Sherman Oaks, CA —  Apex Global Brands reported financial results for its third quarter of Fiscal 2021, which ended October 31, 2020.

“Consistent with the overall retail sector, we continued to see challenges in the third quarter,” said Henry Stupp, Chief Executive Officer of Apex Global Brands.  “The COVID-19 pandemic continues to impact our business.  While our licensees and business partners are adapting, it remains difficult to predict the near-term impact, let alone the long-term impact, on our business.  We are experiencing both weekly changes to retail operations depending on the safer-at-home policies of individual states and countries that limit in-person shopping capacity, yet many of our global retail partners are seeing a rise in online shopping.  Nevertheless, given the current state of the economy, we cannot predict if that shift to online purchasing will result in a successful holiday shopping season.”

Mr. Stupp continued, “Given the current macro conditions, we continue to make efforts to rationalize our costs and improve the efficiencies of our operations.  We have successfully reduced our costs, and, on a year-to-date basis, our SG&A expenses declined by 28% over the prior-year period.  In addition, as I noted in the prior quarter, we are achieving increased efficiency due to our extensive asset library and the introduction of newer technologies, such as 3D product development and virtual brand showrooms, which make remote working more effective.  As we enter the new calendar year, we will continue to adapt our business and work closely with each of our licensees and retail partners to best meet the challenges of the retail industry.”

CARES Act Benefits

Apex Global Brands expects to receive federal income tax refunds of approximately $9.1 million resulting from changes to the net operating losses carryback provisions of the federal tax code that came 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. A substantial portion of this loan is expected to be forgiven.

Forbearance

Apex Global Brands and its senior secured lender agreed on December 15, 2020 to amend their credit agreement and extend the forbearance through December 31, 2020 or March 31, 2021 if certain milestones are met. 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 refinance the term loans under the senior secured credit facility. In exchange for these concessions, the senior secured lender will receive additional fees, which together with other exit fees, are expected to total approximately $2.5 million. The forbearance agreement 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.

Revenues

Revenues were $4.1 million in the third quarter of Fiscal 2021, a decrease of 17% from $4.9 million in the third quarter of the prior year.   The decline in third quarter revenues reflects the non-renewal of certain licenses and the decrease in sales of licensees’ products stemming from the COVID-19 pandemic. For the first nine months of Fiscal 2021, revenues totaled $12.5 million, a decrease of 20% from $15.5 million in the first nine months of Fiscal 2020.

Operating and Non-Operating Expenses

Selling, general and administrative expenses, which comprise the Company’s normal operating expenses, were $2.3 million in the third quarter of Fiscal 2021, a decrease of 28% from $3.2 million in the third 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 nine months of Fiscal 2021, selling, general and administrative expenses also saw significant declines, totaling $7.3 million, down 28% from $10.1 million in the first nine months of Fiscal 2020. The Company incurred $0.7 million of transaction and other costs in the third quarter of Fiscal 2021, including amounts related to its forbearance agreement with its senior secured lender.

Interest expense was $2.9 million in the third quarter of Fiscal 2021, compared to $2.2 million in the third quarter of the prior year. For the first nine months of Fiscal 2021, interest expense was $7.5 million, compared to $6.7 million in the first nine 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 subordinated debt agreements, $3.3 million of interest in the first nine months of Fiscal 2021 was added to the principal balances of the underlying debt instruments and not paid in cash. Interest expense increased in comparison to the prior year due to incremental forbearance and other exit fees.

For the first nine months of Fiscal 2021, the Company reported an income tax benefit of $9.4 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 $2.0 million for the first nine months of Fiscal 2020. In the first nine months of Fiscal 2021, Apex paid $0.7 million in cash taxes, compared to $0.8 million paid in the first nine months of Fiscal 2020.

Operating loss in the third quarter of Fiscal 2021 totaled $3.8 million, compared to a loss of $3.9 million in the third quarter of the prior year. Operating loss during the first nine months of Fiscal 2021 was $10.9 million. This year-to-date operating loss resulted primarily from non-cash impairment charges of $14.4 million. In the first quarter of Fiscal 2021, the book value of the Company’s goodwill was lowered by $5.4 million due to reductions in the Company’s market capitalization, and the book value of the Company’s non-amortizing trademarks were lowered by $4.4 million due to revenue projection declines caused by the onset of the COVID-19 pandemic. The Company’s non-amortizing trademarks were lowered by an additional $4.6 million in the third quarter of Fiscal 2021 due to further reductions in the company’s revenue projections as the COVID-19 pandemic continues to hamper revenues of the Company’s licensees.

Net loss was $6.0 million in the third quarter of Fiscal 2021, or a loss of $10.58 per diluted share, on 564,000 shares outstanding, compared to net loss of $6.8 million, or a loss of $12.35 per diluted share, on 553,000 shares outstanding in the third quarter of the prior year.

Net loss for the first nine months of Fiscal 2021 was $9.2 million, or a loss of $16.34 per diluted share, on 560,000 shares outstanding, compared to a net loss of $10.4 million, or a loss of $19.32 per diluted share, on 536,000 shares outstanding in the prior year.

Adjusted EBITDA totaled $1.8 million in the third quarter of Fiscal 2021, an increase of $0.1 million from $1.7 million in the third quarter of the prior year. Adjusted EBITDA in the first nine months of Fiscal 2021 decreased to $5.2 million from $5.4 million in the first nine months of Fiscal 2020.

Balance Sheet & Liquidity Measures

As of October 31, 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 January 1, 2021 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 October 31, 2020, the Company’s outstanding borrowings under the senior secured term loans were $45.8 million, outstanding borrowings under subordinated promissory notes were $14.8 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 October 31, 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 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, which could put increasing pressure on the Company’s business model.   Furthermore, 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 refinance the debt on or prior to the maturity date.

Movement to the OTC

Apex Global Brands has been making a concerted effort over the past two years to meet the Nasdaq Stock Market’s listing requirements. However, on November 3, 2020, the Company received a notification from the Panel that it determined to delist the Company’s common stock from the Nasdaq Capital Market effective November 5, 2020. On that day, Apex Global Brand’s common stock began trading on the Pink Open Market of the OTC Markets Group under the same ticker “APEX.”

About Apex Global Brands

Apex Global Brands is a global brand management and licensing organization that markets a portfolio of high-equity lifestyle brands it owns creates and elevates. The brand portfolio spans multiple consumer product categories and retail tiers around the world and includes Hi-Tec®, Magnum®, 50 Peaks®, Interceptor®, Cherokee®, Tony Hawk®, Point Cove®, Carole Little®, Everyday California® and Sideout®. The Company currently maintains license agreements with leading retailers and manufacturers that span approximately 140 countries in over 20,000 retail locations and digital commerce. For more information, please visit the Company’s website at apexglobalbrands.com.

APEX GLOBAL BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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APEX GLOBAL BRANDS INC.
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We define Adjusted EBITDA as net income before (i) interest expense, (ii) other (expense) income, net, (iii) (benefit) provision for income taxes, (iv) depreciation and amortization, (v) intangible assets and goodwill impairment charges, (vi) restructuring charges, (vii) transaction and other costs and (viii) stock-based compensation and stock warrant charges. Adjusted EBITDA is not defined under generally accepted accounting principles (“GAAP”) and it may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA, along with GAAP measures, as a measure of profitability, because Adjusted EBITDA helps us compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization, and the cost of acquiring or disposing of businesses and restructuring our operations. We believe it is useful to investors for the same reasons. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our long-term debt, non-operating income or expense items, our provision for income taxes, the effect of our expenditures for capital assets and certain intangible assets, 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 as reported in our condensed consolidated statements of operations to Adjusted EBITDA is as follows: