What changed in this filing

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Item 1A. Risk Factors

2023-04-17 compared with 2022-04-15 · 210 added, 166 removed, 314 unchanged (54% of the section changed)

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Our business is subject to a number of risks, which include, but are not limited to, risks related to:

● our limited amount of cash and our significant debt obligations;

● our limited amount of cash;

● our concentration of revenue with a limited number of licensees;

● restrictions related to certain key licensing agreements;

● our dependency on our Chief Executive Officer and on the promotional services of certain key spokespersons;

● conducting operations through joint ventures and our dependence on the joint ventures;

● our dependency upon our spokespersons;

● the operational performance and/or strategic initiatives of our licensees and retail partners;

● continued market acceptance of our brands and products;

● the use of social media and influencers to market brands and products;

● changing consumer preferences and shifting industry trends;

● execution of our growth strategy, including the acquisition of new brands;

● our dependency on our Chief Executive Officer and other key executives;

● intense competition in the apparel, fashion, and jewelry industries, and within our licensees’ markets;

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● management’s significant control over matters requiring shareholder approval;

● the fact that our common stock has historically been thinly traded;

● potential difficulty in liquidating an investment in shares of our common stock;

● the potential impact of SEC “penny stock” rules on trading of our shares of our common stock;

● declines of and volatility in the market price of our common stock;

● the potential issuance of a substantial number of shares of common stock upon exercise of warrants and options and to satisfy and earn-out obligation if certain conditions are met;

● the potential issuance of a substantial number of shares of common stock upon exercise of warrants and options;

● the potential impact of Rule 144 restrictions on our shares of common stock as a former shell company;

● our intent to not pay any cash dividends for the foreseeable future;

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● a pandemic or outbreak of disease or similar public health threat, or fear of such an event;

● supply chain disruptions;

● the Ukrainian-Russian conflict;

● a decline in general economic conditions or consumer spending levels;

● inflation and/or a potential recession;

● extreme or unseasonable weather conditions;

● potential impairment of our trademarks and other intangible assets under accounting guidelines;

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● limitations on liabilities of our directors and executive officers.

● the potential impact of SEC “penny stock” rules on trading of our shares of our common stock;

● the potential impact of Rule 144 restrictions on our shares of common stock as a former shell company.

Risks Related to Our Business

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Such additional financing may not be available on satisfactory terms or it may not be available when needed, or at all.

As of December 31, 2021, we had cash and cash equivalents of approximately $4.5 million.

Although we believe that our existing cash and our anticipated cash flow from operations will be sufficient to sustain our operations at our current expense levels for at least 12 months subsequent to the date of the filing of this Annual Report on Form 10-K, we may require significant additional cash to satisfy our working capital requirements, expand our operations or acquire additional brands, although historically we have funded acquisitions with debt and equity financing.

As of December 31, 2022, we had cash and cash equivalents of approximately $4.6 million, and during the year ended December 31, 2022, we used $14.2 million of cash in operating activities.

Although we believe that our existing cash and our anticipated cash flow from operations will be sufficient to sustain our operations at our current expense levels for at least twelve months subsequent to the date of the filing of this Annual Report on Form 10-K, we may require significant additional cash to satisfy our working capital requirements, expand our operations or acquire and develop additional brands.

Our inability to finance our growth, either internally through our operations or externally, may limit our growth potential and our ability to execute our business strategy successfully.

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In addition, the new securities may have rights senior to those of our common stock.

Our significant debt obligations could impair our liquidity and financial condition, and in the event we are unable to meet our debt obligations, we could lose ownership of our trademarks and/or other assets.

On December 30, 2021, we entered into a loan and security agreement with FEAC Agent LLC and the financial institutions party thereto.

We currently have an outstanding balance of $29.0 million under this credit facility.

We may also assume or incur additional debt, including secured debt, in the future in connection with, or to fund, future acquisitions or for other operating needs.

