What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-04-17 compared with 2022-04-15 · 447 added, 506 removed, 607 unchanged (61% of the section changed)

Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firms (PCAOB ID:

688 and PCAOB ID:

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Xcel Brands, Inc.

and Subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of Xcel Brands, Inc.

and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Tradename Impairment Testing – Refer to Note 2 and Note 4 to the Consolidated Financial Statements

Description of the Matter

The Company evaluates indefinite-lived intangible assets for impairment annually by comparing the carrying values to their estimated fair values as of the evaluation dates unless an interim evaluation is required due to the presence of indictors that the tradenames may be impaired.

The Company uses the income approach using a discounted cash flow model to value the indefinite-lived tradename, comparing its fair value to carrying value to determine impairment.

If the carrying value of this asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds fair value.

As of December 31, 2021, the Company had one indefinite-lived tradename (Isaac Mizrahi Brand) with a carrying value of $44,500,000.

We identified the Company’s indefinite-lived tradename impairment evaluation as a critical audit matter.

Auditing the Company’s tradename impairment evaluation was complex and subjective due to the significant estimation required to determine the forecasted cash flows used in the Company’s evaluation.

Specifically, the forecasted cash flows are sensitive to significant assumptions such as revenue growth rates, including the terminal growth rates, margins, expenses, and discount rates, all of which are affected by expected future market or economic conditions, including the effects of the global pandemic.

In addition, our audit effort involved the use of professionals within our firm with specialized skill and knowledge in valuation methods and models.

How We Addressed the Matter in our Audit

The primary procedures we performed, with the assistance of professionals within our firm with specialized skills and knowledge in valuation methods and models, where necessary, to address this critical audit matter included the following, among others.

(1) We evaluated the Company’s forecasted revenue (2) Evaluated the guideline companies used that operated in similar industries.

(3) The Company used the appropriate modified capital asset pricing model and a weighted average cost of capital.

(4) We performed independent calculations to evaluate the sensitivity of the key assumptions used by management.

/s/ Marcum LLP

We have served as the Company’s auditor since 2021.

April 14, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Xcel Brands, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Xcel Brands, Inc.

and Subsidiaries (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgements.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Tradename Impairment Testing

As disclosed in Note 2 to the consolidated financial statements, indefinite-lived tradenames are tested for impairment annually in the fourth quarter of each year unless an interim test is required due to the presence of indictors that the tradenames may be impaired.

The Company uses the income approach using a discounted cash flow model to value the indefinite-lived tradename, comparing its fair value to carrying value to determine impairment.

If the carrying value of such assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds fair value.

Finite-lived tradenames are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

The Company uses the income approach using an undiscounted cash flow model to assess the recoverability of the finite-lived tradename, comparing its undiscounted cash flows to its carrying value.

If the carrying value exceeds undiscounted cash flows, the Company will use a discounted cash flow model to determine the fair value, and an impairment loss is recognized if the carrying amount of finite-lived intangible asset exceeds fair value.

As of December 31, 2020, the Company had one indefinite-lived tradename (Isaac Mizrahi Brand) with a carrying value of $44,500,000.

As of December 31, 2020, the Company had four finite-lived tradenames (Ripka Brand, Halston Brand, C Wonder Brand and Longaberger Brand) with an aggregate carrying value of $48,748,000.

We identified the Company’s tradename impairment testing as a critical audit matter.

Auditing the Company’s tradename impairment testing was complex and subjective due to the significant estimation required to determine the forecasted cash flows used in the Company’s testing.

In addition, our audit effort involved the use of professionals within our firm with specialized skill and knowledge in valuation methods and models.

The primary procedures we performed to address this critical audit matter included the following.

● We obtained an understanding of and evaluated the Company’s process to estimate future cashflows, including methods, data, and significant assumptions used in developing the discounted cashflow analysis as well as the completeness and accuracy of the underlying data used by the Company in its analysis.

● We evaluated the reasonableness of the Company’s forecasted revenues, operating results, and cash flows by comparing those forecasts to the underlying business strategies and growth plans, including existing license arrangements.

In addition, we performed a sensitivity analysis related to the key inputs to forecasted cash flows, including revenue growth rates, margins, and discount rates, to evaluate whether the changes in the assumptions would result in a material change in fair value of the tradenames.

● We evaluated management’s ability to estimate future cash flows by comparing the Company’s historical forecasted sales, operating results, and cash flow forecasts to actual results.

We also considered management's ability to estimate license renewals by examining historical renewal rates.

● With the assistance of our firm’s valuation professionals, we evaluated the reasonableness of the Company’s discounted cash flow models, including the terminal value and discount rates assumptions.

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Liquidity and Management’s Plans

Critical Audit Matter Description

As described further in Note 1 to the financial statements, the Company has incurred recurring losses from operations, has an accumulated deficit and insufficient revenues to cover its operating costs.

The ability of the Company to continue as a going concern is dependent on executing its business plans and meeting its obligations as they come due within the next twelve months from the filing date of this Annual Report on Form 10-K.

Accordingly, the Company has determined that these factors raise substantial doubt and uncertainty as to the Company’s ability to continue as a

going concern.

As disclosed in Note 10 to the consolidated financial statements, in March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, negatively and materially impacting the Company’s financial results and liquidity.

Specifically, licensing and wholesale revenues decreased primarily due to lower customer sales by its licensees and wholesale customers as a result of government-ordered retail store closures as well as an overall slowdown in economic activity related to the COVID-19 pandemic.

This resulted in significant uncertainty surrounding the potential impact on the Company’s future results of operations and cash flows.

We identified the evaluation of whether the Company has the ability to continue as a going concern due to liquidity impacted by COVID-19 as a critical audit matter.

Auditing management’s going concern analysis was complex and highly subjective due to the significant estimation required to forecast future operations and cash flows that are affected by expected future market conditions, including the effects of global pandemic.

The primary procedures we performed to address this critical audit matter included the following.

● We obtained an understanding of and tested the company’s process to identify events and circumstances that would raise substantial doubt about the Company’s ability to continue as a going concern and process to estimate future cashflows, including methods, data, and significant assumptions used in developing the future cashflows, as well as the completeness and accuracy of the underlying data used by the Company in its analyses.

● We evaluated the reasonableness of the following significant assumptions made by management, including:

o The Company’s forecasted revenues and cash flows by comparing those forecasts to the underlying business strategies and growth plans, including existing license arrangements;

o Management’s ability to estimate future cash flows, including forecasted revenues, by comparing the Company’s historical cash flow forecasts to actual results.

We also considered management's ability to estimate license renewals by examining historical renewal rates.;

o We performed a sensitivity analysis related to the key inputs to forecasted cash flows, including revenue growth rates and cost saving measures, to evaluate the impact of COVID-19 on the Company’s future cash flows and how the Company’s strategy mitigates the impact.

/s/ CohnReznick LLP

New York, New York

However, management has implemented plans which are expected to mitigate these conditions or events, and therefore, such conditions or events of substantial doubt have been alleviated.

How the Critical Audit Matter was Addressed in the Audit

We determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the Company’s available capital and the risk of bias in management’s judgments and assumptions in their determination.

Our audit procedures related to considering whether the results of our audit procedures, when considered in the aggregate, indicate that there could be substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time, obtaining information about management’s plans that are intended to mitigate the effect of such conditions or events, and assessing the likelihood that such plans can be effectively implemented, included the following, among others:

● We reviewed the Company’s assessment and conclusions regarding their ability to generate cashflows for at least twelve months from the filing date of this Annual Report on Form 10-K.

● We inquired of Company management and reviewed Company records to assess whether there are additional factors that contribute to the uncertainties disclosed.

● We assessed whether the Company’s determination that there are factors that raise such uncertainties about its ability to continue as a going concern, was adequately disclosed in the financial statements.

● We reviewed and evaluated management's plans for alleviating such conditions and uncertainties and considered whether it is likely that these conditions and uncertainties would be mitigated for a reasonable period of time and that such plans can be effectively implemented.

● We performed testing procedures such as reviewing;

prospective financial information for the twelve-month period beginning with the filing date of this Annual Report on Form 10-K, actual operating performance for periods subsequent to December 31, 2022, implemented reductions in operating expenses, and plans for further reductions to support expected cashflows.

/s/ Marcum LLP

We have served as the Company’s auditor since 2021.

April 17, 2023

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Trademarks and other intangibles, net

Equity method investment

Restricted cash

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Accounts payable, accrued expenses and other current liabilities

Accrued income taxes payable

Accrued payroll

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Current portion of long-term debt

Current portion of contingent obligations

Total current liabilities

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Long-term debt, net, less current portion

Contingent obligations

Deferred tax liabilities, net

Other long-term liabilities

Long-term portion of contingent obligations

Total long-term liabilities

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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 19,571,119 and 19,260,862 shares issued and outstanding at December 31, 2021 and 2020, respectively

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

Paid-in capital

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Depreciation and amortization

Government assistance - Paycheck Protection Program and other

Asset impairment charges

Total operating costs and expenses

Other income (expense)

Gain on sale of majority interest in Isaac Mizrahi brand

Loss from equity method investment

Gain on reduction of contingent obligation

Total other income (expense)

Operating loss

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Interest expense - term loan debt

Other interest and finance charges (income), net

Loss on extinguishment of debt

Other interest and finance charges, net

Loss on early extinguishment of debt

Total interest and finance expense

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Shares issued to executive in connection with stock grants for bonus payments

Shares issued to other employees in connection with stock grants

Shares issued to directors in connection with restricted stock grants

Shares issued to consultants in connection with restricted stock grants

Shares issued to employee in connection with contractual agreement

Shares issued on exercise of stock options, net of shares surrendered for cashless exercises

Shares repurchased from employees in exchange for withholding taxes

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

Additional investment in Longaberger Licensing, LLC by noncontrolling interest

Net loss for the year ended December 31, 2021

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Shares issued to executive in connection with stock grants for bonus payments

