What changed in this filing

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Item 1. Financial Statements

2023-05-18 compared with 2022-11-14 · 186 added, 329 removed, 218 unchanged (70% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

September 30, 2022

March 31, 2023

December 31, 2022

1 unchanged sentence

Cash and cash equivalents

Accounts receivable, net of allowances of $ 1,263 and $ 1,090 , respectively

Accounts receivable, net

Prepaid expenses and other current assets

5 unchanged sentences

Equity method investment

Restricted cash

Deferred tax assets, net

6 unchanged sentences

Current portion of operating lease obligations

Current portion of long-term debt

Current portion of contingent obligations

2 unchanged sentences

Long-term portion of operating lease obligations

Long-term debt, net, less current portion

Long-term portion of contingent obligations

Deferred tax liabilities, net

Total long-term liabilities

3 unchanged sentences

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

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

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,633,194 and 19,624,860 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

3 unchanged sentences

Other selling, general and administrative expenses

Stock-based compensation

Depreciation and amortization

Total operating costs and expenses

Other (expense) income

Gain on sale of majority interest in Isaac Mizrahi brand

Operating loss before other expense (income), including non-cash expenses

Other expense (income), including non-cash expenses

Depreciation and amortization

Loss from equity method investment

Total other (expense) income

Operating (loss) income

Interest and finance (income) expense

Total other expense (income), including non-cash expenses

Operating loss

Interest and finance expense

Interest expense - term loan debt

Other interest and finance (income) charges, net

Loss on early extinguishment of debt

Total interest and finance (income) expense

(Loss) income before income taxes

Income tax (benefit) provision

Net (loss) income

Other interest and finance charges, net

Total interest and finance expense

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

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

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

Net loss attributable to Xcel Brands, Inc.

Loss per common share attributable to Xcel Brands, Inc.

stockholders:

Basic net (loss) income per share

Diluted net (loss) income per share

Basic and diluted net loss per share

Weighted average number of common shares outstanding:

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

Basic and diluted weighted average common shares outstanding

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

7 unchanged sentences

Compensation expense related to stock options and restricted stock

Shares issued on exercise of stock options, net

Balance as of March 31, 2022

Compensation expense related to stock options and restricted stock

Shares issued to executive related to stock grants for bonus payments

Shares issued to consultant in connection with stock grant

Shares issued to directors in connection with restricted stock grants

Shares issued on exercise of stock options, net

Balance as of June 30, 2021

Compensation expense related to stock options and restricted stock

Shares issued to consultant in connection with stock grant

Shares issued on exercise of stock options

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

Balance as of September 30, 2021

Balance as of December 31, 2022

Compensation expense related to stock options and restricted stock

Balance as of March 31, 2022

Compensation expense related to stock options and restricted stock

Shares issued to executive related to stock grants for bonus payments

Shares repurchased from executive in exchange for withholding taxes

Shares issued to consultant in connection with stock grant

Shares issued to directors in connection with restricted stock grants

Shares issued to consultant in connection with sale transaction (see Note 2 and Note 8)

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 income (loss)

Balance as of June 30, 2022

Compensation expense related to stock options and restricted stock

Balance as of September 30, 2022

Balance as of March 31, 2023

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3 unchanged sentences

(in thousands)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Cash flows from operating activities

Net income (loss)

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

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

Depreciation and amortization expense

1 unchanged sentence

Stock-based compensation

Provision for doubtful accounts

Undistributed proportional share of net income of equity method investee

Loss on early extinguishment of debt

Deferred income tax provision (benefit)

Gain on sale of majority interest in Isaac Mizrahi brand

Undistributed proportional share of net loss of equity method investee

Changes in operating assets and liabilities:

3 unchanged sentences

Lease-related assets and liabilities

Other liabilities

Net cash used in operating activities

Cash flows from investing activities

Net proceeds from sale of majority interest in Isaac Mizrahi brand

Cash consideration for acquisition of Lori Goldstein assets

Purchase of other intangible assets

Purchase of property and equipment

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities

Proceeds from exercise of stock options

Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Proceeds from revolving loan debt

Proceeds from long-term debt

Payment of deferred finance costs

Payment of long-term debt

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

Net cash (used in) provided by financing activities

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

Net cash used in financing activities

Net decrease in cash, cash equivalents, and restricted cash

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

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

Reconciliation to amounts on condensed consolidated balance sheets:

Reconciliation to amounts on consolidated balance sheets:

Cash and cash equivalents

1 unchanged sentence

Total cash, cash equivalents, and restricted cash

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

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

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

March 31, 2023

Nature of Operations, Background, and Basis of Presentation

11 unchanged sentences

the Company consolidates Longaberger Licensing, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party.

