What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-15 · 109 added, 100 removed, 134 unchanged (61% of the section changed)

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Xcel was founded in 2011 with a vision to reimagine shopping, entertainment, and social media as one thing.

Currently, the Company’s brand portfolio – including wholly owned brands – the LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brands (the "Halston Brand"), the Judith Ripka brands (the "Ripka Brand"), the C Wonder brands (the "C Wonder Brand"), and other proprietary brands – and brands partially-owned through business ventures with third parties – the Longaberger brand (the “Longaberger Brand”) and the Isaac Mizrahi brands (the "Isaac Mizrahi Brand").

Currently, the Company’s brand portfolio includes wholly owned brands – the LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brand (the "Halston Brand"), the Judith Ripka brand (the "Ripka Brand"), the C Wonder brand (the "C Wonder Brand"), and other proprietary brands – and brands partially-owned through business ventures with third parties – the Longaberger brand (the “Longaberger Brand”) and the Isaac Mizrahi brand (the "Isaac Mizrahi Brand").

Xcel continues to pioneer a true omni-channel sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels to be everywhere its customers shop.

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● our management team, including our officers’ and directors’ experience in, and relationships within the industry;

● our deep knowledge and expertise in live streaming;

● our deep knowledge and expertise in live streaming and related technology platforms;

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

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Summary of Operating Results

Three months ended June 30, 2022 (the “current quarter”) compared with the three months ended June 30, 2021 (the “prior year quarter”)

Three months ended September 30, 2022 (the “current quarter”) compared with the three months ended September 30, 2021 (the “prior year quarter”)

Current quarter net revenue decreased approximately $6.8 million to $4.5 million from $11.3 million for the prior year quarter.

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Net sales decreased by approximately $2.1 million in the current quarter to $2.3 million, compared with $4.4 million in the prior year quarter.

This decrease in net sales was primarily attributable to declines in apparel wholesale revenue, mainly driven by the temporary closing of overseas factories, causing delays in product delivery resulting in cancelled orders.

This decrease in net sales was primarily attributable to declines in apparel wholesale revenue and, to a lesser extent, in wholesale jewelry sales, mainly driven by a combination of retailers pausing on purchases triggered by excess inventory levels, and the temporary closing of overseas factories due to COVID-19, causing delays in product delivery resulting in cancelled orders.

Cost of Goods Sold

Current quarter cost of goods sold was $1.5 million, compared with $2.9 million for the prior year quarter.

Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) declined from approximately 33% in the prior year quarter to approximately 22% in the current quarter, primarily due to the selling-off of seasoned apparel inventory and write-downs for certain inventory related to canceled sales orders.

Gross profit (net revenue less cost of goods sold) decreased approximately $1.8 million to $5.9 million from $7.7 million in the prior year quarter, driven by the combination of the aforementioned decrease in net licensing revenue and decline in gross profit margin from net product sales.

Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) increased from approximately 35% in the prior year quarter to approximately 37% in the current quarter.

Gross profit (net revenue less cost of goods sold) decreased approximately $5.4 million to $3.0 million from $8.4 million in the prior year quarter, primarily driven by the aforementioned decrease in net licensing revenue, and also by the aforementioned decline in the wholesale business.

Operating Costs and Expenses

Operating costs and expenses increased approximately $1.9 million from $9.4 million in the prior year quarter to $11.3 million in the current quarter.

This increase was primarily driven by the combination of (i) $1.0 million of bonuses awarded to senior management related to the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand, (ii) higher shipping and logistics costs, and (iii) various other cost increases from service providers and vendors due to the current inflationary economic environment.

We recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand in the current quarter of approximately $20.6 million, which was comprised of $46.2 million of cash proceeds plus the recognition of the fair value of our retained

interest in the brand of $19.8 million, less $0.9 million of fees and expenses directly related to the transaction and the derecognition of the brand trademarks previously recorded on our balance sheet of $44.5 million.

Interest and Finance Expense

Interest and finance expense for the current quarter was $2.8 million, compared with $1.4 million for the prior year quarter.