Shares repurchased from executive in exchange for withholding taxes

Shares issued to directors in connection with restricted stock grants

Shares issued to consultants in connection with restricted stock grants

Shares issued to employee in connection with contractual agreement

Shares issued on exercise of stock options, net of shares surrendered for cashless exercises

Shares repurchased from employees in exchange for withholding taxes

Additional investment in Longaberger Licensing, LLC by noncontrolling interest

Shares issued to consultant in connection with sale transaction (see Note 3 and Note 7)

Shares issued to key employee in connection with stock grant

Shares repurchased from key employee in exchange for withholding taxes related to vesting of restricted shares

Net loss for the year ended December 31, 2022

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Cash flows from operating activities

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization expense

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Provision for doubtful accounts

Loss on extinguishment of debt

Undistributed proportional share of net income of equity method investee

Loss on early extinguishment of debt

Deferred income tax benefit

Net gain on sale of assets

Gain on sale of majority interest in Isaac Mizrahi brand

Gain on reduction of contingent obligation

Changes in operating assets and liabilities:

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Prepaid expenses and other current and non-current assets

Accounts payable, accrued expenses and other current liabilities

Accounts payable, accrued expenses, accrued payroll, accrued income taxes payable, and other current liabilities

Lease-related assets and liabilities

Net cash (used in) provided by operating activities

Other liabilities

Net cash used in operating activities

Cash flows from investing activities

Net proceeds from sale of majority interest in Isaac Mizrahi brand

Capital contribution to equity method investee

Cash consideration for acquisition of Lori Goldstein assets

Net proceeds from sale of assets

Purchase of other intangible assets

Purchase of property and equipment

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities

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Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Cash contribution from noncontrolling interest

Proceeds from revolving loan debt

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Payment of long-term debt

Payment of breakage and other fees associated with extinguishment of long-term debt

Net cash provided by (used in) financing activities

Net (decrease) increase in cash, cash equivalents, and restricted cash

Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt

Net cash (used in) provided by financing activities

Net decrease in cash, cash equivalents, and restricted cash

Cash, cash equivalents, and restricted cash at beginning of period

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Supplemental disclosure of non-cash activities:

Operating lease right-of-use assets

Operating lease obligations

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

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Supplemental disclosure of cash flow information:

Cash paid during the year for interest

Cash paid during the year for income taxes

Cash paid during the period for interest

Cash paid during the period for income taxes

See accompanying Notes to Consolidated Financial Statements.

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(“Xcel” and, together with its subsidiaries, 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 Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the LOGO by Lori Goldstein brand, the Judith Ripka brands (the "Ripka Brand"), the Halston brands (the "Halston Brand"), the C Wonder brands (the "C Wonder Brand"), and other proprietary brands.

The Company also manages the Longaberger brand (the “Longaberger Brand”) through its 50 % ownership interest in Longaberger Licensing, LLC (see Note 3).

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 (see Note 3 for additional details).

● The Company manages the Q Optix business through its 50 % ownership interest in Q Optix, LLC.

● 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 3 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.

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

The Company incurred net losses of approximately $ 13.0 million and $ 13.1 million during the years ended December 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately $ 28.8 million and $ 16.6 million as of December 31, 2021 and 2020, respectively.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations) of approximately $ 7.9 million as of both December 31, 2021 and 2020.

Liquidity and Management’s Plans

The Company incurred net losses of approximately $ 5.4 million ($ 25.9 million excluding the gain on sale of a majority interest in the Isaac Mizrahi brand) and $ 13.0 million during the years ended December 31, 2022 and 2021, respectively, and had an accumulated deficit of approximately $ 32.8 million and $ 28.8 million as of December 31, 2022 and 2021, respectively.

Included in the net losses were non-cash expenses of approximately $ 8.2 million and $ 7.5 million for the years ended December 31, 2022 and 2021, respectively.

Net cash used in operating activities was $ 14.2 million in 2022 and $ 6.6 million in 2021.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations) of approximately $ 8.8 million and $ 7.9 million as of December 31, 2022 and 2021, respectively.

The Company’s cash and cash equivalents were approximately $ 4.6 million as of December 31, 2022.

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

The aforementioned factors raise uncertainties about the Company’s ability to continue as a going concern.

Management plans to mitigate an expected shortfall of capital and to support future operations by shifting the business from a wholesale/licensing hybrid model into a licensing plus business model and to divest or restructure the Longaberger brand.

In the first quarter of 2023, the Company began to restructure its business operations by entering into new licensing agreements and joint venture arrangements with best-in-class business partners.

The Company entered into a new

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

interactive television licensing agreement with America’s Collectibles Network, Inc.

d/b/a JTV (“JTV”) for the Ripka Brand, and a separate license with JTV for the Ripka Brand’s e-commerce business.

For apparel, similar transactions have recently been executed.

In conjunction with the launch of the C Wonder Brand on HSN, the Company licensed the wholesale production operations related to the brand to One Jeanswear Group, LLC (“OJG”);

this new license with OJG also includes other new celebrity brands that the Company plans to launch in 2023 and beyond.

For the Halston Brand, management plans on entering into a joint venture related to the brand’s wholesale apparel business with another leading apparel manufacturer (the “Halston JV”).

The Halston JV will develop an apparel business under the H Halston brand through department stores, e-commerce, and other retailers.

The Halston JV will include a wholesale license to Xcel.

Management expects the transition of these operating businesses to be completed by second quarter of 2023.

Management believes that this evolution of the Company’s operating model will provide the Company with significant cost savings and allow the Company to reduce and better manage its exposure to operating risks.

As of March 31, 2023, steps have been taken to reduce payroll costs by $ 6 million and operating expenses by $ 7 million over the next twelve months.

Further, the Company intends to obtain a line of credit to provide additional capital resources.

However, there is no assurance that this line of credit or any other external financing will be obtained.

Based on these recent changes in the Company’s business model, management expects to generate adequate cash flows to meet the Company’s operating and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Annual Report on Form 10-K, and therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of December 31, 2022, have subsequently been alleviated.

Summary of Significant Accounting Policies

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Making estimates requires management to exercise significant judgment.

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● Useful lives of trademarks;

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

● Assumptions used in the valuation of intangible assets, including cash flow estimates for initial determinations of fair value and/or impairment analysis;

● Black-Scholes option pricing model assumptions for the grant date fair value of stock options;

● Incremental borrowing rate;

● Inventory reserves;

● Valuation allowances and effective tax rate for tax purposes.

Reclassifications

Certain reclassifications have been made to Prior Year financial statements to conform to classifications used in the Current Year – specifically, the classification and aggregation / disaggregation of certain types of operating costs and expenses, and the disaggregation of the components of interest and finance expense.

These reclassifications had no impact on total operating costs and expenses, total interest and finance expense, net loss, stockholders’ equity, or cash flows as previously reported.

● Stock-based compensation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Accounts Receivable

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As of December 31, 2022 and 2021, the Company had $ 5.1 million and $ 7.6 million, respectively, of accounts receivable, net of allowances for doubtful accounts of $ 0.1 million and $ 1.1 million, respectively.

The Company recognized bad debt expense of $ 0.1 million and $ 1.1 million for the Current Year and Prior Year, respectively, of which the Current Year and Prior Year reflected $ 0.1 million and $ 1.0 million, respectively, of bad debt expense related to the bankruptcy of several retail customers due to the novel coronavirus disease pandemic.

The allowance of approximately $ 1.1 million against such customers’ outstanding receivable balances of $ 1.4 million at December 31, 2021 represents management’s best estimate of collectibility, based on information currently available.

The allowance of $ 1.0 million against such customers’ outstanding receivable balances of $ 1.2 million at December 31, 2020 represented management’s best estimate of collectibility based on information available at that time.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

The Company recognized bad debt expense of $ 0.4 million and $ 0.1 million for the Current Year and Prior Year, respectively, which was related to the bankruptcy of several retail customers due to the novel coronavirus disease pandemic.

The Company wrote-off approximately $ 1.5 million of such customers’ outstanding receivable balances in the Current Year.

There is no earned revenue that has been accrued but not billed as of December 31, 2022 and 2021.

As of December 31, 2022, approximately $ 1.7 million of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the Current Year, 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 Year, the Company paid approximately $ 0.05 million in fees to the agent under the aforementioned services agreement.

Inventory is recorded at the lower of cost or net realizable value, with cost determined on a weighted average basis.

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Betterments and improvements are capitalized, while repairs and maintenance are expensed as incurred.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Costs to develop or acquire software for internal use incurred during the preliminary project stage and the post implementation stage are expensed, while internal and external costs to acquire or develop software for internal use incurred during the application development stage – including design, configuration, coding, testing, and installation – are generally capitalized.

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The inputs utilized in the impairment analysis are classified as Level 3 inputs within the fair value hierarchy as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement.”

As a result of management’s decision to close its brick-and-mortar fine jewelry retail store, the Company recognized a $ 0.7 million impairment charge in the Current Year related to furniture and fixtures, equipment, and leasehold improvement assets of the store, and a $ 0.7 million impairment charge in the Current Year related to the operating lease right-of-use asset for the store.

As a result of the bankruptcy of Lord & Taylor in 2020, the Company recognized a $ 0.1 million impairment charge in the Prior Year related to certain furniture and fixture assets physically located in Lord & Taylor’s stores.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

As a result of management’s decision to close its brick-and-mortar fine jewelry retail store, the Company recognized a $ 0.7 million impairment charge in the Prior Year related to furniture and fixtures, equipment, and leasehold improvement assets of the store, and a $ 0.7 million impairment charge in the Prior Year related to the operating lease right-of-use asset for the store.

Separately, the Company recognized impairment charges of $ 0.3 million in the Current Year related to store fixtures purchased for an apparel program with one of the Company’s retail partners.

Trademarks and Other Intangible Assets

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If the carrying amount of such assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the recoverable amount of the assets.

The Company performed its annual impairment testing as described above for the years ended December 31, 2021 and 2020, and concluded that there was no impairment of its indefinite-lived intangible asset.

