What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-04-17 compared with 2022-04-15 · 175 added, 232 removed, 151 unchanged (73% 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.

Xcel owns the Isaac Mizrahi, LOGO by Lori Goldstein, Judith Ripka, Halston, C Wonder, and Longaberger brands, pioneering a true omni-channel sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, brick-and-mortar retail,wholesale, and e-commerce channels.

Currently, Xcel’s brand portfolio consists of the LOGO by Lori Goldstein Brand, the Halston Brand, the Ripka Brand, the C Wonder Brand, the Longaberger Brand, the Isaac Mizrahi Brand, and other proprietary brands.

● The Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand are wholly owned by the Company.

● We manage the Longaberger Brand through our 50% ownership interest in Longaberger Licensing, LLC.

● We manage the Q Optix business through our 50% ownership interest in Q Optix, LLC.

● The Company wholly owned and managed the Isaac Mizrahi Brand through May 31, 2022.

On May 31, 2022, we sold a majority interest in the brand to a third party, but retained a 30% noncontrolling interest in the brand and continue to participate in the operations of the business.

Xcel is pioneering a true omni-channel sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels.

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

● expanding and leveraging our live-streaming platform.

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

We plan to leverage this technology across our other brands.

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

● wholesale sales and/or licensing our brands for sale through interactive television (i.e., QVC, HSN, The Shopping Channel, TVSN, etc.);

● Distribution and/or licensing of our brands for sale through interactive television (i.e., QVC, HSN, The Shopping Channel, TVSN, CJO, JTV, etc.);

● wholesale distribution through joint ventures or licensing of our brands to retailers that sell to the end consumer;

● direct-to-consumer distribution of our brands through e-commerce and live streaming;

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

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

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

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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 sales;

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

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

● our deep knowledge, expertise, and proprietary technology in live streaming;

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

● our significant media and internet presence and distribution.

Our vision is intended to reimagine shopping, entertainment, and social media as one thing.

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Our strong relationships with leading retailers, interactive television companies, and streaming networks enable us to reach consumers in over 200 million homes worldwide and hundreds of millions of social media followers.

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

We focus on our core competencies of live streaming, marking, design, integrated technologies, production and supply chain platform, and brand development.

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

We focus on our core competencies of live streaming, marketing, design, integrated technologies, production and joint venture supply chain platform, and brand development.

We believe that we offer a 360-degree solution to our retail partners that addresses many of the challenges facing the retail industry today.

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Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

While our significant accounting policies and estimates are described in more detail in the notes to our consolidated financial statements, our most critical accounting policies and estimates, discussed below, pertain to revenue recognition, trademarks and other intangible assets, leases, and income taxes.

These include but are not limited to the estimation of the useful lives of our trademarks, the estimation of the future cash flows related to our trademarks, and the estimation of our incremental borrowing rate (for purposes of accounting for leases).

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(i) Contracts for which, based on experience, royalties are expected to exceed any applicable minimum guaranteed payments, and to which an output-based measure of progress based on the “right to invoice” practical expedient is applied because the royalties due for each period correlate directly with the value to the customer of our performance in each period (this approach is identified as “View A” by the FASB Revenue Recognition Transition Resource Group, “TRG”);

(ii) Contracts for which revenue is recognized based on minimum guaranteed payments using an appropriate measure of progress, in which minimum guaranteed payments are straight-lined over the term of the contract and recognized ratably based on the passage of time, and to which the royalty recognition constraint to the sales-based royalties in excess of minimum guaranteed is applied and such sales-based royalties are recognized to distinct period

only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG).

Wholesale Sales

We generate revenue through sale of branded jewelry and apparel to both domestic and international customers who, in turn, sell the products to their consumers.

We recognize revenue when performance obligations identified under the terms of contracts with our customers are satisfied, which occurs upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale.

We recognize revenue within net sales in the accompanying consolidated statements of operations when performance obligations identified under the terms of contracts with our customers are satisfied, which occurs upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale.

Shipping to customers is accounted for as a fulfillment activity and is recorded within other selling, general and administrative expenses.

Direct to Consumer Sales

Our revenue associated with our e-commerce jewelry operations and the Longaberger brand is recognized at a point in time when product is shipped to the customer.

Our revenue associated with our e-commerce jewelry operations and the Longaberger brand is recognized within net sales in the accompanying consolidated statements of operations at the point in time when product is shipped to the customer.

Shipping to customers is accounted for as a fulfillment activity and is recorded within other selling, general and administrative expenses.

Revenue associated with our fine jewelry brick-and-mortar retail store is recognized at the point of sale.

Revenue associated with our fine jewelry brick-and-mortar retail store is recognized within net sales in the accompanying consolidated statements of operations at the point of sale.

Trademarks and Other Intangible Assets

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We estimate the useful lives of our intangible assets based principally on our expected use and strategic plans for each asset, our own historical experience with similar assets, and our expectations related to demand, competition, and other economic factors.

We perform our annual quantitative analysis of our indefinite-lived intangible asset as of December 31 each year.

There were no impairment charges recorded for our indefinite-lived intangible asset for the years ended December 31, 2021 and 2020.

During the year ended December 31, 2020, delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the Ripka Brand, primarily as a result of the novel coronavirus disease pandemic, indicated that the carrying value of the Ripka Brand trademarks may not be recoverable.

Therefore, we performed an impairment test of the related finite-lived intangible assets, and as a result, recorded a $13.0 million impairment charge related to the Ripka Brand trademarks.

No other impairment charges were recorded for intangible assets for the years ended December 31, 2021 and 2020.

Indefinite-Lived Intangible Asset

We test our indefinite-lived intangible asset for recovery in accordance with ASC 820-10-55-3F, which states that the income approach (“Income Approach”) converts future amounts (for example, cash flows) into a single current (that is, discounted) amount.

We tested our indefinite-lived intangible asset for recovery in accordance with ASC 820-10-55-3F, which states that the income approach (“Income Approach”) converts future amounts (for example, cash flows) into a single current (that is, discounted) amount.

When the Income Approach is used, fair value measurement reflects current market expectations about those future amounts.

The Income Approach is based on the present value of future earnings expected to be generated by a business or asset.

