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 first quarter of Fiscal 2021, which ended May 2, 2020.

“The global macro-events of the past three months have been and continue to be challenging.  The retail industry is suffering.  The fashion industry is suffering, and we are all focused on managing our way through this difficult period,” said Henry Stupp, Chief Executive Officer of Apex Global Brands.  “As expected, revenues for the first quarter of Fiscal 2021 declined year-over-year due to a combination of the non-renewal of certain of our license agreements along with the impacts of COVID-19.  While much is still uncertain, we can leverage times such as these to refine our operations and find new, innovative solutions to maximize our brand assets and reduce our expenses.  We have improved our efficiencies and are now doing more with less, carefully managing our costs to achieve both a sequential and a year-over-year decline in our SG&A expenses.

“While our licensees’ e-commerce businesses saw notable improvements during the quarter, we are also fortunate that many of our global retail partners, who provide essential services such as groceries, have been able to remain open during shelter-at-home orders.  Over the past few months, we’ve also begun to see increased consumer interest in our brands, and we continue to sign new licenses for various brands in our portfolio.  Consumers are looking beyond private label programs towards brands like ours that evoke purpose and emotion, and they are willing to pay for better designed, better quality products.  Our Interceptor tactical boot brand is praised for its higher quality, greater value price point, which allows us to explore category extensions domestically and abroad.  Our entire range of Hi-Tec and Magnum products, from footwear to apparel and accessories, is respected for quality and design.  This full circle in shopping behavior as consumers return to brands is a positive for our industry.  Our wholesale and retail partners are adapting and demonstrating resilience as they continue to support our brands during these challenging times,” Mr. Stupp concluded.

CARES Act Benefits

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was passed by the U.S. federal government in March 2020, allows taxpayers to carryback net operating losses that otherwise could only be carried forward to future tax years.  As a result of the carrybacks, Apex Global Brands expects to receive income tax refunds of approximately $9.0 million of previously paid federal taxes over the next two to twelve months. 

During the first quarter of Fiscal 2021, the Company received a $0.7 million Paycheck Protection Program loan under the CARES Act.  As a result of the Paycheck Protection Program Flexibility Act (PPPFA), which was signed into law on June 5, 2020, this loan now matures in April 2025, and the time frame to use the loan proceeds for payroll, rent, utilities and interest has been extended to 24 weeks.  At the end of this 24-week period, Apex expects to apply for loan forgiveness based on actual spending in these categories, reduced by any decrease in average headcount in comparison to the period prior to receiving the loan.

Forbearance

Apex Global Brand and its senior secured lender agreed in April 2020 to a forbearance and amendment of their credit agreement.  Apex’s earnings in Fiscal 2020 did not achieve the level of Adjusted EBITDA that was required by the senior secured credit agreement.  However, the lender agreed not to enforce its rights through July 27, 2020.  The forbearance agreement also has provisions that assist Apex’s cash management as the Company manages through the COVID-19 pandemic, which is expected to continue to have an adverse effect on Apex’s revenues, especially in the near term.  Rather than receive interest and loan amortization payments in cash during the forbearance period, the Company’s senior secured lender has agreed to receive its interest payments in the form of additional principal amounts due.  Apex’s senior lender also agreed to ease other requirements during the forbearance period by lowering the minimum Adjusted EBITDA, minimum cash and borrowing base requirements.  At the conclusion of the forbearance period, these amended items revert to the original terms of the credit facilities. For further information on the forbearance, please refer to the Company’s Form 10-Q for the period ended May 2, 2020, which was filed today with the Securities and Exchange Commission.

Apex Global Brands’ subordinated lenders are also supporting the Company by agreeing to temporarily suspend cash interest payments on subordinated debt through October 1, 2020.

The timing of Apex’s tax refunds is dependent on processing by the Internal Revenue Service and therefore difficult to predict, but when received, a portion of these proceeds is expected to be used to pay the deferred interest and loan amortization payments due to the Company’s lenders.  

Revenues  

Revenues were $4.0 million in the first quarter of Fiscal 2021, a decrease of 20% from $5.1 million in the first quarter of the prior year.  The decline in first quarter revenues reflects the non-renewal of Apex’s Cherokee license in Japan and the decrease in sales by the Company’s licensees related to COVID-19 shelter-in-place and similar orders.

Operating and Non-Operating Expenses

Selling, general and administrative expenses, which comprise the Company’s normal operating expenses, were $2.9 million in the first quarter of Fiscal 2021, a decrease of 25% from $3.9 million in the first quarter of the prior year.  This year-over-year decrease in SG&A reflects the beneficial impact of the Company’s restructuring efforts, which resulted in reduced spending for payroll, facilities and general operations in Fiscal 2021 compared to Fiscal 2020, in addition to cost-savings measures undertaken in response to the COVID-19 pandemic and the related shortfall in revenues.

The market capitalization of Apex and its revenue projections declined during the first quarter as a result of the COVID-19 pandemic, which necessitated a $5.4 million non-cash impairment charge to lower the book value of the Company’s goodwill and a $4.4 million non-cash impairment charge to lower the book value of the Company’s non-amortizing trademarks.  Additional information regarding these adjustments can be found in the Company’s Form 10-Q for the period ended May 2, 2020.

Interest expense was $2.2 million in the first quarter, which was consistent with interest expense in first quarter of the prior year.

The Company reported an income tax benefit of $9.4 million in the first quarter of Fiscal 2021, primarily due to the CARES Act, which changed federal regulations regarding the carryback of net operating losses.  The Company anticipates receiving refunds of previously paid federal income taxes of approximately $9.0 million from net operating loss carrybacks.

Profitability Measures

Primarily due to the $9.8 million in non-cash impairment charges, the Company’s operating loss for the first quarter of Fiscal 2021 totaled $9.0 million.  In the first quarter of the prior year, the Company reported operating income of $0.6 million.

Net loss was $1.8 million in the first quarter of Fiscal 2021, or a loss of $0.33 per diluted share, on 5.6 million shares outstanding, compared to net loss of $2.3 million, or a loss of $0.44 per diluted share, on 5.1 million shares outstanding, in the first quarter of the prior year.

Adjusted EBITDA totaled $1.1 million in the first quarter of Fiscal 2021 compared to $1.2 million in the first quarter of the prior year.  This decline was minor as the Company’s lower revenues were substantially offset by reductions in SG&A.

Balance Sheet & Liquidity Measures

As of May 2, 2020, the Company had cash and cash equivalents of $1.3 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.  These deferrals extend through the forbearance period for the Company’s senior secured debt and extend through October 2020 for the Company’s subordinated debt.

The Company had outstanding borrowings at May 2, 2020 of $57.3 million, including its senior secured credit facility, subordinated promissory notes, and Paycheck Protection Program promissory note.  Excluding a portion of the Paycheck Protection Program loan, the Company’s borrowings are reflected as a current obligation in its May 2, 2020 balance sheet, net of deferred financing costs, as current forecasts indicate the Company may incur additional defaults after the expiration of the forbearance agreement at the end of July.  Additional information regarding the Company’s debt and the related forbearance is available in Apex’s quarterly report on Form 10-Q for the quarter ended May 2, 2020.

Steve Brink, the Company’s Chief Financial Officer, commented, “As a result of the COVID-19 pandemic, Nasdaq temporarily suspended its $1.00 per share minimum bid price requirement until the end of June.  We currently expect to present our compliance plan proposal to Nasdaq in early July, but at this time, there has been no change to our listing status since the filing of our Form 10-K in April.”

Fiscal 2021 Outlook

Due to the evolving and uncertain nature of the COVID-19 pandemic and its impact on Apex Global Brand’s business, the Company will not be providing Fiscal 2021 guidance at this time.  While revenues are expected to be down year-over-year, so too will the Company’s expenses.  In response to the anticipated decline in revenues, Apex Global Brands has implemented cost savings measures whose full effect will be more fully seen in the second quarter of Fiscal 2021.  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 has minimum guarantees with many of its licensing partners that can support its royalty revenues, but the full extent to which these minimum guarantees will be maintained throughout the duration of the pandemic cannot be presently determined.

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 October 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 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 novel coronavirus (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 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)

		May 2,2020					February 1,2020
Assets
Current assets:
Cash and cash equivalents		$		1,259			$		1,209
Accounts receivable, net				3,319					4,962
Income tax and other receivables				8,869					157
Prepaid expenses and other current assets				1,077					1,431
Total current assets				14,524					7,759
Property and equipment, net				316					319
Intangible assets, net				54,547					59,110
Goodwill				6,752					12,152
Accrued revenue and other assets				3,505					3,582
Total assets		$		79,644			$		82,922
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other current liabilities		$		5,225			$		6,282
Current portion of long-term debt				56,786					56,044
Deferred revenue—current				2,580					3,551
Total current liabilities				64,591					65,877
Long-term liabilities:
Long-term debt				491					—
Deferred income taxes				8,781					9,515
Long-term lease liabilities				1,309					1,389
Other liabilities				792					794
Total liabilities				75,964					77,575
Commitments and Contingencies
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  5,570,530 (May 2, 2020) and 5,570,530 (February 1, 2020)				111					111
Additional paid-in capital				78,723					78,541
Accumulated deficit				(75,154	)				(73,305	)
Total stockholders’ equity				3,680					5,347
Total liabilities and stockholders’ equity				79,644			$		82,922

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

		Three Months Ended
		May 2,2020					May 4,2019
Revenues		$		4,034			$		5,052
Operating expenses:
Selling, general and administrative expenses				2,896					3,855
Stock-based compensation				150					208
Business acquisition and integration costs				—					66
Restructuring charges				—					42
Intangible assets and goodwill impairment charges				9,800					—
Depreciation and amortization				202					257
Total operating expenses				13,048					4,428
Operating (loss) income				(9,014	)				624
Other income (expense):
Interest expense				(2,181	)				(2,245	)
Other (expense) income, net				(34	)				1
Total other expense, net				(2,215	)				(2,244	)
Loss before income taxes				(11,229	)				(1,620	)
(Benefit) provision for income taxes				(9,380	)				638
Net loss		$		(1,849	)		$		(2,258	)
Net loss per share:
Basic loss per share		$		(0.33	)		$		(0.44	)
Diluted loss per share		$		(0.33	)		$		(0.44	)
Weighted average common shares outstanding:
Basic				5,571					5,128
Diluted				5,571					5,128

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
(In thousands)		May 2, 2020					May 4, 2019
Net loss		$		(1,849	)		$		(2,258	)
(Benefit) provision for income taxes				(9,380	)				638
Interest expense				2,181					2,245
Other expense (income)				34					(1	)
Depreciation and amortization				202					257
Intangible assets and goodwill impairment charge				9,800					—
Restructuring charges				—					42
Business acquisition and integration costs				—					66
Stock-based compensation				150					208
Adjusted EBITDA		$		1,138			$		1,197