What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-04-19 compared with 2023-04-17 · 524 added, 510 removed, 544 unchanged (66% of the section changed)

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

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

and Subsidiaries (collectively, the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

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

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

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

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Critical Audit Matters

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

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

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

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

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

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

Liquidity and Management’s Plans

Critical Audit Matter Description

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

As described further in Note 1 to the financial statements, the Company has incurred recurring losses from operations, has used net cash in operating activities, and has an accumulated deficit.

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

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

going concern.

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

Accordingly, the Company has determined that these factors raise uncertainty as to the Company’s ability to continue as a going concern.

However, management has

implemented plans which are expected to mitigate these conditions or events, and therefore, has concluded that such conditions or events have been alleviated.

How the Critical Audit Matter was Addressed in the Audit

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

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

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

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

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

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

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

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

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

● We performed testing procedures such as reviewing;

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

prospective financial information for the twelve-month period beginning with the filing date of this Annual Report on Form 10-K, actual operating performance for periods after December 31, 2023, other events and transactions occurring after December 31, 2023, implemented reductions in operating expenses, plans for further reductions to support expected cashflows, and implemented changes in the business.

● We performed sensitivity analysis of management's forecasts and key assumptions used in developing their prospective financial information.

Finite-Lived Trademarks and Other Intangible Assets

Critical Audit Matter Description

As described further in Note 4 to the financial statements, the carrying amount of finite-lived trademarks and other intangible assets was $41.5 million as of December 31, 2023.

Under the applicable accounting guidance, these assets shall be tested for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

Management has concluded that these assets are not impaired as of December 31, 2023.

How the Critical Audit Matter was Addressed in the Audit

We determined the Company’s ability to assess if their finite-lived trademarks and other intangible assets are impaired is a critical audit matter due to the estimation and uncertainty regarding the Company’s ability to generate sufficient undiscounted cash flows, to be in excess of the carrying amounts of these assets.

The Company evaluates its finite-lived trademarks and other intangible assets for impairment when events are triggered by economic conditions.

These events require the Company to compare the carrying values to the undiscounted cash flows from the operation and eventual disposition of these assets over their estimated useful lives (“undiscounted cash flows”).

If the carrying value of any of these assets is considered to be impaired, as described above, the amount of the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.

Auditing the Company’s finite-lived trademarks and other intangible assets for impairment is complex and subjective due to the significant estimation required to determine the forecasted undiscounted cash flows used in the Company’s evaluation.

Specifically, the forecasted undiscounted cash flows are sensitive to significant assumptions such as revenue growth rates, including the terminal growth rates, margins, and expenses over the estimated useful lives of these assets, all of which are affected by expected future market or economic conditions, and other factors.

The primary procedures we performed to address this critical audit matter included the following, among others:

● We evaluated management’s assessment of events and changes in circumstances, which required a more detailed evaluation of undiscounted cash flows.

● We obtained management’s forecasts of undiscounted cash flows, and assumptions utilized in developing such forecasts.

● We evaluated management’s forecasts and key assumptions utilized to arrive at undiscounted cash flows.

● We performed sensitivity analysis of management’s forecasts and key assumptions used to arrive at undiscounted cash flows.

● We compared undiscounted cash flows to the carrying amounts of the respective assets and determined in all cases that undiscounted cash flows exceeded the carrying amounts.

/s/ Marcum LLP

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Cash and cash equivalents

Accounts receivable, net of allowances of $ 63 and $ 1,090 , respectively

Accounts receivable, net

Prepaid expenses and other current assets

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Trademarks and other intangibles, net

Equity method investment

Restricted cash

Equity method investment in IM Topco, LLC

Deferred tax assets, net

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Accounts payable, accrued expenses and other current liabilities

Deferred revenue

Accrued income taxes payable

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Current portion of long-term debt

Current portion of contingent obligations

Current portion of contingent obligation

Total current liabilities

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Long-term portion of operating lease obligations

Deferred revenue

Long-term debt, net, less current portion

Long-term portion of contingent obligations

Long-term portion of contingent obligation

Other long-term liabilities

Total long-term liabilities

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

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

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,795,053 and 19,624,860 shares issued and outstanding at December 31, 2023 and 2022, respectively

Paid-in capital

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Cost of goods sold

Operating costs and expenses

Direct operating costs and expenses

Salaries, benefits and employment taxes

Other selling, general and administrative expenses

Stock-based compensation

Total direct operating costs and expenses

Other operating costs and expenses (income)

Depreciation and amortization

Asset impairment charges

Total operating costs and expenses

Other income (expense)

Gain on sale of majority interest in Isaac Mizrahi brand

Loss from equity method investment

Gain on sale of limited partner ownership interest

Gain on settlement of lease liability

Gain on reduction of contingent obligation

Total other income (expense)

Operating loss

Interest and finance expense

Interest expense - term loan debt

Interest expense

Other interest and finance charges, net

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Loss before income taxes

Income tax benefit

Income tax provision (benefit)

Net loss attributable to noncontrolling interest

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Balance as of January 1, 2022

Compensation expense in connection with stock options and restricted stock

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

Shares issued to directors in connection with restricted stock grants

Shares issued to consultants in connection with restricted stock grants

Shares issued to employee in connection with contractual agreement

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

Shares repurchased from employees in exchange for withholding taxes

Additional investment in Longaberger Licensing, LLC by noncontrolling interest

Net loss for the year ended December 31, 2021

Balance as of December 31, 2021

Compensation expense in connection with stock options and restricted stock

Compensation expense related to stock options and restricted stock

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

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Shares issued to directors in connection with restricted stock grants

Shares issued to consultants in connection with restricted stock grants

Shares issued to consultants in connection with stock grants

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

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Balance as of December 31, 2022

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

Forfeitures of restricted stock grants

Shares issued to consultant in connection with stock grants

Shares issued to employee in connection with stock grant

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

Net loss for the year ended December 31, 2023

Balance as of December 31, 2023

See accompanying Notes to Consolidated Financial Statements.

