Apex Global Brands reported sales declined 21.4 percent in the second quarter ending August 1. The net loss came to $1.3 million, or $2.38 a share, in-line with the year-ago period. The owner of Hi-Tec, Magnum, Tony Hawk and other lifestyle brands also said it entered into an amended forbearance agreement with senior secured lender on September 1.
Apex Global Brands include Hi-Tec, Magnum, 50 Peaks, Interceptor, Cherokee, Tony Hawk, Point Cove, Carole Little, Everyday California and Sideout.
“The COVID-19 pandemic has brought tremendous uncertainty to the retail sector, including a profound impact on our licensees domestically and abroad,” said Henry Stupp, chief executive officer of Apex Global Brands. “While we continue to onboard new licensees for our portfolio of lifestyle brands, with the rationalization and reduction of retail doors, particularly throughout the United States, there has naturally been a decline in stores and shelves to place our licensees’ products. Further, while ecommerce continues to be a bright spot, it did not have a material impact on our financial performance for the second quarter as many of our retail partners’ physical locations have remained open during the pandemic.”
“As we enter into the second half of the fiscal year, we remain acutely focused on supporting our licensees and promoting our brands in unique ways that reflect the changes in consumer interests and behavior. In light of market conditions, we also continue to monitor and identify ways to manage costs and improve our overall liquidity. On a year-to-date basis, our SG&A expenses declined nearly 30 percent over the prior-year period, but we are achieving increased efficiency due to our extensive asset library and the introduction of new technologies, including the development of virtual product showrooms. Ultimately, while we cannot predict the long-term impact the pandemic will have on our licensees’ abilities to meet their royalty agreements, we have adapted and positioned our company to manage the new realities of the retail market,” Stupp concluded.
CARES Act Benefits Update
Apex Global Brands expects to receive federal income tax refunds of approximately $9.0 million as a result of changes to the net operating losses carryback provisions of the federal tax code that resulted from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The company has submitted refund claims to the Internal Revenue Service for a portion of these tax refunds; however, the timing of these future cash receipts is unknown due to processing delays by the Internal Revenue Service related to the COVID-19 pandemic. A significant portion of these refunds are contractually required to pay down obligations to the company’s senior secured lenders.
In April 2020, the company received a $0.7 million Paycheck Protection Program loan under the CARES Act. The Paycheck Protection Program Flexibility Act has extended the time frame to use these loan proceeds for payroll, rent, utilities and interest. Apex plans to apply for loan forgiveness to the maximum allowable extent.
As previously disclosed, Apex Global Brands and its senior secured lender agreed on September 1, 2020 to amend their credit agreement and extend the forbearance through December 31, 2020. The forbearance agreement has provisions that assist Apex’s cash management and requires the company to continue to evaluate strategic alternatives designed to provide liquidity to repay the term loans under the senior secured credit facility. The forbearance agreement also accelerates the maturity of the underlying debt from August 3, 2021 to March 31, 2021 or to December 31, 2020 if certain milestones are not met. Previous forbearance agreements provide for a fee to be paid to the senior secured lender when the debt is repaid, which together with other exit fees is expected to total approximately $2.5 million.
Revenues were $4.4 million in the second quarter of Fiscal 2021, a decrease of 22 percent from $5.6 million in the second quarter of the prior year. The decline in second-quarter revenues reflects the non-renewal of certain Cherokee brand licenses and the decrease in sales of licensees’ products related to COVID-19 shelter-in-place orders. For the first six months of Fiscal 2021, revenues totaled $8.4 million, a decrease of 21 percent from $10.7 million in the first six months of Fiscal 2020.
Operating And Non-Operating Expenses
Selling, general and administrative expenses, which comprise the company’s normal operating expenses, were $2.1 million in the second quarter of Fiscal 2021, a decrease of 32 percent from $3.1 million in the second quarter of the prior year. This decrease in SG&A reflects cost-savings measures undertaken in response to the COVID-19 pandemic and the related shortfall in revenues, along with the beneficial impact of the company’s restructuring efforts, which resulted in reduced spending for payroll, facilities and general operations.
For the first six months of Fiscal 2021, selling, general and administrative expenses also saw significant declines, totaling $5.0 million, down 28 percent from $6.9 million in the first six months of Fiscal 2020.
Interest expense was $2.4 million in the second quarter of Fiscal 2021, compared with $2.3 million in the second quarter of the prior year. For the first six months of Fiscal 2021, interest expense was $4.6 million, compared with $4.5 million in the first six months of the prior year. As a result of the forbearance agreements with the company’s senior secured lender and modifications to the company’s Junior Notes, $1.9 million of interest in the first six months of Fiscal 2021 was not paid in cash but was added to the principal balances of the underlying debt instruments.
For the first six months of Fiscal 2021, the company reported an income tax benefit of $8.6 million, primarily due to changes in federal regulations regarding the carryback of net operating losses implemented by the CARES Act. This compares to an income tax expense of $1.3 million for the first six months of Fiscal 2020. In the first six months of both Fiscal 2021 and Fiscal 2020, Apex paid $0.5 million in cash taxes.
Operating income in the second quarter of Fiscal 2021 totaled $2.0 million, compared with $1.6 million in the second quarter of the prior year. Operating loss during the first six months of Fiscal 2021 was $7.0 million. This year-to-date operating loss resulted from first quarter non-cash impairment charges of $5.4 million to lower the book value of the company’s goodwill as a result of market capitalization and $4.4 million to lower the book value of the company’s non-amortizing trademarks due to revenue projection declines stemming from the COVID-19 pandemic. By comparison, operating income for the first six months of Fiscal 2020 was $2.2 million.
Net loss was $1.3 million in the second quarter of Fiscal 2021, or a loss of $2.38 per diluted share, on 560,000 shares outstanding, compared to net loss of $1.3 million, or a loss of $2.34 per diluted share, on 542,000 shares outstanding in the second quarter of the prior year.
Net loss for the first six months of Fiscal 2021, was $3.2 million, or a loss of $5.69 per diluted share, on 559,000 shares outstanding, compared to a net loss of $3.5 million, or a loss of $6.69 per diluted share, on 527,000 shares outstanding in the prior year.
Adjusted EBITDA totaled $2.3 million in the second quarter of Fiscal 2021 compared to $2.5 million in the second quarter of the prior year. Adjusted EBITDA in the first six months of Fiscal 2021 decreased to $3.4 million, compared to $3.7 million in the first half of Fiscal 2020.
Reverse Stock Split
On September 2, 2020, the company affected a one-for-ten reverse stock split, which reduced the company’s number of outstanding shares of common stock from approximately 5.6 million shares to approximately 0.6 million shares.
On September 4, 2020, the company received a notification from the Nasdaq Hearings Panel that Apex was no longer in compliance with the minimum publicly held share count requirement, and that it would consider this in its determination of Apex’s continued listing on The Nasdaq Capital Market.
For further information on the compliance requirements and monitoring procedures, please refer to the company’s Form 10-Q for the period ended August 1, 2020.
Balance Sheet And Liquidity Measures
As of August 1, 2020, the company had cash and cash equivalents of $1.6 million. The company’s forbearance agreement with its senior secured lender and the modification of the company’s subordinated promissory note agreements defer the interest and principal payments that would otherwise be payable in cash by the company, thereby improving its liquidity position. These deferrals extend through the forbearance period for the company’s senior secured debt and extend through October 1, 2020 for the company’s subordinated debt. Payments to the company’s subordinated debt holders are generally restricted by the company’s credit agreement with its senior secured lender.
As of August 1, 2020, the company’s outstanding borrowings under the senior secured term loans were $45.2 million, outstanding borrowings under subordinated promissory notes were $14.4 million, and outstanding borrowings under the Paycheck Protection Program promissory note were $0.7 million. A substantial portion of the Paycheck Protection Program loan is anticipated to be forgiven. Additional information regarding the company’s debt and the related forbearance agreement is available in Apex’s quarterly report on Form 10-Q for the period ended August 1, 2020.
Fiscal 2021 Outlook
Due to the evolving and uncertain nature of the COVID-19 pandemic and its impact on Apex Global Brands’ business, the company is maintaining its current suspension of forward-looking guidance. While revenues are expected to be down year-over-year, so too will the company’s expenses. Apex Global Brands initiated cost-saving measures beginning in the first quarter of Fiscal 2021 in response to the anticipated decline in revenues. Apex cannot provide assurance that these cost savings measures will be adequate to offset further revenue declines, and COVID-19 may have a material impact on operating results, cash flows and financial condition beyond Apex’s current expectations. The company anticipates that it may be increasingly difficult to obtain license renewals or new licenses with terms comparable to existing licenses, which could put increasing pressure on the company’s business model. The forbearance agreement with Apex’s lender accelerates the maturity date of its senior secured debt to March 31, 2021 or to December 31, 2020 if certain milestones are not met. There is substantial uncertainty about the potential success of the company’s efforts to find strategic alternatives to provide liquidity to repay the debt on or prior to the maturity date.
Apex Global Brands 2020 Annual Shareholder Meeting
Due to the evolving and uncertain nature of the COVID-19 pandemic and its impact on Apex Global Brands, the company is expecting to hold its annual meeting of stockholders in the fourth quarter of 2020 using a virtual format. These plans are subject to change.