J.Jill(JILL) - 2021 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION J.Jill's unaudited consolidated financial statements and notes detail COVID-19 impact, covenant non-compliance, and restructuring efforts Item 1. Financial Statements Unaudited consolidated financial statements, including balance sheets, income, cash flow, and equity, are presented with detailed notes Consolidated Balance Sheets (Unaudited) Unaudited consolidated balance sheets detail assets, liabilities, and shareholders' equity at key fiscal dates Consolidated Balance Sheets (Unaudited) | Metric | August 1, 2020 (in thousands) | February 1, 2020 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------ | :-------------------- | :------- | | Assets | | | | | | Total current assets | $144,236 | $122,950 | $21,286 | 17.3% | | Total assets | $574,650 | $633,988 | $(59,338) | (9.4%) | | Liabilities & Shareholders' Equity | | | | | | Total current liabilities | $413,202 | $122,439 | $290,763 | 237.5% | | Long-term debt, net of discount and current portion | $— | $231,200 | $(231,200) | (100.0%) | | Total liabilities | $624,247 | $595,423 | $28,824 | 4.8% | | Total shareholders' equity | $(49,597) | $38,565 | $(88,162) | (228.6%) | - The significant increase in current liabilities is primarily due to the reclassification of long-term debt to current portion of long-term debt, reflecting the company's financial distress and covenant non-compliance[9][54] Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Unaudited consolidated statements of operations and comprehensive income (loss) are presented for specified fiscal periods Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) | Metric | 13 Weeks Ended Aug 1, 2020 (in thousands) | 13 Weeks Ended Aug 3, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | :------- | | Net sales | $92,636 | $180,744 | $(88,108) | (48.7%) | | Gross profit | $55,020 | $105,341 | $(50,321) | (47.8%) | | Operating loss | $(21,824) | $(94,785) | $72,961 | (77.0%) | | Net loss | $(19,034) | $(96,735) | $77,701 | (80.3%) | | Basic EPS | $(0.43) | $(2.21) | $1.78 | (80.5%) | | Metric | 26 Weeks Ended Aug 1, 2020 (in thousands) | 26 Weeks Ended Aug 3, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------- | | Net sales | $183,605 | $357,196 | $(173,591) | (48.6%) | | Gross profit | $105,185 | $221,597 | $(116,412) | (52.5%) | | Operating loss | $(111,567) | $(83,974) | $(27,593) | 32.9% | | Net loss | $(89,303) | $(92,369) | $3,066 | (3.3%) | | Basic EPS | $(2.00) | $(2.12) | $0.12 | (5.7%) | - Net sales for the thirteen weeks ended August 1, 2020, decreased by 48.7% due to temporary store closures caused by the COVID-19 pandemic[109] - The company reported a significant reduction in net loss for the thirteen weeks ended August 1, 2020, primarily due to lower impairment charges compared to the prior year[11][108] Consolidated Statement of Shareholders' Equity (Unaudited) Unaudited consolidated statement of shareholders' equity details changes in equity over time Consolidated Statement of Shareholders' Equity (Unaudited) | Metric | August 1, 2020 (in thousands) | February 1, 2020 (in thousands) | Change (in thousands) | % Change | | :----------------------- | :----------------------------- | :------------------------------ | :-------------------- | :------- | | Total Shareholders' Equity | $(49,597) | $38,565 | $(88,162) | (228.6%) | | Accumulated (Deficit) | $(176,257) | $(86,954) | $(89,303) | 102.7% | - Shareholders' equity significantly declined from a positive balance of $38.6 million at February 1, 2020, to a deficit of $(49.6) million at August 1, 2020, primarily driven by net losses[13] Consolidated Statements of Cash Flows (Unaudited) Unaudited consolidated statements of cash flows categorize cash movements from operating, investing, and financing Consolidated Statements of Cash Flows (Unaudited) | Metric | 26 Weeks Ended Aug 1, 2020 (in thousands) | 26 Weeks Ended Aug 3, 2019 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :-------------------- | :------- | | Net cash (used in) provided by operating activities | $(17,340) | $23,536 | $(40,876) | (173.7%) | | Net cash used in investing activities | $(2,675) | $(7,904) | $5,229 | (66.2%) | | Net cash provided by (used in) financing activities | $30,250 | $(52,712) | $82,962 | (157.4%) | | Net change in cash | $10,235 | $(37,080) | $47,315 | (127.6%) | | Cash, End of Period | $31,762 | $29,124 | $2,638 | 9.1% | - Operating activities shifted from providing $23.5 million in cash in the prior year to using $17.3 million, primarily due to the impact of COVID-19 related store closures, partially offset by working capital improvements from deferred rent and extended vendor payment terms[135][136] - Net cash provided