Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
We operate in a highly competitive industry that involves numerous known and unknown risks and uncertainties that could impact our operations. The risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our financial condition and/or operating results.
We have identified the following risk as a material change from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
We have recently begun to conduct certain of our operations through a joint venture. Joint ventures could fail to meet our expectations or cease to deliver anticipated benefits. There could also be disagreements with our joint venture partners that could adversely affect our interest in a joint venture.
In May 2022, we sold a majority interest in the Isaac Mizrahi brand through the sale of a 70% interest in IM Topco, LLC to IM WHP, LLC (“WHP”), a subsidiary of WHP Global. We may enter into additional joint ventures in the future. Our operating results are, in part, dependent upon the performance of IM Topco, LLC and, in the future, could also be dependent in part upon the performance of future joint ventures. Joint ventures involve numerous risks, and could fail to meet our initial or ongoing expectations. We provide certain services to IM Topco, LLC and may provide services to future joint ventures, but we do not control the day-to-day operations of IM Topco, LLC and may not control the day-to-day operations of future joint ventures. The anticipated synergies or other benefits of a joint venture may fail to materialize due to changing business conditions or changes in our business priorities or those of our joint venture partners. Our joint venture partners, as well as any future partners, may have interests that are different from our interests, which may result in conflicting views as to the conduct of the business or future direction of the joint venture. In the event that we have a disagreement with a joint venture partner with respect to a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture, we may not be able to resolve such disagreement in our favor. Any such disagreement could have a material adverse effect on our interest in the joint venture, the business of the joint venture, or the portion of our growth strategy related to the joint venture.
In connection with the May 2022 Isaac Mizrahi transaction, the Company agreed with WHP that, in the event that IM Topco, LLC receives less than $13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from us up to $16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP. Such amount would be payable by us in either cash or equity interests in IM Topco, LLC held by us. Based on IM Topco, LLC’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, LLC’s aggregate royalties were 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. In exchange for the waiver, we agreed to provide IM Topco, LLC with a $0.6 million reduction in future service fee payments over the next eighteen months. There can be no assurance that IM Topco, LLC’s royalties will meet the required threshold level during any future measurement period. If such aggregate royalties are below the threshold and the Company does not receive a waiver, WHP will be entitled to a price adjustment which will result in either a cash payment by us or a reduction in our equity interest in WHP.
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