XCel Brands, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS ​ Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 December 31, 2021 ​ ​ (Unaudited) ​ (Note 1) Assets ​ ​ Current Assets: ​ ​ Cash and cash equivalents ​ $ 8,407 ​ $ 4,483 Accounts receivable, net of allowances of $ 1,263 and $ 1,090 , respectively ​ 6,720 ​ 7,640 Inventory ​ 3,884 ​ 3,375 Prepaid expenses and other current assets ​ 1,752 ​ 1,681 Total current assets ​ 20,763 ​ 17,179 Non-current Assets: ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 1,948 ​ 2,549 Operating lease right-of-use assets ​ ​ 5,650 ​ ​ 6,314 Trademarks and other intangibles, net ​ 49,200 ​ 98,304 Equity method investment ​ ​ 19,520 ​ ​ — Restricted cash ​ — ​ 739 Deferred tax assets, net ​ ​ — ​ ​ 141 Other assets ​ 146 ​ 555 Total non-current assets ​ 76,464 ​ 108,602 ​ ​ ​ ​ ​ ​ ​ Total Assets ​ $ 97,227 ​ $ 125,781 ​ ​ ​ ​ ​ ​ ​ Liabilities and Stockholders' Equity ​ ​ Current Liabilities: ​ ​ Accounts payable, accrued expenses and other current liabilities ​ $ 3,959 ​ $ 6,169 Accrued income taxes payable ​ ​ 1,326 ​ ​ 64 Accrued payroll ​ 228 ​ 577 Current portion of operating lease obligations ​ ​ 1,331 ​ ​ 1,207 Current portion of long-term debt ​ — ​ 2,500 Current portion of contingent obligations ​ 2,478 ​ — Total current liabilities ​ 9,322 ​ 10,517 Long-Term Liabilities: ​ ​ Long-term portion of operating lease obligations ​ ​ 6,157 ​ ​ 7,252 Long-term debt, net, less current portion ​ — ​ 25,531 Long-term portion of contingent obligations ​ ​ 5,061 ​ ​ 7,539 Deferred tax liabilities, net ​ 223 ​ — Total long-term liabilities ​ 11,441 ​ 40,322 Total Liabilities ​ 20,763 ​ 50,839 ​ ​ ​ ​ ​ ​ ​ Commitments and Contingencies ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders' Equity: ​ ​ 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 September 30, 2022 and December 31, 2021, respectively ​ 20 ​ 20 Paid-in capital ​ 103,541 ​ 103,039 Accumulated deficit ​ ( 26,818 ) ​ ( 28,779 ) Total Xcel Brands, Inc. stockholders' equity ​ 76,743 ​ 74,280 Noncontrolling interest ​ ​ ( 279 ) ​ ​ 662 Total Stockholders' Equity ​ 76,464 ​ 74,942 ​ ​ ​ ​ ​ ​ ​ Total Liabilities and Stockholders' Equity ​ $ 97,227 ​ $ 125,781 ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ 3 Table of Contents Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Operations (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ For the Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2022 2021 2022 2021 ​ Revenues ​ ​ ​ ​ ​ ​ Net licensing revenue ​ $ 2,166 ​ $ 6,854 ​ $ 13,302 ​ $ 17,385 ​ Net sales ​ 2,335 ​ 4,407 ​ 8,413 ​ 12,449 ​ Net revenue ​ 4,501 ​ 11,261 ​ 21,715 ​ 29,834 ​ Cost of goods sold ​ 1,465 ​ 2,865 ​ 5,715 ​ 7,763 ​ Gross profit ​ 3,036 ​ 8,396 ​ 16,000 ​ 22,071 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs and expenses ​ ​ ​ ​ ​ Salaries, benefits and employment taxes ​ 3,301 ​ 4,185 ​ 13,390 ​ 12,286 ​ Other selling, general and administrative expenses ​ 3,567 ​ 3,463 ​ 10,762 ​ 9,591 ​ Stock-based compensation ​ 51 ​ 163 ​ 568 ​ 754 ​ Depreciation and amortization ​ 1,815 ​ 1,891 ​ 5,447 ​ 4,949 ​ Total operating costs and expenses ​ 8,734 ​ 9,702 ​ 30,167 ​ 27,580 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other (expense) income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gain on sale of majority interest in Isaac Mizrahi brand ​ ​ — ​ ​ — ​ ​ 20,608 ​ ​ — ​ Loss from equity method investment ​ ​ ( 277 ) ​ ​ — ​ ​ ( 277 ) ​ ​ — ​ Total other (expense) income ​ ​ ( 277 ) ​ ​ — ​ ​ 20,331 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating (loss) income ​ ( 5,975 ) ​ ( 1,306 ) ​ 6,164 ​ ( 5,509 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest and finance (income) expense ​ ​ ​ ​ ​ Interest expense - term loan debt ​ — ​ 565 ​ 1,187 ​ 1,363 ​ Other interest and finance (income) charges, net ​ ( 6 ) ​ 23 ​ ( 6 ) ​ 127 ​ Loss on early extinguishment of debt ​ ​ — ​ ​ — ​ ​ 2,324 ​ ​ 821 ​ Total interest and finance (income) expense ​ ( 6 ) ​ 588 ​ 3,505 ​ 2,311 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Loss) income before income taxes ​ ( 5,969 ) ​ ( 1,894 ) ​ 2,659 ​ ( 7,820 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income tax (benefit) provision ​ ( 1,539 ) ​ ( 535 ) ​ 1,639 ​ ( 2,019 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income ​ ​ ( 4,430 ) ​ ​ ( 1,359 ) ​ ​ 1,020 ​ ​ ( 5,801 ) ​ Net loss attributable to noncontrolling interest ​ ​ ( 388 ) ​ ​ ( 223 ) ​ ​ ( 941 ) ​ ​ ( 560 ) ​ Net (loss) income attributable to Xcel Brands, Inc. stockholders ​ $ ( 4,042 ) ​ $ ( 1,136 ) ​ $ 1,961 ​ $ ( 