by financing activities significantly increased to $30.3 million, driven by borrowings under the ABL Facility, contrasting with a $52.7 million use of cash in the prior year due to a special dividend payment[139] Notes to Consolidated Financial Statements (Unaudited) Detailed notes explain significant accounting policies, revenue, asset impairments, debt, income taxes, and other financial disclosures 1. Description of Business J.Jill, Inc. is a premier omnichannel retailer of women's apparel, operating stores and an e-commerce platform - J.Jill, Inc. is a premier omnichannel retailer and nationally recognized women's apparel brand, operating approximately 280 stores nationwide and a robust e-commerce platform[19] 2. Summary of Significant Accounting Policies Significant accounting policies, including going concern assessment and responses to the COVID-19 pandemic, are outlined - The company's management has evaluated conditions that raise substantial doubt about its ability to continue as a going concern within one year, primarily due to the material adverse impact of the COVID-19 pandemic on revenues, operations, and cash flows, leading to covenant non-compliance[22][24] - In response to the pandemic, J.Jill closed all stores in March 2020, began reopening in May 2020, and implemented aggressive cost reduction measures including staffing reductions, pay cuts, deferred rent payments, catalog reductions, and significantly reduced capital expenditures[23][29][30] - The company entered into forbearance agreements with lenders, extended until September 26, 2020, and subsequently announced a Transaction Support Agreement (TSA) for a financial restructuring to waive past non-compliance and provide liquidity, aiming for an out-of-court resolution or a prepackaged Chapter 11 plan[24][26][27] 3. Revenues Net revenues are disaggregated by retail and direct channels, detailing contract liabilities like gift cards and signing bonuses Revenues | Revenue Source | 13 Weeks Ended Aug 1, 2020 (in thousands) | 13 Weeks Ended Aug 3, 2019 (in thousands) | 26 Weeks Ended Aug 1, 2020 (in thousands) | 26 Weeks Ended Aug 3, 2019 (in thousands) | | :------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Retail | $26,304 | $103,666 | $61,397 | $206,260 | | Direct | $66,332 | $77,078 | $122,208 | $150,936 | | Net revenues | $92,636 | $180,744 | $183,605 | $357,196 | - For the thirteen weeks ended August 1, 2020, Direct channel sales surpassed Retail sales, contributing 71.6% of net sales, a significant shift from 42.6% in the prior year, reflecting the impact of store closures[33][110] Contract Liabilities | Contract Liabilities | August 1, 2020 (in thousands) | February 1, 2020 (in thousands) | | :------------------- | :----------------------------- | :------------------------------ | | Signing bonus | $435 | $506 | | Unredeemed gift cards | $5,825 | $7,264 | | Total | $6,260 | $7,770 | 4. Other Income Other income details an insurance claim settlement related to nonsalable inventory from a cargo vessel fire - In July 2019, the company settled an insurance claim for $3.3 million related to nonsalable inventory from a cargo vessel fire in January 2019, recording a $2.4 million gain in selling, general and administrative expenses[37] 5. Asset Impairments Non-cash impairment charges on long-lived assets, goodwill, and tradename are detailed due to the COVID-19 pandemic - In Q1 Fiscal Year 2020, the company incurred $27.5 million in non-cash impairment charges on long-lived assets ($6.7 million on leasehold improvements, $20.8 million on right-of-use assets) due to the material adverse effect of the COVID-19 pandemic on its store fleet[38] - The company recorded a $17.9 million impairment of goodwill, a $4.0 million impairment of tradename, and a $2.6 million impairment of customer list in Q1 Fiscal Year 2020, triggered by the COVID-19 pandemic's impact on operations and stock price[40][41] Goodwill | Goodwill (in thousands) | Amount | | :---------------------- | :----- | | Balance, February 2, 2019 | $197,026 | | Impairment losses (FY19) | $(119,429) | | Balance, February 1, 2020 | $77,597 | | Impairment losses (FY20) | $(17,900) | | Balance, August 1, 2020 | $59,697 | | Accumulated goodwill impairment losses as of August 1, 2020 | $137,300 | 6. Restructuring Costs Restructuring costs incurred from headcount reductions at corporate headquarters and a New Hampshire facility are outlined - In July 2019, J.Jill implemented a restructuring plan, incurring $1.6 million in costs primarily from headcount reductions at its corporate headquarters and a facility in New Hampshire, with payments expected to be complete by October 31, 2020[48][49] 7. Debt The company's debt, including term loans and revolving