What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-18 compared with 2022-11-14 · 87 added, 149 removed, 94 unchanged (72% of the section changed)

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

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

Currently, the Company’s brand portfolio consists of the LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brands (the "Halston Brand"), the Judith Ripka brands (the "Ripka Brand"), the C Wonder brands (the "C Wonder Brand"), the Longaberger brand (the “Longaberger Brand”), the Isaac Mizrahi brands (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 contribute to the operations of the brand through a service agreement.

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

Our brands have generated over $3 billion in retail sales via live streaming in interactive television and digital channels alone

Our objective is to build a diversified portfolio of lifestyle consumer brands through organic growth and the strategic acquisition of new brands.

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

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

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

● 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;

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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 and related technology platforms;

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

Our design, production and supply chain platform was developed to shorten the supply chain cycle by utilizing state-of-the-art supply chain management technology, trend analytics, and data science to actively monitor fashion trends and read and react to customer demands.

● our significant media and internet presence.

We utilize state-of-the-art supply chain management technology, trend analytics, and data science to actively monitor fashion trends and read and react to customer demands.

Summary of Operating Results

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

Three months ended March 31, 2023 (the “current quarter”) compared with the three months ended March 31, 2022 (the “prior year quarter”)

Current quarter net revenue decreased approximately $2.7 million to $6.1 million from $8.7 million for the prior year quarter.

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Since the closing of such sale, we no longer record Isaac Mizrahi brand licensing revenue as part of our revenues.

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

This decrease in net sales was primarily attributable to declines in apparel wholesale revenue 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.

Net sales increased by approximately $1.0 million in the current quarter to $3.8 million, compared with $2.8 million in the prior year quarter.

This increase was primarily attributable to sale of all of our C Wonder apparel inventory to HSN as part of the restructuring and transformation of our business operating model, which we began in the current quarter and expect to complete by the end of the second quarter of 2023.

Cost of Goods Sold

Current quarter cost of goods sold was $2.7 million, compared with $1.7 million for the prior year quarter.

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

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

Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) decreased from approximately 40% in the prior year quarter to approximately 30% in the current quarter.

Gross profit (net revenue less cost of goods sold) decreased approximately $3.7 million to $3.4 million from $7.1 million in the prior year quarter, primarily driven by the aforementioned decrease in net licensing revenue.

Operating Costs and Expenses

Operating costs and expenses decreased approximately $1.3 million from $8.3 million in the prior year quarter to $7.0 million in the current quarter.

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

Other (Expense) Income

This decrease was primarily attributable to lower salaries, benefits and employment costs, driven by the combination of (i) the May 31, 2022 sale of a majority interest in the Isaac Mizrahi brand and the transfer of the employees associated with the Isaac Mizrahi brand to the IM Topco, LLC business venture, and (ii) reductions in staffing levels during the current quarter related to the restructuring and transformation of our business operating model.

Other Expense (Income), Including Non-cash Expenses

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

We recognized an equity method loss of $0.52 million related to our investment for the current quarter, based on the distribution provisions set forth in the related business venture agreement.

Interest and Finance (Income) Expense

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

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

Income Tax (Benefit) Provision

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

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

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

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

Depreciation and amortization was approximately $1.8 million in both the current quarter and prior year quarter.

Interest and Finance Expense

Interest and finance expense for the current quarter was approximately $0.0 million, compared with $0.7 million for the prior year quarter.

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

Income Tax Benefit

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 0% for both periods, resulting in an income tax benefit of $0 for both periods.

For both the current quarter and the prior year quarter, the federal statutory rate differed from the effective tax rate due to the recording of a valuation allowance against the benefit that would have otherwise been recognized, as it was considered not more likely than not that the net operating losses generated during each period will be utilized in future periods.

Net Loss Attributable to Xcel Brands, Inc.

We had a net loss of $5.6 million for the current quarter, compared with a net loss of $3.5 million for the prior year quarter, due to the combination of the factors outlined above.

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

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

We had a non-GAAP net loss of approximately $3.6 million, or $0.18 per diluted share (“non-GAAP diluted EPS”), for the current quarter and a non-GAAP net loss of $1.9 million, or $0.10 per diluted share, for the prior year quarter.

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

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

stockholders before depreciation and amortization, our proportional share of trademark amortization of equity method investees, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on reduction of contingent obligations, gain on sale of assets, costs (recoveries) in connection with potential acquisitions, asset impairments, gain on sales of assets, and certain adjustments to the provision for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic.

impairments, and certain adjustments to the provision for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic.

