APEX GLOBAL BRANDS INC. As used in this discussion and analysis, "Apex Global Brands", the "Company", "we", "us" and "our" refer toApex Global Brands Inc. and its consolidated subsidiaries, unless the context indicates or requires otherwise. Additionally, "Fiscal 2021" refers to our fiscal year endingJanuary 30, 2021 and "Fiscal 2020" refers to our fiscal year endedFebruary 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 10Q 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 10K, for the fiscal year endedFebruary 1, 2020 , which was filed with theSecurities and Exchange Commission ("SEC") onApril 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 SK. The section entitled "Risk Factors" set forth in Item 1A of our Annual Report and similar disclosures in our otherSEC 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 "forwardlooking 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 forwardlooking statements, but the absence of these words does not mean that a statement is not forward-looking. Forwardlooking 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 forwardlooking 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 forwardlooking 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 andTony Hawk , we have shifted our strategy forU.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 ofAugust 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 ofAugust 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 periodtoperiod 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 inMarch 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 inSherman Oaks, California andAmsterdam inthe 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. InMarch 2020 , the federal government passed the CARES Act, which has several provisions that have been, and are expected to be, beneficial to us. InApril 2020 , we received a$0.7 million loan under the Paycheck Protection Program that is being implemented by theSmall 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 andCanada . Our wholesale licensees inthe United States experienced sales decreases, and hence our royalty revenues decreased, during the three and six months endedAugust 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 theU.S. andCanada 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 inEurope , theMiddle East andAfrica 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 endedAugust 1, 2020 . 15 --------------------------------------------------------------------------------Asia-Pacific . Our Cherokee licensee inJapan 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 endedAugust 1, 2020 and is expected to result in lower royalty revenues for the full year of Fiscal 2021.Latin America . Our royalty revenues inLatin America resulted primarily from our Cherokee Brand and Everyday California licensees inMexico ,Peru andChile . Our Hi-Tec and Magnum brands are also distributed in various other countries inLatin 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 endedAugust 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
%
% 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
August 1, August 3, August 1, August 3,
(In thousands) 2020 2019 2020 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
The decrease in royalty revenues in the three and six months endedAugust 1, 2020 compared to the three and six months endedAugust 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 inJapan . Selling, general and administrative expenses decreased 32% to$2.1 million in the three months endedAugust 1, 2020 from$3.1 million in the three months endedAugust 3, 2019 and decreased 28% to$5.0 million in the six months endedAugust 1, 2020 from$6.9 million in the six months endedAugust 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 endedAugust 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 endedMay 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 endedMay 2, 2020 to reduce the book value of goodwill. Interest expense was$2.4 million in the three months endedAugust 1, 2020 compared to$2.3 million in the three months endedAugust 3, 2019 , and$4.6 million in the six months endedAugust 1, 2020 compared to$4.5 million in the six months endedAugust 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 endedAugust 1, 2020 , respectively, compared to income tax provisions of$0.7 million and$1.3 million in the three and six months endedAugust 3, 2019 .Congress passed the CARES Act during the three months endedMay 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 endedMay 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 endedMay 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 endedAugust 1, 2020 compared to a net loss$1.3 million and$3.5 million in the three and six months endedAugust 3, 2019 . Our Adjusted EBITDA decreased 10% to$2.3 million in the three months endedAugust 1, 2020 , from$2.5 million in the three months endedAugust 3, 2019 , and decreased 8% to$3.4 million in the six months endedAugust 1, 2020 from$3.7 million in the six months endedAugust 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. OnAugust 3, 2018 , we entered into a$40.0 million term loan and$13.5 million of subordinated promissory notes, and onJanuary 30, 2019 , we obtained an incremental$5.3 million term loan. OnDecember 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 endedAugust 1, 2020 , compared to using$3.0 million in the six months endedAugust 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 endedAugust 1, 2020 and the six months endedAugust 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 endedAugust 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 endedAugust 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
OnAugust 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. OnJanuary 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 inNovember 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 inApril 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 atAugust 1, 2020 was 11.0%. Outstanding borrowings under the senior secured credit facility were$45.2 million atAugust 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 endedNovember 2, 2019 and twelve months endedFebruary 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 endedMay 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 onSeptember 1, 2020 , the senior secured credit facility was amended, and the forbearance agreement was extended throughDecember 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 withSeptember 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 fromAugust 3, 2021 toMarch 31, 2021 or toDecember 31, 2020 if certain milestones are not met. The Company'sJunior Note holders agreed to accept interest payments in the form of additional principal rather than in cash fromApril 1, 2020 throughOctober 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 ofMarch 31, 2021 , which could be further accelerated toDecember 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.
© Edgar Online, source
