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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 September 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 October 27, 2021, there were 19,558,813 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

34

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

36

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)

    

September 30, 2021

    

December 31, 2020

(Unaudited)

(Note 1)

Assets

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

3,981

$

4,957

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

 

10,949

 

8,889

Inventory

 

3,430

 

1,216

Prepaid expenses and other current assets

 

1,711

 

1,085

Total current assets

 

20,071

 

16,147

Non-current Assets:

Property and equipment, net

 

3,481

 

3,367

Operating lease right-of-use assets

6,831

8,668

Trademarks and other intangibles, net

 

99,859

 

93,535

Restricted cash

 

739

 

1,109

Other assets

 

222

 

228

Total non-current assets

 

111,132

 

106,907

Total Assets

$

131,203

$

123,054

Liabilities and Equity

 

  

 

  

Current Liabilities:

 

  

 

  

Accounts payable, accrued expenses and other current liabilities

$

5,444

$

4,442

Accrued payroll

 

683

 

973

Current portion of operating lease obligations

1,315

2,101

Current portion of long-term debt

 

4,998

 

2,800

Total current liabilities

 

12,440

 

10,316

Long-Term Liabilities:

 

  

 

  

Long-term portion of operating lease obligations

7,295

8,469

Long-term debt, less current portion

 

20,233

 

13,838

Contingent obligations

7,539

900

Deferred tax liabilities, net

 

1,038

 

3,052

Other long-term liabilities

 

591

 

224

Total long-term liabilities

 

36,696

 

26,483

Total Liabilities

 

49,136

 

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 19,541,921 and 19,260,862 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

 

20

 

19

Paid-in capital

 

102,936

 

102,324

Accumulated deficit

 

(21,836)

 

(16,595)

Total Xcel Brands, Inc. stockholders' equity

 

81,120

 

85,748

Noncontrolling interest

947

507

Total Equity

 

82,067

 

86,255

Total Liabilities and Equity

$

131,203

$

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 Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Revenues

 

  

 

  

  

 

  

Net licensing revenue

$

6,854

$

5,236

$

17,385

$

15,378

Net sales

 

4,407

 

2,155

 

12,449

 

6,590

Net revenue

 

11,261

 

7,391

 

29,834

 

21,968

Cost of goods sold (sales)

 

2,865

 

1,270

 

7,763

 

3,923

Gross profit

 

8,396

 

6,121

 

22,071

 

18,045

Operating costs and expenses

 

  

 

  

 

  

 

  

Salaries, benefits and employment taxes

 

4,185

 

2,968

 

12,286

 

9,798

Other selling, general and administrative expenses

 

3,463

 

2,159

 

9,591

 

7,153

Stock-based compensation

 

163

 

49

 

754

 

780

Depreciation and amortization

 

1,891

 

1,437

 

4,949

 

4,069

Government assistance - Paycheck Protection Program and other

(176)

(1,816)

Asset impairment charges

 

 

31

 

 

113

Total operating costs and expenses

 

9,702

 

6,468

 

27,580

 

20,097

Other income

46

46

Operating loss

 

(1,306)

 

(301)

 

(5,509)

 

(2,006)

Interest and finance expense

 

  

 

  

 

  

 

  

Interest expense - term loan debt

 

565

 

303

 

1,363

 

926

Other interest and finance charges (income), net

 

23

 

1

 

127

 

(29)

Loss on extinguishment of debt

821

Total interest and finance expense

 

588

 

304

 

2,311

 

897

Loss before income taxes

 

(1,894)

 

(605)

 

(7,820)

 

(2,903)

Income tax benefit

 

(535)

 

(145)

 

(2,019)

 

(269)

Net loss

(1,359)

(460)

(5,801)

(2,634)

Less: Net loss attributable to noncontrolling interest

(223)

(26)

(560)

(95)

Net loss attributable to Xcel Brands, Inc. stockholders

$

(1,136)

$

(434)

$

(5,241)

$

(2,539)

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

 

  

 

  

 

  

 

  

Basic and diluted net loss per share

$

(0.06)

$

(0.02)

$

(0.27)

$

(0.13)

Weighted average number of common shares outstanding:

 

  

 

  

 

  

 

  

Basic and diluted weighted average common shares outstanding

 

19,541,774

 

19,231,040

 

19,418,469

 

19,078,453

See Notes to Unaudited Condensed Consolidated Financial Statements.

