Phoenix Footwear Reports New Financing and Smaller Second Quarter Loss

Consolidated net loss from continuing operations for the first six months of fiscal 2012 narrowed to $209,000 or $0.03 per share compared to a net loss of $1.0 million or $0.12 per share for the first six months of fiscal 2011.

Net sales from continuing operations for the first six months increased 10.3% to $8.9 million.

Cash provided by operating activities from continuing operations was $253,000 compared to cash used in operating activities of $724,000 for the first six months of fiscal 2011.

On July 30, 2012, the Company entered into a new $7.25 million three-year Loan and Security Agreement with AloStar Bank of Commerce replacing its former $5.25 million credit facility with Gibraltar Business Capital and Westran Industrial Loan Co. Concurrent with the execution of the new credit facility, the Company entered into a subordinated $700,000 three-year term note with Gibraltar Business Capital and completed the sale of a $350,000 of subordinated secured 1% convertible note. The new credit facility effectively expands the Company's working capital while substantially lowering its borrowing costs.

For the quarter ended June 30, 2012, net sales declined to $3.15 million or 1.7% from $3.2 million when compared to the second quarter of fiscal 2011. Net sales for the first six months of fiscal 2012 increased $828,000 or 10.3% to $8.9 million compared to $8.0 million for the first six months of fiscal 2011. For the first six months of fiscal 2012, the Company experienced improving unit sales volumes in most all of its channels of distribution, as well as an increase in the average net unit selling price.

Gross margins for the second quarter of 2012 declined slightly to 36.2% compared to 36.5% for the second quarter of fiscal 2011. For the first six months of fiscal 2012, gross margins improved 110 basis points to 37.0% compared to 35.9% in 2011. The improved gross margin for the period resulted from an increase in the average net unit selling price on a higher unit volume during the first six months of fiscal 2012 that was partly offset by an increase in the average net cost per unit.

Operating expenses continued to decrease in the second quarter and first six months of fiscal 2012 when compared to the same periods of the prior year, primarily due to reductions in legal, public company, rent and other operating expenses associated with the restructuring of the Company's operations that was largely completed during the first quarter of fiscal 2011.

Selling, general and administrative expenses or SG&A, totaled $1.4 million and $3.1 million for the second quarter and first six months of fiscal 2012, compared to $1.5 million and $3.5 million for the second quarter and first six months of fiscal 2011. SG&A as a percentage of net sales for the second quarter and first six months of fiscal 2012 was 45.2% and 35.3% compared to 47.5% and 44.0% for the second quarter and first six months of fiscal 2011.

The Company reported a net operating loss from continuing operations of $470,000 or $0.06 per share for the second quarter, compared to a net operating loss from continuing operations of $535,000 or $0.07 per share for the same period of the prior year.

For the first six months of fiscal 2012, the Company reported a net operating loss from continuing operations of $209,000 or $0.03 per share, compared to a net operating loss from continuing operations of $1.0 million or $0.12 per share for the first six months of fiscal 2011.

Earnings before interest, taxes, depreciation and amortization (or “EBITDA”) from continuing operations for the first six months of fiscal 2012 was $233,000 compared to a negative EBITDA of $541,000 for the first six months of fiscal 2011.

BANK REFINANCING

On July 30, 2012, the Company entered into a new three-year Loan and Security Agreement (the “AloStar Loan Agreement”) with AloStar Bank of Commerce, an Alabama bank (“AloStar”) that provides for up to $7.25 million in borrowing capacity consisting of a secured first lien revolving credit facility of up to $7.0 million with an initial per annum interest rate of 7.5% and a secured first lien term loan of $250,000 with an initial per annum interest rate of 8.5%, replacing the previous Loan and Security Agreement with Gibraltar Business Capital (“Gibraltar”) and Westran Industrial Loan Co. (“Westran”), that provided for up to $5.25 million in borrowing capacity consisting of a revolving credit facility of $4.75 million at a per annum interest rate of 11.25% and a term loan of $1.5 million with a per annum interest rate of 16.0%. The new AloStar Loan Agreement provides the Company with additional working capital at significantly reduced interest rates.

Concurrently with the execution of the AloStar Loan Agreement, and as a condition thereof, the Company also entered into a subordinated Loan and Security Agreement with Gibraltar Business Capital, LLC (“Gibraltar”) for a three-year $700,000 term loan with a per annum interest rate of 18.0% (the “Gibraltar Subordinated Loan Agreement”).

As an additional condition to the financing, the Company also concurrently completed the sale of $350,000 of a subordinated secured 1% convertible note (the “2012 Note,” and collectively with the 2011 Notes, the “Greenwood Notes”) to MGPLA LP (the “2012 Investor,” and together with the 2011 Investors, the “Greenwood Investors”), an affiliate of the 2011 Investors, with a conversion rate of $0.23 per share convertible into 1,521,739 shares of the Company's common stock. As a result of the issuance of the 2012 Note at a lower conversion price than the 2011 Notes, the conversion price of the 2011 Notes were adjusted from $0.334 to $0.23 per share.

Proceeds from the borrowings made on July 30, 2012, were used to pay in full the outstanding balances of the Loan and Security Agreement owed to its prior lenders, Gibraltar and Westran. As a result, all commitments under the Prior Loan Agreement and related $4.75 million Revolving Credit Note and $1.5 million Term Loan, Intellectual Property Security Agreement, and Pledge Agreement each dated November 3, 2010, were terminated, all borrowings thereunder were repaid, and all liens thereunder were released, in each case effective July 30, 2012.

The terms of the AloStar Loan Agreement, the Gibraltar Subordinated Loan Agreement, and the 2012 Purchase Agreement and related instruments and documents executed on July 30, 2012 were included as Exhibits 10.01 to 10.21 to the Company's Supplemental Report posted to the OTC Disclosure & News Service on August 4, 2012, and can be accessed by going to www.otcmarkets.com/stock/PXFG/filings.