What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-13 · 104 added, 91 removed, 156 unchanged (56% of the section changed)

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The statements that are not historical facts contained in this report are forward-looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

These risks are detailed in the Risk Section of our Form 10-K for the fiscal year ended December 31, 2020.

These risks are detailed in the Risk Factors section of our Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on April 23, 2021.

The words “believe,” “anticipate,” “expect,” “continue,” “estimate,” “appear,” “suggest,” “goal,” “potential,” “predicts,” “seek,” “will,” “confident,” “project,” “provide,” “plan,” “likely,” “future,” “ongoing,” “intend,” “may,” “should,” “would,” “could,” “guidance,” and similar expressions identify forward-looking statements.

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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:

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

● expanding and leveraging our live-streaming platform.

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Summary of Operating Results

Three months ended June 30, 2021 (the “current quarter”) compared with the three months ended June 30, 2020 (the “prior year quarter”)

Three months ended September 30, 2021 (the “current quarter”) compared with the three months ended September 30, 2020 (the “prior year quarter”)

Current quarter net revenue increased approximately $3.9 million to $11.3 million from $7.4 million for the prior year quarter.

Net licensing revenue increased by approximately $1.7 million in the current quarter to $6.9 million, compared with $5.2 million in the prior year quarter.

This increase in licensing revenue was primarily attributable to the Lori Goldstein brand, which we acquired on April 1, 2021, as well as continued strong performance by the Isaac Mizrahi brand, partially offset by a decline in licensing revenue related to the transitioning of the H Halston brand to a wholesale supply model.

This increase in licensing revenue was primarily attributable to the Lori Goldstein brand, which we acquired on April 1, 2021, as well as continued strong performance and growth by the Isaac Mizrahi brand, partially offset by a decline in licensing revenue related to the transitioning of the H Halston brand to a wholesale supply model.

Net product sales increased by approximately $2.2 million in the current quarter to $4.4 million, compared with $2.2 million in the prior year quarter.

The increase in net sales was primarily attributable to higher wholesale apparel sales, as retail sales were severely negatively impacted in the prior year quarter during the initial outbreak of the COVID-19 pandemic.

Jewelry wholesale sales also contributed significantly to the increase in sales, and e-commerce sales of Longaberger branded products and Judith Ripka brand jewelry also grew substantially from the prior year quarter.

The increase in net sales was primarily attributable to growth in wholesales for both apparel and jewelry, as sales in the prior year quarter were negatively impacted by an overall slowdown in economic activity related to the initial outbreak of the COVID-19 pandemic.

Sales of Longaberger branded products through e-commerce, social commerce, and livestreaming also continued to grow year-over-year.

Cost of Goods Sold

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Gross profit (net revenue less cost of goods sold) increased approximately $2.3 million to $8.4 million from $6.1 million in the prior year quarter, primarily driven by the aforementioned increase in net licensing revenue.

Gross profit margin from product sales declined slightly from approximately 41% in the prior year quarter to approximately 35% in the current quarter, primarily due to increased freight costs and other supply costs to source products.

Operating Costs and Expenses

Operating costs and expenses increased approximately $3.2 million from $6.5 million in the prior year quarter to $9.7 million in the current quarter.

This increase was mainly driven by normalized post-COVID adjusted salary costs and marketing expenses, and expenses related to the Lori Goldstein brand trademarks acquired on April 1, 2021.

Additionally, the prior year quarter notably included the benefit of government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $1.6 million as a reduction to prior year quarter expenses.

This increase was mainly driven by (i) a $1.2 million increase in salaries, benefits and employment taxes, which was primarily attributable to post-COVID normalized salary costs, and (ii) a $1.1 million increase in selling, general and administrative expenses, which was primarily attributable to combination of increased marketing expenses and higher logistics costs.

Also significantly contributing the increase in operating costs and expenses was a $0.4 million increase in depreciation and amortization expense, primarily related to the Lori Goldstein brand trademarks acquired on April 1, 2021.

