APEX Apex Global Brands Inc

Apex Global Brands (Nasdaq: APEX), a global brand ownership and marketing organization that manages, creates and elevates a growing portfolio of high-equity lifestyle brands, today reported financFclipial results for its fourth quarter and full year ended February 1, 2020.

"While fourth quarter results were in line with our expectations, there is no denying the extent of the challenges COVID-19 has presented our company, our industry and our world,” said Henry Stupp, Chief Executive Officer of Apex Global Brands. “While our management team has successfully weathered financial crises before, the size and scale of this world health pandemic is unprecedented. In an effort to do our part to slow the spread of the virus and abide by CDC and WHO guidelines, beginning in mid-March, we transitioned our team to work from home status by leveraging our cloud-based accounting, product development and digital asset management systems. I want to thank our licensees, retail partners, service providers, and the Apex team for their swift response to these difficult circumstances, which enabled us to move forward while efficiently supporting each other.

“Many of our brand partners and licensees are also facing negative consequences as a result of COVID-19.  We are closely working with our partners across the globe to provide a unique set of tools that will further the long-term potential of each of our brands and products. At the same time, we are actively managing our own internal business and proactively taking the necessary cost-cutting measures to reduce our expenses. In addition to reducing marketing spend, nonessential travel and unfortunately our headcount, the executive team and the board of directors have reduced salaries beginning in April. We are also fortunate to have received a paycheck protection program loan that will help maintain our current employee base and cover other basic expenses. Furthermore, in the coming months, we expect to receive refunds of taxes we paid in previous years, which will also help our liquidity.

“In the near term, we are expecting a downturn in revenue consistent with our entire industry. While we feel it is best not to provide financial guidance at this time, we remain confident in our agile business model, which includes a well-established global distribution network and multiple unique digital channels that are well-suited for the future consumer landscape and will ultimately position our business strongly when the economy inevitably returns,” Mr. Stupp concluded.

CARES Act BenefitsThe Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was enacted by the U.S. Federal Government on March 27, 2020, grants taxpayers the ability to carryback net operating losses (NOLs) that otherwise could only be carried forward to future tax years. Apex Global Brands is now able to carryback NOLs from its fiscal years ending in February 2018, 2019 and 2020 and obtain refunds of federal taxes that it previously paid. Apex expects to receive approximately $8.0 million in tax refunds in accordance with these new rules. These refunds will be received in various installments as the Company’s carryback claims and amended returns are received and processed by the Internal Revenue Service.

In addition, as a U.S. small business, Apex Global Brands qualified for the Paycheck Protection Program (the “PPP”) of the CARES Act, which allows businesses and nonprofits with fewer than 500 employees to obtain loans to maintain their workforce and cover certain basic expenses as they manage business disruptions caused by COVID-19. On April 20, 2020, the Company received loan proceeds of $0.7 million. This loan matures on April 20, 2022 and bears interest at a fixed rate of 1.0% per annum, payable monthly, commencing in six months from the date of issuance. Under the terms of the PPP loan, however, the principal, or a portion of the principal, may be forgiven as long as the loan proceeds are used for certain expenses as described in the CARES Act, such as payroll costs, employee benefits, rent, utilities and interest.

ForbearanceOn April 30, 2020, Apex Global Brand’s senior lender agreed to a 90-day forbearance and amendment of its credit agreement with Apex. The lender agreed to not enforce its rights through July 28, 2020 under the Company’s senior secured credit facility. The forbearance agreement also has provisions that assist Apex in managing its cash flows as the COVID-19 pandemic has had, and is expected to continue to have, an adverse effect on Apex’s revenues. Rather than receive interest and loan amortization payments in cash during the forbearance period, the Company’s senior 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 during the forbearance period.

The Company’s subordinated lenders are also supporting the Company by agreeing to temporarily suspend cash interest payments due to them. All deferred interest and loan amortization payments are expected to be repaid in cash with a portion of the proceeds from the federal tax refunds that Apex is expecting to receive. 

For further information on the forbearance agreement, please refer to the Company’s Form 10-K for the year ended February 1, 2020 that was filed today with the Securities and Exchange Commission.

Revenues  Revenues were $5.5 million for the fourth quarter of Fiscal 2020, a decrease of 10% from $6.1 million in the prior year period. For the full year, revenues totaled $21.0 million, a decrease of 14% from $24.4 million in the prior year.  The year-over-year decline in fourth quarter revenues reflects the non-renewal of Apex’s Cherokee license in South Africa and its Tony Hawk license in Canada. Hi-Tec and Magnum royalty revenues also declined internationally, primarily due to the uncertainty surrounding Brexit and exchange rate fluctuations. 

Full year revenues were also impacted by the non-renewal of the Cherokee license in South Africa and the disposition of the Company’s Flip Flop Shops franchise business in June 2018. Apex’s revenues were further impacted by higher tariffs in the U.S. and reduced royalties from the Company’s licensees in Europe. These decreases were partially offset by having a full year of revenues from the Company’s design services agreement with a retailer in China, which started midway through Fiscal 2019.