Our debt obligations:

● could impair our liquidity;

● could make it more difficult for us to satisfy our other obligations;

● are secured by substantially all of our assets;

● require us to dedicate a substantial portion of our cash flow to payments on our debt obligations, which reduces the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements;

● could impede us from obtaining additional financing in the future for working capital, capital expenditures, acquisitions and general corporate purposes;

● impose restrictions on us with respect to the use of our available cash, including in connection with future transactions;

● could limit our ability to execute on our acquisition strategy;

● make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility to plan for, or react to, changes in our sales and licensing channels.

In the event that we fail in the future to make any required payment under the agreements governing our indebtedness or if we fail to comply with the financial and operating covenants contained in those agreements, we would be in default with respect to that indebtedness and the lenders could declare such indebtedness to be immediately due and payable.

In the past, we have received waivers and/or amendments from prior lenders under the various loan agreements for compliance

with certain financial covenants.

The impact the COVID-19 pandemic could continue to have on our operating results could result in our inability to comply with certain debt covenants and require the lenders under the loan agreement to waive compliance with or agree to amend any such covenant to avoid a default.

There can be no assurance that the lenders will amend or grant waivers to the loan agreement to adjust or eliminate covenants or waive our non-compliance or breach of a financial or other covenant in the future.

Termination of any of the Qurate Agreements would also result in a default under our loan agreement.

A debt default could significantly diminish the market value and marketability of our common stock and could result in the acceleration of the payment obligations under all or a portion of our indebtedness, or a renegotiation of our loan agreement with more onerous terms and/or additional equity dilution.

Since substantially all of our debt obligations are secured by our assets, upon a default, our lenders may be able to foreclose on our assets.

A substantial portion of our net licensing revenue is concentrated with a limited number of licensees such that the loss of any of such licensees could decrease our revenue and impair our cash flows.

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Qurate is not required to devote any minimum amount of programming time for any of our brands.

While our business with Qurate has grown since the IsaacMizrahiLIVE brand was launched through December 31, 2017, our 2018 Qurate revenues were flat compared to 2017, and Qurate revenues declined from 2018 to 2020.

Although Qurate revenues increased from 2020 to 2021, there can be no guarantee that our Qurate revenues will continue to grow in the future or that they will not decline.

While our business with Qurate has grown since we first launched one of our brands on QVC, our Qurate revenues declined from 2021 to 2022, as a result of the May 31, 2022 sale of a controlling interest of the Isaac Mizrachi brand through the sale of a 70% interest in IM Topco, LLC.

There can be no guarantee that our Qurate revenues will grow in the future or that they will not decline further.

Additionally, there can be no assurance that our other licensees will be able to generate sales of products under our brands or grow their existing sales of products under our brands, and if they do generate sales, there is no guarantee that they will not cause a decline in sales of products being sold through Qurate.

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A breach of any of these agreements could also result in Qurate seeking monetary damages, seeking an injunction against us and our other licensees, reducing the programming time allocated to our brands, and/or terminating the respective agreement, which could have a material adverse effect on our net income and cash flows.

Termination of any one of our agreements with Qurate would result in a default under our credit facility and would also enable our creditors to foreclose on our assets, including our membership interests in our subsidiaries, which combined currently hold all of our trademarks and other intangible assets.

We are dependent upon the promotional services of Isaac Mizrahi as they relate to the Mizrahi brands.

If we lose the services of Isaac Mizrahi, we may not be able to fully comply with the terms of our agreement with Qurate, and it may result in significant reductions in the value of the Mizrahi brands and our prospects, revenues, and cash flows.

Isaac Mizrahi is a key individual in our continued promotion of the Mizrahi brands and the principal salesperson of the

Mizrahi brands on Qurate.

Failure of Isaac Mizrahi to provide services to Qurate could result in a termination of the IM Qurate Agreement, which could trigger an event of default under our credit facility.

Although we have entered into the IM employment agreement with Mr.

Mizrahi and he is a significant stockholder of Xcel, there is no guarantee that we will not lose his services.

To the extent that any of Mr.

