UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
⌧☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31 2020, 2023
OR
◻☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37527
XCEL BRANDS, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
| 76-0307819 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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| (Address of Principal Executive Offices) | |
(347) 727-2474
(Issuer’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
Common Stock, $0.001 par value per share | | XELB | | NASDAQ |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻☐ No ⌧☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻☐ No ⌧☒
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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧☒ No ◻☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧☒ No ◻
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ◻☐
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.
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Large accelerated filer |
| Accelerated filer |
Non-accelerated filer | | Smaller reporting company |
| | Emerging |
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 check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ◻☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ◻☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently computedcompleted second fiscal quarter was $10,967,000$17,934,000 based upon the closing price of such common stock on June 30, 2020.2023.
The number of shares of the issuer’s common stock issued and outstanding as of March 30, 2021April 3, 2024 was 19,260,86223,492,117 shares.
Documents Incorporated By Reference: None
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
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Certain Relationships and Related Transactions, and Director Independence | |
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements of historical fact contained in this Annual Report, including statements regarding future events, our future financial performance, business strategy, and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “seeks,” “should,” “would,” “guidance,” “confident”“confident,” or “will” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding our anticipated revenue, expenses, profitability, strategic plans, and capital needs. These statements are based on information available to us on the date hereof and our current expectations, estimates, and projections and are not guarantees of future performance. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors, including, without limitation, the risks outlined under “Risk Factors” or elsewhere in this Annual Report, as well as adverse effects on us, our licensees, and customers due to natural disasters, pandemic disease, and other unexpected events, which may cause our or our industry’s actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements. You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.
The "Isaac Mizrahi New York®," “Isaac Mizrahi®," "IsaacMizrahiLIVE®," "Isaac Mizrahi Jeans"LOGO by Lori Goldstein™," "Isaac Mizrahi CRAFT ™," "Judith Ripka LTD™," "Judith Ripka Collection™," "Judith Ripka Legacy™," "Judith Ripka®,” "Judith Ripka Sterling ™," "Halston," "Halston Heritage," "H by Halston®," "H Halston™," "Roy Frowick," "Judith Ripka LTD™," "Judith Ripka Collection™," "Judith Ripka Legacy™," "Judith Ripka®,” "Judith Ripka Sterling™," "C. Wonder™," "C. Wonder Limited™," and "C. Wonder Limited™"“TowerHill by Christie Brinkley” brands and all related logos and other trademarks or service marks of the Company appearing in this Annual Report are the property of the Company. Brands and all related logos and other trademarks or service marks of other entities (for example, QVC, HSN, JTV, etc.) are the property of those respective entities.
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Overview
Xcel Brands, Inc. (the “Company,” “Xcel,” “We,” “Us,” or “We”“Our”) is a media and consumer products company engaged in the design, production,licensing, marketing, wholesalelive streaming, and direct-to-consumersocial commerce 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. Xcel owns the Isaac Mizrahisocial commerce. Currently, our brand (the “Isaac Mirzrahi Brand”), the Halston brand (the “Halston Brand”), the Judith Ripka brand (the “Ripka Brand”), the C Wonder brand (the “C Wonder Brand”),portfolio consists of the LOGO by Lori Goldstein brand (the “Logo Lori“Lori Goldstein Brand”), andthe 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”), pioneeringthe Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the TowerHill by Christie Brinkley brand (the “CB Brand”), and other proprietary brands, including:
● | the Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand, which are wholly owned by the Company; |
● | the Longaberger Brand, which we manage through our 50% ownership interest in Longaberger Licensing, LLC, and the CB Brand, which is a co-owned brand between Xcel and Christie Brinkley; and |
● | the Isaac Mizrahi Brand, which we wholly owned and managed 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. |
We also own a 30% interest in ORME Live Inc. (“ORME”), a short-form video and social commerce marketplace that launched in the first quarter of 2024.
Xcel continues to pioneer a true omni-channel and social commerce sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, social commerce, traditional brick-and-mortar retail, wholesaleretailers, and e-commerce channels, to be everywhere theirits customers shop. The Company’sOur brands have generated over $3$5 billion in retail sales via live streaming in interactive television and digital channels alone.
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Tablealone, and our brands collectively reach over 5 million social media followers through Facebook, Instagram, and TikTok. All of Contentsthe followers may not be unique followers, as many followers may follow multiple brands and follow our brands on multiple platforms.
Our objective is to build a diversified portfolio of lifestyle consumer products brands through organic growth and the strategic acquisition of new brands. To grow our brands, we are focused on the following primary strategies:
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● | 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 |
● | acquiring additional consumer brands and integrating them into our operating platform, and leveraging our operating infrastructure and distribution relationships. |
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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 |
● | our design, |
● | our significant media and |
Our design, productionRecent Developments
Prior to 2023, the Company engaged in certain wholesale and supply chain platform was developed to shortendirect-to-consumer sales of products under its brands. In 2023, we signed master license agreements for our Halston Brand and Judith Ripka Brand, and license agreements for the supply chain cycle by utilizing state-of-the-art supply chain management technology, trend analytics,of products under certain on our brands to HSN, that enabled us to outsource a majority of our wholesale and data sciencedirect-to-consumer operations and revert to actively monitor fashion trendsa working capital light business model. In addition to licensing out the brands described above, we outsourced the operations of Longaberger through a license agreement with a third party to operate and read and react to customer demands.
Recent Highlights
In November 2019, we acquired a controlling interestmanage the Longaberger e-commerce website in the fourth quarter of 2023, and have recently launched Longaberger Brand, an authentic American heritage home products brand that began making artisan basketson ORME in 1896, and we are re-imagining it in 2021 as a digital live-streaming shopping marketplace built to bring women together to support local communities.
In April 2021, we acquired the Lori Goldstein brands, including LOGO by Lori Goldstein, a sophisticated lifestyle brand designed to bring style to the masses and that speaks to everyday women. The acquisition focuses on growing the popular brand through our omni-channel approach including live streaming, e-commerce, and interactive television, and expanding the business into new products and categories.early 2024.
Company History and Corporate Information
The Company was incorporated on August 31, 1989 in the State of Delaware under the name Houston Operating Company. On April 19, 2005, we changed our name to NetFabric Holdings, Inc. On September 29, 2011, Xcel Brands, Inc., a privately-held Delaware corporation (which we refer to as Old Xcel), Netfabric Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company, and certain stockholders of the Company entered into an agreement of merger and plan of reorganization pursuant to which Netfabric Acquisition Corp. was merged with and into Old Xcel, with Old Xcel surviving as a wholly owned subsidiary of the Company. On September 29, 2011, we changed our name to Xcel Brands, Inc.
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Our principal office is currently located at 1333 Broadway,550 Seventh Avenue, 11th Floor, New York, NY 10018.
Our telephone number is (347) 727-2474.
Our corporate website is www.xcelbrands.com. Additionally, we maintain websites for our respective brands and an e-commerce site for our Judith Ripka brand at www.isaacmizrahi.com,www.lorigoldstein.com, www.halston.com, www.judithripka.com, www.cwonder.com, www.longaberger.com, and www.lorigoldstein.com. Our corporate websitewww.isaacmizrahi.com. None of the content on our websites is www.xcelbrands.com.incorporated by reference into this Annual Report on Form 10-K.
Our Brand Portfolio
Currently, our brand portfolio consists of the Lori Goldstein, Halston, Judith Ripka, C Wonder, Longaberger, CB, and Isaac Mizrahi Judith Ripka, Halston, C Wonder, Logo Lori Goldstein,Brands, and Longaberger Brands, andother proprietary brands, including the various labels under these brands. We acquired the Logo Lori Goldstein Brand, and the various labels under the brand, in April 2021.
Isaac Mizrahi
Isaac Mizrahi is an iconic American brand that stands for timeless, cosmopolitan style. Isaac Mizrahi, the designer, launched his eponymous label in 1987 to critical acclaim, including four Council of Fashion Designers of America (CFDA) awards. Since then, this brand has become known and beloved around the world for its colorful and stylish designs. As a true lifestyle brand, under Xcel’s ownership it has expanded into over 150 different product categories including sportswear, footwear, handbags, watches, eyewear, tech accessories, home, and other merchandise. Under our ubiquitous-channel retail sales strategy, the brand is available across various distribution channels to reach customers wherever they shop: better department stores, such as Saks and Hudson’s Bay; interactive television, including QVC and The Shopping Channel; and national specialty retailers. The brand is also sold in various global locations, including Canada, Italy, the United Kingdom, and Japan. We acquired the Isaac Mizrahi brand in September 2011.
Judith Ripka
Judith Ripka is a luxury jewelry brand founded by Judith Ripka in 1977. This brand has become known worldwide for its distinctive designs featuring intricate metalwork, vibrant colors, and distinctive use of texture. The Judith Ripka Fine Jewelry collection consists of pieces in 18 karat gold and sterling silver with precious colored jewels and diamonds, and is currently available in fine jewelry stores, luxury retailers, and via e-commerce. Ms. Ripka launched an innovative collection of fine jewelry on QVC under the Judith Ripka Brand in 1996, where the brand offers customers fine jewelry, watches, and accessories at more accessible price points, including precious and semi-precious stones and multi-faceted diamonique stones made exclusively for QVC. We acquired the Ripka brand in April 2014. In December 2017, we launched our Judith Ripka Fine Jewelry e-commerce operations and in January 2018, we launched the Judith Ripka Fine Jewelry wholesale operations.
Halston
The Halston brand was founded by Roy Halston Frowick in the 1960s, and quickly became one of the most important American fashion brands in the world, becoming synonymous with glamour, sophistication, and femininity. Halston’s groundbreaking designs and visionary style still influence designers around the world today. We acquired the H Halston brands in December 2014, and since our acquisition of the Halston Heritage brands in February 2019, we own all Halston labels under our brands. The brand is available across various distribution channels including premium and better department stores, e-commerce, interactive television, and national specialty retailers.
C Wonder
The C Wonder brand was founded by J. Christopher Burch in 2011 to offer a wide-ranging assortment of beautiful, versatile, and spirited products that are designed to transport its customers to a place they have never been. C Wonder offers women’s clothing, footwear, jewelry and accessories, and delightful surprises at every turn. We acquired the C Wonder Brand in July 2015, and the brand is available at mass merchant retailers, clubs, and certain off-price retailers.
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Longaberger
Longaberger is an iconic American heritage home and collectibles brand that began making baskets in 1896 and launched a direct sales company in 1973 by the Longaberger family. The brand is best known for its distinctive handwoven baskets. We acquired a 50% ownership interest in this brand through a joint venture with Hilco Global in November 2019, and are actively managing this brand to build on its history and bring it into the future as a digital first live-streaming and social commerce business. We launched our Longaberger e-commerce and live-streaming operations in February 2020.
Lori Goldstein
Lori Goldstein helped the fashion industry recognize the value and influence of a visionary stylist by telling powerful, transformative, and authentic stories through the static image. After 35 years behind the camera, Lori ventured in front of it in 2009 when she launched LOGO by Lori Goldstein, an exclusive collection for QVC. LOGO was born from Lori's lifelong passion for layering clothes and her "anything goes with everything" approach to fashion, and is a sophisticated lifestyle brand that embraces Lori's aesthetic and speaks to everyday women. LOGO draws inspiration from the beauty of women of all ages and sizes and gives them the tools and fashion pieces to be their most fabulous selves. We acquired the
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Lori Goldstein brands, including LOGO by Lori Goldstein, in April 2021, and the brand is currently available through the QVC channel.
Halston
The Halston brand was founded by Roy Halston Frowick in the 1960s, and quickly became one of the most important American fashion brands in the world, becoming synonymous with glamour, sophistication, and femininity. Halston’s groundbreaking designs and visionary style still influence designers around the world today. We acquired the H Halston brands in December 2014, and since our acquisition of the Halston Heritage brands in February 2019, we own all Halston labels under our brands. The brand is available across various distribution channels – including premium and better department stores, e-commerce, interactive television, and national specialty retailers – through our long-term master license agreement with G-III Apparel Group.
Judith Ripka
Judith Ripka is a luxury jewelry brand founded by Judith Ripka in 1977. This brand has become known worldwide for its distinctive designs featuring intricate metalwork, vibrant colors, and distinctive use of texture. The Judith Ripka Fine Jewelry collection consists of pieces in 18 karat gold and sterling silver with precious colored jewels and diamonds, and is currently available in fine jewelry stores, luxury retailers, and via e-commerce. We acquired the Ripka brand in April 2014. In 2017 and 2018, we launched our Judith Ripka Fine Jewelry e-commerce operations and wholesale operations; these businesses were subsequently licensed to JTV in the first quarter of 2023. In 2021, we opened a retail store for Judith Ripka Fine Jewelry in Westchester, New York, which was subsequently closed in 2022.
C Wonder
The C Wonder brand was founded by J. Christopher Burch in 2011. This brand is built upon a foundation of bold, vibrant colors and exceptional, eye-catching prints that celebrate the art of everyday dressing. C Wonder offers women’s clothing, footwear, jewelry and accessories, and delightful surprises at every turn. We acquired the C Wonder Brand in July 2015. The brand is currently available through HSN.
Longaberger
Longaberger is an iconic American heritage home and collectibles brand that began making baskets in 1896 and launched a direct sales company in 1973 by the Longaberger family. The brand is best known for its distinctive handwoven baskets. We acquired a 50% ownership interest in this brand through a business venture with Hilco Global in November 2019, and are actively managing this brand to build on its history and bring it into the future as a digital first live-streaming and social commerce business. We launched our Longaberger e-commerce and live-streaming operations in February 2020. In the fourth quarter of 2023, we outsourced the operations and management of the brand’s e-commerce business to a third party.
TowerHill by Christie Brinkley
TowerHill by Christie Brinkley is a new brand announced December 2023 as a co-branded collaboration between Xcel Brands, Inc. and Christie Lee Brinkley, an iconic American supermodel with over one million followers on social media. The brand is scheduled to launch in May 2024 on HSN, with plans to license and launch products outside of HSN starting in 2025.
Isaac Mizrahi
Isaac Mizrahi is an iconic American brand that stands for timeless, cosmopolitan style. Isaac Mizrahi, the designer, launched his eponymous label in 1987 to critical acclaim, including four Council of Fashion Designers of America (CFDA) awards. Since then, this brand has become known and beloved around the world for its colorful and stylish designs. As a true lifestyle brand, under Xcel’s ownership it has expanded into over 150 different product categories including sportswear, footwear, handbags, watches, eyewear, tech accessories, home, and other merchandise. The brand is available across various distribution channels to reach customers wherever they shop: better department stores, such as Saks and
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Hudson’s Bay; interactive television, including QVC and The Shopping Channel; and national specialty retailers. The brand is also sold in various global locations, including Canada, Italy, the United Kingdom, and Japan. We acquired the Isaac Mizrahi brand in September 2011, and in May 2022, we sold a majority interest in the brand to a third party, retaining a 30% noncontrolling interest in the brand.
Growth Strategy
Our vision is intended to reimagine shopping, entertainment, and social media as one. To fulfill this vision, weWe plan to continue to grow our brands and business through three primary strategies:
● | organic growth in our existing brands; |
● | developing new brands that are well positioned in social commerce; and |
● | the acquisition of brands and businesses that fit our long-term strategy. |
With respect to organic growth in our existing brands, we have recently entered into master license agreements for our Halston Brand and Judith Ripka Brand. The Halston master license agreement is with G-III Apparel Group (“G-III”), which is a publicly traded company and one of the reachlargest designers and suppliers of wholesale apparel and accessories in the world, with annual revenues of over $3 billion. While the license provides for guaranteed minimum royalties to us during the term (which extends for 25 years, including an initial term of five years plus renewal options), G-III is expected to launch the brand through its existing distribution channels in Fall 2024, and we expect that the business and corresponding royalty revenues to Xcel will ramp up beginning with the launch. Additionally, we entered into an interactive television license and an e-commerce license in 2023 with America’s Collectible Network, Inc., d/b/a JTV, for our Judith Ripka Brand, which officially launched on JTV’s television channel in October 2023 and which we expect to continue to ramp up in 2024 and beyond, as JTV has expressed plans to make Judith Ripka one of the core brands on its network. Finally, the C Wonder Brand launched on HSN in mid-2023, and performed extremely well in its launch year. HSN has advised us that it has planned increases in the business in 2024, which we expect will result in increased revenues from the brand portfolioin 2024 and beyond. We are also working on licensing other categories under the C Wonder Brand for distribution both on HSN and outside of the network.
TowerHill by leveragingChristie Brinkley is a brand that we are scheduled to launch in May 2024 on HSN, and with plans to license and launch products outside of HSN starting in 2025. While this is a new brand for Xcel, it is an example of a brand that we developed with low up-front costs and that we were able to leverage our technologyunique experience, relationships, and live-streaming platforms, design expertise, our integrated design, productionsocial commerce knowledge to launch. We are excited about launching this brand with Christie Brinkley, and supply chain technology platforms, marketing expertise,expect to launch at least one other similarly-developed brand later in 2024.
We have a proven track record of acquiring brands and/or businesses that are strategically important to and our relationshipssynergistic with our retailbusiness, and are consistently reviewing potential acquisition targets. Potential acquisitions may include established or newer brands that do or would perform well in live streaming or social commerce, direct-to-consumer customers, key licensees, manufacturers, and retailers. We also continue to marketbrands or platforms with significant consumer following, or established media companies which could benefit from our brands through our innovative true omni-channel retail sales strategy. Our strategy includes distribution through interactiveexpertise in direct-response television, e-commerce, live streaming, and traditional brick-and-mortar retail channels. By leveraging the reach and consumer engagement of our media partners, and by developing rich online video and social media content under our brands,commerce. While our strategy is not dependent on such acquisitions, we carefully consider potential acquisitions as a means to drive increased customer engagementleverage our infrastructure and generate sales acrossexpertise and accelerate our channelsgrowth.
Finally, in December 2023, Xcel acquired a 30% interest in ORME, which is a brand new short-form video social commerce marketplace that launched in the first quarter of distribution. Key elements2024. While we will not consolidate ORME’s financial results of operations with our strategy include:
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We believe thatown (given our investment into these technologiesminority noncontrolling position us to provide unique solutions to a rapidly changing environment. More importantly,in the company) and do not anticipate receiving regular dividends or other distributions from ORME in the near future, we believe that it will help us continueORME has significant growth potential and would add significant value to Xcel, both through our equity interest in ORME as well as our ability to leverage ORME in order to grow additional direct-to-consumer brands that would perform well in social commerce pursuant to our aforementioned brand development and acquisition strategies. ORME licenses the technology utilized by its marketplace from KonnectBio Inc., of which Robert D’Loren, our Chairman of the Board, Chief Executive Officer, and President, owns an approximate 20% noncontrolling interest.
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Licensing
Our working-capital-light “licensing plus” business acrossmodel allows us to focus on our brands,core competencies of design, marketing, and brand management without the integrated technologies platform itself should develop more significant value as we continue to build and develop it.
Licensing Design, Production and Marketinginvestment requirements in inventory associated with traditional consumer product companies.
Interactive TVQurate Agreements
Qurate Retail Group (“Qurate”) is an important strategic partner in our interactive television business, and is ourthe largest licensee for ourthe Lori Goldstein, C Wonder, and Isaac Mizrahi Ripka, Halston, and Longaberger brands. Qurate’s business model is to promote and sell products through its interactive television programs featured on QVC and HSN and related e-commerce and mobile platforms. We employ and manage on-air spokespersons under each of these brands in order to promote products under our brands on QVC and HSN. According to Qurate, Qurate had global revenues of approximately $14.2 billion in 2020, of which e-commerce sales represented approximately $8.9 billion, and Qurate’s programming currently reaches approximately 380
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over 200 million homes worldwide. Qurate is ranked as one of the Top 10 e-commerce retailers in North America according to Digital Commerce 360. Our agreements with Qurate allow our on-air spokespersons to promote our non-Qurate product lines and certain strategic partnerships under the Mizrahi, Ripka, and Halston brands through QVC’s and HSN’s programs, subject to certain parameters including, in certain cases, the payment of a portion of our non-Qurate revenues to Qurate. We believe that our ability to continue to leverage Qurate’s media platform, reach, and attractive customer base to cross-promote products in and drive traffic to our other channels of distribution provides us a unique advantage.
The licensing business model allows us to focus on our core competencies of design, production, marketing, and brand management without much of the investment requirements in inventory associated with traditional consumer product companies. The Isaac Mizrahi Brand is licensed through our wholly owned subsidiary, IM Brands, LLC (“IM Brands”), the Ripka Brand is licensed through our wholly owned subsidiary, JR Licensing, LLC (“JR Licensing”) and the Halston Brand is licensed through our wholly owned subsidiaries, H Licensing, LLC (“H Licensing”) and H Heritage Licensing, LLC ("H Heritage Licensing") and the Longaberger brand is licensed through our joint venture Longaberger Licensing, LLC (“Longaberger Licensing”).
Qurate Agreements
Through our wholly owned subsidiaries, we have entered into direct-to-retail license agreements with Qurate, Retail Group (“Qurate”collectively referred to as the Qurate Agreements (individually, each a “Qurate Agreement”), pursuant to which we design, and Qurate sources and sells, various products under our LOGO by Lori Goldstein brand, the Longaberger brand, and the C Wonder brand. We were also previously party to similar agreements with Qurate related to the IsaacMizrahiLIVE brand and the Judith Ripka brands, the H by Halston brand, and the Longaberger brand. These agreements include, respectively, the Qurate Agreement for the Mizrahi Brand (the "IM QVC Agreement"), the Qurate Agreement for the Ripka Brand (the "Ripka QVC Agreement"), the Qurate Agreement for the H Halston Brand (the “H QVC Agreement"), and the Qurate Agreement for the Longaberger Brand (the “Longaberger QVC Agreement”) (collectively, the “QVC Agreements”). Qurate owns the rights to all designs produced under these agreements, and the agreements include the sale of products across various categories through Qurate’s television media and related internet sites.
Pursuant to these agreements, we have granted to Qurate and its affiliates the exclusive, worldwide right to promote our branded products, and the right to use and publish the related trademarks, service marks, copyrights, designs, logos, and other intellectual property rights owned, used, licensed and/or developed by us, for varying terms as set forth below. The agreements include automatic renewal periods as detailed below unless terminated by either party.
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In connection with the foregoingQurate Agreements and during the same periods, Qurate and its subsidiaries have the exclusive, worldwide right to use the names, likenesses, images, voices, and performances of our spokespersons to promote the respective products. Under the IM QVC Agreement, IM Brands has also granted to Qurate and its affiliates, during the same period, exclusive, worldwide rights to promote third party vendor co-branded products that, in addition to bearing and being marketed in connection with the trademarks and logos of such third-party vendors, also bear or are marketed in connection with the IsaacMizrahiLIVE trademark and related logo.
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| | | | | | Xcel Commenced | | Qurate |
Agreement | Current Term Expiry | Automatic Renewal | Brand with Qurate | Product Launch | ||||
LOGO Qurate Agreement (QVC) | | November 1, 2024 | | one-year period | | April 2021 | | 2009 |
Longaberger Qurate Agreement (QVC) | | October 31, 2025 | two-year period | November 2019 | 2019 | |||
C Wonder Qurate Agreement (HSN) | | December 31, 2024 | | two-year period | | March 2023 | | 2023 |
● | On May 31, 2022, in connection with our sale of a majority interest in the Isaac Mizrahi brand to a third party, the agreement with Qurate related to the IsaacMizrahiLIVE brand was assigned to IM Topco, LLC. |
● | On August 30, 2022, Qurate and Xcel amended the licensing agreement for the Judith Ripka brand to terminate the license period effective December 31, 2021. Effective January 1, 2022, the agreement entered a sell-off period, under which Qurate was allowed to continue to license the Ripka brand on a non-exclusive basis for as long as necessary to sell off any of its remaining inventory. The sell-off period ended in 2023. |
Under the QVCQurate Agreements, Qurate is obligated to make payments to us on a quarterly basis, based upon the net retail sales of the specified branded products. 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 QVCQurate Agreements, net of customer returns, and excluding freight, shipping and handling charges, customer returns, and sales, use, or other taxes.
Notwithstanding our grantThe Qurate Agreements generally prohibit us from selling products under the specified respective brands to a direct competitor of worldwide promotion rights to Qurate without Qurate’s consent. Under certain of the Qurate Agreements, we may, with the permission of
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Qurate, sell the respective branded products (i) to better or prestige retailers, but excluding discount divisions of such companies and mass merchants, (ii) via specifically branded brick-and-mortar retail stores, and (iii) via company websites,certain specified sales channels in exchange for making reverse royalty payments to Qurate based on the net retail sales of such products through such channels – with the
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exception of the Longaberger Brand, for which no reverse royalty paymentschannels. However, we are required to be made to Qurategenerally restricted from selling products under the terms of the applicable agreement.specified respective brands or trademarks to certain mass merchants.
Also, under certain of the QVCQurate Agreements, exceptwe may be required for the Longaberger QVC Agreement, we willa period of time to pay a royalty participation fee to Qurate on revenue earned from the sale, license, consignment, or any other form of distribution of any products, bearing, marketed in connection with, or otherwise associated with the specified trademarks and brands.
Under the QVC Agreements, we are generally restricted from selling products under the specified respective brands or trademarks (including the trademarks, copyrights, designs, logos, and related intellectual property themselves) to certain mass merchants. The QVC Agreements generally prohibit us from selling products under the specified respective brands or any of our other trademarks and brands to a direct competitor of Qurate (generally defined as any entity other than Qurate whose primary means of deriving revenue is the transmission of interactive television programs) without Qurate’s consent. In addition, during the terms of the IM QVC Agreement and the Ripka QVC Agreement, and for one year thereafter, the respective subsidiary may not, without Qurate’s consent, promote, advertise, endorse, or sell (i) the specified branded products through any means or (ii) any products through interactive television. During the term of the H QVC Agreement, and for one year thereafter, H Licensing may not, without Qurate’s consent, promote, advertise, endorse, or sell any products, including the H by Halston brands, through interactive television.
In addition to the foregoing, certain of the agreements permit us to promote brick-and-mortar collections on Qurate’s television programs subject to certain terms and restrictions.
For the years ended December 31, 20202023 and 2019,2022, net licensing revenue from Qurate collectively accounted for 60%approximately 34% and 53%44%, respectively, of the total revenuesnet revenue of the Company.
In the fourth quarter of 2020,Halston Master License
On May 15, 2023, the Company, transitionedthrough our wholly owned subsidiaries, H Halston, LLC and discontinued licensingH Heritage Licensing, LLC (collectively, the “Licensor”), entered into a master license agreement relating to the Halston Brand (the “Halston Master License”) with G-III (as licensee) 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 twenty-five-year term (consisting of an initial five-year period, followed by a twenty-year period), subject to G-III’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term. G-III has an option to purchase the Halston Brand for $5.0 million at the end of the H Halston brand to QVC. The Company began wholesale supply salestwenty-five-year term, which right may be accelerated under certain conditions associated with an uncured material breach of the H Halston productsMaster License in accordance with the terms of the Halston Master License. The Licensor granted G-III a security interest in the Halston trademarks to secure the Licensor’s obligations under arrangements with HSNthe Halston Master License, including to honor the obligations under the purchase option.
As a result of the upfront cash payment and certain QVC global affiliatesguaranteed minimum royalties discussed above, the Company has recognized $4.44 million of deferred revenue contract liabilities on its consolidated balance sheet as of December 31, 2023 related to this contract, of which $0.89 million was classified as a current liability and other unrelated interactive television networks.$3.55 million was classified as a long-term liability. The balance of the deferred revenue contract liabilities will be recognized ratably as revenue through December 31, 2028.
For the year ended December 31, 2023, net licensing revenue from the Halston Master License accounted for approximately 9% of the total net revenue of the Company.
Other Licensing Agreements
We have entered into numerous other licensing agreements for sales and distribution through e-commerce and traditional brick-and-mortar retailers. Authorized distribution channels include department stores, mass merchant retailers, clubs, and national specialty retailers such as Best Buy and Bed Bath & Beyond.retailers. Under our other licenses, a supplier is granted rights, typically on an exclusive basis, to a single or small group of related product categories for sale to multiple accounts within an approved channel of distribution and territory. Our other license agreements typically provide the licensee with the exclusive rights for a certain product category in a specified territory and/or distribution channel under a specific brand or brands. Our other license agreements cover various categories, including but not limited to women’s apparel, footwear, and accessories; bath and body; jewelry; home products; men’s apparel and accessories; children’s and infant apparel, footwear, and accessories; and electronics cases and accessories. The terms of the agreements generally range from three to six years with renewal options.
We are in discussions with other potential licensees and strategic partners to license and/or co-brand the Mizrahiour brand Ripka brand, Halston brand, C Wonder brand and Longaberger brandportfolio for additional categories. In certain cases, we have engaged licensing agents to assist in the procurement of such licenses for which we or our licensees pay such agents’ fees based upon a percentage of the net sales of licensed products by such licensees, or a percentage of the royalty payments that we receive from such licensees. While many of the new and proposed licensing agreements will likely require us to provide seasonal design services, most of our new and prospective licensing partners have their own design staff, and we therefore expect low incremental overhead costs related to expanding
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our licensing business. We will endeavor, where possible, to require licensees to provide guaranteed minimum royalties under their license agreements.
Our licensees currently sell our branded licensed products through brick-and-mortar retailers, e-commerce, and in certain cases supply products to interactive television companies for sale through their television programs and/or through their internet websites. We generally recognize revenues from our other licenses based on a percentage of the sales of products under our brands, but excluding (i) sales of products to interactive television networks, where we receive a retail royalty
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directly from the interactive television licensee, and (ii) sales of products tothrough e-commerce sites operated by us. Additionally, based upon guaranteed minimum royalty provisions required under many of the license agreements, we are able to recognize revenue related to certain other licenses based on the greater of the sales-based royalty or the guaranteed minimum royalty.
Wholesale and e-Commerce
In February 2020, we added our Longaberger brand to our e-commerce and live-streaming operations. We continue to expand our wholesale business by adding new domestic accounts, expanding in international markets, and pursuing independent retailers for our jewelry business. Our strategy is to continue to grow our direct-to-consumer and live-streaming businesses into a significant portion of our overall business.
Collaborations
In certain cases, the Company collaborates with and provides promotional services to other brands or companies, which arrangements may include the use of our brands for the promotion of such company or brands through the internet, television, or other digital content, print media, or other marketing campaigns featuring in-person appearances by our celebrity spokespersons, the development of limited collections of products (which may include co-branded products) for such company, or other services as determined on a case-by-case basis. These have included promotions with Sesame Street, Crayola, Hewlett Packard, Revlon, Johnson & Johnson, and Kleenex.
We also provide certain technology services to our retail partners and certain of our licensees under our proprietary integrated technology platform.
Marketing
Marketing is a critical element to maximize brand value to our licensees and our Company. Therefore, weWe employ live streaming, social media, and other marketing and public relations support for our brands.
Given our true omni-channel retail sales strategy focusing on the sale of branded products through various distribution channels (including live-streaming, e-commerce, interactive television, and traditional brick-and-mortar sales channels), our marketing efforts currently focus on leveraging micro and mega-influencers, entertainment tie-ins, PR and editorial, social media campaigns, personal appearances, and digital content in order to drive retail sales of product and consumer awareness across our various sales distribution channels. We seek to create the intersection where shopping, entertainment, and social media meet. As such, our marketing is currently conducted primarily through live-streaming and social media, videos, images, and other digital content that are all updated regularly and are amplified by micro and mega-influencers and entertainment tie-ins. Our efforts also include promoting namesakes of our brands and our personalities through various media including live-streaming, television, design for performances, and other events. We also work with our retail partners to leverage their marketing resources, including e-commerce platforms and related digital marketing campaigns, social media platforms, direct mail pieces, and public relations efforts.
Our agreements with Qurate allow our brand spokespersons to promote our non-Qurate product lines and strategic partnerships under our brands through Qurate’s programs, subject to certain parameters including the payment of a portion of our non-Qurate revenues to Qurate. We believe that this provides us with the ability to leverage Qurate’s media platform (including television, e-commerce, and social media) and Qurate’s customer base of approximately 380 million households worldwide to cross-promote products in and drive traffic to our other channels of distribution. Many of our licensees make advertising and marketing contributions to the Company under their license agreements which are used to fund marketing-related expenses and further promote our brands as we deem appropriate. Certain of the wholesale licenses contain requirements to provide advertising or marketing for our brands under their respective license agreements.
We also market the MizrahiLori Goldstein brand through www.isaacmizrahi.com,www.lorigoldstein.com, the Halston Brand through www.halston.com, the Judith Ripka Fine Jewelry brand through www.judithripka.com, the C Wonder brand through www.cwonder.com, the Logo Lori Goldstein brand through www.lorigoldstein.com, and the Longaberger brand through www.longaberger.com. Through our
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websites, we are able to present the products under our brands to customers with branding that reflects each brand’s heritage and unique point-of-view.point of view.
Our e-commerce businesses’ growth is dependent on live-streaming and other marketing to drive traffic to our websites and converting our visitors into customers.
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Competition
Each of our current brands has and any future acquired brand will likely have many competitors within each of its specific distribution channels that span a broad variety of product categories, including the apparel, footwear, accessories, jewelry, home furnishings and décor, food products, and sporting goods industries. These competitors have the ability to compete with the Company and our licensees in terms of fashion, quality, price, products, and/or marketing, and ultimately retail floor space and consumer spending.
Because many of our competitors have significantly greater cash, revenues, and resources than we do, we must work to differentiate ourselves from our direct and indirect competitors to successfully compete for market share with the brands we own and for future acquisitions. We believe that the following factors help differentiate our Company in an increasingly crowded competitive landscape:
● | our management team, including our officers’ and directors’ historical track records and relationships within the industry; |
● | our brand management platform, which has a strong focus on design, product, marketing, and technology; and |
● | our operating strategies of |
We expect our existing and future licenses to relate to products in the apparel, footwear, accessories, jewelry, home goods, and other consumer products industries, in which our licensees face intense competition, including from our other brands and licensees. In general, competitive factors include quality, price, style, name recognition, and service. In addition, various fashion trends and the limited availability of shelf space could affect competition for our licensees’ products. Many of our licensees’ competitors have greater financial, distribution, marketing, and other resources than our licensees and have achieved significant name recognition for their brand names. Our licensees may be unable to successfully compete in the markets for their products, and we may not be able to continue to compete successfully with respect to our licensing arrangements.
Trademarks
The Company, through its wholly owned subsidiaries, owns and exploits the MizrahiLori Goldstein brands, which include the trademarks and brands Isaac Mizrahi, Isaac Mizrahi New York, IMNYC Isaac Mizrahi,LOGO by Lori Goldstein, LOGO, LOGO Links, LOGO Lounge, LOGO Layers, and IsaacMizrahiLIVE;LOGO Luna; the Halston brands, which include the trademarks and brands Halston, Halston Heritage, Roy Frowick, H by Halston, and H Halston; the Ripka brands, which include the trademarks and brands Judith Ripka LTD, Judith Ripka Collection, Judith Ripka Legacy, Judith Ripka, and Judith Ripka Sterling; all Halston brands and trademarks, namely, Halston, Halston Heritage, Roy Frowick, H by Halston, and H Halston; the C Wonder brands, which include the trademarks and brands C Wonder and C Wonder Limited; and the Logo Lori Goldstein brands, which include the trademarks and brands LOGO by Lori Goldstein, LOGO, LOGO Links, LOGO Lounge, LOGO Layers, and LOGO Luna.Limited. We also manage and have a 50% ownership interest in the brands and trademarks of the Longaberger brand through our jointbusiness venture with Hilco Global. We also have a 30% ownership interest in IM Topco, which owns the Mizrahi brands, including the trademarks and brands Isaac Mizrahi, Isaac Mizrahi New York, IMNYC Isaac Mizrahi, and IsaacMizrahiLIVE.
Where laws limit our ability to record in our name trademarks that we have purchased, we have obtained by way of license all necessary rights to operate our business. Certain of these trademarks and associated marks are registered or pending registration with the U.S. Patent and Trademark Office in block letter and/or logo formats, as well as in combination with a variety of ancillary designs for use in connection with a variety of product categories, such as apparel, footwear and various other goods and services including, in some cases, home furnishings and decor. The Company intends to renew and maintain registrations as appropriate prior to expiration and it makes efforts to diligently prosecute all pending
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applications consistent with the Company’s business goals. In addition, the Company registers its trademarks in certain other countries and regions around the world as it deems appropriate.
The Company and its licensees do not presently earn a material amount of revenue from either the licensing of our trademarks internationally or the sale of products under our trademarks internationally. However, the Company has
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registered its trademarks in certain territories where it expects that it may do business in the foreseeable future. If the Company or a licensee intends to make use of the trademarks in international territories, the Company will seek to register its trademarks in such international territories as it deems appropriate based upon factors including the revenue potential, prospective market, and trademark laws in such territory or territories.
Generally, the Company is primarily responsible for monitoring and protecting its trademarks around the world. The Company seeks to require its licensing partners to advise the Company of any violations of its trademark rights of which its licensing partners become aware and relies primarily upon a combination of federal, state, and local laws, as well as contractual restrictions to protect its intellectual property rights both domestically and internationally.
Human Capital
Our employees’ knowledge, social, and personality attributes enable our company to achieve its goals, develop our business, and remain innovative. As of December 31, 2020,2023, we had 6034 full-time employees and nine2 part-time employees. We value our employees and are committed to providing a healthy and safe work environment. For certain key employees, including our executives, brand ambassadors, and spokespersons, we typically enter into multi-year employment agreements. Overall, we believe that our relationship with our employees is good. None of our employees are represented by a labor union.
Government Regulation
We are subject to federal, state, and local laws and regulations affecting our business, including those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Product Safety Commission, and various environmental laws and regulations. We believe that we are in compliance in all material respects with all applicable governmental regulations.
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In addition to the other information contained herein or incorporated herein by reference, the risks and uncertainties and other factors described below could have a material adverse effect on our business, financial condition, results of operations and share price and could also cause our future business, financial condition and results of operations to differ materially from the results contemplated by any forward-looking statement we may make herein, in any other document we file with the Securities and Exchange Commission (“SEC”), or in any press release or other written or oral statement we may make. Please also see “Forward-Looking Statements” on page 3 for additional information regarding Forward-Looking Statements.
Summary of Risk Factors
Our business is subject to a number of risks, which include, but are not limited to, risks related to:
● | our limited amount of cash; |
● | our concentration of revenue with a limited number of licensees; |
● | restrictions related to certain key licensing agreements; |
● | conducting operations through joint ventures and our dependence on the joint ventures; |
● | our dependency upon our spokespersons; |
● | the operational performance and/or strategic initiatives of our licensees and retail partners; |
● | continued market acceptance of our brands and products; |
● | the use of social media and influencers to market brands and products; |
● | changing consumer preferences and shifting industry trends; |
● | execution of our growth strategy, including the acquisition of new brands; |
● | our dependency on our Chief Executive Officer and other key executives; |
● | intense competition in the apparel, fashion, and jewelry industries, and within our licensees’ markets; and |
● | protection of our trademarks and other intellectual property rights. |
An investment in our securities is subject to a number of risks, which include, but are not limited to, risks related to:
● | management’s significant control over matters requiring shareholder approval; |
● | potential difficulty in liquidating an investment in shares of our common stock; |
● | the potential impact of SEC “penny stock” rules on trading of our shares of our common stock; |
● | declines of and volatility in the market price of our common stock; |
● | the potential issuance of a substantial number of shares of common stock upon exercise of warrants and options; |
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● | the potential impact of Rule 144 restrictions on our shares of common stock as a former shell company; |
● | our intent to not pay any cash dividends for the foreseeable future; and |
● | provisions of our corporate charter documents which could delay or prevent change of control. |
We are also subject to general risks, which include, but are not limited to, risks related to:
● | a pandemic or outbreak of disease or similar public health threat, or fear of such an event; |
● | supply chain disruptions; |
● | the Ukrainian-Russian conflict; |
● | a decline in general economic conditions or consumer spending levels; |
● | inflation and/or a potential recession; |
● | extreme or unseasonable weather conditions; |
● | potential impairment of our trademarks and other intangible assets under accounting guidelines; |
● | changes in our effective tax rates or adverse outcomes resulting from examination of our tax returns; |
● | maintenance and security of our information technology systems; |
● | changes in laws and regulations; |
● | maintaining an effective system of internal control; and |
● | limitations on liabilities of our directors and executive officers. |
Risks Related to Our Business
We have a limited amount of cash to grow our operations. If we cannot obtain additional sources of cash, our growth prospects and future profitability may be materially adversely affected, and we may not be able to implement our business plan. Such additional financing may not be available on satisfactory terms or it may not be available when needed, or at all.
As of December 31, 2020,2023, we had cash and cash equivalents of approximately $5.0$3.0 million, and during the year ended December 31, 2023, we used $6.5 million of cash in operating activities. On March 19, 2024, we closed on a public offering and private placement of our common stock, which resulted in aggregate net proceeds to us of approximately $2.0 million. Although we believe that our existingcurrent levels of cash and our anticipated cash flow from operations will be sufficient to sustain our operations at our current expense levels for at least 12twelve months subsequent to the date of the filing of this Annual Report on Form 10-K, we may require significant additional cash to satisfy our working capital requirements, expand our operations, or acquire and develop additional brands, although historically we have funded acquisitions with debt and equity financing.brands. Our inability to finance our growth, either internally through our operations or externally, may limit our growth potential and our ability to execute
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our business strategy successfully. If we issue additional securities to raise capital to finance operations and/or pay down or restructure our debt, our existing stockholders may experience dilution. In addition, the new securities may have rights senior to those of our common stock.
Our significant debt obligations could impair our liquidity and financial condition, and in the event we are unable to meet our debt obligations, we could lose ownership of our trademarks and/or other assets.
On April 14, 2021, we entered into a loan and security agreement with Bank Hapoalim B.M. and FEAC Agent LLC and the financial institutions party thereto. We have an outstanding balance of $25.0 million as of April 15, 2021 under this credit facility. We may also assume or incur additional debt, including secured debt, in the future in connection with, or to fund, future acquisitions or for other operating needs.
Our debt obligations:
In the event that we fail in the future to make any required payment under the agreements governing our indebtedness or if we fail to comply with the financial and operating covenants contained in those agreements, we would be in default with respect to that indebtedness and the lenders could declare such indebtedness to be immediately due and payable. Our prior credit facility with Bank Hapoalim B.M. had been amended in the past (including for the years ended December 31, 2020 and 2019) to eliminate or change the minimum EBITDA (as defined in the agreement) requirement for specified periods. The impact the COVID-19 pandemic will have on our operating results could result in our inability to comply with certain debt covenants and require the lenders under the loan agreement to waive compliance with or agree to amend any such covenant to avoid a default. There can be no assurance that the lenders will amend or grant waivers to the loan agreement to adjust or eliminate covenants or waive our non-compliance or breach of a financial or other covenant in the future. Termination of any of the Qurate Agreements would also result in a default under our loan agreement. A debt default could significantly diminish the market value and marketability of our common stock and could result in the acceleration of the payment obligations under all or a portion of our indebtedness, or a renegotiation of our loan agreement with more onerous terms and/or additional equity dilution. Since substantially all of our debt obligations are secured by our assets, upon a default, our lenders may be able to foreclose on our assets.
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A substantial portion of our licensing revenue is concentrated with a limited number of licensees such that the loss of any of such licensees could decrease our revenue and impair our cash flows.
A substantial portion of our revenuesrevenue has been paid by Qurate, through the respective agreements with Qurate through QVC and HSN. During the years ended December 31, 20202023 and 2019,2022, Qurate accounted for approximately 60%34% and 53%44%, respectively, of our total net revenue. Because we are dependent on these agreements with Qurate for a significant portion of our revenues, if Qurate were to have financial difficulties, or if Qurate decides not to renew or extend its existing agreements with us, our revenue and cash flows could be reduced substantially. Our cash flow would also be significantly impacted if there were significant delays in our collection of receivables from Qurate. Additionally, we have limited control over the programming that Qurate devotes to our brands or its promotional sales with our brands (such as “Today’s Special Value” sales). If Qurate has reduced the programming time it devotes to jewelry and, accordingly, also to our Ripka brand, and if Qurate further reduces or modifies its programming or promotional sales related to our brands, our revenues and cash flows could be reduced substantially. In order to increase sales of a brand through Qurate, we generally require additional television programming time dedicated to the brand by Qurate. Qurate is not required to devote any minimum amount of programming time for any of our brands.
While our business with Qurate has grown since the IsaacMizrahiLIVE brand was launched through December 31, 2017, our 2018Our Qurate revenues were flat to 2017,have declined since 2021, and Qurate revenues declined from 2018 to 2019 and again from 2019 to 2020. There isthere can be no guarantee that our Qurate revenues will grow in the future or that they will not decline.decline further. Additionally, there can be no assurance that our other licensees will be able to generate sales of products under our brands or grow their existing sales of products under our brands, and if they do generate sales, there is no guarantee that they will not cause a decline in sales of products being sold through Qurate.
Our agreements with Qurate restrict us from selling products under our brands with certain retailers, or branded products we sell on Qurate to any other retailer except certain interactive television channels in other territories approved by Qurate, and provides Qurate with a right to terminate the respective agreement if we breach these provisions.
Although most of our licenses and our Qurate Agreements prohibit the sale of products under our brands to retailers who are restricted by Qurate, and our license agreements with other interactive television companies prohibit such licensees from selling products to retailers restricted by Qurate under the brands we sell on Qurate outside of certain approved territories, one or more of our licensees could sell to a restricted retailer or territory, putting us in breach of our agreements with Qurate and exposing us to potential termination by Qurate. A breach of any of these agreements could also result in Qurate seeking monetary damages, seeking an injunction against us and our other licensees, reducing the programming time allocated to our brands, and/or terminating the respective agreement, which could have a material adverse effect on our net income and cash flows. Termination of any one
We conduct certain of our agreementsoperations through joint ventures. Joint ventures could fail to meet our expectations or cease to deliver anticipated benefits. There could also be disagreements with Qurate would result inour joint venture partners that could adversely affect our interest a default under our credit facility with Bank Hapoalim B.M. and would also enable Bank Hapoalim B.M. to foreclose on our assets, including our membership interests in our subsidiaries, which combined currently hold all of our trademarks and other intangible assets.joint venture.
We hold a 30% interest in each of IM Topco, LLC and ORME. We may enter into additional joint ventures in the future. Our operating results are, in part, dependent upon the promotionalperformance of IM Topco, LLC and ORME, 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. While we provide certain services to IM Topco, LLC and may provide services to future joint ventures, we do not control the day-to-day operations of Isaac MizrahiIM Topco, LLC or ORME, 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 they relatewell as any future partners, may have interests that are different from our interests that may result in conflicting views as to the Mizrahi brands.
Ifconduct of the business or future direction of the joint venture. In the event that we losehave a disagreement with a joint venture partner with respect to a particular issue to come before the servicesjoint venture, or as to the management or conduct of Isaac Mizrahi,the business of the joint venture, we may not be able to fully comply withresolve such disagreement in our favor. Any such disagreement could have a material adverse effect on our interest in the termsjoint venture, the business of the joint venture, or the portion of our agreement with Qurate,growth strategy related to the joint venture.
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We are dependent on our joint ventures to provide timely and it may resultaccurate information about their sales and operations, which we rely upon to effectively manage their brands.
IM Topco, LLC and ORME are, and we expect any future joint ventures will be, contractually obligated to provide timely and accurate information regarding their sales and operations. We rely on this information to prepare our consolidated financial statements. Any delay in significant reductions inreporting reduces our visibility into the valueresults of the Mizrahi brandsoperations for IM Topco, LLC and any future joint ventures, and our prospects, revenues,inability to collect timely and cash flows. Isaac Mizrahi is a key individual in our continued promotion of the Mizrahi brands and the principal salesperson of the Mizrahi brands on Qurate. Failure of Isaac Mizrahi to provide services to Qurate could result in a termination of the IM Qurate Agreement, which could trigger an event of default under our credit facility with Bank Hapoalim B.M. Although we have entered into an employment agreement with Mr. Mizrahi and he is a significant stockholder of Xcel, there is no guarantee that we will not lose his services. To the extent that any of Mr. Mizrahi’s services become unavailable to us, we will likely need to find a replacement for Mr. Mizrahi to promote the Mizrahi brands. Competition for skilled designers and high-profile brand promoters is intense, and compensation levelsaccurate information may be high, and there is no guarantee that we would be able to identify and attract a qualified replacement, or if Mr. Mizrahi’s services are not available to us, that we would be able to promote the Mizrahi brands as well as we are able to with Mr. Mizrahi. This could significantly affect the value of the Mizrahi brands and our ability to markettimely complete our financial statements and timely file reports and other information with the brands,SEC and could impede our ability to fully implement our business
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plan and future growth strategy, which would harmmay adversely affect our business and prospects. Additionally, while we acquired all trademarks, image, and likenessresults of Isaac Mizrahi, pursuant to the acquisition of the Mizrahi business and his employment agreement, Mr. Mizrahi has retained certain rights to participate in outside business activities, including hosting and appearing in television shows, movies and theater productions, and writing and publishing books and other publications. Mr. Mizrahi’s participation in these personal business ventures could limit his availability to us and affect his ability to perform under this employment agreement. Finally, there is no guarantee that Mr. Mizrahi will not take an action that consumers view as negative, which may harm the Mizrahi brands as well as our business and prospects.operations.
We are dependent upon the promotional services of Lori Goldstein and our other spokespersons as they relate to the Logo Lori Goldsteinour respective brands.
If we lose the services of Lori Goldstein, we may not be able to fully comply with the terms of our agreement with Qurate, and it may result in significant reductions in the value of the LogoLOGO by Lori Goldstein brandsbrand and our prospects, revenues, and cash flows. Lori Goldstein is a key individual in our continued promotion of the LogoLOGO by Lori Goldstein brandsbrand and the principal salesperson of the LogoLOGO by Lori Goldstein brandsbrand on Qurate. Failure of Lori Goldstein to provide services to Qurate could result in a termination of related agreements with Qurate, which could trigger an event of default under our credit facility with Bank Hapoalim B.M.facility. Although we have entered into an employment agreement with Ms. Goldstein, there is no guarantee that we will not lose her services. To the extent that any of Ms. Goldstein’s services become unavailable to us, we will likely need to find a replacement for Ms. Goldstein to promote the LogoLOGO by Lori Goldstein brands.brand. Competition for skilled designers and high-profile brand promoters is intense, and compensation levels may be high, and there is no guarantee that we would be able to identify and attract a qualified replacement, or if Ms. Goldstein’s services are not available to us, that we would be able to promote the LogoLOGO by Lori Goldstein brandsbrand as well as we are able to with Ms. Goldstein. This could significantly affect the value of the LogoLOGO by Lori Goldstein brandsbrand and our ability to market the brands,brand, and could impede our ability to fully implement our business plan and future growth strategy, which would harm our business and prospects. Additionally, while we acquired all trademarks, image, and likeness of Lori Goldstein, pursuant to the acquisition of the LogoLOGO by Lori Goldstein assets and her employment agreement, Ms. Goldstein has retained certain rights to participate in outside business activities, including hosting and appearing in television shows, movies and theater productions, and writing and publishing books and other publications. Ms. Goldstein’s participation in these personal business ventures could limit her availability to us and affect her ability to perform under this employment agreement. Finally, there is no guarantee that Ms. Goldstein will not take an action that consumers view as negative, which may harm the LogoLOGO by Lori Goldstein brandsbrand as well as our business and prospects.