5,241 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Loss) earnings per common share attributable to Xcel Brands, Inc. stockholders: ​ ​ ​ ​ ​ Basic net (loss) income per share ​ $ ( 0.21 ) ​ $ ( 0.06 ) ​ $ 0.10 ​ $ ( 0.27 ) ​ Diluted net (loss) income per share ​ $ ( 0.21 ) ​ $ ( 0.06 ) ​ $ 0.10 ​ $ ( 0.27 ) ​ Weighted average number of common shares outstanding: ​ ​ ​ ​ ​ Basic weighted average common shares outstanding ​ 19,624,860 ​ 19,541,774 ​ 19,624,604 ​ 19,418,469 ​ Diluted weighted average common shares outstanding ​ 19,624,860 ​ 19,541,774 ​ 19,752,339 ​ 19,418,469 ​ ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ 4 Table of Contents ​ Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Xcel Brands, Inc. Stockholders ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of ​ ​ ​ ​ Paid-In ​ Accumulated ​ Noncontrolling ​ ​ Total ​ Shares Amount Capital Deficit Interest ​ ​ Equity Balance as of December 31, 2020 19,260,862 ​ $ 19 ​ $ 102,324 ​ $ ( 16,595 ) ​ $ 507 ​ ​ $ 86,255 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 169 ​ ​ — ​ ​ — ​ ​ ​ 169 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued on exercise of stock options, net ​ 1,667 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 2,547 ) ​ ​ ( 81 ) ​ ​ ( 2,628 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of March 31, 2021 19,262,529 ​ ​ 19 ​ ​ 102,493 ​ ​ ( 19,142 ) ​ ​ 426 ​ ​ ​ 83,796 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 52 ​ ​ — ​ ​ — ​ ​ ​ 52 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to executive related to stock grants for bonus payments 181,179 ​ 1 ​ 282 ​ — ​ — ​ ​ 283 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to consultant in connection with stock grant ​ 14,045 ​ ​ — ​ ​ 25 ​ ​ — ​ — ​ ​ ​ 25 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to directors in connection with restricted stock grants ​ 50,000 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued on exercise of stock options, net ​ 23,102 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 1,558 ) ​ ( 256 ) ​ ​ ( 1,814 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of June 30, 2021 19,530,855 ​ ​ 20 ​ ​ 102,852 ​ ​ ( 20,700 ) ​ ​ 170 ​ ​ ​ 82,342 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 59 ​ ​ — ​ ​ — ​ ​ ​ 59 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to consultant in connection with stock grant ​ 9,399 ​ ​ — ​ ​ 25 ​ ​ — ​ — ​ ​ ​ 25 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued on exercise of stock options ​ 1,667 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional investment in Longaberger Licensing, LLC by non-controlling interest holder ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,000 ​ ​ ​ 1,000 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ — ​ ​ — ​ ​ — ​ ​ ( 1,136 ) ​ ​ ( 223 ) ​ ​ ​ ( 1,359 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of September 30, 2021 ​ 19,541,921 ​ $ 20 ​ $ 102,936 ​ $ ( 21,836 ) ​ $ 947 ​ ​ $ 82,067 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of December 31, 2021 19,571,119 ​ $ 20 ​ $ 103,039 ​ $ ( 28,779 ) ​ $ 662 ​ ​ $ 74,942 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 30 ​ ​ — ​ ​ — ​ ​ ​ 30 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 3,487 ) ​ ​ ( 252 ) ​ ​ ( 3,739 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of March 31, 2022 19,571,119 ​ ​ 20 ​ ​ 103,069 ​ ​ ( 32,266 ) ​ ​ 410 ​ ​ ​ 71,233 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 402 ​ ​ — ​ ​ — ​ ​ ​ 402 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to executive related to stock grants for bonus payments ​ 178,727 ​ — ​ 281 ​ — ​ — ​ ​ 281 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares repurchased from executive in exchange for withholding taxes ​ ( 53,882 ) ​ ​ — ​ ​ ( 85 ) ​ ​ — ​ — ​ ​ ( 85 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to consultant in connection with stock grant 20,064 ​ — ​ 33 ​ — ​ — ​ ​ 33 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to directors in connection with restricted stock grants 50,000 ​ — ​ — ​ — ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to consultant in connection with sale transaction (see Note 2 and Note 8) ​ 65,275 ​ ​ — ​ ​ 97 ​ ​ — ​ ​ — ​ ​ ​ 97 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued to key employee in connection with stock grant ​ 33,557 ​ ​ — ​ ​ 50 ​ ​ — ​ ​ — ​ ​ ​ 50 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares repurchased from key employee in exchange for withholding taxes related to vesting of restricted shares ​ ( 240,000 ) ​ ​ — ​ ​ ( 357 ) ​ ​ — ​ ​ — ​ ​ ​ ( 357 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) — ​ — ​ — ​ 9,490 ​ ( 301 ) ​ ​ 9,189 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of June 30, 2022 19,624,860 ​ $ 20 ​ $ 103,490 ​ $ ( 22,776 ) ​ $ 109 ​ ​ $ 80,843 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 51 ​ ​ — ​ ​ — ​ ​ ​ 51 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ — ​ ​ — ​ ​ — ​ ​ ( 4,042 ) ​ ​ ( 388 ) ​ ​ ​ ( 4,430 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of September 30, 2022 ​ 19,624,860 ​ $ 20 ​ $ 103,541 ​ $ ( 26,818 ) ​ $ ( 279 ) ​ ​ $ 76,464 ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements . 5 Table of Contents ​ Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, ​ 2022 2021 Cash flows from operating activities ​ ​ Net income (loss) ​ $ 1,020 ​ $ ( 5,801 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: ​ ​ ​ Depreciation and amortization expense ​ 5,447 ​ 4,949 Amortization of deferred finance costs included in interest expense ​ 156 ​ 211 Stock-based compensation ​ 568 ​ 754 Provision for doubtful accounts ​ ​ 173 ​ ​ 132 Undistributed proportional share of net income of equity method investee ​ ​ 277 ​ ​ — Loss on early extinguishment of debt ​ ​ 2,324 ​ ​ 821 Deferred income tax provision (benefit) ​ 363 ​ ( 2,019 ) Gain on sale of majority interest in Isaac Mizrahi brand ​ ​ ( 20,608 ) ​ ​ — Changes in operating assets and liabilities: ​ ​ ​ ​ Accounts receivable ​ 747 ​ ( 2,192 ) Inventory ​ ( 509 ) ​ ( 2,214 ) Prepaid expenses and other current and non-current assets ​ 235 ​ ( 620 ) Accounts payable, accrued expenses, accrued payroll, accrued income taxes payable, and other current liabilities ​ ( 796 ) ​ 572 Lease-related assets and liabilities ​ ​ ( 202 ) ​ ​ ( 122 ) Other liabilities ​ ( 224 ) ​ — Net cash used in operating activities ​ ( 11,029 ) ​ ( 5,529 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities ​ ​ Net proceeds from sale of majority interest in Isaac Mizrahi brand ​ ​ 45,408 ​ ​ — Cash consideration for acquisition of Lori Goldstein assets ​ ​ — ​ ​ ( 3,661 ) Purchase of other intangible assets ​ ​ — ​ ​ ( 39 ) Purchase of property and equipment ​ ( 241 ) ​ ( 1,049 ) Net cash provided by (used in) investing activities ​ 45,167 ​ ( 4,749 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities ​ ​ Proceeds from exercise of stock options ​ ​ — ​ ​ 5 Shares repurchased including vested restricted stock in exchange for withholding taxes ​ ​ ( 442 ) ​ — Cash contribution from non-controlling interest ​ ​ — ​ ​ 1,000 Proceeds from revolving loan debt ​ ​ — ​ ​ 2,498 Proceeds from long-term debt ​ ​ — ​ ​ 25,000 Payment of deferred finance costs ​ — ​ ( 1,204 ) Payment of long-term debt ​ ( 29,000 ) ​ ( 18,000 ) Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt ​ ​ ( 1,511 ) ​ ​ ( 367 ) Net cash (used in) provided by financing activities ​ ( 30,953 ) ​ 8,932 ​ ​ ​ ​ ​ ​ ​ Net increase (decrease) in cash, cash equivalents, and restricted cash ​ 3,185 ​ ( 1,346 ) ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents, and restricted cash at beginning of period ​ ​ 5,222 ​ ​ 6,066 ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents, and restricted cash at end of period ​ $ 8,407 ​ $ 4,720 ​ ​ ​ ​ ​ ​ ​ Reconciliation to amounts on condensed consolidated balance sheets: ​ ​ Cash and cash equivalents ​ $ 8,407 ​ $ 3,981 Restricted cash ​ — ​ 739 Total cash, cash equivalents, and restricted cash ​ $ 8,407 ​ $ 4,720 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of non-cash activities: ​ ​ ​ ​ ​ ​ Operating lease right-of-use assets ​ $ — ​ $ ( 722 ) Operating lease obligations ​ $ — ​ $ ( 722 ) Contingent obligation related to acquisition of Lori Goldstein assets at fair value ​ $ — ​ $ 6,639 Liability for equity-based bonuses and other equity-based payments ​ $ ( 283 ) ​ $ 140 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ Cash paid during the period for interest ​ $ 1,032 ​ $ 1,346 Cash paid during the period for income taxes ​ $ — ​ $ 18 ​ ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ ​ 6 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 1. Nature of Operations, Background, and Basis of Presentation The accompanying condensed consolidated balance sheet as of December 31, 2021 (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, 2021, as filed with the SEC on April 15, 2022. The Company is a media and consumer products company engaged in the design, production, marketing, live streaming, wholesale distribution, and direct-to-consumer 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 LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), 