Mizrahi’s services become unavailable to us, we will likely need to find a replacement for Mr.

Mizrahi to promote the Mizrahi brands.

Competition for skilled designers and high-profile brand promoters is intense, and compensation levels may be high, and there is no guarantee that we would be able to identify and attract a qualified replacement, or if Mr.

Mizrahi’s services are not available to us, that we would be able to promote the Mizrahi brands as well as we are able to with Mr.

This could significantly affect the value of the Mizrahi brands and our ability to market the brands, and could impede our ability to fully implement our business plan and future growth strategy, which would harm our business and prospects.

Additionally, while we acquired all trademarks, image, and likeness of Isaac Mizrahi, pursuant to the acquisition of the Mizrahi business and his employment agreement, Mr.

Mizrahi has retained certain rights to participate in outside business activities, including hosting and appearing in television shows, movies and theater productions, and writing and publishing books and other publications.

Mizrahi’s participation in these personal business ventures could limit his availability to us and affect his ability to perform under this employment agreement.

Finally, there is no guarantee that Mr.

Mizrahi will not take an action that consumers view as negative, which may harm the Mizrahi brands as well as our business and prospects.

We are dependent upon the promotional services of Lori Goldstein as they relate to the Lori Goldstein brands.

We have recently begun to conduct certain of our operations through a joint venture.

Joint ventures could fail to meet our expectations or cease to deliver anticipated benefits.

There could also be disagreements with our joint venture partners that could adversely affect our interest a joint venture.

In May 2022, we sold a majority interest in Isaac Mizrachi brand through the sale of a 70% interest in IM Topco, LLC.

We may enter into additional joint ventures in the future.

Our operating results are, in part, dependent upon the performance of IM Topco, LLC and, in the future, could also be dependent in part upon the performance of future joint ventures.

Joint ventures involve numerous risks, and could fail to meet our initial or ongoing expectations.

We provide certain services to IM Topco, LLC and may provide services to future joint ventures, but we do not control the day-to-day operations of IM Topco, LLC and may not control the day-to-day operations of future joint ventures.

The anticipated synergies or other benefits of a joint venture may fail to materialize due to changing business conditions or changes in our business priorities or those of our joint venture partners.

Our joint venture partners, as well as any future partners, may have interests that are different from our interests that may result in conflicting views as to the conduct of the business or future direction of the joint venture.

In the event that we have a disagreement with a joint venture partner with respect to a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture, we may not be able to resolve such disagreement in our favor.

Any such disagreement could have a material adverse effect on our interest in the joint venture, the business of the joint venture, or the portion of our growth strategy related to the joint venture.

We are dependent on our joint ventures to provide timely and accurate information about their sales and operations, which we rely upon to effectively manage their brands.

IM Topco, LLC is, and we expect future joint ventures will be, contractually obligated to provide timely and accurate information regarding their sales and operations.

We rely on this information to prepare our consolidated financial statements.

Any delay in reporting reduces our visibility into the results of operations for IM Topco, LLC and any future joint ventures, and our inability to collect timely and accurate information may affect our ability to timely complete our financial statements and timely file reports and other information with the SEC and may adversely affect our business and results of operations.

We are dependent upon the promotional services of Lori Goldstein and our other spokespersons as they relate to our respective brands.

If we lose the services of Lori Goldstein, we may not be able to fully comply with the terms of our agreement with Qurate, and it may result in significant reductions in the value of the LOGO by Lori Goldstein brand and our prospects, revenues, and cash flows.

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Goldstein will not take an action that consumers view as negative, which may harm the LOGO by Lori Goldstein brand as well as our business and prospects.

We are dependent upon our Chief Executive Officer and other key executives.

If we lose the services of these individuals we may not be able to fully implement our business plan and future growth strategy, which would harm our business and prospects.

Our success is largely dependent upon the efforts of Robert W.

D’Loren, our Chief Executive Officer and Chairman of our board of directors.

Our continued success is largely dependent upon his continued efforts and those of our other key executives.

Although we entered into an employment agreement with Mr.

D’Loren, as well as employment agreements with other executives and key employees, including Isaac Mizrahi and Lori Goldstein, such persons can terminate their employment with us at their option, and there is no guarantee that we will not lose the services of our executive officers or key employees.

To the extent that any of their services become unavailable to us, we will be required to hire other qualified executives, and we may not be successful in finding or hiring adequate replacements.

This could impede our ability to fully implement our business plan and future growth strategy, which would harm our business and prospects.

The failure of our licensees to adequately produce, market, source, and sell quality products bearing our brand names in their license categories or to pay their obligations under their license agreements could result in a decline in our results of operations and impact our ability to service our debt obligations.

We will also be dependent upon the services of our other spokespersons and our joint venture partner’s spokesperson to promote our other brands and the brands of our joint venture.

The loss of a spokesperson or a joint ventures’ spokesperson could significantly affect the value of the related brand or our related joint venture interest and our or our related joint venture’s ability to market the brand which would harm our business and prospects.

Our revenues are dependent on payments made to us under our licensing agreements.

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Moreover, during the terms of the license agreements, we are substantially dependent upon the efforts and abilities of our licensees to maintain the quality and marketability of the products bearing our trademarks, as their failure to do so could materially tarnish our brands, thereby harming our future growth and prospects.

In addition, the failure of our licensees to meet their production, manufacturing, sourcing, and distribution requirements or actively market the branded licensed products could cause a decline in their sales and potentially decrease the amount of royalty payments (over and above the guaranteed minimums) due to us.

minimums) due to us.

A weak economy or softness in the apparel and retail sectors could exacerbate this risk.

This, in turn, could decrease our potential revenues.

The concurrent failure by several of our material licensees to meet their financial obligations to us could jeopardize our ability to meet the financial covenant requirements in connection with our debt facility or facilities.

Further, such failure may impact our ability to make required payments with respect to such indebtedness.

The failure to satisfy our financial covenant requirements or to make such required payments would give our lenders the right to accelerate all obligations under our debt facility or facilities and foreclose on our trademarks, license agreements, and other related assets securing such notes.

If our customers change their buying patterns, request additional allowances, develop their own private label brands or enter into agreements with national brand manufacturers to sell their products on an exclusive basis, our sales to these customers could be materially adversely affected.

Our customers’ buying patterns, as well as the need to provide additional allowances to customers, could have a material adverse effect on our business, results of operations and financial condition.

The concurrent failure by several of our material licensees to meet their financial obligations to us could adversely affect our business, results of operations, and cash flows.

We are subject to the risks associated with our Judith Ripka brand’s wholesale and direct-to-consumer model.

We commenced e-commerce sales and wholesale distribution of our Judith Ripka brand in 2017 and 2018, respectively.

In 2019, we completed the transition of our non-interactive television operations of our Judith Ripka brand from a licensing model to a wholesale and direct-to-consumer model.

We opened a brick-and-mortar retail store for the Judith Ripka brand in 2021, which we subsequently closed in 2022.

As a result, we do not have a well-established history of conducting these operations.

We produce product for our Judith Ripka brands to hold as inventory for sales through our website and wholesale accounts.

If we misjudge the market for our Judith Ripka products, we may be faced with significant excess inventory for some products and missed opportunities for other products.

In addition, weak sales and mark downs by our retailers or our need to liquidate excess inventory could adversely affect our results of operations.

If we are not successful in managing our inventory balances, our cash flows and operating results may be adversely affected.

If our retail customers change their buying patterns, request additional allowances, develop their own private label brands or enter into agreements with national brand manufacturers to sell their products on an exclusive basis, our sales to these customers could be materially adversely affected.

Our retail customers’ buying patterns, as well as the need to provide additional allowances to customers, could have a material adverse effect on our business, results of operations and financial condition.

Customers’ strategic initiatives, including developing their own private labels brands, selling national brands on an exclusive basis, reducing the number of vendors they purchase from, or reducing the floor space dedicated to our brands could also impact our sales to these customers.

