PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX GLOBAL BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
|
|
|
August 1,
2020
|
|
|
February 1,
2020
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
|
1,596
|
|
|
$
|
|
1,209
|
|
Accounts receivable, net
|
|
|
|
|
4,213
|
|
|
|
|
4,962
|
|
Income tax and other receivables
|
|
|
|
|
8,876
|
|
|
|
|
157
|
|
Prepaid expenses and other current assets
|
|
|
|
|
1,159
|
|
|
|
|
1,431
|
|
Total current assets
|
|
|
|
|
15,844
|
|
|
|
|
7,759
|
|
Property and equipment, net
|
|
|
|
|
268
|
|
|
|
|
319
|
|
Intangible assets, net
|
|
|
|
|
54,404
|
|
|
|
|
59,110
|
|
Goodwill
|
|
|
|
|
6,752
|
|
|
|
|
12,152
|
|
Accrued revenue and other assets
|
|
|
|
|
3,270
|
|
|
|
|
3,582
|
|
Total assets
|
|
|
$
|
|
80,538
|
|
|
$
|
|
82,922
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
$
|
|
5,515
|
|
|
$
|
|
6,282
|
|
Current portion of long-term debt
|
|
|
|
|
59,157
|
|
|
|
|
56,044
|
|
Deferred revenue—current
|
|
|
|
|
1,942
|
|
|
|
|
3,551
|
|
Total current liabilities
|
|
|
|
|
66,614
|
|
|
|
|
65,877
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
147
|
|
|
|
|
—
|
|
Deferred income taxes
|
|
|
|
|
9,156
|
|
|
|
|
9,515
|
|
Long-term lease liabilities
|
|
|
|
|
1,268
|
|
|
|
|
1,389
|
|
Other liabilities
|
|
|
|
|
829
|
|
|
|
|
794
|
|
Total liabilities
|
|
|
|
|
78,014
|
|
|
|
|
77,575
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.02 par value, 1,000,000 shares authorized, none issued
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
Common stock, $.02 par value, 10,000,000 shares authorized, shares issued
562,907 (August 1, 2020) and 557,053 (February 1, 2020)
|
|
|
|
|
11
|
|
|
|
|
11
|
|
Additional paid-in capital
|
|
|
|
|
79,000
|
|
|
|
|
78,641
|
|
Accumulated deficit
|
|
|
|
|
(76,487
|
)
|
|
|
|
(73,305
|
)
|
Total stockholders’ equity
|
|
|
|
|
2,524
|
|
|
|
|
5,347
|
|
Total liabilities and stockholders’ equity
|
|
|
$
|
|
80,538
|
|
|
$
|
|
82,922
|
|
See notes to condensed consolidated financial statements.
3
APEX GLOBAL BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
Revenues
|
|
|
$
|
|
4,379
|
|
|
$
|
|
5,603
|
|
|
$
|
|
8,413
|
|
|
$
|
|
10,655
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
2,101
|
|
|
|
|
3,069
|
|
|
|
|
4,997
|
|
|
|
|
6,924
|
|
Stock-based compensation
|
|
|
|
|
145
|
|
|
|
|
515
|
|
|
|
|
295
|
|
|
|
|
723
|
|
Business acquisition and integration costs
|
|
|
|
|
—
|
|
|
|
|
145
|
|
|
|
|
—
|
|
|
|
|
211
|
|
Restructuring charges
|
|
|
|
|
(97
|
)
|
|
|
|
—
|
|
|
|
|
(97
|
)
|
|
|
|
42
|
|
Intangible assets and goodwill impairment charges
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
9,800
|
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
|
|
243
|
|
|
|
|
254
|
|
|
|
|
445
|
|
|
|
|
511
|
|
Total operating expenses
|
|
|
|
|
2,392
|
|
|
|
|
3,983
|
|
|
|
|
15,440
|
|
|
|
|
8,411
|
|
Operating income (loss)
|
|
|
|
|
1,987
|
|
|
|
|
1,620
|
|
|
|
|
(7,027
|
)
|
|
|
|
2,244
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
(2,431
|
)
|
|
|
|
(2,251
|
)
|
|
|
|
(4,612
|
)
|
|
|
|
(4,496
|
)
|
Other (expense) income, net
|
|
|
|
|
(114
|
)
|
|
|
|
60
|
|
|
|
|
(148
|
)
|
|
|
|
61
|
|
Total other expense, net
|
|
|
|
|
(2,545
|
)
|
|
|
|
(2,191
|
)
|
|
|
|
(4,760
|
)
|
|
|
|
(4,435
|
)
|
Loss before income taxes
|
|
|
|
|
(558
|
)
|
|
|
|
(571
|
)
|
|
|
|
(11,787
|
)
|
|
|
|
(2,191
|
)
|
Provision (benefit) for income taxes
|
|
|
|
|
775
|
|
|
|
|
696
|
|
|
|
|
(8,605
|
)
|
|
|
|
1,334
|
|
Net loss
|
|
|
$
|
|
(1,333
|
)
|
|
$
|
|
(1,267
|
)
|
|
$
|
|
(3,182
|
)
|
|
$
|
|
(3,525
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
$
|
|
(2.38
|
)
|
|
$
|
|
(2.34
|
)
|
|
$
|
|
(5.69
|
)
|
|
$
|
|
(6.69
|
)
|
Diluted loss per share
|
|
|
$
|
|
(2.38
|
)
|
|
$
|
|
(2.34
|
)
|
|
$
|
|
(5.69
|
)
|
|
$
|
|
(6.69
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
560
|
|
|
|
|
542
|
|
|
|
|
559
|
|
|
|
|
527
|
|
Diluted
|
|
|
|
|
560
|
|
|
|
|
542
|
|
|
|
|
559
|
|
|
|
|
527
|
|
See notes to condensed consolidated financial statements.
