Basis of Presentation	3 Months Ended
May 05, 2018
Basis of Presentation
Basis of Presentation	CHEROKEE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. These financial statements include the accounts of Cherokee Inc. and its consolidated subsidiaries (the “Company”) and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended February 3, 2018 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results to be expected for the full year. Liquidity and Going Concern The accompanying condensed consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As described in Note 8, the Company has $49.1 million of outstanding indebtedness under its Cerberus Credit Facility. As a result of forecasted noncompliance with certain covenants in the Cerberus Credit Facility, there was an explanatory paragraph included in the report of the Company’s independent registered public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018 describing the uncertainty about the Company’s ability to continue as a going concern. This explanatory paragraph resulted in noncompliance with a covenant in the Cerberus Credit Facility, and on June 8, 2018, Cerberus issued a notice of default and reservation of rights, which identifies such default and indicates that the Company will be subject to increased borrowing rates as of the date of the default. The notice further specifies that Cerberus continues to evaluate its response to the default. These factors raise substantial doubt about the Company’s ability to continue as a going concern, and the compliance failure subjects the Company to significant risks, including Cerberus’s right to terminate its obligations under the Cerberus Credit Facility, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under applicable law, including foreclosing on the Company’s and/or its subsidiaries assets that serve as collateral for the borrowed amounts. If any of these rights were to be exercised, the Company’s financial condition and ability to continue operations would be materially jeopardized. The Company is currently facing significant liquidity challenges due to recurring operating losses and negative cash flow. Based on forecasted cash flows, there are material uncertainties regarding the Company’s ability to meet commitments as they come due and to continue as a going concern. If the Company is unable to meet obligations to lenders and other creditors, the Company may have to significantly curtail or even cease operations. The Company plans to address these issues through further negotiations with their lender and with other potential sources of capital and by seeking extensions and other concessions from other creditors. There is no assurance that the Company will be able to execute these plans or continue to operate as a going concern.

CHEROKEE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. These financial statements include the accounts of Cherokee Inc. and its consolidated subsidiaries (the “Company”) and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended February 3, 2018 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results to be expected for the full year.

Liquidity and Going Concern

The accompanying condensed consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As described in Note 8, the Company has $49.1 million of outstanding indebtedness under its Cerberus Credit Facility.

As a result of forecasted noncompliance with certain covenants in the Cerberus Credit Facility, there was an explanatory paragraph included in the report of the Company’s independent registered public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018 describing the uncertainty about the Company’s ability to continue as a going concern. This explanatory paragraph resulted in noncompliance with a covenant in the Cerberus Credit Facility, and on June 8, 2018, Cerberus issued a notice of default and reservation of rights, which identifies such default and indicates that the Company will be subject to increased borrowing rates as of the date of the default. The notice further specifies that Cerberus continues to evaluate its response to the default. These factors raise substantial doubt about the Company’s ability to continue as a going concern, and the compliance failure subjects the Company to significant risks, including Cerberus’s right to terminate its obligations under the Cerberus Credit Facility, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under applicable law, including foreclosing on the Company’s and/or its subsidiaries assets that serve as collateral for the borrowed amounts. If any of these rights were to be exercised, the Company’s financial condition and ability to continue operations would be materially jeopardized. The Company is currently facing significant liquidity challenges due to recurring operating losses and negative cash flow. Based on forecasted cash flows, there are material uncertainties regarding the Company’s ability to meet commitments as they come due and to continue as a going concern. If the Company is unable to meet obligations to lenders and other creditors, the Company may have to significantly curtail or even cease operations. The Company plans to address these issues through further negotiations with their lender and with other potential sources of capital and by seeking extensions and other concessions from other creditors. There is no assurance that the Company will be able to execute these plans or continue to operate as a going concern.