The remainder of the increase in operating costs and expenses from the prior year quarter was largely due to $0.4 million of certain benefits and recoveries – including recovery of costs in connection with

potential acquisitions, and government assistance received through the Paycheck Protection Program – that were recognized in the prior year and did not recur in the current quarter.

Interest and Finance Expense

Interest and finance expense for the current quarter was $0.6 million, compared with $0.3 million for the prior year quarter.

This increase of approximately $1.1 million was primarily attributable to a $0.8 million loss on the extinguishment of debt recognized in the current quarter as a result of the new term loan financing agreement entered into on April 14, 2021.

increase in interest and finance expense was also partially attributable to the fact that the new term loan agreement entered into during the current quarter resulted in a higher outstanding principal balance at a higher interest rate as compared with the previous term loan agreement.

This increase was primarily attributable to the fact that a new term loan agreement entered into during the second quarter of 2021 resulted in a higher outstanding principal balance at a higher interest rate as compared with the previous term loan agreement.

Income Tax Benefit

The effective income tax rate for the current quarter and the prior year quarter was approximately 43% and -49%, respectively, resulting in an income tax (benefit) provision of $(1.35) million and $0.43 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 15% and 7%, respectively.

For the prior year quarter, 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 effective rate by approximately 41%.

The effective tax rate was also attributable to state taxes and recurring permanent differences, which decreased the effective tax rate by approximately 2% and 27%, 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;

The effective income tax benefit rate for the current quarter and the prior year quarter was approximately 28% and 25%, respectively, resulting in an income tax benefit of $0.54 million and $0.15 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes, which increased the effective tax rate by approximately 7%.

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 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%.

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

We had a non-GAAP net loss of approximately $0.1 million, or $(0.01) per diluted share (“non-GAAP diluted EPS”), for the current quarter and non-GAAP net income of $1.2 million, or $0.06 per diluted share, for the prior year quarter.

We had non-GAAP net income of approximately $0.01 million, or $0.00 per diluted share (“non-GAAP diluted EPS”), for the current quarter and non-GAAP net income of $0.8 million, or $0.04 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, 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.

stockholders, exclusive of amortization of trademarks, stock-based compensation, 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 the provision 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.

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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.

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 the provision 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.

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 incurred certain costs in the prior year 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 for the prior year

Accordingly, the PPP Benefit is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA for the prior year periods.

Adjusted EBITDA is the measure used to calculate compliance with the EBITDA covenant under the Company’s term loan agreement.

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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.

Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any other unusual or non-recurring items.

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

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

stockholders (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net (loss) income:

stockholders (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net income:

Three Months Ended

September 30,

($ in thousands)

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Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Certain adjustments to provision for doubtful accounts

Property and equipment impairment

Deferred income tax (benefit) provision

Non-GAAP net (loss) income

Gain on sale of assets

Deferred income tax benefit

Non-GAAP net 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

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Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Certain adjustments to provision for doubtful accounts

Property and equipment impairment

Deferred income tax (benefit) provision

Gain on sale of assets

Deferred income tax benefit

Non-GAAP diluted EPS

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Three Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Interest and finance expense

Income tax (benefit) provision

Income tax benefit

State and local franchise taxes

1 unchanged sentence

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Certain adjustments to provision for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Adjusted EBITDA

Six months ended June 30, 2021 (the “current six months”) compared with the six months ended June 30, 2020 (the “prior year six months”)

Current six months net revenue increased approximately $4.0 million to $18.6 million from $14.6 million for the prior year six months.

Net licensing revenue increased by approximately $0.4 million in the current six months to $10.5 million, compared with $10.1 million in the prior year six months.

Net product sales increased by approximately $3.6 million in the current six months to $8.0 million, compared with $4.4 million in the prior year six months.

The increase in net sales was primarily attributable to the combination of higher jewelry wholesale sales, and higher sales of Longaberger branded products through e-commerce, social commerce, and livestreaming.

Wholesale apparel sales also contributed significantly to the year-over-year increase in net product sales, as retail sales were severely negatively impacted in the prior year period during the initial outbreak of the COVID-19 pandemic.

