XELB 10-Q
XCel Brands, Inc. (XELB)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
or
ACT OF 1934
For the transition period from ___ to ___
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of |
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Incorporation or Organization) |
| Identification No.) |
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(Issuer’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol |
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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.
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).
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 ☐ |
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
As of November 14, 2023, there were
XCEL BRANDS, INC.
INDEX
2
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, 2023 |
| December 31, 2022 | |||
(Unaudited) | (Note 1) | |||||
Assets |
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Current Assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Non-current Assets: | ||||||
Property and equipment, net |
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Operating lease right-of-use assets | | | ||||
Trademarks and other intangibles, net |
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Equity method investment | | | ||||
Deferred tax assets, net | | | ||||
Other assets |
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Total non-current assets |
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Total Assets | $ | | $ | | ||
Liabilities and Stockholders' Equity |
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Current Liabilities: |
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Accounts payable, accrued expenses and other current liabilities | $ | | $ | | ||
Deferred revenue |
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Accrued payroll |
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Current portion of operating lease obligations | | | ||||
Current portion of contingent obligations |
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Total current liabilities |
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Long-Term Liabilities: |
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Long-term portion of operating lease obligations | | | ||||
Deferred revenue | | — | ||||
Long-term portion of contingent obligations | | | ||||
Total long-term liabilities |
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Total Liabilities |
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Commitments and Contingencies |
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Stockholders' Equity: |
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Preferred stock, $ |
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Common stock, $ |
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Paid-in capital |
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Accumulated deficit |
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Total Xcel Brands, Inc. stockholders' equity |
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Noncontrolling interest | ( | ( | ||||
Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity | $ | | $ | | ||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
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, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Revenues |
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Net licensing revenue | $ | | $ | | $ | | $ | | ||||
Net sales |
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Net revenue |
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Cost of goods sold |
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Gross profit |
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Direct operating costs and expenses |
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Salaries, benefits and employment taxes |
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Other selling, general and administrative expenses |
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Total direct operating costs and expenses |
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Operating loss before other operating costs and expenses (income) | ( | ( | ( | ( | ||||||||
Other operating costs and expenses (income) | ||||||||||||
Depreciation and amortization |
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Gain on sale of majority interest in Isaac Mizrahi brand | — | — | — | ( | ||||||||
Loss from equity method investment | | | | | ||||||||
Gain on sale of limited partner ownership interest | — | — | ( | — | ||||||||
Gain on settlement of lease liability | — | — | ( | — | ||||||||
Operating (loss) income |
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Interest and finance (income) expense |
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Interest expense - term loan debt |
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Other interest and finance charges (income), net |
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Loss on early extinguishment of debt | — | — | — | | ||||||||
Total interest and finance (income) expense |
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(Loss) income before income taxes |
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Income tax (benefit) provision |
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Net (loss) income | ( | ( | ( | | ||||||||
Net loss attributable to noncontrolling interest | ( | ( | ( | ( | ||||||||
Net (loss) income attributable to Xcel Brands, Inc. stockholders | $ | ( | $ | ( | $ | ( | $ | | ||||
(Loss) earnings per common share attributable to Xcel Brands, Inc. stockholders: |
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Basic net (loss) income per share | $ | ( | $ | ( | ( | | ||||||
Diluted net (loss) income per share | $ | ( | $ | ( | $ | ( | $ | | ||||
Weighted average number of common shares outstanding: |
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Basic weighted average common shares outstanding |
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Diluted weighted average common shares outstanding |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
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 | |||||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Interest | Total | ||||||||
Balance as of December 31, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | | ||||||
Compensation expense related to stock options and restricted stock | — | — | | — | — | | ||||||||||||
Net loss |
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Balance as of March 31, 2022 |
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Compensation expense related to stock options and restricted stock | — | — | | — | — | | ||||||||||||
Shares issued to executive related to stock grants for bonus payments |
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Shares repurchased from executive in exchange for withholding taxes |
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Shares issued to consultant in connection with stock grant | | — | | — |
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Shares issued to directors in connection with restricted stock grants | | — | — | — | — | — | ||||||||||||
Shares issued to consultant in connection with Isaac Mizrahi sale transaction | | — | | — |
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Shares issued to key employee in connection with stock grant | | — | | — |
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Shares repurchased from key employee in exchange for withholding taxes related to vesting of restricted shares | ( | — | ( | — |
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Net income (loss) |
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Balance as of June 30, 2022 |
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Compensation expense related to stock options and restricted stock | — | — | | — | — | | ||||||||||||
Net loss | — | — | — | ( | ( | ( | ||||||||||||
Balance as of September 30, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Balance as of December 31, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Compensation expense related to stock options and restricted stock | — | — | | — | — | | ||||||||||||
Shares issued to consultant in connection with stock grant |
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Net loss |
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Balance as of March 31, 2023 |
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Compensation expense related to stock options and restricted stock | — | — | | — | — | | ||||||||||||
Shares issued to consultant in connection with stock grant |
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Shares issued on exercise of stock options, net of shares surrendered for cashless exercises | | — | — | — | — | — | ||||||||||||
Net loss |
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Balance as of June 30, 2023 |
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Compensation expense related to stock options and restricted stock | — | — | | — | — | | ||||||||||||
Contra-revenue related to warrants granted to licensee | — | — | 16 | — | — | 16 | ||||||||||||
Shares issued to directors in connection with restricted stock grants | | — | — | — | — | — | ||||||||||||
Shares issued to employee in connection with stock grant | | — | | — | — | | ||||||||||||
Shares issued on exercise of stock options, net of shares surrendered for cashless exercises | | — | | — | — | | ||||||||||||
Net loss | — | — | — | ( | ( | ( | ||||||||||||
Balance as of September 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Xcel Brands, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
For the Nine Months Ended September 30, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities |
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Net (loss) income | $ | ( | $ | | ||
Adjustments to reconcile net (loss) income to net cash used in operating activities: |
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Depreciation and amortization expense |
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Asset impairment charges |
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Amortization of deferred finance costs included in interest expense |
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Stock-based compensation and cost of licensee warrants |
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Provision for doubtful accounts | | | ||||
Restructuring of certain contractual arrangements | | — | ||||
Undistributed proportional share of net loss of equity method investee | | | ||||
Loss on early extinguishment of debt | — | | ||||
Deferred income tax provision |
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Gain on sale of majority interest in Isaac Mizrahi brand | — | ( | ||||
Gain on sale of limited partner ownership interest | ( | — | ||||
Gain on settlement of lease liability | ( | — | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other current and non-current assets |
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Deferred revenue | | | ||||
Accounts payable, accrued expenses, accrued payroll, accrued income taxes payable, and other current liabilities |
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Lease-related assets and liabilities | ( | ( | ||||
Other liabilities |
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Net cash used in operating activities |
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Cash flows from investing activities |
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Net proceeds from sale of majority interest in Isaac Mizrahi brand | — | | ||||
Net proceeds from sale of assets | | — | ||||
Purchase of property and equipment |
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Net cash provided by investing activities |
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Cash flows from financing activities |
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Proceeds from exercise of stock options | | — | ||||
Shares repurchased including vested restricted stock in exchange for withholding taxes | — |
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Payment of long-term debt |
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Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt | — | ( | ||||
Net cash provided by (used in) financing activities |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period | | | ||||
Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental disclosure of non-cash activities: | ||||||
Liability for equity-based bonuses and other equity-based payments | $ | — | $ | ( | ||
Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest | $ | — | $ | | ||
Cash paid during the period for income taxes | $ | | $ | — | ||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
1. Nature of Operations, Background, and Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2022 (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, 2022, as filed with the SEC on April 17, 2023.
