of the adoption of this guidance on the Company is still being evaluated.

In August 2014, the Financial Accounting Standards Board issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016. The adoption of this guidance will not impact the Company’s consolidated financial statements or related disclosures.

In February 2015, the Financial Accounting Standards Board issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal periods beginning after December 15, 2015, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.

Use of Estimates

Use of Estimates

On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets, stock based compensation and income taxes. The Company bases its estimates on historical and anticipated results, trends and on various other assumptions that it believes are reasonable under the circumstances, including assumptions as to 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.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased and money market funds purchased with an original maturity date of three months or less to be cash equivalents.  At August 1, 2015 and January 31, 2015, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation (“FDIC”) limits.

Revenue Recognition and Deferred Revenue

Revenue Recognition and Deferred Revenue

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collection is reasonably assured. Revenues from royalty and brand representation agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from the Company’s licensees.

The Company’s royalty revenue recognition policy provides for recognition of royalties in the quarter earned. The Company’s agreement with Target Corporation (“Target”) for the Cherokee brand in the U.S. accounts for the majority of the Company’s historical revenues and is structured to provide royalty rate reductions once certain cumulative levels of retail sales are achieved by Target. With respect to Target’s sales in the U.S. of Cherokee branded products other than in the school uniforms category and adult products sold on Target’s website, revenue is recognized by applying the reduced contractual royalty rates prospectively to point of sale data after defined sales thresholds are exceeded. The royalty rate reductions do not apply retroactively to sales since the beginning of the fiscal year. As a result, the Company’s royalty revenues as a percentage of Target’s retail sales in the U.S. are highest at the beginning of each fiscal year and decrease during the fiscal year as Target exceeds sales thresholds as set forth in the Company’s agreement with Target. The amount of Cherokee brand royalty revenue earned by the Company from Target in any quarter is dependent not only on Target’s retail sales of Cherokee branded products in the U.S. in each quarter, but also on the royalty rate then in effect after considering Target’s cumulative level of retail sales for Cherokee branded products in the U.S. for the fiscal year. Historically, with Target, this has caused the Company’s first quarter to be the Company’s highest revenue and most profitable quarter and the Company’s fourth quarter to be the Company’s lowest revenue and least profitable quarter. However, such historical patterns may vary in the future depending upon the terms of any new license agreements, retail sales volumes achieved in each quarter from Target and revenues the Company receives from Target or other licensees that may or may not be subject to reduced royalty rates based upon cumulative sales, including with respect to the Company’s Liz Lange and Completely Me by Liz Lange brands, Cherokee brand in the school uniforms category, Cherokee adult products sold on Target’s website, and the Hawk and Tony Hawk brands.

In order to ensure that Cherokee’s licensees are appropriately reporting and calculating royalties owed to Cherokee, all of Cherokee’s license agreements include audit rights to allow Cherokee to validate the amount of the royalties paid. Any revenue resulting from these audits, or other audits, is recognized in the financial statement of the current reporting period.

Deferred Financing Costs and Debt Discount

Deferred Financing Costs and Debt Discount

Deferred financing costs and debt discounts are capitalized and amortized into interest expense over the life of the debt.

Foreign Withholding Taxes

Foreign Withholding Taxes

Licensing revenue is recognized gross of withholding taxes that are remitted by the Company’s licensees directly to their local tax authorities.

Property and Equipment

Property and Equipment

Property and equipment consist of the following:

	August 1, 2015			January 31, 2015
Computer Equipment	$	523		$	426
Software	79			62
Furniture and Store Fixtures	1,633			1,457
Leasehold Improvements	415			413
Less: Accumulated depreciation	(1,399		)	(1,193		)
Property and Equipment, net	$	1,251		$	1,165

Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are written off, and the resulting gains or losses are included in current operations. Depreciation is provided on a straight line basis over the estimated useful life of the related asset.

Computers and related equipment and software are depreciated over three years. Furniture and store fixtures are depreciated over the shorter of seven years, or the remaining term of the licensee agreement. Leasehold improvements are depreciated over the shorter of five years, or the remaining life of the lease term.  Depreciation expense was $111 and $206 for the three and six month periods ended August 1, 2015 and $107 and $209 for the three and six month periods ended August 2, 2014, respectively.

Earnings Per Share Computation

Earnings Per Share Computation (amounts in thousands, including share amounts)

The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three month periods ended August 1, 2015 and August 2, 2014:

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Numerator:
Net income-numerator for net income per common share and net income per common share assuming dilution	$	1,928	$	2,252	$	5,501	$	5,844
Denominator:
Denominator for net income per common share — weighted average shares	8,691		8,414		8,631		8,405
Effect of dilutive securities:
Stock options	260		43		244		34
Denominator for net income per common share, assuming dilution:
Adjusted weighted average shares and assumed exercises	8,951		8,457		8,875		8,439

The computation for diluted number of shares excludes unexercised stock options which are anti-dilutive. There were 193 and 129 anti-dilutive shares for the three and six month periods ended August 1, 2015, respectively, and 961 and 884 anti-dilutive shares for each of the three and six months periods ended August 2, 2014.

Basic earnings per share (“EPS”) is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to the computation for basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

Significant Contracts

Significant Contracts

The terms of the Company’s relationship with Target as of the date of this report are set forth in a restated license agreement with Target, which was entered into effective as of February 1, 2008 and amended (i) on January 31, 2013 to add the category of school uniforms, (ii) on April 3, 2013 to provide for a fixed royalty rate of 2% for sales of Cherokee branded products in the category of adult merchandise sold on Target’s website (target.com) in Fiscal 2015 and in future periods and (iii) on January 6, 2014 to reflect Target’s election to renew the agreement through January 31, 2017 and to provide that Target can renew the agreement for successive two (2) year periods, provided that it satisfies the minimum guaranteed royalty payment of $10,500 for the preceding fiscal year (the “Restated Target Agreement”). The Restated Target Agreement grants Target the exclusive right in the United States to use the Cherokee trademarks in various specified categories of merchandise. On September 3, 2015, Target orally informed the Company that the Restated Target Agreement would not be renewed and will terminate at the end of its current term, which expires January 31, 2017.  The non-renewal was confirmed in writing on September 4, 2015.  The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and 2017 through its expiration.

Under the current terms of the Restated Target Agreement, the minimum annual guaranteed royalty for Target is $10,500 and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum guaranteed royalty of $800). Under the Restated Target Agreement, Target has agreed to pay royalties based on a percentage of Target’s net sales of Cherokee branded merchandise during each fiscal year which percentage varies according to the volume of sales of merchandise other than for sales of Cherokee branded products in the school uniforms category and, beginning in Fiscal 2015, other than for sales of Cherokee branded products in the adult merchandise category that are made on Target’s website. The Company assumed a separate license agreement with Target for the Liz Lange brand in connection with the Company’s acquisition of the assets in September 2012.

In connection with the acquisition of the “Hawk” and “Tony Hawk” signature apparel brands and related trademarks (the “Hawk Acquisition”), Cherokee and Kohl’s Department Stores (“Kohl’s”) entered into an amended license agreement. Pursuant to such amendment, Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk branded apparel and related products in the United States and has agreed to pay Cherokee an annual royalty rate for its sales of Hawk branded signature apparel and related products in the United States subject to a minimum annual guaranteed royalty of $4,800 for four years.

Stock-Based Compensation, Stock Options, and Restricted Stock and Restricted Stock Units

Stock-Based Compensation

Effective July 16, 2013, the Company’s stockholders approved the 2013 Stock Incentive Award Plan (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 authorized to be issued (i) 700,000 additional shares of common stock, and (ii) 102,483 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 such shares of common 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 options to certain executives as a material inducement for employment. The Company accounts for stock options under authoritative guidance, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values.

