What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-20 compared with 2023-08-14 · 118 added, 119 removed, 159 unchanged (60% of the section changed)

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● 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.

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Summary of Operating Results

Three months ended June 30, 2023 (the “current quarter”) compared with the three months ended June 30, 2022 (the “prior year quarter”)

Three months ended September 30, 2023 (the “current quarter”) compared with the three months ended September 30, 2022 (the “prior year quarter”)

Current quarter net revenue decreased approximately $1.9 million to $2.6 million from $4.5 million for the prior year quarter.

Net licensing revenue decreased by approximately $2.8 million in the current quarter to $2.4 million, compared with $5.2 million in the prior year quarter.

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.

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

Net sales increased by approximately $1.1 million in the current quarter to $4.4 million, compared with $3.3 million in the prior year quarter.

This increase was primarily attributable to the sale of all of our Judith Ripka fine jewelry inventory to JTV as part of the restructuring and transformation of our business operating model, which has been substantially completed as of June 30, 2023.

Net licensing revenue increased approximately $0.2 million to $2.4 million from $2.2 million in the prior year quarter, primarily driven by increases in sales through interactive television, mainly attributable to our C Wonder brand.

Net product sales decreased by approximately $2.1 million in the current quarter to approximately $0.3 million, compared with $2.3 million in the prior year quarter.

This decrease was primarily attributable to the exit from our wholesale apparel and fine jewelry sales operations earlier in 2023 as part of the restructuring and transformation of our business operating model, which was substantially completed as of June 30, 2023.

Cost of Goods Sold

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Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) decreased from approximately 37% in the prior year quarter to approximately 12% in the current quarter.

The decrease in gross profit margin percentage was the result of selling all remaining jewelry at an agreed-upon price which was less than historical margins and the sale of the remaining apparel inventory at discounted sales amounts.

Gross profit (net revenue less cost of goods sold) decreased approximately $2.9 million to $3.0 million from $5.9 million in the prior year quarter, primarily driven by the aforementioned decrease in net licensing revenue.

The decrease in gross profit margin percentage was the result of reduced wholesale apparel sales attributable to excess chargebacks.

Gross profit (net revenue less cost of goods sold) decreased approximately $0.6 million to $2.4 million from $3.0 million in the prior year quarter, primarily driven by the aforementioned decrease in net product sales due to the exit from our wholesale apparel and fine jewelry sales operations earlier in 2023.

Direct Operating Costs and Expenses

Direct operating costs and expenses decreased approximately $1.3 million from $6.9 million in the prior year quarter to $5.6 million in the current quarter.

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.

These decreases were partially offset by a $0.1 million impairment charge related to certain capitalized software assets.

This decrease was primarily attributable to lower salaries, benefits and employment costs, driven by reductions in staffing levels in 2023 related to the restructuring and transformation of our business operating model, as well as related reductions in other overhead costs.

These decreases were partially offset by $0.8 million in costs related to the restructuring of certain contractual arrangements in connection with the shift and evolution in the Company’s business operations, and also by a $0.1 million impairment charge related to certain capitalized software assets.

Other Operating Costs and Expenses (Income)

In the prior year quarter, we recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand 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.

Depreciation and amortization expense was approximately $1.8 million and $1.7 million in the current quarter and prior year quarter, respectively.

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.

Also during the current quarter, we recognized a gain of $0.35 million related to the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016, and a gain of $0.44 million related to a lease termination settlement with the landlord of our former retail store location.

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 $0.0 million, compared with $2.8 million for the prior year quarter.

This decrease was attributable to the May 31, 2022 repayment of all of our outstanding term loan debt, which resulted in a $2.3 million loss on early extinguishment of debt in the prior year quarter.

We recognized an equity method loss related to our investment of $0.52 million and $0.28 million for the current quarter and prior year quarter, respectively, based on the distribution provisions set forth in the related business venture agreement.

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 0% and 26%, respectively, resulting in an income tax (benefit) provision of $0 and $1.54 million, respectively.

For the current 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.

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

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

Net Loss Attributable to Xcel Brands, Inc.

We had a net loss of $3.5 million for the current quarter, compared with net income of $9.5 million for the prior year quarter, due to the combination of the factors outlined above.