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 LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brands (the "Halston Brand"), the Judith Ripka brands (the "Ripka Brand"), the C Wonder brands (the "C Wonder Brand"), the Longaberger brand (the “Longaberger Brand”), the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), and other proprietary brands.
| ● | The Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand are wholly owned by the Company. |
| ● | The Company manages the Longaberger Brand through its |
| ● | The Company wholly owned and managed the Isaac Mizrahi Brand through May 31, 2022. On May 31, 2022, the Company sold to a third party a majority interest in a newly-created subsidiary that was formed to hold the Isaac Mizrahi Brand trademarks, but retained a noncontrolling interest in the brand through a |
The Company designs, produces, markets, and distributes products, licenses its brands to third parties, and generates licensing revenues through contractual arrangements with manufacturers and retailers. The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, wholesale, and e-commerce channels to be everywhere its customers shop.
The Company’s wholesale and direct-to-consumer operations are presented as "Net sales" and "Cost of goods sold" in the Condensed Consolidated Statements of Operations, separately from the Company’s net licensing revenue.
7
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
Liquidity and Management’s Plans
The Company incurred a net loss attributable to Company stockholders of approximately $
Management has implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting the business from a wholesale/licensing hybrid model into a “licensing-plus” business model. In the first quarter of 2023, the Company began to restructure its business operations by entering into new licensing agreements and joint venture arrangements with best-in-class business partners. The Company entered into a new interactive television licensing agreement with America’s Collectibles Network, Inc. d/b/a Jewelry Television (“JTV”) for the Ripka Brand, and a separate license with JTV for the Ripka Brand’s e-commerce business. For apparel, similar transactions have been executed. In conjunction with the launch of the C Wonder Brand on HSN, the Company licensed the wholesale operations related to the brand to One Jeanswear Group, LLC (“OJG”); this new license with OJG also includes certain other new celebrity brands that the Company plans to develop and launch in 2023 and beyond. In the second quarter of 2023, the Company entered into a new master license agreement for the Halston Brand, covering men’s, women’s, and children’s apparel, fashion accessories, and other product categories, with an industry-leading wholesale apparel company for distribution through department stores, e-commerce, and other retailers (see Note 4). This new master license for the Halston Brand provides for an upfront cash payment and royalties, including certain guaranteed minimum royalties to the Company, includes significant annual minimum net sales requirements, and has a -year term (consisting of an initial -year period, followed by a -year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each -year period during the term.
The transition of these operating businesses was substantially completed by the end of the second quarter of 2023.
Management believes that this evolution of the Company’s operating model will provide the Company with significant cost savings and allow the Company to reduce and better manage its exposure to operating risks. As of September 30, 2023, the Company has reduced its payroll costs by approximately $
While there is some level of potential risk with respect to the Company’s contingent obligation related to IM Topco, LLC, which could negatively impact the Company’s future cash flows and liquidity, management has taken steps to address such risk (see Note 12 and Note 13 for additional details).
Further, in October 2023, the Company entered into a new term loan agreement in the amount of $
Based on these recent events and changes, management expects that existing cash and future operating cash flows will be adequate to meet the Company’s operating needs, term debt service obligations, and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q; therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of September 30, 2023, have been alleviated.
8
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
Recently Adopted Accounting Pronouncements
The Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (as amended by ASU No. 2018-19 in November 2018, ASU No. 2019-05 in May 2019, ASU No. 2019-10 and 2019-11 in November 2019, ASU No. 2020-02 in February 2020, and ASU No. 2022-02 in March 2022) effective January 1, 2023. This ASU requires entities to estimate lifetime expected credit losses for financial instruments, including trade and other receivables, which will result in earlier recognition of credit losses. The adoption of this new guidance did not have a significant impact on the Company’s results of operations, cash flows, or financial condition.
2. Equity Method Investment
IM Topco, LLC
On May 27, 2022, Xcel (along with IM Topco, LLC (“IM Topco”) and IM Brands, LLC (“IMB”), both wholly owned subsidiaries of the Company) and IM WHP, LLC (“WHP”), a subsidiary of WHP Global, a private equity-backed brand management and licensing company, entered into a membership purchase agreement. Pursuant to this agreement, on May 31, 2022, (i) the Company contributed assets owned by IMB, including the Isaac Mizrahi Brand trademarks and other intellectual property rights relating thereto into IM Topco, and (ii) the Company sold
The purchase price paid by WHP to the Company at the closing of the transaction consisted of $
The Company accounts for its
| (i) | first, |
| (ii) | second, |
| (iii) | thereafter, in proportion to the members’ respective percentage interests. |
Based on these distribution provisions, the Company recognized an equity method loss of $
9
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
of each member (i.e.,
Summarized financial information for IM Topco for the three and nine months ended September 30, 2023 and 2022 is as follows:
| For the three months ended | For the nine months ended | ||||||||||
September 30, | September 30, | |||||||||||
($ in thousands) | 2023 | 2022 | 2023 | 2022(1) | ||||||||
Revenues | $ | | $ | | $ | | $ | | ||||
Gross profit | | | | | ||||||||
(Loss) income from continuing operations | ( | | ( | | ||||||||
Net (loss) income | ( | | ( | | ||||||||
(1) Represents financial information for the period commencing May 31, 2022 (the date of the sale of a majority interest in IM Topco) through September 30, 2022.
Refer to Note 11 for other information regarding the Company’s ongoing relationship with IM Topco.
3. Trademarks and Other Intangibles
Trademarks and other intangibles, net consist of the following:
| Weighted |
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| September 30, 2023 | ||||||||
| Amortization | Gross Carrying | Accumulated | Net Carrying | |||||||
($ in thousands) | Period | Amount | Amortization | Amount | |||||||
Trademarks (finite-lived) |
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Copyrights and other intellectual property |
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Total | $ | | $ | | $ | | |||||
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| December 31, 2022 | ||||||||
| Amortization |
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($ in thousands) | Period | Amount | Amortization | Amount | |||||||
Trademarks (finite-lived) |
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Copyrights and other intellectual property |
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Total |
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| $ | | $ | | $ | | |||
Amortization expense for intangible assets was approximately $
Amortization expense for intangible assets was approximately $
10
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
4. Significant Contracts and Concentrations
Halston Master License
On May 15, 2023, the Company, through its subsidiaries, H Halston, LLC and H Heritage Licensing, LLC (collectively, the “Licensor”), entered into a master license agreement relating to the Halston Brand (the “Halston Master License”) with an industry-leading wholesale apparel company, for men’s and women’s apparel, men’s and women’s fashion accessories, children’s apparel and accessories, home, airline amenity and amenity kits, and such other product categories as mutually agreed upon. The Halston Master License provides for an upfront cash payment and royalties payable to the Company, including certain guaranteed minimum royalties, includes significant annual minimum net sales requirements, and has a -year term (consisting of an initial -year period, followed by a -year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each -year period during the term. The licensee has an option to purchase the Halston Brand for $
As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $
Additionally, in connection with the Halston Master License, the Company issued to the licensee a -year warrant to purchase up to
Qurate Agreements
Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of net retail sales of certain specified branded merchandise. Net retail sales are defined as the aggregate amount of all revenue generated through the sale of the specified branded products by Qurate and its subsidiaries under the Qurate Agreements, net of customer returns, and excluding freight, shipping and handling charges, and sales, use, or other taxes. Net licensing revenue from the Qurate Agreements represents a significant portion of the Company’s total net revenue.
| ● | Net licensing revenue from the Qurate Agreements totaled $ |
| ● | Net licensing revenue from the Qurate Agreements totaled $ |
11
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
| total net revenue for the current nine months and prior year nine months, respectively. The prior year nine months included revenues from Qurate Agreement related to the Isaac Mizrahi Brand; such agreement was assigned to IM Topco on May 31, 2022. |
| ● | As of September 30, 2023 and December 31, 2022, the Company had receivables from Qurate of $ |
5. Accounts Receivable
Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances for credit losses. Such allowances were approximately $
A rollforward of the allowance for credit losses for the nine months ended September 30, 2023 is as follows:
($ in thousands) |
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Balance at December 31, 2022 | $ | — | |
Credit loss expense (1) |
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Write-offs |
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Recoveries |
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Balance at September 30, 2023 | $ | | |
(1) Credit loss expense was $0.12 million for both the current quarter and current nine months, and is recorded within “other selling, general and administrative expenses” in the accompanying condensed consolidated statement of operations.
Credit loss expense recognized in the prior year quarter and prior year nine months was $
The allowance for credit losses is determined based upon a variety of judgments and factors. Factors considered in determining the allowance include historical collection, write-off experience, and management's assessment of collectibility from customers, including current conditions, reasonable forecasts, and expectations of future collectibility and collection efforts. Management continuously assesses the collectibility of receivables and adjusts estimates based on actual experience and future expectations based on economic indicators. Management also monitors the aging analysis of receivables to determine if there are changes in the collections of accounts receivable. Receivable balances are written-off against the allowance for credit losses when such balances are deemed to be uncollectible.
Also, as of September 30, 2023 and December 31, 2022, approximately $
12
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
6. Leases
The Company has an operating lease for its corporate offices and operations facility, as well as certain equipment with a term of 12 months or less. As of September 30, 2023, the Company’s real estate lease has a remaining lease term of approximately
Lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $
Cash paid for amounts included in the measurement of operating lease liabilities was approximately $
The Company is currently in discussions with the lessor of the operating lease for the Company’s corporate offices and operations facility, regarding a potential amendment to restructure such lease. In addition, this could include a requirement for the Company to fund a security deposit to the lessor of up to $
Also, the Company was previously a party to an operating lease for its former retail store location, which was closed in 2022. During the nine months ended September 30, 2023, the Company successfully negotiated a settlement with the lessor resulting in the termination of this lease. Under the settlement agreement, the Company paid $
As of September 30, 2023, the maturities of lease obligations were as follows:
Amount | |||
Year |
| (in thousands) | |
2023 (October 1 through December 31) | $ | ||
2024 | |||
2025 |
| ||
2026 |
| ||
2027 |
| ||
Total lease payments | |||
Less: Discount | |||
Present value of lease liabilities | |||
Current portion of lease liabilities | |||
Non-current portion of lease liabilities | $ | ||
13
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
7. Debt
The Company did not have any debt obligations as of September 30, 2023 or December 31, 2022. See Note 13 for information regarding new debt agreements entered into subsequent to September 30, 2023.
From December 30, 2021 through May 31, 2022, the Company had term loan debt outstanding pursuant to an agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”); this debt was repaid in full and extinguished on May 31, 2022. As a result of this extinguishment, the Company recognized a loss on early extinguishment of debt of approximately $
For the prior year nine months, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $
8. Stockholders’ Equity
Equity Incentive Plans
A total of
In addition, stock-based awards (including options, warrants, and restricted stock) previously granted under the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) remain outstanding and shares of common stock may be issued to satisfy options or warrants previously granted under the 2011 Plan, although no new awards may be granted under the 2011 Plan.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“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. Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur. 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. Expense for such awards is recognized only to the extent that the achievement of the specified performance target(s) has been met or is considered probable.
Total expense recognized for all forms of stock-based compensation was approximately $0.05 million for both the current quarter and prior year quarter. For both periods, the majority of the expense was related to directors and consultants, and was recorded as operating costs within “other selling, general and administrative expenses” in the accompanying condensed consolidated statements of operations.
Total expense recognized in the current nine months and prior year nine months for all forms of stock-based compensation was approximately $
14
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
the accompanying condensed consolidated statements of operations. Of the prior year nine months expense amount, approximately $
Stock Options
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, 2023 |
| | $ | |
| $ | | |||
Granted |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Expired/Forfeited |
| ( |
| |
|
|
|
| ||
Outstanding at September 30, 2023, and expected to vest |
| | $ | |
| $ | | |||
Exercisable at September 30, 2023 |
| | $ | |
| $ | | |||
On August 23, 2023 the Company granted options to purchase an aggregate of
Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $
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, 2023 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( | | ||
Forfeited or Canceled |
| — |
| — | |
Balance at September 30, 2023 |
| | $ | | |
15
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
Warrants
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, 2023 |
| | $ | |
| $ | | |||
Granted |
| |
| |
|
|
|
| ||
Exercised |
| |
| |
|
|
|
| ||
Expired/Forfeited |
| |
| |
|
|
|
| ||
Outstanding at September 30, 2023 |
| | $ | |
| $ | | |||
Exercisable at September 30, 2023 |
| | $ | |
| $ | | |||
See Note 4 for information regarding the warrant to purchase
Stock Awards
A summary of the Company’s restricted stock activity for the current nine months is as follows:
Weighted | |||||
Number of | Average | ||||
Restricted | Grant Date | ||||
| Shares |
| Fair Value | ||
Outstanding at January 1, 2023 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Expired/Forfeited |
| |
| | |
Outstanding at September 30, 2023 |
| | $ | | |
On January 1, 2023, the Company issued
On April 17, 2023, the Company issued
On May 15, 2023, the Company issued
On July 20, 2023, the Company issued
On August 23, 2023, the Company issued an aggregate of
Compensation expense related to stock awards was approximately $
16
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
and is expected to be recognized over a weighted average period of approximately
Restricted Stock Units
There were
Shares Available Under the Company’s Equity Incentive Plans
As of September 30, 2023, there were
Shares Reserved for Issuance
As of September 30, 2023, there were
9. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury stock method. Diluted EPS excludes all potentially dilutive shares of common stock if their effect is anti-dilutive.
The following table is a reconciliation of the numerator and denominator of the basic and diluted net (loss) income per share computations for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Numerator: | |||||||||||||
Net (loss) income attributable to Xcel Brands, Inc. stockholders (in thousands) | $ | ( | $ | ( | $ | ( | $ | | |||||
Denominator: | |||||||||||||
Basic weighted average number of shares outstanding |
| |
| | |
| |
| |||||
Add: Effect of warrants |
| — |
| — | — |
| |
| |||||
Add: Effect of stock options | — | — | — | | |||||||||
Diluted weighted average number of shares outstanding |
| |
| | |
| | ||||||
Basic net (loss) income per share | $ | ( | $ | ( | $ | ( | $ | | |||||
Diluted net (loss) income per share | $ | ( | $ | ( | $ | ( | $ | | |||||
17
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
As a result of the net loss for the current quarter, prior quarter, and current nine months, the Company calculated diluted EPS using basic weighted average shares outstanding for such periods, as utilizing diluted shares would be anti-dilutive to loss per share for such periods.
The computation of diluted EPS excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:
| Three Months Ended | Nine Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||
Stock options | | | | | |||||
Warrants | | | | | |||||
Total | |
| | |
| |
| ||
10. Income Taxes
The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately
For the current quarter, the federal statutory rate differed from the effective tax rate due to the recording of a valuation allowance against the benefit that would have otherwise been recognized, as it was considered not more likely than not that the net operating losses generated during the period will be utilized in future periods. For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately
For the current nine months, the federal statutory rate differed from the effective tax rate due to the recording of a valuation allowance against the benefit that would have otherwise been recognized, as it was considered not more likely than not that the net operating losses generated during the period will be utilized in future periods. For the prior year nine months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately
11. Related Party Transactions
IM Topco, LLC
The Company holds a noncontrolling interest in IM Topco, which is accounted for under the equity method of accounting.