We will also be dependent upon the services of our other spokespersons and our joint venture partner’s spokesperson to promote our other brands and the brands of our joint venture. The loss of a spokesperson or a joint ventures’ spokesperson could significantly affect the value of the related brand or our related joint venture interest and our or our related joint venture’s ability to market the brand which would harm our business and prospects.
The company has withheld and rescheduled payment of the $963,642 earnout payment for 2023 due to a spokesperson due to alleged uncured breaches of the spokesperson’s obligations under an employment agreement.
On February 16, 2024, counsel to Lori Goldstein, a brand spokesperson for the company, advised the company that the Company was in material breach of the March 31, 2021 asset purchase agreement for failure to pay the earn-out achieved for 2023 in the amount of $963,642 (the “2023 Earn-out”) under the terms of the agreement, and is instead intending on paying such amount quarterly in 2024. The Company does not dispute the amount of the 2023 Earn-out and advised Ms. Goldstein that due to Ms. Goldstein’s failure to make all of the QVC appearances as required by her employment agreement, the Company was not willing to pay the 2023 Earn-out in a lump sum but would make the payment in four quarterly installments. Failure to amicably resolve this dispute could adversely affect the Company’s cash flow and the availability of Ms. Goldstein’s services. To the extent that any of Ms. Goldstein’s services become unavailable to us, we will likely need to utilize our existing back-up guest hosts in lieu of Ms. Goldstein and/or find a replacement for Ms. Goldstein to promote the LOGO by Lori Goldstein brand. Competition for skilled designers and high-profile brand promoters is intense, and compensation levels may be high, and there is no guarantee that we would be able to identify and attract a qualified replacement, or if Ms. Goldstein’s services are not available to us, that we would be able to promote
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the LOGO by Lori Goldstein brand on QVC and otherwise. This could significantly affect the value of the LOGO by Lori Goldstein brand and our ability to market the brand, and could impede our ability to fully implement our business plan and future growth strategy for the Lori Goldstein brands, which would harm our business and prospects and adversely impact our results of operations, financial conditions, and cash flows.
The failure of our licensees to adequately produce, market, source, and sell quality products bearing our brand names in their license categories or to pay their obligations under their license agreements could result in a decline in our results of operations and impact our ability to service our debt obligations.operations.
Our revenues are dependent on payments made to us under our licensing agreements. Although the licensing agreements for our brands typically require the advance payment to us of a portion of the licensing fees and in many cases provide for guaranteed minimum royalty payments to us, the failure of our licensees to satisfy their obligations under these agreements or their inability to operate successfully or at all, could result in their breach and/or the early termination of such agreements, the non-renewal of such agreements, or our decision to amend such agreements to reduce the guaranteed minimums or sales royalties due thereunder, thereby eliminating some or all of that stream of revenue. Moreover, during the terms of the license agreements, we are substantially dependent upon the efforts and abilities of our licensees to maintain the quality and marketability of the products bearing our trademarks, as their failure to do so could materially tarnish our brands, thereby harming our future growth and prospects. In addition, the failure of our licensees to meet their production, manufacturing, sourcing, and distribution requirements or actively market the branded licensed products could cause a decline in their sales and potentially decrease the amount of royalty payments (over and above the guaranteed minimums) due to us. A weak economy or softness in the apparel and retail sectors could exacerbate this risk. This, in turn, could decrease our potential revenues. The concurrent failure by several of our material licensees to meet their financial obligations to us could jeopardizeadversely affect our abilitybusiness, results of operations, and cash flows.
If our retail customers change their buying patterns, request additional allowances, develop their own private label brands or enter into agreements with national brand manufacturers to meetsell their products on an exclusive basis, our sales to these customers could be materially adversely affected.
Our retail customers’ buying patterns, as well as the need to provide additional allowances to customers, could have a material adverse effect on our business, results of operations and financial covenant requirements in connection withcondition. Customers’ strategic initiatives, including developing their own private labels brands, selling national brands on an exclusive basis, reducing the number of vendors they purchase from, or reducing the floor space dedicated to our debt facility or facilities. Further, such failure maybrands could also impact our abilitysales to make required payments with respectthese customers. There is a trend among major retailers to such indebtedness. The failure to satisfyconcentrate purchasing among a narrowing group of vendors. To the extent that any key customer reduces the number of its vendors or allocates less floor space for our financial covenant requirementsproducts and, as a result, reduces or to make such required payments would give our lenders the right to accelerate all obligations under our debt facility or facilities and forecloseeliminates purchases from us, there could be a material adverse effect on our trademarks, license agreements, and other related assets securing such notes.us.
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Our business is dependent on continued market acceptance of our brands, our joint venture brands, and any future brands we may acquire directly or through a joint venture, and the products of our licensees.
Although manycertain of our licensees guarantee minimum net sales and minimum royalties to us, some of our licensees are not yet selling licensed products or currently have limited distribution of licensed products, and a failure of our brands or of our joint venture brands or of products bearing our brands or our joint venture brands to achieve or maintain broad market acceptance could cause a reduction of our licensing revenues, diminish the value of and generally affect the operating results of our joint ventures, and could further cause existing licensees not to renew their agreements. Such failure could also cause the devaluation of our trademarks, which are our primary assets and the primary assets of our joint ventures, making it more difficult for us or our joint ventures to renew our current licenses upon their expiration or enter into new or additional licenses for oursuch trademarks. In addition, if such devaluation of our trademarks were to occur, a material impairment in the carrying value of one or more of our trademarks, which had an aggregate carrying value of $41.5 million as of December 31, 2023, could also occur and be charged as an expense to our operating results. Continued market acceptance of our brands, our joint ventures’ brands, and our licensees’ products, as well as market acceptance of any future products bearing any future brands we may acquire, is subject to a high degree of uncertainty and constantly changing consumer tastes, preferences, and purchasing patterns. Creating and maintaining market acceptance of our licensees’ products and creating market acceptance of new products and categories of products bearing our marks may require substantial marketing efforts, which may, from time to time, also include our expenditure of significant additional
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funds to keep pace with changing consumer demands, which funds may or may not be available on a timely basis, on acceptable terms or at all. Additional marketing efforts and expenditures may not, however, result in either increased market acceptance of, or additional licenses for, our trademarks or increased market acceptance, or sales, of our licensees’ products. Furthermore, we do not actually design or manufacture all of the products bearing our marks, and therefore, have less control over such products’ quality and design than a traditional product manufacturer might have. The failure of our licensees and joint ventures to maintain the quality of their products could harm the reputation and marketability of our brands and our joint ventures’ brands, which would adversely impact our business.business and the business of our joint ventures.
Negative claims or publicity regarding Xcel, IM Topco, LLC, any future joint ventures, our or their brands, or our products could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our businesses may be similarly affected in the future.
Use of social media and influencers may materially and adversely affect our reputation or subject us to fines or other penalties.
We use and our joint ventures may use third-party social media platforms as, among other things, marketing tools. We also maintain, and our joint ventures may maintain, relationships with many social media influencers and engage in sponsorship initiatives. As existing e-commerce and social media platforms continue to rapidly evolve and new platforms develop, we and our joint ventures must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we or our joint ventures are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we or our joint ventures use change their policies or algorithms, we or our joint ventures may not be able to fully optimize such platforms, and our and their ability to maintain and acquire customers and our financial condition may suffer.
Furthermore, as laws and regulations and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and operating results.
In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us and our joint ventures to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. For example, in some cases, the Federal Trade Commission has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser.
We do not prescribe what our influencers post, and if we were held responsible for the content of their posts or their actions, we could be fined or forced to alter our practices, which could have an adverse impact on our business.
Negative commentary regarding us, our joint ventures or our or their products or influencers and other third parties who are affiliated with us or our joint ventures may also be posted on social media platforms and may be adverse to our or our joint ventures’ reputation or business. Influencers with whom we or our joint ventures maintain relationships could engage in behavior or use their platforms to communicate directly with our customers in a manner that reflects poorly on our or our joint ventures’ brand and may be attributed to us or our joint ventures or otherwise adversely affect us or our joint ventures. It is not possible to prevent such behavior, and the precautions we and our joint ventures take to detect this activity may not be effective in all cases. Our and our joint ventures’ target consumers often value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate, without affording us and our joint ventures an opportunity for redress or correction.
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If we are unable to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely manner, our business, financial condition, and operating results could be harmed.
Our success largely depends on our ability to consistently gauge tastes and trends and provide a diverse and balanced assortment of merchandise that satisfies customer demands in a timely manner. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in demand for our products or for products of our competitors, our failure to accurately forecast acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions, and weakening of economic conditions or consumer confidence in future economic conditions. We typically enter into agreements to manufacture and purchase our merchandise in advance of the applicable selling season and our failure to anticipate, identify or react appropriately, or in a timely manner to changes in customer preferences, tastes and trends or economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability and have a material adverse effect on our business, financial condition, and operating results. Failure to respond to changing customer preferences and fashion trends could also negatively impact the image of our brands with our customers and result in diminished brand loyalty.
If major department, mass merchant, and specialty store chains consolidate, continue to close stores, or cease to do business, our business could be negatively affected.
Certain of our licensees sell our branded products through major department, mass merchant, and specialty store chains. Continued consolidation in the retail industry, as well as store closures or retailers ceasing to do business, could negatively impact our business. Consolidation could also reduce the number of our customers and potential customers who can access our branded products. A store group could decide to close stores, decrease the amount of our branded product purchased from our licensees, modify the amount of floor space allocated to apparel in general or to our brands specifically, or focus on promoting private label products or national brand products for which it has exclusive rights rather than promoting our brands. Customers are also concentrating purchases among a narrowing group of vendors. These types of decisions could adversely affect our business.
We expect to achieve growth based upon our plans to expand our business under our existing brands.brands and brands we may develop independently or through collaborations or acquire. If we fail to manage our expected future growth, our business and operating results could be materially harmed.
We expect to achieve growth in our existing brands and brands we may develop independently or through collaborations or acquire through expansion of our wholesale businesslicensing activities and social media e-commerce platforms. Revenue growth is expected to come from new wholesale accounts and increased traffic to our e-commerce sites.platforms, including ORME. We continue to seek new opportunities and international expansion through interactive television and licensing arrangements.arrangements, as well as joint ventures and collaborations. The success of our company, however, will still remain largely dependent on our ability to build and maintain broad market acceptance of our brands, to contract with and retain key licensees and on our licensees’ ability to accurately predict upcoming fashion and design trends within customer bases and fulfill the product requirements of retail channels within the global marketplace.
Our recent growth has placed, and our anticipated future growth will continue to place, considerable demands on our management and other resources. Our ability to compete effectively and to manage future growth, if any, will depend on the sufficiency and adequacy of our current resources and infrastructure and our ability to continue to identify, attract and retain personnel to manage our brands and integrate any brands we may acquire into our operations. There can be no assurance that our personnel, systems, procedures and controls will be adequate to support our operations and properly oversee our brands. The failure to support our operations effectively and properly oversee our brands could cause harm to our brands and have a material adverse effect on the value of such brands and on our reputation, business, financial condition and results of operations. In addition, we may be unable to leverage our core competencies in managing apparel and jewelry brands to managing brands in new product categories.
Also, there can be no assurance that we will be able to achieve and sustain meaningful growth. Our growth may be limited by a number of factors including increased competition among branded products at brick-and-mortar, internet and interactive retailers, decreased airtime on QVC, HSN, and JTV, competition for retail licenses and brand acquisitions, joint ventures and collaborations, and insufficient capitalization for future transactions.
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We are subjectdependent upon our Chief Executive Officer and other key executives. If we lose the services of these individuals, we may not be able to fully implement our business plan and future growth strategy, which would harm our business and prospects.
Our success is largely dependent upon the risks associated withefforts of Robert W. D’Loren, our Judith Ripka brand’s wholesaleChief Executive Officer and direct-to-consumer model.
We commenced e-commerce sales and wholesalesChairman of our Judith Ripka brand in 2017board of directors. Our continued success is largely dependent upon his continued efforts and 2018, respectively. In 2019, we completed the transitionthose of our non-interactive television operations of our Judith Ripka brand to a wholesale and direct-to-consumer model, thus changing these operations from a licensed model to a wholesale and direct-to-consumer business model. As a result,other key executives. Although we do not have a well-established history of conducting these operations.
We produce product for our Judith Ripka brands to hold as inventory for sales through our website and wholesale accounts. If we misjudge the market for our Judith Ripka products, we may be facedentered into an employment agreement with significant excess inventory for some products and missed opportunities for other products. In addition, weak sales and mark downs by our retailers or our need to liquidate excess inventory could adversely affect our results of operations. If we are not successful in managing our inventory balances, our cash flows and operating results may be adversely affected.
If our customers change their buying patterns, request additional allowances, develop their own private label brands or enter into agreements with national brand manufacturers to sell their products on an exclusive basis, our sales to these customers could be materially adversely affected.
Our customers’ buying patterns,Mr. D’Loren, as well as employment agreements with other executives and key employees, such persons can terminate their employment with us at their option, and there is no guarantee that we will not lose the need to provide additional allowances to customers, could have a material adverse effect onservices of our business, results of operations and financial condition. Customers’ strategic initiatives, including developing their own private labels brands, selling national brands on an exclusive basis, reducing the number of vendors they purchase from,executive officers or reducing the floor space dedicated to our brands could also impact our sales to these customers. There is a trend among major retailers to concentrate purchasing among a narrowing group of vendors.key employees. To the extent that any of their services become unavailable to us, we will be required to hire other qualified executives, and we may not be successful in finding or hiring adequate replacements. This could impede our ability to fully implement our business plan and future growth strategy, which would harm our business and prospects.
If we are unable to identify and successfully acquire additional trademarks or enter into joint ventures or collaborations for brands, our growth may be limited and, even if additional trademarks are acquired or joint ventures and collaborations are formed, we may not realize anticipated benefits due to integration or licensing difficulties.
While we are focused on growing our existing brands, we intend to selectively seek to acquire additional intellectual property, either directly or through the formation of joint ventures or collaborations. However, as our competitors continue to pursue a brand management model, acquisitions, joint ventures, and collaborations may become more expensive and suitable candidates could become more difficult to find. In addition, even if we successfully acquire additional intellectual property or the rights to use additional intellectual property, we may not be able to achieve or maintain profitability levels that justify our investment in, or realize planned benefits with respect to, those additional brands.
Although we will seek to temper our acquisition, joint venture, and collaboration risks by following guidelines relating to purchase price and valuation, projected returns, existing strength of the brand, its diversification benefits to us, its potential licensing scale and creditworthiness of licensee base, acquisitions, joint ventures, and collaborations, whether they be of additional intellectual property assets or of the companies that own them, entail numerous risks, any of which could detrimentally affect our reputation, our results of operations, and/or the value of our common stock. These risks include, among others:
● | unanticipated costs associated with the target acquisition, joint venture, or collaboration, or its integration with our company; |
● | our ability to identify or consummate additional quality business opportunities, including potential licenses and new product lines and markets; |
● | negative effects on reported results of operations from acquisition related charges and costs, and amortization of acquired intangibles; |
● | diversion of management’s attention from other business concerns; |
● | the challenges of maintaining focus on, and continuing to execute, core strategies and business plans as our brand and license portfolio grows and becomes more diversified; |
● | adverse effects on existing licensing and other relationships; |
● | potential difficulties associated with the retention of key employees, and difficulties, delays and unanticipated costs associated with the assimilation of personnel, operations, systems and cultures, which may be retained by us in connection with or as a result of our acquisitions; |
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● | risks of entering new domestic and international markets (whether it be with respect to new licensed product categories or new licensed product distribution channels) or markets in which we have limited prior experience; and |
● | increased concentration in our revenues with one or more customers in the event that the brand has distribution channels in which we currently distribute products under one or more of our brands. |
When we acquire intellectual property assets or the companies that own them, or enter into joint ventures or collaborations, our due diligence reviews are subject to inherent uncertainties and may not reveal all potential risks. We may therefore fail to discover or inaccurately assess undisclosed or contingent liabilities, including liabilities for which we may have responsibility as a successor to the seller or the target company. As a successor, we may be responsible for any past or continuing violations of law by the seller or the target company. Although we will generally attempt to seek contractual protections through representations, warranties and indemnities, we cannot be sure that we will obtain such provisions or that such provisions will fully protect us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not, or may not be able to, indemnify us or that may exceed the scope, duration or amount of the seller’s indemnification obligations.
Acquiring additional intellectual property could also have a significant effect on our financial position and could cause substantial fluctuations in our quarterly and yearly operating results. Acquisitions and joint ventures could result in the recording of significant goodwill and intangible assets on our financial statements, the amortization or impairment of which would reduce our reported earnings in subsequent years. No assurance can be given with respect to the timing, likelihood or financial or business effect of any possible transaction. Moreover, our ability to grow through the acquisition of additional intellectual property, joint ventures and collaborations will also depend on the availability of capital to complete the necessary acquisition arrangements. In the event that we are unable to obtain debt financing on acceptable terms for a particular transaction, we may elect to pursue the transaction through the issuance by us of shares of our common stock (and, in certain cases, convertible securities) as equity consideration, which could dilute our common stock and reduce our earnings per share, and any such dilution could reduce the market price of our common stock unless and until we were able to achieve revenue growth or cost savings and other business economies sufficient to offset the effect of such an issuance. Acquisitions of additional brands may also involve challenges related to integration into our existing operations, merging diverse cultures, and retaining key customer reducesemployees. Any failure to integrate additional brands successfully in the number of its vendors or allocates less floor space forfuture may adversely impact our productsreputation and business.
As a result, there is no guarantee that our stockholders will achieve greater returns as a result reduces or eliminates purchases from us, there could be a material adverse effect on us.of any future acquisitions we complete.
Intense competition in the apparel, fashion, and jewelry industries could reduce our sales and profitability.
As a fashion company, we face intense competition from other domestic and foreign apparel, footwear, accessories, and jewelry manufacturers and retailers. Competition has and may continue to result in pricing pressures, reduced profit margins, lost market share, or failure to grow our market share, any of which could substantially harm our business and results of operations. Competition is based on many factors including, without limitation, the following:
● | establishing and maintaining favorable brand recognition; |
● | developing products that appeal to consumers; |
● | pricing products appropriately; |
● | determining and maintaining product quality; |
● | obtaining access to sufficient floor space in retail locations; |
● | providing appropriate services and support to retailers; |
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● | maintaining and growing market share; |
● | developing and maintaining a competitive e-commerce site; |
● | hiring and retaining key employees; and |
● | protecting intellectual property. |
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Competition in the apparel, fashion and jewelry industries is intense and is dominated by a number of very large brands, many of which have longer operating histories, larger customer bases, more established relationships with a broader set of suppliers,potential licensees, greater brand recognition, and greater financial, research and development, marketing, distribution, and other resources than we do. These capabilities of our competitors may allow them to better withstand downturns in the economy or apparel, fashion and jewelry industries. Any increased competition, or our failure to adequately address any of these competitive factors which we have seen from time to time, could result in reduced sales, which could adversely affect our business, financial condition, and operating results.
Competition, along with such other factors as consolidation within the retail industry and changes in consumer spending patterns, could also result in significant pricing pressure and cause the sales environment to be more promotional, as it has been in recent years, impacting our financial results. If promotional pressure remains intense, either through actions of our competitors or through customer expectations, this may cause a further reduction in our sales and gross margins and could have a material adverse effect on our business, financial condition, and operating results.
Because of the intense competition within our existing and potential wholesale licensees’ markets and the strength of some of their competitors, we and our licensees may not be able to continue to compete successfully.
We expect our existing and future licenses to relate to products in the apparel, footwear, accessories, jewelry, home goods, and other consumer industries, in which our licensees face intense competition, including from our other brands and licensees. In general, competitive factors include quality, price, style, name recognition, and service. In addition, various fashion trends and the limited availability of shelf space could affect competition for our licensees’ products. Many of our licensees’ competitors have greater financial, distribution, marketing, and other resources than our licensees and have achieved significant name recognition for their brand names. Our licensees may be unable to successfully compete in the markets for their products, and we may not be able to continue to compete successfully with respect to our contractual arrangements.
If our competition for licenses increases, or any of our current licensees elect not to renew their licenses or renew on terms less favorable than today, our growth plans could be slowed and our business, financial condition and results of operations would be adversely affected.
To the extent we seek to acquire additional brands, we will face competition to retain licenses and to complete such acquisitions. The ownership, licensing, and management of brands is becoming a more widely utilized method of managing consumer brands as production continues to become commoditized and manufacturing capacity increases worldwide. We face competition from numerous direct competitors, both publicly and privately-held, including traditional apparel and consumer brand companies, other brand management companies and private equity groups. Companies that traditionally focused on wholesale manufacturing and sourcing models are now exploring licensing as a way of growing their businesses through strategic licensing partners and direct-to-retail contractual arrangements. Furthermore, our current or potential licensees may decide to develop or purchase brands rather than renew or enter into contractual agreements with us. In addition, this increased competition could result in lower sales of products offered by our licensees under our brands. If our competition for licenses increases, it may take us longer to procure additional licenses, which could slow our growth rate.
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Difficulties with foreign sourcing may adversely affect our business.
We and ourOur licensees work with several manufacturers overseas, primarily located overseas, including in China and Thailand. A manufacturing contractor’s failure to ship products to usour licensees in a timely manner or to meet the required quality standards could cause usthe licensee to miss the delivery date requirements of ourits customers for those items.items or not have seasonal product available for a selling season. The failure to make timely deliveries may cause their customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could reduce our licensing royalties, which could have a material adverse effect on us. As a result of the magnitude of our licensees’ foreign sourcing, our business is subject to the following risks:
● | political and economic instability in countries or regions, especially Asia, including heightened terrorism and other security concerns, which could subject imported or exported goods to additional or more frequent inspections, leading to delays |
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● | imposition of regulations, quotas and other trade restrictions relating to imports, including quotas imposed by bilateral textile agreements between the U.S. and foreign countries; |
● | currency exchange rates; |
● | imposition of increased duties, taxes and other charges on imports; |
● | pandemics and disease outbreaks such as COVID-19; |
● | labor union strikes at ports through which our products enter the U.S.; |
● | labor shortages in countries where contractors and suppliers are located; |
● | restrictions on the transfer of funds to or from foreign countries; |
● | disease epidemics and health-related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; |
● | the migration and development of manufacturing contractors, which could affect where our |
● | increases in the costs of fuel, travel and transportation; and |
● |
violations by foreign contractors of labor and wage standards and resulting adverse publicity. |
If these risks limit or prevent usour licensees from manufacturing products in any significant international market, prevent us from acquiring products from foreign suppliers, or significantly increase the costproduction and sale of our products, our operations couldbrands be seriously disrupted until alternative suppliers are found or alternative markets are developed, which could negatively impact our business.
A pandemic outbreak of disease or similar public health threat, or fear of such an event, could have a material adverse impact on the Company's business, operating results and financial condition.
A pandemic or outbreak of disease or similar public health threat, such as the COVID-19 pandemic, or fear of such an event, could have a material adverse impact on our business, operating results, and financial condition. The current COVID-19 pandemic has caused a disruption to our business, beginning in March 2020. The impacts of the current COVID-19 pandemic are broad reaching and are having an impact on our licensing and wholesale businesses. The COVID-19 pandemic is impacting our supply chain as most of our products are manufactured in China, Thailand, and other places around the world affected by this event. Temporary factory closures and the pace of workers returning to work have impacted our contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner. The pandemic is also impacting distribution and logistics providers' ability to operate in the normal course of business. In addition, COVID-19 has resulted in a sudden and continuing decrease in sales for many of our products, resulting in order cancellations. Further, the pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, Stein Mart, and Century 21, from which we had an aggregate of $1.21 million of accounts receivable due at December 31, 2020. As a result, we have recognized an allowance for doubtful accounts of $0.97 million for the year ended December 31, 2020, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility. Financial impacts associated with the COVID-19 pandemic include, but are not limited to, lower net sales, adjustments to allowances
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for doubtful accounts due to customer bankruptcy or other inability to pay their amounts due to vendors, the delay of inventory production and fulfillment, potentially further impacting net sales, and potential incremental costs associated with mitigating the effects of the pandemic, including increased freight and logistics costs and other expenses. We expect that the impact the COVID-19 pandemic may have on our operating results could result in our inability to comply with certain debt covenants and require BHI to waive compliance with, or agree to amend, any such covenant to avoid a default. The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, and actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our 2021 results. However, as of the date of this filing, we expect our results for 2021 to be negatively affected.
We may not be entitled to forgiveness of our recently received Paycheck Protection Program loan, and our application for the Paycheck Protection Program loan could in the future be determined to have been impermissible or could result in damage to our reputation.
We received an unsecured loan in the amount of $1,805,856 (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained.
In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the PPP of the CARES Act. The certification described above did not contain any objective criteria and is subject to interpretation. However, on April 23, 2020, the U.S. Small Business Administration (“SBA”) issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the PPP has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we or any company that we may acquire in the future which received a loan under the PPP, are later determined to have violated any of the laws or governmental regulations that apply to us or such acquiree in connection with the PPP Loan or another loan under the PPP, respectively, such as the False Claims Act, or it is otherwise determined that we or such acquiree were ineligible to receive the PPP Loan or such other loan under the PPP, respectively, we or such acquiree may be subject to penalties, including significant civil, criminal and administrative penalties, and could be required to repay the PPP Loan or such other loan under the PPP, respectively, in its entirety. In addition, our receipt of the PPP Loan or any company that we may acquire in the future which received a loan under the PPP may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.
Fluctuations in the price, availability and quality of raw materials could cause delays and increase costs and cause our operating results and financial condition to suffer.
Fluctuations in the price, availability and quality of the fabrics or other raw materials, particularly cotton, silk, leather and synthetics used in our manufactured apparel, and gold, silver and other precious and semi-precious metals and gem stones used in our jewelry, could have a material adverse effect on cost of sales or our ability to meet customer demands. The prices of fabrics, precious and semi-precious metals and gemstones depend largely on the market prices of the raw materials used to produce them. The price and availability of the raw materials and, in turn, the fabrics, precious and semi-precious metals and gem stones used in our apparel and jewelry may fluctuate significantly, depending on many factors, including crop yields, weather patterns, labor costs and changes in oil prices. We may not be able to create suitable design
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solutions that utilize raw materials with attractive prices or, alternatively, to pass higher raw materials prices and related transportation costs on to our customers. We are not always successful in our efforts to protect our business from the volatility of the market price of raw materials, and our business can be materially affected by dramatic movements in prices of raw materials. The ultimate effect of this change on our earnings cannot be quantified, as the effect of movements in raw materials prices on industry selling prices are uncertain, but any significant increase in these prices could have a material adverse effect on our business, financial condition and operating results.
Our reliance on independent manufacturers could cause delays or quality issues which could damage customer relationships.
We use approximately eight independent manufacturers to assemble or produce all of our products. We are dependent on the ability of these independent manufacturers to adequately finance the production of goods ordered and maintain sufficient manufacturing capacity. The use of independent manufacturers to produce finished goods and the resulting lack of direct control could subject us to difficulty in obtaining timely delivery of products of acceptable quality. We generally do not have long-term written agreements with any independent manufacturers. As a result, any single manufacturing contractor could unilaterally terminate its relationship with us at any time. Supply disruptions from these manufacturers (or any of our other manufacturers) could have a material adverse effect on our ability to meet customer demands, if we are unable to source suitable replacement materials at acceptable prices or at all. Moreover, alternative manufacturers, if available, may not be able to provide us with products or services of a comparable quality, at an acceptable price or on a timely basis. We may also, from time to time, make a decision to enter into a relationship with a new manufacturer. Identifying a suitable supplier is an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial stability and labor and other ethical practices. There can be no assurance that there will not be a disruption in the supply of our products from independent manufacturers or that any new manufacturer will be successful in producing our products in a manner we expected. The failure of any independent manufacturer to perform or the loss of any independent manufacturer could have a material adverse effect on our business, results of operations and financial condition.
If our independent manufacturers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.
We have established and currently maintain operating guidelines which promote ethical business practices such as fair wage practices, compliance with child labor laws and other local laws. While we monitor compliance with those guidelines, we do not control our independent manufacturers or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.
Violation of labor or other laws by our independent manufacturers or the divergence of an independent manufacturer’s labor or other practices from those generally accepted as ethical in the U.S. or other markets in which we do business could also attract negative publicity for us and our brand. From time to time, our audit results have revealed a lack of compliance in certain respects, including with respect to local labor, safety and environmental laws. Other fashion companies have faced criticism after highly-publicized incidents or compliance issues have occurred or been exposed at factories producing their products. To the extent our manufacturers do not bring their operations into compliance with such laws or resolve material issues identified in any of our audit results, we may face similar criticism and negative publicity. This could diminish the value of our brand image and reduce demand for our merchandise. In addition, other fashion companies have encountered organized boycotts of their products in such situations. If we, or other companies in our industry, encounter similar problems in the future, it could harm our brand image, stock price and results of operations.
Monitoring compliance by independent manufacturers is complicated by the fact that expectations of ethical business practices continually evolve, may be substantially more demanding than applicable legal requirements and are driven in part by legal developments and by diverse groups active in publicizing and organizing public responses to perceived ethical shortcomings. Accordingly, we cannot predict how such expectations might develop in the future and cannot be certain that our guidelines would satisfy all parties who are active in monitoring and publicizing perceived shortcomings in labor and other business practices worldwide.
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If we are unable to identify and successfully acquire additional trademarks, our growth may be limited and, even if additional trademarks are acquired, we may not realize anticipated benefits due to integration or licensing difficulties.
While we are focused on growing our existing brands, we intend to selectively seek to acquire additional intellectual property. However, as our competitors continue to pursue a brand management model, acquisitions may become more expensive and suitable acquisition candidates could become more difficult to find. In addition, even if we successfully acquire additional intellectual property or the rights to use additional intellectual property, we may not be able to achieve or maintain profitability levels that justify our investment in, or realize planned benefits with respect to, those additional brands.
Although we will seek to temper our acquisition risks by following acquisition guidelines relating to purchase price and valuation, projected returns, existing strength of the brand, its diversification benefits to us, its potential licensing scale and creditworthiness of licensee base, acquisitions, whether they be of additional intellectual property assets or of the companies that own them, entail numerous risks, any of which could detrimentally affect our reputation, our results of operations, and/or the value of our common stock. These risks include, among others:
When we acquire intellectual property assets or the companies that own them, our due diligence reviews are subject to inherent uncertainties and may not reveal all potential risks. We may therefore fail to discover or inaccurately assess undisclosed or contingent liabilities, including liabilities for which we may have responsibility as a successor to the seller or the target company. As a successor, we may be responsible for any past or continuing violations of law by the seller or the target company. Although we will generally attempt to seek contractual protections through representations, warranties and indemnities, we cannot be sure that we will obtain such provisions in our acquisitions or that such provisions will fully protect us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not, or may not be able to, indemnify us or that may exceed the scope, duration or amount of the seller’s indemnification obligations.
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Acquiring additional intellectual property could also have a significant effect on our financial position and could cause substantial fluctuations in our quarterly and yearly operating results. Acquisitions could result in the recording of significant goodwill and intangible assets on our financial statements, the amortization or impairment of which would reduce our reported earnings in subsequent years. No assurance can be given with respect to the timing, likelihood or financial or business effect of any possible transaction. Moreover, our ability to grow through the acquisition of additional intellectual property will also depend on the availability of capital to complete the necessary acquisition arrangements. In the event that we are unable to obtain debt financing on acceptable terms for a particular acquisition, we may elect to pursue the acquisition through the issuance by us of shares of our common stock (and, in certain cases, convertible securities) as equity consideration, which could dilute our common stock and reduce our earnings per share, and any such dilution could reduce the market price of our common stock unless and until we were able to achieve revenue growth or cost savings and other business economies sufficient to offset the effect of such an issuance. Acquisitions of additional brands may also involve challenges related to integration into our existing operations, merging diverse cultures, and retaining key employees. Any failure to integrate additional brands successfully in the future may adversely impact our reputation and business.
As a result, there is no guarantee that our stockholders will achieve greater returns as a result of any future acquisitions we complete.
Our failure to protect our proprietary rights could compromise our competitive position and decrease the value of our brands.
We own, through our wholly owned subsidiaries, various U.S. federal trademark registrations and foreign trademark registrations for our brands, together with pending applications for registration, which are vital to the success and further growth of our business and which we believe have significant value. We rely primarily upon a combination of trademarks, copyrights, and contractual restrictions to protect and enforce our intellectual property rights domestically and internationally. We believe that such measures afford only limited protection and, accordingly, there can be no assurance that the actions taken by us to establish, protect, and enforce our trademarks and other proprietary rights will prevent
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infringement of our intellectual property rights by others, or prevent the loss of licensing revenue or other damages caused therefrom.
For instance, despite our efforts to protect and enforce our intellectual property rights, unauthorized parties may attempt to copy aspects of our intellectual property, which could harm the reputation of our brands, decrease their value, and/or cause a decline in our licensees’ sales and thus our revenues. Further, we and our licensees may not be able to detect infringement of our intellectual property rights quickly or at all, and at times, we or our licensees may not be successful in combating counterfeit, infringing, or knockoff products, thereby damaging our competitive position. In addition, we depend upon the laws of the countries where our licensees’ products are sold to protect our intellectual property. Intellectual property rights may be unavailable or limited in some countries because standards of registration and ownership vary internationally. Consequently, in certain foreign jurisdictions, we have elected or may elect not to apply for trademark registrations. Also, in certain jurisdictions, as described above, certain H by Halston and H Halston trademark registrations or applications that we acquired (including but not limited to those based upon “intent to use”) may not yet be recorded in our name, due to laws governing the timing and nature of certain trademark assignments. Where laws limit our ability to record in our name trademarks that we have purchased, we have obtained by way of license all necessary rights to operate our business.
While we generally apply for trademarks in most countries where we license or intend to license our trademarks, we may not accurately predict all of the countries where trademark protection will ultimately be desirable. If we fail to timely file a trademark application in any such country, we may be precluded from obtaining a trademark registration in such country at a later date. Failure to adequately pursue and enforce our trademark rights could damage our brands, enable others to compete with our brands and impair our ability to compete effectively.
In addition, in the future, we may be required to assert infringement claims against third parties or more third parties may assert infringement claims against us. Any resulting litigation or proceeding could result in significant expense to us and divert the efforts of our management personnel, whether or not such litigation or proceeding is determined in our favor. To the extent that any of our trademarks were ever deemed to violate the proprietary rights of others in any litigation or
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proceeding or as a result of any claim, we may be prevented from using them, which could cause a termination of our contractual arrangements, and thus our revenue stream, with respect to those trademarks. Litigation could also result in a judgment or monetary damages being levied against us.
Risks Related to an Investment in Our Securities
Management exercises significant control over matters requiring shareholder approval, which may result in the delay or prevention of a change in our control.
Pursuant to voting agreements, certain shareholders agreed to appoint a person designated by our board of directors as their collective irrevocable proxy and attorney-in-fact with respect to the shares of the common stock received by them. The proxy holder will vote in favor of matters recommended or approved by the board of directors. The board of directors has designated Robert W. D’Loren as proxy. Also, pursuant to separate voting agreements, certain other stockholders have agreed to appoint Mr. D’Loren as their respective irrevocable proxy and attorney-in-fact with respect to the shares of the common stock issued to them by us. The proxy holder shall vote in favor of matters recommended or approved by the board of directors.
The combined voting power of the common stock ownership of our directors and executive officers is approximately 45% of our voting securities as of March 31, 2024. As a result, our management through such stock ownership will exercise significant influence over all matters requiring shareholder approval, including the election of our directors and approval of significant corporate transactions. This concentration of ownership in management may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by stockholders other than management. There is also a risk that our existing management and a limited number of stockholders may have interests which are different from certain stockholders and that they will pursue an agenda which is beneficial to themselves at the expense of other stockholders.
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Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common stock and our ability to access the capital markets.
On April 16, 2024, we received a letter from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) notifying us that the minimum bid price per share for our common stock fell below $1.00 for a period of 30 consecutive business days. Therefore, the Company did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules.
The letter also states that pursuant to Nasdaq Listing Rules 5810(c)(3)(A), we will be provided 180 calendar days to regain compliance with the minimum bid price requirement, or until October 14, 2024.
We are dependent uponcan regain compliance if, at any time during the Tolling Period or such 180-day period, the closing bid price of our Chief Executive Officer and other key executives.common stock is at least $1.00 for a minimum period of 10 consecutive business days. If by October 14, 2024, we losedo not regain compliance with the services of these individualsNasdaq Listing Rules, we may be eligible for additional time to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(ii). We would also need to provide written notice to Nasdaq of our intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. As part of its review process, the Nasdaq staff will make a determination of whether it believes we will be able to cure this deficiency. Should the Nasdaq staff conclude that we will not be able to fully implementcure the deficiency, or should we determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that our shares of common stock will be subject to delisting.
If we do not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our shares of common stock will be subject to delisting from the Nasdaq Capital Market. At such time, we may appeal the delisting determination to a hearings panel.
We intend to monitor our common stock closing bid price between now and October 14, 2024 and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.
Our common stock may be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which could make it more difficult for our stockholders to sell their securities.
Rule 3a51-1 of the Exchange Act establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share, subject to a limited number of exceptions, including for having securities registered on certain national securities exchanges. If our common stock were delisted from the NASDAQ, market liquidity for our common stock could be severely and adversely affected.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
● | the basis on which the broker or dealer made the suitability determination; and |
● | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
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Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock even if and when our common stock becomes listed on the NASDAQ Capital Market. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock.
No assurance can be given that our stock will not be subject to these “penny stock” rules in the future.
Investors should be aware that, according to Commission Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include: (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the future volatility of our share price.
Our common stock has historically been thinly traded, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
Although our common stock is listed on the NASDAQ Capital Market, our common stock has historically been traded at relatively low volumes. As a result, the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small. This situation is attributable to a number of factors, including that we are currently a small company which is still relatively unknown to securities analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot provide any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
The market price of our common stock has declined over the past several years and may be volatile, which could reduce the market price of our common stock.
Currently the publicly traded shares of our common stock are not widely held, and do not have significant trading volume, and, therefore, may experience significant price and volume fluctuations. Although our common stock is quoted on the NASDAQ Capital Market, this does not assure that a meaningful, consistent trading market will develop or that the volatility will decline. This market volatility could reduce the market price of the common stock, regardless of our operating performance. In addition, the trading price of the common stock has been volatile over the past several years and could change significantly over short periods of time in response to actual or anticipated variations in our quarterly operating results, announcements by us, our licensees or our respective competitors, factors affecting our licensees’ markets generally and/or changes in national or regional economic conditions, making it more difficult for shares of the common stock to be sold at a favorable price or at all. The market price of the common stock could also be reduced by general market price declines or market volatility in the future or future declines or volatility in the prices of stocks for companies in the trademark licensing business planor companies in the industries in which our licensees compete.
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We may issue a substantial number of shares of common stock upon exercise of outstanding warrants and futureoptions.
As of December 31, 2023, we had outstanding warrants and options to purchase 6,264,605 shares of our common stock with a weighted average exercise price of $1.96. The holders of warrants and options will likely exercise such securities at a time when the market price of our common stock exceeds the exercise price. Therefore, exercises of warrants and options will result in a decrease in the net tangible book value per share of our common stock and such decrease could be material.
The issuance of shares upon exercise of outstanding warrants and options will dilute our then-existing stockholders’ percentage ownership of our company, and such dilution could be substantial. In addition, our growth strategy which would harm our business and prospects.
Our success is largely dependent uponincludes the effortsacquisition of Robert W. D’Loren, our Chief Executive Officer and Chairman of our board of directors. Our continued success is largely dependent upon his continued efforts and those of our other key executives. Although we entered into an employment agreement with Mr. D’Loren, as well as employment agreements with other executives and key employees, including Isaac Mizrahi, such persons can terminate their employment with us at their option, and there is no guarantee that we will not lose the services of our executive officers or key employees. To the extent that any of their services become unavailable to us, we will be required to hire other qualified executives,additional brands, and we may issue shares of our common stock as consideration for acquisitions. Sales or the potential for sale of a substantial number of such shares could adversely affect the market price of our common stock, particularly if our common stock remains thinly traded at such time.
As of December 31, 2023, we had an aggregate of 3,103,941 shares of common stock available for grants under our 2021 Equity Incentive Plan (the "2021 Plan") to our directors, executive officers, employees, and consultants. Issuances of common stock pursuant to the exercise of stock options or other stock grants or awards which may be granted under our 2021 Plan will dilute your interest in us.
Holders of our common stock may be subject to restrictions on the use of Rule 144 by shell companies or former shell companies.
Historically, the SEC has taken the position that Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, is not available for the resale of securities initially issued by companies that are, or previously were, shell companies (we were considered a shell company on and prior to September 29, 2011), to their promoters or affiliates despite technical compliance with the requirements of Rule 144. The SEC prohibits the use of Rule 144 for resale of securities issued by shell companies (other than business transaction related shell companies) or issuers that have been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met: the issuer of the securities that was formerly a shell company has ceased to be successfula shell company; the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. As such, due to the fact that we had been a shell company prior to September 2011, holders of “restricted securities” within the meaning of Rule 144, when reselling their shares pursuant to Rule 144, shall be subject to the conditions set forth herein.
We do not anticipate paying cash dividends on our common stock.
You should not rely on an investment in finding or hiring adequate replacements. This could impede our abilitycommon stock to fully implementprovide dividend income, as we have not paid dividends on our businesscommon stock, and we do not plan to pay any dividends in the foreseeable future. Instead, we plan to retain any earnings to maintain and future growth strategy,expand our existing licensing operations, further develop our trademarks, and finance the acquisition of additional trademarks. Accordingly, investors must rely on sales of their common stock after price appreciation, which would harm our business and prospects.may never occur, as the only way to realize any return on their investment. In addition, Bank Hapoalim B.M. requires that Robert W. D’Loren isour credit facility limits the Chairmanamount of cash dividends we may pay while amounts under the boardcredit facility are outstanding.
Provisions of directorsour corporate charter documents could delay or prevent change of the Company. The failurecontrol.
Our certificate of Mr. D’Loren to continue in his duties as Chairman ofincorporation authorizes our board of directors would resultto issue up to 1,000,000 shares of preferred stock without stockholder approval, in a default under the credit facility with Bank Hapoalim B.M.
Our trademarks and other intangible assets are subject to impairment charges under accounting guidelines.
Intangible assets including our trademarks represent a substantial portion of our assets. Under accounting principles generally accepted in the United States of America (“GAAP”), indefinite lived intangible assets, including our trademarks, are not amortized, but must be tested for impairment annually or more frequently if events or circumstances indicate the asset may be impaired. The estimated useful life of an intangible asset must be evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Finite lived intangible assets are amortized over their estimated useful lives. Non-renewal of license agreements or other factors affecting our market segments or brands could result in significantly reduced revenue for a brand, which could result in a devaluation of the affected trademark. If such devaluations of our trademarks were to occur, a material impairment in the carrying value of one or more series, and to fix the dividend rights, terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series of preferred stock. The designation of preferred stock in the future could make it difficult for third parties to gain control of our trademarkscompany, prevent or substantially delay a change in control, discourage bids for the common stock at a premium, or otherwise adversely affect the market price of the common stock.
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General Risks
A pandemic outbreak of disease or similar public health threat, or fear of such an event, could also occurhave a material adverse impact on the Company's business, operating results and be chargedfinancial condition.
A pandemic or outbreak of disease or similar public health threat, such as the COVID-19 pandemic, or fear of such an event, could have a material adverse impact on our business, operating results, and financial condition. The COVID-19 pandemic caused a disruption to our business, beginning in March 2020.
The impacts of the ongoing COVID-19 pandemic (including actions taken by national, state, and local governments in response to COVID-19) negatively impacted the U.S. and global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. The initial onset of the pandemic in 2020 resulted in a sudden decrease in sales for many of the Company’s products, from which we have yet to fully recover. The global pandemic affected the financial health of certain of our customers, and the bankruptcy of certain other customers; as a non-cash expenseresult, we may be required to make additional adjustments for doubtful accounts which would increase our operating results, whichexpenses in future periods and negatively impact our operating results.
Supply chain disruptions have adversely affected, and could continue to adversely affect, our licensees’ ability to import our products in a timely manner.
The effects of the COVID-19 pandemic on the shipping industry negatively impacted our and our licensees’ ability to import our branded products in a manner that allows for timely delivery to customers. Congestion at ports of loading and ports of entry caused significant delays in deliveries and changes to the itineraries of steamship carriers. Use of alternate routes or delivery methods would require additional trucking for our licensees and their customers. Truck driver shortages, shortages of truck equipment and the inability of ports to provide reliable pick up times, also negatively impacted our and our licensees’ ability to timely receive goods in the past. If our licensees are unable to mitigate supply chain disruptions, their ability to meet customer expectations, manage inventory and complete sales could be material. For the year ended December 31, 2019, we recorded a $6.2 million impairment charge related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct-to-consumer model. For the year ended December 31, 2020, we recorded a $13.0 million impairment charge related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarilymaterially adversely affected.
Contractual shipping rates have increased as a result of increased demand for container space and the novel coronavirus disease pandemic. Any further write-downlogistical delays experienced by the shipping industry. Costs have increased as a result of intangible assets resultinghigher contractual shipping rates and the need to purchase additional container space on the secondary market at higher spot rates. Terminals are also now imposing additional fees on importers not picking up containers on time, even when equipment and labor shortages negatively affect the ability of importers to pick up in a timely manner.
If our licensees are unable to secure container space on a vessel for our branded product due to limited availability, they may experience delays in shipping product from future periodic evaluations would, as applicable, either decreaseoverseas suppliers and ultimately to their customers. Furthermore, even if they are able to secure space, ports around the world are experiencing congestion from time to time, slowing transit times of product through ports of entry which negatively affects their ability to timely receive and deliver product to their retail partners and customers.
If our net income or increase our net losslicensees are unable to mitigate these supply chain disruptions, their ability to meet customer expectations, manage inventory and those decreases or increasescomplete sales could be material.
Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returnsmaterially adversely affected, which could adversely affect our results.results of operations.
Our future effective tax ratesThe Ukrainian-Russian conflict could be adversely affectedhave a material adverse impact on our business.
The Ukrainian-Russian conflict, the responses thereto, such as sanctions imposed by changes in the valuation of our deferred tax assetsUnited States and liabilities, or by changes in tax laws or by a change in allocation of stateother western democracies, and local jurisdictions, or interpretations thereof. The Company currently files U.S. federal tax returnsany expansion thereof is likely to have unpredictable and various state tax returns. Tax years that remain open for assessment for federal and state purposes include years ended December 31, 2017 through December 31, 2020. We regularly assess the likelihood of recovering the amount of deferred tax assets recordedwide-ranging effects on the balance sheetdomestic and the likelihood of adverse outcomes resulting from examinations by various taxing authorities in order to determine the adequacy of our provision for income taxes. Although under the 2017 Tax Cutsglobal economy and Jobs Act Federal tax rates are lower, certain expenses will be either reduced or eliminated, causing the Company to have increased taxable income,financial markets, which maycould have an adverse effect on our future income tax obligations. We cannot guarantee thatbusiness and results of operations. Already the outcomesconflict has caused market volatility, a sharp increase in certain commodity prices, such as wheat and oil, and an increasing number and frequency of these evaluationscybersecurity threats. So far, we have not experienced any direct impact from the conflict and, continuous examinationsas our business is conducted exclusively in the United States, we are probably less vulnerable than companies with international operations. Nevertheless, we will not harmcontinue to monitor the situation carefully and, if necessary, take action to protect our reported operating resultsbusiness, operations, and financial condition.
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We must successfully maintain and/or upgrade our information technology systems.
We rely on various information technology systems to manage our operations, which subject us to inherent costs and risks associated with maintaining, upgrading, replacing, and changing these systems, including impairment of our information technology, potential disruption of our internal control systems, substantial capital expenditures, demands on management time, cyber security breaches and other risks of delays or difficulties in upgrading, transitioning to new systems, or of integrating new systems into our current systems.
A decline in general economic conditions resulting in a decrease in consumer spending levels and an inability to access capital may adversely affect our business.
The success of our operations depends on consumer spending. Consumer spending is impacted by a number of factors which are beyond our control, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment, wages, energy costs and consumer debt levels), customer traffic within shopping and selling environments, business conditions, interest rates and availability of credit and tax rates in the general economy and in the international, regional and local markets in which our products are sold and the impact of natural disasters and pandemics and disease outbreaks such as the COVID-19 pandemic. Global economic conditions historically included significant recessionary pressures and declines in employment levels, disposable income and actual and/or perceived wealth and further declines in consumer confidence and economic growth. A depressed economic environment is often characterized by a decline in consumer discretionary spending and has disproportionately affected retailers and sellers of consumer goods, particularly those whose goods are viewed as discretionary or luxury purchases, including fashion apparel and accessories such as ours. Such factors as well as another shift towards recessionary conditions have in the past, and could in the future, devalue our brands, which could result in an impairment in its carrying value, which could be material, create downward pricing pressure on the products carrying our brands, and adversely impact our sales volumes and overall profitability. Further, economic and political volatility and declines in the value of foreign currencies could negatively impact the global economy as a whole and have a material adverse effect on the profitability and liquidity of our operations, as well as hinder our ability to grow through expansion in the international markets. In addition, domestic and international political situations also affect consumer confidence, including the threat, outbreak or escalation of terrorism, military conflicts or other hostilities around the world. Furthermore, changes in the credit and capital markets, including market disruptions, limited liquidity, and interest rate fluctuations, may increase the cost of financing or restrict our access to potential sources of capital for future acquisitions.
The risks associated with our business are more acute during periods of economic slowdown or recession. Accordingly, any prolonged economic slowdown or a lengthy or severe recession with respect to either the U.S. or the global economy is likely to have a material adverse effect on our results of operations, financial condition, and business prospects.
Inflation and/or a potential recession could adversely impact our business and results of operations.
Many of the components of our cost of goods sold are subject to price increases that are attributable to factors beyond our control, including but not limited to, global economic conditions, trade barriers or restrictions, supply chain disruptions, changes in crop size, product scarcity, demand dynamics, currency rates, water supply, weather conditions, import and export requirements, and other factors. The cost of raw materials, labor, manufacturing, energy, fuel, shipping and logistics, and other inputs related to the production and distribution of our products have increased and may continue to increase unexpectedly.
In addition, 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 the inflation as well as a potential recession, our business, financial condition, and results of operations could be adversely affected.
Extreme or unseasonable weather conditions could adversely affect our business.
Extreme weather events and changes in weather patterns can influence customer trends and shopping habits. Extended periods of unseasonably warm temperatures during the fall and winter seasons, or cool weather during the summer season, may diminish demand for our seasonal merchandise. Heavy snowfall, hurricanes or other severe weather events in the areas in which our retail stores and the retail stores of our wholesale customers are located may decrease customer traffic in those stores and reduce our sales and profitability. If severe weather events were to force closure of or disrupt operations at the distribution centers we use for our merchandise, we could incur higher costs and experience longer lead times to distribute our products to our retail stores, wholesale customers or digital channel customers. If prolonged, such extreme or unseasonable weather conditions could adversely affect our business, financial condition, and results of operations.
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Our trademarks and other intangible assets are subject to impairment charges under accounting guidelines.
Our intangible assets including our trademarks had a net carrying value of $41.5 million as of December 31, 2023 and represent a substantial portion of our assets. Under accounting principles generally accepted in the United States of America (“GAAP”), finite-lived intangible assets are amortized over their estimated useful lives, and reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Non-renewal of license agreements or other factors affecting our market segments or brands could result in significantly reduced revenue for a brand, which could result in a devaluation of the affected trademark. If such devaluations of our trademarks were to occur, a material impairment in the carrying value of one or more of our trademarks could also occur and be charged as a non-cash expense to our operating results, which could be material. Any write-down of intangible assets resulting from future periodic evaluations would, as applicable, either decrease our net income or increase our net loss and those decreases or increases could be material.
Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results.
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or by a change in allocation of state and local jurisdictions, or interpretations thereof. The Company currently files U.S. federal tax returns and various state tax returns. Tax years that remain open for assessment for federal and state purposes include the years ended December 31, 2020 through December 31, 2023. We regularly assess the likelihood of recovering the amount of deferred tax assets recorded on the balance sheet and the likelihood of adverse outcomes resulting from examinations by various taxing authorities in order to determine the adequacy of our provision for income taxes. Although under the 2017 Tax Cuts and Jobs Act Federal tax rates are lower, certain expenses will be either reduced or eliminated, causing the Company to have increased taxable income, which may have an adverse effect on our future income tax obligations. We cannot guarantee that the outcomes of these evaluations and continuous examinations will not harm our reported operating results and financial condition.
We must successfully maintain and/or upgrade our information technology systems.
We rely on various information technology systems to manage our operations, which subject us to inherent costs and risks associated with maintaining, upgrading, replacing, and changing these systems, including impairment of our information technology, potential disruption of our internal control systems, substantial capital expenditures, demands on management time, cyber security breaches and other risks of delays or difficulties in upgrading, transitioning to new systems, or of integrating new systems into our current systems.
System security risk issues as well as other major system failures could disrupt our internal operations or information technology services, and any such disruption could negatively impact our net sales,revenues, increase our expenses, and harm our reputation.
Experienced computer programmers and hackers, and even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, enter into or facilitate fraudulent transactions, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of our network. In addition, we rely on third parties for the operation of our websites, and for the various social media tools and websites we use as part of our marketing strategy.
Consumers are increasingly concerned over the security of personal information transmitted over the internet, consumer identity theft, and user privacy, and any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or breaches. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation
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of our systems. The costs to us to eliminate or alleviate security problems, viruses, and bugs, or any problems associated with our newly transitioned systems or outsourced services could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions. In addition to taking the necessary precautions ourselves, we require that third-party service providers implement reasonable security measures to protect our customers’ identity and privacy as well as credit card information. We do not, however, control these third-party service providers and cannot guarantee that no electronic or physical computer break-ins and security breaches will occur in the future. We could also incur significant costs in complying with the multitude of state, federal, and foreign laws including the European Union’s general data protection regulations to be effective in May 2018, regarding the use and unauthorized disclosure of personal information, to the extent they are applicable. In the case of a disaster affecting our information technology systems, we may experience
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delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support our operations, and other breakdowns in normal communication and operating procedures that could materially and adversely affect our financial condition and results of operations.
We rely significantly on information technology systems and any failure, inadequacy, interruption, or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively and have a material adverse effect on our business, reputation, financial condition, and results of operations.
We rely significantly on our information technology systems to effectively manage and maintain our operations, and internal reports. Any failure, inadequacy, or interruption of that infrastructure or security lapse (whether intentional or inadvertent) of that technology, including cybersecurity incidents or attacks, could harm our ability to operate our business effectively. Our investment in ORME also leverages certain artificial intelligence (AI) technologies, which ORME’s technology partner licenses from several third parties including but not limited to Amazon and ChatGPT, and which technologies are nascent and rapidly evolving.
In addition, our technology systems, including our cloud technologies, continue to increase in multitude and complexity, making them potentially vulnerable to breakdown, cyberattack, and other disruptions. Potential problems and interruptions associated with the implementation of new or upgraded technology systems or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations and expose us to greater risk of security breaches. Cybersecurity incidents resulting in the failure of our enterprise resource planning system, production management, or other systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access or unavailability of these systems or those of any third parties on whom we depend, have occurred in the past and may affect our ability in the future to manage and maintain our operations, internal reports, and result in reduced efficiency of our operations.
As part of our business, we collect, store, and transmit large amounts of confidential information, proprietary data, intellectual property, and personal data. The information and data processed and stored in our technology systems, and those of our licensees, joint ventures, and other third parties on whom we depend to operate our business, may be vulnerable to loss, damage, denial-of-service, unauthorized access, or misappropriation. Data security incidents may be the result of unauthorized or unintended activity (or lack of activity) by our employees, contractors, or others with authorized access to our network or malware, hacking, business email compromise, phishing, ransomware, or other cyberattacks directed by third parties. While we have implemented measures to protect our information and data stored in our technology systems and those of the third parties that we rely on, our efforts may not be successful. In addition, employee error, malfeasance, or other errors in the storage, use, or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of our network.
We have experienced and may continue to experience cybersecurity incidents, including an unsuccessful ransomware attack in February 2024, although to our knowledge we have not experienced any material incident or interruption to date. If such a significant event were to occur, it could result in a material disruption of our business and commercial operations, including due to a loss, corruption, or unauthorized disclosure of our trade secrets, personal data, or other proprietary or sensitive information. Further, these cybersecurity incidents can lead to the public disclosure of personal information (including sensitive personal information) of our employees, customers, and others and result in demands for ransom or other forms of blackmail. Such attacks, including phishing attacks and attempts to misappropriate or compromise confidential or proprietary information or sabotage enterprise information technology systems, are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including industrial espionage) and expertise, including by organized criminal groups, “hacktivists,” nation states, and others. Moreover, the costs to us to investigate and mitigate cybersecurity incidents could be significant. Any security breach that results in the unauthorized access, use, or disclosure of personal data may require us to notify individuals, governmental authorities, credit reporting agencies, or other parties pursuant to privacy and security laws and regulations or other obligations. Such a security compromise could harm our reputation, erode confidence in our information security measures, and lead to regulatory scrutiny. To the extent that any disruption or security breach resulted in a loss of, or damage to, our data or systems, or inappropriate disclosure of confidential, proprietary, or personal information, we could be exposed to a risk of
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loss, enforcement measures, penalties, fines, indemnification claims, litigation and potential civil or criminal liability, which could materially adversely affect our business, financial condition and results of operations.
Not all our contracts contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
Further, the SEC has adopted new rules that require us to provide greater disclosures around proactive security protections that we employ and reactive issues (e.g., security incidents). Any such disclosures, including those under state data breach notification laws, can be costly, and the disclosures we make to comply with, or the failure to comply with, such requirements could lead to adverse consequences.
Changes in laws could make conducting our business more expensive or otherwise change the way we do business.
We are subject to numerous domestic and international regulations, including labor and employment, customs, truth-in-advertising, consumer protection, data protection, and zoning and occupancy laws and ordinances that regulate retailers generally or govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. If these regulations were to change or were violated by our management, employees, vendors, independent manufacturers or partners, the costs of certain goods could increase, or we could experience delays in shipments of our products, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.
In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of business more expensive or require us to change the way we do business. Laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, supervisory status, leaves of absence, mandated health benefits, overtime pay, unemployment tax rates and citizenship requirements, could negatively impact us, by increasing compensation and benefits costs, which would in turn reduce our profitability.
Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws and future actions or payments related to such changes could be material to us.
Risks Related to an Investment in Our Securities
If we fail to maintain an effective system of internal control, we may not be able to report our financial results accurately or in a timely fashion, and we may not be able to prevent fraud. In such case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form 10-K our assessment of the effectiveness of our internal control over financial reporting. We have dedicated a significant amount of time and resources to ensure compliancecomply with this legislation for the years ended December 31, 20202023 and 2019,2022, and will continue to do so for future fiscal periods. However, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2023 due to the material weakness. We cannot be certain that our internal controls will become effective or that future material changes to our internal control over financial reporting will be effective. If we cannot adequately obtain and maintain the effectiveness of our internal control over financial reporting, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock. Moreover, if we discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price.
Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until we are no longer a “smaller reporting company.” At such time that an attestation is required,
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our independent registered public accounting firm may issue a report that is adverse or qualified in the event that they are
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not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness or significant deficiency in the future.
Management exercises significant control over matters requiring shareholder approval, which may result in the delay or prevention of a change in our control.
Pursuant to a voting agreement, IM Ready-Made, LLC, Isaac Mizrahi, and Marisa Gardini agreed to appoint a person designated by our board of directors as their collective irrevocable proxy and attorney-in-fact with respect to the shares of the common stock received by them. The proxy holder will vote in favor of matters recommended or approved by the board of directors. The board of directors has designated Robert W. D’Loren as proxy. Also, pursuant to separate voting agreements, each of Judith Ripka and the H Company IP, LLC and certain other parties have agreed to appoint Mr. D’Loren as their respective irrevocable proxy and attorney-in-fact with respect to the shares of the common stock issued to them by us. The proxy holder shall vote in favor of matters recommended or approved by the board of directors.
The combined voting power of the common stock ownership of our officers, directors, and key employees is approximately 60% of our voting securities as of March 26, 2021. As a result, our management and key employees through such stock ownership will exercise significant influence over all matters requiring shareholder approval, including the election of our directors and approval of significant corporate transactions. This concentration of ownership in management and key employees may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by stockholders other than management. There is also a risk that our existing management and a limited number of stockholders may have interests which are different from certain stockholders and that they will pursue an agenda which is beneficial to themselves at the expense of other stockholders.
There are limitations on the liabilities of our directors and executive officers. Under certain circumstances, we are obligated to indemnify our directors and executive officers against liability and expenses incurred by them in their service to us.
Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. In addition, we have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us to indemnify each director and executive officer for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts, incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the person’s services as one of our directors or executive officers. The costs associated with providing indemnification under these agreements could be harmful to our business and have an adverse effect on results of operations.
Our common stock
Item 1B. Unresolved Staff Comments
Not applicable.
Item 1C.Cybersecurity
In the ordinary course of business, we receive, process, use, and store digitally large amounts of data, including customer data as well as confidential, sensitive, proprietary, and personal information. Maintaining the integrity and availability of our information technology systems and this information, as well as appropriate limitations on access and confidentiality of such information, is currently thinly traded,important to us and youour business operations. To this end, we have implemented a program designed to assess, identify, and manage risks from potential unauthorized occurrences on or through our information technology systems that may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
Although our common stock is listedresult in adverse effects on the NASDAQ Global Market,confidentiality, integrity, and availability of these systems and the data residing in them.
The program is managed by our common stock is currently traded at relatively low volumes. As a result,executive management team, and includes mechanisms, controls, technologies, systems, policies, and other processes designed to prevent or mitigate data loss, theft, misuse, or other security incidents or vulnerabilities affecting the number of persons interestedsystems and data residing in purchasing our common stock at or near bid prices at any given time may be relatively small. This situation is attributablethem. We consult with and rely upon outside advisors and experts to a number of factors, includingassist us with assessing, identifying, and managing cybersecurity risks.
We consider cybersecurity, along with other significant risks that we are currently a small company which is still relatively unknown to securities analysts, stock brokers, institutional investorsface, within our overall enterprise risk management framework. Our Board of Directors has oversight for the most significant risks facing us and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot provide any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
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The market price of our common stock has declined over the past three years and may be volatile, which could reduce the market price of our common stock.
Currently the publicly traded shares of our common stock are not widely held, and do not have significant trading volume, and, therefore, may experience significant price and volume fluctuations. Although our common stock is quotedDirectors receives periodic updates on the NASDAQ Global Market, this does not assure that a meaningful, consistent trading market will develop or that the volatility will decline. This market volatility could reduce the market price of the common stock, regardless of our operating performance. In addition, the trading price of the common stock has been volatile over the past few years and could change significantly over short periods of time in response to actual or anticipated variations in our quarterly operating results, announcements by us, our licensees or our respective competitors, factors affecting our licensees’ markets generally and/or changes in national or regional economic conditions, making it more difficult for shares of the common stock to be sold at a favorable price or at all. The market price of the common stock could also be reduced by general market price declines or market volatility in the future or future declines or volatility in the prices of stocks for companies in the trademark licensing business or companies in the industries in which our licensees compete.
Our common stock may be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which could make it more difficult for our stockholders to sell their securities.
Rule 3a51-1 of the Exchange Act establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions, including for having securities registered on certain national securities exchanges. If our common stock were delisted from the NASDAQ, market liquidity for our common stock could be severely and adversely affected.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the accountcybersecurity and information on the limited market in penny stocks.technology matters and related risk exposures from management.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock even if and when our common stock becomes listed on the NASDAQ Global Market. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock.
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Although our common stock closed at $2.25 per share on April 13, 2021, no assurance can be given that the per share price of our common stock will maintain such levels or that our stock will not be subject to these “penny stock” rules in the future.
Investors should be aware that, according to Commission Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include: (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the future volatility of our share price.
We may issue a substantial number of shares of common stock upon exercise of outstanding warrants and options and to satisfy obligations to the H Company IP, LLC (the “Halston Heritage Earn-Out”) if certain conditions, including royalty revenue targets, are met.
As of December 31, 2020, we had outstanding warrants and options to purchase 7,759,190 shares of our common stock. The holders of warrants and options will likely exercise such securities at a time when the market price of our common stock exceeds the exercise price. Therefore, exercises of warrants and options will result in a decrease in the net tangible book value per share of our common stock and such decrease could be material.
The issuance of shares to satisfy such obligations and upon exercise of outstanding warrants and options will dilute our then-existing stockholders’ percentage ownership of our company, and such dilution could be substantial. In addition, our growth strategy includes the acquisition of additional brands, and we may issue shares of our common stock as consideration for acquisitions. Sales or the potential for sale of a substantial number of such shares could adversely affect the market price of our common stock, particularly if our common stock remains thinly traded at such time.
As of December 31, 2020, we had an aggregate of 1,549,598 shares of common stock available for grants under our Amended and Restated 2011 Equity Incentive Plan (the "Plan") to our directors, executive officers, employees, and consultants. Issuances of common stock pursuant to the exercise of stock options or other stock grants or awards which may be granted under our Plan will dilute your interest in us.
We do not anticipate paying cash dividends on our common stock.
You should not rely on an investment in our common stock to provide dividend income, as we have not paid dividends on our common stock, and we do not plan to pay any dividends in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing licensing operations, further develop our trademarks, and finance the acquisition of additional trademarks. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. In addition, our credit facility with Bank Hapoalim B.M. limits the amount of cash dividends we may pay while amounts under the credit facility are outstanding.
Provisions of our corporate charter documents could delay or prevent change of control.
Our certificate of incorporation authorizes our board of directors to issue up to 1,000,000 shares of preferred stock without stockholder approval, in one or more series, and to fix the dividend rights, terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series of preferred stock. The designation of preferred stock in the future could make it difficult for third parties to gain control of our company, prevent or substantially delay a change in control, discourage bids for the common stock at a premium, or otherwise adversely affect the market price of the common stock.
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Holders of our common stock may be subject to restrictions on the use of Rule 144 by shell companies or former shell companies.
Historically, the SEC has taken the position that Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, is not available for the resale of securities initially issued by companies that are, or previously were, shell companies (we were considered a shell company on and prior to September 29, 2011), to their promoters or affiliates despite technical compliance with the requirements of Rule 144. The SEC prohibits the use of Rule 144 for resale of securities issued by shell companies (other than business transaction related shell companies) or issuers that have been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met: the issuer of the securities that was formerly a shell company has ceased to be a shell company; the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. As such, due to the fact that we had been a shell company prior to September 2011, holders of “restricted securities” within the meaning of Rule 144, when reselling their shares pursuant to Rule 144, shall be subject to the conditions set forth herein.
We currently lease and maintain our corporate offices and operations facility located at 1333 Broadway, 10th550 Seventh Avenue, 11th floor, New York, New York. We entered into a lease agreement on July 8, 2015effective February 29, 2024 for such offices of approximately 29,60012,000 square feet of office space. This lease commenced on March 1, 2016in April 2024 and shall expire seven years from the commencement date, in 2031.
We also currently lease approximately 29,600 square feet of office space at 1333 Broadway, 10th floor, New York, New York; this location represented our former corporate offices and operations facility and shall expire on October 30, 2027.
We also lease approximately 18,500 square feet of office space at 475 Tenth Avenue, 4th Floor, New York, New York. This location represents our former corporate offices and operations facility, which we relocated to our current location described above in June 2016. This lease shall expire on February 28, 2022. We are currently subleasinghave subleased this office space to a third-party subtenant through February 27, 2022.October 30, 2027.
We also lease approximately 1,300 square feet33
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, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NASDAQ GlobalCapital Market, under the trading symbol “XELB.”
The table below sets forth the range of quarterly high and low sales prices for our common stock in 2020 and 2019:
| | | | | | |
December 31, 2020 |
| High |
| Low | ||
First Quarter | | $ | 1.60 | | $ | 0.40 |
Second Quarter | | $ | 1.70 | | $ | 0.50 |
Third Quarter | | $ | 1.04 | | $ | 0.65 |
Fourth Quarter | | $ | 1.32 | | $ | 0.74 |
| | | | | | |
December 31, 2019 | |
|
| |
|
|
First Quarter | | $ | 1.80 | | $ | 1.18 |
Second Quarter | | $ | 1.70 | | $ | 1.19 |
Third Quarter | | $ | 3.50 | | $ | 1.52 |
Fourth Quarter | | $ | 1.82 | | $ | 1.33 |
Holders
As of December 31, 2020,2023, the number of our stockholders of record was 578556 (excluding beneficial owners and any shares held in street name or by nominees).
Dividends
We have never declared or paid any cash dividends on our common stock. In addition, our credit facility with Bank Hapoalim B.M. limits the amount of cash dividends we may pay while amounts under the credit facility are outstanding. Furthermore, weWe expect to retain future earnings to finance our operations and expansion. The payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon our earnings levels, capital requirements, any restrictive loan covenants, and other factors the board of directors considers relevant.
Securities authorized for issuance under equity compensation plans
20112021 Equity Incentive Plan
Our Amended and Restated 20112021 Equity Incentive Plan, which we refer to as the 2021 Plan, is designed and utilized to enable the Company to offer its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. The following is a description of the Plan, as amended.2021 Plan.
● | The 2021 Plan provides for the grant of stock options, |
● | A total of |
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● | The 2021 Plan may be administered by the Board of Directors (the “Board”) or a committee consisting of two or more members of the Board of Directors appointed by the Board (for purposes of this description, any such committee, a “Committee”). |
● | Officers and other employees of our Company or any parent or subsidiary of our Company who are at the time of the grant of an Award employed by us or any parent or subsidiary of our Company are eligible to be granted |
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options or other Awards under the 2021 Plan. In addition, non-qualified stock options and other Awards may be granted under the 2021 Plan to any person, including, but not limited to, directors, independent agents, consultants, and attorneys who the Board or the Committee, as the case may be, believes has contributed or will contribute to our success. |
● | With respect to incentive stock options granted to an eligible employee owning stock possessing more than 10% of the total combined voting power of all classes of our stock or the stock of a parent or subsidiary of our Company immediately before the grant (each, a “10% Stockholder”), such incentive stock option shall not be exercisable more than 5 years from the date of grant. |
● | The exercise price of |
● |
Restricted stock awards give the recipient the right to receive a specified number of shares of common stock, subject to such terms, conditions and restrictions as the Board or the Committee, as the case may be, deems appropriate. Restrictions may include limitations on the right to transfer the stock until the expiration of a specified period of time and forfeiture of the stock upon the occurrence of certain events such as the termination of employment prior to expiration of a specified period of time. |
● | Restricted stock unit awards will be settled in cash or shares of common stock, in an amount based on the fair market value of our common stock on the settlement date. The RSUs will be subject to forfeiture and restrictions on transferability as set forth in the 2021 Plan and the applicable award agreement and as may be otherwise determined by the Board or the Committee. There were no RSUs outstanding as of December 31, 2023. |
● | Certain Awards made under the Plan may be granted so that they qualify as “performance-based compensation” (as this term is used in Internal Revenue Code Section 162(m) and the regulations thereunder) and are exempt from the deduction limitation imposed by Code Section 162(m) (these Awards are referred to as “Performance-Based Awards”). Under Internal Revenue Code Section 162(m), our tax deduction may be limited to the extent total compensation paid to the chief executive officer, or any of the four most highly compensated executive officers (other than the chief executive officer) exceeds $1 million in any one tax year. In accordance with the 2017 Tax Cuts and Jobs Act, the tax deductibility for each of these executives will be limited to $1,000,000 of compensation annually, including any performance-based compensation. Among other criteria, Awards only qualify as performance-based awards if at the time of grant the compensation committee is comprised solely of two or more “outside directors” (as this term is used in Internal Revenue Code Section 162(m) and the regulations thereunder). In addition, we must obtain stockholder approval of material terms of performance goals for such “performance-based compensation.” |
● | All stock options and certain stock awards, performance awards, and stock units granted under the Plan, and the compensation attributable to such Awards, are intended to (i) qualify as performance-based awards or (ii) be otherwise exempt from the deduction limitation imposed by Internal Revenue Code Section 162(m). |
● |
● | No Awards may be granted on or after the tenth anniversary of the effective date of the 2021 Plan. |
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2011 Equity Incentive Plan
The key terms and provisions of our Amended and Restated 2011 Equity Incentive Plan, which we refer to as the 2011 Plan, were substantially similar to the 2021 Plan described above, with the major difference being the number of shares of common stock reserved for issuance under the 2011 Plan. Stock-based awards (including options, warrants, and restricted stock) previously granted under 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.
Issuances
From time to time, the Company issues stock-based compensation to its officers, directors, employees, and consultants.consultants through its equity compensation plans. The maximum term of options granted is generally 10five years and generally options vest over a period of six months to fourtwo years. However, the Board may approve other vesting schedules. Options may be exercised in whole or in part. The exercise price of stock options granted is generally the fair market value of the Company’s common stock as determined by the Board on the date of grant, considering factors such as the sale of stock, results of operations, and consideration of the fair value of comparable private companies in the industry.grant.
The fair value of each stock option award is estimated using the Black-Scholes option pricing model based on certain assumptions. The assumption for expected term is based on evaluations of expected future employee exercise behavior. Because of a lack of historical information related to exercise activity, we use the simplified method to determine the expected term. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The historical volatility of comparable companies’our common stock is used as the basis for the volatility assumption. The Company has never paid cash dividends, and does not currently intend to pay cash dividends, and thus assumes a 0% dividend yield.
The following table sets forth information as of December 31, 20202023 regarding compensation plans under which our equity securities are authorized for issuance:
| | | | | | | |
| | | | | | | Number of Securities |
| | Number of Securities | | | | | Remaining Available for |
| | to be Issued Upon | | Weighted Average | | Future Issuance Under | |
| | Exercise of | | Exercise Price of | | Equity Compensation Plans | |
| | Outstanding Options, | | Outstanding Options, | | (Excluding Securities | |
| | Warrants and Rights | | Warrants and Rights | | Reflected in Column (a)) | |
Plan Category |
| (a) |
| (b) |
| (c) | |
Equity compensation Plans (1) | | 5,264,605 | | $ | 2.05 | | 3,103,941 |
| | | | | | | |
| | | | | | | Number of Securities |
| | Number of Securities | | | | | Remaining Available for |
| | to be Issued Upon | | Weighted Average | | Future Issuance Under | |
| | Exercise of | | Exercise Price of | | Equity Compensation Plans | |
| | Outstanding Options, | | Outstanding Options, | | (Excluding Securities | |
| | Warrants and Rights | | Warrants and Rights | | Reflected in Column (a)) | |
Plan Category |
| (a) |
| (b) |
| (c) | |
Equity compensation Plans (1) | | 7,759,190 | | $ | 3.25 | | 1,549,598 |
(1) Pursuant to our 2011 and 2021 Equity Incentive Plan.Plans.
Recent Sales of Unregistered Securities
There were no sales of unregistered or registered securities during the years ended December 202031, 2023 and 2019.2022.
Purchases of equity securities by the issuer and affiliated purchasers
The following table provides information with respect toWe did not repurchase any shares of common stock repurchased by us during the yearsfourth fiscal quarter ended December 31, 2020 and 2019:2023.
| | | | | | | |
|
| |
| | |
| Total Number of Shares |
| | | | | | | of Common Stock |
| | Total Number of | | | | | Purchased as |
| | Shares of | | Average | | Part of a Publicly | |
| | Common Stock | | Price per | | Announced | |
Period | | Purchased | | Share | | Plan or Program | |
March 1, 2020 to March 31, 2020 (i) |
| 155,556 | | $ | 0.65 |
| — |
May 1, 2020 to May 31, 2020 (i) |
| 87,249 | |
| 0.98 |
| — |
December 1, 2020 to December 31, 2020 (i) |
| 2,478 | |
| 1.14 |
| — |
Total year ended December 31, 2020 |
| 245,283 | | $ | 0.77 |
| — |
| | | | | | | |
September 1, 2019 to September 30, 2019 (i) |
| 18,147 | | $ | 1.34 |
| — |
October 1, 2019 to October 31, 2019 (i) |
| 29,189 | |
| 1.75 |
| — |
November 1, 2019 to November 30, 2019 (i) |
| 57,980 | |
| 1.45 |
| — |
December 1, 2019 to December 31, 2019 (i) |
| 9,846 | |
| 1.45 |
| — |
Total year ended December 31, 2019 |
| 115,162 | | $ | 1.51 |
| — |
Item 6.[Reserved]
Smaller reporting companies are not required to provide the information required by this Item 6.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read together with our consolidated financial statements and the notes thereto, included in Item 8 of this Annual Report on Form 10-K. This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity and cash flows for the years ended December 31, 20202023 and 2019.2022. Except for historical information, the matters discussed in this Management’s Discussion
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and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning factors that are beyond our control.
Overview
Xcel Brands is a media and consumer products company engaged in the design, production,licensing, marketing, wholesalelive streaming, and direct-to-consumersocial commerce sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands. The Company’s brands have generated over $3 billion in retail sales via live streaming in interactive television and digital channels alone.
Xcel was founded in 2011 with a vision to reimagine shopping, entertainment, and social media as one thing. Xcel ownssocial commerce. Currently, Xcel’s brand portfolio consists of the LOGO by Lori Goldstein Brand, the Halston Brand, the Ripka Brand, the C Wonder Brand, the Longaberger Brand, the CB Brand, the Isaac Mizrahi Halston, Judith Ripka, C Wonder,Brand, and Longabergerother proprietary brands, pioneeringincluding:
● | the Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand, which are wholly owned by the Company; |
● | the Longaberger Brand, which we manage through our 50% ownership interest in Longaberger Licensing, LLC, and the CB Brand, which is a co-owned brand between Xcel and Christie Brinkley; and |
● | the Isaac Mizrahi Brand, which we wholly owned and managed 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. |
We also own a ubiquitous30% interest in ORME Live Inc. (“ORME”), a short-form video and social commerce marketplace that launched in the first quarter of 2024.
Xcel continues to pioneer a true omni-channel and social commerce sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, social commerce, traditional brick-and-mortar retail,wholesaleretailers, and e-commerce channels.channels, to be everywhere its customers shop. Our brands have generated over $5 billion in retail sales via live streaming in interactive television and digital channels alone, and our brands collectively reach over 5 million social media followers through Facebook, Instagram, and TikTok. All of the followers may not be unique followers, as many followers may follow multiple brands and follow our brands on multiple platforms.
Our objective is to build a diversified portfolio of lifestyle consumer products brands through organic growth and the strategic acquisition of new brands. To grow our brands, we are focused on the following primary strategies:
● |
● |
● |
● | licensing our brands to manufacturers and retailers for promotion and distribution through e-commerce, social commerce, and traditional brick-and-mortar retail |
● |
acquiring additional consumer brands and integrating them into our operating platform, and leveraging our operating infrastructure and distribution relationships. |
We believe that we offerXcel 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; |
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● | our deep knowledge, expertise, and |
● | our design, |
● | our |
Our vision is intendedBusiness Model and Operations Restructuring
In the first quarter of 2023, we began to reimagine shopping, entertainment,restructure and social media as one thing. By leveraging live streaming, digital, and social media content across all distribution channels, we seektransition our business operations from a more capital-intensive wholesale/licensing hybrid model to drive consumer engagement and generate retail sales across our brands. Our strong relationshipsa capital-light “licensing plus” model, by entering into new licensing agreements with leading retailers,best-in-class business partners. We entered into a new interactive television companies,licensing agreement with America’s Collectibles Network, Inc. d/b/a JTV (“JTV”) for the Ripka Brand, and streaming networks enablea 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 production operations related to that brand to One Jeanswear Group, LLC (“OJG”); this new license with OJG also includes other new celebrity brands that we plan to launch in 2024 and beyond.
In the second quarter of 2023, we entered into a new master license agreement with G-III Apparel Group, an industry-leading wholesale apparel company, for the Halston Brand, covering men’s, women’s, and children’s apparel and accessories, and other product categories, for distribution through department stores, e-commerce, and other retailers. This 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.
In the third quarter of 2023, we entered into various settlements and incurred approximately $1 million of expenses to restructure certain contractual arrangements related to our former wholesale operations.
In the fourth quarter of 2023, we entered into a new term loan agreement, which provided us with approximately $5 million of additional liquidity. Additionally, Longaberger Licensing, LLC outsourced the operations of the Longaberger Brand through a license agreement with a third party to operate and manage the Longaberger e-commerce website ’s e-commerce business to a third party.
Overall, we believe that this evolution of our operating model will provide significant cost savings and allow us to reach consumersreduce and better manage our exposure to operating risks. As of December 31, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses (excluding non-recurring charges related to the restructuring) by approximately $9 million, on an annualized basis when compared to the corresponding periods in over 380 million homes worldwide and hundreds of millions of social media followers.the prior year.
We believe our design, production, and supply chain platform provides significant competitive advantages compared with traditional wholesale consumer products companies that design, manufacture, and distribute products. We focus on our core competencies of live streaming, marking, design, integrated technologies, production and supply chain platform, and brand development. We believe that we offer a 360-degree solution to our retail partners that addresses many of the challenges facing the retail industry today. We believe our platform is highly scalable. Additionally, we believe we can acquire additional brands into our platform in order to leverage our operating infrastructure, marketing capabilities, and distribution network.
Summary of Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that are the most important to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective, and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. While our significant accounting policies and estimates are described in more detail in the notes to our consolidated financial statements, our most critical accounting policies and estimates, discussed below, pertain to revenue recognition, trademarks and other intangible assets, stock-based compensation, fair valueincome taxes, and equity method investments. These include but are not limited to the estimation of contingent obligations,the useful lives of our trademarks, the estimation of the future cash flows related to our trademarks, and income taxes.the estimation of our incremental borrowing rate (for purposes of accounting for leases). In applying such policies, we must use some amounts that are based upon our informed judgments and best estimates.
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Estimates, by their nature, are based upon judgments and available information. The estimates that we make are based upon historical factors, current circumstances, and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis.
Revenue Recognition
Licensing
In connection with our licensing“licensing plus” business model, we follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606-10-55-65, by which we recognize licensing revenue at the later of when (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied (in whole or in part). More specifically, we separately identify:
(i) Contracts for which, based on experience, royalties are expected to exceed any applicable minimum guaranteed payments, and to which an output-based measure of progress based on the “right to invoice” practical expedient is applied because the royalties due for each period correlate directly with the value to the customer of our performance in each period (this approach is identified as “View A” by the FASB Revenue Recognition Transition Resource Group, “TRG”); and
(ii) Contracts for which revenue is recognized based on minimum guaranteed payments using an appropriate measure of progress, in which minimum guaranteed payments are straight-lined over the term of the contract and recognized ratably based on the passage of time, and to which the royalty recognition constraint to the sales-based
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royalties in excess of minimum guaranteed is applied and such sales-based royalties are recognized to the distinct period only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG).
Wholesale Sales
We generatePrior to the restructuring of our business model and operations in 2023, we generated a portion of our revenue through sale of branded jewelry and apparel to both domestic and international customers who, in turn, sellsold the products to their consumers. We recognizerecognized revenue from such transactions within net sales in the accompanying consolidated statements of operations when performance obligations identified under the terms of contracts with our customers arewere satisfied, which occursoccurred upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale. Shipping to customers was accounted for as a fulfillment activity and was recorded within other selling, general and administrative expenses.
Direct to ConsumerDirect-to-Consumer Sales
Our revenue associated with our e-commerce jewelry operations and the Longaberger brand is(prior to the restructuring of our business model and operations in 2023) was recognized within net sales in the accompanying consolidated statements of operations at athe point in time when product is shipped to the customer. Shipping to customers was accounted for as a fulfillment activity and was recorded within other selling, general and administrative expenses.
Trademarks and Other Intangible Assets
We follow ASC Topic 350, “Intangibles - Goodwill and Other.” Under this standard, goodwill and indefinite-lived intangible assets are not amortized, but are required to be assessed for impairment at least annually. Our finite-lived intangible assets (primarily trademarks, along with other intangible assets) are amortized over their estimated useful lives.
We performlives, which are estimated based principally on our annual quantitative analysis of indefinite-lived intangibleexpected use and strategic plans for each asset, our own historical experience with similar assets, as of December 31 each year. As a result of performingand our annual impairment testing of indefinite-lived intangible assets for the year ended December 31, 2019, we recorded a $6.2 million impairment chargeexpectations related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesaledemand, competition, and direct-to-consumer model.other economic factors.
Effective January 1, 2020, we determined that the Ripka Brand, inclusive of all its trademarks, has a finite life of 15 years, and began to amortize these trademarks on a straight-line basis accordingly. During the year ended December 31, 2020, delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the Ripka Brand, primarily as a result of the novel coronavirus disease pandemic, indicated that the carrying value of the Ripka Brand trademarks may not be recoverable. Therefore, we performed an impairment test ofOur finite-lived intangible assets and as a result, recorded a $13.0 million impairment charge related to the Ripka Brand trademarks.
No other impairment charges were recorded for intangible assets for the years ended December 31, 2020 and 2019.
Indefinite-Lived Intangibles
The Company tests its indefinite-lived intangible assets for recovery in accordance with ASC 820-10-55-3F, which states that the income approach (“Income Approach”) converts future amounts (for example, cash flows) into a single current (that is, discounted) amount. When the Income Approach is used, fair value measurement reflects current market expectations about those future amounts. The Income Approach is based on the present value of future earnings expected to be generated by a business or asset. Income projections for a future period are discounted at a rate commensurate with the degree of risk associated with future proceeds. A residual or terminal value is also added to the present value of the income to quantify the value of the business beyond the projection period. As such, recoverability of such assets is measured by a comparison of the carrying amount of the asset to its expected future discounted net cash flows. If the carrying amount of such assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the recoverability of the assets.
Finite-Lived Intangibles
The Company’s finite-lived intangible assets, including Trademarks, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment loss is recognized if the carrying amount of a finite-lived intangible asset is not recoverable and its carrying amount exceeds its fair value.
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With reference toTo test our finite-lived intangible assets’assets for impairment, process, the Company groupswe group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of undiscounted future cash flows. If the undiscounted cash flows
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do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flows analysis or appraisals.
Leases
We determine if an arrangement is a lease at inception. At commencement of a lease, we recognize an operating lease right-of-use (“ROU”) asset, representingThere were no impairment charges recorded for our right to use the underlying leased assetintangible assets for the lease term,years ended December 31, 2023 and a lease liability, representing our obligation to make future lease payments, based on the present value of the remaining lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We may use the implicit rate when readily determinable. Operating lease ROU assets also include scheduled lease payments made and initial direct costs, and exclude lease incentives and accrued rent. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments related to office leases is generally recognized on a straight-line basis over the lease term. Lease expense for operating lease payments related to retail leases is generally recognized on a straight-line basis over the period of operation, as this is representative of the pattern in which benefit is derived from the lease.
For real estate leases, we account for the lease and non-lease components as a single lease component. Variable lease payments that do not depend on an index or rate (such as real estate taxes and building insurance and lessee’s shares thereof), if any, are excluded from lease payments at lease commencement date for initial measurement. Subsequent to initial measurement, these variable payments are recognized when the event determining the amount of variable consideration to be paid occurs.
For leases with a term of 12 months or less, we do not recognize lease liabilities and ROU assets, but recognize the lease payments in net income on a straight-line basis over the respective lease terms.
We recognize income from subleases (in which we are the sublessor) on a straight-line basis over the term of the sublease, as a reduction to lease expense.2022.
Income Taxes
Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the temporary difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. ASC Topic 740, “AccountingWe consider forecasted earnings, future taxable income, and prudent and feasible tax planning strategies in determined the need for Income Taxes” clarifies the accounting for uncertaintythese valuation allowances.
With respect to any uncertainties in income taxes recognized in an enterprise’sour financial statements. Taxstatements, tax positions shallare initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions shallare initially and subsequently be measured as the largest amount of tax benefit that has a probability of fifty percent or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 20172020 through December 31, 2020.2023.
Equity Method Investments
We account for our investments in entities over which we have the ability to exercise significant influence, but do not control, under the equity method of accounting, and we recognize our proportionate share of income or losses from the entity within other operating costs and expenses (income) in the consolidated statement of operations.
We initially measure our investment in an equity method investee at cost. In cases where we retain a noncontrolling interest in an investee which we had previously consolidated, we initially measure such retained interest at fair value. In estimating fair value in such cases, we seek to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).
Subsequent recognition of an investor’s proportionate share of income or losses of an equity method investee is generally determined based on the investor’s proportional ownership interest. However, in cases where contractual agreements specify allocation ratios for profits and losses, specified costs and expenses, and/or distributions of cash from operations, that differ from our ownership interest, we use such specified allocation ratios for purposes of determining our share of income or losses from the investee if the agreement is considered substantive.
Recently IssuedAdopted Accounting Pronouncements
In December 2019,We adopted the FASB issuedprovisions of Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes certain exceptions to the general principles in Topic 740, including, but not limited to, intraperiod tax allocations and interim period tax calculations. The ASU also provides additional clarification and guidance related to recognition of franchise taxes and changes in tax laws. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15,
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2020, with early adoption permitted. The adoption of this new guidance in 2021 will not have any significant impact on our results of operations, cash flows, and financial condition.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which was subsequentlyInstruments" (as amended by ASU No. 2018-19 in November 2018, through ASU No. 2018-19.2019-05 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 will requirerequires entities to estimate lifetime expected credit losses for financial instruments, including trade and other receivables, which will resultgenerally results in earlier recognition of credit losses. In November 2019, the FASB issued ASU No. 2019-10, which, among other things, deferred the application of the new guidance on credit losses for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the new guidance to determine the impact the adoption of this guidance will have on our results of operations, cash flows, and financial condition.
Recently Adopted Accounting Pronouncements
We adopted ASU No. 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” effective January 1, 2020. This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance did not have anya significant impact on our results of operations, cash flows, andor financial condition.
We adopted ASU No. 2016-02, “Leases,” effective January 1, 2019, by applying the new guidance under the additional and alternative transition method allowed by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” As
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Summary of Operating Results
The consolidated financial statements and related notes included elsewhere in this Form 10-K are as of or for the yearyears ended December 31, 20202023 (the “Current Year”), and the year ended December 31, 20192022 (the “Prior Year”).
Revenues
Current Year net revenue decreased approximately $12.3$8.0 million to $29.4$17.8 million from $41.7$25.8 million for the Prior Year.
Net licensing revenue decreased by $6.2approximately $5.5 million in the Current Year to approximately $20.2$9.2 million, compared with $26.4approximately $14.7 million in the Prior Year. This declinedecrease in licensing revenue was primarily driven by a combination of (i) lower customer sales by our licensees as a result of government-ordered retail store closures as well as an overall slowdown in economic activity relatedattributable to the COVID-19 pandemic, (ii)May 31, 2022 sale of a $3.0 million reductionmajority interest in guaranteed minimum revenues from onethe Isaac Mizrahi brand through the sale of our existinga 70% interest in IM Topco, LLC to WHP, partially offset by increased licensing arrangements upon renewal effective January 1, 2020, and (iii) a $1.7 million reduction in revenues from another one of our existing licensing arrangements changing from guaranteed minimum amounts to sales-based royalties effective April 1, 2019.revenue generated by the C Wonder brand through interactive television.
Net product sales decreased by approximately $6.1$2.5 million in the Current Year to $9.2approximately $8.6 million, compared with approximately $15.3$11.1 million in the Prior Year. The declineThis decrease in net product sales was primarily driven by lower sales as a result of government-ordered retail store closures as well as an overall slowdown in economic activity relatedattributable to the COVID-19 pandemic followingexit from our wholesale apparel and fine jewelry sales operations in the outbreakCurrent Year as part of the pandemic, partially offset by volume growth inrestructuring and transformation of our apparel wholesale business in the first quarter of 2020.operating model.
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Cost of Goods Sold and Gross Profit
Current Year cost of goods sold was $5.5$6.9 million, compared with $10.3$8.0 million for the Prior Year. This decrease was due
Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) decreased from approximately 28% in the Prior Year to lower overall volume of wholesale and e-commerce salesapproximately 20% in the Current Year. This decrease in gross profit margin percentage was the result of selling our remaining jewelry inventory at an agreed-upon price which was less than historical margins and the sale of our remaining apparel inventory at discounted prices.
Gross profit (net revenue less cost of goods sold) decreased approximately $7.4$7.0 million to $24.1$10.8 million from $31.5$17.8 million in the Prior Year, primarily driven by the aforementioned declinedecrease in net licensing revenue.
Gross profit margin from product sales increased from 33% in the Prior Year to 41% in the Current Year as a result of achieving greater efficiencies in our wholesale business operations. Total gross profit margin was 75% in the Prior Year and 81% in the Current Year; this increase was the result of the aforementioned increase in gross profit margins for product sales as well as the proportional shift of revenue mix towards licensing revenues in the Current Year.
Direct Operating Costs and Expenses
OperatingDirect operating costs and expenses increaseddecreased approximately $3.5$9.8 million from $36.9$33.1 million in the Prior Year to $40.4$23.3 million in the Current Year.
This increasedecrease was primarily dueattributable to lower salaries, benefits and employment costs, driven by the combination of (i) the May 31, 2022 sale of a $13.0majority 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 operating model. These decreases were partially offset by $0.8 million non-cashin 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 recordedrelated to certain capitalized software assets.
Other Operating Costs and Expenses (Income)
Depreciation and amortization expense was approximately $7.0 million and $7.3 million in the Current Year and Prior Year, respectively.
In the Prior Year, 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 Ripka Brand trademarks, driven by delaystransaction and uncertainty in implementing the brick-and-mortar retail store strategy for a portionderecognition of the brand primarily as a resulttrademarks previously recorded on our balance sheet of the COVID-19 pandemic, compared with a similar $6.2 million non-cash impairment charge recorded$44.5 million.
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We account for our interest in the Prior Yearongoing operations of IM Topco, LLC using the equity method of accounting. We recognized an equity method loss related to the Ripka Brand trademarks, which was driven by the timingour investment of the transition from a licensing model to a wholesale$2.1 million and direct-to-consumer model. Also contributing to the increase was a $1.6$1.2 million increase in depreciation and amortization expense, primarily due to the change in estimated life for the Judith Ripka trademarks as of January 1, 2020, and $1.0 million of bad debt expense recognized in the Current Year related toand Prior Year, respectively, based on the bankruptcy of several retail customers due to the COVID-19 pandemic.
These increases in operating costs and expenses were partially offset by various cost reduction actions taken by management during the Current Year in response to the COVID-19 pandemic, including temporary reductions of employee compensation from April to December of 2020 and cutting non-essential costs, as well as government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $1.8 million as a reduction to Current Year operating costs and expenses. Additionally, there were $1.3 million of costs incurreddistribution provisions set forth in the Prior Year in connection with a potential acquisition, which ultimately was not consummated; approximately $0.2 million of these costs were recovered or reimbursed in the Current Year.related business venture agreement.
Other Income
DuringAlso during the Current Year, we recognized a $0.05gain of $0.36 million net gain onrelated to the sale of certain assetsa 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 Longaberger brand.landlord of our former retail store location.
DuringIn the Prior Year, we recognized a $2.85$0.9 million gain on the reduction of contingent obligations related to the 2015 acquisitionobligations. In connection with our 2019 purchase of the C Wonder Brand. As part of that acquisition,Halston Heritage trademarks, we agreed to pay the seller was eligible to earn additional consideration if certain royalty targets were met from 2019 through December 31, 2022. This potential earn-out was initially recorded as a liability of $0.9 million, based on future royalties related to the C Wonder Brand exceeding certain thresholds,difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage trademarks and we recorded a liability for the potential future payment of such consideration.total consideration paid. The final earn-out periodroyalty target year ended on June 30, 2019,December 31, 2022, and the seller ultimately did not earn any additional consideration underbased on the terms offormula set forth in the related asset purchase agreement.
Interest and Finance Expense
Interest and finance expense for the Current Year was $1.2$0.4 million, compared with $1.5$3.5 million for the Prior Year. This decrease is primarily attributable to the fact that
In the Prior Year, includeswe incurred $1.2 million of interest expense related to term loan debt, reflecting an effective interest rate of approximately 9.8% on an average principal balance of $28.7 million from January 1, 2022 through May 31, 2022. We repaid all of such term loan debt on May 31, 2022 and recognized a $0.2 million loss on early extinguishment of debt as a resultof $2.3 million in the Prior Year.
In contrast, during the Current Year we did not have any outstanding debt for most of the February 11, 2019year. In October 2023, we entered into a new term loan amendment, with no such comparable extinguishment loss inagreement for a borrowing of $5.0 million at a floating interest rate, incurring total interest expense of only $0.4 million during the currentCurrent Year. The remainder of the decrease is largely due to a lower outstanding principal balance on our term loan resulting from regular debt service payments.
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Income Tax Provision (Benefit) Provision
The effective income tax rate for the Current Year was approximately 25.9%-6%, resulting in a $4.5$1.2 million income tax provision. During the Current Year, the federal statutory rate differed from the effective tax rate primarily 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.
The effective income tax rate for the Prior Year was approximately 10%, resulting in a $0.4 million income tax benefit. During the CurrentPrior Year, the effective tax rate was impacted byprimarily attributable to the vestingimpacts of restricted shares of common stock. The excess tax deficiencies were treated as a discrete item in the determination of the tax provision as required by ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” decreasingstock-based compensation, which decreased the effective rate by approximately 1.9%6%, and federal tax true-ups, which decreased the effective tax rate by approximately 5%. The effective tax rate was also impacted by recurring permanent differences, which, based ondifferences; the amount of income before income taxes compared to the permanent differences, increased the effective rate in 2020 by approximately 4.0%. The largest such recurring permanent differences were state and local tax provisions, which increased the effective rate in 20202022 by approximately 4.5%6%, and disallowed excess compensation, which decreased the effective rate in 20202022 by approximately 0.5%. Also impacting the effective rate for 2020 was the addback impact of the Paycheck Protection Program, which increased the effective rate by approximately 2.2%.
The effective income tax rate for the Prior Year was approximately 15.8% resulting in a $0.6 million income tax benefit. During the Prior Year, the effective tax rate was impacted by the vesting of restricted shares of common stock. The excess tax deficiencies were treated as a discrete item in the determination of the tax provision as required by ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” decreasing the effective rate by approximately 7.0%. The effective tax rate was also impacted by recurring permanent differences, which, based on the amount of income before income taxes compared to the permanent differences, increased the effective rate in 2019 by approximately 1.8%. The largest such recurring permanent differences were state and local tax provisions, which increased the effective rate in 2019 by approximately 7.4%, and was largely offset by the effect of disallowed excess compensation, which decreased the effective rate in 2019 by approximately 5.1%5%.
Net Loss
We had a net loss of approximately $13.1$21.1 million for the Current Year, compared with a net loss of approximately $3.4$4.0 million for the Prior Year, as a result of the factors discussed above.
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Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
We had a non-GAAP net incomeloss of $1.8$12.2 million or $0.10$(0.62) per share (“non-GAAP diluted EPS”) based on 19,152,56919,711,637 weighted average shares outstanding for the Current Year, compared with a non-GAAP net incomeloss of $4.8$15.0 million or $0.25$(0.77) per share based on 18,858,37919,624,669 weighted average shares outstanding for the Prior Year. Non-GAAP net income is a non-GAAP unaudited term, which we define as net income (loss) attributable to Xcel Brands, Inc. stockholders, exclusive of asset impairments, amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation non-cash interest and finance expense from discounted debt related to acquired assets,cost of licensee warrants, loss on extinguishment of debt, gaincertain adjustments to the provision for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers, gains on sales of assets and investments, gain on lease termination, gain on reduction of contingent obligations, costs (recoveries) in connection with potential acquisitions, certain adjustments to allowances for doubtful accounts related to debtors that have filed for bankruptcy protection triggered by the impact of COVID-19, asset impairments,obligation, and deferred 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 $4.1approximately $(5.7) million for the Current Year, compared with Adjusted EBITDA of approximately $7.1$(12.5) million for the Prior Year. Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net income (loss) attributable to Xcel Brands, Inc. stockholders before asset impairments, 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, certain adjustments to the provision for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers, gains on sales of assets and investments, gain on lease termination, gain on reduction of contingent obligations, gain on saleobligation, and costs associated with restructuring of assets, costs (recoveries) in connectionoperations. Costs associated with potential acquisitions, asset impairments, andrestructuring of operations include the current year operating losses generated by certain adjustments to allowances for doubtful accounts related to debtorsof our businesses that have filed for bankruptcy protection triggered bybeen restructured or discontinued (i.e., wholesale apparel and fine jewelry), as well as non-cash charges associated with the impactrestructuring of COVID-19.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
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supplemental information to assist investors in evaluating the Company’s financial results. The Company has incurred certain costs which it could have eliminated but elected not to do so in light of government assistance received through the Paycheck Protection Program under the CARES Act (the “PPP Benefit”), which represents a cash benefit directly related to the Company’s operating expenses incurred. Accordingly, the PPP Benefit is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA. Adjusted EBITDA is the measure used to calculate compliance with the EBITDA covenant under our term loan agreement with BHI.
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 these measures in a different manner than we do.
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 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.
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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 non-GAAP net income:loss:
| | | | | | |
|
| Year Ended December 31, | ||||
($ in thousands) |
| 2020 |
| 2019 | ||
Net loss attributable to Xcel Brands, Inc. stockholders | | $ | (12,936) | | $ | (3,426) |
Intangible asset impairments | | | 13,000 | | | 6,200 |
Amortization of trademarks | |
| 4,432 | |
| 3,105 |
Non-cash interest and finance expense | |
| — | |
| 16 |
Stock-based compensation | |
| 850 | |
| 976 |
Loss on extinguishment of debt | | | — | | | 189 |
(Recovery of) costs in connection with potential acquisition | | | (158) | | | 1,290 |
Certain adjustments to allowances for doubtful accounts | | | 971 | | | — |
Property and equipment impairment | | | 113 | | | — |
Gain on sale of assets | | | (46) | | | — |
Gain on reduction of contingent obligation | | | — | | | (2,850) |
Deferred income tax benefit | |
| (4,382) | |
| (705) |
Non-GAAP net income | | $ | 1,844 | | $ | 4,795 |
| | | | | | |
|
| Year Ended December 31, | ||||
($ in thousands) |
| 2023 |
| 2022 | ||
Net loss attributable to Xcel Brands, Inc. stockholders | | $ | (21,052) | | $ | (4,018) |
Asset impairments | | | 100 | | | 274 |
Amortization of trademarks | |
| 6,085 | |
| 6,079 |
Proportional share of trademark amortization of equity method investee | | | 2,060 | | | 1,202 |
Stock-based compensation and cost of licensee warrants | |
| 242 | |
| 620 |
Loss on early extinguishment of debt | | | — | | | 2,324 |
Certain adjustments to provision for doubtful accounts | | | — | | | 413 |
Gains on sales of assets and investments | | | (359) | | | (20,586) |
Gain on lease termination | | | (445) | | | — |
Gain on reduction of contingent obligation | | | — | | | (900) |
Income tax provision (benefit) | |
| 1,212 | |
| (431) |
Non-GAAP net loss | | $ | (12,157) | | $ | (15,023) |
The following table is a reconciliation of diluted loss per share to non-GAAP diluted EPS:
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2023 |
| 2022 | ||
Diluted net loss attributable to Xcel Brands, Inc. stockholders | | $ | (1.07) | | $ | (0.20) |
Asset impairments | | | 0.01 | | | 0.01 |
Amortization of trademarks | |
| 0.31 | |
| 0.31 |
Proportional share of trademark amortization of equity method investee | | | 0.10 | | | 0.06 |
Stock-based compensation and cost of licensee warrants | |
| 0.01 | |
| 0.03 |
Loss on early extinguishment of debt | | | — | | | 0.12 |
Certain adjustments to provision for doubtful accounts | | | — | | | 0.02 |
Gains on sales of assets and investments | | | (0.02) | | | (1.05) |
Gain on lease termination | | | (0.02) | | | — |
Gain on reduction of contingent obligation | | | — | | | (0.05) |
Income tax provision (benefit) | |
| 0.06 | |
| (0.02) |
Non-GAAP diluted EPS | | $ | (0.62) | | $ | (0.77) |
Diluted weighted average shares outstanding | |
| 19,711,637 | |
| 19,624,669 |
4144
The following table is a reconciliation of diluted (loss) earnings per sharenet loss attributable to non-GAAP diluted EPS:
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2020 |
| 2019 | ||
Diluted loss per share attributable to Xcel Brands, Inc. stockholders | | $ | (0.68) | | $ | (0.18) |
Intangible asset impairments | | | 0.68 | | | 0.33 |
Amortization of trademarks | |
| 0.23 | |
| 0.16 |
Non-cash interest and finance expense | |
| — | |
| 0.00 |
Stock-based compensation | |
| 0.04 | |
| 0.05 |
Loss on extinguishment of debt | | | — | | | 0.01 |
(Recovery of) costs in connection with potential acquisitions | | | (0.01) | | | 0.07 |
Certain adjustments to allowances for doubtful accounts | | | 0.05 | | | — |
Property and equipment impairment | | | 0.01 | | | — |
Gain on sale of assets | | | 0.00 | | | — |
Gain on reduction of contingent obligation | | | — | | | (0.15) |
Deferred income tax (benefit) provision | |
| (0.22) | |
| (0.04) |
Non-GAAP diluted EPS | | $ | 0.10 | | $ | 0.25 |
Diluted weighted average shares outstanding | |
| 19,152,569 | |
| 18,858,379 |
The following table is a reconciliation of basic weighted average shares outstanding to non-GAAP diluted weighted average shares outstanding:
| | | | |
| | Year Ended December 31, | ||
|
| 2020 |
| 2019 |
Basic weighted average shares | | 19,117,460 | | 18,857,657 |
Effect of exercising warrants | | 490 | | 722 |
Effect of exercising stock options | | 34,619 | | — |
Non-GAAP diluted weighted average shares outstanding | | 19,152,569 | | 18,858,379 |
The following table is a reconciliation of net lossXcel Brands, Inc. stockholders (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | | ||||||||
($ in thousands) |
| 2020 |
| 2019 | |
| 2023 |
| 2022 | | ||||
Net loss attributable to Xcel Brands, Inc. stockholders | | $ | (12,936) | | $ | (3,426) | | | $ | (21,052) | | $ | (4,018) | |
Intangible asset impairments | |
| 13,000 | |
| 6,200 | | |||||||
Asset impairments | |
| 100 | |
| 274 | | |||||||
Depreciation and amortization | |
| 5,497 | |
| 3,902 | | |
| 6,954 | |
| 7,263 | |
Proportional share of trademark amortization of equity method investee | | | 2,060 | | | 1,202 | | |||||||
Interest and finance expense | |
| 1,193 | |
| 1,474 | | |
| 381 | |
| 3,527 | |
Income tax benefit | |
| (4,518) | |
| (642) | | |||||||
Income tax provision (benefit) | |
| 1,212 | |
| (431) | | |||||||
State and local franchise taxes | |
| 145 | |
| 197 | | |
| 76 | |
| 102 | |
Stock-based compensation | |
| 850 | |
| 976 | | |||||||
(Recovery of) costs in connection with potential acquisition | | | (158) | | | 1,290 | | |||||||
Certain adjustments to allowances for doubtful accounts | | | 971 | | | — | | |||||||
Property and equipment impairment | | | 113 | | | — | | |||||||
Gain on sale of assets | | | (46) | | | — | | |||||||
Stock-based compensation and cost of licensee warrants | |
| 242 | |
| 620 | | |||||||
Certain adjustments to provision for doubtful accounts | | | — | | | 413 | | |||||||
Gains on sales of assets and investments | | | (359) | | | (20,586) | | |||||||
Gain on lease termination | | | (445) | | | — | | |||||||
Gain on reduction of contingent obligation | |
| — | |
| (2,850) | | |
| — | |
| (900) | |
Costs associated with restructuring of operations | | | 5,106 | | | — | | |||||||
Adjusted EBITDA | | $ | 4,111 | | $ | 7,121 | | | $ | (5,725) | | $ | (12,534) | |
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Liquidity and Capital Resources
General
As of December 31, 20202023 and 2019,2022, our cash and cash equivalents were $5.0$3.0 million and $4.6 million, respectively. Restricted cash at December 31, 2020 and 2019 consisted of $1.1 million of cash deposited with Bank Hapoalim B.M. (“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facility.
Our principal capital requirements have been to fund working capital needs, acquire new brands, and to a lesser extent, capital expenditures. Notwithstanding certain investments made in 2020 and 2021, our recent investments in our ERP system, our businesscurrent “licensing plus” operating model is a working capital light business model, and generally does not require material capital expenditures, and asexpenditures. As of December 31, 2020,2023, we have no significant commitments for future capital expenditures. Material cash requirements from known contractual and other obligations are discussed under “Obligations and Commitments” below.
Working Capital
Our working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent liabilities payable in common stock) was $2.1 million and $8.8 million as of December 31, 2023 and 2022, respectively. Commentary on components of our cash flows for the Current Year compared with the Prior Year is set forth below.
Liquidity and Management’s Plans
We expectincurred net losses of approximately $21.1 million and $5.4 million during the years ended December 31, 2023 and 2022, respectively (which included non-cash expenses of approximately $9.0 million and $8.2 million, respectively), and had an accumulated deficit of approximately $53.8 million and $32.8 million as of December 31, 2023 and 2022, respectively. Net cash used in operating activities was $6.5 million in 2023 and $14.2 million in 2022. These factors raise uncertainties about the Company’s ability to continue as a going concern.
During the year ended December 31, 2023, management implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting its business from a wholesale/licensing hybrid model into a “licensing plus” 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
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transactions were 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 2024 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.
These restructuring initiatives were substantially completed as of June 30, 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 December 31, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses (excluding non-recurring charges related to the restructuring) by approximately $9 million, on an annualized basis when compared to the corresponding periods in the prior year.
Further, in October 2023, the Company entered into a new term loan agreement in the amount of $5 million. Subsequent to year end, in January 2024, the Company entered into a sublease of its offices at 1333 Broadway in New York, NY, and in March 2024, the Company issued new shares of common stock for net proceeds of approximately $2 million.
Based on these recent events and changes, management expects that existing cash and future operating cash flows will be adequate to meet ourthe 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 Annual Report on Form 10-K. We believe that cash from future operations, including growth opportunities10-K; therefore, such conditions and future business development,uncertainties with respect to the Company’s ability to continue as well as currently available cash, will be sufficient to satisfy our anticipated long-term operating needs, including our debt service requirements and making necessary investments in our infrastructure and technology, for the foreseeable future beyond the next twelve months.
Changes in Working Capital
Our working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent liabilities payable in common stock) was $7.9 million and $9.5 milliona going concern as of December 31, 2020 and 2019, respectively. This decrease in working capital was primarily due to lower accounts receivable at December 31, 2020 as a result of the combination of lower sales during the Current Year and increased allowances for doubtful accounts. Commentary on components of our cash flows for the Current Year compared with the Prior Year is set forth below. Working capital as of December 31, 2020 included $8.9 million of accounts receivable; substantially all of this balance was collected subsequent to year-end.2023, have been alleviated.
Operating Activities
Net cash provided byused in operating activities was approximately $3.2$6.5 million and $3.5$14.2 million in the Current Year and Prior Year, respectively.
The Current Year’s cash provided byused in operating activities was primarily attributable to the combination of the net loss of $(13.1)$(22.2) million, pluspartially offset by non-cash expensesitems of approximately $16.2$10.5 million and a net change in operating assets and liabilities of approximately $0.1$5.2 million. The net loss of $(13.1) million includes $1.8 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to Current Year expenses for which the program was intended to compensate. Non-cash net expensesitems were primarily comprised of, a $13.0 million intangible asset impairment charge, $5.5but not limited to, $7.0 million of depreciation and amortization, $1.0the $2.1 million undistributed proportional share of net loss of equity method investee, $1.1 million of deferred taxes, and $0.8 million of bad debt expense, $0.9partially offset by a $(0.4) million gain on the sale of stock-based compensation,a financial asset and $(4.4)a $(0.4) million gain on the settlement of deferred income tax benefit.a lease liability. The net change in operating assets and liabilities includeswas primarily comprised of (i) an increase in deferred revenue of approximately $4.4 million, which was mainly attributable to the upfront payment received for the Halston Master License agreement entered into during the Current Year, (ii) a decrease in accounts receivable of $0.7 million, an increase in inventory of $(0.3)approximately $2.4 million, a decreasedriven 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 prepaid expensesoperating assets and other assets of $0.6 million, and a decreaseliabilities were decreases in accounts payable, accrued expenses and other currentvarious operating liabilities of $(0.5) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.4)approximately $(2.9) million.
The Prior Year’s cash provided byused in operating activities was primarily attributable to the combination of the net loss of $(3.4)$(5.4) million plus non-cash expensesitems of approximately $7.8$(10.2) million, partially offset by a net change in operating assets and liabilities of approximately $(0.9)$1.4 million. Non-cash items were primarily comprised of, but not limited to, the net expenses mainly consistedgain on sale of a $6.2assets of $(20.6) million, intangible asset impairment charge, $3.9$7.3 million of depreciation and amortization, $1.0a $2.3 million of stock-based compensation, $(0.7) million of deferred income tax benefit, $(2.9) million of gain on reduction of contingent obligations, and $0.2 million of
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loss on extinguishment of debt.debt, and the $1.2 million undistributed proportional share of net income of equity method investee. The net change in operating assets and liabilities includesnotably included a decrease in accounts receivable of $0.4$2.1 million, a decrease in inventory of $1.1$0.5 million, and a decrease in accounts payable, accruedprepaid expenses and other currentassets of $0.6 million, and decreases in various operating liabilities of $(1.7) million, all$(1.4) million. The decrease in accounts receivable was primarily related to the Prior Year sale of which area majority interest in the Isaac Mizrahi brand, resulting in lower licensing revenues and thus lower receivable balances. The decreases in inventory and other operating assets and liabilities were primarily reflective of the declines in our wholesale business due to timingretailers pausing or canceling orders during the Prior Year.
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Investing Activities
Net cash used inprovided by investing activities for the Current Year was approximately $0.7$0.2 million, compared with $10.3primarily driven by $0.5 million of proceeds received from the sale of a limited partner ownership interest in an unconsolidated affiliate, partially offset by approximately $0.2 million capital contributions made to a new equity method investee.
Net cash provided by investing activities for the Prior Year was approximately $44.5 million, and was attributable to $45.4 million of net proceeds from the sale of a majority interest in the Prior Year. Cash used in investingIsaac Mizrahi brand to WHP, partially offset by $0.6 million of capital contributions to our equity method investee IM Topco and approximately $0.3 million of capital expenditures.
Financing Activities
Net cash provided by financing activities for the Current Year was approximately $4.7 million, which primarily attributable to capital expenditures, a substantial portionconsisted of which relates to$5.0 million of proceeds from borrowings incurred under new term loan debt, partially offset by the implementationpayment of our ERP system. Cash used in investing activities in the Prior Year was primarily related to $8.8$0.3 million in cash consideration paid to acquire the Halston Heritage Brands, as well as capital expenditures of $1.1 million predominantly related to implementation of our ERP system.
Financing Activitiesdebt issuance costs.
Net cash used in financing activities for the CurrentPrior Year was approximately $(2.2)$31.0 million, which mainly consisted of $29.0 million of repayments of our term loan debt, and, was primarily attributable to payments made on long-terma lesser extent, $1.5 million of prepayment and other fees associated with the early extinguishment of debt, obligations of $(2.3) million, cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $0.3 million, and $(0.2)as well as $0.4 million of shares repurchased related to withholding taxes on vested restricted stock.
Equity Transactions – Public Offering and Private Placement
On March 19, 2024, the Company closed on a public offering of 3,284,421 shares of common stock at an offering price of $0.65 per share and a private placement of 294,642 shares of common stock at an offering price of $0.98 per share. In connection with the public offering, Robert W. D’Loren, Chairman and Chief Executive Officer of the Company; an affiliate of Mark DiSanto, a director of the Company; and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company, purchased 146,250, 146,250, and 32,500 shares of common stock, respectively. Robert W. D’Loren, an affiliate of Mark DiSanto, and Seth Burroughs also purchased 132,589, 132,589, and 29,464 shares of common stock, respectively, in exchange for withholding taxes.
Net cash provided by financing activities for the Prior Year wasprivate placement. The aggregate net proceeds from the equity transactions were approximately $2.3 million, and was primarily attributable to proceeds received from long-term debt of $7.5 million, partially offset by payments made on our senior term debt obligation of $(4.0) million, the final payment on the IM Seller Note obligation of $(0.7) million, and payment of $(0.3) million of deferred finance costs.$2.0 million.
Obligations and Commitments
Term Loan Debt
On February 26, 2016, the Company and itsOctober 19, 2023, H Halston IP, LLC (the “Borrower”), a wholly owned subsidiaries, IMsubsidiary of Xcel Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, IMNY Retail Management, LLC, and IMNY E-Store, USA, LLC (each a “Guarantor” and collectively, the “Guarantors”)Inc., as Guarantors, entered into an amended and restateda term loan and security agreement with Bank Hapoalim B.M. as agent, and the financial institutions party thereto as lenders.
On February 11, 2019, concurrent with the Closing Date of the acquisition of the Halston Heritage Brands (see Note 3 to the notes to financial statements), the Company entered into an amended loan agreement with BHI (the “Loan Agreement”), which amended and restated the prior term loan. Immediately prior to February 11, 2019, the aggregate principal amount with Israel Discount Bank of the prior term loan was $14.5 million.New York (“IDB”). Pursuant to the Loan Agreement, the Lenders have extended to Xcel an additional term loan in the amount of $7.5 million, such that, as of February 11, 2019, the aggregate outstanding balance of all the term loans extended by BHI to Xcel was $22.0 million, which amount has been divided under the Loan Agreement into two term loans: (1)IDB made a term loan in the aggregate amount of $7.3 million (“Term Loan A”) and (2) a term loan in the amount of $14.7 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”).$5.0 million. The proceeds of the additionalthis term loan were used to finance the Halston Heritage Brands acquisition.
The termspay fees, costs, and conditions ofexpenses incurred in connection with entering into the Loan Agreement resulted in significantly different debt service payment requirements, compared with the prior term loan, including an increase of $7.5approximately $0.1 million (including a commitment fee paid to IDB in the principal balance, and related changes to the timing and amount of principal payments, as well as changes$50,000 and legal fees paid to counsel of IDB in the interest rate. Management assessedamount of $82,000), and determined that this amendment resulted in an extinguishment of debt and recognized a loss of $0.2 million (consisting of unamortized deferred finance costs) during the year ended December 31, 2019.may be used for working capital purposes.
The Loan Agreement also allows that BHI and any other lender party to
In connection with the Loan Agreement, (collectively, the “Lenders”Borrower and H Licensing, LLC (“H Licensing”) can provide, another wholly owned subsidiary of Xcel, entered into a security agreement in favor of IDB, and Xcel entered into a membership interest pledge agreement in favor of IDB. Pursuant to Xcelthe security agreement, the Borrower and H Licensing granted IDB a revolving loan facilitysecurity interest in substantially all of their respective assets, other than the trademarks owned by the Borrower and a letter of credit facility,H Licensing, to secure the terms of each of which shall be agreed to by Xcel and the Lenders. Amounts advancedBorrower’s obligations under the revolving loan facility (the “Revolving Loans”) will be used for the purpose of consummating acquisitions by Xcel or its subsidiaries that are or become parties to the Loan Agreement. Pursuant to the membership interest pledge agreement, Xcel granted IDB a security interest in its membership interests in H Licensing to secure the Borrower’s obligations under the Loan Agreement.
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will have the right to convert Revolving Loans to incrementalThe term loans (the “Incremental Term Loans”) in minimum amounts of $5.0 million. The Company has not drawn down any funds under either the revolving loan facility or letter of credit facility.
On April 13, 2020, the Company and BHI amended the Loan Agreement. Under this amendment, the quarterly installment payment due March 31, 2020 was deferred, and the amounts of the quarterly installment payments due throughout the remainder of 2020 were reduced, while the amount of principal to be repaid through variable payments basedmatures on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. Further, this amendment permitted Xcel to incur unsecured debt through the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and excludes any associated PPP debt and debt service from the covenant calculations. There were no changes to the total principal balance, interest rate, or maturity date.
On August 18, 2020, the Company and BHI further amended the Loan Agreement. Under this amendment, the amounts of the quarterly installment payments due throughout 2021 were reduced, and the amount of principal to be repaid through variable payments based on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. There were no changes to the total principal balance, interest rate, or maturity date.
The Term Loans mature on December 31, 2023, Incremental Term Loans shall matureOctober 19, 2028. Principal on the date set forth in the applicable term note, and Revolving Loans and the letter of credit facility shall mature on such date as agreed upon by Xcel and the Lenders. Any letter of credit issued under Loan Agreement shall terminate no later than one year following the date of issuance thereof.
The remaining principal balance of the Term Loans, as amended, outstanding at December 31, 2020loan is payable in fixedquarterly installments as set forth in the following table, plus the variable payments as described below:
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Installment Payment Dates |
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March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021 | | $ | 700 |
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March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022 | | $ | 1,125 |
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March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023 | | $ | 1,250 |
In addition to the fixed installments outlined above,of $250,000 on each of January 2, April 1, July 1, and October 1 of each year, commencing with the fiscal quarter ending March 31, 2021, the Company is required to repay a portion of the Term Loans in an amount equal to 50% of the excess cash flow for the fiscal quarter, provided that no early termination fee shall be payable with respect to any such payment. Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash principal paid or payable during such period, and (iii) all dividends declared and paid (or which could have been declared and paid) during such period to equity holders of any credit party treated as a disregarded entity for tax purposes. To the extent that the cumulative amount of such variable repayments made is less than $4.45 million as of March 31, 2022, any such shortfall must be repaid at that date.
Thus, the aggregate remaining annual principal payments under the Term Loans at December 31, 2020 were as follows:
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Year Ending December 31, |
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2021 | | $ | 2,800 |
2022 | |
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2023 | |
| 5,000 |
Total | | $ | 16,750 |
Xcelon April 1, 2024. The Borrower has the right to prepay the Term Loans, Incremental Term Loans, Revolving Loans, and obligations with respect to letters of credit and accrued and unpaid interest thereon and to terminate the Lenders’ obligations to make Revolving
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Loans and issue letters of credit; provided thatall or any prepayment of less than allportion of the outstanding balancesterm loan at any time without penalty.
Interest on the term loan accrues at Term SOFR (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 Term Loans and Incremental Term Loans shall be applied to the remaining amounts due in inverse order of maturity.
If any Term Loan or any Incremental Term Loanday that is prepaid on ortwo U.S. Government Securities Business Days prior to the third anniversaryfirst day of each calendar month) plus 4.25% per annum. Interest on the Closing Date (including as a resultterm loan is payable on the first day of an event of default), Xcel shall pay an early termination fee as follows: an amount equal to the principal amount of the Term Loan or Incremental Term Loan, as applicable, being prepaid, multiplied by: (i) two percent (2.00%) if any of Term Loan B or any Incremental Term Loan is prepaid on or before the second anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable; (ii) one percent (1.00%) if any of Term Loan A is prepaid on or before the second anniversary of the Closing Date; (iii) one percent (1.00%) if any of Term Loan B or any Incremental Term Loan is prepaid after the second anniversary of the later of the Closing Date or such Incremental Term Loan was made, as applicable, but on or before the third anniversary of such date; (iv) one-half of one percent (0.50%) if any of Term Loan A is prepaid after the second anniversary of the Closing Date, but on or before the third anniversary of such date; or (v) zero percent (0.00%) if any Term Loan or any Incremental Term Loan is prepaid after the third anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable.each calendar month.
Notwithstanding the above, Xcel may make a voluntary prepayment of up to $0.75 million without any early termination fees, and any such prepayment would be excluded from the computation of excess cash flows.
Xcel’s obligations under the Loan Agreement are guaranteed by and secured by all of the assets of Xcel and its wholly owned subsidiaries, as well as any subsidiary formed or acquired that becomes a credit party to the Loan Agreement (the “Guarantors”) and, subject to certain limitations contained in Term Loans, equity interests of the Guarantors. Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration will be paid other than by cash of Xcel or by the issuance of equity interest of Xcel.
The Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the followingcertain 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 4.25% per annum on the notional amount of the Company (on a consolidated basisswap in exchange for the Borrower paying IDB 9.46% per annum on such notional amount. The term and declining notional amount of the swap agreement is aligned with the Guarantors underamortization of the Loan Agreement):
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term loan principal amount.
The Company was in compliance with all applicable covenants under the Loan Agreement as of and for the fiscal year ended December 31, 2020.
Contingent Obligation – Lori Goldstein Earn-Out
In connection with the February 11, 2019 refinancing transaction and subsequent amendments, the Company incurred fees to or on behalf of BHI of approximately $0.3 million during the Prior Year and $0.03 million during the Current Year. These fees have been deferred on the consolidated balance sheets as a reduction to the carrying value of the Term Loans, and are being amortized to interest expense over the term of the Term Loans using the effective interest method. The effective interest rate on the Loan Agreement was approximately 6.6% and 6.7% for the Current Year and Prior Year, respectively.
Interest on Term Loan A accrues at a fixed rate of 5.1% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on Term Loan B accrues at a fixed rate of 6.25% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on the Revolving Loans will accrue at either the Base Rate or LIBOR, as elected by Xcel, plus a margin to be agreed to by Xcel and the Lenders and will be payable on the first day of each month. Base Rate is defined in the Loan Agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York. Interest on the Incremental Term Loans will accrue at rates to be agreed to by Xcel and the Lenders and will be payable on each day on which the scheduled principal payments under the applicable note are required to be made.
For the Current Year and Prior Year, the Company incurred interest expense of approximately $1.1 million and $1.2 million, respectively, related to term loan debt.
On April 14,1, 2021 we entered into a loan and security agreement with BHI, FEAC Agent LLC, and the financial institutions party thereto (the “2021 Loan Agreement”). We used a portion of the proceeds from the 2021 Loan Agreement to repay the $16.75 million outstanding balance under the previous Loan Agreement, resulting in the extinguishment of the term loan debt that existed as of December 31, 2020. Under 2021 Loan Agreement, the Company’s debt obligations increased to $25.0 million, payable in 16 equal quarterly installments of $625,000, commencing June 30, 2021 and ending on March 31, 2025, with a final payment of $15.0 million payable on the maturity date of April 14, 2025. The debt under the 2021 Loan Agreement bears interest at a weighted average rate of LIBOR plus 6.2% per annum. In addition, the 2021 Loan Agreement provides for up to $25 million of future acquisition financing, subject to lender approval on a deal-by-deal basis.
Contingent Obligations – HH Seller (Halston Heritage Earn-Out)
In connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from HIP, the CompanyLori Goldstein trademarks, we agreed to pay HIPthe seller additional cash consideration (the “Halston Heritage Earn-Out”) of up to $6.0$12.5 million, based on royalties earned through December 31, 2022.during the six calendar year period commencing in 2021. The Halston HeritageLori Goldstein Earn-Out of $0.9 million iswas initially recorded as a long-term liability as of December 31, 2020 and 2019 in the accompanying consolidated balance sheets,$6.6 million, based on the difference between the fair value of the acquired assets of the Halston Heritage TrademarksLori Goldstein brand and the total consideration paid.
As of December 31, 2022, based on the performance of the Lori Goldstein brand to date, approximately $0.2 million of additional consideration was earned by the seller, and thus $0.2 million of the balance was recorded as a current liability and $6.4 million was recorded as a long-term liability. The $0.2 million of additional consideration was paid to the seller during 2023.
Based on the performance of the Lori Goldstein through December 31, 2023, approximately 1.0 million of incremental additional consideration was earned by the seller, which will be paid out in 2024. Accordingly, as of December 31, 2023, $1.0 million of the remaining balance was recorded as a current liability and approximately $5.4 million was recorded as a long-term liability.
Contingent Obligation – Isaac Mizrahi Transaction
In accordanceconnection with ASC Topic 480,the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi brand, we agreed with WHP (the buyer) 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 would 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.
In November 2023, this agreement was amended such that the purchase price adjustment provision was waived until the measurement period ending March 31, 2024. No amount has been recorded in the Company’s consolidated balance sheets related to this contingent obligation.
Subsequently, in April 2024, the Company, WHP, and IM Topco, LLC entered into an amendment of this agreement, such that the purchase price adjustment provision within the membership purchase agreement was waived until the measurement period ending September 30, 2025. Additionally, the parties agreed that if IM Topco, LLC royalties are less than $13.5 million for the twelve-month period ending March 31, 2025 or less than $18.0 million for the year ending December 31, 2025, Xcel shall transfer equity interests in IM Topco, LLC to WHP, such that Xcel’s ownership interest in IM Topco,
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LLC would decrease from 30% to 17.5%, and WHP’s ownership interest in IM Topco, LLC would increase from 70% to 82.5%
Contingent Obligation – Halston Heritage Earn-Out
In connection with the February 11, 2019 purchase of the Halston Heritage Earn-Out obligation is treated astrademarks, we agreed to pay the seller additional consideration of up to an aggregate of $6.0 million, based on royalties earned from 2019 through December 31, 2022. The final royalty target year ended on December 31, 2022, and the seller ultimately did not earn any additional consideration based on the formula set forth in the related asset purchase agreement. As such, during the year ended December 31, 2022, we recorded a liability$0.9 million gain on the reduction of contingent obligations in the accompanying consolidated balance sheets becausestatement of the variable numberoperations. As of shares payableDecember 31, 2022, there were no amounts remaining under the agreement.
The Halston Heritage Earn-Out is generally required to be paid in shares of our common stock, subject to certain limitations. Payment of this obligation in stock would not affect our liquidity.Earn-Out.
Real Estate Leases
As described in Item 2 of this Annual Report on Form 10-K, as of December 31, 2023 we have real estate leaseshad a lease for our currentapproximately 29,600 square feet of office former office, and a planned retail store location, with remaining lease terms between approximately one year to eight years.space at 1333 Broadway, 10th floor, New York, New York. Future payments under these leasesthis lease are expected to be approximately $2.7$1.6 million for each of the years ending December 31, 2024 – 2026, and $1.3 million for the year ending December 31, 2021, $1.7 million for each year ending2027.
Subsequent to December 31, 2022 – 2025,2023, we entered into a new lease of office space at 550 Seventh Avenue, 11th floor, New York, New York, and $3.3 million thereafter.
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Tablea sublease of Contentsour office space at 1333 Broadway. These leasing transactions are further described in Item 8, Note 12 of this Annual Report on Form 10-K.
Employment Contracts
We have entered into contracts with certain executives and key employees. The future minimum payments under these contracts areis expected to be approximately $6.7$17.7 million, of which, approximately $4.6$4.3 million is expected to be paid in 2021 and2024, approximately $2.1 million is expected to be paid for each of the years ending December 31, 2025 – 2030, and approximately $0.5 million is expected to be paid in 2022.2031.
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.
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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 MizrahiLori Goldstein brand, Halston brand, and C Wonder brand, and TowerHill by Christie Brinkley brand have a core business in fashion apparel and accessories. The Ripka brand is a fine jewelry business, and the Longaberger brand focuses on home good products, which we believe helps diversify our industry focus while at the same time complements our business operations and relationships.
We continueWhile 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 work towards expandingreplace those revenues in the long-term with new strategic business initiatives, as we concentrate our wholesaleresources on growing our brands, launching new brands, and e-commerce businesses, and complement these operations with our licensingentering into new business including interactive television, and leveraging our wholesale customers with our brick-and-mortar licensees. Our current strategy is to manage our working capital needs by minimizing inventory risk.
In addition, wepartnerships. We continue to seek new opportunities, including expansion through interactive television, our design, productionlive streaming, and supply chain platform, additional domestic and international licensing arrangements, and acquiring and collaborating with additional brands. In November 2019,brands, launching the C Wonder by Christian Siriano business on HSN, and the planned May 2024 launch of the TowerHill by Christie Brinkley brand.
During 2023, we acquiredrestructured 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, on a go-forward basis, are expected to provide us with approximately $15 million of cost savings on an ownership interestannualized basis compared to our previous operating model.
However, we continue to face a number of headwinds in the Longaberger brand throughcurrent macroeconomic environment. Poor economic and market conditions, including inflation, rising consumer debt levels, and a joint venture,potential recession, may negatively impact market sentiment, decreasing the demand for apparel, footwear, accessories, fine jewelry, home goods, and launched the brand on the QVC channel that same month. We are also actively pursuing the potential acquisition of other brands and business operationsconsumer products, which we believe are synergistic to our existing portfolio of brands andwould adversely affect our operating platform,income and results of operations. If we are complementaryunable to our overall strategy.
However, the impacts of the current COVID-19 pandemic are broad reaching and are having an impact on our licensing and wholesale businesses. This global pandemic is impacting our supply chain, and temporary factory closures and the pace of workers returning to work have impacted our contract manufacturers’ ability to source certain raw materials and to produce finished goodstake effective measures in a timely manner. The pandemic is also impacting distribution and logistics providers' abilitymanner to operate inmitigate the normal course of business. In addition, COVID-19 has resulted in a sudden and continuing decrease in sales for many of our products, resulting in order cancellations. Further, the global pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, Stein Mart, and Century 21, from which we had an aggregate of $1.21 million of accounts receivable due at December 31, 2020. As a result, we have recognized an allowance for doubtful accounts of $0.97 million for the year ended December 31, 2020, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility. Financial impacts associated with the COVID-19 pandemic include, but are not limited to, lower net sales, adjustments to allowances for doubtful accounts due to customer bankruptcy or other inability to pay their amounts due to vendors, the delay of inventory production and fulfillment, potentially further impacting net sales, and potential incremental costs associated with mitigating the effects of the pandemic, including increased freight and logistics costs and other expenses. The impact of the COVID-19 pandemic is expected to continue to have an adverse effect oninflation and/or a potential recession, our operatingbusiness, financial condition, and results whichof operations could result in our inability to comply with certain debt covenants and require BHI to waive compliance with, or agree to amend, any such covenant to avoid a default. The COVID-19 global pandemic is ongoing, and its dynamic nature, including uncertainties relating to the severity and duration of the pandemic, as well as actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our 2021 results. However, as of the date of this filing, we expect our results for some portion of 2021 to be significantlyadversely 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
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supplies, consolidation of retail establishments, and other factors noted in the section captioned “Risk Factors” 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.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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Item 8. Financial Statements and Supplementary Data
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors andof
Stockholders of Xcel Brands, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Xcel Brands, Inc. and Subsidiaries (the(collectively, the “Company”) as of December 31, 20202023 and 2019, and2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years thenin the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial“financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the two years thenin the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s consolidatedCompany's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i)that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgements.judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Liquidity and Management’s Plans
Tradename Impairment TestingCritical Audit Matter Description
As discloseddescribed further in Note 21 to the consolidated financial statements, indefinite-lived tradenamesthe Company has incurred recurring losses from operations, has used net cash in operating activities, and has an accumulated deficit. The ability of the Company to continue as a going concern is dependent on executing its business plans and meeting its obligations as they come due within the next twelve months from the filing date of this Annual Report on Form 10-K. Accordingly, the Company has determined that these factors raise uncertainty as to the Company’s ability to continue as a going concern. However, management has
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implemented plans which are tested for impairment annuallyexpected to mitigate these conditions or events, and therefore, has concluded that such conditions or events have been alleviated.
How the Critical Audit Matter was Addressed in the fourth quarter of each year unless an interim testAudit
We determined the Company’s ability to continue as a going concern is requireda critical audit matter due to the presenceestimation and uncertainty regarding the Company’s available capital and the risk of indictorsbias in management’s judgments and assumptions in their determination. Our audit procedures related to considering whether the results of our audit procedures, when considered in the aggregate, indicate that there could be uncertainty about the tradenamesCompany’s ability to continue as a going concern for a reasonable period of time, obtaining information about management’s plans that are intended to mitigate the effect of such conditions or events, and assessing the likelihood that such plans can be effectively implemented, included the following, among others:
● | We reviewed the Company’s assessment and conclusions regarding their ability to generate cashflows for at least twelve months from the filing date of this Annual Report on Form 10-K. |
● | We inquired of Company management and reviewed Company records to assess whether there are additional factors that contribute to the uncertainties disclosed. |
● | We assessed whether the Company’s determination that there are factors that raise such uncertainties about its ability to continue as a going concern, were adequately disclosed in the financial statements. |
● | We reviewed and evaluated management's plans for alleviating such conditions and uncertainties and considered whether it is likely that these conditions and uncertainties would be mitigated for a reasonable period and that such plans can be effectively implemented. |
● | We performed testing procedures such as reviewing; prospective financial information for the twelve-month period beginning with the filing date of this Annual Report on Form 10-K, actual operating performance for periods after December 31, 2023, other events and transactions occurring after December 31, 2023, implemented reductions in operating expenses, plans for further reductions to support expected cashflows, and implemented changes in the business. |
● | We performed sensitivity analysis of management's forecasts and key assumptions used in developing their prospective financial information. |
Finite-Lived Trademarks and Other Intangible Assets
Critical Audit Matter Description
As described further in Note 4 to the financial statements, the carrying amount of finite-lived trademarks and other intangible assets was $41.5 million as of December 31, 2023. Under the applicable accounting guidance, these assets shall be tested for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be impaired. recoverable. Management has concluded that these assets are not impaired as of December 31, 2023.
How the Critical Audit Matter was Addressed in the Audit
We determined the Company’s ability to assess if their finite-lived trademarks and other intangible assets are impaired is a critical audit matter due to the estimation and uncertainty regarding the Company’s ability to generate sufficient undiscounted cash flows, to be in excess of the carrying amounts of these assets.
The Company usesevaluates its finite-lived trademarks and other intangible assets for impairment when events are triggered by economic conditions. These events require the income approach using a discountedCompany to compare the carrying values to the undiscounted cash flow model to valueflows from the indefinite-lived tradename, comparing its fair value to carrying value to determine impairment. operation and eventual disposition of these assets over their estimated useful lives (“undiscounted cash flows”).
53
suchthese assets is considered to be impaired, as described above, the amount of the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds fair value.
Finite-lived tradenames are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company uses the income approach using an undiscounted cash flow model to assess the recoverability of the finite-lived tradename, comparing its undiscounted cash flows to its carrying value. If the carrying value exceeds undiscounted cash flows, the Company will use a discounted cash flow model to determine the fair value, and an impairment loss is recognized if the carrying amount of finite-lived intangible asset exceeds its fair value.
As of December 31, 2020, the Company had one indefinite-lived tradename (Isaac Mizrahi Brand) with a carrying value of $44,500,000. As of December 31, 2019, the Company had two indefinite-lived tradenames (Isaac Mizrahi Brand and Ripka Brand) with a carrying value of $62,900,000.
As of December 31, 2020, the Company had four finite-lived tradenames (Ripka Brand, Halston Brand, C Wonder Brand and Longaberger Brand) with an aggregate carrying value of $48,748,000. As of December 31, 2019, the Company had three finite-lived tradenames (Halston Brand, C Wonder Brand and Longaberger Brand) with an aggregate carrying value of $47,780,000.
We identified the Company’s tradename impairment testing as a critical audit matter. Auditing the Company’s tradenamefinite-lived trademarks and other intangible assets for impairment testing wasis complex and subjective due to the significant estimation required to determine the forecasted undiscounted cash flows used in the Company’s testing.evaluation. Specifically, the forecasted undiscounted cash flows are sensitive to significant assumptions such as revenue growth rates, including the terminal growth rates, margins, and expenses and discount rates,over the estimated useful lives of these assets, all of which are affected by expected future market or economic conditions, including the effects of the global pandemic. In addition, our audit effort involved the use of professionals within our firm with specialized skill and knowledge in valuation methods and models. other factors.
The primary procedures we performed to address this critical audit matter included the following.following, among others:
● | We |
● | We |
● | We evaluated management’s |
● |
● | We compared undiscounted cash flows to the |
Going Concern
As disclosed in Note 10 to the consolidated financial statements, in March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, negatively and materially impacting the Company’s financial results and liquidity. Specifically, licensing and wholesale revenues decreased primarily due to lower customer sales by its licensees and wholesale customers as a result of government-ordered retail store closures as well as
51
an overall slowdown in economic activity related to the COVID-19 pandemic. This resulted in significant uncertainty surrounding the potential impact on the Company’s future results of operations and cash flows.
We identified the evaluation of whether the Company has the ability to continue as a going concern due to liquidity impacted by COVID-19 as a critical audit matter. Auditing management’s going concern analysis was complex and highly subjective due to the significant estimation required to forecast future operations and cash flows that are affected by expected future market conditions, including the effects of global pandemic.
The primary procedures we performed to address this critical audit matter included the following.
/s/ CohnReznickMarcum LLP
Marcum LLP
We have served as the Company’s auditorsauditor since 2012.2021.
New York, New YorkNY
April 22, 202118, 2024
5254
Xcel Brands, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | | | | | |
|
| December 31, 2020 |
| December 31, 2019 | ||
Assets |
| |
|
| |
|
Current Assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 4,957 | | $ | 4,641 |
Accounts receivable, net of allowances of $1,151 and $155, respectively | |
| 8,889 | |
| 10,622 |
Inventory | |
| 1,216 | |
| 899 |
Prepaid expenses and other current assets | |
| 1,085 | |
| 1,404 |
Total current assets | |
| 16,147 | |
| 17,566 |
Property and equipment, net | |
| 3,367 | |
| 3,666 |
Operating lease right-of-use assets | | | 8,668 | | | 9,250 |
Trademarks and other intangibles, net | |
| 93,535 | |
| 111,095 |
Restricted cash | |
| 1,109 | |
| 1,109 |
Other assets | |
| 228 | |
| 505 |
Total non-current assets | |
| 106,907 | |
| 125,625 |
| | | | | | |
Total Assets | | $ | 123,054 | | $ | 143,191 |
| | | | | | |
Liabilities and Equity | |
|
| |
|
|
Current Liabilities: | |
|
| |
|
|
Accounts payable, accrued expenses and other current liabilities | | $ | 4,442 | | $ | 4,391 |
Accrued payroll | |
| 973 | |
| 1,444 |
Current portion of operating lease obligation | | | 2,101 | | | 1,752 |
Current portion of long-term debt | |
| 2,800 | |
| 2,250 |
Total current liabilities | |
| 10,316 | |
| 9,837 |
Long-Term Liabilities: | |
|
| |
|
|
Long-term portion of operating lease obligation | | | 8,469 | | | 9,773 |
Long-term debt, less current portion | |
| 13,838 | |
| 16,571 |
Contingent obligation | | | 900 | | | 900 |
Deferred tax liabilities, net | |
| 3,052 | |
| 7,434 |
Other long-term liabilities | |
| 224 | |
| 224 |
Total long-term liabilities | |
| 26,483 | |
| 34,902 |
Total Liabilities | |
| 36,799 | |
| 44,739 |
| | | | | | |
Commitments and Contingencies | |
|
| |
|
|
| | | | | | |
Equity: | |
|
| |
|
|
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding | |
| — | |
| — |
Common stock, $.001 par value, 50,000,000 shares authorized, and 19,260,862 and 18,866,417 shares issued and outstanding at December 31, 2020 and 2019, respectively | |
| 19 | |
| 19 |
Paid-in capital | |
| 102,324 | |
| 101,736 |
Accumulated deficit | |
| (16,595) | |
| (3,659) |
Total Xcel Brands, Inc. stockholders' equity | |
| 85,748 | |
| 98,096 |
Noncontrolling interest | | | 507 | | | 356 |
Total Equity | |
| 86,255 | |
| 98,452 |
| | | | | | |
Total Liabilities and Equity | | $ | 123,054 | | $ | 143,191 |
| | | | | | |
|
| December 31, 2023 |
| December 31, 2022 | ||
Assets |
| |
|
| |
|
Current Assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 2,998 | | $ | 4,608 |
Accounts receivable, net | |
| 3,454 | |
| 5,110 |
Inventory | |
| 453 | |
| 2,845 |
Prepaid expenses and other current assets | |
| 398 | |
| 1,457 |
Total current assets | |
| 7,303 | |
| 14,020 |
Non-current Assets: | | | | | | |
Property and equipment, net | |
| 634 | |
| 1,418 |
Operating lease right-of-use assets | | | 4,453 | | | 5,420 |
Trademarks and other intangibles, net | |
| 41,520 | |
| 47,665 |
Equity method investment in IM Topco, LLC | | | 17,585 | | | 19,195 |
Deferred tax assets, net | | | — | | | 1,107 |
Other assets | |
| 165 | |
| 110 |
Total non-current assets | |
| 64,357 | |
| 74,915 |
| | | | | | |
Total Assets | | $ | 71,660 | | $ | 88,935 |
| | | | | | |
Liabilities and Stockholders' Equity | |
|
| |
|
|
Current Liabilities: | |
|
| |
|
|
Accounts payable, accrued expenses and other current liabilities | | $ | 2,127 | | $ | 3,870 |
Deferred revenue | |
| 889 | |
| 88 |
Accrued income taxes payable | | | 372 | | | 568 |
Accrued payroll | |
| 109 | |
| 416 |
Current portion of operating lease obligations | | | 1,258 | | | 1,376 |
Current portion of long-term debt | |
| 750 | |
| — |
Current portion of contingent obligation | |
| 964 | |
| 243 |
Total current liabilities | |
| 6,469 | |
| 6,561 |
Long-Term Liabilities: | |
|
| |
|
|
Long-term portion of operating lease obligations | | | 4,021 | | | 5,839 |
Deferred revenue | | | 3,556 | | | — |
Long-term debt, net, less current portion | |
| 3,971 | |
| — |
Long-term portion of contingent obligation | | | 5,432 | | | 6,396 |
Other long-term liabilities | |
| 40 | |
| — |
Total long-term liabilities | |
| 17,020 | |
| 12,235 |
Total Liabilities | |
| 23,489 | |
| 18,796 |
| | | | | | |
Commitments and Contingencies | |
|
| |
|
|
| | | | | | |
Stockholders' Equity: | |
|
| |
|
|
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding | |
| — | |
| — |
Common stock, $.001 par value, 50,000,000 shares authorized, and 19,795,053 and 19,624,860 shares issued and outstanding at December 31, 2023 and 2022, respectively | |
| 20 | |
| 20 |
Paid-in capital | |
| 103,861 | |
| 103,592 |
Accumulated deficit | |
| (53,849) | |
| (32,797) |
Total Xcel Brands, Inc. stockholders' equity | |
| 50,032 | |
| 70,815 |
Noncontrolling interest | | | (1,861) | | | (676) |
Total Stockholders' Equity | |
| 48,171 | |
| 70,139 |
| | | | | | |
Total Liabilities and Stockholders' Equity | | $ | 71,660 | | $ | 88,935 |
See accompanying Notes to Consolidated Financial Statements.
5355
Xcel Brands, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except share and per share data)
| | | | | | |
| | For the Year Ended | ||||
| | December 31, | ||||
| | 2020 |
| 2019 | ||
Revenues | | |
|
| |
|
Net licensing revenue | | $ | 20,255 | | $ | 26,435 |
Net sales | |
| 9,193 | |
| 15,292 |
Net revenue | |
| 29,448 | |
| 41,727 |
Cost of goods sold (sales) | |
| 5,456 | |
| 10,272 |
Gross profit | |
| 23,992 | |
| 31,455 |
| | | | | | |
Operating costs and expenses | |
|
| |
|
|
Salaries, benefits and employment taxes | |
| 13,061 | |
| 15,834 |
Other design and marketing costs | |
| 3,334 | |
| 3,164 |
Other selling, general and administrative expenses | |
| 6,567 | |
| 5,552 |
(Recovery of) costs in connection with potential acquisitions | |
| (158) | |
| 1,290 |
Stock-based compensation | |
| 850 | |
| 976 |
Depreciation and amortization | |
| 5,497 | |
| 3,902 |
Government assistance - Paycheck Protection Program and other | | | (1,816) | | | — |
Asset impairment charges | |
| 13,113 | |
| 6,200 |
Total operating costs and expenses | |
| 40,448 | |
| 36,918 |
| | | | | | |
Other income | | | 46 | | | 2,850 |
| | | | | | |
Operating loss | |
| (16,410) | |
| (2,613) |
| | | | | | |
Interest and finance expense | |
|
| |
|
|
Interest expense and other finance charges | | | 1,193 | | | 1,285 |
Loss on extinguishment of debt | | | — | | | 189 |
Total interest and finance expense | |
| 1,193 | |
| 1,474 |
| | | | | | |
Loss before income taxes | |
| (17,603) | |
| (4,087) |
| | | | | | |
Income tax benefit | |
| (4,518) | |
| (642) |
| | | | | | |
Net loss | | | (13,085) | | | (3,445) |
Less: Net loss attributable to noncontrolling interest | | | (149) | | | (19) |
Net loss attributable to Xcel Brands, Inc. stockholders | | $ | (12,936) | | $ | (3,426) |
| | | | | | |
Loss per share attributable to Xcel Brands, Inc. common stockholders: | |
|
| |
|
|
Basic net loss per share: | | $ | (0.68) | | $ | (0.18) |
Diluted net loss per share: | | $ | (0.68) | | $ | (0.18) |
Weighted average number of common shares outstanding: | |
|
| |
|
|
Basic weighted average common shares outstanding | |
| 19,117,460 | |
| 18,857,657 |
Diluted weighted average common shares outstanding | |
| 19,117,460 | |
| 18,857,657 |
| | | | | | |
| | For the Year Ended | ||||
| | December 31, | ||||
| | 2023 |
| 2022 | ||
Revenue | | |
|
| |
|
Net licensing revenue | | $ | 9,156 | | $ | 14,737 |
Net sales | |
| 8,599 | |
| 11,044 |
Net revenue | |
| 17,755 | |
| 25,781 |
Cost of goods sold | |
| 6,918 | |
| 7,980 |
Gross profit | |
| 10,837 | |
| 17,801 |
| | | | | | |
Direct operating costs and expenses | |
|
| |
|
|
Salaries, benefits and employment taxes | |
| 9,910 | |
| 16,802 |
Other selling, general and administrative expenses | |
| 13,361 | |
| 16,280 |
Total direct operating costs and expenses | |
| 23,271 | |
| 33,082 |
| | | | | | |
Other operating costs and expenses (income) | | | | | | |
Depreciation and amortization | | | 6,954 | | | 7,263 |
Gain on sale of majority interest in Isaac Mizrahi brand | | | — | | | (20,586) |
Loss from equity method investment | | | 2,060 | | | 1,202 |
Gain on sale of limited partner ownership interest | | | (359) | | | — |
Gain on settlement of lease liability | | | (445) | | | — |
Gain on reduction of contingent obligation | | | — | | | (900) |
| | | | | | |
Operating loss | |
| (20,644) | |
| (2,260) |
| | | | | | |
Interest and finance expense | |
|
| |
|
|
Interest expense | |
| 113 | |
| 1,187 |
Other interest and finance charges, net | |
| 268 | |
| 16 |
Loss on early extinguishment of debt | | | — | | | 2,324 |
Total interest and finance expense | |
| 381 | |
| 3,527 |
| | | | | | |
Loss before income taxes | |
| (21,025) | |
| (5,787) |
| | | | | | |
Income tax provision (benefit) | |
| 1,212 | |
| (431) |
| | | | | | |
Net loss | | | (22,237) | | | (5,356) |
Net loss attributable to noncontrolling interest | | | (1,185) | | | (1,338) |
Net loss attributable to Xcel Brands, Inc. stockholders | | $ | (21,052) | | $ | (4,018) |
| | | | | | |
Loss per common share attributable to Xcel Brands, Inc. stockholders: | |
|
| |
|
|
Basic and diluted net loss per share | | $ | (1.07) | | $ | (0.20) |
Weighted average number of common shares outstanding: | |
|
| |
|
|
Basic and diluted weighted average common shares outstanding | |
| 19,711,637 | |
| 19,624,669 |
See accompanying Notes to Consolidated Financial Statements.