Income projections for a future period are discounted at a rate commensurate with the degree of risk associated with future proceeds.

Income projections for a future period are discounted at a rate commensurate with the degree of

risk associated with future proceeds.

A residual or terminal value is also added to the present value of the income to quantify the value of the business beyond the projection period.

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If the carrying amount of such assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the recoverability of the assets.

We also re-evaluate on an annual basis whether events and circumstances continue to support an indefinite useful life.

We also re-evaluated on an annual basis whether events and circumstances continue to support an indefinite useful life.

We performed the annual impairment testing as described above for the year ended December 31, 2021, and concluded that there was no impairment of our indefinite-lived intangible asset.

We subsequently sold our indefinite-lived intangible asset in May 2022 for a gain.

Finite-Lived Intangibles

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If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flows analysis or appraisals.

We determine if an arrangement is a lease at the inception of the arrangement.

At commencement of a lease (i.e., the date on which the lessor makes the underlying asset available for use), we recognize an operating lease right-of-use (“ROU”) asset, representing our right to use the underlying leased asset for the lease term, and a lease liability, representing our obligation to make future lease payments, based on the present value of the remaining lease payments over the lease term.

As generally our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

We may use the implicit rate when readily determinable.

Operating lease ROU assets also include scheduled lease payments made and initial direct costs, and exclude lease incentives and accrued rent.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for operating lease payments is generally recognized on a straight-line basis over the lease term.

For real estate leases, we account for the lease and non-lease components as a single lease component.

Variable lease payments that do not depend on an index or rate (such as real estate taxes and building insurance and lessee’s shares thereof), if any, are excluded from lease payments at lease commencement date for initial measurement.

Subsequent to initial measurement, these variable payments are recognized when the event determining the amount of variable consideration to be paid occurs.

For leases with a term of 12 months or less, we do not recognize lease liabilities and ROU assets, but recognize the lease payments in net income on a straight-line basis over the respective lease terms.

We recognize income from subleases (in which we are the sublessor) on a straight-line basis over the term of the sublease, as a reduction to lease expense.

There were no impairment charges recorded for finite-lived intangible assets for the years ended December 31, 2022 and 2021.

Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.

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Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

ASC Topic 740, “Accounting for Income Taxes” clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.

Tax positions shall initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities.

Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a probability of fifty percent or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

We consider forecasted earnings, future taxable income, and prudent and feasible tax planning strategies in determined the need for these valuation allowances.

With respect to any uncertainties in income taxes recognized in our financial statements, tax positions are initially recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities.

Such tax positions are initially and subsequently measured as the largest amount of tax benefit that has a probability of fifty percent or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 2019 through December 31, 2022.

Equity Method Investments

We account for our investments in entities over which we have the ability to exercise significant influence, but do not control the entity, under the equity method of accounting, and we recognize our proportionate share of income or losses from the entity within other income (expense) in the consolidated statement of operations.

We initially measure our investment in an equity method investee at cost.

In cases where we retain a noncontrolling interest in an investee which we had previously consolidated, we initially measure such retained interest at fair value.

In estimating fair value in such cases, we seek to maximize the use of observable inputs (market data obtained from independent sources)

and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).

Subsequent recognition of an investor’s proportionate share of income or losses of an equity method investee is generally determined based on the investor’s proportional ownership interest.

However, in cases where contractual agreements specify allocation ratios for profits and losses, specified costs and expenses, and/or distributions of cash from operations, that differ from our ownership interest, we use such specified allocation ratios for purposes of determining our share of income or losses from the investee if the agreement is considered substantive.

Recently Issued Accounting Pronouncements

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This ASU will require entities to estimate lifetime expected credit losses for financial instruments, including trade and other receivables, which will result in earlier recognition of credit losses.

In November 2019, the FASB issued ASU No.

2019-10, which, among other things, deferred the application of the new guidance on credit losses for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

We are currently evaluating the new guidance to determine the impact the adoption of this guidance will have on our results of operations, cash flows, and financial condition.

In November 2021, the FASB issued ASU No.

2021-10, “Government Assistance (Topic 823):

Disclosures by Business Entities about Government Assistance.” This ASU will require certain financial statement disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

This guidance is effective for financial statements issued for annual periods beginning after December 15, 2021.

As this ASU only affects financial statement disclosures, the adoption of this guidance will not have any impact on our results of operations, cash flows, or financial condition.

Subsequently, the FASB issued additional guidance in ASU No.

2019-05 in May 2019, ASU No.

2019-10 and 2019-11 in November 2019, ASU No.

2020-02 in February 2020, and ASU No.

2022-02 in March 2022.

Among other things, the additional guidance deferred the application of the new guidance on credit losses for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

We are currently evaluating the new guidance to determine the impact the adoption of this guidance will have on our results of operations, cash flows, and financial condition when it is adopted during the first quarter of 2023.

Recently Adopted Accounting Pronouncements

We adopted ASU No.

2021-10, “Government Assistance (Topic 823):

Disclosures by Business Entities about Government Assistance” effective January 1, 2022.

This ASU requires certain financial statement disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

As this ASU only affects financial statement disclosures, the adoption of this guidance did not have any impact on our results of operations, cash flows, or financial condition.

We adopted ASU No.

2019-12, “Income Taxes (Topic 740):

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The adoption of this new guidance did not have any impact on our results of operations, cash flows, or financial condition.

We adopted ASU No.

2018‑13, “Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” effective January 1, 2020.

This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance did not have any impact on our results of operations, cash flows, or financial condition.

Summary of Operating Results

The consolidated financial statements and related notes included elsewhere in this Form 10-K are as of or for the year ended December 31, 2021 (the “Current Year”), and the year ended December 31, 2020 (the “Prior Year”).

Current Year net revenue increased approximately $8.5 million to $37.9 million from $29.4 million for the Prior Year.

Net licensing revenue increased by $1.6 million in the Current Year to approximately $21.8 million, compared with approximately $20.2 million in the Prior Year.

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

Net sales increased by $6.9 million in the Current Year to $16.1 million, compared with $9.2 million in the Prior Year.

Net sales of jewelry – primarily through wholesale distribution, and to a lesser extent through e-commerce and brick-and-mortar retail – comprised nearly half of the overall increase in net product sales.

