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 September 30, 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 November 6, 2020, there were 19,231,040 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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II - OTHER INFORMATION

34

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

36

Signatures

37

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)

    

September 30, 2020

    

December 31, 2019

(Unaudited)

(Note 1)

Assets

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

4,783

$

4,641

Accounts receivable, net of allowances of $1,163 and $155, respectively

 

8,188

 

10,622

Inventory

 

723

 

899

Prepaid expenses and other current assets

 

1,426

 

1,404

Total current assets

 

15,120

 

17,566

Property and equipment, net

 

3,604

 

3,666

Operating lease right-of-use assets

9,019

9,250

Trademarks and other intangibles, net

 

107,675

 

111,095

Restricted cash

 

1,109

 

1,109

Other assets

 

297

 

505

Total non-current assets

 

121,704

 

125,625

Total Assets

$

136,824

$

143,191

Liabilities and Equity

 

  

 

  

Current Liabilities:

 

  

 

  

Accounts payable, accrued expenses and other current liabilities

$

2,908

$

4,391

Accrued payroll

 

618

 

1,444

Current portion of operating lease obligation

1,917

1,752

Current portion of long-term debt

 

2,850

 

2,250

Total current liabilities

 

8,293

 

9,837

Long-Term Liabilities:

 

  

 

  

Long-term portion of operating lease obligation

9,101

9,773

Long-term debt, less current portion

 

14,523

 

16,571

Contingent obligation

900

900

Deferred tax liabilities, net

 

7,165

 

7,434

Other long-term liabilities

 

224

 

224

Total long-term liabilities

 

31,913

 

34,902

Total Liabilities

 

40,206

 

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, and 19,231,040 and 18,866,417 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

19

 

19

Paid-in capital

 

102,236

 

101,736

Accumulated deficit

 

(6,198)

 

(3,659)

Total Xcel Brands, Inc. stockholders' equity

 

96,057

 

98,096

Noncontrolling interest

561

356

Total Equity

 

96,618

 

98,452

Total Liabilities and Equity

$

136,824

$

143,191

See Notes to Unaudited Condensed Consolidated Financial Statements.

3


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Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Revenues

 

  

 

  

  

 

  

Net licensing revenue

$

5,236

$

6,428

$

15,378

$

21,094

Net sales

 

2,155

 

4,504

 

6,590

 

9,277

Net revenue

 

7,391

 

10,932

 

21,968

 

30,371

Cost of goods sold (sales)

 

1,270

 

2,950

 

3,923

 

6,549

Gross profit

 

6,121

 

7,982

 

18,045

 

23,822

Operating costs and expenses

 

  

 

  

 

  

 

  

Salaries, benefits and employment taxes

 

2,968

 

4,045

 

9,798

 

12,038

Other design and marketing costs

 

706

 

797

 

2,336

 

2,352

Other selling, general and administrative expenses

 

1,642

 

1,356

 

5,027

 

4,014

(Recovery of) costs in connection with potential acquisition

 

(189)

 

126

 

(210)

 

231

Stock-based compensation

 

49

 

295

 

780

 

777

Depreciation and amortization

 

1,437

 

991

 

4,069

 

2,939

Government assistance - Paycheck Protection Program and other

(176)

(1,816)

Property and equipment impairment

 

31

 

 

113

 

Total operating costs and expenses

 

6,468

 

7,610

 

20,097

 

22,351

Other income

46

46

2,850

Operating (loss) income

 

(301)

 

372

 

(2,006)

 

4,321

Interest and finance expense

 

  

 

  

 

  

 

  

Interest expense and other finance charges

304

330

897

968

Loss on extinguishment of debt

189

Total interest and finance expense

 

304

 

330

 

897

 

1,157

(Loss) income before income taxes

 

(605)

 

42

 

(2,903)

 

3,164

Income tax (benefit) provision

 

(145)

 

137

 

(269)

 

1,280

Net (loss) income

(460)

(95)

(2,634)

1,884

Less: Net loss attributable to noncontrolling interest

(26)

(95)

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

$

(434)

$

(95)

$

(2,539)

$

1,884

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

 

  

 

  

 

  

 

  

Basic net (loss) income per share:

$

(0.02)

$

(0.01)

$

(0.13)

$

0.10

Diluted net (loss) income per share:

$

(0.02)

$

(0.01)

$

(0.13)

$

0.10

Weighted average number of common shares outstanding:

 

  

 

  

 

  

 

  

Basic weighted average common shares outstanding

 

19,231,040

 

18,975,265

 

19,078,453

 

18,839,424

Diluted weighted average common shares outstanding

 

19,231,040

 

18,975,265

 

19,078,453

 

18,840,149

See Notes to Unaudited Condensed Consolidated Financial Statements.