On May 31, 2022, the Company entered into a services agreement with IM Topco, pursuant to which the Company provides certain design and support services (including assistance with the operations of the interactive television business and related talent support) to IM Topco in exchange for payments of $
On May 31, 2022, the Company entered into a license agreement with IM Topco, pursuant to which IM Topco granted the Company a license to use certain Isaac Mizrahi trademarks on and in connection with the design, manufacture, distribution, sale, and promotion of women’s sportswear products in the United States and Canada during the term of the agreement, in exchange for the payment of royalties in connection therewith. The initial term of this agreement was set to end on
18
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
December 31, 2026, and provided guaranteed minimum royalties to IM Topco of $
12. Commitments and Contingencies
Contingent Obligation – Lori Goldstein Earn-Out
In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks, the Company agreed to pay the seller additional cash consideration (the “Lori Goldstein Earn-Out”) of up to $
Contingent Obligation – Isaac Mizrahi Transaction
In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 2), the Company agreed with WHP that, in the event that IM Topco receives less than $
Although IM Topco’s aggregate royalties fell below the aforementioned threshold for the four consecutive quarter period ending September 30, 2023, WHP provided a waiver to Xcel relative to such requirement for the period. The waiver also includes the measurement period ending December 31, 2023. The next measurement period shall be the trailing four calendar quarters ending March 31, 2024. IM Topco’s aggregate royalties through September 30, 2023 were lower than expected as a result of soft sales in its interactive television business, primarily driven by talent scheduling conflicts as QVC transitions from remote shows to 100% in-studio shows. Management believes this softness in sales is temporary, and steps are underway to restore airtime back to levels that will result in meeting planned sales levels. Accordingly, no amount has been recorded in the accompanying condensed consolidated balance sheets related to this contingent obligation.
19
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
Legal Proceedings
From time to time, the Company becomes involved in legal claims and litigation in the ordinary course of business. In the opinion of management, based on consultations with legal counsel, the disposition of litigation currently pending against the Company is unlikely to have, individually or in the aggregate, a materially adverse effect on the Company’s business, financial position, results of operations, or cash flows. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
13. Subsequent Events
Restructuring of Certain Contractual Arrangements
On October 17, 2023, the Company and one of the licensees managed under the Halston Master License entered into an amendment of their respective licensing agreement. Under this amendment, the payment terms of the $
The Company recorded a non-cash charge of $
IDB Term Loan and Interest Rate Swap
On October 19, 2023, H Halston IP, LLC (the “Borrower”), a wholly owned indirect subsidiary of Xcel Brands, Inc., entered into a Term Loan Agreement (the “Loan Agreement”) with Israel Discount Bank of New York (“IDB”). Pursuant to the Loan Agreement, IDB made a term loan in the aggregate amount of $
In connection with the Loan Agreement, the Borrower and H Licensing, LLC (“H Licensing”), a wholly owned subsidiary of Xcel, entered into a Security Agreement (the “Security Agreement”) in favor of IDB, and Xcel entered into a Membership Interest Pledge Agreement (the “Pledge Agreement”) in favor of IDB. Pursuant to the Security Agreement, the Borrower and H Licensing granted to IDB a security interest in substantially all of their respective assets, other than the trademarks owned by the Borrower and H Licensing, to secure the Borrower’s obligations under the Loan Agreement. Pursuant to the Pledge Agreement, Xcel granted to IDB a security interest in its membership interests in H Licensing to secure the Borrower’s obligations under the Loan Agreement.
The Term Loan matures on October 19, 2028. Principal on the Term Loan shall be payable in quarterly installments of $
Interest on the Term Loan accrues at Term SOFR (as defined in the Loan Agreement as the forward-looking term rate based on secured overnight financing rate as administered by the Federal Reserve Bank of New York for an interest period equal to one month on the day that is two U.S. Government Securities Business Days prior to the first day of each calendar month) plus
20
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
The Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and certain financial covenants including annual guaranteed minimum royalty ratio, annual fixed charge coverage ratio, and minimum cash balance levels, all as specified and defined in the Loan Agreement.
In addition, on October 19, 2023, the Borrower also entered into a swap agreement with IDB, pursuant to which IDB will pay the Borrower Term SOFR plus
Longaberger Brand E-Commerce Agreement
On October 29, 2023, Longaberger Licensing, LLC (“LL”) entered into a master services agreement with a third party, under which LL granted to the counterparty a license to operate and manage the e-commerce operations of LL. This agreement has an initial term ending December 31, 2026, with an option for the counterparty to renew for an additional three years, provided that certain sales thresholds are met. In exchange, the counterparty agreed to pay LL a percentage royalty based on net sales, as well as a percentage share of the “modified contribution margin” (as defined in the agreement) of the e-commerce business operations.
Amendments Related to IM Topco
In November 2023, the Company, WHP, and IM Topco entered into amendments of the May 27, 2022 membership purchase agreement (see Note 2) and the May 31, 2022 services agreement (see Note 11). Under these amendments, the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024. In exchange, Xcel shall provide IM Topco with a $
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this report are forward-looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks are detailed in the Risk Factors section of our Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on April 17, 2023. The words “believe,” “anticipate,” “expect,” “continue,” “estimate,” “appear,” “suggest,” “goal,” “potential,” “predicts,” “seek,” “will,” “confident,” “project,” “provide,” “plan,” “likely,” “future,” “ongoing,” “intend,” “may,” “should,” “would,” “could,” “guidance,” and similar expressions identify forward-looking statements.
Overview
Xcel Brands, Inc. (“Xcel,” the “Company,” “we,” “us,” or “our”) 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. Xcel was founded in 2011 with a vision to reimagine shopping, entertainment, and social media as one thing. Currently, the Company’s brand portfolio consists of the LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brands (the "Halston Brand"), the Judith Ripka brands (the "Ripka Brand"), the C Wonder brands (the "C Wonder Brand"), the Longaberger brand (the “Longaberger Brand”), the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), and other proprietary brands.
| ● | The Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand are wholly owned by the Company. |
| ● | We manage the Longaberger Brand through our 50% ownership interest in Longaberger Licensing, LLC. |
| ● | The Company wholly owned and managed the Isaac Mizrahi Brand through May 31, 2022. On May 31, 2022, we sold a majority interest in the brand to a third party, but retained a 30% noncontrolling interest in the brand and continue to contribute to the operations of the brand through a service agreement. |
Xcel continues to pioneer a true omni-channel sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, wholesale, and e-commerce channels to be everywhere its customers shop. Our brands have generated over $3 billion in retail sales via live streaming in interactive television and digital channels alone
Our objective is to build a diversified portfolio of lifestyle consumer brands through organic growth and the strategic acquisition of new brands. To grow our brands, we are focused on the following primary strategies:
| ● | distribution and/or licensing of our brands for sale through interactive television (i.e., QVC, HSN, The Shopping Channel, TVSN, CJO, JTV, etc.); |
| ● | licensing of our brands to retailers that sell to the end consumer; |
| ● | direct-to-consumer distribution of our brands through e-commerce and live streaming; |
| ● | licensing our brands to manufacturers and retailers for promotion and distribution through e-commerce, social commerce, and traditional brick-and-mortar retail channels whereby we provide certain design services; and |
| ● | acquiring additional consumer brands and integrating them into our operating platform and leveraging our operating infrastructure and distribution relationships. |
22
We believe that Xcel offers a unique value proposition to our retail and direct-to-consumer customers and our licensees for the following reasons:
| ● | our management team, including our officers’ and directors’ experience in, and relationships within the industry; |
| ● | our deep knowledge, expertise, and proprietary technology in live streaming; |
| ● | our design, production, sales, marketing, and supply chain and integrated technology platform that enables us to design and distribute trend-right product; and |
| ● | our significant media and internet presence. |
We utilize state-of-the-art supply chain management technology, trend analytics, and data science to actively monitor fashion trends and read and react to customer demands.
