What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-17 compared with 2020-11-13 · 81 added, 196 removed, 85 unchanged (77% of the section changed)

5 unchanged sentences

Xcel Brands, Inc.

(“Xcel,” the “Company,” “we,” “us,” or “our”) is a media and consumer products company engaged in the design, production, marketing, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

Xcel was founded by Robert W.

D’Loren in 2011 with a vision to reimagine shopping, entertainment, and social as one.

The Company owns and manages the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the Judith Ripka brands (the "Ripka Brand"), the Halston brands ("Halston Brand"), and the C Wonder brands (the "C Wonder Brand”).

The Company also owns and manages the Longaberger brand (the “Longaberger Brand”) through its 50% ownership interest in Longaberger Licensing, LLC.

The Company and its licensees distribute through a ubiquitous channel retail sales strategy which includes distribution through interactive television, the Internet and e-commerce, and traditional brick-and-mortar retail channels.

Headquartered in New York City, Xcel is led by an executive team with significant production, merchandising, design, marketing, retailing, and licensing experience, and a proven track record of success in elevating branded consumer product companies.

With an experienced team of professionals focused on design, production, and digital marketing, Xcel maintains control of product quality and promotion across all of its product categories and distribution channels.

(“Xcel,” the “Company,” “we,” “us,” or “our”) is a media and consumer products company engaged in the design, production, marketing, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, 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.

The Company owns and manages the Isaac Mizrahi brand (the "Isaac Mizrahi Brand"), the Halston brand (the "Halston Brand"), the Judith Ripka brand (the "Ripka Brand"), the C Wonder brand (the "C Wonder Brand"), the LOGO by Lori Goldstein brand (the "Logo Lori Goldstein Brand"), and the Longaberger brand (the “Longaberger Brand”), pioneering a true omni-channel sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale and e-commerce channels to be everywhere its customers shop.

Our objective is to build a diversified portfolio of lifestyle consumer brands through organic growth and the strategic acquisition of new brands.

To grow our brands, we are focused on following primary strategies:

● distribution and/or licensing of our brands for sale through interactive television (i.e.

QVC, The Shopping Channel) whereby we design, manage production, merchandise the shows, and manage the on-air talent;

● licensing our brands to manufacturers and retailers for promotion and distribution through e-commerce, social commerce, and traditional brick-and-mortar retail channels whereby we provide certain design services and, in certain cases, manage supply and merchandising;

● expanding and leveraging our live-streaming platform.

We recently launched our live-streaming platform through our Longaberger brand technology platform with the goal to build the world’s largest digital marketplace powered by live-streaming and micro-influencers for home and other related products, designed to create a better lifestyle.

We plan to leverage this technology across our other brands.

● wholesale distribution of our brands to retailers that sell to the end consumer;

● distribution of our brands through our e-commerce sites directly to the end consumer;

● quickly integrate additional consumer brands into our operating platform and leverage our design, production, and marketing capabilities, and distribution relationships.

● wholesale sales and/or licensing of our brands for sale through interactive television (i.e.

QVC, HSN, The Shopping Channel, TVSN, etc.);

● distribution of our brands through e-commerce directly to the end consumer;

● acquiring additional consumer brands and integrating them into our operating platform while leveraging our operating infrastructure and distribution relationships.

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 and expertise in live streaming;

● our design, production, sales, marketing, and supply chain and integrated technology platform that enables us to design and distribute trend-right product;

● our significant media and internet presence and distribution.

We believe that our strategy distinguishes us from other brand management companies that rely primarily on their licensees for design, production, and distribution, and enables us to leverage the media reach of our interactive television partners, including through television, digital, and social media, to drive sales of products under our brands across multiple distribution channels.

By leveraging digital and social media content across all distribution channels, we seek to drive consumer engagement and generate retail sales across our brands.

Our strong relationships with leading retailers and interactive television companies and cable networks enable us to reach consumers in over 380 million homes worldwide and hundreds of millions of social media followers.

We believe our design, production and supply chain platform provides significant competitive advantages compared with traditional wholesale apparel companies that design, manufacture, and distribute products.

We focus on our core competencies of design, integrated technologies, design, production and supply chain platform, marketing, 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 quickly integrate additional brands into our platform in order to leverage our design, production, and marketing capabilities, and distribution network.

● our operating strategy, significant media and internet presence, and distribution network.

Our design, production and supply chain platform was developed to shorten the supply chain cycle by utilizing state-of-the-art supply chain management technology, trend analytics, and data science to actively monitor fashion trends and read and react to customer demands.

Summary of Operating Results

Three months ended September 30, 2020 (the “current quarter”) compared with the three months ended September 30, 2019 (the “prior year quarter”)

Three months ended March 31, 2021 (the “current quarter”) compared with the three months ended March 31, 2020 (the “prior year quarter”)

Current quarter net revenue decreased approximately $1.7 million to $7.8 million from $9.5 million for the prior year quarter.

Net licensing revenue decreased by approximately $1.3 million in the current quarter to $4.3 million, compared with $5.6 million in the prior year quarter.

Approximately half of this decline was attributable to a reduction in guaranteed minimum revenues from one of our existing licensing arrangements upon renewal effective January 1, 2020.

The remaining portion of the decline in licensing revenue was driven by lower sales by our licensees as a result of an overall slowdown in economic activity related to the ongoing COVID-19 pandemic.

Approximately $1.1 million of this decline was attributable to the discontinuation of the licensing of the H Halston brand through QVC during the fourth quarter of 2020, and the Company’s transitioning of that brand to a wholesale supply model under arrangements with HSN and certain Qurate global affiliates, and other unrelated interactive television networks.

The remainder of the decline in net licensing revenue was primarily driven by lower sales by our licensees as a result of the economic impacts related to the ongoing COVID-19 pandemic.

Net product sales decreased by approximately $0.4 million in the current quarter to $3.5 million, compared with $3.9 million in the prior year quarter.

The decline in net product sales was the result of canceled and reduced wholesale orders caused by an overall slowdown in economic activity related to the ongoing COVID-19 pandemic.

Declines in wholesale apparel sales, primarily as the result of the economic impacts of the ongoing COVID-19 pandemic, were partially offset by significant growth in wholesale and e-commerce sales of fine jewelry as well as significant growth in e-commerce sales of Longaberger branded products.

Cost of Goods Sold

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Gross profit (net revenue less cost of goods sold) decreased approximately $1.1 million to $6.0 million from $7.1 million in the prior year quarter, primarily driven by the aforementioned decline in net licensing revenue.

Total gross profit margin increased from 73% in the prior year quarter to 83% in the current quarter, reflecting the proportional shift of revenue mix towards licensing revenues in the current quarter.

Total gross profit margin increased by approximately 1%, from 75% in the prior year quarter to 76% in the current quarter.

Gross profit margin from product sales increased from 38% in the prior year quarter to 48% in the current quarter as a result of achieving greater efficiencies.

Operating Costs and Expenses

Operating costs and expenses decreased approximately $1.1 million from $7.6 million in the prior year quarter to $6.5 million in the current quarter.

This reduction was primarily attributable to cost reduction actions taken by management in response to the COVID-19 pandemic, including temporary reductions of employee compensation and cutting non-essential costs.

Also contributing to the reduction was government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $0.2 million as a reduction to current quarter expenses, the recovery of $0.2 million of expenses previously recognized in 2019 for a potential acquisition which ultimately was not consummated, and a $0.2 million decrease in stock-based compensation costs.

Partially offsetting these decreases in operating costs and expenses was a $0.4 million increase in depreciation and amortization expense, primarily due to the change in estimated life for the Judith Ripka trademarks, and $0.4 million of bad debt expense related to the bankruptcy of several retail customers due to the COVID-19 pandemic.

During the current quarter, we recognized a $0.05 million net gain on the sale of certain assets related to the Longaberger brand.

Operating costs and expenses increased approximately $0.3 million from $8.2 million in the prior year quarter to $8.5 million in the current quarter.

This increase was mainly driven by higher salaries and benefits costs, and higher marketing expenses, partially offset by lower depreciation and amortization expense, resulting from the impairment and write-down of our Judith Ripka intangible assets in the fourth quarter of 2020, and the fact that the prior year quarter included expenses related a potential acquisition which ultimately was not consummated.