4


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Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

Xcel Brands, Inc. Stockholders

Retained

Common Stock

Earnings

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

Compensation expense in connection with stock options and restricted stock

135

135

Shares issued to employees in connection with restricted stock grants

 

60,000

 

 

 

 

 

Net income

 

 

 

 

1,852

 

 

1,852

Balance as of June 30, 2019

 

18,976,394

19

101,636

1,746

103,401

Compensation expense in connection with stock options and restricted stock

127

127

Shares repurchased including vested restricted stock in exchange for withholding taxes

(18,147)

(24)

(24)

Net loss

(95)

(95)

Balance as of September 30, 2019

18,958,247

$

19

$

101,739

$

1,651

$

$

103,409

Balance as of December 31, 2019

 

18,866,417

$

19

$

101,736

$

(3,659)

$

356

$

98,452

Compensation expense in connection with stock options and restricted stock

91

91

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

 

336,700

 

 

220

 

 

 

220

Shares repurchased from executive in exchange for withholding taxes

(155,556)

(102)

(102)

Net loss

 

 

 

 

(805)

(33)

 

(838)

Balance as of March 31, 2020

 

19,047,561

19

101,945

(4,464)

323

97,823

Compensation expense in connection with stock options and restricted stock

55

55

Shares issued to employees in connection with stock grants

 

270,728

 

 

265

 

 

 

265

Shares repurchased from employees in exchange for withholding taxes

(87,249)

 

 

(85)

 

 

 

(85)

Additional investment in Longaberger Licensing, LLC by non-controlling interest holder

 

 

 

 

300

 

300

Net loss

 

 

 

 

(1,300)

 

(36)

 

(1,336)

Balance as of June 30, 2020

 

19,231,040

19

102,180

(5,764)

587

97,022

Compensation expense in connection with stock options and restricted stock

56

56

Net loss

(434)

(26)

(460)

Balance as of September 30, 2020

19,231,040

$

19

$

102,236

$

(6,198)

$

561

$

96,618

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

For the Nine Months Ended September 30, 

    

2020

    

2019

Cash flows from operating activities

 

  

 

  

Net (loss) income

$

(2,634)

$

1,884

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

 

 

  

Depreciation and amortization expense

 

4,069

 

2,939

Property and equipment impairment

 

113

 

Amortization of deferred finance costs

 

72

 

114

Stock-based compensation

 

780

 

777

Amortization of note discount

 

 

16

Allowance for doubtful accounts

1,054

(144)

Loss on extinguishment of debt

189

Deferred income tax (benefit) provision

 

(269)

 

1,280

Net gain on sale of assets

(46)

Gain on reduction of contingent obligation

(2,850)

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

1,380

 

1,182

Inventory

 

176

 

(87)

Prepaid expenses and other assets

 

187

 

(14)

Accounts payable, accrued expenses and other current liabilities

 

(2,403)

 

(1,744)

Cash paid in excess of rent expense

(276)

(337)

Other liabilities

 

 

(196)

Net cash provided by operating activities

 

2,203

 

3,009

Cash flows from investing activities

 

  

 

  

Cash consideration for acquisition of Halston Heritage assets

(8,830)

Net proceeds from sale of assets

46

Purchase of property and equipment

 

(700)

 

(918)

Net cash used in investing activities

 

(654)

 

(9,748)

Cash flows from financing activities

 

  

 

  

Shares repurchased including vested restricted stock in exchange for withholding taxes

 

(187)

 

(24)

Cash contribution from non-controlling interest

300

Payment of deferred finance costs

 

(20)

 

(315)

Proceeds from long-term debt

7,500

Payment of long-term debt

 

(1,500)

 

(3,742)

Net cash (used in) provided by financing activities

 

(1,407)

 

3,419

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

142

 

(3,320)

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

5,750

10,319

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

$

5,892

$

6,999

Reconciliation to amounts on consolidated balance sheets:

 

  

 

  

Cash and cash equivalents

$

4,783

$

5,890

Restricted cash

 

1,109

 

1,109

Total cash, cash equivalents, and restricted cash

$

5,892

$

6,999

Supplemental disclosure of non-cash activities:

 

  

 

  

Operating lease right-of-use asset

$

797

$

10,409

Operating lease obligation

$

797

$

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

$

93

$

168

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for income taxes

$

58

$

91

Cash paid during the period for interest

$

1,092

$

1,108

See Notes to Unaudited Condensed Consolidated Financial Statements.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

2. Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

    

Weighted

    

    

    

 

Average

 

September 30, 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

 

6,291

 

28,322

Trademarks (finite-lived)

18 years

38,194

3,660

34,534

Other intellectual property

 

7 years

 

762

 

510

 

252

Copyrights and other intellectual property

 

10 years

 

190

 

123

 

67

Total

$

118,259

$

10,584

$

107,675

    

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 September 30, 2020 (the "current quarter") and was approximately $0.83 million for the three-month period ended September 30, 2019 (the "prior year quarter"). Amortization expense for intangible assets was approximately $3.42 million for the nine-month period ended September 30, 2020 (the “current nine months”) and was approximately $2.43 million for the nine-month period ended September 30, 2019 (the “prior year nine months”).

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.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

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 $4.70 million and $5.16 million for the current and prior year quarter, respectively, representing approximately 64% and 47% of the Company’s total net revenues for the current and prior year quarter, respectively.
Total revenues from QVC totaled $13.44 million and $17.96 million for the current and prior year nine months, respectively, representing approximately 61% and 59% of the Company’s total net revenues for the current and prior year nine months, respectively.
As of September 30, 2020 and December 31, 2019, the Company had receivables from QVC of $4.72 million and $5.30 million, respectively, representing approximately 58% and 50% of the Company’s total receivables, respectively.

4. Allowance for Doubtful Accounts

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $1,163,000 and $155,000 as of September 30, 2020 and December 31, 2019, respectively. The Company recognized bad debt expense of $371,000 and $0 for the current quarter and prior year quarter, respectively, and recognized bad debt expense of $1,054,000 and a recovery of $(144,000) for the current nine months and prior year nine months, respectively.

Included within these amounts, the current quarter and current nine months reflect $385,000 and $971,000, respectively, of bad debt expense related to the bankruptcy of several retail customers due to the novel coronavirus disease pandemic. The total allowance of $971,000 against such customers’ outstanding receivable balances of $1.21 million at September 30, 2020 represents management’s best estimate of collectibility, based on information currently available.

5. Leases

The Company has operating leases for its current office, former office, and a planned retail store location, as well as certain equipment with a term of 12 months or less. The Company’s real estate leases have remaining lease terms of between 1 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 the Company’s leases typically 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

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

that the Company will exercise that option. Lease expense for operating lease payments related to office leases is recognized on a straight-line basis over the lease term. Lease expense for operating lease payments related to retail leases is recognized on a straight-line basis over the period of operation, as this is representative of the pattern in which benefit is derived from the lease.

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. For the current and prior year nine months, lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was $1.2 million.

As of September 30, 2020, the weighted average remaining operating lease term was 6.4 years and the weighted average discount rate for operating leases was 6.25%.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.6 million in both the current quarter and prior year quarter, $1.2 million in the current nine months, and $1.8 million in the prior year nine months.

As of September 30, 2020, the maturities of lease liabilities were as follows:

($ in thousands)

    

Remainder of 2020

$

711

2021

2,544

2022

 

1,891

2023

 

1,711

2024

 

1,711

After 2024

 

4,886

Total lease payments

13,454

Less: Discount

2,436

Present value of lease liabilities

11,018

Current portion of lease liabilities

1,917

Non-current portion of lease liabilities

$

9,101

In Note 12 of the Company’s Form 10-Q for the quarterly period ended June 30, 2020, the Company had previously disclosed (as a subsequent event) that it had entered into an assignment and assumption agreement with the landlord and subtenant at its former office location at 475 Tenth Avenue, New York, NY. However, this agreement was later voided during the current quarter, and ultimately was not consummated.

