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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to

Commission file No. 0-18640

APEX GLOBAL BRANDS INC.

(Exact name of registrant as specified in charter)

 

Delaware

 

95-4182437

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

5990 Sepulveda Boulevard
Sherman Oaks, CA 91411
(818) 908‑9868
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.02 par value per share

APEX

Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

    

Indicate by check mark whether the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes   No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   N0 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes:   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer

  ☐

 

Accelerated filer

  ☐

Emerging Growth Company

  ☐

   

Smaller Reporting Company

  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accountant standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes   No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes   No 

As of August 2, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non‑affiliates of the registrant was approximately $8.0 million (computed by reference to the price at which the registrant’s common stock was last sold on August 2, 2019, as reported by the Nasdaq Capital Market). For purposes of this calculation, it has been assumed that shares of common stock held by each director, officer and person who beneficially owns 10% or more of the outstanding common stock of the registrant are held by affiliates of the registrant. The treatment of these persons as affiliates for purposes of this calculation is not, and shall not be considered, a determination as to whether such persons are affiliates of the registrant for any other purpose.  

As of April 16, 2020, the registrant had 5,570,530 shares of its common stock, issued and outstanding.

 

 

 


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APEX GLOBAL BRANDS INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2020

TABLE OF CONTENTS

 

 

Page

PART I

Item 1 .

Business

4

Item 1A.  

Risk Factors

8

Item 1B .

Unresolved Staff Comments

20

Item 2.  

Properties

20

Item 3 .

Legal Proceedings

20

Item 4.  

Mine Safety Disclosures

20

PART II

Item 5 .

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

Item 6 .

Selected Financial Data

21

Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 8 .

Financial Statements

34

Item 9 .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

57

Item 9A.  

Controls and Procedures

57

Item 9B. 

Other information

57

PART III

Item 10 .

Directors and Executive Officers and Corporate Governance

59

Item 11 .

Executive Compensation

62

Item 12 .

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

68

Item 13 .

Certain Relationships and Related Transactions, and Director Independence

71

Item 14 .

Principal Accounting Fees and Services

73

PART IV

Item 15 .

Exhibits and Financial Statement Schedules

74

Item 16.  

Form 10-K Summary

74

 

 

 


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As used in this Annual Report, “Apex Global Brands”, the “Company”, “we”, “us” and “our” refer to Apex Global Brands Inc. and its consolidated subsidiaries, unless the context indicates or requires otherwise.  Additionally, as used herein, “Fiscal 2020” refers to our fiscal year ending February 1, 2020; “Fiscal 2019” refers to our fiscal year ended February 2, 2019.

We own the registered trademarks or trademark applications for Cherokee®, Hi-Tec®, Magnum®, 50 Peaks®, Interceptor®, Hawk Signature®, Tony Hawk®, Everyday California®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, Sideout®, Sideout Sport®, and others.  Although we do not use the “®”symbol in each instance in which one of our trademarks appears in this Annual Report, this should not be construed as any indication that we will not assert our rights thereto to the fullest extent under applicable law.  All other trademarks, trade names and service marks included in this Annual Report are the property of their respective owners.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report, our quarterly reports on Form 10‑Q, other filings we make with the Securities and Exchange Commission (the “SEC”), and press releases and other written or oral statements we may make from time to time may contain “forward‑looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements are statements other than historical facts that relate to future events or circumstances or our future performance.  The words “anticipates”, “believes”, “estimates”, “plans”, “expects”, “objectives”, “goals”, “aims”, “hopes”, “may”, “might”, “will”, “likely”, “should” and similar words or expressions are intended to identify forward‑looking statements, but the absence of these words does not mean that a statement is not forward-looking.

Forward‑looking statements in this Annual Report include statements about, among other things:

 

our goals or expectations for our future performance, including anticipated revenue and expense levels and projections about other elements of our results of operations;

 

expectations about our sources of capital and other matters relating to our liquidity;

 

our ability to manage the various licensing and selling models we use in our operations;

 

expected trends in the retail industry, including apparent trends relating to our different licensing models;

 

the competitive environment in which we operate and the nature and impact of competitive developments in our industry;

 

our expectations about consumer acceptance and sales levels of products bearing our brands;

 

the anticipated impact on our business and performance of factors relating to our licensees’ and franchisees’ businesses and operations;

 

the likelihood of sustained or increased sales by, or royalty revenues from, our existing licensees and franchisees;

 

our prospects for obtaining new licensees and franchisees;

 

the success of any new licensee or franchisee relationships we may establish, including the level of royalty revenues they may generate;

 

our prospects for identifying and successfully acquiring new brands;

 

the success and importance of any acquisitions, divestitures, investments or other strategic relationships or transactions we may announce, including our ability to integrate acquired brands or businesses into our operations and achieve the intended benefits of any such acquisitions;

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our business and growth strategies, including our ability to successfully implement these strategies and their expected impact on our business and our performance;

 

our expectations about the geographic and customer markets that show the most promise for acceptance of our brands and increased sales of products bearing our brands;

 

general economic, political and market conditions;

 

the expected or potential impact of the novel coronavirus (COVID-19) pandemic, and the related responses of the government, consumers, and the company, on our business, financial condition and results of operations; and

 

the impact of the above factors and other future events on the market price and trading volume of our common stock.

Forward‑looking statements are based on our current views, expectations and assumptions and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or stock prices to be materially different from any future results, performance, achievements or stock prices expressed or implied by the forward‑looking statements.  Such risks, uncertainties and other factors include, among others, those described in Item 1A, “Risk Factors” in this Annual Report.  In addition, we operate in a competitive and rapidly evolving industry in which new risks emerge from time to time, and it is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations.  As a result of these and other potential risks and uncertainties, forward-looking statements should not be relied on or viewed as predictions of future events because some or all of them may turn out to be wrong.  Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation to update any of the forward‑looking statements we make to reflect future events or developments or changes in our expectations or for any other reason.

We qualify all of our forward-looking statements by this cautionary note.

 

 

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PART I

Item 1.

BUSINESS

Overview

Apex Global Brands is a global marketer and manager of a portfolio of fashion and lifestyle brands that we own, brands that we create, and brands that we develop for others. Cherokee Inc. changed its name to Apex Global Brands Inc. effective June 27, 2019. Company-owned brands, which are licensed in multiple consumer product categories and retail tiers around the world, include Cherokee, Hi-Tec, Magnum, 50 Peaks, Interceptor, Hawk Signature, Tony Hawk, Everyday California, Carole Little, Sideout and others.  As part of our business strategy, we also regularly evaluate other brands and trademarks for acquisition into our portfolio.  We believe the strength of our brand portfolio and platform of design, product development and marketing capabilities has made us one of the leading global licensors of style-focused lifestyle brands for apparel, footwear, accessories and home products.

We have licensing relationships with recognizable retail partners in their global locations to provide them with the rights to design, manufacture and sell products bearing our brands, and we also have licensing relationships with manufacturers and distributors for the manufacture and sale of products bearing our brands.  As a brand marketer and manager, we do not directly sell product ourselves.  Rather, we earn royalties when our licensees sell licensed products bearing the trademarks that we own, or when they sell products that we have designed and developed.

We provide our licensees with access to our proprietary 360-degree platform and believe that our brand marketing and media outreach, product design and development capabilities, and growth strategies and tactics have allowed Apex Global Brands to address the growing power of the consumer and the present and future needs of our wholesale and retail business partners and licensees.  Based on consumer research, retail insights and brand insights that we continually measure, evaluate and incorporate into our 360-degree platform, we believe Apex Global Brands has become a key strategic partner to our licensees.  We believe our licensing partners rely on our vision, which defines the growth potential and trajectories of our brands, the agility we afford to them through our 360-degree platform, which is designed to quickly seize opportunities and integrate new innovations, and the opportunity to realize global, multi-channel, multi-category scale through our portfolio of lifestyle brands and our platform capabilities.  As of February 1, 2020, we had 42 continuing license agreements in approximately 144 countries.  These arrangements include relationships with Walmart, Soriana, Comercial Mexicana, TJ Maxx, Tottus, Arvind, Reliance Retail, Tharanco, Martes Sports, Hi-Tec Europe, Hi-Tec South Africa, JD Sports, Black’s and Lidl, in addition to regional distributors.

Licensing and Other Selling Models

Direct to Retail

In Direct to Retail licensing, or “DTR” licensing, we grant retailers a “territory” or “channel-specific” license to use our trademarks on certain categories of merchandise.  We collaborate with our licensees’ product development staff and merchandisers on design direction, packaging, marketing and other aspects pertaining to the products sold with our trademarks, and in some cases our licensees modify or expand the designs or create their own designs to suit their seasonal, regional and category needs.  In several cases, the licensee is responsible for designing and manufacturing the merchandise, although many products are subject to our pre‑approved packaging, graphics and quality control standards and many of our licensees’ marketing campaigns are subject to similar oversight.  We plan to continue to solicit new licensees using our DTR licensing model in new territories and additional product categories as we seek to expand this part of our business.

The DTR licensing model generally offers each licensee, or retailer, the exclusive right to market multiple categories of products with a recognized brand within their territory, thereby offering licensees the ability to enhance their marketing strategies and achieve a competitive advantage over competing retailers.  We believe that this differentiation can also provide the retailer/licensee an opportunity to command a “premium” for our brand offering over private label price points, which can result in increased profit margins for the licensee, even after royalties have been paid to the licensor.  The licensees generally directly source their own merchandise, thereby eliminating the licensor’s exposure to inventory and manufacturing risk while allowing the licensees to benefit from large economies of scale.

Many of the world’s largest retailers have successfully introduced, and continue to introduce, new brands based on the DTR licensing model.  Examples of retailers participating in the DTR licensing model include Walmart, Carrefour, Lidl and C&A, among others.

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Our DTR licensing strategy is premised on the proposition that, for many retailers worldwide, most aspects of the moderately priced apparel, accessory, footwear and home categories, including product development, design, merchandising, sourcing and distribution, can be executed most effectively by these retailers themselves, who typically command significant economies of scale, but also interact daily with their end consumers.  We believe many of these retailers may be able to obtain higher gross margins on sales and increase store traffic by sourcing, stocking and selling licensed products bearing widely recognized brand names (such as our brands) than by carrying only private label goods or by carrying only branded products obtained from third‑party vendors.  We also believe many retailers may be able to achieve enhanced profitability with our DTR licensing model because it allows them to avoid the substantial marketing costs associated with establishing and maintaining an in‑store brand.

Wholesale

We also license our brands to manufacturers and distributors based on wholesale arrangements.  Wholesale licensing arrangements generally involve licensing to manufacturers and distributors that produce and/or import various categories of apparel, accessories, footwear and home products under our trademarks and trademarks owned by third parties and sell the licensed products to retailers, which then resell the products to consumers.  

We have several new wholesale arrangements for the Cherokee, Hawk Signature and Tony Hawk brands.  In addition, we are primarily relying on a wholesale licensing strategy for global sales of our Hi-Tec, Magnum, 50 Peaks and Interceptor brands.

Design Services

We provide product design and development services for retailers that prefer to sell brands that they own.  We believe that our 360-degree platform provides the key ingredients for retailers to efficiently produce product ranges that are tailored for their target consumers and the retailers’ specific business needs.  Our retail partners can rely on our product development and design capabilities, which are supported by our retail and brand marketing abilities, focusing their resources instead on retail operations.  We expect that together this will lead to increased rates of sale, greater sell-through and improved retail performance.

Brand Portfolio

Cherokee

Cherokee is an iconic, American family‑lifestyle brand, offering classic, casual and comfortable products at affordable prices.  Cherokee, which was initially launched as a footwear line in 1973, seeks to produce timeless classics, inspired by vintage Americana while continually being updated to account for modern trends.  After four decades, the Cherokee brand stands for confident, effortless and relaxed American style.  We believe this heritage positions the Cherokee brand for future growth and further international expansion.   Cherokee branded products are sold internationally across multiple age ranges in a wide range of categories, including casual sportswear, sweaters, outerwear, active wear, dresses, denim, swimwear, sleepwear, accessories, home décor, textiles, outdoor furnishings and camping gear.

Royalty revenues from global sales of Cherokee branded products were $6.7 million and $9.7 million in Fiscal 2020 and Fiscal 2019, respectively, which accounted for 32% and 40% of our total royalty revenues in these years.  Our wholesale distributor licenses offer a variety of categories of products bearing the Cherokee brand to retailers in the United States.  A large majority of our Cherokee brand royalties are now derived from multiple DTR license agreements with various retailers outside the United States, many of which have been in place for several years.  

Hi-Tec, Magnum, 50 Peaks and Interceptor

Founded in 1974 and based in the Netherlands, the Hi-Tec footwear brand seeks to produce quality shoes for a fair price that are “comfortable anywhere”.  Hi-Tec is known for its comfortable and lightweight hiking and walking shoes, and also produces technical outdoor footwear and various other types of shoes.  The Hi-Tec brand is one of the world’s leaders in sports and outdoor footwear.  Magnum produces work boot footwear, specific-purpose tactical boots and uniform footwear.  50 Peaks is a high spec, technical outdoor footwear brand that was born out of the accomplishments of adventurer Adrian Crane, who climbed the 50 highest peaks in each of the 50 states in the USA in a record time of 101 days.  Interceptor is a tactical footwear brand sold internationally, with primary distribution through Walmart U.S.  Hi-Tec and Magnum products are sold throughout the world in Europe, the United States, Canada, South Africa, the Middle East, South and Central America, Oceania and Asia.

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Royalty revenues from global sales of Hi-Tec, Magnum, 50 Peaks and Interceptor branded products were $10.5 and $11.6 million in Fiscal 2020 and Fiscal 2019, respectively, which accounted for 50% and 47% of our total royalty revenues in those years.  

Hawk Signature and Tony Hawk

Tony Hawk is among the most well‑known athletes in skateboarding history and is the founder of the Hawk Signature and Tony Hawk apparel lines.  The Tony Hawk brand is designed for comfort, flexibility and durability and it embodies the “skate culture” lifestyle, combining style with performance.  The Hawk Signature and Tony Hawk brands have expanded our presence in the department store and specialty channels of distribution.

Hawk Signature and Tony Hawk branded products are distributed to a variety of retailers in the United States, including specialty, mid-tier, regional, mass market, off-price and club stores, by several wholesale distributors under license agreements with these distributors.  In addition, we have separate wholesale license agreements with others to supply Hawk Signature and Tony Hawk apparel in China, Japan, South Korea and throughout Europe. Royalty revenues from global sales of Hawk Signature and Tony Hawk branded products were $0.3 and $0.6 million in Fiscal 2020 and Fiscal 2019, respectively, which accounted for 1% and 3% of our total royalty revenues in those years.  

Everyday California

Crafted in Southern California, Everyday California is designed to embody the California spirit and celebrate living life to the fullest.  From California’s snowcapped mountains to its sandy shores, Everyday California apparel and accessories for men and women are the perfect match for any journey.  Everyday California was born out of a desire to share the California state of mind and the notion that adventure is just around the corner.   We acquired the Everyday California brand in May 2015.  In addition to the United States, Everyday California is distributed in Mexico and Japan.

Point Cove

Point Cove was created in-house by Apex Global Brands' design team in close collaboration with Reliance Trends, a chain of retail stores in India.  The brand was launched in September 2015 and brings a combination of playfulness and sophistication to Reliance Trends stores in key categories, including apparel, accessories and footwear, for kids ages 2-14.  The collection features bold colors that bring the California spirit to India.

Carole Little

Carole Little was founded in 1975 by designer Carole Little through her love for contemporary clothing.  The Carole Little brand became recognized for colorful and unusual prints, soft two‑piece outfits and dresses, and has an ageless, independent attitude for the self‑confident woman.

Sideout

Conceived in 1983 by a California volleyball player, the Sideout brand took root at the beach, harnessing the easy spirit of a casual California lifestyle.  Ideal for a game of beach volleyball or a breezy vacation, Sideout products perform in quality, functionality and originality by offering casual, hip and cool clothing, footwear and accessories at affordable prices.

Royalties and Other Revenues

Our rights to receive royalties for sales of products bearing our brands or products we have developed and designed are set forth in the terms of our license agreements with various retailers and wholesalers.  The royalty rates we receive from our licensees vary depending on the terms of each licensing agreement.  Generally, our DTR license agreements include royalty rates based on a percentage of the retailer’s sales of licensed products.  Some of our DTR license agreements provide for fixed royalty rates, and other DTR license agreements provide for royalty rates that may decrease or otherwise fluctuate during a year as the retailer achieves sales volume thresholds.  For wholesale license agreements, royalty rates are generally based on a fixed percentage of wholesale sales from the wholesaler to the retailer or a fixed percentage of manufacturing costs.

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In some cases, we require the licensee to guarantee a minimum royalty payment to us each year, although the amount of this minimum payment can vary significantly from licensee to licensee and is typically lower for wholesale licensees than for DTR licensees.  We do not have a significant concentration of fixed minimum payments in any one licensee.  As of February 1, 2020, we had contractual rights to receive over $50.0 million forward‑facing minimum royalty revenues over the next ten years, excluding any revenues that may be guaranteed in connection with future contract renewals.

Royalties are generally paid within 30 days after a quarterly selling period as defined in the applicable license agreement.  To ensure our licensees are reporting and calculating the appropriate royalties, our license agreements grant us the right to audit our licensees’ royalty reports to validate the amount of sales or purchases reported and royalties paid.

Trademarks and Other Intellectual Property Rights

We hold various trademarks, including Cherokee®, Hi-Tec®, Magnum®, 50 Peaks ® , Interceptor ® , Hawk Signature®, Tony Hawk®, Everyday California®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, Sideout®, Sideout Sport® and others for numerous categories of apparel and other goods.  These trademarks are registered with the United States Patent and Trademark Office, and we also hold trademarks or trademark applications for each of these brand names and others with similar government agencies in a number of other countries.  Our trademark registrations typically expire after seven to ten years depending on the jurisdiction, although we intend, and expect to be able, to renew these trademarks for as long as we continue to use them.  Our business is dependent on our trademarks, and we monitor unauthorized uses of these trademarks on an ongoing basis.  In addition to trademarks, we also rely on know‑how, trade secrets and contractual restrictions to protect our intellectual property rights domestically and internationally.

Competition

Merchandise bearing our brand names and goods that we have developed and are subject to intense competition.  Competing brands with respect to our Cherokee brand include Polo Ralph Lauren, Tommy Hilfiger, and private label brands (developed by retailers) such as Faded Glory, Arizona and Route 66, and competing brands with respect to the Hi-Tec and Magnum brands include Columbia, Merrell, Keen, North Face, Timberland, Bates, Wolverine and other private label brands.  Our other brands also face competition from these and other numerous brands.  Factors that shape the competitive environment for our brands include quality of garment or accessory construction and design, brand name, style and color selection, price, fashion and other trends, avenue of purchase (including in stores and online), and the manufacturer’s ability to respond quickly to retailer and consumer demand.

Our business plan focuses on creating strategic alliances with major retailers and wholesalers for their sale of products bearing our brands or products that we have developed and designed.  We license our trademarks directly to retailers, and we engage wholesalers to manufacture and distribute products bearing our brands and sell these products to retailers.  We also develop and design products for retailers that prefer to sell products bearing their own brand names.  Therefore, our degree of success is dependent on the strength of our brands, consumer acceptance of our brands, our licensees’ ability to design, manufacture and sell products bearing our brands and our licensees’ ability to sell products we have developed and designed, all of which is dependent on the ability of us and our licensees to respond to ever-changing consumer demands.  In addition, we compete with companies that own other brands and trademarks, as these companies could enter into similar licensing arrangements with retailers and wholesalers in the United States and internationally.  These arrangements could be with our existing retail and wholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same stores in which our branded products are sold, and vying with us for the time and resources of the retailers and wholesale licensees that manufacture and distribute our products.

Seasonality

Our business and performance do not reflect significant seasonality trends.  However, to the extent royalty revenues grow from our new wholesale licensees, we expect our revenues may shift toward the latter half of our fiscal year, which would be consistent with the normal, holiday-based seasonal pattern of retail sales.

Government Regulations

Our business practices in international markets are subject to the requirements of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and any applicable foreign anti-bribery laws.  We are also subject to various laws that are generally applicable to businesses in our industry, such as work safety and labor laws that govern certain of our operations and our employee relations.  Our violation of any of these laws could subject us to significant fines, criminal sanctions and other penalties, which could have a material adverse effect on our business and results of operations.

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Employees

As of February 1, 2020, we employed 37 persons.  None of our employees are represented by labor unions, and we believe that our employee relations are satisfactory.

Financial Information about Geographic Areas

Approximately 77% and 75% of our revenues were derived from our international licensees in Fiscal 2020 and Fiscal 2019, respectively, and we face risks related to these foreign operations.  See Item 1A, “Risk Factors” for information about these risks, and see Note 13 to our consolidated financial statements included in this Annual Report for certain financial information by geographic area.

General Information

Apex Global Brands was incorporated in Delaware in 1988.  We maintain a website at www.apexglobalbrands.com, and our Nasdaq trading symbol is “APEX”.  We make our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on our website as soon as reasonably practicable after we file these materials with, or furnish them to, the SEC.  All references to our website in this Annual Report are inactive textual references, and the contents of our website are not incorporated in or otherwise considered part of this Annual Report.

Item 1A.

RISK FACTORS

The occurrence of any of the risks, uncertainties and other factors described below and elsewhere in this Annual Report and the other documents we file with the SEC could have a material adverse effect on our business, financial condition, results of operations and stock price, and could cause our future business, financial condition, results of operations and stock price to differ materially from our historical results and the results contemplated by any forward-looking statements we may make herein, in any other document we file with the SEC, or in any press release or other written or oral statement we may make.  You should carefully consider all of these risks and the other information in this Annual Report and the other documents we file with the SEC before making any investment decision with respect to our securities.  The risks described below and elsewhere in this Annual Report are not the only ones we face.  Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business, financial condition and results of operations or cause our stock price to decline.

Risks Related to Our Business

We face risks related to the impact of the COVID-19 pandemic and the related protective public health measures.

In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus, COVID-19, as a pandemic.  Our business has been materially adversely affected by the effects of COVID-19 and the related protective public health measures. Our business depends upon purchases and sales of our branded products by our licensees, and the prevalence of shelter-in-place orders in the regions where our products are sold, together with the closure of many of our licensees’ or their customers’ stores, have resulted in significant declines in our royalties, which will likely continue for some period of time.  In response to the decline in revenues, we have implemented cost savings measures, including pay reductions, employee furloughs and other measures.  We can provide no assurance that these cost savings measures will not cause our business operations and results to suffer.  The decline and anticipated decline in our revenues also exposes us to the risk that we will remain non-compliant with the covenants in our credit facility, which creates risk that our lender will exercise its rights to accelerate the amounts payable and foreclose on our assets.  We have not been designated as an essential business, and therefore all of our employees are working remotely, which may result in inefficiencies and lost opportunities. In addition, the responses of the federal, international, state and regional governments to the pandemic, including the shelter-in-place orders and the allocation of healthcare resources to treating those infected with the virus, has caused and may continue to cause a significant decline in retail sales, including sales of our branded products by our licensees. Other adverse effects of the pandemic on our business could include disruptions or restrictions on our employees’ ability to travel, as well as temporary closures of the facilities of the manufacturers and distributors of our branded products, which could cause further or extended declines in sales and royalties. In addition, the continued spread of COVID-19, or the occurrence of other epidemics, could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our branded products and further adversely impact our results of operations.

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There are numerous uncertainties associated with the coronavirus outbreak, including the number of individuals who will become infected, whether a vaccine or cure that mitigates the effect of the virus will be synthesized, and, if so, when such vaccine or cure will be ready to be used, and the extent of the protective and preventative measures that have been put in place by both governmental entities and other businesses and those that may be put in place in the future.  Any, or all, of the foregoing uncertainties could have a material adverse effect on our results of operations, financial position and/or cash flows.

Our business is subject to intense competition.

Merchandise bearing our brand names and goods that we have developed and designed are subject to intense competition.  Competing brands with respect to our Cherokee brand include Polo Ralph Lauren, Tommy Hilfiger, and private label brands (developed by retailers) such as Faded Glory, Arizona and Route 66, and competing brands with respect to the Hi-Tec and Magnum brands include Columbia, Merrell, Keen, North Face, Timberland, Bates, Wolverine and other private label brands.  Our other brands also face competition from these and other numerous brands.  Factors that shape the competitive environment for our brands include quality of garment or accessory construction and design, brand name, style and color selection, price, fashion and other trends, avenue of purchase (including in stores and online), and the manufacturer’s ability to respond quickly to retailer and consumer demand.

Our business plan focuses on creating strategic alliances with major retailers and wholesalers for their sale of products bearing our brands through the licensing of our trademarks directly to retailers, engaging wholesalers to manufacture and distribute products bearing our brands and sell these products to retailers, and entering into design services agreements with retailers and wholesalers to develop and design products bearing the brands that those retailers and wholesalers own.  Therefore, our degree of success is dependent on the strength of our brands, consumer acceptance of our brands, our licensees’ ability to design, manufacture and sell products bearing our brands and our other licensees’ ability to sell products in their stores that we have developed and designed, all of which is dependent on the ability of us and our licensees to respond to ever-changing consumer demands.  We cannot control the level of consumer acceptance of our brands and changing preferences and trends may lead customers to purchase other products.  Further, we cannot control the level of resources that our other licensees commit to supporting their brands for which we have developed and designed product. Our licensees may choose to support products bearing other brands to the detriment of our brands because our agreements generally do not prevent them from licensing or selling other products, including products bearing competing brands. 

In addition, we compete with companies that own other brands and trademarks, as these companies could enter into similar licensing arrangements with retailers and wholesalers in the United States and internationally.  These arrangements could be with our existing retail and wholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same stores in which our branded products are sold, and vying with us for the time and resources of the retailers and wholesale licensees that manufacture and distribute our products.  These companies may be able to respond more quickly to changes in retailer, wholesaler and consumer preferences and devote greater resources to brand acquisition, development and marketing.  We may not be able to compete effectively against these companies.

If we or our brands are unable to compete successfully against current and future competitors, we may be unable to sustain or increase demand for products bearing our brands, or we may be unable to develop and design products bearing brands owned by our licensees that compete successfully in the retail market place, which could have a material adverse effect on our reputation, prospects, performance and financial condition.

We are subject to the risks of the retail business that apply to retailers selling our products.

There are numerous risks and other factors applicable to the businesses of retailers (including our DTR licensees and retailers to which our wholesale licensees distribute products) that can impact the sale of products that bear our brands and, with respect to our other licensees, the sale of products that we have developed and designed that bear their brands and are sold in their stores.  Any decline in retail sales of our branded products or products that we have designed for others could adversely affect our revenues.

Factors that may adversely affect retailers and their sales of products include, among others: (i) the ongoing impacts of COVID-19; (ii) consumer preferences regarding fashion trends and styles, which can be region-dependent and subject to rapid and significant fluctuations; (iii) consumer preferences regarding where to shop; (iv) the growth of online shopping and the ability of a retailer to market and sell products through these avenues; (v) fluctuating retail prices; (vi) the reputation of or general consumer perceptions about the retailers that sell our brands; (vii) security breaches or other cybersecurity incidents; (viii) shifts in the seasonality of shopping patterns; (ix) weather, environmental or other conditions that may impact consumer shopping activity; (x) changes in the availability or cost of capital in light of a retailer’s financial condition, capital requirements and other factors; (xi) labor strikes or other interruptions that impact supply chains and transport vendors; (xii) the impact of excesses or shortages of retail or manufacturing capacity; (xiii) changes in the cost of accepting various payment

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methods and changes in the rate of utilization of these payment methods; (xiv) material acquisitions or dispositions; (xv) investments in new business strategies; (xvi) the success or failure of significant new business ventures or technologies; (xvii) general business and operational risks, including, among others, the ability to obtain and maintain desirable store locations, litigation risks, departures of key personnel or other employee matters; (xviii) actions taken or omitted to be taken by legislative, regulatory, judicial and other government authorities and officials; (xix) natural disasters, the outbreak of war, acts of terrorism or other significant national or international events; and (xx) the other risks discussed in these risk factors.

We have incurred a significant amount of indebtedness, our level of indebtedness and restrictions under our indebtedness could adversely affect our operations and liquidity, and we are currently in violation of certain financial covenants under our credit facility.

On August 3, 2018, we entered into a senior secured credit facility that provided a $40.0 million term loan, and $13.5 million of subordinated promissory notes.  The credit facility was amended on January 30, 2019 to provide an additional term loan of $5.3 million.  As of February 1, 2020, outstanding borrowings under the term loans were $44.1 million, and outstanding borrowings under subordinated promissory notes were $13.5 million.  The term loans mature in August 2021 and require quarterly principal payments and monthly interest payments based on LIBOR plus a margin.  The subordinated promissory notes mature in November 2021.  Interest is payable monthly on the subordinated promissory notes, but no periodic amortization payments are required.

The senior secured credit facility imposes various restrictions and covenants regarding the operation of our business, including covenants that require us to obtain the lender’s consent before we can, among other things and subject to certain limited exceptions: (i) incur additional indebtedness or additional liens on our property; (ii) consummate acquisitions, dispositions, mergers or consolidations; (iii) make any change in the nature of our business; (iv) enter into transactions with our affiliates; or (v) repurchase or redeem any outstanding shares of our common stock or pay dividends or other distributions, other than stock dividends, to our stockholders.  The senior secured credit facility also imposes financial covenants that set financial standards we are required to maintain, including the requirement to maintain specified levels of Adjusted EBITDA, as defined in the credit agreement ($9.5 million for the trailing twelve months as of February 1, 2020), and maintain a minimum cash balance of $1.0 million.  We are also required to maintain a borrowing base comprising the value of our trademarks that exceeds the outstanding balance of the term loan.  If the borrowing base is less than the outstanding term loan at any measurement period, then we would be required to repay a portion of the term loan to eliminate such shortfall.  Further, as collateral for the credit facility, we have granted a first priority security interest in favor of the lender in substantially all of our assets (including trademarks), and our indebtedness is guaranteed by our subsidiaries. If we do not comply with these requirements or if there is a change of control of the Company, it would be an event of default.

Our operating results for the twelve months ended November 2, 2019 and February 1, 2020 resulted in violations of the minimum Adjusted EBITDA covenant, which were events of default.  However, our senior lender has agreed to forbear from enforcing its rights under the senior secured credit facility through July 27, 2020.  Our financial projections indicate that there is a significant risk of further violations of the minimum Adjusted EBITDA covenant or minimum cash covenant beyond the forbearance period agreed to with our senior lender.  If any such future violation or other event of default occurs under the credit facility that is not forborne, cured or waived in accordance with the terms of the credit facility, we would be subject to significant risks, including the right of our lender to terminate its obligations under the credit facility, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other right or remedies it may have under applicable law, including foreclosing on our and/or our subsidiaries’ assets that serve as collateral for the borrowed amounts.  Furthermore, a default under our term loan agreement would also trigger a default under our subordinated promissory note agreements, which would give those lenders the right to terminate their obligations under the subordinated promissory note agreements and accelerate the payment of those promissory notes.  If any of these rights were to be exercised, our financial condition and ability to continue operations would be materially jeopardized.  If we are unable to meet obligations to lenders and other creditors, we may have to significantly curtail or even cease operations.  We are evaluating potential sources of working capital, including the disposition of certain assets, and we believe that certain provisions of the CARES Act passed by the U.S. Congress in March 2020 will result in additional liquidity.  We recently received proceeds of $0.7 million from a promissory note issued by one of our banks under the Paycheck Protection Program included in the CARES Act, and the NOL carryback provisions of the CARES Act are expected to result in federal refund claims of approximately $8.0 million.  Our plans also include the evaluation of strategic alternatives to enhance shareholder value.  However, there is no assurance that we will be able to execute these plans or continue to operate as a going concern.

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Additionally, even if we are able to avoid a further event of default under the credit facility, the amount of our outstanding indebtedness, which is substantial, could have an adverse effect on our operations and liquidity, including by, among other things: (i) making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions, because we may not have sufficient cash flows to make our scheduled debt payments; (ii) causing us to use a larger portion of our cash flows to fund interest and principal payments, thereby reducing the availability of cash to fund working capital, product development, capital expenditures and other business activities; (iii) making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market or industry conditions; and (iv) limiting our ability to borrow additional monies in the future to fund the activities and expenditures described above and for other general corporate purposes as and when needed, which could force us to suspend, delay or curtail business prospects, strategies or operations.

Our future capital needs may be uncertain, and we may need to raise additional funds in the future, which may not be available when needed, on acceptable terms or at all.

Our capital requirements in future periods may be uncertain and could depend on many factors, including, among others: (i) acceptance of, and demand for, our brands; (ii) the extent to which we invest in our existing brand portfolio or any new brands; (iii) the number and timing of our acquisitions and other strategic transactions; (iv) the costs of developing new brands; (v) the costs associated with our efforts to expand our business; and (vi) the costs of litigation and enforcement activities to protect and defend our trademarks.  We may need to raise additional funds to meet our capital requirements.  However, these or any other necessary funds may not be available when needed, on favorable terms or at all.  If we issue equity or convertible debt securities to raise additional funds, as we did with our refinancing of our senior secured credit facility in August 2018 and additional borrowings under our new facility in January 2019, our existing stockholders may experience dilution and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders.  If we incur additional debt to raise funds, as we did with our senior secured credit facility, we may become over-leveraged, and we may become subject to restrictive financial or operating covenants that could limit our ability to operate our business and expose us to significant risks in the event of any compliance failure.  Moreover, in light of our current level of indebtedness, which is significant, additional debt or equity capital may not be available on terms we consider advantageous or favorable to us.  In addition, we may seek equity and/or debt financing from sources that expose us to additional risks or negative effects, such as, for example, obtaining funding from related parties in transactions that create conflicts of interest between us and the related party, as we did with our arrangement of purchases by certain of our directors, officers and large stockholders of participation interests in our credit facility in December 2017 and the exchange of those participation interests into junior subordinated notes in our new credit facility in August 2018.  Further, we may incur substantial costs in pursuing future capital-raising transactions, including investment banking, legal and accounting fees, printing and distribution expenses and other costs.

If we cannot raise funds when needed, on acceptable terms or at all, we may not be able to develop or enhance our brand portfolio or marketing initiatives, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or customer requirements.  Any of these outcomes may materially harm our business, results of operations and financial condition.

Our wholesale licensing arrangements subject us to a number of risks.

We have entered into several wholesale arrangements in connection with a significant shift in our business strategy, from our historical focus on a DTR licensing model to a substantially greater focus on wholesale licensing for many of our key brands.  Although we believe our wholesale licensing arrangements may have certain benefits, these arrangements are subject to a number of risks and our beliefs could turn out to be wrong.  If any of these risks occur and we do not achieve the intended or expected benefits of our strategy shift toward wholesale arrangements, our results of operations, liquidity and financial condition could be materially adversely affected.  Moreover, we have less experience with the wholesale licensing model than the DTR licensing model and we may find it difficult to develop reliable forecasts and expectations regarding royalty revenues from these arrangements, either of which could harm our business and our operating results.

The terms of our wholesale licensing arrangements differ in certain important ways from the terms of our DTR licensing arrangements.  For instance, the minimum annual royalty obligations under our wholesale licensing arrangements are significantly smaller than the minimum annual royalty obligations in some of our DTR licensing arrangements.  Also, our new wholesale license agreements for the Cherokee brand and the Hi-Tec and Magnum brands are not subject to reducing royalty rates based on cumulative sales levels, as was our former license agreement with Target for the Cherokee brand.  These different terms could have a material impact on our performance.  For example, the consistent royalty rates of these wholesale licensing arrangements could cause our performance and cash flows to be more strongly influenced by the seasonality of the retail business and thus subject to more material fluctuations between periods, and the lower minimum royalty obligations could cause our aggregate annual royalty revenues to decline if retail sales volume for our brands decreases and we become dependent on minimum royalty obligations.  These effects on our performance could become increasingly significant in future periods, to the extent our new wholesale licensees gain traction over time with new retailers and consumer bases and the proportion of our royalty revenues from these licensees increases, or if we pursue similar wholesale arrangements in the future.

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Additionally, in wholesale licensing arrangements, we have limited ability to control various aspects of the manufacturing process, including access to raw materials, the timing of delivery of finished products, the quality of finished products and manufacturing costs.  Our wholesale licensees may not be able to produce finished products of the quality or in the quantities that are sufficient to meet retailer and consumer demand in a timely manner or at all, which could result in an inability to generate revenues from any such products and loss of confidence in our brands.  Interruptions or delays in the manufacturing process can occur at any time and for a variety of reasons, many of which are outside our control, including, among others, unforecasted spikes in demand, shortages of raw materials, labor disputes, backlogs, insufficient devotion of resources to the manufacture of products bearing our brands, or problems that may arise with manufacturing operations or facilities or our wholesale licensees’ businesses generally.  On the other hand, our wholesale licensees may produce inventory in excess of retailer and consumer demand, in which case over-supply may cause retail prices of products bearing our brands to decline.  Further, we compete with other brand owners for the time and resources of our wholesale licensees, which could curtail or limit our ability to engage new or maintain relationships with existing wholesale licensee partners on acceptable terms or at all.  Further, the unplanned loss of any of our wholesale licensees could lead to inadequate market coverage for retail sales of products bearing our brands, create negative impressions of us and our brands with retailers and consumers, and add downward pricing pressure on products bearing our brands as a result of liquidating a former wholesaler’s inventory of such products.  The occurrence of any of these risks could adversely impact our reputation, performance and financial condition.

We rely on the accuracy of our licensees’ sales reports for reporting and collecting our royalty revenues, and if these reports are untimely or incorrect, our revenues could be delayed or inaccurately reported or collected

Most of our royalty revenues are generated from retailers that manufacture and sell products bearing our brands in their stores and on their websites, and from wholesalers that manufacture and distribute products bearing our brands and sell these products to retailers.  In addition, we generate revenues from licensees that sell products that we have developed and designed.  Under our existing agreements, our licensees pay us fees based on their sales of products or, for some of our wholesale licensees, based on their manufacturing costs.  As a result, we rely on our licensees to accurately report their sales or costs in collecting our license and design fees, preparing our financial reports, projections and budgets and directing our sales and marketing efforts.  Although all of our agreements permit us to audit our licensees, if any of them understate their sales or costs, we may not collect and recognize the royalty revenues to which we are entitled on a timely basis or at all, or we may endure significant expense to obtain compliance.

We utilize various licensing and selling models in our operations, and our success is dependent on our ability to manage these different models.

In addition to the DTR licensing model, we also focus some of our key brands on a wholesale licensing strategy, and we use a product development and design model for brands owned by others.  Although we believe these various licensing and design models could have certain benefits, these models could themselves be unsuccessful and our beliefs could turn out to be wrong.  Moreover, our pursuit of these different models could divert management’s attention and other resources, including time and capital.  As a result, our future success depends in part on our ability to successfully manage these multiple licensing and design models.  If we are unable to do so, our performance, financial condition and prospects could be materially harmed.

Our business continues to depend in part on the success of our Direct to Retail licensing model.

Our DTR licensing model continues to be an important part of our operations.  We believe the DTR licensing model has become more widely accepted by many retailers worldwide, and our business plan is based in part on the success of this model with our existing retail licensees and with new retailers we may solicit to license our brands under this model in new territories and additional product categories.  However, our beliefs regarding the DTR licensing model may turn out to be wrong, and it may not achieve or sustain increased acceptance or its use by retailers could decline.  If our existing or potential future retail licensees do not perceive the DTR licensing model to be advantageous to them, which could occur for a variety of reasons, they may move away from this model and pursue alternatives, such as purchasing from wholesalers or manufacturing private label products.  In that event, this aspect of our business may prove unsuccessful and our financial condition and performance could suffer material adverse effects.

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The failure of our licensees to sell products that generate royalties to us, to pay us royalties pursuant to their license agreements with us, or to renew these agreements could negatively affect our results of operations and financial condition.

Our revenues are dependent on royalty payments made to us under our license and design services agreements.  Although some of our license agreements guarantee a minimum royalty payment to us each year, the failure of our licensees to satisfy these or the other obligations under their agreements with us, their decision to not renew their agreements with us or their inability to grow or maintain their sales of products bearing our brands or their businesses generally could cause our revenues to decline.  These events or circumstances could occur for a variety of reasons, many of which are outside our control, including business and operational risks that impact our licensees’ ability to make payments and sell products generally, such as obtaining and maintaining desirable store locations and consumer acceptance and presence; retaining key personnel, including the specific individuals who work on sales and marketing for products bearing our brands; and liquidity and capital resources risks.  Further, while we historically have been dependent on our relationships with Target and Kohl’s, the failure by any of our other key licensees or the concurrent failure by several licensees to meet their financial obligations to us or to renew their license agreements with us could materially and adversely impact our results of operations and our financial condition.

Our business may be negatively impacted by general economic conditions.

Our performance is subject to worldwide economic conditions and the corresponding impact on levels of consumer spending, which may affect our licensees’ retail sales.  It is difficult to predict future levels of consumer spending, and any such predictions are inherently uncertain.  Many factors affect the level of consumer spending in the industry in which we operate, including, among others, prevailing economic conditions; levels of employment, salaries and wage rates; energy costs; interest rates; the availability of consumer credit; tax rates; and consumer confidence in future economic conditions.  Further, our industry is heavily influenced by general economic cycles, as purchases of apparel, footwear, accessories and home products tend to decline in periods of economic uncertainty, slowdown or recession because disposable income typically declines during these periods.  As a result, the risks associated with our business are generally more acute in these periods.  For instance, general uncertainty in U.S. economic, political, regulatory, and market conditions has increased following the results of the 2016 U.S. presidential election due to the unpredictability of the policies and direction of the current administration, and these uncertainties may result in decreased confidence in the U.S. or global economy and decreased levels of consumer spending.  In addition to decreased consumer spending generally, periods of uncertainty, slowdown or recession may be accompanied by decreased demand for, or additional downward pricing pressure on, the products carrying our brands.  Accordingly, any prolonged economic slowdown, a lengthy or severe recession or any other negative trend in the U.S. or global economy would likely have a material adverse effect on our results of operations, financial condition and business prospects.

We are subject to additional risks associated with the international scope of our operations.

Many of our licensees are located outside the United States, and we aim to expand our international revenues. In addition, we have subsidiaries and employees in Amsterdam.

We face numerous risks in doing business outside the United States, including, among others: (i) the ongoing worldwide impacts of COVID-19; (ii) our general lack of experience operating foreign subsidiaries; (iii) unusual, unfamiliar or burdensome foreign laws or regulatory requirements, including tax, labor, contract, intellectual property protection and other laws, and unexpected changes to these laws or requirements; (iv) difficulties complying with the laws of multiple jurisdictions; (v) uncertainties in some jurisdictions related to developing legal and regulatory systems and standards for economic and business activities, property ownership and the application of contract rights; (vi) tariffs, trade protection measures, import or export licensing requirements, trade embargos, and other trade barriers, about which there is increased uncertainty following the results of the 2016 U.S. presidential election and the trade policies of the current administration, including withdrawal from the Trans-Pacific Partnership and proposed revision to the North American Free Trade Agreement; (vii) difficulties attracting and retaining qualified personnel to conduct our foreign operations or manage our foreign licensees and franchisees; (viii) challenges relating to labor and employment matters, including differing employment practices and requirements regarding health, safety and other working conditions in foreign jurisdictions; (ix) competition from foreign companies; (x) longer accounts receivable collection cycles and difficulties collecting accounts receivable from international licensees and franchisees; (xi) less effective and less predictable protection and enforcement of our intellectual property rights in some jurisdictions; (xii) changes in the political or economic condition of a specific country or region, particularly in emerging markets; (xiii) potentially adverse tax consequences from the several U.S. and foreign jurisdictions in which we are subject to taxation; and (xiv) cultural differences in the conduct of business.  Any one or more of these factors could cause our international revenues to decline or could cause us to fail to execute on our business strategy involving international expansion.  In addition, our business practices in international markets are subject to the requirements of the FCPA and applicable foreign anti-bribery laws, any violation of which could subject us to significant fines, criminal sanctions and other penalties.

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Our international royalty revenues are typically denominated in U.S. dollars.  However, because our international licensees and franchisees operate in other currencies, fluctuations in the value of the U.S. dollar relative to these foreign currencies have an impact on our royalty revenues, which could materially affect our results of operations and cash flows.  The primary foreign currencies in which our licensees operate are the Euro, the Great British Pound, the Mexican Peso, the South African Rand, the Japanese Yen, the Chinese Yuan, the Indian Rupee and the Canadian Dollar.  We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

Some of our licensees have contracts with government entities that are subject to unique risks.

Some of our licensees for our Hi-Tec family of footwear brands have, and expect to maintain, long-term contracts with various foreign government entities.  In addition to normal business risks, including the other risks discussed in these risk factors, our licensees’ contracts with government entities are often subject to unique risks, some of which are beyond our or their control.  For instance, long-term government contracts and related orders are subject to cancellation if adequate appropriations for subsequent performance periods are not made.  As a result, the termination of funding for a government program supporting any of our licensees’ government contracts could result in a loss of anticipated future revenues from that contract, which could have a negative impact on our operations because our royalty revenues from the licensee attributable to the government contract would also cease.  In periods of global or local political tension or unrest or decreased spending, these risks could be amplified.  In addition, government entities are often able to modify, curtail or terminate contracts at their convenience and without prior notice and would only be required to pay for work completed and commitments made at the time of the termination.  Any such modification, curtailment or termination of significant government contracts products bearing our Hi-Tec family of footwear brands could have a material adverse effect on our licensees’ sales of these products, which in turn, could have a material adverse effect on our results of operations and financial condition.

Our business and the success of our products could be harmed if we are unable to maintain the strength of our brands.

Our success is dependent on the strength of our brands.  If we are unable to timely and appropriately respond to changes to consumer preferences and demands, which are subject to significant fluctuations, the strength of our brands may be impaired.  Even if we do react timely and appropriately to these changes, consumers may still consider one or more of our brands to be outdated or associated with styles that are no longer popular.  In the past, many companies in our industry have experienced periods of rapid growth in sales and revenues followed by periods of declining sales and losses.  Our business may be similarly affected.

We are dependent on our intellectual property rights, especially our trademarks, and we may not be able to successfully protect our rights, or we may become involved in costly legal proceedings relating to these rights or the intellectual property rights of third parties.

Our trademarks are vital to our business.  We hold various trademarks for our brand names, which are registered with the United States Patent and Trademark Office.  We also hold trademarks or trademark applications for our brand names with similar government agencies in a number of other countries, although the laws of many countries may not protect our intellectual property rights to the same extent as the laws of the United States and, as a result, adequate protection in these jurisdictions may be unavailable or limited in spite of our efforts to safeguard these rights.  In addition, our efforts to establish and protect our trademarks and other proprietary rights might not prevent imitation of our brands or products bearing our brands, other infringement of our rights, challenges to our intellectual property ownership, the loss of license or franchise revenues or other negative effects.  Further, any insufficiency in the protection of our trademarks and other intellectual property rights could reduce the value of our brands, which could limit the ability of our licensees and franchisees to effectively compete for market share.  If any of these events were to occur, our business, prospects, financial condition, results of operations and liquidity could be materially harmed.

In addition, in the future, we may decide to assert infringement claims against third parties, and one or more parties may assert infringement claims against us.  Any resulting litigation could result in significant expense and divert the efforts of our management and other personnel, whether or not such litigation is determined in our favor.  Further, any adverse ruling in any such matter could reduce the value of our intellectual property assets and our licenses, which could result in limitations on our ability to market and license our brands and have a material adverse effect on our business, financial condition and results of operations.

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We may become involved in other litigation or government or administrative proceedings that may materially affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including commercial, employment, class action and other litigation and claims.  We may also be the subject of government and other regulatory investigations, audits and proceedings, including in connection with any claim of our violation of the laws, rules and regulations applicable to our business, such as federal, state and foreign franchise laws, anti-bribery laws and work safety and labor laws, among others.  These matters can be time-consuming, divert management’s attention and resources and result in significant legal and other expenses.  Furthermore, because litigation and administrative or government proceedings are inherently unpredictable, any of these proceedings could result in unfavorable outcomes, which could include monetary damages or fines and other sanctions.  Any such result could have a material adverse effect on our business, results of operations or financial condition.

We are dependent on our key management and other personnel.

Our success is highly dependent on the continued services of our key executives, including of Henry Stupp, our Chief Executive Officer and a member of our board of directors.  We have a relatively small number of employees, and the leadership and experience of Mr. Stupp and our other executives and key employees are important to the successful implementation of our business and marketing strategies.  We do not carry key person life insurance covering any of our executives or other employees.  The loss of the services of Mr. Stupp or our other executives or key employees could have a material adverse effect on our business prospects, financial condition, results of operations and liquidity.

We may encounter risks and difficulties in connection with acquisitions or other strategic transactions, and we may not realize the expected benefits of these transactions.

We regularly evaluate opportunities to acquire or represent new brands, and we have completed several such acquisitions during the past several years.  We expect to continue to consider opportunities to acquire or make investments in other brands or to engage in other strategic transactions that could enhance our portfolio or enable us to expand to new markets.  Our experience integrating acquired assets and businesses is limited, and we may not be successful in realizing the expected benefits of any acquisition we may pursue.  Our future success depends, in part, on our ability to manage an expanding portfolio of brands, which could involve significantly increased costs and pose substantial challenges for management.

Acquisitions and other strategic transactions can involve numerous risks and difficulties, including, among others: (i) challenges assimilating new brands or other assets into our business and our brand licensing model; (ii) problems maintaining and enforcing standards, procedures, controls, policies and information systems; (iii) difficulties and costs in combining the operations and personnel of an acquired business with our operations and personnel, including any failure to retain key employees, customers, vendors, manufacturers or other service providers or partners of an acquired business, any failure to convert and integrate acquired assets into our brand licensing business model, and challenges forecasting revenues and expenses for newly acquired brands or businesses; (iv) significant or unanticipated costs associated with an acquisition, including incurrence of contingent liabilities, amortization charges associated with acquired assets, write-offs of goodwill or intangible assets, capital expenditures and accounting, legal and other transaction expenses; (v) any inability to realize the intended or expected synergies or other benefits of an acquisition or transaction, particularly if our assumptions about sales, revenues, operating expenses and costs of acquired assets or businesses turn out to be wrong; (vi) diversion of management’s attention from our existing brand portfolio; (vii) adverse effects on existing business relationships; (viii) risks associated with foreign acquisitions or otherwise entering new geographic or customer markets, including regional differences in consumer preferences, branding standards and the general conduct of business, less effective and less predictable protection and enforcement of intellectual property rights in some foreign jurisdictions and the other risks related to doing business outside the United States discussed elsewhere in these risk factors; and (ix) risks associated with new types of business arrangements in which we have no or limited prior experience.  Accordingly, our recent acquisitions and any future strategic transactions we pursue may not result in the anticipated benefits and could have a material adverse effect on our business, results of operations, financial condition and prospects.

In addition, future acquisitions may require us to obtain additional equity or debt financing, which may not be available when needed, on favorable terms or at all.  If we seek to finance future acquisitions or other strategic transactions by issuing equity or convertible debt securities or by incurring other types of indebtedness, we may experience the risks associated with these transactions that are described elsewhere in these risk factors.

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Our strategic and marketing initiatives may not be successful.

We have invested significant funds and management time in furtherance of our global strategic and marketing initiatives, which are designed to strengthen our brands, assist our licensees in generating increased sales of products bearing our brands and build value for our stockholders over the long term.  We expect to continue and, in some cases, expand these initiatives in future periods.  While we are hopeful that our efforts in executing these initiatives will grow our business and build stockholder value, we may not be successful in doing so and these initiatives may not result in the intended or expected benefits.  Any failure by us to execute our strategic initiatives, or the failure of these initiatives to cause our revenues to grow, could have a materially adverse impact on our operating results and financial performance.

Significant disruptions of information technology systems, breaches of data security, or unauthorized disclosures of sensitive data or personally identifiable information could adversely affect our business and could subject us to liability or reputational damage.

Our business is increasingly dependent on critical, complex, and interdependent information technology (“IT”) systems, including Internet-based systems, some of which are managed or hosted by third parties, to support business processes as well as internal and external communications. The size and complexity of our IT systems make us potentially vulnerable to IT system breakdowns, malicious intrusion, and computer viruses, which may result in the impairment of our ability to operate our business effectively.

In addition, our systems and the systems of our third-party providers and collaborators are potentially vulnerable to data security breaches which may expose sensitive data to unauthorized persons or to the public. Such data security breaches could lead to the loss of confidential information, trade secrets or other intellectual property, or could lead to the public exposure of personal information (including personally identifiable information) of our employees, customers, business partners, and others. In addition, the increased use of social media by our employees and contractors could result in inadvertent disclosure of sensitive data or personal information, including but not limited to, confidential information, trade secrets and other intellectual property.

Any such disruption or security breach, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. Federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful.

In addition, the European Parliament and the Council of the European Union adopted a comprehensive general data privacy regulation (“GDPR”) in 2016 to replace the current European Union Data Protection Directive and related country-specific legislation. The GDPR took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is wide-ranging in scope, will impose several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater.

Changes in our effective tax rates or tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our financial results.

We are subject to income tax in the United States, California and certain other state jurisdictions.  In addition, we are also subject to taxation in several foreign jurisdictions, which may have unusual, unfamiliar or particularly burdensome tax laws.  Our global tax structure could be negatively impacted by various factors, including changes in the tax rates in jurisdictions in which we earn income or changes in tax laws or interpretations of tax laws in the jurisdictions in which we operate, any of which could impact our future effective income tax rates.  Our effective tax rates could also be affected by changes in the valuation of our deferred tax assets and liabilities.  Any increase in our effective tax rate could adversely affect our reported financial results or the way in which we conduct our business.

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Significant judgment is required in determining our provision for income taxes, as there are many transactions and calculations in the ordinary course of our business that involve uncertain tax determinations.  If we are audited by tax authorities, these authorities could disagree with our judgments about our tax provisions.  Although we believe our tax estimates are reasonable, the final determination of tax authorities in the event of such an audit could be materially different from our historical income tax provisions and accruals.  Any adverse result in such an audit or related litigation could materially negatively affect our income tax provision and results of operations in the period or periods for which the determination is made.  Moreover, any such audits or litigation, regardless of its outcome, could distract management and be expensive to defend, which could negatively affect our results of operations, liquidity and financial condition.

Compliance with securities laws, regulations and financial reporting standards could increase our costs and pose challenges for our management team, and any compliance failures could materially harm our business.

Existing laws, regulations, listing requirements and other standards relating to corporate governance and public disclosure significantly increase the costs and risks associated with operating as a publicly traded company in the United States.  Our management team devotes significant time and financial resources to try to comply with existing and evolving standards for public companies.  Notwithstanding our efforts, it is possible that financial and other public reports we are obligated to file may not be considered timely, accurate or complete, in which case we may be forced to devote additional time and capital resources to further improve our public reporting systems and processes.  In addition, any noncompliance with public reporting requirements could subject us to sanctions or investigation by regulatory authorities, such as the SEC, which could involve fines or other penalties, and could also adversely affect our financial results, result in a loss of investor confidence in the reliability of our financial information and other public disclosures and jeopardize the listing of our common stock on the Nasdaq Capital Market, as described elsewhere in these risk factors.  If any of these risks were to occur, our business and reputation could be materially adversely affected, and the market price of our common stock could materially decline.

Further, the SEC has passed, promulgated or proposed new rules on a variety of subjects, including, for example, preparing and filing financial statements, establishing and disclosing clawback and hedging policies and disclosing additional executive compensation information.  The existence of new and proposed laws and regulations relating to financial reporting or other disclosure obligations or that impose additional or more stringent compliance requirements could create uncertainties for public companies, make it more difficult to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit and compensation committees, and generate significantly increased costs if we are required to add additional accounting or other staff, engage consultants or change our internal practices in order to comply with the new requirements.  The occurrence of any of these outcomes could significantly harm our business, financial condition and performance.

Risks Related to Our Common Stock

The trading price of our common stock may be volatile, and shares of our common stock are relatively illiquid.

The trading price of our common stock has been, and is likely to continue to be, subject to material fluctuations.  These fluctuations can be caused by various factors, including, among others: (i) the ongoing impacts of COVID-19; (ii) our financial results and financial condition, including our liquidity; (iii) our ability to maintain compliance with our obligations, including our credit facility; (iv) the successful completion of any acquisition or strategic transaction, including the integration of the acquired assets or businesses and realization of the intended or expected synergies and other benefits; (v) any announcements by us, our retail partners or our competitors regarding or affecting the retail environment, the reputation of our brands, our existing or any new license agreements and brand representations, or acquisitions, strategic alliances or other transactions; (vi) recruitment or departure of key personnel; (vii) changes in our financial guidance, if any, expectations for our financial results in the investment community, or the recommendations of any securities analysts that elect to follow our common stock; (viii) any material weaknesses in our internal control over financial reporting or any failures to comply with our public reporting requirements; (ix) market conditions in the retail industry and the economy as a whole; and (x) the other risks described in these risk factors.

Further, as a result of our relatively small public float, our common stock may be less liquid, and the trading price for our common stock may be more affected by relatively small volumes of trading, than is the case for the common stock of companies with broader public ownership.

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We are not currently in compliance with certain Nasdaq listing requirements. If we are not able to regain compliance with these requirements, our common stock may be delisted from trading on the Nasdaq Stock Market, which could have a material adverse effect on us and our stockholders.

On June 5, 2018, we received a deficiency letter from the Nasdaq Stock Market (“Nasdaq”) notifying us that, because the bid price of our common stock closed below $1.00 per share for 30 consecutive business days, we were no longer in compliance with Nasdaq’s minimum bid price rule, which is a requirement for continued listing on the Nasdaq Global Market. Nasdaq’s rules require that we would need to regain compliance with this rule by December 3, 2018.  On December 4, 2018, however, we received a letter from Nasdaq notifying us that our transfer to the Nasdaq Capital Market was approved and that we had been granted an additional 180-day extension period to regain compliance with the minimum bid price rule.  This 180-day period expired on June 3, 2019.  We received another letter from Nasdaq on June 4, 2019 indicating their intent to delist our securities from the Nasdaq Capital Market on June 13, 2019 because we had not achieved the required minimum bid price unless we requested an appeal of this determination.  We filed our appeal on June 6, 2019 and met with the Nasdaq Hearings Panel in August 2019. The Nasdaq Hearings Panel accepted our compliance plan, which resulted in the September 2019 one-for-three reverse stock split described in Note 1 to our condensed consolidated financial statements included in this report.  On October 30, 2019, The Nasdaq Hearings Panel granted our continued listing on Nasdaq subject to further review after December 2, 2019.  On December 11, 2019, we received a letter from Nasdaq informing us that the Nasdaq Hearings Panel determined that we had regained compliance with the minimum bid price rule.  As a result, the Nasdaq Hearings Panel determined that we were in compliance with all applicable listing standards required for listing on The Nasdaq Capital Market.  However, based on our recent bid price history, the Nasdaq Hearings Panel imposed a Hearings Panel monitor pursuant to Nasdaq Listing Rule 5815(d)(4)(A), through December 2, 2020.  On April 3, 2020, we received notice from the Nasdaq indicating that, based upon the Company’s non-compliance with the minimum closing bid price requirement of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Rule”), for the prior 30-consecutive business day period, the Company’s securities were subject to suspension and delisting unless the Company timely requests a hearing before the Nasdaq Hearings Panel. We were not provided the 180-day compliance period typically granted to issuers under Nasdaq Listing Rule 5810(c)(3)(A) because we were already under the jurisdiction of the Nasdaq Hearings Panel.  We filed our appeal on April 10, 2020, which stays any further action by Nasdaq at least pending the ultimate conclusion of the hearing process. On April 16, 2020, Nasdaq announced it was providing temporary relief from the Rule as a result of the COVID-19 pandemic and related extraordinary market conditions.  Compliance requirements will resume on July 1, 2020.  If we have not regained compliance with the Rule by the date that compliance requirements resume, the hearings process will resume.  At the hearing, if it becomes necessary, we would expect to present our plan to regain compliance with the Rule and request an extension within which to do so. The Nasdaq Hearings Panel has the discretion to grant us an extension through no later than September 30, 2020 plus the incremental days of the temporary relief period; however, there can be no assurance that the Nasdaq Hearings Panel will grant our request or that we will be able to evidence compliance with the applicable listing criteria within the period of time that may be provided by the Nasdaq Hearing Panel.

If we fail to continue to comply with the minimum bid price rule or with any other Nasdaq requirement in the future, our common stock could be delisted from trading on Nasdaq.  Such an event could cause our common stock to be classified as a “penny stock,” among other potentially detrimental consequences, and could severely limit the liquidity of our common stock and materially adversely affect the price of our common stock.

We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our common stock to decline in value.

From time to time, we may provide forward-looking financial guidance regarding our performance.  Any such guidance would be based on our then-current views, expectations and assumptions and could be materially different than our actual results.  Additionally, securities analysts or others in the investment community may publish expectations for our financial results, which also could be materially different than our actual results.  These differences could occur for a variety of reasons, such as, for instance, changes to the assumptions used to forecast or calculate the financial guidance or expectations, or the occurrence of risks related to our performance and our business, including those discussed in these risk factors, among others.  Any failure to meet any financial guidance or expectations regarding our future performance could harm our reputation and cause our stock price to decline.

We may not pay dividends regularly or at all in the future.

Determinations regarding the payment of dividends are subject to the discretion of our board of directors.  As a result, we may not pay any dividends in future periods, whether or not we generate sufficient cash to do so.  In addition, pursuant to our credit facility, subject to limited exceptions, we are prohibited from paying dividends or making other distributions to our stockholders without our lender’s consent.  As a result, any return on an investment in our common stock may be limited to an appreciation in the value of our common stock.

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Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

The sale by our stockholders of substantial amounts of our common stock in the public market, or the perception that such sales could occur upon the expiration of any statutory holding period, such as under Rule 144 under the Securities Act, upon expiration of any lock-up periods applicable to outstanding shares, or upon our issuance of new shares as a result of the exercise of outstanding options or warrants or the vesting of restricted stock units, could cause the market price of our common stock to fall.  The availability for sale of a substantial number of shares of our common stock, whether or not sales have occurred or are occurring, also could make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future when needed, on acceptable terms or at all.

Our certificate of incorporation allows our board of directors to issue up to 1,000,000 shares of “blank check” preferred stock.

Our certificate of incorporation allows our board of directors to issue up to 1,000,000 shares of “blank check” preferred stock without any action by our stockholders.  Subject to the restrictions under our credit facility, such shares of preferred stock may be issued on terms determined by our board of directors in its discretion, and may have rights, preferences and privileges superior to those of our common stock.  For instance, such shares of preferred stock could have liquidation preferences that are senior to the liquidation rights applicable to our common stock, could have superior voting or conversion rights, which could adversely affect the voting power of the holders of our common stock, or could have other terms that negatively impact the voting control or other rights of our common stockholders.  Additionally, the ownership interest of holders of our common stock would be diluted following the issuance of any shares of our preferred stock. Further, the preferred stock could be utilized, under certain circumstances, as a method for discouraging, delaying or preventing a change in control of our Company, even at a time or under circumstances when you or other stockholders may prefer such a change in control.

A small number of our stockholders beneficially own a significant portion of our common stock and therefore are able to exert significant influence over our corporate decisions, including the election of directors and a change of control.  The interests of these stockholders may differ from yours.

A small number of stockholders beneficially own a significant portion of our common stock.  As a result, these parties may be able to influence or control matters requiring approval by our stockholders, including the election of directors and mergers, acquisitions or other extraordinary transactions.  These parties may have interests that differ from ours or yours, and they may vote in ways with which you disagree and that may be adverse to your interests.  This concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of our Company, which could deprive our stockholders of an opportunity to receive a premium for their shares of our common stock as part of a sale of our Company.  Conversely, this concentration of ownership may facilitate a change of control at a time or under circumstances when you and other stockholders may prefer not to sell.  Further, this concentration of ownership could adversely affect the prevailing market price for our common stock.

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Item 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

Item 2.    PROPERTIES

We lease an 11,399 square foot office facility in Sherman Oaks, California, which serves as our corporate headquarters.  The lease for this facility will expire on October 31, 2024, subject to our option to renew the lease for an additional five years thereafter.

Item 3.    LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of our business.  The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that could harm our business.  We are not currently aware of any such legal proceedings or claims to which we are a party or to which our property is subject that we believe will have, individually or in the aggregate, a material effect on our business, financial condition or results of operations.

Item 4.    MINE SAFETY DISCLOSURES

Not applicable.

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PART II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Dividends and Holders

Our common stock trades on the Nasdaq Capital Market under the trading symbol “APEX”.  There were no dividends declared or paid during Fiscal 2020 or Fiscal 2019.

 

As of April 13, 2020, the approximate number of holders of record of our common stock was 38.  This figure does not include an indeterminable number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies.

From time to time, our board of directors may, in its discretion, declare cash dividends depending on our financial condition, results of operations, cash flow, capital requirements, compliance with our senior secured credit facility and other factors deemed relevant by our board of directors. See the discussion under “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis” and Note 7 to the consolidated financial statements included in Item 8, “Financial Statements” for information about the restrictions on dividends contained in our credit facility.

 

Item 6.    SELECTED FINANCIAL DATA

The following financial information has been derived from our consolidated financial statements.  Our consolidated financial statements for Fiscal 2020 and Fiscal 2019 and for each of the two years ended February 1, 2020 are included in this Annual Report and have been audited by our independent registered public accounting firm.  You should read this information together with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Consolidated Financial Statements”.

 

 

 

Year Ended

 

(In thousands, except per share data)

 

February 1,

2020 (1)

 

 

February 2,

2019 (1)

 

 

February 3,

2018 (1)

 

 

January 28,

2017 (1)

 

 

January 30,

2016

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

21,041

 

 

$

 

24,444

 

 

$

 

29,365

 

 

$

 

34,022

 

 

$

 

34,654

 

Selling, general and administrative expenses

 

 

 

13,255

 

 

 

 

14,638

 

 

 

 

25,446

 

 

 

 

19,106

 

 

 

 

16,553

 

Stock-based compensation and stock warrant charges

 

 

 

1,032

 

 

 

 

890

 

 

 

 

3,789

 

 

 

 

2,380

 

 

 

 

2,222

 

Business acquisition and integration costs

 

 

 

284

 

 

 

 

307

 

 

 

 

7,537

 

 

 

 

11,498

 

 

 

 

1,234

 

Restructuring charges

 

 

 

1,134

 

 

 

 

5,755

 

 

 

 

2,080

 

 

 

 

3,782

 

 

 

 

 

Intangible asset and goodwill impairment charge

 

 

 

9,100

 

 

 

 

 

 

 

 

35,500

 

 

 

 

 

 

 

 

 

Gain on sale of assets

 

 

 

 

 

 

 

(479

)

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

1,167

 

 

 

 

1,478

 

 

 

 

1,408

 

 

 

 

1,483

 

 

 

 

1,329

 

Operating (loss) income

 

 

 

(4,931

)

 

 

 

1,855

 

 

 

 

(46,395

)

 

 

 

(4,227

)

 

 

 

13,316

 

(Loss) income before income taxes

 

 

 

(13,832

)

 

 

 

(9,638

)

 

 

 

(52,831

)

 

 

 

(5,464

)

 

 

 

12,791

 

Net (loss) income

 

 

 

(11,500

)

 

 

 

(11,539

)

 

 

 

(55,861

)

 

 

 

(8,722

)

 

 

 

8,433

 

Basic (loss) earnings per share

 

 

 

(2.12

)

 

 

 

(2.45

)

 

 

 

(12.48

)

 

 

 

(2.79

)

 

 

 

2.91

 

Diluted (loss) earnings per share

 

 

 

(2.12

)

 

 

 

(2.45

)

 

 

 

(12.48

)

 

 

 

(2.79

)

 

 

 

2.85

 

Cash dividends declared per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

February 1,

2020

 

 

February 2,

2019

 

 

February 3,

2018

 

 

January 28,

2017

 

 

January 30

2016

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

 

(58,118

)

 

$

 

(917

)

 

$

 

(48,200

)

 

$

 

(6,979

)

 

$

 

3,010

 

Total assets

 

 

 

82,922

 

 

 

 

93,111

 

 

 

 

101,729

 

 

 

 

153,081

 

 

 

 

70,548

 

Long-term debt, including current portion

 

 

 

56,044

 

 

 

 

54,454

 

 

 

 

46,105

 

 

 

 

46,732

 

 

 

 

23,524

 

Stockholders’ equity

 

 

 

5,347

 

 

 

 

15,122

 

 

 

 

24,115

 

 

 

 

72,318

 

 

 

 

42,071

 

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Year Ended

 

(In thousands, except percentages)

 

February 1,

2020 (1)

 

 

February 2,

2019 (1)

 

 

February 3,

2018 (1)

 

 

January 28,

2017 (1)

 

 

January 30

2016

 

Non-GAAP and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (2)

 

$

 

7,786

 

 

$

 

9,806

 

 

$

 

3,919

 

 

$

 

14,916

 

 

$

 

18,101

 

Selling, general and administrative expenses ratio (3)

 

 

 

63.0

%

 

 

 

59.9

%

 

 

 

86.7

%

 

 

 

56.2

%

 

 

 

47.8

%

Return on average stockholders’ equity (4)

 

 

 

(112.4

)%

 

 

 

(64.1

)%

 

 

 

(115.9

)%

 

 

 

(15.2

)%

 

 

 

23.5

%

 

(1)

Fiscal 2020, Fiscal 2019, Fiscal 2018 and Fiscal 2017 include the operations of Hi-Tec since its acquisition on December 7, 2016. 

