What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-12-20 compared with 2024-08-14 · 129 added, 113 removed, 177 unchanged (58% of the section changed)

31 unchanged sentences

Summary of Operating Results

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 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.

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

Current quarter net revenue decreased $0.73 million to $1.91 million from $2.64 million for the prior year quarter.

This decrease was primarily attributable to a $0.87 million reduction in net licensing revenue, which declined from $2.38 million in the prior year quarter to $1.51 million in the current quarter, and was mainly driven by the June 30, 2024 divestiture of the Lori Goldstein Brand, partially offset by increased licensing revenues generated by our other brands.

In the current quarter, we recognized $0.41 million of net product sales from the sale of all remaining inventory of the Longaberger Brand to a third party at cost.

As of September 30, 2024, we had no remaining inventory.

Prior year quarter net product sales of $0.26 million represent the direct-to-consumer sales operations related to the Longaberger Brand, prior to our outsourcing of that business in the fourth quarter of 2023.

Cost of Goods Sold

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.

Current quarter cost of goods sold was $0.41 million, as we sold all remaining inventory related to the Longaberger Brand to a third party during the current quarter, at cost.

Direct Operating Costs and Expenses

Direct operating costs and expenses decreased approximately $2.79 million, from $5.62 million in the prior year quarter to $2.83 million in the current quarter.

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.

This decrease was primarily attributable to the 2023 restructuring and transformation of our business operating model, along with additional cost reduction actions taken by management in the current year, which have significantly reduced the Company’s payroll, operating, and overhead costs.

As of the third quarter of 2024, the Company has reduced its direct operating expenses to a current run rate of approximately $11 million per annum.

Other Operating Costs and Expenses (Income)

Depreciation and amortization expense was approximately $1.5 million and $1.8 million in the current quarter and prior year quarter, respectively.

Depreciation and amortization expense decreased approximately $0.77 million, from $1.68 million in the prior year quarter to $0.91 million in the current quarter.

This decrease is primarily attributable to the June 30, 2024 divestiture of the Lori Goldstein Brand, which included trademarks related to that brand with a net book value of approximately $1.93 million at the time of the divestiture.

We recognized equity method losses related to our equity investments in unconsolidated affiliates (IM Topco, LLC and Orme Live Inc.) of $0.59 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.

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.

We also recognized a $6.25 million non-cash charge in the current quarter to recognize the estimated value of our contingent obligation to transfer a portion of our equity ownership interests in IM Topco, LLC to WHP after March 31, 2025.

This charge essentially represents a subsequent reduction of the previously-recognized gain from the 2022 sale of a majority interest in the Isaac Mizrahi Brand.

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 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 $9.21 million for the current quarter, compared with a net loss of $5.14 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

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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.

stockholders, exclusive of amortization of trademarks, income (loss) from equity method investments, changes in ownership interests of 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 (loss) 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.

We had Adjusted EBITDA of approximately $(1.05) million for the current quarter, compared with approximately $(1.41) million for the prior year quarter.

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

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.

Management believes non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus, these non-GAAP measures provide supplemental information to assist investors in evaluating the Company’s financial results.

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

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

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.

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 income (loss) attributable to Xcel Brands, Inc.

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

Management uses non-GAAP net income (loss), 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.

Management believes non-GAAP net income (loss), non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus, these non-GAAP measures provide supplemental information to assist investors in evaluating the Company’s financial results.

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

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

In evaluating non-GAAP net income (loss), 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 (loss), 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 (loss), 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:

Three Months Ended

September 30,

($ in thousands)

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

Net loss attributable to Xcel Brands, Inc.

Amortization of trademarks

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

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 earnings (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 loss per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:

Three Months Ended

Diluted earnings (loss) per share

September 30,

Diluted loss per share

Amortization of trademarks

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

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

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

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

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

Three Months Ended

September 30,

($ in thousands)

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

Asset impairment charges

Net loss attributable to Xcel Brands, Inc.

Depreciation and amortization

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

Interest and finance expense (income)

2 unchanged sentences

Stock-based compensation and cost of licensee warrants

Gains on sales of assets and investments

Gain on lease termination

Losses from discontinued businesses

Costs associated with restructuring of operations

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.

Nine months ended September 30, 2024 (the “current nine months”) compared with the nine months ended September 30, 2024 (the “prior year nine months”)

Current nine months net revenue decreased approximately $8.42 million to $7.05 million from $15.47 million for the prior year nine months.

This decline was primarily attributable to the $7.90 million decrease in net product sales from $8.44 million in the prior year nine months to $0.54 million in the current nine 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 nine months were related to the final sale of certain residual jewelry inventories and the sale of all remaining inventory related to the Longaberger brand;

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

Net licensing revenues also decreased, from $7.03 million in the prior year nine months to $6.52 million in the current nine months.

This decline of approximately $0.51 million was primarily attributable to the June 30, 2024 divestiture of the Lori Goldstein Brand, partially offset by licensing revenues from 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.

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.

Current nine months cost of goods sold was $0.45 million, compared with $6.72 million for the prior year nine months.

This decrease 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.

Direct operating costs and expenses decreased approximately $7.86 million from $17.77 million in the prior year nine months to $9.91 million in the current nine months.

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.

Depreciation and amortization expense decreased approximately $1.22 million, from $5.26 million in the prior year nine months to $4.04 million in the current nine months.

Equity method losses related to our equity investments in unconsolidated affiliates (IM Topco, LLC and Orme Live Inc.) were $1.68 million and $1.55 million for the current nine months and prior year nine months, respectively, due to the operations of those businesses and the distribution provisions applicable to each.

The equity method losses for each nine-month period related to IM Topco, LLC consisted of $1.55 million of amortization expense of the Isaac Mizrahi intellectual property assets.

We also recognized a $6.25 million non-cash charge in the current nine months to recognize the estimated value of our contingent obligation to transfer a portion of our equity ownership interests in IM Topco, LLC to WHP after March 31, 2025.

This charge essentially represents a subsequent reduction of the previously-recognized gain from the 2022 sale of a majority interest in the Isaac Mizrahi Brand.

During the current nine 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.

Also during the current nine months, we recognized asset impairment charges of approximately $3.48 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 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 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 nine months and the prior year nine months was approximately 0% for both periods, resulting in an income tax benefit of $0 for both 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.

We had a net loss of $15.31 million for the current nine months, compared with a net loss of $14.26 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 $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.

We had a non-GAAP net loss of approximately $3.44 million, or $0.15 per diluted share for the current nine months and a non-GAAP net loss of $8.66 million, or $0.44 per diluted share, for the prior year nine months.

We had Adjusted EBITDA of approximately $(2.66) million for the current nine months, compared with approximately $(4.57) million for the prior year nine 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

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

Stock-based compensation and cost of licensee warrants

4 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

Diluted loss per share

1 unchanged sentence

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

Stock-based compensation and cost of licensee warrants

4 unchanged sentences

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

Nine Months Ended

September 30,

($ in thousands)

3 unchanged sentences

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

Interest and finance expense

4 unchanged sentences

Gain on lease termination

Losses from discontinued businesses

Costs associated with restructuring of operations

Adjusted EBITDA

Liquidity and Capital Resources

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;

As of September 30, 2024 and December 31, 2023, our unrestricted cash and cash equivalents were $0.24 million and $3.00 million, respectively.

Restricted cash at September 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.

1 unchanged sentence

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

As of June 30, 2024, we have no significant commitments for future capital expenditures.

As of September 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 $1.1 million and $2.9 million as of June 30, 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 approximately negative $0.4 million and positive $2.9 million as of September 30, 2024 and December 31, 2023, respectively.

Post closing of the new term loan debt in December 2024 (as described further below), the Company’s working capital increased by approximately $4.5 million.

Liquidity and Management’s Plans

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.

We incurred a net loss attributable to Company stockholders of approximately $15.3 million during the nine months ended September 30, 2024 (which included non-cash expenses of approximately $15.8 million, and a non-cash gain of approximately $3.8 million on the divestiture of the Lori Goldstein Brand), and had an accumulated deficit of approximately $69.2 million as of September 30, 2024.

Net cash used in operating activities was approximately $3.3 million for the nine months ended September 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.

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 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.

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.

These restructuring initiatives included entering into various new licensing agreements and joint venture arrangements with best-in-class business partners, and reducing the Company’s payroll, overhead, and other operating costs by approximately $15 million on an annualized basis when compared to 2022.

During the first nine months of 2024, management took further actions to optimize its cost structure and manage its liquidity, including entering into a divestiture transaction (see Note 3 for details) which eliminated certain operating and compensation expenses, relieved the Company of its contractual obligations to make future cash payments of approximately $1 million, and relieved the Company of a potential future contingent obligation to make future cash payments of up to approximately $11 million.

As of the third quarter of 2024, the Company has reduced its direct operating expenses to a current run rate of approximately $11 million per annum.

Also during the first nine months of 2024, the Company issued new shares of common stock for net proceeds of approximately $2 million.

Further, in December 2024, the Company entered into a new term loan agreement for the aggregate amount of $10 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 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.

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of September 30, 2024 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.

Operating Activities

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.

Net cash used in operating activities was approximately $3.31 million in the current nine months, compared with approximately $2.81 million in the prior year nine months.

The current nine months net cash used in operating activities was primarily attributable to the combination of the net loss of $(15.40) million plus non-cash items of approximately $11.99 million and the net change in operating assets and liabilities of approximately $0.11 million.

Non-cash items were primarily comprised of approximately $6.25 million for the change in value of contingent obligations, $4.04 million of depreciation and amortization expense, $3.48 million of asset impairment charges, and our $1.68 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 decreases in accounts receivable and inventory of approximately $0.59 million and $0.45 million, respectively, partially offset by a decrease in lease-related assets and liabilities of $(0.71) million.

The prior year 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 expense, our $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 prior year 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.

Investing Activities

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.

Net cash used in investing activities in the current nine months was comprised of purchases of furniture and fixtures totaling approximately $0.11 million.

Net cash provided by investing activities in the prior year 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.

Financing Activities

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.

Net cash provided by financing activities in the current nine 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 $0.50 million of scheduled principal payments made on our term loan debt.

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

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.

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.

Prior to the current quarter, no amount was recorded on the Company’s consolidated balance sheets related to this contingent obligation.

However, during the current quarter, management concluded that, based on current trends in and projections of IM Topco’s royalty revenues, the Company would likely be required to make such transfer of equity interests to WHP after March 31, 2025.

As such, the Company estimated and recorded a contingent obligation of $6.25 million as a reduction to the carrying value of the equity method investment in the accompanying condensed consolidated balance sheet as of September 30, 2024.

Contingent Obligation – Lori Goldstein Earn-Out

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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.

During the current nine months, 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.

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

Debt Refinancing

On December 12, 2024, the Company and certain of its subsidiaries entered into a new loan and security agreement with FEAC Agent, LLC, as administrative agent and collateral agent, FEF Distributors, LLC, as lead arranger, and Restore Capital, LLC, as agent for certain lenders, pursuant to which the lenders made term loans to the Company and agreed to make additional term loans to the Company upon the satisfaction of a condition precedent described in the loan agreement .

The term loans under the loan agreement are as follows:

(1) a term loan in the amount of $3.95 million (“Term Loan A”) was made on the closing date, (2) a term loan in the amount of $4.0 million (“Term Loan B”) was made on the closing date, and (3) a term loan in the amount of $2.05 million (“Delayed Draw Term Loan”;

Term Loan A, Term Loan B and Delayed Draw Term Loan are referred to as “Term Loans”) which will be made upon the satisfaction of a condition precedent described in the loan agreement.

The proceeds from Term Loan A and Term Loan B were used to repay the remaining balance of the Company’s October 2023 term loan with IDB, as well as to pay fees, costs, and expenses incurred in connection with entering into the new loan agreement, and the balance may be used for working capital purposes.

The proceeds from the Delayed Draw Term Loan will be deposited in a bank account to satisfy a liquidity covenant in the loan agreement.

Principal amounts on Term Loans are payable on a pro rata basis in quarterly installments of $250,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on March 31, 2026, with the unpaid balance due at the maturity date of December 12, 2028.

Interest on Term Loans accrues at an annual rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York for an interest period equal to three months, subject to a 2.0% floor, plus (i) 8.5% for Term Loan A and Delayed Draw Term Loan and (ii) 13.5% for Term Loan B.

Interest on amounts outstanding under the Term Loans accrues daily and is payable at the end of each calendar month.

The Term Loans are guaranteed by certain direct and indirect subsidiaries of the Company, and are secured by all of the asset of the Company and such subsidiaries.

The loan agreement contains various customary financial covenants and reporting requirements, as specified and defined in the loan agreement.

In connection with the loan agreement, the Company issued warrants to purchase an aggregate of 1,456,667 shares of the Company’s common stock.

These warrants have an exercise price of $0.6315 per share, are immediately exercisable, and expire on December 12, 2034.

Further, IPX Capital, LLC (“IPX”), a company controlled by Robert W.

D’Loren, Chairman and Chief Executive Officer of the Company , purchased a 12.5% undivided, last-out, subordinated participation interest in Term Loan B for a purchase price of $500,000;

IPX also received 153,333 of the aforementioned warrants.

Also, in October 2024, IPX made a $250,000 non-interest-bearing advance to one of the Company’s subsidiaries, of which $200,000 was repaid to IPX upon the closing of the December 12, 2024 debt refinancing transaction

Other Factors

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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 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.

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 have taken and continue to take 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.

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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.

Based on additional actions taken by management during the first nine months of 2024 and the recent divestiture of the Lori Goldstein brand, the Company’s direct operating costs on an annualized basis have been reduced from approximately $8 million per quarter under our previous operating model to approximately $2.5 to $3.0 million per quarter on a going-forward basis.

This represents approximately $21 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.

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.

Poor economic and market conditions, including the impacts of recent 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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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 and six months ended June 30, 2024, there were no material changes to our critical accounting policies or estimates.

During the three and nine months ended September 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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What changed 10-Q

Item 2. Management’s Discussion and Analysis