Nine months ended September 30, 2021 (the “current nine months”) compared with the nine months ended September 30, 2020 (the “prior year nine months”)

Current nine months net revenue increased approximately $7.8 million to $29.8 million from $22.0 million for the prior year nine months.

Net licensing revenue increased by approximately $2.0 million in the current nine months to $17.4 million, compared with $15.4 million in the prior year nine months.

This increase in licensing revenue was primarily attributable to the Lori Goldstein brand, which we acquired on April 1, 2021, as well as continued revenue growth by the Isaac Mizrahi brand, partially offset by a decline in licensing revenue related to the transitioning of the H Halston brand to a wholesale supply model.

Net product sales increased by approximately $5.8 million in the current nine months to $12.4 million, compared with $6.6 million in the prior year nine months.

The increase in net sales was primarily attributable to higher jewelry wholesale sales.

In addition, wholesale apparel sales contributed significantly to the year-over-year increase in net product sales, as retail sales were severely negatively impacted in the prior year period during the initial outbreak of the COVID-19

Sales of Longaberger branded products through e-commerce, social commerce, and livestreaming also continued to grow year-over-year.

Cost of Goods Sold

Current six months cost of goods sold was $4.9 million, compared with $2.7 million for the prior year six months due to significantly higher volume of wholesale and e-commerce sales in the current six months.

Gross profit (net revenue less cost of goods sold) increased approximately $1.8 million to $13.7 million from $11.9 million in the prior year six months, primarily driven by the aforementioned increase in net product sales.

Gross profit margin from product sales remained constant at 40% for both the current and prior year six months.

Current nine months cost of goods sold was $7.8 million, compared with $3.9 million for the prior year nine months due to the higher volumes of wholesale and e-commerce sales in the current nine months.

Gross profit (net revenue less cost of goods sold) increased approximately $4.1 million to $22.1 million from $18.0 million in the prior year nine months, driven by the combination of the aforementioned increases in both net licensing revenue and net product sales.

Gross profit margin from product sales declined slightly from approximately 41% in the prior year period to approximately 38% in the current nine months, primarily due to increased freight costs and other supply costs to source products.

Operating Costs and Expenses

Operating costs and expenses increased approximately $4.3 million from $13.6 million in the prior year six months to $17.9 million in the current six months.

This increase was mainly driven by a combination of post-COVID normalized salary costs, marketing expenses, shipping and warehousing costs, and consulting fees, partially offset by lower bad debt expense.

The increase in operating expenses was also partially attributable to increased non-cash amortization expense related to the Lori Goldstein brand trademarks acquired on April 1, 2021.

Additionally, the prior year six months notably

included the benefit of government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $1.6 million as a reduction to prior year six months expenses.

Operating costs and expenses increased approximately $7.5 million from $20.1 million in the prior year nine months to $27.6 million in the current nine months.

This increase was mainly driven by (i) a $2.5 million increase in salaries, benefits and employment taxes, which was primarily attributable to post-COVID normalized salary costs, (ii) a $2.2 million increase in selling, general and administrative expenses, which was primarily attributable to combination of increased marketing expenses, consulting fees, and logistics costs, partially offset by lower bad debt expense, and (iii) the prior year benefit of government assistance received through the Paycheck Protection Program in the prior year, for which the Company recognized $1.8 million as a reduction to prior year nine months’ expenses.

Also significantly contributing the increase in operating costs and expenses was a $0.9 million increase in depreciation and amortization expense, primarily related to the Lori Goldstein brand trademarks acquired on April 1, 2021.

Interest and Finance Expense

Interest and finance expense for the current six months was $1.7 million, compared with $0.6 million for the prior year quarter.

This increase of approximately $1.1 million was primarily attributable to a $0.8 million loss on the extinguishment of debt recognized in the current six months as a result of the new term loan financing agreement entered into on April 14, 2021.

The increase in interest and finance expense was also partially attributable to the fact that the new term loan agreement entered into during the current six months resulted in a higher outstanding principal balance at a higher interest rate as compared with the previous term loan agreement.

Interest and finance expense for the current nine months was $2.3 million, compared with $0.9 million for the prior nine months.