4

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of 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 related to stock grants for bonus payments

336,700

220

220

Shares repurchased from employees in exchange for withholding taxes

(155,556)

(102)

(102)

Compensation expense related to 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 related to stock options and restricted stock

55

55

Shares issued to employees related to 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

Compensation expense related to 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

Balance as of December 31, 2020

 

19,260,862

$

19

$

102,324

$

(16,595)

$

507

$

86,255

Compensation expense related to 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 related to stock options and restricted stock

52

52

Shares issued to executive related to stock grants for bonus payments

181,179

 

1

 

282

 

 

 

283

Shares issued to consultants related to restricted stock grants

 

14,045

 

 

25

 

 

 

25

Shares issued to directors related to restricted stock grants

 

50,000

 

 

 

 

 

Shares issued on exercise of stock options

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

Compensation expense related to stock options and restricted stock

59

59

Shares issued to consultants related to restricted stock grants

 

9,399

 

 

25

 

 

 

25

Shares issued on exercise of stock options

1,667

 

 

 

 

 

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

1,000

1,000

Net loss

(1,136)

(223)

(1,359)

Balance as of September 30, 2021

19,541,921

$

20

$

102,936

$

(21,836)

$

947

$

82,067

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 Nine Months Ended September 30, 

    

2021

    

2020

Cash flows from operating activities

 

  

 

  

Net loss

$

(5,801)

$

(2,634)

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

 

 

  

Depreciation and amortization expense

 

4,949

 

4,069

Asset impairment charges

 

 

113

Amortization of deferred finance costs included in interest expense

 

211

 

72

Stock-based compensation

 

754

 

780

Provision for doubtful accounts

132

1,054

Loss on extinguishment of debt (non-cash portion)

454

Deferred income tax benefit

 

(2,019)

 

(269)

Net gain on sale of assets

(46)

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(2,192)

 

1,380

Inventory

 

(2,214)

 

176

Prepaid expenses and other assets

 

(620)

 

187

Accounts payable, accrued expenses and other current liabilities

 

572

 

(2,403)

Cash paid in excess of rent expense

(122)

(276)

Other liabilities

 

367

 

Net cash (used in) provided by operating activities

 

(5,529)

 

2,203

Cash flows from investing activities

 

  

 

  

Cash consideration for acquisition of Lori Goldstein assets

(3,661)

Net proceeds from sale of assets

46

Purchase of other intangible assets

(39)

Purchase of property and equipment

 

(1,049)

 

(700)

Net cash used in investing activities

 

(4,749)

 

(654)

Cash flows from financing activities

 

  

 

  

Proceeds from exercise of stock options

5

Shares repurchased including vested restricted stock in exchange for withholding taxes

 

 

(187)

Cash contribution from non-controlling interest

1,000

300

Proceeds from revolving loan debt

2,498

Proceeds from long-term debt

25,000

Payment of deferred finance costs

 

(1,204)

 

(20)

Payment of long-term debt

 

(18,000)

 

(1,500)

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

(367)

Net cash provided by (used in) financing activities

 

8,932

 

(1,407)

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

 

(1,346)

 

142

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

6,066

5,750

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

$

4,720

$

5,892

Reconciliation to amounts on consolidated balance sheets:

 

  

 

  

Cash and cash equivalents

$

3,981

$

4,783

Restricted cash

 

739

 

1,109

Total cash, cash equivalents, and restricted cash

$

4,720

$

5,892

Supplemental disclosure of non-cash activities:

Operating lease right-of-use assets

$

(722)

$

797

Operating lease obligations

$

(722)

$

797

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

$

6,639

$

Liability for equity-based bonuses and other equity-based payments

$

140

$

93

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for interest

$

1,346

$

1,092

Cash paid during the period for income taxes

$

18

$

58

See Notes to Unaudited Condensed Consolidated Financial Statements.

6

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 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 consolidates Longaberger Licensing, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party. 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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Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 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 paid subsequent to closing

 

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

8

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

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.

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.