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

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

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

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

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

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

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Three Months Ended

September 30,

($ in thousands)

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Stock-based compensation

Income tax benefit

Non-GAAP net (loss) income

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Three Months Ended

September 30,

Diluted loss per share

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Stock-based compensation

Income tax provision (benefit)

Non-GAAP diluted EPS

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Three Months Ended

September 30,

($ in thousands)

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Proportional share of trademark amortization of equity method investee

Interest and finance (income) expense

Income tax benefit

State and local franchise taxes

Stock-based compensation

Adjusted EBITDA

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

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

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

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

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

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

Cost of Goods Sold

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

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

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

Operating Costs and Expenses

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

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

Other (Expense) Income

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

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

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

Interest and Finance (Income) Expense

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

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

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

Income Tax (Benefit) Provision

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

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

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

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

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

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

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

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

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

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

Nine Months Ended

September 30,

($ in thousands)

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

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Income tax provision (benefit)

Non-GAAP net (loss) income

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

Nine Months Ended

September 30,

Diluted earnings (loss) per share

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Income tax provision (benefit)

Non-GAAP diluted EPS

Non-GAAP weighted average diluted shares

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

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

Nine Months Ended

September 30,

($ in thousands)

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

Depreciation and amortization

Proportional share of trademark amortization of equity method investee

Interest and finance expense

Income tax provision (benefit)

State and local franchise taxes

Stock-based compensation

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Adjusted EBITDA

Liquidity and Capital Resources

As of March 31, 2023 and December 31, 2022, our cash and cash equivalents were $1.6 million and $4.6 million, respectively.

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

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

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

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

We expect that existing cash and operating cash flows will be adequate to meet our operating and capital expenditure needs for at least the 12 months subsequent to the filing date of this Quarterly Report on Form 10-Q.

Changes in Working Capital

Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations and any contingent obligations payable in common stock) was $13.7 million and $7.9 million as of September 30, 2022 and

December 31, 2021, respectively.

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

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

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 March 31, 2023, we have no significant commitments for future capital expenditures.

Working Capital

Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations and any contingent obligations payable in common stock) was $5.1 million and $8.8 million as of March 31, 2023 and December 31, 2022, respectively.

Liquidity and Management’s Plans

We incurred a net loss of approximately $5.6 million during the three months ended March 31, 2023 (which included non-cash expenses of approximately $2.4 million), and had an accumulated deficit of approximately $38.4 million as of March 31, 2023.

Net cash used in operating activities was approximately $2.9 million for the three months ended March 31, 2023.

These factors, along with our current levels of cash and working capital, 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.

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 Jewelry Television (“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 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, on May 15, 2023 we entered into a new master license agreement for men’s, women’s, and children’s apparel, fashion accessories, and other product categories with an industry-leading wholesale apparel company for distribution through department stores, e-commerce, and other retailers.

This new master license for the Halston Brand provides for an upfront cash payment and royalties to the Company, including certain guaranteed minimum royalties, includes significant annual minimum net sales requirements, and has a twenty-five-year term (consisting of an initial five-

year period, followed by a twenty-year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term.

Management expects the transition of these operating businesses to be completed by the end of the second quarter of 2023.

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

As of March 31, 2023, the Company has taken steps that will reduce payroll costs by $6 million and operating expenses by $7 million over the next twelve months.

Based on these recent events and 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 Quarterly Report on Form 10-Q, and therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of March 31, 2023, have subsequently been alleviated.

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

Operating Activities

Net cash used in operating activities was approximately $11.03 million in the current nine months, compared with approximately $5.53 million in the prior year nine months.

The current nine months cash used in operating activities was primarily attributable to the combination of the net income of $1.02 million plus non-cash items of approximately $(11.30) million and the net change in operating assets and liabilities of approximately $(0.75) million.

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

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

The prior year nine months cash used in operating activities was primarily attributable to the combination of the net loss of $(5.80) million plus non-cash expenses of approximately $4.85 million and the net change in operating assets and liabilities of approximately $(4.58) million.

Non-cash net expenses were primarily comprised of $4.95 million of depreciation and amortization, $0.75 million of stock-based compensation, $0.13 million of bad debt expense, $0.21 million of amortization of deferred finance costs, a $0.82 million loss on extinguishment of debt, and a deferred income tax benefit of $(2.02) million.

The net change in operating assets and liabilities was primarily comprised of an increase in inventory of $(2.21) million and an increase in accounts receivable of $(2.19) million.

Net cash used in operating activities was approximately $2.92 million in the current quarter, compared with approximately $0.89 million in the prior year nine months.

The current quarter cash used in operating activities was primarily attributable to the combination of the net loss of $(5.94) million plus non-cash items of approximately $2.37 million and the net change in operating assets and liabilities of approximately $0.65 million.

Non-cash items were primarily comprised of $1.80 million of depreciation and amortization and the $0.52 million undistributed proportional share of net loss of equity method investee.