This increase of approximately $1.4 million was primarily attributable to a $0.8 million loss on the extinguishment of debt recognized in the current nine months as a result of the new term loan financing agreement entered into on April 14, 2021.

The increase in interest and finance expense was also partially attributable to the fact that the new term loan agreement entered into during the current nine months resulted in a higher outstanding principal balance at a higher interest rate as compared with the previous term loan agreement.

Income Tax Benefit

The effective income tax rate for the current six months and prior year six months was approximately 25% and 5%, respectively, resulting in an income tax (benefit) provision of $(1.48) million and $(0.12) million, respectively.

For the current six months, the federal statutory rate differed from the effective tax rate primarily due to state taxes, which increased the effective tax rate by approximately 7%, partially offset by the impact of recurring permanent differences, which decreased the effective tax rate by approximately 3%.

For the prior year six 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 16%.

The effective income tax benefit rate for the current nine months and prior year nine months was approximately 26% and 10%, respectively, resulting in an income tax benefit of $2.02 million and $0.27 million, respectively.

For the current nine months, the federal statutory rate differed from the effective tax rate primarily due to state taxes, which increased the effective tax rate by approximately 7%, partially offset by the impact of recurring permanent differences, which decreased the effective tax rate by approximately 2%.

For the prior year 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.

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 4%.

Net Loss Attributable to Xcel Brands, Inc.

We had a net loss of $4.1 million for the current six months, compared with a net loss of $2.1 million for the prior year six months, due to the combination of the factors outlined above.

We had a net loss of $5.2 million for the current nine months, compared with a net loss of $2.5 million for the prior year nine months, due to the combination of the factors outlined above.

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

We had a non-GAAP net loss of approximately $1.6 million, or $(0.09) per diluted share, for the current six months and non-GAAP net income of $1.4 million, or $0.07 per diluted share, for the prior year six months.

We had Adjusted EBITDA of approximately $(0.0) million for the current six months, compared with Adjusted EBITDA of $2.5 million for the prior year six months.

We had a non-GAAP net loss of approximately $1.6 million, or $(0.08) per diluted share, for the current nine months and non-GAAP net income of approximately $2.1 million, or $0.11 per diluted share, for the prior year nine months.

We had Adjusted EBITDA of approximately $1.0 million for the current nine months, compared with Adjusted EBITDA of $3.9 million for the prior year nine months.

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:

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Certain adjustments to provision for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Deferred income tax benefit

1 unchanged sentence

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:

Six Months Ended

Nine Months Ended

September 30,

Diluted loss per share

3 unchanged sentences

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Certain adjustments to provision for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Deferred income tax benefit

3 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Interest and finance expense

Income tax (benefit) provision

Income tax benefit

State and local franchise taxes

1 unchanged sentence

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Certain adjustments to provision for doubtful accounts

Property and equipment impairment

Gain on sale of assets

Adjusted EBITDA

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

As of June 30, 2021 and December 31, 2020, our cash and cash equivalents were approximately $4.8 million and $5.0 million, respectively.

Restricted cash at June 30, 2021 and at December 31, 2020 consisted of $0.7 million and $1.1 million, respectively, 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.

As of September 30, 2021 and December 31, 2020, our cash and cash equivalents were approximately $4.0 million and $5.0 million, respectively.

Restricted cash at September 30, 2021 and at December 31, 2020 consisted of $0.7 million and $1.1 million, respectively, 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 December 31, 2020, 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.

In addition, the agreement provides for up to $25.0 million of future acquisition financing, subject to lender approval on a deal-by-deal basis, and a revolving loan facility of up to $1.5 million (increasing to a maximum of $4.0 million after we demonstrate compliance with certain financial covenants for the applicable periods ending December 31, 2021) on a discretionary basis.

On June 24, 2021, we borrowed $1.5 million under the revolving loan facility.

The agreement also provides for up to $25.0 million of future acquisition financing, subject to lender approval on a deal-by-deal basis.

In addition, the agreement provides for a revolving loan facility of up to $2.5 million until November 15, 2021 and a maximum of $1.5 million thereafter, increasing to a maximum of $4.0 million after we demonstrate compliance with certain financial covenants for the applicable periods ending December 31, 2021 on a discretionary basis.

On June 24, 2021, we borrowed $1.5 million under the revolving loan facility, and on September 30, 2021, we borrowed an additional $1.0 million under the revolving credit facility.

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 $7.9 million as of June 30, 2021 and December 31, 2020, respectively.

This working capital increase was primarily attributable to cash provided by the new term loan entered into during the current quarter, partially offset by cash used to repay amounts outstanding under the previous term loan and to acquire the Lori Goldstein brand trademarks during the current quarter.

Commentary on the components of our cash flows for the current six months as compared with the prior year six 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 $8.9 million and $7.9 million as of September 30, 2021 and December 31, 2020, respectively.

This working capital increase was primarily attributable to cash provided by the new term loan entered into during the current year period, partially offset by cash used to repay amounts outstanding under the previous term loan and to acquire the Lori Goldstein brand trademarks.

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

Operating Activities

Net cash used in operating activities was approximately $(5.74) million in the current six months, compared with net cash provided by operating activities of approximately $2.38 million in the prior year six months.

The current six months cash used in operating activities was primarily attributable to the combination of the net loss of $(4.44) million plus non-cash expenses of approximately $2.86 million and the net change in operating assets and liabilities of approximately $(4.16) million.

Non-cash net expenses were primarily comprised of $3.06 million of depreciation and amortization, $0.59 million of stock-based compensation, $0.13 million of bad debt expense, $0.11 million of amortization of deferred finance costs, a $0.45 non-cash loss on extinguishment of debt, and a deferred income tax benefit of $(1.48) million.

The net change in operating assets and liabilities was primarily comprised of an increase in inventory of $(1.93) million, an increase in accounts receivable of $(2.39) million, an increase in other liabilities of $0.37 million, and cash paid in excess of rent expense of $(0.23) million.

The change in accounts receivable was primarily related to the timing of sales and collections, while the change in inventory is primarily related to expected increases in wholesales, including our drop-ship programs, and an increase in our direct-to-consumer businesses.

The prior year six months cash provided by operating activities was primarily attributable to the combination of the net loss of $(2.17) million plus non-cash expenses of approximately $4.05 million and the net change in operating assets and liabilities of approximately $0.50 million.

The net loss of $(2.17) million includes $1.64 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to prior year six months expenses for which the program was intended to compensate.

Non-cash net expenses were primarily comprised of $2.63 million of depreciation and amortization, $0.73 million of stock-based compensation, $0.68 million of bad debt expense, and deferred income tax benefit of $(0.12) million.

The net change in operating assets and liabilities included a decrease in accounts receivable of $3.40 million and a decrease in accounts payable, accrued expenses and other current liabilities of $(2.71) million, and cash paid in excess of rent expense of $(0.18) million.

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

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

Net cash used in operating activities was approximately $(5.53) million in the current nine months, compared with net cash provided by operating activities of approximately $2.20 million in the prior year nine months.

The current nine months cash used in operating activities was primarily attributable to the combination of the net loss of $(5.80) million plus non-cash expenses of approximately $4.48 million and the net change in operating assets and liabilities of approximately $(4.21) million.

Non-cash net expenses were primarily comprised of $4.95 million of depreciation and amortization, $0.75 million of stock-based compensation, $0.13 million of bad debt expense, $0.21 million of amortization of deferred finance costs, a $0.45 million non-cash loss on extinguishment of debt, and a deferred income tax benefit of $(2.02) million.

The net change in operating assets and liabilities was primarily comprised of an increase in inventory of $(2.21) million and an increase in accounts receivable of $(2.06) million.

The change in accounts receivable was primarily related to the timing and volume of sales and collections, while the change in inventory is primarily related to expected increases in wholesales, including our drop-ship programs, and an increase in our direct-to-consumer businesses.

