What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2023-05-18 · 196 added, 139 removed, 265 unchanged (56% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

March 31, 2023

June 30, 2023

December 31, 2022

14 unchanged sentences

Accounts payable, accrued expenses and other current liabilities

Deferred revenue

Accrued income taxes payable

5 unchanged sentences

Long-term portion of operating lease obligations

Deferred revenue

Long-term portion of contingent obligations

4 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 19,633,194 and 19,624,860 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,700,656 and 19,624,860 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Net licensing revenue

Cost of goods sold

Operating costs and expenses

Direct operating costs and expenses

Salaries, benefits and employment taxes

Other selling, general and administrative expenses

Total operating costs and expenses

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

Other expense (income), including non-cash expenses

Total direct operating costs and expenses

Operating loss before other operating costs and expenses (income)

Other operating costs and expenses (income)

Depreciation and amortization

Gain on sale of majority interest in Isaac Mizrahi brand

Loss from equity method investment

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

Operating loss

Interest and finance expense

Gain on sale of limited partner ownership interest

Gain on settlement of lease liability

Operating (loss) income

Interest and finance (income) expense

Interest expense - term loan debt

Other interest and finance charges, net

Total interest and finance expense

Loss before income taxes

Income tax benefit

Loss on early extinguishment of debt

Total interest and finance (income) expense

(Loss) income before income taxes

Income tax (benefit) provision

Net (loss) income

Net loss attributable to noncontrolling interest

Net loss attributable to Xcel Brands, Inc.

Loss per common share attributable to Xcel Brands, Inc.

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

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

stockholders:

Basic and diluted net loss per share

Basic net (loss) income per share

Diluted net (loss) income per share

Weighted average number of common shares outstanding:

Basic and diluted weighted average common shares outstanding

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

8 unchanged sentences

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 Isaac Mizrahi sale transaction

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

Balance as of December 31, 2022

2 unchanged sentences

Balance as of March 31, 2023

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, net of shares surrendered for cashless exercises

Balance as of June 30, 2023

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3 unchanged sentences

(in thousands)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash flows from operating activities

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

Net (loss) income

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

Depreciation and amortization expense

Asset impairment charges

Amortization of deferred finance costs included in interest expense

Stock-based compensation

Provision for doubtful accounts

Undistributed proportional share of net loss of equity method investee

Loss on early extinguishment of debt

Deferred income tax provision

Gain on sale of majority interest in Isaac Mizrahi brand

Gain on sale of limited partner ownership interest

Gain on settlement of lease liability

Changes in operating assets and liabilities:

1 unchanged sentence

Prepaid expenses and other current and non-current assets

Deferred revenue

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

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

Net proceeds from sale of assets

Purchase of property and equipment

Net cash used in investing activities

Net cash provided by investing activities

Cash flows from financing activities

Shares repurchased including vested restricted stock in exchange for withholding taxes

Payment of long-term debt

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

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 consolidated balance sheets:

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents, and restricted cash

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

June 30, 2023

Nature of Operations, Background, and Basis of Presentation

14 unchanged sentences

● 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 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.

2 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

June 30, 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.

The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels to be everywhere its customers shop.

The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, wholesale, and e-commerce channels to be everywhere its customers shop.

The Company’s wholesale and direct-to-consumer operations are presented as "Net sales"

2 unchanged sentences

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 Company incurred a net loss attributable to Company stockholders of approximately $ 3.5 million and $ 9.1 million during the three and six months ended June 30, 2023, respectively (which included net non-cash expenses of approximately $ 1.7 million and $ 4.0 million, respectively), and had an accumulated deficit of approximately $ 41.9 million as of June 30, 2023.

Net cash used in operating activities was approximately $ 1.5 million for the six months ended June 30, 2023.

The Company’s cash and cash equivalents were approximately $ 3.5 million as of June 30, 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.

Management implemented a plan 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.

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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.

this new license with OJG also includes certain other new celebrity brands that the Company plans to develop and 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 4).

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.

The transition of these operating businesses was substantially completed as of June 30, 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.

As of June 30, 2023, the Company has reduced payroll costs by approximately $ 6 million and operating expenses by approximately $ 7 million, on an annualized basis when compared to the corresponding periods in the prior year.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

June 30, 2023

Recently Adopted Accounting Pronouncements

14 unchanged sentences

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

The purchase price paid by WHP to the Company at the closing of the transaction consisted of $ 46.2 million in cash.

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

The Company recognized a net pre-tax gain from the transaction of $ 20.6 million, which is classified within “other expense (income), including non-cash expenses” in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.

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

3 unchanged sentences

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

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)

Loss from continuing operations

Based on these distribution provisions, the Company recognized an equity method loss of $ 0.52 million and $ 1.03 million related to its investment for the three and six months ended June 30, 2023, respectively.

The Company did not recognize any equity income or loss related to its investment for the three and six months ended June 30, 2022.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

June 30, 2023

Summarized financial information for IM Topco for the three and six months ended June 30, 2023 is as follows:

For the three

($ in thousands)

Income from continuing operations

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

March 31, 2023

June 30, 2023

Gross Carrying

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Copyrights and other intellectual property

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").

Amortization expense for intangible assets was approximately $ 1.54 million for both the three-month period ended June 30, 2023 (the "current quarter") and the three-month period ended June 30, 2022 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 3.07 million for both the six-month period ended June 30, 2023 (the "current six months") and the six-month period ended June 30, 2022 (the "prior year six months").

Significant Contracts and Concentrations

Halston Master License

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

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.

As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $ 4.89 million of deferred revenue contract liabilities on its condensed consolidated balance sheet as of June 30, 2023 related to this contract, of which $ 0.89 million was classified as a current liability and $ 4.00 million was classified as a long-term liability.

The balance of the deferred revenue contract liabilities will be recognized ratably as revenue over the next 5.5 years .

Net licensing revenue recognized from the Halston Master License was $ 0.33 million for the current quarter and current six months.

Qurate Agreements

5 unchanged sentences

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.

● Net licensing revenue from the Qurate Agreements totaled $ 3.28 million and $ 9.06 million for the current six months and prior year six months, respectively, representing approximately 26 % and 53 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

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

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

● As of June 30, 2023 and December 31, 2022, the Company had receivables from Qurate of $ 1.6 million and $ 0.9 million, respectively, representing approximately 23 % 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.

Such allowances were approximately $ 0.0 million as of both June 30, 2023 and December 31, 2022.

The Company did no t recognize any credit loss expense in the current quarter or current six months.

There were no significant write-offs or recoveries in the current quarter or current six months.

Credit loss expense recognized in the prior year quarter and prior year six months was $ 0.09 million.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

June 30, 2023

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

3 unchanged sentences

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.

Also, as of June 30, 2023 and December 31, 2022, approximately $ 1.18 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, the Company paid approximately $ 0.05 million in fees to the agent under the aforementioned services agreement.

During the current quarter and current six months, the Company paid approximately $ 0.02 million and $ 0.07 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 2022;

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

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:

As of June 30, 2023, the Company’s real estate lease has a remaining lease term of approximately 4.3 years, and the lease liability is measured using a discount rate of 6.25 %.

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 $ 0.8 million for the current six months, and approximately $ 0.7 million for the prior year six months.

Cash paid for amounts included in the measurement of operating lease liabilities was approximately $ 0.4 million in both the current quarter and prior year quarter, approximately $ 0.8 million in the current six months, and approximately $ 1.0 million in the prior year six months.

Also, the Company was previously a party to an operating lease for its former retail store location, which was closed in 2022.

During the three months ended June 30, 2023, the Company successfully negotiated a settlement with the lessor resulting in the termination of this lease.

Under the settlement agreement, the Company paid $ 0.07 million to the lessor in May 2023, and agreed to make two subsequent payments of approximately $ 0.11 million each to the lessor on or before July 31, 2023 and October 31, 2023.

The Company recognized a liability of $ 0.23 million for these remaining payments as part of “accounts payable, accrued expenses and other current liabilities” on the condensed consolidated balance sheet as of June 30, 2023.

The Company recognized a gain of $ 0.44 million from this settlement transaction, which is classified within “other expense (income), including non-cash expenses” in the condensed consolidated statements of operations for the three and six months ended June 30, 2023.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

As of June 30, 2023, the maturities of lease obligations were as follows:

($ in thousands)

2023 (April 1 through December 31)

Thereafter (through 2028)

2023 (July 1 through December 31)

Total lease payments

2 unchanged sentences

Non-current portion of lease liabilities

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

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

The Company did not have any debt obligations as of June 30, 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 %.

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

For the prior year quarter and prior year six months, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.48 million and $ 1.19 million, respectively, and the effective interest rate related to term loan debt was approximately 9.8 %.

Stockholders’ Equity

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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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

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

For stock option awards for which vesting is contingent upon the achievement of certain performance targets, the timing and amount of compensation expense recognized is based upon the Company’s projections and estimates of the relevant performance metric(s) until the time the performance obligation is satisfied.

2 unchanged sentences

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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

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

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

Total expense recognized in the current six months and prior year six months for all forms of stock-based compensation was approximately $ 0.12 million and $ 0.61 million, respectively.

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

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

Stock Options

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

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

Outstanding at January 1, 2023

Expired/Forfeited

Outstanding at March 31, 2023, and expected to vest

Exercisable at March 31, 2023

Outstanding at June 30, 2023, and expected to vest

Exercisable at June 30, 2023

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 0.02 million and $ 0.38 million, respectively.

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:

Compensation expense related to stock options for the current six months and the prior year six months was approximately $ 0.05 million and $ 0.40 million, respectively.

Total unrecognized compensation expense related to unvested stock options at June 30, 2023 was approximately $ 0.05 million and is expected to be recognized over a weighted average period of approximately 0.79 years.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

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

Balance at January 1, 2023

Forfeited or Canceled

Balance at March 31, 2023

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

Balance at June 30, 2023

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

Outstanding and exercisable at January 1, 2023

Expired/Forfeited

Outstanding and exercisable at March 31, 2023

Outstanding at June 30, 2023

Exercisable at June 30, 2023

On May 15, 2023, in connection with the Halston Master License (see Note 4), the Company issued to a 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 under the license agreement.

The fair value of the warrants will be recognized as a reduction of revenue over the term of the related license agreement, with an offsetting increase to stockholders’ equity as additional paid-in capital.

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

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

Outstanding at January 1, 2023

Expired/Forfeited

Outstanding at June 30, 2023

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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 March 31, 2023

June 30, 2023

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

On April 17, 2023, the Company issued 8,334 shares of common stock to a consultant, which vested immediately.

On May 15, 2023, the Company issued 50,000 shares of common stock to a consultant, which vested immediately.

Compensation expense related to stock awards was approximately $ 0.05 million for the current quarter and approximately $ 0.20 million for the prior year quarter.

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.

Compensation expense related to stock awards was approximately $ 0.08 million for the current six months and approximately $ 0.21 million for the prior year six months.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, 2023 was approximately $ 0.03 million and is expected to be recognized over a weighted average period of approximately 0.79 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.

There were no restricted stock units outstanding as of June 30, 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 March 31, 2023, there were 3,321,075 shares of common stock available for award grants under the 2021 Plan.

As of June 30, 2023, there were 3,302,241 shares of common stock available for award grants under the 2021 Plan.

Shares Reserved for Issuance

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.

As of June 30, 2023, there were 8,537,726 shares of common stock reserved for issuance, including 4,898,135 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 337,350 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 3,302,241 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

XCEL BRANDS, INC.

1 unchanged sentence

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:

June 30, 2023

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 six months ended June 30, 2023 and 2022:

Three Months Ended

Net loss attributable to Xcel Brands, Inc.

Six Months Ended

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

stockholders (in thousands)

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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.

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

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

Three Months Ended

Six Months Ended

Stock options

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

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

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 0 % and 25 %, respectively, resulting in an income tax (benefit) provision of $ 0 and $ 3.18 million, respectively.

For the current 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.

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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 .

June 30, 2023

The estimated annual effective income tax rate for the current six months and the prior year six months was approximately 0 % and 35 %, respectively, resulting in an income tax (benefit) provision of $ 0 and $ 3.18 million, respectively.

For the current six months, 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.

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

Related Party Transactions

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 six months ended June 30, 2023, the Company recognized service fee income related to this agreement of $ 75,000 and $ 150,000 , respectively.

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.

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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.

For the three and six months ended June 30, 2023, the estimated amount of such shortfall was approximately $ 60,000 and $ 120,000 , respectively, which the Company recognized as royalty expense in the condensed consolidated statements of operations.

Commitments and Contingencies

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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.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

long-term liability.

At June 30, 2023, $ 1.4 million of the remaining balance was recorded as a current liability and $ 5.0 million was recorded as a long-term liability.

Contingent Obligation – Isaac Mizrahi Transaction

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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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2023

Based on IM Topco’s earnings from May 31, 2022 through June 30, 2023 and the applicable distribution provisions, WHP earned $ 7.9 million in cash flow, which reduces the maximum potential purchase price adjustment to $ 8.1 million.

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.

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

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.

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