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Amortization of deferred finance costs included in interest expense

Stock-based compensation

Provision for doubtful accounts

Undistributed proportional share of net income of equity method investee

Stock-based compensation and cost of licensee warrants

Provision for credit losses

Undistributed proportional share of net loss of equity method investee

Loss on early extinguishment of debt

Deferred income tax benefit

Deferred income tax provision (benefit)

Gain on sale of majority interest in Isaac Mizrahi brand

Gain on sale of limited partner ownership interest

Gain on settlement of lease liability

Gain on reduction of contingent obligation

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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

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Net proceeds from sale of majority interest in Isaac Mizrahi brand

Capital contribution to equity method investee

Cash consideration for acquisition of Lori Goldstein assets

Purchase of other intangible assets

Capital contribution to equity method investees

Net proceeds from sale of assets

Purchase of property and equipment

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash flows from financing activities

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Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from noncontrolling interest

Proceeds from revolving loan debt

Proceeds from long-term debt

Payment of deferred finance costs

Payment of revolving loan debt

Payment of long-term debt

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

Net cash (used in) provided by financing activities

Net 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 cash provided by (used in) financing activities

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental disclosure of non-cash activities:

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

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

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Xcel Brands, Inc.

(“Xcel” and, together with its subsidiaries, the “Company”) is a media and consumer products company engaged in the design, production, marketing, live streaming, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

Currently, the Company’s brand portfolio consists of the LOGO by Lori Goldstein brand (the “Lori Goldstein Brand”), the Halston brands (the “Halston Brand”), the Judith Ripka brands (the "Ripka Brand"), the C Wonder brands (the “C Wonder Brand”), the Longaberger brand (the “Longaberger Brand”), the Isaac Mizrahi brands (the “Isaac Mizrahi Brand”), and other proprietary brands.

(“Xcel” and, together with its subsidiaries, the “Company”) is a media and consumer products company engaged in the design, licensing, marketing, live streaming, and social commerce sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

● The Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand are wholly owned by the Company.

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the Company consolidates Longaberger Licensing, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party (see Note 3 for additional details).

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

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

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the Company accounts for its interest in IM Topco, LLC using the equity method of accounting (see Note 3 for additional details).

The Company designs, produces, markets, and distributes products, licenses its brands to third parties, and generates licensing revenues through contractual arrangements with manufacturers and retailers.

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

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

and "Cost of goods sold"

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

● The CB Brand is a new co-branded collaboration between Xcel and Christie Brinkley, announced in 2023 and planned to launch in 2024.

The Company also owns a 30 % interest in ORME Live, Inc.

(“ORME”), a short-form video and social commerce marketplace that is planned to launch in 2024.

The Company primarily generates revenue through the licensing of its brands through contractual arrangements with manufacturers and retailers.

The Company, through its licensees, distributes through an omni-channel and social commerce sales strategy, which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, social commerce, traditional brick-and-mortar retailers, and e-commerce channels, to be everywhere its customers shop.

Prior to 2023, and for a portion of 2023, the Company also engaged in certain wholesale and direct-to-consumer sales of products under its brands.

The Company’s wholesale and direct-to-consumer operations are presented as "Net sales" and "Cost of goods sold" in the Consolidated Statements of Operations, separately from the Company’s licensing revenues.

Liquidity and Management’s Plans

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

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

The Company incurred a net loss attributable to Company stockholders of approximately $ 21.1 million and $ 4.0 million during the years ended December 31, 2023 and 2022, respectively (which included non-cash expenses of approximately $ 9.0 million and $ 8.2 million, respectively), and had an accumulated deficit of approximately $ 53.8 million and $ 32.8 million as of December 31, 2023 and 2022, respectively.

Net cash used in operating activities was $ 6.5 million in 2023 and $ 14.2 million in 2022.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations) of approximately $ 2.1 million and $ 8.8 million as of December 31, 2023 and 2022, respectively.

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

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

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

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

The Company entered into a new

The Company’s cash and cash equivalents were approximately $ 3.0 million and $ 4.6 million as of December

XCEL BRANDS, INC.

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December 31, 2023 and 2022

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

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

For apparel, similar transactions have recently been executed.

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

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

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

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

The Halston JV will include a wholesale license to Xcel.

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

31, 2023 and 2022, respectively.

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

During the year ended December 31, 2023, management implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting its business from a wholesale/licensing hybrid model into a “licensing plus” model.

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

The Company entered into a new interactive television licensing agreement with America’s Collectibles Network, Inc.

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

For apparel, similar transactions were 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 2024 and beyond.

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 5 for details).

These restructuring initiatives were 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, steps have been taken to reduce payroll costs by $ 6 million and operating expenses by $ 7 million over the next twelve months.

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

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

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

As of December 31, 2023, the Company has reduced payroll costs by approximately $ 6 million and operating expenses (excluding non-recurring charges related to the restructuring) by approximately $ 9 million, on an annualized basis when compared to the corresponding periods in the prior year.

Further, in October 2023, the Company entered into a new term loan agreement in the amount of $ 5 million (see Note 6 for details).

Subsequent to year end, in January 2024, the Company entered into a sublease of its offices at 1333 Broadway in New York, NY (see Note 12 for details), and in March 2024, the Company issued new shares of common stock for net proceeds of approximately $ 2 million (see Note 12 for 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 Annual Report on Form 10-K;

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of December 31, 2023, have been alleviated.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Xcel, its wholly owned subsidiaries, and entities in which Xcel has a controlling financial interest as of and for the years ended December 31, 2022 (the "Current Year") and 2021 (the "Prior Year").

The consolidated financial statements include the accounts of Xcel, its wholly owned subsidiaries, and entities in which Xcel has a controlling financial interest as of and for the years ended December 31, 2023 (the "Current Year") and 2022 (the "Prior Year").

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

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All significant intercompany accounts and transactions have been eliminated in consolidation, and net earnings have been adjusted by the portion of operating results of consolidated entities attributable to noncontrolling interests.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Investments in Unconsolidated Affiliates

The Company holds a noncontrolling equity interest in IM Topco, LLC, which was entered into during the Prior Year, and a noncontrolling equity interest in ORME Live, Inc., which was entered into during the Current Year.

These investments are accounted for in accordance with ASC Topic 323, “Investments – Equity Method and Joint Ventures,” as the Company has the ability to exercise significant influence over their operating and financial policies of these affiliates, but does not control the affiliates.

The Company recognizes its share of the ongoing operating results of these affiliates within other operating costs and expenses (income) in the accompanying consolidated statements of operations.

The Company’s investments in unconsolidated affiliates are reviewed for impairment whenever there are indicators that their carrying value may not be recoverable;

if a decrease in value of the investment has occurred and such decrease is determined to be other than temporary in nature, the Company shall record an impairment charge to reduce the carrying amount of the investment to its fair value.

See Note 3 for additional information related to the Company’s investments in unconsolidated affiliates.

Use of Estimates

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The Company deems the following items to require significant estimates from management:

● Allowance for doubtful accounts;

● Allowances for credit losses;

● Useful lives of trademarks;

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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Accounts Receivable

Accounts receivable are reported net of the allowance for doubtful accounts.

The allowance for doubtful accounts is based on the Company’s ongoing discussions with its licensees, wholesale and digital customers, and its evaluation of each customer’s payment history, account aging, and financial position.

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

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

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

Accounts receivable are reported net of an allowance for credit losses.

As of December 31, 2023 and 2022, the Company had $ 3.5 million and $ 5.1 million, respectively, of accounts receivable, net of allowances of $ 0.8 million and $ 0 , respectively.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

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

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

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

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

A rollforward of the allowance for credit losses for the Current Year is as follows:

($ in thousands)

Balance at December 31, 2022

Credit loss expense

Balance at December 31, 2023

The Company recognized credit loss expense of $ 0.4 million in the Prior Year, which was related to the bankruptcy of several retail customers due to the 2020 – 2023 coronavirus disease pandemic.

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

Additionally, on October 17, 2023, the Company and one of the licensees managed under the Halston Master License (see Note 5) 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 this 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 Year related to the restructuring of this licensing arrangement, in order to write-down the previously-recorded receivable to zero, which is not included in the credit loss expense and allowance for credit losses amounts set forth above.

There is no earned revenue that has been accrued but not billed as of December 31, 2023 and 2022.

As of December 31, 2022, approximately $ 1.7 million of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the Current Year, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit.

As of December 31, 2023 and 2022, approximately $ 0.04 million and $ 1.7 million, respectively, of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the Prior Year, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit.

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

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

During both the Current Year and Prior Year, the Company paid less than $ 0.1 million in fees to the agent under the aforementioned services agreement.

All of the Company’s inventory consists of finished goods.

As of December 31, 2022, inventory was composed of jewelry, wholesale apparel, and home goods.

During the Current Year, as a result of the restructuring of its business operating model, the Company sold all of its wholesale apparel inventory and substantially all of its remaining fine jewelry inventory to its new business partners and licensees.

Thus, as of December 31, 2023, inventory was primarily composed of home goods and related items for the Longaberger Brand.

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

The Company holds finished goods inventory for its direct-to-consumer operations.

Apparel and jewelry finished goods inventory is purchased to satisfy orders received from its wholesale operations.

The Company periodically reviews the composition of its inventories in order to identify obsolete, slow-moving, or otherwise non-saleable items.

If non-saleable items are observed and there are no alternate uses for the inventories, the Company will record a write-down to net realizable value in the period that the decline in value is first recognized.

If non-saleable items are observed and there are no alternate uses for the inventories, the Company

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

will record a write-down to net realizable value in the period that the decline in value is first recognized.

Write-downs for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

The Company’s long-lived property and equipment assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

An impairment loss is recognized if the carrying amount of an asset is not recoverable and its carrying amount exceeds its fair value.

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

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

To perform such impairment testing, the Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluates the asset group against the sum of undiscounted future cash flows.

