Cherokee Global Brands reported a loss for the first quarter ended May 5 of $2.7 million, or 20 cents per share, missing analysts’ consensus estimates by 11 cents per share. The company’s revenue of $5.4 million beat estimates by $0.2 million.

“We are pleased with the progress made during our first quarter of fiscal 2019 as we continue to streamline our operations and reduce our operating expenses,” said Henry Stupp, chief executive officer. “With the sale of Flip Flop Shops complete, we look forward to leveraging our more focused platform to drive profitable growth within our existing brand portfolio and partners while building awareness and traction among new partners.

Cherokee Global Brands announced the sale of Flip Flop Shops to Bearpaw Holdings LLC earlier this month.

The company on Wednesday updated its guidance for the fiscal year ending February 2, 2019, to account for cost reduction efforts, the sale of Flip Flop Shops and the corresponding loss of revenues.

  • Revenues are anticipated to be in the range of $25 to $27 million
  • Adjusted EBITDA is expected to remain in the range of $8 to $10 million
  • SG&A run rate is now expected to approximate $17 million, a reduction of $8.4 million from fiscal 2018

“With this in mind, we are pleased to report that momentum with our Hi-Tec portfolio continues to accelerate—with licensed revenues increasing 58 percent year-over-year,” Stupp said. “It is increasingly apparent that our strategy to globalize Hi-Tec beyond footwear into a full family, lifestyle brand is proving successful.

“We continue to take actions to resolve our liquidity challenges, and we’re optimistic that our efforts to resolve the noncompliance with our existing credit agreement will result in an acceptable outcome.”

Operating Expenses

Selling, general and administrative expenses, which comprise the company’s normal operating expenses, were $4.4 million, compared to $6 million in the first quarter of the prior year. The $1.6 million, or 27 percent year-over-year decrease, is due to reduced spending for personnel along with lower professional fees and other operating expenses following the completion of the Hi-Tec consolidation.

In addition, the company is undergoing additional restructuring efforts that will support the long-term health and profitability of the organization. The restructuring includes headcount reductions and lower operating expenses as the company implements a more streamlined management structure.

Profitability Measures

The company’s operating loss was $0.2 million as compared to a loss of $2.3 million in the first quarter of the prior year.  Net loss was $2.7 million, or $0.20 per share on a diluted basis, as compared to a net loss in the prior year period of $3.3 million, or $0.25 per share on a diluted basis. Adjusted EBITDA increased 20 percent to $1 million compared to $0.9 million in the first quarter of the prior year. This improvement was due to the decrease in selling, general and administrative expenses versus the first quarter of the prior year.

Balance Sheet

At May 5, 2018, the company had cash and cash equivalents of $2.5 million and $49.1 million of borrowings outstanding under its credit agreement.

Going Concern

The company continues to face liquidity challenges with recurring operating losses and negative cash flows. Based on the company’s forecasted cash flows for the next twelve months, the company has concluded that material uncertainties regarding its ability to meet its commitments to lenders raise significant doubt as to the ability of Cherokee Global Brands to continue as a going concern. Please refer to Note 1 of the company’s condensed consolidated financial statements for the three months ended May 5, 2018 included in the company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for more information.

Management plans to address the company’s ability to continue as a going concern through further negotiations with its lender and with other potential sources of capital. The company will further evaluate its ability to meet its obligations as they come due over the next twelve months, and the resolution of the noncompliance with its credit facility is a critical part of management’s plans to meet its obligations as they come due. There is no assurance that management will be able to execute these plans.