Interest and Finance Expense

Interest and finance expense for the current quarter was $0.3 million, compared with $0.3 million for the prior year quarter.

Income Tax (Benefit) Provision

The effective income tax rate for the current quarter and the prior year quarter was approximately 25% and 333%, respectively, resulting in an income tax (benefit) provision of $(0.1) million and $0.1 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 12% and 18%, respectively, partially offset by the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effective rate by approximately 26%.

The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act;

this item increased the effective rate by approximately 3%.

For the prior year quarter, the effective tax rate was primarily attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes;

this item increased the effective rate by approximately 291%.

The federal statutory rate also differed from the effective tax rate due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 8% and 12%, respectively.

Net (Loss) Income

We had a net loss of $(0.5) million for the current quarter, compared with net loss of $(0.1) million for the prior year quarter.

Income Tax Benefit

The effective income tax rate for the current quarter and the prior year quarter was approximately 5% and 40%, respectively, resulting in an income tax benefit of $0.1 million and $0.6 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, which decreased the effective tax rate by approximately 17%, partially offset by state taxes, which increased the effective tax rate by approximately 1%.

For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 8% and 4%, respectively.

The effective tax rate was also attributable to the tax impact of a potential federal net operating loss carryback due to the CARES Act.

This item increased the effective rate by 7%.

Net Loss attributable to Xcel Brands, Inc.

We had a net loss of $2.5 million for the current quarter, compared with a net loss of $0.8 million for the prior year quarter, due to the combination of the factors outlined above.

Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA

We had non-GAAP net income of approximately $0.8 million, or $0.04 per diluted share (“non-GAAP diluted EPS”), for the current quarter and $1.2 million, or $0.06 per diluted share, for the prior year quarter.

Non-GAAP net income is a non-GAAP unaudited term, which we define as net income (loss), exclusive of amortization of trademarks, stock-based compensation, non-cash interest and finance expense from discounted debt related to acquired assets, loss on extinguishment of debt, gain on sales of assets, 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, and deferred income taxes.

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 $1.4 million for the current quarter, compared with Adjusted EBITDA of $1.8 million for the prior year quarter.

Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net income (loss) before depreciation and amortization, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on reduction of contingent obligations, gain on sale of assets, costs (recoveries) in connection with potential acquisitions, asset impairments, and certain adjustments to allowances for doubtful accounts related to debtors that have filed for bankruptcy protection triggered by the impact of COVID-19.

We had a non-GAAP net loss of approximately $1.5 million, or $(0.08) per diluted share (“non-GAAP diluted EPS”), for the current quarter and non-GAAP net income of $0.2 million, or $0.01 per diluted share, for the prior year quarter.

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 amortization of trademarks, stock-based compensation, non-cash interest and finance expense from discounted debt related to acquired assets, loss on extinguishment of debt, gain on sales of assets, gain on reduction of contingent obligations, costs (recoveries) in connection with potential acquisitions, certain adjustments to allowances for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic, asset impairments, 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 negative $0.9 million for the current quarter, compared with Adjusted EBITDA of positive $0.7 million for the prior year quarter.

Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net income (loss) attributable to Xcel Brands, Inc.

stockholders before depreciation and amortization, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on reduction of contingent obligations, gain on sale of assets, costs (recoveries) in connection with potential acquisitions, asset impairments, and certain adjustments to allowances for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic.

Management uses non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the Company’s results of operations.

Management believes non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus, these non-GAAP measures provide supplemental information to assist investors in evaluating the Company’s financial results.

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 the Xcel Term Loan.

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.

accordance with GAAP.

Given that non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are financial measures not deemed to be in accordance with GAAP and are susceptible to varying calculations, our non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in our industry, because other companies may calculate non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA in a different manner than we calculate these measures.

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When evaluating our performance, you should consider non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.