Sales of Longaberger branded products through e-commerce, social commerce, and livestreaming grew by over 270% year-over-year.

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 pandemic.

Cost of Goods Sold

Current Year cost of goods sold was $10.7 million, compared with $5.5 million for the Prior Year due to the higher volumes of product sales in the Current Year.

Gross profit (net revenue less cost of goods sold) increased approximately $3.3 million to $27.3 million from $24.0 million in the Prior Year, driven by the combination of the aforementioned increases in both net licensing revenue and net product sales.

Gross profit margin from product sales (net sales less cost of goods sold, divided by net sales) declined from approximately 41% in the Prior Year to approximately 34% in the Current Year, primarily due to increased freight costs and other supply costs to source products.

The consolidated financial statements and related notes included elsewhere in this Form 10-K are as of or for the years ended December 31, 2022 (the “Current Year”), and December 31, 2021 (the “Prior Year”).

Current Year net revenue decreased approximately $12.1 million to $25.8 million from $37.9 million for the Prior Year.

Net licensing revenue decreased by $7.1 million in the Current Year to approximately $14.7 million, compared with approximately $21.8 million in the Prior Year.

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 $5.0 million in the Current Year to approximately $11.1 million, compared with approximately $16.1 million in the Prior Year.

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 and Gross Profit

Current Year cost of goods sold was $8.0 million, compared with $10.7 million for the Prior Year, due to the lower volumes of product sales in the Current Year.

Gross profit (net revenue less cost of goods sold) decreased approximately $9.5 million to $17.8 million from $27.3 million in the Prior Year, primarily driven by the aforementioned decrease in net licensing revenue.

Gross profit margin from product sales (net sales less cost of goods sold, divided by net sales) declined from approximately 34% in the Prior Year to approximately 28% in the Current Year, primarily due to the selling-off of seasoned apparel inventory during the earlier portion of 2022, and inventory write-downs related to cancelled sales orders for the reasons outlined above in the discussion of revenues.

Operating Costs and Expenses

Operating costs and expenses decreased approximately $0.6 million from $40.4 million in the Prior Year to $39.8 million in the Current Year.

This decrease in operating costs and expenses was mainly driven by lower non-cash impairment charges of $13.1 million recorded in the Prior Year (primarily related to the Ripka Brand trademarks) compared with $1.4 million in the Current Year (related to our brick-and-mortar fine jewelry retail store, which we subsequently closed in 2022).

This decrease was partially offset by the combination of (i) a $4.5 million increase in selling, general and administrative expenses, which was primarily attributable to increased marketing, advertising and public relations expenses, and higher warehouse and logistics costs, partially offset by lower bad debt expense;

(ii) a $3.5 million increase in salaries, benefits and employment taxes, which was primarily attributable to the combination of post-COVID normalized salary costs and costs associated with the Lori Goldstein brand;

and (iii) the Prior Year benefit of government assistance received through the Paycheck Protection Program in 2020, for which the Company recognized $1.8 million as a reduction to Prior Year operating costs and expenses.

Also significantly offsetting the aforementioned decrease in operating costs and expenses was a $1.3 million increase in depreciation and amortization expense, primarily related to the Lori Goldstein brand trademarks acquired on April 1, 2021.

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

Operating costs and expenses increased approximately $0.5 million, or approximately 1%, from $39.8 million in the Prior Year to $40.3 million in the Current Year.

This slight increase was primarily driven by the combination of (i) higher shipping and logistics costs, as well as cost increases from other service providers and vendors due to the current inflationary economic environment, and (ii) increased trademark amortization expense, related to the acquisition of the Lori Goldstein brand on April 1, 2021, largely offset by (iii) lower asset impairment charges in the Current Year, and (iv) the elimination of salary and other expenses associated with the Isaac Mizrahi brand after the sale of a majority interest in that brand on May 31, 2022.

Other Income (Expense)

We recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand in the Current Year 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 approximately $1.2 million related to our investment for Current Year, based on the distribution provisions and preferences set forth in the related business venture agreement.

Other income (expense) for the Current Year also includes a $0.9 million gain on the reduction of contingent obligations.

In connection with our 2019 purchase of the Halston Heritage trademarks, we agreed to pay the seller additional consideration of up to an aggregate of $6.0 million, based on royalties earned from 2019 through December 31, 2022.

This potential earn-out was initially recorded as a liability of $0.9 million, based on the difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage trademarks and the total consideration paid.

The final royalty target year ended on December 31, 2022, and the seller ultimately did not earn any additional consideration based on the formula set forth in the related asset purchase agreement.

Interest and Finance Expense

Interest and finance expense for the Current Year was $3.5 million, compared with $3.6 million for the Prior Year.

This increase of approximately $2.4 million was primarily attributable to $1.5 million of losses on the extinguishment of debt recognized in the Current Year as a result of the new term loan financing agreements entered into on April 14, 2021 and December 30, 2021.

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

This slight decrease was primarily attributable to the fact that we had no interest expense from June 1, 2022 through December 31, 2022, as all of our outstanding term loan was repaid on May 31, 2022 and we have not incurred any new debt.

The decrease was partially offset by the higher loss on early extinguishment of debt as a result of the aforementioned May 31, 2022 repayment in the Current Year, compared with losses on extinguishment in the Prior Year.

Income Tax Benefit

The effective income tax benefit rate for the Current Year was approximately 10.0% resulting in a $0.4 million income tax benefit.

During the Current Year, the effective tax rate was impacted by the impact of stock-based compensation, which decreased the effective rate by approximately 5.6%.

During the Current Year, the effective tax rate was primarily attributable to the impacts of stock-based compensation, which decreased the effective rate by approximately 6.1%, and federal tax true-ups, which decreased the effective tax rate by approximately 5.1%.

The effective tax rate was also impacted by recurring permanent differences;

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The effective income tax benefit rate for the Prior Year was approximately 19.3% resulting in a $3.1 million income tax benefit.

During the Prior Year, the effective tax rate was impacted by the vesting of restricted shares of common stock.

The excess tax deficiencies were treated as a discrete item in the determination of the tax provision, and decreased the

effective rate by approximately 1.9%.