This increase was primarily attributable to a higher loss on early extinguishment of debt as a result of the May 31, 2022 repayment of all of our outstanding term loan debt in the current quarter compared with a smaller loss on early extinguishment of debt incurred in the prior year quarter as a result of the April 14, 2021 term loan debt refinancing.

Income Tax Provision (Benefit)

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 25% and 43%, respectively, resulting in an income tax provision (benefit) of $3.18 million and $(1.35) million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 10%, partially offset by the reversal of a valuation allowance that was previously recorded in the first quarter of 2022, which decreased the effective tax rate by approximately 6%.

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

Net Income (Loss) Attributable to Xcel Brands, Inc.

We had net income of $9.5 million for the current quarter, compared with a net loss of $1.6 million for the prior year quarter, due to the combination of the factors outlined above.

Operating costs and expenses decreased approximately $1.0 million from $9.7 million in the prior year quarter to $8.7 million in the current quarter.

This decrease was primarily attributable to lower salaries, benefits and employment costs, driven by the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand, and the transfer of the employees associated with the Isaac Mizrahi brand to the IM Topco, LLC business venture.

Other (Expense) Income

We account for our interest in the ongoing operations of IM Topco, LLC using the equity method of accounting.

We recognized an equity method loss of $0.28 million related to our investment for the current quarter, based on the distribution provisions set forth in the related business venture agreement.

Interest and Finance (Income) Expense

Interest and finance (income) expense for the current quarter was $0.0 million, compared with $0.6 million for the prior year quarter.

This decrease was primarily attributable to the May 31, 2022 repayment of all of our outstanding term loan debt.

Income Tax (Benefit) Provision

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 26% and 28%, respectively, resulting in an income tax benefit of $1.54 million and $0.54 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 5%.

Net (Loss) Income Attributable to Xcel Brands, Inc.

We had a net loss of $4.0 million for the current quarter, compared with a net loss of $1.1 million for the prior year quarter, due to the combination of the factors outlined above.

Non-GAAP Net (Loss) Income, Non-GAAP Diluted EPS, and Adjusted EBITDA

We had a non-GAAP net loss of approximately $3.6 million, or $0.18 per diluted share (“non-GAAP diluted EPS”), for the current quarter and a non-GAAP net loss of $0.1 million, or $0.01 per diluted share, for the prior year quarter.

Non-GAAP net (loss) 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 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 income taxes.

We had a non-GAAP net loss of approximately $3.3 million, or $0.17 per diluted share (“non-GAAP diluted EPS”), for the current quarter and non-GAAP net income of $0.01 million, or $0.00 per diluted share, for the prior year quarter.

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

stockholders, exclusive of amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation, 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 income taxes.

Non-GAAP net income and non-GAAP diluted EPS measures do not include the tax effect of the aforementioned adjusting items, due to the nature of these items and the Company’s tax strategy.

We had Adjusted EBITDA of approximately $(2.9) million for the current quarter, compared with approximately $1.0 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, gain on sales of assets, 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.

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

stockholders before depreciation and amortization, our proportional share of trademark amortization of equity method investees, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on reduction of contingent obligations, gain on sale of assets, costs (recoveries) in connection with potential acquisitions, asset impairments, gain on sales of assets, 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.

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Non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP.

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

Given that non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are financial

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

In evaluating non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA, you should be aware that in the future we may or may not incur expenses similar to some of the adjustments in this report.

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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 income (loss) attributable to Xcel Brands, Inc.

stockholders (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 (loss) income:

Three Months Ended

September 30,

($ in thousands)

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

Net loss attributable to Xcel Brands, Inc.

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

Gain on sale of assets

Income tax provision (benefit)

Income tax benefit

Non-GAAP net (loss) income

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

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

Diluted earnings (loss) per share

September 30,

Diluted loss per share

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

Gain on sale of assets

Income tax provision (benefit)

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Three Months Ended

September 30,

($ in thousands)

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

Net loss attributable to Xcel Brands, Inc.

Depreciation and amortization

Interest and finance expense

Income tax provision (benefit)

Proportional share of trademark amortization of equity method investee

Interest and finance (income) expense

Income tax benefit

State and local franchise taxes

Stock-based compensation

Gain on sale of assets

Adjusted EBITDA

Six months ended June 30, 2022 (the “current six months”) compared with the six months ended June 30, 2021 (the “prior year six months”)

Current six months net revenue decreased approximately $1.4 million to $17.2 million from $18.6 million for the prior year six months.

Net licensing revenue increased by approximately $0.6 million in the current six months to $11.1 million, compared with $10.5 million in the prior year six months.

This increase in licensing revenue was primarily attributable to the Lori Goldstein brand, which we acquired on April 1, 2021, partially offset by the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand through the sale of a 70% interest in IM Topco, LLC to WHP.

Net sales decreased by approximately $1.9 million in the current six months to $6.1 million, compared with $8.0 million in the prior year six months.

This decrease in net sales was primarily attributable to declines in apparel wholesale revenue, mainly driven by the previously mentioned delays in product deliveries and canceled sales orders.

Nine months ended September 30, 2022 (the “current nine months”) compared with the nine months ended September 30, 2021 (the “prior year nine months”)

Current nine months net revenue decreased approximately $8.1 million to $21.7 million from $29.8 million for the prior year nine months.

Net licensing revenue decreased by approximately $4.1 million in the current nine months to $13.3 million, compared with $17.4 million in the prior year nine months.

This decrease in licensing revenue was primarily attributable to the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand through the sale of a 70% interest in IM Topco, LLC to WHP, partially offset by increased licensing revenue generated by the Lori Goldstein brand, which we acquired on April 1, 2021.

Net sales decreased by approximately $4.0 million in the current nine months to $8.4 million, compared with $12.4 million in the prior year nine months.

This decrease in net sales was primarily attributable to declines in apparel wholesale revenue and, to a lesser extent, in wholesale jewelry sales, mainly driven by the previously mentioned retailer inventory levels and delays in product deliveries and canceled sales orders.

Cost of Goods Sold

Current six months cost of goods sold was $4.3 million, compared with $4.9 million for the prior year six months.

Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) declined from approximately 39% in the prior year six months to approximately 30% in the current six months, primarily due to selling-off of seasoned apparel inventory and inventory write-downs related to cancelled sales orders.

Gross profit (net revenue less cost of goods sold) decreased approximately $0.7 million to $13.0 million from $13.7 million in the prior year six months, primarily driven by the decrease in gross profit margin described above, partially offset by an increase in licensing revenue.

The increase in licensing revenue was mainly driven by the April 2021 acquisition of the Lori Goldstein brand.

Current nine months cost of goods sold was $5.7 million, compared with $7.8 million for the prior year nine months.

Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) declined from approximately 38% in the prior year nine months to approximately 32% in the current nine months, primarily due to selling-off of seasoned apparel inventory during the earlier portion of 2022 and inventory write-downs related to cancelled sales orders.

Gross profit (net revenue less cost of goods sold) decreased approximately $4.1 million to $16.0 million from $22.1 million in the prior year nine months, primarily driven by the aforementioned decrease in net licensing revenue.

Operating Costs and Expenses

Operating costs and expenses increased approximately $3.5 million from $17.9 million in the prior year six months to $21.4 million in the current six months.

This increase was primarily driven by the combination of (i) costs associated with the Lori Goldstein brand acquired on April 1, 2021 (including a $0.6 million increase in salaries, benefits and employment taxes and $0.6 million of increased trademark amortization expense), (ii) $1.0 million of bonuses awarded to senior management related to the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand, and (iii) higher shipping

and logistics costs, as well as cost increases from other service providers and vendors due to the current inflationary economic environment.

We recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand in the current six months of approximately $20.6 million, which was comprised of $46.2 million of cash proceeds plus the recognition of the fair value of our retained interest in the brand of $19.8 million, less $0.9 million of fees and expenses directly related to the transaction and the derecognition of the brand trademarks previously recorded on our balance sheet of $44.5 million.

Interest and Finance Expense

Interest and finance expense for the current six months was $3.5 million, compared with $1.7 million for the prior year quarter.

This increase was primarily attributable to a higher loss on early extinguishment of debt as a result of the May 31, 2022 repayment of all of our outstanding term loan debt in the current six months compared with a smaller loss on early extinguishment of debt incurred in the prior year six months as a result of the April 14, 2021 term loan debt refinancing.

Income Tax Provision (Benefit)

The estimated annual effective income tax rate for the current six months and the prior year six months was approximately 35% and 25%, respectively, resulting in an income tax provision (benefit) of $3.18 million and $(1.48) million, respectively.

For the current six months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 14%.

For the prior year six months, the federal statutory rate differed from the effective tax rate primarily due to state taxes, which increase 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%.

Net Income (Loss) Attributable to Xcel Brands, Inc.

We had net income of $6.0 million for the current six months, compared with a net loss of $4.1 million for the prior year six months, due to the combination of the factors outlined above.

Operating costs and expenses increased approximately $2.6 million from $27.6 million in the prior year nine months to $30.2 million in the current nine months.

This increase was primarily driven by the combination of (i) costs associated with the Lori Goldstein brand acquired on April 1, 2021 (including salaries, benefits and employment taxes as well as increased trademark amortization expense), (ii) $1.0 million of bonuses awarded to senior management related to the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand, and (iii) higher shipping and logistics costs, as well as cost increases from other service providers and vendors due to the current inflationary economic environment.

Other (Expense) Income

We recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand in the current nine months of approximately $20.6 million, which was comprised of $46.2 million of cash proceeds plus the recognition of the fair value of our retained interest in the brand of $19.8 million, less $0.9 million of fees and expenses directly related to the transaction and the derecognition of the brand trademarks previously recorded on our balance sheet of $44.5 million.

We account for our interest in the ongoing operations of IM Topco, LLC using the equity method of accounting.

We recognized an equity method loss of $0.28 million related to our investment for the current nine months, based on the distribution provisions set forth in the related business venture agreement.

Interest and Finance (Income) Expense

Interest and finance expense for the current nine months was $3.5 million, compared with $2.3 million for the prior year nine months.

This increase was primarily attributable to a higher loss on early extinguishment of debt as a result of the May 31, 2022 repayment of all of our outstanding term loan debt in the current nine months compared with a smaller loss on early extinguishment of debt incurred in the prior year nine months as a result of the April 14, 2021 term loan debt refinancing.

This was partially offset by the fact that we had no interest expense in the current quarter, as all of our outstanding term loan was repaid on May 31, 2022 and we have not incurred any new debt.

Income Tax (Benefit) Provision

The estimated annual effective income tax rate for the current nine months and the prior year nine months was approximately 62% and 26%, respectively, resulting in an income tax provision (benefit) of $1.64 million and $(2.02) million, respectively.

For the current nine months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 41%.

For the prior year nine months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 5%.

Net (loss) Income Attributable to Xcel Brands, Inc.

We had net income of $2.0 million for the current nine months, compared with a net loss of $5.2 million for the prior year nine months, due to the combination of the factors outlined above.

Non-GAAP Net (Loss) Income, Non-GAAP Diluted EPS, and Adjusted EBITDA

We had a non-GAAP net loss of approximately $5.5 million, or $0.28 per diluted share, for the current six months and a non-GAAP net loss of $1.6 million, or $0.09 per diluted share, for the prior year six months.

We had Adjusted EBITDA of approximately $(3.7) million for the current six months, compared with approximately $(0.0) million for the prior year six months.

We had a non-GAAP net loss of approximately $8.8 million, or $0.45 per diluted share, for the current nine months and a non-GAAP net loss of $1.6 million, or $0.08 per diluted share, for the prior year nine months.

We had Adjusted EBITDA of approximately $(6.6) million for the current nine months, compared with approximately $1.0 million for the prior year nine months.

The following table is a reconciliation of net income (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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Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

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The following table is a reconciliation of diluted earnings (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 earnings (loss) per share

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

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Non-GAAP weighted average diluted shares

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

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

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)

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Depreciation and amortization

Proportional share of trademark amortization of equity method investee

Interest and finance expense

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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, 2022 and December 31, 2021, our cash and cash equivalents were approximately $10.9 million and $4.5 million, respectively.

As of September 30, 2022 and December 31, 2021, our cash and cash equivalents were approximately $8.4 million and $4.5 million, respectively.

Restricted cash at December 31, 2021 was approximately $0.7 million, and consisted of cash deposited as collateral for an irrevocable standby letter of credit associated with the lease of our corporate office and operating facility.

There was no restricted cash at June 30, 2022, as the aforementioned letter of credit had expired and was not renewed.

There was no restricted cash at September 30, 2022, as the aforementioned letter of credit had expired and was not renewed.

We expect that existing cash and operating cash flows will be adequate to meet our operating 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 $16.9 million and $7.9 million as of June 30, 2022 and December 31, 2021, respectively.

This increase in working capital was primarily attributable to the net proceeds received from the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand to WHP, partially offset by the full repayment of all of our term loan debt.

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 $13.7 million and $7.9 million as of September 30, 2022 and

December 31, 2021, respectively.

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 $8.72 million in the current six months, compared with approximately $5.74 million in the prior year quarter.

The current six months cash used in operating activities was primarily attributable to the combination of the net income of $5.45 million plus non-cash items of approximately $(12.51) million and the net change in operating assets and liabilities of approximately $(1.66) million.

Net cash used in operating activities was approximately $11.03 million in the current nine months, compared with approximately $5.53 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 income of $1.02 million plus non-cash items of approximately $(11.30) million and the net change in operating assets and liabilities of approximately $(0.75) million.

Non-cash items were primarily comprised of a $(20.61) million net gain on the sale of the assets of the Isaac Mizrahi brand, $5.45 million of depreciation and amortization, $0.57 million of stock-based compensation, a $2.32 million loss on extinguishment of debt, and $0.36 million of deferred taxes.

The net change in operating assets and liabilities was primarily comprised of an increase in accounts receivable of $(1.74) million, an increase in accounts payable, accrued expenses, and other liabilities of $0.55 million, a decrease in other liabilities of $(0.22) million, and changes in lease-related assets and liabilities of $(0.16) million.

The prior year six months cash used in operating activities was primarily attributable to the combination of the net loss of $(4.44) million plus non-cash items of approximately $3.23 million and the net change in operating assets and liabilities of approximately $(4.53) million.

Non-cash items 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, a $0.82 million 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, and changes in lease-related assets and liabilities of $(0.23) million.

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

The net change in operating assets and liabilities was primarily comprised of an increase in inventory of $(0.51) million, decreases in various operating liabilities of $(0.80) million, and changes in lease-related assets and liabilities of $(0.20) million, partially offset by a decrease in accounts receivable of $0.75 million.

The prior year 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 $4.85 million and the net change in operating assets and liabilities of approximately $(4.58) 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 $0.82 million 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 $(2.19) million.

Investing Activities

Net cash provided by investing activities for the current six months was approximately $45.32 million, and was almost entirely attributable to $45.41 million of net proceeds from the sale of a majority interest in the Isaac Mizrahi brand to WHP.

Net cash used in investing activities for the prior year 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, capital expenditures relating to the fit-out and furnishing of our Judith Ripka fine jewelry retail store (which opened in the second quarter of 2021 and was subsequently closed in the first quarter of 2022).

Net cash provided by investing activities for the current nine months was approximately $45.17 million, and was predominantly attributable to $45.41 million of net proceeds from the sale of a majority interest in the Isaac Mizrahi brand to WHP, partially offset by approximately $0.24 million of capital expenditures.

Net cash used in investing activities for the prior year 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, capital expenditures relating to the fit-out and furnishing of our Judith Ripka fine jewelry retail store (which opened in the second quarter of 2021 and was subsequently closed in the first quarter of 2022).