4
APEX GLOBAL BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance, February 1, 2020
|
|
|
557
|
|
|
$
|
|
11
|
|
|
$
|
|
78,641
|
|
|
$
|
|
(73,305
|
)
|
|
$
|
|
5,347
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
150
|
|
|
|
|
—
|
|
|
|
|
150
|
|
Stock Warrants
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
32
|
|
|
|
|
—
|
|
|
|
|
32
|
|
Net Loss
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(1,849
|
)
|
|
|
|
(1,849
|
)
|
Balance, May 2, 2020
|
|
|
557
|
|
|
$
|
|
11
|
|
|
$
|
|
78,823
|
|
|
$
|
|
(75,154
|
)
|
|
$
|
|
3,680
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
145
|
|
|
|
|
—
|
|
|
|
|
145
|
|
Equity issuances, net of tax
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Stock Warrants
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
32
|
|
|
|
|
—
|
|
|
|
|
32
|
|
Net Loss
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(1,333
|
)
|
|
|
|
(1,333
|
)
|
Balance, August 1, 2020
|
|
|
563
|
|
|
$
|
|
11
|
|
|
$
|
|
79,000
|
|
|
$
|
|
(76,487
|
)
|
|
$
|
|
2,524
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance, February 2, 2019
|
|
|
490
|
|
|
$
|
|
10
|
|
|
$
|
|
76,917
|
|
|
$
|
|
(61,805
|
)
|
|
$
|
|
15,122
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
208
|
|
|
|
|
—
|
|
|
|
|
208
|
|
Equity issuances, net of tax
|
|
|
42
|
|
|
|
|
1
|
|
|
|
|
622
|
|
|
|
|
—
|
|
|
|
|
623
|
|
Stock Warrants
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
28
|
|
|
|
|
—
|
|
|
|
|
28
|
|
Net Loss
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(2,258
|
)
|
|
|
|
(2,258
|
)
|
Balance, May 4, 2019
|
|
|
532
|
|
|
$
|
|
11
|
|
|
$
|
|
77,775
|
|
|
$
|
|
(64,063
|
)
|
|
$
|
|
13,723
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
515
|
|
|
|
|
—
|
|
|
|
|
515
|
|
Equity issuances, net of tax
|
|
|
20
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Stock Warrants
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
28
|
|
|
|
|
—
|
|
|
|
|
28
|
|
Net Loss
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(1,267
|
)
|
|
|
|
(1,267
|
)
|
Balance, August 3, 2019
|
|
|
552
|
|
|
$
|
|
11
|
|
|
$
|
|
78,318
|
|
|
$
|
|
(65,330
|
)
|
|
$
|
|
12,999
|
|
See notes to condensed consolidated financial statements.
5
APEX GLOBAL BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Six Months Ended
|
|
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
(3,182
|
)
|
|
$
|
|
(3,525
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
445
|
|
|
|
|
511
|
|
Restructuring charges
|
|
|
|
(97
|
)
|
|
|
|
42
|
|
Intangible assets and goodwill impairment charge
|
|
|
|
9,800
|
|
|
|
|
—
|
|
Amortization of deferred financing costs
|
|
|
|
1,384
|
|
|
|
|
1,165
|
|
Interest expense paid in kind
|
|
|
|
1,947
|
|
|
|
|
—
|
|
Deferred income taxes and noncurrent provisions
|
|
|
|
(359
|
)
|
|
|
|
776
|
|
Stock-based compensation and stock warrant charges
|
|
|
|
359
|
|
|
|
|
779
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
749
|
|
|
|
|
(861
|
)
|
Income tax and other receivables
|
|
|
|
(8,719
|
)
|
|
|
|
43
|
|
Prepaid expenses and other current assets
|
|
|
|
272
|
|
|
|
|
163
|
|
Accrued revenue and other assets
|
|
|
|
312
|
|
|
|
|
(507
|
)
|
Accounts payable and other liabilities
|
|
|
|
(680
|
)
|
|
|
|
(2,976
|
)
|
Long- term lease liabilities
|
|
|
|
(121
|
)
|
|
|
|
—
|
|
Deferred revenue
|
|
|
|
(1,609
|
)
|
|
|
|
1,369
|
|
Net cash provided by (used in) operating activities
|
|
|
|
501
|
|
|
|
|
(3,021
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital investments
|
|
|
|
(88
|
)
|
|
|
|
(119
|
)
|
Net cash used in investing activities
|
|
|
|
(88
|
)
|
|
|
|
(119
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from promissory note payable
|
|
|
|
735
|
|
|
|
|
—
|
|
Payments on term loan and line of credit
|
|
|
|
(350
|
)
|
|
|
|
(600
|
)
|
Debt issuance costs
|
|
|
|
(411
|
)
|
|
|
|
(36
|
)
|
Issuance of common stock
|
|
|
|
—
|
|
|
|
|
623
|
|
Net cash used in financing activities
|
|
|
|
(26
|
)
|
|
|
|
(13
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
387
|
|
|
|
|
(3,153
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
|
1,209
|
|
|
|
|
4,284
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
1,596
|
|
|
$
|
|
1,131
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
510
|
|
|
$
|
|
528
|
|
Interest
|
|
$
|
|
1,278
|
|
|
$
|
|
3,313
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Interest paid in kind
|
|
$
|
|
1,947
|
|
|
$
|
|
—
|
|
See notes to condensed consolidated financial statements.
6
APEX GLOBAL BRANDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. Cherokee Inc. changed its name to Apex Global Brands Inc. effective June 27, 2019. These financial statements include the accounts of Apex Global Brands Inc. and its consolidated subsidiaries (the “Company”) and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended February 1, 2020 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results to be expected for the full year.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Under the Company’s senior secured credit facility, the Company is required to maintain specified levels of Adjusted EBITDA as defined. The Company’s 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, and the valuation report prepared by the Company’s senior secured lender during the first quarter of Fiscal 2021 indicated that the Company’s borrowing base is less than the outstanding term loan balance. Beginning in the first quarter of fiscal 2021, Company’s business has been materially adversely affected by the effects of the global pandemic of COVID-19 and the related protective public health measures. The Company’s business depends upon purchases and sales of products bearing the Company’s brands by the Company’s licensees, and the prevalence of shelter in place and similar orders in the regions where these products are sold, together with the closure of many retail stores of the Company’s licensees, have resulted in significant declines in the Company’s royalties, which will likely continue for some period of time. In response to the decline in revenues, the Company has implemented cost savings measures, such as pay reductions and employee furloughs among other things.
The Company’s senior lender has agreed to forbear from enforcing its rights under the senior secured credit facility with respect to these defaults through December 31, 2020, and the senior secured credit facility now matures on March 31, 2021 or December 31, 2020 if certain milestones are not met. 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, other than approximately $85,000 per month beginning on September 1, 2020 and the interest payment due August 1, 2020, but an equivalent amount will be added to the principal amount of the term loans to be repaid in future periods. During the forbearance period, the Adjusted EBITDA covenant was reduced, the required minimum cash balance to be maintained by the Company was reduced, and the borrowing base requirement was suspended. The Company is 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 outstanding loan balance when the debt is repaid, which together with other exit fees is expected to total approximately $2.5 million. The Company’s Junior Note holders also agreed to accept interest payments in the form of additional principal rather than in cash from April 1, 2020 through October 1, 2020, and payments to the Company’s Junior Notes holders are generally restricted by the forbearance agreement.
7
Future compliance failures under the senior secured credit facility would subject the Company to significant risks, including the right of its senior lender to terminate its obligations under the senior secured 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 the Company’s and/or its subsidiaries’ assets that serve as collateral for the borrowed amounts. If any of these rights were to be exercised, or if the Company is unable to refinance its senior secured credit facility by the accelerated maturity of March 31, 2021, which could be further accelerated to December 31, 2020 if certain milestones are not met, the Company’s financial condition and ability to continue operations would be materially jeopardized. If the Company is unable to meet obligations to lenders and other creditors, the Company may have to significantly curtail or even cease operations. The Company is evaluating potential sources of working capital and believes that the NOL carryback provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by the U.S. Congress in March 2020 will result in additional liquidity, although the timing of these future cash receipts is uncertain. NOL carryback claims are expected to result in federal income tax refunds of approximately $9.0 million. Management’s plans also include the evaluation of strategic alternatives to enhance shareholder value. There is no assurance that the Company will be able to execute these plans. Because of this uncertainty, there is substantial doubt about the Company’s ability to continue as a going concern.
Reverse Stock Split
On September 2, 2020, the Company effected a one-for-ten reverse stock split (the “Reverse Stock Split”) of its common stock. The Reverse Stock Split reduced the number of the Company’s outstanding shares of common stock from approximately 5.6 million shares to approximately 0.6 million shares. Unless the context otherwise requires, all share and per share amounts in these condensed 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.
2.
|
New Accounting Pronouncements
|
In December 2019, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update (“ASU”) to simplify the accounting for income taxes. The new guidance removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This guidance will be effective for the first quarter of the Company’s Fiscal 2023, which will end on January 28, 2023. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
Intangible assets consists of the following:
|
|
August 1, 2020
|
|
|
February 1, 2020
|
|
(In thousands)
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Amortizable trademarks
|
|
$
|
|
30,237
|
|
|
|
|
(20,990
|
)
|
|
$
|
|
9,247
|
|
|
$
|
|
30,153
|
|
|
|
|
(20,600
|
)
|
|
$
|
|
9,553
|
|
Indefinite lived trademarks
|
|
|
|
45,157
|
|
|
|
|
—
|
|
|
|
|
45,157
|
|
|
|
|
49,557
|
|
|
|
|
—
|
|
|
|
|
49,557
|
|
|
|
$
|
|
75,394
|
|
|
$
|
|
(20,990
|
)
|
|
$
|
|
54,404
|
|
|
$
|
|
79,710
|
|
|
$
|
|
(20,600
|
)
|
|
$
|
|
59,110
|
|
Intangible assets include trademarks that are classified as indefinite lived and not subjected to amortization. The Company's revenues have been adversely impacted by the COVID-19 pandemic and its effect on the Company’s licensees. This was identified as an interim impairment indicator for the related indefinite lived trademarks during the preparation of the Company’s interim financial statements for the quarter ended May 2, 2020, and management performed an interim impairment test at that time based on updated cash flow projections and discounted cash flows based on estimated weighted average costs of capital (income approach). The Company 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 impairment charge of $4.4 million was recorded during the three months ended May 2, 2020 to adjust these trademarks to their estimated fair value. The forecasted impact of the COVID-19 pandemic on the Company’s future revenues is subject to change as
8
additional information becomes available. Further impairments may be required if management’s revenue forecasts for Hi-Tec and Magnum are further reduced in future reporting periods. The Company has acquired other trademarks that are being amortized over their estimated useful lives, which average 10.0 years with no residual values. Amortization of intangible assets was $0.2 million for both the three months ended August 1, 2020 and August 3, 2019, and $0.4 million for both the six months ended August 1, 2020 and August 3, 2019.
The Company’s goodwill arose from the Hi-Tec Acquisition that occurred during Fiscal 2017 and amounted to $16.3 million at that time. Goodwill is tested at least annually for impairment in the Company’s fourth quarter, and because the Company has one reporting unit, the impairment test is based primarily on the relationship between the Company’s market capitalization and the book value of its equity adjusted for an estimated control premium. The annual goodwill impairment test in the fourth quarter of the fiscal year ended February 1, 2020 indicated that the Company’s goodwill was impaired, and an impairment charge of $4.1 million was recorded to reduce goodwill to $12.2 million. The Company’s market capitalization was adversely affected during the three months ended May 2, 2020 as a result of the COVID-19 pandemic. This was identified as an interim impairment indicator for goodwill during the preparation of the Company’s interim financial statements, and management performed an interim impairment test, which indicated that the Company’s goodwill was impaired. Accordingly, an impairment charge of $5.4 million was recorded during the quarter ended May 2, 2020 to reduce goodwill to $6.8 million.
4.
|
Accounts Payable and Other Current Liabilities
|
Accounts Payable and other current liabilities consist of the following:
(In thousands)
|
|
August 1,
2020
|
|
|
February 1,
2020
|
|
Accounts payable
|
|
$
|
|
2,851
|
|
|
$
|
|
2,814
|
|
Accrued employee compensation and benefits
|
|
|
|
293
|
|
|
|
|
413
|
|
Restructuring plan liabilities
|
|
|
|
994
|
|
|
|
|
1,677
|
|
Income taxes payable
|
|
|
|
309
|
|
|
|
|
291
|
|
Other liabilities
|
|
|
|
1,068
|
|
|
|
|
1,087
|
|
|
|
$
|
|
5,515
|
|
|
$
|
|
6,282
|
|
The Company incurred restructuring charges in Fiscal 2018 and Fiscal 2017 related to the Hi-Tec Acquisition and its integration into the Company’s ongoing operations (the “Hi-Tec Plan”). Restructuring charges were also incurred during Fiscal 2019 as the Company took additional steps designed to improve its organizational efficiencies by eliminating redundant positions and unneeded facilities, and by terminating various consulting and marketing contracts (the “FY19 Plan”).
Adjustments to, and payments against, the restructuring plan obligations were as follows:
(In thousands)
|
|
FY19 Plan
|
|
|
Hi-Tec Plan
|
|
|
Total
|
|
Balance, February 1, 2020
|
|
|
|
1,649
|
|
|
|
|
28
|
|
|
|
|
1,677
|
|
Restructuring charges
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
(97
|
)
|
Payments during the period
|
|
|
|
(580
|
)
|
|
|
|
(6
|
)
|
|
|
|
(586
|
)
|
Balance, August 1, 2020
|
|
$
|
|
972
|
|
|
$
|
|
22
|
|
|
$
|
|
994
|
|
9
On August 3, 2018, the Company entered into a senior secured credit facility, which provided a $40.0 term loan, and $13.5 million of subordinated promissory notes (the “Junior Notes”). The credit facility was amended on January 30, 2019 to provide an additional term loan of $5.3 million. The term loans generally 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 the assets of the Company and are guaranteed by the Company’s subsidiaries. The Junior Notes mature in November 2021, and they are secured by a second priority lien on substantially all of the assets of Company and guaranteed by the Company’s subsidiaries. Interest is generally payable monthly on the Junior Notes, but no periodic amortization payments are required. The Junior Notes are subordinated in rights of payment and priority to the term loans but otherwise have economic terms substantially similar to the term loans. The weighted-average interest rate on both the term loans and Junior Notes at August 1, 2020 was 11.0%.
The term loans are generally subject to a borrowing base and include financial covenants and obligations regarding the operation of the Company’s 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 agreement, and maintain a specified level of cash on hand. The Company is required to maintain a borrowing base comprising the value of the Company’s trademarks that exceeds the outstanding balance of the term loans. If the borrowing base is less than the outstanding term loans at any measurement period, then the Company would be required to repay a portion of the term loans to eliminate such shortfall. Events of default include, among other things, the occurrence of a change of control of the Company, and a default under the term loans agreement would also trigger a default under the Junior Notes agreements.
The Company’s operating results for the twelve months ended November 2, 2019 and February 1, 2020 resulted in violations of the minimum Adjusted EBITDA covenant, which are events of default, and the valuation report prepared by the Company’s senior secured lender during the first quarter of Fiscal 2021 indicated that the Company’s borrowing base is less than the outstanding term loan balance. However, the Company’s senior secured lender has agreed to forbear from enforcing its rights under the senior secured credit facility in response to these events of default and borrowing base shortfall, and on September 1, 2020, the senior secured credit facility was amended, and the forbearance agreement was extended through December 31, 2020 (the September 2020 Forbearance Agreement). (See Note 1, Liquidity and Going Concern). In conjunction with the September 2020 Forbearance Agreement, the senior secured credit facility was amended to (i) reduce the Adjusted EBITDA requirement to $6.5 million during the forbearance period, (ii) reduce the minimum cash requirement to $100,000 during the forbearance period, (iii) defer the quarterly principal payment otherwise due during the forbearance period and (iv) accept interest payments in the form of additional principal rather than in cash during the forbearance period, other than approximately $85,000 per month beginning with September 1, 2020. The September 2020 Forbearance Agreement requires that a portion of the Company’s federal income tax refunds expected to be received by the Company during the forbearance period be used to pay in cash the interest previously accrued and added to the principal amount of the term loans, and also to pay down a portion of the term loans principal balance. After such federal income tax refunds are received, monthly interest will again be required in cash, and no further interest payment obligations will be deferred and added to the principal amount of the term loans. At the conclusion of the forbearance period, the Adjusted EBITDA requirement, the borrowing base requirement and the minimum cash requirement revert to the original terms of the senior secured credit facility. Previous forbearance agreements provided for a fee to be paid to the senior secured lender when the debt is repaid. The September 2020 Forbearance Agreement accelerates the maturity date of the Company’s senior secured credit facility from August 3, 2021 to March 31, 2021 or to December 31, 2020 if certain milestones are not met. The Company’s Junior Note holders agreed to accept interest payments in the form of additional principal rather than in cash from April 1, 2020 through October 1, 2020, and payments to the Junior Notes holders are generally restricted by the September 2020 Forbearance Agreement.
Outstanding borrowings under the term loans were $45.2 million at August 1, 2020 with associated unamortized debt issuance costs of $0.8 million. Outstanding Junior Notes were $14.4 million at August 1, 2020 with associated unamortized debt issuance costs of $0.2 million. As a result of the covenant violations and the short-term nature of the forbearance agreement referred to above, the total amount of the Company’s long-term debt is reflected as a current obligation in the Company’s August 1, 2020 consolidated balance sheet.
10
During the three months ended May 2, 2020 the company obtained a Paycheck Protection Program loan under the CARES Act totaling $0.7 million. The Paycheck Protection Program loan bears interest at 1.0% per annum, is repayable monthly starting in October 2020, and matures in April 2022. In addition, a substantial portion of the loan may be forgiven under provisions under the CARES Act based on payments for payroll, rent and utilities during the period subsequent to obtaining the loan.
7.
|
Commitments and Contingencies
|
The Company indemnifies certain customers against liability arising from third‑party claims of intellectual property rights infringement related to the Company’s trademarks. These indemnities appear in the licensing agreements with the Company’s customers, are not limited in amount or duration and generally survive the expiration of the contracts. The Company is unable to determine a range of estimated losses that it could incur related to such indemnities since the amount of any potential liabilities cannot be determined until an infringement claim has been made.
The Company is involved from time to time in various claims and other matters incidental to the Company’s business, the resolution of which is not presently expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity. Estimated reserves for contingent liabilities, including threatened or pending litigation, are recorded as liabilities in the financial statements when the outcome of these matters is deemed probable and the liability is reasonably estimable.
The Company has non-cancelable operating lease agreements with various expiration dates for office space and equipment. Certain lease agreements include options to renew, which are not reasonably certain to be exercised and therefore are not factored into our determination of the present value of lease obligations.
Operating lease costs are included as a component of selling, general and administrative expense and were $0.1 million and $0.2 million, excluding variable lease costs and sublease income, for the three and six months ended August 1, 2020 and $0.1 million and $0.3 million August 3, 2019, respectively. Cash paid for operating lease obligations is consistent with operating lease costs for the period.
As of August 1, 2020, the weighted-average remaining lease term is 4.2 years, and the weighted-average IBR is 8.8%. The right-of-use assets as of August 1, 2020 was $1.4 million. Future minimum commitments under non-cancelable operating leases as of August 1, 2020 are as follows:
(In thousands)
|
|
Operating
Leases
|
|
Remainder of Fiscal 2021
|
|
$
|
|
152
|
|
Fiscal 2022
|
|
|
|
540
|
|
Fiscal 2023
|
|
|
|
425
|
|
Fiscal 2024
|
|
|
|
434
|
|
Fiscal 2025
|
|
|
|
352
|
|
Total future minimum lease payments
|
|
|
|
1,903
|
|
Less imputed interest
|
|
|
|
(326
|
)
|
Present value of operating lease liabilities
|
|
$
|
|
1,577
|
|
11
8.
|
Revenues and Concentrations of Risk
|
Revenues by geographic area based upon the licensees’ country of domicile comprise the following:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In thousands)
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
U.S. and Canada
|
|
$
|
|
1,029
|
|
|
$
|
|
1,380
|
|
|
$
|
|
2,056
|
|
|
$
|
|
2,722
|
|
EMEA (1)
|
|
|
|
1,192
|
|
|
|
|
1,472
|
|
|
|
|
2,324
|
|
|
|
|
2,821
|
|
Asia-Pacific
|
|
|
|
1,352
|
|
|
|
|
1,856
|
|
|
|
|
2,622
|
|
|
|
|
3,538
|
|
Latin America
|
|
|
|
806
|
|
|
|
|
895
|
|
|
|
|
1,411
|
|
|
|
|
1,574
|
|
Total
|
|
$
|
|
4,379
|
|
|
$
|
|
5,603
|
|
|
$
|
|
8,413
|
|
|
$
|
|
10,655
|
|
(1) EMEA includes Europe, Middle East and Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long‑lived assets located in the United States and outside the United States amount to $0.2 million and $0.1 million, respectively, at August 1, 2020 and $0.2 million and $0.2 million, respectively, at February 1, 2020.
