xelb_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

or

 

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ to ___

 

Commission File Number: 001‑37527

 

XCEL BRANDS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

    

76‑0307819

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

1333 Broadway, 10th Floor, New York, NY 10018

 

 

(Address of Principal Executive Offices)

 

 

(347) 727‑2474

(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

XELB

 

NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes         No   

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company   

 

Emerging growth company   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes       No   

 

As of May 7, 2020, there were 19,047,561 shares of common stock, $.001 par value per share, of the issuer outstanding.

 

 

 

 

Table of Contents

XCEL BRANDS, INC.

INDEX

 

a

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION 

3

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4. 

Controls and Procedures

27

 

 

 

PART II - OTHER INFORMATION 

27

 

 

 

Item 1. 

Legal Proceedings

27

 

 

 

Item 1A. 

Risk Factors

27

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3. 

Defaults Upon Senior Securities

28

 

 

 

Item 4. 

Mine Safety Disclosures

28

 

 

 

Item 5. 

Other Information

28

 

 

 

Item 6. 

Exhibits

29

 

 

 

 

Signatures

30

 

2

Table of Contents

PART 1. FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

(Unaudited)

 

(Note 1)

Assets

 

 

  

 

 

  

Current Assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

4,246

 

$

4,641

Accounts receivable, net

 

 

8,843

 

 

10,622

Inventory

 

 

788

 

 

899

Prepaid expenses and other current assets

 

 

1,433

 

 

1,404

Total current assets

 

 

15,310

 

 

17,566

Property and equipment, net

 

 

4,107

 

 

3,666

Operating lease right-of-use assets

 

 

8,913

 

 

9,250

Trademarks and other intangibles, net

 

 

109,955

 

 

111,095

Restricted cash

 

 

1,109

 

 

1,109

Other assets

 

 

490

 

 

505

Total non-current assets

 

 

124,574

 

 

125,625

 

 

 

 

 

 

 

Total Assets

 

$

139,884

 

$

143,191

 

 

 

 

 

 

 

Liabilities and Equity

 

 

  

 

 

  

Current Liabilities:

 

 

  

 

 

  

Accounts payable, accrued expenses and other current liabilities

 

$

3,747

 

$

4,391

Accrued payroll

 

 

365

 

 

1,444

Current portion of operating lease obligation

 

 

1,800

 

 

1,752

Current portion of long-term debt

 

 

3,375

 

 

2,250

Total current liabilities

 

 

9,287

 

 

9,837

Long-Term Liabilities:

 

 

  

 

 

  

Long-term portion of operating lease obligation

 

 

9,297

 

 

9,773

Long-term debt, less current portion

 

 

15,471

 

 

16,571

Contingent obligation

 

 

900

 

 

900

Deferred tax liabilities, net

 

 

6,882

 

 

7,434

Other long-term liabilities

 

 

224

 

 

224

Total long-term liabilities

 

 

32,774

 

 

34,902

Total Liabilities

 

 

42,061

 

 

44,739

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

  

 

 

  

 

 

 

 

 

 

 

Equity:

 

 

  

 

 

  

Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding

 

 

 —

 

 

 —

Common stock, $.001 par value, 50,000,000 shares authorized at March 31, 2020 and December 31, 2019, respectively, and 19,047,561 and 18,866,417 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

19

 

 

19

Paid-in capital

 

 

101,945

 

 

101,736

Accumulated deficit

 

 

(4,464)

 

 

(3,659)

Total Xcel Brands, Inc. stockholders' equity

 

 

97,500

 

 

98,096

Noncontrolling interest

 

 

323

 

 

356

Total Equity

 

 

97,823

 

 

98,452

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

139,884

 

$

143,191

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

3

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Revenues

 

 

  

 

 

  

 

Net licensing revenue

 

$

5,641

 

$

7,863

 

Net sales

 

 

3,886

 

 

2,438

 

Net revenue

 

 

9,527

 

 

10,301

 

Cost of goods sold (sales)

 

 

2,400

 