The effective tax rate was also impacted by recurring permanent differences, which, based on the amount of income before income taxes compared to the permanent differences, increased the effective rate in 2020 by approximately 4.0%.

During the Prior Year, the effective tax rate was impacted by the impact of stock-based compensation, which decreased the effective rate by approximately 5.6%.

The effective tax rate was also impacted by recurring permanent differences;

the largest such recurring permanent differences were state and local tax provisions, which increased the effective rate in 2021 by approximately 4.6%, and disallowed excess compensation, which decreased the effective rate in 2021 by approximately 0.7%.

Also impacting the effective rate for 2020 was the addback impact of the Paycheck Protection Program, which increased the effective rate by approximately 2.2%.

We had a net loss of approximately $5.4 million for the Current Year, compared with a net loss of approximately $13.0 million for the Prior Year, as a result of the factors discussed above.

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

We had a non-GAAP net loss of $6.2 million or $(0.32) per share (“non-GAAP diluted EPS”) based on 19,455,987 weighted average shares outstanding for the Current Year, compared with non-GAAP net income of $1.8 million, or $0.10 per share based on 19,152,569 weighted average shares outstanding for the Prior Year.

We had a non-GAAP net loss of $15.0 million or $(0.77) per share (“non-GAAP diluted EPS”) based on 19,624,669 weighted average shares outstanding for the Current Year, compared with a non-GAAP net loss of $6.2 million, or $(0.32) per share based on 19,455,987 weighted average shares outstanding for the Prior Year.

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, 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.

stockholders, exclusive of asset impairments, amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation, loss on early extinguishment of debt, 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, gain on sale of assets, gain on reduction of contingent obligations, 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.

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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 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.

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

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

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

The Company 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.

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

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 these measures in a different manner than we do.

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 these measures in a different manner than we do.

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 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 loss:

Year Ended December 31,

3 unchanged sentences

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Loss on early extinguishment of debt

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Deferred income tax benefit

Non-GAAP net (loss) income

The following table is a reconciliation of diluted (loss) earnings per share to non-GAAP diluted EPS:

Gain on reduction of contingent obligation

Income tax benefit

Non-GAAP net loss

The following table is a reconciliation of diluted loss per share to non-GAAP diluted EPS:

Year Ended December 31,

2 unchanged sentences

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Loss on early extinguishment of debt

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Deferred income tax benefit

Gain on reduction of contingent obligation

Income tax benefit

Non-GAAP diluted EPS

Diluted weighted average shares outstanding

The following table is a reconciliation of basic weighted average shares outstanding to non-GAAP diluted weighted average shares outstanding:

Year Ended December 31,

Basic weighted average shares

Effect of exercising warrants

Effect of exercising stock options

Non-GAAP diluted weighted average shares outstanding

As a result of the non-GAAP net loss for the Current Year, the non-GAAP diluted weighted average shares outstanding for the Current Year excludes the effect of exercising warrants and stock options, as such effect would be anti-dilutive.

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

5 unchanged sentences

Depreciation and amortization

Proportional share of trademark amortization of equity method investee

Interest and finance expense

2 unchanged sentences

Stock-based compensation

(Recovery of) costs in connection with potential acquisition

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Gain on reduction of contingent obligation

Adjusted EBITDA

1 unchanged sentence

As of December 31, 2022 and 2021, our cash and cash equivalents were $4.6 million and $4.5 million, respectively.

Restricted cash at December 31, 2021 and 2020 consisted of $0.7 million and $1.1 million, respectively, of cash deposited as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facility.

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

There was no restricted cash at December 31, 2022, as the aforementioned letter of credit had expired and was not renewed.

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

Notwithstanding our recent investments in our ERP system and our brick-and-mortal retail store, our business operating model generally does not require material capital expenditures, and as of December 31, 2021, we have no significant commitments for future capital expenditures.

Notwithstanding our recent investments in our ERP system and our brick-and-mortal retail store in 2020 and 2021, respectively, our business operating model generally does not require material capital expenditures, and as of December 31, 2022, we have no significant commitments for future capital expenditures.

Material cash requirements from known contractual and other obligations are discussed under “Obligations and Commitments” below.

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

We believe that cash from future operations, including growth opportunities and future business development, as well as currently available cash, will be sufficient to satisfy our anticipated long-term operating needs, including our debt service requirements and making necessary investments in our infrastructure and technology, for the foreseeable future beyond the next twelve months.

Working Capital

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

Commentary on components of our cash flows for the Current Year compared with the Prior Year is set forth below.

Liquidity and Management’s Plans

The Company incurred net losses of approximately $5.4 million ($25.9 million excluding the gain on sale of a majority interest in the Isaac Mizrahi brand) and $13.0 million during the years ended December 31, 2022 and 2021, respectively, and had an accumulated deficit of approximately $32.8 million and $28.8 million as of December 31, 2022 and 2021, respectively.

Included in the net losses were non-cash expenses of approximately $8.2 million and $7.5 million for the years ended December 31, 2022 and 2021, respectively.

Net cash used in operating activities was $14.2 million in 2022 and $6.6 million in 2021.

These factors raise uncertainties about the Company’s ability to continue as a going concern.

Management plans to mitigate an expected shortfall of capital and to support future operations by shifting the business from a wholesale/licensing hybrid model into a licensing plus business model and to divest or restructure the Longaberger brand.

In the first quarter of 2023, we began to restructure our business operations by entering into new licensing agreements and joint venture arrangements with best-in-class business partners.

We entered into a new interactive

television licensing agreement with America’s Collectibles Network, Inc.

d/b/a JTV (“JTV”) for the Ripka Brand, and a separate license with JTV for the Ripka Brand’s e-commerce business.

For apparel, similar transactions have recently been executed.

In conjunction with the launch of the C Wonder Brand on HSN, we licensed the wholesale production operations related to the brand to One Jeanswear Group, LLC (“OJG”);

this new license with OJG also includes other new celebrity brands that we plan to launch in 2023 and beyond.

For the Halston Brand, we plan on entering into a joint venture related to the brand’s wholesale apparel business with another leading manufacturer (the “Halston JV”).

The Halston JV will develop an apparel business under the H Halston brand through department stores, e-commerce, and other retailers.

The Halston JV will include a wholesale license to Xcel.

We expect the transition of these operating businesses to be completed by the second quarter of 2023.

We believe that this evolution of our operating model will provide us with significant cost savings and allow us to reduce and better manage our exposure to operating risks.

As of March 31, 2023, steps have been taken to reduce payroll by $6 million and operating cost by approximately $7 million over the next twelve months.

Further, the Company intends to obtain a line of credit to provide additional capital resources.

However, there is no assurance that this line of credit or any other external financing will be obtained.

Based on these recent changes in our business model, management expects to generate adequate cash flows to meet the Company’s operating and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Annual Report on Form 10-K, and therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of December 31, 2022, have subsequently been alleviated.

Operating Activities

Net cash (used in) provided by operating activities was approximately $(14.2) million and $(6.6) million in the Current Year and Prior Year, respectively.

The Current Year’s cash used in operating activities was primarily attributable to the combination of the net loss of $(13.0) million plus non-cash expenses of approximately $7.7 million, and a net change in operating assets and liabilities of approximately $(1.2) million.

million loss on extinguishment of debt, $0.7 million of stock-based compensation, and $(3.2) million of deferred income tax benefit.

The Current Year’s cash used in operating activities was primarily attributable to the combination of the net loss of $(5.4) million plus non-cash items of approximately $(10.2) million, partially offset by a net change in operating assets and liabilities of approximately $1.4 million.

Non-cash items were primarily comprised of, but not limited to, the net gain on sale of assets of $(20.6) million, $7.3 million of depreciation and amortization, a $2.3 million loss on extinguishment of debt, and the $1.2 million undistributed proportional share of net income of equity method investee.

The net change in operating assets and liabilities notably included a decrease in accounts receivable of $2.1 million, a decrease in inventory of $0.5 million, a decrease in prepaid expenses and other assets of $0.6 million, and decreases in various operating liabilities of $(1.4) million.

The decrease in accounts receivable was primarily related to the Current Year sale of a majority interest in the Isaac Mizrahi brand, resulting in lower licensing revenues and thus lower receivable balances.

The decreases in inventory and other operating assets and liabilities were primarily reflective of the declines in our wholesale business due to retailers pausing or canceling orders during the Current Year.

The Prior Year’s cash used in operating activities was primarily attributable to the combination of the net loss of $(13.0) million plus non-cash expenses of approximately $7.7 million, and a net change in operating assets and liabilities of approximately $(1.2) million.

Non-cash net expenses were primarily comprised of $6.8 million of depreciation and amortization, $1.4 million of asset impairment charges, $0.3 million of amortization of deferred finance costs, a $1.5 million loss on extinguishment of debt, $0.7 million of stock-based compensation, and $(3.2) million of deferred income tax benefit.

The net change in operating assets and liabilities notably included a decrease in accounts receivable of $1.1 million, an increase in inventory of $(2.2) million, an increase in prepaid expenses and other assets of $(0.8) million, and an increase in accounts payable, accrued expenses and other current liabilities of $1.2 million.

The changes in accounts receivable and payable were primarily related to the timing of collections and payments, 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’s cash provided by operating activities was primarily attributable to the combination of the net loss of $(13.1) million plus non-cash expenses of approximately $16.2 million, and a net change in operating assets and liabilities of approximately $0.1 million.

The net loss of $(13.1) million included $1.8 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to Current Year expenses for which the program was intended to compensate.

Non-cash net expenses were primarily comprised of a $13.0 million intangible asset impairment charge, $5.5 million of depreciation and amortization, $1.0 million of bad debt expense, $0.9 million of stock-based compensation, and $(4.4) million of deferred income tax benefit.

The net change in operating assets and liabilities included a decrease in accounts receivable of $0.7 million, an increase in inventory of $(0.3) million, a decrease in prepaid expenses and other assets of $0.6 million, and a decrease in accounts payable, accrued expenses and other current liabilities of $(0.5) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.4) million.

Investing Activities

Net cash used in investing activities for the Current Year was approximately $4.8 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.

Net cash used in investing activities for the Prior Year was approximately $0.7 million, primarily attributable to capital expenditures, a substantial portion of which related to the implementation of our ERP system.

Net cash provided by investing activities for the Current Year was approximately $44.5 million, and was attributable to $45.4 million of net proceeds from the sale of a majority interest in the Isaac Mizrahi brand to WHP, partially offset by $0.6 million of capital contributions to our equity method investee and approximately $0.3 million of capital expenditures.

Net cash used in investing activities for the Prior Year was approximately $4.8 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 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 provided by financing activities for the Current Year was approximately $10.5 million, and was primarily attributable to a net increase in debt obligations of $13.5 million, due to debt refinancing transactions entered into on April 14, 2021 and December 30, 2021, as well as cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $1.0 million.

Net cash used in financing activities for the Current Year was approximately $31.0 million, which mainly consisted of $29.0 million of repayments of our term loan debt, and, to a lesser extent, $1.5 million of prepayment and other fees associated with the early extinguishment of debt, as well as $0.4 million of shares repurchased related to withholding taxes on vested restricted stock.

Net cash provided by financing activities for the Prior Year was approximately $10.5 million, and was primarily attributable to a net increase in debt obligations of $13.5 million, due to debt refinancing transactions entered into on April 14, 2021 and December 30, 2021, as well as cash contributions received from the noncontrolling interest holder in Longaberger Licensing, LLC of $1.0 million.

These sources of cash were partially offset by deferred finance costs and other fees paid in connection with the aforementioned debt refinancing transactions of $(2.7) million, and principal payments made on term loan debt of $(1.3) million during the year.

Net cash used in financing activities for the Prior Year was approximately $(2.2) million, and was primarily attributable to payments made on long-term debt obligations of $(2.3) million, cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $0.3 million, and $(0.2) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Obligations and Commitments

Term Loan Debt and Revolving Loan Debt

Previous Term Loan Debt

On February 11, 2019, the Company entered into an amended loan agreement with Bank Hapoalim B.M.

(“BHI”), which amended and restated a prior term loan with BHI.

Under that amended loan agreement, the aggregate amount of all the term loans extended by BHI to Xcel was $22.0 million, which amount was divided into two term loans:

(1) a term loan in the amount of $7.3 million and (2) a term loan in the amount of $14.7 million.