Financing Activities

Net cash used in financing activities for the current six months was approximately $30.95 million, which mainly consisted of $29.00 million of repayments of our term loan debt, and, to a lesser extent, $1.51 million of prepayment and other fees associated with the extinguishment of debt, as well as $0.44 million of shares repurchased related to withholding taxes on vested restricted stock.

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

Partially offsetting these proceeds were $(17.38) million paid on the balance of term loan debt, and $(1.50) million of various fees and finance costs paid in connection with the April 2021 refinancing of term loan debt.

Net cash used in financing activities for the current nine months was approximately $30.95 million, which mainly consisted of $29.00 million of repayments of our term loan debt, and, to a lesser extent, $1.51 million of prepayment and other fees associated with the extinguishment of debt, as well as $0.44 million of shares repurchased related to withholding taxes on vested restricted stock.

Net cash provided by financing activities for the prior year nine months was approximately $8.93 million, and was primarily attributable to $25.0 million of proceeds from term loan debt entered into on April 14, 2021, as well as $2.5 million of proceeds drawn from a 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 previous term loan debt, $(0.37) million of fees paid to the previous debtholders in connection with the extinguishment of previous term loan debt, $(1.20) million of deferred

finance costs paid in connection with the April 14, 2021 term loan, and $(1.25) million of scheduled principal payments made under the April 14, 2021 term loan.

Other Factors

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We continue to work towards expanding our wholesale and e-commerce businesses, and complement these operations with our licensing business.

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.

However, the impacts of the ongoing COVID-19 pandemic are broad reaching and have had an impact on our licensing and wholesale businesses.

This global pandemic has impacted our supply chain as most of the Company’s products are manufactured in China, Thailand, and other places around the world affected by this event.

Temporary factory closures and the pace of workers returning to work have impacted contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner.

The pandemic has also impacted and, from time to time, could continue to impact, distribution and logistics providers' ability to operate in the normal course of business.

Further, the initial onset of the pandemic in 2020 resulted in a sudden decrease in sales for many of the Company’s products, from which the Company has yet to fully recover.

The initial onset of the pandemic resulted in order cancellations and a decrease in accounts receivable collections.

Also, the global pandemic has affected the financial health of certain of our customers,

and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, Stein Mart, and Century 21, from which we had an aggregate of approximately $1.5 million of accounts receivable due at June 30, 2022.

As a result, we continue to recognize an allowance for doubtful accounts of approximately $1.1 million as of June 30, 2022, 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.

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 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 2022 results.

However, as of the date of this filing, we expect our results for a significant portion of 2022 to be affected.

In addition, we continue to seek new opportunities, including expansion through interactive television, live streaming, our design, production and supply chain platform, additional domestic and international licensing arrangements, and acquiring additional brands.

However, the impacts of the ongoing COVID-19 pandemic (including actions taken by national, state, and local governments in response to COVID-19) has negatively impacted the U.S.

and global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets.

More specifically, COVID-19 has had, and continues to have, a significant negative impact on our business.

The initial onset of the pandemic in 2020 resulted in a sudden decrease in sales for many of the Company’s products, from which we have yet to fully recover.

The global pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers;

as a result, we continue to recognize an allowance for doubtful accounts of approximately $1.3 million as of September 30, 2022, 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.

Due to the ongoing COVID-19 pandemic, there is significant uncertainty surrounding the Company’s future results of operations and cash flows.

Continued impacts of the pandemic could materially adversely affect the Company’s near-term and long-term revenues, earnings, liquidity, and cash flows.

In addition, the global shipping industry continues to face 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 for us and our licensees.

Such higher costs are currently expected to continue for a significant portion of 2022.

Such higher costs are currently expected to continue for the remainder of 2022, if not longer.

Further, the cost of raw materials, labor, manufacturing, energy, fuel, shipping and logistics, and other inputs related to the production and distribution of our products have increased and may continue to increase unexpectedly.

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Please refer to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 15, 2022, for a discussion of our critical accounting policies and estimates.

During the three and six months ended June 30, 2022, there were no material changes to our accounting policies.

During the three and nine months ended September 30, 2022, 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