 

1,832

 

Gross profit

 

 

7,127

 

 

8,469

 

 

 

 

 

 

 

 

 

Operating costs and expenses

 

 

  

 

 

  

 

Salaries, benefits and employment taxes

 

 

3,948

 

 

4,145

 

Other design and marketing costs

 

 

992

 

 

758

 

Other selling, general and administrative expenses

 

 

1,737

 

 

1,590

 

Stock-based compensation

 

 

243

 

 

347

 

Depreciation and amortization

 

 

1,303

 

 

948

 

Total operating costs and expenses

 

 

8,223

 

 

7,788

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(1,096)

 

 

681

 

 

 

 

 

 

 

 

 

Interest and finance expense

 

 

  

 

 

  

 

Interest expense - term debt

 

 

288

 

 

264

 

Other interest and finance charges

 

 

 6

 

 

26

 

Loss on extinguishment of debt

 

 

 —

 

 

189

 

Total interest and finance expense

 

 

294

 

 

479

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(1,390)

 

 

202

 

 

 

 

 

 

 

 

 

Income tax (benefit) provision

 

 

(552)

 

 

75

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(838)

 

 

127

 

Less: Net loss attributable to noncontrolling interest

 

 

(33)

 

 

 —

 

Net (loss) income attributable to Xcel Brands, Inc. stockholders

 

$

(805)

 

$

127

 

 

 

 

 

 

 

 

 

(Loss) earnings per share attributable to Xcel Brands, Inc. common stockholders:

 

 

  

 

 

  

 

Basic net (loss) income per share:

 

$

(0.04)

 

$

0.01

 

Diluted net (loss) income per share:

 

$

(0.04)

 

$

0.01

 

Weighted average number of common shares outstanding:

 

 

  

 

 

  

 

Basic weighted average common shares outstanding

 

 

18,870,398

 

 

18,562,073

 

Diluted weighted average common shares outstanding

 

 

18,870,398

 

 

18,562,763

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

4

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

For the Three Months Ended March 31, 2020 and 2019

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Xcel Brands, Inc. stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

Paid-In

 

Accumulated

 

Noncontrolling

 

Total

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

 

Equity

Balance as of December 31, 2018

 

18,138,616

 

$

18

 

$

100,097

 

$

(233)

 

$

 —

 

$

99,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in connection with the acquisition of Halston Heritage

 

777,778

 

 

 1

 

 

1,057

 

 

 —

 

 

 —

 

 

1,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense in connection with stock options and restricted stock

 

 —

 

 

 —

 

 

347

 

 

 —

 

 

 —

 

 

347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

127

 

 

 —

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2019

 

18,916,394

 

$

19

 

$

101,501

 

$

(106)

 

$

 —

 

$

101,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2019

 

18,866,417

 

$

19

 

$

101,736

 

$

(3,659)

 

$

356

 

$

98,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to employees in connection with stock grants for bonus payments

 

336,700

 

 

 —

 

 

220

 

 

 —

 

 

 —

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased from employees in exchange for withholding taxes

 

(155,556)

 

 

 —

 

 

(102)

 

 

 —

 

 

 —

 

 

(102)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense in connection with stock options and restricted stock

 

 —

 

 

 —

 

 

91

 

 

 —

 

 

 —

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(805)

 

 

(33)

 

 

(838)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2020

 

19,047,561

 

$

19

 

$

101,945

 

$

(4,464)

 

$

323

 

$

97,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

5

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

    

2020

    

2019

Cash flows from operating activities

 

 

  

 

 

  

Net (loss) income

 

$

(838)

 

$

127

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

  

Depreciation and amortization expense

 

 

1,303

 

 

948

Amortization of deferred finance costs

 

 

25

 

 

34

Stock-based compensation

 

 

243

 

 

347

Amortization of note discount

 

 

 —

 

 

16

Allowance for doubtful accounts

 

 

211

 

 

 —

Loss on extinguishment of debt

 

 

 —

 

 

189

Deferred income tax (benefit) provision

 