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To the extent that any key customer reduces the number of its vendors or allocates less floor space for our products and, as a result, reduces or eliminates purchases from us, there could be a material adverse effect on us.

Our business is dependent on continued market acceptance of our brands and any future brands we acquire and the products of our licensees.

Although certain of our licensees guarantee minimum net sales and minimum royalties to us, some of our licensees are not yet selling licensed products or currently have limited distribution of licensed products, and a failure of our brands or of products bearing our brands to achieve or maintain broad market acceptance could cause a reduction of our licensing revenues and could further cause existing licensees not to renew their agreements.

Such failure could also cause the devaluation of our trademarks, which are our primary assets, making it more difficult for us to renew our current licenses upon their expiration or enter into new or additional licenses for our trademarks.

In addition, if such devaluation of our trademarks were to occur, a material impairment in the carrying value of one or more of our trademarks could also occur and be charged as an expense to our operating results.

Continued market acceptance of our brands and our licensees’ products, as well as market acceptance of any future products bearing any future brands we may acquire, is subject to a high degree of uncertainty and constantly changing consumer tastes, preferences, and purchasing patterns.

Our business is dependent on continued market acceptance of our brands, our joint venture brands, and any future brands we may acquire directly or through a joint venture, and the products of our licensees.

Although certain of our licensees guarantee minimum net sales and minimum royalties to us, some of our licensees are not yet selling licensed products or currently have limited distribution of licensed products, and a failure of our brands or of our joint venture brands or of products bearing our brands or our joint venture brands to achieve or maintain broad market acceptance could cause a reduction of our licensing revenues, diminish the value of and generally affect the operating results of our joint ventures, and could further cause existing licensees not to renew their agreements.

Such failure could also cause the devaluation of our trademarks, which are our primary assets and the primary assets of our joint ventures, making it more difficult for us or our joint ventures to renew our current licenses upon their expiration or enter into new or additional licenses for such trademarks.

In addition, if such devaluation of our trademarks were to occur, a material impairment in the carrying value of one or more of our trademarks, which had an aggregate carrying value of $47.7 million as of December 31, 2022, could also occur and be charged as an expense to our operating results.

Continued market acceptance of our brands, our joint ventures’ brands, and our licensees’ products, as well as market acceptance of any future products bearing any future brands we may acquire, is subject to a high degree of uncertainty and constantly changing consumer tastes, preferences, and purchasing patterns.

Creating and maintaining market acceptance of our licensees’ products and creating market acceptance of new products and categories of products bearing our marks may require substantial marketing efforts, which may, from time to time, also include our expenditure of significant additional funds to keep pace with changing consumer demands, which funds may or may not be available on a timely basis, on acceptable terms or at all.

Additional marketing efforts and expenditures may not, however, result in either increased market acceptance of, or additional licenses for, our trademarks or increased market acceptance, or sales, of our licensees’ products.

Furthermore, we do not actually design or manufacture all of the products

bearing our marks, and therefore, have less control over such products’ quality and design than a traditional product manufacturer might have.

The failure of our licensees to maintain the quality of their products could harm the reputation and marketability of our brands, which would adversely impact our business.

Negative claims or publicity regarding Xcel, our brands or our products could adversely affect our reputation and sales regardless of whether such claims are accurate.

Furthermore, we do not actually design or manufacture all of the products bearing our marks, and therefore, have less control over such products’ quality and design than a traditional product manufacturer might have.

The failure of our

licensees and joint ventures to maintain the quality of their products could harm the reputation and marketability of our brands and our joint ventures’ brands, which would adversely impact our business and the business of our joint ventures.

Negative claims or publicity regarding Xcel, IM Topco, LLC, any future joint ventures, our or their brands, or products could adversely affect our reputation and sales regardless of whether such claims are accurate.

Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims.

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Our businesses may be similarly affected in the future.