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

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

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

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

Trademarks and Other Intangible Assets

The Company follows FASB ASC Topic 350, “Intangibles - Goodwill and Other.” Under this standard, goodwill and indefinite-lived intangible assets are not amortized, but are required to be assessed for impairment at least annually (the Company utilizes December 31 as its testing date) and when events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount.

Indefinite-Lived Intangible Asset

The Company tests its indefinite-lived intangible asset for recovery in accordance with ASC-820-10-55-3F, which states that the income approach (“Income Approach”) converts future amounts (for example cash flows) to a single current (that is, discounted) amount.

When the Income Approach is used, fair value measurement reflects current market expectations about those future amounts.

The Income Approach is based on the present value of future earnings expected to be generated by a business or asset.

Income projections for a future period are discounted at a rate commensurate with the degree of risk associated with future proceeds.

A residual or terminal value is also added to the present value of the income to quantify the value of the business beyond the projection period.

As such, recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its expected future discounted net cash flows.

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

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

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

Finite-Lived Intangible Assets

The Company’s finite-lived intangible assets, including Trademarks, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

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

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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

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

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

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

Restricted Cash

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

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

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

Investments in Unconsolidated Affiliates

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

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

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

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

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

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

As of December 31, 2022 and 2021, the carrying value of this investment was $ 0.1 million.

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

Deferred Finance Costs

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

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

Contingent Obligations

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

The Company’s finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

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

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

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

See Note 4 for additional information related to the Company’s trademarks and other intangible assets.

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Deferred Finance Costs

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

These costs have been deferred on the consolidated balance sheet as a reduction to the carrying value of the associated borrowings, and are being amortized as interest expense over the term of the related borrowings using the effective interest method.

Contingent Obligations

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

The Company recorded contingent obligations in connection with the acquisitions of the Halston Heritage trademarks in 2019 and the LOGO by Lori Goldstein trademarks in 2021.

See Note 3 and Note 9 for additional information related to contingent obligations.

Under the applicable accounting guidance, the Company is required to carry such contingent liability balances on its consolidated balance sheet until the measurement period of the earn-out expires and all related contingencies have been resolved.

The Company recorded contingent obligations in connection with the purchase of the Halston Heritage trademarks in 2019 and the purchase of the LOGO by Lori Goldstein trademarks in 2021, but no amount has been recorded for the contingent obligation related to the sale of a majority interest in the Isaac Mizrahi Brand in 2022.

See Note 9 for additional information related to the Company’s contingent obligations.

Revenue Recognition

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

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

With the exception of the Halston Master License agreement described in Note 5, there were no such differences that would have a material impact on the Company’s consolidated balance sheets at December 31, 2023 and 2022.

In accordance with ASC 606-10-55-65, the Company recognizes net licensing revenue at the later of when (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied (in whole or in part).

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

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

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

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

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

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December 31, 2023 and 2022

however, as of December 31, 2023, the Company has recognized approximately $ 4.4 million of deferred revenue contract liabilities on its consolidated balance sheet related to the Halston Master License agreement (see Note 5).

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

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Wholesale Sales

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

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

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

Prior to the restructuring of the Company’s business model and operations in the Current Year, the Company generated a portion of its revenue through the design, sourcing, and sale of branded jewelry and apparel to both domestic and international customers who, in turn, sold the products to the consumer.

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

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

Direct-to-Consumer Sales

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

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

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

The Company’s revenue associated with its e-commerce jewelry operations and the Longaberger Brand (prior to the restructuring of the Company’s business model and operations in the Current Year) was recognized within net sales in the accompanying consolidated statements of operations at the point in time when product is shipped to the customer.

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

Advertising Costs

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The Company incurred approximately $ 1.0 million and $ 2.6 million in advertising and marketing costs for the Current Year and Prior Year, respectively, which are included within other selling, general and administrative expenses in the accompanying consolidated statements of operations.

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Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

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

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Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

The Company recognizes income from subleases (in which the Company is the sublessor) on a straight-line basis over the term of the sublease, as a reduction to lease expense.

See Note 9 for additional information related to the Company’s leases.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with 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.

The Company accounts for stock-based compensation by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable.

The fair value of stock options and warrants is estimated on the date of grant using the Black-Scholes option pricing model.

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

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

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

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

The Company accounts for forfeitures 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.

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Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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.

See Note 7 for additional information related to stock-based compensation.

Current income taxes are based on the respective period’s taxable income for federal and state income tax reporting purposes.

Deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

A valuation allowance is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deferred tax assets and liabilities are determined based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates and laws that will be in effect for the year in which the differences are expected to reverse.

A valuation allowance is recognized when necessary to reduce deferred tax assets to the amount expected to be realized.

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

A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company applies the FASB guidance on accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also addresses derecognition, classification, interest, and penalties related to uncertain tax positions.

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

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Notes to Consolidated Financial Statements

December 31, 2022 and 2021

See Note 10 for additional information related to income taxes.

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

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Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, and accounts payable, the carrying amounts approximate fair value due to the short-term maturities of these instruments.

The carrying value of term loan debt approximates fair value because the fixed interest rate approximates current market rates and in the instances it does not, the impact is not material.

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

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, the carrying amounts approximate fair value due to the short-term maturities of these instruments.

The carrying value of term loan debt approximates fair value due to the floating interest rate structure of the term loan agreement.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, and accounts receivable.