We had a net loss of $5.1 million for the current quarter, compared with a net loss of $4.0 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

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

stockholders, exclusive of amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation, loss on extinguishment of debt, gain on sale of assets, gain on lease termination, asset impairments, and income taxes.

stockholders, exclusive of amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation and cost of licensee warrants, loss on extinguishment of debt, gains on sales of assets and investments, gain on lease termination, asset impairments, and income taxes.

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

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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 sale of assets, gain on lease termination, asset impairments, and operating losses stemming from certain of our businesses that have been restructured or discontinued.

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 and cost of licensee warrants, gains on sales of assets and investments, gain on lease termination, asset impairments, and costs associated with restructuring of operations.

Costs associated with restructuring of operations include the current year operating losses generated by certain of our businesses that have been restructured or discontinued (i.e., wholesale apparel and fine jewelry), as well as non-cash charges associated with the restructuring of certain contractual arrangements.

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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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) income attributable to Xcel Brands, Inc.

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

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

Three Months Ended

September 30,

($ in thousands)

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

Net loss attributable to Xcel Brands, Inc.

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Loss on extinguishment of debt

Gain on sale of assets

Gain on lease termination

Asset impairment

Income tax provision

Stock-based compensation and cost of licensee warrants

Income tax benefit

Non-GAAP net loss

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Three Months Ended

Diluted (loss) earnings per share

September 30,

Diluted loss per share

Amortization of trademarks

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Stock-based compensation

Loss on extinguishment of debt

Gain on sale of assets

Gain on lease termination

Asset impairment

Income tax provision

Income tax benefit

Non-GAAP diluted EPS

Non-GAAP weighted average diluted shares

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

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 Adjusted EBITDA:

Three Months Ended

September 30,

($ in thousands)

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

Net loss attributable to Xcel Brands, Inc.

Depreciation and amortization

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Interest and finance (income) expense

Income tax provision

Income tax benefit

State and local franchise taxes

Stock-based compensation

Gain on sale of assets

Gain on lease termination

Asset impairment

Losses from discontinued businesses

Stock-based compensation and cost of licensee warrants

Costs associated with restructuring of operations

Adjusted EBITDA

Six months ended June 30, 2023 (the “current six months”) compared with the six months ended June 30, 2022 (the “prior year six months”)

Current six months net revenue decreased approximately $4.4 million to $12.8 million from $17.2 million for the prior year six months.

Net licensing revenue decreased by approximately $6.4 million in the current six months to $4.7 million, compared with $11.1 million in the prior year six months.

Nine months ended September 30, 2023 (the “current nine months”) compared with the nine months ended September 30, 2022 (the “prior year nine months”)

Current nine months net revenue decreased approximately $6.2 million to $15.5 million from $21.7 million for the prior year nine months.

Net licensing revenue decreased by approximately $6.3 million in the current nine months to $7.0 million, compared with $13.3 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.

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

Net sales increased by approximately $2.1 million in the current six months to $8.2 million, compared with $6.1 million in the prior year six months.

This increase was primarily attributable to sale of all of our C Wonder apparel inventory to HSN and the sale of all of our Judith Ripka fine jewelry inventory to JTV, as part of the restructuring and transformation of our business operating model, which has been substantially completed as of June 30, 2023.

Net product sales were essentially flat at $8.4 million for both the current nine months and the prior year nine months.

This was primarily attributable to sale of all of our C Wonder apparel inventory to HSN and the sale of all of our Judith Ripka fine jewelry inventory to JTV, as part of the restructuring and transformation of our business operating model during the first half of 2023, partially offset by the lack of such sales during the third quarter of 2023 due to our exit from wholesale apparel and fine jewelry sales operations.

Cost of Goods Sold

Current six months cost of goods sold was $6.5 million, compared with $4.3 million for the prior year six months.

Gross profit margin from net product sales (net sales less cost of goods sold, divided by net sales) decreased from approximately 30% in the prior year six months to approximately 21% in the current six months.

Current nine months cost of goods sold was $6.7 million, compared with $5.7 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) decreased from approximately 32% in the prior year nine months to approximately 20% in the current nine months.

Gross profit (net revenue less cost of goods sold) decreased approximately $6.6 million to $6.3 million from $12.9 million in the prior year six months, primarily driven by the aforementioned decrease in net licensing revenue.