The net change in operating assets and liabilities was primarily comprised of increases in various operating liabilities of approximately $1.40 million, partially offset by an increase in accounts receivable of $(0.86) million.

The prior year quarter cash used in operating activities was primarily attributable to the combination of the net loss of $(3.74) million plus non-cash expenses of approximately $1.94 million and the net change in operating assets and liabilities of approximately $0.91 million.

Non-cash net expenses were primarily comprised of $1.82 million of depreciation and amortization and $0.09 million of amortization of deferred finance costs.

The net change in operating assets and liabilities was primarily comprised of an increase in various operating liabilities of $2.62 million, partially offset by an increase in accounts receivable of $(1.04) million and an increase in inventory of $(0.57) million.

Investing Activities

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

Net cash used in investing activities for the prior year nine months was approximately $4.75 million, which was primarily attributable to the acquisition of the Lori Goldstein brand on April 1, 2021, and, to a lesser extent, capital expenditures relating to the fit-out and furnishing of our Judith Ripka fine jewelry retail store (which opened in the second quarter of 2021 and was subsequently closed in the first quarter of 2022).

Net cash used in investing activities for the current quarter consisted of approximately $0.08 million of capital expenditures, primarily related to software.

Net cash used in the investing activities for the prior year quarter consisted of approximately $0.04 million of capital expenditures.

Financing Activities

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

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

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

Partially offsetting these proceeds were $(16.75) million paid on the balance of previous term loan debt, $(0.37) million of fees paid to the previous debtholders in connection with the extinguishment of previous term loan debt, $(1.20) million of deferred

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

Net cash used in financing activities for the prior year quarter consisted of approximately $(0.63) million of scheduled principal payments on term loan debt.

There was no cash used in or provided by financing activities in the current quarter.

Other Factors

We continue to seek to expand and diversify the types of products being produced and licensed under our brands.

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

The Lori Goldstein brand, Halston brand, C Wonder brand, and Isaac Mizrahi 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.

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 the continuing cash flows from our retained interest in the Isaac Mizrahi brand, are expected to help fuel various strategic initiatives as we concentrate our resources on growing our brands, new brand launches, and investing in livestreaming technology platforms and partnerships.

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, live streaming, our design, production and supply chain platform, additional domestic and international licensing arrangements, and acquiring additional brands.

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

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

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

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

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

as a result, we continue to recognize an allowance for doubtful accounts of approximately $1.3 million as of September 30, 2022, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results.

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

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

In addition, the global shipping industry continues to face challenges related to port delays and tight availability for carriers and containers.

We continue to seek to expand and diversify the types of licensed products being produced under our brands.

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 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 which we believe helps diversify our industry focus while at the same time complements our business operations and relationships.

While the recent sale of a majority interest in the Isaac Mizrahi brand has resulted in a short-term decrease in our revenues, as that brand represented a significant portion of our historical revenues, we are taking actions to replace those revenues in the long-term with new strategic business initiatives, as we concentrate our resources on growing our brands, launching new brands, and entering into new business partnerships.

We continue to seek new opportunities, including expansion through interactive television, live streaming, additional domestic and international licensing arrangements, and acquiring additional brands, including recent launches of our Victor Glemaud and C Wonder by Christian Siriano businesses on HSN.

In the first quarter of 2023, we began to restructure our business operations by shifting our business from a wholesale/licensing hybrid model into a “licensing-plus” business model.

These efforts include entering into new structured contractual arrangements with best-in-class business partners in order to more efficiently operate our wholesale and e-commerce businesses and reduce and better manage our exposure to operating risks.

At the same time, we continue to face a number of headwinds in the current macroeconomic environment.

The global shipping industry has experienced and continues to experience challenges related to port delays and reduced availability for carriers and containers.

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

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

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

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 the remainder of 2022, if not through 2023.

We expect the pressures of input cost inflation to continue for at least the majority 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, 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.

If we are unable to take effective measures in a timely manner to mitigate the impact of 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 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

economy, changes in the prices of supplies, consolidation of retail establishments, and other factors noted in Item 1A of our most recent 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.

Off-Balance Sheet Arrangements

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Please refer to our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on April 17, 2023, for a discussion of our critical accounting policies and estimates.

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

Effective January 1, 2023, we adopted the provisions of Accounting Standards Update No.

2016-13, "Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments"

(as amended).

Although the adoption of this new guidance did not have a significant impact on the Company’s results of operations, cash flows, or financial condition, it represented a change in our accounting policy with respect to the estimation of allowance for uncollectible accounts.

Refer to Part I, Item 1, Note 5 of this Quarterly Report on Form 10-Q for additional information.

During the three months ended March 31, 2023, there were no other material changes to our accounting policies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis