APEX Apex Global Brands Inc

Apex Global Brands (Nasdaq: APEX), a global brand management and licensing organization that markets a portfolio of high-equity lifestyle brands it owns, creates and elevates, today reported financial results for its second quarter of Fiscal 2021, which ended August 1, 2020.

“The COVID-19 pandemic has brought tremendous uncertainty to the retail sector, including a profound impact on our licensees domestically and abroad,” said Henry Stupp, Chief Executive Officer of Apex Global Brands.  “While we continue to onboard new licensees for our portfolio of lifestyle brands, with the rationalization and reduction of retail doors, particularly throughout the United States, there has naturally been a decline in stores and shelves to place our licensees’ products.  Further, while ecommerce continues to be a bright spot, it did not have a material impact on our financial performance for the second quarter as many of our retail partners’ physical locations have remained open during the pandemic.”

“As we enter into the second half of the fiscal year, we remain acutely focused on supporting our licensees and promoting our brands in unique ways that reflect the changes in consumer interests and behavior.  In light of market conditions, we also continue to monitor and identify ways to manage costs and improve our overall liquidity.  On a year-to-date basis, our SG&A expenses declined nearly 30% over the prior-year period, but we are achieving increased efficiency due to our extensive asset library and the introduction of new technologies, including the development of virtual product showrooms.  Ultimately, while we cannot predict the long-term impact the pandemic will have on our licensees’ abilities to meet their royalty agreements, we have adapted and positioned our company to manage the new realities of the retail market,” Mr. Stupp concluded.

CARES Act Benefits Update

Apex Global Brands expects to receive federal income tax refunds of approximately $9.0 million as a result of changes to the net operating losses carryback provisions of the federal tax code that resulted from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  The Company has submitted refund claims to the Internal Revenue Service for a portion of these tax refunds, however the timing of these future cash receipts is unknown due to processing delays by the Internal Revenue Service related to the COVID-19 pandemic.  A significant portion of these refunds are contractually required to pay down obligations to the Company’s senior secured lenders.

In April 2020, the Company received a $0.7 million Paycheck Protection Program loan under the CARES Act.  The Paycheck Protection Program Flexibility Act has extended the time frame to use these loan proceeds for payroll, rent, utilities and interest.  Apex plans to apply for loan forgiveness to the maximum allowable extent.

Forbearance

As previously disclosed, Apex Global Brands and its senior secured lender agreed on September 1, 2020 to amend their credit agreement and extend the forbearance through December 31, 2020.  The forbearance agreement has provisions that assist Apex’s cash management and requires the Company to continue to evaluate strategic alternatives designed to provide liquidity to repay the term loans under the senior secured credit facility.  The forbearance agreement also accelerates the maturity of the underlying debt from August 3, 2021 to March 31, 2021 or to December 31, 2020 if certain milestones are not met.  Previous forbearance agreements provide for a fee to be paid to the senior secured lender when the debt is repaid, which together with other exit fees is expected to total approximately $2.5 million. 

Revenues  

Revenues were $4.4 million in the second quarter of Fiscal 2021, a decrease of 22% from $5.6 million in the second quarter of the prior year.  The decline in second quarter revenues reflects the non-renewal of certain Cherokee brand licenses and the decrease in sales of licensees’ products related to COVID-19 shelter-in-place orders.  For the first six months of Fiscal 2021, revenues totaled $8.4 million, a decrease of 21% from $10.7 million in the first six months of Fiscal 2020.

Operating and Non-Operating Expenses

Selling, general and administrative expenses, which comprise the Company’s normal operating expenses, were $2.1 million in the second quarter of Fiscal 2021, a decrease of 32% from $3.1 million in the second quarter of the prior year.  This decrease in SG&A reflects cost-savings measures undertaken in response to the COVID-19 pandemic and the related shortfall in revenues, along with the beneficial impact of the Company’s restructuring efforts, which resulted in reduced spending for payroll, facilities and general operations.

For the first six months of Fiscal 2021, selling, general and administrative expenses also saw significant declines, totaling $5.0 million, down 28% from $6.9 million in the first six months of Fiscal 2020.

Interest expense was $2.4 million in the second quarter of Fiscal 2021, compared with $2.3 million in the second quarter of the prior year.  For the first six months of Fiscal 2021, interest expense was $4.6 million, compared with $4.5 million in the first six months of the prior year.  As a result of the forbearance agreements with the Company’s senior secured lender and modifications to the Company’s Junior Notes, $1.9 million of interest in the first six months of Fiscal 2021 was not paid in cash, but was added to the principal balances of the underlying debt instruments. 