5456
Xcel Brands, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
| | | | | | | | | | | | | | | | | |
| | Xcel Brands, Inc. stockholders | | | | | | | |||||||||
| | Common Stock | | Paid-in | | Accumulated | | Noncontrolling | | | | ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Interest |
| Total | |||||
Balance as of January 1, 2019 |
| 18,138,616 | | $ | 18 | | $ | 100,097 | | $ | (233) | | $ | — | | $ | 99,882 |
| | | | | | | | | | | | | | | | | |
Issuance of common stock in connection with the acquisition of Halston Heritage |
| 777,778 | |
| 1 | |
| 1,057 | |
| — | |
| — | |
| 1,058 |
| | | | | | | | | | | | | | | | | |
Shares issued to directors in connection with restricted stock grants, net of forfeitures |
| 60,000 | |
| — | |
| — | |
| — | |
| — | |
| — |
| | | | | | | | | | | | | | | | | |
Shares issued on exercise of stock options, net |
| 5,185 | |
| — | |
| — | |
| — | |
| — | |
| — |
| | | | | | | | | | | | | | | | | |
Compensation expense in connection with stock options and restricted stock |
| — | |
| — | |
| 756 | |
| — | |
| — | |
| 756 |
| | | | | | | | | | | | | | | | | |
Shares repurchased including vested restricted stock in exchange for withholding taxes |
| (115,162) | |
| — | |
| (174) | |
| — | |
| — | |
| (174) |
| | | | | | | | | | | | | | | | | |
Consolidation of Longaberger Licensing, LLC variable interest entity |
| — | |
| — | |
| — | |
| — | |
| 375 | |
| 375 |
| | | | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2019 |
| — | |
| — | |
| — | |
| (3,426) | |
| (19) | |
| (3,445) |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2019 |
| 18,866,417 | |
| 19 | |
| 101,736 | |
| (3,659) | |
| 356 | |
| 98,452 |
| | | | | | | | | | | | | | | | | |
Compensation expense in connection with stock options and restricted stock |
| — | |
| — | |
| 257 | |
| — | |
| — | |
| 257 |
| | | | | | | | | | | | | | | | | |
Shares issued to executive in connection with stock grants for bonus payments | | 336,700 | | | — | | | 220 | | | — | | | — | | | 220 |
| | | | | | | | | | | | | | | | | |
Shares issued to other employees in connection with stock grants | | 303,028 | | | — | | | 301 | | | — | | | — | | | 301 |
| | | | | | | | | | | | | | | | | |
Shares repurchased from employees in exchange for withholding taxes |
| (245,283) | |
| — | |
| (190) | |
| — | |
| — | |
| (190) |
| | | | | | | | | | | | | | | | | |
Additional investment in Longaberger Licensing, LLC by non-controlling interest |
| — | |
| — | |
| — | |
| — | |
| 300 | |
| 300 |
| | | | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2020 |
| — | |
| — | |
| — | |
| (12,936) | |
| (149) | |
| (13,085) |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2020 |
| 19,260,862 | | $ | 19 | | $ | 102,324 | | $ | (16,595) | | $ | 507 | | $ | 86,255 |
| | | | | | | | | | | | | | | | | |
| | Xcel Brands, Inc. Stockholders | | | | | | | |||||||||
| | Common Stock | | Paid-in | | Accumulated | | Noncontrolling | | | | ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Interest |
| Total | |||||
Balance as of January 1, 2022 |
| 19,571,119 | |
| 20 | | | 103,039 | | | (28,779) | | | 662 | |
| 74,942 |
| | | | | | | | | | | | | | | | | |
Compensation expense related to stock options and restricted stock |
| — | |
| — | |
| 534 | |
| — | |
| — | | | 534 |
| | | | | | | | | | | | | | | | | |
Shares issued to executive in connection with stock grants for bonus payments | | 178,727 | | | — | | | 281 | | | — | | | — | | | 281 |
| | | | | | | | | | | | | | | | | |
Shares repurchased from executive in exchange for withholding taxes | | (53,882) | | | — | | | (85) | | | — | | | — | | | (85) |
| | | | | | | | | | | | | | | | | |
Shares issued to directors in connection with restricted stock grants | | 50,000 | | | — | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | |
Shares issued to consultants in connection with stock grants | | 20,064 | | | — | | | 33 | | | — | | | — | | | 33 |
| | | | | | | | | | | | | | | | | |
Shares issued to consultant in connection with sale transaction (see Note 3 and Note 7) | | 65,275 | | | — | | | 97 | | | — | | | — | | | 97 |
| | | | | | | | | | | | | | | | | |
Shares issued to key employee in connection with stock grant | | 33,557 | | | — | |
| 50 | |
| — | |
| — | | | 50 |
| | | | | | | | | | | | | | | | | |
Shares repurchased from key employee in exchange for withholding taxes related to vesting of restricted shares |
| (240,000) | |
| — | |
| (357) | |
| — | |
| — | | | (357) |
| | | | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2022 |
| — | |
| — | |
| — | |
| (4,018) | |
| (1,338) | | | (5,356) |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2022 |
| 19,624,860 | |
| 20 | |
| 103,592 | |
| (32,797) | |
| (676) | |
| 70,139 |
| | | | | | | | | | | | | | | | | |
Compensation expense related to stock options and restricted stock |
| — | |
| — | |
| 161 | |
| — | |
| — | |
| 161 |
| | | | | | | | | | | | | | | | | |
Contra-revenue related to warrants granted to licensee | | — | | | — | | | 26 | | | — | | | — | | | 26 |
| | | | | | | | | | | | | | | | | |
Shares issued to directors in connection with restricted stock grants | | 40,000 | | | — | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | |
Forfeitures of restricted stock grants | | (5,000) | | | — | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | |
Shares issued to consultant in connection with stock grants | | 66,668 | | | — | | | 45 | | | — | |
| — | |
| 45 |
| | | | | | | | | | | | | | | | | |
Shares issued to employee in connection with stock grant | | 7,300 | | | — | | | 10 | | | — | | | — | |
| 10 |
| | | | | | | | | | | | | | | | | |
Shares issued on exercises of stock options, net of shares surrendered for cashless exercises | | 61,225 | | | — | | | 27 | | | — | | | — | | | 27 |
| | | | | | | | | | | | | | | | | |
Net loss for the year ended December 31, 2023 |
| — | |
| — | |
| — | |
| (21,052) | |
| (1,185) | |
| (22,237) |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2023 |
| 19,795,053 | | $ | 20 | | $ | 103,861 | | $ | (53,849) | | $ | (1,861) | | $ | 48,171 |
See accompanying Notes to Consolidated Financial Statements.
5557
Xcel Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities |
| |
|
| |
|
Net loss | | $ | (13,085) | | $ | (3,445) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | |
|
|
Depreciation and amortization expense | |
| 5,497 | |
| 3,902 |
Asset impairment charges | |
| 13,113 | |
| 6,200 |
Amortization of deferred finance costs | |
| 95 | |
| 146 |
Stock-based compensation | |
| 850 | |
| 976 |
Amortization of note discount | |
| — | |
| 16 |
Allowance for doubtful accounts | | | 1,042 | | | (50) |
Loss on extinguishment of debt | | | — | | | 189 |
Deferred income tax benefit | |
| (4,382) | |
| (705) |
Net gain on sale of assets | | | (46) | | | — |
Gain on reduction of contingent obligation | | | — | | | (2,850) |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| 691 | |
| 438 |
Inventory | |
| (317) | |
| 1,089 |
Prepaid expenses and other assets | |
| 597 | |
| (59) |
Accounts payable, accrued expenses and other current liabilities | |
| (496) | |
| (1,720) |
Cash paid in excess of rent expense | | | (374) | | | (431) |
Other liabilities | |
| — | |
| (196) |
Net cash provided by operating activities | |
| 3,185 | |
| 3,500 |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Cash consideration for acquisition of Halston Heritage assets | | | — | | | (8,830) |
Net proceeds from sale of assets | | | 46 | | | — |
Investment in Longaberger Licensing, LLC | |
| — | |
| (375) |
Purchase of property and equipment | |
| (748) | |
| (1,133) |
Net cash used in investing activities | |
| (702) | |
| (10,338) |
| | | | | | |
Cash flows from financing activities | |
|
| |
|
|
Shares repurchased including vested restricted stock in exchange for withholding taxes | |
| (190) | |
| (174) |
Cash contribution from non-controlling interest | | | 300 | | | — |
Payment of deferred finance costs | |
| (27) | |
| (315) |
Proceeds from long-term debt | | | — | | | 7,500 |
Payment of long-term debt | |
| (2,250) | |
| (4,742) |
Net cash (used in) provided by financing activities | |
| (2,167) | |
| 2,269 |
| | | | | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | |
| 316 | |
| (4,569) |
| | | | | | |
Cash, cash equivalents, and restricted cash at beginning of period | | | 5,750 | | | 10,319 |
| | | | | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 6,066 | | $ | 5,750 |
| | | | | | |
Reconciliation to amounts on consolidated balance sheets: | |
|
| |
|
|
Cash and cash equivalents | | $ | 4,957 | | $ | 4,641 |
Restricted cash | |
| 1,109 | |
| 1,109 |
Total cash, cash equivalents, and restricted cash | | $ | 6,066 | | $ | 5,750 |
| | | | | | |
Supplemental disclosure of non-cash activities: | |
|
| |
|
|
Operating lease right-of-use asset | | $ | 797 | | $ | 10,409 |
Operating lease obligation | | $ | 797 | | $ | 13,210 |
Accrued rent offset to operating lease right-of-use assets | | $ | — | | $ | 2,801 |
Settlement of seller note through offset to receivable | | $ | — | | $ | 600 |
Settlement of contingent obligation through offset to note receivable | | $ | — | | $ | 100 |
Issuance of common stock in connection with Halston Heritage assets acquisition | | $ | — | | $ | 1,058 |
Contingent obligation related to acquisition of Halston Heritage assets at fair value | | $ | — | | $ | 900 |
Liability for equity-based bonuses | | $ | 71 | | $ | 220 |
| | | | | | |
Supplemental disclosure of cash flow information: | |
|
| |
|
|
Cash paid during the period for income taxes | | $ | 58 | | $ | 136 |
Cash paid during the period for interest | | $ | 1,128 | | $ | 1,176 |
| | | | | | |
| | For the Year Ended December 31, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities |
| |
|
| |
|
Net loss | | $ | (22,237) | | $ | (5,356) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | |
|
|
Depreciation and amortization expense | |
| 6,954 | |
| 7,263 |
Asset impairment charges | |
| 100 | |
| 274 |
Amortization of deferred finance costs included in interest expense | |
| 22 | |
| 156 |
Stock-based compensation and cost of licensee warrants | |
| 242 | |
| 620 |
Provision for credit losses | | | 787 | | | 413 |
Undistributed proportional share of net loss of equity method investee | | | 2,060 | | | 1,202 |
Loss on early extinguishment of debt | | | — | | | 2,324 |
Deferred income tax provision (benefit) | |
| 1,107 | |
| (965) |
Gain on sale of majority interest in Isaac Mizrahi brand | | | — | | | (20,586) |
Gain on sale of limited partner ownership interest | | | (359) | | | — |
Gain on settlement of lease liability | | | (445) | | | — |
Gain on reduction of contingent obligation | | | — | | | (900) |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| 869 | |
| 2,117 |
Inventory | |
| 2,391 | |
| 530 |
Prepaid expenses and other current and non-current assets | |
| 1,034 | |
| 566 |
Deferred revenue | | | 4,356 | | | 54 |
Accounts payable, accrued expenses, accrued payroll, accrued income taxes payable, and other current liabilities | |
| (2,936) | |
| (1,426) |
Lease-related assets and liabilities | | | (525) | | | (244) |
Other liabilities | |
| 35 | |
| (224) |
Net cash used in operating activities | |
| (6,545) | |
| (14,182) |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Net proceeds from sale of majority interest in Isaac Mizrahi brand | | | — | | | 45,386 |
Capital contribution to equity method investees | | | (150) | | | (600) |
Net proceeds from sale of assets | | | 459 | | | — |
Purchase of property and equipment | |
| (100) | |
| (265) |
Net cash provided by investing activities | |
| 209 | |
| 44,521 |
| | | | | | |
Cash flows from financing activities | |
|
| |
|
|
Proceeds from exercise of stock options | | | 27 | | | — |
Shares repurchased including vested restricted stock in exchange for withholding taxes | | | — | |
| (442) |
Proceeds from long-term debt | | | 5,000 | | | — |
Payment of deferred finance costs | |
| (301) | |
| — |
Payment of long-term debt | |
| — | |
| (29,000) |
Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt | | | — | | | (1,511) |
Net cash provided by (used in) financing activities | |
| 4,726 | |
| (30,953) |
| | | | | | |
Net decrease in cash and cash equivalents | |
| (1,610) | |
| (614) |
| | | | | | |
Cash and cash equivalents at beginning of year | | | 4,608 | | | 5,222 |
| | | | | | |
Cash and cash equivalents at end of year | | $ | 2,998 | | $ | 4,608 |
| | | | | | |
Supplemental disclosure of non-cash activities: | | | | | | |
Liability for equity-based bonuses and other equity-based payments | | $ | — | | $ | (283) |
| | | | | | |
Supplemental disclosure of cash flow information: | |
|
| |
|
|
Cash paid during the period for interest | | $ | 56 | | $ | 1,032 |
Cash paid during the period for income taxes | | $ | 99 | | $ | — |
See accompanying Notes to Consolidated Financial Statements.
5658
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
1. Nature of Operations, Background, and Basis of Presentation
Xcel Brands, Inc. (“Xcel” and, together with its subsidiaries, the “Company”) is a media and consumer products company engaged in the design, production,licensing, marketing, live streaming, wholesale distribution, and direct-to-consumersocial commerce sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.
Currently, the Company’s brand portfolio consists of the Isaac MizrahiLOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brands (the "Isaac Mizrahi Brand"“Halston Brand”), the Judith Ripka brands (the "Ripka Brand"), the Halston brands (the "Halston Brand"), the C Wonder brands (the "C“C Wonder Brand"Brand”), and other proprietary brands. The Company also manages the Longaberger brand (the “Longaberger Brand”), the Isaac Mizrahi brands (the “Isaac Mizrahi Brand”), the TowerHill by Christie Brinkley brand (the “CB 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 50% ownership interest in Longaberger Licensing, LLC; the Company consolidates Longaberger Licensing, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party (see Note 3 for additional details). |
● | 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 30% ownership interest in IM Topco, LLC and continues to participate in the operations of the business; the Company accounts for its interest in IM Topco, LLC using the equity method of accounting (see Note 3 for additional details). |
● | The CB Brand is a new co-branded collaboration between Xcel and Christie Brinkley, announced in 2023 and planned to launch in 2024. |
The Company also owns a 30% interest in Longaberger Licensing, LLC.ORME Live, Inc. (“ORME”), a short-form video and social commerce marketplace that is planned to launch in 2024.
The Company designs, produces, markets, and distributes products, and in certain cases, licensesprimarily generates revenue through the licensing of its brands to third parties, and generates licensing and other revenues through contractual arrangements with manufacturers and retailers. This includes licensingThe Company, through its own brands for promotionlicensees, distributes through an omni-channel and distribution through a ubiquitous-channel retailsocial commerce sales strategy, which includes distributionthe promotion and sale of products under its brands through interactive television, the internet, anddigital live-stream shopping, social commerce, traditional brick-and-mortar retail channels.retailers, and e-commerce channels, to be everywhere its customers shop.
Prior to 2023, and for a portion of 2023, the Company also engaged in certain wholesale and direct-to-consumer sales of products under its brands. The Company’s wholesale and e-commercedirect-to-consumer operations are presented as "Net sales" and "Cost of goods sold (sales)"sold" in the Consolidated Statements of Operations, separately from the Company’s licensing revenues.
Liquidity and Management’s Plans
The Company incurred a net loss attributable to Company stockholders of approximately $21.1 million and $4.0 million during the years ended December 31, 2023 and 2022, respectively (which included non-cash expenses of approximately $9.0 million and $8.2 million, respectively), and had an accumulated deficit of approximately $53.8 million and $32.8 million as of December 31, 2023 and 2022, respectively. Net cash used in operating activities was $6.5 million in 2023 and $14.2 million in 2022. The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations) of approximately $2.1 million and $8.8 million as of December 31, 2023 and 2022, respectively. The Company’s cash and cash equivalents were approximately $3.0 million and $4.6 million as of December
59
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
31, 2023 and 2022, respectively. The aforementioned factors raise uncertainties about the Company’s ability to continue as a going concern.
During the year ended December 31, 2023, management implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting its business from a wholesale/licensing hybrid model into a “licensing plus” 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 were 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 2024 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 5 for details).
These restructuring initiatives were substantially completed as of June 30, 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 December 31, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses (excluding non-recurring charges related to the restructuring) by approximately $9 million, on an annualized basis when compared to the corresponding periods in the prior year.
Further, in October 2023, the Company entered into a new term loan agreement in the amount of $5 million (see Note 6 for details). Subsequent to year end, in January 2024, the Company entered into a sublease of its offices at 1333 Broadway in New York, NY (see Note 12 for details), and in March 2024, the Company issued new shares of common stock for net proceeds of approximately $2 million (see Note 12 for details).
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 Annual Report on Form 10-K; therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of December 31, 2023, have been alleviated.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Xcel, its wholly owned subsidiaries, and entities in which Xcel has a controlling financial interest as of and for the years ended December 31, 20202023 (the "Current Year") and 20192022 (the "Prior Year"). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions have been eliminated in consolidation.consolidation, and net earnings have been adjusted by the portion of operating results of consolidated entities attributable to noncontrolling interests.
60
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Investments in Unconsolidated Affiliates
The Company holds a noncontrolling equity interest in IM Topco, LLC, which was entered into during the Prior Year, and a noncontrolling equity interest in ORME Live, Inc., which was entered into during the Current Year. These investments are accounted for in accordance with ASC Topic 323, “Investments – Equity Method and Joint Ventures,” as the Company has the ability to exercise significant influence over their operating and financial policies of these affiliates, but does not control the affiliates.
The Company recognizes its share of the ongoing operating results of these affiliates within other operating costs and expenses (income) in the accompanying consolidated statements of operations. The Company’s investments in unconsolidated affiliates are reviewed for impairment whenever there are indicators that their carrying value may not be recoverable; if a decrease in value of the investment has occurred and such decrease is determined to be other than temporary in nature, the Company shall record an impairment charge to reduce the carrying amount of the investment to its fair value.
See Note 3 for additional information related to the Company’s investments in unconsolidated affiliates.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation, or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
The Company deems the following items to require significant estimates from management:
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.
Accounts Receivable
Accounts receivable are reported net of an allowance for credit losses. As of December 31, 2023 and 2022, the Company had $3.5 million and $5.1 million, respectively, of accounts receivable, net of allowances of $0.8 million and $0, respectively.
61
57
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Reclassifications
Certain reclassifications have been mademanagement'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 Prior Year financial statements to conform to classifications useddetermine if there are changes in the Current Year – specifically,collections of accounts receivable. Receivable balances are written-off against the aggregation of interest expense with other finance charges, the latter of which was not material in Current Year or Prior Year. This reclassification had no impact on net income, stockholders’ equity, or cash flows as previously reported.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or lessallowance for credit losses when such balances are deemed to be cash equivalents.uncollectible.
Accounts Receivable
Accounts receivable are reported netA rollforward of the allowance for doubtful accounts. The allowance for doubtful accounts is based on the Company’s ongoing discussions with its licensees, wholesale and digital customers, and its evaluation of each customer’s payment history, account aging, and financial position.
As of December 31, 2020 and 2019, the Company had $8.9 million and $10.6 million, respectively, of accounts receivable, net of allowances for doubtful accounts of $1.2 million and $0.2 million, respectively. The Company recognized bad debt expense of $1.1 millioncredit losses for the Current Year and a recoveryis as follows:
| | | |
($ in thousands) |
| | |
Balance at December 31, 2022 | | $ | — |
Credit loss expense | |
| 787 |
Write-offs | |
| — |
Recoveries | |
| — |
Balance at December 31, 2023 | | $ | 787 |
The Company recognized credit loss expense of $(0.1)$0.4 million forin the Prior Year. Included within these amounts, the Current Year, reflects $1.0 million of bad debt expensewhich was related to the bankruptcy of several retail customers due to the novel2020 – 2023 coronavirus disease pandemic. The total allowanceCompany wrote-off approximately $1.5 million of $1.0 million against such customers’ outstanding receivable balances in the Prior Year.
Additionally, on October 17, 2023, the Company and one of $1.2the licensees managed under the Halston Master License (see Note 5) entered into an amendment of their respective licensing agreement. Under this amendment, the payment terms of the $0.76 million at December 31, 2020 represents management’s best estimateoutstanding balance due to the Company were changed such that this receivable (and collection thereof) became contractually contingent upon the licensee’s future performance. The licensee is also required to pay interest to the Company on a monthly basis until the outstanding balance is paid in full. The Company recorded a non-cash charge of collectibility, based on information currently available.$0.76 million within other selling, general and administrative expenses in the Current Year related to the restructuring of this licensing arrangement, in order to write-down the previously-recorded receivable to zero, which is not included in the credit loss expense and allowance for credit losses amounts set forth above.
There is no earned revenue that has been accrued but not billed as of December 31, 20202023 and 2019.2022.
As of December 31, 2023 and 2022, approximately $0.04 million and $1.7 million, respectively, of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the Prior Year, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit. Under such agreement, the Company retains ownership of such assigned receivables, and receives payment from the agent (less certain fees charged by the agent) upon the agent's collection of the receivables from customers. During both the Current Year and Prior Year, the Company paid less than $0.1 million in fees to the agent under the aforementioned services agreement.
Inventory
All of the Company’s inventory consists of finished goods. As of December 31, 2022, inventory was composed of jewelry, wholesale apparel, and home goods. During the Current Year, as a result of the restructuring of its business operating model, the Company sold all of its wholesale apparel inventory and substantially all of its remaining fine jewelry inventory to its new business partners and licensees. Thus, as of December 31, 2023, inventory was primarily composed of home goods and related items for the Longaberger Brand.
Inventory is recorded at the lower of cost or net realizable value, with cost determined on a weighted average basis. The Company holds finished goods inventory for its e-commerce jewelry operations. Apparel and jewelry finished goods inventory is purchased to satisfy orders received from its wholesale operations. The Company periodically reviews the composition of its inventories in order to identify obsolete, slow-moving, or otherwise non-saleable items. If non-saleable items are observed and there are no alternate uses for the inventories, the Company
62
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
will record a write-down to net realizable value in the period that the decline in value is first recognized. ReservesWrite-downs for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Property and Equipment
Furniture, equipment, and software are stated at cost less accumulated depreciation and amortization, and are depreciated using the straight-line method over their estimated useful lives, generally three (3) to seven (7) years. Leasehold
58
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Depreciation expense for the years ended December 31, 20202023 and 20192022 was approximately $0.8 million and $1.1 million, respectively.
Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the leases. Betterments and improvements are capitalized, while repairs and maintenance are expensed as incurred.
Costs to develop or acquire software for internal use incurred during the preliminary project stage and the post implementation stage are expensed, while internal and external costs to acquire or develop software for internal use incurred during the application development stage – including design, configuration, coding, testing, and installation – are generally capitalized.
As a result of the bankruptcy of Lord & Taylor in the Current Year, the Company recognized a $0.1 million impairment related to certain furniture and fixture assets physically located in Lord & Taylor’s stores.
Trademarks and Other Intangible Assets
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles - Goodwill and Other.” Under this standard, goodwill and indefinite-lived intangible assets are not amortized, but are required to be assessed for impairment at least annually (the Company utilizes December 31 as its testing date) and when events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount.
Indefinite-Lived Intangible Assets
The Company tests its indefinite-lived intangible assets for recovery in accordance with ASC-820-10-55-3F, which states that the income approach (“Income Approach”) converts future amounts (for example cash flows) to a single current (that is, discounted) amount. When the Income Approach is used, fair value measurement reflects current market expectations about those future amounts. The Income Approach is based on the present value of future earnings expected to be generated by a business or asset. Income projections for a future period are discounted at a rate commensurate with the degree of risk associated with future proceeds. A residual or terminal value is also added to the present value of the income to quantify the value of the business beyond the projection period. As such, recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its expected future discounted net cash flows. If the carrying amount of such assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the recoverable amount of the assets.
The Company performed its annual impairment testing as described above for the year ended December 31, 2020, and concluded that there was no impairment of its indefinite-lived intangible assets.
As a result of performing its annual impairment testing as described above for the year ended December 31, 2019, the Company recorded a $6.2 million impairment related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct-to-consumer model. No other impairment charges were recorded for the year ended December 31, 2019.
Finite-Lived Intangible Assets
The Company’s finite-lived intangiblelong-lived property and equipment assets including Trademarks, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment loss is recognized if the carrying amount of a finite-lived intangible asset is not recoverable and its carrying amount exceeds its fair value.
With reference to finite-lived intangible assetsTo perform such impairment testing, the Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluateevaluates the asset group against the sum of undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on undiscounteda discounted cash flows analysis or appraisals. The inputs utilized in the impairment analysis are classified as Level 3 inputs within the fair value hierarchy as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement.”
59
TableThe Company recognized impairment charges of Contents$0.3 million in the Prior Year related to store fixtures purchased for an apparel program with one of the Company’s retail partners.
XCEL BRANDS, INC. AND SUBSIDIARIESTrademarks and Other Intangible Assets
NotesThe Company’s finite-lived intangible assets are amortized over their estimated useful lives of three (3) to Consolidated Financial Statementseighteen (18) years. The Company re-evaluates the remaining useful life of its finite-lived intangible assets on an annual basis, based on consideration of current events and circumstances, the expected use of the asset, and the effects of demand, competition, and other economic factors. No changes were made to the estimated useful lives of intangible assets in the Current Year or Prior Year.
December 31, 2020The Company’s finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. To perform such impairment testing, the Company groups assets and 2019
liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluates the asset group against the sum of undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value, based on a discounted cash flows analysis or appraisals. The inputs utilized in the finite-lived intangible assets impairment analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC Topic 820, “Fair Value Measurement.”
As a result of performing its annual impairment testing as described above for the year ended December 31, 2020, the Company recorded a $13.0 million impairment related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the novel coronavirus disease pandemic. No other impairment charges were recorded for the year ended December 31, 2020.
820. No impairment charges were recorded related to finite-lived intangible assets for the year ended Current Year or Prior Year.
See Note 4 for additional information related to the Company’s trademarks and other intangible assets.
63
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019.2023 and 2022
The Company’s finite-lived intangible assets are amortized over their estimated useful lives of seven (7) to eighteen (18) years.
Restricted Cash
Restricted cash was $1.1 million as of December 31, 2020 and 2019, respectively. This balance consisted of $1.1 million of cash deposited with Bank Hapoalim B.M. (“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of the Company’s current corporate office and operating facility at 1333 Broadway, New York City.
Investment in Unconsolidated Affiliate
The Company holds a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016. This investment is accounted for in accordance with Accounting Standards Update (“ASU”) No. 2016-01, "Financial Instruments – Overall (Subtopic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities," and is included within other assets on the Company’s consolidated balance sheets at December 31, 2020 and 2019. As of December 31, 2020 and 2019, the carrying value of this investment was $0.1 million. This investment does not have a readily determinable fair value and in accordance with ASC 820-10-35-59, the investment is valued at cost, less impairment, plus or minus observable price changes of an identical or similar investment of the same issuer.
Note Receivable
The Company previously entered into a promissory note receivable from a certain key employee in the amount of $0.9 million. This note receivable bore interest at 5.1%, was due and payable in full on April 1, 2019, and was fully collateralized by various assets of the employee in which the Company had been granted a security interest. The note receivable was satisfied on March 31, 2019, and as of December 31, 2019, there were no amounts remaining outstanding under the note.
Deferred Finance Costs
The Company incurred costs (primarily professional fees and lender underwriting fees) in connection with borrowings under the senior secured term loans. These costs have been deferred on the consolidated balance sheetssheet as a reduction to the carrying value of the associated borrowings. Such costsborrowings, and are being amortized as interest expense over the term of the related borrowings using the effective interest method.
Contingent Obligations
When accounting for asset acquisitions, if any contingent obligations exist and the fair value of the assets acquired is greater than the consideration paid, any contingent obligations are recognized and recorded as the positive difference between the fair value of the assets acquired and the consideration paid for the acquired assets.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
When accounting for asset acquisitions, if any contingent obligations exist and the fair value of the assets acquired are equal to the consideration paid, any contingent obligations are recognized based upon the Company’s best estimate of the amount that will be paid to settle the liability.
The Company recorded contingent obligations in connection with the acquisition of the Judith Ripka Trademarks in 2014, the C Wonder Trademarks in 2015, and the Halston Heritage Trademarks in 2019. See Note 6 and Note 10 for additional information related to contingent obligations.
Under the applicable accounting guidance, the Company is required to carry such contingent liability balances on its consolidated balance sheet until the measurement period of the earn-out expires and all related contingencies have been resolved.
The Company recorded contingent obligations in connection with the purchase of the Halston Heritage trademarks in 2019 and the purchase of the LOGO by Lori Goldstein trademarks in 2021, but no amount has been recorded for the contingent obligation related to the sale of a majority interest in the Isaac Mizrahi Brand in 2022.
See Note 9 for additional information related to the Company’s contingent obligations.
Revenue Recognition
The Company applies the guidance in ASC Topic 606, “Revenue from Contracts with Customers” to recognize revenue.
Licensing
The Company recognizes revenue continuously over time as it satisfies its continuous obligation of granting access to its licensed intellectual properties, which are deemed symbolic intellectual properties under the applicable revenue accounting guidance. Payments are typically due after sales have occurred and have been reported by the licensees or, where applicable, in accordance with minimum guaranteed payment provisions. The timing of performance obligations is typically consistent with the timing of payments, though there may be differences if contracts provide for advances or significant escalations of contractually guaranteed minimum payments. ThereWith the exception of the Halston Master License agreement described in Note 5, there were no such differences that would have a material impact on the Company’s consolidated balance sheets at December 31, 20202023 and 2019.2022. In accordance with ASC 606-10-55-65, the Company recognizes net licensing revenue at the later of when (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied (in whole or in part). More specifically, the Company separately identifies:
(i) | Contracts for which, based on experience, royalties are expected to exceed any applicable minimum guaranteed payments, and to which an output-based measure of progress based on the “right to invoice” practical expedient is applied because the royalties due for each period correlate directly with the value to the customer of the Company’s performance in each period (this approach is identified as “View A” by the FASB Revenue Recognition Transition Resource Group, “TRG”); and |
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(ii) | Contracts for which revenue is recognized based on minimum guaranteed payments using an appropriate measure of progress, in which minimum guaranteed payments are straight-lined over the term of the contract and recognized ratably based on the passage of time, and to which the royalty recognition constraint to the sales-based royalties in excess of minimum guaranteed is applied and such sales-based royalties are recognized to the distinct period only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG). |
The Company’s unconditional right to receive consideration based on the terms and conditions of licensing contracts is presented as accounts receivable on the accompanying consolidated balance sheets. The Company does not typically perform by transferring goods or services to customers before the customer pays consideration or before payment is due, thus the amounts of contract assets as defined by ASC 606-10-45-3 related to licensing contracts were not material as of December 31, 20202023 and 2019. The Company’s unconditional right to receive consideration based on the terms and conditions of licensing contracts is presented as accounts receivable on the accompanying consolidated balance.2022. The Company typically does not receive consideration in advance of performance and, consequently, amounts of contract liabilities as defined by ASC 606-10-45-2 related to licensing contracts were not material as of December 31, 2020 and 2019.2022; however, as of December 31, 2023, the Company has recognized approximately $4.4 million of deferred revenue contract liabilities on its consolidated balance sheet related to the Halston Master License agreement (see Note 5).
The Company does not disclose the amount attributable to unsatisfied or partially satisfied performance obligations for variable revenue contracts (identified under “View A” above) in accordance with the optional exemption allowed under
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
ASC 606. The Company did not have any revenue recognized in the reporting period from performance obligations satisfied, or partially satisfied, in previous periods. Remaining minimum guaranteed payments for active contracts as of December 31, 20202023 are expected to be recognized ratably in accordance with View C over the remaining term of each contract based on the passage of time and through December 2023.2028, subject to renewal or extension upon termination.
Wholesale Sales
ThePrior to the restructuring of the Company’s business model and operations in the Current Year, the Company generatesgenerated a portion of its revenue through the design, sourcing, and sale of branded jewelry and apparel to both domestic and international customers who, in turn, sellsold the products to the consumer. The Company recognizesrecognized such revenue within net sales in the accompanying consolidated statements of operations when performance obligations identified under the terms of contracts with its customers arewere satisfied, which occursoccurred upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale. Shipping to customers was accounted for as a fulfillment activity and was recorded within other selling, general and administrative expenses.
Direct to ConsumerDirect-to-Consumer Sales
The Company’s revenue associated with its e-commerce businesses isjewelry operations and the Longaberger Brand (prior to the restructuring of the Company’s business model and operations in the Current Year) was recognized within net sales in the accompanying consolidated statements of operations at athe point in time when product is shipped to the customer. Shipping to customers was accounted for as a fulfillment activity and was recorded within other selling, general and administrative expenses.
Advertising Costs
All costs associated with production for the Company’s advertising, marketing, and promotion are expensed during the periods when the activities take place. All other advertising costs, such as print and online media, are expensed when the advertisement occurs. The Company incurred $0.9approximately $1.0 million and $2.6 million in advertising and marketing costs for eachthe Current Year and Prior Year, respectively, which are included within other selling, general and administrative expenses in the accompanying consolidated statements of the years ended operations.
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and December 31, 2019.2022
Leases
The Company determines if an arrangement is a lease (as defined in ASC Topic 842, “Leases”) at inception.the inception of the arrangement. The Company generally recognizes a right-of-use (“ROU”) asset, representing its right to use the underlying leased asset for the lease term, and a liability for its obligation to make future lease payments (the lease liability) at commencement date (the date on which the lessor makes the underlying asset available for use) based on the present value of lease payments over the lease term. The Company does not recognize ROU assets and lease liabilities for lease terms of 12 months or less, but recognizes such lease payments in net incomeoperations on a straight-line basis over the lease terms.
As the Company’s leases typically do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
For real estate leases of office space, the Company accounts for the lease and non-lease components as a single lease component. Variable lease payments that do not depend on an index or rate (such as real estate taxes and building insurance and lessee’s shares thereof), if any, are excluded from lease payments at lease commencement date for initial measurement. Subsequent to initial measurement, these variable payments are recognized when the event determining the amount of variable consideration to be paid occurs.
Lease expense for operating lease payments related to office leases is generally recognized on a straight-line basis over the lease term. Lease expense for operating lease payments related to retail leases is recognized on a straight-line basis over the period of operation, as this is representative of the pattern in which benefit is derived from the lease. The Company recognizes income from subleases (in which the Company is the sublessor) on a straight-line basis over the term of the sublease, as a reduction to lease expense.
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NotesSee Note 9 for additional information related to Consolidated Financial Statementsthe Company’s leases.
December 31, 2020 and 2019
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation,” by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable.
The fair value of stock options and warrants is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the awards and the expected stock price volatility over the terms of the awards, and actual and projected employee stock option exercise behaviors.awards. The risk-free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, and expected life is based on the estimated average life of options and warrants using the simplified method. Themethod; the Company utilizes the simplified method to determine the expected life of the options and warrants due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The risk-free rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the historical volatility of the Company’s common stock, and the expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
Restricted stock awards are valued using the fair value of the Company’s stock at the date of grant.grant, based on the quoted market price of the Company’s common shares on the NASDAQ Capital Market.
The Company accounts for non-employee awards in accordance with ASU 2018-07, “Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting.” SuchNon-employee awards are measured at the grant date fair value of the equity instruments to be issued, and the Company recognizes compensation cost for grants to non-employees on a straight-line basis over the period of the grant.
The Company accounts for forfeitures 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
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Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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.
See Note 7 for additional information related to stock-based compensation.
Income Taxes
Current income taxes are based on the respective period’s taxable income for federal and state income tax reporting purposes. Deferred tax liabilitiesassets and assetsliabilities are determined based on the differencedifferences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates and laws that will be in effect for the year in which the differences are expected to reverse.
A valuation allowance is requiredrecognized when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company applies the FASB guidance on accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also addresses derecognition, classification, interest, and penalties related to uncertain tax positions. The Company has no unrecognized tax benefits as of December 31, 20202023 and 2019.2022. Interest and penalties related to uncertain tax positions, if any, are recorded in income tax expense. Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 20172020 through December 31, 2020.2023.
The income tax effects of changes in tax laws are recognized in the period when enacted.
See Note 10 for additional information related to income taxes.
Fair Value
ASC Topic 820, “Fair Value Measurements and Disclosures,Measurement,” defines fair value and establishes a framework for measuring fair value under U.S. GAAP. The fair value of the Company’s financial assets and liabilities reflects management’s
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of the Company’s assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, and accounts payable, the carrying amounts approximate fair value due to the short-term maturities of these instruments. The carrying value of term loan debt approximates fair value becausedue to the fixedfloating interest rate approximates current market rates and in the instances it does not, the impact is not material. When debt interest rates are below market rates, the Company considers the discounted valuestructure of the difference of actual interest rates and its internal borrowing against the scheduled debt payments. The fair value of the Company’s cost method investment does not have a readily determinable fair value and in accordance with ASC 820-10-35-59, the investment is valued at cost, less impairment, plus or minus observable price changes of an identical or similar investment of the same issuer.term loan agreement.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents restricted cash,and accounts receivable, and notes receivable. The Company limits its credit risk with respect to cash and cash equivalents by maintaining cash, cash equivalents, and restricted cashsuch balances with high quality financial institutions. At times, the Company’s cash and cash equivalents and restricted cash may exceed federally insured limits. Concentrations of credit risk with respect to accounts receivable are minimalnot considered
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
significant due to the collection history and due to the nature of the Company’s royalty revenues. Generally, the Company does not require collateral or other security to support accounts receivable.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted earnings (loss) per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants using the treasury stock method. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and warrants outstanding were exercised into common stock if the effect is not anti-dilutive. See Note 8 for additional information related to earnings (loss) per share.
Recently IssuedAdopted Accounting Pronouncements
In December 2019,The Company adopted the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying theprovisions of Accounting for Income Taxes.” This ASU removes certain exceptions to the general principles in Topic 740, including, but not limited to, intraperiod tax allocations and interim period tax calculations. The ASU also provides additional clarification and guidance related to recognition of franchise taxes and changes in tax laws. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of this new guidance in 2021 will not have any significant impact on the Company’s results of operations, cash flows, and financial condition.
In June 2016, the FASB issued ASUStandards Update (“ASU”) No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which was subsequentlyInstruments" (as amended by ASU No. 2018-19 in November 2018, through ASU No. 2018-19.2019-05 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 will requirerequires entities to estimate lifetime expected credit losses for financial instruments, including trade and other receivables, which will generally 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.
Recently Issued Accounting Pronouncements
In November 2019,December 2023, the FASB issued ASU No. 2019-10, which, among2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU requires disclosure of additional categories of information about federal, state, and foreign income taxes in the rate reconciliation table and requires entities to provide more details about the reconciling items in some categories if items meet a quantitative threshold. The ASU also requires entities to disclose income taxes paid, net of refunds, disaggregated by federal (national), state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold. The guidance makes several other things, deferredchanges to the applicationdisclosure requirements. The ASU is required to be applied prospectively, with the option to apply it retrospectively, and is effective for fiscal years beginning after December 15, 2024. The Company does not anticipate that the adoption of this ASU will have a significant impact on its consolidated financial statements.
3. Acquisitions and Divestitures, Investments in Unconsolidated Affiliates, and Variable Interest Entities
Sale of Majority Interest in Isaac Mizrahi Brand
On May 27, 2022, Xcel (along with IM Topco, LLC (“IM Topco”) and IM Brands, LLC (“IMB”), both wholly owned subsidiaries of the new guidanceCompany) 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 credit lossesMay 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 70% of the membership interests of IM Topco to WHP.
The purchase price paid by WHP to the Company at the closing of the transaction in exchange for smaller reportingthe 70% membership interest in IM Topco consisted of $46.2 million in cash. The Company incurred approximately $0.9 million of expenses directly related to this transaction, including legal fees and agent fees, of which $0.1 million of the agent fees were paid through the issuance of 65,275 shares of the Company’s common stock, which were recognized as a reduction to the gain from the transaction. The Company recognized a net pre-tax gain from the transaction of $20.6 million, which is classified
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Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the new guidance to determine the impact the adoptionas a component of this guidance will have on the Company’s results of operations, cash flows,other operating costs and financial condition.
Recently Adopted Accounting Pronouncements
The Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” effective January 1, 2020. This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance did not have any impact on the Company’s results of operations, cash flows, and financial condition.
The Company adopted ASU No. 2016-02, “Leases,” effective January 1, 2019, by applying the new guidance under the additional and alternative transition method allowed by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” As of January 1, 2019, the adoption resultedexpenses (income) in the recognition of operating lease right-of-use ("ROU") assets of approximately $10.4 million, lease liabilities of approximately $13.2 million, and a decrease of approximately $2.8 million in accrued rent. The adoption of the new lease accounting guidance did not have an impact on the Company’s consolidated statement of operations and had no impact on cash provided by or used in operating, financing, or investing activities in the Company's consolidated statement of cash flows.
The Company elected the available practical expedients under ASC 842-10-15-37 (thereby not separating lease components from non-lease components and instead accounting for all components as a single lease component) and ASC 842-10-65-1 (thereby, among other things, not reassessing lease classification), and implemented changes to its processes and methodologies related to leases to enable the preparation of financial information upon adoption and to allow for the correct identification, classification, and measurement of leases in accordance with the new guidance going forward.
3. Acquisitions
Acquisition of Halston Heritage Trademarks
On February 11, 2019 (the “Closing Date”), the Company and its wholly owned subsidiary, H Heritage Licensing, LLC, entered into an asset purchase agreement (the "Heritage Asset Purchase Agreement") with the H Company IP, LLC (the "Seller" or "HIP") and its parent, House of Halston LLC ("HOH"), pursuant to which the Company acquired certain assets of HIP, including the "Halston", "Halston Heritage", and "Roy Frowick" trademarks (collectively, the "Halston Heritage Trademarks") and other intellectual property rights relating thereto. Benjamin Malka, who was a director of the Company, is a 25% equity holder of HOH and former Chief Executive Officer of HOH.Prior Year.
Pursuant to the Heritage Asset Purchase Agreement, at closing,May 27, 2022 purchase agreement, the Company deliveredwas also entitled to receive an “earn-out” payment in escrow for HIP or its designees (collectively, the “Sellers”) an aggregateamount of $8.4$2.0 million in cash and 777,778 shares ofif, during the Company’s common stock valued at $1.1 million (the “Xcel Shares”), subject to a voting agreement and a lock-up agreement relating to the Xcel Shares and a consent and waiver agreement each in form satisfactory to Xcel within three monthsperiod from the date of the Heritage Asset Purchase Agreement. Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.
In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”)January 1, 2023 through December 31, 2022 based on Excess2023, (i) IM Topco received Net Royalties. “Excess Net Royalties” during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) isRoyalty Revenue (as defined in the purchase agreement) in an amount equal to (a)or greater than $17.5 million and (ii) IM Topco generated EBITDA (as defined in the positivepurchase agreement) in an amount ifequal to or greater than $11.8 million. These conditions were not met during 2023, and ultimately the Company did not receive any additional “earn-out” payment.
Additionally, the purchase agreement provided that, in the event IM Topco receives less than $13.347 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on the third anniversary of the Net Royalties as calculatedclosing, WHP would be entitled to receive from the Company up to $16 million, less all amounts of net cash flow distributed to WHP for such Royalty Target Year,period, as an adjustment to the purchase price, payable in either cash or equity interests in IM Topco held by the Company. This provision was subsequently amended in November 2023, as described further below, and was subsequently further amended in April 2024 (see Note 12 for additional information).
In connection with the May 27, 2022 membership purchase agreement, the Company and WHP also entered into an Amended and Restated Limited Liability Company Agreement of IM Topco (the “Business Venture Agreement”) governing the operation of IM Topco as a partnership between the Company and WHP following the closing. Pursuant to the Business Venture Agreement, IM Topco is managed by a single Manager appointed by the vote of a majority-in-interest of IM Topco’s members, and WHP serves as the sole Manager of IM Topco. The Business Venture Agreement contains customary provisions for the governance of a partnership, including with respect to decision making, access to information, restrictions on transfer of interests, and covenants.
Pursuant to the Business Venture Agreement, IM Topco’s Net Cash Flow (as defined in the agreement) shall be distributed to the members during each fiscal year no less than once per fiscal quarter, as follows:
(i) | first, 100% to WHP, until WHP has received an aggregate amount during such fiscal year equal to $8,852,000 (subject to adjustment in certain circumstances as set forth in the agreement); |
(ii) | second, 100% to Xcel, until Xcel has received an aggregate amount during such fiscal year equal to $1,316,200 (subject to adjustment in certain circumstances as set forth in the agreement); and |
(iii) | thereafter, in proportion to the members’ respective ownership interests. |
The distribution provisions in the greaterBusiness Venture Agreement were subsequently amended in April 2024 (see Note 12 for additional information).
The Company also entered into a number of other related agreements on May 31, 2022 in connection with the transaction, including a services agreement with IM Topco and a license agreement with IM Topco (see Note 11 for details), while the Company’s employment agreement with Mr. Mizrahi and the Company’s services agreement with Laugh Club (see Note 11) were transferred to IM Topco. Further, the Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 5) was assigned to IM Topco as of May 31, 2022.
Management assessed and evaluated the ownership structure and other terms of the May 27, 2022 membership purchase agreement and Business Venture Agreement, as well as considered the Company’s continuing involvement with the Isaac Mizrahi Brand through the aforementioned services agreement and license agreement with IM Topco, and concluded that (i) One Million Five Hundred Thousand Dollars ($1.5 million), orIM Topco is not a Variable Interest Entity under ASC Topic 810, and (ii) the maximum Net Royalties for any previous Royalty Target Year. “Applicable Percentage” means (a) 50%Company has significant influence over, but does not control, IM Topco. As such, on May 31, 2022, the Company de-recognized the carrying amount of the first $10.0 millionIsaac Mizrahi Brand trademarks of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0$44.5 million and up to $15.0 million and (c) 0%recognized the fair value of aggregate Excess Net Royalties during theits retained interest in IM Topco of
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Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Earn-Out Period in excess of $15.0 million. The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”); provided, however, that if the number of Earn-Out Shares, when combined with the number of Xcel Shares issued at the Closing Date, will exceed 4.99% of the aggregate number of shares of Xcel common stock outstanding as of the Closing Date (calculated in accordance with Nasdaq Rule 5635(a)) (the “Xcel Share Limit”), then Xcel may, in its sole and unfettered discretion, elect to (x) pay cash for the Earn-Out Value attributable to the Earn-Out Shares that would exceed the Xcel Share Limit; (y) solicit stockholder approval for the issuance of Earn-Out Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, issue such Earn-Out Shares to HIP; or (z) solicit stockholder approval for the issuance of Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, pay the applicable Earn-Out Consideration with a combination of cash and Earn-Out Shares.
The Halston Heritage Trademark acquisition was accounted forapproximately $19.8 million as an asset purchase.equity method investment. The aggregate purchase price has been allocated to the following assets based on the fair value of the assetsCompany’s retained interest was determined by applying the Company’s ownership percentage to the implied enterprise value of IM Topco, which was calculated based on the dateprice paid by WHP for the 70% controlling interest, as the May 31, 2022 sale transaction was considered an arms-length transaction between knowledgeable market participants and the most relevant and reasonable indication of acquisition:value to utilize. The inputs and assumptions for this nonrecurring fair value measurement are classified as Level 3 within the fair value hierarchy defined in ASC Topic 820.
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Investment in IM Topco, LLC
The Halston Heritage Trademarks have been determined byCompany accounts for its interest in the ongoing operations of IM Topco as a component of other operating costs and expenses (income) under the equity method of accounting. Based on the aforementioned distribution provisions set forth in the Business Venture Agreement, the Company recognized an equity method loss of approximately $2.1 and $1.2 million related to its investment for the years ended December 31, 2023 and 2002, respectively. For cash flow earnings (i.e., net income before intangible asset amortization expense), management allocated the amounts based on the preferences outlined above. As such, Xcel recognized no cash-based earnings for all of the periods presented. For non-cash amortization expense, management allocated the amounts based on the relative ownership of each member (i.e., 70% WHP and 30% Xcel). The equity method loss for each period presented is equal to haveXcel’s share of amortization expense.
Summarized financial information for IM Topco is as follows:
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| For the year ended | ||||
| | December 31, | ||||
($ in thousands) | | 2023 | | 2022(1) | ||
Revenues | | $ | 12,119 | | $ | 7,791 |
Gross profit | | | 12,119 | | | 7,791 |
(Loss) income from continuing operations | | | (1,961) | | | 316 |
Net (loss) income | | | (1,961) | | | 316 |
(1) | Represents financial information for the period commencing May 31, 2022 (the date of the sale of a majority interest in IM Topco) through December 31, 2022. |
During the Prior Year (subsequent to the May 27, 2022 transaction), the Company made a finite useful life,capital contribution to IM Topco of $0.6 million in cash, which did not change the Company’s noncontrolling ownership interest of 30%.
In November 2023, the Company, WHP, and accordingly, amortizationIM Topco entered into an amendment of the May 27, 2022 membership purchase agreement, under which the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024. In exchange, Xcel agreed to make additional royalty payments to IM Topco totaling $0.45 million over the next 11 months. As a result of this amendment, the Company recognized a $0.45 million increase to the carrying value basis of its equity method investment and a corresponding increase in current liabilities.
The provisions of the membership purchase agreement were subsequently further amended in April 2024 (see Note 12 for additional information).
Investment in Orme Live, Inc.
In December 2023, the Company contributed $0.15 million of cash to ORME in exchange for a 30% equity ownership interest in ORME. The carrying value of this investment is recordedincluded within other assets in the Company’s consolidated statementsbalance sheet. The Company accounts for its interest in the operations of operations. The Halston Heritage TrademarksORME as a component of other operating costs and archives are amortized on a straight-line basis over their expected useful livesexpenses (income) under the equity method of eighteenaccounting; the Company’s proportional share of the operating results of ORME were not material in the Current Year.
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and seven years, respectively.2022
Sale of Investment in Unconsolidated Affiliate
The following representsCompany previously held a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016. This investment did not have a readily determinable fair value and in accordance with ASC 820-10-35-59, the aggregate purchaseinvestment was valued at cost, less impairment, plus or minus observable price changes of $10.8 million:
| | | |
($ in thousands, except share amounts) |
| | |
Cash | | $ | 8,350 |
Fair value of Common Stock issued (777,778 shares) | |
| 1,058 |
Total direct initial consideration | |
| 9,408 |
Direct transaction expenses | |
| 480 |
Contingent obligation | |
| 900 |
Total consideration |
| $ | 10,788 |
an identical or similar investment of the same issuer. This investment was included within other assets on the Company’s consolidated balance sheet at December 31, 2022, at a carrying value of $0.1 million. During the Current Year, the Company sold its ownership interest in this entity, and recognized a gain of $0.36 million related to the sale within other operating costs and expenses (income) on the consolidated statement of operations.
Consolidation of
Longaberger Licensing, LLC Variable Interest Entity and Acquisition of Longaberger Trademarks
On November 12,
Since 2019, the Company entered intoXcel has been party to a limited liability company agreement (the “LLC Agreement”) with a subsidiary of Hilco Global forrelated to Longaberger Licensing, LLC (“LL”). Hilco Global becameis the sole Class A Member of LL, and Xcel becameis the sole Class B Member of LL.LL (each individually a “Member”). Each member committed to an initial capital contribution of $425,000 in return forMember holds a 50% equity ownership interest in LL, with each member actually contributing $375,000 upon execution of the LLC Agreement.
Simultaneously on November 12, 2019, Longaberger Licensing, LLC completed the acquisition of the Longaberger trademarks and other intellectual property rights relating thereto from the trustee for the Longaberger Company. The total purchase price for such assets was $750,000. No other assets or liabilities were acquired as part of this transaction, and the acquisition was accounted for as an asset purchase.