The Company also re-evaluates on an annual basis whether events and circumstances continue to support an indefinite useful life.

The Company performed its annual impairment testing as described above for the year ended December 31, 2021, and concluded that there was no impairment of its indefinite-lived intangible asset.

The Company subsequently sold its indefinite-lived intangible asset during the Current Year for a gain (see Note 3 for additional details).

Finite-Lived Intangible Assets

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An impairment loss is recognized if the carrying amount of a finite-lived intangible asset is not recoverable and its carrying amount exceeds its fair value.

With reference to finite-lived intangible assets impairment testing, the Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluates the asset group against the sum of undiscounted future cash flows.

If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on undiscounted cash flows analysis or appraisals.

The inputs utilized in the finite-lived intangible assets impairment analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC Topic 820, “Fair Value Measurement.”

As a result of performing its required impairment testing as described above for the year ended December 31, 2020, the Company recorded a $ 13.0 million impairment charge in the Prior Year related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the novel coronavirus disease pandemic.

No other impairment charges were recorded for the year ended December 31, 2020, and no impairment charges were recorded related to finite-lived intangible assets for the year ended December 31, 2021.

The Company’s finite-lived intangible assets are amortized over their estimated useful lives of four (4) to eighteen (18) years.

The Company re-evaluates the remaining useful life of its finite-lived intangible assets on an annual basis, based on consideration of current events and circumstances, the expected use of the asset, and the effects of demand, competition, and other economic factors.

XCEL BRANDS, INC.

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December 31, 2022 and 2021

No impairment charges were recorded related to finite-lived intangible assets for the Current Year or Prior Year.

The Company’s finite-lived intangible assets are amortized over their estimated useful lives of three (3) to eighteen (18) years.

No changes were made to the estimated useful lives of intangible assets in the Current Year or Prior Year.

Restricted Cash

Restricted cash was $ 0.7 million and $ 1.1 million as of December 31, 2021 and 2020, respectively.

Restricted cash was $ 0.7 million as of December 31, 2021.

This balance consisted of cash deposited as collateral for an irrevocable standby letter of credit associated with the lease of the Company’s current corporate office and operating facility at 1333 Broadway, New York City.

Investment in Unconsolidated Affiliate

The Company holds a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016.

There was no restricted cash at December 31, 2022, as the aforementioned letter of credit expired and was not renewed.

Investments in Unconsolidated Affiliates

The Company holds a noncontrolling equity interest in IM Topco, LLC, which was entered into during the Current Year (see Note 3 for additional details).

This investment is accounted for in accordance with ASC Topic 323, “Investments – Equity Method and Joint Ventures,” as the Company has the ability to exercise significant influence over operating and financial policies but does not control the affiliate.

As of December 31, 2022, the carrying value of this investment on the Company’s consolidated balance sheet was $ 19.2 million.

The Company recognizes its share of the ongoing operating results of IM Topco LLC (based on the distribution provisions set forth in the related business venture agreement) as other income (expense) in the accompanying consolidated statement of operations for the Current Year.

The Company also holds a limited partner ownership interest in an unconsolidated affiliate, which was entered into in 2016.

This investment is accounted for in accordance with ASC Topic 321, “Investments – Equity Securities,” and is included within other assets on the Company’s consolidated balance sheets at December 31, 2022 and 2021.

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Deferred Finance Costs

The Company has incurred costs (primarily professional fees and lender underwriting fees) in connection with borrowings under senior secured term loans.

These costs have been deferred on the consolidated balance sheets as a reduction to the carrying value of the associated borrowings.

Such costs are amortized as interest expense using the effective interest method.

The Company previously incurred costs (primarily professional fees and lender underwriting fees) in connection with borrowings under senior secured term loans.

Such costs were deferred on the consolidated balance sheet as a reduction to the carrying value of the associated borrowing, and were amortized as interest expense using the effective interest method.

Contingent Obligations

When accounting for asset acquisitions, if any contingent obligations exist and the fair value of the assets acquired is greater than the consideration paid, any contingent obligations are recognized and recorded as the positive difference between the fair value of the assets acquired and the consideration paid for the acquired assets.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

When accounting for asset acquisitions, if any contingent obligations exist and the fair value of the assets acquired are equal to the consideration paid, any contingent obligations are recognized based upon the Company’s best estimate of the amount that will be paid to settle the liability.

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Payments are typically due after sales have occurred and have been reported by the licensees or, where applicable, in accordance with minimum guaranteed payment provisions.

The timing of performance obligations is typically consistent with the timing of payments, though there may be differences if contracts provide for advances or

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

significant escalations of contractually guaranteed minimum payments.

The timing of performance obligations is typically consistent with the timing of payments, though there may be differences if contracts provide for advances or significant escalations of contractually guaranteed minimum payments.

There were no such differences that would have a material impact on the Company’s consolidated balance sheets at December 31, 2022 and 2021.

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(i) Contracts for which, based on experience, royalties are expected to exceed any applicable minimum guaranteed payments, and to which an output-based measure of progress based on the “right to invoice” practical expedient is applied because the royalties due for each period correlate directly with the value to the customer of the Company’s performance in each period (this approach is identified as “View A” by the FASB Revenue Recognition Transition Resource Group, “TRG”);

(ii) Contracts for which revenue is recognized based on minimum guaranteed payments using an appropriate measure of progress, in which minimum guaranteed payments are straight-lined over the term of the contract and recognized ratably based on the passage of time, and to which the royalty recognition constraint to the sales-based royalties in excess of minimum guaranteed is applied and such sales-based royalties are recognized to distinct period only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG).

(ii) Contracts for which revenue is recognized based on minimum guaranteed payments using an appropriate measure of progress, in which minimum guaranteed payments are straight-lined over the term of the contract and recognized ratably based on the passage of time, and to which the royalty recognition constraint to the sales-based royalties in excess of minimum guaranteed is applied and such sales-based royalties are recognized to the distinct period only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG).

The Company does not typically perform by transferring goods or services to customers before the customer pays consideration or before payment is due, thus the amounts of contract assets as defined by ASC 606-10-45-3 related to licensing contracts were not material as of December 31, 2022 and 2021.

The Company’s unconditional right to receive consideration based on the terms and conditions of licensing contracts is presented as accounts receivable on the accompanying consolidated balance.

The Company’s unconditional right to receive consideration based on the terms and conditions of licensing contracts is presented as accounts receivable on the accompanying consolidated balance sheets.

The Company typically does not receive consideration in advance of performance and, consequently, amounts of contract liabilities as defined by ASC 606-10-45-2 related to licensing contracts were not material as of December 31, 2022 and 2021.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company does not disclose the amount attributable to unsatisfied or partially satisfied performance obligations for variable revenue contracts (identified under “View A” above) in accordance with the optional exemption allowed under ASC 606.

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The Company generates revenue through the design, sourcing, and sale of branded jewelry and apparel to both domestic and international customers who, in turn, sell the products to the consumer.

The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which occurs upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale.

The Company recognizes revenue within net sales in the accompanying consolidated statements of operations when performance obligations identified under the terms of contracts with its customers are satisfied, which occurs upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale.

Shipping to customers is accounted for as a fulfillment activity and is recorded within other selling, general and administrative expenses.

Direct to Consumer Sales

The Company’s revenue associated with its e-commerce businesses is recognized at a point in time when product is shipped to the customer.

The Company’s revenue associated with its e-commerce businesses is recognized within net sales in the accompanying consolidated statements of operations at the point in time when product is shipped to the customer.

Shipping to customers is accounted for as a fulfillment activity and is recorded within other selling, general and administrative expenses.

The Company’s revenue related to its brick-and-mortar retail store is recognized at the point of sale to the customer.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

The Company’s revenue related to its brick-and-mortar retail store is recognized within net sales in the accompanying consolidated statements of operations at the point of sale to the customer.

Advertising Costs

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All other advertising costs, such as print and online media, are expensed when the advertisement occurs.

The Company incurred $ 2.5 million and $ 0.9 million in advertising and marketing costs for the Current Year and Prior Year, respectively.

The Company incurred approximately $ 2.6 million and $ 2.5 million in advertising and marketing costs for the Current Year and Prior Year, respectively, which are included within other selling, general and administrative expenses in the accompanying consolidated statements of operations.

The Company determines if an arrangement is a lease (as defined in ASC Topic 842, “Leases”) at the inception of the arrangement.

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Subsequent to initial measurement, these variable payments are recognized when the event determining the amount of variable consideration to be paid occurs.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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The risk-free rate is based on the U.S.

Treasury rate for the expected life at the time of grant, volatility is based on the historical volatility of the Company’s common stock, and the expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

Treasury rate for the expected term at the time of grant, volatility is based on the historical volatility of the Company’s common stock, and the expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

Restricted stock awards are valued using the fair value of the Company’s stock at the date of grant, based on the quoted market price of the Company’s common shares on the NASDAQ Global Market.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Non-employee awards are measured at the grant date fair value of the equity instruments to be issued, and the Company recognizes compensation cost for grants to non-employees on a straight-line basis over the period of the grant.

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The income tax effects of changes in tax laws are recognized in the period when enacted.

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value and establishes a framework for measuring fair value under U.S.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

ASC Topic 820, “Fair Value Measurement,” defines fair value and establishes a framework for measuring fair value under U.S.

The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date.

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When debt interest rates are below market rates, the Company considers the discounted value of the difference of actual interest rates and its internal borrowing against the scheduled debt payments.

The fair value of the Company’s investment in an unconsolidated affiliate does not have a readily determinable fair value and in accordance with ASC 820-10-35-59, the investment is valued at cost, less impairment, plus or minus observable price changes of an identical or similar investment of the same issuer.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Concentrations of Credit Risk

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Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities.

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities.

Diluted earnings (loss) per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants using the treasury stock method.

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This ASU will require entities to estimate lifetime expected credit losses for financial instruments, including trade and other receivables, which will result in earlier recognition of credit losses.