Gross profit (net revenue less cost of goods sold) decreased approximately $7.2 million to $8.8 million from $16.0 million in the prior year nine months, primarily driven by the aforementioned decrease in net licensing revenue.

Direct Operating Costs and Expenses

Direct operating costs and expenses decreased approximately $5.7 million from $17.8 million in the prior year six months to $12.1 million in the current six months.

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 and other costs during the current six months related to the restructuring and transformation of our business operating model.

These decreases were partially offset by a $0.1 million impairment charge related to certain capitalized software assets.

Direct operating costs and expenses decreased approximately $6.9 million from $24.7 million in the prior year nine months to $17.8 million in the current nine months.

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 and other costs during 2023 related to the restructuring and transformation of our business

operating model.

Other Operating Costs and Expenses (Income)

In the prior year six months, we recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand 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.

Depreciation and amortization expense was approximately $5.4 million and $5.3 million in the current nine months and prior year nine months, respectively.

In the prior year nine months, we recognized a gain on the sale of a majority interest in the Isaac Mizrahi brand 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 $1.03 million related to our investment for the current six months, based on the distribution provisions set forth in the related business venture agreement.

Also during the current six months, we recognized a gain of $0.35 million related to the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016, and a gain of $0.44 million related to a lease termination settlement with the landlord of our former retail store location.

Depreciation and amortization was approximately $3.6 million in both the current six months and prior year six months.

We recognized an equity method loss related to our investment of $1.55 million and $0.28 million for the current nine months and prior year nine months, respectively, based on the distribution provisions set forth in the related business venture agreement.

Also during the current nine months, we recognized a gain of $0.35 million related to the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016, and recognized a gain of $0.44 million related to a lease termination settlement with the landlord of our former retail store location.

Interest and Finance Expense

Interest and finance expense for the current six months was $0.0 million, compared with $3.5 million for the prior year six months.

This decrease was attributable to the May 31, 2022 repayment of all of our outstanding term loan debt, which resulted in a $2.3 million loss on early extinguishment of debt in the prior year six months.

The estimated annual effective income tax rate for the current six months and the prior year six months was approximately 0% and 35%, respectively, resulting in an income tax (benefit) provision of $0 and $3.18 million, respectively.

For the current six months, 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.

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

Interest and finance expense for the current nine months was $0.0 million, compared with $3.5 million for the prior year nine months.

The estimated annual effective income tax rate for the current nine months and the prior year nine months was approximately 0% and 62%, respectively, resulting in an income tax (benefit) provision of $0 and $1.64 million, respectively.

For the current nine months, 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.

For the prior year 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%%.

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

We had a net loss of $9.1 million for the current six months, compared with net income of $6.0 million for the prior year six months, due to the combination of the factors outlined above.

We had a net loss of $14.3 million for the current nine months, compared with net income of $2.0 million for the prior year nine months, due to the combination of the factors outlined above.

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

We had a non-GAAP net loss of approximately $5.3 million, or $0.27 per diluted share for the current six months and a non-GAAP net loss of $5.5 million, or $0.28 per diluted share, for the prior year six months.

We had Adjusted EBITDA of approximately $(2.9) million for the current six months, compared with approximately $(3.7) million for the prior year six months.

We had a non-GAAP net loss of approximately $8.7 million, or $0.44 per diluted share for the current nine months and a non-GAAP net loss of $8.8 million, or $0.45 per diluted share, for the prior year nine months.

We had Adjusted EBITDA of approximately $(4.6) million for the current nine months, compared with approximately $(6.6) million for the prior year nine months.

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

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

Six Months Ended

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

Nine Months Ended

September 30,

($ in thousands)

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Proportional share of trademark amortization of equity method investee

Stock-based compensation

Stock-based compensation and cost of licensee warrants

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisition

Gain on sale of assets

Gains on sales of assets and investments

Gain on lease termination

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

Six Months Ended

Nine Months Ended

September 30,

Diluted (loss) earnings per share

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Proportional share of trademark amortization of equity method investee

Stock-based compensation

Stock-based compensation and cost of licensee warrants

Loss on extinguishment of debt

Gain on sale of assets

Gains on sales of assets and investments

Gain on lease termination

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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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State and local franchise taxes

Stock-based compensation

Gain on sale of assets

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Asset impairment

Losses from discontinued businesses

Costs associated with restructuring of operations

Adjusted EBITDA

Liquidity and Capital Resources

As of June 30, 2023 and December 31, 2022, our cash and cash equivalents were $3.5 million and $4.6 million, respectively.

As of September 30, 2023 and December 31, 2022, our cash and cash equivalents were $2.2 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.

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 June 30, 2023, we have no significant commitments for future capital expenditures.

Notwithstanding our 2020 and 2021 investments in our ERP system and our brick-and-mortal retail store, respectively, our business operating model generally does not require material capital expenditures, and as of September 30, 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 $6.0 million and $8.8 million as of June 30, 2023 and December 31, 2022, respectively.

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 $2.9 million and $8.8 million as of September 30, 2023 and December 31, 2022, respectively.

Liquidity and Management’s Plans

We incurred a net loss attributable to Company stockholders of approximately $3.5 million and $9.1 million during the three and six months ended June 30, 2023, respectively (which included net non-cash expenses of approximately $1.7 million and $4.0 million, respectively), and had an accumulated deficit of approximately $41.9 million as of June 30, 2023.

Net cash used in operating activities was approximately $1.5 million for the six months ended June 30, 2023.

We incurred a net loss attributable to Company stockholders of approximately $5.1 million and $14.3 million during the three and nine months ended September 30, 2023, respectively (which included net non-cash expenses of approximately $2.3 million and $7.1 million, respectively), and had an accumulated deficit of approximately $47.1 million as of September 30, 2023.

Net cash used in operating activities was approximately $2.8 million for the nine months ended September 30, 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 implemented a plan 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.

Management has implemented a plan 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.

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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.

For apparel, similar transactions were 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 develop and 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 license with OJG also includes other new celebrity brands that we plan to develop and launch in 2023

In the second quarter of 2023, we entered into a new master license agreement for the Halston Brand, covering 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.

The transition of these operating businesses was substantially completed as of June 30, 2023.

The transition of these operating businesses was substantially completed by the end of the second quarter of 2023.

Additionally, during the third quarter of 2023, the Company entered into various settlements and incurred approximately $1.0 million of expenses to restructure certain contractual arrangements related to its former wholesale operations.

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 June 30, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses by approximately $7 million, on an annualized basis when compared to the corresponding periods in the prior year.

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 June 30, 2023, have 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.

As of September 30, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses by approximately $7 million, on an annualized basis when compared to the corresponding periods in the prior year.

While there is some level of potential risk with respect to the Company’s contingent obligation related to IM Topco, LLC, which could negatively impact our future cash flows and liquidity, management has taken steps to address such risk.

Further, in October 2023, we entered into a new term loan agreement in the amount of $5 million, which provides us with approximately $5 million of additional liquidity.

Also in October 2023, Longaberger Licensing, LLC outsourced the operations and management of the Longaberger Brand’s e-commerce business to a third party.

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

Operating Activities

Net cash used in operating activities was approximately $1.47 million in the current six months, compared with approximately $8.72 million in the prior year six months.

The current six months cash used in operating activities was primarily attributable to the combination of the net loss of $(9.64) million plus non-cash items of approximately $4.04 million and the net change in operating assets and liabilities of approximately $4.13 million.

Non-cash items were primarily comprised of $3.58 million of depreciation and amortization and the $1.03 million undistributed proportional share of net loss of equity method investee, partially offset by a $(0.35) gain on the sale of a financial asset and a $(0.44) gain on the settlement of a lease liability.

The net change in operating assets and liabilities was primarily comprised of (i) an increase in deferred revenue of approximately $5.04 million, which was mainly attributable to the upfront payment received for the Halston Master License agreement entered into during the current six months, (ii) a decrease in inventory of approximately $2.05 million, driven by the sale of all of our C Wonder apparel inventory to HSN and the sale of all of our Judith Ripka fine jewelry inventory to JTV, as part of the restructuring and transformation of our business operating model.

Partially offsetting these net changes in operating

assets and liabilities were increases in accounts receivable of approximately $(1.77) million and deceases in various operating liabilities of approximately $(1.64) million.