BasedLL; however, based on an analysis of the contractual terms and rights contained in the LLC Agreement and related agreements, the Company has previously determined that under the applicable accounting standards, LL is a variable interest entity and the Company has effective control over the entity.LL. Therefore, as the primary beneficiary, the Company has consolidated LL since 2019, and has recognized the assets, liabilities, revenues, and expenses of LL as part of November 12, 2019. Upon consolidation, the Company recognized $750,000 of intangible assets andits consolidated financial statements, along with a noncontrolling interest which represents Hilco Global’s 50% ownership share in LL.
4. Trademarks and Other Intangibles
Trademarks and other intangibles, net consist of $375,000.the following:
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| Weighted |
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| | |
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| Average |
| December 31, 2023 | |||||||
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| Amortization | | Gross Carrying | | Accumulated | | Net Carrying | |||
($ in thousands) | | Period | | Amount | | Amortization | | Amount | |||
Trademarks (finite-lived) |
| 15 years | |
| 68,880 | |
| 27,431 | |
| 41,449 |
Copyrights and other intellectual property |
| 8 years | |
| 429 | |
| 358 | |
| 71 |
Total | | | | $ | 69,309 | | $ | 27,789 | | $ | 41,520 |
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| Weighted |
| | |
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| | |
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| Average |
| December 31, 2022 | |||||||
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| Amortization |
| Gross Carrying | | Accumulated | | Net Carrying | |||
($ in thousands) | | Period | | Amount | | Amortization | | Amount | |||
Trademarks (finite-lived) |
| 15 years | |
| 68,880 | |
| 21,346 | |
| 47,534 |
Copyrights and other intellectual property |
| 8 years | |
| 429 | |
| 298 | |
| 131 |
Total |
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| | $ | 69,309 | | $ | 21,644 | | $ | 47,665 |
During the Prior Year, the Company sold its $44.5 million of indefinite-lived trademarks related to the Isaac Mizrahi Brand (see Note 3 for details).
Amortization expense for intangible assets was approximately $6.1 million for both the Current Year and Prior Year.
6671
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
The Longaberger trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s consolidated statements of operations. The Longaberger trademarks are amortized on a straight-line basis over their expected useful life of fifteen (15) years.
During the Current Year, Hilco Global and Xcel each contributed $300,000 to LL in order to fund LL’s working capital requirements, which resulted in an increase of $300,000 to the carrying value of Hilco Global’s non-controlling interest.
4. Trademarks and Other Intangibles
Trademarks and other intangibles, net consist of the following:
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| Weighted |
| | |
| | |
| | |
|
| Average |
| December 31, 2020 | |||||||
|
| Amortization | | Gross Carrying | | Accumulated | | Net Carrying | |||
($ in thousands) | | Period | | Amount | | Amortization | | Amount | |||
Trademarks (indefinite-lived) |
| n/a | | $ | 44,500 | | $ | — | | $ | 44,500 |
Trademarks (finite-lived) |
| 15 years | |
| 21,613 | |
| 6,867 | |
| 14,746 |
Trademarks (finite-lived) | | 18 years | | | 38,194 | | | 4,192 | | | 34,002 |
Other intellectual property |
| 7 years | |
| 762 | |
| 537 | |
| 225 |
Copyrights and other intellectual property |
| 10 years | |
| 190 | |
| 128 | |
| 62 |
Total | | | | $ | 105,259 | | $ | 11,724 | | $ | 93,535 |
| | | | | | | | | | | |
|
| Weighted |
| | |
| | |
| | |
|
| Average |
| December 31, 2019 | |||||||
|
| Amortization |
| Gross Carrying | | Accumulated | | Net Carrying | |||
($ in thousands) | | Period | | Amount | | Amortization | | Amount | |||
Trademarks (indefinite-lived) |
| n/a | | $ | 62,900 | | $ | — | | $ | 62,900 |
Trademarks (finite-lived) |
| 15 years | |
| 16,213 | |
| 4,560 | |
| 11,653 |
Trademarks (finite-lived) | | 18 years | | | 38,194 | | | 2,067 | | | 36,127 |
Other intellectual property |
| 7 years | |
| 762 | |
| 428 | |
| 334 |
Copyrights and other intellectual property |
| 10 years | |
| 190 | |
| 109 | |
| 81 |
Total |
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| | $ | 118,259 | | $ | 7,164 | | $ | 111,095 |
During the year ended December 31, 2020, the Company recorded a non-cash impairment charge of $13.0 million related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the novel coronavirus disease pandemic. During the year ended December 31, 2019, the Company recorded a non-cash impairment charge of $6.2 million related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct-to-consumer model. No other intangible asset impairment charges were recorded for the years ended December 31, 2020 and 2019.
Amortization expense for intangible assets for the years ended December 31, 2020 and 2019 was approximately $4.6 million and $3.2 million, respectively.
Effective January 1, 2020, the Company determined that the Ripka Brand, inclusive of all its trademarks, has a finite life of 15 years, and is amortized on a straight-line basis accordingly. Prior to January 1, 2020, the Ripka Brand trademarks were considered indefinite-lived assets.
The trademarks of the Isaac Mizrahi Brand have been determined to have indefinite useful lives and accordingly, no amortization has been recorded for those intangible assets.
67
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Estimated future amortization expense related to finite-lived intangible assets over the remaining useful lives is as follows:
| | | | | | |
($ in thousands) | | Amortization | | Amortization | ||
Year Ending December 31, |
| Expense |
| Expense | ||
2021 | | $ | 3,632 | |||
2022 |
| | 3,632 | |||
2023 |
| | 3,632 | |||
2024 |
| | 3,617 | | $ | 6,115 |
2025 |
| | 3,613 |
| | 4,177 |
Thereafter |
| | 30,909 | |||
2026 |
| | 3,506 | |||
2027 |
| | 3,504 | |||
2028 |
| | 3,504 | |||
Thereafter (through 2036) |
| | 20,714 | |||
Total | | $ | 49,035 | | $ | 41,520 |
5. Significant Contracts
QVCQurate Agreements
Through its wholly owned subsidiaries, the Company has entered into direct-to-retail license agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements (individually, each a “Qurate Agreement”), pursuant to which the Company designs, and Qurate sources and sells, various products under the LOGO by Lori Goldstein brand, the Longaberger brand, and the C Wonder brand. The Company was also previously party to similar agreements with Qurate related to the IsaacMizrahiLIVE brand and the Judith Ripka brand, the H by Halston brand, and the Longaberger brand. These agreements include, respectively, the IM QVC Agreement, the Ripka QVC Agreement, the H QVC Agreement, and the Longaberger QVC Agreement (collectively, the “QVC Agreements”). Qurate owns the rights to all designs produced under the QVC Agreements,these agreements, and the QVC Agreementsagreements include the sale of products across various categories through Qurate’s television media (including QVC and HSN) and related internet sites.
Pursuant to thethese agreements, the Company has granted to Qurate and its affiliates the exclusive, worldwide right to promote the Company’s branded products, and the right to use and publish the related trademarks, service marks, copyrights, designs, logos, and other intellectual property rights owned, used, licensed and/or developed by the Company, for varying terms as set forth below. The QVC Agreements include automatic renewal periods as detailed below unless terminated by either party.
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In connection with the foregoingQurate Agreements and during the same periods, Qurate and its subsidiaries have the exclusive, worldwide right to use the names, likenesses, images, voices, and performances of the Company’s spokespersons to promote the respective products. Under the IM QVC Agreement, IM Brands has also granted to Qurate and its affiliates, during the same period, exclusive, worldwide rights to promote third-party vendor co-branded products that, in addition to bearing and being marketed in connection with the trademarks and logos of such third-party vendors, also bear or are marketed in connection with the IsaacMizrahiLIVE trademark and related logo.
| | | | | | | | |
| | | | | | Xcel Commenced | | Qurate |
Agreement | Current Term Expiry | Automatic Renewal | Brand with Qurate | Product Launch | ||||
LOGO Qurate Agreement (QVC) | | November 1, 2024 | | one-year period | | April 2021 | | 2009 |
Longaberger Qurate Agreement (QVC) | | October 31, 2025 | two-year period | November 2019 | 2019 | |||
C Wonder Qurate Agreement (HSN) | | December 31, 2024 | | two-year period | | March 2023 | | 2023 |
● | On May 31, 2022, in connection with the sale of a majority interest in the Isaac Mizrahi brand to a third party, the Qurate Agreement related to the IsaacMizrahiLIVE brand was assigned to IM Topco, LLC. See Note 3 for additional details. |
● | On August 30, 2022, Qurate and Xcel amended the licensing agreement for the Judith Ripka brand to terminate the license period effective December 31, 2021. Effective January 1, 2022, the agreement entered a sell-off period, under which Qurate was allowed to continue to license the Ripka brand on a non-exclusive basis for as long as necessary to sell off any of its remaining inventory. The sell-off period ended in 2023. |
Under the QVCQurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of the net retail sales of the specified branded products. 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 QVCQurate Agreements, net of customer returns, and excluding freight, shipping and handling charges, customer returns, and sales, use, or other taxes.
72
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
The Qurate Agreements generally prohibit the Company from selling products under the specified respective brands to a direct competitor of Qurate without Qurate’s consent. Under certain of the Qurate Agreements, the Company may, with the permission of Qurate, sell the respective branded products via certain specified sales channels in exchange for making reverse royalty payments to Qurate based on the net retail sales of such products through such channels. However, the Company is generally restricted from selling products under the specified respective brands or trademarks to certain mass merchants.
Also, under certain of the QVCQurate Agreements, except for the Longaberger QVC Agreement, the Company willmay be required for a period of time to pay a royalty participation fee to Qurate on revenue earned from the sale, license, consignment, or any other form of distribution of any products, bearing, marketed in connection with, or otherwise associated with the specified trademarks and brands.
68
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Net licensing revenue from Qurate totaled $17.61$6.0 million and $22.24$11.4 million for the Current Year and Prior Year, respectively, representing approximately 60%34% and 53%44% of the Company’s total revenues,net revenue, respectively. As of December 31, 20202023 and 2019,2022, the Company had receivables from Qurate of $4.46$1.5 million and $4.36$0.9 million, representing approximately 50%43% and 41%17% of the Company’s accounts receivable, respectively. The December 31, 20202023 and 20192022 Qurate receivables did not include any earned revenue accrued but not yet billed as of the respective balance sheet dates.
6. DebtHalston Master License
On May 15, 2023, the Company, through its subsidiaries, H Halston, LLC and Other Long-term Liabilities
Debt
H Heritage Licensing, LLC (collectively, the “Licensor”), entered into a master license agreement relating to the Halston Brand (the “Halston Master License”) with G-III Apparel Group (“G-III”), 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 Company’sHalston Master License provided for an upfront cash payment and royalties payable to the Company, including certain guaranteed minimum royalties, includes significant annual minimum net carrying amountsales requirements, and has a twenty-five-year term (consisting of debt is comprisedan initial five-year period, followed by a twenty-year period), subject to G-III’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term. G-III has an option to purchase the Halston Brand for $5.0 million at the end of the following:
| | | | | | | |
| | December 31, | | December 31, | | ||
($ in thousands) |
| 2020 |
| 2019 | | ||
Term loan debt | | $ | 16,750 | | $ | 19,000 | |
Unamortized deferred finance costs related to term loan | |
| (112) | |
| (179) | |
Total | |
| 16,638 | |
| 18,821 | |
Current portion of long-term debt | |
| 2,800 | |
| 2,250 | |
Long-term debt | | $ | 13,838 | | $ | 16,571 | |
Term Loan Debt
On February 26, 2016, the Company and its wholly owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, IMNY Retail Management, LLC, and IMNY E-Store, USA, LLC (each a “Guarantor” and collectively, the “Guarantors”), as Guarantors, entered intotwenty-five-year term, which right may be accelerated under certain conditions associated with an amended and restated loan and security agreement with Bank Hapoalim B.M. as agent, and the financial institutions party thereto as lenders.
On February 11, 2019, concurrent with the Closing Date of the acquisitionuncured material breach of the Halston Heritage Brands (see Note 3), the Company entered into an amended loan agreementMaster License in accordance with BHI (the “Loan Agreement”), which amended and restated the prior term loan. Immediately prior to February 11, 2019, the aggregate principal amount of the prior term loan was $14.5 million. Pursuant to the Loan Agreement, the Lenders have extended to Xcel an additional term loan in the amount of $7.5 million, such that, as of February 11, 2019, the aggregate outstanding balance of all the term loans extended by BHI to Xcel was $22.0 million, which amount has been divided under the Loan Agreement into two term loans: (1) a term loan in the amount of $7.3 million (“Term Loan A”) and (2) a term loan in the amount of $14.7 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”). The proceeds of the additional term loan were used to finance the Halston Heritage Brands acquisition described in Note 3.
The terms and conditions of the Loan Agreement resulted in significantly different debt service payment requirements, compared with the prior term loan, including an increase of $7.5 million in the principal balance, and related changes to the timing and amount of principal payments, as well as changes in the interest rate. Management assessed and determined that this amendment resulted in an extinguishment of debt and recognized a loss of $0.2 million (consisting of unamortized deferred finance costs) during the year ended December 31, 2019.
The Loan Agreement also allows that BHI and any other lender party to the Loan Agreement (collectively, the “Lenders”) can provide to Xcel a revolving loan facility and a letter of credit facility, the terms of eachthe Halston Master License. The Licensor granted G-III a security interest in the Halston trademarks to secure the Licensor’s obligations under the Halston Master License, including to honor the obligations under the purchase option.
As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $4.4 million of deferred revenue contract liabilities on its consolidated balance sheet as of December 31, 2023 related to this contract, of which shall$0.9 million was classified as a current liability and approximately $3.5 million was classified as a long-term liability. The balance of the deferred revenue contract liabilities will be agreedrecognized ratably as revenue over the next 5.0 years. Net licensing revenue recognized from the Halston Master License was $1.6 million for the Current Year, representing approximately 9% of the Company’s total net revenue for the Current Year.
Additionally, in connection with the Halston Master License, the Company issued to by Xcel andG-III a ten-year warrant to purchase up to 1,000,000 shares of the Lenders. Amounts advancedCompany’s common stock at an exercise price of $1.50 per share, which vests based upon certain annual royalty targets being satisfied under the revolving loan facility (the “Revolving Loans”) will be used forlicense agreement. The fair value of this warrant is being recognized as a reduction of revenue over the purposeterm of consummating acquisitions by Xcel or its subsidiaries that are or become partiesthe related license agreement, with an offsetting increase to stockholders’ equity as additional paid-in capital. The amount of contra-revenue recorded related to this warrant during the Loan Agreement. Xcel will have the right to convert Revolving Loans to incremental term loans (the “Incremental Term Loans”) in minimum amountsCurrent Year was approximately $0.03 million. As of $5.0 million. The Company has not drawn down any funds under either the revolving loan facility or letterDecember 31, 2023, no portion of credit facility.this warrant had vested.
6973
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
On April 13, 2020, the Company and BHI amended the Loan Agreement. Under this amendment, the quarterly installment payment due March 31, 20206. Debt
The Company’s net carrying amount of debt was deferred, and the amountscomprised of the quarterly installment payments due throughout the remainder of 2020 were reduced, while the amount of principal to be repaid through variable payments based on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. Further, this amendment permitted Xcel to incur unsecured debt through the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and excludes any associated PPP debt and debt service from the covenant calculations. See Note 7 for details regarding the Company’s accounting for the PPP. There were no changes to the total principal balance, interest rate, or maturity date.following:
On August 18, 2020, the Company and BHI further amended its Loan Agreement. Under this amendment, the amounts of the quarterly installment payments due throughout 2021 were reduced, and the amount of principal to be repaid through variable payments based on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. There were no changes to the total principal balance, interest rate, or maturity date.
| | | | | | |
| | December 31, | ||||
($ in thousands) | | 2023 |
| 2022 | ||
Term loan debt | | $ | 5,000 | | $ | — |
Unamortized deferred finance costs related to term loan debt | |
| (279) | |
| — |
Total | |
| 4,721 | |
| — |
Current portion of debt | |
| 750 | |
| — |
Long-term debt | | $ | 3,971 | | $ | — |
Management assessed and determined thatFor the Current Year amendments representedand Prior Year, the Company incurred interest expense of approximately $0.4 million and $1.2 million, respectively, related to term loan debt. The effective interest rate related to term loan debt modificationswas approximately 11.6% and accordingly, no gain9.8% for the Current Year and Prior Year, respectively.
Previous Term Loan Debt (through May 31, 2022)
On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries entered into a loan and security agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”), as lead arranger and as administrative agent and collateral agent, and the financial institutions party thereto as lenders. Pursuant to this loan agreement, the lenders made a term loan in the aggregate amount of $29.0 million. This term loan bore interest at “LIBOR” plus 7.5% per annum, with “LIBOR” defined as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to three months as published by Bloomberg or loss was recorded. Ina comparable or successor quoting service at approximately 11:00 a.m. (London time) two business days prior to the last business day of each calendar month and (b) 1.0% per annum.
Upon entering into the December 2021 loan agreement, Xcel paid a 1.75% closing fee to FEAC for the benefit of the lenders; the Company also paid approximately $0.5 million of various legal and other fees in connection with the Current Year amendments,execution of the loan agreement. These fees and costs totaling approximately $0.97 million were deferred on the Company’s balance sheet as a reduction of the carrying value of the term loan debt, to be subsequently amortized to interest expense over the term of the debt using the effective interest method.
The December 2021 term loan was to mature on April 14, 2025. Principal on this debt was payable in quarterly installments of $625,000 on each of March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2022 and ending on March 31, 2025, with a final payment of $20,875,000 on the maturity date of April 14, 2025.
The December 2021 term loan agreement also contained customary covenants, including reporting requirements, trademark preservation, and certain financial covenants; the Company incurred feeswas in compliance with all applicable covenants under the loan agreement as of and for all periods presented in the consolidated financial statements.
Extinguishment of Previous Term Loan Debt
On May 31, 2022, the Company used $30.1 million of the proceeds received from the transaction related to orthe Isaac Mizrahi Brand (see Note 3) to repay all amounts outstanding under the December 30, 2021 term loan agreement with FEAC, consisting of $28.4 million in principal amount, a $1.4 million prepayment fee, and approximately $0.3 million in interest and related expenses. As a result, the Company recognized a loss on behalfearly extinguishment of BHIdebt of approximately $27,000; these fees, along with$2.3 million during the Prior Year, consisting of approximately $1.4 million of debt prepayment premium, the immediate write-off of approximately $0.8 million of unamortized deferred finance costs, relatedand approximately $0.1 million of other costs.
74
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to financing transactions that took placeConsolidated Financial Statements
December 31, 2023 and 2022
New Term Loan Debt
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 with Israel Discount Bank of New York (“IDB”). Pursuant to this loan agreement, IDB made a term loan to the Company in prior years,the aggregate amount of $5.0 million. The proceeds of this term loan were used to pay fees, costs, and expenses incurred in connection with entering into the loan agreement, and may be used for working capital purposes. Such costs incurred in connection with the borrowing included a commitment fee paid to IDB, plus various legal and other fees. These fees and costs totaling $0.30 million have been deferred on the consolidatedCompany’s balance sheetssheet as a reduction toof the carrying value of the term loan debt, and are being amortized to interest expense over the term of the Loan Agreementdebt using the effective interest method.
In connection with October 2023 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 October 2023 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 October 2023 loan agreement.
The Term Loans matureterm loan matures on October 19, 2028. Principal on the term loan is payable in quarterly installments of $250,000 on each of January 2, April 1, July 1, and October 1 of each year, commencing on April 1, 2024. The Borrower has the right to prepay all or any portion of the term loan at any time without penalty.
As of December 31, 2023, Incremental Term Loans shall maturethe aggregate remaining principal payments under the October 2023 term loan were as follows:
| | | |
|
| Amount of | |
($ in thousands) | | Principal | |
Year Ending December 31, | | Payment | |
2024 | | $ | 750 |
2025 | |
| 1,000 |
2026 | | | 1,000 |
2027 | | | 1,000 |
2028 | |
| 1,250 |
Total | | $ | 5,000 |
Interest on the date set forthOctober 2023 term loan accrues at “Term SOFR” (as defined in the applicableloan agreement as the forward-looking term note, and Revolving Loans andrate based on secured overnight financing rate as administered by the letterFederal Reserve Bank of credit facility shall matureNew York for an interest period equal to one month on such date as agreed upon by Xcel and the Lenders. Any letterday that is two U.S. Government Securities Business Days prior to the first day of credit issued under Loan Agreement shall terminate no later than one year followingeach calendar month) plus 4.25% per annum. Interest on the dateterm loan is payable on the first day of issuance thereof.each calendar month.
The remaining principalOctober 2023 term 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 of the Term Loans,levels, all as amended, outstanding at December 31, 2020 is payable in fixed installments as set forthspecified and defined in the following table, plusloan agreement. The Company was in compliance with all applicable covenants under the variable paymentsloan agreement as described below:
| | | |
($ in thousands) | |||
Installment Payment Dates |
| Amount | |
March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021 | | $ | 700 |
| | | |
March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022 | | $ | 1,125 |
| | | |
March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023 | | $ | 1,250 |
of and for all periods presented in the financial statements.
In addition, on October 19, 2023, the Borrower also entered into a swap agreement with IDB, pursuant to which IDB will pay the fixed installments outlined above, commencingBorrower Term SOFR plus 4.25% per annum on the notional amount of the swap in exchange for the Borrower paying IDB 9.46% per annum on such notional amount. The term and declining notional amount of the swap agreement is aligned with the fiscal quarter ending March 31, 2021, the Company is required to repay a portionamortization of the Term Loans in an amount equal to 50% of the excess cash flow for the fiscal quarter, provided that no early termination fee shall be payable with respect to any such payment. Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cashOctober 2023 term loan principal paid or payable during such period, and (iii) all dividends declared and paid (or which could have been declared and paid) during such period to equity holders of any credit party treated as a disregarded entity for tax purposes. To the extent that the cumulative amount of such variable repayments made is less than $4.45 million as of March 31, 2022, any such shortfall must be repaid at that date.amount.
7075
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Thus, the aggregate remaining annual principal payments under the Term Loans at December 31, 2020 were as follows:
| | | |
| | Amount of | |
($ in thousands) |
| Principal | |
Year Ending December 31, |
| Payment | |
2021 | | $ | 2,800 |
2022 | |
| 8,950 |
2023 | |
| 5,000 |
Total | | $ | 16,750 |
Xcel has the right to prepay the Term Loans, Incremental Term Loans, Revolving Loans, and obligations with respect to letters of credit and accrued and unpaid interest thereon and to terminate the Lenders’ obligations to make Revolving Loans and issue letters of credit; provided that any prepayment of less than all of the outstanding balances of the Term Loans and Incremental Term Loans shall be applied to the remaining amounts due in inverse order of maturity.
If any Term Loan or any Incremental Term Loan is prepaid on or prior to the third anniversary of the Closing Date (including as a result of an event of default), Xcel shall pay an early termination fee as follows: an amount equal to the principal amount of the Term Loan or Incremental Term Loan, as applicable, being prepaid, multiplied by: (i) two percent (2.00%) if any of Term Loan B or any Incremental Term Loan is prepaid on or before the second anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable; (ii) one percent (1.00%) if any of Term Loan A is prepaid on or before the second anniversary of the Closing Date; (iii) one percent (1.00%) if any of Term Loan B or any Incremental Term Loan is prepaid after the second anniversary of the later of the Closing Date or such Incremental Term Loan was made, as applicable, but on or before the third anniversary of such date; (iv) one-half of one percent (0.50%) if any of Term Loan A is prepaid after the second anniversary of the Closing Date, but on or before the third anniversary of such date; or (v) zero percent (0.00%) if any Term Loan or any Incremental Term Loan is prepaid after the third anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable.
Xcel’s obligations under the Loan Agreement are guaranteed by and secured by all of the assets of Xcel and its wholly owned subsidiaries, as well as any subsidiary formed or acquired that becomes a credit party to the Term Loans (the “Guarantors”) and, subject to certain limitations contained in the Term Loans, equity interests of the Guarantors. Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration will be paid other than by cash of Xcel or by the issuance of equity interest of Xcel.
The Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of the Company (on a consolidated basis with the Guarantors under the Loan Agreement):
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71
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
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The Company was in compliance with all applicable covenants under the Loan Agreement as of and for the fiscal year ended December 31, 2020.
In connection with the February 11, 2019 refinancing transaction and subsequent amendments, the Company incurred fees to or on behalf of BHI of approximately $0.3 million during the Prior Year and $0.03 million during the Current Year. These fees have been deferred on the consolidated balance sheets as a reduction to the carrying value of the Term Loans, and are being amortized to interest expense over the term of the Term Loans using the effective interest method. The effective interest rate on the Loan Agreement was approximately 6.6% and 6.7% for the Current Year and Prior Year, respectively.
Interest on Term Loan A accrues at a fixed rate of 5.1% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on Term Loan B accrues at a fixed rate of 6.25% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on the Revolving Loans will accrue at either the Base Rate or LIBOR, as elected by Xcel, plus a margin to be agreed to by Xcel and the Lenders and will be payable on the first day of each month. Base Rate is defined in the Loan Agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York. Interest on the Incremental Term Loans will accrue at rates to be agreed to by Xcel and the Lenders and will be payable on each day on which the scheduled principal payments under the applicable note are required to be made.
For the Current Year and Prior Year, the Company incurred interest expense of approximately $1.1 million and $1.2 million, respectively, related to term loan debt.
On April 14, 2021, the Company and its wholly owned subsidiaries entered into a new loan and security agreement with BHI and First Eagle Alternative Credit, LLC (“FEAC”), which resulted in the extinguishment of the term loan debt which existed as of December 31, 2020. See Note 13 for additional details.
IM Seller Note
On September 29, 2011, as part of the consideration for the purchase of the Isaac Mizrahi business, the Company issued to IM Ready-Made, LLC a promissory note in the principal amount of $7.4 million (the “IM Seller Note”). The IM Seller Note was subsequently amended in 2013 and 2016. On March 31, 2019, the Company paid the final installment of $750,000 under the IM Seller Note, and no amounts remained outstanding under the IM Seller Note as of December 31, 2019.
For the year ended December 31, 2019, the Company incurred interest expense of approximately $4,000 under the IM Seller Note, which consisted solely of amortization of the discount on the IM Seller Note.
72
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Ripka Seller Notes
As of January 1, 2019, the Company had a note payable of approximately $0.58 million relating to the acquisition of the Judith Ripka assets (the "Ripka Seller Note"). Separately, the Company held a promissory note receivable due from the sellers of the Judith Ripka assets (the "Ripka Sellers") with a maturity date of March 31, 2019. On March 31, 2019, the Company agreed to net its note receivable due from the Ripka Sellers of approximately $0.9 million against the Ripka Seller Note of $0.6 million and the remaining Ripka Earn-Out of $0.1 million (see below). As of December 31, 2019, there were no amounts remaining outstanding under the Ripka Seller Note.
For the year ended December 31, 2019, the Company incurred interest expense of approximately $16,000, which consisted solely of amortization of the discount on the Ripka Seller Note.
Other Long-term Liabilities
Other long-term liabilities consist of the Company’s obligation to a subtenant for its security deposit under a sublease arrangement, which was $0.2 million as of both December 31, 2020 and 2019.
7. Government assistance
Paycheck Protection Program (PPP)
On April 20, 2020, the Company executed a promissory note (the “Promissory Note”) with Bank of America, N.A., which provided for an unsecured loan in the amount of $1.806 million, pursuant to the PPP under the CARES Act. The loan has a two-year term and bears interest at a fixed rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. The loan was funded on April 23, 2020.
The PPP also provides that this loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act, and later amended by the Paycheck Protection Program Flexibility Act (the "Flexibility Act") signed into law on June 5, 2020. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. While management believes that it is probable that the loan will be forgiven in full, no definite assurance can be provided that forgiveness for any portion of the loan will be obtained. Management's determination that full forgiveness is probable is based on qualification under the Flexibility Act.
Management evaluated the legal and contractual terms associated with the loan, and concluded that, although the legal form of the loan is debt, it represents in substance a government grant that is expected to be forgiven. Given the lack of definitive authoritative guidance under GAAP for accounting for government grants, the Company analogized to accounting guidance under International Accounting Standard No. 20, “Accounting for Government Grants and Disclosure of Government Assistance.” Under such guidance, once it is probable that the conditions attached to the assistance will be met, the earnings impact of government grants is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Accordingly, the Company recognized $1.806 million as a reduction to operating expenses in the Current Year. No interest expense related to the loan has been recorded in the Company’s consolidated financial statements.
Economic Incentive Disaster Loan (EIDL)
Concurrently with the PPP loan, in May 2020 the Company also received a $10,000 Economic Incentive Disaster Loan (“EIDL”) Advance through the U.S. Small Business Administration. The EIDL Advance represents a grant that does not
73
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
have to be repaid, and as such, the Company has recognized $10,000 as a reduction to operating expenses in the Current Year.
In total between the PPP and EIDL, the Company recognized $1,816,000 as a reduction to operating expenses in the Current Year.
8. Stockholders’ Equity
The Company has authority to issue up to 51,000,000 shares, consisting of 50,000,000 shares of common stock and 1,000,000 shares of preferred stock.
2011Equity Incentive Plans
The Company’s 2021 Equity Incentive Plan
The Company’s 2011 Equity Incentive Plan, as amended and restated (the “Plan”“2021 Plan”), is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 13,000,0004,000,000 shares of common stock are eligible for issuance under the 2021 Plan. The 2021 Plan provides for the grant of any or all of the following types of awards: stock options (incentive or non-qualified), restricted stock, deferredrestricted stock stock appreciation rights, and other stock-basedunits, performance awards, or cash awards. The 2021 Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board.
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
Total expense recognized for all forms of stock-based compensation was approximately $0.22 million and $0.72 million in the Current Year and Prior Year, respectively.
Of the Current Year expense amount, approximately $0.02 related to employees and approximately $0.20 related to directors and consultants; all of this expense was recorded as a direct operating cost in the accompanying statement of operations.
Of the Prior Year expense amount, approximately $0.41 million related to employees and approximately $0.31 million related to directors and consultants; approximately $0.62 million was recorded as a direct operating cost and approximately $0.10 million was recorded within other operating costs and expenses (income).
Stock Options
Options granted under the PlanCompany’s equity incentive plans expire at various times – either five, seven, or ten years from the date of grant, depending on the particular grant.
A summary of the Company’s stock option activity for the Current Year is as follows:
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | | | | Average | | | |
| | | | Weighted | | Remaining | | | | |
| | | | Average | | Contractual | | Aggregate | ||
| | Number of | | Exercise | | Life | | Intrinsic | ||
|
| Options |
| Price |
| (in Years) |
| Value | ||
Outstanding at January 1, 2020 |
| 7,222,625 | | $ | 3.33 |
| 5.82 | | $ | — |
Granted |
| 531,250 | |
| 1.40 |
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Canceled |
| — | |
| — |
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Exercised |
| — | |
| — |
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Expired/Forfeited |
| (574,500) | |
| 3.94 |
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Outstanding at December 31, 2020, and expected to vest |
| 7,179,375 | | $ | 3.14 |
| 4.93 | | $ | — |
Exercisable at December 31, 2020 |
| 3,063,208 | | $ | 4.91 |
| 1.22 | | $ | — |
Current Year stock option grants were as follows:
On January 1, 2020, the Company granted options to purchase 5,000 shares of common stock to a board observer. The exercise price of the options is $4.00 per share, and 50% of the options vest on each of January 1, 2021 and January 1, 2022.
On January 31, 2020, the Company granted options to purchase 75,000 shares of common stock to a consultant. The exercise price of the options is $1.57 per share, and all options vested immediately on the date of grant.
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | | | | Average | | | |
| | | | Weighted | | Remaining | | | | |
| | | | Average | | Contractual | | Aggregate | ||
| | Number of | | Exercise | | Life | | Intrinsic | ||
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| Options |
| Price |
| (in Years) |
| Value | ||
Outstanding at January 1, 2023 |
| 5,614,310 | | $ | 2.12 |
| 4.76 | | $ | — |
Granted |
| 200,000 | |
| 1.51 |
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Exercised |
| (87,750) | |
| 0.80 |
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Expired/Forfeited |
| (578,020) | |
| 2.96 |
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Outstanding at December 31, 2023, and expected to vest |
| 5,148,540 | | $ | 2.03 |
| 4.26 | | $ | — |
Exercisable at December 31, 2023 |
| 1,398,540 | | $ | 2.88 |
| 1.66 | | $ | — |
7476
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
On February 28, 2020,
Current Year stock option grants were as follows:
In April 2023, the Company granted options to purchase 50,000an aggregate of 100,000 shares of common stock to an employee.a key individual. The exercise price of the options is $1.40$1.50 per share, and the vesting of such options is dependent upon the Company achievingachievement of certain 12-month sales targets throughrevenue targets. None of these options were vested as of December 31, 2021.2023.
On March 13, 2020,August 23, 2023 the Company granted options to purchase 50,000an aggregate of 100,000 shares of common stock to a certain key employee.non-management directors. The exercise price of the options is $5.50$1.51 per share, and 50% of the options vest on each of April 1, 2024 and April 1, 2025.
Prior Year stock option grants were as follows:
On April 20, 2022, the Company granted options to purchase an aggregate of 380,850 shares of common stock to various employees. The exercise price of the options is $1.62 per share, and all options vested immediately on the date of grant.
On March 31, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee. The exercise price of the options is $0.61 per share, and one-third of the options shall vest on each of March 31, 2021, March 31, 2021, and March 31, 2022.
On April 1, 2020,20, 2022 the Company granted options to purchase an aggregate of 200,000125,000 shares of common stock to non-management directors. The exercise price of the options is $0.50$1.62 per share, and 50%share. Half of the options shallvested on April 20, 2023, and the remaining half of the options will vest on each of April 1, 2021 and April 1, 2022.20, 2024.
On April 15, 2020,26, 2022, the Company granted options to purchase 13,500an aggregate of 100,000 shares of common stock to a consultant. The exercise price of the options is $3.00 per share. One-third of the options vested on each of June 30, 2020, September 30, 2020, and December 31, 2020.
On August 21, 2020, the Company granted options to purchase 22,750 shares of common stock to a consultant. The exercise price of the options is $1.00$1.58 per share, and all options vested immediately on December 31, 2020.the date of grant.
On September 28, 2020, the Company granted options to purchase 15,000 shares of common stock to an employee. The exercise pricefair values of the options is $0.71 per share,granted were estimated at the respective dates of grant using the Black-Scholes option pricing model with the following range of assumptions:
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| | Year Ended December 31, |
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| 2023 |
| 2022 |
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Expected Volatility |
| 89 – 90 | % | 57 – 93 | % |
Expected Dividend Yield |
| — | % | — | % |
Expected Life (Term, in years) |
| 2.75 – 10 |
| 0.67 – 3.25 | |
Risk-Free Interest Rate |
| 4.0 – 4.7 | % | 1.6 – 2.8 | % |
Compensation expense related to stock options for the Current Year and one-third of the options shall vest on each of September 28, 2021, September 28, 2022, and September 28, 2023.
On December 21, 2020, the Company granted options to purchase an aggregate of 50,000 shares of common stock to two employees. The exercise price of the options is $1.09 per share, and 50% of the options shall vest on each of December 21, 2021 and December 21, 2022.
Prior Year was approximately $0.1 million and $0.5 million, respectively. Total unrecognized compensation expense related to unvested stock option grants were as follows:options (excluding stock options with performance-based vesting) at December 31, 2023 amounts to approximately $0.1 million and is expected to be recognized over a weighted average period of 1.05 years.
On January 1, 2019,
Of the Company grantedtotal stock options to purchase 250,000 shares of common stock to a certain key employee. The exercise price is $3.00 per share, andoutstanding at December 31, 2023, the vesting of such3,500,000 options is dependent upon the Company achieving certain 12-month sales targets through December 31, 2021. As of December 31, 2020, 100,000 of these options have vested.
On February 27, 2019, the Company granted options to purchase 2,578,947 shares of common stock to Robert W. D’Loren, the Company’s Chief Executive Officer. The exercise price is $1.70 per share, and the vesting of such options is dependentcontingent upon the Company’s common stock achieving certain stock tradingtarget prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 736,842 shares occur if the Target Prices are equal to or greater than $3.00 per share; 626,316 shares vest if the Target Price is equal to or greater than $5.00 per share; 515,789 shares vest if the Target Price is equal to or greater than $7.00 per share; 405,263 shares vest if the Target Price is equal to or greater than $9.00 per share; and 294,737 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. as follows:
| | |
Target Prices |
| Number of Options Vesting |
$3.00 | | 1,000,000 |
$5.00 | | 850,000 |
$7.00 | | 700,000 |
$9.00 | | 550,000 |
$11.00 | | 400,000 |
As of December 31, 2020, none of the aforementioned Target Price thresholds have been met, and therefore,2023, none of these 3,500,000 performance-based stock options have vested.
On February 27, 2019, the Company granted optionsvested, and no compensation expense has been recorded related to purchase 552,632 shares of common stock to James F. Haran, the Company’s Chief Financial Officer. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 157,895 shares occur if the Target Prices are equal to or greater than $3.00 per share; 134,211 shares vest if the Target Price is equal to or greater than $5.00 per share; 110,526 shares vest if the Target Priceoptions.
7577
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
is equal to or greater than $7.00 per share; 86,842 shares vest if the Target Price is equal to or greater than $9.00 per share; and 63,158 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of December 31, 2020, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.
On February 27, 2019, the Company granted options to purchase 368,421 shares of common stock to Seth Burroughs, an officer of the Company. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 105,263 shares occur if the Target Prices are equal to or greater than $3.00 per share; 89,474 shares vest if the Target Price is equal to or greater than $5.00 per share; 73,684 shares vest if the Target Price is equal to or greater than $7.00 per share; 57,895 shares vest if the Target Price is equal to or greater than $9.00; and 42,105 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of December 31, 2020, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.
On March 13, 2019, the Company granted options to purchase an aggregate of 154,000 shares of common stock to various employees. The exercise price of the options is $1.73 per share, and all options vested immediately on the date of grant.
On March 15, 2019, the Company granted options to purchase 50,000 shares of common stock to a certain key employee. The exercise price of the options is $5.50 per share, and all options vested immediately on the date of grant.
On April 1, 2019, the Company granted options to purchase an aggregate of 150,000 shares of common stock to non-management directors. The exercise price of the options is $1.70 per share, and 50% of the options vest on each of April 1, 2020 and April 1, 2021.
On April 15, 2019, the Company granted options to purchase an aggregate of 24,000 shares of common stock to certain employees. The exercise price of the options is $1.40 per share, and 50% of the options vest on each of April 15, 2020 and April 15, 2021.
On May 1, 2019, the Company granted options to purchase 10,000 shares of common stock to an employee. The exercise price of the options is $1.38 per share, and 50% of the options vest on each of May 1, 2020 and May 1, 2021.
On September 1, 2019, the Company granted options to purchase 15,000 shares of common stock to an employee. The exercise price of the options is $1.59 per share, and one-third of the options vest on each of September 1, 2020, September 1, 2021, and September 1, 2022.
On October 1, 2019, the Company granted options to purchase 100,000 shares of common stock to an employee. The exercise price of the options is $1.77 per share, and one-third of the options vest on each of October 1, 2020, October 1, 2021, and October 1, 2022.
On October 31, 2019, the Company granted options to purchase 10,000 shares of common stock to an employee. The exercise price of the options is $1.72 per share, and one-third of the options vest on each of October 31, 2020, October 31, 2021, and October 31, 2022.
76
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | | | |
| | Year Ended December 31, |
| ||
|
| 2020 |
| 2019 |
|
Expected Volatility |
| 24.26 – 28.79 |
| 20.69 – 26.21 | |
Expected Dividend Yield |
| — | % | — | % |
Expected Life (Term, in years) |
| 2.5 – 3.5 |
| 2.5 – 3.5 | |
Risk-Free Interest Rate |
| 0.16 – 1.60 | % | 1.51 – 2.48 | % |
Compensation expense related to stock options for the Current Year and Prior Year was approximately $0.2 million and $0.5 million, respectively. Total unrecognized compensation expense related to unvested stock options at December 31, 2020 amounts to approximately $0.2 million and is expected to be recognized over a weighted average period of 1.06 years.
The following table summarizes the Company’s stock option activity for non-vested options for the current year:Current Year:
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| |
| Weighted |
| |
| Weighted | ||
| | | | Average | | | | Average | ||
| | Number of | | Grant Date | | Number of | | Grant Date | ||
|
| Options |
| Fair Value |
| Options |
| Fair Value | ||
Balance at January 1, 2020 |
| 4,551,500 | | $ | 0.18 | |||||
Balance at January 1, 2023 |
| 3,697,500 | | $ | 0.05 | |||||
Granted |
| 531,250 | |
| 0.14 |
| 200,000 | |
| 0.68 |
Vested |
| (444,083) | |
| 0.58 |
| (135,000) | | | 0.68 |
Forfeited or Canceled |
| (522,500) | |
| 0.65 |
| (12,500) | |
| 0.89 |
Balance at December 31, 2020 |
| 4,116,167 | | $ | 0.08 | |||||
Balance at December 31, 2023 |
| 3,750,000 | | $ | 0.05 |
Warrants
Warrants granted by the Company expire at various times – either five, seven, or ten years from the date of grant, depending on the particular grant.
A summary of the Company’s warrant activity for the Current Year is as follows:
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| | | | | | | Weighted | | | |
| | | | | | | Average | | | |
| | | | Weighted | | Remaining | | | | |
| | |
| Average |
| Contractual | | Aggregate | ||
| | Number of | | Exercise |
| Life | | Intrinsic | ||
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| Warrants |
| Price |
| (in Years) |
| Value | ||
Outstanding and exercisable at January 1, 2020 |
| 579,815 | | $ | 4.63 |
| 2.32 | | $ | — |
Granted |
| — | |
| — |
| | |
|
|
Canceled |
| — | |
| — |
| | |
|
|
Exercised |
| — | |
| — |
| | |
|
|
Expired/Forfeited |
| — | |
| — |
| | |
|
|
Outstanding and exercisable at December 31, 2020 |
| 579,815 | | $ | 4.63 |
| 1.32 | | $ | — |
The Company did not grant any warrants to purchase shares of common stock during the Current Year.
On July 18, 2019, the Company granted warrants to purchase an aggregate of 115,000 shares of common stock. The exercise price of the warrants is $3.17 per share, and one-third of the options vested on each of July 25, 2019, August 24, 2019, and September 23, 2019.
77
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
No compensation expense was recorded in the Current Year related to warrants. Compensation expense related to warrants was approximately $14,000 in the Prior Year.
Stock Awards
A summary of the Company’s restricted stock activity for the Current Year is as follows:
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| | | | Weighted | | | | Weighted | ||
| | Number of | | Average | | Number of | | Average | ||
| | Restricted | | Grant Date | | Restricted | | Grant Date | ||
|
| Shares |
| Fair Value |
| Shares |
| Fair Value | ||
Outstanding at January 1, 2020 |
| 1,230,623 | | $ | 4.33 | |||||
Outstanding at January 1, 2023 |
| 333,333 | | $ | 3.71 | |||||
Granted |
| 639,728 | |
| 0.82 |
| 113,968 | |
| 1.01 |
Canceled |
| — | |
| — | |||||
Vested |
| (1,089,518) | |
| 2.43 |
| (108,968) | |
| 1.08 |
Expired/Forfeited |
| — | |
| — |
| (5,000) | |
| 1.62 |
Outstanding at December 31, 2020 |
| 780,833 | | $ | 4.09 | |||||
Outstanding at December 31, 2023 |
| 333,333 | | $ | 3.69 |
Current Year stock award grants were as follows:
On March 30, 2020,January 1, 2023, the Company issued 336,7008,334 shares of common stock to a consultant, which vested immediately.
On April 17, 2023, the Company issued 8,334 shares of common stock to a consultant, which vested immediately.
On May 15, 2023, the Company issued 50,000 shares of common stock to a consultant, which vested immediately.
On July 20, 2023, the Company issued 7,300 shares of common stock to an employee, which vested immediately.
On August 23, 2023, the Company issued an aggregate of 40,000 shares of common stock to non-management directors, of which 50% shall vest on April 1, 2024, and 50% shall vest on April 1, 2025.
Prior Year stock award grants were as follows:
On April 20, 2022, the Company issued an aggregate of 50,000 shares of common stock to non-management directors, which vest evenly over two years. Half of these shares vested on April 20, 2023, and the remaining half shall vest on April 20, 2024.
On April 20, 2022, the Company issued 20,064 shares of common stock to a consultant, which vested immediately.
On May 31, 2022, the Company issued 65,275 shares of common stock to a consultant in connection with the transaction related to the Isaac Mizrahi Brand (see Note 3); these shares vested immediately.
On May 31, 2022, the Company issued 33,557 shares of common stock to Isaac Mizrahi, which vested immediately (see Note 11 for additional details).
78
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Additionally, on April 20, 2022, the Company issued 178,727 shares of common stock to a member of senior management as payment for a performance bonus earned in the Prior Year.2021. These shares vested immediately. The Company had previously recognized compensation expense of approximately $0.2$0.28 million in the Prior Year2021 to accrue for this performance bonus.
The Company also recognized approximately $0.3 million of compensation expense in the Current Year related to similar senior management bonuses payable in common stock in 2021.
On May 20, 2020, the Company issued an aggregate of 270,728 shares of common stock to various employees. These shares vested immediately. The Company recognized approximately $0.3 million of compensation expense in the Current Year related to this grant.
On December 24, 2020, the Company issued an aggregate of 32,300 shares of common stock to various employees. These shares vested immediately. The Company recognized approximately $0.04 million of compensation expense in the Current Year related to this grant.
Prior Year stock award grants were as follows:
On February 27, 2019, the Company entered into a two-year employment agreement with a key employee, which includes a performance stock bonus of up to $90,000 for each of the years ended December 31, 2019 and 2020. The performance stock bonus is earned upon the Company achieving certain sales targets.
On April 1, 2019, the Company issued an aggregate of 60,000 shares of stock to certain non-management directors, which vest evenly over two years, whereby 50% vested on April 1, 2020, and 50% shall vest on April 1, 2021.
Notwithstanding the foregoing, each grantee may extend the first anniversary of all or a portion of the restricted stock by six months and, thereafter one or more times may further extend such date with respect to all or a portion of the restricted stock until the next following date exactly six months thereafter, by providing written notice of such election to extend such date with respect to all or a portion of the restricted stock prior to such date.
Total compensation expense related to stock awards for the Current Year and Prior Year (inclusive of the amounts detailed above) was approximately $0.6$0.1 million and $0.5$0.3 million, respectively. Total unrecognized compensation expense related to unvested restricted stock grants at December 31, 20202023 amounts to $0.01$0.1 million and is expected to be recognized over a weighted average period of 0.251.06 years.
78
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The following table provides information with respect to restricted stock purchased and retired by the Company during the Current Year and Prior Year:
| | | | | | | | | | |
| | | | | | | Number of | | | |
| | | | | | | Shares | | | |
| | | | | | | Purchased as | | | |
| | | | | | | Part of | | | |
| | Total Number | | Actual | | Publicly | | Fair value of | ||
| | of Shares | | Price Paid | | Announced | | Re-Purchased | ||
Date |
| Purchased |
| per Share |
| Plan |
| Shares | ||
None |
| — | |
| — |
| — | |
| — |
Total 2023 |
| — | | $ | — |
| — | | $ | — |
| | | | | | | | | | |
April 20, 2022 (i) | | 53,882 | |
| 1.57 |
| — | |
| 84,000 |
May 31, 2022 (i) |
| 240,000 | |
| 1.49 |
| — | |
| 358,000 |
Total 2022 |
| 293,882 | | $ | 1.50 |
| — | | $ | 442,000 |
| | | | | | | | | | |
| | | | | | | Number of | | | |
| | | | | | | Shares | | | |
| | | | | | | Purchased as | | | |
| | | | | | | Part of | | | |
| | Total Number | | Actual | | Publicly | | Fair value of | ||
| | of Shares | | Price Paid | | Announced | | Re-Purchased | ||
Date |
| Purchased |
| per Share |
| Plan |
| Shares | ||
March 30, 2020 (i) |
| 155,556 | | $ | 0.65 |
| — | | $ | 102,000 |
May 20, 2020 (i) |
| 87,249 | |
| 0.98 |
| — | |
| 85,000 |
December 24, 2020 (i) |
| 2,478 | |
| 1.14 |
| — | |
| 3,000 |
Total 2020 |
| 245,283 | | $ | 0.77 |
| — | | $ | 190,000 |
| | | | | | | | | | |
September 30, 2019 (i) |
| 18,147 | | $ | 1.34 |
| — | | $ | 25,000 |
October 31, 2019 (i) |
| 29,189 | |
| 1.75 |
| — | |
| 51,000 |
November 30, 2019 (i) |
| 57,980 | |
| 1.45 |
| — | |
| 84,000 |
December 31, 2019 (i) |
| 9,846 | |
| 1.45 |
| — | |
| 14,000 |
Total 2019 |
| 115,162 | | $ | 1.51 |
| — | | $ | 174,000 |
(i) | The shares were exchanged from employees and directors in connection with the income tax withholding obligations on behalf of such employees and directors from the vesting of restricted |
AllRestricted Stock Units
There were no restricted stock units outstanding as of December 31, 2023 and 2022, and no restricted stock units have been issued since the inception of the shares of restricted stock in the preceding table were originally granted to employees and directors as restricted stock awards pursuant to the2021 Plan.
Shares Available Under the Company’s 2011 Equity Incentive PlanPlans
At December 31, 2020,2023, there were 1,549,5983,103,941 shares of common stock available for issuanceaward grants under the 2021 Plan.
Shares Reserved for Issuance
At December 31, 2020,2023, there were 9,308,7888,368,546 shares of common stock reserved for issuance, including 4,771,255 shares reserved pursuant to unexercised warrants and stock options orpreviously granted under the 2011 Plan, 493,350 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 3,103,941 shares available for issuance under the 2021 Plan.
Dividends
The Company has not paid any dividends to date.
9. Earnings Per Share
Shares used in calculating basic and diluted earnings per share are as follows:
| | | | | |
| | Year Ended | | ||
| | December 31, | | ||
|
| 2020 |
| 2019 | |
Basic | | 19,117,460 |
| 18,857,657 |
|
Effect of exercise of warrants | | — |
| — |
|
Effect of exercise of stock options | | — | | — | |
Diluted | | 19,117,460 |
| 18,857,657 |
|
79
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Warrants
Warrants granted by the Company expire at various times – either five, seven, or ten years from the date of grant, depending on the particular grant.
A summary of the Company’s warrant activity for the Current Year 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 |
| 116,065 | | $ | 3.15 |
| 1.57 | | $ | — |
Granted |
| 1,000,000 | |
| 1.50 |
| | |
|
|
Exercised |
| — | |
| — |
| | |
|
|
Expired/Forfeited |
| — | |
| — |
| | |
|
|
Outstanding at December 31, 2023 |
| 1,116,065 | | $ | 1.67 |
| 8.46 | | $ | — |
Exercisable at December 31, 2023 |
| 116,065 | | $ | 3.15 |
| 0.57 | | $ | — |
See Note 5 for information regarding the warrant to purchase 1,000,000 shares of common stock granted during the Current Year in connection with the Halston Master License; the Company recognized contra-revenue of approximately $0.03 million in the Current Year with respect to this warrant. There was no compensation expense related to other warrants recognized in the Current Year or Prior Year.
Dividends
The Company has not paid any dividends to date.
8. Earnings (Loss) Per Share
The following table is a reconciliation of the numerator and denominator of the basic and diluted net loss per share computations for the years ended December 31, 2023 and 2022:
| | | | | | | |
| | | Year Ended | | |||
| | December 31, | | ||||
|
| 2023 |
| 2022 | | ||
Numerator: | | | | | | | |
Net loss attributable to Xcel Brands, Inc. stockholders (in thousands) | | $ | (21,052) | | $ | (4,018) | |
| | | | | | | |
Denominator: | | | | | | | |
Basic weighted average number of shares outstanding | | | 19,711,637 |
| | 19,624,669 |
|
Add: Effect of warrants | | | — |
| | — |
|
Add: Effect of stock options | | | — | | | — | |
Diluted weighted average number of shares outstanding | | | 19,711,637 |
| | 19,624,669 | |
| | | | | | | |
Basic net loss per share | | $ | (1.07) | | $ | (0.20) | |
Diluted net per share | | $ | (1.07) | | $ | (0.20) | |
80
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
As a result of the net loss presented for the Current Year and Prior Year, the Company calculated diluted earningsloss per share using basic weighted-average shares outstanding for such period,both years, as utilizing diluted shares would be anti-dilutive to loss per share.
The computation of basic and diluted earningsloss per share excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
| | | | | | | | | |
| | Year Ended | | | | ||||
| | December 31, | | | Year Ended December 31, | ||||
|
| 2020 |
| 2019 | | | 2023 |
| 2022 |
Stock options and warrants | | 7,759,190 |
| 7,802,440 |
| ||||
Stock options | | 5,148,540 | | 5,614,310 | |||||
Warrants | | 1,116,065 | | 116,065 | |||||
Total |
| 6,264,605 |
| 5,730,375 |
10.
9. Commitments and Contingencies
Leases
The Company hasis party to operating leases for its current office, former office,real estate, and a planned retail store location, as well asfor certain equipment with a term of 12 months or less. The Company is currently not a party to any finance leases.
The Company's real estate leases have remaining lease terms between approximately 1 year5 to 87 years. As of December 31, 2020,2023, the weighted average remaining lease term was 6.33.83 years and the weighted average discount rate was 6.25%.
As of December 31, 2023, the Company leased approximately 29,600 square feet of |
The aforementioned office leases requirespace at 1333 Broadway, 10th floor, New York, New York for its corporate offices and operations facility. This lease commenced on March 1, 2016 and expires on October 30, 2027. This lease requires the Company to pay additional rents related to increases in certain taxes and other costs on the properties.property.
The Company also leasespreviously leased approximately 1,300 square feet of retail space for a planned futureits former retail store location in Westchester, New York.York, which was closed in the Prior Year. In the Current Year, the Company successfully negotiated a settlement with the lessor resulting in the termination of this lease, and recognized a gain related to the settlement of $0.4 million within other operating costs and expenses (income) in the consolidated statement of operations. The Company had recorded an impairment charge of $0.7 million to fully impair the right-of-use asset for this lease in the Prior Year.
The Company also previously leased certain office space in New York, New York, which was subleased to a third-party subtenant through February 27, 2022, and the Company's lease of this office space expired by its terms on February 28, 2022.
For the years ended December 31, 20202023 and 2019,2022, total lease expense included in selling, general and administrative expenses on the Company's consolidated statements of operations was approximately $1.5 million and $1.6 million respectively.for both periods. The Company’s total lease costs for the years ended December 31, 20202023 and 20192022 were comprised of the following:
| | | | | | | | | | | | |
($ in thousands) |
| 2020 |
| 2019 |
| 2023 |
| 2022 | ||||
Operating lease cost | | $ | 1,986 | | $ | 1,925 | | $ | 1,337 | | $ | 1,474 |
Short-term lease cost | |
| 81 | |
| 76 | |
| 62 | |
| 55 |
Variable lease cost | |
| 98 | |
| 105 | |
| 233 | |
| 217 |
Sublease income | |
| (618) | |
| (488) | |
| — | |
| (104) |
Total lease cost | | $ | 1,547 | | $ | 1,618 | | $ | 1,632 | | $ | 1,642 |
8081
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Cash paid for amounts included in the measurement of operating lease liabilities was $1.9$1.6 million and $2.4$1.7 million in the Current Year and Prior Year, respectively. Cash received from subleasing was $0.7 million and $0.3 million in the Current Year and Prior Year respectively.was $0.1 million.
As of December 31, 2020,2023, the maturities of lease liabilities were as follows:
| | | | | | |
($ in thousands) |
| | | |||
2021 | | $ | 2,682 | |||
2022 | | | 1,700 | |||
2023 | |
| 1,711 | |||
| | Amount | ||||
Year |
| (in thousands) | ||||
2024 | |
| 1,711 | | $ | 1,552 |
2025 | |
| 1,711 | | | 1,552 |
After 2025 | |
| 3,334 | |||
2026 | |
| 1,552 | |||
2027 | |
| 1,294 | |||
Total lease payments | | | 12,849 | | | 5,950 |
Less: Discount | | | 2,279 | | | 671 |
Present value of lease liabilities | | | 10,570 | | | 5,279 |
Current portion of lease liabilities | | | 2,101 | | | 1,258 |
Non-current portion of lease liabilities | | $ | 8,469 | | $ | 4,021 |
Employment Agreements
The Company has employment contracts with certain executives and key employees. The future minimum payments under these contracts are as follows:
| | | | | | |
| | Employment | | Employment | ||
($ in thousands) | | Contract | | Contract | ||
Year Ended December 31, |
| Payments |
| Payments | ||
2021 | | $ | 4,595 | |||
2022 | |
| 2,100 | |||
2024 | | $ | 4,292 | |||
2025 | |
| 2,150 | |||
2026 | | | 2,150 | |||
2027 | | | 2,150 | |||
2028 | | | 2,150 | |||
Thereafter | |
| — | |
| 4,837 |
Total future minimum employment contract payments | | $ | 6,695 | | $ | 17,729 |
In addition to the employment contract payments stated above, the Company’s employment contracts with certain executives and key employees contain performance-based bonus provisions. These provisions include bonuses based on the Company achieving revenues in excess of established targets and/or on operating results.
Certain of the employment agreements contain severance and/or change in control provisions. Aggregate potential severance compensation amounted to approximately $8.1$2.9 million as of December 31, 2020.2023.
Contingent Obligation – HH Seller (HalstonHalston Heritage Earn-Out)Earn-Out
In connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from HIP,trademarks, the Company agreed to pay HIPthe seller additional consideration (the “Halston Heritage Earn-Out”) of up to an aggregate of $6.0 million, based on royalties earned from 2019 through December 31, 2022 (see Note 3).2022. The final royalty target year for the Halston Heritage Earn-Out ofended on December 31, 2022, and the seller ultimately did not earn any additional consideration based on the formula set forth in the related asset purchase agreement. As such, during the Prior Year, the Company recorded a $0.9 million is recorded as a long-term liability asgain on the reduction of December 31, 2019contingent obligations in the accompanying consolidated balance sheets, based on the difference between the fair valuestatement of the acquired assetsoperations. As of December 31, 2022, there were no amounts remaining under the Halston Heritage Trademarks and the total consideration paid. In accordance with ASC Topic 480, the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying consolidated balance sheets because of the variable number of shares payable under the agreement.Earn-Out.
8182
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Contingent Obligation – CW Seller (C Wonder Earn-Out)Lori Goldstein Earn-Out
In connection with the assetApril 1, 2021 purchase of the C Wonder Brand in 2015,Lori Goldstein trademarks, the Company agreed to pay the seller additional cash consideration which would be payable, if at all,(the “Lori Goldstein Earn-Out”) of up to $12.5 million, based on royalties earned during the six calendar year period commencing in cash or shares2021. The Lori Goldstein Earn-Out was initially recorded as a liability of common stock of the Company, at the Company’s sole discretion, after June 30, 2019. Under the applicable accounting guidance, the Company was required to carry such contingent liability balance on its consolidated balance sheet until the measurement period of the earn-out expired and all related contingencies had been resolved. The seller ultimately did not earn any additional consideration$6.6 million, based on the criteriadifference between the fair value of the acquired assets of the Lori Goldstein brand and terms set forththe total consideration paid, in accordance with the asset purchase agreement. As such, during the year ended December 31, 2019, the Company recorded a $2.85 million gain on the reduction of contingent obligationsguidance in the accompanying consolidated statements of operations. ASC Subtopic 805-50.
As of December 31, 2019, there were no amounts2022, based on the performance of the Lori Goldstein brand to date, approximately $0.2 million of additional consideration was earned by the seller, and thus $0.2 million of the balance was recorded as a current liability and $6.4 million was recorded as a long-term liability. The $0.2 million of additional consideration was paid to the seller during the Current Year.
Based on the performance of the Lori Goldstein through December 31, 2023, approximately $1.0 million of incremental additional consideration was earned by the seller, which will be paid out in 2024. Accordingly, as of December 31, 2023, $1.0 million of the remaining under the C Wonder Earn-Out.balance was recorded as a current liability and $5.4 million was recorded as a long-term liability.
Contingent Obligation – JR Seller (Ripka Earn-Out)Isaac Mizrahi Transaction
In connection with the asset purchaseMay 31, 2022 transaction related to the sale of a majority interest in the RipkaIsaac Mizrahi Brand in 2014,(see Note 3), the Company agreed with WHP that, in the event that 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 would be entitled to payreceive from Xcel up to $16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the sellers ofpurchase price previously paid by WHP. Such amount would be payable by the Ripka Brand certain additional consideration. As of January 1, 2019,Company in either cash or equity interests in IM Topco held by the remaining balance ofCompany. In November 2023, this agreement was amended such that the Ripka Earn-Outpurchase price adjustment provision was $0.1 million. Onwaived until the measurement period ending March 31, 2019,2024.
No amount has been recorded in the accompanying consolidated balance sheets related to this contingent obligation.
The purchase price adjustment provision was subsequently further amended in April 2024 (see Note 12 for details).
Legal Proceedings
From time to time, the Company satisfiedbecomes involved in legal claims and litigation in the remaining Ripka Earn-Out balanceordinary course of $0.1 million by off-settingbusiness. In the amountopinion of management, based on consultations with legal counsel, the disposition of litigation pending against the aforementioned promissory note receivable. AsCompany as of December 31, 2019, there were no amounts remaining outstanding under2023 is unlikely to have, individually or in the Ripka Earn-Out.
Coronavirus Pandemic
In March 2020, the World Health Organization declared the outbreak ofaggregate, a novel coronavirus disease (“COVID-19”) as a pandemic, which continues to spread throughout the U.S. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis.
The impacts of the current COVID-19 pandemic are broad reaching and are having an impactmaterially adverse effect on the Company’s licensing and wholesale businesses. The COVID-19 pandemic is impacting the Company’s supply chain as most of the Company’s products are manufactured in China, Thailand, and other places around the world affected by this event. Temporary factory closures and the pace of workers returning to work have impacted contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner. The outbreak is also impacting distribution and logistics providers' ability to operate in the normal course of business. Further, the pandemic has resulted in a sudden and continuing decrease in sales for many of the Company’s products, resulting in order cancellations, and a decrease in accounts receivable collections, as the Company recorded approximately $1 million of additional allowance for doubtful accounts for the year ended December 31, 2020 for retailers that have filed for bankruptcy.
Due to the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company’s futurebusiness, financial position, results of operations, andor cash flows. Continued impactsThe 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 pandemic could materially adversely affectultimate loss in situations where it assesses the Company’s near-term and long-term revenues, earnings, liquidity, and cash flowslikelihood of loss as the Company’s customers and/or licensees may request temporary relief, delay, or not make scheduled payments.probable.
See Note 12 for information related to certain legal matters which arose subsequent to December 31, 2023.
8283
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
11.
10. Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business.
The income tax provision (benefit) provision for federal and state and local income taxes in the consolidated statements of operations consists of the following:
| | | | | | | | | | | | |
| | Years Ended December 31, | | Years Ended December 31, | ||||||||
($ in thousands) |
| 2020 |
| 2019 |
| 2023 |
| 2022 | ||||
Current: |
| |
|
| |
|
| |
|
| |
|
Federal | | $ | (202) | | $ | — | | $ | 22 | | $ | 300 |
State and local | |
| 66 | |
| 63 | |
| 83 | |
| 234 |
Total current | |
| (136) | |
| 63 | |
| 105 | |
| 534 |
| | | | | | | | | | | | |
Deferred: | |
|
| |
|
| |
|
| |
|
|
Federal | |
| (3,538) | |
| (354) | |
| 727 | |
| (509) |
State and local | |
| (844) | |
| (351) | |
| 380 | |
| (456) |
Total deferred | |
| (4,382) | |
| (705) | |
| 1,107 | |
| (965) |
Total benefit | | $ | (4,518) | | $ | (642) | ||||||
Total provision (benefit) | | $ | 1,212 | | $ | (431) |
The reconciliation of the federal statutory income tax (benefit) provision computed at the federal and state and local statutory ratesrate to the Company’s loss before taxeseffective tax rate reflected in the income tax provision (benefit) shown in the consolidated statements of operations is as follows:
| | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | | ||||
|
| 2020 |
| 2019 |
|
| 2023 |
| 2022 |
|
U.S. statutory federal rate |
| 21.00 | % | 21.00 | % |
| 21.00 | % | 21.00 | % |
State and local rate, net of federal tax |
| 4.54 |
| 7.40 | | |||||
State and local rate, net of federal tax benefit |
| 6.36 |
| 6.10 | | |||||
Stock compensation |
| (1.94) |
| (7.01) | |
| (0.14) |
| (6.14) | |
Excess compensation deduction |
| (0.51) |
| (5.08) | |
| (0.27) |
| (5.32) | |
Foreign tax credits |
| 0.11 |
| 0.45 | | |||||
Federal true-ups |
| 0.18 |
| (5.09) | | |||||
Life insurance |
| (0.04) |
| (0.81) | |
| (0.12) |
| (0.52) | |
Net operating loss carryback |
| 0.56 |
| — | | |||||
Paycheck Protection Program addback |
| 2.18 |
| — | | |||||
Other permanent differences |
| (0.01) |
| (0.16) | | |||||
Income tax benefit |
| 25.89 | % | 15.79 | % | |||||
Change in valuation allowance |
| (33.16) |
| — | | |||||
Income tax (provision) benefit |
| (6.15) | % | 10.03 | % |
8384
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
The significant components of net deferred tax liabilitiesassets (liabilities) of the Company consist of the following:
| | | | | | | | | | | | |
| | December 31, | | December 31, | ||||||||
($ in thousands) |
| 2020 |
| 2019 |
| 2023 |
| 2022 | ||||
Deferred tax assets |
| |
|
| |
|
| |
|
| |
|
Stock-based compensation | | $ | 2,440 | | $ | 2,774 | | $ | 712 | | $ | 712 |
Federal, state and local net operating loss carryforwards | |
| 2,907 | |
| 1,207 | |
| 8,127 | |
| 3,175 |
Accrued compensation and other accrued expenses | |
| 664 | |
| 846 | |
| 451 | |
| 748 |
Allowance for doubtful accounts | |
| 329 | |
| 43 | |
| 231 | |
| — |
Basis difference arising from discounted note payable | |
| 11 | |
| 316 | |
| 11 | |
| 11 |
Foreign tax credit | |
| 219 | |
| 148 | ||||||
Charitable contribution carryover | |
| 63 | |
| 60 | |
| 1 | |
| — |
Property and equipment | |
| 321 | |
| 180 | |
| 169 | |
| 497 |
Interest expense | |
| 31 | |
| — | ||||||
Total deferred tax assets | | | 6,954 | | | 5,574 | | | 9,733 | | | 5,143 |
Valuation allowance | | | (6,537) | | | — | ||||||
Total deferred tax assets, net of valuation allowance | | | 3,196 | | | 5,143 | ||||||
| | | | | | | | | | | | |
Deferred tax liabilities | | | | | | | | | | | | |
Basis difference arising from intangible assets of acquisition | |
| (10,006) | |
| (13,008) | |
| (3,196) | |
| (4,036) |
Total deferred tax liabilities | |
| (10,006) | |
| (13,008) | |
| (3,196) | |
| (4,036) |
Net deferred tax liabilities | | $ | (3,052) | | $ | (7,434) | ||||||
| | | | | | | ||||||
Net deferred tax assets | | $ | — | | $ | 1,107 |
As of December 31, 20202023 and 2019,2022, the Company had approximately $10.1$28.6 million and $4.0$10.9 million, respectively, of federal net operating loss carryforwards ("NOLs") available to offset future taxable income. The NOL as of December 31, 2017 of $0.3 million has an expiration period through 2037. The NOL generated during tax years beginning after December 31, 2017 of $9.8$28.3 million has an indefinite life and does not expire.
On March 27, 2020, the CARES Act was enacted and signed into law. The CARES Act includes certain provisions impacting businesses’ income taxes related to 2018, 2019, and 2020. Some of the significant tax law changes are to increase the limitation on deductible business interest expense for 2019 and 2020, allow for the five-year carryback of net operating losses for 2018-2020, suspend the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020, provide for the acceleration of depreciation expense from 2018 and forward on qualified improvement property, and accelerate the ability to claim refunds of AMT credit carryforwards. The Company is required to recognize the effect of tax law changes on its financial statements in the period in which the law was enacted. At this time, the Company may avail itself of the ability to carry back net operating losses generated in 2018 and 2019 tax years for five years, which would result in an estimated income statement benefit of $0.1 million and tax refund receivable of $0.2 million.
As of December 31, 20202023 and 2019,2022, management does not believe the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its consolidated financial statements. The Company will continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its consolidated financial statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.
During the Current Year, the Company recognized a valuation allowance in order to reduce deferred tax assets to the amount expected to be realized. The change in the valuation allowance from December 31, 2022 to December 31, 2023 was approximately $6.5 million.
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
12.
11. Related Party Transactions
Benjamin MalkaIM Topco, LLC
Benjamin Malka wasAs described in Note 3, the Company holds a directornoncontrolling interest in IM Topco, which is accounted for under the equity method of accounting.
Services Agreement
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 Company from June 2014 through September 2019. Mr. Malka is also a 25% equity holderinteractive television business and related talent support) to IM Topco in exchange for payments of HOH, and is$300,000 per year.
In November 2023, the former Chief Executive Officer of HOH. HOH is the parent company of HIP.
On February 11, 2019, pursuant to the Heritage Asset Purchase Agreement and the acquisition of the Halston Heritage Trademarks (see Note 3),services agreement was amended such that the Company delivered in escrow for HIP or its designees an aggregate of $8.4 million in cash and 777,778 shares of the Company’s common stock valued at $1.1 million, subjectagreed to a voting agreement and a lock-up agreement relating to such shares and a consent and waiver agreement each in form satisfactory to Xcel within three months from the date of the Heritage Asset Purchase Agreement. Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.
In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, 2022 based on Excess Net Royalties. “Excess Net Royalties” during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) is equal to (a) the positive amount, if any, of the Net Royalties as calculated for such Royalty Target Year, less the greater of (i) One Million Five Hundred Thousand Dollars ($1.5 million), or (ii) the maximum Net Royalties for any previous Royalty Target Year. “Applicable Percentage” means (a) 50% of the first $10.0 million of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0 million and up to $15.0 million and (c) 0% of aggregate Excess Net Royalties during the Earn-Out Period in excess of $15.0 million. The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”); provided, however, that if the number of Earn-Out Shares, when combined with the number of Xcel Shares issued at the Closing Date, will exceed 4.99% of the aggregate number of shares of Xcel common stock outstanding as of the Closing Date (calculated in accordance with Nasdaq Rule 5635(a)) (the “Xcel Share Limit”), then Xcel may, in its sole and unfettered discretion, elect to (x) pay cash for the Earn-Out Value attributable to the Earn-Out Shares that would exceed the Xcel Share Limit; (y) solicit stockholder approval for the issuance of Earn-Out Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, issue such Earn-Out Shares to HIP; or (z) solicit stockholder approval for the issuance of Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, pay the applicable Earn-Out Considerationprovide IM Topco with a combination$600,000 reduction of cash and Earn-Out Shares.future service fees over the next eighteen months, beginning on July 1, 2023.
Hilco Trading, LLC
Hilco Trading, LLC ("Hilco") directly and indirectly owns greater than 5% of the Company's common stock, and its affiliate Hilco Global owns 50% of the equity of Longaberger Licensing, LLC. DuringFor the year ended December 31, 2020,2023, the Company soldrecognized service fee income related to this agreement of $150,000.
License Agreement
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 apparelIsaac 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 December 31, 2026, and provided guaranteed minimum royalties to IM Topco of $400,000 per year.
Effective December 16, 2022, the license agreement between IM Topco and Xcel was terminated in favor of a new similar license agreement between IM Topco and an affiliateunrelated third party. However, as part of Hilco,the termination of the May 31, 2022 license agreement, Xcel provided a guarantee to IM Topco for the payment of any difference between (i) the royalties received by IM Topco from the unrelated third party under the new agreement and recognized $0.15 million(ii) the amount of revenueguaranteed royalties that IM Topco would have received from this transaction. Additionally, duringXcel under the May 31, 2022 agreement. For the year ended December 31, 2020,2023, the estimated amount of such shortfall was approximately $325,000, which the Company sold certain intangible assetsrecognized as royalty expense in the consolidated statements of Longaberger Licensing, LLCoperations.
In November 2023, the Company, WHP, and IM Topco entered into an amendment of the May 27, 2022 membership purchase agreement, under which the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024 (see Note 3 for details). In exchange, Xcel agreed to make additional royalty payments to IM Topco totaling $450,000 the next 11 months. As a third party; an affiliateresult of Hilco earned and was paidthis amendment, the Company recognized a commission of $0.05 million related$450,000 increase to the salecarrying value basis of these assets.its equity method investment in IM Topco and a corresponding increase in current liabilities.
Robert W. D’Loren
Jennifer D’Loren is the wife of Robert W. D’Loren, the Company’s Chief Executive Officer and Chairman of the Board, and is employed by the Company. Mrs. D’Loren brings vast experience in project management and implementation of financial IT solutions. During the past two years, Mrs. D’Loren has worked on the implementation of the Company’s ERP system. Mrs. D’Loren received compensation of $0.14 million and $0.17 million for the years ended December 31, 2020 and 2019, respectively.
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20202023 and 20192022
Isaac Mizrahi
Isaac Mizrahi is a principal stockholder and former employee of the Company.
Employment Agreement
On February 24, 2020, the Company entered into an employment agreement with IsaacMr. Mizrahi a principal stockholder of the Company, for Mr. Mizrahihim to continue to serve as Chief Design Officer of the Isaac Mizrahi Brand. The termThis employment agreement remained in effect through May 31, 2022. On May 31, 2022, this agreement was transferred to IM Topco as part of the transaction in which the Company sold a majority interest in the Isaac Mizrahi Brand trademarks to a third party (see Note 3 for details).
The employment agreement expires on December 31, 2022, subject to earlier termination, and may be extended, at the Company’s option, for two successive one-year terms (each,provided Mr. Mizrahi with a “Renewal Period”). Mr. Mizrahi’s base salary shall beof $1.8 million, $2.0 million, and $2.1 million per annum during the term of the agreementfor 2020, 2021, and $2.25 million and $2.4 million during 2023 and 2024 if the term is extended, in each case, subject to adjustment in the event2022, respectively. Mr. Mizrahi does not make a specified number of appearances on the QVC channel. Mr. Mizrahi shall bewas also eligible to receive an annual cash bonus (the “Bonus”) up to an amount equal to $2.5 million less base salary for 2020 and $3.0 million less base salary for 2021 2022, and any year during the Renewal Period.2022. The Bonus shall consistconsisted of the DRT Revenue, Bonus, the Brick-and-Mortar Bonus, the Endorsement Bonus and the Monday Bonus, if any, as determined in accordance with the below:
● | “DRT Bonus” means for any calendar year an amount equal to 10% of the aggregate net revenue related to sales of Isaac Mizrahi Brand products through direct response television. The DRT Revenue Bonus shall be reduced by the amount of the Monday Bonus. |
● | “Brick-and-Mortar Bonus” means for any calendar year an amount equal to 10% of the net revenues from sales of products under the Isaac Mizrahi Brand, excluding DRT revenue and endorsement revenues. |
● | “Endorsement Bonus” means for any calendar year an amount equal to 40% of revenues derived from projects undertaken by the Company with one or more third parties solely for Mr. Mizrahi to endorse the third party’s products through the use of Mr. Mizrahi’s name, likeness, and/or image, and neither the Company nor Mr. Mizrahi provides licensing or design. |
● | “Monday Bonus” means $10,000 for each appearance by Mr. Mizrahi on |
Mr. Mizrahi is required to devote his full business time and attention to the business and affairsIn addition, on May 31, 2022, all 522,500 unvested shares of restricted stock of the Company and its subsidiaries; however,held by Mr. Mizrahi is the principal(for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of IM Ready-Made, LLC and Laugh Club, Inc. (“Laugh Club”), and accordingly, he may undertake promotional activities related thereto (including the promotionsuch shares being surrendered for cancellation in satisfaction of his name, image, and likeness) through television, video, and other media (and retain any compensation he receives for such activities) (referred to as “Retained Media Rights”) so long as such activities (i) do not utilize the IM Trademarks, (ii) do not have a mutually negative impact upon or materially conflict with Mr. Mizrahi’s duties under the employment agreement, or (iii) are consented to by the Company. The Company believes that it benefits from Mr. Mizrahi’s independent promotional activities by increased brand awareness of IM Brands and the IM Trademarks.
Severance. If Mr. Mizrahi’s employment is terminated bywithholding tax obligations. Also on May 31, 2022, the Company without “cause,” or if Mr. Mizrahi resigns with “good reason,” then Mr. Mizrahi will be entitled to receive his unpaid base salary and cash bonuses through the termination date and an amount equal to his base salary in effect on the termination date for the longerissued 33,557 additional shares of six months and the remaindercommon stock of the then-current term, but in no event exceeding 18 months. If Mr. Mizrahi’s employment is terminated by the Company without “cause” or if Mr. Mizrahi resigns with “good reason,” within six months following a change of control (as defined in the employment agreement), Mr. Mizrahi shall be eligible to receive a lump-sum payment equal to two times the sum of (i) his base salary (at an average rate that would have been in effect for such two year period following termination) plus (ii) the bonus paid or due(valued at $50,000) to Mr. Mizrahi, in the year priorwhich vested immediately, and made a $100,000 cash payment to the change in control.Mr. Mizrahi
Non-Competition and Non-Solicitation. Laugh Club Services AgreementDuring the term of his employment by the Company and for a one-year period after the termination of such employment (unless Mr. Mizrahi’s employment was terminated without “cause” or was terminated by him for “good reason”), Mr. Mizrahi may not permit his name to be used by or to participate in any business or enterprise (other than the mere passive ownership of not more than 3% of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
or proposes to engage in the Company’s business anywhere in the world other than the Company and its subsidiaries. Also during his employment and for a one-year period after the termination of such employment, Mr. Mizrahi may not, directly or indirectly, solicit, induce, or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any or its subsidiaries; or solicit, induce, or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager, or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries; or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries; or in any way interfere with the relationship between any such customer, supplier, licensee, employee, or business relation and the Company or any of its subsidiaries.
On February 24, 2020 the Company entered into a services agreement with Laugh Club, an entity wholly-owned by Mr. Mizrahi, pursuant to which Laugh Club shall provideprovided services to Mr. Mizrahi necessary for Mr. Mizrahi to perform his services pursuant to the employment agreement. The Company will paypaid Laugh Club an annual fee of $0.72 million for such services. This services agreement remained in effect through May 31, 2022. On May 31, 2022, this agreement was transferred to IM Topco as part of the transaction in which the Company sold a majority interest in the Isaac Mizrahi Brand trademarks to a third party (see Note 3 for details).
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13. Subsequent EventsXCEL BRANDS, INC. AND SUBSIDIARIES
Acquisition of Lori Goldstein BrandNotes to Consolidated Financial Statements
December 31, 2023 and 2022
ORME
On April 1, 2021,December 4, 2023, the Company acquired a 30% equity ownership interest in ORME, a short-form video and social commerce marketplace that is planned to launch in 2024, for a purchase price of $150,000. ORME licenses the technology utilized by its wholly-owned subsidiary, Gold Licensing, LLC, acquired the “Lori Goldstein” trademarks and other intellectual property rights related thereto,marketplace from Lori Goldstein, Ltd. (the “Seller”)KonnectBio Inc., in exchange for initial cash consideration of $3.6 million, plus additional cash earn-out consideration of up to $12.5 million based onwhich Robert W. D’Loren, the future performanceCompany’s Chairman of the brand.
Concurrent with the acquisition, the Company also entered into a 10-year employment agreement with the shareholder of the Seller to serve as brand’s Chief Creative Officer and Spokesperson, with a base salary rate of $1.2 million per annum, and the opportunity to earn additional incentives based on the future net royalties related to the brand. Additionally, the Company concurrently entered into a consulting agreement with the Seller to provide creative advice and consultation, for a fee of 0.8 million per annum.
Upon the consummation of the acquisition of the Lori Goldstein Brand described above, the Company incurred cash bonuses totaling $175,000 to certain members of the Company’s senior management (including $100,000 to theBoard, Chief Executive Officer, and $25,000 eachPresident, owns an approximate 20% noncontrolling interest.
12.Subsequent Events
Leasing Transactions
Effective February 29, 2024, the Company entered into an operating lease for new corporate offices located at 550 Seventh Avenue, 11th floor, New York, New York. This lease commenced in April 2024 and shall expire seven years from the commencement date in 2031. The average annual lease cost over the term of this lease is approximately $0.5 million per year.
On January 26, 2024, the Company, as lessor, entered into a lease agreement for the sublease of its former corporate offices and operations facility located at 1333 Broadway, 10th floor, New York, New York to a third-party subtenant through October 30, 2027. The average annual fixed rent over the term of this sublease is approximately $0.8 million per year. As a result of entering into this sublease, the Company recognized an impairment charge of approximately $2.1 million related to the Chief Financial Officer, Presidentright-of-use asset. The loss recognition will coincide with the departure date. February 29, 2024 has been determined to be the date of a fundamental change to the use of the 1333 Broadway premises.
Public Offering and Private Placement
On March 15, 2024, the Company entered into an underwriting agreement with Craig-Hallum Capital Group LLC (the “Representative”), as the representative of the underwriters, relating to a firm commitment underwritten public offering (the “Offering”) of 3,284,421 shares of the Company’s common stock at a price to the public of $0.65 per share. In connection with the Offering, Robert W. D’Loren, Chairman and Chief OperatingExecutive Officer of the Company; an affiliate of Mark DiSanto, a director of the Company; and Seth Burroughs, Executive Vice President of Business Development and Treasury), such bonuses having been approvedTreasury of the Company, purchased 146,250, 146,250, and 32,500 shares of common stock, respectively.
The closing of the Offering occurred on March 19, 2024. The net proceeds to the Company from the sale of the shares, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the BoardCompany, were approximately $1,735,000.
Upon closing of Directors onthe Offering, the Company issued the Representative certain warrants to purchase up to 178,953 shares of common stock (the “Representative’s Warrants”) as compensation. The Representative’s Warrants will be exercisable at a per share exercise price of $0.8125. The Representative’s Warrants are exercisable, in whole or in part, during the four and one-half-year period commencing 180 days from the commencement of sales of the shares of common stock in the Offering.
On March 18, 2021.14, 2024, the Company entered into subscription agreements with each of Robert W. D’Loren, Chairman and Chief Executive Officer of the Company; an affiliate of Mark DiSanto, a director of the Company; and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company to purchase 132,589, 132,589, and 29,464 shares, respectively (collectively, the “Private Placement Shares”), at a price of $0.98 per Private Placement Share. The total number of Private Placement Shares purchased was 294,642. Net proceeds after payment of agent fees to the Representative were approximately $265,000. The purchase of the Private Placement Shares closed concurrently with the Offering.
Debt Refinancing Transaction
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XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
The aggregate number of shares of common stock issued from the Offering and the Private Placement was 3,579,063 shares and the total net proceeds received was approximately $2,000,000.
IM Topco
On April 14, 2021,12, 2024, the Company, WHP, and its wholly owned subsidiariesIM Topco entered into a new loan and security agreement with BHI and FEAC, which resulted in the extinguishmentamendments of the term loan debtMay 27, 2022 membership purchase agreement and the Business Venture Agreement. Under these amendments, the parties agreed to the following:
● | The purchase price adjustment provision within the membership purchase agreement was waived until the measurement period ending September 30, 2025. |
● | If IM Topco royalties are less than $13.5 million for the twelve-month period ending March 31, 2025 or less than $18.0 million for the year ending December 31, 2025, Xcel shall transfer equity interests in IM Topco to WHP equal to 12.5% of the total outstanding equity interests of IM Topco, such that Xcel’s ownership interest in IM Topco would decrease from 30% to 17.5%, and WHP’s ownership interest in IM Topco would increase from 70% to 82.5%. In addition, Xcel shall be obligated to make such transfer to WHP if Xcel fails to make certain payments owed to IM Topco under the second amendment (which totaled $375,000 as of December 31, 2023). |
● | On and after January 1, 2026, WHP shall receive 50% of the Net Cash Flow which would otherwise be payable to Xcel, until WHP has received an aggregate amount of additional Net Cash Flow equal to $1.0 million. |
Legal Matters
On February 16, 2024, counsel to Lori Goldstein, a brand spokesperson for the Company, advised the Company that existed asthe Company was in material breach of December 31, 2020. Under this transaction, the Company’s term loan debt obligation increased to $25.0 million, payable in 16 equal quarterly installments of $625,000, commencing June 30, 2021 and ending on March 31, 2025,2021 asset purchase agreement for failure to pay $963,642 earned in 2023 in accordance with a final paymentthe provisions of $15.0 million payable on the maturity date of April 14, 2025. The new term loan debt bears interest at a weighted average rate of LIBOR plus 6.2% per annum. In addition, the facility provides for up to $25 million of future acquisition financing, subject to lender approval on a deal-by-deal basis. The Company’s obligationsLori Goldstein Earn-Out (as described in Note 9) under the new loanterms of the agreement. The Company does not dispute the amount of the Lori Goldstein Earn-Out that was achieved in 2023, and security agreement are secured byadvised Ms. Goldstein that due to Ms. Goldstein’s failure to make all of the assets ofQVC appearances as required by her employment agreement, the Company and, subjectwas not willing to certain limitations, equity interests ofpay the amount due in a lump sum, but instead would make the payment in four quarterly installments. Failure to amicably resolve this dispute could adversely affect the Company’s wholly owned subsidiaries. The new loancash flows and security agreement contains customary covenants, including reporting requirements, trademark preservation, and financial covenants.the availability of Ms. Goldstein’s services.
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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements with the Company’sour auditors which would require disclosure under Item 304(b) of Regulation S-K.
Item 9A.Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Such controls and procedures, by their nature, can provide only reasonable assurance regarding management’s control objectives.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a 15(f) and 15d 15(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2020.2023. Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective as of December 31, 2020,2023, due to the material weakness described below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the chief executive officer and principal financial officer and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the design and effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on itsour evaluation as of December 31, 2020,under the framework described above, our management has concluded that our internal controlscontrol over financial reporting werewas not effective as of December 31, 20202023 due to the material weaknessesweakness set forth below. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The basis for the conclusion that such internal control was ineffective included the following considerations:
● |
● | During the middle of February 2024, our equity method investee engaged an independent audit accounting firm (separate from Marcum, LLP) to conduct its audit. We agreed to pay for all fees of the audit, and on February 23, 2024, paid a retainer to the audit firm, in accordance with the engagement. The audit firm was the same firm which conducted the audit for the year ended December 31, 2022 for the same equity method investee and delivered timely such audited financial statements for such prior audit. However, the audit firm for the equity method investee has not completed the 2023 audit on a timely basis. It was determined their progress was significantly deficient, and there would not be sufficient time to engage a new audit firm to receive timely, audited financial statements of the equity method investee. The determination was made to terminate this firm’s 2023 engagement and have a new firm engaged to provide the 2023 audited financial statements. |
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Going forward, the Company has hired additional personnelwill arrange for the appointment of a different auditor by the equity method investee and take a more active role in its finance department to addresscommunicating with the material weakness.auditor of the equity method investee, including assessing progress and timing.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report wasWe were not subjectrequired to attestation requirements byhave, nor have we, engaged the Company’s independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit the Companyus to provide only management’s report in this annual report.
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Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our most recent completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange ActGovernance
The following table sets forth the names, ages, and positions of our executive officers and directors as of the date hereof. Executive officers are appointed by our board of directors. Each executive officer holds office until resignation, is removed by the Board, or a successor is elected and qualified. Each director holds office until a successor is elected and qualified or earlier resignation or removal.
| | | | |
NAME |
| AGE |
| POSITION |
Robert W. D’Loren |
|
|
| Chairman of the Board of Directors and Chief Executive Officer and President |
James F. Haran |
|
|
| Chief Financial Officer and Assistant Secretary, and Principal Financial and Accounting Officer |
|
|
| ||
Seth Burroughs |
|
|
| Executive Vice President of Business Development and Treasury and Secretary |
Mark DiSanto |
|
|
| Director |
James Fielding |
|
|
| |
|
|
| Director | |
Howard Liebman |
|
|
| Director |
Deborah Weinswig |
|
|
| Director |
Below are the biographies of each of our officers and directors as of December 31, 2019.2023.
Robert W. D’Loren has been the Chairman of our Board and our Chief Executive Officer and President since September 2011. Mr. D’Loren has been an entrepreneur, innovator, and pioneer of the consumer branded products industry for the pastover 35 years. Mr. D’Loren has spearheaded the Company’s omni-channel platform, connecting the channels of digital, brick-and-mortar, social media, and direct-response television to create a single customer view and brand experience for Xcel’s brands. He served as Chairman and CEO of IPX Capital, LLC and its subsidiaries, a consumer products investment company, from 2009 to 2011. He continues to serve as IPX Capital LLC’s Chairman.
Prior to founding the Company, from June 2006 to July 2008, Mr. D’Loren was a director, President and CEO of NexCen Brands, Inc., a global brand acquisition and management company with holdings that included The Athlete’s Foot,
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Waverly Home, Bill Blass, MaggieMoo’s, Marble Slab Creamery, Pretzel Time, Pretzelmaker, Great American Cookies, and The Shoe Box.
From 2002 to 2006, Mr. D’Loren’s work among consumer brands continued as President and CEO of UCC Capital Corporation, an intellectual property investment company where he invested in the consumer branded products, media, and entertainment sectors. From 1997 to 2002, Mr. D’Loren founded and acted as President and Chief Operating Officer of CAK Universal Credit Corporation, an intellectual property finance company. Mr. D’Loren’s total career debt and equity investments in over 30 entertainment and consumer branded products companies have exceeded $1.0 billion. In 1985, he founded and served as President and CEO of the D’Loren Organization, an investment and restructuring firm responsible for over $2 billion of transactions. Mr. D’Loren has also served as an asset manager for Fosterlane Management, as well as a manager with Deloitte.
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Mr. D’Loren has served on the Board of Directors for Iconix Brand Group, Longaberger Company, Business Loan Center, and as a board advisor to The Athletes Foot and Bill Blass, Ltd. He also serves on the board of directors for the Achilles Track Club International. Mr. D’Loren is a Certified Public Accountant and holds an M.S. degree from Columbia University and a B.S. degree from New York University.
James F. Haran has been our Chief Financial Officer since September 2011. Mr. Haran served as CFO of IPX Capital, LLC and its related subsidiaries, from June 2008 to September 2011. Mr. Haran was the Executive Vice President, Capital Markets for NexCen Brands, Inc. from 2006 to May 2008 and Chief Financial Officer and Chief Credit Officer for UCC Capital Corporation, and its predecessor company, CAK Universal Credit Corp., from 1998 to 2006. Prior to joining UCC, Mr. Haran was a partner at Sidney Yoskowitz and Company P.C., a registered diversified certified public accounting firm. During his tenure, which began in 1987, his focus was on real estate and financial services companies. Mr. Haran is a Certified Public Accountant and holds a B.S. degree from State University of New York at Plattsburgh.
Joe Falco has been our Chief Operating Officer and President of the Mizrahi brands since September 2011. Mr. Falco is a merchant with almost two decades of experience in managing lifestyle brands and business development. Mr. Falco served as President of Misook, a division of HMX, from February 2010 to February 2011, as Worldwide President and Chief Merchant for Elie Tahari from 2007 to 2009, and as President of Sixty USA from 2005 to 2006. Prior to that position, Mr. Falco was Senior Vice President for Dolce & Gabbana from 1998 to 2004, where he was responsible for North American development and operations. Mr. Falco started his career with the luxury retailer Barneys New York where he became a student of product merchandising and brand communication.
Seth Burroughs has been our Executive Vice President of Business Development and Treasury since September 2011. From June 2006 to October 2010, Mr. Burroughs served as Vice President of NexCen Brands, Inc. Prior to his role at NexCen, from 2003 to 2006, Mr. Burroughs served as Director of M&A Advisory and Investor Relations at UCC Capital Corporation, an intellectual property investment company, where he worked on $500 million in acquisitions and $300 million in specialty financing as an advisor to consumer branded products companies in the franchising and apparel industries. From 2001 to 2003, Mr. Burroughs worked as a Senior Financial Analyst at The Pullman Group where he was involved with structuring the first securitizations of music royalties, including the Bowie Bonds, and as a Financial Analyst at Merrill Lynch’s private client group. Mr. Burroughs received a B.S. degree in economics from The Wharton School of Business at the University of Pennsylvania.
Mark DiSanto has served as a member of our Board since October 2011. Since 1988, Mr. DiSanto has served as the Chief Executive Officer of Triple Crown Corporation, a regional real estate development and investment company with commercial and residential development projects exceeding 1.5 million square feet. Mr. DiSanto received a degree in business administration from Villanova University’s College of Commerce and Finance, a J.D. degree from the University of Toledo College of Law, and an M.S. degree in real estate development from Columbia University.
James Fielding was appointed as a member of our Board in July 2018. He is a 25-year veteran in the consumer retail space, and previously served as the Global Head of Consumer Products for Dreamworks Animation and Awesomeness TV. Prior to that, Mr. Fielding served as the CEO of Claire’s Stores Inc., where he oversaw strategic growth and international development for the retail chain’s 3,000-plus stores worldwide. From May 2008 to 2012 Mr. Fielding served as the President of Disney Stores Worldwide.
Michael R. Francis has served as a member of our Board since June 2015. Mr. Francis is founder and CEO of Fairview Associates, LLC, a retail and branding consultancy. From February 2012 to December 2015, Mr. Francis served as the Chief Global Brand Officer of DreamWorks Animation SKG, which creates world-class entertainment, including animated feature films, television specials and series, and live-entertainment properties for audiences around the world. During this tenure with DreamWorks, Mr. Francis was responsible for global consumer products, retail, brand strategy, creative design, location-based entertainment, digital, publishing, and franchise development. From November 2010 to June 2011, Mr. Francis served as the President of J.C. Penney Company, Inc., one of the largest department store operators in the United States. Prior to November 2010, Mr. Francis spent more than 26 years with Target Corporation, an American retailing company and the second-largest discount retailer in the United States, in various roles including Executive Vice President and Global Chief Marketing Officer. Mr. Francis has a B.A. degree in international studies from the University of Michigan.
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Howard Liebman has served as a member of our Board since October 2011. He was President, Chief Operating Officer and a director of Hobart West Group, a provider of national court reporting and litigation support services, from 2007 until the sale of the business in 2008. Mr. Liebman served as a consultant to Hobart from 2006 to 2007. Mr. Liebman was President, Chief Financial Officer, and a director of Shorewood Packaging Corporation, a multinational manufacturer of high-end value-added paper and paperboard packaging for the entertainment, tobacco, cosmetics and other consumer products markets. Mr. Liebman joined Shorewood in 1994 as Executive Vice President and Chief Financial Officer, and served as its President from 1999 until Shorewood was acquired by International Paper in 2000. Mr. Liebman continued
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as Executive Vice President of Shorewood until his retirement in 2005. Mr. Liebman is a Certified Public Accountant and was an audit partner with Deloitte and Touche, LLP (and its predecessors) from 1974 to 1994.
Deborah Weinswig was appointed as a member of our Board in January 2018. She is a Managing Director of Funding Global Retail & Technology (“FGRT”), the think tank for the Hong Kong-based Fung Group, since April 2014 where she is responsible for building the team’s research capabilities and providing insights into the disruptive technologies that are reshaping today’s global retail landscape. Prior to leading FGRT, Weinswig served as Chief Customer Officer for Profitect Inc., a predictive analytics and big data software provider. From March 2002 to October 2013, Ms. Weinswig was employed by Citigroup, Inc., most recently where she was Managing Director and Head of the Global Staples & Consumer Discretionary team at Citi Research. Ms. Weinswig also serves as an e-commerce expert for the International Council of Shopping Centers’ Research Task Force and was a founding member of the Oracle Retail Industry Strategy Council. Lastly, she is a member of the Board of Directors of Kiabi (affiliated with the Auchan Group). Ms. Weinswig is a Certified Public Accountant and holds an MBA from the University of Chicago.
Directors’ Qualifications
In furtherance of our corporate governance principles, each of our directors brings unique qualities and qualifications to our Board. We believe that all of our directors have a reputation for honesty, integrity, and adherence to high ethical standards. They each have demonstrated business acumen, leadership, and an ability to exercise sound judgment, as well as a commitment to serve the Company and our Board. The following descriptions demonstrate the qualifications of each director:
Robert W. D’Loren has extensive experience in and knowledge of the licensing and commercial business industries and financial markets. This knowledge and experience, including his experience as director, president, and chief executive officer of a global brand management company, provide us with valuable insight to formulate and create our acquisition strategy and how to manage and license acquired brands.
Mark DiSanto has considerable experience in building and running businesses and brings his strong business acumen to the Board.
James Fielding brings extensive senior level experience in the consumer retail space, as well as strong relationships in the media and retail industries.
Michael R. Francis brings extensive senior level experience in the media and retail industries, as well as relationships in the media and retail industries.
Howard Liebman brings comprehensive knowledge of accounting, the capital markets, mergers and acquisitions, financial reporting, and financial strategies from his extensive public accounting experience and prior service as Chief Financial Officer of a public company.
Deborah Weinswig brings thought leadership in the retail and licensing industries, particularly in the areas of sourcing and logistics.
Key Employees
Isaac MizrahiLori Goldstein is Chief DesignCreative Officer and Spokeswoman for IMthe Lori Goldstein Brands. As Chief DesignCreative Officer, heshe is responsible for providing design input and design directionguidance to Xcel Brands for all brands under hisher name. Mr. MizrahiMs. Goldstein’s work has beencovered a leadervast range, from her collaborations with photographers Annie Leibovitz at Vanity Fair to Steven Meisel at Vogue Italia, to her styling for designers Donatella Versace and Vera Wang. Ms. Goldstein stepped in front of the fashion industrycamera in 2009 when she launched LOGO by Lori Goldstein, her exclusive collection for almost 30 years. SinceQVC. She is the author of “Style Is Instinct,” which was published in 2013. In 2014, Ms. Goldstein’s brand was awarded “Apparel Product Concept of the Year” and she was named QVC Ambassador.
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his first collection in 1987, Mr. Mizrahi’s designs have come to stand for timeless, cosmopolitan style. He has been awarded four Council of Fashion Designers of America (CFDA) awards, including a special award in 1996 for the groundbreaking documentary “Unzipped.” In the Spring of 2016, Mr. Mizrahi launched IMNYC Isaac Mizrahi, available exclusively at Hudson’s Bay and Lord & Taylor department stores. Previously, in 2009, Mr. Mizrahi launched his exclusive lifestyle collection, ISAACMIZRAHILIVE, on QVC. In addition, television audiences have come to value Mr. Mizrahi’s media presence through his roles on “Project Runway All Stars” for Lifetime, and his appearances on broadcast television networks where he offers his expertise on fashion and style.
Employment Agreements with Executives
Robert W. D’Loren
On February 28, 2019, and effective as of January 1, 2019, the Company entered into a three-year employment agreement with Robert W. D’Loren for him to continue to serve as Chief Executive Officer of the Company, referred to as the D’Loren Employment Agreement. Following the initial three-year term, the agreement automatically renewed for successive one-year terms in 2022, 2023, and 2024, and will be automatically renewed for one-year terms thereafter unless either party gives written notice of intent to terminate at least 90 days prior to the termination of the then current term. Pursuant to the D’Loren Employment Agreement, Mr. D’Loren’s annual base salary is $0.89 million. The Company’s board of directors or the compensation committee may approve increases (but not decreases) from time to time. Following the initial three-year term, Mr. D’Loren’s base salary will be reviewed at least annually. Mr. D’Loren receives an allowance for an automobile appropriate for his level of position and the Company pays (in addition to monthly lease or other payments) all of the related expenses for gasoline, insurance, maintenance, repairs, or any other costs with Mr. D’Loren’s automobile.
Bonus
Mr. D’Loren will be eligible to receive an annual cash bonus in an amount equal to (i) 2.5% of all income generated from the sales of the Company’s products and by the trademarks and other intellectual property owned, operated or managed by us (“IP Income”), in excess of $8.0 million earned and received by us in such fiscal year: provided that any IP income generated through net sales shall be multiplied by (x) 7% in the case of net sales from wholesale sales, and private label sales and (y) 3% in the case of net sales from e-commerce sales through the Company’s web sites and (ii) 5% of the Company’s adjusted EBITDA (as defined in the D’Loren Employment Agreement) for such fiscal year. Mr. D’Loren shall have the right to elect to receive the cash bonus through the issuance of shares of the Company’s common stock.
Pursuant to the D’Loren Agreement, Mr. D’Loren was granted an option to purchase up to 2,578,947 shares of the Company’s common stock at an exercise price of $1.70$1.72 per share. The option is exercisable until February 28, 2029 and shall vest, subject to Mr. D’Loren remaining employed by the Company and based upon the Company’s common stock achieving the following target prices:
| | |
Target Prices |
| Number of Option Shares Vesting |
$3.00 | | 736,842 |
$5.00 | | 626,316 |
$7.00 | | 515,789 |
$9.00 | | 405,263 |
$11.00 | | 294,737 |
Severance
If Mr. D’Loren’s employment is terminated by the Company without cause, or if Mr. D’Loren resigns with good reason, or if the Company fails to renew the term, then Mr. D’Loren will be entitled to receive his unpaid base salary and cash bonuses through the termination date and a lump sum payment equal to the base salary in effect on the termination date for the longer of two years from the termination date or the remainder of the then-current term. Additionally, Mr. D’Loren would be entitled to two hundred times the average annual cash bonuses paid in the preceding 12 months. Mr. D’Loren would also be entitled to continue to participate in the Company’s group medical plan or receive reimbursement for
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premiums paid for other medical insurance in an amount not to exceed the cost to participate in the Company’s plan, subject to certain conditions, for a period of 36 months from the termination date.
Change of Control
In the event Mr. D’Loren’s employment is terminated within 12 months following a change of control by the Company without cause or by Mr. D’Loren with good reason, he would be entitled to a lump sum payment equal to two times (i) his base salary in effect on the termination date for the longer of two years from the termination date or the remainder of the then-current term and (ii) two times the average annual cash bonuses paid in the preceding 12 months, minus $100. “Change
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“Change of control,” as defined in Mr. D’Loren’s employment agreement, means a merger or consolidation to which we are a party, a sale, lease or other transfer, exclusive license or other disposition of all or substantially all of our assets, a sale or transfer by our stockholders of voting control, in a single transaction or a series of transactions or, if during any twelve consecutive month period, the individuals who at the beginning of such period, constitute the board of directors of the Company (the “Incumbent Directors”) cease (other than due to death) to constitute a majority of the members of the board at the end of such period; provided that directors elected by or on the recommendation of a majority of the directors who so qualify as Incumbent Directors shall be deemed to be Incumbent Directors. Upon a change of control, notwithstanding the vesting and exercisability schedule in any stock option or other grant agreement between Mr. D’Loren and the Company, all unvested stock options, shares of restricted stock and other equity awards granted by the Company to Mr. D’Loren pursuant to any such agreement shall immediately vest, and all such stock options shall become exercisable and remain exercisable for the lesser of 180 days after the date the change of control occurs or the remaining term of the applicable option.
Non-Competition and Non-Solicitation
During the term of his employment by the Company and for a one-year period after the termination of such employment (unless Mr. D’Loren’s employment was terminated without cause or was terminated by him for good reason, in which case only for his term of employment and a six-month period after the termination of such employment), Mr. D’Loren may not permit his name to be used by or participate in any business or enterprise (other than the mere passive ownership of not more than 5% of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages or proposes to engage in our business in the United States, its territories and possessions and any foreign country in which we do business as of the date of termination of his employment. Also, during his employment and for a one-year period after the termination of such employment, Mr. D’Loren may not, directly or indirectly, solicit, induce or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries; or solicit, induce or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager, or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries; or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries; or in any way interfere with the relationship between any such customer, supplier, licensee, employee, or business relation and the Company or any of its subsidiaries.
James Haran
On February 28, 2019, and effective as of January 1, 2019, the Company entered into a two-year employment agreement with James Haran for him to continue to serve as the Company’s Chief Financial Officer, referred to as the Haran Employment Agreement. Following the initial two-year term, the agreement automatically renewed for asuccessive one-year termterms in 2021, 2022, 2023, and 2024, and will be automatically renewed for one-year terms thereafter unless either party gives written notice of intent to terminate at least 30 days prior to the expiration of the then current term. Pursuant to the Haran Employment Agreement, Mr. Haran’s annual base salary is $0.37 million per annum. The board of directors or the compensation committee may approve increases (but not decreases) from time to time. Following the initial two-year term, the base salary shall be reviewed at least annually. In addition, Mr. Haran receives a car allowance of $1,500 per month.
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Bonus
Mr. Haran will be eligible to receive a performance cash bonus in an amount equal to (i) 0.23% of all IP Income in excess of $12.0 million earned and received by us in such fiscal year; provided that any IP income generated through net sales shall be multiplied by (x) 7% in the case of net sales from wholesale sales, and private label sales and (y) 3% in the case of net sales from e-commerce sales through the Company’s web sites plus (ii) 0.375% of the Company’s adjusted EBITDA (as defined in the Haran Employment Agreement) for such fiscal year. Notwithstanding the foregoing, for (i) 2019, $0.04 million of Mr. Haran’s bonus was guaranteed, of which $0.01 million was paid to Mr. Haran upon execution of the Haran Employment Agreement and $0.03 million was paid prior to June 30, 2019, and (ii) for 2020, $0.03 million of Mr. Haran’s bonus was guaranteed and paid prior to June 30, 2020, in each case.
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Pursuant to the Haran Employment Agreement, Mr. Haran was granted an option to purchase up to 552,632 shares of the Company’s common stock at an exercise price of $1.70$1.72 per share. The option is exercisable until February 28, 2029 and shall vest, subject to Mr. Haran remaining employed with the Company and based upon the Company’s common stock achieving target prices as follows:
| | |
Target Prices |
| Number of Option Shares Vesting |
$3.00 |
| 157,895 |
$5.00 |
| 134,211 |
$7.00 |
| 110,526 |
$9.00 |
| 86,842 |
$11.00 |
| 63,158 |
Severance
If Mr. Haran’s employment is terminated by the Company without cause, or if Mr. Haran resigns with good reason, or if the Company fails to renew the term, then Mr. Haran will be entitled to receive his unpaid base salary and cash bonuses through the termination date and a lump sum payment equal to his base salary in effect on the termination date for 12 months. Mr. Haran would also be entitled to continue to participate in our group medical plan, subject to certain conditions, for a period of 12 months from the termination date.
Change of Control
In the event Mr. Haran’s employment is terminated within 12 months following a change of control by the Company without cause or by Mr. Haran with good reason, Mr. Haran would be entitled to a lump sum payment equal to his base salary in effect on the termination date for 12 months following such termination. “Change of control,” as defined in Mr. Haran’s employment agreement, means a merger or consolidation to which we are a party, a sale, lease or other transfer, exclusive license or other disposition of all or substantially all of our assets, or a sale or transfer by our stockholders of voting control, in a single transaction or a series of transactions. Upon a change of control, notwithstanding the vesting and exercisability schedule in any stock option or other grant agreement between Mr. Haran and us, all unvested stock options, shares of restricted stock and other equity awards granted by us to Mr. Haran pursuant to any such agreement shall immediately vest, and all such stock options shall become exercisable and remain exercisable for the lesser of 180 days after the date the change of control occurs or the remaining term of the applicable option.
Non-Competition and Non-Solicitation
During the term of his employment by the Company and for a one-year period after the termination of such employment, Mr. Haran may not permit his name to be used by or participate in any business or enterprise (other than the mere passive ownership of not more than 5% of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages or proposes to engage in our business in the United States, its territories and possessions and any foreign country in which we do business as of the date of termination of such employment. Also, during his employment and for a one-year period after the termination of his employment, Mr. Haran may not, directly or indirectly, solicit, induce or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or
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any of its subsidiaries; or solicit, induce or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries; or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries; or in any way interfere with the relationship between any such customer, supplier, licensee, employee or business relation and the Company or any of its subsidiaries.
Giuseppe Falco96
Seth Burroughs
On February 27,28, 2019, and effective as of January 1, 2019, the Company entered into a two-year employment agreement with Giuseppe FalcoSeth Burroughs for him to continue to serve as President and Chief Merchant of the Company’s Interactive Technology businessExecutive Vice President – Business Development and the Company’s Creative Director,Treasury, referred to as the FalcoBurroughs Employment Agreement. Following the initial two-year term, the agreement automatically renewed for an additionalsuccessive one-year terms in 2021, 2022, 2023, and 2024, and will be automatically renewed for one-year terms thereafter unless either party gives written notice of intent to terminate at least 30 days prior to the expiration of the then current term. UnderPursuant to the FalcoBurroughs Employment Agreement, Mr. Falco’sBurroughs’ annual base salary is $0.55$0.34 million per annum. The board of directors or the compensation committee may approve increases (but not decreases) from time to time. Following the initial two-year term, the base salary shall be reviewed at least annually.
Bonus
Cash Bonus and Stock Bonus. Mr. Falco wasBurroughs will be eligible to receive a performance cash bonus in an amount equal to (i) 0.23% of all IP Income in excess of $12.0 million earned and received by us in such fiscal year; provided that any IP income generated through net sales shall be multiplied by (x) 7% in the case of net sales from wholesale sales, and private label sales and (y) 3% in the case of net sales from e-commerce sales through the Company’s web sites plus (ii) 0.375% of the Company’s adjusted EBITDA (as defined in the Haran Employment Agreement) for such fiscal year.
Pursuant to the Burroughs Employment Agreement, Mr. Burroughs was granted an option to purchase up to $0.4 million368,421 shares of the Company’s common stock at an exercise price of $1.72 per annumshare. The option is exercisable until February 28, 2029 and a performance stock bonusshall vest, subject to Mr. Burroughs remaining employed with a value of up to $0.09 million per annumthe Company and based upon the Company receiving Gross DRT SalesCompany’s common stock achieving target prices as follows:
| | | | | | |
($ in thousands) | ||||||
2019 Gross DRT Sales Level |
| Cash Bonus |
| $ Value of Stock Bonus | ||
$242,500- $250,000 | | $ | 90 | | $ | 24 |
$250,000 - $257,500 | | $ | 180 | | $ | 45 |
$257,500 - $265,000 | | $ | 270 | | $ | 68 |
$265,000 or more | | $ | 360 | | $ | 90 |
| | |
Target Prices |
| Number of Option Shares Vesting |
$3.00 |
| 105,263 |
$5.00 |
| 89,474 |
$7.00 |
| 73,684 |
$9.00 |
| 57,895 |
$11.00 |
| 42,105 |
The Gross DRT Sale Level targets for 2020 were established by the Compensation Committee of the Company’s Board of Directors.
“Gross DRT Sales” means gross sales generated by the Company’s trademarks through any program transmitted by television, on QVC, HSN (including their e-commerce businesses known as Buy Any Time), or similar interactive television networks globally.
Severance
If Mr. Falco’sBurrough’s employment is terminated by usthe Company without cause, or if Mr. FalcoBurroughs resigns with good reason, or if we failthe Company fails to renew the term, then Mr. FalcoBurroughs will be entitled to receive his unpaid base salary and cash bonuses through the termination date and a lump sum payment of an amount equal to his base salary in effect for a period of six months, payable on the six-month anniversary of thetermination date of separation of services and the option shall remain exercisable as to those shares as to which the option previously vested and shall become exercisable as to any unvested shares immediately following such transaction.for 12 months. Mr. FalcoBurroughs would also be entitled to continue to participate in our group medical plan, subject to certain conditions, for a period of six12 months from the termination date.
Change of Control
In the event Mr. Falco’sBurroughs’ employment is terminated within 12 months following a change of control by the Company without cause or by Mr. FalcoBurroughs with good reason, Mr. FalcoBurroughs would be entitled to a lump sum payment equal to his base salary in effect on the termination date for six12 months following such termination. “Change of control,” as defined in Mr. Falco’sBurroughs’ employment agreement, means a merger or consolidation to which we are a party, a sale, lease or other transfer, exclusive license or other disposition of all or substantially all of our assets, or a sale or transfer by our stockholders of voting control, in a single transaction or a series of transactions. Upon a change of control, notwithstanding the vesting and exercisability schedule in any stock option or other grant agreement between Mr. FalcoBurroughs and us, all unvested stock
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options, shares of restricted stock and other equity awards granted by us to Mr. FalcoBurroughs pursuant to any such agreement shall immediately vest, and all such stock options shall become exercisable and remain exercisable for the lesser of 180 days after the date the change of control occurs or the remaining term of the applicable option.
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Non-Competition and Non-Solicitation
During the term of his employment by the Company and for a one-year period after the termination of such employment, Mr. FalcoBurroughs may not permit his name to be used by or participate in any business or enterprise (other than the mere passive ownership of not more than 5% of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages or proposes to engage in the Company’sour business in the United States, its territories and possessions and any foreign country in which we do business as of the date of termination of hissuch employment. Also, during his employment and for a one-year period after the termination of suchhis employment, Mr. FalcoBurroughs may not, directly or indirectly, solicit, induce or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries; or solicit, induce or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries; or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries; or in any way interfere with the relationship between any such customer, supplier, licensee, employee or business relation and the Company or any of its subsidiaries.
Family Relationships
There are no family relationships among our directors or officers.
Independence of the Board of Directors
The board has determined that Messrs. Howard Liebman, Mark DiSanto, James Fielding, Michael R. Francis, and Ms. Deborah Weinswig meet the director independence requirements under the applicable listing rule of the NASDAQ Stock Market LLC (“NASDAQ”). Each current member of the Audit Committee, Compensation Committee, and Nominating Committee is independent and meets the applicable rules and regulations regarding independence for such committee, including those set forth in the applicable NASDAQ rules, and each member is free of any relationship that would interfere with his individual exercise of independent judgment.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, based solely on a review of Forms 3 and 4 and any amendments thereto furnished to our Company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, all Section 16(a) filing requirements applicable to our officers, directors, and beneficial owners of more than 10% of our equity securities were timely filed, except that Mr. DiSantoDeborah Weinswig filed Formsa late Form 4 late for six transactions and Mr. D’Loren filed Forms 4 late for three transactions. one transaction.
Code of Ethics
On September 29, 2011, we adopted a code of ethics that applies to our officers, employees, and directors, including our Chief Executive Officer, Chief Financial Officer, and senior executives. Our Code of Ethics can be accessed on our website, www.xcelbrands.com.
Insider Trading Policy
We have adopted an insider trading policy (the “Trading Policy”) that is designed to promote compliance with federal securities laws, rules, and regulations, as well as the rules and regulations of the NASDAQ Stock Market. The Trading Policy provides Xcel’s standards on trading and causing the trading of our securities or securities of other publicly traded companies while in possession of confidential information. It prohibits trading in certain circumstances and applies to all of our directors, officers, and employees, as well as independent contractors or consultants who have access to material nonpublic information of Xcel. Additionally, our Trading Policy imposes special additional trading restrictions applicable to all of our directors and executive officers. The Trading Policy is annexed to this Annual Report as an exhibit and the full text of the Trading Policy is available on our website at www.xcelbrands.com.
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Audit Committee and Audit Committee Financial Expert
Our board of directors has appointed an Audit Committee which consists of Mr. Liebman, Mr. DiSanto, and Ms. Weinswig. Each of such persons has been determined to be an “independent director” under the applicable NASDAQ and SEC rules, which is the independence standard that was adopted by our board of directors. The board of directors has determined that Mr. Liebman meets the requirements to serve as the Audit Committee Financial Expert by our board of directors. The Audit Committee operates under a written charter adopted by our board of directors. The Audit Committee
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assists the board of directors by providing oversight of our accounting and financial reporting processes, appoints the independent registered public accounting firm, reviews with the registered independent registered public accounting firm the scope and results of the audit engagement, approves professional services provided by the independent registered public accounting firm, reviews the independence of the independent registered public accounting firm, considers the range of audit and non-audit fees and reviews the adequacy of internal accounting controls.
Compensation Committee
Our board of directors has appointed a Compensation Committee consisting of Messrs. DiSanto and Fielding. Each of such persons has been determined to be an “independent director” under the applicable NASDAQ rules. Our board of directors has adopted a written Compensation Committee Charter that sets forth the committee’s responsibilities. The committee is responsible for determining all forms of compensation for our executive officers, and establishing and maintaining executive compensation practices designed to enhance long-term stockholder value.
Nominating Committee
Our board of directors has appointed a Nominating Committee consisting of Messrs. DiSanto and Liebman. Each of such persons has been determined to be an “independent director” under the applicable NASDAQ rules. Our board of directors has adopted a written Nominating Committee Charter that sets forth the committee’s responsibilities.
Item 11. Executive Compensation
The following table sets forth information regarding all cash and non-cash compensation earned, during the years ended December 31, 20202023 and 2019,2022, by our principal executive officer and our two other most highly compensated executive officers, which we refer to collectively as the named executive officers, for services in all capacities to the Company:
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
| Salary |
| Bonus |
| Stock Awards |
| All Other |
|
| | ||||
Name | | Title | | Year | | (1) | | (2) | | (3) | | Compensation | | Total | |||||
Robert W. D’Loren |
| CEO and Chairman |
| 2023 | | $ | 888,500 | | $ | 187,731 | | $ | — | | $ | 1,890 | | $ | 1,078,121 |
|
| |
| 2022 | | $ | 888,500 | | $ | 863,534 | | $ | 280,601 | | $ | 10,698 | | $ | 2,043,333 |
| | | | | | | | | | | | | | | | | | | |
James F. Haran |
| CFO |
| 2023 | | $ | 366,000 | | $ | 7,896 | | $ | — | | $ | 961 | | $ | 374,857 |
|
| |
| 2022 | | $ | 366,000 | | $ | 139,672 | | $ | — | | $ | 3,332 | | $ | 509,004 |
| | | | | | | | | | | | | | | | | | | |
Seth Burroughs |
| EVP - Business |
| 2023 | | $ | 340,600 | | $ | 7,896 | | $ | — | | $ | 35 | | $ | 348,531 |
| | Development | | 2022 | | $ | 340,600 | | $ | 154,672 | | $ | — | | $ | — | | $ | 495,272 |
|
| and Treasury |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
| Salary |
| Bonus |
| Awards |
| All Other |
|
| | ||||
Name | | Title | | Year | | (1) | | (2) | | (3) | | Compensation | | Total | |||||
Robert W. D’Loren |
| CEO and Chairman |
| 2020 | | $ | 758,927 | | $ | 440,235 | | $ | 220,000 | | $ | 92 | | $ | 1,419,254 |
|
| |
| 2019 | |
| 888,500 | |
| 939,066 | |
| — | |
| 8,747 | | | 1,836,313 |
| | | | | | | | | | | | | | | | | | | |
James F. Haran |
| CFO |
| 2020 | |
| 312,625 | |
| 42,380 | |
| — | |
| 2,547 | |
| 357,552 |
|
| |
| 2019 | |
| 366,000 | |
| 55,000 | |
| — | |
| 5,587 | | | 426,587 |
| | | | | | | | | | | | | | | | | | | |
Giuseppe Falco |
| President and COO |
| 2020 | |
| 469,792 | |
| — | |
| — | |
| — | |
| 469,792 |
|
| |
| 2019 | |
| 568,750 | |
| 187,500 | |
| — | |
| — | | | 756,250 |
(1) |
(2) | Bonuses |
99
(3) | The amount shown represents the grant date fair value of fully-vested common stock awards issued |
97
Outstanding Equity Awards as of December 31, 20202023
| | | | | | | | | | | | | | | | |
| | | | Options and Warrant Awards | | Stock Awards | ||||||||||
| | | | Number of | | Number of | | | | | | | | | | |
| | | | Securities |
| Securities |
| | |
| |
| | | Market | |
| | | | Underlying |
| Underlying | | | |
| |
| Number of | | Value of | |
| | | | Unexercised |
| Unexercised | | | |
| Option or | | Shares of | | Shares of | |
| | | | Options & |
| Options & | | | | | Warrant | | Stock that | | Stock that | |
| | | | Warrants, |
| Warrants, | | Exercise | | Expiration | | Have Not | | Have Not | ||
Name |
| Title |
| Exercisable |
| Unexercisable |
| Price |
| Date |
| Vested |
| Vested | ||
Robert W. D’Loren | | CEO, Chairman | | — | | 2,578,947 | (1) | $ | 1.72 | | 2/28/2029 | | — | | $ | — |
|
| | | | | | | | | | | | | | | |
James F. Haran |
| CFO | | — | | 552,632 | (1) | $ | 1.72 | | 2/28/2029 | | — | | $ | — |
|
| | | | | | | | | | | | | | | |
Seth Burroughs |
| EVP - Bus. Development | | — | | 368,421 | (1) | $ | 1.72 | | 2/28/2029 |
| — | | $ | — |
|
| & Treasury | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | Options and Warrant Awards | | Stock Awards | ||||||||||
| | | | Number of | | Number of | | | | | | | | | | |
| | | | Securities |
| Securities |
| | |
| |
| | | Market | |
| | | | Underlying |
| Underlying | | | |
| |
| Number of | | Value of | |
| | | | Unexercised |
| Unexercised | | | |
| Option or | | Shares of | | Shares of | |
| | | | Options & |
| Options & | | | | | Warrant | | Stock that | | Stock that | |
| | | | Warrants, |
| Warrants, | | Exercise | | Expiration | | Have Not | | Have Not | ||
Name |
| Title |
| Exercisable |
| Unexercisable |
| Price |
| Date |
| Vested |
| Vested | ||
Robert W. D’Loren | | CEO, Chairman | | 239,250 | (1) | — | | $ | 5.00 | | 9/29/2021 | | | |
|
|
|
| | | 884,220 | (2) | — | | $ | 5.80 | | 3/31/2021 | | | | | |
| | | | — | | 2,578,947 | (3) | $ | 1.72 | | 2/28/2029 | | | | | |
|
| | | | | | | | | | | | — | | $ | — |
| | | | | | | | | | | | | | | | |
James F. Haran |
| CFO | | 49,500 | (1) | — | | $ | 5.00 | | 9/29/2021 |
| | |
|
|
|
| | | 189,468 | (2) | — | | $ | 5.80 | | 3/31/2021 | | | | | |
| | | | — | | 552,632 | (3) | $ | 1.72 | | 2/28/2029 | | | | | |
|
| | | | | | | | | | | | — | | $ | — |
Giuseppe Falco |
| President, COO | | 100,000 | (1) | — | | $ | 5.00 | | 9/29/2021 |
| | |
|
|
|
| | | 200,000 | (2) | — | | $ | 5.80 | | 3/31/2021 | | | | | |
|
| | | 300,000 | | 200,000 | (5) | $ | 5.00 | | Multiple dates (5) |
| | | | |
|
| | | | | | | | | | | | 195,333 | (4) | $ | 236,353 |
(1) |
These options shall become exercisable based upon the Company’s common stock achieving specified target prices as outlined in the executive’s employment agreement, and expire on February 28, 2029. See “Employment Agreements with Executives” in Item 10. |
Clawback Policy
The Board has adopted a clawback policy which allows us to recover performance-based compensation, whether cash or equity, from a current or former executive officer in the event of an Accounting Restatement. The clawback policy defines an Accounting Restatement as an accounting restatement of our financial statements due to our material noncompliance with any financial reporting requirement under the securities laws. Under such policy, we may recoup incentive-based compensation previously received by an executive officer that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the restated amounts in the Accounting Restatement.
The Board has the sole discretion to determine the form and timing of the recovery, which may include repayment, forfeiture, and/or an adjustment to future performance-based compensation payouts or awards. The remedies under the clawback policy are in addition to, and not in lieu of, any legal and equitable claims available to the Company. The clawback policy is annexed to this Annual Report as an exhibit.
Director Compensation
We pay our non-employee directors $3,000 for each board of directors and committee meeting attended, up to a maximum of $12,000 per year for board of directors’ meetings and up to a maximum of $12,000 per year for committee meetings, except that the chairman of each committee receives $4,000 for each such committee meeting attended, up to a maximum of $16,000 per year.
The following table sets forth information with respect to each non-employee director’s compensation for the year ended December 31, 2020.2023. The dollar amounts shown for Stock Awards represent the grant date fair value of the restricted stock awards or stock options granted during the fiscal year calculated in accordance with ASC Topic 718.
| | | | | | | | | | | | |
| | Fees Earned | | | | | | | | | | |
|
| or Paid |
| Stock | | Option | | | | |||
Name |
| in Cash |
| Awards |
| Awards |
| Total | ||||
Mark DiSanto (1) (2) | | $ | 24,000 | | $ | 15,100 | | $ | 21,544 | | $ | 60,644 |
Howard Liebman (1) (2) | | $ | 28,000 | | $ | 15,100 | | $ | 21,544 | | $ | 64,644 |
Deborah Weinswig (1) (2) | | $ | 21,000 | | $ | 15,100 | | $ | 21,544 | | $ | 57,644 |
James Fielding (1) (2) | | $ | 12,000 | | $ | 15,100 | | $ | 21,544 | | $ | 48,644 |
98
| | | | | | | | | | | | |
| | Fees Earned | | | | | | | | | | |
|
| or Paid |
| Stock | | Option | | | | |||
Name |
| in Cash |
| Awards |
| Awards |
| Total | ||||
Mark DiSanto (1) | | $ | 24,000 | | $ | — | | $ | 3,676 | | $ | 27,676 |
Michael R. Francis (1) | | $ | 9,000 | | $ | — | | $ | 3,676 | | $ | 12,676 |
Howard Liebman (1) | | $ | 28,000 | | $ | — | | $ | 3,676 | | $ | 31,676 |
Deborah Weinswig (1) | | $ | 24,000 | | $ | — | | $ | 3,676 | | $ | 27,676 |
James Fielding (1) | | $ | 12,000 | | $ | — | | $ | 3,676 | | $ | 15,676 |
(1) | On August 23, 2023, each non-employee directory was granted 10,000 shares of restricted stock pursuant to the terms and conditions of the 2021 Equity Incentive Plan. Such shares of restricted stock will vest evenly over approximately |
100
19 months, whereby 50% shall vest on April 1, |
(2) | On August 23, 2023, each non-employee director was granted options to purchase |
20112021 Equity Incentive Plan
Our Amended and Restated 20112021 Equity Incentive Plan, which we refer to as the 2021 Plan, is designed and utilized to enable the Company to offer its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company.
The 2021 Plan provides for the grant of stock options, restricted stock, restricted stock units, performance awards, or restricted stock.cash awards. The stock options may be incentive stock options or non-qualified stock options. A total of 13,000,0004,000,000 shares of common stock have been reservedare eligible for issuance under the Plan, the maximum number of shares of common stock with respect to which incentive stock options may be granted under the Plan is 5,000,000 and the maximum number of shares of common stock with respect to which options or restricted stock may be granted to any participant is 10,000,000.2021 Plan. The 2021 Plan may be administered by the board of directors or a committee consisting of two or more members of the board of directors appointed by the board of directors.
Officers and other employees of Xcel or any parent or subsidiary of Xcel who are at the time of the grant of an award employed by us or any parent or subsidiary of Xcel are eligible to be granted options or other awards under the 2021 Plan. In addition, non-qualified stock options and other awards may be granted under the 2021 Plan to any person, including, but not limited to, directors, independent agents, consultants, and attorneys who the board of directors or the committee, as the case may be, believes has contributed or will contribute to our success.
Cash awards may be issued under the 2021 Plan either alone or in addition to or in tandem with other awards granted under the 2021 Plan or other payments made to a participant not under the 2021 Plan. The board or committee, as the case may be, shall determine the eligible persons to whom, and the time or times at which, cash awards will be made, the amount that is subject to the cash award, the circumstances and conditions under which such amount shall be paid, in whole or in part, the time of payment, and all other terms and conditions of the awards. The maximum cash award that may be paid to any participant under the Plan during any calendar year shall not exceed $2,500,000.
With respect to incentive stock options granted to an eligible employee owning stock possessing more than 10% of the total combined voting power of all classes of our stock or the stock of a parent or subsidiary of our Company immediately before the grant, such incentive stock option shall not be exercisable more than 5 years from the date of grant. The exercise price of an incentive stock option will not be less than the fair market value of the shares underlying the option on the date the option is granted, provided, however, that the exercise price of an incentive stock option granted to a 10% stockholder may not be less than 110% of such fair market value. The exercise price of a non-qualified stock option may not be less than fair market value of the shares of common stock underlying the option on the date the option is granted.
UnderRestricted stock awards give the Plan, werecipient the right to receive a specified number of shares of common stock, subject to such terms, conditions and restrictions as the board or the committee, as the case may not, inbe, deems appropriate. Restrictions may include limitations on the aggregate, grant incentiveright to transfer the stock options that are first exercisable by any individual optionee during any calendar year (under all such plansuntil the expiration of a specified period of time and forfeiture of the optionee’s employer corporation and its “parent” and “subsidiary” corporations,stock upon the occurrence of certain events such as those terms are definedthe termination of employment prior to expiration of a specified period of time. Restricted stock unit (“RSU”) awards will be settled in Section 424cash or shares of common stock, in an amount based on the Internal Revenue Code) to the extent that the aggregate fair market value of our common stock on the underlying stock (determined atsettlement date. The RSUs will be subject to forfeiture and restrictions on transferability as set forth in the time2021 Plan and the option is granted) exceeds $100,000.applicable award agreement and as may be otherwise determined by the board or the committee. There were no RSUs outstanding as of December 31, 2022.
99101
Certain awards made under the 2021 Plan may be granted so that they qualify as “performance-based compensation” (as this term is used in Internal Revenue Code Section 162(m) and the regulations thereunder) and are exempt from the deduction limitation imposed by Code Section 162(m). Under Internal Revenue Code Section 162(m), our tax deduction may be limited to the extent total compensation paid to the chief executive officer, or any of the four most highly compensated executive officers (other than the chief executive officer) exceeds $1 million in any one tax year. Among other criteria, awards only qualify as performance-based awards if at the time of grant the compensation committee is comprised solely of two or more “outside directors” (as this term is used in Internal Revenue Code Section 162(m) and the regulations thereunder). In addition, we must obtain stockholder approval of material terms of performance goals for such performance-based compensation.
All stock options and certain stock awards, performance awards, cash awards and stock units granted under the 2021 Plan, and the compensation attributable to such awards, are intended to (i) qualify as performance-based awards or (ii) be otherwise exempt from the deduction limitation imposed by Internal Revenue Code Section 162(m). No options or other awards may be granted on or after the fifth anniversary of the effective date of the 2021 Plan.
The 2021 Equity Incentive Plan became effective April 19, 2022. Prior to the effectiveness of the 2021 Plan, the Company made awards under our Amended and Restated 2011 Equity Incentive Plan (the “2011 Plan”), the key terms and provisions of which were substantially similar to the 2021 Plan described above, with the major difference being the number of shares of common stock eligible for issuance. Stock-based awards (including options, warrants, and restricted stock) previously granted under our 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table lists, as of March 1, 2021,April 3, 2024, the number of shares of common stock beneficially owned by (i) each person or entity known to the Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each named executive officer and director of the Company, and (iii) all officers and directors as a group. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to dispose of or direct the disposition of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power. Unless otherwise indicated, the address for such person is c/o Xcel Brands, Inc., 1333 Broadway, 10th550 Seventh Avenue, 11th Floor, New York, New York 10018.
100102
The percentages below are calculated based on 19,260,86223,492,117 shares of common stock issued and outstanding as of March 1, 2021:April 3, 2023:
| | | | | |
| | Number of | | |
|
| | Shares | | |
|
| | of Common | | | |
| | Stock | | Percent | |
| | Beneficially | | Beneficially | |
Name and Address |
| Owned |
| Owned | |
Named executive officers and directors: | | | | | |
Robert W. D’Loren (1) |
| 7,793,399 |
| 33.17 | % |
James F. Haran (2) |
| 204,018 |
| * | |
Seth Burroughs (3) |
| 372,513 |
| 1.59 | |
Howard Liebman (4) |
| 196,165 |
| * | |
Mark DiSanto (5) |
| 1,841,915 |
| 7.81 | |
Deborah Weinswig (6) |
| 148,000 |
| * | |
James Fielding (7) |
| 140,000 |
| * | |
| | | | | |
All directors and executive officers as a group (7 persons) (8) |
| 10,696,010 |
| 44.84 | |
| | | | | |
5% Shareholders: | | | | | |
Isaac Mizrahi (9) |
| 2,366,882 |
| 10.03 | |
| | | | | |
| | Number of | | |
|
| | Shares | | |
|
| | of Common | | | |
| | Stock | | Percent | |
| | Beneficially | | Beneficially | |
Name and Address |
| Owned |
| Owned | |
Named executive officers and directors: | | | | | |
Robert W. D’Loren (1) |
| 9,592,365 |
| 47.06 | % |
James F. Haran (2) |
| 442,986 |
| 2.27 | |
Giuseppe Falco (3) |
| 853,912 |
| 4.30 | |
Seth Burroughs (4) |
| 486,861 |
| 2.50 | |
Howard Liebman (5) |
| 203,665 |
| 1.05 | |
Mark DiSanto (6) |
| 1,574,176 |
| 8.11 | |
Michael R. Francis (7) |
| 196,500 |
| 1.02 | |
Deborah Weinswig (8) |
| 55,500 |
| * | |
James Fielding (9) |
| 22,500 |
| * | |
| | | | | |
All directors and executive officers as a group (9 persons)(10) |
| 13,326,940 |
| 61.10 | |
5% Shareholders: | | | | | |
Isaac Mizrahi (11) |
| 2,773,325 |
| 14.18 | |
Hilco Trading, LLC (12) |
| 1,667,767 |
| 8.66 | |
5 Revere Drive, Suite 206, Northbrook, IL 60062 | | | | | |
Burch Acquisition LLC (13) |
| 1,000,000 |
| 5.19 | |
840 First Avenue, Suite 200, King of Prussia, PA 19406 |
|
|
|
| |
* Less than 1%.
(1) | Consists of (i) |
(2) | Consists of (i) |
(3) | Consists of (i) |
(4) |
Consists of (i) 36,165 shares of common stock, (ii) |
Consists of (i) 26,500 shares of common stock, (ii) 326,671 shares held by the D’Loren Family Trust, of which Mark DiSanto is trustee and has sole voting and dispositive power over the shares held by the D’Loren Family Trust, |
101
shares held by the Trust, |
(6) | Consists of (i) 58,000 restricted shares and (ii) immediately exercisable options to purchase 90,000 shares. |
(7) | Consists of (i) |
103
(8) |
Includes (i) |
Consists of (i) |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Benjamin MalkaIM Topco, LLC
Benjamin Malka wasThe Company holds a directornoncontrolling interest in IM Topco, LLC (“IM Topco”), which is accounted for under the equity method of accounting.
Services Agreement
On May 31, 2022, the Company from June 2014 through September 2019. Mr. Malka is also a 25% equity holder of House of Halston LLC (“HOH”), and is the former Chief Executive Officer of HOH. HOH is the parent company of the H Company IP, LLC (“HIP”).
On February 11, 2019, the Company and its wholly owned subsidiary, H Heritage Licensing, LLC, entered into an asset purchasea services agreement (the "Heritage Asset Purchase Agreement") with HIP and HOH,IM Topco, pursuant to which the Company acquiredprovides certain assetsdesign and support services (including assistance with the operations of HIP, including the "Halston," "Halston Heritage,"interactive television business and "Roy Frowick" trademarks (collectively,related talent support) to IM Topco in exchange for payments of $300,000 per year.
In November 2023, the "Halston Heritage Trademarks") and other intellectual property rights relating thereto.
102
Pursuant to the Heritage Asset Purchase Agreement, at closing,services agreement was amended such that the Company delivered in escrow for HIP or its designees (collectively, the “Sellers”) an aggregate of $8.4 million in cash and 777,778 shares of the Company’s common stock valued at $1.1 million (the “Xcel Shares”), subjectagreed to a voting agreement and a lock-up agreement relating to the Xcel Shares and a consent and waiver agreement each in form satisfactory to Xcel within three months from the date of the Heritage Asset Purchase Agreement. Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.
In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, 2022 based on Excess Net Royalties. “Excess Net Royalties” during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) is equal to (a) the positive amount, if any, of the Net Royalties as calculated for such Royalty Target Year, less the greater of (i) One Million Five Hundred Thousand Dollars ($1.5 million), or (ii) the maximum Net Royalties for any previous Royalty Target Year. “Applicable Percentage” means (a) 50% of the first $10.0 million of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0 million and up to $15.0 million and (c) 0% of aggregate Excess Net Royalties during the Earn-Out Period in excess of $15.0 million. The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”); provided, however, that if the number of Earn-Out Shares, when combined with the number of Xcel Shares issued at the Closing Date, will exceed 4.99% of the aggregate number of shares of Xcel common stock outstanding as of the Closing Date (calculated in accordance with Nasdaq Rule 5635(a)) (the “Xcel Share Limit”), then Xcel may, in its sole and unfettered discretion, elect to (x) pay cash for the Earn-Out Value attributable to the Earn-Out Shares that would exceed the Xcel Share Limit; (y) solicit stockholder approval for the issuance of Earn-Out Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, issue such Earn-Out Shares to HIP; or (z) solicit stockholder approval for the issuance of Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, pay the applicable Earn-Out Considerationprovide IM Topco with a combination$600,000 reduction of cash and Earn-Out Shares.future service fees over the next eighteen months, beginning on July 1, 2023.
Hilco Trading, LLC
Hilco Trading, LLC ("Hilco") directly and indirectly owns greater than 5% of the Company's common stock, and its affiliate Hilco Global owns 50% of the equity of Longaberger Licensing, LLC. DuringFor the year ended December 31, 2020,2023, the Company soldrecognized service fee income related to this agreement of $150,000.
License Agreement
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 apparelIsaac 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 December 31, 2026, and provided guaranteed minimum royalties to IM Topco of $400,000 per year.
Effective December 16, 2022, the license agreement between IM Topco and Xcel was terminated in favor of a new similar license agreement between IM Topco and an affiliateunrelated third party. However, as part of Hilco,the termination of the May 31, 2022 license agreement, Xcel provided a guarantee to IM Topco for the payment of any difference between (i) the royalties received by IM Topco from the unrelated third party under the new agreement and recognized $0.15 million(ii) the amount of revenueguaranteed royalties that IM Topco would have received from this transaction. Additionally, duringXcel under the May 31, 2022 agreement. For the year ended December 31, 2020,2023, the estimated amount of such shortfall was approximately $325,000, which the Company sold certain intangible assetsrecognized as royalty expense in the consolidated statements of Longaberger Licensing, LLCoperations.
In November 2023, the Company, WHP, and IM Topco entered into an amendment of the May 27, 2022 membership purchase agreement, under which the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024 (see Note 3 for details). In exchange, Xcel agreed to make additional royalty payments to IM Topco totaling $450,000 the next 11 months. As a third party; an affiliateresult of Hilco earned and was paidthis amendment, the Company recognized a commission of $0.05 million related$450,000 increase to the salecarrying value basis of these assets.its equity method investment in IM Topco and a corresponding increase in current liabilities.
104
Isaac Mizrahi
Robert W. D’Loren
Jennifer D’LorenIsaac Mizrahi is the wife of Robert W. D’Loren, the Company’s Chief Executive Officera principal stockholder and Chairmanformer employee of the Board, and is employed by the Company. Mrs. D’Loren brings vast experience in project management and implementation of financial IT solutions. During the past two years, Mrs. D’Loren has worked on the implementation of the Company’s ERP system. Mrs. D’Loren received compensation of $0.14 million and $0.17 million for the years ended December 31, 2020 and 2019, respectively.
Isaac MizrahiEmployment Agreement
On February 24, 2020, the Company entered into an employment agreement with IsaacMr. Mizrahi a principal stockholder of the Company, for Mr. Mizrahihim to continue to serve as Chief Design Officer of the Isaac Mizrahi Brand. The termThis employment agreement remained in effect through May 31, 2022. On May 31, 2022, this agreement was transferred to IM Topco as part of the transaction in which the Company sold a majority interest in the Isaac Mizrahi Brand trademarks to a third party (WHP).
The employment agreement expires on December 31, 2022, subject to earlier termination, and may be extended, at the Company’s option, for two successive one-year terms (each,provided Mr. Mizrahi with a “Renewal Period”). Mr. Mizrahi’s base salary shall beof $1.8 million, $2.0 million, and $2.1 million per annum during the term of the agreementfor 2020, 2021, and $2.25 million and $2.4 million during 2023 and 2024 if the term is extended, in each case, subject to adjustment in the event2022, respectively. Mr. Mizrahi does not make a specified number of appearances on QVC. Mr. Mizrahi shall bewas also eligible to receive an annual cash bonus (the “Bonus”) up to an amount equal to $2.5 million less base salary for 2020 and $3.0 million less base salary for 2021 2022, and any year during the Renewal Period.2022. The Bonus shall consistconsisted of the DRT Revenue, Bonus, the Brick-and-Mortar Bonus, the Endorsement Bonus and the Monday Bonus, if any, as determined in accordance with the below:
103
● | “DRT Bonus” means for any calendar year an amount equal to 10% of the aggregate net revenue related to sales of Isaac Mizrahi Brand products through direct response television. The DRT Revenue Bonus shall be reduced by the amount of the Monday Bonus. |
● | “Brick-and-Mortar Bonus” means for any calendar year an amount equal to 10% of the net revenues from sales of products under the Isaac Mizrahi Brand, excluding DRT revenue and endorsement revenues. |
● | “Endorsement Bonus” means for any calendar year an amount equal to 40% of revenues derived from projects undertaken by the Company with one or more third parties solely for Mr. Mizrahi to endorse the third party’s products through the use of Mr. Mizrahi’s name, likeness, and/or image, and neither the Company nor Mr. Mizrahi provides licensing or design. |
● | “Monday Bonus” means $10,000 for each appearance by Mr. Mizrahi on |
Mr. Mizrahi is required to devote his full business time and attention to the business and affairsIn addition, on May 31, 2022, all 522,500 unvested shares of restricted stock of the Company and its subsidiaries; however,held by Mr. Mizrahi is the principal(for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of IM Ready-Made, LLC and Laugh Club, Inc. (“Laugh Club”), and accordingly, he may undertake promotional activities related thereto (including the promotionsuch shares being surrendered for cancellation in satisfaction of his name, image, and likeness) through television, video, and other media (and retain any compensation he receives for such activities) (referred to as “Retained Media Rights”) so long as such activities (i) do not utilize the IM Trademarks, (ii) do not have a mutually negative impact upon or materially conflict with Mr. Mizrahi’s duties under the employment agreement, or (iii) are consented to by the Company. The Company believes that it benefits from Mr. Mizrahi’s independent promotional activities by increased brand awareness of IM Brands and the IM Trademarks.
Severance. If Mr. Mizrahi’s employment is terminated bywithholding tax obligations. Also on May 31, 2022, the Company without “cause,” or if Mr. Mizrahi resigns with “good reason,” then Mr. Mizrahi will be entitled to receive his unpaid base salary and cash bonuses through the termination date and an amount equal to his base salary in effect on the termination date for the longerissued 33,557 additional shares of six months and the remaindercommon stock of the then-current term, but in no event exceeding 18 months. If Mr. Mizrahi’s employment is terminated by the Company without “cause” or if Mr. Mizrahi resigns with “good reason,” within six months following a change of control (as defined in the employment agreement), Mr. Mizrahi shall be eligible to receive a lump-sum payment equal to two times the sum of (i) his base salary (at an average rate that would have been in effect for such two year period following termination) plus (ii) the bonus paid or due(valued at $50,000) to Mr. Mizrahi, in the year priorwhich vested immediately, and made a $100,000 cash payment to the change in control.Mr. Mizrahi
Non-Competition and Non-Solicitation. Laugh Club Services AgreementDuring the term of his employment by the Company and for a one-year period after the termination of such employment (unless Mr. Mizrahi’s employment was terminated without “cause” or was terminated by him for “good reason”), Mr. Mizrahi may not permit his name to be used by or to participate in any business or enterprise (other than the mere passive ownership of not more than 3% of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages or proposes to engage in the Company’s business anywhere in the world other than the Company and its subsidiaries. Also during his employment and for a one-year period after the termination of such employment, Mr. Mizrahi may not, directly or indirectly, solicit, induce, or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any or its subsidiaries; or solicit, induce, or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager, or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries; or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries; or in any way interfere with the relationship between any such customer, supplier, licensee, employee, or business relation and the Company or any of its subsidiaries.
On February 24, 2020 the Company entered into a services agreement with Laugh Club, an entity wholly-owned by Mr. Mizrahi, pursuant to which Laugh Club shall provideprovided services to Mr. Mizrahi necessary for Mr. Mizrahi to perform his services pursuant to the employment agreement. The Company will paypaid Laugh Club an annual fee of $0.72 million for such services. This services agreement remained in effect through May 31, 2022. On May 31, 2022, this agreement was transferred to IM Topco as part of the transaction in which the Company sold a majority interest in the Isaac Mizrahi Brand trademarks to a third party (WHP).
ORME
On December 4, 2023, the Company acquired a 30% equity ownership interest in Orme Live, Inc. (“ORME”), a short-form video and social commerce marketplace that is planned to launch in 2024, for a purchase price of $150,000. ORME licenses the technology utilized by its marketplace from KonnectBio Inc., in which Robert W. D’Loren, the Company’s Chairman of the Board, Chief Executive Officer, and President, owns an approximate 20% noncontrolling interest.
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Equity Transactions
On March 15, 2024, the Company entered into an underwriting agreement with Craig-Hallum Capital Group LLC (the “Representative”), as the representative of the underwriters, relating to a firm commitment underwritten public offering (the “Offering”) of 3,284,421 shares of the Company’s common stock at a price to the public of $0.65 per share. In connection with the Offering, Robert W. D’Loren, Chairman and Chief Executive Officer of the Company; an affiliate of Mark DiSanto, a director of the Company; and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company, purchased 146,250, 146,250, and 32,500 shares of common stock, respectively.
The closing of the Offering occurred on March 19, 2024. The net proceeds to the Company from the sale of the shares, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the Company, are expected to be approximately $1,735,000.
Upon closing of the Offering, the Company issued the Representative certain warrants to purchase up to 178,953 shares of common stock (the “Representative’s Warrants”) as compensation. The Representative’s Warrants will be exercisable at a per share exercise price of $0.8125. The Representative’s Warrants are exercisable, in whole or in part, during the four and one-half-year period commencing 180 days from the commencement of sales of the shares of common stock in the Offering.
On March 14, 2024, the Company entered into subscription agreements with each of Robert W. D’Loren, Chairman and Chief Executive Officer of the Company; an affiliate of Mark DiSanto, a director of the Company; and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company to purchase 132,589, 132,589, and 29,464 shares, respectively (collectively, the “Private Placement Shares”), at a price of $0.98 per Private Placement Share. The total number of Private Placement Shares purchased was 294,642. Net proceeds after payment of agent fees to the Representative were approximately $265,000. The purchase of the Private Placement Shares closed concurrently with the Offering.
The aggregate number of shares of common stock issued from the Offering and the Private Placement was 3,579,063 shares and the total net proceeds received was approximately $2,000,000.
Item 14. Principal AccountingAccountant Fees and Services
Audit Fees
The aggregate fees billed or to be billed for professional services rendered by our Independent Registered Public Accounting Firm, CohnReznickMarcum LLP, for the audit of our annual consolidated financial statements, review of our consolidated financial statements included in our quarterly reports, and other fees that are normally provided by the accounting firm in connection with statutory and regulatory filings or engagements for the years ended December 31, 20202023 and December 31, 20192022 were approximately $341,000$453,000 and $319,000,$353,000, respectively.
Audit-Related Fees
There were no fees billed by our Independent Registered Public Accounting Firm for audit-related services for the fiscal years ended December 31, 20202023 and 2019.2022.
Tax Fees
There were no fees billed for professional services rendered by our Independent Registered Public Accounting Firm for tax compliance, tax advice, and tax planning for the fiscal years ended December 31, 20202023 and 2019.2022.
All Other Fees
There were no fees billed for non-audit services by our Independent Registered Public Accounting Firm for the fiscal years ended December 31, 20202023 and 2019.2022.
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Audit Committee Determination
The Audit Committee considered and determined that the services performed are compatible with maintaining the independence of the independent registered public accounting firm.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
The Audit Committee is responsible for pre-approving all audit and permitted non-audit services to be performed for us by our Independent Registered Public Accounting Firm as outlined in its Audit Committee charter. Prior to engagement of the Independent Registered Public Accounting Firm for each year’s audit, management or the Independent Registered Public Accounting Firm submits to the Audit Committee for approval an aggregate request of services expected to be rendered during the year, which the Audit Committee pre-approves. During the year, circumstances may arise when it may become necessary to engage the Independent Registered Public Accounting Firm for additional services not contemplated in the original pre-approval. In those circumstances, the Audit Committee requires specific pre-approval before engaging the Independent Registered Public Accounting Firm. The engagements of our Independent Registered Public Accounting Firm CohnReznick LLP waswere approved by the Company’s Audit Committee.
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Exhibit |
| Description |
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3.1 | | Amended and Restated Certificate of Incorporation of Xcel Brands, Inc. |
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3.2 | | Third Restated and Amended Bylaws of Xcel Brands, Inc. |
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4.1 | | Third Amended and Restated Equity Incentive Plan and Forms of Award Agreements(9) |
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4.3 | | |
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4.4 | | |
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4.5 | | Form of Representative’s Warrant issued on March 19, 2024 (14) |
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9.2 | | Voting Agreement between Xcel Brands, Inc. and Judith Ripka Berk, dated as of April 3, 2014 |
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| Employment Agreement between the Company and Robert D’Loren dated February 27, 2019 |
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| | Employment Agreement between the Company and James Haran dated February 27, 2019 |
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10.4 | | |
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| | Sublease Agreement, dated as of July 8, 2015, by and between Xcel Brands, Inc. and GBG USA Inc. |
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10.6 | | |
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10.7 | | Second Amendment to Membership Interest Purchase Agreement(15) |
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10.8 | | Third Amendment to Membership Interest Purchase Agreement(15) |
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10.10 | | |
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21.1 | | Subsidiaries of the Registrant |
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32(i).1 | | Section 1350 Certification (CEO) |
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32(i).2 | | Section 1350 Certification (CFO) |
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97.1 | | Clawback Policy(15) |
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99.1 | | IM Topco, LLC Financial Statements as of December 31, 2023 and 2022, and for the Year Ended December 31, 2023 and Period from May 11, 2022 (inception) through December 31, 2022 and Independent Auditor’s Report (16) |
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101.INS | | Inline XBRL Instance Document |
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101.SCH | | Inline XBRL Taxonomy Schema |
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101.CAL | | Inline XBRL Taxonomy Calculation Linkbase |
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101.DEF | | Inline XBRL Taxonomy Definition Linkbase |
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101.LAB | | Inline XBRL Taxonomy Label Linkbase |
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101.PRE | | Inline XBRL Taxonomy Presentation Linkbase |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) (15) |
(1) |
This Exhibit is incorporated by reference to the appropriate exhibit to the Current Report on Form 8-K, which was filed with the SEC on February 15, 2019. |
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This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on December 24, 2013. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on March 20, 2014. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on April 9, 2014. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on December 24, 2014. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on July 14, 2015. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on October 24, 2017. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on December 8, 2017. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Definitive Proxy Statement on Form DEF 14-A, which was filed with the SEC on August 15, 2016. |
This Exhibit is incorporated by reference to the appropriate Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on April 23, 2021. |
(11) | This Exhibit is incorporated by reference to the appropriate Exhibit to the revised Definitive Proxy Statement on Form DEF 14-A, which was filed with the SEC on October 20, 2021. |
(12) | This Exhibit is incorporated by reference to the appropriate Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on April 15, 2022. |
(13) | This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on June 3, 2022. |
(14) | This Exhibit is incorporated by reference to the appropriate Exhibit to the Current Report on Form 8-K, which was filed with the SEC on March |
(15) | Filed herewith. |
(16) |
* Portions of this exhibit have been omitted pursuant to a Request for Confidential Treatment and filed separately with the SEC. Such portions are designated “***”.
+ Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Xcel Brands, Inc. hereby undertakes to furnish supplementally to the SEC copies of any of the omitted schedules and exhibits upon request by the SEC.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: April |
| /s/ Robert W. D’Loren |
| | Robert W. D’Loren, Chairman, President, |
| | Chief Executive Officer and Director |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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/s/ Robert W. D’Loren |
| Chief Executive Officer and Chairman |
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Robert W. D’Loren |
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/s/ James F. Haran |
| Chief Financial Officer |
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James F. Haran |
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Mark DiSanto |
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/s/ Howard Liebman |
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Howard Liebman |
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/s/ Deborah Weinswig |
| Director |
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Deborah Weinswig |
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