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Item 2. Management’s Discussion and Analysis

2024-05-20 compared with 2023-11-20 · 103 added, 189 removed, 88 unchanged (77% of the section changed)

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Xcel Brands, Inc.

(“Xcel,” the “Company,” “we,” “us,” or “our”) is a media and consumer products company engaged in the design, production, marketing, live streaming, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

(“Xcel,” the “Company,” “we,” “us,” or “our”) is a media and consumer products company engaged in the design, licensing, marketing, live streaming, and social commerce sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

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

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.

● 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, 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.

Currently, the Company’s brand portfolio consists of the following:

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

● the Longaberger Brand, which we manage through our 50% ownership interest in Longaberger Licensing, LLC, and the CB Brand, which is a co-owned brand between Xcel and Christie Brinkley;

● the Isaac Mizrahi Brand, in which we hold a 30% noncontrolling interest and continue to contribute to the operations of the brand through a service agreement.

We also own a 30% interest in ORME Live Inc., a short-form video and social commerce marketplace that launched in the first quarter of 2024.

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

Our brands have generated over $5 billion in retail sales via live streaming in interactive television and digital channels alone, and our brands collectively reach over 5 million social media followers through Facebook, Instagram, and TikTok.

All of the followers may not be unique followers, as many followers may follow multiple brands and follow our brands on multiple platforms.

Our objective is to build a diversified portfolio of lifestyle consumer products 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, CJO, JTV, etc.);

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

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

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

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

● licensing our brands to manufacturers and retailers for promotion and distribution through e-commerce, social commerce, and traditional brick-and-mortar retail channels;

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

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● our management team, including our officers’ and directors’ experience in, and relationships within the industry;

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

● our design, sales, marketing, and technology platform that enables us to design trend-right product;

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

Three months ended March 31, 2024 (the “current quarter”) compared with the three months ended March 31, 2023 (the “prior year quarter”)

Current quarter net revenue decreased approximately $3.9 million to $2.2 million from $6.1 million for the prior year quarter.

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.

This decline was almost entirely attributable to the decrease in net product sales to zero, due to the exit from our wholesale apparel and fine jewelry sales operations and outsourcing of our Longaberger business as part of the restructuring and transformation of our business operating model in 2023.

Net licensing revenue was approximately $2.2 million in both the current quarter and prior year quarter, and with a decrease of less than 2% was essentially flat year-over-year.

Cost of Goods Sold

Current quarter cost of goods sold was $0.2 million, compared with $1.5 million for the prior year quarter.

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 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.

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

This was driven by the aforementioned exit from our wholesale and direct-to-consumer operations as part of the 2023 business model restructuring.

Direct Operating Costs and Expenses

Direct operating costs and expenses decreased approximately $3.0 million from $7.0 million in the prior year quarter to $4.0 million in the current quarter.

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.

This decrease was primarily attributable to the 2023 restructuring and transformation of our business operating model, which included reductions in staffing levels as well as related reductions in other overhead costs.

Other Operating Costs and Expenses (Income)

Depreciation and amortization expense was approximately $1.6 million and $1.8 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 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 and state taxes, which increased the effective tax rate by approximately 5%

We recognized equity method losses related to our equity investments in unconsolidated affiliates (IM Topco, LLC and Orme Live Inc.) of $0.53 million and $0.52 million for the current quarter and prior year quarter, respectively, due to the operations of those businesses and the distribution provisions applicable to each.

During the current quarter, we recognized asset impairment charges of $2.3 million related to our exit from and sublease of our offices at 1333 Broadway, of which $1.9 million related to the operating lease right-of-use asset and $0.4 million related to leasehold improvements at that location.

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.

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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 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 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.

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 impairment charges, and costs associated with restructuring of operations.

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

Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any other unusual or non-recurring items.

Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by

these expenses or any other unusual or non-recurring items.

When evaluating our performance, you should consider non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.

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

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

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

Three Months Ended

September 30,

($ in thousands)

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Stock-based compensation and cost of licensee warrants

Income tax benefit

Asset impairment charges

Non-GAAP net loss

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:

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

Three Months Ended

September 30,

Diluted loss per share

Diluted net loss per share

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Stock-based compensation

Income tax benefit

Stock-based compensation and cost of licensee warrants

Asset impairment charges

Non-GAAP diluted EPS

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Three Months Ended

September 30,

($ in thousands)

Net loss attributable to Xcel Brands, Inc.