6. Debt

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

September 30, 

December 31, 

($ in thousands)

    

2020

    

2019

Xcel Term Loan

$

17,500

$

19,000

Unamortized deferred finance costs related to term loan

 

(127)

 

(179)

Total

 

17,373

 

18,821

Current portion of long-term debt

 

2,850

 

2,250

Long-term debt

$

14,523

$

16,571

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Xcel Term Loan

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 was 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 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 permitted 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.

On August 18, 2020, the Company further amended its Second Amended and Restated Loan and Security Agreement with BHI. Under this amendment, the amounts of the quarterly installment payments due throughout 2021 were reduced, and 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. 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 the 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

September 30, 2020

(Unaudited)

The remaining principal balance of the Xcel Term Loan, as amended, outstanding at September 30, 2020 is payable in fixed installments as set forth in the following table, plus the variable payments as described below:

($ in thousands)

Installment Payment Dates

    

Amount

December 31, 2020

$

750

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

$

700

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 $4.45 million as of March 31, 2022, any such shortfall must be repaid at that date.

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

Amount of

($ in thousands)

 

Principal

Year Ending December 31, 

    

Payment

2020

$

750

2021

 

2,800

2022

8,950

2023

 

5,000

Total

$

17,500

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 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.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

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 the 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 as defined in the loan agreements of at least $90.0 million at the end of each fiscal quarter;
liquid assets of at least $3.0 million through December 31, 2020, at least $2.5 million for the fiscal quarters ending March 31, 2021 through September 30, 2021, at least $3.0 million for the fiscal quarter ending December 31, 2021, and at least $5.0 million thereafter;
EBITDA shall not be less than $5.0 million for the twelve month fiscal period ending September 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

December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021

1.25 to 1.00

March 31, 2022, 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

September 30, 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

September 30, 2020

4.00 to 1.00

December 31, 2020

3.50 to 1.00

March 31, 2021

3.15 to 1.00

June 30, 2021

3.00 to 1.00

September 30, 2021

2.75 to 1.00

December 31, 2021

2.50 to 1.00

March 31, 2022 and each Fiscal Quarter end thereafter

1.50 to 1.00

The Company was in compliance with all applicable covenants as of September 30, 2020.

For the current and prior year quarter, the Company incurred aggregate interest expense related to term loan debt of approximately $281,000 and $317,000, respectively. For the current nine months and prior year nine months, the Company incurred aggregate interest expense related to term loan debt of approximately $854,000 and $903,000, respectively. The effective interest rate related to term loan debt was approximately 6.6% for the current quarter and current nine months, approximately 6.7% for the prior year quarter, and approximately 6.8% for the prior year nine months.

7.Government assistance

Paycheck Protection Program (PPP)

On April 20, 2020, the Company executed a promissory note (the “Promissory Note”) with Bank of America, N.A., which provides for an unsecured loan in the amount of $1.806 million, pursuant to the PPP under the CARES Act. The loan has a two-year term and bears interest at a fixed rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. The loan was funded on April 23, 2020.

The PPP also provides that this loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act, and later amended by the Paycheck Protection Program Flexibility Act (the "Flexibility Act") signed into law on June 5, 2020. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. While management believes that it is probable that the loan will be forgiven in full, no definite assurance can be provided that forgiveness for any portion of the loan will be obtained. Management's determination that full forgiveness is probable is based on qualification under the Flexibility Act.

Management evaluated the legal and contractual terms associated with the loan, and concluded that, although the legal form of the loan is debt, it represents in substance a government grant that is expected to be forgiven. Given the lack of definitive authoritative guidance under GAAP for accounting for government grants, the Company analogized to accounting guidance under International Accounting Standard 20, “Accounting for Government Grants and Disclosure of Government Assistance.” Under such guidance, once it is probable that the conditions attached to the assistance will be met, the earnings impact of government grants is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Accordingly, the Company recognized approximately $166,000 and $1,806,000 as a reduction to operating expenses in the current quarter and current nine months, respectively. No interest expense related to the loan has been recorded in the Company’s unaudited condensed consolidated financial statements.