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"), and other proprietary brands. ● The Lori Goldstein Brand, 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 wholly owned and managed the Isaac Mizrahi Brand through May 31, 2022. On May 31, 2022, the Company sold to a third party a majority interest in a newly-created subsidiary that was formed to hold the Isaac Mizrahi Brand trademarks, but retained a noncontrolling interest in the brand through a 30 % ownership interest in IM Topco, LLC and continues to participate in the operations of the business; the Company accounts for its interest in IM Topco, LLC using the equity method of accounting. See Note 2 for additional details. The Company designs, produces, markets, and distributes products, licenses its brands to third parties, and generates licensing revenues through contractual arrangements with manufacturers and retailers. The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels to be everywhere its customers shop. The Company’s wholesale and direct-to-consumer operations are presented as "Net sales" and "Cost of goods sold" in the Condensed Consolidated Statements of Operations, separately from the Company’s net licensing revenue. 7 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Liquidity 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 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 $ 13.7 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. ​ 2. Acquisitions and Divestitures Sale of Majority Interest in Isaac Mizrahi Brand 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 in exchange for the 70 % membership interest in IM Topco consisted of $ 46.2 million in cash. Pursuant to the purchase agreement, the Company will also be entitled to receive an “earn-out” payment in the amount of $ 2.0 million if, during the period from January 1, 2023 through December 31, 2023, (i) IM Topco receives Net Royalty Revenue (as defined in the purchase agreement) in an amount equal to or greater than $ 17.5 million and (ii) IM Topco generates EBITDA (as defined in the purchase agreement) in an amount equal to or greater than $ 11.8 million. Additionally, in the event that IM Topco receives less than $ 13.347 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on the third anniversary of the closing, 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, payable in either cash or equity interests in IM Topco held by the Company. In connection with the aforementioned purchase agreement, on May 31, 2022, the Company and WHP entered into an Amended and Restated Limited Liability Company Agreement of IM Topco (the “Business Venture Agreement”) governing the operation of IM Topco as a partnership between the Company and WHP following the closing. Pursuant to the Business Venture Agreement, IM Topco is managed by a single Manager appointed by the vote of a majority-in-interest of IM Topco’s members, and WHP serves as the sole Manager of IM Topco. The Business Venture Agreement contains customary provisions for the governance of a partnership, including with respect to decision making, access to information, restrictions on transfer of interests, and covenants. Pursuant to the Business Venture Agreement, 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 ; 8 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) (ii) second, 100 % to Xcel, until Xcel has received an aggregate amount during such fiscal year equal to $ 1,316,200 ; and (iii) thereafter, in proportion to the members’ respective percentage interests. The amounts described in (i) and (ii) above are subject to adjustment in certain circumstances as set forth in the Business Venture Agreement. The Company also entered into a number of other related agreements on May 31, 2022 in connection with the transaction, as described below: ● The Company entered into a services agreement with IM Topco, pursuant to which the Company will provide 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 $ 0.3 million per fiscal year. ● 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 of $ 0.4 million per year to IM Topco. ● The Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 4) was assigned to IM Topco as of May 31, 2022. ● The Company’s employment agreement with Mr. Mizrahi and the Company’s services agreement with Laugh Club (see Note 10) were transferred to IM Topco. In addition, all 522,500 unvested shares of restricted stock of the Company held by Mr. Mizrahi (for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of such shares being surrendered for cancellation in satisfaction of withholding tax obligations. In addition, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr. Mizrahi, which vested immediately, and made a $ 100,000 cash payment to Mr. Mizrahi. Management assessed and evaluated the ownership structure and other terms of the May 27, 2022 membership purchase agreement and Business Venture Agreement, as well as considered the Company’s continuing involvement with the Isaac Mizrahi Brand through the aforementioned services agreement and licensing agreement, and concluded that (i) IM Topco is not a Variable Interest Entity under Accounting Standards Codification (“ASC”) Topic 810, and (ii) the Company has significant influence over, but does not control, IM Topco. 