These two term loans bore interest at a fixed rate of 5.1% and 6.25% per annum, respectively.

Such loan agreement was subsequently amended on April 13, 2020 and

again on August 18, 2020;

such amendments changed the timing and amount of quarterly installment payments, but did not change the total principal balance, interest rate, or maturity date.

These amendments during 2020 were accounted for as debt modifications and, accordingly, no gain or loss was recorded.

April 2021 Term Loan Debt

On April 14, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries entered into a Loan and Security Agreement (the “Loan Agreement”) with BHI as administrative agent and collateral agent, FEAC Agent, LLC (“FEAC”) as co-collateral agent, and the financial institutions party thereto as lenders.

Pursuant to the Loan Agreement, the lenders made two term loans:

(1) a term loan in the amount of $10.0 million (“Term Loan A”) and (2) a term loan in the amount of $15.0 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”).

The Loan Agreement also provided that the lenders make available to Xcel a revolving loan facility in an amount up to $4.0 million on a discretionary basis, but not to exceed 85% of the amount of eligible accounts receivable, as defined.

Management assessed and determined that this new agreement resulted in an extinguishment of the previous term loan debt, and accordingly recognized a loss of approximately $0.82 million (consisting of $0.09 million of unamortized deferred finance costs and $0.73 million of breakage fees owed to the old lender under the terms of the previous debt agreement) during the Current Year.

Approximately $367,000 of such aforementioned breakage fees were paid at time of extinguishment, with the remaining $367,000 of such fees payable in three equal payments on each of May 1, 2022, 2023, and 2024.

Upon entering into the Loan Agreement, Xcel paid a 2.5% closing fee in the amount of $0.625 million to the administrative agent for the benefit of each lender having a term loan commitment;

the Company also paid approximately $0.6 million of various legal and other fees in connection with the execution of the Loan Agreement.

These fees and costs totaling approximately $1.2 million were deferred on the Company’s balance sheet as a reduction of the carrying value of the Term Loans, to be subsequently amortized to interest expense over the term of the Term Loans using the effective interest method.

The Term Loans were to mature on April 14, 2025, with principal payable in 16 quarterly installments of $625,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on June 30, 2021 and ending on March 31, 2025, with a final payment of $15.0 million on the maturity date of April 14, 2025.

The Company made the required principal payments on June 30, 2021 and September 30, 2021 (totaling $1.25 million) as scheduled.

Interest on Term Loan A accrued at LIBOR plus 4.0% per annum, and interest on the Term Loan B accrued at LIBOR plus 8.0% per annum.

Interest on the Loans was paid on the last business day of each calendar month.

Base Rate was defined in the Loan Agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York.

LIBOR was defined in the Loan Agreement as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to one month as published by ICE Benchmark Administration Limited or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) on such date of determination or (b) 1.0% per annum.

The Loan Agreement also contained customary covenants, including reporting requirements, trademark preservation, and financial covenants (on a consolidated basis with Xcel and its wholly-owned subsidiaries).

The Company, BHI, FEAC, and the lenders subsequently amended the Loan Agreement multiple times during 2021 – on August 12, 2021, September 29, 2021, and November 12, 2021.

While these amendments modified financial covenants and/or adjusted the maximum amount available under the revolving loan facility, there were no changes made to the total principal balance, interest rate, maturity date, or any other terms of the Loan Agreement.

Also, under the terms of the April 2021 Loan Agreement, the lenders made a revolving loan facility available to Xcel.

On June 24, 2021, we borrowed $1.5 million under the aforementioned revolving loan facility, and on September 30, 2021, we borrowed $998,000 under the revolving loan facility.

We repaid the outstanding balance in full on December 30, 2021.

The revolving loan facility bore interest at a rate of 4.75% per annum, and we incurred related interest expense of

approximately $0.05 million for the Current Year.

As of December 31, 2021, we no longer had access to a revolving loan facility under the terms of the new loan agreement entered into on December 30, 2021 (as described below).

December 2021 Term Loan Debt

On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, Judith Ripka Fine Jewelry, LLC, H Heritage Licensing, LLC, Xcel-CT MFG, LLC and Gold Licensing, LLC, as Guarantors (each a “Guarantor” and collectively, the “Guarantors”), entered into a Loan and Security Agreement (the “New Loan Agreement”) with FEAC, as lead arranger and as administrative agent and collateral agent for the lenders party to the New Loan Agreement, and the financial institutions party thereto as lenders (the “Lenders”).

Pursuant to the New Loan Agreement, the Lenders made a term loan in the aggregate amount of $29.0 million (the “New Term Loan”).

The proceeds of the New Term Loan were used for the purpose of refinancing existing indebtedness (i.e., the April 2021 Term Loan debt), to pay fees, costs, and expenses incurred in connection with entering into the New Loan Agreement, and for working capital purposes.

The New Loan Agreement also provides that Xcel may request the Lenders make incremental term loans of up to $25.0 million (the “Incremental Term Loans”).

The terms and conditions of the Incremental Term Loans will be agreed in an amendment to the New Loan Agreement prior to the funding by the Incremental Term Loans.

Management assessed and determined that the New Loan Agreement resulted in an extinguishment of the April 2021 Term Loan debt, and accordingly recognized a loss of approximately $0.74 million (consisting of $0.92 million of unamortized deferred finance costs and $(0.18) of net fees owed to BHI less refunds of certain costs related to the April 2021 Term Loan debt) during the Current Year.

Upon entering into the New Loan Agreement, Xcel paid a 1.75% closing fee to FEAC for the benefit of the Lenders;

the Company also paid approximately $0.5 million of various legal and other fees in connection with the execution of the New Loan Agreement.

These fees and costs totaling approximately $1.0 million have been deferred on the Company’s balance sheet as of December 31, 2021 as a reduction of the carrying value of the New Term Loan, to be subsequently amortized to interest expense over the term of the New Term Loan using the effective interest method.

The New Term Loan matures on April 14, 2025.

Principal on the New Term Loan is payable in quarterly installments of $625,000 on each of March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2022 and ending on March 31, 2025, with a final payment of $20,875,000 on the maturity date of April 14, 2025.