Use of social media and influencers may materially and adversely affect our reputation or subject us to fines or other penalties.

We use and our joint ventures may use third-party social media platforms as, among other things, marketing tools.

We also maintain, and our joint ventures may maintain, relationships with many social media influencers and engage in sponsorship initiatives.

As existing e-commerce and social media platforms continue to rapidly evolve and new platforms develop, we and our joint ventures must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms.

If we or our joint ventures are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we or our joint ventures use change their policies or algorithms, we or our joint ventures may not be able to fully optimize such platforms, and our and their ability to maintain and acquire customers and our financial condition may suffer.

Furthermore, as laws and regulations and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and operating results.

In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us and our joint ventures to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations.

For example, in some cases, the Federal Trade Commission has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser.

We do not prescribe what our influencers post, and if we were held responsible for the content of their posts or their actions, we could be fined or forced to alter our practices, which could have an adverse impact on our business.

Negative commentary regarding us, our joint ventures or our or their products or influencers and other third parties who are affiliated with us or our joint ventures may also be posted on social media platforms and may be adverse to our or our joint ventures’ reputation or business.

Influencers with whom we or our joint ventures maintain relationships could engage in behavior or use their platforms to communicate directly with our customers in a manner that reflects poorly on our or our joint ventures’ brand and may be attributed to us or our joint ventures or otherwise adversely affect us or our joint ventures.

It is not possible to prevent such behavior, and the precautions we and our joint ventures take to detect this activity may not be effective in all cases.

Our and our joint ventures’ target consumers often value readily available information and often act on such information without further investigation and without regard to its accuracy.

The harm may be immediate, without affording us and our joint ventures an opportunity for redress or correction.

If we are unable to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely manner, our business, financial condition, and operating results could be harmed.

Our success largely depends on our ability to consistently gauge tastes and trends and provide a diverse and balanced assortment of merchandise that satisfies customer demands in a timely manner.

Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in demand for our products or for products of our competitors, our failure to accurately forecast acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions, and weakening of economic conditions or consumer

confidence in future economic conditions.

We typically enter into agreements to manufacture and purchase our merchandise in advance of the applicable selling season and our failure to anticipate, identify or react appropriately, or in a timely manner to changes in customer preferences, tastes and trends or economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability and have a material adverse effect on our business, financial condition, and operating results.

Failure to respond to changing customer preferences and fashion trends could also negatively impact the image of our brands with our customers and result in diminished brand loyalty.

If major department, mass merchant, and specialty store chains consolidate, continue to close stores, or cease to do business, our business could be negatively affected.

We sell our products through major department, mass merchant, and specialty store chains.

Continued consolidation in the retail industry, as well as store closing or retailers ceasing to do business, could negatively impact our business.

Various customers of ours have encountered reductions in operations including Macy’s and Kohl’s, as well as other store chains that have reduced the number of stores they operated, Lord & Taylor, which closed all of its stores, and JC Penney and Christopher & Banks, each of which filed for bankruptcy.

Store closings could adversely affect our business and results of operations.

Consolidation could reduce the number of our customers and potential customers.

With increased consolidation in the retail industry, we are increasingly dependent on retailers whose bargaining strength may increase and whose share of our business may grow.

As a result, we may face greater pressure from these customers to provide more favorable terms, including increased support of their retail margins.

As purchasing decisions become more centralized, the risks from consolidation increase.

A store group could decide to close stores, decrease the amount of product purchased from us, modify the amount of floor space allocated to apparel in general or to our products specifically, or focus on promoting private label products or national brand products for which it has exclusive rights rather than promoting our products.

Customers are also concentrating purchases among a narrowing group of vendors.

These types of decisions by our key customers could adversely affect our business.

We expect to achieve growth based upon our plans to expand our business under our existing brands.

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Our growth may be limited by a number of factors including increased competition among branded products at brick-and-mortar, internet and interactive retailers, decreased airtime on QVC, competition for retail licenses and brand acquisitions, and insufficient capitalization for future transactions.