The Company estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the consolidated statements of income. The compensation expense recognized for all stock-based awards is net of estimated forfeitures over the award’s service period.

Stock-based compensation expense recognized in selling, general and administrative expenses for stock options for the Six Months was $943, as compared to $424 for the comparable period in the prior year.

A summary of all activity for the Company’s stock options for the Six Months is as follows:

					Weighted
					Average
					Remaining
			Weighted		Contractual	Aggregate
			Average		Term	Intrinsic
	Shares		Price		(in years)	Value
Outstanding, at January 31, 2015	1,185,767		$	15.89	3.49	$	2,910
Granted	335,000		$	22.79
Exercised/cancellations for net settlements	(261,097	)	17.06
Expired/forfeited	(146,667	)	$	17.33
Outstanding, at August 1, 2015	1,113,003		$	17.50	4.56	$	11,159
Vested and Exercisable at August 1, 2015	550,161		$	15.50	3.18	$	6,616

As of August 1, 2015, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2,665, which is expected to be recognized over a weighted average period of approximately 2.48 years. The total fair value of all options which vested during the Six Months was $603.

Restricted Stock and Restricted Stock Units

In 2013, the Compensation Committee of the Company’s board of directors (the “Board of Directors”) granted certain performance-based equity awards to executives under the Company’s 2006 Stock Plan.

The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s Common Stock on February 1, 2013, or $13.95, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $15.35 for Fiscal 2014, (ii) $16.88 for Fiscal 2015 and (iii) $18.57 for the Company’s fiscal year ending in 2016.  The average share price will be calculated as the average of all market closing prices during the January preceding 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, 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 met for Fiscal 2015, which resulted in the vesting of two thirds of the shares subject to each award

Since the vesting of these performance-based equity awards are subject to market based performance conditions, the fair value of these awards were 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 grant and calculates the fair market value for the performance 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.

Pursuant to a compensation program for non-employee directors adopted by the Compensation Committee, at the meeting of the Board of Directors held immediately following the annual stockholder meeting in June each year, each non-employee member of the Board of Directors must make an election regarding the percentage, up to 100%, of his annual compensation for service on the Board of Directors to be paid in equity, in the form of restricted stock units (“RSU’s”). All of the RSU’s issuable under this program in June 2014 were approved and granted on July 28, 2014. The RSU’s awarded to the non-employee directors are subject to the terms of the 2013 Plan and RSU agreements that provide for quarterly vesting over a one year service period of August 4, 2014 through August 3, 2015, subject to acceleration of vesting upon the earlier to occur of the following: (i) a change in control of the Company, (ii) the death of the recipient or (iii) the recipient’s failure to be re-elected to the Board of Directors in any election in which the recipient stands for re-election.The fair value of these awards was measured on the effective date of grant using the price of the Company’s common stock. At the Board meeting held immediately following the annual stockholder meeting in June 2015, all of the non-employee directors elected to take all of their annual compensation for service on the Board in cash for the following year.

In June 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs and stock options to each member of the Board of Directors and to each of the Company’s executive officers under the 2013 Plan. All of the equity awards approved at that meeting vest in equal annual installments over three years, such that the full grants shall be vested on the 3rd anniversary of the grant date. The fair value of the RSU awards was measured on the effective date of grant using the price of the Company’s common stock.

In August 2014, the Compensation Committee of the Company’s Board of Directors granted a sales-based performance-based equity award to an employee under the 2013 Plan, which vests in five increments dependent upon achievement of certain annual sales targets. The fair value of this award was measured on the effective date of grant using the price of the Company’s common stock.

Stock-based compensation expense for shares of restricted stock and performance stock units for the Six Months was $488 compared to $96 for the comparable period in the prior year.