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

Non-cash items were primarily comprised of a $(20.61) million net gain on the sale of the assets of the Isaac Mizrahi brand, $3.63 million of depreciation and amortization, $0.52 million of stock-based compensation, a $2.32 million loss on extinguishment of debt, and $1.38 million of deferred taxes.

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

Net cash used in operating activities was approximately $2.81 million in the current nine months, compared with approximately $11.03 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 loss of $(15.04) million plus non-cash items of approximately $7.07 million and the net change in operating assets and liabilities of approximately $5.16 million.

Non-cash items were primarily comprised of $5.26 million of depreciation and amortization, the $1.55 million undistributed proportional share of net loss of equity method investee, and a $0.76 million charge related to the restructuring of certain contractual arrangements, partially offset by a $(0.35) gain on the sale of a financial asset and a $(0.44) gain on the settlement of a lease liability.

The net change in operating assets and liabilities was primarily comprised of (i) an increase in deferred revenue of approximately $4.68 million, which was mainly attributable to the upfront payment received for the Halston Master License agreement entered into during the current nine months, (ii) a decrease in inventory of approximately $1.85 million, driven by the sale of all of our C Wonder apparel inventory to HSN and the sale of all of our Judith Ripka fine jewelry inventory to JTV, as part of the restructuring and transformation of our business operating model.

Partially offsetting these net changes in operating assets and liabilities were decreases in various operating liabilities of approximately $(1.40) million.

The prior year nine months cash used in operating activities as 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..

Investing Activities

Net cash provided by investing activities for the current six months was approximately $0.37 million, primarily driven by $0.45 million of proceeds received from the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016.

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

Net cash provided by investing activities for the current nine months was approximately $0.36 million, primarily driven by $0.45 million of proceeds received from the sale of a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016.

Net cash provided by investing activities for the prior year 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

Financing Activities

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

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

Net cash provided by financing activities for the current nine months was entirely attributable to proceeds from the exercise of employee stock options in the amount of approximately $0.03 million.

Net cash used in financing activities for the prior year nine months was approximately $30.95 million, which mainly consisted of $29.00 million of repayments of 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.

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, the Company agreed with WHP that, in the event that IM Topco, LLC (“IM Topco”) 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 held by us.

Based on IM Topco’s earnings from May 31, 2022 through September 30, 2023 and the applicable distribution provisions, WHP earned $9.1 million in cash flow, which reduces the maximum potential purchase price adjustment to $6.9 million.

Although IM Topco’s aggregate royalties fell below the aforementioned threshold for the four consecutive quarter period ending September 30, 2023, WHP provided a waiver to us relative to such requirement for the period.

The waiver also includes the measurement period ending December 31, 2023.

The next measurement period will be the trailing four calendar quarters ending March 31, 2024.

IM Topco’s aggregate royalties through September 30, 2023 were lower than expected as a result of soft sales in its interactive television business, primarily driven by talent scheduling conflicts as QVC transitions from remote shows to 100% in-studio shows.

Management believes this softness in sales is temporary, and steps are underway to restore airtime back to levels that will result in meeting planned sales levels.

Accordingly, no amount has been recorded in the accompanying condensed consolidated balance sheets related to this contingent obligation.

In November 2023, the Company, WHP, and IM Topco entered into amendments of the May 27, 2022 membership purchase agreement and the May 31, 2022 services agreement.

Under these amendments, the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024.

In exchange, we will provide IM Topco with a $0.6 million reduction of future service fees over the next eighteen months, beginning on July 1, 2023.

Other Factors

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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.

While the 2022 sale of a majority interest in the Isaac Mizrahi brand has resulted in a 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.

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These efforts included 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.

These restructuring initiatives have been substantially completed as of June 30, 2023.

These restructuring initiatives were substantially completed as of June 30, 2023, and going forward are expected to provide us with approximately $13 million of cost savings on an annualized basis compared to our previous operating model.

However, 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 at least the majority 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 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 inflation as well as a potential recession, our business, financial condition, and results of operations could be adversely affected.

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 inflation and/or 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.

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We evaluate our estimates and judgments on an on-going basis.

We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry, and current and expected economic conditions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.

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(as amended).

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.

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 and six months ended June 30, 2023, there were no other material changes to our accounting policies.

During the three and nine months ended September 30, 2023, there were no other material changes to our accounting policies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis