What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-20 · 157 added, 58 removed, 133 unchanged (62% of the section changed)

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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 Halston Brand, Ripka Brand, and C Wonder Brand, which are wholly owned by the Company;

● the TowerHill by Christie Brinkley brand, which is a new co-branded collaboration between Xcel and Christie Brinkley that launched in May 2024;

● the Longaberger Brand, which we manage through our 50% ownership interest in Longaberger Licensing, LLC;

● 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.

Our brand portfolio also included the LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”) as a wholly owned brand from April 1, 2021 through June 30, 2024;

the Lori Goldstein Brand was divested on June 30, 2024.

The Company also currently owns a 30% interest in ORME Live Inc., a short-form video and social commerce marketplace that launched in April 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.

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Summary of Operating Results

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

Three months ended June 30, 2024 (the “current quarter”) compared with the three months ended June 30, 2023 (the “prior year quarter”)

Current quarter net revenue decreased approximately $3.8 million to $3.0 million from $6.8 million for the prior year quarter.

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.

This decline was primarily attributable to the $4.2 million decrease in net product sales from $4.4 million in the prior year quarter to $0.1 million in the current quarter, 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.

The only net product sales in the current quarter were related to the final sale of certain residual jewelry inventories;

as of June 30, 2024, the Company has no remaining jewelry inventory.

Partially offsetting the decrease in net product sales was an increase of approximately $0.4 million in net licensing revenue from $2.4 million in the prior year quarter to $2.8 million in the current quarter.

This increase was primarily attributable to the new licensing agreements with best-in-class business partners that we entered into in 2023, most notably the Halston Master License with G-III Apparel Group, as well as significantly increased revenues generated by the C Wonder by Christian Siriano business on HSN and the launch of TowerHill by Christie Brinkley brand in May 2024.

Due to the June 30, 2024 divestiture of the Lori Goldstein Brand, we expect that our total net revenue, as well as the relative proportional share of our total net revenue and total accounts receivable attributable to the Qurate Agreements, will decrease in future periods;

however, due to our anticipated growth from our other brands, we expect that Qurate will remain a significant licensee.

Cost of Goods Sold

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

Current quarter cost of goods sold was less than $0.1 million, compared with $3.8 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.

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We recognized equity method losses related to our equity investments in unconsolidated affiliates (IM Topco, LLC and Orme Live Inc.) of $0.56 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.

We had a net loss of $6.3 million for the current quarter, compared with a net loss of $5.6 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

The equity method losses for each quarter related to IM Topco, LLC consisted of $0.52 million of amortization expense of the Isaac Mizrahi intellectual property assets.

During the current quarter, we recognized a $3.80 million gain on the divestiture of the Lori Goldstein Brand.

The consideration received from this transaction was non-cash in nature, and consisted of approximately $6.08 million of relief from certain accrued earn-out payments and the release of contingent obligations under contractual agreements with the buyer.

The net book value of the intangible assets sold was approximately $1.93 million, and we also incurred approximately $0.35 million of legal fees in connection with the sale.

Also during the current quarter, we recognized additional asset impairment charges of $1.2 million related to our exit from and sublease of our former offices at 1333 Broadway.

During the prior year 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.

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

The effective tax rate differed from the federal statutory rate due to the recording of a valuation allowance against the provision (benefit) and any deferred tax assets or liabilities 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 Income (Loss) Attributable to Xcel Brands, Inc.

We had net income of $0.2 million for the current quarter, compared with a net loss of $3.5 million for the prior year quarter, due to the combination of the factors outlined above.

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

We had a non-GAAP net loss of approximately $0.3 million, or $0.01 per diluted share (“non-GAAP diluted EPS”), for the current quarter and a non-GAAP net loss of $2.1 million, or $0.10 per diluted share, for the prior year quarter.

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

stockholders, exclusive of amortization of trademarks, our proportional share of trademark amortization of equity method investees, stock-based compensation and cost of licensee warrants, asset impairment charges, and income taxes.

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

stockholders, exclusive of amortization of trademarks, income (loss) from equity method investments, stock-based compensation and cost of licensee warrants, gains on sales of assets and investments, gain on lease termination, asset impairment charges, and income taxes (if any).

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 impairment charges, and costs associated with restructuring of operations.

stockholders before asset impairment charges, depreciation and amortization, income (loss) from equity method investments, interest and finance expenses (including loss on extinguishment of debt, if any), accretion of lease liability for exited lease, income taxes (if any), 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 losses from discontinued businesses.