	Number of Shares		Weighted Average Grant-Date Fair Value
Unvested stock at January 31, 2015	76,936		$	13.02
Granted	160,000		22.94
Vested	(20,789	)	15.44
Forfeited	—		—
Unvested stock at August 1, 2015	216,147		$	20.13

As of August 1, 2015, total unrecognized stock-based compensation expense related to restricted stock and performance stock units was approximately $231, which is expected to be recognized over a weighted average period of approximately 2.4 years.

Trademarks and Acquired Trademarks

Trademarks

The Company holds various trademarks including Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others, in connection with numerous categories of apparel and other goods. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in a number of other countries. The Company also holds trademark applications for Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Sideout, Sideout Sport, Carole Little, Chorus Line, Saint Tropez-West, All That Jazz, and others in numerous countries. The Company intends to renew these registrations, as appropriate, prior to expiration. The Company monitors on an ongoing basis unauthorized uses of the Company’s trademarks, and relies primarily upon a combination of trademark, copyright, know-how, trade secrets, and contractual restrictions to protect the Company’s intellectual property rights both domestically and internationally.

Trademark registration and renewal fees are capitalized and are amortized on a straight-line basis over the estimated useful lives of the assets. Trademark acquisitions are capitalized and are either amortized on a straight-line basis over the estimated useful lives of the assets, or are capitalized as indefinite-lived assets, if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to Cherokee. Trademarks are evaluated for the possibility of impairment at least annually.

Acquisition of Everyday California® Lifestyle Brand

On May 14, 2015, Cherokee consummated an asset purchase agreement with Everyday California Holdings, LLC, under which it acquired various assets related to the Everyday California® Lifestyle Brand and related trademarks. The consideration for the assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal years 2017 and 2018.

Trademarks consist of the following:

	August 1, 2015			January 31, 2015
Acquired Trademarks	$	49,255		$	47,994
Other Trademarks	8,666			8,621
Accumulated amortization	(17,215		)	(16,794		)
Total	$	40,706		$	39,821

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

Level 3: Unobservable inputs for which there is little or no market data, which require the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities

The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these instruments. Long-term debt approximates fair value due to the variable rate nature of the debt.

The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in business are written off in the period identified since they will no longer generate any positive cash flows for the Company. Periodically, long-lived assets that will continue to be used by the Company need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses involve management judgment. In the event the projected undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written down to their estimated fair value, in accordance with authoritative guidance. The estimated undiscounted cash flows used for this nonrecurring fair value measurement are considered a Level 3 input, which consist of unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

Income Taxes

Income Taxes

Income tax expense of $1,045 was recognized for the Second Quarter, resulting in an effective tax rate of 35.1% in the Second Quarter, as compared to 35.7% in the second quarter of last year and compared to 32.4% for the full year of Fiscal 2015. The effective tax rate for the Second Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits.

The amount of unrecognized tax benefits was approximately $449 and $449, respectively, at August 1, 2015 and January 31, 2015. At August 1, 2015, approximately $296 of unrecognized tax benefits would, if recognized, affect the 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 consolidated statements of income. The total amount of interest and penalties recognized in the consolidated statements of income for the Second Quarter was $5 as compared with $1 in the second quarter of last year. As of August 1, 2015 and January 31, 2015, respectively, the total amount of accrued interest and penalties included in the liability for unrecognized tax benefits was $94 and $84.

The Company has unrecognized tax benefits pertaining to the issue of its taxability in various state tax jurisdictions.  It is reasonably possible that the amount of unrecognized tax benefits may decrease within the next 12 months as a result of the Company’s interaction with these various state tax jurisdictions.  The Company anticipates that the total amount of unrecognized tax benefits may decrease in the next 12 months by approximately $449.

The Company files income tax returns in the U.S. federal and California and certain other state jurisdictions. For federal income tax purposes, the fiscal 2012 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 2011 and later tax years remain open for examination by the tax authorities under a four year statute of limitations.

Marketing and Advertising

Marketing and Advertising

Generally, the Company’s “Direct to Retail” licensees fund their own advertising programs. Cherokee’s marketing, advertising and promotional costs totaled $730 and $664 for the six month periods ended August 1, 2015 and August 2, 2014, respectively. These costs are expensed as incurred and were accounted for as selling, general and administrative expenses.