Deferred revenue totaled $2.3 million and $3.8 million at August 1, 2020 and February 1, 2020, respectively. Revenue recognized in the three and six months ended August 1, 2020 that was previously included in deferred revenue was $0.7 million and $1.9 million, respectively. Revenue recognized in the three and six months ended August 3, 2019 that was previously included in deferred revenue was $0.7 million and $1.4 million, respectively.
Three licensees accounted for approximately 40% of accounts receivable at August 1, 2020, and three licensees accounted for approximately 42% and two licensees for approximately 33% of revenues for the three and six months ended August 1, 2020, respectively. Four licensees accounted for approximately 45% of accounts receivable at February 1, 2020. Two licensees accounted for approximately 25% and two licensees for approximately 26% of revenues for the three and six months ended August 3, 2019.
9.
|
Earnings (Loss) Per Share
|
Basic earnings (loss) per share (“EPS”) is computed by dividing the net (loss) income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of outstanding stock options and warrants as if such securities had been exercised at the beginning of the period. The computation of diluted common shares outstanding excludes outstanding stock options and warrants that are anti‑dilutive.
10.Taxes on Income
Each reporting period, the Company evaluates the realizability of its deferred tax assets, and in recent years has maintained a full valuation allowance against its deferred tax assets in the United States and the foreign subsidiaries acquired in the Hi-Tec Acquisition. However, the CARES Act allows the Company’s historical net operating loss in Fiscal 2018 to be carried back two years and the Company’s net operating losses for Fiscal 2019, Fiscal 2020 and Fiscal 2021 to be carried back five years. The Company recognized an income tax benefit of in the six months ended August 1, 2020, which includes the estimated tax refunds expected to result from these carryback claims. The Company continues to maintain a full valuation allowance against its other deferred tax assets. These valuation allowances will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that these other deferred tax assets will be realized.
The Company’s deferred tax liabilities related to its indefinite lived Hi-Tec and Magnum trademarks cannot be used as a source of taxable income to support the realization of the Company’s 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. The impairment charge recorded during the six months ended August 1, 2020 for these indefinite-lived trademarks reduced the naked credit, which resulted in an income tax benefit during the six months ended August 1, 2020.
12
ITEM 2. 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 2021” refers to our fiscal year ending January 30, 2021 and “Fiscal 2020” refers to our fiscal year ended February 1, 2020. The following discussion and analysis should be read together with the unaudited condensed consolidated financial statements and the related notes included in this report. The information contained in this quarterly report on Form 10‑Q is not a complete description of our business or the risks associated with an investment in our securities. For additional context with which to understand our financial condition and results of operations, refer to management’s discussion and analysis of financial condition and results of operations (“MD&A”) contained in our Annual Report on Form 10‑K, for the fiscal year ended February 1, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on April 30, 2020, as well as the consolidated financial statements and notes contained therein (collectively, our “Annual Report”). In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S‑K. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report and similar disclosures in our other SEC filings discuss some of the important risk factors that may affect our business, results of operations and financial condition.
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 report and in our 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 elevate 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.
13
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 for 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
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 August 1, 2020, we had 41 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 August 1, 2020, we had contractual rights to receive $47.1 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. However, our licensees 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 and similar 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 licensees of ours have requested extensions of time for them to pay royalties due to us. We believe the impact of the global pandemic increases the uncertainty around our ability to negotiate future renewals with our licensees on favorable terms. 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. The shelter-in-place orders have begun to be lifted in various regions where our products are sold, which is expected to ease the negative effect of the pandemic on our licensees’ businesses and accordingly ease the negative effect on our royalty revenues and cash flows. However, it is uncertain whether the relaxing of these orders will result in renewed COVID-19 infections and reinstatement of shelter-in-place orders, which would extend the adverse effects of the pandemic on our financial results.
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.
14
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 and CARES Act benefits 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 have been, and are expected to be, beneficial to us. In April 2020, we received a $0.7 million loan under the Paycheck Protection Program that is being implemented by the Small Business Administration and numerous 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 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.
The CARES Act also modified federal income tax regulations related to the carryback of net operating losses. We incurred net operating losses in Fiscal 2018, Fiscal 2019, Fiscal 2020, and thus far in Fiscal 2021, which can be carried back either two or five years to receive refunds of federal income taxes previously paid. Our current estimate of federal income tax refunds available to us is approximately $9.0 million, which is subject to change, and is expected to be received in various installments as our carryback claims and amended returns are received and processed by the Internal Revenue Service. The timing of such refunds cannot be assured.
Revenue Overview
We typically enter into license agreements with retailers and wholesalers for a certain brand in specific product categories over explicit territories, which can include one country or groups of countries and territories. Our revenues by geographic territory are as follows:
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands, except percentages)
|
|
August 1, 2020
|
|
|
|
August 3, 2019
|
|
|
|
August 1, 2020
|
|
|
|
August 3, 2019
|
|
|
U.S. and Canada
|
|
$
|
|
1,029
|
|
|
|
23.5
|
|
%
|
|
$
|
|
1,380
|
|
|
|
24.6
|
|
%
|
|
$
|
|
2,056
|
|
|
|
24.4
|
|
%
|
|
$
|
|
2,722
|
|
|
|
25.5
|
|
%
|
EMEA
|
|
|
|
1,192
|
|
|
|
27.2
|
|
%
|
|
|
|
1,472
|
|
|
|
26.3
|
|
%
|
|
|
|
2,324
|
|
|
|
27.6
|
|
%
|
|
|
|
2,821
|
|
|
|
26.5
|
|
%
|
Asia-Pacific
|
|
|
|
1,352
|
|
|
|
30.9
|
|
%
|
|
|
|
1,856
|
|
|
|
33.1
|
|
%
|
|
|
|
2,622
|
|
|
|
31.2
|
|
%
|
|
|
|
3,538
|
|
|
|
33.2
|
|
%
|
Latin America
|
|
|
|
806
|
|
|
|
18.4
|
|
%
|
|
|
|
895
|
|
|
|
16.0
|
|
%
|
|
|
|
1,411
|
|
|
|
16.8
|
|
%
|
|
|
|
1,574
|
|
|
|
14.8
|
|
%
|
Total
|
|
$
|
|
4,379
|
|
|
|
100.0
|
|
%
|
|
$
|
|
5,603
|
|
|
|
100.0
|
|
%
|
|
$
|
|
8,413
|
|
|
|
100.0
|
|
%
|
|
$
|
|
10,655
|
|
|
|
100.0
|
|
%
|
United States and Canada. Our wholesale licensees in the United States experienced sales decreases, and hence our royalty revenues decreased, during the three and six months ended August 1, 2020 from the impact of the various shelter-in-place orders related to the COVID-19 pandemic. Furthermore, 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. Our royalty revenues from these categories have decreased in comparison to the prior year as our licensees adapt to the new tariff environment.