Operating and Non-Operating ExpensesSelling, general and administrative expenses (SG&A), which comprise the Company’s normal operating expenses, were $3.1 million in the fourth quarter of Fiscal 2020, consistent with the prior year. For the full year, SG&A totaled $13.3 million, down 9% from $14.6 million in Fiscal 2019. This significant 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 operating costs in 2020 compared to 2019. As part of these efforts, Apex and its landlord in Amsterdam agreed to an early termination of a building lease, which reduced Apex’s long-term lease obligation by $2.4 million. 

The market capitalization of Apex declined during the fourth quarter, which necessitated a $4.1 million non-cash impairment charge to lower the Company’s goodwill book value. Additional information regarding this adjustment can be found in the Company’s Form 10-K for the year ended February 1, 2020.

Interest expense was $2.1 million for the fourth quarter, which includes $0.6 million of non-cash charges for deferred financing costs. For the full year of Fiscal 2020, non-cash deferred financing costs were $2.3 million. In addition to ongoing interest payments and deferred financing costs, Apex’s Fiscal 2019 results also include a $3.2 million non-cash charge related to refinancing of the Company's former credit facility, which did not repeat in Fiscal 2020.

Prior to Fiscal 2020, the benefits of the deferred tax assets of the foreign subsidiaries that Apex acquired in its acquisition of the Hi-Tec brands were not being recognized due to the cumulative losses generated by those foreign subsidiaries. In Fiscal 2020, however, the Company obtained approval to combine certain of its subsidiaries in the Netherlands as one tax filing group. This determination allowed the Company to recognize tax benefits for a majority of the remaining uncertain tax positions taken in prior years. The Company paid cash taxes of approximately $1.2 million in the full year of Fiscal 2020, compared to $1.3 million in the previous year.

Profitability MeasuresApex’s operating loss for the fourth quarter of Fiscal 2020 totaled $3.3 million, as compared to operating income of $2.4 million in the prior-year period. The operating losses in the fourth quarter of 2020 resulted primarily from the non-cash goodwill impairment charge of $4.1 million. The operating loss for the full year of Fiscal 2020 was $4.9 million, compared to operating income of $1.9 million for Fiscal 2019. The Fiscal 2020 loss includes $9.1 million of non-cash impairment charges.

Net loss was $1.1 million for the fourth quarter of Fiscal 2020, or a loss of $0.21 per diluted share, on 5.6 million shares outstanding, compared to net income of $0.2 million, or $0.04 per diluted share, on 4.8 million shares outstanding, in the fourth quarter of the prior year. These share and per share amounts reflect the Company’s one-for-three stock split in September 2019.

Net loss for Fiscal 2020 was $11.5 million, or a loss of $2.12 per diluted share, on 5.4 million shares outstanding, compared to a net loss of $11.5 million, or a loss of $2.45 per diluted share, on 4.7 million shares outstanding, in the prior year.

Adjusted EBITDA decreased to $2.4 million for the fourth quarter of Fiscal 2020 from $3.1 million in the prior year. This decline was due primarily to the lower revenues discussed above. Adjusted EBITDA for Fiscal 2020 decreased to $7.8 million from $9.8 million for Fiscal 2019.

Balance Sheet & Liquidity MeasuresAs of February 1, 2020, the Company had cash and cash equivalents of $1.2 million. The Company’s current cash balance is approximately $1.5 million.

The Company has outstanding borrowings totaling $57.6 million, including its senior secured credit facility and subordinated promissory notes. These loans are subject to financial covenants, including maintaining specified levels of Adjusted EBITDA and cash. The Company’s operating results for the 12 months ended February 1, 2020 were below the minimum EBITDA requirement, but as noted above, the Company’s senior lender has agreed to forbear from enforcing its rights through July 27, 2020.  At February 1, 2020, the Company’s total borrowings are reflected as a current obligation in its balance sheet, net of deferred financing costs, as current forecasts indicate the Company may incur additional defaults after the expiration of the forbearance agreement. Additional information regarding the events of default and the related forbearance is available in Apex’s annual report on Form 10-K for the year ended February 1, 2020.

Reverse Stock SplitOn September 27, 2019, the Company effected a one-for-three reverse stock split, which reduced the Company’s number of outstanding shares of common stock from approximately 16.6 million shares to approximately 5.5 million shares and decreased the number of authorized shares of common stock from 30.0 million shares to 10.0 million shares.

Subsequent to the reverse stock split, the Nasdaq Hearings Panel found that the Company was in compliance with the Nasdaq listing requirements, including the minimum bid price rule, but that the Company would be subject to a monitoring period that ends in December 2020. Nasdaq has recently temporarily suspended its minimum bid price rule in response to the COVID-19 pandemic through June 30, 2020. For further information on the compliance requirements and monitoring procedures, please refer to the Company’s Form 10-K for the year ended February 1, 2020.