In November 2019, the FASB issued ASU No.

2019-10, which, among other things, deferred the application of the new guidance on credit losses for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows, and financial condition.

In November 2021, the FASB issued ASU No.

2021-10, “Government Assistance (Topic 823):

Disclosures by Business Entities about Government Assistance.” This ASU will require certain financial statement disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

This guidance is effective for financial statements issued for annual periods beginning after December 15, 2021.

As this ASU only affects financial statement disclosures, the adoption of this guidance will not have any impact on the Company’s results of operations, cash flows, or financial condition.

Subsequently, the FASB issued additional guidance in ASU No.

2019-05 in May 2019, ASU No.

2019-10 and 2019-11 in November 2019, ASU No.

2020-02 in February 2020, and ASU No.

2022-02 in March 2022.

Among other things, the additional guidance deferred the application of the new guidance on credit losses for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows, and financial condition when it is adopted during the first quarter of 2023.

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Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Recently Adopted Accounting Pronouncements

The Company adopted ASU No.

2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” effective January 1, 2020.

This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance did not have any impact on the Company’s results of operations, cash flows, and financial condition.

The Company adopted ASU No.

2019-12, “Income Taxes (Topic 740):

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The adoption of this new guidance did not have any impact on the Company’s results of operations, cash flows, and financial condition.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Acquisitions and Variable Interest Entities

The Company adopted ASU No.

2021-10, “Government Assistance (Topic 823):

Disclosures by Business Entities about Government Assistance.” This ASU requires certain financial statement disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

As this ASU only affects financial statement disclosures, the adoption of this guidance did not have any impact on the Company’s results of operations, cash flows, or financial condition.

Acquisitions, Divestitures and Variable Interest Entities

Acquisition of LOGO by Lori Goldstein Brand

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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 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 Accounting Standards Codification (“ASC”) Subtopic 805-50.

Based on the performance of the Lori Goldstein brand through December 31, 2022, approximately $ 0.2 million of additional consideration has been earned and is payable to the Seller in 2023.

The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase.

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The aggregate purchase price 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 consolidated statements of operations.

Such trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s consolidated

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

statements of operations.

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

Upon the consummation of the acquisition of the LOGO by Lori Goldstein brand as described above, the Company incurred cash bonuses totaling $ 175,000 to certain members of the Company’s senior management (including $ 100,000 to the Chief Executive Officer, and $ 25,000 each to the Chief Financial Officer, President and Chief Operating Officer, and Executive Vice President of Business Development and Treasury), such success-related bonuses having been approved by the Board of Directors on March 18, 2021.

These bonuses were expensed on the Closing Date and were subsequently paid in May 2021.

Additionally, concurrent with the acquisition, the Company also entered into a 10-year employment agreement with the Shareholder to serve as the LOGO by Lori Goldstein brand’s Chief Creative Officer and Spokesperson, with a base salary of $ 0.9 million per annum through December 31, 2021 and $ 1.2 million per annum thereafter, and the opportunity to earn additional incentives based on the future net royalties related to the brand.

Further, the Company concurrently entered into a consulting agreement with the Seller to provide creative advice and consultation, for a fee of $ 0.6 million per annum

Further, the Company concurrently entered into a consulting agreement with the Seller to provide creative advice and consultation, for a fee of $ 0.6 million per annum through December 31, 2021 and $ 0.8 million per annum thereafter.

The Company therefore recognized $ 1.2 million and $ 0.9 million of salary expense within salaries, benefits and employment taxes in the accompanying consolidated statements of operations, and $ 0.8 million and $ 0.6 million of consulting expense within other selling, general and administrative expenses in the accompanying consolidated statements of operations, in the Current Year and Prior Year, respectively, related to such agreements.

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.

Based on IM Topco’s earnings from May 31, 2022 through December 31, 2022 and the applicable distribution provisions, WHP earned $ 4.32 million in cash flow, which reduces the potential purchase price adjustment to $ 11.68 million.

In connection with the aforementioned membership 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.

XCEL BRANDS, INC.

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December 31, 2022 and 2021

through December 31, 2021 and $ 0.8 million per annum thereafter.

The Company therefore recognized $ 0.9 million of salary expense and $ 0.6 million of consulting expense in the Current Year related to such agreements.

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 ;

(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 ownership 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 5) 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 11) 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.

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 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 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.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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 consolidated statement of operations for the Current Year.

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.

These bonuses are included in Salaries, benefits and employment taxes in the accompanying consolidated statement of operations for Current Year.

During the Current Year subsequent to the May 27, 2022 transaction, the Company made a capital contribution to IM Topco of $ 0.6 million in cash, which did not change the Company’s noncontrolling ownership interest of 30 %.

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

The Company recognized an equity method loss of approximately $ 1.2 million related to its investment for the year ended December 31, 2022, based on the aforementioned distribution provisions and preferences set forth in the Business Venture Agreement.

Summarized financial information for IM Topco for the period commencing May 31, 2022 (the date of the sale of a majority interest in IM Topco) through December 31, 2022 is as follows:

($ in thousands)

Income from continuing operations

Longaberger Licensing, LLC Variable Interest Entity

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Therefore, as the primary beneficiary, the Company has consolidated LL since 2019, and has recognized the assets, liabilities, revenues, and expenses of LL as part of its consolidated financial statements, along with a noncontrolling interest which represents Hilco Global’s 50 % ownership share in LL.

During the Current Year and Prior Year, the Members made capital contributions to LL of $ 0.3 million each and $ 1.0 million each, respectively, in order to fund LL’s working capital requirements.

This resulted in increases to the carrying value of Hilco Global’s non-controlling interest in LL for the Current Year and Prior year of $ 0.3 million and $ 1.0 million, respectively.

During the Prior Year, the Members made capital contributions to LL of $ 1.0 million each in order to fund LL’s working capital requirements.

This resulted in increases to the carrying value of Hilco Global’s noncontrolling interest in LL for the Prior year of $ 1.0 million.

The impacts of Xcel’s capital contributions were eliminated in consolidation.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Trademarks and Other Intangibles

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($ in thousands)

Trademarks (indefinite-lived)

Trademarks (finite-lived)

Non-compete agreement

Copyrights and other intellectual property

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Copyrights and other intellectual property

During the year ended December 31, 2020, the Company recorded a non-cash impairment charge of $ 13.0 million related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the novel coronavirus disease pandemic.

The net carrying amount of the Ripka Brand trademarks (which were considered finite-lived intangible assets effective as of January 1, 2020) immediately prior to the impairment was approximately $ 17.2 million;

following the impairment, the remaining balance of approximately $ 4.2 million became the new gross carrying basis for the Ripka Brand trademarks.

No other intangible asset impairment charges were recorded for the years ended December 31, 2021 and 2020.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Amortization expense for intangible assets for the years ended December 31, 2021 and 2020 was approximately $ 5.6 million and $ 4.6 million, respectively.

The trademarks of the Isaac Mizrahi Brand have been determined to have indefinite useful lives and accordingly, no amortization has been recorded for those intangible assets.

During the Current Year, the Company sold its $ 44.5 million of indefinite-lived trademarks related to the Isaac Mizrahi Brand (see Note 3 for details).

Also during the Current Year, 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.

Amortization expense for intangible assets for the Current Year and Prior Year was approximately $ 6.1 million and $ 5.6 million, respectively.

Estimated future amortization expense related to finite-lived intangible assets over the remaining useful lives is as follows:

4 unchanged sentences

Qurate Agreements

Through its wholly owned subsidiaries, the Company has direct-to-retail license agreements with Qurate Retail Group (“Qurate”), pursuant to which the Company designs, and Qurate sources and sells, various products under the IsaacMizrahiLIVE brand, the LOGO by Lori Goldstein brand, the Judith Ripka brand, the H by Halston brand, and the Longaberger brand.

These agreements include, respectively, the IM Qurate Agreement, the LOGO Qurate Agreement, the Ripka Qurate Agreement, the H Qurate Agreement, and the Longaberger Qurate Agreement (collectively, the “Qurate Agreements”).

Qurate owns the rights to all designs produced under the Qurate Agreements, and the Qurate Agreements include the sale of products across various categories through Qurate’s television media (including QVC and HSN) and related internet sites.

Pursuant to the agreements, the Company has granted to Qurate and its affiliates the exclusive, worldwide right to promote the Company’s branded products, and the right to use and publish the related trademarks, service marks, copyrights, designs, logos, and other intellectual property rights owned, used, licensed, and/or developed by the Company, for varying terms as set forth below.

The Qurate Agreements include automatic renewal periods as detailed below unless terminated by either party.

Through its wholly owned subsidiaries, the Company has direct-to-retail license agreements with Qurate Retail Group (“Qurate”), pursuant to which the Company designs, and Qurate sources and sells, various products under the LOGO by Lori Goldstein brand, the Longaberger brand, and the Judith Ripka brand.

These agreements include, respectively, the LOGO Qurate Agreement, Longaberger Qurate Agreement, and the Ripka Qurate Agreement.

The Company was also previously a party to similar agreements with Qurate related to the Isaac Mizrahi brand (the IM Qurate Agreement) and the H by Halston brand (the H Qurate Agreement).

Qurate owns the rights to all designs produced under the aforementioned

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

agreements (collectively, the “Qurate Agreements”), and the Qurate Agreements include the sale of products across various categories through Qurate’s television media (including QVC and HSN) and related internet sites.

Pursuant to the agreements, the Company granted to Qurate and its affiliates the exclusive, worldwide right to promote the Company’s branded products, and the right to use and publish the related trademarks, service marks, copyrights, designs, logos, and other intellectual property rights owned, used, licensed, and/or developed by the Company, for varying terms as set forth below.

Xcel Commenced

Brand with QVC

IM Qurate Agreement

September 30, 2022

one-year period

September 2011

LOGO Qurate Agreement

1 unchanged sentence

one-year period

Ripka Qurate Agreement

March 31, 2022

one-year period

H Qurate Agreement

December 31, 2022

three-year period

Longaberger Qurate Agreement

2 unchanged sentences

November 2019

* On March 31, 2022, the Ripka Qurate Agreement was automatically renewed for a one-year period, and the new term expiry is March 31, 2023 .