credit, covenant non-compliance, and restructuring efforts, is detailed Debt Component | Debt Component (in thousands) | August 1, 2020 | February 1, 2020 | | :---------------------------- | :------------- | :--------------- | | Term Loan | $236,179 | $237,579 | | Discount on debt and debt issuance costs | $(2,827) | $(3,580) | | Less: Current portion | $(233,352) | $(2,799) | | Net long-term debt | $— | $231,200 | | Borrowings under revolving credit facility | $31,800 | $— | - Due to COVID-19 related store closures and the going concern disclosure, the company failed to comply with financial covenants, leading to forbearance agreements with lenders, which were extended until September 26, 2020[52] - The company entered into a Transaction Support Agreement (TSA) on September 1, 2020, with over 70% of term loan lenders and a majority of shareholders, to restructure debt and extend maturity by two years (through May 2024) via an out-of-court or prepackaged Chapter 11 transaction[53][54] 8. Income Taxes Income tax benefit and effective tax rates, including the impact of CARES Act provisions, are provided Income Tax Metrics | Metric | 13 Weeks Ended Aug 1, 2020 | 13 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 1, 2020 | 26 Weeks Ended Aug 3, 2019 | | :---------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Income tax benefit (in thousands) | $7,034 | $3,069 | $31,151 | $1,631 | | Effective tax rate | 27.0% | 3.1% | 25.9% | 1.7% | - The higher effective tax rate in Fiscal Year 2020 was primarily driven by the anticipated benefit from the CARES Act, which allows net operating losses to be carried back to earlier tax years with higher rates, and the impact of state income taxes[56] - The company expects a $6.9 million tax refund due to CARES Act provisions, including bonus depreciation, net operating loss carryback, and accelerated AMT credit refunds, of which $1.2 million has been received[58] 9. Earnings Per Share Basic and diluted earnings per share calculations are presented, noting diluted EPS equals basic EPS due to net losses Earnings Per Share | Metric | 13 Weeks Ended Aug 1, 2020 | 13 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 1, 2020 | 26 Weeks Ended Aug 3, 2019 | | :------------------------------------------------ | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Net loss attributable to common shareholders (in thousands) | $(19,034) | $(96,735) | $(89,303) | $(92,369) | | Basic EPS | $(0.43) | $(2.21) | $(2.00) | $(2.12) | | Diluted EPS | $(0.43) | $(2.21) | $(2.00) | $(2.12) | - Diluted EPS is the same as basic EPS due to net losses, which render outstanding equity awards antidilutive[59] 10. Equity-Based Compensation Equity-based compensation expense and adjustments to outstanding equity awards following a special cash dividend are detailed Equity-Based Compensation Expense | Period | Equity-Based Compensation Expense (in thousands) | | :------------------------- | :------------------------------------- | | 13 Weeks Ended Aug 1, 2020 | $615 | | 13 Weeks Ended Aug 3, 2019 | $1,214 | | 26 Weeks Ended Aug 1, 2020 | $1,291 | | 26 Weeks Ended Aug 3, 2019 | $2,416 | - Equity-based compensation expense decreased by approximately 49% for the thirteen weeks and 46% for the twenty-six weeks ended August 1, 2020, compared to the prior year periods[60] - In March 2019, the company declared a special cash dividend of $1.15 per share ($50.2 million total), leading to anti-dilution adjustments for outstanding equity awards, including RSU adjustments and option strike price reductions[61][62] 11. Related Party Transactions Related party transactions for the reported periods were immaterial - The company incurred an immaterial amount of related party transactions for the thirteen and twenty-six weeks ended August 1, 2020, and August 3, 2019[63] 12. Commitments and Contingencies Legal proceedings and other commitments are addressed, with no material adverse effect anticipated - The company is subject to various legal proceedings in the ordinary course of business but does not believe any will have a material adverse effect on its financial condition or operations[64] 13. Operating Leases Operating lease costs, rent payment withholdings, and negotiated lease concessions due to COVID-19 are detailed Lease Cost | Lease Cost (in thousands) | 13 Weeks Ended Aug 1, 2020 | 13 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 1, 2020 | 26 Weeks Ended Aug 3, 2019 | | :------------------------ | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Operating lease cost | $10,913 | $11,820 | $22,742 | $23,372 | | Variable lease cost | $478 | $774 | $896 | $1,540 | | Total lease cost | $11,391 | $12,594 | $23,638 | $24,912 | - Due to COVID-19, the company withheld $17.1 million in rent payments as of August 1, 2020, and successfully negotiated lease concessions (abated and deferred rent, term extensions) for some leases[68][69] Lease Term and Discount Rate | Lease Term and Discount Rate (as of August 1, 2020) | Value | | :---------------------------------- | :---- | | Weighted-average remaining lease term (in years) | 6.9 | | Weighted-average discount rate | 6.6% | 14. Barter Arrangement A barter arrangement involving inventory exchange for media credits and the resulting gain is described - In Q3 Fiscal Year 2019, the company exchanged $3.3 million of inventory for media credits, recording a $1.3 million gain upon shipment and holding $2.0 million in unused media credits as of August 1, 2020[73] 15. Subsequent Event Subsequent events, including extended forbearance agreements and the Transaction Support Agreement for debt restructuring, are detailed - Forbearance Agreements with lenders were extended until September 26, 2020, addressing non-compliance with credit facility covenants[76][77] - On September 1, 2020, the company entered into a Transaction Support Agreement (TSA) with term loan lenders and shareholders for a financial restructuring to waive past non-compliance and extend debt maturity by two years (through May 2024), aiming for an out-of-court or prepackaged Chapter 11 transaction[78][79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses J.Jill's financial condition and results, focusing on COVID-19's impact, company responses, liquidity, and restructuring Overview COVID-19's severe impact on Q1 and Q2 Fiscal Year 2020, cash preservation actions, and ongoing going concern doubts are highlighted - J.Jill's Q1 and Q2 Fiscal Year 2020 financial results were severely impacted by the COVID-19 pandemic, leading to temporary store closures and a focus on leveraging the Direct channel, cost management, and liquidity improvement[84] - The company drew $33.0 million from its ABL facility, implemented extended vendor payment terms, withheld store rent, and reduced expenses (pay cuts, furloughs, marketing cuts, reduced capital expenditures) to preserve cash[84] - Despite efforts, substantial doubt remains about the company's ability to continue as a going concern due to risks related to store performance, consumer resilience, potential COVID-19 resurgence, and the possibility of lenders calling debt due to covenant defaults[85] Factors Affecting Our Operating Results Key factors influencing operating results include economic trends, consumer preferences, competition, and strategic initiatives - Key factors influencing operating results include overall economic trends (consumer spending), consumer preferences and fashion trends, intense retail competition, the ongoing implementation of strategic initiatives (e-commerce, information systems), pricing and merchandise mix changes, and potential changes in tax laws/regulations[87][88][89][90][91][92] How We Assess the Performance of Our Business J.Jill assesses performance using GAAP and non-GAAP metrics like Net Sales, Gross Profit, SG&A, and Adjusted EBITDA - Performance is assessed using GAAP and non-GAAP metrics, including Net Sales (from Retail and Direct channels, impacted by customer base, product assortment, marketing, and omnichannel migration), Number of Stores, Gross Profit (net sales less cost of goods sold, affected by inventory shrinkage, markdowns, and raw material costs), Selling, General and Administrative Expenses (operating costs, payroll, occupancy, marketing, distribution), and Adjusted EBITDA[93][94][95][96][97][98][99][101] - Adjusted EBITDA is a non-GAAP measure used by management and investors to assess operating performance, planning, and forecasting, and is reconciled to net income[101][102] Reconciliation of Net Income to Adjusted EBITDA and Calculation of Adjusted EBITDA Margin Net income is reconciled to Adjusted EBITDA, and the Adjusted EBITDA margin is calculated for the reported periods Reconciliation of Net Income to Adjusted EBITDA and Calculation of Adjusted EBITDA Margin | Metric (in thousands) | 13 Weeks Ended Aug 1, 2020 | 13 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 1, 2020 | 26 Weeks Ended Aug 3, 2019 | | :------------------------------------ | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Net loss | $(19,034) | $(96,735) | $(89,303) | $(92,369) | | Adjusted EBITDA | $(6,460) | $12,585 | $(32,295) | $34,056 | | Net sales | $92,636 | $180,744 | $183,605 | $357,196 | | Adjusted EBITDA margin | (7.0)% | 7.0% | (17.6)% | 9.5% | - Adjusted EBITDA for the thirteen weeks ended August 1, 2020, was $(6.5) million, a significant decline from $12.6 million in the prior year, resulting in a negative Adjusted EBITDA margin of (7.0)%[104] - For