What changed in this filing

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Item 1. Financial Statements

2023-11-20 compared with 2023-08-14 · 234 added, 147 removed, 314 unchanged (55% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

June 30, 2023

September 30, 2023

December 31, 2022

15 unchanged sentences

Deferred revenue

Accrued income taxes payable

Accrued payroll

11 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 19,700,656 and 19,624,860 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,800,053 and 19,624,860 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

14 unchanged sentences

Interest expense - term loan debt

Other interest and finance charges, net

Other interest and finance charges (income), net

Loss on early extinguishment of debt

32 unchanged sentences

Balance as of June 30, 2022

Compensation expense related to stock options and restricted stock

Balance as of September 30, 2022

Balance as of December 31, 2022

6 unchanged sentences

Balance as of June 30, 2023

Compensation expense related to stock options and restricted stock

Contra-revenue related to warrants granted to licensee

Shares issued to directors in connection with restricted stock grants

Shares issued to employee in connection with stock grant

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

Balance as of September 30, 2023

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities

4 unchanged sentences

Amortization of deferred finance costs included in interest expense

Stock-based compensation

Stock-based compensation and cost of licensee warrants

Provision for doubtful accounts

Restructuring of certain contractual arrangements

Undistributed proportional share of net loss of equity method investee

18 unchanged sentences

Cash flows from financing activities

Proceeds from exercise of stock options

Shares repurchased including vested restricted stock in exchange for withholding taxes

1 unchanged sentence

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

Net cash used in financing activities

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents at end of period

Supplemental disclosure of non-cash activities:

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

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

September 30, 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.

1 unchanged sentence

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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.

3 unchanged sentences

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

Liquidity and Management’s Plans

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 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 $ 6.0 million as of June 30, 2023.

The Company’s cash and cash equivalents were approximately $ 3.5 million as of June 30, 2023.

The Company incurred a net loss attributable to Company stockholders of approximately $ 5.1 million and $ 14.3 million during the three and nine months ended September 30, 2023, respectively (which included net non-cash expenses of approximately $ 2.3 million and $ 7.1 million, respectively), and had an accumulated deficit of approximately $ 47.1 million as of September 30, 2023.

Net cash used in operating activities was approximately $ 2.8 million for the nine months ended September 30, 2023.

The Company’s cash and cash equivalents were approximately $ 2.2 million as of September 30, 2023.

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

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.

Management has 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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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.

For apparel, similar transactions have 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 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).

In the second quarter of 2023, the Company entered into a new master license agreement for the Halston Brand, covering 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.

The transition of these operating businesses was substantially completed as of June 30, 2023.

The transition of these operating businesses was substantially 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 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.

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 June 30, 2023, have been alleviated.

As of September 30, 2023, the Company has reduced its 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.

While there is some level of potential risk with respect to the Company’s contingent obligation related to IM Topco, LLC, which could negatively impact the Company’s future cash flows and liquidity, management has taken steps to address such risk (see Note 12 and Note 13 for additional details).

Further, in October 2023, the Company entered into a new term loan agreement in the amount of $ 5 million, which provides the Company with approximately $ 5 million of additional liquidity (see Note 13 for additional details).

Also in October 2023, Longaberger Licensing, LLC outsourced the operations and management of the Longaberger Brand’s e-commerce business to a third party (see Note 13 for additional details).

Based on these recent events and changes, management expects that existing cash and future operating cash flows will be adequate to meet the Company’s operating needs, term debt service obligations, and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q;

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of September 30, 2023, have been alleviated.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

September 30, 2023

Recently Adopted Accounting Pronouncements

16 unchanged sentences

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 recognized a net pre-tax gain from the transaction of $ 20.6 million, which is classified within “other operating costs and expense (income)” in the condensed consolidated statements of operations for the nine months ended September 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.

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.

Based on these distribution provisions, the Company recognized an equity method loss of $ 0.52 million and $ 1.55 million related to its investment for the three and nine months ended September 30, 2023, respectively.

The Company recognized an equity method loss of $ 0.28 million related to its investment for both the three and nine months ended September 30, 2022.