The following table is a reconciliation of net loss (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net income:

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:

Three Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Stock-based compensation

(Recovery of) costs in connection with potential acquisition

Costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Deferred income tax (benefit) provision

Non-GAAP net income

Deferred income tax benefit

Non-GAAP net (loss) income

The following table is a reconciliation of diluted loss per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:

Three Months Ended

September 30,

Diluted loss per share

1 unchanged sentence

Stock-based compensation

(Recovery of) costs in connection with potential acquisition

Costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Deferred income tax (benefit) provision

Deferred income tax benefit

Non-GAAP diluted EPS

Non-GAAP weighted average diluted shares

The following table is a reconciliation of net (loss) income (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:

The following table is a reconciliation of net loss attributable to Xcel Brands, Inc.

stockholders (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:

Three Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Interest and finance expense

Income tax (benefit) provision

State and local franchise taxes

Stock-based compensation

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Adjusted EBITDA

Both non-GAAP net income and Adjusted EBITDA for the current quarter include an adjustment to net (loss) income for allowances for doubtful accounts related to account debtors that have filed for bankruptcy protection triggered by the impact of COVID-19.

In addition, net loss for the current quarter includes $0.2 million of PPP Benefit, which was recognized as a reduction to current quarter expenses for which the program was intended to compensate.

As such, this amount is included in net (loss) income in accordance with GAAP.

The expense reduction from the PPP is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA due to the fact that the PPP Benefit represents a cash benefit and is directly related to the Company’s operating expenses incurred.

Such treatment is also consistent with the calculation of EBITDA for financial covenant compliance purposes under the Xcel Term Loan.

Nine months ended September 30, 2020 (the “current nine months”) compared with the nine months ended September 30, 2019 (the “prior year nine months”)

Current nine months net revenue decreased approximately $8.4 million to $22.0 million from $30.4 million for the prior year nine months.

Net licensing revenue decreased by approximately $5.7 million in the current nine months to $15.4 million, compared with $21.1 million in the prior year nine months.

This decline 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 related to the COVID-19 pandemic, (ii) revenues from one of our existing licensing arrangements changing from guaranteed minimum amounts to sales-based royalties effective April 1, 2019, and (iii) a reduction in guaranteed minimum revenues from another of our existing licensing arrangements upon renewal effective January 1, 2020.

Net product sales decreased by approximately $2.7 million in the current nine months to $6.6 million, compared with approximately $9.3 million in the prior year nine months.

The decline 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 related to the COVID-19 pandemic during the second and third quarters of 2020, partially offset by volume growth in our apparel wholesale business in the first quarter of 2020.

Cost of Goods Sold

Current nine months cost of goods sold was $3.9 million, compared with $6.5 million for the prior year nine months due to lower overall volume of wholesale and e-commerce sales in the current nine months.

Gross profit (net revenue less cost of goods sold) decreased approximately $5.8 million to $18.0 million from $23.8 million in the prior year nine months, primarily driven by the aforementioned decline in net licensing revenue.

Gross profit margin from product sales increased from 29% in the prior year nine months to 40% in the current nine months as a result of achieving greater efficiencies in our wholesale business operations.

Total gross profit margin was 78% in the prior year nine months and 82% in the current nine months, up slightly due to the aforementioned increase in gross profit margins for product sales, while the proportional mix between licensing revenue and product sales was essentially unchanged.

Operating Costs and Expenses

Operating costs and expenses decreased approximately $2.3 million from $22.4 million in the prior year nine months to $20.1 million in the current nine months.

This reduction was primarily due to various cost reduction actions taken by management in response to the COVID-19 pandemic, including temporary reductions of employee compensation 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 nine months expenses.

Partially offsetting these reductions was a $1.1 million increase in depreciation and amortization expense, primarily due to the change in estimated life for the Judith Ripka trademarks, and $1.0 million of bad debt expense recognized in the current nine months related to the bankruptcy of several retail customers due to the COVID-19 pandemic.

During the current quarter, we recognized a $0.05 million net gain on the sale of certain assets related to the Longaberger brand.

During the prior year nine months, we recognized a $2.9 million gain on the reduction of contingent obligations related to the 2015 acquisition of the C Wonder Brand.

As part of that acquisition, the seller was eligible to earn additional consideration based on future royalties related to the C Wonder Brand exceeding certain thresholds, and we recorded a liability for the potential future payment of such consideration.

The final earn-out period ended on June 30, 2019, and the seller ultimately did not earn any additional consideration under the terms of the purchase agreement.