EMEA. Sales of products by our licensees that operate in Europe, the Middle East and Africa were negatively affected by shelter-in-place orders related to the COVID-19 pandemic, which had a corresponding negative impact on our royalty revenues during the three and six months ended August 1, 2020.
15
Asia-Pacific. Our Cherokee licensee in Japan opted to not renew their license at the end of Fiscal 2020. This resulted in a decrease in our royalty revenues during the three and six months ended August 1, 2020 and is expected to result in lower royalty revenues for the full year of Fiscal 2021.
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.
Sales of products by most of our licensees are being negatively affected by the numerous shelter-in-place orders related to the COVID-19 pandemic, which have depressed wholesale and retail sales of footwear, apparel and related accessories. This had a corresponding negative impact on our royalty revenues in the three and six months ended August 1, 2020. This trend is expected to continue into future quarters until the shelter-in-place orders are lifted and consumer demand is restored to pre-pandemic levels.
Results of Operations
The table below contains certain information about our continuing operations from our condensed consolidated statements of operations along with other data and percentages. Historical results are not necessarily indicative of results to be expected in future periods.
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands, except percentages)
|
|
August 1, 2020
|
|
|
|
August 3, 2019
|
|
|
|
August 1, 2020
|
|
|
|
August 3, 2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cherokee
|
|
$
|
|
929
|
|
|
|
21
|
|
%
|
|
$
|
|
1,899
|
|
|
|
34
|
|
%
|
|
$
|
|
1,759
|
|
|
|
21
|
|
%
|
|
$
|
|
3,433
|
|
|
|
32
|
|
%
|
Hi-Tec, Magnum, Interceptor and 50 Peaks
|
|
|
|
2,431
|
|
|
|
56
|
|
%
|
|
|
|
2,753
|
|
|
|
49
|
|
%
|
|
|
|
4,673
|
|
|
|
56
|
|
%
|
|
|
|
5,279
|
|
|
|
50
|
|
%
|
Hawk
|
|
|
|
109
|
|
|
|
2
|
|
%
|
|
|
|
70
|
|
|
|
1
|
|
%
|
|
|
|
208
|
|
|
|
2
|
|
%
|
|
|
|
173
|
|
|
|
2
|
|
%
|
Other brands
|
|
|
|
910
|
|
|
|
21
|
|
%
|
|
|
|
881
|
|
|
|
16
|
|
%
|
|
|
|
1,773
|
|
|
|
21
|
|
%
|
|
|
|
1,770
|
|
|
|
16
|
|
%
|
Total revenues
|
|
|
|
4,379
|
|
|
|
100
|
|
%
|
|
|
|
5,603
|
|
|
|
100
|
|
%
|
|
|
|
8,413
|
|
|
|
100
|
|
%
|
|
|
|
10,655
|
|
|
|
100
|
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and, administrative expenses
|
|
|
|
2,101
|
|
|
|
48
|
|
%
|
|
|
|
3,069
|
|
|
|
55
|
|
%
|
|
|
|
4,997
|
|
|
|
59
|
|
%
|
|
|
|
6,924
|
|
|
|
65
|
|
%
|
Stock-based compensation
|
|
|
|
145
|
|
|
|
3
|
|
%
|
|
|
|
515
|
|
|
|
9
|
|
%
|
|
|
|
295
|
|
|
|
4
|
|
%
|
|
|
|
723
|
|
|
|
7
|
|
%
|
Business acquisition and integration costs
|
|
|
|
—
|
|
|
|
—
|
|
%
|
|
|
|
145
|
|
|
|
3
|
|
%
|
|
|
|
—
|
|
|
|
—
|
|
%
|
|
|
|
211
|
|
|
|
2
|
|
%
|
Restructuring charges
|
|
|
|
(97
|
)
|
|
|
(2
|
)
|
%
|
|
|
|
—
|
|
|
|
—
|
|
%
|
|
|
|
(97
|
)
|
|
|
(1
|
)
|
%
|
|
|
|
42
|
|
|
|
0
|
|
%
|
Intangible assets and goodwill impairment charges
|
|
|
|
—
|
|
|
|
—
|
|
%
|
|
|
|
—
|
|
|
|
—
|
|
%
|
|
|
|
9,800
|
|
|
|
116
|
|
%
|
|
|
|
—
|
|
|
|
—
|
|
%
|
Depreciation and amortization
|
|
|
|
243
|
|
|
|
6
|
|
%
|
|
|
|
254
|
|
|
|
5
|
|
%
|
|
|
|
445
|
|
|
|
5
|
|
%
|
|
|
|
511
|
|
|
|
5
|
|
%
|
Total operating expenses
|
|
|
|
2,392
|
|
|
|
55
|
|
%
|
|
|
|
3,983
|
|
|
|
71
|
|
%
|
|
|
|
15,440
|
|
|
|
184
|
|
%
|
|
|
|
8,411
|
|
|
|
79
|
|
%
|
Operating income (loss)
|
|
|
|
1,987
|
|
|
|
45
|
|
%
|
|
|
|
1,620
|
|
|
|
29
|
|
%
|
|
|
|
(7,027
|
)
|
|
|
(84
|
)
|
%
|
|
|
|
2,244
|
|
|
|
21
|
|
%
|
Interest and other expense (income)
|
|
|
|
(2,545
|
)
|
|
|
(58
|
)
|
%
|
|
|
|
(2,191
|
)
|
|
|
(39
|
)
|
%
|
|
|
|
(4,760
|
)
|
|
|
(57
|
)
|
%
|
|
|
|
(4,435
|
)
|
|
|
(42
|
)
|
%
|
Loss before income taxes
|
|
|
|
(558
|
)
|
|
|
(13
|
)
|
%
|
|
|
|
(571
|
)
|
|
|
(10
|
)
|
%
|
|
|
|
(11,787
|
)
|
|
|
(140
|
)
|
%
|
|
|
|
(2,191
|
)
|
|
|
(21
|
)
|
%
|
Provision (benefit) for income taxes
|
|
|
|
775
|
|
|
|
18
|
|
%
|
|
|
|
696
|
|
|
|
12
|
|
%
|
|
|
|
(8,605
|
)
|
|
|
(102
|
)
|
%
|
|
|
|
1,334
|
|
|
|
13
|
|
%
|
Net loss
|
|
$
|
|
(1,333
|
)
|
|
|
(30
|
)
|
%
|
|
$
|
|
(1,267
|
)
|
|
|
(23
|
)
|
%
|
|
$
|
|
(3,182
|
)
|
|
|
(38
|
)
|
%
|
|
$
|
|
(3,525
|
)
|
|
|
(33
|
)
|
%
|
Non-GAAP data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
|
2,278
|
|
|
|
|
|
|
|
$
|
|
2,534
|
|
|
|
|
|
|
|
$
|
|
3,416
|
|
|
|
|
|
|
|
$
|
|
3,731
|
|
|
|
|
|
|
(1)
|
We define Adjusted EBITDA as net income before (i) interest expense, (ii) other (income) expense, net, (iii) (benefit) provision for income taxes, (iv) depreciation and amortization, (v) gain on sale of assets, (vi) intangible assets and goodwill impairment charges (vii) restructuring charges, (viii) business acquisition and integration costs and (ix) stock-based compensation charges. Adjusted EBITDA is not defined under generally accepted accounting
|
16
|
principles (“GAAP”) and it may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA, along with GAAP measures, as a measure of profitability, because Adjusted EBITDA helps us compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation, amortization and impairments, and the cost of acquiring or disposing of businesses and restructuring our operations. We believe it is useful to investors for the same reasons. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our long-term debt, non-operating income or expense items, our provision for income taxes, the effect of our expenditures for capital assets and certain intangible assets, or the costs of acquiring or disposing of businesses and restructuring our operations, or our non-cash charges for stock-based compensation and stock warrants. A reconciliation from net loss from continuing operations as reported in our condensed consolidated statement of operations to Adjusted EBITDA is as follows:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In thousands)
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
|
August 1,
2020
|
|
|
August 3,
2019
|
|
Net loss
|
|
$
|
|
(1,333
|
)
|
|
|
|
(1,267
|
)
|
|
|
|
(3,182
|
)
|
|
|
|
(3,525
|
)
|
Provision (benefit) for income taxes
|
|
|
|
775
|
|
|
|
|
696
|
|
|
|
|
(8,605
|
)
|
|
|
|
1,334
|
|
Interest expense
|
|
|
|
2,431
|
|
|
|
|
2,251
|
|
|
|
|
4,612
|
|
|
|
|
4,496
|
|
Other expense (income), net
|
|
|
|
114
|
|
|
|
|
(60
|
)
|
|
|
|
148
|
|
|
|
|
(61
|
)
|
Depreciation and amortization
|
|
|
|
243
|
|
|
|
|
254
|
|
|
|
|
445
|
|
|
|
|
511
|
|
Intangible assets and goodwill impairment charges
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
9,800
|
|
|
|
|
—
|
|
Restructuring charges
|
|
|
|
(97
|
)
|
|
|
|
—
|
|
|
|
|
(97
|
)
|
|
|
|
42
|
|
Business acquisition and integration costs
|
|
|
|
—
|
|
|
|
|
145
|
|
|
|
|
—
|
|
|
|
|
211
|
|
Stock-based compensation
|
|
|
|
145
|
|
|
|
|
515
|
|
|
|
|
295
|
|
|
|
|
723
|
|
Adjusted EBITDA
|
|
$
|
|
2,278
|
|
|
$
|
|
2,534
|
|
|
$
|
|
3,416
|
|
|
$
|
|
3,731
|
|
Three and Six Months Ended August 1, 2020 Compared to Three and Six Months Ended August 3, 2019
The decrease in royalty revenues in the three and six months ended August 1, 2020 compared to the three and six months ended August 3, 2019 was primarily due to the decrease in sales by our licensees related to the COVID-19 shelter-in-place orders and the non-renewal of our Cherokee license in Japan.
Selling, general and administrative expenses decreased 32% to $2.1 million in the three months ended August 1, 2020 from $3.1 million in the three months ended August 3, 2019 and decreased 28% to $5.0 million in the six months ended August 1, 2020 from $6.9 million in the six months ended August 3, 2019. These ongoing expenses include payroll, employee benefits, marketing, sales, legal, rent, information systems and other administrative costs that are part of our current operations. These decreases reflect the impact of cost-savings measures undertaken in response to the COVID-19 pandemic and related shortfall in revenues, and the impact of our restructuring plans that are continuing in Fiscal 2021.
Stock-based compensation in the three and six months ended August 1, 2020 was $0.1 million and $0.3 million, respectively, and comprises charges related to stock options and restricted stock grants.
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 are being amortized over their useful lives. In connection with the first quarter of Fiscal 2021, our royalty revenues were re-projected in consideration of the estimated negative impact on our licensee’s sales from the COVID-19 pandemic and related shelter-in-place orders. These re-projections indicated that the fair values of our Hi-Tec and Magnum indefinite-lived trademarks were not in excess of their carrying values. As a result, a non-cash impairment charge of $4.4 million was recorded in the three months ended May 2, 2020 to adjust these trademarks to their estimated fair value. The forecasted impact of the COVID-19 pandemic on our future revenues is subject to change as additional information becomes available. Further impairments may be required if our revenue forecasts for our indefinite-lived trademarks are further reduced in future reporting periods.
17
Our assessment of the fair value of goodwill is based primarily on the relationship between our market capitalization and the book value of our equity. Our market capitalization was adversely affected during the first quarter of Fiscal 2021 because of the COVID-19 pandemic. As a result of this impairment indicator, we performed an interim impairment test, which indicated that our goodwill was impaired. As a result, we recorded a $5.4 million non-cash impairment charge in the three months ended May 2, 2020 to reduce the book value of goodwill.
Interest expense was $2.4 million in the three months ended August 1, 2020 compared to $2.3 million in the three months ended August 3, 2019, and $4.6 million in the six months ended August 1, 2020 compared to $4.5 million in the six months ended August 3, 2019. Our term loans and Junior Notes are based on LIBOR, but we are not benefitting from declining LIBOR rates because our interest rates are subject to a 2.0% LIBOR floor.