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 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- 9 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 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 For the nine ​ ​ months ended ​ months ended ​ ​ September 30, ​ September 30, ($ in thousands) ​ 2022 ​ ​ 2022 (1) Revenues ​ $ 4,185 ​ $ 5,479 Gross profit ​ ​ 4,185 ​ ​ 5,479 Income from continuing operations ​ ​ 928 ​ ​ 1,118 Net income ​ ​ 928 ​ ​ 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. ​ Acquisition of LOGO by Lori Goldstein Brand On April 1, 2021, the Company acquired certain assets of Lori Goldstein, Ltd. (the "Seller"), including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto. Pursuant to the asset purchase agreement related to this transaction, the Company delivered $ 1.6 million in cash consideration to the Seller at closing, and was obligated to subsequently deliver an additional $ 2.0 million in cash to the Seller, which was paid in July 2021. In addition to the consideration described above, the Seller is eligible to earn additional consideration of up to $ 12.5 million (the “Lori Goldstein Earn-Out”), which would be payable, in cash, within 45 days after the end of each applicable calendar year during the six calendar year period commencing 2021 in an amount equal to 75 % percent of the Royalty Contribution (as defined in the related asset purchase agreement) for such calendar year. The Company recorded a contingent obligation of $ 6.6 million related to the Lori Goldstein Earn-Out, based on the difference between the fair value of the acquired assets of the LOGO by Lori Goldstein brand and the total consideration paid, in accordance with the guidance in ASC Subtopic 805-50. To date, no consideration under the terms of the Lori Goldstein Earn-Out has been payable or paid to the Seller. The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase, and the aggregate purchase price of $ 10.3 million was allocated entirely to the trademarks of the brand. Such trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s condensed consolidated statements of operations. The Lori Goldstein trademarks are being amortized on a straight-line basis over their expected useful life of four years . 10 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) ​ 3. Trademarks and Other Intangibles Trademarks and other intangibles, net consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ Average September 30, 2022 ​ Amortization ​ Gross Carrying ​ Accumulated ​ Net Carrying ($ in thousands) ​ Period ​ Amount ​ Amortization ​ Amount Trademarks (finite-lived) 15 years ​ 68,880 ​ 19,827 ​ 49,053 Copyrights and other intellectual property 8 years ​ 429 ​ 282 ​ 147 Total ​ ​ ​ $ 69,309 ​ $ 20,109 ​ $ 49,200 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ Average December 31, 2021 ​ Amortization Gross Carrying ​ Accumulated ​ Net Carrying ($ in thousands) ​ Period ​ Amount ​ Amortization ​ Amount Trademarks (indefinite-lived) n/a ​ $ 44,500 ​ $ — ​ $ 44,500 Trademarks (finite-lived) 15 years ​ 68,880 ​ 15,268 ​ 53,612 Non-compete agreement 7 years ​ 562 ​ 562 ​ — Copyrights and other intellectual property 8 years ​ 429 ​ 237 ​ 192 Total ​ $ 114,371 ​ $ 16,067 ​ $ 98,304 ​ 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. 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. ​ ​ 4. Significant Contracts and Concentrations Qurate Agreements Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of net retail sales of Lori Goldstein, Judith Ripka, and Longaberger branded merchandise. The Company was also previously a party to a similar agreement with Qurate related to the Isaac Mizrahi Brand through May 31, 2022; see Note 2 for details. Net retail sales are defined as the aggregate amount of all revenue generated through the sale of the specified branded products by Qurate and its subsidiaries under the Qurate Agreements, net of customer returns, and excluding freight, shipping and handling charges, and sales, use, or other taxes. Net licensing revenue from the Qurate Agreements represents a significant portion of the Company’s total net revenue. 11 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) ● 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. ​ 5. 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. 6. Leases 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. The Company also has an operating lease for its former retail store location, which was closed in the first quarter of 2022; the Company is currently in the process of negotiating the termination of this lease. 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 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. The Company does not recognize ROU assets and lease liabilities for lease terms of 12 months or less, but recognizes such lease payments in operations on a straight-line basis over the lease terms. 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 12 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 (October 1 through December 31) ​ $ 547 2023 ​ ​ 1,711 2024 ​ 1,711 2025 ​ 1,711 2026 ​ 1,710 Thereafter (through 2028) ​ 1,610 Total lease payments ​ ​ 9,000 Less: Discount ​ ​ 1,512 Present value of lease liabilities ​ ​ 7,488 Current portion of lease liabilities ​ ​ 1,331 Non-current portion of lease liabilities ​ $ 6,157 ​ ​ ​ ​ ​ ​ 7. Debt The Company’s net carrying amount of debt was comprised of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ($ in thousands) 2022 2021 ​ Term loan debt ​ $ — ​ $ 29,000 ​ Unamortized deferred finance costs related to term loan debt ​ — ​ ( 969 ) ​ Total ​ — ​ 28,031 ​ Current portion of debt ​ — ​ 2,500 ​ Long-term debt ​ $ — ​ $ 25,531 ​ ​ 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 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 13 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) “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; the Company also paid approximately $ 0.5 million of various legal and other fees in connection with the execution of the Loan Agreement. These fees and costs totaling approximately $ 0.97 million were deferred on the Company’s balance sheet as of December 31, 2021 as a reduction of the carrying value of the Term Loan, and commencing in 2022 were being amortized to interest expense over the term of the Term Loan using the effective interest method. The New Term Loan was to mature on April 14, 2025. Principal on the New Term Loan was payable in quarterly installments of $ 625,000 on each of March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2022 and ending on March 31, 2025, with a final payment of $ 20,875,000 due on the maturity date of April 14, 2025. Under the Loan Agreement, Xcel had the right upon thirty (30) days prior written notice to prepay all or any portion of the Term Loan and accrued and unpaid interest thereon. 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 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. ​ 8. Stockholders’ Equity Equity Incentive Plans The Company’s 2021 Equity Incentive Plan (the “2021 Plan”) is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 4,000,000 shares of common stock are eligible for issuance under the 2021 Plan. The 2021 Plan provides for the grant of any or all of the following types of awards: stock options (incentive or non-qualified), restricted stock, restricted stock units, performance awards, or cash awards. The 2021 Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board. In addition, stock-based awards (including options, warrants, and restricted stock) previously granted under the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) remain outstanding and shares of common stock may be issued to satisfy options or warrants previously granted under the 2011 Plan, although no new awards may be granted under the 2011 Plan. ​ 14 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Stock-based Compensation The Company accounts for stock-based compensation in accordance with Accounting Standards Codification Topic 718, “Compensation - Stock Compensation,” by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable. Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur. For stock option awards for which vesting is contingent upon the achievement of certain performance targets, the timing and amount of compensation expense recognized is based upon the Company’s projections and estimates of the relevant performance metric(s) until the time the performance obligation is satisfied. Expense for such awards is recognized only to the extent that the achievement of the specified performance target(s) has been met or is considered probable. 