Interest and Finance Expense

Interest and finance expense for the current nine months was $0.9 million, compared with $1.2 million for the prior year nine months.

This decrease is primarily attributable to the fact that the prior year nine months includes a $0.2 million loss on extinguishment of debt as a result of the February 11, 2019 term loan amendment, with no such comparable extinguishment loss in the current nine months.

Income Tax (Benefit) Provision

The effective income tax rate for the current nine months and the prior year nine months was approximately 10% and 40%, respectively, resulting in an income tax (benefit) provision of $(0.3) million and $1.3 million, respectively.

For the current nine months, the federal statutory rate differed from the effective tax rate primarily due to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effect rate by approximately 5%.

The effective rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 6% and decreased the effective tax rate by approximately 3%, respectively.

For the prior year nine months, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 9% and 9%, respectively.

The effective tax rate was also partly attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes;

this item increased the effective rate by approximately 4%

Net (Loss) Income

We had a net loss of $(2.6) million for the current nine months, compared with net income of $1.9 million for the prior year nine months.

Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA

We had non-GAAP net income of approximately $2.1 million, or $0.11 per diluted share (“non-GAAP diluted EPS”), for the current nine months and $3.8 million, or $0.20 per diluted share, for the prior year nine months.

We had Adjusted EBITDA of $3.9 million for the current nine months, compared with Adjusted EBITDA of $5.6 million for the prior year nine months.

The following table is a reconciliation of net (loss) income (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net income:

Nine Months Ended

September 30,

($ in thousands)

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

Amortization of trademarks

Non-cash interest and finance expense

Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Gain on reduction of contingent obligation

Deferred income tax (benefit) provision

Non-GAAP net income

The following table is a reconciliation of diluted (loss) earnings per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:

Nine Months Ended

September 30,

Diluted (loss) earnings per share

Amortization of trademarks

Non-cash interest and finance expense

Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Gain on reduction of contingent obligation

Deferred income tax (benefit) provision

Non-GAAP diluted EPS

Non-GAAP weighted average diluted shares

The following table is a reconciliation of net (loss) income (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:

Nine Months Ended

September 30,

($ in thousands)

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

Depreciation and amortization

Interest and finance expense

Income tax (benefit) provision

Income tax benefit

State and local franchise taxes

Stock-based compensation

(Recovery of) costs in connection with potential acquisition

Costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Gain on reduction of contingent obligation

Adjusted EBITDA

Both non-GAAP net income and Adjusted EBITDA for the current nine months include certain adjustment to net (loss) income including allowances for doubtful accounts for account debtors that have filed for bankruptcy protection triggered by the impact of COVID-19.

In addition, net loss for the current nine months includes $1.8 million of government assistance received through the Paycheck Protection Program under the CARES Act, which was recognized as a reduction to current nine months expenses for which the program was intended to compensate.

As such, the PPP Benefit is included in net (loss) income in accordance with GAAP.

Such treatment is also consistent with the calculation of EBITDA for financial covenant compliance purposes under the Xcel Term Loan.

Liquidity and Capital Resources

Our principal capital requirements have been to fund working capital needs, acquire new brands, and to a lesser extent, capital expenditures.

As of September 30, 2020 and December 31, 2019, our cash and cash equivalents were $4.8 million and $4.6 million, respectively.

Restricted cash at September 30, 2020 and at December 31, 2019 consisted of $1.1 million of cash deposited with BHI as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facility.

On April 23, 2020, we received $1.8 million from Bank of America through the PPP.

We used the proceeds primarily to pay for payroll costs, and we believe it is probable that the loan will be forgiven under the terms of the PPP.

We expect that existing cash and operating cash flows will be adequate to meet our operating needs, term debt service obligations, and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q.

As of March 31, 2021 and December 31, 2020, our cash and cash equivalents were approximately $3.0 million and $5.0 million, respectively.

Restricted cash at March 31, 2021 and at December 31, 2020 consisted of $1.1 million of cash deposited with BHI as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facility.

On April 14, 2021, we entered into a new loan and security agreement, which resulted in the extinguishment of the $16.8 million term loan debt which existed as of March 31, 2021, and increased our term loan debt obligations to $25.0 million.