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.

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

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

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($ in thousands)

Net loss attributable to Xcel Brands, Inc.

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

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Loss from equity method investments

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Asset impairment charges

Non-GAAP net loss

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:

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

Three Months Ended

Diluted net loss per share

Diluted earnings (loss) per share

Amortization of trademarks

Proportional share of trademark amortization of equity method investee

Loss from equity method investments

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Asset impairment charges

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Non-GAAP weighted average diluted shares

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

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

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

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($ in thousands)

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

Asset impairment charges

Depreciation and amortization

Loss from equity method investments

Interest and finance expense (income)

Accretion of lease liability for exited lease

State and local franchise taxes

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Losses from discontinued businesses

Adjusted EBITDA

Six months ended June 30, 2024 (the “current six months”) compared with the six months ended June 30, 2024 (the “prior year six months”)

Current six months net revenue decreased approximately $7.7 million to $5.1 million from $12.8 million for the prior year six months.

This decline was primarily attributable to the $8.1 million decrease in net product sales from $8.2 million in the prior year six months to $0.1 million in the current six months, 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.

The only net product sales in the current six months were related to the final sale of certain residual jewelry inventories;

as of June 30, 2024, the Company has no remaining jewelry inventory.

Partially offsetting the decrease in net product sales was an increase of approximately $0.4 million in net licensing revenue from approximately $4.6 million in the prior year six months to $5.0 million in the current six months.

however, due to our anticipated growth from our other brands, we expect that Qurate will remain a significant licensee.

Cost of Goods Sold

Current six months cost of goods sold was less than $0.1 million, compared with $8.2 million for the prior year six months.

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 $5.0 million from $12.1 million in the prior year six months to $7.1 million in the current six months.

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 $3.1 million and $3.6 million in the current six months and prior year six months, respectively.

We recognized equity method losses related to our equity investments in unconsolidated affiliates (IM Topco, LLC and Orme Live Inc.) of $1.09 million and $1.03 million for the current six months and prior year six months, respectively, due to the operations of those businesses and the distribution provisions applicable to each.

The equity method losses for each six-month period related to IM Topco, LLC consisted of $1.03 million of amortization expense of the Isaac Mizrahi intellectual property assets.

During the current six months, we recognized a $3.80 million gain on the divestiture of the Lori Goldstein Brand.

The net book value of the intangible assets sold was approximately $1.93 million, and we also incurred approximately $0.35 million of legal fees in connection with the sale.

During the current six months, we recognized asset impairment charges of approximately $3.5 million related to our exit from and sublease of our offices at 1333 Broadway, of which approximately $3.1 million related to the operating lease right-of-use asset and approximately $0.4 million related to leasehold improvements at that location.

During the prior year 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.

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

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

Net Loss Attributable to Xcel Brands, Inc.

We had a net loss of $6.1 million for the current six months, compared with a net loss of $9.1 million for the prior year six 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 $2.1 million, or $0.10 per diluted share for the current six months and a non-GAAP net loss of $5.6 million, or $0.28 per diluted share, for the prior year six months.

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:

Six Months Ended

($ in thousands)

Net loss attributable to Xcel Brands, Inc.

Amortization of trademarks

Loss from equity method investments

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

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:

Six Months Ended

Diluted loss per share

Amortization of trademarks

Loss from equity method investments

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Asset impairment charges

Non-GAAP diluted EPS

Non-GAAP weighted average diluted shares

We had Adjusted EBITDA of approximately $(1.6) million for the current six months, compared with approximately $(3.3) million for the prior year six months.

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:

Six Months Ended

($ in thousands)

Net loss attributable to Xcel Brands, Inc.

Asset impairment charges

Depreciation and amortization

Proportional share of trademark amortization of equity method investee

Loss from equity method investments

Interest and finance expense

Accretion of lease liability for exited lease

State and local franchise taxes

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Losses from discontinued businesses

Adjusted EBITDA

Liquidity and Capital Resources

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;

As of June 30, 2024 and December 31, 2023, our unrestricted cash and cash equivalents were $0.9 million and $3.0 million, respectively.

Restricted cash at June 30, 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.

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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.

As of June 30, 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, 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.

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 $1.1 million and $2.9 million as of June 30, 2024 and December 31, 2023, respectively.

Liquidity and Management’s Plans

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.

We incurred a net loss attributable to Company stockholders of approximately $6.1 million during the six months ended June 30, 2024 (which included non-cash expenses of approximately $7.7 million), and had an accumulated deficit of approximately $59.9 million as of June 30, 2024.

Net cash used in operating activities was approximately $2.9 million for the six months ended June 30, 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.

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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.

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 2022.

In addition, during the first six months of 2024, management took actions which further reduced direct operating expenses to a run rate of approximately $12.5 million per annum, and going forward beginning in the third quarter of 2024, will reduce operating expenses to a run rate of approximately $10 million per annum, due to the elimination of expenses related to the Lori Goldstein Brand and reduction of executive cash compensation.

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.

During the six months ended June 30, 2024, the Company issued new shares of common stock for net proceeds of approximately $1.9 million, which provided the Company with additional liquidity.

Additionally, the Company entered into a divestiture transaction which relieved the Company of its contractual obligations to make future cash payments of approximately $1.0 million, and also relieved the Company of a potential future contingent obligation to make future cash payments of up to $11.3 million.

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.

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of June 30, have been alleviated.

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

Operating Activities

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.

Net cash used in operating activities was approximately $2.88 million in the current six months, compared with approximately $1.47 million in the prior year six months.

The current six months net cash used in operating activities was primarily attributable to the combination of the net loss of $(6.18) million plus non-cash items of approximately $4.10 million and the net change in operating assets and liabilities of approximately $(0.80) million.

Non-cash items were primarily comprised of approximately $3.48 million of asset impairment charges, $3.13 million of depreciation and amortization, and our $1.09 million undistributed proportional share of net losses from equity method investees, partially offset by a $(3.80) million gain on the divestiture of the Lori Goldstein Brand.

The net change in operating assets and liabilities was primarily comprised of (i) a decrease in various operating liabilities of $(0.56) million, (ii) a decrease in lease-related assets and liabilities of $(0.63) million, and (iii) an increase in other long-term liabilities of $0.39 million.

The prior year 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.

Investing Activities

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.

Net cash used in investing activities in the current six months was comprised of purchases of furniture and fixtures totaling approximately $0.10 million.

Net cash provided by investing activities in the prior year 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.

Financing Activities

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.

Net cash provided by financing activities in the current six months was primarily attributable to $1.90 million of net proceeds generated by equity issuance transactions undertaken during the first quarter, as described in more detail below, partially offset by $0.25 million of scheduled principal payments made on our term loan debt.

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

Public Offering and Private Placement Transactions

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Contingent Obligation – Isaac Mizrahi Transaction

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

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.

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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%.

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

Contingent Obligation – Lori Goldstein Earn-Out

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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.

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

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

During the first quarter of 2024, the Company paid approximately $0.3 million of the $1.0 million earned.

During the current quarter, as a result of the divestiture of the Lori Goldstein Brand, the seller waived their rights with respect to the Lori Goldstein Earn-Out amounts that had been previously earned and had not yet been paid, and terminated their rights to any future payments under the Lori Goldstein Earn-Out.

As a result, the Company de-recognized approximately $1.03 million of accrued Lori Goldstein Earn-Out payments and the remaining balance of approximately $5.05 million of contingent obligations recorded on the Company’s balance sheet.

As of June 30, 2024, there were no liability amounts remaining on the Company’s balance sheet related to the Lori Goldstein Earn-Out.

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 Halston brand, C Wonder brand, Lori Goldstein brand, and TowerHill by Christie Brinkley brand have a core business in fashion apparel and accessories.

The Halston brand, C Wonder 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.

While the 2022 sale of a majority interest in the Isaac Mizrahi brand resulted in a decrease in our licensing revenues, as that brand represented a significant portion of our historical licensing 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, including the C Wonder by Christian Siriano business on HSN, and the recently-launched 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, 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.

These restructuring initiatives were originally expected to provide us with approximately $15 million of cost savings on an annualized basis compared to our previous operating model.

Based on additional actions taken by management during the first six months of 2024 and the recent divestiture of the Lori Goldstein brand, the Company’s direct operating costs on an annualized basis will have been reduced from approximately $8 million per quarter under our previous operating model to approximately $2.5 million per quarter on a going-forward basis.

This represents approximately $22 million of cost savings on an annualized basis compared to our cost structure in 2022.

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

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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.

During the three months ended March 31, 2024, there were no material changes to our accounting policies.

During the three and six months ended June 30, 2024, there were no material changes to our critical accounting policies or estimates.

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