Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
We operate in a highly competitive industry that involves numerous known and unknown risks and uncertainties that could impact our operations. The risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our financial condition and/or operating results.
There is a high likelihood that we will be obligated to transfer an additional 12.5% of IM Topco to WHP as we do not expect IM Topco to meet revenue targets set forth in the purchase agreement.
In accordance with the May 31, 2022 membership interest purchase agreement, as amended, WHP (as buyer) may be entitled to receive from Xcel 12.5% of the total outstanding equity interests of IM Topco if, during the twelve-month period ending March 31, 2025, IM Topco receives less than $13.5 million in aggregate royalties (the “Purchase Price Adjustment”). Based on current trends and projections of IM Topco’s revenues, the Company estimates that there is high likelihood that IM Topco’s revenues will be less than the required minimum and the Company will be obligated to transfer the required membership interests to WHP in accordance with the Purchase Price Adjustment. The Company has recorded a contingent obligation of approximately $6.3 million as a reduction to the carrying value of the equity method investment as of September 30, 2024, based on the expected March 31, 2025 value of the potential transferred membership interest. If such transfer occurs, our interest in the equity of IM Topco will be reduced from 30% to 17.5%.
Our existing and any future indebtedness could adversely affect our ability to operate our business.
On December 12, 2024, we and certain of our subsidiaries entered into a new loan and security agreement with FEAC Agent, LLC, as administrative agent and collateral agent, FEF Distributors, LLC, as lead arranger, and Restore Capital, LLC, as agent for certain lenders, pursuant to which the lenders made term loans to us and agreed to make additional term loans to us upon the satisfaction of a condition precedent described in the loan agreement. The term loans under the loan agreement are as follows: (1) a term loan in the amount of $3.95 million (“Term Loan A”) was made on the closing date, (2) a term loan in the amount of $4.0 million (“Term Loan B”) was made on the closing date, and (3) a term loan in the amount of $2.05 million (“Delayed Draw Term Loan”; Term Loan A, Term Loan B and Delayed Draw Term Loan are referred to as “Term Loans”) which will be made upon the satisfaction of a condition precedent described in the loan agreement. The proceeds from the Delayed Draw Term Loan were deposited in a bank account to satisfy a liquidity covenant in the loan agreement.
Principal amounts on Term Loans are payable on a pro rata basis in quarterly installments of $250,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on March 31, 2026, with the unpaid balance due at the maturity date of December 12, 2028. Interest on Term Loans accrues at an annual rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York for an interest period equal to three months, subject to a 2.0% floor, plus (i) 8.5% for Term Loan A and Delayed Draw Term Loan and (ii) 13.5% for Term Loan B. Interest on amounts outstanding under the Term Loans accrues daily and is payable at the end of each calendar month.
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The Term Loans are guaranteed by certain of our direct and indirect subsidiaries, and are secured by all of the assets of the Company and such subsidiaries. The loan agreement contains various customary financial covenants and reporting requirements, as specified and defined in the loan agreement, including minimum revenue requirements and an approximately $2.05 million minimum liquidity requirement. In addition, we are required to raise at least $1,500,000 of equity capital by March 31, 2025. If we do not raise the equity capital, the reserve for the liquidity covenant will increase to approximately $4.05 million and the minimum revenue requirements will increase by 12.5%.
Our outstanding indebtedness, i ncluding any additional indebtedness beyond our borrowings under the loan agreement, combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:
● Requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, potential acquisitions, international expansion, new product development, new enterprise relationships, and other general corporate purposes;
● Increasing our vulnerability to adverse changes in general economic, industry, and market conditions;
● Subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;
● Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
● Placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.
We intend to satisfy our current and future debt service obligations with our then existing cash and cash equivalents. However, we may not have sufficient funds, and may be unable to arrange for additional financing, to pay the amounts due under the loan agreement or any other debt instruments. Failure to make payments or comply with other covenants under our existing loan agreement or such other debt instruments could result in an event of default and acceleration of amounts due, which would have a material adverse effect on our business.
A breach of the covenants under the loan agreement could result in an event of default under the applicable indebtedness. An event of default under the loan agreement could permit the lenders under the loan agreement to terminate all commitments to extend further credit under the loan agreement. Furthermore, if we were unable to repay the amounts due and payable under the loan agreement, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lender accelerates the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.