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Equity Method Investment

9 Months Ended

Sep. 30, 2023

Equity Method Investment, Summarized Financial Information [Abstract]

Equity Method Investment

2. Equity Method Investment

IM Topco, LLC

On May 27, 2022, Xcel (along with IM Topco, LLC (“IM Topco”) and IM Brands, LLC (“IMB”), both wholly owned subsidiaries of the Company) and IM WHP, LLC (“WHP”), a subsidiary of WHP Global, a private equity-backed brand management and licensing company, entered into a membership purchase agreement. Pursuant to this agreement, on May 31, 2022, (i) the Company contributed assets owned by IMB, including the Isaac Mizrahi Brand trademarks and other intellectual property rights relating thereto into IM Topco, and (ii) the Company sold 70% of the membership interests of IM Topco to WHP.

The purchase price paid by WHP to the Company at the closing of the transaction consisted of $46.2 million in cash. The Company incurred approximately $0.9 million of expenses directly related to this transaction, including legal fees and agent fees, of which $0.1 million of the agent fees were paid through the issuance of 65,275 shares of the Company’s common stock, which were recognized as a reduction to the gain from the transaction. The Company recognized a net pre-tax gain from the transaction of $20.6 million, which is classified within “other operating costs and expense (income)” in the condensed consolidated statements of operations for the nine months ended September 30, 2022.

The Company accounts for its 30% interest in the ongoing operations of IM Topco as other expense (income) under the equity method of accounting. Pursuant to the business venture agreement between the Company and WHP governing the operation of IM Topco, IM Topco’s net cash flow (as defined in the agreement) shall be distributed to the members during each fiscal year no less than once per fiscal quarter, as follows:

(i)

first, 100% to WHP, until WHP has received an aggregate amount during such fiscal year equal to $8,852,000 (subject to adjustment in certain circumstances as set forth in the agreement);

(ii)

second, 100% to Xcel, until Xcel has received an aggregate amount during such fiscal year equal to $1,316,200 (subject to adjustment in certain circumstances as set forth in the agreement); and

(iii)

thereafter, in proportion to the members’ respective percentage interests.

Based on these distribution provisions, the Company recognized an equity method loss of $0.52 million and $1.55 million related to its investment for the three and nine months ended September 30, 2023, respectively. The Company recognized an equity method loss of $0.28 million related to its investment for both the three and nine months ended September 30, 2022. For cash flow earnings (i.e., net income before intangible asset amortization expense), management allocated the 2023 amounts based on the preferences outlined above. As such, Xcel recognized no cash-based earnings for all of the periods presented. For non-cash amortization expense, management allocated the amounts based on the relative ownership

of each member (i.e., 70% WHP and 30% Xcel). The equity method loss for each period presented is equal Xcel’s share of amortization expense.

Summarized financial information for IM Topco for the three and nine months ended September 30, 2023 and 2022 is as follows:


		For the three months ended						For the nine months ended
		September 30,						September 30,
($ in thousands)		2023			2022			2023			2022⁽¹⁾
Revenues		$	3,219		$	4,185		$	9,819		$	5,479
Gross profit			3,219			4,185			9,819			5,479
(Loss) income from continuing operations			(91)			928			(348)			1,118
Net (loss) income			(91)			928			(348)			1,118

(1) Represents financial information for the period commencing May 31, 2022 (the date of the sale of a majority interest in IM Topco) through September 30, 2022.

Refer to Note 11 for other information regarding the Company’s ongoing relationship with IM Topco.