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

the Company consolidates Q Optix, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party.

● The Company wholly owned and managed the Isaac Mizrahi Brand through May 31, 2022.

On May 31, 2022, the Company sold to a third party a majority interest in a newly-created subsidiary that was formed to hold the Isaac Mizrahi Brand trademarks, but retained a noncontrolling interest in the brand through a 30 % ownership interest in IM Topco, LLC and continues to participate in the operations of the business;

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 contribute to the operations of the brand through a service agreement (see Note 2 and Note 11 for additional details).

The Company accounts for its interest in IM Topco, LLC using the equity method of accounting.

See Note 2 for additional details.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

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.

3 unchanged sentences

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

Liquidity and Management’s Plans

The Company incurred a net loss of approximately $ 5.6 million during the three months ended March 31, 2023 (which included non-cash expenses of approximately $ 2.4 million), and had an accumulated deficit of approximately $ 38.4 million as of March 31, 2023.

Net cash used in operating activities was approximately $ 2.9 million for the three months ended March 31, 2023.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent obligations payable in common stock) of approximately $ 5.1 million as of March 31, 2023.

The Company’s cash and cash equivalents were approximately $ 1.6 million as of March 31, 2023.

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.

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

d/b/a Jewelry Television (“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 operations related to the brand to One Jeanswear Group, LLC (“OJG”);

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

For the Halston Brand, on May 15, 2023 the Company entered into a new master license agreement for men’s, women’s, and children’s apparel, fashion accessories, and other product categories with an industry-leading wholesale apparel company for distribution through department stores, e-commerce, and other retailers (see Note 13).

This new master license for the Halston Brand provides for an upfront cash payment and royalties, including certain guaranteed minimum royalties to the Company, includes significant annual minimum net sales requirements, and has a twenty-five -year term (consisting of an initial five -year period, followed by a twenty -year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each five -year period during the term.

Management expects the transition of these operating businesses to be completed by the end of the 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, the Company took steps that will reduce payroll costs by $ 6 million and operating expenses by $ 7 million over the next twelve months.

Based on these recent events and 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 Quarterly Report on Form 10-Q, and therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of March 31, 2023, have subsequently been alleviated.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

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

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

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

Acquisitions and Divestitures

Sale of Majority Interest in Isaac Mizrahi Brand

March 31, 2023

Recently Adopted Accounting Pronouncements

The Company adopted the provisions of Accounting Standards Update (“ASU”) No.

2016-13, "Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments"

(as amended by ASU No.

2018-19 in November 2018, 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) effective January 1, 2023.

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

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

Equity Method Investment

IM Topco, LLC

On May 27, 2022, Xcel (along with IM Topco, LLC (“IM Topco”) and IM Brands, LLC (“IMB”), both wholly owned subsidiaries of the Company) and IM WHP, LLC (“WHP”), a subsidiary of WHP Global, a private equity-backed brand management and licensing company, entered into a membership purchase agreement.

Pursuant to this agreement, on May 31, 2022, (i) the Company contributed assets owned by IMB, including the Isaac Mizrahi Brand trademarks and other intellectual property rights relating thereto into IM Topco, and (ii) the Company sold 70 % of the membership interests of IM Topco to WHP.

The purchase price paid by WHP to the Company at the closing of the transaction in exchange for the 70 % membership interest in IM Topco consisted of $ 46.2 million in cash.

Pursuant to the purchase agreement, the Company will also be entitled to receive an “earn-out” payment in the amount of $ 2.0 million if, during the period from January 1, 2023 through December 31, 2023, (i) IM Topco receives Net Royalty Revenue (as defined in the purchase agreement) in an amount equal to or greater than $ 17.5 million and (ii) IM Topco generates EBITDA (as defined in the purchase agreement) in an amount equal to or greater than $ 11.8 million.

Additionally, in the event that IM Topco receives less than $ 13.347 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on the third anniversary of the closing, WHP will be entitled to receive from the Company up to $ 16 million, less all amounts of net cash flow distributed to WHP for such period, as an adjustment to the purchase price, payable in either cash or equity interests in IM Topco held by the Company.

In connection with the aforementioned purchase agreement, on May 31, 2022, the Company and WHP entered into an Amended and Restated Limited Liability Company Agreement of IM Topco (the “Business Venture Agreement”) governing the operation of IM Topco as a partnership between the Company and WHP following the closing.

Pursuant to the Business Venture Agreement, IM Topco is managed by a single Manager appointed by the vote of a majority-in-interest of IM Topco’s members, and WHP serves as the sole Manager of IM Topco.

The Business Venture Agreement contains customary provisions for the governance of a partnership, including with respect to decision making, access to information, restrictions on transfer of interests, and covenants.

Pursuant to the Business Venture Agreement, IM Topco’s Net Cash Flow (as defined in the agreement) shall be distributed to the members during each fiscal year no less than once per fiscal quarter, as follows:

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

The Company accounts for its 30 % interest in the ongoing operations of IM Topco as other expense (income) under the equity method of accounting.

Pursuant to the business venture agreement between the Company and WHP governing the operation of IM Topco, IM Topco’s net cash flow (as defined in the agreement) shall be distributed to the members during each fiscal year no less than once per fiscal quarter, as follows:

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

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

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

The amounts described in (i) and (ii) above are subject to adjustment in certain circumstances as set forth in the Business Venture Agreement.

The Company also entered into a number of other related agreements on May 31, 2022 in connection with the transaction, as described below:

● The Company entered into a services agreement with IM Topco, pursuant to which the Company will provide certain design and support services (including assistance with the operations of the interactive television business and related talent support) to IM Topco in exchange for payments of $ 0.3 million per fiscal year.

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

The initial term of this agreement ends December 31, 2026, and provides guaranteed royalties of $ 0.4 million per year to IM Topco.

● The Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 4) was assigned to IM Topco as of May 31, 2022.

● The Company’s employment agreement with Mr.

Mizrahi and the Company’s services agreement with Laugh Club (see Note 10) were transferred to IM Topco.

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

Mizrahi (for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of such shares being surrendered for cancellation in satisfaction of withholding tax obligations.

In addition, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr.

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

Management assessed and evaluated the ownership structure and other terms of the May 27, 2022 membership purchase agreement and Business Venture Agreement, as well as considered the Company’s continuing involvement with the Isaac Mizrahi Brand through the aforementioned services agreement and licensing agreement, and concluded that (i) IM Topco is not a Variable Interest Entity under Accounting Standards Codification (“ASC”) Topic 810, and (ii) the Company has significant influence over, but does not control, IM Topco.

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

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

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

The Company incurred approximately $ 0.9 million of expenses directly related to this transaction, including legal fees and agent fees, of which $ 0.1 million of the agent fees were paid through the issuance of 65,275 shares of the Company’s common stock, which were recognized as a reduction to the gain from the transaction.

The Company recognized a net pre-

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

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

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

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

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

Summarized financial information for IM Topco is as follows:

For the three

September 30,

The Company recognized an equity method loss of $ 0.52 million related to its investment for the three months ended March 31, 2023, based on the distribution provisions described above.

Summarized financial information for IM Topco for the three months ended March 31, 2023 is as follows:

($ in thousands)

Income from continuing operations

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

Acquisition of LOGO by Lori Goldstein Brand

On April 1, 2021, the Company acquired certain assets of Lori Goldstein, Ltd.

(the "Seller"), including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto.

Pursuant to the asset purchase agreement related to this transaction, the Company delivered $ 1.6 million in cash consideration to the Seller at closing, and was obligated to subsequently deliver an additional $ 2.0 million in cash to the Seller, which was paid in July 2021.

In addition to the consideration described above, the Seller is eligible to earn additional consideration of up to $ 12.5 million (the “Lori Goldstein Earn-Out”), which would be payable, in cash, within 45 days after the end of each applicable calendar year during the six calendar year period commencing 2021 in an amount equal to 75 % percent of the Royalty Contribution (as defined in the related asset purchase agreement) for such calendar year.

The Company recorded a contingent obligation of $ 6.6 million related to the Lori Goldstein Earn-Out, based on the difference between the fair value of the acquired assets of the LOGO by Lori Goldstein brand and the total consideration paid, in accordance with the guidance in ASC Subtopic 805-50.

To date, no consideration under the terms of the Lori Goldstein Earn-Out has been payable or paid to the Seller.

The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase, and the aggregate purchase price of $ 10.3 million was allocated entirely to the trademarks of the brand.

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

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

Loss from continuing operations

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

March 31, 2023

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

September 30, 2022

March 31, 2023

Gross Carrying

5 unchanged sentences

($ in thousands)

Trademarks (indefinite-lived)

Trademarks (finite-lived)

Non-compete agreement

Copyrights and other intellectual property

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

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

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

see Note 2 for details.

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

Amortization expense for intangible assets was approximately $ 1.54 million for the three-month period ended March 31, 2023 (the "current quarter") and was approximately $ 1.53 million for the three-month period ended March 31, 2022 (the "prior year quarter").

Significant Contracts and Concentrations

Qurate Agreements

Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of net retail sales of Lori Goldstein, Judith Ripka, and Longaberger branded merchandise.

The Company was also previously a party to a similar agreement with Qurate related to the Isaac Mizrahi Brand through May 31, 2022;

see Note 2 for details.

Net retail sales are defined as the aggregate amount of all revenue generated through the sale of the specified branded products by Qurate and its subsidiaries under the Qurate Agreements, net of customer returns, and excluding freight, shipping and handling charges, and sales, use, or other taxes.

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

● Net licensing revenue from the Qurate Agreements totaled $ 1.52 million and $ 5.01 million for the current quarter and prior year quarter, respectively, representing approximately 25 % and 57 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

The prior year quarter included revenues from Qurate Agreement related to the Isaac Mizrahi Brand;

such agreement was assigned to IM Topco on May 31, 2022.

● As of March 31, 2023 and December 31, 2022, the Company had receivables from Qurate of $ 1.5 million and $ 0.9 million, respectively, representing approximately 25 % and 17 % of the Company’s total net accounts receivable, respectively.

Accounts Receivable

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances for credit losses.

Such allowances were approximately $ 0.0 million as of both March 31, 2023 and December 31, 2022.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

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

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

Accounts Receivable

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

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

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

March 31, 2023

Company did not recognize any credit loss expense in the current quarter or prior year quarter.

For the current quarter, there were no significant write-offs or recoveries.

The allowance for credit losses is determined based upon a variety of judgments and factors.

Factors considered in determining the allowance include historical collection, write-off experience, and management's assessment of collectibility from customers, including current conditions, reasonable forecasts, and expectations of future collectibility and collection efforts.

Management continuously assesses the collectibility of receivables and adjusts estimates based on actual experience and future expectations based on economic indicators.

Management also monitors the aging analysis of receivables to determine if there are changes in the collections of accounts receivable.

Receivable balances are written-off against the allowance for credit losses when such balances are deemed to be uncollectible.

Also, as of March 31, 2023 and December 31, 2022, approximately $ 1.86 million and $ 1.65 million, respectively, of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the third quarter of 2022, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit.

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

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

During the current quarter, the Company paid approximately $ 0.05 million in fees to the agent under the aforementioned services agreement.

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

The Company also has an operating lease for its former retail store location, which was closed in the first quarter of 2022;

The Company also has an operating lease for its former retail store location, which was closed in 2022;

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

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

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

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

The Company does not recognize ROU assets and lease liabilities for lease terms of 12 months or less, but recognizes such lease payments in operations on a straight-line basis over the lease terms.

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

of the sublease, as a reduction to lease expense.

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

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

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

As of March 31, 2023, the Company’s real estate leases have remaining lease terms of 4 – 6 years , with a weighted average remaining lease term of approximately 4.7 years and a weighted average discount rate of 6.25 %.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 0.4 million and $ 0.6 million in the current quarter and prior year quarter, respectively.

As of March 31, 2023, the maturities of lease obligations were as follows:

($ in thousands)

2022 (October 1 through December 31)

2023 (April 1 through December 31)

Thereafter (through 2028)

3 unchanged sentences

Non-current portion of lease liabilities

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

September 30,

($ in thousands)

Term loan debt

Unamortized deferred finance costs related to term loan debt

Current portion of debt

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 2) to repay all amounts outstanding under the December 30, 2021 term loan agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”), consisting of $ 28.4 million in principal amount, a $ 1.4 million prepayment fee, and approximately $ 0.3 million in interest and related expenses.

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

Term Loan Debt (through May 31, 2022)

On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, Judith Ripka Fine Jewelry, LLC, H Heritage Licensing, LLC, Xcel-CT MFG, LLC and Gold Licensing, LLC, as Guarantors (each a “Guarantor” and collectively, the

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

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

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

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

the Company also paid approximately $ 0.5 million of various legal and other fees in connection with the execution of the Loan Agreement.

These fees and costs totaling approximately $ 0.97 million were deferred on the Company’s balance sheet as of December 31, 2021 as a reduction of the carrying value of the Term Loan, and commencing in 2022 were being amortized to interest expense over the term of the Term Loan using the effective interest method.

The New Term Loan was to mature on April 14, 2025.

Principal on the New Term Loan was payable in quarterly installments of $ 625,000 on each of March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2022 and ending on March 31, 2025, with a final payment of $ 20,875,000 due on the maturity date of April 14, 2025.

Under the Loan Agreement, Xcel had the right upon thirty (30) days prior written notice to prepay all or any portion of the Term Loan and accrued and unpaid interest thereon.

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

March 31, 2023

The Company did not have any debt obligations as of March 31, 2023 or December 31, 2022.

From December 30, 2021 through May 31, 2022, the Company had term loan debt outstanding pursuant to an agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”);

this debt was repaid in full and extinguished on May 31, 2022.

For the prior year quarter, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.71 million, and the effective interest rate related to term loan debt was approximately 9.8 %.

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

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

Stockholders’ Equity

Equity Incentive Plans

The Company’s 2021 Equity Incentive Plan (the “2021 Plan”) is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company.

A total of 4,000,000 shares of common stock are eligible for issuance under the 2021 Plan.

A total of 4,000,000 shares of common stock are eligible for issuance under the Company’s 2021 Equity Incentive Plan (the “2021 Plan”).

The 2021 Plan provides for the grant of any or all of the following types of awards:

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In addition, stock-based awards (including options, warrants, and restricted stock) previously granted under the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) remain outstanding and shares of common stock may be issued to satisfy options or warrants previously granted under the 2011 Plan, although no new awards may be granted under the 2011 Plan.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

Stock-based Compensation

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification Topic 718, “Compensation - Stock Compensation,” by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable.

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation - Stock Compensation,” by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable.

Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur.

2 unchanged sentences

Total expense recognized in the current quarter and prior year quarter for all forms of stock-based compensation was approximately $ 0.06 million and $ 0.03 million, respectively.

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

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

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

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

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

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

Stock Options

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

Outstanding at January 1, 2022

Expired/Forfeited

Outstanding at September 30, 2022, and expected to vest

Exercisable at September 30, 2022

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

The exercise price of the options is $ 1.62 per share, and all options vested immediately on the date of grant.

On April 20, 2022 the Company granted options to purchase an aggregate of 125,000 shares of common stock to non-management directors.

The exercise price of the options is $ 1.62 per share, and 50 % of the options vest on each of April 20, 2023 and April 20, 2024.

Of the current quarter expense amount, substantially all of the expense related to directors and consultants, and was recorded within other selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Of the prior year quarter expense amount, approximately $ 0.01 million related to employees and was recorded within salaries, benefits and expenses, while approximately $ 0.02 million related to directors and consultants and was recorded within other selling, general and administrative expenses.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

The exercise price of the options is $ 1.58 per share, and all options vested immediately on the date of grant.

March 31, 2023

Stock Options

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

Outstanding at January 1, 2023

Expired/Forfeited

Outstanding at March 31, 2023, and expected to vest

Exercisable at March 31, 2023

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 0.03 million and $ 0.02 million, respectively.

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

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

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

Total unrecognized compensation expense related to unvested stock options at March 31, 2023 was approximately $ 0.06 million and is expected to be recognized over a weighted average period of approximately 1.01 years.

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

Balance at January 1, 2023

Forfeited or Canceled

Balance at September 30, 2022

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

Balance at March 31, 2023

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

Outstanding and exercisable at January 1, 2023

Expired/Forfeited

Outstanding and exercisable at September 30, 2022

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

Outstanding and exercisable at March 31, 2023

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

March 31, 2023

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

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

Outstanding at January 1, 2023

Expired/Forfeited

Outstanding at September 30, 2022

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

On April 20, 2022, the Company issued 20,064 shares of common stock to a consultant, which vested immediately.

On May 31, 2022, the Company issued 65,275 shares of common stock to a consultant in connection with the transaction related to the Isaac Mizrahi Brand (see Note 2);

these shares vested immediately.

On May 31, 2022, the Company issued 33,557 shares of common stock to a key employee, which vested immediately.

Additionally, on April 20, 2022, the Company issued 178,727 shares of common stock to a member of senior management as payment for a performance bonus earned in 2021.

These shares vested immediately.

The Company had previously recognized compensation expense of approximately $ 0.28 million in 2021 to accrue for this performance bonus.

Outstanding at March 31, 2023

On January 1, 2023, the Company issued 8,334 shares of common stock to a consultant, which vested immediately.

Compensation expense related to stock awards was approximately $ 0.03 million for the current quarter and approximately $ 0.01 million for the prior year quarter.

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

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

Total unrecognized compensation expense related to unvested restricted stock grants at March 31, 2023 was approximately $ 0.04 million and is expected to be recognized over a weighted average period of approximately 1.04 years.

Restricted Stock Units

There were no restricted stock units outstanding as of March 31, 2023 and December 31, 2022, and no restricted stock units have been issued since the inception of the 2021 Plan.

Shares Available Under the Company’s Equity Incentive Plans

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

As of March 31, 2023, there were 3,321,075 shares of common stock available for award grants under the 2021 Plan.

Shares Reserved for Issuance

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

As of March 31, 2023, there were 8,805,920 shares of common stock reserved for issuance, including 5,484,845 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 376,850 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 3,321,075 shares available for issuance under the 2021 Plan.

Earnings (Loss) Per Share

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

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

The following

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

table is a reconciliation of the numerator and denominator of the basic and diluted net (loss) income per share computations for the three months ended March 31, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30,

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

Net loss attributable to Xcel Brands, Inc.

stockholders (in thousands)

3 unchanged sentences

Diluted weighted average number of shares outstanding

Basic net (loss) income per share

Diluted net (loss) income per share

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

Basic net loss per share

Diluted net loss per share

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

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

Three Months Ended

Nine Months Ended

September 30,

Stock options

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

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

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

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

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

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

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 0 % for both periods, resulting in an income tax benefit of $ 0 for both periods.

For both the current quarter and the prior year quarter, the federal statutory rate differed from the effective tax rate due to the recording of a valuation allowance against the benefit that would have otherwise been recognized, as it was considered not more likely than not that the net operating losses generated during each period will be utilized in future periods.

Related Party Transactions

Isaac Mizrahi

On February 24, 2020, the Company entered into an employment agreement with Isaac Mizrahi, a principal stockholder of the Company, for Mr.

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

This employment agreement remained in effect through May 31, 2022.

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

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

Mizrahi, pursuant to which Laugh Club provided services to Mr.

Mizrahi necessary for Mr.

Mizrahi to perform his services pursuant to the employment agreement.

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

This services agreement remained in effect through May 31, 2022.

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.

IM Topco, LLC

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

On May 31, 2022, the Company entered into a services agreement with IM Topco, pursuant to which the Company provides certain design and support services (including assistance with the operations of the interactive television business

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

IM Topco, LLC

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

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

March 31, 2023

and related talent support) to IM Topco in exchange for payments of $ 300,000 per year.

For the three months ended March 31, 2023, the Company recognized service fee income related to this agreement of $ 75,000 .

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

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

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

The initial term of this agreement was set to end on December 31, 2026, and provided guaranteed royalties to IM Topco of $ 400,000 per year.

Effective December 16, 2022, the license agreement between IM Topco and Xcel was terminated in favor of a new similar license agreement between IM Topco and an unrelated third party.

However, as part of the termination of the May 31, 2022 license agreement, Xcel provided a guarantee to IM Topco for the payment of any difference between (i) the royalties received by IM Topco from the unrelated third party under the new agreement and (ii) the amount of guaranteed royalties that IM Topco would have received from Xcel under the May 31, 2022 agreement.

For the three months ended March 31, 2023, the estimated amount of such shortfall was approximately $ 60,000 , which the Company recognized as royalty expense in the condensed consolidated statements of operations.

Commitments and Contingencies

Contingent Obligation – Halston Heritage Earn-Out

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

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

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

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

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 acquisition of the Lori Goldstein trademarks, the Company agreed to pay the seller additional cash consideration (the “Lori Goldstein Earn-Out”) of up to an aggregate of $ 12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

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

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

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

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks, the Company agreed to pay the seller additional cash consideration (the “Lori Goldstein Earn-Out”) of up to $ 12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

The Lori Goldstein Earn-Out was initially recorded as a liability of $ 6.6 million, 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 Accounting Standards Codification 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 by the seller to date, and this amount was paid to the seller in the current quarter.

At December 31, 2022, $ 0.2 million of the balance was recorded as a current liability and $ 6.4 million was recorded as a long-term liability;

at March 31, 2023, the entire remaining balance of $ 6.4 million is recorded as a long-term liability.

Contingent Obligation – Isaac Mizrahi Transaction

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 2), the Company has agreed with WHP that, in the event that IM Topco receives less than $ 13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from the Company up to $ 16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP.

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 2), the Company 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

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

Based on IM Topco’s earnings from May 31, 2022 through March 31, 2023 and the applicable distribution provisions, WHP earned $ 5.89 million in cash flow, which reduces the maximum potential purchase price adjustment to $ 10.11 million.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

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

March 31, 2023

Legal Proceedings

2 unchanged sentences

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

Coronavirus Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, which continues to circulate throughout the U.S.

and the world.

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

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

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

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

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

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

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

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

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 letter also states 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 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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

Subsequent Events

On May 15, 2023, the Company, through its subsidiaries, H Halston, LLC and H Heritage Licensing, LLC (collectively, the “Licensor”), entered into a master license agreement relating to the Halston Brand (the “Halston Master License”) with an industry-leading wholesale apparel company, for men’s and women’s apparel, men’s and women’s fashion accessories, children’s apparel and accessories, home, airline amenity and amenity kits, and such other product categories as mutually agreed upon.

The Halston Master License provides for an upfront cash payment and royalties payable to the Company, including certain guaranteed minimum royalties, includes significant annual minimum net sales requirements, and has a twenty-five -year term (consisting of an initial five -year period, followed by a twenty -year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each five -year period during the term.

The licensee has an option to purchase the Halston Brand for $ 5.0 million at the end of the twenty-five -year term, which right may be accelerated under certain conditions associated with an uncured material breach of the Halston Master License in accordance with the terms of the Halston Master License.

The Licensor granted to the licensee a security interest in the Halston trademarks to secure the Licensor’s obligations under the Halston Master License, including to honor the obligations under the purchase option.

In connection with the Halston Master License, the Company issued to the licensee a ten -year warrant to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $ 1.50 per share, which vest based upon certain annual royalty targets being satisfied.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements