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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 June 30, 2021

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 August 9, 2021, there were 19,540,254 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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

34

PART II - OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signatures

36

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

    

June 30, 2021

    

December 31, 2020

(Unaudited)

(Note 1)

Assets

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

4,815

$

4,957

Accounts receivable, net of allowances of $1,284 and $1,151, respectively

 

10,662

 

8,889

Inventory

 

3,146

 

1,216

Prepaid expenses and other current assets

 

1,751

 

1,085

Total current assets

 

20,374

 

16,147

Property and equipment, net

 

3,515

 

3,367

Operating lease right-of-use assets

7,914

8,668

Trademarks and other intangibles, net

 

101,412

 

93,535

Restricted cash

 

739

 

1,109

Other assets

 

222

 

228

Total non-current assets

 

113,802

 

106,907

Total Assets

$

134,176

$

123,054

Liabilities and Equity

 

  

 

  

Current Liabilities:

 

  

 

  

Accounts payable, accrued expenses and other current liabilities

$

5,010

$

4,442

Accrued payroll

 

660

 

973

Acquisition consideration payable

2,045

Current portion of operating lease obligation

1,720

2,101

Current portion of long-term debt

 

4,000

 

2,800

Total current liabilities

 

13,435

 

10,316

Long-Term Liabilities:

 

  

 

  

Long-term portion of operating lease obligation

7,869

8,469

Long-term debt, less current portion

 

20,829

 

13,838

Contingent obligations

7,539

900

Deferred tax liabilities, net

 

1,571

 

3,052

Other long-term liabilities

 

591

 

224

Total long-term liabilities

 

38,399

 

26,483

Total Liabilities

 

51,834

 

36,799

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 19,530,855 and 19,260,862 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

20

 

19

Paid-in capital

 

102,852

 

102,324

Accumulated deficit

 

(20,700)

 

(16,595)

Total Xcel Brands, Inc. stockholders' equity

 

82,172

 

85,748

Noncontrolling interest

170

507

Total Equity

 

82,342

 

86,255

Total Liabilities and Equity

$

134,176

$

123,054

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

For the Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Revenues

 

  

 

  

  

 

  

Net licensing revenue

$

6,224

$

4,501

$

10,531

$

10,142

Net sales

 

4,540

 

549

 

8,042

 

4,435

Net revenue

 

10,764

 

5,050

 

18,573

 

14,577

Cost of goods sold (sales)

 

3,063

 

253

 

4,898

 

2,653

Gross profit

 

7,701

 

4,797

 

13,675

 

11,924

Operating costs and expenses

 

  

 

  

 

  

 

  

Salaries, benefits and employment taxes

 

4,049

 

2,882

 

8,101

 

6,830

Other selling, general and administrative expenses

 

3,090

 

2,366

 

6,128

 

5,015

Recovery of costs in connection with potential acquisitions

 

 

(101)

 

 

(21)

Stock-based compensation

 

431

 

488

 

591

 

731

Depreciation and amortization

 

1,848

 

1,329

 

3,058

 

2,632

Government assistance - Paycheck Protection Program

(1,640)

(1,640)

Asset impairment charges

 

 

82

 

 

82

Total operating costs and expenses

 

9,418

 

5,406

 

17,878

 

13,629

Operating loss

 

(1,717)

 

(609)

 

(4,203)

 

(1,705)

Interest and finance expense

 

  

 

  

 

  

 

  

Interest expense - term loan debt

 

522

 

310

 

798

 

623

Other interest and finance charges (income), net

 

100

 

(11)

 

104

 

(30)

Loss on extinguishment of debt

821

821

Total interest and finance expense

 

1,443

 

299

 

1,723

 

593

Loss before income taxes

 

(3,160)

 

(908)

 

(5,926)

 

(2,298)

Income tax (benefit) provision

 

(1,346)

 

428

 

(1,484)

 

(124)

Net loss

(1,814)

(1,336)

(4,442)

(2,174)

Less: Net loss attributable to noncontrolling interest

(256)

(36)

(337)

(69)

Net loss attributable to Xcel Brands, Inc. stockholders

$

(1,558)

$

(1,300)

$

(4,105)

$

(2,105)

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

 

  

 

  

 

  

 

  

Basic net loss per share

$

(0.08)

$

(0.07)

$

(0.21)

$

(0.11)

Diluted net loss per share

$

(0.08)

$

(0.07)

$

(0.21)

$

(0.11)

Weighted average number of common shares outstanding:

 

  

 

  

 

  

 

  

Basic weighted average common shares outstanding

 

19,449,116

 

19,132,244

 

19,355,795

 

19,001,321

Diluted weighted average common shares outstanding

 

19,449,116

 

19,132,244

 

19,355,795

 

19,001,321

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(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, 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

Compensation expense in connection with stock options and restricted stock

55

55

Shares issued to employees in connection with restricted 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

Balance as of December 31, 2020

 

19,260,862

$

19

$

102,324

$

(16,595)

$

507

$

86,255

Compensation expense in connection with stock options and restricted stock

169

169

Shares issued on exercise of stock options, net

1,667

Net loss

 

 

 

 

(2,547)

(81)

 

(2,628)

Balance as of March 31, 2021

 

19,262,529

19

102,493

(19,142)

426

83,796

Compensation expense in connection with stock options and restricted stock

52

52

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

181,179

 

1

 

282

 

 

 

283

Shares issued to consultants in connection with restricted stock grants

 

14,045

 

 

25

 

 

 

25

Shares issued to directors in connection with restricted stock grants

 

50,000

 

 

 

 

 

Shares issued on exercise of stock options, net

23,102

 

 

 

 

 

Net loss

 

 

 

 

(1,558)

 

(256)

 

(1,814)

Balance as of June 30, 2021

 

19,530,855

$

20

$

102,852

$

(20,700)

$

170

$

82,342

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 Six Months Ended June 30, 

    

2021

    

2020

Cash flows from operating activities

 

  

 

  

Net loss

$

(4,442)

$

(2,174)

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

 

 

  

Depreciation and amortization expense

 

3,058

 

2,632

Asset impairment charges

 

 

82

Amortization of deferred finance costs

 

109

 

50

Stock-based compensation

 

591

 

731

Allowance for doubtful accounts

132

683

Loss on extinguishment of debt (non-cash portion)

454

Deferred income tax benefit

 

(1,484)

 

(124)

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(2,392)

 

3,396

Inventory

 

(1,930)

 

33

Prepaid expenses and other assets

 

(174)

 

(59)

Accounts payable, accrued expenses and other current liabilities

 

192

 

(2,688)

Cash paid in excess of rent expense

(225)

(181)

Other liabilities

 

367

 

Net cash (used in) provided by operating activities

 

(5,744)

 

2,381

Cash flows from investing activities

 

  

 

  

Cash consideration for acquisition of Lori Goldstein assets

(1,616)

Purchase of other intangible assets

(37)

Purchase of property and equipment

 

(747)

 

(634)

Net cash used in investing activities

 

(2,400)

 

(634)

Cash flows from financing activities

 

  

 

  

Proceeds from exercise of stock options

5

Shares repurchased including vested restricted stock in exchange for withholding taxes

 

 

(187)

Proceeds from revolving loan debt

1,500

Proceeds from long-term debt

25,000

10

Payment of deferred finance costs

 

(1,131)

 

Payment of long-term debt

 

(17,375)

 

(750)

Payment of breakage fees associated with extinguishment of long-term debt

(367)

Net cash provided by (used in) financing activities

 

7,632

 

(927)

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

 

(512)

 

820

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

6,066

5,750

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

$

5,554

$

6,570

Reconciliation to amounts on consolidated balance sheets:

 

  

 

  

Cash and cash equivalents

$

4,815

$

5,461

Restricted cash

 

739

 

1,109

Total cash, cash equivalents, and restricted cash

$

5,554

$

6,570

Supplemental disclosure of non-cash activities:

Consideration payable to seller of Lori Goldstein assets

$

2,045

$

Contingent obligation related to acquisition of Lori Goldstein assets at fair value

$

6,639

$

Liability for equity-based bonuses

$

62

$

100

Amount due from noncontrolling interest for capital contribution

$

$

300

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for income taxes

$

15

$

47

Cash paid during the period for interest

$

852

$

811

See Notes to Unaudited Condensed Consolidated Financial Statements.

6

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

(Unaudited)

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

The accompanying condensed consolidated balance sheet as of December 31, 2020 (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, 2020, as filed with the SEC on April 23, 2021.

Certain reclassifications have been made to prior year comparable period financial statements to conform to classifications used in the current year – specifically, the classification and aggregation / disaggregation of certain types of operating costs and expenses, and the disaggregation of the components of interest and finance expense. These reclassifications had no impact on total operating costs and expenses, total interest and finance expense, net loss, stockholders’ equity, or cash flows as previously reported.

The Company is a media and consumer products company engaged in the design, production, marketing, live streaming, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands. Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the LOGO by Lori Goldstein 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 acquired the LOGO by Lori Goldstein brand, and the various labels under the brand, on April 1, 2021 (see Note 2).

The Company designs, produces, markets, and distributes products, licenses its brands to third parties, and generates licensing revenues. The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels to be everywhere its customers shop.

Recently Adopted Accounting Pronouncements

On January 1, 2021, the Company adopted Accounting Standards Update ("ASU") No. 2019‑12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes certain exceptions to the general principles in Topic 740, including, but not limited to, intraperiod tax allocations and interim period tax calculations. The ASU also provides additional clarification and guidance related to recognition of franchise taxes and changes in tax laws. 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

June 30, 2021

(Unaudited)

2.      Acquisitions

Acquisition of LOGO by Lori Goldstein Brand

On March 30, 2021, the Company and its wholly owned subsidiary, Gold Licensing, LLC, entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Lori Goldstein, Ltd. (the “Seller”) and Lori Goldstein (“Shareholder”), pursuant to which the Company agreed to acquire, and the Seller and Shareholder agreed to sell, certain assets of the Seller, including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto. On April 1, 2021 (the “Closing Date”), the Company completed the acquisition of the assets specified in the Asset Purchase Agreement.