For cash flow earnings (i.e., net income before intangible asset amortization expense), management allocated the 2023 amounts based on the preferences outlined above.

As such, Xcel recognized no cash-based earnings for all of the periods presented.

For non-cash amortization expense, management allocated the amounts based on the relative ownership

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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

September 30, 2023

of each member (i.e., 70 % WHP and 30 % Xcel).

The equity method loss for each period presented is equal Xcel’s share of amortization expense.

Summarized financial information for IM Topco for the three and nine months ended September 30, 2023 and 2022 is as follows:

For the three months ended

For the nine months ended

September 30,

($ in thousands)

Income from continuing operations

(Loss) income from continuing operations

Net (loss) income

(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.

Refer to Note 11 for other information regarding the Company’s ongoing relationship with IM Topco.

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

June 30, 2023

September 30, 2023

Gross Carrying

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Copyrights and other intellectual property

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").

Amortization expense for intangible assets was approximately $ 1.53 million for both the three-month period ended September 30, 2023 (the "current quarter") and the three-month period ended September 30, 2022 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 4.60 million for both the nine-month period ended September 30, 2023 (the "current nine months") and the nine-month period ended September 30, 2022 (the "prior year nine months").

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

Significant Contracts and Concentrations

2 unchanged sentences

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 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.

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.

As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $ 4.67 million of deferred revenue contract liabilities on its condensed consolidated balance sheet as of September 30, 2023 related to this contract, of which $ 0.89 million was classified as a current liability and $ 3.78 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 5.25 years .

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

Net licensing revenue recognized from the Halston Master License was $ 0.65 million and $ 0.98 million for the current quarter and current nine months, respectively representing approximately 25 % and 6 % of the Company’s total net revenue for the current quarter and current nine months, respectively.

Additionally, 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 vests based upon certain annual royalty targets being satisfied under the license agreement.

The fair value of this warrant 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.

The amount of contra-revenue recorded related to this warrant during the current quarter and current nine months was approximately $ 0.02 million.

As of September 30, 2023, no portion of this warrant had vested.

Qurate Agreements

3 unchanged sentences

● Net licensing revenue from the Qurate Agreements totaled $ 1.61 million and $ 1.40 million for the current quarter and prior year quarter, respectively, representing approximately 61 % and 31 % 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.

● 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 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.

● Net licensing revenue from the Qurate Agreements totaled $ 4.90 million and $ 10.47 million for the current nine months and prior year nine months, respectively, representing approximately 32 % and 48 % of the Company’s

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

September 30, 2023

total net revenue for the current nine months and prior year nine months, respectively.

The prior year nine 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 September 30, 2023 and December 31, 2022, the Company had receivables from Qurate of $ 1.6 million and $ 0.9 million, respectively, representing approximately 34 % 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 $ 0.02 million and $ 0.00 as of September 30, 2023 and December 31, 2022, respectively.

A rollforward of the allowance for credit losses for the nine months ended September 30, 2023 is as follows:

($ in thousands)

Balance at December 31, 2022

Credit loss expense (1)

Balance at September 30, 2023

(1) Credit loss expense was $0.12 million for both the current quarter and current nine months, and is recorded within “other selling, general and administrative expenses” in the accompanying condensed consolidated statement of operations.

Credit loss expense recognized in the prior year quarter and prior year nine months was $ 0.08 million and $ 0.17 million, respectively.

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 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.

Also, as of September 30, 2023 and December 31, 2022, approximately $ 0.33 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 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.

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.

During the current quarter and current nine months, the Company paid approximately $ 0.02 million and $ 0.09 million in fees to the agent under the aforementioned services agreement;

such agent fees were approximately $ 0.04 million in the prior year quarter and prior year nine months.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

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

September 30, 2023

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.

As of September 30, 2023, the Company’s real estate lease has a remaining lease term of approximately 4.08 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, and approximately $ 1.2 million for both the current nine months and prior year nine 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 $ 1.2 million in the current nine months, and approximately $ 1.3 million in the prior year nine months.