Depreciation and amortization

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 and cost of licensee warrants

Costs associated with restructuring of operations

Adjusted EBITDA

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 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 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.

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 $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 $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)

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 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 nine months was $0.0 million, compared with $3.5 million for the prior year nine 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 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 $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 $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:

Nine Months Ended

September 30,

($ in thousands)

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

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

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 impairment

Income tax provision

Non-GAAP net loss

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:

Nine Months Ended

September 30,

Diluted (loss) earnings per share

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

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 impairment

Income tax provision

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.

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

Nine Months Ended

September 30,

($ in thousands)

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

Asset impairment charges

Depreciation and amortization

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Interest and finance expense

Income tax provision

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 impairment

Costs associated with restructuring of operations

Adjusted EBITDA

Liquidity and Capital Resources

As of September 30, 2023 and December 31, 2022, our cash and cash equivalents were $2.2 million and $4.6 million, respectively.

As of March 31, 2024 and December 31, 2023, our unrestricted cash and cash equivalents were $1.6 million and $3.0 million, respectively.

Restricted cash at March 31, 2024 (included within other assets in the condensed consolidated balance sheet) consisted of $0.7 million of cash deposited with Israel Discount Bank of New York as collateral for a standby letter of credit associated with a real estate lease;

there was no restricted cash as of December 31, 2023.

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

Our current “licensing plus” operating model is a working capital light business model, and generally does not require material capital expenditures.

As of March 31, 2024, 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 $2.9 million and $8.8 million as of September 30, 2023 and December 31, 2022, respectively.

Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations, deferred revenue, and any contingent obligations payable in common stock) was $2.1 million and $2.9 million as of March 31, 2024 and December 31, 2023, respectively.

Liquidity and Management’s Plans

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.

We incurred a net loss attributable to Company stockholders of approximately $6.3 million during the three months ended March 31, 2024 (which included non-cash expenses of approximately $4.6 million), and had an accumulated deficit of approximately $60.1 million as of March 31, 2024.

Net cash used in operating activities was approximately $2.6 million for the three months ended March 31, 2024.

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 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.

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 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

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 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 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.

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 September 30, 2023, have been alleviated.

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.

During the year ended December 31, 2023, management implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting its business from a wholesale/licensing hybrid model into a “licensing plus” model.

To affect this transition, the Company entered into various new licensing agreements and joint venture arrangements with best-in-class business partners.

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

Management believes that this evolution of the Company’s operating model will provide the Company with significant cost savings and allow the Company to reduce and better manage its exposure to operating risks.

As of December 31, 2023, the Company had reduced payroll costs by approximately $6 million and operating expenses (excluding non-recurring charges related to the restructuring) by approximately $9 million, on an annualized basis when compared to the corresponding periods in the prior year.

Also during the year ended December 31, 2023, the Company entered into a new term loan agreement in the amount of $5 million, which provided the Company with additional liquidity.

Further, in March 2024, the Company issued new shares of common stock for net proceeds of approximately $1.9 million, which provided the Company with additional liquidity.

Based on the aforementioned events and changes, management expects that existing cash and future operating cash flows will be adequate to meet the Company’s operating needs, term debt service obligations, and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q;

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of March 31, 2024, 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.

Operating Activities

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..

Net cash used in operating activities was approximately $2.61 million in the current quarter, compared with approximately $2.92 million in the prior year quarter.

The current quarter net cash used in operating activities was primarily attributable to the combination of the net loss of $(6.35) million plus non-cash items of approximately $4.59 million and the net change in operating assets and liabilities of approximately $(0.85) million.

Non-cash items were primarily comprised of asset impairment charges of approximately $2.30 million, $1.59 million of depreciation and amortization, and the $0.53 million undistributed proportional share of net loss of equity method investees.

The net change in operating assets and liabilities was primarily comprised of (i) a

decrease in deferred revenue of approximately $(0.22) million, mainly related to the Halston Master License agreement, (ii) a decrease in various operating liabilities of $(0.56) million, and (iii) a decrease in lease-related assets and liabilities of $(0.24) million.

The prior year quarter net 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 an equity method investee.

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

Investing Activities

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

There was no net cash used in or provided by investing activities for the current quarter.

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

Financing Activities

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.

Net cash provided by financing activities was $1.90 million, due to the financing transactions described below.

There was no net cash used in or provided by financing activities in the prior year quarter.

Public Offering and Private Placement Transactions

On March 15, 2024, the Company entered into an underwriting agreement with Craig-Hallum Capital Group LLC (the “Representative”), as the representative of the underwriters, relating to a firm commitment underwritten public offering (the “Offering”) of 3,284,422 shares of the Company’s common stock at a price to the public of $0.65 per share.

The closing of the Offering occurred on March 19, 2024.

The net proceeds to the Company from the sale of the shares, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the Company, were approximately $1.7 million.

Upon closing of the Offering, the Company issued the Representative certain warrants to purchase up to 182,952 shares of common stock (the “Representative’s Warrants”) as compensation.

The Representative’s Warrants will be exercisable at a per share exercise price of $0.8125.

The Representative’s Warrants are exercisable, in whole or in part, during the four and one-half-year period commencing 180 days from the commencement of sales of the shares of common stock in the Offering.

In connection with the Offering, on March 14, 2024, the Company entered into subscription agreements with each of Robert W.

D’Loren, Chairman and Chief Executive Officer of the Company;

an affiliate of Mark DiSanto, a director of the Company;

and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company to purchase 132,589, 132,589, and 29,464 shares, respectively (collectively, the “Private Placement Shares”), at a price of $0.98 per Private Placement Share.

The total number of Private Placement Shares purchased was 294,642.

Net proceeds after payment of agent fees to the Representative were approximately $0.3 million.

The purchase of the Private Placement Shares closed concurrently with the Offering.

The aggregate number of shares of common stock issued from the Offering and the Private Placement was 3,579,064 shares and the total net proceeds received was approximately $1.9 million.

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.

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi brand, we agreed with WHP (the buyer) that, in the event that IM Topco, LLC receives less than $13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP would 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.

In November 2023, this agreement was amended such that the purchase price adjustment provision was waived until the measurement period ending March 31, 2024.

No amount has been recorded in the Company’s condensed consolidated balance sheets related to this contingent obligation.

In April 2024, the Company, WHP, and IM Topco, LLC entered into an amendment to this agreement, such that the purchase price adjustment provision within the membership purchase agreement was waived until the measurement period ending September 30, 2025.

Additionally, the parties agreed that if IM Topco, LLC royalties are less than $13.5 million for the twelve-month period ending March 31, 2025 or less than $18.0 million for the year ending December 31, 2025, Xcel shall transfer equity interests in IM Topco, LLC to WHP, such that Xcel’s ownership interest in IM Topco, LLC would decrease from 30% to 17.5%, and WHP’s ownership interest in IM Topco, LLC would increase from 70% to 82.5%.

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks, we agreed to pay the seller additional cash consideration of up to $12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

The Lori Goldstein Earn-Out was initially recorded as a liability of $6.6 million, based on the difference between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid.

As of December 31, 2022, based on the performance of the Lori Goldstein brand to date, approximately $0.2 million of additional consideration was earned by the seller, and thus $0.2 million of the balance was recorded as a current liability and $6.4 million was recorded as a long-term liability.

The $0.2 million of additional consideration was paid to the seller during 2023.

Based on the performance of the Lori Goldstein through December 31, 2023, approximately $1.0 million of incremental additional consideration was earned by the seller, which will be paid out in 2024.

During the current quarter, the Company paid approximately $0.3 million of the $1.0 million earned, and as of March 31, 2024, $0.7 million of the remaining balance was recorded as a current liability and $5.4 million was recorded as a long-term liability.

Other Factors

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

The 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 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.

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.

The Halston brand, C Wonder brand, Lori Goldstein brand, and TowerHill by Christie Brinkley 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 2022 sale of a majority interest in the Isaac Mizrahi brand 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, and additional domestic and international licensing arrangements, and acquiring and collaborating with additional brands, launching the C Wonder by Christian Siriano business on HSN, and the planned May 2024 launch of the TowerHill by Christie Brinkley brand.

During 2023, we restructured our business operations by shifting our business from a wholesale/licensing hybrid model into a “licensing plus” business model.

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 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.

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.

These restructuring initiatives, on a go-forward basis, are expected to provide us with approximately $15 million of cost savings on an annualized basis compared to our previous operating model.

Nonetheless, we continue to face a number of headwinds in the current macroeconomic environment.

Poor economic and market conditions, including inflation and rising consumer debt levels, 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.

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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.

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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Please refer to our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 19, 2024, for a discussion of our critical accounting policies and estimates.

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

During the three months ended March 31, 2024, there were no 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