Debt

9 Months Ended

Oct. 31, 2020

On August 3, 2018, the Company entered into a senior secured credit facility, which provided a $40.0 term loan, and $13.5 million of subordinated promissory notes (the “Junior Notes”). The credit facility was amended on January 30, 2019 to provide an additional term loan of $5.3 million. 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 the assets of the Company and are guaranteed by the Company’s subsidiaries. The Junior Notes mature in November 2021, and they are secured by a second priority lien on substantially all of the assets of Company and guaranteed by the Company’s subsidiaries. Interest is generally payable monthly on the Junior Notes, but no periodic amortization payments are required. The Junior Notes are subordinated in rights of payment and priority to the term loans but otherwise have economic terms substantially similar to the term loans. The weighted-average interest rate on both the term loans and Junior Notes at October 31, 2020 was 11.0%.

The term loans are generally subject to a borrowing base and include financial covenants and obligations regarding the operation of the Company’s 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 agreement, and maintain a specified level of cash on hand. The Company is required to maintain a borrowing base comprising the value of the Company’s 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 the Company would be required to repay a portion of the term loans to eliminate such shortfall. Events of default include, among other things, the occurrence of a change of control of the Company, and a default under the term loans agreement would also trigger a default under the Junior Notes agreements.

The Company’s operating results for the twelve months ended November 2, 2019 and February 1, 2020 resulted in violations of the minimum Adjusted EBITDA covenant, which are events of default, and the valuation report prepared by the Company’s senior secured lender during the first quarter of Fiscal 2021 indicated that the Company’s borrowing base is less than the outstanding term loan balance. However, the Company’s senior secured lender has agreed to forbear from enforcing its rights under the senior secured credit facility in response to these events of default and borrowing base shortfall, and on December 15, 2020, the senior secured credit facility was amended, and the forbearance agreement was extended through December 31, 2020 or March 31, 2021 if certain milestones are met (the Forbearance Agreement). (See Note 1, Liquidity and Going Concern). In conjunction with the Forbearance Agreement, the senior secured credit facility was amended to (i) reduce the Adjusted EBITDA requirement to $6.5 million during the forbearance period, (ii) reduce the minimum cash requirement to $100,000 during the forbearance period, (iii) defer the quarterly principal payment otherwise due during the forbearance period and (iv) accept interest payments in the form of additional principal rather than in cash during the forbearance period, other than approximately $85,000 per month beginning with September 1, 2020. The Forbearance Agreement requires that a portion of the Company’s federal income tax refunds expected to be received by the Company 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. In exchange for these concessions, the senior lender will receive an additional fee totaling 2% of the outstanding loan balance when the debt is repaid, which together with other exit fees is expected to total approximately $2.5 million. The Forbearance Agreement accelerates the maturity date of the Company’s senior secured credit facility from August 3, 2021 to March 31, 2021 or to December 31, 2020 if certain milestones are not met. As a result of the accelerated maturity, the additional fee and other exit fees are accreting starting September 1, 2020 over the accelerated life of the loans. The Company’s Junior Note holders have agreed to accept interest payments in the form of additional principal rather than in cash from April 1, 2020 through January 1, 2021, and payments to the Junior Notes holders are generally restricted by the September 2020 Forbearance Agreement.

Amounts due under the term loans at October 31, 2020 were $46.1 million, including $45.8 million of principle, unamortized debt issuance costs of $1.3 million and exit fees of $1.6 million. An additional $1.0 million of exit fees are expected to accrete by the maturity date of the term loans. Amounts due under the Junior Notes at October 31, 2020 were $14.6 million, including $14.8 million of principle and associated unamortized debt issuance costs of $0.2 million. As a result of the covenant violations and the short-term nature of the forbearance agreement referred to above, the related debt is reflected as a current obligation in the Company’s October 31, 2020 consolidated balance sheet.

During the three months ended May 2, 2020 the company obtained a Paycheck Protection Program loan under the CARES Act totaling $0.7 million. A substantial portion of this loan is expected to be forgiven under provisions of the CARES Act and related rules implemented by the Small Business Administration. The Paycheck Protection Program loan bears interest at 1.0% per annum for the balance not forgiven, and it matures in April 2022. The unforgiven portion is repayable monthly starting at the earlier of the application for forgiveness or August 2021.

Apex Global Brands Inc. 10-Q