The Company is currently in discussions with the lessor of the operating lease for the Company’s corporate offices and operations facility, regarding a potential amendment to restructure such lease.

In addition, this could include a requirement for the Company to fund a security deposit to the lessor of up to $ 0.73 million.

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

During the nine months ended September 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 $ 0.18 million to the lessor during the nine months ended September 30, 2023.

The Company has recognized a liability of $ 0.11 million for the remaining settlement payment (due to be paid to the lessor in the fourth quarter of 2023) as part of “accounts payable, accrued expenses and other current liabilities” on the condensed consolidated balance sheet as of September 30, 2023.

The Company recognized a gain of $ 0.44 million from this settlement transaction, which is classified within “other operating costs and expenses (income)” in the condensed consolidated statements of operations for the nine months ended September 30, 2023.

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

(in thousands)

2023 (July 1 through December 31)

2023 (October 1 through December 31)

Total lease payments

2 unchanged sentences

Non-current portion of lease liabilities

The Company did not have any debt obligations as of June 30, 2023 or December 31, 2022.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

The Company did not have any debt obligations as of September 30, 2023 or December 31, 2022.

See Note 13 for information regarding new debt agreements entered into subsequent to September 30, 2023.

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.

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 %.

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 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.

For the 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 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.

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

Expense for such awards is recognized only to the extent that the achievement of the specified performance target(s) has been met or is considered probable.

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

For both periods, the majority of the expense was related to directors and consultants, and was recorded as operating costs within “other selling, general and administrative expenses” in the accompanying condensed consolidated statements of operations.

Total expense recognized in the current nine months and prior year nine months for all forms of stock-based compensation was approximately $ 0.17 million and $ 0.67 million, respectively.

Of the current nine months expense amount, approximately $ 0.15 million related to directors and consultants, and approximately $ 0.02 million related to employees;

all such stock-based compensation expense was recorded within “other selling, general and administrative expenses” in

XCEL BRANDS, INC.

1 unchanged sentence

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.

Expense for such awards is recognized only to the extent that the achievement of the specified performance target(s) has been met or is considered probable.

Total expense recognized in the current quarter and prior year quarter for all forms of stock-based compensation was approximately $ 0.06 million and $ 0.58 million, respectively.

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 $ 0.39 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.

September 30, 2023

the accompanying condensed consolidated statements of operations.

Of the prior year 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 prior year nine months expense was recorded as operating costs, and approximately $ 0.10 million was recorded as part of other operating costs and expenses (income).

Stock Options

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

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

Outstanding at January 1, 2023

Expired/Forfeited

Outstanding at June 30, 2023, and expected to vest

Exercisable at June 30, 2023

Outstanding at September 30, 2023, and expected to vest

Exercisable at September 30, 2023

On August 23, 2023 the Company granted options to purchase an aggregate of 100,000 shares of common stock to non-management directors.

The exercise price of the options is $ 1.51 per share, and 50 % of the options vest on each of April 1, 2024 and April 1, 2025.

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

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.

Compensation expense related to stock options for the current nine months and the prior year nine months was approximately $ 0.07 million and $ 0.43 million, respectively.

Total unrecognized compensation expense related to unvested stock options at September 30, 2023 was approximately $ 0.11 million and is expected to be recognized over a weighted average period of approximately 1.23 years.

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

Balance at January 1, 2023

Forfeited or Canceled

Balance at September 30, 2023

XCEL BRANDS, INC.

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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 June 30, 2023

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

September 30, 2023

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

Outstanding and exercisable at January 1, 2023

Expired/Forfeited

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 September 30, 2023

Exercisable at September 30, 2023

See Note 4 for information regarding the warrant to purchase 1,000,000 shares of common stock granted during the current nine months in connection with the Halston Master License.

Excluding the contra-revenue recognized with respect to the Halston Master License warrant, there was no compensation expense related to warrants recognized in the current quarter, prior year quarter, current nine months, or prior year nine months.

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

Outstanding at January 1, 2023

Expired/Forfeited

Outstanding at June 30, 2023

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

Outstanding at September 30, 2023

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

1 unchanged sentence

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

On July 20, 2023, the Company issued 7,300 shares of common stock to an employee, which vested immediately.

On August 23, 2023, the Company issued an aggregate of 40,000 shares of common stock to non-management directors, of which 50 % shall vest on April 1, 2024, and 50 % shall vest on April 1, 2025.

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

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.

Compensation expense related to stock awards was approximately $ 0.10 million for the current nine months and approximately $ 0.24 million for the prior year nine months.

Total unrecognized compensation expense related to unvested restricted stock grants at September 30, 2023 was approximately $ 0.08 million

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

and is expected to be recognized over a weighted average period of approximately 1.23 years.

Restricted Stock Units

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.

There were no restricted stock units outstanding as of September 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 June 30, 2023, there were 3,302,241 shares of common stock available for award grants under the 2021 Plan.

As of September 30, 2023, there were 3,170,191 shares of common stock available for future award grants under the 2021 Plan.

Shares Reserved for Issuance

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.

As of September 30, 2023, there were 8,430,426 shares of common stock reserved for issuance, including 4,838,135 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 422,100 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 3,170,191 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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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:

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, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

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

4 unchanged sentences

Diluted weighted average number of shares outstanding

Basic net loss per share

Diluted net 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.

Basic net (loss) income per share

Diluted net (loss) income per share

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

As a result of the net loss for the current quarter, prior quarter, and current 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 for such periods.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Stock options

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 0 % and 26 %, respectively, resulting in an income tax (benefit) provision of $ 0 and $( 1.54 ) 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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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 %.

The estimated annual effective income tax rate for the current nine months and the prior year nine months was approximately 0 % and 62 %, respectively, resulting in an income tax (benefit) provision of $ 0 and $ 1.64 million, respectively.

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 5 %.

For the current nine 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 the period will be utilized in future periods.

For the prior year 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 %.

Related Party Transactions

2 unchanged sentences

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

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

For the three and nine months ended September 30, 2023, the Company recognized service fee income related to this agreement of $ 0 and $ 150,000 , respectively.

See Note 13 for discussion related to a reduction of future service fees, effective as of July 1, 2023.

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

The initial term of this agreement was set to end on

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

December 31, 2026, and provided guaranteed minimum 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 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.

For the three and nine months ended September 30, 2023, the estimated amount of such shortfall was approximately $ 105,000 and $ 225,000 , respectively, which the Company recognized as royalty expense in the condensed consolidated statements of operations.

Commitments and Contingencies

1 unchanged sentence

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 six months.

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.

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 September 30, 2023, $ 0.8 million of the remaining balance was recorded as a current liability and approximately $ 5.6 million was recorded as a long-term liability.

Contingent Obligation – Isaac Mizrahi Transaction

1 unchanged sentence

Such amount would be payable by the Company in either cash or equity interests in IM Topco held by the Company.

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

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.

Based on IM Topco’s earnings from May 31, 2022 through September 30, 2023 and the applicable distribution provisions, WHP earned $ 9.1 million in cash flow, which reduces the maximum potential purchase price adjustment to $ 6.9 million.

Although IM Topco’s aggregate royalties fell below the aforementioned threshold for the four consecutive quarter period ending September 30, 2023, WHP provided a waiver to Xcel relative to such requirement for the period.

The waiver also includes the measurement period ending December 31, 2023.

The next measurement period shall be the trailing four calendar quarters ending March 31, 2024.

IM Topco’s aggregate royalties through September 30, 2023 were lower than expected as a result of soft sales in its interactive television business, primarily driven by talent scheduling conflicts as QVC transitions from remote shows to 100% in-studio shows.

Management believes this softness in sales is temporary, and steps are underway to restore airtime back to levels that will result in meeting planned sales levels.

Accordingly, no amount has been recorded in the accompanying condensed consolidated balance sheets related to this contingent obligation.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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.

Subsequent Events

Restructuring of Certain Contractual Arrangements

On October 17, 2023, the Company and one of the licensees managed under the Halston Master License entered into an amendment of their respective licensing agreement.

