Item 8.01 Other Events.
RTW Retailwinds, Inc. (the "Company") filed a Form 12b-25 seeking an extension
to file its Annual Report on Form 10-K for the year ended February 1, 2020 (the
"Form 10-K"). In addition, the Form 12b-25 disclosed the following information.
The Company has determined that it is unable to file its Form 10-K within the
prescribed time period without unreasonable effort or expense for the reasons
set forth below.
The Company and its independent auditor, BDO USA LLP ("BDO"), are in the process
of finalizing disclosures concerning recent developments related to the impact
of the coronavirus (COVID-19) pandemic. The Form 10-K will reflect a substantial
doubt about the Company's ability to continue as a going concern and the
possibility it may file for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. In consultation with the Company's audit committee and
independent public accountants, additional time is required to consider the
disclosures about these matters, which will be included in its Annual Report in
the Form 10-K. There is no disagreement between BDO and the Company. The Company
continues to work closely with BDO in order to issue its Form 10-K within the
extension period. Any opinion delivered by BDO is expected to reference a
substantial doubt about the Company's ability to continue as a going concern.
As previously disclosed on April 16, 2020, the Company relied on the Securities
and Exchange Commission's order (Release No. 34-88318) under Section 36 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") granting
exemptions from specified provisions of the Exchange Act and certain rules
thereunder, as amended by Release No. 34-88465 issued on March 25, 2020, to
delay the filing of the Form 10-K due to the circumstances related to the
COVID-19 pandemic.
COVID-19 has caused disruptions to the Company's suppliers overseas and to its
supply chain, has resulted in continued store closures, and had led to furloughs
for all store associates, as well as terminating certain corporate personnel. As
a result, COVID-19 and related events have resulted in the Company's management
devoting significant time and attention to assessing the existing and future
impact of COVID-19 and those events on the Company's operations, financial
position, and cash flows, and developing operational and financial plans to
address those matters. This has diverted management and financial resources from
completing all of the tasks necessary to file the Company's Form 10-K by its
April 16, 2020 due date. Notwithstanding the foregoing, the Company expected to
file its Form 10-K no later than June 1, 2020 (which is 45 days from the Form
10-K's original filing deadline of April 16, 2020).
The Company cannot reasonably estimate the length or severity of COVID-19 but it
currently anticipates a material adverse impact on its financial position,
results of operations, and cash flows during fiscal year 2020. As such, the
Company's revenues, results of operations, and cash flows have been materially
adversely impacted which raises substantial doubt about the Company's ability to
continue as a going concern. The Company has already experienced substantial and
recurring losses from operations, and such losses have caused a retained deficit
of $164.6 million as of February 1, 2020. As such, the Company has been
considering available options, including restructuring its obligations or
seeking protection under the bankruptcy laws, in which case there will likely
not be any value distributed to its shareholders and its shares could be
cancelled for no consideration. The Company believes that seeking protection
under the bankruptcy laws is probable.
As previously announced in March 2020, the COVID-19 outbreak in the United
States initially led to reduced store traffic and the temporary reduction of
operating hours for the Company's brick-and-mortar stores. As the impact of
COVID-19 evolved, the Company took decisive action to temporarily close all of
the Company's brick-and-mortar stores to ensure the health and safety of its
employees, customers, and communities. As of the date of this filing, in
accordance with the federal and state guidelines and the adoption of new health
and safety recommendations resulting from the COVID-19 pandemic, the Company
expects to begin re-opening its brick-and-mortar stores during the first week of
June 2020. The Company will re-open stores utilizing a staggered approach, with
the goal of a majority of its brick-and-mortar stores re-opened by the last week
of June 2020. Effective April 27, 2020, the Company permanently reduced its
corporate headquarters headcount by over 50%. In addition to furloughing a
substantial number of the Company's personnel and terminating certain corporate
personnel, the Company has taken steps to reduce operating costs and improve
efficiency, including targeted reductions in capital expenditures, and engaging
in conversations with landlords and vendors to defer payments until the
Company's brick-and-mortar stores reopen.
The Company has not paid rent to its landlords for its store locations for the
months of April 2020 and May 2020. In addition, the Company has not made recent
payments to many of its vendors. As of the date of this filing, the Company has
received default notices from many landlords and vendors for non-payment. The
Company may be in default of all of its store lease agreements as of the date of
this filing, but has not yet received default notification from all landlords.
As previously announced, on March 20, 2020 the Company drew down $40 million
under its loan agreement with Wells Fargo Bank, National Association ("Wells
Fargo") (the "Loan Agreement"), at an interest rate equal to the LIBOR plus a
margin of 1.25% as a precautionary measure and to preserve financial
flexibility. As a result of the COVID-19 pandemic and steps the Company has
taken in response thereto, the Company is likely in default under the Loan
Agreement although the Company has not received any default notices from Wells
Fargo, administrative agent and lender. Borrowing availability under the Loan
Agreement is determined by a borrowing base calculation based on applying
specified advance rates against inventory and certain other eligible assets and
may be limited if there are existing defaults. As the borrowing base is reduced,
the Company plans to repay amounts outstanding under the Loan Agreement. The
Company's does not have any other credit facilities it can borrow under. The
Company believes without seeking protection under the bankruptcy laws it does
not have ability to raise additional capital at this time.
As a result of COVID-19, all of the Company's retail stores have been closed
since March 19, 2020, which has led to a subsequent impairment of the carrying
values of the Company's inventory, right-of-use assets, fixed assets and other
long-term assets, which the Company expects to be substantial and material. The
carrying values of all of the Company's assets as of February 1, 2020 do not
reflect the impairments of such assets as of the filing date. The Company is
unable to estimate the current or future carrying values of its inventory,
right-of-use assets, fixed assets, intangible assets and other assets as of the
date of this filing due to the uncertainty in the macro economic environment and
customer spending behavior as a result of the ongoing COVID-19 pandemic.
Since the Company's stores have been closed since mid-March 2020, the inventory
located in its stores and distribution center is aged and has been significantly
impaired. If the Company seeks protection under the bankruptcy laws, this
inventory may be sold at substantial discount to the values reflected on the
February 1, 2020 balance sheet.
The Company's right-of-use assets primarily consist of its store leases, which
at February 1, 2020 were $189.8 million. As a result of the above-mentioned
store closures, and the material adverse effect the COVID-19 pandemic has had
and is expected to continue to have on mall traffic and consumer spending on the
Company's merchandise, the Company's right-of-use assets are significantly
impaired as of the filing date. If the Company seeks protection under the
bankruptcy laws, it could be determined that these right-of-use assets may have
little to no value. In addition, the related non-current lease liabilities were
$189.2 million at February 1, 2020, and are expected to be classified as current
liabilities of the Company.
The Company's fixed assets primarily consist of store fixtures, equipment,
leasehold improvements and office equipment, which at February 1, 2020 were
$44.9 million. As a result of store closures, and the material adverse effect
the COVID-19 pandemic has had and is expected to continue to have on mall
traffic and consumer spending on the Company's merchandise, the Company's fixed
assets have been significantly impaired as of this filing date. If the Company
seeks protection under the bankruptcy laws, it could be determined that the
Company's fixed assets in stores and corporate headquarters may have little to
no value.
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