Fiscal 2021 OutlookDue to the evolving and uncertain nature of COVID-19 on Apex Global Brand’s business, the Company will not be providing Fiscal 2021 guidance at this time. COVID-19 may have a material impact on Apex’s operating results, cash flows and financial condition, making accurate forward-looking projections very difficult at this time.

About Apex Global BrandsApex Global Brands is a global brand ownership and marketing organization that manages, creates and elevates a growing portfolio of high-equity lifestyle brands.  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 StatementsThis 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 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 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 as a result of new information, future events or otherwise.

Note Regarding Use of Non-GAAP Financial MeasuresCertain 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 BRANDSCONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share and per share amounts)

		February 1,				February 2,
		2020				2019
Assets
Current assets:
Cash and cash equivalents		$	1,209			$	4,284
Accounts receivable, net			4,962				4,363
Other receivables			157				339
Prepaid expenses and other current assets			1,431				857
Total current assets			7,759				9,843
Property and equipment, net			319				620
Intangible assets, net			59,110				64,751
Goodwill			12,152				16,252
Accrued revenue and other assets			3,582				1,645
Total assets		$	82,922			$	93,111
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other current liabilities		$	6,282			$	7,834
Current portion of long-term debt			56,044				1,300
Deferred revenue—current			3,551				1,626
Total current liabilities			65,877				10,760
Long-term liabilities:
Long-term debt			—				53,154
Deferred income taxes			9,515				11,268
Long-term lease liabilities			1,389				—
Other liabilities			794				2,807
Total liabilities			77,575				77,989
Commitments and Contingencies (Note 8)
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			111				98
5,570,530 (February 1, 2020) and 4,900,318 (February 2, 2019)
Additional paid-in capital			78,541				76,829
Accumulated deficit			(73,305	)			(61,805	)
Total stockholders’ equity			5,347				15,122
Total liabilities and stockholders’ equity		$	82,922			$	93,111

 

APEX GLOBAL BRANDSCONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)(In thousands, except per share amounts)

	Three Months Ended								Year Ended
	February 1,			February 2,					February 1,			February 2,
	2020			2019					2020			2019
Revenues	$	5,492		$	6,127				$	21,041		$	24,444
Operating expenses:
Selling, general and administrative expenses		3,138			3,061					13,255			14,638
Stock-based compensation and stock warrant charges		156			224					1,032			890
Business acquisition and integration costs		—			—					284			307
Restructuring charges		954			140					1,134			5,755
Intangible assets impairment charge		4,100			—					9,100			—
Gain on sale of assets		—			67					-			(479	)
Depreciation and amortization		424			255					1,167			1,478
Total operating expenses		8,772			3,747					25,972			22,589
Operating (loss) income		(3,280	)		2,380					(4,931	)		1,855
Other income (expense):
Interest expense		(2,131	)		(2,213	)				(8,809	)		(8,220	)
Other income (expense), net		(94	)		(54	)				(92	)		(3,273	)
Total other expense, net		(2,225	)		(2,267	)				(8,901	)		(11,493	)
(Loss) income before income taxes		(5,505	)		113					(13,832	)		(9,638	)
(Benefit) provision for income taxes		(4,358	)		(79	)				(2,332	)		1,901
Net (loss) income	$	(1,147	)	$	192				$	(11,500	)	$	(11,539	)
Net (loss) income per share:
Basic (loss) income per share	$	(0.21	)	$	0.04				$	(2.12	)	$	(2.45	)
Diluted (loss) income per share	$	(0.21	)	$	0.04				$	(2.12	)	$	(2.45	)
Weighted average common shares outstanding:
Basic		5,571			4,768					5,412			4,710
Diluted		5,571			4,768					5,412			4,710

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

We define Adjusted EBITDA as net income before (i) interest expense, (ii) other expense (iii) provision for income taxes, (iv) depreciation and amortization, (v) intangible asset impairment loss, (vi) gain on sale of assets, (vii) restructuring charges, (viii) business acquisition and integration costs and (ix) 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, or 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 from continuing operations as reported in our condensed consolidated statement of operations to Adjusted EBITDA is as follows:

	Three Months Ended							Year Ended
(In thousands)	February 1,			February 2,				February 1,			February 2,
	2020			2019				2020			2019
Net (loss) income	$	(1,147	)	$	192			$	(11,500	)	$	(11,539	)
(Benefit) provision for income taxes		(4,358	)		(79	)			(2,332	)		1,901
Interest expense		2,131			2,213				8,809			8,220
Other expense (income)		94			54				92			3,273
Depreciation and amortization		424			255				1,167			1,478
Gain on sale of assets		—			—				—			(479	)
Intangible assets and goodwill impairment charge		4,100			—				9,100			—
Restructuring charges		954			140				1,134			5,755
Business acquisition and integration costs		—			67				284			307
Stock-based compensation and stock warrant charges		156			224				1,032			890
Adjusted EBITDA	$	2,354		$	3,066			$	7,786		$	9,806