Pursuant to the Asset Purchase Agreement, on the Closing Date, the Company delivered $1.6 million in cash consideration to the Seller. In addition, the Company was required to deliver $2.0 million in cash consideration to the Seller on the earlier of (i) the Company’s receipt of the first royalty payment from QVC, Inc. in respect of the acquired assets, or (ii) July 29, 2021. This payment was made in July 2021.

In addition to the consideration described above, the Seller is eligible to earn additional consideration of up to $12.5 million (the “Lori Goldstein Earn-Out”), which would be payable, in cash, within 45 days after the end of each applicable calendar year during the six calendar year period commencing 2021 in an amount equal to 75% percent of the Royalty Contribution (as defined in the Asset Purchase Agreement) for such calendar year. The Company recorded a contingent obligation of $6.6 million related to the Lori Goldstein Earn-Out, based on the difference between the fair value of the acquired assets of the LOGO by Lori Goldstein brand and the total consideration paid, in accordance with the guidance in Accounting Standards Codification (“ASC”) Subtopic 805-50.

The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase. The following represents the aggregate purchase price of $10.3 million:

($ in thousands)

    

Cash paid at closing

$

1,600

Cash consideration payable

 

2,045

Total direct initial consideration

 

3,645

Direct transaction expenses

 

16

Contingent obligation (Lori Goldstein Earn-Out)

 

6,639

Total consideration

 

$

10,300

The aggregate purchase price has been allocated entirely to the trademarks of the brand. Such trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s condensed consolidated statements of operations. The Lori Goldstein trademarks are being amortized on a straight-line basis over their expected useful life of four years.

Upon the consummation of the acquisition of the LOGO by Lori Goldstein brand as described above, the Company incurred cash bonuses totaling $175,000 to certain members of the Company’s senior management (including $100,000 to the Chief Executive Officer, and $25,000 each to the Chief Financial Officer, President and Chief Operating Officer, and Executive Vice President of Business Development and Treasury), such success-related bonuses having been approved by the Board of Directors on March 18, 2021. These bonuses were subsequently paid in May 2021.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

(Unaudited)

Additionally, concurrent with the acquisition, the Company also entered into a 10-year employment agreement with the Shareholder to serve as the LOGO by Lori Goldstein brand’s Chief Creative Officer and Spokesperson, with a base salary of $0.9 million per annum through December 31, 2021 and $1.2 million per annum thereafter, and the opportunity to earn additional incentives based on the future net royalties related to the brand. Further, the Company concurrently entered into a consulting agreement with the Seller to provide creative advice and consultation, for a fee of $0.6 million per annum through December 31, 2021 and $0.8 million per annum thereafter.

3.      Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

    

Weighted

    

    

    

 

Average

 

June 30, 2021

 

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

 

20,386

 

6,330

 

14,056

Trademarks (finite-lived)

18 years

38,194

5,254

32,940

Trademarks (finite-lived)

4 years

10,300

644

9,656

Other intellectual property

 

7 years

 

762

 

591

 

171

Copyrights and other intellectual property

 

9 years

 

227

 

138

 

89

Total

$

114,369

$

12,957

$

101,412

    

Weighted

    

    

    

 

Average

 

December 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

 

20,386

 

5,640

 

14,746

Trademarks (finite-lived)

18 years

38,194

4,192

34,002

Other intellectual property

 

7 years

 

762

 

537

 

225

Copyrights and other intellectual property

 

10 years

 

190

 

128

 

62

Total

 

  

$

104,032

$

10,497

$

93,535

Amortization expense for intangible assets was approximately $1.55 million for the three-month period ended March 31, 2021 (the "current quarter") and was approximately $1.14 million for the three-month period ended March 31, 2020 (the "prior year quarter"). Amortization expense for intangible assets was approximately $2.46 million for the six-month period ended June 30, 2021 (the “current six months”) and was approximately $2.28 million for the six-month period ended June 30, 2020 (the “prior year six months”).

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

June 30, 2021

(Unaudited)

Estimated future amortization expense related to finite-lived intangible assets over the remaining useful lives is as follows:

($ in thousands)

Amortization

Year Ending December 31, 

    

Expense

2021 (July 1 through December 31)

$

3,110

2022

 

6,219

2023

 

6,219

2024

 

6,199

2025

 

4,257

Thereafter

 

30,908

Total

$

56,912

4.      Significant Contracts

QVC Agreements

Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the QVC Agreements, Qurate is required to pay the Company fees based primarily on a percentage of its net sales of Isaac Mizrahi, Judith Ripka, Lori Goldstein, and Longaberger branded merchandise. Qurate royalty revenue represents a significant portion of the Company’s total revenues.

Revenues from the QVC Agreements totaled $5.45 million and $4.04 million for the current and prior year quarter, respectively, representing approximately