We reported an income tax provision of $0.8 million and an income tax benefit $8.6 million in the three and six months ended August 1, 2020, respectively, compared to income tax provisions of $0.7 million and $1.3 million in the three and six months ended August 3, 2019. Congress passed the CARES Act during the three months ended May 2, 2020 which changed the federal regulations regarding the carryback of net operating losses. Our Fiscal 2018 net operating loss can now be carried back two years, and our net operating losses in Fiscal 2019, Fiscal 2020 and Fiscal 2021 can be carried back five years. We estimate these carryback claims will result in refunds of approximately $9.0 million of previously paid federal income taxes, the benefit of which was recognized during the three months ended May 2, 2020. The timing of these future cash receipts is uncertain since it is based on when the Internal Revenue Service processes our refund claims and amended returns. Even though we generated pretax losses in the three and six months ended May 4, 2019, we did not recognize tax benefits during that period, but we recorded an income tax provision, primarily as a result of deferred tax valuation allowances.
Our net loss was $1.3 million and $3.2 million in the three and six months ended August 1, 2020 compared to a net loss $1.3 million and $3.5 million in the three and six months ended August 3, 2019. Our Adjusted EBITDA decreased 10% to $2.3 million in the three months ended August 1, 2020, from $2.5 million in the three months ended August 3, 2019, and decreased 8% to $3.4 million in the six months ended August 1, 2020 from $3.7 million in the six months ended August 3, 2019.
Liquidity and Capital Resources
We generally finance our working capital needs and capital investments with operating cash flows, term loans, subordinated promissory notes and lines of credit. On August 3, 2018, we 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
Our operating activities provided $0.5 million of cash in the six months ended August 1, 2020, compared to using $3.0 million in the six months ended August 3, 2019. This $3.5 million increase in cash provided by operating activities resulted primarily from not paying a portion of our interest expense in cash. Rather, $1.9 million was paid in kind and added to the principal balance of our long-term debt. In addition, we used less cash to fund our accounts payable and restructuring obligations.
Our investing activities used $0.1 million of cash to fund trademark investments in both the six months ended August 1, 2020 and the six months ended August 3, 2019.
We received $0.7 million from the proceeds of a promissory note as part of the Paycheck Protection Program of the CARES Act in the first quarter of Fiscal 2021, which was used to fund payroll expenses, employee benefits, rent and utilities. We used $0.8 million of cash in the six months ended August 1, 2020 to make a principal payment on our term loan and pay for certain costs related to the forbearance agreement with our senior secured lender. The principal payment on our term loan in the six months ended August 3, 2019 was more than offset by $0.6 million of cash received from the exercise of stock warrants.
18
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 generally 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 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 generally 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 loans. In the first quarter of Fiscal 2021, we borrowed $0.7 under the Paycheck Protection Program of the CARES Act. The Paycheck Protection Program loan bears interest at 1.0% per annum and matures in April 2022. We anticipate that a substantial portion of the loan will be forgiven under provisions under the CARES Act based on payments for payroll, rent and utilities during the period subsequent to obtaining the loan.
Excluding the interest of 3% payable in kind on the $5.3 million term loan, the weighted-average interest rate on the term loans, the subordinated promissory notes and the Paycheck Protection Program loan at August 1, 2020 was 11.0%. Outstanding borrowings under the senior secured credit facility were $45.2 million at August 1, 2020, outstanding subordinated secured promissory notes were $14.4 million, and the outstanding Paycheck Protection Program loan was $0.7 million.
The term loans are subject to a borrowing base and include 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, and maintain a minimum cash balance. We are also required to maintain a borrowing base comprising the value of our trademarks that exceeds the outstanding balance of the term loans. If the borrowing base is less than the outstanding term loans at any measurement period, then we would be required to repay a portion of the term loan to eliminate such shortfall.
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, and the valuation report prepared by our senior secured lender during the three months ended May 2, 2020 indicated that our borrowing base was less than the outstanding balance of the term loans. However, our senior lender has agreed to forbear from enforcing its rights under the senior secured credit facility, and on September 1, 2020, the senior secured credit facility was amended, and the forbearance agreement was extended through December 31, 2020. In conjunction with the extended forbearance agreement, the senior secured credit facility was amended to reduce the Adjusted EBITDA requirement from $9.5 million to $6.5 million during the forbearance period and reduce our minimum cash requirement to $100,000 during the forbearance period. The quarterly principal payment due during the extended forbearance period was deferred, and other than approximately $85,000 per month beginning with September 1, 2020, interest payments due during the forbearance period will be paid in the form of additional principal rather than in cash. The extended forbearance agreement requires that a portion of our federal income tax refunds expected to be received during the forbearance period be used to pay in cash the interest previously accrued and added to the principal amount of the term loans, and also to pay down a portion of the term loans principal balance. After such federal income tax refunds are received, monthly interest will again be required in cash, and no further interest payment obligations will be deferred and added to the principal amount of the term loans. At the conclusion of the forbearance period, the Adjusted EBITDA requirement, the borrowing base requirement and the minimum cash requirement revert to the original terms of the senior secured credit facility. Previous forbearance agreements provided for a fee to be paid to the senior secured lender when the debt is repaid, which together with other exit fees is expected to total approximately $2.5 million. The extended forbearance agreement accelerates the maturity date of the senior secured credit facility from August 3, 2021 to March 31, 2021 or to December 31, 2020 if certain milestones are not met. The Company’s Junior Note holders agreed to accept interest payments in the form of additional principal rather than in cash from April 1, 2020 through October 1, 2020, and payments to the Junior Notes holders are generally restricted by the forbearance agreements. 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.
19
Future compliance failures under our senior secured credit facility would subject us to significant risks, including the right of our senior lender to terminate their obligations under the senior secured 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, or if we are unable to refinance our senior secured credit facility by the accelerated maturity of March 31, 2021, which could be further accelerated to December 31, 2020 if certain milestones are not met, 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. We are evaluating potential sources of working capital, 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. Our NOL carryback claims are expected to result in federal income tax refunds of approximately $9.0 million. We estimated that receipt of these tax refunds could range from one 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, and because of this uncertainty, there is substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies and Estimates
This MD&A is based upon our condensed consolidated financial statements, which are included in this report. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Refer to Note 3 of our condensed consolidated financial statements filed herewith regarding our indefinite lived trademarks and goodwill, and our Annual Report on Form 10-K for a discussion of our critical accounting policies and recent accounting pronouncements.