The Company limits its credit risk with respect to cash by maintaining cash, cash equivalents, and restricted cash balances with high quality financial institutions.

At times, the Company’s cash, cash equivalents, and restricted cash may exceed federally insured limits.

Concentrations of credit risk with respect to accounts receivable are minimal due to the collection history and due to the nature of the Company’s royalty revenues.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.

The Company limits its credit risk with respect to cash and cash equivalents by maintaining such balances with high quality financial institutions.

At times, the Company’s cash and cash equivalents may exceed federally insured limits.

Concentrations of credit risk with respect to accounts receivable are not considered

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Notes to Consolidated Financial Statements

December 31, 2023 and 2022

significant due to the collection history and due to the nature of the Company’s royalty revenues.

Generally, the Company does not require collateral or other security to support accounts receivable.

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The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and warrants outstanding were exercised into common stock if the effect is not anti-dilutive.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

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

Measurement of Credit Losses on Financial Instruments,"

which was subsequently amended in November 2018 through ASU No.

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

Subsequently, the FASB issued additional guidance in ASU No.

See Note 8 for additional information related to earnings (loss) per share.

Recently Adopted Accounting Pronouncements

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

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

Measurement of Credit Losses on Financial Instruments" (as amended by ASU No.

2018-19 in November 2018, ASU No.

2019-05 in May 2019, ASU No.

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2020-02 in February 2020, and ASU No.

2022-02 in March 2022.

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

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

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Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Recently Adopted Accounting Pronouncements

The Company adopted ASU No.

2022-02 in March 2022) effective January 1, 2023.

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

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

Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes” effective January 1, 2021.

This ASU removes certain exceptions to the general principles in Topic 740, including, but not limited to, intraperiod tax allocations and interim period tax calculations.

The ASU also provides additional clarification and guidance related to recognition of franchise taxes and changes in tax laws.

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

The Company adopted ASU No.

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

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

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

Acquisitions, Divestitures and Variable Interest Entities

Acquisition of LOGO by Lori Goldstein Brand

On March 30, 2021, the Company and its wholly owned subsidiary, Gold Licensing, LLC, entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Lori Goldstein, Ltd.

(the “Seller”) and Lori Goldstein (“Shareholder”), pursuant to which the Company agreed to acquire, and the Seller and Shareholder agreed to sell, certain assets of the Seller, including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto.

On April 1, 2021 (the “Closing Date”), the Company completed the acquisition of the assets specified in the Asset Purchase Agreement.

Pursuant to the Asset Purchase Agreement, on the Closing Date, the Company delivered $ 1.6 million in cash consideration to the Seller.

In addition, the Company was required to deliver $ 2.0 million in cash consideration to the Seller on the earlier of (i) the Company’s receipt of the first royalty payment from QVC, Inc.

in respect of the acquired assets, or (ii) July 29, 2021.

This payment was made in July 2021.

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

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

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

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

The following represents the aggregate purchase price of $ 10.3 million:

($ in thousands)

Cash paid at closing

Cash paid subsequent to closing

Total direct initial consideration

Direct transaction expenses

Contingent obligation (Lori Goldstein Earn-Out)

Total consideration

The aggregate purchase price was allocated entirely to the trademarks of the brand.

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

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Notes to Consolidated Financial Statements

December 31, 2022 and 2021

statements of operations.

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

Upon the consummation of the acquisition of the LOGO by Lori Goldstein brand as described above, the Company incurred cash bonuses totaling $ 175,000 to certain members of the Company’s senior management, such success-related bonuses having been approved by the Board of Directors on March 18, 2021.

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

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

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

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

Improvements to Income Tax Disclosures.” This ASU requires disclosure of additional categories of information about federal, state, and foreign income taxes in the rate reconciliation table and requires entities to provide more details about the reconciling items in some categories if items meet a quantitative threshold.

The ASU also requires entities to disclose income taxes paid, net of refunds, disaggregated by federal (national), state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold.

The guidance makes several other changes to the disclosure requirements.

The ASU is required to be applied prospectively, with the option to apply it retrospectively, and is effective for fiscal years beginning after December 15, 2024.

The Company does not anticipate that the adoption of this ASU will have a significant impact on its consolidated financial statements.

Acquisitions and Divestitures, Investments in Unconsolidated Affiliates, and Variable Interest Entities

Sale of Majority Interest in Isaac Mizrahi Brand

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

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

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

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

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

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

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

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

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as a component of other operating costs and expenses (income) in the consolidated statement of operations for the Prior Year.

Pursuant to the May 27, 2022 purchase agreement, the Company was also entitled to receive an “earn-out” payment in the amount of $ 2.0 million if, during the period from January 1, 2023 through December 31, 2023, (i) IM Topco received Net Royalty Revenue (as defined in the purchase agreement) in an amount equal to or greater than $ 17.5 million and (ii) IM Topco generated EBITDA (as defined in the purchase agreement) in an amount equal to or greater than $ 11.8 million.

These conditions were not met during 2023, and ultimately the Company did not receive any additional “earn-out” payment.

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

This provision was subsequently amended in November 2023, as described further below, and was subsequently further amended in April 2024 (see Note 12 for additional information).