For the first six months of Fiscal 2021, the Company reported an income tax benefit of $8.6 million, primarily due to changes in federal regulations regarding the carryback of net operating losses implemented by the CARES Act.  This compares to an income tax expense of $1.3 million for the first six months of Fiscal 2020.  In the first six months of both Fiscal 2021 and Fiscal 2020, Apex paid $0.5 million in cash taxes.

Operating income in the second quarter of Fiscal 2021 totaled $2.0 million, compared with $1.6 million in the second quarter of the prior year.  Operating loss during the first six months of Fiscal 2021 was $7.0 million.  This year-to-date operating loss resulted from first quarter non-cash impairment charges of $5.4 million to lower the book value of the Company’s goodwill as a result of market capitalization and $4.4 million to lower the book value of the Company’s non-amortizing trademarks due to revenue projection declines stemming from the COVID-19 pandemic.  By comparison, operating income for the first six months of Fiscal 2020 was $2.2 million.

Net loss was $1.3 million in the second quarter of Fiscal 2021, or a loss of $2.38 per diluted share, on 560,000 shares outstanding, compared to net loss of $1.3 million, or a loss of $2.34 per diluted share, on 542,000 shares outstanding in the second quarter of the prior year.

Net loss for the first six months of Fiscal 2021, was $3.2 million, or a loss of $5.69 per diluted share, on 559,000 shares outstanding, compared to a net loss of $3.5 million, or a loss of $6.69 per diluted share, on 527,000 shares outstanding in the prior year.

Adjusted EBITDA totaled $2.3 million in the second quarter of Fiscal 2021 compared to $2.5 million in the second quarter of the prior year.  Adjusted EBITDA in the first six months of Fiscal 2021 decreased to $3.4 million, compared to $3.7 million in the first half of Fiscal 2020.

Reverse Stock Split

On September 2, 2020, the Company effected a one-for-ten reverse stock split, which reduced the Company’s number of outstanding shares of common stock from approximately 5.6 million shares to approximately 0.6 million shares.

On September 4, 2020, the Company received a notification from the Nasdaq Hearings Panel that Apex was no longer in compliance with the minimum publicly held share count requirement, and that it would consider this in its determination of Apex’s continued listing on The Nasdaq Capital Market.

For further information on the compliance requirements and monitoring procedures, please refer to the Company’s Form 10-Q for the period ended August 1, 2020.

Balance Sheet & Liquidity Measures

As of August 1, 2020, the Company had cash and cash equivalents of $1.6 million.  The Company’s forbearance agreement with its senior secured lender and the modification of the Company’s subordinated promissory note agreements defer the interest and principal payments that would otherwise be payable in cash by the Company, thereby improving its liquidity position.  These deferrals extend through the forbearance period for the Company’s senior secured debt and extend through October 1, 2020 for the Company’s subordinated debt.  Payments to the Company’s subordinated debt holders are generally restricted by the Company’s credit agreement with its senior secured lender.

As of August 1, 2020, the Company’s outstanding borrowings under the senior secured term loans were $45.2 million, outstanding borrowings under subordinated promissory notes were $14.4 million, and outstanding borrowings under the Paycheck Protection Program promissory note were $0.7 million.  A substantial portion of the Paycheck Protection Program loan is anticipated to be forgiven.  Additional information regarding the Company’s debt and the related forbearance agreement is available in Apex’s quarterly report on Form 10-Q for the period ended August 1, 2020.

Fiscal 2021 Outlook

Due to the evolving and uncertain nature of the COVID-19 pandemic and its impact on Apex Global Brands’ business, the Company is maintaining its current suspension of forward-looking guidance.  While revenues are expected to be down year-over-year, so too will the Company’s expenses.  Apex Global Brands initiated cost saving measures beginning in the first quarter of Fiscal 2021 in response to the anticipated decline in revenues.  Apex cannot provide assurance that these cost savings measures will be adequate to offset further revenue declines, and COVID-19 may have a material impact on operating results, cash flows and financial condition beyond Apex’s current expectations.  The Company anticipates that it may be increasingly difficult to obtain license renewals or new licenses with terms comparable to existing licenses, which could put increasing pressure on the Company’s business model.  The forbearance agreement with Apex’s lender accelerates the maturity date of its senior secured debt to March 31, 2021 or to December 31, 2020 if certain milestones are not met.  There is substantial uncertainty about the potential success of the Company’s efforts to find strategic alternatives to provide liquidity to repay the debt on or prior to the maturity date.