Summary of Operating Results
Three months ended September 30, 2023 (the “current quarter”) compared with the three months ended September 30, 2022 (the “prior year quarter”)
Revenues
Current quarter net revenue decreased approximately $1.9 million to $2.6 million from $4.5 million for the prior year quarter.
Net licensing revenue increased approximately $0.2 million to $2.4 million from $2.2 million in the prior year quarter, primarily driven by increases in sales through interactive television, mainly attributable to our C Wonder brand.
Net product sales decreased by approximately $2.1 million in the current quarter to approximately $0.3 million, compared with $2.3 million in the prior year quarter. This decrease was primarily attributable to the exit from our wholesale apparel and fine jewelry sales operations earlier in 2023 as part of the restructuring and transformation of our business operating model, which was substantially completed as of June 30, 2023.
Cost of Goods Sold
Current quarter cost of goods sold was $0.2 million, compared with $1.5 million for the prior year quarter.
Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) decreased from approximately 37% in the prior year quarter to approximately 12% in the current quarter. The decrease in gross profit margin percentage was the result of reduced wholesale apparel sales attributable to excess chargebacks.
Gross profit (net revenue less cost of goods sold) decreased approximately $0.6 million to $2.4 million from $3.0 million in the prior year quarter, primarily driven by the aforementioned decrease in net product sales due to the exit from our wholesale apparel and fine jewelry sales operations earlier in 2023.
23
Direct Operating Costs and Expenses
Direct operating costs and expenses decreased approximately $1.3 million from $6.9 million in the prior year quarter to $5.6 million in the current quarter. This decrease was primarily attributable to lower salaries, benefits and employment costs, driven by reductions in staffing levels in 2023 related to the restructuring and transformation of our business operating model, as well as related reductions in other overhead costs. These decreases were partially offset by $0.8 million in costs related to the restructuring of certain contractual arrangements in connection with the shift and evolution in the Company’s business operations, and also by a $0.1 million impairment charge related to certain capitalized software assets.
Other Operating Costs and Expenses (Income)
Depreciation and amortization expense was approximately $1.8 million and $1.7 million in the current quarter and prior year quarter, respectively.
We account for our interest in the ongoing operations of IM Topco, LLC using the equity method of accounting. We recognized an equity method loss related to our investment of $0.52 million and $0.28 million for the current quarter and prior year quarter, respectively, based on the distribution provisions set forth in the related business venture agreement.
Income Taxes
The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 0% and 26%, respectively, resulting in an income tax (benefit) provision of $0 and $1.54 million, respectively.
For the current quarter, the federal statutory rate differed from the effective tax rate due to the recording of a valuation allowance against the benefit that would have otherwise been recognized, as it was considered not more likely than not that the net operating losses generated during each period will be utilized in future periods.
For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 5%
Net Loss Attributable to Xcel Brands, Inc. Stockholders
We had a net loss of $5.1 million for the current quarter, compared with a net loss of $4.0 million for the prior year quarter, due to the combination of the factors outlined above.
Non-GAAP Net (Loss) Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
We had a non-GAAP net loss of approximately $3.0 million, or $0.15 per diluted share (“non-GAAP diluted EPS”), for the current quarter and a non-GAAP net loss of $3.3 million, or $0.17 per diluted share, for the prior year quarter. Non-GAAP net (loss) income is a non-GAAP unaudited term, which we define as net (loss) income attributable to Xcel Brands, Inc. stockholders, exclusive of amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation and cost of licensee warrants, loss on extinguishment of debt, gains on sales of assets and investments, gain on lease termination, asset impairments, and income taxes. Non-GAAP net income and non-GAAP diluted EPS measures do not include the tax effect of the aforementioned adjusting items, due to the nature of these items and the Company’s tax strategy.
We had Adjusted EBITDA of approximately $(1.4) million for the current quarter, compared with approximately $(2.9) million for the prior year quarter. Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net (loss) income attributable to Xcel Brands, Inc. stockholders before depreciation and amortization, our proportional share of trademark amortization of equity method investees, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation and cost of licensee warrants, gains on sales of assets and investments, gain on lease termination, asset impairments, and costs associated with restructuring of operations.
24
Costs associated with restructuring of operations include the current year operating losses generated by certain of our businesses that have been restructured or discontinued (i.e., wholesale apparel and fine jewelry), as well as non-cash charges associated with the restructuring of certain contractual arrangements.
Management uses non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the Company’s results of operations. Management believes non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus, these non-GAAP measures provide supplemental information to assist investors in evaluating the Company’s financial results.
Non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP. Given that non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are financial measures not deemed to be in accordance with GAAP and are susceptible to varying calculations, our non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in our industry, because other companies may calculate non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA in a different manner than we calculate these measures.
In evaluating non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA, you should be aware that in the future we may or may not incur expenses similar to some of the adjustments in this report. Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any other unusual or non-recurring items. When evaluating our performance, you should consider non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.
The following table is a reconciliation of net loss attributable to Xcel Brands, Inc. stockholders (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net (loss) income:
| Three Months Ended | |||||
September 30, | ||||||
($ in thousands) |
| 2023 |
| 2022 | ||
Net loss attributable to Xcel Brands, Inc. stockholders | $ | (5,144) | $ | (4,042) | ||
Amortization of trademarks |
| 1,520 |
| 1,520 | ||
Proportional share of trademark amortization of equity method investee | 515 | 742 | ||||
Stock-based compensation and cost of licensee warrants |
| 62 |
| 51 | ||
Income tax benefit |
| — |
| (1,539) | ||
Non-GAAP net loss | $ | (3,047) | $ | (3,268) | ||
The following table is a reconciliation of diluted loss per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:
Three Months Ended | ||||||
September 30, | ||||||
| 2023 |
| 2022 | |||
Diluted loss per share | $ | (0.26) | $ | (0.21) | ||
Amortization of trademarks |
| 0.08 |
| 0.08 | ||
Proportional share of trademark amortization of equity method investee | 0.03 | 0.04 | ||||
Stock-based compensation |
| 0.00 |
| 0.00 | ||
Income tax benefit |
| — |
| (0.08) | ||
Non-GAAP diluted EPS | $ | (0.15) | $ | (0.17) | ||
Non-GAAP weighted average diluted shares |
| 19,749,317 |
| 19,624,860 | ||
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The following table is a reconciliation of net loss attributable to Xcel Brands, Inc. stockholders (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:
Three Months Ended | ||||||
September 30, | ||||||
($ in thousands) |
| 2023 |
| 2022 | ||
Net loss attributable to Xcel Brands, Inc. stockholders | $ | (5,144) | $ | (4,042) | ||
Depreciation and amortization |
| 1,677 |
| 1,815 | ||
Proportional share of trademark amortization of equity method investee | 515 | 742 | ||||
Interest and finance (income) expense |
| — |
| (6) | ||
Income tax benefit |
| — |
| (1,539) | ||
State and local franchise taxes |
| 9 |
| 85 | ||
Stock-based compensation and cost of licensee warrants |
| 62 |
| 51 | ||
Costs associated with restructuring of operations | 1,471 | — | ||||
Adjusted EBITDA | $ | (1,410) | $ | (2,894) | ||
Nine months ended September 30, 2023 (the “current nine months”) compared with the nine months ended September 30, 2022 (the “prior year nine months”)
Revenues
Current nine months net revenue decreased approximately $6.2 million to $15.5 million from $21.7 million for the prior year nine months.
Net licensing revenue decreased by approximately $6.3 million in the current nine months to $7.0 million, compared with $13.3 million in the prior year nine months. This decrease in licensing revenue was primarily attributable to the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand through the sale of a 70% interest in IM Topco, LLC to WHP. Since the closing of such sale, we no longer record Isaac Mizrahi brand licensing revenue as part of our revenues.
Net product sales were essentially flat at $8.4 million for both the current nine months and the prior year nine months. This was primarily attributable to sale of all of our C Wonder apparel inventory to HSN and the sale of all of our Judith Ripka fine jewelry inventory to JTV, as part of the restructuring and transformation of our business operating model during the first half of 2023, partially offset by the lack of such sales during the third quarter of 2023 due to our exit from wholesale apparel and fine jewelry sales operations.
Cost of Goods Sold
Current nine months cost of goods sold was $6.7 million, compared with $5.7 million for the prior year nine months.
Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) decreased from approximately 32% in the prior year nine months to approximately 20% in the current nine months. The decrease in gross profit margin percentage was the result of selling all remaining jewelry at an agreed-upon price which was less than historical margins and the sale of the remaining apparel inventory at discounted sales amounts.
Gross profit (net revenue less cost of goods sold) decreased approximately $7.2 million to $8.8 million from $16.0 million in the prior year nine months, primarily driven by the aforementioned decrease in net licensing revenue.
Direct Operating Costs and Expenses
Direct operating costs and expenses decreased approximately $6.9 million from $24.7 million in the prior year nine months to $17.8 million in the current nine months. This decrease was primarily attributable to lower salaries, benefits and employment costs, driven by the combination of (i) the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand and the transfer of the employees associated with the Isaac Mizrahi brand to the IM Topco, LLC business venture, and (ii) reductions in staffing levels and other costs during 2023 related to the restructuring and transformation of our business
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operating model. These decreases were partially offset by $0.8 million in costs related to the restructuring of certain contractual arrangements in connection with the shift and evolution in the Company’s business operations, and also by a $0.1 million impairment charge related to certain capitalized software assets.
Other Operating Costs and Expenses (Income)
Depreciation and amortization expense was approximately $5.4 million and $5.3 million in the current nine months and prior year nine months, respectively.
In the prior year nine months, we recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand of approximately $20.6 million, which was comprised of $46.2 million of cash proceeds plus the recognition of the fair value of our retained interest in the brand of $19.8 million, less $0.9 million of fees and expenses directly related to the transaction and the derecognition of the brand trademarks previously recorded on our balance sheet of $44.5 million.
We account for our interest in the ongoing operations of IM Topco, LLC using the equity method of accounting. We recognized an equity method loss related to our investment of $1.55 million and $0.28 million for the current nine months and prior year nine months, respectively, based on the distribution provisions set forth in the related business venture agreement.
Also during the current nine months, we recognized a gain of $0.35 million related to the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016, and recognized a gain of $0.44 million related to a lease termination settlement with the landlord of our former retail store location.
Interest and Finance Expense
Interest and finance expense for the current nine months was $0.0 million, compared with $3.5 million for the prior year nine months. This decrease was attributable to the May 31, 2022 repayment of all of our outstanding term loan debt, which resulted in a $2.3 million loss on early extinguishment of debt in the prior year nine months.
Income Taxes
The estimated annual effective income tax rate for the current nine months and the prior year nine months was approximately 0% and 62%, respectively, resulting in an income tax (benefit) provision of $0 and $1.64 million, respectively.
For the current nine months, the federal statutory rate differed from the effective tax rate due to the recording of a valuation allowance against the benefit that would have otherwise been recognized, as it was considered not more likely than not that the net operating losses generated during each period will be utilized in future periods.
For the prior year nine months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 41%%.
Net (Loss) Income Attributable to Xcel Brands, Inc. Stockholders
We had a net loss of $14.3 million for the current nine months, compared with net income of $2.0 million for the prior year nine months, due to the combination of the factors outlined above.
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Non-GAAP Net (Loss) Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
We had a non-GAAP net loss of approximately $8.7 million, or $0.44 per diluted share for the current nine months and a non-GAAP net loss of $8.8 million, or $0.45 per diluted share, for the prior year nine months.
We had Adjusted EBITDA of approximately $(4.6) million for the current nine months, compared with approximately $(6.6) million for the prior year nine months.
The following table is a reconciliation of net (loss) income attributable to Xcel Brands, Inc. stockholders (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net loss:
| Nine Months Ended | |||||
September 30, | ||||||
($ in thousands) |
| 2023 |
| 2022 | ||
Net (loss) income attributable to Xcel Brands, Inc. stockholders | $ | (14,255) | $ | 1,961 | ||
Amortization of trademarks |
| 4,565 |
| 4,559 | ||
Proportional share of trademark amortization of equity method investee | 1,545 | 742 | ||||
Stock-based compensation and cost of licensee warrants |
| 184 |
| 568 | ||
Loss on extinguishment of debt | — | 2,324 | ||||
Gains on sales of assets and investments | (351) | (20,608) | ||||
Gain on lease termination | (445) | — | ||||
Asset impairment | 100 | — | ||||
Income tax provision |
| — |
| 1,639 | ||
Non-GAAP net loss | $ | (8,657) | $ | (8,815) | ||
The following table is a reconciliation of diluted loss per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:
Nine Months Ended | ||||||
September 30, | ||||||
| 2023 |
| 2022 | |||
Diluted (loss) earnings per share | $ | (0.72) | $ | 0.10 | ||
Amortization of trademarks |
| 0.23 |
| 0.23 | ||
Proportional share of trademark amortization of equity method investee | 0.08 | 0.04 | ||||
Stock-based compensation and cost of licensee warrants |
| 0.01 |
| 0.03 | ||
Loss on extinguishment of debt | — | 0.12 | ||||
Gains on sales of assets and investments | (0.02) | (1.05) | ||||
Gain on lease termination | (0.02) | — | ||||
Asset impairment | 0.00 | — | ||||
Income tax provision |
| — |
| 0.08 | ||
Non-GAAP diluted EPS | $ | (0.44) | $ | (0.45) | ||
Non-GAAP weighted average diluted shares |
| 19,683,525 |
| 19,624,604 | ||
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The following table is a reconciliation of net (loss) income attributable to Xcel Brands, Inc. stockholders (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:
Nine Months Ended | ||||||
September 30, | ||||||
($ in thousands) |
| 2023 |
| 2022 | ||
Net (loss) income attributable to Xcel Brands, Inc. stockholders | $ | (14,255) | $ | 1,961 | ||
Depreciation and amortization |
| 5,260 |
| 5,447 | ||
Proportional share of trademark amortization of equity method investee | 1,545 | 742 | ||||
Interest and finance expense |
| 18 |
| 3,505 | ||
Income tax provision |
| — |
| 1,639 | ||
State and local franchise taxes |
| 53 |
| 121 | ||
Stock-based compensation and cost of licensee warrants |
| 184 |
| 568 | ||
Gains on sales of assets and investments | (351) | (20,608) | ||||
Gain on lease termination | (445) | — | ||||
Asset impairment | 100 | — | ||||
Costs associated with restructuring of operations | 3,319 | — | ||||
Adjusted EBITDA | $ | (4,572) | $ | (6,625) | ||
Liquidity and Capital Resources
General
As of September 30, 2023 and December 31, 2022, our cash and cash equivalents were $2.2 million and $4.6 million, respectively.
Our principal capital requirements have been to fund working capital needs, acquire new brands, and to a lesser extent, capital expenditures. Notwithstanding our 2020 and 2021 investments in our ERP system and our brick-and-mortal retail store, respectively, our business operating model generally does not require material capital expenditures, and as of September 30, 2023, we have no significant commitments for future capital expenditures.
Working Capital
Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations and any contingent obligations payable in common stock) was $2.9 million and $8.8 million as of September 30, 2023 and December 31, 2022, respectively.
Liquidity and Management’s Plans
We incurred a net loss attributable to Company stockholders of approximately $5.1 million and $14.3 million during the three and nine months ended September 30, 2023, respectively (which included net non-cash expenses of approximately $2.3 million and $7.1 million, respectively), and had an accumulated deficit of approximately $47.1 million as of September 30, 2023. Net cash used in operating activities was approximately $2.8 million for the nine months ended September 30, 2023. These factors, along with our current levels of cash and working capital, raise uncertainties about the Company’s ability to continue as a going concern.
Management has implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting the business from a wholesale/licensing hybrid model into a “licensing-plus” business model. In the first quarter of 2023, we began to restructure our business operations by entering into new licensing agreements and joint venture arrangements with best-in-class business partners. We entered into a new interactive television licensing agreement with America’s Collectibles Network, Inc. d/b/a Jewelry Television (“JTV”) for the Ripka Brand, and a separate license with JTV for the Ripka Brand’s e-commerce business. For apparel, similar transactions were executed. In conjunction with the launch of the C Wonder Brand on HSN, we licensed the wholesale operations related to the brand to One Jeanswear Group, LLC (“OJG”); this new license with OJG also includes other new celebrity brands that we plan to develop and launch in 2023
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and beyond. In the second quarter of 2023, we entered into a new master license agreement for the Halston Brand, covering men’s, women’s, and children’s apparel, fashion accessories, and other product categories, with an industry-leading wholesale apparel company for distribution through department stores, e-commerce, and other retailers. This new master license for the Halston Brand provides for an upfront cash payment and royalties to the Company, including certain guaranteed minimum royalties, includes significant annual minimum net sales requirements, and has a twenty-five-year term (consisting of an initial five-year period, followed by a twenty-year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term.
The transition of these operating businesses was substantially completed by the end of the second quarter of 2023. Additionally, during the third quarter of 2023, the Company entered into various settlements and incurred approximately $1.0 million of expenses to restructure certain contractual arrangements related to its former wholesale operations.
We believe that this evolution of our operating model will provide significant cost savings and allow us to reduce and better manage our exposure to operating risks. As of September 30, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses by approximately $7 million, on an annualized basis when compared to the corresponding periods in the prior year.
While there is some level of potential risk with respect to the Company’s contingent obligation related to IM Topco, LLC, which could negatively impact our future cash flows and liquidity, management has taken steps to address such risk.
Further, in October 2023, we entered into a new term loan agreement in the amount of $5 million, which provides us with approximately $5 million of additional liquidity. Also in October 2023, Longaberger Licensing, LLC outsourced the operations and management of the Longaberger Brand’s e-commerce business to a third party.
Based on these recent events and changes in our business model, management expects to generate adequate cash flows to meet the Company’s operating and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q, and therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of September 30, 2023, have been alleviated.
Commentary on the components of our cash flows for the current nine months as compared with the prior year nine months is set forth below.
Operating Activities
Net cash used in operating activities was approximately $2.81 million in the current nine months, compared with approximately $11.03 million in the prior year nine months.
The current nine months cash used in operating activities was primarily attributable to the combination of the net loss of $(15.04) million plus non-cash items of approximately $7.07 million and the net change in operating assets and liabilities of approximately $5.16 million. Non-cash items were primarily comprised of $5.26 million of depreciation and amortization, the $1.55 million undistributed proportional share of net loss of equity method investee, and a $0.76 million charge related to the restructuring of certain contractual arrangements, partially offset by a $(0.35) gain on the sale of a financial asset and a $(0.44) gain on the settlement of a lease liability. The net change in operating assets and liabilities was primarily comprised of (i) an increase in deferred revenue of approximately $4.68 million, which was mainly attributable to the upfront payment received for the Halston Master License agreement entered into during the current nine months, (ii) a decrease in inventory of approximately $1.85 million, driven by the sale of all of our C Wonder apparel inventory to HSN and the sale of all of our Judith Ripka fine jewelry inventory to JTV, as part of the restructuring and transformation of our business operating model. Partially offsetting these net changes in operating assets and liabilities were decreases in various operating liabilities of approximately $(1.40) million.
The prior year nine months cash used in operating activities as primarily attributable to the combination of the net income of $1.02 million plus non-cash items of approximately $(11.30) million and the net change in operating assets and liabilities of approximately $(0.75) million. Non-cash items were primarily comprised of a $(20.61) million net gain on the sale of the assets of the Isaac Mizrahi brand, $5.45 million of depreciation and amortization, $0.57 million of stock-based
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compensation, a $2.32 million loss on extinguishment of debt, and $0.36 million of deferred taxes. The net change in operating assets and liabilities was primarily comprised of an increase in inventory of $(0.51) million, decreases in various operating liabilities of $(0.80) million, and changes in lease-related assets and liabilities of $(0.20) million, partially offset by a decrease in accounts receivable of $0.75 million..
Investing Activities
Net cash provided by investing activities for the current nine months was approximately $0.36 million, primarily driven by $0.45 million of proceeds received from the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016.
Net cash provided by investing activities for the prior year nine months was approximately $45.17 million, and was predominantly attributable to $45.41 million of net proceeds from the sale of a majority interest in the Isaac Mizrahi brand to WHP, partially offset by approximately $0.24 million of capital expenditures
Financing Activities
Net cash provided by financing activities for the current nine months was entirely attributable to proceeds from the exercise of employee stock options in the amount of approximately $0.03 million.
Net cash used in financing activities for the prior year nine months was approximately $30.95 million, which mainly consisted of $29.00 million of repayments of term loan debt, and, to a lesser extent, $1.51 million of prepayment and other fees associated with the extinguishment of debt, as well as $0.44 million of shares repurchased related to withholding taxes on vested restricted stock.
Contingent Obligation – Isaac Mizrahi Transaction
In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi brand, the Company agreed with WHP that, in the event that IM Topco, LLC (“IM Topco”) receives less than $13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from us up to $16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP. Such amount would be payable by us in either cash or equity interests in IM Topco held by us. Based on IM Topco’s earnings from May 31, 2022 through September 30, 2023 and the applicable distribution provisions, WHP earned $9.1 million in cash flow, which reduces the maximum potential purchase price adjustment to $6.9 million.
Although IM Topco’s aggregate royalties fell below the aforementioned threshold for the four consecutive quarter period ending September 30, 2023, WHP provided a waiver to us relative to such requirement for the period. The waiver also includes the measurement period ending December 31, 2023. The next measurement period will be the trailing four calendar quarters ending March 31, 2024. IM Topco’s aggregate royalties through September 30, 2023 were lower than expected as a result of soft sales in its interactive television business, primarily driven by talent scheduling conflicts as QVC transitions from remote shows to 100% in-studio shows. Management believes this softness in sales is temporary, and steps are underway to restore airtime back to levels that will result in meeting planned sales levels. Accordingly, no amount has been recorded in the accompanying condensed consolidated balance sheets related to this contingent obligation.
In November 2023, the Company, WHP, and IM Topco entered into amendments of the May 27, 2022 membership purchase agreement and the May 31, 2022 services agreement. Under these amendments, the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024. In exchange, we will provide IM Topco with a $0.6 million reduction of future service fees over the next eighteen months, beginning on July 1, 2023.
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Other Factors
We continue to seek to expand and diversify the types of licensed products being produced under our brands. We plan to continue to diversify the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer, consumer, or market sector within each of our brands. The Lori Goldstein brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories. The Ripka brand is a fine jewelry business which we believe helps diversify our industry focus while at the same time complements our business operations and relationships.
While the 2022 sale of a majority interest in the Isaac Mizrahi brand has resulted in a decrease in our revenues, as that brand represented a significant portion of our historical revenues, we are taking actions to replace those revenues in the long-term with new strategic business initiatives, as we concentrate our resources on growing our brands, launching new brands, and entering into new business partnerships. We continue to seek new opportunities, including expansion through interactive television, live streaming, additional domestic and international licensing arrangements, and acquiring additional brands, including recent launches of our Victor Glemaud and C Wonder by Christian Siriano businesses on HSN.
In the first quarter of 2023, we began to restructure our business operations by shifting our business from a wholesale/licensing hybrid model into a “licensing-plus” business model. These efforts included entering into new structured contractual arrangements with best-in-class business partners in order to more efficiently operate our wholesale and e-commerce businesses and reduce and better manage our exposure to operating risks. These restructuring initiatives were substantially completed as of June 30, 2023, and going forward are expected to provide us with approximately $13 million of cost savings on an annualized basis compared to our previous operating model.
However, we continue to face a number of headwinds in the current macroeconomic environment. Poor economic and market conditions, including a potential recession, may negatively impact market sentiment, decreasing the demand for apparel, footwear, accessories, fine jewelry, home goods, and other consumer products, which would adversely affect our operating income and results of operations. If we are unable to take effective measures in a timely manner to mitigate the impact of inflation and/or a potential recession, our business, financial condition, and results of operations could be adversely affected.
Our long-term success, however, will still remain largely dependent on our ability to build and maintain our brands’ awareness and continue to attract wholesale and direct-to-consumer customers, and contract with and retain key licensees and business partners, as well as our and our licensees’ ability to accurately predict upcoming fashion and design trends within their respective customer bases and fulfill the product requirements of the particular retail channels within the global marketplace. Unanticipated changes in consumer fashion preferences and purchasing patterns, slowdowns in the U.S. economy, changes in the prices of supplies, consolidation of retail establishments, and other factors noted in Item 1A of our most recent Annual Report on Form 10-K could adversely affect our licensees’ ability to meet and/or exceed their contractual commitments to us and thereby adversely affect our future operating results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, or liquidity.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in conformity with GAAP requires management to exercise judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry, and current and expected economic conditions that are believed to be reasonable under the circumstances, the results of which form the basis for
32
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Because the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on April 17, 2023, for a discussion of our critical accounting policies and estimates.
Effective January 1, 2023, we adopted the provisions of Accounting Standards Update No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (as amended). Although the adoption of this new guidance did not have a significant impact on the Company’s results of operations, cash flows, or financial condition, it represented a change in our accounting policy with respect to the estimation of allowance for uncollectible accounts. Refer to Part I, Item 1, Note 5 of this Quarterly Report on Form 10-Q for additional information. During the three and nine months ended September 30, 2023, there were no other material changes to our accounting policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2023, the end of the period covered by this report. Based on, and as of the date of such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023 such that the information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
B. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, from time to time we become involved in legal claims and litigation. In the opinion of management, based on consultations with legal counsel, the disposition of litigation currently pending against us is unlikely to have, individually or in the aggregate, a materially adverse effect on our business, financial position, or results of operations.
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ITEM 1A. RISK FACTORS
We operate in a highly competitive industry that involves numerous known and unknown risks and uncertainties that could impact our operations. The risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our financial condition and/or operating results.
We have identified the following risk as a material change from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
We have recently begun to conduct certain of our operations through a joint venture. Joint ventures could fail to meet our expectations or cease to deliver anticipated benefits. There could also be disagreements with our joint venture partners that could adversely affect our interest in a joint venture.
In May 2022, we sold a majority interest in the Isaac Mizrahi brand through the sale of a 70% interest in IM Topco, LLC to IM WHP, LLC (“WHP”), a subsidiary of WHP Global. We may enter into additional joint ventures in the future. Our operating results are, in part, dependent upon the performance of IM Topco, LLC and, in the future, could also be dependent in part upon the performance of future joint ventures. Joint ventures involve numerous risks, and could fail to meet our initial or ongoing expectations. We provide certain services to IM Topco, LLC and may provide services to future joint ventures, but we do not control the day-to-day operations of IM Topco, LLC and may not control the day-to-day operations of future joint ventures. The anticipated synergies or other benefits of a joint venture may fail to materialize due to changing business conditions or changes in our business priorities or those of our joint venture partners. Our joint venture partners, as well as any future partners, may have interests that are different from our interests, which may result in conflicting views as to the conduct of the business or future direction of the joint venture. In the event that we have a disagreement with a joint venture partner with respect to a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture, we may not be able to resolve such disagreement in our favor. Any such disagreement could have a material adverse effect on our interest in the joint venture, the business of the joint venture, or the portion of our growth strategy related to the joint venture.
In connection with the May 2022 Isaac Mizrahi transaction, the Company agreed with WHP that, in the event that IM Topco, LLC receives less than $13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from us up to $16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP. Such amount would be payable by us in either cash or equity interests in IM Topco, LLC held by us. Based on IM Topco, LLC’s earnings from May 31, 2022 through September 30, 2023 and the applicable distribution provisions, WHP earned $9.1 million in cash flow, which reduces the maximum potential purchase price adjustment to $6.9 million. Although IM Topco, LLC’s aggregate royalties were below the aforementioned threshold for the four consecutive quarter period ending September 30, 2023, WHP provided a waiver to us relative to such requirement for the period. In exchange for the waiver, we agreed to provide IM Topco, LLC with a $0.6 million reduction in future service fee payments over the next eighteen months. There can be no assurance that IM Topco, LLC’s royalties will meet the required threshold level during any future measurement period. If such aggregate royalties are below the threshold and the Company does not receive a waiver, WHP will be entitled to a price adjustment which will result in either a cash payment by us or a reduction in our equity interest in WHP.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
There were no sales of unregistered or registered securities during the three months ended September 30, 2023.
On August 22, 2023, in connection with an individual’s cashless exercise of 40,000 stock options, 12,903 shares of common stock were exchanged from that individual in connection with the exercise cost. The 12,903 shares of stock were considered repurchased and retired by the Company during the three months ended September 30, 2023; the price paid for the shares was $1.55, and the fair value of the shares repurchased was $20,000.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
101.INS Inline XBRL Instance Document |
101.SCH Inline XBRL Taxonomy Extension Schema Document |
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document |
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 20, 2023 | By: | /s/ Robert W. D’Loren |
|
| Name: Robert W. D’Loren |
|
| Title: Chairman and Chief Executive Officer |
|
|
|
| By: | /s/ James Haran |
|
| Name: James Haran |
|
| Title: Chief Financial Officer and Vice President |
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