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, 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 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 nine months is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ Weighted ​ Remaining ​ ​ ​ ​ ​ ​ ​ Average ​ Contractual ​ Aggregate ​ ​ Number of ​ Exercise ​ Life ​ Intrinsic ​ Options Price (in Years) Value Outstanding at January 1, 2022 5,630,970 ​ $ 2.25 5.46 ​ $ — Granted 605,850 ​ 1.61 ​ Canceled — ​ — ​ Exercised — ​ — ​ Expired/Forfeited ( 474,930 ) ​ 3.18 ​ Outstanding at September 30, 2022, and expected to vest 5,761,890 ​ $ 2.11 4.94 ​ $ — Exercisable at September 30, 2022 2,048,556 ​ $ 2.81 2.01 ​ $ — ​ On April 20, 2022, the Company granted options to purchase an aggregate of 380,850 shares of common stock to various employees. The exercise price of the options is $ 1.62 per share, and all options vested immediately on the date of grant. On April 20, 2022 the Company granted options to purchase an aggregate of 125,000 shares of common stock to non-management directors. The exercise price of the options is $ 1.62 per share, and 50 % of the options vest on each of April 20, 2023 and April 20, 2024. 15 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) On April 26, 2022, the Company granted options to purchase an aggregate of 100,000 shares of common stock to a consultant. The exercise price of the options is $ 1.58 per share, and all options vested immediately on the date of grant. 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 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ Average ​ ​ Number of ​ Grant Date ​ Options Fair Value Balance at January 1, 2022 3,873,334 ​ $ 0.07 Granted 605,850 ​ 0.79 Vested ( 755,850 ) ​ ​ 0.73 Forfeited or Canceled ( 10,000 ) ​ 1.09 Balance at September 30, 2022 3,713,334 ​ $ 0.05 ​ Warrants A summary of the Company’s warrants activity for the current nine months is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ Weighted ​ Remaining ​ ​ ​ ​ ​ ​ Average Contractual ​ Aggregate ​ ​ Number of ​ Exercise Life ​ Intrinsic ​ Warrants Price (in Years) Value Outstanding and exercisable at January 1, 2022 116,065 ​ $ 3.15 2.57 ​ $ — Granted — ​ — ​ ​ Canceled — ​ — ​ ​ Exercised — ​ — ​ ​ Expired/Forfeited — ​ — ​ ​ Outstanding and exercisable at September 30, 2022 116,065 ​ $ 3.15 1.82 ​ $ — ​ No compensation expense related to warrants was recognized in the current quarter, prior year quarter, current nine months, or prior year nine months. 16 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Stock Awards A summary of the Company’s restricted stock activity for the current nine months is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ Number of ​ Average ​ ​ Restricted ​ Grant Date ​ Shares Fair Value Outstanding at January 1, 2022 815,833 ​ $ 4.00 Granted 347,623 ​ 1.58 Canceled — ​ — Vested ( 820,123 ) ​ 3.12 Expired/Forfeited — ​ — Outstanding at September 30, 2022 343,333 ​ $ 3.66 ​ 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. On April 20, 2022, the Company issued 20,064 shares of common stock to a consultant, which vested immediately. On May 31, 2022, the Company issued 65,275 shares of common stock to a consultant in connection with the transaction related to the Isaac Mizrahi Brand (see Note 2); these shares vested immediately. On May 31, 2022, the Company issued 33,557 shares of common stock to a key employee, which vested immediately. Additionally, on April 20, 2022, the Company issued 178,727 shares of common stock to a member of senior management as payment for a performance bonus earned in 2021. These shares vested immediately. The Company had previously recognized compensation expense of approximately $ 0.28 million in 2021 to accrue for this performance bonus. 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 $ 0.24 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 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 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. ​ 17 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) ​ 9. Earnings (Loss) Per Share Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury stock method. 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 (loss) income per share computations for the three and nine months ended September 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2022 2021 2022 2021 ​ Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income attributable to Xcel Brands, Inc. stockholders (in thousands) ​ $ ( 4,042 ) ​ $ ( 1,136 ) ​ $ 1,961 ​ $ ( 5,241 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted average number of shares outstanding ​ 19,624,860 ​ 19,541,774 ​ ​ 19,624,604 ​ 19,418,469 Add: Effect of warrants ​ — ​ — ​ ​ 620 ​ — Add: Effect of stock options ​ ​ — ​ ​ — ​ ​ 127,115 ​ ​ — ​ Diluted weighted average number of shares outstanding ​ 19,624,860 ​ 19,541,774 ​ ​ 19,752,339 ​ 19,418,469 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net (loss) income per share ​ $ ( 0.21 ) ​ $ ( 0.06 ) ​ $ 0.10 ​ $ ( 0.27 ) ​ Diluted net (loss) income per share ​ $ ( 0.21 ) ​ $ ( 0.06 ) ​ $ 0.10 ​ $ ( 0.27 ) ​ ​ 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 ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ ​ 2022 2021 2022 2021 ​ Stock options ​ 5,761,890 ​ 5,810,945 ​ 5,514,140 ​ 5,810,945 ​ Warrants ​ 116,065 ​ 116,065 ​ 115,000 ​ 116,065 ​ Total ​ 5,877,955 5,927,010 ​ 5,629,140 5,927,010 ​ ​ ​ ​ 18 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) ​ 10. Income Taxes 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 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 7 %. 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 %. 11. Related Party Transactions Isaac Mizrahi On February 24, 2020, the Company entered into an employment agreement with Isaac Mizrahi, a principal stockholder of the Company, for Mr. Mizrahi to continue to serve as Chief Design Officer of the Isaac Mizrahi Brand. This employment agreement remained in effect through May 31, 2022. 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). On February 24, 2020, the Company also entered into a services agreement with Laugh Club, an entity wholly-owned by Mr. Mizrahi, pursuant to which Laugh Club provided services to Mr. Mizrahi necessary for Mr. Mizrahi to perform his services pursuant to the employment agreement. The Company paid Laugh Club an annual fee of $ 0.72 million for such services. This services agreement remained in effect through May 31, 2022. 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). In addition, on May 31, 2022, all 522,500 unvested shares of restricted stock of the Company held by Mr. Mizrahi (for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of such shares being surrendered for cancellation in satisfaction of withholding tax obligations. Also on May 31, 2022, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr. Mizrahi, which vested immediately, and made a $ 100,000 cash payment to Mr. Mizrahi. ​ 19 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 nine months ended September 30, 2022, the Company recognized royalty expense related to this agreement of $ 92,000 and $ 123,000 , respectively. ​ 12. Commitments and Contingencies Contingent Obligation – Halston Heritage Earn-Out 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 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. In accordance with ASC Topic 480, “Distinguishing Liabilities from Equity,” the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying condensed consolidated balance sheets because of the variable number of shares payable under the agreement. Contingent Obligation – Lori Goldstein Earn-Out In connection with the April 1, 2021 acquisition of the Lori Goldstein trademarks, the Company agreed to pay the seller additional cash consideration (the “Lori Goldstein Earn-Out”) of up to an aggregate of $ 12.5 million, based on royalties earned during the six calendar year period commencing in 2021. 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 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 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 20 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) condensed consolidated balance sheets related to this contingent obligation, and management believes the likelihood of any such payment is remote. Legal Proceedings From time to time, the Company becomes involved in legal claims and litigation in the ordinary course of business. In the opinion of management, based on consultations with legal counsel, the disposition of litigation currently pending against the Company is unlikely to have, individually or in the aggregate, a materially adverse effect on the Company’s business, financial position, results of operations, or cash flows. 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. Coronavirus Pandemic In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, which continues to circulate throughout the U.S. and the world. 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. ​ ​ ​ ​ 21 Table of Contents