Under this amendment, the payment terms of the $ 0.76 million outstanding balance due to the Company were changed such that the receivable (and collection thereof) became contractually contingent upon the licensee’s future performance.

The licensee is also required to pay interest to the Company on a monthly basis until the outstanding balance is paid in full.

The Company recorded a non-cash charge of $ 0.76 million within other selling, general and administrative expenses in the current quarter and current nine months related to the restructuring of this licensing arrangement, in order to write-down the previously-recorded receivable to zero.

IDB Term Loan and Interest Rate Swap

On October 19, 2023, H Halston IP, LLC (the “Borrower”), a wholly owned indirect subsidiary of Xcel Brands, Inc., entered into a Term Loan Agreement (the “Loan Agreement”) with Israel Discount Bank of New York (“IDB”).

Pursuant to the Loan Agreement, IDB made a term loan in the aggregate amount of $ 5.0 million (the “Term Loan”).

The proceeds of the Term Loan were used to pay fees, costs, and expenses incurred in connection with entering into the Loan Agreement of approximately $ 0.1 million (including a commitment fee paid to IDB in the amount of $ 50,000 and legal fees paid to counsel of IDB in the amount of $ 82,000 ), and may be used for working capital purposes.

In connection with the Loan Agreement, the Borrower and H Licensing, LLC (“H Licensing”), a wholly owned subsidiary of Xcel, entered into a Security Agreement (the “Security Agreement”) in favor of IDB, and Xcel entered into a Membership Interest Pledge Agreement (the “Pledge Agreement”) in favor of IDB.

Pursuant to the Security Agreement, the Borrower and H Licensing granted to IDB a security interest in substantially all of their respective assets, other than the trademarks owned by the Borrower and H Licensing, to secure the Borrower’s obligations under the Loan Agreement.

Pursuant to the Pledge Agreement, Xcel granted to IDB a security interest in its membership interests in H Licensing to secure the Borrower’s obligations under the Loan Agreement.

The Term Loan matures on October 19, 2028.

Principal on the Term Loan shall be payable in quarterly installments of $ 250,000 on each of January 2, April 1, July 1, and October 1of each year, commencing on April 1, 2024.

The Borrower has the right to prepay all or any portion of the Term Loan at any time without penalty.

Interest on the Term Loan accrues at Term SOFR (as defined in the Loan Agreement as the forward-looking term rate based on secured overnight financing rate as administered by the Federal Reserve Bank of New York for an interest period equal to one month on the day that is two U.S.

Government Securities Business Days prior to the first day of each calendar month) plus 4.25 % per annum.

Interest on the Term Loan is payable on the first day of each calendar month.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

The Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and certain financial covenants including annual guaranteed minimum royalty ratio, annual fixed charge coverage ratio, and minimum cash balance levels, all as specified and defined in the Loan Agreement.

In addition, on October 19, 2023, the Borrower also entered into a swap agreement with IDB, pursuant to which IDB will pay the Borrower Term SOFR plus 4.25 % per annum on the notional amount of the swap in exchange for the Borrower paying IDB 9.46 % per annum on such notional amount.

The term and declining notional amount of the swap agreement is aligned with the amortization of the Term Loan principal amount.

Longaberger Brand E-Commerce Agreement

On October 29, 2023, Longaberger Licensing, LLC (“LL”) entered into a master services agreement with a third party, under which LL granted to the counterparty a license to operate and manage the e-commerce operations of LL.

This agreement has an initial term ending December 31, 2026, with an option for the counterparty to renew for an additional three years, provided that certain sales thresholds are met.

In exchange, the counterparty agreed to pay LL a percentage royalty based on net sales, as well as a percentage share of the “modified contribution margin” (as defined in the agreement) of the e-commerce business operations.

Amendments Related to IM Topco

In November 2023, the Company, WHP, and IM Topco entered into amendments of the May 27, 2022 membership purchase agreement (see Note 2) and the May 31, 2022 services agreement (see Note 11).

Under these amendments, the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024.

In exchange, Xcel shall provide IM Topco with a $ 0.6 million reduction of future service fees over the next eighteen months, beginning on July 1, 2023.

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