In connection with the May 27, 2022 membership purchase agreement, the Company and WHP also entered into an Amended and Restated Limited Liability Company Agreement of IM Topco (the “Business Venture Agreement”) governing the operation of IM Topco as a partnership between the Company and WHP following the closing.

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

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

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

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

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

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

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

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

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

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

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

● The Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 5) was assigned to IM Topco as of May 31, 2022.

● The Company’s employment agreement with Mr.

The distribution provisions in the Business Venture Agreement were subsequently amended in April 2024 (see Note 12 for additional information).

The Company also entered into a number of other related agreements on May 31, 2022 in connection with the transaction, including a services agreement with IM Topco and a license agreement with IM Topco (see Note 11 for details), while the Company’s employment agreement with Mr.

Mizrahi and the Company’s services agreement with Laugh Club (see Note 11) were transferred to IM Topco.

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

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

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

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

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

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

Further, the Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 5) was assigned to IM Topco as of May 31, 2022.

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

As such, on May 31, 2022, the Company de-recognized the carrying amount of the Isaac Mizrahi Brand trademarks of $ 44.5 million and recognized the fair value of its retained interest in IM Topco of

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

approximately $ 19.8 million as an equity method investment.

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

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

Investment in IM Topco, LLC

The Company accounts for its interest in the ongoing operations of IM Topco as a component of other operating costs and expenses (income) under the equity method of accounting.

Based on the aforementioned distribution provisions set forth in the Business Venture Agreement, the Company recognized an equity method loss of approximately $ 2.1 and $ 1.2 million related to its investment for the years ended December 31, 2023 and 2002, respectively.

For cash flow earnings (i.e., net income before intangible asset amortization expense), management allocated the 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 of each member (i.e., 70 % WHP and 30 % Xcel).

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

Summarized financial information for IM Topco is as follows:

For the year ended

($ in thousands)

(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 December 31, 2022.

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

In November 2023, the Company, WHP, and IM Topco entered into an amendment of the May 27, 2022 membership purchase agreement, under which the parties agreed to waive the purchase price adjustment provision until the measurement period ending March 31, 2024.

In exchange, Xcel agreed to make additional royalty payments to IM Topco totaling $ 0.45 million over the next 11 months.

As a result of this amendment, the Company recognized a $ 0.45 million increase to the carrying value basis of its equity method investment and a corresponding increase in current liabilities.

The provisions of the membership purchase agreement were subsequently further amended in April 2024 (see Note 12 for additional information).

Investment in Orme Live, Inc.

In December 2023, the Company contributed $ 0.15 million of cash to ORME in exchange for a 30 % equity ownership interest in ORME.

The carrying value of this investment is included within other assets in the Company’s consolidated balance sheet.

The Company accounts for its interest in the operations of ORME as a component of other operating costs and expenses (income) under the equity method of accounting;

the Company’s proportional share of the operating results of ORME were not material in the Current Year.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

The Company recognized a net pre- tax gain from the transaction of $ 20.6 million, which is classified as other income in the consolidated statement of operations for the Current Year.

In addition to the amounts described above, the Company’s Board of Directors awarded cash bonuses totaling approximately $ 1.0 million to certain members of the Company’s senior management.

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

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

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

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

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

($ in thousands)

Income from continuing operations

Sale of Investment in Unconsolidated Affiliate

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

This investment did not have a readily determinable fair value and in accordance with ASC 820-10-35-59, the investment was valued at cost, less impairment, plus or minus observable price changes of an identical or similar investment of the same issuer.

This investment was included within other assets on the Company’s consolidated balance sheet at December 31, 2022, at a carrying value of $ 0.1 million.

During the Current Year, the Company sold its ownership interest in this entity, and recognized a gain of $ 0.36 million related to the sale within other operating costs and expenses (income) on the consolidated statement of operations.

Longaberger Licensing, LLC Variable Interest Entity

Xcel is party to a limited liability company agreement (the “LLC Agreement”) with a subsidiary of Hilco Global related to Longaberger Licensing, LLC (“LL”).

Hilco Global is the sole Class A Member of LL, and Xcel is the sole Class B Member of LL (each individually a “Member,” and collectively, the “Members”).

Since 2019, Xcel has been party to a limited liability company agreement (the “LLC Agreement”) with a subsidiary of Hilco Global related to Longaberger Licensing, LLC (“LL”).

Hilco Global is the sole Class A Member of LL, and Xcel is the sole Class B Member of LL (each individually a “Member”).

Each Member holds a 50 % equity ownership interest in LL;

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Trademarks and Other Intangibles

8 unchanged sentences

($ in thousands)

Trademarks (indefinite-lived)

Trademarks (finite-lived)

Non-compete agreement

Copyrights and other intellectual property

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

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

4 unchanged sentences

Qurate Agreements

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

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

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

Qurate owns the rights to all designs produced under the aforementioned

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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

Through its wholly owned subsidiaries, the Company has entered into direct-to-retail license agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements (individually, each a “Qurate Agreement”), pursuant to which the Company designs, and Qurate sources and sells, various products under the LOGO by Lori Goldstein brand, the Longaberger brand, and the C Wonder brand.

The Company was also previously party to similar agreements with Qurate related to the IsaacMizrahiLIVE brand and the Judith Ripka brand.