 

(552)

 

 

75

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

1,568

 

 

1,035

Inventory

 

 

111

 

 

571

Prepaid expenses and other assets

 

 

(13)

 

 

(492)

Accounts payable, accrued expenses and other current liabilities

 

 

(1,656)

 

 

(1,331)

Cash paid in excess of rent expense

 

 

(91)

 

 

(91)

Other liabilities

 

 

 —

 

 

(196)

Net cash provided by operating activities

 

 

311

 

 

1,232

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

  

 

 

  

Cash consideration for acquisition of Halston Heritage assets

 

 

 —

 

 

(8,830)

Purchase of property and equipment

 

 

(604)

 

 

(282)

Net cash used in investing activities

 

 

(604)

 

 

(9,112)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

  

 

 

  

Shares repurchased including vested restricted stock in exchange for withholding taxes

 

 

(102)

 

 

 —

Payment of deferred finance costs

 

 

 —

 

 

(286)

Proceeds from long-term debt

 

 

 —

 

 

7,500

Payment of long-term debt

 

 

 —

 

 

(1,742)

Net cash (used in) provided by financing activities

 

 

(102)

 

 

5,472

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(395)

 

 

(2,408)

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

5,750

 

 

10,319

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period

 

$

5,355

 

$

7,911

 

 

 

 

 

 

 

Reconciliation to amounts on consolidated balance sheets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

4,246

 

$

6,802

Restricted cash

 

 

1,109

 

 

1,109

Total cash, cash equivalents, and restricted cash

 

$

5,355

 

$

7,911

 

 

 

 

 

 

 

Supplemental disclosure of non-cash activities:

 

 

  

 

 

  

Operating lease right-of-use asset

 

$

 —

 

$

10,409

Operating lease obligation

 

$

 —

 

$

13,210

Accrued rent offset to operating lease right-of-use assets

 

$

 —

 

$

2,801

Settlement of seller note through offset to receivable

 

$

 —

 

$

600

Settlement of contingent obligation through offset to note receivable

 

$

 —

 

$

100

Issuance of common stock in connection with Halston Heritage assets acquisition

 

$

 —

 

$

1,058

Contingent obligation related to acquisition of Halston Heritage assets at fair value

 

$

 —

 

$

900

Liability for equity-based bonuses

 

$

(68)

 

$

 —

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

Cash paid during the period for income taxes

 

$

17

 

$

10

Cash paid during the period for interest

 

$

290

 

$

458

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

6

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

1. Nature of Operations, Background, and Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2019 (which has been derived from audited financial statements) and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions to Form 10‑Q and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position, and cash flows of Xcel Brands, Inc. and its subsidiaries (the “Company” or "Xcel"). The results of operations for the interim periods presented herein are not necessarily indicative of the results for the entire fiscal year or for any future interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019, as filed with the SEC on April 14, 2020.

The Company is a media and consumer products company engaged in the design, production, marketing, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands. The Company has developed a design, production, and supply chain capability driven by its proprietary integrated technology platform. Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the Judith Ripka brands (the "Ripka Brand"), the Halston brands (the "Halston Brands"), the C Wonder brands (the "C Wonder Brand"), and other proprietary brands. The Company also manages the Longaberger brand (“the Longaberger Brand”) through its 50% ownership interest in Longaberger Licensing, LLC. The Company designs, produces, markets, and distributes products, and in certain cases, licenses its brands to third parties, and generates licensing fees. The Company and its licensees distribute through a ubiquitous-channel retail sales strategy, which includes distribution through interactive television, the internet, and traditional brick-and-mortar retail channels.

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Update ("ASU") No. 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” effective January 1, 2020. This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance did not have any impact on the Company’s results of operations, cash flows, and financial condition.

 

7

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

2. Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted

    

 

 

    

 

 

    

 

 

 

 

Average

 

March 31, 2020

 

 

Amortization

 

Gross Carrying

 

Accumulated

 

Net Carrying

($ in thousands)

 

Period

 

Amount

 

Amortization

 

Amount

Trademarks (indefinite-lived)

 

n/a

 

$

44,500

 

$

 —

 

$

44,500

Trademarks (finite-lived)

 

15 years

 

 

34,613

 

 

5,137

 

 

29,476

Trademarks (finite-lived)

 

18 years

 

 

38,194

 

 

2,598

 

 

35,596

Other intellectual property

 

7 years

 

 

762

 

 

455

 

 

307

Copyrights and other intellectual property

 

10 years

 

 

190

 

 

114

 

 

76

Total

 

 

 

$

118,259

 

$

8,304

 

$

109,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted

    

 

 

    

 

 

    

 

 

 

 

Average

 

December 31, 2019

 

 

Amortization

 

Gross Carrying

 

Accumulated

 

Net Carrying

($ in thousands)

 

Period

 

Amount

 

Amortization

 

Amount

Trademarks (indefinite-lived)

 

n/a

 

$

62,900

 

$

 —

 

$

62,900

Trademarks (finite-lived)

 

15 years

 

 

16,213

 

 

4,560

 

 

11,653

Trademarks (finite-lived)

 

18 years

 

 

38,194

 

 

2,067

 

 

36,127

Other intellectual property

 

7 years

 

 

762

 

 

428

 

 

334

Copyrights and other intellectual property

 

10 years

 

 

190

 

 

109

 

 

81

Total

 

  

 

$

118,259

 

$

7,164

 

$

111,095

 

Amortization expense for intangible assets was approximately $1.14 million for the three-month period ended March 31, 2020 (the "current quarter") and was approximately $0.77 million for the three-month period ended March 31, 2019 (the "prior year quarter").

Effective January 1, 2020, the Company determined that the Ripka Brand, inclusive of all its trademarks, has a finite life of 15 years, and is amortized on a straight-line basis accordingly. Prior to January 1, 2020, the Ripka Brand trademarks were considered indefinite-lived assets.

The trademarks related to the Isaac Mizrahi Brand have been determined to have indefinite useful lives and, accordingly, no amortization has been recorded for these assets.

3. Significant Contracts

QVC Agreements

Under the Company’s agreements with QVC, QVC is required to pay the Company fees based primarily on a percentage of its net sales of Isaac Mizrahi, Ripka, and H Halston branded merchandise. QVC royalty revenue represents a significant portion of the Company’s total revenues.

·

Total revenues from QVC totaled $4.69 million and $6.86 million for the current and prior year quarter, respectively, representing approximately 49% and 82% of the Company’s total net revenues for the current and prior year quarter, respectively.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

·

As of March 31, 2020 and December 31, 2019, the Company had receivables from QVC of $4.59 million and $4.33 million, respectively, representing approximately 52% and 41% of the Company’s total receivables, respectively.

 

4. Leases

The Company has operating leases for its current office, former office, and certain equipment with a term of 12 months or less. The Company’s office leases have remaining lease terms of approximately 2 years to 8 years.  

Under GAAP, a lessee is generally required to recognize a liability for its obligation to make future lease payments (the lease liability) and a right-of-use (“ROU”) asset representing its right to use the underlying leased asset for the lease term.  The Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities on the Company’s condensed consolidated balance sheets. The Company does not recognize lease liabilities and ROU assets for lease terms of 12 months or less, but recognizes such lease payments in net income on a straight-line basis over the lease terms.

Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

For the current and prior year quarter, lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was $0.4 million.

As of March 31, 2020, the weighted average remaining operating lease term was 6.6 years and the weighted average discount rate for operating leases was 6.3%.

Cash paid for amounts included in the measurement of operating lease liabilities in both the current and prior year quarter was $0.6 million.