The prior year nine months cash provided by operating activities was primarily attributable to the combination of the net loss of $(2.63) million plus non-cash expenses of approximately $5.77 million and the net change in operating assets and liabilities of approximately $(0.94) million.

The net loss of $(2.63) million includes $1.81 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to prior year nine months expenses for which the program was intended to compensate.

Non-cash net expenses were primarily comprised of $4.07 million of depreciation and amortization, $0.78 million of stock-based compensation, $1.05 million of bad debt expense, and a deferred income tax benefit of $(0.27) million.

The net change in operating assets and liabilities includes a decrease in accounts receivable of $1.38 million, a decrease in accounts payable, accrued expenses and other current liabilities of $(2.40) million, a decrease in inventory of $0.18 million, a decrease in prepaid expenses and other assets of $0.19 million, and cash paid in excess of rent expense of $(0.28) million.

The net change in accounts receivable was 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 was due to timing of payments, as well as actions taken by management during the prior year nine months in response to the COVID-19 pandemic to conserve cash.

Investing Activities

Net cash used in investing activities for the current six months was approximately $2.40 million, which was primarily attributable to the acquisition of the Lori Goldstein brand on April 1, 2021, and, to a lesser extent, to capital expenditures relating to the fit-out and furnishing of our new Judith Ripka fine jewelry retail store, which opened in June 2021.

Net cash used in investing activities for the prior year six months was approximately $0.63 million, primarily attributable to capital expenditures, a substantial portion of which related to the implementation of our ERP system.

Net cash used in investing activities for the current nine months was approximately $4.75 million, which was primarily attributable to the acquisition of the Lori Goldstein brand on April 1, 2021, and, to a lesser extent, to capital expenditures relating to the fit-out and furnishing of our new Judith Ripka fine jewelry retail store, which opened in June 2021.

Net cash used in investing activities for the prior year nine months was approximately $0.65 million, primarily attributable to capital expenditures, a substantial portion of which related to the implementation of our ERP system.

Financing Activities

Net cash provided by financing activities for the current six months was approximately $7.63 million, and was primarily attributable to $25.0 million of proceeds from our new term loan debt entered into on April 14, 2021, as well as $1.5 million of proceeds drawn from our new revolving loan facility.

Net cash provided by financing activities for the current nine months was approximately $8.93 million, and was primarily attributable to $25.0 million of proceeds from our new term loan debt entered into on April 14, 2021, as well as $2.5 million of proceeds drawn from our new revolving loan facility.

Also contributing to cash inflows from financing activities was a $1.0 million capital contribution in Longaberger Licensing, LLC by the non-controlling interest holder.

Partially offsetting these proceeds were $(16.75) million paid on the balance of our previous term loan, $(0.37) million of fees paid to the previous debtholders in connection with the extinguishment of the previous term loan, $(1.20) million of deferred finance costs paid in connection with our new term loan, and $(1.25) million of scheduled principal payments made under our new term loan.

Net cash used in financing activities for the prior year six months was approximately $(0.93) million, and was primarily attributable to payments made on long-term debt obligations of $(0.75) million, and $(0.19) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Net cash (used in) financing activities for the prior year nine months was approximately $(1.41) million, and was primarily attributable to payments made on long-term debt obligations of $(1.50) million, cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $0.30 million, and $(0.19) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Other Factors

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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 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 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 June 30, 2021.

As a result, we have recognized an allowance for doubtful accounts of approximately $1.1 million as of June 30, 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.

As a result, we have recognized an allowance for doubtful accounts of approximately $1.1 million as of September 30, 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.

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However, as of the date of this filing, we expect our results for some portion of 2021 to be significantly affected.

In addition, the global shipping industry is currently experiencing challenges related to port delays and tight availability for carriers and containers.

This situation has negatively impacted our supply chain partners, including third party manufacturers, logistics providers, and other vendors, as well as the supply chains of our licensees, and has resulted in increased cost of supply and freight costs.

Such higher costs are currently expected to continue for the remainder of 2021 and at least some portion of 2022.

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 six months ended June 30, 2021, there were no material changes to our accounting policies.

During the three and nine months ended September 30, 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