the twenty-six weeks ended August 1, 2020, Adjusted EBITDA was $(32.3) million, down from $34.1 million in the prior year, with an Adjusted EBITDA margin of (17.6)%[104] Items Affecting Comparability of Financial Results Factors affecting comparability include significant impairment charges and the pervasive impact of the COVID-19 pandemic - Fiscal Year 2020 year-to-date results include $51.1 million in impairment charges for long-lived assets, goodwill, and intangible assets, compared to $97.5 million in Q2 Fiscal Year 2019[106] - The COVID-19 pandemic significantly impacted Q2 and year-to-date Fiscal Year 2020 results due to temporary store closures, leading to revenue loss while still incurring expenses like payroll and rent, making comparisons to prior periods difficult[107] Results of Operations The company's operating results are analyzed, comparing key financial metrics for the thirteen and twenty-six week periods Thirteen weeks ended August 1, 2020 Compared to Thirteen weeks ended August 3, 2019 Financial performance for the thirteen-week periods is compared, highlighting changes in net sales, gross profit, and operating loss Financial Performance (13 Weeks) | Metric (in thousands) | Aug 1, 2020 | Aug 3, 2019 | $ Change | % Change | | :------------------------------------ | :---------- | :---------- | :--------- | :--------- | | Net sales | $92,636 | $180,744 | $(88,108) | (48.7)% | | Gross profit | $55,020 | $105,341 | $(50,321) | (47.8)% | | Gross margin | 59.4% | 58.3% | 1.1% | 1.9% | | Selling, general and administrative expenses | $77,737 | $102,634 | $(24,897) | (24.3)% | | Operating loss | $(21,824) | $(94,785) | $72,961 | (77.0)% | | Net loss | $(19,034) | $(96,735) | $77,701 | (80.3)% | - Net sales decreased by 48.7% due to temporary store closures. The Direct channel's contribution to net sales increased from 42.6% to 71.6%[109][110] - Gross margin improved to 59.4% from 58.3%, primarily due to a $2.4 million change in estimate to reduce an accrual for potential future product liabilities, offsetting higher promotions and markdowns[111] - Selling, general and administrative expenses decreased by 24.3% due to expense reduction actions (headcount, pay reductions, lower store payroll, reduced marketing costs)[112] Twenty-six weeks ended August 1, 2020 Compared to Twenty-six weeks ended August 3, 2019 Financial performance for the twenty-six-week periods is compared, detailing changes in net sales, gross profit, and operating loss Financial Performance (26 Weeks) | Metric (in thousands) | Aug 1, 2020 | Aug 3, 2019 | $ Change | % Change | | :------------------------------------ | :---------- | :---------- | :--------- | :--------- | | Net sales | $183,605 | $357,196 | $(173,591) | (48.6)% | | Gross profit | $105,185 | $221,597 | $(116,412) | (52.5)% | | Gross margin | 57.3% | 62.0% | (4.7)% | (7.6)% | | Selling, general and administrative expenses | $165,645 | $208,079 | $(42,434) | (20.4)% | | Operating loss | $(111,567) | $(83,974) | $(27,593) | 32.9% | | Net loss | $(89,303) | $(92,369) | $3,066 | (3.3)% | - Net sales decreased by 48.6% due to prolonged store closures. The Direct channel's contribution to net sales increased from 42.3% to 66.6%[117][118] - Gross margin declined to 57.3% from 62.0%, primarily due to increased promotions, markdowns, liquidation actions, and a $3.0 million accrual for vendor order cancellation liabilities[119] - Selling, general and administrative expenses decreased by 20.4% due to expense reduction actions, but as a percentage of net sales, they increased to 90.2% from 58.3% due to the significant revenue decrease[120][121] Liquidity and Capital Resources Liquidity and capital resources are discussed, emphasizing COVID-19 impact, going concern doubts, and debt covenant non-compliance - The COVID-19 pandemic has materially adversely impacted liquidity, leading to substantial doubt about the company's ability to continue as a going concern and potential acceleration of debt due to covenant non-compliance[124][128] - Primary liquidity sources are cash from operations and the ABL Facility. The company borrowed $33.0 million under the ABL Facility in March 2020[125][126] - Capital expenditures decreased to $2.7 million for the twenty-six weeks ended August 1, 2020, from $7.9 million in the prior year, reflecting efforts to reduce cash expenditures[133] Cash Flow Analysis Cash flows from operating, investing, and financing activities are analyzed for the twenty-six-week periods Cash Flow Activity | Cash Flow Activity (in thousands) | 26 Weeks Ended Aug 1, 2020 | 26 Weeks Ended Aug 3, 2019 | | :-------------------------------- | :------------------------- | :------------------------- | | Net cash (used in) provided by operating activities | $(17,340) | $23,536 | | Net cash used in investing activities | $(2,675) | $7,904 | | Net cash provided by (used in) financing activities | $30,250 | $(52,712) | - Operating cash flow shifted from a $23.5 million source to a $17.3 million use, primarily due to COVID-19 impacts, partially offset by working capital improvements from deferred rent and extended vendor payment terms[135][136] - Financing activities provided $30.3 million in cash, driven by ABL Facility borrowings, a reversal from the prior year's $52.7 million use due to a special dividend[139] Dividends Past dividend payments and future dividend policy, subject to board discretion and debt restrictions, are detailed - On April 1, 2019, the company paid a special cash dividend of $50.2 million. Future dividend payments are at the discretion of the board and subject to earnings, capital requirements, and debt agreement restrictions[140][141] Credit Facilities Details on the ABL Facility, including outstanding balances, letters of credit, and additional borrowing capacity, are provided ABL Facility | ABL Facility (in thousands) | August 1, 2020 | February 1, 2020 | | :-------------------------- | :------------- | :--------------- | | Outstanding balance | $31,800 | $— | | Outstanding letters of credit | $2,700 | $1,700 | | Maximum additional borrowing capacity | $5,500 | $38,300 | Contractual Obligations Contractual obligations, including debt and leases, and the risk of debt acceleration from covenant non-compliance, are outlined - Contractual obligations include debt, interest, operating leases, and purchase orders. Non-compliance with covenants due to COVID-19 could lead to lenders accelerating debt, potentially resulting in a Chapter 11 filing if waivers are not obtained[143][144] Contingencies Legal proceedings and other contingencies are addressed, with no material adverse effects anticipated - The company is involved in various legal proceedings but does not anticipate any material adverse effects on its business, financial condition, operating results, or cash flows[145] Off-Balance Sheet Arrangements The company confirms it is not a party to any off-balance sheet arrangements - The company is not a party to any off-balance sheet arrangements[146] Critical Accounting Policies and Significant Estimates Critical accounting estimates, including revenue recognition, inventory valuation, and impairment assessments, are identified - Critical accounting estimates involve revenue recognition (gift card breakage, merchandise returns), inventory valuation, impairment assessments for goodwill, intangible assets, and long-lived assets, and equity-based compensation expense[147] Recent Accounting Pronouncements The adoption of recent accounting pronouncements and their expected impact on financial statements are discussed - The company adopted ASU 2018-18 (Collaborative Arrangements) with no material impact and expects ASU 2019-12 (Income Tax Accounting) to have no material impact upon adoption in Q1 Fiscal Year 2021[31][32][149] Item 3. Quantitative and Qualitative Disclosures About Market Risk J.Jill's exposure to market risks, specifically interest rate risk from variable-rate debt and inflation impact, is discussed Interest Rate Risk The company's exposure to interest rate risk from variable-rate borrowings under its Term Loan and ABL Facility is detailed - The company is exposed to interest rate risk from variable-rate borrowings under its Term Loan and ABL Facility. As of August 1, 2020, $31.8 million was outstanding under the ABL Facility and $236.2 million under the Term Loan[154] - A 10% change in the current interest rate would affect net income by $1.2 million during Fiscal Year 2020[154] Impact of Inflation The impact of inflation on operations and financial condition is assessed, noting it has been immaterial to date - The effects of inflation on the company's results of operations and financial condition have been immaterial to date, though future impacts cannot be assured[155] Item 4. Controls and Procedures J.Jill's disclosure controls and internal control effectiveness are addressed, noting a material weakness in impairment accounting and remediation Evaluation of Disclosure Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in goodwill and tradename impairment - Management concluded that disclosure controls and procedures were not effective as of August 1, 2020[158] - This ineffectiveness is due to a material weakness in internal control over financial reporting related to the design and maintenance of controls for goodwill and tradename impairment accounting, specifically the review of carrying values[157][158] Changes to Internal Control over Financial Reporting No significant changes to internal control over financial reporting occurred, apart from the remediation plan for the weakness - No significant changes to internal control over financial reporting occurred during the fiscal quarter ended August 1, 2020, other than those related to the remediation plan for the identified material weakness[159] Remediation Plan Management's active remediation plan strengthens internal controls for goodwill and tradename impairment accounting - Management is actively implementing a remediation plan to strengthen internal processes and controls for goodwill and tradename impairment accounting, aiming to fully remediate the material weakness[160] Limitations on the Effectiveness of Controls and Procedures Controls provide only reasonable assurance due to inherent limitations like resource constraints and judgment - Controls and procedures provide only reasonable, not absolute, assurance due to inherent limitations such as resource constraints, judgment in design, and assumptions about future events[162] Special Note Regarding Forward-Looking Statements The report contains forward-looking statements, subject to known and unknown risks, including financial restructuring, COVID-19 impact, and going concern status Special Note Regarding Forward-Looking Statements This section reiterates the cautionary note on forward-looking statements, highlighting inherent risks and uncertainties that could alter actual results - The report contains forward-looking statements identified by terms like 'anticipate,' 'believe,' 'expect,' and 'plan,' which are not historical facts but reflect future operations, financial position, and market growth[150] - Actual results may differ materially due to known and unknown risks, including the company's ability to complete the financial restructuring, comply with the TSA, manage the COVID-19 pandemic's impact, and resolve substantial doubt about its going concern status[151] - Readers are cautioned not to place undue reliance on these statements, which reflect estimates and assumptions only as of the report date, and the company undertakes no obligation to update them[152] PART II. OTHER INFORMATION Other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits, is provided Item 1. Legal Proceedings J.Jill is involved in ordinary course legal proceedings, with no anticipated material adverse effect on financials or operations - The company is subject to various legal proceedings in the ordinary course of business[165] - Management does not believe that the resolution of these proceedings will have a material adverse effect on the company's business, financial condition, operating results, or cash flows[165] Item 1A. Risk Factors Risk factors are updated, focusing on COVID-19's severe impact, pandemic uncertainty, and credit covenant non-compliance - The COVID-19 pandemic has had a material adverse effect on J.Jill's business, liquidity, financial condition, and results of operations, with significant uncertainty regarding its duration, economic impact, and potential 'second waves'[167][168][170] - The company is currently in non-compliance with financial covenants in its Term Loan and ABL Facility due to COVID-19 related store closures and the going concern disclosure[171][173] - Forbearance agreements with lenders, extended until September 26, 2020, temporarily prevent lenders from exercising remedies, but failure to maintain compliance or secure a long-term solution could result in debt acceleration[173] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds are reported for the period - There were no unregistered sales of equity securities and no use of proceeds to report[174] Item 3. Defaults Upon Senior Securities No defaults upon senior securities are reported for the period - There were no defaults upon senior securities[175] Item 4. Mine Safety Disclosures This item is not applicable to J.Jill, Inc.'s operations - This item is not applicable[176] Item 5. Other Information No other information is reported for the period - There is no other information to report[177] Item 6. Exhibits All exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, forbearance agreements, and certifications, are listed - The exhibits include corporate documents (Certificate of Incorporation, Bylaws), multiple Forbearance Agreements (dated June 15, 2020, through August 31, 2020), the Transaction Support Agreement (dated August 31, 2020), and certifications by the Principal Executive and Financial Officers[178][181] Signatures The report is signed by J.Jill's Interim CEO and CFO, attesting to its filing - The report is signed by James Scully, Interim Chief Executive Officer, and Mark Webb, Executive Vice President and Chief Financial Officer, on September 10, 2020[184][185]