Under this agreement, our term loan debt obligation is 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 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 $25.0 million of future acquisition financing, subject to lender approval on a deal-by-deal basis.

We expect that existing cash and operating cash flows will be adequate to meet our operating needs, term debt service obligations, and capital expenditure needs, for at least the 12 months subsequent to the filing date of this Quarterly Report on Form 10-Q.

Changes in Working Capital

Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations and any contingent obligations payable in common stock) was $8.7 million and $9.5 million as of September 30, 2020 and December 31, 2019, respectively.

Working capital decreased by approximately $0.8 million during the first nine months of 2020 primarily due to the $0.6 million increase in the current portion of long-term debt.

Commentary on the components of our cash flows for the current nine months as compared with the prior year nine months is set forth below.

Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations and any contingent obligations payable in common stock) was $6.5 million and $7.9 million as of March 31, 2021 and December 31, 2020, respectively.

This working capital decrease was primarily attributable to cash used in operating activities during the first three months of 2021.

Commentary on the components of our cash flows for the current quarter as compared with the prior year quarter is set forth below.

Operating Activities

Net cash provided by operating activities was approximately $2.2 million in the current nine months, compared with approximately $3.0 million in the prior year nine months.

The current nine months cash provided by operating activities was primarily attributable to the combination of the net loss of $(2.6) million plus non-cash expenses of approximately $5.8 million and the net change in operating assets and liabilities of approximately $(0.9) million.

The net loss of $(2.6) million includes $1.8 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to current nine months expenses for which the program was intended to compensate.

Net cash used in operating activities was approximately $(1.69) million in the current quarter, compared with net cash provided by operating activities of approximately $0.31 million in the prior year quarter.

The current quarter cash used in operating activities was primarily attributable to the combination of the net loss of $(2.63) million plus non-cash expenses of approximately $1.38 million and the net change in operating assets and liabilities of approximately $(0.45) million.

Non-cash net expenses were primarily comprised of $1.21 million of depreciation and amortization, $0.16 million of stock-based compensation, $0.13 million of bad debt expense, and a deferred income tax benefit of $(0.14) million.

The net change in operating assets and liabilities includes a decrease in accounts receivable of $1.4 million, a decrease in accounts payable, accrued expenses and other current liabilities of $(2.4) million, a decrease in inventory of $0.2 million, a decrease in prepaid expenses and other assets of $0.2 million, and cash paid in excess of rent expense of $(0.3) million.

The net change in accounts receivable is attributable to a combination of the timing of collections, increased allowance for doubtful accounts, and lower revenues recognized as a result of the COVID-19 pandemic.

The net change in accounts payable, accrued expenses and other current liabilities is due to timing of payments, as well as actions taken by management in response to the COVID-19 pandemic to conserve cash.

The prior year nine months cash provided by operating activities was primarily attributable to the combination of net income of $1.9 million plus non-cash expenses of approximately $2.3 million, partially offset by a net change in operating assets and liabilities of approximately $(1.2) million.

Non-cash net expenses primarily consisted of $0.8 million of stock-based compensation, $2.9 million of depreciation and amortization, loss on extinguishment of debt of $0.2 million, deferred income tax provision of $1.3 million, and gain on reduction of contingent obligations of $(2.9) million.

The net change from operating assets and liabilities included a decrease in accounts receivable of $1.2 million, an increase in inventory of approximately $(0.1) million, a decrease in accounts payable, accrued expenses and other current liabilities of $(1.7) million, and a decrease in other liabilities of $(0.2) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.3) million.

The net change in operating assets and liabilities includes an increase in inventory of $(1.57) million, an increase in accounts receivable of $(0.38) million, an increase in accounts payable, accrued expenses and other current liabilities of $1.82 million, an increase in prepaid expenses and other assets of $(0.22) million, and cash paid in excess of rent expense of $(0.10) million.

The changes in inventory and accounts payable, which largely offset each other, are related and are mainly due to the timing of certain inventory purchases.

The change in accounts receivable is primarily related to the timing of sales and collections.