Thus, the aggregate remaining annual principal payments under the New Term Loan at December 31, 2021 were as follows:

($ in thousands)

Year Ending December 31,

Xcel has the right upon thirty (30) days prior written notice to prepay all or any portion of the New Term Loan or Incremental Term Loans and accrued and unpaid interest thereon;

provided that any prepayment shall be applied first to prepay the New Term Loan in full and second to the Incremental Term Loans.

If the New Term Loan is prepaid in whole or in part on or prior to the second anniversary of the closing date (including as a result of an event of default), Xcel shall pay a prepayment premium as follows:

an amount equal to the principal amount of the New Term Loan prepaid multiplied by:

(i) five percent (5.00%) if such prepayment occurs on or before the first anniversary of the closing date;

(ii) two percent (2.00%) if such prepayment occurs at any time after the first anniversary

of the closing date and on or prior to the second anniversary of the closing date;

and (iii) one percent (1.00%) if such prepayment occurs at any time after the second anniversary of the closing date.

Xcel’s obligations under the New Loan Agreement are guaranteed by the Guarantors and secured by all of the assets of Xcel and the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the Loan Agreement) and, subject to certain limitations contained in the New Loan Agreement, equity interests of the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the New Loan Agreement).

Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration therefore will be paid other than by cash of Xcel or the Guarantors, the issuance of equity interest of Xcel or the issuance of notes to the applicable seller.

The New Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of Xcel (on a consolidated basis with the Guarantors and any subsidiaries subsequently formed or acquired that become a credit party under the Loan Agreement):

● liquid assets of at least (i) $2.5 million during the first fiscal month of each fiscal quarter if cash payments from revenue licenses during the immediately succeeding 30 days are expected to be at least $4.0 million, and (ii) $3.0 million at all other times;

● a fixed charge coverage ratio of not less than 1.00 to 1.00 for the fiscal quarter ending September 30, 2022, and for the twelve fiscal month period ending at the end of each fiscal quarter commencing with the fiscal quarter ending December 31, 2022;

● a loan to value ratio not to exceed 50% at all times;

● minimum revenues as set forth below:

Fiscal Period

Minimum Revenue

April 1, 2021 - December 31, 2021

For the trailing twelve month period ending March 31, 2022

For the trailing twelve month period ending June 30, 2022

For the trailing twelve month periods ending September 30, 2022

and each fiscal quarter end thereafter

● the sum of (i) the eligible inventory plus (ii) eligible cash on hand to the extent not used to satisfy the Minimum Accounts Amount (as defined below) plus (iii) the eligible accounts to the extent not used to satisfy the Minimum Accounts Amount (as defined below) of at least $1.25 million at all times (“Minimum Inventory Amount”), and the sum of (i) the eligible accounts plus (ii) eligible cash on hand to the extent not used to satisfy the Minimum Inventory Amount of at least $1.5 million at all times (“Minimum Accounts Amount”);

● Adjusted EBITDA of at least $2.0 million for the 6 fiscal month period ending June 30, 2022.

The Company was in compliance with all applicable covenants under the Loan Agreement as of and for the fiscal year ended December 31, 2021.

Interest on the New Term Loan accrues at “LIBOR” plus 7.5% per annum, and is payable on the last business day of each calendar month.

“LIBOR” is defined in the New Loan Agreement as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to three months as published by Bloomberg or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) two business days prior to the last business day of each calendar month and (b) 1.0% per annum.

For the Current Year and Prior Year, the Company incurred interest expense of approximately $1.9 million and $1.2 million, respectively, related to term loan debt.

The effective interest rate related to term loan debt was approximately 8.7% and 6.7% for the Current Year and Prior Year, respectively.

Contingent Obligations – Halston Heritage Earn-Out

In connection with the February 11, 2019 purchase of the Halston Heritage trademarks from the H Company IP, LLC (“HIP”), the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to $6.0 million, based on royalties earned through December 31, 2022.

The Halston Heritage Earn-Out of $0.9 million is recorded as a long-term liability as of December 31, 2021 and 2020 in the accompanying consolidated balance sheets, based on the difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

The Halston Heritage Earn-Out is generally required to be paid in shares of our common stock, subject to certain limitations.

Payment of this obligation in stock would not affect our liquidity.

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks (see Note 3 of the financial statements for additional information), the Company agreed to pay the seller additional cash consideration of up to $12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

The Lori Goldstein Earn-Out of $6.6 million is recorded as a long-term liability at December 31, 2021 in the accompanying consolidated balance sheet, based on the difference at the date of acquisition between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid.

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks (see Note 3 of the consolidated financial statements for additional information), we agreed to pay the seller additional cash consideration of up to $12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

The Lori Goldstein Earn-Out of $6.6 million is recorded as a liability in the accompanying consolidated balance sheets, based on the difference at the date of acquisition between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid.

Based on the performance of the Lori Goldstein brand through December 31, 2022, approximately $0.2 million of additional consideration has been earned and is payable to the Seller in 2023.

At December 31, 2022, $0.2 million of the balance is recorded as a current liability and $6.4 million is recorded as a long-term liability;

at December 31, 2021, the entire balance was recorded as a long-term liability.

Contingent Obligation – Isaac Mizrahi Transaction

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi brand, we agreed with WHP (the buyer) that, in the event that IM Topco, LLC receives less than $13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from us up to $16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP.

Such amount would be payable by us in either cash or equity interests in IM Topco, LLC held by us.

Based on IM Topco’s earnings from May 31, 2022 through December 31, 2022 and the applicable distribution provisions, WHP earned $4.32 million in cash flow, which reduces the potential purchase price adjustment to $11.68 million.

No amount has been recorded in the accompanying consolidated balance sheets related to this contingent obligation, and management believes the likelihood of any such payment is remote.

Contingent Obligation – Halston Heritage Earn-Out

In connection with the February 11, 2019 purchase of the Halston Heritage trademarks from the H Company IP, LLC (“HIP”), we agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to an aggregate of $6.0 million, based on royalties earned from 2019 through December 31, 2022.

This additional consideration would have been payable in shares of our common stock.

The Halston Heritage Earn-Out of $0.9 million was recorded as a long-term liability on February 11, 2019 and as of December 31, 2021, based on the difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

The final royalty target year ended on December 31, 2022, and HIP ultimately did not earn any additional consideration based on the formula set forth in the related asset purchase agreement.

As such, during the year ended December 31, 2022, we recorded a $0.9 million gain on the reduction of contingent obligations in the accompanying consolidated statement of operations.

As of December 31, 2022, there were no amounts remaining under the Halston Heritage Earn-Out.

Real Estate Leases

As described in Item 2 of this Annual Report on Form 10-K, as of December 31, 2021 we had real estate leases for our current office, former office, and a retail store location, with remaining lease terms between approximately two months to seven years.

As described in Item 2 of this Annual Report on Form 10-K, as of December 31, 2022 we had real estate leases for our current office and a retail store location, with remaining lease terms between approximately five to seven years.

We recorded an impairment charge related to the right-of-use asset for the retail store as of December 31, 2021, subsequently closed the retail store in 2022, and are currently in the process of negotiating the termination of the retail store lease;

however, the lease liability for the retail store remains on our consolidated balance sheet as a liability and is included in the future payment obligations set forth below.

Future payments under our real estate leases are expected to be approximately $1.7 million for the year ending December 31, 2022, $1.7 million for each of the years ending December 31, 2023 – 2026, and $2.0 million thereafter.

Future payments under our real estate leases are expected to be approximately $1.7 million for each of the years ending December 31, 2023 – 2026, $1.5 million for the year ending December 31, 2027, and $0.2 million thereafter.

Employment Contracts

We have entered into contracts with certain executives and key employees.

The future minimum payments under these contracts is expected to be approximately $2.4 million and is expected to be paid in 2022.

The future minimum payments under these contracts is expected to be approximately $19.9 million, of which, approximately $4.3 million is expected to be paid in 2023, approximately $2.1 million is expected to be paid for each of the years ending December 31, 2024 – 2030, and approximately $0.5 million is expected to be paid in 2031.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations or liquidity.

Other Factors

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We plan to continue to diversify the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer, consumer, or market sector within each of our brands.

The Mizrahi brand, Lori Goldstein brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories.

The Lori Goldstein brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories.

The Ripka brand is a fine jewelry business, and the Longaberger brand focuses on home good products, which we believe helps diversify our industry focus while at the same time complements our business operations and relationships.

We 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.

In April 2021, we acquired the Lori Goldstein brand, which is currently available and sold to consumers through Qurate’s QVC channel.

However, the impacts of the ongoing 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.

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, including Lord & Taylor and Le Tote, Stein Mart, and Century 21, from which we had an aggregate of approximately $1.4 million of accounts receivable due at December 31, 2021.

As a result, we have recognized an allowance for doubtful accounts of approximately $1.1 million as of December 31, 2021, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility.

Financial impacts associated with the COVID-19 pandemic include, but are not limited to, lower net sales, adjustments to allowances for doubtful accounts due to customer bankruptcy or other inability to pay their amounts due to vendors, the delay of inventory production and fulfillment, potentially further impacting net sales, and potential incremental costs associated with mitigating the effects of the pandemic, including increased freight and logistics costs and other expenses.

The impact of the COVID-19 pandemic is expected to continue to have an adverse effect on our operating results, which could result in our inability to comply with certain debt covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default.

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 some portion of 2022 to be affected.

While the recent sale of a majority interest in the Isaac Mizrahi brand is expected to result in a short-term decrease in our revenues, as that brand represented a significant portion of our historical revenues, we will seek to replace those revenues in the long-term with new strategic business initiatives.

The proceeds from the sale, as well as future cash flows from our retained interest in the Isaac Mizrahi brand, are expected to position us to fund various strategic initiatives as we concentrate our resources on growing our brands, new brand launches, and investing in live streaming technology and new business partnerships.

We continue to work towards expanding and developing more efficient ways to operate 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, live streaming, our design, production and supply chain platform, additional domestic and international licensing arrangements, and acquiring additional brands, including recent launches of our Victor Glemaud and C Wonder by Christian Sirano businesses on HSN.

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 recognized bad debt expense of approximately $0.4 million and $0.1 million in the Current Year and Prior Year, respectively, 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 is currently experiencing challenges related to port delays and tight availability for carriers and containers.

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Such higher costs are currently expected to continue for at least some portion of 2023.

Our long-term success, however, will still remain largely dependent on our ability to build and maintain our brands’ awareness and continue to attract wholesale and direct-to-consumer customers, and contract with and retain key licensees, as well as our and our licensees’ ability to accurately predict upcoming fashion and design trends within their respective customer bases and fulfill the product requirements of the particular retail channels within the global marketplace.

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.

Beginning in the first quarter of 2022, input costs increased significantly.

We expect the pressures of input cost inflation to continue for at least some portion of 2023.

We may not be able to mitigate the impact of inflation and cost increases or pass these costs along to our customers.

Also, poor economic and market conditions, including a potential recession, may negatively impact market sentiment, decreasing the demand for apparel, footwear, accessories, fine jewelry, home goods, and other consumer products, which would adversely affect our operating income and results of operations.

If we are unable to take effective measures in a timely manner to mitigate the impact of the inflation as well as a potential recession, our business, financial condition, and results of operations could be adversely affected.

Our long-term success, however, will still remain largely dependent on our ability to build and maintain our brands’ awareness and continue to attract wholesale and direct-to-consumer customers, and contract with and retain key licensees and potential business partners, as well as our and our licensees’ ability to accurately predict upcoming fashion and design trends within their respective customer bases and fulfill the product requirements of the particular retail channels within the global marketplace.

Unanticipated changes in consumer fashion preferences and purchasing patterns, slowdowns in the U.S.

economy, changes in the prices of supplies, consolidation of retail establishments, and other factors noted in “Risk Factors” could adversely affect our licensees’ ability to meet and/or exceed their contractual commitments to us and thereby adversely affect our future operating results.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations or liquidity.

economy, changes in the prices of supplies, consolidation of retail establishments, and other factors noted in Item 1A of this Annual Report on Form 10-K could adversely affect our licensees’ ability to meet and/or exceed their contractual commitments to us and thereby adversely affect our future operating results.

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-K

Item 7. Management’s Discussion and Analysis