In connection with the foregoing and during the same periods, Qurate and its subsidiaries have the exclusive, worldwide right to use the names, likenesses, images, voices, and performances of the Company’s spokespersons to promote the respective products.

Under the IM Qurate Agreement, IM Brands has also granted to Qurate and its affiliates, during the

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

same period, exclusive, worldwide rights to promote third-party vendor co-branded products that, in addition to bearing and being marketed in connection with the trademarks and logos of such third-party vendors, also bear or are marketed in connection with the IsaacMizrahiLIVE trademark and related logo.

Ripka Qurate Agreement

not applicable

IM Qurate Agreement

not applicable

September 2011

H Qurate Agreement

not applicable

* On August 30, 2022, Qurate and the Company amended the Ripka Qurate Agreement such that the license period was terminated effective December 31, 2021.

Effective January 1, 2022, the agreement entered a sell-off period, under which Qurate may continue to license the Ripka brand on a non-exclusive basis for as long as necessary to sell off any of its remaining inventory.

** On May 31, 2022, in connection with the sale of a majority interest in the Isaac Mizrahi brand to WHP, this agreement was assigned to IM Topco, LLC.

See Note 3 for additional details.

*** In the fourth quarter of 2020, the Company transitioned and discontinued licensing of the H Halston brand to Qurate.

The Company began wholesale supply sales of the H Halston products under arrangements with HSN and certain Qurate global affiliates and other unrelated interactive television networks.

In connection with the Qurate Agreements and during the same periods, Qurate and its subsidiaries have the exclusive, worldwide right to use the names, likenesses, images, voices, and performances of the Company’s spokespersons to promote the respective products.

Under the Qurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of the net retail sales of the specified branded products.

5 unchanged sentences

The December 31, 2022 and 2021 Qurate receivables did not include any earned revenue accrued but not yet billed as of the respective balance sheet dates.

Debt and Other Long-term Liabilities

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

($ in thousands)

3 unchanged sentences

Long-term debt

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 3) to repay all amounts outstanding under the December 30, 2021 term loan agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”) described below, 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 Year, 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)

Previous Term Loan Debt

6 unchanged sentences

such amendments changed the timing and amount of quarterly installment payments, but did not change the total principal balance, interest rate, or maturity date.

These amendments during 2020 were accounted for as debt modifications and, accordingly, no gain or loss was recorded.

April 2021 Term Loan Debt

On April 14, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries entered into a Loan and Security Agreement (the “Loan Agreement”) with BHI as administrative agent and collateral agent, FEAC Agent, LLC (“FEAC”) as co-collateral agent, and the financial institutions party thereto as lenders.

Pursuant to the Loan Agreement, the lenders made two term

On April 14, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries entered into a new loan and security agreement with BHI as administrative agent and collateral agent, FEAC as co-collateral agent, and the financial institutions party thereto as lenders.

Pursuant to this loan agreement, the lenders made two term loans:

(1) a term loan in the amount of $ 10.0 million and (2) a term loan in the amount of $ 15.0 million.

These two term loans bore interest at “LIBOR” plus 4.0 % per annum, and “LIBOR” plus 8.0 % per annum, respectively, with “LIBOR” defined as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to one month as published by ICE Benchmark Administration Limited or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) on such date of determination or (b) 1.0 % per annum.

This loan agreement also provided that the lenders make available to Xcel a revolving loan facility in an amount up to $ 4.0 million on a discretionary basis, but not to exceed 85 % of the amount of eligible accounts receivable, as defined.

Management assessed and determined that the April 2021 loan agreement resulted in an extinguishment of the previous term loan debt, and accordingly recognized a loss of approximately $ 0.8 million (consisting of $ 0.1 million of unamortized deferred finance costs and $ 0.7 million of breakage fees owed to the old lender under the terms of the previous debt agreement) during the Prior Year.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2022 and 2021

(1) a term loan in the amount of $ 10.0 million (“Term Loan A”) and (2) a term loan in the amount of $ 15.0 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”).

The Loan Agreement also provided that the lenders make available to Xcel a revolving loan facility in an amount up to $ 4.0 million on a discretionary basis, but not to exceed 85 % of the amount of eligible accounts receivable, as defined.

Management assessed and determined that this new agreement resulted in an extinguishment of the previous term loan debt, and accordingly recognized a loss of approximately $ 0.8 million (consisting of $ 0.1 million of unamortized deferred finance costs and $ 0.7 million of breakage fees owed to the old lender under the terms of the previous debt agreement) during the Current Year.

Approximately $ 0.4 million of such aforementioned breakage fees were paid at time of extinguishment, with the remaining $ 0.4 million of such fees payable in three equal payments on each of May 1, 2022, 2023, and 2024.

Upon entering into the Loan Agreement, Xcel paid a 2.5 % closing fee in the amount of $ 0.6 million to the administrative agent for the benefit of each lender having a term loan commitment;

Upon entering into the April 2021 loan agreement, Xcel paid a 2.5 % closing fee in the amount of $ 0.6 million to the administrative agent for the benefit of each lender having a term loan commitment;

the Company also paid approximately $ 0.6 million of various legal and other fees in connection with the execution of the loan agreement.

These fees and costs totaling approximately $ 1.2 million were deferred on the Company’s balance sheet as a reduction of the carrying value of the Term Loans, to be subsequently amortized to interest expense over the term of the Term Loans using the effective interest method.

The Term Loans were to mature on April 14, 2025, with principal payable in 16 quarterly installments of $ 625,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on June 30, 2021 and ending on March 31, 2025, with a final payment of $ 15.0 million on the maturity date of April 14, 2025.

These fees and costs totaling approximately $ 1.2 million were deferred on the Company’s balance sheet as a reduction of the carrying value of the term loan debt, to be subsequently amortized to interest expense over the term of the debt using the effective interest method.

Under the April 2021 loan agreement, the debt was to mature on April 14, 2025, with principal payable in 16 quarterly installments of $ 625,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on June 30, 2021 and ending on March 31, 2025, with a final payment of $ 15.0 million on the maturity date of April 14, 2025.

The Company made the required principal payments on June 30, 2021 and September 30, 2021 (totaling $ 1.25 million) as scheduled.

Interest on Term Loan A accrued at LIBOR plus 4.0 % per annum, and interest on the Term Loan B accrued at LIBOR plus 8.0 % per annum.

Interest on the Loans was paid on the last business day of each calendar month.

Base Rate was defined in the Loan Agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00 % per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York.

LIBOR was defined in the Loan Agreement as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to one month as published by ICE Benchmark Administration Limited or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) on such date of determination or (b) 1.0 % per annum.

The Loan Agreement also contained customary covenants, including reporting requirements, trademark preservation, and financial covenants (on a consolidated basis with Xcel and its wholly-owned subsidiaries).

The Company, BHI, FEAC, and the lenders subsequently amended the Loan Agreement multiple times during 2021 – on August 12, 2021, September 29, 2021, and November 12, 2021.

The Company, BHI, FEAC, and the lenders subsequently amended the April 2021 loan agreement multiple times during 2021 – on August 12, 2021, September 29, 2021, and November 12, 2021.

While these amendments modified financial covenants and/or adjusted the maximum amount available under the revolving loan facility, there were no changes made to the total principal balance, interest rate, maturity date, or any other terms of the loan agreement.

December 2021 Term Loan Debt

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

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

The proceeds of the New Term Loan were used for the

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

purpose of refinancing existing indebtedness (i.e., the April 2021 Term Loans), to pay fees, costs, and expenses incurred in connection with entering into the New Loan Agreement, and for working capital purposes.

The New Loan Agreement also provides that Xcel may request the Lenders make incremental term loans of up to $ 25.0 million (the “Incremental Term Loans”).

The terms and conditions of the Incremental Term Loans will be agreed in an amendment to the New Loan Agreement prior to the funding by the Incremental Term Loans.

Management assessed and determined that the New Loan Agreement resulted in an extinguishment of the April 2021 Term Loan debt, and accordingly recognized a loss of approximately $ 0.74 million (consisting of $ 0.92 million of unamortized deferred finance costs and $( 0.18 ) of net fees owed to BHI less refunds of certain costs related to the April 2021 Term Loan debt) during the Current Year.

Upon entering into the New 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 New Loan Agreement.

These fees and costs totaling approximately $ 0.97 million have been deferred on the Company’s balance sheet as of December 31, 2021 as a reduction of the carrying value of the New Term Loan, to be subsequently amortized to interest expense over the term of the New Term Loan using the effective interest method.

The New Term Loan matures on April 14, 2025.

Principal on the New Term Loan is 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 on the maturity date of April 14, 2025.

Thus, the aggregate remaining annual principal payments under the New Term Loan at December 31, 2021 were as follows:

($ in thousands)

Year Ending December 31,

Xcel has the right upon thirty (30) days prior written notice to prepay all or any portion of the New Term Loan or Incremental Term Loans and accrued and unpaid interest thereon;

provided that any prepayment shall be applied first to prepay the New Term Loan in full and second to the Incremental Term Loans.

If the New Term Loan is prepaid in whole or in part on or prior to the second anniversary of the closing date (including as a result of an event of default), Xcel shall pay a prepayment premium as follows:

an amount equal to the principal amount of the New Term Loan prepaid multiplied by:

(i) five percent ( 5.00 %) if such prepayment occurs on or before the first anniversary of the closing date;

(ii) two percent ( 2.00 %) if such prepayment occurs at any time after the first anniversary of the closing date and on or prior to the second anniversary of the closing date;

and (iii) one percent ( 1.00 %) if such prepayment occurs at any time after the second anniversary of the closing date.

Xcel’s obligations under the New Loan Agreement are guaranteed by the Guarantors and secured by all of the assets of Xcel and the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the New Loan Agreement) and, subject to certain limitations contained in the New Loan Agreement, equity interests of the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the New Loan Agreement).

Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration therefore will be paid other than by cash of Xcel or the Guarantors, the issuance of equity interest of Xcel, or the issuance of notes to the applicable seller.

On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries entered into a new loan and security agreement with FEAC, as lead arranger and as administrative agent and collateral agent, and the financial institutions party thereto as lenders.

Pursuant to this loan agreement, the lenders made a term loan in the aggregate amount of $ 29.0 million.

This term loan bore interest at “LIBOR” plus 7.5 % per annum, with “LIBOR” defined as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to three months as published by Bloomberg or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) two business days prior to the last business day of each calendar month and (b) 1.0% per annum.

The December 2021 loan agreement also provides that Xcel may request the lenders make incremental term loans of up to $ 25.0 million, with the terms and conditions of any such incremental term loans to be agreed in an amendment to the agreement prior to funding.

Management assessed and determined that the December 2021 loan agreement resulted in an extinguishment of the April 2021 term loan debt, and accordingly recognized a loss of approximately $ 0.74 million (consisting of $ 0.92 million of unamortized deferred finance costs and $( 0.18 ) of net fees owed to BHI less refunds of certain costs related to the April 2021 term loan debt) during the Prior Year.

Upon entering into the December 2021 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 debt, to be subsequently amortized to interest expense over the term of the debt using the effective interest method.

The December 2021 term loan was to mature on April 14, 2025.

Principal on this debt 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 on the maturity date of April 14, 2025.

Under the December 2021 loan agreement, Xcel had the right upon thirty ( 30 ) days prior written notice to prepay all or any portion of the term loan debt 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.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2022 and 2021

The New Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of Xcel (on a consolidated basis with the Guarantors and any subsidiaries subsequently formed or acquired that become a credit party under the Loan Agreement):

● liquid assets of at least (i) $ 2.5 million during the first fiscal month of each fiscal quarter if cash payments from revenue licenses during the immediately succeeding 30 days are expected to be at least $ 4.0 million, and (ii) $ 3.0 million at all other times;

● a fixed charge coverage ratio of not less than 1.00 to 1.00 for the fiscal quarter ending September 30, 2022, and for the twelve fiscal month period ending at the end of each fiscal quarter commencing with the fiscal quarter ending December 31, 2022;

● a loan to value ratio not to exceed 50 % at all times;

● minimum revenues as set forth below

Fiscal Period

Minimum Revenue

April 1, 2021 - December 31, 2021

For the trailing twelve month period ending March 31, 2022

For the trailing twelve month period ending June 30, 2022

For the trailing twelve month periods ending September 30, 2022

and each fiscal quarter end thereafter

● the sum of (i) the eligible inventory plus (ii) eligible cash on hand to the extent not used to satisfy the Minimum Accounts Amount (as defined below) plus (iii) the eligible accounts to the extent not used to satisfy the Minimum Accounts Amount (as defined below) of at least $ 1.25 million at all times (“Minimum Inventory Amount”), and the sum of (i) the eligible accounts plus (ii) eligible cash on hand to the extent not used to satisfy the Minimum Inventory Amount of at least $ 1.5 million at all times (“Minimum Accounts Amount”);

● Adjusted EBITDA of at least $ 2.0 million for the 6 fiscal month period ending June 30, 2022.

The Company was in compliance with all applicable covenants under the Loan Agreement as of and for the fiscal year ended December 31, 2021.

Interest on the New Term Loan accrues at “LIBOR” plus 7.5 % per annum, and is payable on the last business day of each calendar month.

“LIBOR” is defined in the New Loan Agreement as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to three months as published by Bloomberg or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) two business days prior to the last business day of each calendar month and (b) 1.0 % per annum.

Xcel also granted the lenders a right of first offer to finance any acquisition for which the consideration therefore will be paid other than by cash, the issuance of equity interests of Xcel, or the issuance of notes to the applicable seller.

The various term loan agreements described above also contained customary covenants, including reporting requirements, trademark preservation, and certain financial covenants (on a consolidated basis with Xcel and its wholly-owned subsidiaries);

the Company was in compliance with all applicable covenants under the respective loan agreements as of and for all periods presented in the financial statements.

For the Current Year and Prior Year, the Company incurred interest expense of approximately $ 1.2 million and $ 1.9 million, respectively, related to term loan debt.

4 unchanged sentences

Xcel repaid the outstanding balance in full on December 30, 2021.

The revolving loan facility bore interest at a rate of 4.75 % per annum, and the Company incurred related interest expense of approximately $ 0.1 million for the Current Year.

As of December 31, 2021, the Company no

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

longer had access to a revolving loan facility under the terms of the New Loan Agreement entered into on December 30, 2021.

Other Long-term Liabilities

Other long-term liabilities as of December 31, 2020 consisted of the Company’s obligation to a subtenant for its security deposit under a sublease arrangement in the amount of $ 0.2 million.

As of December 31, 2021, this liability was classified as current and is reflected as part of Accounts payable, accrued expenses and other current liabilities on the Company’s consolidated balance sheet.

Government Assistance

Paycheck Protection Program (PPP)

On April 20, 2020, the Company executed a promissory note (the “Promissory Note”) with Bank of America, N.A., which provided for an unsecured loan in the amount of $ 1,805,856 , pursuant to the PPP under the CARES Act.

The loan had a two-year term and bore interest at a fixed rate of 1.0 % per annum, and monthly principal and interest payments were deferred for six months after the date of disbursement.

The Promissory Note contained events of default and other provisions customary for a loan of this type.

The loan was funded on April 23, 2020.

The PPP also provides that such a loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act, and later amended by the Paycheck Protection Program Flexibility Act (the "Flexibility Act") signed into law on June 5, 2020.

Such forgiveness is determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.

Management evaluated the legal and contractual terms associated with the loan, and concluded that, although the legal form of the loan is debt, it represented in substance a government grant that was expected to be forgiven.

Given the lack of definitive authoritative guidance under GAAP for accounting for government grants, the Company analogized to accounting guidance under International Accounting Standard No.

20, “Accounting for Government Grants and Disclosure of Government Assistance.” Under such guidance, once it is probable that the conditions attached to the assistance will be met, the earnings impact of government grants is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.

Accordingly, the Company recognized $ 1.8 million as a reduction to operating expenses in the Prior Year.

No interest expense related to the loan was recorded in the Company’s consolidated financial statements.

On September 29, 2021, the U.S.

Small Business Administration, as authorized by the CARES Act, remitted payment of $ 1.8 million to Bank of America, N.A.

for full forgiveness of the Company’s Promissory Note under the PPP.

This event had no impact on the Current Year statement of operations, as the benefit of the PPP had already been fully recognized in the Prior Year, as described in the previous paragraph.

Economic Incentive Disaster Loan (EIDL)

Concurrently with the PPP loan, in May 2020 the Company also received a $ 10,000 Economic Incentive Disaster Loan (“EIDL”) Advance through the U.S.

Small Business Administration.

Similar to the PPP loan, the EIDL Advance represented a grant that does not have to be repaid, and as such, the Company recognized $ 10,000 as a reduction to operating expenses in the Prior Year.

In total between the PPP and EIDL, the Company recognized approximately $ 1.8 million as a reduction to operating expenses in the Prior Year.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

The revolving loan facility bore interest at a rate of 4.75 % per annum, and the Company incurred related interest expense of approximately $ 0.1 million for the Prior Year.

As of December 31, 2021, the Company no longer had access to a revolving loan facility under the terms of the new loan agreement entered into on December 30, 2021.

Stockholders’ Equity

8 unchanged sentences

Stock-Based Compensation

Total expense recognized in the Current Year and Prior Year for all forms of stock-based compensation was approximately $ 0.72 million and $ 0.85 million, respectively.

Total expense recognized for all forms of stock-based compensation was approximately $ 0.72 million in both the Current Year and Prior Year.

Of the Current Year expense amount, approximately $ 0.41 million related to employees and approximately $ 0.31 million related to directors and consultants;

approximately $ 0.62 million was recorded as an operating cost and approximately $ 0.10 million was recorded as a reduction to other income.

Of the Prior Year expense amount, approximately $ 0.55 million related to employees and approximately $ 0.17 million related to directors and consultants;

all of the Prior Year expense amount was recorded as an operating cost.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Stock Options

3 unchanged sentences

Expired/Forfeited

( 1,961,045 )

Outstanding at December 31, 2022, and expected to vest

1 unchanged sentence

Current Year stock option grants were as follows:

On March 15, 2021, the Company granted options to purchase an aggregate of 365,390 shares of common stock to various employees.

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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

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.

On July 1, 2021, the Company granted options to purchase an aggregate of 20,000 shares of common stock to a member of management.

The exercise price of the options is $ 2.76 per share, and 50 % of the options vest on each of June 1, 2022 and June 1, 2023.

On August 13, 2021, the Company granted options to purchase an aggregate of 10,000 shares of common stock to an employee.

The exercise price of the options is $ 2.00 per share, and 50 % of the options vest on each of August 13, 2022 and August 13, 2023.

Prior Year stock option grants were as follows:

On January 1, 2020, the Company granted options to purchase 5,000 shares of common stock to a board observer.

The exercise price of the options is $ 4.00 per share.

One -half of the options vested on January 1, 2021, and the remaining half of the options will vest on January 1, 2022.

On January 31, 2020, the Company granted options to purchase 75,000 shares of common stock to a consultant.

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.

On February 28, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee.

The exercise price was $ 1.40 per share, and the vesting of such options was dependent upon the Company achieving certain 12-month sales targets through December 31, 2021.

None of these options ultimately vested.

On March 13, 2020, the Company granted options to purchase 50,000 shares of common stock to a certain key employee.

Prior Year stock option grants were as follows:

On March 15, 2021, the Company granted options to purchase an aggregate of 365,390 shares of common stock to various employees.

The exercise price of the options is $ 1.86 per share, and all options vested immediately on the date of grant.

On March 31, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee.

The exercise price of the options is $ 0.61 per share.

The options were scheduled to vest over a three-year period from the date of grant, but were all forfeited when the employee left the Company.

On April 1, 2021, 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 $ 1.93 per share.

One -half of the options vested on April 1, 2021, and the remaining half of the options shall vest on April 1, 2022.

On April 15, 2020, the Company granted options to purchase 13,500 shares of common stock to a consultant.

One-half of the options vested on April 1, 2022, and the remaining half of the options will vest on April 1, 2023.

On July 1, 2021, the Company granted options to purchase an aggregate of 20,000 shares of common stock to a member of management.

The exercise price of the options is $ 2.76 per share.

One -third of the options vested on each of June 30, 2020, September 30, 2020, and December 31, 2020.

On August 21, 2020, the Company granted options to purchase 22,750 shares of common stock to a consultant.

The exercise price of the options is $ 1.00 per share, and all options vested on December 31, 2020.

On September 28, 2020, the Company granted options to purchase 15,000 shares of common stock to an employee.

The exercise price of the options was $ 0.71 per share.

The options were scheduled to vest over a three-year period from the date of grant, but were all forfeited when the employee left the Company.

On December 21, 2020, the Company granted options to purchase an aggregate of 25,000 shares of common stock to an employee.

One-half of the options vested on June 1, 2022, and the remaining half of the options will vest on June 1, 2023.

On August 13, 2021, the Company granted options to purchase an aggregate of 10,000 shares of common stock to an employee.

The exercise price of the options is $ 2.00 per share.

One -half of the options vested on December 21, 2021, and the remaining half of the options shall vest on December 21, 2022.

One-half of the options were to vest on August 13, 2022, with the remaining half of the options to vest on August 13, 2023, but all of these options were forfeited when the employee left the Company in the Current Year.

XCEL BRANDS, INC.

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December 31, 2022 and 2021

On December 21, 2020, the Company granted options to purchase an aggregate of 25,000 shares of common stock to another employee.

The exercise price of the options was $ 1.09 per share, and were scheduled to vest over a two-year period from the date of grant, but were all forfeited when the employee left the Company in 2021.

The fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

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Compensation expense related to stock options for the Current Year and Prior Year was approximately $ 0.5 million and $ 0.3 million, respectively.

Total unrecognized compensation expense related to unvested stock options at December 31, 2021 amounts to approximately $ 0.1 million and is expected to be recognized over a weighted average period of 1.29 years.

Total unrecognized compensation expense related to unvested stock options (excluding stock options with performance-based vesting) at December 31, 2022 amounts to approximately $ 0.1 million and is expected to be recognized over a weighted average period of 1.12 years.

Of the total stock options outstanding at December 31, 2022, the vesting of 3,500,000 options is contingent upon the Company’s common stock achieving certain target prices as follows:

Target Prices

Number of Options Vesting

As of December 31, 2022, none of these 3,500,000 performance-based stock options have vested, and no compensation expense has been recorded related to such options.

The following table summarizes the Company’s stock option activity for non-vested options for the Current Year:

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Balance at December 31, 2022

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Warrants granted by the Company expire at various times – either five , seven , or ten years from the date of grant, depending on the particular grant.

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Outstanding and exercisable at December 31, 2022

The Company did no t grant any warrants to purchase shares of common stock during the Current Year or Prior Year.

No compensation expense was recorded in the Current Year or Prior Year related to warrants.

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Notes to Consolidated Financial Statements

December 31, 2021 and 2020

A summary of the Company’s restricted stock activity for the Current Year is as follows:

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Outstanding at December 31, 2022

On May 7, 2021, the Company issued 181,179 shares of common stock to a member of senior management as payment for a performance bonus earned in the Prior Year.

Current Year stock award grants were as follows:

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 3);

these shares vested immediately.

The Company recognized compensation expense of approximately $ 0.3 million in the Prior Year to accrue for this performance bonus.

The Company also recognized approximately $ 0.3 million of compensation expense in the Current Year related to similar senior management bonuses payable in common stock in 2022.

On April 1, 2021, the Company issued an aggregate of 50,000 shares of stock to non-management directors, which vest evenly over two years , whereby 50 % shall vest on April 1, 2022, and 50 % shall vest on April 1, 2023.

On May 31, 2022, the Company issued 33,557 shares of common stock to Isaac Mizrahi, which vested immediately (see Note 3 for additional details).

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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 the Prior Year to accrue for this performance bonus.

Prior Year stock award grants were as follows:

On April 1, 2021, the Company issued an aggregate of 50,000 shares of stock to non-management directors, which vest evenly over two years .

One-half of the shares vested on April 1, 2022, and the remaining half shall vest on April 1, 2023.

On April 26, 2021, the Company issued 14,045 shares of stock to a consultant, which vested immediately.

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On October 29, 2021, the Company issued 12,489 shares of stock to an employee pursuant to the terms of a contractual agreement, which vested immediately.

Prior Year stock award grants were as follows:

On May 20, 2020, the Company issued an aggregate of 270,728 shares of common stock to various employees.

These shares vested immediately.

On December 24, 2020, the Company issued an aggregate of 32,300 shares of common stock to various employees.

Additionally, on May 7, 2021, the Company issued 181,179 shares of common stock to a member of senior management as payment for a performance bonus earned 2020.

These shares vested immediately.

The Company recognized compensation expense of approximately $ 0.3 million in 2020 to accrue for this performance bonus.

Notwithstanding the foregoing, each grantee may extend the first anniversary of all or a portion of the restricted stock by six months and, thereafter one or more times may further extend such date with respect to all or a portion of the restricted stock until the next following date exactly six months thereafter, by providing written notice of such election to extend such date with respect to all or a portion of the restricted stock prior to such date.

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Total unrecognized compensation expense related to unvested restricted stock grants at December 31, 2022 amounts to $ 0.1 million and is expected to be recognized over a weighted average period of 1.10 years.

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Notes to Consolidated Financial Statements

December 31, 2021 and 2020

The following table provides information with respect to restricted stock purchased and retired by the Company during the Current Year and Prior Year:

Fair value of

October 29, 2021 (i)

March 30, 2020 (i)

April 20, 2022 (i)

May 31, 2022 (i)

December 24, 2020 (i)

October 29, 2021 (i)

(i) The shares were exchanged from employees and directors in connection with the income tax withholding obligations on behalf of such employees and directors from the vesting of restricted stock or the receipt of stock awards.

The 2011 Plan and 2021 Plan allow for award holders to surrender vested shares to cover withholding tax liabilities.

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Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Shares Available Under the Company’s Equity Incentive Plans

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Shares Reserved for Issuance

At December 31, 2021, there were 9,747,035 shares of common stock reserved for issuance, including 5,747,035 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, and 4,000,000 shares available for issuance under the 2021 Plan.

At December 31, 2022, there were 9,022,284 shares of common stock reserved for issuance, including 5,316,025 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 414,350 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 3,291,909 shares available for issuance under the 2021 Plan.

The Company has not paid any dividends to date.

Earnings (Loss) Per Share

Shares used in calculating basic and diluted earnings (loss) per share are as follows:

Effect of exercise of warrants

Effect of exercise of stock options

As a result of the net loss presented for the Current Year and Prior Year, the Company calculated diluted earnings (loss) per share using basic weighted-average shares outstanding for such period, as utilizing diluted shares would be anti-dilutive to loss per share.

The following table is a reconciliation of the numerator and denominator of the basic and diluted net loss per share computations for the years ended December 31, 2022 and 2021:

Net loss attributable to Xcel Brands, Inc.

stockholders (in thousands)

Basic weighted average number of shares outstanding

Effect of warrants

Effect of stock options

Diluted weighted average number of shares outstanding

Basic net loss per share

Diluted net loss per share

As a result of the net loss presented for the Current Year and Prior Year, the Company calculated diluted loss per share using basic weighted-average shares outstanding for both years, as utilizing diluted shares would be anti-dilutive to loss per share.

The computation of basic and diluted loss per share excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

Stock options

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December 31, 2022 and 2021

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

Stock options and warrants

Commitments and Contingencies

The Company has operating leases for its current office, former office, and a retail store location, as well as certain equipment with a term of 12 months or less.

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 is currently not a party to any finance leases.

The Company's real estate leases have remaining lease terms between approximately 2 months to 7 years .

The Company's real estate leases have remaining lease terms between approximately 5 to 7 years .

As of December 31, 2022, the weighted average remaining lease term was 5.0 years and the weighted average discount rate was 6.25 %.

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This lease commenced on March 1, 2016 and expires on October 30, 2027 .

In connection with this lease, the Company obtained an irrevocable standby letter of credit;

the Company has deposited funds as collateral for the letter of credit and has recorded the amount as restricted cash in the consolidated balance sheets as of December 31, 2021 and December 31, 2020.

The Company also leases office space under an operating lease agreement at another location in New York City, representing the Company’s former corporate offices and operations facility.

This lease shall expire on February 28, 2022 .

This office space is subleased to a third-party subtenant through February 27, 2022 .

The aforementioned office leases require the Company to pay additional rents related to increases in certain taxes and other costs on the properties.

The Company also leases approximately 1,300 square feet of retail space for a retail store location in Westchester, New York.

This lease requires the Company to pay additional rents related to increases in certain taxes and other costs on the property.

The Company also has an operating lease for its former retail store location in Westchester, New York, which was closed in the Current Year.

This lease shall expire on January 31, 2029;

however, the Company is currently in the process of negotiating the termination of this lease.

The Company recorded an impairment charge of $ 0.7 million to fully impair the remaining balance of the right-of-use asset for this lease as of December 31, 2021.

The Company recorded an impairment charge of $ 0.7 million to fully impair the remaining balance of the right-of-use asset for this lease in the Prior Year.

The Company had an operating lease for its former corporate offices and operations facility, which was 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 .

For the years ended December 31, 2022 and 2021, total lease expense included in selling, general and administrative expenses on the Company's consolidated statements of operations was approximately $ 1.6 million and $ 1.7 million, respectively.

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Employment Agreements

The Company has contracts with certain executives and key employees.

The Company has employment contracts with certain executives and key employees.

The future minimum payments under these contracts are as follows:

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In connection with the February 11, 2019 purchase of the Halston Heritage trademarks from the 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 from 2019 through December 31, 2022.

This additional consideration shall be payable in shares of common stock of the Company.

The Halston Heritage Earn-Out of $ 0.9 million is recorded as a long-term liability as of December 31, 2021 and 2020 in the accompanying consolidated balance sheets, based on the difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

In accordance with ASC Topic 480, the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying consolidated balance sheets because of the variable number of shares payable under the agreement.

This additional consideration would have been payable in shares of common stock of the Company.

The Halston Heritage Earn-Out of $ 0.9 million was recorded as a long-term liability on February 11, 2019 and as of December 31, 2021, based on the difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

The final royalty target year ended on December 31, 2022, and HIP ultimately did not earn any additional consideration based on the formula set forth in the related asset purchase agreement.

As such, during the year ended December 31, 2022, the Company recorded a $ 0.9 million gain on the reduction of contingent obligations in the accompanying consolidated

XCEL BRANDS, INC.

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December 31, 2022 and 2021

statement of operations.

As of December 31, 2022, there were no amounts remaining under the Halston Heritage Earn-Out.

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks (see Note 3 for additional information), the Company agreed to pay the seller additional cash consideration of up to $ 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 long-term liability at December 31, 2021 in the accompanying consolidated balance sheet, based on the difference at the date of acquisition between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid.

The Lori Goldstein Earn-Out of $ 6.6 million is recorded as a liability in the accompanying 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.

Based on the performance of the Lori Goldstein brand through December 31, 2022, approximately $ 0.2 million of additional consideration has been earned and is payable to the Seller in 2023.

At December 31, 2022, $ 0.2 million of the balance is recorded as a current liability and $ 6.4 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 3 for additional information), 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 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.

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.

COVID-19 has had an unprecedented impact on the U.S.

and global economy as federal, state, and local governments continue to react to and attempt to manage this ongoing public health crisis.

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

The COVID-19 pandemic is impacting 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 outbreak is also impacting distribution and logistics providers' ability to operate in the normal course of business.

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

This has resulted in order cancellations and a decrease in accounts receivable collections, as the Company recorded additional allowances for doubtful accounts of approximately $ 1 million in the Prior Year and approximately $ 0.1 million in the Current Year related to retailers that have 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.

Other Matters

On November 22, 2022, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that the minimum bid price per share for its common stock fell below $ 1.00 for a period of 30 consecutive business days.

Therefore, the Company did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules.

The letters also state that pursuant to Nasdaq Listing Rules 5810(c)(3)(A), the Company will be provided 180 calendar days to regain compliance with the minimum bid price requirement, or until May 22, 2022.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company can regain compliance if, at any time during the Tolling Period or such 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum period of 10 consecutive business days.

If by May 22, 2023, the Company does not regain compliance with the Nasdaq Listing Rules, the Company may be eligible for additional time to regain compliance pursuant to Nasdaq Listing

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December 31, 2022 and 2021

Rule 5810(c)(3)(A)(ii).

To qualify, the Company would need to submit a transfer application and a $5,000 application fee.

The Company would also need to provide written notice to Nasdaq of its intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary.

As part of its review process, the Nasdaq staff will make a determination of whether it believes the Company will be able to cure this deficiency.

Should the Nasdaq staff conclude that the Company will not be able to cure the deficiency, or should the Company determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that the Company’s shares of common stock will be subject to delisting.

If the Company does not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company’s shares of common stock will be subject to delisting from the Nasdaq Global Market.

At such time, the Company may appeal the delisting determination to a hearings panel.

The Company intends to monitor its closing bid price and the market value of its publicly held common stock between now and May 22, 2023, and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary.

There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.

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.

The Company accounts for income taxes in accordance with ASC Topic 740.

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In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business.

The income tax (benefit) provision for federal and state and local income taxes in the consolidated statements of operations consists of the following:

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The income tax provision (benefit) for federal and state and local income taxes in the consolidated statements of operations consists of the following:

Years Ended December 31,

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Total benefit

The reconciliation of income tax (benefit) provision computed at the federal and state and local statutory rates to the Company’s loss before taxes is as follows:

The reconciliation of income tax benefit computed at the federal and state and local statutory rates to the Company’s loss before taxes is as follows:

Years Ended December 31,

statutory federal rate

State and local rate, net of federal tax

State and local rate, net of federal tax benefit

Stock compensation

Excess compensation deduction

Foreign tax credits

Federal true-ups

Life insurance

Net operating loss carryback

Paycheck Protection Program addback

Change in tax rate

1 unchanged sentence

Income tax benefit

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

The significant components of net deferred tax assets (liabilities) of the Company consist of the following:

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Total deferred tax liabilities

Net deferred tax assets (liabilities)

Net deferred tax assets

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

As of December 31, 2022 and 2021, the Company had approximately $ 10.9 million and $ 20.8 million, respectively, of federal net operating loss carryforwards ("NOLs") available to offset future taxable income.

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Related Party Transactions

Hilco Trading, LLC

Hilco Trading, LLC ("Hilco") directly and indirectly owns greater than 5 % of the Company's common stock, and its affiliate Hilco Global owns 50 % of the equity of Longaberger Licensing, LLC.

During the year ended December 31, 2020, the Company sold certain apparel products to an affiliate of Hilco, and recognized approximately $ 0.2 million of revenue from this transaction.

Additionally, during the year ended December 31, 2020, the Company sold certain intangible assets of Longaberger Licensing, LLC to a third party;

an affiliate of Hilco earned and was paid a commission of approximately $ 0.1 million related to the sale of these assets.

Jennifer D’Loren is the wife of Robert W.

D’Loren, the Company’s Chief Executive Officer and Chairman of the Board, and is employed by the Company.

D’Loren brings vast experience in project management and implementation of financial IT solutions.

During the past two years , Mrs.

D’Loren has worked on the implementation of the Company’s ERP system.

D’Loren received compensation of less than $ 0.1 million and approximately $ 0.1 million for the years ended December 31, 2021 and 2020, respectively.

XCEL BRANDS, INC.

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Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Isaac Mizrahi

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Mizrahi to continue to serve as Chief Design Officer of the Isaac Mizrahi Brand.

The term of the employment agreement expires on December 31, 2022, subject to earlier termination, and may be extended, at the Company’s option, for two successive one-year terms (each, a “Renewal Period”).

Mizrahi’s base salary shall be $ 1.8 million, $ 2.0 million, and $ 2.1 million per annum during the term of the agreement and $ 2.25 million and $ 2.4 million during 2023 and 2024 if the term is extended, in each case, subject to adjustment in the event Mr.

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

Mizrahi shall be 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, 2022, and any year during the Renewal Period.

The Bonus shall consist 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 below:

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 3 for details).

The employment agreement provided Mr.

Mizrahi with a base salary of $ 1.8 million, $ 2.0 million, and $ 2.1 million per annum for 2020, 2021, and 2022, respectively.

Mizrahi was also 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.

The Bonus consisted 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 below:

● “DRT 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.

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

Mizrahi is required to devote his full business time and attention to the business and affairs of the Company and its subsidiaries;

Mizrahi is the principal of IM Ready-Made, LLC and Laugh Club, Inc.

(“Laugh Club”), and accordingly, he may undertake promotional activities related thereto (including the promotion of his name, image, and likeness) through television, video, and other media (and retain any compensation he receives for such activities) (referred to as “Retained Media Rights”) so long as such activities (i) do not utilize the IM Trademarks, (ii) do not have a mutually negative impact upon or materially conflict with Mr.

Mizrahi’s duties under the employment agreement, or (iii) are consented to by the Company.

The Company believes that it benefits from Mr.

Mizrahi’s independent promotional activities by increased brand awareness of IM Brands and the IM Trademarks.

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

Mizrahi resigns with “good reason,” then Mr.

Mizrahi will be 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.

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

Mizrahi resigns with “good reason,” within six months following a change of control (as defined in the employment agreement), Mr.

Mizrahi shall be eligible to receive a lump-sum payment equal to two times the sum of (i) his base salary (at an average rate that would have been in effect for such two year period following termination) plus (ii) the bonus paid or due to Mr.

Mizrahi in the year prior to the change in control.

Non-Competition and Non-Solicitation.

During the term of his employment by the Company and for a one-year period after the termination of such employment (unless Mr.

Mizrahi’s 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

On February 24, 2020 the Company 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.

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December 31, 2022 and 2021

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 entered into a services agreement with Laugh Club, an entity wholly-owned by Mr.

Mizrahi, pursuant to which Laugh Club shall provide services to Mr.

Mizrahi necessary for Mr.

Mizrahi to perform his services pursuant to the employment agreement.

The Company will pay Laugh Club an annual fee of $ 0.72 million for such services.

In addition, on May 31, 2022, all 522,500 unvested shares of restricted stock of the Company held by Mr.

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.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On October 1, 2021, the Company dismissed CohnReznick LLP (“CR”) as its independent registered public accounting firm.

CR’s reports on the financial statements of the Company as of and for the years ended December 31, 2019 and 2020 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

In connection with the audits of the financial statements of the Company for the years ended December 31, 2019 and 2020 and the subsequent interim period through October 1, 2021, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with CR’s opinion to the subject matter of the disagreement.

CR’s report on the financial statements of the Company as of and for the year ended December 31, 2020 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles.

In connection with the audit of the financial statements of the Company for the year ended December 31, 2020 and the subsequent interim period through October 1, 2021, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with CR’s opinion to the subject matter of the disagreement.

On September 30, 2021, the Audit Committee of the Board of Directors appointed Marcum LLP (“Marcum”) as the Company’s new independent registered public accounting firm.

3 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data