Apex Global Brands 2020 Annual Shareholder Meeting

Due to the evolving and uncertain nature of the COVID-19 pandemic and its impact on Apex Global Brands, the Company is expecting to hold its annual meeting of stockholders in the fourth quarter of 2020 using a virtual format.  These plans are subject to change.

About Apex Global Brands

Apex Global Brands is a global brand management and licensing organization that markets a portfolio of high-equity lifestyle brands it owns creates and elevates.  The brand portfolio spans multiple consumer product categories and retail tiers around the world and includes Hi-Tec®, Magnum®, 50 Peaks®, Interceptor®, Cherokee®, Tony Hawk®, Point Cove®, Carole Little®, Everyday California® and Sideout®.  The Company currently maintains license agreements with leading retailers and manufacturers that span approximately 140 countries in over 20,000 retail locations and digital commerce.  For more information, please visit the Company's website at apexglobalbrands.com.

Forward Looking Statements

This news release may contain forward-looking statements regarding future events and the future performance of Apex Global Brands.  Forward-looking statements in this press release include, without limitation, express or implied statements regarding: the Company’s forecasted operating results; the Company’s anticipated receipt of federal income tax refunds, including the timing thereof; the effects of the Company’s cost saving efforts; the anticipated and ongoing impacts of the novel coronavirus (COVID-19) pandemic; the Company’s expectations regarding its new and existing license agreements and the performance of its licensees thereunder; the Company’s ability to sustain necessary liquidity and grow its business; and anticipated market developments and opportunities.  A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and is based on currently available market, operating, financial and competitive information and assumptions.  Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expected or projected, including, among others, risks that: the Company will not receive the anticipated federal income tax refunds in a timely manner or at all; the Company and its partners will not achieve the results anticipated in the statements made in this release; the impact of the COVID-19 pandemic, and the related responses of the government, consumers and the Company, on its business, financial condition and results of operations is more adverse than currently predicted; that anticipated revenues or cash collections will be lower than anticipated or that expenses will be higher than anticipated, which could cause the Company to fail to meet the financial covenants in its credit facility and thereby give its lender the right to terminate the forbearance and declare an event of default and to exercise its rights under the credit facility; global economic conditions and the financial condition of the apparel and retail industry and/or adverse changes in licensee or consumer acceptance of products bearing the Company’s brands may lead to reduced royalties; the ability and/or commitment of the Company’s licensees to design, manufacture and market Cherokee®, Hi-Tec®, Magnum®, 50 Peaks®, Interceptor®, Carole Little®, Tony Hawk® and Hawk Brands®, Everyday California® and Sideout® branded products could cause our results to differ from our anticipations; the Company’s dependence on a select group of licensees for most of the Company’s revenues makes us susceptible to changes in those organizations; our level of indebtedness and restrictions under our indebtedness; and the Company’s dependence on its key management personnel could leave us exposed to disruption on any termination of service.  A more detailed discussion of such risks and uncertainties are described in the Company’s annual report on Form 10-K filed on April 30, 2020, its periodic reports on Forms 10-Q and 8-K, and subsequent filings with the SEC the Company makes from time to time.  Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.

Note Regarding Use of Non-GAAP Financial Measures

Certain of the information set forth herein, including Adjusted EBITDA, may be considered non-GAAP financial measures.  Apex believes this information is useful to investors as a measure of profitability, because it helps them compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization, and the cost of acquiring or disposing of businesses and restructuring our operations.  In addition, the Company’s management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Company’s operating performance and cash flow.  Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as reported by the Company may not be comparable to similarly titled amounts reported by other companies.  A reconciliation of net loss from continuing operations as reported in our consolidated statements of operations is reconciled to Adjusted EBITDA in tabular form later in this release under the heading “Reconciliation of GAAP to Non-GAAP Financial Data”.