The prior year quarter cash provided by operating activities was primarily attributable to the combination of the net loss of $(0.84) million plus non-cash expenses of approximately $1.23 million, partially offset by a net change in operating assets and liabilities of approximately $(0.08) million.

Non-cash net expenses were primarily comprised of $1.30 million of depreciation and amortization, $0.24 million of stock-based compensation, $0.21 million of bad debt expense, and deferred income tax benefit of $(0.55) million.

The net change from operating assets and liabilities includes a decrease in accounts receivable of $1.57 million, a decrease in inventory of approximately $0.11 million, and a decrease in accounts payable, accrued expenses and other current liabilities of $(1.67) million, all of which were primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.09) million.

Investing Activities

Net cash used in investing activities for the current nine months was approximately $0.7 million, compared with approximately $9.7 million in the prior year nine months.

Cash used in investing activities for in the current nine months

was primarily attributable to capital expenditures, a substantial portion of which relates to the implementation of our ERP system, while cash used in investing activities for the prior year nine months was primarily related to cash consideration paid to acquire the Halston Heritage Brands.

Net cash used in investing activities for the current quarter was approximately $0.3 million, primarily attributable to capital expenditures relating to the fit-out and furnishing of our planned Judith Ripka fine jewelry retail store.

Net cash used in investing activities for the prior year quarter was approximately $0.6 million and was attributable to capital expenditures, a substantial portion of which related to the implementation of our ERP system.

Financing Activities

Net cash (used in) financing activities for the current nine months was approximately $(1.4) million, and was primarily attributable to payments made on long-term debt obligations of $(1.5) million, cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $0.3 million, and $(0.2) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Net cash provided by financing activities for the prior year nine months was approximately $3.4 million, primarily attributable to proceeds received from long-term debt of $7.5 million, partially offset by payments made on long-term debt obligations of $(3.0) million, the final payment on the IM Seller Note obligation of $(0.7) million, and payment of $(0.3) million of deferred finance costs.

There was no cash provided by or used in financing activities for the current quarter.

Net cash used in financing activities for the prior year quarter was approximately $0.1 million, and was attributable to shares repurchased related to vested restricted stock in exchange for withholding taxes.

Other Factors

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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 have transitioned our department store business from a licensing model to a wholesale model, and continue to work towards expanding our Judith Ripka Fine Jewelry wholesale and e-commerce business.

Our strategy is to manage our working capital needs by utilizing back-to-back sales and purchase orders and minimizing inventory risk.

This change should, on a long-term basis, increase our revenues as compared to the licensing model.

We expect to develop a core licensing business for the Longaberger brand, in addition to a direct-to-consumer business.

We continue to work towards expanding our wholesale and e-commerce businesses, and complement these operations with our licensing 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, we continue to seek new opportunities, including expansion through interactive television, our design, production and supply chain platform, additional domestic and international licensing arrangements, and acquiring additional brands.

In November 2019, we acquired an ownership interest in the Longaberger brand through a joint venture, and launched the brand on QVC that same month.

In April 2021, we acquired the Lori Goldstein brand trademarks, which are currently available and sold to consumers through QVC.

However, 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.

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 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 September 30, 2020.

As a result, we have recognized an allowance for doubtful accounts of $0.97 million for the nine months ended September 30, 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.

Further, the global pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers, from which we had an aggregate of approximately $1.5 million of accounts receivable due at March 31, 2021.

As a result, we have recognized an allowance for doubtful accounts of approximately $1.1 million as of March 31, 2021, 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 on our operating results, which 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 results for the remainder of 2020.

However, as of the date of this filing, we expect our results for 2020 and potentially 2021 to be significantly affected.

Effects of Inflation

We do not believe that the relatively moderate rates of inflation experienced over the past two years in the United States, where we primarily compete, have had a significant effect on revenues or profitability.

If there were an adverse change in the rate of inflation by less than 10%, the expected effect on net income and cash flows would be immaterial.

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 significantly affected.

Off-Balance Sheet Arrangements

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Please refer to our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on April 23, 2021, for a discussion of our critical accounting policies.

During the three and nine months ended September 30, 2020, there were no material changes to our accounting policies.

During the three months ended March 31, 2021, there were no material changes to our accounting policies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis