What changed in this filing

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Item 1. Financial Statements

2022-11-14 compared with 2022-08-15 · 159 added, 160 removed, 388 unchanged (45% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

June 30, 2022

September 30, 2022

December 31, 2021

31 unchanged sentences

Preferred stock, $ .001 par value, 1,000,000 shares authorized, none issued and outstanding

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,624,860 and 19,571,119 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,624,860 and 19,571,119 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

6 unchanged sentences

Total operating costs and expenses

Other (expense) income

Gain on sale of majority interest in Isaac Mizrahi brand

Total other income

Operating income (loss)

Interest and finance expense

Loss from equity method investment

Total other (expense) income

Operating (loss) income

Interest and finance (income) expense

Interest expense - term loan debt

Other interest and finance charges (income), net

Other interest and finance (income) charges, net

Loss on early extinguishment of debt

Total interest and finance expense

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

Total interest and finance (income) expense

(Loss) income before income taxes

Income tax (benefit) provision

Net (loss) income

Net loss attributable to noncontrolling interest

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

Earnings (loss) per common share attributable to Xcel Brands, Inc.

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

(Loss) earnings per common share attributable to Xcel Brands, Inc.

stockholders:

Basic net income (loss) per share

Diluted net income (loss) per share

Basic net (loss) income per share

Diluted net (loss) income per share

Weighted average number of common shares outstanding:

18 unchanged sentences

Balance as of June 30, 2021

Compensation expense related to stock options and restricted stock

Shares issued to consultant in connection with stock grant

Shares issued on exercise of stock options

Additional investment in Longaberger Licensing, LLC by non-controlling interest holder

Balance as of September 30, 2021

Balance as of December 31, 2021

11 unchanged sentences

Balance as of June 30, 2022

Compensation expense related to stock options and restricted stock

Balance as of September 30, 2022

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities

5 unchanged sentences

Provision for doubtful accounts

Undistributed proportional share of net income of equity method investee

Loss on early extinguishment of debt

17 unchanged sentences

Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Proceeds from revolving loan debt

12 unchanged sentences

Supplemental disclosure of non-cash activities:

Consideration payable to seller of Lori Goldstein assets

Operating lease right-of-use assets

Operating lease obligations

Contingent obligation related to acquisition of Lori Goldstein assets at fair value

Liability for equity-based bonuses

Liability for equity-based bonuses and other equity-based payments

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

September 30, 2022

Nature of Operations, Background, and Basis of Presentation

19 unchanged sentences

and "Cost of goods sold"

in the Condensed Consolidated Statements of Operations, separately from the Company’s licensing revenues.

in the Condensed Consolidated Statements of Operations, separately from the Company’s net licensing revenue.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

The Company had net income of approximately $ 9.5 million and $ 6.0 million during the three and six months ended June 30, 2022, respectively, and had an accumulated deficit of approximately $ 22.8 million as of June 30, 2022.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent obligations payable in common stock) of approximately $ 16.9 million as of June 30, 2022.

The Company’s cash and cash equivalents were approximately $ 10.9 million as of June 30, 2022.

In conjunction with the sale of the majority interest in the Isaac Mizrahi Brand (as described in Note 2), the Company used a portion of the proceeds to extinguish all of its term loan debt, which had a balance of approximately $ 28.4 million.

September 30, 2022

The Company had a net (loss) income of approximately $( 4.0 ) million and $ 1.9 million during the three and nine months ended September 30, 2022, respectively, and had an accumulated deficit of approximately $ 26.8 million as of September 30, 2022.

The Company’s cash and cash equivalents were approximately $ 8.4 million as of September 30, 2022.

In conjunction with the sale of the majority interest in the Isaac Mizrahi Brand (as described in Note 2) on May 31, 2022, the Company used a portion of the proceeds to extinguish all of its term loan debt, which had a balance of approximately $ 28.4 million.

Management expects that existing cash and operating cash flows will be adequate to meet the Company’s operating and capital expenditure needs for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q.

11 unchanged sentences

(i) first, 100 % to WHP, until WHP has received an aggregate amount during such fiscal year equal to $ 8,852,000 ;

(ii) second, 100 % to Xcel, until Xcel has received an aggregate amount during such fiscal year equal to $ 1,316,200 ;

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

September 30, 2022

(ii) second, 100 % to Xcel, until Xcel has received an aggregate amount during such fiscal year equal to $ 1,316,200 ;

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

13 unchanged sentences

As such, on May 31, 2022, the Company de-recognized the carrying amount of the Isaac Mizrahi Brand trademarks of $ 44.5 million and recognized the fair value of its retained interest in IM Topco of approximately $ 19.8 million as an equity method investment on the accompanying condensed consolidated balance sheet.

The fair value of the of the Company’s retained interest was determined by applying the Company’s ownership percentage to the implied enterprise value of IM Topco, which was calculated based on the price paid by WHP for the 70 % controlling interest, as the May 31, 2022 sale transaction was considered an arms-length transaction between knowledgeable market participants and the most relevant and reasonable indication of value to utilize.

The fair value of the Company’s retained interest was determined by applying the Company’s ownership percentage to the implied enterprise value of IM Topco, which was calculated based on the price paid by WHP for the 70 % controlling interest, as the May 31, 2022 sale transaction was considered an arms-length transaction between knowledgeable market participants and the most relevant and reasonable indication of value to utilize.

The inputs and assumptions for this nonrecurring fair value measurement are classified as Level 3 within the fair value hierarchy defined in ASC Topic 820.

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 as other income in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.

The Company recognized a net pre-

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

The Company accounts for its interest in the ongoing operations of IM Topco as other income under the equity method of accounting.

The Company did not recognize any equity income related to its investment for the three and six months ended June 30, 2022, due to the aforementioned distribution provisions set forth in the Business Venture Agreement.

September 30, 2022

tax gain from the transaction of $ 20.6 million, which is classified as other income in the condensed consolidated statements of operations for the nine months ended September 30, 2022.

In addition to the amounts described above, the Company’s Board of Directors awarded cash bonuses totaling approximately $ 1.0 million to certain members of the Company’s senior management, consisting of bonuses of $ 770,000 to Robert D’Loren, $ 115,000 to Jim Haran, and $ 130,000 to Seth Burroughs.

These bonuses are included in Salaries, benefits and employment taxes in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2022.

These bonuses are included in Salaries, benefits and employment taxes in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2022.

The Company accounts for its interest in the ongoing operations of IM Topco as other income under the equity method of accounting.

The Company recognized an equity method loss of $ 0.28 million related to its investment for the three and nine months ended September 30, 2022, based on the aforementioned distribution provisions set forth in the Business Venture Agreement.

Summarized financial information for IM Topco is as follows:

For the three

September 30,

($ in thousands)

Income from continuing operations

(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.

Acquisition of LOGO by Lori Goldstein Brand

8 unchanged sentences

The Lori Goldstein trademarks are being amortized on a straight-line basis over their expected useful life of four years .

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

June 30, 2022

September 30, 2022

Gross Carrying

2 unchanged sentences

Copyrights and other intellectual property

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

December 31, 2021

5 unchanged sentences

Copyrights and other intellectual property

Amortization expense for intangible assets was approximately $ 1.54 million for the three-month period ended June 30, 2022 (the "current quarter") and was approximately $ 1.55 million for the three-month period ended June 30, 2021 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 3.07 million for the six-month period ended June 30, 2022 (the "current six months") and was approximately $ 2.46 million for the six-month period ended June 30, 2021 (the "prior year six months").

During the current quarter, the Company sold its $ 44.5 million of indefinite-lived trademarks related to the Isaac Mizrahi Brand;

Amortization expense for intangible assets was approximately $ 1.53 million for the three-month period ended September 30, 2022 (the "current quarter") and was approximately $ 1.56 million for the three-month period ended September 30, 2021 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 4.60 million for the nine-month period ended September 30, 2022 (the "current nine months") and was approximately $ 4.02 million for the nine-month period ended September 30, 2021 (the "prior year nine months").

During the current nine months, the Company sold its $ 44.5 million of indefinite-lived trademarks related to the Isaac Mizrahi Brand;

see Note 2 for details.

During the current six months, the Company retired its intangible asset for a non-compete agreement related to the Halston Brand, as such intangible asset had reached the end of its estimated useful life and had become fully amortized.

Also during the current nine months, the Company retired its intangible asset for a non-compete agreement related to the Halston Brand, as such intangible asset had reached the end of its estimated useful life and had become fully amortized.

Significant Contracts and Concentrations

5 unchanged sentences

Net licensing revenue from the Qurate Agreements represents a significant portion of the Company’s total net revenue.

● Net licensing revenue from the Qurate Agreements totaled $ 4.05 million and $ 5.45 million for the current quarter and prior year quarter, respectively, representing approximately 48 % and 51 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

● Net licensing revenue from the Qurate Agreements totaled $ 9.06 million and $ 9.19 million for the current six months and prior year six months, respectively, representing approximately 53 % and 50 % of the Company’s total net revenue for the current six months and prior year six months, respectively.

● As of June 30, 2022 and December 31, 2021, the Company had receivables from Qurate of $ 4.15 million and $ 3.51 million, respectively, representing approximately 45 % and 46 % of the Company’s total net accounts receivable, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

Allowance for Doubtful Accounts

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $ 1.18 and $ 1.09 million as of June 30, 2022 and December 31, 2021, respectively.

The Company recognized bad debt expense of $ 0.09 million in the current quarter and current six months, and $ 0.13 million in the prior year six months, but did no t recognize any bad debt expense in the prior year quarter.

September 30, 2022

● Net licensing revenue from the Qurate Agreements totaled $ 1.40 million and $ 6.05 million for the current quarter and prior year quarter, respectively, representing approximately 31 % and 54 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

● Net licensing revenue from the Qurate Agreements totaled $ 10.47 million and $ 15.24 million for the current nine months and prior year nine months, respectively, representing approximately 48 % and 51 % of the Company’s total net revenue for the current nine months and prior year nine months, respectively.

● As of September 30, 2022 and December 31, 2021, the Company had receivables from Qurate of $ 1.45 million and $ 3.51 million, respectively, representing approximately 22 % and 46 % of the Company’s total net accounts receivable, respectively.

Accounts Receivable

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $ 1.26 and $ 1.09 million as of September 30, 2022 and December 31, 2021, respectively.

The Company recognized bad debt expense of $ 0.08 million in the current quarter, $ 0.17 million in the current nine months, and $ 0.13 million in the prior year nine months, but did no t recognize any bad debt expense in the prior year quarter.

As of September 30, 2022, approximately $ 1.62 million of the Company's outstanding receivables were assigned to a third party agent pursuant to a services agreement entered into during the current quarter, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit.

Under such agreement, the Company retains ownership of such assigned receivables, and receives payment from the agent (less certain fees charged by the agent) upon the agent's collection of the receivables from customers.

During the current quarter and current nine months, the Company paid approximately $ 0.04 million in fees to the agent under the aforementioned services agreement.

The Company has an operating lease for its corporate offices and operations facility, as well as certain equipment with a term of 12 months or less.

2 unchanged sentences

The Company previously had an operating lease for its former office location, which it subleased to a third-party subtenant through February 27, 2022, and the Company’s lease of this office space expired by its terms on February 28, 2022.

As of June 30, 2022, the Company’s real estate leases have remaining lease terms of 5 – 7 years , with a weighted average remaining lease term of approximately 5.4 years and a weighted average discount rate of 6.25 %.

As of September 30, 2022, the Company’s real estate leases have remaining lease terms of 5 – 6 years , with a weighted average remaining lease term of approximately 5.2 years and a weighted average discount rate of 6.25 %.

The Company generally recognizes a right-of-use (“ROU”) asset, representing its right to use the underlying leased asset for the lease term, and a liability for its obligation to make future lease payments (the lease liability) at commencement date (the date on which the lessor makes the underlying asset available for use) based on the present value of lease payments over the lease term.

1 unchanged sentence

Lease expense for operating lease payments is generally recognized on a straight-line basis over the lease term.

The Company recognizes income from subleases (in which the Company is the sublessor) on a straight-line basis over the term of the sublease, as a reduction to lease expense.

Lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $ 0.4 million for both the current quarter and prior year quarter, and was approximately $ 0.7 million for the current six months and prior year six months.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 0.4 million in the current quarter, $ 0.7 million in the prior year quarter, $ 1.0 million in the current six months, and $ 1.3 million in the prior year six months.

The Company recognizes income from subleases (in which the Company is the sublessor) on a straight-line basis over the term

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

As of June 30, 2022, the maturities of lease obligations were as follows:

September 30, 2022

of the sublease, as a reduction to lease expense.

Lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $ 0.4 million for both the current quarter and prior year quarter, approximately $ 1.2 million for the prior year nine months, and approximately $ 1.0 million for the current nine months.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 0.4 million in the current quarter and prior year quarter, $ 1.3 million in the current nine months, and $ 1.7 million in the prior year nine months.

As of September 30, 2022, the maturities of lease obligations were as follows:

($ in thousands)

2022 (April 1 through December 31)

2022 (October 1 through December 31)

Thereafter (through 2028)

4 unchanged sentences

The Company’s net carrying amount of debt was comprised of the following:

September 30,

($ in thousands)

4 unchanged sentences

On May 31, 2022, the Company used $ 30.1 million of the proceeds received from the transaction related to the Isaac Mizrahi Brand (see Note 2) to repay all amounts outstanding under the December 30, 2021 term loan agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”), consisting of $ 28.4 million in principal amount, a $ 1.4 million prepayment fee, and approximately $ 0.3 million in interest and related expenses.

As a result, the Company recognized a loss on early extinguishment of debt of approximately $ 2.3 million during the current quarter and current six months, consisting of approximately $ 1.4 million of debt prepayment premium, the immediate write-off of approximately $ 0.8 million of unamortized deferred finance costs, and approximately $ 0.1 million of other costs.

As a result, the Company recognized a loss on early extinguishment of debt of approximately $ 2.3 million during the current nine months, consisting of approximately $ 1.4 million of debt prepayment premium, the immediate write-off of approximately $ 0.8 million of unamortized deferred finance costs, and approximately $ 0.1 million of other costs.

Term Loan Debt (through May 31, 2022)

On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, Judith Ripka Fine Jewelry, LLC, H Heritage Licensing, LLC, Xcel-CT MFG, LLC and Gold Licensing, LLC, as Guarantors (each a “Guarantor” and collectively, the “Guarantors”), entered into a Loan and Security Agreement (the “Loan Agreement”) with FEAC, as lead arranger and as administrative agent and collateral agent for the lenders party to the Loan Agreement, and the financial institutions party thereto as lenders (the “Lenders”).

Pursuant to the Loan Agreement, the Lenders made a term loan in the aggregate amount of $ 29.0 million (the “Term Loan”).

The proceeds of the Term Loan were used for the purpose of refinancing existing

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

indebtedness (i.e., previous term loan debt), to pay fees, costs, and expenses incurred in connection with entering into the Loan Agreement, and for working capital purposes.

September 30, 2022

“Guarantors”), entered into a Loan and Security Agreement (the “Loan Agreement”) with FEAC, as lead arranger and as administrative agent and collateral agent for the lenders party to the Loan Agreement, and the financial institutions party thereto as lenders (the “Lenders”).

Pursuant to the Loan Agreement, the Lenders made a term loan in the aggregate amount of $ 29.0 million (the “Term Loan”).

The proceeds of the Term Loan were used for the purpose of refinancing existing indebtedness (i.e., previous term loan debt), to pay fees, costs, and expenses incurred in connection with entering into the Loan Agreement, and for working capital purposes.

Upon entering into the Loan Agreement, Xcel paid a 1.75 % closing fee to FEAC for the benefit of the Lenders;

5 unchanged sentences

Based on the terms of the Loan Agreement, when the Term Loan was repaid in full on May 31, 2022, Xcel was required to pay a prepayment premium of five percent ( 5.00 %), which amounted to approximately $ 1.4 million.

For the current quarter and prior year quarter, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.48 million and $ 0.52 million, respectively.

The effective interest rate related to term loan debt was approximately 9.8 % and 9.0 % for the current quarter and prior year quarter, respectively.

For the current six months and prior year six months, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 1.19 million and $ 0.80 million, respectively.

For the prior year quarter, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.57 million, and the effective interest rate related to term loan debt was approximately 9.6 %.

For the current nine months and prior year nine months, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 1.19 million and $ 1.36 million, respectively.

The effective interest rate related to term loan debt was approximately 9.8 % and 8.4 % for the current quarter and prior year quarter, respectively.

10 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

September 30, 2022

Stock-based Compensation

4 unchanged sentences

Total expense recognized in the current quarter and prior year quarter for all forms of stock-based compensation was approximately $ 0.05 million and $ 0.16 million, respectively.

Of the current quarter expense amount, approximately $ 0.39 million related to employees and approximately $ 0.19 million related to directors and consultants.

Approximately $ 0.48 million of the current quarter expense was recorded as operating costs, and approximately $ 0.10 million was recorded as a reduction to other income.

Of the current quarter expense amount, substantially all of the expense related to directors and consultants, and all of the current quarter expense was recorded as operating costs in the accompanying condensed consolidated statements of operations.

Of the prior year quarter expense amount, all of which was recorded as operating costs in the accompanying condensed consolidated statements of operations, approximately $ 0.11 million related to employees and approximately $ 0.05 million related to directors and consultants.

Total expense recognized in the current six months and prior year six months for all forms of stock-based compensation was approximately $ 0.61 million and $ 0.59 million, respectively.

Of the current six months expense amount, approximately $ 0.40 million related to employees and approximately $ 0.21 million related to directors and consultants.

Approximately $ 0.51 million of the current six months expense was recorded as operating costs, and approximately $ 0.10 million was recorded as a reduction to other income.

Of the prior year six months expense amount, approximately $ 0.52 million related to employees and approximately $ 0.07 million related to directors and consultants.

Total expense recognized in the current nine months and prior year nine months for all forms of stock-based compensation was approximately $ 0.67 million and $ 0.75 million, respectively.

Of the current nine months expense amount, approximately $ 0.41 million related to employees and approximately $ 0.26 million related to directors and consultants.

Approximately $ 0.57 million of the current nine months expense was recorded as operating costs, and approximately $ 0.10 million was recorded as a reduction to other income.

Of the prior year nine months expense amount, all of which was recorded as operating costs, approximately $ 0.63 million related to employees and approximately $ 0.12 million related to directors and consultants.

Stock Options

A summary of the Company’s stock options activity for the current six months is as follows:

A summary of the Company’s stock options activity for the current nine months is as follows:

Outstanding at January 1, 2022

Expired/Forfeited

Outstanding at June 30, 2022, and expected to vest

Exercisable at June 30, 2022

Outstanding at September 30, 2022, and expected to vest

Exercisable at September 30, 2022

On April 20, 2022, the Company granted options to purchase an aggregate of 380,850 shares of common stock to various employees.

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

September 30, 2022

On April 26, 2022, the Company granted options to purchase an aggregate of 100,000 shares of common stock to a consultant.

1 unchanged sentence

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 0.03 million and $ 0.05 million, respectively.

Compensation expense related to stock options for the current six months and the prior year six months was approximately $ 0.40 million and $ 0.20 million, respectively.

Total unrecognized compensation expense related to unvested stock options at June 30, 2022 was approximately $ 0.15 million and is expected to be recognized over a weighted average period of approximately 1.49 years.

A summary of the Company’s non-vested stock options activity for the current six months is as follows:

Compensation expense related to stock options for the current nine months and the prior year nine months was approximately $ 0.43 million and $ 0.25 million, respectively.

Total unrecognized compensation expense related to unvested stock options at September 30, 2022 was approximately $ 0.12 million and is expected to be recognized over a weighted average period of approximately 1.29 years.

A summary of the Company’s non-vested stock options activity for the current nine months is as follows:

Balance at January 1, 2022

Forfeited or Canceled

Balance at June 30, 2022

A summary of the Company’s warrants activity for the current six months is as follows:

Balance at September 30, 2022

A summary of the Company’s warrants activity for the current nine months is as follows:

Outstanding and exercisable at January 1, 2022

Expired/Forfeited

Outstanding and exercisable at June 30, 2022

No compensation expense related to warrants was recognized in the current quarter, prior year quarter, current six months, or prior year six months.

Outstanding and exercisable at September 30, 2022

No compensation expense related to warrants was recognized in the current quarter, prior year quarter, current nine months, or prior year nine months.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

A summary of the Company’s restricted stock activity for the current six months is as follows:

September 30, 2022

A summary of the Company’s restricted stock activity for the current nine months is as follows:

Outstanding at January 1, 2022

Expired/Forfeited

Outstanding at June 30, 2022

Outstanding at September 30, 2022

On April 20, 2022, the Company issued an aggregate of 50,000 shares of common stock to non-management directors, which vest evenly over two years , of which 50 % shall vest on April 20, 2023, and 50 % shall vest on April 20, 2024.

7 unchanged sentences

Compensation expense related to stock awards was approximately $ 0.02 million for the current quarter and approximately $ 0.12 million for the prior year quarter.

Compensation expense related to stock awards was approximately $ 0.21 million for the current six months and approximately $ 0.39 million for the prior year six months.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, 2022 was approximately $ 0.11 million and is expected to be recognized over a weighted average period of approximately 1.45 years.

Compensation expense related to stock awards was approximately $ 0.24 million for the current nine months and approximately $ 0.51 million for the prior year nine months.

Total unrecognized compensation expense related to unvested restricted stock grants at September 30, 2022 was approximately $ 0.09 million and is expected to be recognized over a weighted average period of approximately 1.25 years.

Shares Available Under the Company’s Equity Incentive Plans

As of June 30, 2022, there were 3,140,909 shares of common stock available for award grants under the 2021 Plan.

As of September 30, 2022, there were 3,160,909 shares of common stock available for award grants under the 2021 Plan.

Shares Reserved for Issuance

As of June 30, 2022, there were 9,038,864 shares of common stock reserved for issuance, including 5,897,955 shares reserved for issuance pursuant to unexercised warrants and stock options, and 3,140,909 shares available for award grants under the 2021 Plan.

As of September 30, 2022, there were 9,038,864 shares of common stock reserved for issuance, including 5,877,955 shares reserved for issuance pursuant to unexercised warrants and stock options, and 3,160,909 shares available for award grants under the 2021 Plan.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

September 30, 2022

Earnings (Loss) Per Share

2 unchanged sentences

Diluted EPS excludes all potentially dilutive shares of common stock if their effect is anti-dilutive.

The following table is a reconciliation of the numerator and denominator of the basic and diluted net income (loss) per share computations for the three and six months ended June 30, 2022:

The following table is a reconciliation of the numerator and denominator of the basic and diluted net (loss) income per share computations for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

Six Months Ended

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

Nine Months Ended

September 30,

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

stockholders (in thousands)

3 unchanged sentences

Diluted weighted average number of shares outstanding

Basic net income (loss) per share

Diluted net income (loss) per share

As a result of the net loss for the prior year quarter and prior year six months, the Company calculated diluted EPS using basic weighted average shares outstanding for such periods, as utilizing diluted shares would be anti-dilutive to loss per share.

The computation of basic and diluted earnings (loss) per share excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

Basic net (loss) income per share

Diluted net (loss) income per share

As a result of the net loss for the current quarter, prior year quarter, and prior year nine months, the Company calculated diluted EPS using basic weighted average shares outstanding for such periods, as utilizing diluted shares would be anti-dilutive to loss per share.

The computation of diluted EPS excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Stock options

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 25 % and 43 %, respectively, resulting in an income tax provision (benefit) of $ 3.18 million and $( 1.35 ) million, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

The estimated annual effective income tax rate for the current six months and the prior year six months was approximately 35 % and 25 %, respectively, resulting in an income tax provision (benefit) of $ 3.18 million and $( 1.48 ) million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 10 %, partially offset by the reversal of a valuation allowance that was previously recorded in the first quarter of 2022, which decreased the effective tax rate by approximately 6 %.

For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 15 % and 7 %, respectively.

For the current six months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 14 %.

For the prior year six months, the federal statutory rate differed from the effective tax rate primarily due to state taxes, which increased the effective tax rate by approximately 7 %, partially offset by the impact of recurring permanent differences, which decreased the effective tax rate by approximately 3 %.

September 30, 2022

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 26 % and 28 %, respectively, resulting in an income tax provision (benefit) of $( 1.54 ) million and $( 0.54 ) million, respectively.

The estimated annual effective income tax rate for the current nine months and the prior year nine months was approximately 62 % and 26 %, respectively, resulting in an income tax provision (benefit) of $ 1.64 million and $( 2.02 ) million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 5 %.

For the current nine months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 41 %.

For the prior year nine months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 5 %.

Related Party Transactions

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On May 31, 2022, this agreement was transferred to IM Topco as part of the transaction in which the Company sold a majority interest in the Isaac Mizrahi Brand trademarks to a third party (see Note 2 for details).

The term of the employment agreement with Mr.

Mizrahi was to expire on December 31, 2022, subject to earlier termination or extension.

Mizrahi’s annual base salary was $ 1.8 million, $ 2.0 million, and $ 2.1 million per annum during the term of the agreement, subject to adjustment in the event Mr.

Mizrahi did not make a specified number of appearances on Qurate’s QVC channel.

Mizrahi was eligible to receive an annual cash bonus (the “Bonus”) up to an amount equal to $ 2.5 million less base salary for 2020 and $ 3.0 million less base salary for 2021 and 2022, consisting of the DRT Revenue Bonus, the Brick-and-Mortar Bonus, the Endorsement Bonus, and the Monday Bonus, if any, as determined in accordance with the following:

● “DRT Revenue Bonus” means for any calendar year an amount equal to 10 % of the aggregate net revenue related to sales of Isaac Mizrahi Brand products through direct response television.

The DRT Revenue Bonus shall be reduced by the amount of the Monday Bonus.

● “Brick-and-Mortar Bonus” means for any calendar year an amount equal to 10 % of the net revenues from sales of products under the Isaac Mizrahi Brand, excluding DRT revenue and endorsement revenues.

● “Endorsement Bonus” means for any calendar year an amount equal to 40 % of revenues derived from projects undertaken by the Company with one or more third parties solely for Mr.

Mizrahi to endorse the third party’s products through the use of Mr.

Mizrahi’s name, likeness, and/or image, and neither the Company nor Mr.

Mizrahi provides licensing or design.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

● “Monday Bonus” means $ 10,000 for each appearance by Mr.

Mizrahi on the QVC channel on Mondays (subject to certain expectations) up to a maximum of 40 such appearances in a calendar year.

The employment agreement also included severance provisions.

In the event Mr.

Mizrahi’s employment was terminated by the Company without “cause,” or if Mr.

Mizrahi resigned with “good reason,” then Mr.

Mizrahi would have been entitled to receive his unpaid base salary and cash bonuses through the termination date and an amount equal to his base salary in effect on the termination date for the longer of six months and the remainder of the then-current term, but in no event exceeding 18 months.

Additionally, during the term of Mr.

Mizrahi’s employment by the Company and for a one-year period after the termination of such employment (unless his employment was terminated without “cause” or was terminated by him for “good reason”), Mr.

Mizrahi may not permit his name to be used by or to participate in any business or enterprise (other than the mere passive ownership of not more than 3 % of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages or proposes to engage in the Company’s business anywhere in the world other than the Company and its subsidiaries.

Also during his employment and for a one-year period after the termination of such employment, Mr.

Mizrahi may not, directly or indirectly, solicit, induce, or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any or its subsidiaries;

or solicit, induce, or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager, or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries;

or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries;

or in any way interfere with the relationship between any such customer, supplier, licensee, employee, or business relation and the Company or any of its subsidiaries.

On February 24, 2020, the Company also entered into a services agreement with Laugh Club, an entity wholly-owned by Mr.

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Mizrahi, which vested immediately, and made a $ 100,000 cash payment to Mr.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

IM Topco, LLC

The Company holds a noncontrolling interest in IM Topco, which is accounted for under the equity method of accounting.

On May 31, 2022, the Company entered into a services agreement with IM Topco, pursuant to which the Company provides certain design and support services (including assistance with the operations of the interactive television business and related talent support) to IM Topco in exchange for payments of $ 300,000 per year.

For the three and nine months ended September 30, 2022, the Company recognized service fee income related to this agreement of $ 101,000 .

On May 31, 2022, the Company entered into a license agreement with IM Topco, pursuant to which IM Topco granted the Company a license to use certain Isaac Mizrahi trademarks on and in connection with the design, manufacture, distribution, sale, and promotion of women’s sportswear products in the United States and Canada during the term of the agreement, in exchange for the payment of royalties in connection therewith.

The initial term of this agreement ends December 31, 2026, and provides guaranteed royalties to IM Topco of $ 400,000 per year.

For the three and six months ended June 30, 2022, the Company recognized royalty expense related to this agreement of $ 31,000 .

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

For the three and nine months ended September 30, 2022, the Company recognized royalty expense related to this agreement of $ 92,000 and $ 123,000 , respectively.

Commitments and Contingencies

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In connection with the February 11, 2019 purchase of the Halston Heritage trademarks from H Company IP, LLC (“HIP”), the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to an aggregate of $ 6.0 million, based on royalties earned through December 31, 2022.

The Halston Heritage Earn-Out of $ 0.9 million is recorded as a current liability at June 30, 2022 and as a long-term liability at December 31, 2021 in the accompanying condensed consolidated balance sheets, based on the difference between the fair value of the acquired assets of the Halston Heritage trademarks and the total consideration paid.

The Halston Heritage Earn-Out of $ 0.9 million is recorded as a current liability at September 30, 2022 and as a long-term liability at December 31, 2021 in the accompanying condensed consolidated balance sheets, based on the difference between the fair value of the acquired assets of the Halston Heritage trademarks and the total consideration paid.

Management estimates that it is highly unlikely the Company will owe any of this contingent obligation at December 31, 2022.

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The Lori Goldstein Earn-Out of $ 6.6 million is recorded as a liability in the accompanying condensed consolidated balance sheets, based on the difference between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid, in accordance with the guidance in ASC Subtopic 805-50.

At June 30, 2022, $ 1.9 million of the balance is recorded as a current liability and $ 4.7 million is recorded as a long-term liability;

At September 30, 2022, $ 1.6 million of the balance is recorded as a current liability and $ 5.0 million is recorded as a long-term liability;

at December 31, 2021, the entire balance was recorded as a long-term liability.

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 (see Note 2), the Company has agreed with WHP that, in the event that IM Topco receives less than $ 13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from the Company up to $ 16 million, less all amounts of net cash flow distributed to WHP for such period, as an adjustment to the purchase price previously paid by WHP.

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 2), the Company has agreed with WHP that, in the event that IM Topco receives less than $ 13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from the Company 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 the Company in either cash or equity interests in IM Topco held by the Company.

No amount has been recorded in the accompanying condensed consolidated balance sheets related to this contingent obligation, and management believes the likelihood of any such payment is remote.

No amount has been recorded in the accompanying

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

condensed consolidated balance sheets related to this contingent obligation, and management believes the likelihood of any such payment is remote.

Legal Proceedings

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The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

Coronavirus Pandemic

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and the world.

COVID-19 (including actions taken by national, state, and local governments in response to COVID-19) has had an unprecedented impact on the U.S.

and global economy.

The impacts of the ongoing COVID-19 pandemic are broad reaching and have had an impact on the Company’s licensing and wholesale businesses.

The COVID-19 pandemic has impacted the Company’s supply chain as most of the Company’s products are manufactured in China, Thailand, and other places around the world affected by this event.

Temporary factory closures and the pace of workers returning to work have impacted contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner.

The pandemic has also impacted distribution and logistics providers' ability to operate in the normal course of business.

Further, the initial onset of the pandemic in 2020 resulted in a sudden decrease in sales for many of the Company’s products, from which the Company has yet to fully recover.

The initial onset of the pandemic resulted in order cancellations and a decrease in accounts receivable collections, and the Company recorded additional allowances for doubtful accounts of approximately $ 1 million and $ 0.1 million for the years ended December 31, 2020 and 2021, respectively, related to retailers that filed for bankruptcy.

Due to the ongoing COVID-19 pandemic, there is significant uncertainty surrounding the impact on the Company’s future results of operations and cash flows.

Continued impacts of the pandemic could materially adversely affect the Company’s near-term and long-term revenues, earnings, liquidity, and cash flows as the Company’s customers and/or licensees may request temporary relief, delay, or not make scheduled payments.

The COVID-19 pandemic (including actions taken by national, state, and local governments in response to COVID-19) has negatively impacted the U.S.

and global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets.

COVID-19 has had, and continues to have, a significant negative impact on the Company’s business.

The initial onset of the pandemic in 2020 resulted in a sudden decrease in sales for many of the Company’s products, from which the Company has yet to fully recover.

Additionally, COVID-19 has also impacted, and continues to impact, the Company’s supply chain partners, including third party manufacturers, logistics providers, and other vendors, as well as the supply chains of its licensees.

These supply chains have experienced, and may continue to experience in the future, disruptions as a result of closed factories, factories operating with a reduced workforce, or other logistics constraints, including vessel, container and other transportation shortages, labor shortages, and port congestion.

Due to the ongoing COVID-19 pandemic, there is significant uncertainty surrounding the Company’s future results of operations and cash flows.

Continued impacts of the pandemic could materially adversely affect the Company’s near-term and long-term revenues, earnings, liquidity, and cash flows.

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 1. Financial Statements