The Company provides marketing expense money to certain large licensees based upon sales criteria to help them build the Company’s licensed brands in their respective territories, thus providing an identifiable benefit to Cherokee. The amounts paid for such marketing expenses during the six month periods ended August 1, 2015 and August 2, 2014 were $332 and $118, respectively, and are included in the total marketing, advertising and promotional costs.

Deferred Rent and Lease Incentives

Deferred Rent and Lease Incentives

When a lease includes lease incentives (such as a rent abatement) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent and lease incentives in the accompanying consolidated balance sheets. For leasehold allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income over the term of the lease.

Comprehensive Income

Comprehensive Income

Authoritative guidance establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the three months ended August 1, 2015 and August 2, 2014, the Company has no comprehensive income components and accordingly, net income equals comprehensive income.

Treasury Stock

Treasury Stock

Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, and the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company records such excess as an increase in additional paid-in capital.

Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.

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Segment Reporting (Tables)

6 Months Ended

Aug. 01, 2015

Segment Reporting

Schedule of revenues by geographic area based upon the licensees' country of domicile

	Three Months Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
U.S. and Canada	$	6,069	$	6,092	$	13,809	$	13,663
Asia	936		932		1,805		1,804
Latin America	608		795		1,153		1,443
All Others	762		654		1,434		1,189
United Kingdom and Europe	107		291		511		626
Total	$	8,482	$	8,764	$	18,712	$	18,725

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Summary of Significant Accounting Policies (Details 5) - USD ($) $ in Thousands		6 Months Ended
	Jul. 16, 2013	Aug. 01, 2015	Aug. 02, 2014
Stock-Based Compensation
Stock-based compensation expense recognized (in dollars)		$ 943	$ 424
Stock Options | Employees
Stock-Based Compensation
Vesting period		3 years
Stock Options | Minimum | Employees
Stock-Based Compensation
Expiration period		7 years
Stock Options | Maximum | Employees
Stock-Based Compensation
Expiration period		10 years
2013 Plan
Stock-Based Compensation
Number of additional shares of common stock authorized to be issued	700,000
Number of shares of common stock authorized that were previously reserved but unissued under 2006 Plan	102,483
2006 Plan
Stock-Based Compensation
Number of shares available for future grants		0

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Summary of Significant Accounting Policies (Details 10) - USD ($) $ in Thousands	6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014
Marketing and Advertising
Marketing, advertising and promotional costs	$ 730	$ 664
Marketing expenses	$ 332	$ 118

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Aug. 01, 2015	Aug. 02, 2014	Aug. 01, 2015	Aug. 02, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 1,928	$ 2,252	$ 5,501	$ 5,844
Comprehensive income	$ 1,928	$ 2,252	$ 5,501	$ 5,844

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Debt

6 Months Ended

Aug. 01, 2015

Debt

Debt

(3)    Debt

Credit Agreement with JPMorgan Chase

On September 4, 2012, and in connection with the acquisition of the “Liz Lange” and “Completely Me by Liz Lange” brands, Cherokee and JPMorgan Chase (or “JPMorgan”) entered into a credit agreement (as amended, the “Credit Agreement”), which was amended on January 31, 2013 in connection with the Company’s acquisition of rights related to the Cherokee brand in the school uniforms category and was further amended on January 10, 2014 in connection with the Hawk Acquisition. Effective January 10, 2014, Cherokee and JPMorgan entered into amendments to each of (i) the Credit Agreement, (ii) the existing term note, which was originally issued by Cherokee in favor of JPMorgan as of September 4, 2012 and previously amended by the parties effective January 31, 2013 (as amended, the “2013 Term Note”) and (iii) the line of credit note, which was issued by Cherokee in favor of JPMorgan as of September 4, 2012 (as amended, the “Revolver”). In addition, pursuant to the Credit Agreement, JPMorgan issued to Cherokee a new term note (the “2014 Term Note” and, together with the foregoing amendments, the “Loan Agreement Amendments”) in the principal sum equal to the purchase price in the Hawk Acquisition, or $19,000. The 2014 Term Note bears interest equal to either: (i) an adjusted annual LIBOR rate reset monthly, bimonthly or quarterly, plus 2.75% or 3.00% depending on the applicable senior funded debt ratio or (ii) JPMorgan’s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the one month LIBOR rate plus 2.5%. Pursuant to the Credit Agreement, the definition of “senior funded debt ratio” requires that Cherokee not exceed a ratio equal to (i) 2.50 to 1.00 until the fiscal quarter ending October 31, 2014, (ii) 2.25 to 1.00 from the fiscal quarter ending January 31, 2015 until the fiscal quarter ending January 31, 2016, and (iii) 2.00 to 1.00 thereafter. Prior to the effectiveness of the January 2014 amendment to the Credit Agreement, such limitation on Cherokee’s senior funded debt ratio was fixed at 2.00 to 1.00 for all periods. In addition, pursuant to the Loan Agreement Amendments, the interest rate that applies to the 2013 Term Note and to the Revolver was amended to equal either: (i) an adjusted annual LIBOR rate reset monthly, bimonthly or quarterly, plus 2.25% or 2.5% depending on the applicable senior funded debt ratio or (ii) the JPMorgan’s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the 1 month LIBOR Rate plus 2.5%.

Following the issuance of the 2014 Term Note, Cherokee’s total borrowings under the Credit Agreement (collectively, the “Loan”) is evidenced by (i) the 2013 Term Note, which was issued in the principal amount of $16,600 and is payable on a quarterly basis through August 2017 and of which $7,975 was outstanding as of August 1, 2015, (ii) the Revolver, which provides Cherokee with a revolving line of credit in the principal amount of $2,000, none of which is outstanding as of August 1, 2015 and (iii) the 2014 Term Loan, which was issued in the principal amount of $19,000 and is payable on a quarterly basis through November 2018 and of which approximately $13,617 is outstanding as of August 1, 2015. Cherokee paid an upfront fee equal to $95 in connection with the issuance of the 2014 Term Loan.

Consistent with the existing terms of the Credit Agreement, the Loan is secured by continuing security agreements, trademark security agreements and continuing guarantees executed by Cherokee and its subsidiaries, as applicable. In addition, the Credit Agreement includes various restrictions and covenants regarding the operation of Cherokee’s business, including covenants that require Cherokee to obtain JPMorgan’s consent in certain circumstances before Cherokee can: (i) incur additional indebtedness, (ii) make acquisitions, mergers or consolidations in excess of $5,000 on an aggregate basis following the Hawk Acquisition, (iii) issue any equity securities other than pursuant to Cherokee’s employee equity incentive plans or programs and (iv) repurchase or redeem any outstanding shares of common stock or pay dividends or other distributions, other than stock dividends, to Cherokee’s stockholders. The Credit Agreement also imposes financial covenants, including: (i) a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 and (ii) a limitation of Cherokee’s “senior funded debt ratio” as described above. Further, Cherokee has granted a security interest in favor of JPMorgan in all of Cherokee’s assets (including trademarks) as collateral for the Loan. In the event of a default under the Credit Agreement, JPMorgan has the right to terminate its obligations under the Credit Agreement, accelerate the payment on any unpaid balance of the Credit Agreement and exercise its other rights, including foreclosing on Cherokee’s assets under the security agreements. As of August 1, 2015, the Company was in compliance with these financial covenants.

Target’s election not to renew the Restated Target Agreement triggered an event of default under the Credit Agreement, but JPMorgan and the Company have entered into a Forbearance Agreement pursuant to which JPMorgan has agreed that it will not exercise any of its rights or remedies under the Credit Agreement solely with respect to such event of default through October 12, 2015.  The Company intends to seek a waiver of the event of default during the forbearance period, but no assurance can be given that such waiver will be issued, or if issued, that it will be on terms favorable to the Company.

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Debt (Details) $ in Thousands		6 Months Ended	11 Months Ended
	Jan. 10, 2014 USD ($)	Aug. 01, 2015 USD ($)	Jan. 08, 2014	Jan. 31, 2013 USD ($)
Credit Agreement
Debt
Senior funded debt ratio			2.00
Threshold amount of acquisitions, mergers or consolidations in excess of which consent is required to be obtained		$ 5,000
Credit Agreement | Minimum
Debt
Fixed charge coverage ratio to be maintained		1.2
Credit Agreement | Until fiscal quarter ending October 31, 2014
Debt
Senior funded debt ratio	2.50
Credit Agreement | From the fiscal quarter ending January 31, 2015 until the fiscal quarter ending January 31, 2016
Debt
Senior funded debt ratio	2.25
Credit Agreement | Thereafter
Debt
Senior funded debt ratio	2.00
Term Note | 2014 Term Note
Debt
Principal amount	$ 19,000
Total amount outstanding		$ 13,617
Upfront fee	$ 95
Term Note | 2013 Term Note
Debt
Principal amount				$ 16,600
Total amount outstanding		$ 7,975
Term Note | Adjusted annual LIBOR | 2014 Term Note | Minimum
Debt
Interest rate added to the reference rate (as a percent)		2.75%
Term Note | Adjusted annual LIBOR | 2014 Term Note | Maximum
Debt
Interest rate added to the reference rate (as a percent)		3.00%
Term Note | Adjusted annual LIBOR | 2013 Term Note | Minimum
Debt
Interest rate added to the reference rate (as a percent)		2.25%
Term Note | Adjusted annual LIBOR | 2013 Term Note | Maximum
Debt
Interest rate added to the reference rate (as a percent)		2.50%
Term Note | Prime rate | 2014 Term Note
Debt
Interest rate added to the reference rate (as a percent)		0.25%
Term Note | Prime rate | 2013 Term Note
Debt
Interest rate added to the reference rate (as a percent)		0.25%
Term Note | 1 month LIBOR | 2014 Term Note
Debt
Interest rate added to the reference rate (as a percent)		2.50%
Term Note | 1 month LIBOR | 2013 Term Note
Debt
Interest rate added to the reference rate (as a percent)		2.50%
Revolver
Debt
Maximum borrowing capacity				$ 2,000
Outstanding amount		$ 0
Revolver | Adjusted annual LIBOR | Minimum
Debt
Interest rate added to the reference rate (as a percent)		2.25%
Revolver | Adjusted annual LIBOR | Maximum
Debt
Interest rate added to the reference rate (as a percent)		2.50%
Revolver | Prime rate
Debt
Interest rate added to the reference rate (as a percent)		0.25%
Revolver | 1 month LIBOR
Debt
Interest rate added to the reference rate (as a percent)		2.50%

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Summary of Significant Accounting Policies (Details 4) - USD ($) $ in Thousands		6 Months Ended
	Jan. 10, 2014	Aug. 01, 2015
Restated Target Agreement
Significant Contracts
Renewal period of agreement		2 years
Restated Target Agreement | All products except those in the school uniforms category | Minimum
Significant Contracts
Annual guaranteed royalty		$ 10,500
Restated Target Agreement | Branded products in the adult merchandise category
Significant Contracts
Fixed royalty rate in Fiscal 2015 and in future periods (as a percent)		2.00%
Restated Target Agreement | Branded products in the school uniforms category | Minimum
Significant Contracts
Annual guaranteed royalty		$ 800
Kohl's Amended Retail License Agreement
Significant Contracts
Period over which minimum annual guaranteed royalty will be received	4 years
Kohl's Amended Retail License Agreement | Minimum
Significant Contracts
Annual guaranteed royalty	$ 4,800