Nature of Operations, Background, and Basis of Presentation

9 Months Ended

Sep. 30, 2024

Nature of Operations, Background, and Basis of Presentation [Abstract]

Nature of Operations, Background, and Basis of Presentation

1. Nature of Operations, Background, and Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2023 (which has been derived from audited financial statements) and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position, and cash flows of Xcel Brands, Inc. and its subsidiaries (the “Company” or "Xcel"). The results of operations for the interim periods presented herein are not necessarily indicative of the results for the entire fiscal year or for any future interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on April 19, 2024.

The Company is a media and consumer products company engaged in the design, licensing, marketing, live streaming, and social commerce sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

Currently, the Company’s brand portfolio consists of the Halston brands (the "Halston Brand"), the Judith Ripka brands (the "Ripka Brand"), the C Wonder brands (the "C Wonder Brand"), the Longaberger brand (the “Longaberger Brand”), the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the TowerHill by Christie Brinkley brand (the “CB Brand”), and other proprietary brands.

● The Halston Brand, Ripka Brand, and C Wonder Brand are wholly owned by the Company.

● The Company manages the Longaberger Brand through its 50% ownership interest in Longaberger Licensing, LLC; the Company consolidates Longaberger Licensing, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party.

● The Company holds a noncontrolling interest in the Isaac Mizrahi Brand through its 30% ownership interest in IM Topco, LLC; the Company accounts for its interest in IM Topco, LLC using the equity method of accounting.

● The CB Brand is a new co-branded collaboration between Xcel and Christie Brinkley, announced in 2023 and launched in May 2024.

The Company’s 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 (see Note 3 for additional details).

The Company also owns a 30% interest in ORME Live, Inc. (“ORME”), a short-form video and social commerce marketplace that launched in April 2024.

The Company primarily generates revenue through the licensing of its brands through contractual arrangements with manufacturers and retailers. The Company, through its licensees, distributes through an 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.

Prior to and for a portion of 2023, the Company also engaged in wholesale and direct-to-consumer sales of products under its brands. The Company’s former wholesale and direct-to-consumer operations were presented as "Net sales" and "Cost of goods sold" in the condensed consolidated statements of operations, separately from the Company’s licensing revenues. The only net sales and cost of goods sold recognized for the nine months ended September 30, 2024 were (i) the final sale of certain residual jewelry inventories during the three months ended June 30, 2024 and (ii) the sale of all remaining inventory related to the Longaberger Brand during the three months ended September 30, 2024. As of September 30, 2024, the Company has no remaining inventory.

Liquidity and Management’s Plans  

The Company 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 $3.80 million non-cash gain 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, of which $2.6 million of the cash used in operating activities was attributable to the three months ended March 31, 2024. The Company had unrestricted cash and cash equivalents of approximately $0.2 million as of September 30, 2024, and a working capital deficit (current assets less current liabilities, excluding the current portions of lease obligations, deferred revenue, and any contingent obligations payable in shares) of approximately $(0.4) million as of September 30, 2024.

The aforementioned factors raise uncertainties about the Company’s ability to continue as a going concern. However, in December 2024, the Company entered into a new term loan agreement for an aggregate amount of $10 million, which provides the Company with approximately $3.5 million of additional liquidity after repayment of the previous term loan (see Note 13 for additional details). In connection with the new term loan debt, Company’s working capital increased by approximately $4.5 million subsequent to September 30, 2024.

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. 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.

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 September 30, 2024 have been alleviated.