Company Business and Summary of Significant Accounting Policies	12 Months Ended
Feb. 03, 2018
Company Business and Summary of Significant Accounting Policies
Company Business and Summary of Significant Accounting Policies	1. Company Business and Summary of Significant Accounting Policies Cherokee Inc. and subsidiaries (the “Company”) is an international marketer and manager of a portfolio of fashion and lifestyle brands, primarily licensing product in the apparel, footwear, home products and accessories categories. The Company’s brands include Cherokee, Hi-Tec, Magnum, Interceptor, 50 Peaks, Hawk Signature, Tony Hawk, Liz Lange, Completely Me by Liz Lange, Flip Flop Shops, Everyday California, Carole Little and Sideout. On December 7, 2016, the Company acquired Hi-Tec Sports International Holdings BV (“Hi-Tec”) and simultaneously sold certain sales and distribution operations of Hi-Tec to third parties. (See Note 2.) Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Cherokee Inc., Hi-Tec and its other subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal year comprises a 52- or 53-week period ending on the Saturday nearest to January 31. The fiscal year ended February 3, 2018 (“Fiscal 2018”) is a 53-week period, while the fiscal years ended January 28, 2017 (“Fiscal 2017”) and January 30, 2016 (“Fiscal 2016”) are 52-week periods. The Company’s functional currency is the U.S. dollar. Substantially all of the Company’s revenues are denominated in U.S. dollars, even though they may be generated from agreements with licensee in foreign countries. A large majority of the Company’s operating expenses are also denominated in U.S dollars and any expenses that are not denominated in U.S. dollars are recorded using the average exchange rate during the period. Monetary foreign currency assets and liabilities are reported using the exchange rate at the end of the reporting period. Any gains or losses from exchange rate fluctuations are included in other income (expense) in the consolidated statements of operations. Liquidity and Going Concern The accompanying 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 7., the Company has $49.5 million of outstanding indebtedness under its Cerberus Credit Facility. Based on the Company’s current forecasts, the Company anticipates that it will violate the liquidity covenant included in the Cerberus Credit Facility within the next twelve months, which requires the Company to maintain liquidity of $2.0 million, comprising either cash balances or borrowing capacity under the revolving credit component of the Cerberus Credit Facility. As a result of the forecasted noncompliance, there is an explanatory paragraph included in the report of the Company’s independent registered public accounting firm describing the uncertainty about the Company’s ability to continue as a going concern, which itself results in noncompliance with covenants in the Cerberus Credit Facility. These factors raise substantial doubt about the Company’s ability to continue as a going concern, and the compliance failure, and potential failure, subject 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. Management plans to address the Company’s ability to continue to continue as a going concern by seeking an increase in its borrowing capacity under the Cerberus Credit Facility and amending existing covenants, or by seeking additional liquidity from other lenders with Cerberus’ consent. The Company will further evaluate its ability to meet its obligations as they come due over the next twelve months, and the successful amendment of the Cerberus Credit Facility is a critical part of the management’s plans to meet its obligations as they come due. There is no assurance that management will be able to execute these plans. Cash and Cash Equivalents Money market funds and highly liquid debt instruments purchased with original maturities of three months or less are considered cash equivalents. Carrying values approximate fair value. Inventories Inventories comprise finished goods and are valued at the lower of cost (first-in, first-out) or market. Inventories at January 28, 2017 related to the Company’s distribution business that was sold prior to the end of Fiscal 2018 and are included in current assets of discontinued operations in the consolidated balance sheet. (See Note 2.) Property and Equipment Furniture and fixtures, computer equipment and software are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to seven years. Leasehold improvements are recorded at cost and amortized on a straight-line basis over their estimated useful lives or related lease term, whichever is shorter. Intangible Assets, Goodwill and Other Long-Lived Assets The Company holds various trademarks that are registered with the United States Patent and Trademark Office and similar government agencies in a number of other countries. Acquired trademarks are either capitalized and amortized on a straight-line basis over their estimated useful lives, or classified as indefinite-lived assets and not amortized if no legal, regulatory, contractual, competitive, economic, or other factors limit their useful lives. The Company routinely evaluates the remaining useful life of trademarks that are not being amortized to determine whether events or circumstances continue to support an indefinite useful life. Trademark registration and renewal costs are capitalized and amortized on a straight-line basis over their estimated useful lives. Franchise agreements are amortized on a straight-line basis over the lives of the agreements. Goodwill represents the excess of purchase price over the fair value of assets acquired in business combinations and is not amortized. Indefinite lived trademarks and goodwill are evaluated annually for impairment or when events or circumstances indicate