Investor Contacts:Apex Global BrandsSteve Brink, CFO818-908-9868

Addo Investor RelationsKimberly Esterkin/Patricia Nir310-829-5400

APEX GLOBAL BRANDS INC.CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share and per share amounts)

	August 1,2020					February 1,2020
Assets
Current assets:
Cash and cash equivalents	$		1,596			$		1,209
Accounts receivable, net			4,213					4,962
Income tax and other receivables			8,876					157
Prepaid expenses and other current assets			1,159					1,431
Total current assets			15,844					7,759
Property and equipment, net			268					319
Intangible assets, net			54,404					59,110
Goodwill			6,752					12,152
Accrued revenue and other assets			3,270					3,582
Total assets	$		80,538			$		82,922
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other current liabilities	$		5,515			$		6,282
Current portion of long-term debt			59,157					56,044
Deferred revenue—current			1,942					3,551
Total current liabilities			66,614					65,877
Long-term liabilities:
Long-term debt			147					—
Deferred income taxes			9,156					9,515
Long-term lease liabilities			1,268					1,389
Other liabilities			829					794
Total liabilities			78,014					77,575
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Preferred stock, $.02 par value, 1,000,000 shares authorized, none issued			—					—
Common stock, $.02 par value, 10,000,000 shares authorized, shares issued   562,907 (August 1, 2020) and 557,053 (February 1, 2020)			11					11
Additional paid-in capital			79,000					78,641
Accumulated deficit			(76,487	)				(73,305	)
Total stockholders’ equity			2,524					5,347
Total liabilities and stockholders’ equity	$		80,538			$		82,922

APEX GLOBAL BRANDS INC.CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)(In thousands, except per share amounts)

		Three Months Ended										Six Months Ended
		August 1,2020					August 3,2019					August 1,2020					August 3,2019
Revenues		$		4,379			$		5,603			$		8,413			$		10,655
Operating expenses:
Selling, general and administrative expenses				2,101					3,069					4,997					6,924
Stock-based compensation				145					515					295					723
Business acquisition and integration costs				—					145					—					211
Restructuring charges				(97	)				—					(97	)				42
Intangible assets and goodwill impairment charges				—					—					9,800					—
Depreciation and amortization				243					254					445					511
Total operating expenses				2,392					3,983					15,440					8,411
Operating income (loss)				1,987					1,620					(7,027	)				2,244
Other (expense) income:
Interest expense				(2,431	)				(2,251	)				(4,612	)				(4,496	)
Other (expense) income, net				(114	)				60					(148	)				61
Total other expense, net				(2,545	)				(2,191	)				(4,760	)				(4,435	)
Loss before income taxes				(558	)				(571	)				(11,787	)				(2,191	)
Provision (benefit) for income taxes				775					696					(8,605	)				1,334
Net loss		$		(1,333	)		$		(1,267	)		$		(3,182	)		$		(3,525	)
Net loss per share:
Basic loss per share		$		(2.38	)		$		(2.34	)		$		(5.69	)		$		(6.69	)
Diluted loss per share		$		(2.38	)		$		(2.34	)		$		(5.69	)		$		(6.69	)
Weighted average common shares outstanding:
Basic				560					542					559					527
Diluted				560					542					559					527

APEX GLOBAL BRANDS INC. RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL DATA  (In thousands)

We define Adjusted EBITDA as net income before (i) interest expense, (ii) other expense (income), (iii) (benefit) provision for income taxes, (iv) depreciation and amortization, (v) intangible assets and goodwill impairment charges, (vi) restructuring charges, (vii) business acquisition and integration costs and (viii) stock-based compensation and stock warrant charges.  Adjusted EBITDA is not defined under generally accepted accounting principles (“GAAP”) and it may not be comparable to similarly titled measures reported by other companies.  We use Adjusted EBITDA, along with GAAP measures, as a measure of profitability, because Adjusted EBITDA helps us compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization, and the cost of acquiring or disposing of businesses and restructuring our operations.  We believe it is useful to investors for the same reasons.  Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our long-term debt, non-operating income or expense items, our provision for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the costs of acquiring or disposing of businesses and restructuring our operations, or our non-cash charges for stock-based compensation and stock warrants.  A reconciliation from net loss as reported in our condensed consolidated statement of operations to Adjusted EBITDA is as follows:

		Three Months Ended										Six Months Ended
(In thousands)		August 1,2020					August 3,2019					August 1,2020					August 3,2019
Net loss		$		(1,333	)				(1,267	)				(3,182	)				(3,525	)
Provision (benefit) for income taxes				775					696					(8,605	)				1,334
Interest expense				2,431					2,251					4,612					4,496
Other expense (income), net				114					(60	)				148					(61	)
Depreciation and amortization				243					254					445					511
Intangible assets and goodwill impairment charges				—					—					9,800					—
Restructuring charges				(97	)				—					(97	)				42
Business acquisition and integration costs				—					145					—					211
Stock-based compensation				145					515					295					723
Adjusted EBITDA		$		2,278			$		2,534			$		3,416			$		3,731