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Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Economic Incentive Disaster Loan (EIDL)

Concurrently with the PPP loan, in May 2020 the Company also received a $10,000 Economic Incentive Disaster Loan (EIDL) Advance through the U.S. Small Business Administration. The EIDL Advance represents a grant that does not have to be repaid, and as such, the Company has recognized $10,000 as a reduction to operating expenses in the current quarter and current nine months.

In total, the Company recognized approximately $176,000 and $1,816,000 as a reduction to operating expenses in the current quarter and current nine months, respectively.

8.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 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.

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Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

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 nine months 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

 

481,250

 

1.43

 

  

 

  

Canceled

 

 

 

  

 

  

Exercised

 

 

 

  

 

  

Expired/Forfeited

 

(200,000)

 

1.55

 

  

 

  

Outstanding at September 30, 2020, and expected to vest

 

7,503,875

$

3.26

 

5.06

$

Exercisable at September 30, 2020

 

3,067,125

$

4.92

 

1.45

$

On January 1, 2020, the Company granted options to purchase 5,000 shares of stock to a board observer. The exercise price of the options is $4.00 per share, and 50% of the options vest on each of January 1, 2021 and January 1, 2022.

On January 31, 2020, the Company granted options to purchase 75,000 shares of stock to a consultant. The exercise price of the options is $1.57 per share, and all options vested immediately on the date of grant.

On February 28, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee. The exercise price is $1.40 per share, and the vesting of such options is dependent upon the Company achieving certain 12-month sales targets through December 31, 2021.

On March 13, 2020, the Company granted options to purchase 50,000 shares of common stock to a certain key employee. The exercise price of the options is $5.50 per share, and all options vested immediately on the date of grant.

On March 31, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee. The exercise price of the options is $0.61 per share, and one-third of the options shall vest on each of March 31, 2021, March 31, 2021, and March 31, 2022.

On April 1, 2020, the Company granted options to purchase an aggregate of 200,000 shares of commons stock to non-management directors. The exercise price of the options is $0.50 per share, and 50% of the options shall vest on each of April 1, 2021 and April 1, 2022.

On April 15, 2020, the Company granted options to purchase 13,500 shares of common stock to a consultant. The exercise price of the options is $3.00 per share. One-third of the options vested on June 30, 2020, and one-third of the options shall vest on each of September 30, 2020 and December 31, 2020.

On August 21, 2020, the Company granted options to purchase 22,750 shares of common stock to a consultant. The exercise price of the options is $1.00 per share, and all options shall vest on December 31, 2020.

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Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

On September 28, 2020, the Company granted options to purchase 15,000 shares of common stock to an employee. The exercise price of the options is $0.71 per share, and one-third of the options shall vest on each of September 28, 2021, September 28, 2022, and September 28, 2023.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $45,000 and $66,000, respectively. Compensation expense related to stock options for the current nine months and prior year nine months was approximately $158,000 and $382,000, respectively.

Total unrecognized compensation expense related to unvested stock options at September 30, 2020 amounts to approximately $204,000 and is expected to be recognized over a weighted average period of approximately 1.24 years.

A summary of the Company’s non-vested stock options activity for the current nine months is as follows:

    

    

Weighted

 Average 

Number of

Grant Date 

    

Options

    

Fair Value

Balance at January 1, 2020

 

4,551,500

$

0.18

Granted

 

481,250

 

0.13

Vested

 

(413,500)

 

0.61

Forfeited or Canceled

 

(182,500)

 

0.29

Balance at September 30, 2020

 

4,436,750

$

0.13

Warrants

Warrants expire at various times - either five or ten years from the date of grant, depending on the particular grant.

A summary of the Company’s warrants activity for the current nine months is as follows:

Weighted

Average

Weighted

Remaining

 

Average

 

Contractual

Aggregate

Number of

Exercise

 

Life

Intrinsic

    

Warrants

    

Price

    

(in Years)

    

Value

Outstanding and exercisable at January 1, 2020

 

579,815

$

4.63

 

2.32

$

Granted

 

 

 

 

  

Canceled

 

 

 

 

  

Exercised

 

 

 

 

  

Expired/Forfeited