a potential impairment, and an impairment loss is recognized to the extent that the asset’s carrying amount exceeds its fair value. The Company estimates these fair values based on discounted cash flow models and market place multiples that include assumptions determined by the Company’s management regarding projected revenues, operating costs and discount rates. Management’s expectations regarding license agreement renewals are also considered, along with forecasts of revenues from replacement licensees for agreements that have terminated. Amortizing trademarks, franchise agreements and other long-lived assets are tested for recoverability as necessary using undiscounted cash flow models. Deferred Financing Costs and Debt Discounts Deferred financing costs and debt discounts are reflected in the balance sheets as a reduction of long-term debt and are amortized into interest expense over the life of the debt using the effective interest method. Revenue Recognition and Deferred Revenue Revenue is recognized under the Company’s various license and franchise agreements as services are rendered, or are otherwise earned in accordance with the underlying agreements. Royalties are typically earned based on the licensees’ retail or wholesale sales of licensed products, or based on the cost of producing the licensed goods. Revenues from license fees, up-front payments and milestone payments, which are received in connection with other rights and services that represent continuing obligations of the Company, are deferred and recognized in accordance with the license agreements. Minimum guaranteed royalties paid in advance of the culmination of the earnings process, the majority of which are non‑refundable to the licensee, are deferred and recognized as revenues when earned. Initial franchise fees are recognized as revenue when a franchised location opens, since the services and conditions related to the franchise fee have generally been performed at that point. Renewal franchise fees are recognized as revenue when the renewal agreements are signed and the fee is paid since there are no material services and conditions related to these franchise fees. The Company’s license and franchise agreements typically include audit rights to allow the Company to validate the amount of royalties received. Differences between amounts initially recognized and amounts subsequently determined under audit are recognized when the differences become known and are considered collectible. The Company regularly enforces its intellectual property rights and pursues third parties that are utilizing its trademarks without a license. Royalties generated from such enforcement proceedings are recognized when they are determined and considered collectible. Marketing and Advertising Generally, the Company’s licensees and franchisees fund their own advertising programs. Marketing, advertising and promotional costs incurred by the Company are charged to selling, general and administrative expense as incurred and were approximately $3.7 million, $1.4 million and $1.0 during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. Rent Expense and Tenant Improvement Allowances Rent expense is recognized on a straight‑line basis over the term of the lease. Tenant improvements allowances are recorded as a deferred lease credit in the balance sheets and amortized as a reduction of rent expense over the term of the lease. Stock-Based Compensation Stock option grants and restricted stock awards to employees and directors are measured and recognized as compensation expense based on estimated fair values, which are determined using option valuation models. These models are based on assumptions about stock price volatility, interest rates, dividend rates and other factors. The estimated fair value is amortized over the vesting period of the award using the graded amortization method. Restructuring Charges Restructuring charges consist of severance, lease termination, contract termination and other restructuring-related costs. A liability for severance costs is recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Lease and contract termination costs are recognized at the date the Company ceases using the rights conveyed by the lease or contract and are measured at fair value, which is determined based on the remaining contractual lease obligations reduced by estimated sublease rentals, if any. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company considers estimates of future taxable income and ongoing prudent and feasible tax planning strategies. Beginning with Fiscal 2018, the Company records the tax effect of equity issuances within the income statement rather than paid-in capital. The Company accounts for uncertainty in income taxes based on financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. A tax position is initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are measured as the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Earnings (Loss) Per Share Basic earnings (loss) per share (“EPS”) is computed by dividing the net (loss) income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of outstanding stock options and warrants as if such securities had been exercised at the beginning of the period. For Fiscal 2016, the weighted-average common shares outstanding includes 0.2 million shares of dilutive stock options. The computation of diluted common shares outstanding excludes outstanding stock options and warrants that are anti‑dilutive. Warrants The Company has issued warrants to purchase shares of its common stock to one of its Hi-Tec licensees and to certain of its lenders and investors. Because the warrants are assessed to be equity in nature, they are measured at fair value at inception. The warrants issued to the Company’s licensee are recognized as additional paid-in capital and contra revenue over the period the revenue from the license is expected to be recognized in accordance with Accounting Standards Codification (“ASC”) 605-60-25 and ASC 505-50-S99-1. The warrants issued to the Company’s lenders and investors are recognized as additional paid-in capital and charged to operating expenses in the Company’s statements of operations. Fair Value of Financial Instruments The carrying value of accounts receivable and accounts payable approximates fair value due to their short‑term nature. The carrying value of the Company’s long‑term debt approximates fair value as these borrowings bear interest at floating rates. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. While management bases its estimates on assumptions it believes are reasonable under the circumstances, these estimates by their nature are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates. Reclassifications Certain reclassifications have been made to the Fiscal 2017 and Fiscal 2016 financial statements in order to conform to the current year presentation. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard (including clarification guidance issued in Fiscal 2017) is effective for the Company’s fiscal year ending February 2, 2019 (“Fiscal 2019”) and allows for either full retrospective or modified retrospective adoption. The Company plans to adopt this guidance using the modified retrospective method beginning in the first quarter of Fiscal 2019 and estimates that the cumulative effect on adoption will be a $0.4 million charge to accrued revenue with a corresponding credit to retained earnings. Minimum guaranteed royalties under the Company’s agreements with its licensees have historically been recognized as earned in accordance with the underlying license agreements, while under this new standard, such royalties will generally be recognized on a straight-line basis over the term of the license agreement. Accordingly, for license agreements with escalating minimum guaranteed royalties, revenues will generally be higher during the early years of the license agreement than they would have been under the previous guidance. In March 2016, the FASB issued authoritative guidance which modifies existing guidance for off-balance sheet treatment of a lessee’s operating leases. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset would be recognized related to the right to use the underlying asset, and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures about leases. This guidance is effective for the Company’s fiscal year ending February 1, 2020 (“Fiscal 2020”). The anticipated impact of the adoption of this guidance on the Company’s financial statements is still being evaluated, but the Company expects there will be a significant increase in its long-term assets and liabilities resulting from adoption. In March 2016, the FASB issued authoritative guidance to simplify the accounting for certain aspects of share-based compensation, which was adopted by the Company for Fiscal 2018. This guidance addresses the accounting for income tax effects at award settlement, the use of an expected forfeiture rate to estimate award cancellations prior to the vesting date and the presentation of excess tax benefits and shares surrendered for tax withholdings on the statement of cash flows. This guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. This is a change from the current guidance that requires such activity to be recorded in paid-in capital within stockholder’s equity. This guidance will be applied prospectively and may create volatility in the Company’s effective tax rate when adopted depending largely on future events and other factors which may include the Company’s stock price, timing of stock option exercises, the value realized upon vesting or exercise of shares compared to the grant date fair value of those shares and any employee terminations. This guidance also eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur. The company has elected to continue to estimate forfeitures. In August 2016, the FASB issued authoritative guidance that reduces the diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance is effective for the Company’s Fiscal 2019. This guidance was adopted by the Company in Fiscal 2018 and did not have a material impact on the Company’s financial position or results of operations. In January 2017, the FASB issued authoritative guidance which modifies guidance for determining whether a transaction involves the purchase or disposal of a business or an asset. This standard was early adopted by the Company in Fiscal 2017. The amendments clarify that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar assets, the set of assets and activities is not a business. In January 2017, the FASB issued authoritative guidance to simplify the testing for goodwill impairment by removing step two from the goodwill testing. Under previous guidance, if the fair value of a reporting unit was lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the reporting unit from the reporting unit’s fair value as determined under step one. This new guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance was adopted by the Company in Fiscal 2018 and did not have a material impact on the Company’s financial position or results of operations. In May 2017, the FASB issued authoritative guidance related to stock-based compensation. Under this new guidance, the Company would not account for the effects of a modification of a share-based payment award if the fair value of the award does not change, the vesting conditions remain the same and the classification of the award as an equity or a liability instrument does not change. This standard is effective for Fiscal 2019 and is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.

1. Company Business and Summary of Significant Accounting Policies

Cherokee Inc. and subsidiaries (the “Company”) is an international marketer and manager of a portfolio of fashion and lifestyle brands, primarily licensing product in the apparel, footwear, home products and accessories categories. The Company’s brands include Cherokee, Hi-Tec, Magnum, Interceptor, 50 Peaks, Hawk Signature, Tony Hawk, Liz Lange, Completely Me by Liz Lange, Flip Flop Shops, Everyday California, Carole Little and Sideout.

On December 7, 2016, the Company acquired Hi-Tec Sports International Holdings BV (“Hi-Tec”) and simultaneously sold certain sales and distribution operations of Hi-Tec to third parties. (See Note 2.)

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Cherokee Inc., Hi-Tec and its other subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal year comprises a 52- or 53-week period ending on the Saturday nearest to January 31. The fiscal year ended February 3, 2018 (“Fiscal 2018”) is a 53-week period, while the fiscal years ended January 28, 2017 (“Fiscal 2017”) and January 30, 2016 (“Fiscal 2016”) are 52-week periods.

The Company’s functional currency is the U.S. dollar. Substantially all of the Company’s revenues are denominated in U.S. dollars, even though they may be generated from agreements with licensee in foreign countries. A large majority of the Company’s operating expenses are also denominated in U.S dollars and any expenses that are not denominated in U.S. dollars are recorded using the average exchange rate during the period. Monetary foreign currency assets and liabilities are reported using the exchange rate at the end of the reporting period. Any gains or losses from exchange rate fluctuations are included in other income (expense) in the consolidated statements of operations.

Liquidity and Going Concern

The accompanying 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 7., the Company has $49.5 million of outstanding indebtedness under its Cerberus Credit Facility.

Based on the Company’s current forecasts, the Company anticipates that it will violate the liquidity covenant included in the Cerberus Credit Facility within the next twelve months, which requires the Company to maintain liquidity of $2.0 million, comprising either cash balances or borrowing capacity under the revolving credit component of the Cerberus Credit Facility. As a result of the forecasted noncompliance, there is an explanatory paragraph included in the report of the Company’s independent registered public accounting firm describing the uncertainty about the Company’s ability to continue as a going concern, which itself results in noncompliance with covenants in the Cerberus Credit Facility. These factors raise substantial doubt about the Company’s ability to continue as a going concern, and the compliance failure, and potential failure, subject 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.

Management plans to address the Company’s ability to continue to continue as a going concern by seeking an increase in its borrowing capacity under the Cerberus Credit Facility and amending existing covenants, or by seeking additional liquidity from other lenders with Cerberus’ consent. The Company will further evaluate its ability to meet its obligations as they come due over the next twelve months, and the successful amendment of the Cerberus Credit Facility is a critical part of the management’s plans to meet its obligations as they come due. There is no assurance that management will be able to execute these plans.

Cash and Cash Equivalents

Money market funds and highly liquid debt instruments purchased with original maturities of three months or less are considered cash equivalents. Carrying values approximate fair value.

Inventories

Inventories comprise finished goods and are valued at the lower of cost (first-in, first-out) or market. Inventories at January 28, 2017 related to the Company’s distribution business that was sold prior to the end of Fiscal 2018 and are included in current assets of discontinued operations in the consolidated balance sheet. (See Note 2.)

Property and Equipment

Furniture and fixtures, computer equipment and software are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, ranging from three to seven years. Leasehold improvements are recorded at cost and amortized on a straight-line basis over their estimated useful lives or related lease term, whichever is shorter.

Intangible Assets, Goodwill and Other Long-Lived Assets

The Company holds various trademarks that are registered with the United States Patent and Trademark Office and similar government agencies in a number of other countries. Acquired trademarks are either capitalized and amortized on a straight-line basis over their estimated useful lives, or classified as indefinite-lived assets and not amortized if no legal, regulatory, contractual, competitive, economic, or other factors limit their useful lives. The Company routinely evaluates the remaining useful life of trademarks that are not being amortized to determine whether events or circumstances continue to support an indefinite useful life. Trademark registration and renewal costs are capitalized and amortized on a straight-line basis over their estimated useful lives. Franchise agreements are amortized on a straight-line basis over the lives of the agreements. Goodwill represents the excess of purchase price over the fair value of assets acquired in business combinations and is not amortized. Indefinite lived trademarks and goodwill are evaluated annually for impairment or when events or circumstances indicate a potential impairment, and an impairment loss is recognized to the extent that the asset’s carrying amount exceeds its fair value. The Company estimates these fair values based on discounted cash flow models and market place multiples that include assumptions determined by the Company’s management regarding projected revenues, operating costs and discount rates. Management’s expectations regarding license agreement renewals are also considered, along with forecasts of revenues from replacement licensees for agreements that have terminated. Amortizing trademarks, franchise agreements and other long-lived assets are tested for recoverability as necessary using undiscounted cash flow models.

Deferred Financing Costs and Debt Discounts

Deferred financing costs and debt discounts are reflected in the balance sheets as a reduction of long-term debt and are amortized into interest expense over the life of the debt using the effective interest method.

Revenue Recognition and Deferred Revenue

Revenue is recognized under the Company’s various license and franchise agreements as services are rendered, or are otherwise earned in accordance with the underlying agreements. Royalties are typically earned based on the licensees’ retail or wholesale sales of licensed products, or based on the cost of producing the licensed goods. Revenues from license fees, up-front payments and milestone payments, which are received in connection with other rights and services that represent continuing obligations of the Company, are deferred and recognized in accordance with the license agreements. Minimum guaranteed royalties paid in advance of the culmination of the earnings process, the majority of which are non‑refundable to the licensee, are deferred and recognized as revenues when earned. Initial franchise fees are recognized as revenue when a franchised location opens, since the services and conditions related to the franchise fee have generally been performed at that point. Renewal franchise fees are recognized as revenue when the renewal agreements are signed and the fee is paid since there are no material services and conditions related to these franchise fees.

The Company’s license and franchise agreements typically include audit rights to allow the Company to validate the amount of royalties received. Differences between amounts initially recognized and amounts subsequently determined under audit are recognized when the differences become known and are considered collectible. The Company regularly enforces its intellectual property rights and pursues third parties that are utilizing its trademarks without a license. Royalties generated from such enforcement proceedings are recognized when they are determined and considered collectible.

Marketing and Advertising

Generally, the Company’s licensees and franchisees fund their own advertising programs. Marketing, advertising and promotional costs incurred by the Company are charged to selling, general and administrative expense as incurred and were approximately $3.7 million, $1.4 million and $1.0 during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.

Rent Expense and Tenant Improvement Allowances

Rent expense is recognized on a straight‑line basis over the term of the lease. Tenant improvements allowances are recorded as a deferred lease credit in the balance sheets and amortized as a reduction of rent expense over the term of the lease.

Stock-Based Compensation

Stock option grants and restricted stock awards to employees and directors are measured and recognized as compensation expense based on estimated fair values, which are determined using option valuation models. These models are based on assumptions about stock price volatility, interest rates, dividend rates and other factors. The estimated fair value is amortized over the vesting period of the award using the graded amortization method.

Restructuring Charges

Restructuring charges consist of severance, lease termination, contract termination and other restructuring-related costs. A liability for severance costs is recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Lease and contract termination costs are recognized at the date the Company ceases using the rights conveyed by the lease or contract and are measured at fair value, which is determined based on the remaining contractual lease obligations reduced by estimated sublease rentals, if any.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company considers estimates of future taxable income and ongoing prudent and feasible tax planning strategies. Beginning with Fiscal 2018, the Company records the tax effect of equity issuances within the income statement rather than paid-in capital.

The Company accounts for uncertainty in income taxes based on financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. A tax position is initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are measured as the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing the net (loss) income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of outstanding stock options and warrants as if such securities had been exercised at the beginning of the period. For Fiscal 2016, the weighted-average common shares outstanding includes 0.2 million shares of dilutive stock options. The computation of diluted common shares outstanding excludes outstanding stock options and warrants that are anti‑dilutive.

Warrants

The Company has issued warrants to purchase shares of its common stock to one of its Hi-Tec licensees and to certain of its lenders and investors. Because the warrants are assessed to be equity in nature, they are measured at fair value at inception. The warrants issued to the Company’s licensee are recognized as additional paid-in capital and contra revenue over the period the revenue from the license is expected to be recognized in accordance with Accounting Standards Codification (“ASC”) 605-60-25 and ASC 505-50-S99-1. The warrants issued to the Company’s lenders and investors are recognized as additional paid-in capital and charged to operating expenses in the Company’s statements of operations.

Fair Value of Financial Instruments

The carrying value of accounts receivable and accounts payable approximates fair value due to their short‑term nature. The carrying value of the Company’s long‑term debt approximates fair value as these borrowings bear interest at floating rates.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. While management bases its estimates on assumptions it believes are reasonable under the circumstances, these estimates by their nature are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.

Reclassifications

Certain reclassifications have been made to the Fiscal 2017 and Fiscal 2016 financial statements in order to conform to the current year presentation.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard (including clarification guidance issued in Fiscal 2017) is effective for the Company’s fiscal year ending February 2, 2019 (“Fiscal 2019”) and allows for either full retrospective or modified retrospective adoption. The Company plans to adopt this guidance using the modified retrospective method beginning in the first quarter of Fiscal 2019 and estimates that the cumulative effect on adoption will be a $0.4 million charge to accrued revenue with a corresponding credit to retained earnings. Minimum guaranteed royalties under the Company’s agreements with its licensees have historically been recognized as earned in accordance with the underlying license agreements, while under this new standard, such royalties will generally be recognized on a straight-line basis over the term of the license agreement. Accordingly, for license agreements with escalating minimum guaranteed royalties, revenues will generally be higher during the early years of the license agreement than they would have been under the previous guidance.

In March 2016, the FASB issued authoritative guidance which modifies existing guidance for off-balance sheet treatment of a lessee’s operating leases. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset would be recognized related to the right to use the underlying asset, and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures about leases. This guidance is effective for the Company’s fiscal year ending February 1, 2020 (“Fiscal 2020”). The anticipated impact of the adoption of this guidance on the Company’s financial statements is still being evaluated, but the Company expects there will be a significant increase in its long-term assets and liabilities resulting from adoption.

In March 2016, the FASB issued authoritative guidance to simplify the accounting for certain aspects of share-based compensation, which was adopted by the Company for Fiscal 2018. This guidance addresses the accounting for income tax effects at award settlement, the use of an expected forfeiture rate to estimate award cancellations prior to the vesting date and the presentation of excess tax benefits and shares surrendered for tax withholdings on the statement of cash flows. This guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. This is a change from the current guidance that requires such activity to be recorded in paid-in capital within stockholder’s equity. This guidance will be applied prospectively and may create volatility in the Company’s effective tax rate when adopted depending largely on future events and other factors which may include the Company’s stock price, timing of stock option exercises, the value realized upon vesting or exercise of shares compared to the grant date fair value of those shares and any employee terminations. This guidance also eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur. The company has elected to continue to estimate forfeitures.

In August 2016, the FASB issued authoritative guidance that reduces the diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance is effective for the Company’s Fiscal 2019. This guidance was adopted by the Company in Fiscal 2018 and did not have a material impact on the Company’s financial position or results of operations.

In January 2017, the FASB issued authoritative guidance which modifies guidance for determining whether a transaction involves the purchase or disposal of a business or an asset. This standard was early adopted by the Company in Fiscal 2017. The amendments clarify that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar assets, the set of assets and activities is not a business.

In January 2017, the FASB issued authoritative guidance to simplify the testing for goodwill impairment by removing step two from the goodwill testing. Under previous guidance, if the fair value of a reporting unit was lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the reporting unit from the reporting unit’s fair value as determined under step one. This new guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance was adopted by the Company in Fiscal 2018 and did not have a material impact on the Company’s financial position or results of operations.

In May 2017, the FASB issued authoritative guidance related to stock-based compensation. Under this new guidance, the Company would not account for the effects of a modification of a share-based payment award if the fair value of the award does not change, the vesting conditions remain the same and the classification of the award as an equity or a liability instrument does not change. This standard is effective for Fiscal 2019 and is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.