(2)

Adjusted EBITDA is defined as net income before (i) interest expense, (ii) other expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) gain on sale of assets, (vi) intangible asset impairment charge, (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 other 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, 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 operations as reported in our consolidated statement of operations to Adjusted EBITDA is as follows:

 

 

 

Year Ended

 

(In thousands)

 

February 1,

2020

 

 

February 2,

2019

 

 

February 3,

2018

 

 

January 28,

2017

 

 

January 30

2016

 

Net (loss) income

 

$

 

(11,500

)

 

$

 

(11,539

)

 

$

 

(55,861

)

 

$

 

(8,722

)

 

$

 

8,433

 

Provision for income taxes

 

 

 

(2,332

)

 

 

 

1,901

 

 

 

 

3,030

 

 

 

 

3,258

 

 

 

 

4,358

 

Interest expense

 

 

 

8,809

 

 

 

 

8,220

 

 

 

 

6,500

 

 

 

 

1,661

 

 

 

 

711

 

Other expense (income)

 

 

 

92

 

 

 

 

3,273

 

 

 

 

(64

)

 

 

 

(424

)

 

 

 

(186

)

Depreciation and amortization

 

 

 

1,167

 

 

 

 

1,478

 

 

 

 

1,408

 

 

 

 

1,483

 

 

 

 

1,329

 

Gain on sale of assets

 

 

 

 

 

 

 

(479

)

 

 

 

 

 

 

 

 

 

 

 

 

Intangible asset and goodwill impairment loss

 

 

 

9,100

 

 

 

 

 

 

 

 

35,500

 

 

 

 

 

 

 

 

 

Restructuring charges

 

 

 

1,134

 

 

 

 

5,755

 

 

 

 

2,080

 

 

 

 

3,782

 

 

 

 

 

Business acquisition and integration costs

 

 

 

284

 

 

 

 

307

 

 

 

 

7,537

 

 

 

 

11,498

 

 

 

 

1,234

 

Stock-based compensation and stock warrant charges

 

 

 

1,032

 

 

 

 

890

 

 

 

 

3,789

 

 

 

 

2,380

 

 

 

 

2,222

 

Adjusted EBITDA

 

$

 

7,786

 

 

$

 

9,806

 

 

$

 

3,919

 

 

$

 

14,916

 

 

$

 

18,101

 

 

(3)

Computed based on selling, general and administrative expenses divided by revenues.

(4)

Computed based on net (loss) income from continuing operations divided by the average of beginning and ending stockholders’ equity.

 

 

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Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS

As used in this discussion and analysis, “Apex Global Brands”, the “Company”, “we”, “us” and “our” refer to Apex Global Brands Inc. and its consolidated subsidiaries, unless the context indicates or requires otherwise.  Additionally, “Fiscal 2020” refers to our fiscal year ending February 1, 2020; “Fiscal 2019” refers to our fiscal year ending February 2, 2019  We have a 52‑ or 53‑week fiscal year ending on the Saturday nearest to January 31.  This results in a 53‑week fiscal year approximately every four or five years.  Fiscal 2018 was a 53-week fiscal year, while each of Fiscal 2020, Fiscal 2019 were 52‑week fiscal years.  This discussion and analysis should be read together with the consolidated financial statements and related notes included in this annual report on Form 10‑K.

Forward-Looking Statements

In addition to historical information, this discussion and analysis contains “forward‑looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are statements other than historical facts that relate to future events or circumstances or our future performance.  The words “anticipates”, “believes”, “estimates”, “plans”, “expects”, “objectives”, “goals”, “aims”, “hopes”, “may”, “might”, “will”, “likely”, “should” and similar words or expressions are intended to identify forward‑looking statements, but the absence of these words does not mean that a statement is not forward-looking.  Forward‑looking statements in this discussion and analysis include statements about, among other things, our future financial and operating performance, our future liquidity and capital resources, our business and growth strategies and anticipated trends in our business and our industry.  Forward-looking statements are based on our current views, expectations and assumptions and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or stock prices to be materially different from any future results, performance, achievements or stock prices expressed or implied by the forward‑looking statements.  Such risks, uncertainties and other factors include, among others, those described in Item 1A, “Risk Factors” in this Annual Report.  In addition, we operate in a competitive and rapidly evolving industry in which new risks emerge from time to time, and it is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations.  As a result of these and other potential risks and uncertainties, forward-looking statements should not be relied on or viewed as predictions of future events because some or all of them may turn out to be wrong.  Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation to update any of the forward‑looking statements we make in this discussion and analysis to reflect future events or developments or changes in our expectations or for any other reason.

Overview

Apex Global Brands is a global marketer and manager of a portfolio of fashion and lifestyle brands that we own, brands that we create, and brands that we develop for others.  Company-owned brands, which are licensed in multiple consumer product categories and retail channels around the world, include Cherokee, Hi-Tec, Magnum, 50 Peaks, Interceptor, Hawk Signature, Tony Hawk, Everyday California, Carole Little, Sideout and others.  As part of our business strategy, we also regularly evaluate other brands and trademarks for acquisition into our portfolio.  We believe the strength of our brand portfolio and platform of design, product development and marketing capabilities has made us one of the leading global licensors of style-focused lifestyle brands for apparel, footwear, accessories and home products.

We have licensing relationships with recognizable retail partners in their global locations to provide them with the rights to design, manufacture and sell products bearing our brands.  We refer to this strategy as our “Direct to Retail” or “DTR” licensing model.  We also have license agreements with manufacturers and distributors for the manufacture and sale of products bearing our brands, which we refer to as “wholesale” licensing.  In addition, we have relationships with other retailers that sell products we have developed and designed.  As a brand marketer and manager, we do not directly sell product ourselves.  Rather, we earn royalties when our licensees sell licensed products bearing the trademarks that we own or that we have designed and developed.

For certain of our key legacy brands, including Cherokee, Hawk Signature and Tony Hawk, we have shifted our strategy for U.S. sales from DTR licensing to wholesale licensing.  In addition, we are primarily pursuing a wholesale licensing strategy for global sales of our Hi-Tec, Magnum, Interceptor and 50 Peaks brands.  We believe wholesale licensing arrangements help to diversify our sources of revenue and licensee or other partner relationships, and may provide additional avenues to obtain brand recognition and grow our Company.

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We derive revenues primarily from licensing our trademarks to retailers and wholesalers all over the world, and we are continually pursuing relationships with new retailers, wholesalers and others in order to expand the reach of our existing brands into new geographic and customer markets and new types of stores and other selling mediums.  As of February 1, 2020, we had 42 continuing license agreements in approximately 144 countries.  These arrangements include relationships with Walmart, Soriana, Comercial Mexicana, TJ Maxx, Tottus, Arvind, Reliance Retail, Tharanco, Martes Sports, Hi-Tec Europe, Hi-Tec South Africa, JD Sports, Black’s and Lidl.  As of February 1, 2020, we had contractual rights to receive over $55.0 million of forward‑facing minimum royalty revenues, excluding any revenues that may be guaranteed in connection with contract renewals.  

The terms of our royalty arrangements vary for each of our licensees.  We receive quarterly royalty statements and periodic sales and purchasing information from our licensees and franchisees.  However, our licensees and franchisees are generally not required to provide, and typically do not provide, information that would enable us to determine the specific reasons for period‑to‑period fluctuations in sales or purchases.  As a result, we do not typically have sufficient information to determine the effects on our operations of changes in price, volume or mix of products sold.

Recent Developments

COVID-19 Global Pandemic

Our business has been materially adversely affected by the effects of the global pandemic of COVID-19 and the related protective public health measures that began in earnest in March 2020. Our business depends upon purchases and sales of our branded products by our licensees, and the prevalence of shelter-in-place orders in the regions where our products are sold, together with the closure of many of our licensees’ or their customers’ stores, have resulted in significant declines in our royalties, which will likely continue for some period of time, and various of our licensees have requested extensions of time for them to pay their royalties to us.  Our licensees manufacture and distribute goods that carry our brands, and the temporary closures of the facilities used by our licensees to perform these functions could cause further or extended declines in sales and royalties.

In response to the decline in revenues, we have implemented cost savings measures, including pay reductions, employee furloughs and other measures.  We can provide no assurance that these cost savings measures will not cause our business operations and results to suffer.  Our current forecasts indicate that we will generally be able to maintain our profit margins as a result of these efforts, even though the amount of anticipated profit is lower.  It is not possible to predict with certainty the impact that the shelter-in-place orders and other business restrictions will have on our licensees and, therefore, our royalty revenues in the future.  The ultimate impact will be greater the longer these restrictions remain in place.

The decline and anticipated decline in our revenues also exposes us to the risk that we will remain non-compliant with the covenants in our credit facility, which creates risk that our lender will exercise its rights to accelerate the amounts payable and foreclose on our assets.  For further information, refer to the credit facilities section below under the caption, Liquidity and Capital Resources.

We have not been designated as an essential business, and therefore our offices in Sherman Oaks California and Amsterdam in the Netherlands have been closed.  However, the nature of the work performed by our employees does not require us to assemble in our facilities, and we have successfully implemented work-from-home strategies using technologies that we generally had in place before the onset of the pandemic. These strategies may result in inefficiencies and lost opportunities, but they are not expected to materially affect our internal control over financial reporting.  In previous years, we have successfully implemented cloud-based accounting systems that provide for remote access.  We are also unable to travel to meetings with our licensees or their customers, which historically has been an important component of our business strategy.  Our use of video conferencing technologies has been expanded and has proven effective, yet business opportunities may be diminished or lost due to the lack of in-person contact.

In March 2020, the federal government passed the CARES Act, which has several provisions that are expected to be beneficial to our Company.  On April 20, 2020, we received a $0.7 million loan under the Paycheck Protection Program that is being implemented by the Small Business Administration and multiple commercial banks across the country.  We anticipate that a substantial portion of this loan will be forgiven based on the amount we incur for payroll, rent and utilities in the eight weeks following the grant date of the loan.  The portion of the loan that is not forgiven will bear interest at 1.0% per annum and will mature two years from the date of funding.

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The CARES Act also enacted changes in the federal income tax loss carryback rules that we expect will benefit us.  Net operating losses that we incurred in Fiscal 2018, Fiscal 2019 and Fiscal 2020 can now be carried back either two or five years to tax years when we paid significant taxes.  Initial estimates of the refundable taxes and foreign tax credits are approximately $8.0 million, including approximately $6.0 million to $7.0 million from losses incurred in Fiscal 2018 and Fiscal 2019.  These amounts are subject to change as we prepare the necessary filings.  We are in the process of preparing such carryback tax filings, however, the timing of receiving such refunds is uncertain and can range from approximately three to twelve months or more depending on the operations of the Internal Revenue Service.  Additional carryback refund claims will also be made based on the final determination of our tax net operating loss for Fiscal 2020.  The receipt of these tax refunds would significantly enhance our liquidity.

Reverse Stock Split

In September 2019, we effected a one-for-three reverse stock split of our common stock.  The reverse stock split reduced the number of our Company’s outstanding shares of common stock from approximately 16.6 million shares to approximately 5.5 million shares and reduced the number of authorized shares of common stock from 30.0 million shares to 10.0 million shares.  Unless the context otherwise requires, all share and per share amounts in these consolidated financial statements have been revised to reflect the reverse stock split, including reclassifying an amount equal to the reduction in par value of our common stock to additional paid-in capital.

Revenue Overview

We typically enter into license agreements with retailers, manufacturers and distributors for a certain brand in specific product categories over explicit territories, which can include one country or groups of countries and territories.  Our royalty revenues are globally diversified, generated from multiple licensees in the following geographic regions:

 

 

 

 

Year Ended

 

(In thousands, except percentages)

 

 

February 1, 2020

 

 

 

February 2, 2019

 

U.S. and Canada

 

$

 

5,223

 

 

 

25

%

 

$

 

6,383

 

 

 

26

%

EMEA

 

 

 

5,229

 

 

 

25

%

 

 

 

8,015

 

 

 

33

%

Asia and Pacific

 

 

 

7,168

 

 

 

34

%

 

 

 

6,046

 

 

 

25

%

Latin America

 

 

 

3,421

 

 

 

16

%

 

 

 

4,000

 

 

 

16

%

Revenues

 

$

 

21,041

 

 

 

100

%

 

$

 

24,444

 

 

 

100

%

 

United States and Canada.  A substantial portion of our royalty revenues in the U.S. and Canada come from wholesale license arrangements for the sale of footwear bearing our Hi-Tec, Magnum and Interceptor brands.  The U.S. has increased tariff rates on apparel and footwear, and we believe our licensees who use manufacturing facilities in countries subject to increased tariffs have taken steps to offset the impact of higher tariffs, including moving production to countries not subject to higher tariffs and negotiating lower costs with existing suppliers.  Nonetheless, our royalty revenues have decreased as our licensees adapt to this new tariff environment.

EMEA.  Revenues from our licensees in the United Kingdom and other countries in this region decreased by 8% as a component of our total revenues compared to Fiscal 2019. Pan European royalties from our Cherokee brand licensee in Fiscal 2019 repeated at lower levels in Fiscal 2020, and our South African Cherokee licensee did not renew their license at the end of Fiscal 2019.  Royalties from our Hi-Tec and Magnum licensee in the United Kingdom were also lower in Fiscal 2020.  Sales of products by certain of our licensees that operate in Europe were negatively affected by the economic uncertainty surrounding Brexit. We believe this had a negative effect on these licensees’ businesses during Fiscal 2020 and a corresponding negative impact on our royalty revenues.

Asia and Pacific.  The growth in our royalty revenues in the Asia/Pacific region came primarily from our product development and design services agreement with a major retailer in the People’s Republic of China.  We are providing our product design and development expertise for a brand that they own, which we believe will efficiently enhance their retail operations.  Our Cherokee licensee in Japan opted to not renew their license at the end of Fiscal 2020.  This is expected to decrease our revenues in this region in Fiscal 2021, and possibly longer, as we transition to a new licensee.

Latin America.  Our royalty revenues in Latin America resulted primarily from our Cherokee Brand and Everyday California licensees in Mexico, Peru and Chile.  Our Hi-Tec and Magnum brands are also distributed in various other countries in Latin America.

 

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Results of Operations

The table below contains certain information about our operations from our consolidated statements of operations along with other data and percentages.  Historical results are not necessarily indicative of results to be expected in future periods.

 

 

 

 

Year Ended

 

(In thousands, except percentages)

 

 

February 1, 2020

 

 

 

February 2, 2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cherokee

 

$

 

6,741

 

 

 

32.0

%

 

$

 

9,706

 

 

 

39.7

%

Hi-Tec, Magnum, Interceptor and 50 Peaks

 

 

 

10,525

 

 

 

50.0

%

 

 

 

11,564

 

 

 

47.3

%

Hawk

 

 

 

258

 

 

 

1.2

%

 

 

 

602

 

 

 

2.5

%

Other brands

 

 

 

3,517

 

 

 

16.7

%

 

 

 

2,572

 

 

 

10.5

%

Total revenues

 

 

 

21,041

 

 

 

100.0

%

 

 

 

24,444

 

 

 

100.0

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and, administrative expenses

 

 

 

13,255

 

 

 

63.0

%

 

 

 

14,638

 

 

 

59.9

%

Stock-based compensation and stock warrant charges

 

 

 

1,032

 

 

 

4.9

%

 

 

 

890

 

 

 

3.6

%

Business acquisition and integration costs

 

 

 

284

 

 

 

1.3

%

 

 

 

307

 

 

 

1.3

%

Restructuring charges

 

 

 

1,134

 

 

 

5.4

%

 

 

 

5,755

 

 

 

23.5

%

Intangible assets and goodwill impairment charge

 

 

 

9,100

 

 

 

43.2

%

 

 

 

 

 

 

0.0

%

Gain on sale of assets

 

 

 

 

 

 

0.0

%

 

 

 

(479

)

 

 

-2.0

%

Depreciation and amortization

 

 

 

1,167

 

 

 

5.5

%

 

 

 

1,478

 

 

 

6.0

%

Total operating expenses

 

 

 

25,972

 

 

 

123.4

%

 

 

 

22,589

 

 

 

92.4

%

Operating (loss) income

 

 

 

(4,931

)

 

 

-23.4

%

 

 

 

1,855

 

 

 

7.6

%

Interest expense and other expense

 

 

 

(8,901

)

 

 

-42.3

%

 

 

 

(11,493

)

 

 

-47.0

%

Loss before income taxes

 

 

 

(13,832

)

 

 

-65.7

%

 

 

 

(9,638

)

 

 

-39.4

%

(Benefit) provision for income taxes

 

 

 

(2,332

)

 

 

-11.0

%

 

 

 

1,901

 

 

 

7.7

%

Net loss

 

$

 

(11,500

)

 

 

-54.7

%

 

$

 

(11,539

)

 

 

-47.1

%

Non-GAAP data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(1)

 

$

 

7,786

 

 

 

 

 

 

$

 

9,806

 

 

 

 

 

 

(1)

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 charge, (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 other 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, 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.  See a reconciliation of this non-GAAP financial measure to our consolidated statement of operations in Item 6. of this Annual Report. 

Fiscal 2020 Compared to Fiscal 2019

The decrease in royalty revenues in Fiscal 2020 was primarily due to the decrease in Cherokee, Hi-Tec and Magnum royalties from our European licensees, the expiration of our Cherokee license in South Africa at the end of Fiscal 2019, the impact of higher tariffs and the sale of our Flip Flop Shops franchise business in June 2018.  These decreases were partially offset by a full year of revenues in Fiscal 2020 from our new design services agreement with a retailer in China, which started midway through Fiscal 2019

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Cherokee

Cherokee branded products have been distributed in the United States under wholesale licensing arrangements generally for the past several years.  Prior to that, sales of Cherokee branded products in the United States were governed by our DTR license agreement with Target.  These new wholesale arrangements consist of multiple license agreements with different distributors that include higher royalty rates but lower minimum annual royalty obligations, as compared to our previous license agreement with Target.  A large majority of our Cherokee brand royalties are now derived from multiple DTR license agreements with various retailers outside the United States, many of which have been in place for multiple years.  Our DTR licensee in South Africa opted to not renew their Cherokee brand license at the end of Fiscal 2019, and our pan-European Cherokee brand licensee reduced their planned sales of Cherokee product in Fiscal 2020.  These factors are the primary reasons for the decrease in Cherokee brand royalties.  Our overall royalty revenues from our licensees’ sales of Cherokee branded products decreased 31% to $6.7 million in Fiscal 2020 from $9.7 million in Fiscal 2019, primarily due to the expiration of multiple license agreement during Fiscal 2019.  

Hi-Tec, Magnum, Interceptor and 50 Peaks

In December 2016, we completed the Hi-Tec Acquisition whereby we acquired the intellectual property of Hi-Tec, including the Hi-Tec, Magnum, Interceptor and 50-Peaks brands and related trademarks.  At that time and in the following year, we entered into wholesale license agreements with certain of Hi-Tec’s operating partners and/or distributors to sell Hi-Tec, Magnum, Interceptor and 50 Peaks branded products in the United States, Canada, the United Kingdom, continental Europe, Latin America, the Middle East, Russia, Asia Pacific, South Africa and other territories.  These arrangements are structured similarly to our other wholesale licensing arrangements.  Issues surrounding Brexit and increased tariffs on footwear and apparel in the United States negatively impacted our Fiscal 2020 royalties from licensees of Hi-Tec, Magnum, Interceptor and 50 Peaks in comparison to Fiscal 2019.  Overall, our royalty revenues from our licensees’ sales of Hi-Tec, Magnum, Interceptor and 50-Peaks branded products decreased 9% to $10.5 million in Fiscal 2020 from $11.6 million in Fiscal 2019.

Hawk Signature and Tony Hawk

Hawk Signature and Tony Hawk branded products have been distributed in the United States under wholesale licensing arrangements generally for the past several years.  Prior to that, sales of Hawk Signature and Tony Hawk branded products in the United States were made under our DTR license agreement with Kohl’s.  We also had a DTR license agreement with a Canadian retailer for the distribution of these products, which did not renew at the end of Fiscal 2019.  Royalty revenues from our license agreements for the sale of Hawk Signature and Tony Hawk branded products decreased to $0.3 million in Fiscal 2020 from $0.6 million in Fiscal 2019.

Other Brands

Our product development and design services agreement with a major retailer in the People’s Republic of China started in the middle of Fiscal 2019, and having a full year of revenues from this agreement in Fiscal 2020 is the primary reason for the increase in revenues from other brands.  This increase was partially offset by the disposition of our Flip Flop Shops franchise business in the second quarter of Fiscal 2019. Royalty revenues from our other brands increased 37% to $3.5 million in Fiscal 2020 from $2.6 million in Fiscal 2019

Operating Expenses

Selling, general and administrative expenses decreased 9% to $13.3 million in Fiscal 2020 from $14.6 million in Fiscal 2019.  These ongoing expenses include payroll, employee benefits, marketing, sales, legal, rent, information systems and other administrative costs that are part of our ongoing operations.  This $1.3 million decrease reflects our restructuring plans that we implemented during Fiscal 2020 and Fiscal 2019 to improve our organizational efficiencies by eliminating redundant positions and unneeded facilities, and by terminating various consulting and marketing contracts.  We incurred a $1.1 million charge in Fiscal 2020 and a $5.8 million charge in Fiscal 2019 as a result of implementing these plans. We believe that these changes eliminate unnecessary costs and enable us to operate effectively going forward as we leverage one executive structure to manage our business globally.

Stock-based compensation and stock warrant charges in Fiscal 2020 totaled $1.0 million compared to $0.9 million in Fiscal 2019, and comprises charges related to stock option and restricted stock grants.  We incurred $0.3 million of legal, due diligence and other costs related to business acquisition and integration in both Fiscal 2020 and Fiscal 2019.

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We own various trademarks that are considered to have indefinite lives, while others are being amortized over their estimated useful lives.  We also have furniture, fixtures and other equipment that is being amortized over their useful lives.  Our royalty revenues from Hi-Tec, Magnum and Interceptor were significantly below previous forecasts for the third quarter of Fiscal 2020, which affected our revenue projections in the near term for these brands.  As these trademarks have indefinite lives and are not being amortized, we updated our projected cash flows for these brands and determined that the fair values of these trademarks were not in excess of their carrying values, and as a result, an impairment charge of $5.0 million was recorded during year ended February 1, 2020 to adjust these trademarks to their estimated fair value.   The fair value of the Company’s Interceptor brand was in excess of its carrying value, so no impairment charge was necessary based on the interim test.  However, the Company believes that increased tariffs and global trade wars have negatively impacted the competitive and economic environment in which Interceptor operates, and an indefinite life is no longer supported.  Accordingly, the Interceptor trademark with estimated value of $2.1 million is now being amortized over its estimated remaining useful life.  During the fourth quarter of Fiscal 2020, management completed its evaluation of key inputs used to estimate the fair value of its indefinite lived trademarks and determined that the interim impairment charge was appropriate.  

Our goodwill impairment test, which is required at least annually, is based primarily on the relationship between our market capitalization and the book value of our equity adjusted for an estimated control premium and other factors that may indicate our market capitalization does not represent fair value. Our impairment test at the end of Fiscal 2020 indicated that the Company’s goodwill was impaired, and an impairment charge of $4.1 million was recorded to reduce goodwill to its estimated fair value.

The assumptions we use to estimate fair value of our indefinite lived intangibles and goodwill may change materially as we re-evaluate them in light of the COVID-19 global pandemic when we complete the accounting for our first quarter financial results for the three months ending May 2, 2020 or in future periods.  These new assumptions may indicate the need for future impairment charges if revenues are projected at that point to be significantly below current forecasts and/or if our market capitalization remains low.  

Interest Expense and Other Income

Interest expense was $8.8 million in Fiscal 2020 compared to $8.2 million in Fiscal 2019.  In addition to our normal interest expense that is based on LIBOR and amortizing deferred financing charges, the remaining $3.2 million of unamortized deferred financing costs associated with our former credit facility were charged to other expense as a result of the repayment in Fiscal 2019.

Provision for Income Taxes

In Fiscal 2020, our effective tax rate was 16.8% while for Fiscal 2019, it was negative 19.7%.  Prior to Fiscal 2020, the benefits of the deferred tax assets of the foreign subsidiaries we acquired in the Hi-Tec Acquisition were not being recognized due to the cumulative losses generated by those foreign subsidiaries.  Even though we generated pretax losses in Fiscal 2019, we did not recognize tax benefits in that year, but we recorded an income tax provision of $1.9 million primarily as a result of deferred tax valuation allowances.  In Fiscal 2020, however, we obtained approval to combine certain of our 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 Hi-Tec and Magnum indefinite-lived trademarks acquired in the Hi-Tec Acquisition result in a deferred tax liability that has an indefinite life and cannot be used as a source of taxable income to support the realization of other deferred tax assets.  Accordingly, the valuation allowance reserves for the deferred tax assets in these foreign jurisdictions and results in a “naked credit” for these indefinite-lived trademarks.  This naked credit would only result in a cash obligation when the underlying trademark assets were sold, but it results in deferred tax expense as the trademark assets are amortized for tax purposes.  This naked credit, which has historically been denominated in euros, also fluctuated in Fiscal 2020 and Fiscal 2019 due to changes in the exchange rate between euros and U.S. dollars.

The benefits of tax losses in our U.S. tax jurisdiction are not being recognized primarily because of accumulated losses generated.  However, the CARES Act, which was enacted by the U.S. government in March 2020, enables us to carry back certain federal net operating losses to previous fiscal years when we reported taxable and paid federal income taxes.  We are in the process of finalizing the impact of these carrybacks and expect such benefits to be recorded in our consolidated financial statements in the first quarter of Fiscal 2021 when the law was passed.  Our current estimate of these benefits is approximately $8.0 million, which is subject to change, and is expected to be received in various installments as our carry back claims and amended returns are received and processed by the Internal Revenue Service.  The timing of such refunds cannot be assured.

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Net Loss and Adjusted EBITDA

Our net loss was $11.5 million in Fiscal 2020 and $11.5 million in Fiscal 2019 as a result of the above factors, which equates to a loss of $2.12 per share and $2.45 per share on a diluted basis in Fiscal 2020 and Fiscal 2019, respectively.  Our Adjusted EBITDA decreased to $7.8 million in Fiscal 2020 from $9.8 million in Fiscal 2019.

Liquidity and Capital Resources

We generally finance our working capital needs and capital investments with operating cash flows, terms loans, subordinated promissory notes and lines of credit.  On August 3, 2018, entered into a $40.0 million term loan and $13.5 million of subordinated promissory notes, and on January 30, 2019, we obtained an incremental $5.3 million term loan. On December 31, 2019 we issued a $0.3 million subordinated promissory note to our former landlord as partial consideration for an early lease termination.  

Cash Flows

We used $2.4 million of cash in our operating activities related to our continuing operations in Fiscal 2020 compared to $8.6 million of cash used in Fiscal 2019.  This $6.2 million improvement in cash flow from continuing operations resulted primarily from using less cash to fund our restructuring obligations and accounts payable in Fiscal 2020 in comparison to Fiscal 2019.  This improvement in cash flow was partially offset by lower collections from our licensees in Fiscal 2020 in comparison to Fiscal 2019 when we collected cash from our sales and distribution business that was sold to International Brands Group during the fourth quarter of Fiscal 2018.    

We used $0.2 million of cash from our investing activities in Fiscal 2020 compared to $5.3 million provided by investing activities in Fiscal 2019.  Capital investments in both years comprise our continual expenditures to maintain our trademarks around the world, along with recurring capital investments in property and equipment.  Fiscal 2019 also includes $5.6 million received from the disposition of our Flip Flop Shops franchise business and the sale of our remaining sales and distribution operations of Hi-Tec to International Brands Group.

Our financing activities used $0.4 million of cash in Fiscal 2020.  Principal repayments on our term loans were partially offset by proceeds received from the exercise of stock warrants.  In Fiscal 2019, we refinanced our former credit facility, resulting in net proceeds of $5.5 million after the payment of debt issuance costs.