As of March 31, 2020, the maturities of lease liabilities were as follows:

 

 

 

 

 

($ in thousands)

    

 

 

Remainder of 2020

 

$

1,817

2021

 

 

2,577

2022

 

 

1,732

2023

 

 

1,552

2024

 

 

1,552

After 2024

 

 

4,398

Total lease payments

 

 

13,628

Less: Discount

 

 

2,531

Present value of lease liabilities

 

 

11,097

Current portion of lease liabilities

 

 

1,800

Non-current portion of lease liabilities

 

$

9,297

 

 

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

5. Debt and Contingent Obligation

Debt

 

The Company’s net carrying amount of debt was comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

($ in thousands)

    

2020

    

2019

 

Xcel Term Loan

 

$

19,000

 

$

19,000

 

Unamortized deferred finance costs related to term loan

 

 

(154)

 

 

(179)

 

Total

 

 

18,846

 

 

18,821

 

Current portion of long-term debt

 

 

3,375

 

 

2,250

 

Long-term debt

 

$

15,471

 

$

16,571

 

 

On February 11, 2019, the Company entered into an amended loan agreement with Bank Hapoalim B.M. (“BHI”), which amended and restated the prior Xcel Term Loan. Immediately prior to February 11, 2019, the aggregate principal amount of the prior Xcel Term Loan was $14.5 million. Pursuant to the Xcel Term Loan agreement, the Lenders extended to Xcel an additional term loan in the amount of $7.5 million, such that, as of February 11, 2019, the aggregate outstanding balance of all the term loans extended by BHI to Xcel was $22.0 million, which amount has been divided under the Xcel Term Loan agreement into two term loans: (1) a term loan in the amount of $7.3 million (“Term Loan A”) and (2) a term loan in the amount of $14.7 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”).

The terms and conditions of the Xcel Term Loan resulted in significantly different debt service payment requirements compared with the prior term debt with BHI. Management assessed and determined that this amendment resulted in a loss on extinguishment of debt and recognized a loss of $0.2 million (consisting of unamortized deferred finance costs) during the prior year quarter. Upon entering into the Xcel Term Loan, Xcel paid an upfront fee in the amount of $0.09 million to BHI.

The Xcel Term Loan also allows that BHI and any other lender party to the Xcel Term Loan (collectively, the “Lenders”) can provide to Xcel a revolving loan facility and a letter of credit facility, the terms of each of which shall be agreed to by Xcel and the Lenders. Amounts advanced under the revolving loan facility (the “Revolving Loans”) will be used for the purpose of consummating acquisitions by Xcel or its subsidiaries that are or become parties to the Xcel Term Loan. Xcel will have the right to convert Revolving Loans to incremental term loans (the “Incremental Term Loans”) in minimum amounts of $5.0 million. The Company has not drawn down any funds under either the revolving loan facility or letter of credit facility.

On April 13, 2020, the Company further amended its Second Amended and Restated Loan and Security Agreement with BHI. Under this amendment, the quarterly installment payment due March 31, 2020 was deferred, and the amounts of the quarterly installment payments due throughout the remainder of 2020 were reduced, while the amount of principal to be repaid through variable payments based on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. Further, this amendment permits Xcel to incur unsecured debt through the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and excludes any associated PPP debt and debt service from the covenant calculations. There were no changes to the total principal balance, interest rate, or maturity date.

The Term Loans mature on December 31, 2023; Incremental Term Loans shall mature on the date set forth in the applicable term note; and Revolving Loans and the letter of credit facility shall mature on such date as agreed upon by Xcel and the Lenders. Any letter of credit issued under Xcel Term Loan shall terminate no later than one year following the date of issuance thereof.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

Principal on the Xcel Term Loan, as amended, is payable in fixed installments as follows:

 

 

 

 

 

($ in thousands)

Installment Payment Dates

    

Amount

June 30, 2020, September 30, 2020, and December 31, 2020

 

$

750

 

 

 

 

March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021

 

$

1,125

 

 

 

 

April 30, 2021

 

$

750

 

 

 

 

March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022

 

$

1,125

 

 

 

 

March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023

 

$

1,250

 

In addition to the fixed installments outlined above, commencing with the fiscal quarter ended March 31, 2021, the Company is required to repay a portion of the Xcel Term Loan in an amount equal to 50% of the excess cash flow for the fiscal quarter, provided that no early termination fee shall be payable with respect to any such payment. Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash principal paid or payable during such period, and (iii) all dividends declared and paid (or which could have been declared and paid) during such period to equity holders of any credit party treated as a disregarded entity for tax purposes. To the extent that the cumulative amount of such variable repayments made is less than $2.00 million as of March 31, 2022, any such shortfall must be repaid at that date.

Thus, the aggregate remaining annual principal payments under the Xcel Term Loan are as follows:

 

 

 

 

 

 

 

Amount of

($ in thousands)

 

Principal

Year Ending December 31, 

    

Payment

2020

 

$

2,250

2021

 

 

5,250

2022

 

 

6,500

2023

 

 

5,000

Total

 

$

19,000

 

Xcel has the right to prepay the Term Loans, Incremental Term Loans, Revolving Loans, and obligations with respect to letters of credit and accrued and unpaid interest thereon and to terminate the Lenders’ obligations to make Revolving Loans and issue letters of credit; provided that any prepayment of less than all of the outstanding balances of the Term Loans and Incremental Term Loans shall be applied to the remaining amounts due in inverse order of maturity.

If any Term Loan or any Incremental Term Loan is prepaid on or prior to the third anniversary of the Closing Date (including as a result of an event of default), Xcel shall pay an early termination fee as follows: an amount equal to the principal amount of the Term Loan or Incremental Term Loan, as applicable, being prepaid, multiplied by: (i) two percent (2.00%) if any of Term Loan B or any Incremental Term Loan is prepaid on or before the second anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable; (ii) one percent (1.00%) if any of Term Loan A is prepaid on or before the second anniversary of the Closing Date; (iii) one percent (1.00%) if any of Term Loan B or any Incremental Term Loan is prepaid after the second anniversary of the later of the Closing Date or such Incremental Term Loan was made, as applicable, but on or before the third anniversary of such date; (iv) one-half of one percent (0.50%) if any of Term Loan A is prepaid after the second anniversary of the Closing Date, but on or before

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

the third anniversary of such date; or (v) zero percent (0.00%) if any Term Loan or any Incremental Term Loan is prepaid after the third anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable.

Notwithstanding the above, Xcel may make a voluntary prepayment of up to $0.75 million without any early termination fees. Any such prepayment would be applied against the April 30, 2021 fixed installment payment and would be excluded from the computation of excess cash flows.

Xcel’s obligations under the Xcel Term Loan are guaranteed by and secured by all of the assets of Xcel and its wholly owned subsidiaries, as well as any subsidiary formed or acquired that becomes a credit party to the Xcel Term Loan agreement (the “Guarantors”) and, subject to certain limitations contained in Xcel Term Loan, equity interests of the Guarantors. Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration will be paid other than by cash of Xcel or by the issuance of equity interest of Xcel.

Interest on Term Loan A accrues at a fixed rate of 5.1% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on Term Loan B accrues at a fixed rate of 6.25% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on the Revolving Loans will accrue at either the Base Rate or LIBOR, as elected by Xcel, plus a margin to be agreed to by Xcel and the Lenders and will be payable on the first day of each month. Base Rate is defined in the Xcel Term Loan agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York. Interest on the Incremental Term Loans will accrue at rates to be agreed to by Xcel and the Lenders and will be payable on each day on which the scheduled principal payments under the applicable note are required to be made.

The Xcel Term Loan contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of Xcel (on a consolidated basis with Xcel and the Guarantors under the Second Amended and Restated Loan and Security Agreement):

·

net worth of at least $90.0 million at the end of each fiscal quarter;

·

liquid assets of at least $3.25 million through the earlier of December 31, 2020 or such time as any PPP loan proceeds are received by the Company, at least $4.0 million through December 31, 2020 provided that PPP loan proceeds have been received by the Company, and at least $5.0 million thereafter;

·

EBITDA shall not be less than $5.0 million for the twelve fiscal month period ended March 31, 2020, and $4.8 million for the twelve fiscal month period ending June 30, 2020;

·

the fixed charge coverage ratio for the twelve fiscal month period ending at the end of each fiscal quarter shall not be less than the ratio set forth below:

 

 

 

 

Fiscal Quarter End

    

Fixed Charge Coverage Ratio

September 30, 2020

 

1.00 to 1.00

December 31, 2020, and thereafter

 

1.10 to 1.00

 

·

capital expenditures (excluding any capitalized compensation costs) shall not exceed $1.6 million for the fiscal year ending December 31, 2020, and $0.7 million for any fiscal year beginning after December 31, 2020; and

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

·

the leverage ratio for the twelve fiscal month period ending at the end of each fiscal period set forth below shall not exceed the ratio below:

 

 

 

 

Fiscal Period

    

Maximum Leverage Ratio

December 31, 2019

 

2.90 to 1.00

June 30, 2020

 

4.25 to 1.00

September 30, 2020

 

3.50 to 1.00

December 31, 2020

 

2.75 to 1.00

March 31, 2021, June 30, 2021 and September 30, 2021

 

1.70 to 1.00

December 31, 2021 and each Fiscal Quarter end thereafter

 

1.50 to 1.00

 

The Company was in compliance with all applicable covenants as of March 31, 2020.

For the current and prior year quarter, the Company incurred aggregate interest expense related to term loan debt of approximately $288,000 and $260,000, respectively.

Contingent Obligation 

In connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from the H Company IP, LLC (“HIP”), the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to an aggregate of $6.0 million, based on royalties earned through December 31, 2022. The Halston Heritage Earn-Out of $0.9 million is recorded as a  long-term liability at March 31, 2020 and December 31, 2019 in the accompanying condensed consolidated balance sheets, based on the difference between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid. In accordance with Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity,” the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying condensed consolidated balance sheets because of the variable number of shares payable under the agreement.

 

6.Stockholders’ Equity

2011 Equity Incentive Plan

The Company’s 2011 Equity Incentive Plan, as amended and restated (the “Plan”), is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 13,000,000 shares of common stock are eligible for issuance under the Plan. The Plan provides for the grant of any or all of the following types of awards: stock options, restricted stock, deferred stock, stock appreciation rights, and other stock-based awards. The Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board.

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation,” by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable.

The fair value of options and warrants is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The risk-free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

on the average long-term implied volatilities of peer companies, and expected life is based on the estimated average of the life of options and warrants using the simplified method. The Company utilizes the simplified method to determine the expected life of the options and warrants due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

Restricted stock awards are valued using the fair value of the Company’s stock at the date of grant.

The Company accounts for non-employee awards in accordance with ASU 2018‑07, “Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting”. Such awards are measured at the grant-date fair value of the equity instruments to be issued, and the Company recognizes compensation cost for grants to non-employees on a straight-line basis over the period of the grant.

For stock option awards for which vesting is contingent upon the achievement of certain performance targets, the timing and amount of compensation expense recognized is based upon the Company’s projections and estimates of the relevant performance metric(s) until the time the performance obligation is satisfied.

Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur.

Stock Options

Options granted under the Plan expire at various times - either five,  seven, or ten years from the date of grant, depending on the particular grant.

A summary of the Company’s stock options activity for the current quarter is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

Number of

 

Exercise

 

Life

 

Intrinsic

 

    

Options

    

Price

    

(in Years)

    

Value

Outstanding at January 1, 2020

 

7,222,625

 

$

3.33

 

5.82

 

$

 —

Granted

 

230,000

 

 

2.23

 

  

 

 

  

Canceled

 

 —

 

 

 —

 

  

 

 

  

Exercised

 

 —

 

 

 —

 

  

 

 

  

Expired/Forfeited

 

(121,000)

 

 

1.81

 

  

 

 

  

Outstanding at March 31, 2020, and expected to vest

 

7,331,625

 

$

3.32

 

5.57

 

$

 —

Exercisable at March 31, 2020

 

2,940,125