Credit Facilities and CARES Act Benefits

On August 3, 2018, we replaced our previous credit facility with a combination of a new senior secured credit facility, which provided a $40.0 million term loan, and $13.5 million of subordinated secured promissory notes.  On January 30, 2019, the credit facility was amended to provide an additional $5.3 million term loan. The term loans mature in August 2021 and require quarterly principal payments and monthly interest payments based on LIBOR plus a margin.  The additional $5.3 million term loan also requires interest of 3.0% payable in kind with such interest being added to the principal balance of the loan.  The term loans are secured by substantially all of our assets and are guaranteed by our subsidiaries.  The $13.5 million of subordinated promissory notes mature in November 2021, and they are secured by a second priority lien on substantially all of our assets and guaranteed by our subsidiaries.  Interest is payable monthly on the subordinated promissory notes, but no periodic amortization payments are required.  The subordinated promissory notes are subordinated in rights of payment and priority to the term loan but otherwise have economic terms substantially similar to the term loan.  Excluding the interest payable in kind, the weighted-average interest rate on both the term loan and subordinated promissory notes at February 1, 2020 was 11.0%.  Outstanding borrowings under the senior secured credit facility were $44.1 million at February 1, 2020, and outstanding subordinated secured promissory notes were $13.5 million.

The term loan is subject to a borrowing base and includes financial covenants and obligations regarding the operation of our business that are customary in facilities of this type, including limitations on the payment of dividends.  Financial covenants include the requirement to maintain specified levels of Adjusted EBITDA, as defined in the credit agreement (approximately $9.5 million for the trailing twelve months as of February 1, 2020), and maintain a minimum cash balance of $1.0 million.  We are required to maintain a borrowing base comprising the value of our trademarks that exceeds the outstanding balance of the term loan.  If the borrowing base is less than the outstanding term loan at any measurement period, then we would be required to repay a portion of the term loan to eliminate such shortfall.

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Our operating results for the twelve months ended November 2, 2019 and twelve months ended February 1, 2020 resulted in violations of the minimum Adjusted EBITDA covenant, which are events of default.  Revenues for the third quarter of Fiscal 2020 were lower than the Company’s previous forecasts due to lower than expected royalties reported by the Company’s licensees, which were negatively impacted by the economic uncertainty surrounding Brexit, global trade wars and increasing tariffs on footwear and apparel, along with the weakening of the British pound sterling and euro in relation to the U.S. dollar.  In response, management enacted certain cash savings measures, and although operating results improved during the three months ended February 1, 2020, the cash savings measures and operational improvements were not enough to regain compliance with the Adjusted EBITDA covenant.  Our latest financial projections, which have been revised to account for the current information we have regarding the potential impact of the COVID-19 global pandemic, indicate that there is a significant risk of further violations of the minimum Adjusted EBITDA covenant beyond the forbearance period agreed to with our senior lender.  

Our senior lender has agreed to forbear from enforcing its rights under the senior secured credit facility through July 27, 2020.  Beginning with May 1, 2020 and continuing through the term of the forbearance agreement, interest and loan amortization payments will not be paid in cash, but an equivalent amount will be added to the principal amount of the term loans to be repaid in future periods.  Our required minimum cash balance was reduced during the forbearance period, and the senior lender agreed that the proceeds from the April 2020 Paycheck Protection Program promissory note of $0.7 million can be used for the working capital purposes specified under the promissory note.  We are required during the forbearance period to evaluate strategic alternatives designed to provide liquidity to repay the term loans under the senior secured credit facility.  In exchange for these concessions, the senior lender will receive an additional fee totaling 2% of the then outstanding loan balance when the debt is repaid.

Future compliance failures would subject us to significant risks, including the right of our senior lender to terminate their obligations under the Credit Facility, declare all or any portion of the borrowed amounts then outstanding to be accelerated and due and payable, and/or exercise any other right or remedies they may have under applicable law, including foreclosing on our assets that serve as collateral for the borrowed amounts.  If any of these rights were to be exercised, our financial condition and ability to continue operations would be materially jeopardized.  If we are unable to meet our obligations to our lenders and other creditors, we may have to significantly curtail or even cease operations.  Because of this uncertainty, there is substantial doubt about our ability to continue as a going concern.  We are evaluating potential sources of working capital, including the disposition of certain assets, and we believe that the NOL carryback provisions of the CARES Act will result in additional liquidity, although the timing of these cash inflows is uncertain.  We received $0.7 million of proceeds on April 20, 2020 from a promissory note issued by one of our banks under the Paycheck Protection Program included in the CARES Act, and NOL carryback claims are expected to total approximately $8.0 million.  We estimated that receipt of these tax refunds could range from three to 12 months from the date of this filing.  Our plans also include the evaluation of strategic alternatives to enhance shareholder value.  There is no assurance that we will be able to execute these plans or continue to operate as a going concern.

On December 28, 2018, we borrowed $2.0 million on a subordinated basis from a large stockholder and two board members to provide working capital. These notes were repaid on January 30, 2019 with proceeds from the additional term loan under the Company’s senior secured credit facility.

In connection with the refinancing on August 3, 2018, we issued warrants to purchase 397,666 shares of our common stock to our term loan lenders at an exercise price of $1.35 per share, and we issued warrants to purchase 533,333 shares of our common stock to certain holders of our subordinated promissory notes at an exercise price of $1.50 per share.  Each warrant is exercisable on issuance and has a seven-year life.  Warrants to purchase 230,000 shares of the Company’s common stock were also issued to the Company’s term loan lenders in connection with the additional $5.3 million term loan on January 30, 2019 at an exercise price of $2.28 per share with a 7-year life.  The fair values of these warrants were $1.2 million on their grant dates as determined using a Black Scholes option pricing model and were included as a noncash component of deferred financing costs.  The underlying shares of these warrants were registered for resale in November 2018.  In the first quarter of Fiscal 2020 and the 4th quarter of Fiscal 2019, the 533,333 stock warrant shares issued to our subordinated promissory note holders were exercised and converted into our common stock for a cash exercise price of $0.8 million.

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The following table shows the lenders, their relationship to the company, the loan amounts provided at the time and the stock warrants issued to such investors, if any:

 

(Dollars in thousands)

 

Term Loan

and

Junior Note

Amounts

 

 

Stock

Warrant

Shares

 

Term Loan lenders, unrelated parties

 

$

 

40,000

 

 

 

 

397,666

 

Additional Term Loan lenders, unrelated parties

 

 

 

5,250

 

 

 

 

230,000

 

Cove Street Capital, LLC, large stockholder

 

 

 

9,000

 

 

 

 

415,000

 

Jess Ravich, board member and large stockholder

 

 

 

4,400

 

 

 

 

118,333

 

Henry Stupp, Chief Executive Officer and board member

 

 

 

100

 

 

 

 

 

 

 

$

 

58,750

 

 

 

 

1,160,999

 

 

Lease Obligation

In November 2019, we entered into a lease termination agreement for our office building in Amsterdam, and accordingly, the lease terminated as of December 31, 2019 rather than continue through December 2026.  The compensation for early termination were cash payments totaling $0.6 million and a subordinated note of $0.3 million, excluding VAT, reducing our lease obligation by $2.4 million.

 

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Judgment is also required about the disclosure of contingent liabilities and other matters.  Estimates are subject to an inherent degree of uncertainty by their nature, and actual results could differ materially from these estimates.  We believe the following discussion addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.

Revenue Recognition and Deferred Revenue

We adopted ASC 606 using the modified retrospective method as of February 4, 2018, the beginning of the first quarter of Fiscal 2019.  The adoption of the new guidance primarily affected the recognition of minimum guaranteed royalties in our license agreements that have historically been recognized as earned in accordance with those agreements, while under this new standard, such royalties are generally recognized on a straight-line basis over the term of the license agreements.  Accordingly, for license agreements with escalating minimum guaranteed royalties, revenues will generally be higher during the early years of the license agreement than they would have been under the previous guidance.  The cumulative effect on adoption of ASC 606 totaled $0.3 million, which was charged to accrued revenue or deferred revenue with a corresponding credit to accumulated deficit, for all contracts not completed as of the adoption date. The comparative information has not been restated.  As a result of adopting ASC 606, we recognized $0.9 and $1.1 million of additional revenue in Fiscal 2020 and Fiscal 2019, respectively.

The Company recognizes contract liabilities as deferred revenue when licensees prepay royalties, or from license fees, up-front payments and milestone payments that have not yet been earned.  Deferred revenue is classified as current or noncurrent depending on when it is anticipated to be recognized.  The Company recognizes contract assets as accrued revenue when minimum guaranteed royalties are recognized that have not yet been earned under the license agreements.  Accrued revenue is classified as current or noncurrent depending on when the asset is anticipated to be charged to revenue.  Our performance obligations are to maintain our licensed intellectual property, and in some cases, to provide product development and design services.

Our license agreements include audit rights to allow us to validate the amount of royalties received.  Differences between amounts initially recognized and amounts subsequently determined under audit are recognized when the differences become known and are considered collectible.  We regularly enforce our intellectual property rights and pursue third parties that are utilizing our trademarks without a license.  Royalties generated from these enforcement proceedings are recognized when they are determined and considered collectible.  We consider revenue recognition to be a critical accounting policy because of the significance of revenues to our operating results.

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Intangible Assets and Goodwill

We hold various trademarks that are registered with the United States Patent and Trademark Office and similar government agencies in a number of other countries.  Acquired trademarks are either capitalized and amortized on a straight-line basis over their estimated useful lives, or classified as an indefinite-lived asset and not amortized if no legal, regulatory, contractual, competitive, economic, or other factors limit their useful lives.  We routinely evaluate the remaining useful life of trademarks that are not being amortized to determine whether events or circumstances continue to support an indefinite useful life.  Goodwill represents the excess of purchase price over the fair value of assets acquired in business combinations and is not amortized.  Indefinite lived trademarks and goodwill are evaluated annually in our fourth quarter for impairment or when events or circumstances indicate a potential impairment, and an impairment loss is recognized to the extent that the asset’s carrying amount or the reporting unit’s book value exceeds its fair value.  We estimate the fair values of our indefinite-lived trademarks, in part, based on discounted cash flow models that include assumptions determined by us regarding projected revenues, operating costs and discount rates.  Our expectations regarding license agreement renewals are also considered, along with forecasts of revenues from replacement licensees for those that have terminated. 

We restructured our operations in Fiscal 2019 to improve our organizational efficiencies, and we no longer evaluate financial information and business activities of the business acquired in the Hi-Tec Acquisition on a standalone basis.  Consequently, our operations now comprise one reportable segment, which consists of a single operating segment and reporting unit. Because we only have one reporting unit, our goodwill impairment test is based primarily on the relationship between our market capitalization and the book value of our equity adjusted for an estimated control premium and other factors that may indicate our market capitalization does not represent fair value. The annual goodwill impairment test at the end of Fiscal 2020 indicated that the Company’s goodwill was impaired, and an impairment charge of $4.1 million was recorded to reduce goodwill to its estimated fair value.  

Our revenues from our Hi-Tec, Magnum and Interceptor brands were significantly below previous forecasts for the third quarter of Fiscal 2020.  This was identified as an interim impairment indicator for the related indefinite lived trademarks during the preparation of our interim financial statements, and we performed an interim impairment test based on updated cash flow projections and discounted cash flows based on estimated weighted average costs of capital (income approach).  We determined that the fair values of its Hi-Tec and Magnum trademarks were not in excess of their carrying values, and as a result, an interim impairment charge of $5.0 million was recorded during the third quarter to adjust these trademarks to their estimated fair values.  The fair value of the Company’s Interceptor brand was in excess of its $2.1 million carrying value, so no impairment charge was necessary based on the interim test.  However, the Company believes that increased tariffs and global trade wars have negatively impacted the competitive and economic environment in which Interceptor operates, and an indefinite life is no longer supported.  Accordingly, the Interceptor trademark is now being amortized over its estimated remaining useful life.  During the fourth quarter, we completed our evaluation of key inputs used to estimate the fair value of our indefinite lived trademarks and determined that the interim impairment charge was appropriate.

The discounted cash flow model used in determining the fair values of our indefinite-lived trademarks requires extensive use of accounting judgment and financial estimates.  Future events could cause us to conclude that impairment indicators exist, and therefore our trademarks could be further impaired.  The valuation of our trademarks is affected by, among other things, our business plan for the future and estimated results of future operations. Changes in the business plan, operating results, or application of alternative assumptions that are different than the estimates used to develop the valuations of the assets may materially impact their valuation.  The assumptions we use to estimate fair value of our indefinite lived intangibles and goodwill may change materially as we re-evaluate them in light of the COVID-19 global pandemic when we complete the accounting for our first quarter financial results for the three months ending May 2, 2020 or in future periods.  These new assumptions may indicate the need for future impairment charges if revenues are projected at that point to be significantly below current forecasts and/or if our market capitalization remains low.

 

Income Taxes

We use the asset and liability method of accounting for income taxes.  Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  In assessing the need for a valuation allowance, we consider estimates of future taxable income and ongoing prudent and feasible tax planning strategies.  We record the tax effect of equity issuances within the income statement.  We account for uncertainty in

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income taxes based on financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return.  A tax position is initially recognized in our financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions are measured as the largest amount of tax benefit with a greater than 50% likelihood of being realized upon final settlement with the tax authority, assuming full knowledge of the position and all relevant facts.  When we establish or reduce the valuation allowance against deferred tax assets, and when our uncertain tax positions are resolved or our judgment about these tax positions change, our provision for income taxes will increase or decrease, which could have a material impact on our financial position or results of operations.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in this Annual Report for a description of recent accounting pronouncements.

Off‑Balance Sheet Arrangements

We do not have off‑balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition or results of operations.

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Item 8.    FINANCIAL STATEMENTS

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Apex Global Brands Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Apex Global Brands Inc. and subsidiaries (formerly Cherokee Inc.) (the "Company") as of February 1, 2020 and February 2, 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the two years in the period ended February 1, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the two years in the period ended February 1, 2020, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has violated certain financial covenants related to its Senior Secured Credit Facility resulting in current classification of the debt. The Company has inadequate cash on hand to meet such obligations, which raises substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Deloitte & Touche LLP

Los Angeles, California

April 30, 2020

We have served as the Company's auditor since 2017.

 

 

 

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APEX GLOBAL BRANDS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

February 1,

2020

 

 

February 2,

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

1,209

 

 

$