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

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

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

Xcel Commenced

Brand with QVC

LOGO Qurate Agreement

Current Term Expiry

Automatic Renewal

Brand with Qurate

Product Launch

LOGO Qurate Agreement (QVC)

November 1, 2024

one-year period

Longaberger Qurate Agreement

Longaberger Qurate Agreement (QVC)

October 31, 2025

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November 2019

Ripka Qurate Agreement

not applicable

IM Qurate Agreement

not applicable

September 2011

H Qurate Agreement

not applicable

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

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

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

C Wonder Qurate Agreement (HSN)

December 31, 2024

two-year period

● On May 31, 2022, in connection with the sale of a majority interest in the Isaac Mizrahi brand to a third party, the Qurate Agreement related to the IsaacMizrahiLIVE brand was assigned to IM Topco, LLC.

See Note 3 for additional details.

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

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

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

● On August 30, 2022, Qurate and Xcel amended the licensing agreement for the Judith Ripka brand to terminate the license period effective December 31, 2021.

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

The sell-off period ended in 2023.

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

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

Also, under the Qurate Agreements, except for the Longaberger Qurate Agreement, the Company will pay for a period of time a royalty participation fee to Qurate on revenue earned from the sale, license, consignment, or any other form of distribution of any products, bearing, marketed in connection with, or otherwise associated with the specified trademarks and brands.

Such royalty participation fees are recorded as a reduction to net licensing revenue.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

The Qurate Agreements generally prohibit the Company from selling products under the specified respective brands to a direct competitor of Qurate without Qurate’s consent.

Under certain of the Qurate Agreements, the Company may, with the permission of Qurate, sell the respective branded products via certain specified sales channels in exchange for making reverse royalty payments to Qurate based on the net retail sales of such products through such channels.

However, the Company is generally restricted from selling products under the specified respective brands or trademarks to certain mass merchants.

Also, under certain of the Qurate Agreements, the Company may be required for a period of time to pay a royalty participation fee to Qurate on revenue earned from the sale, license, consignment, or any other form of distribution of any products, bearing, marketed in connection with, or otherwise associated with the specified trademarks and brands.

Net licensing revenue from Qurate totaled $ 6.0 million and $ 11.4 million for the Current Year and Prior Year, respectively, representing approximately 34 % and 44 % of the Company’s total net revenue, respectively.

1 unchanged sentence

The December 31, 2023 and 2022 Qurate receivables did not include any earned revenue accrued but not yet billed as of the respective balance sheet dates.

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 G-III Apparel Group (“G-III”), 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 provided 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 G-III’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term.

G-III 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 G-III 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.

As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $ 4.4 million of deferred revenue contract liabilities on its consolidated balance sheet as of December 31, 2023 related to this contract, of which $ 0.9 million was classified as a current liability and approximately $ 3.5 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 5.0 years.

Net licensing revenue recognized from the Halston Master License was $ 1.6 million for the Current Year, representing approximately 9 % of the Company’s total net revenue for the Current Year.

Additionally, in connection with the Halston Master License, the Company issued to G-III 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 is being 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 Year was approximately $ 0.03 million.

As of December 31, 2023, no portion of this warrant had vested.

XCEL BRANDS, INC.

8 unchanged sentences

Long-term debt

On May 31, 2022, the Company used $ 30.1 million of the proceeds received from the transaction related to the Isaac Mizrahi Brand (see Note 3) to repay all amounts outstanding under the December 30, 2021 term loan agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”) described below, consisting of $ 28.4 million in principal amount, a $ 1.4 million prepayment fee, and approximately $ 0.3 million in interest and related expenses.

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

Term Loan Debt (through May 31, 2022)

Previous Term Loan Debt

On February 11, 2019, the Company entered into an amended loan agreement with Bank Hapoalim B.M.

(“BHI”), which amended and restated a prior term loan with BHI.

Under that amended loan agreement, the aggregate amount of all the term loans extended by BHI to Xcel was $ 22.0 million, which amount was divided into two term loans:

(1) a term loan in the amount of $ 7.3 million and (2) a term loan in the amount of $ 14.7 million.

These two term loans bore interest at a fixed rate of 5.1 % and 6.25 % per annum, respectively.

Such loan agreement was subsequently amended on April 13, 2020 and again on August 18, 2020;

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

April 2021 Term Loan Debt

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

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

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

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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

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

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

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

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

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

December 2021 Term Loan Debt

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

For the Current Year and Prior Year, the Company incurred interest expense of approximately $ 0.4 million and $ 1.2 million, respectively, related to term loan debt.

The effective interest rate related to term loan debt was approximately 11.6 % and 9.8 % for the Current Year and Prior Year, respectively.

Previous Term Loan Debt (through May 31, 2022)

On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries entered into a loan and security agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”), as lead arranger and as administrative agent and collateral agent, and the financial institutions party thereto as lenders.

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

1 unchanged sentence

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

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

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

Upon entering into the December 2021 loan agreement, Xcel paid a 1.75 % closing fee to FEAC for the benefit of the lenders;

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

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

These fees and costs totaling approximately $ 0.97 million were deferred on the Company’s balance sheet as a reduction of the carrying value of the term loan debt, to be subsequently amortized to interest expense over the term of the debt using the effective interest method.

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

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

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

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

The December 2021 term loan agreement also contained customary covenants, including reporting requirements, trademark preservation, and certain financial covenants;

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

Extinguishment of Previous Term Loan Debt

On May 31, 2022, the Company used $ 30.1 million of the proceeds received from the transaction related to the Isaac Mizrahi Brand (see Note 3) to repay all amounts outstanding under the December 30, 2021 term loan agreement with FEAC, consisting of $ 28.4 million in principal amount, a $ 1.4 million prepayment fee, and approximately $ 0.3 million in interest and related expenses.

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

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

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

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

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

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

The effective interest rate related to term loan debt was approximately 9.8 % and 8.7 % for the Current Year and Prior Year, respectively.

Revolving Loan Debt

Under the terms of the April 2021 loan agreement discussed above, the lenders made a revolving loan facility available to Xcel.

On June 24, 2021, Xcel borrowed $ 1.5 million under the aforementioned revolving loan facility, and on September 30, 2021, Xcel borrowed $ 998,000 under the revolving loan facility.

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

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

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

New Term Loan Debt

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 with Israel Discount Bank of New York (“IDB”).

Pursuant to this loan agreement, IDB made a term loan to the Company in the aggregate amount of $ 5.0 million.

The proceeds of this term loan were used to pay fees, costs, and expenses incurred in connection with entering into the loan agreement, and may be used for working capital purposes.

Such costs incurred in connection with the borrowing included a commitment fee paid to IDB, plus various legal and other fees.

These fees and costs totaling $ 0.30 million have been deferred on the Company’s balance sheet as a reduction of the carrying value of the term loan debt, and are being amortized to interest expense over the term of the debt using the effective interest method.

In connection with October 2023 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 October 2023 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 October 2023 loan agreement.

The term loan matures on October 19, 2028.

Principal on the term loan is payable in quarterly installments of $ 250,000 on each of January 2, April 1, July 1, and October 1 of 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.

As of December 31, 2023, the aggregate remaining principal payments under the October 2023 term loan were as follows:

($ in thousands)

Year Ending December 31,

Interest on the October 2023 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.

The October 2023 term 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.

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

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 October 2023 term loan principal amount.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Stockholders’ Equity

8 unchanged sentences

Stock-Based Compensation

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

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

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

Total expense recognized for all forms of stock-based compensation was approximately $ 0.22 million and $ 0.72 million in the Current Year and Prior Year, respectively.

Of the Current Year expense amount, approximately $ 0.02 related to employees and approximately $ 0.20 related to directors and consultants;

all of this expense was recorded as a direct operating cost in the accompanying statement of operations.

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

approximately $ 0.62 million was recorded as a direct operating cost and approximately $ 0.10 million was recorded within other operating costs and expenses (income).

Stock Options

5 unchanged sentences

Exercisable at December 31, 2023

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Current Year stock option grants were as follows:

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

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

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

In April 2023, the Company granted options to purchase an aggregate of 100,000 shares of common stock to a key individual.

The exercise price of the options is $ 1.50 per share, and the vesting of such options is dependent upon the achievement of certain revenue targets.

None of these options were vested as of December 31, 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.

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

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

Prior Year stock option grants were as follows:

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

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

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

1 unchanged sentence

The exercise price of the options is $ 1.62 per share.

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

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

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

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

Half of the options vested on April 20, 2023, and the remaining half of the options will vest on April 20, 2024.

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

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

The fair values of the options granted were estimated at the respective dates of grant using the Black-Scholes option pricing model with the following range of assumptions:

Year Ended December 31,

Expected Volatility

57.14 – 92.65

29.49 – 82.99

Expected Dividend Yield

7 unchanged sentences

As of December 31, 2023, none of these 3,500,000 performance-based stock options have vested, and no compensation expense has been recorded related to such options.

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

Balance at January 1, 2022

Forfeited or Canceled

Balance at December 31, 2022

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

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

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

Outstanding and exercisable at January 1, 2022

Expired/Forfeited

Outstanding and exercisable at December 31, 2022

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

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

Balance at January 1, 2023

Forfeited or Canceled

Balance at December 31, 2023

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

3 unchanged sentences

Current Year stock award grants were as follows:

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

On 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.

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.

Prior Year stock award grants were as follows:

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

Half of these shares vested on April 20, 2023, and the remaining half shall vest on April 20, 2024.

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

On May 31, 2022, the Company issued 65,275 shares of common stock to a consultant in connection with the transaction related to the Isaac Mizrahi Brand (see Note 3);

7 unchanged sentences

These shares vested immediately.

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

Prior Year stock award grants were as follows:

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

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

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

On July 1, 2021, the Company issued 9,399 shares of stock to a consultant, which vested immediately.

On October 1, 2021, the Company issued 16,892 shares of stock to a consultant, which vested immediately.

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

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

These shares vested immediately.

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

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

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

5 unchanged sentences

May 31, 2022 (i)

October 29, 2021 (i)

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Restricted Stock Units

There were no restricted stock units outstanding as of December 31, 2023 and 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

2 unchanged sentences

At December 31, 2023, there were 8,368,546 shares of common stock reserved for issuance, including 4,771,255 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 493,350 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 3,103,941 shares available for issuance under the 2021 Plan.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

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

Outstanding and exercisable at January 1, 2023

Expired/Forfeited

Outstanding at December 31, 2023

Exercisable at December 31, 2023

See Note 5 for information regarding the warrant to purchase 1,000,000 shares of common stock granted during the Current Year in connection with the Halston Master License;

the Company recognized contra-revenue of approximately $ 0.03 million in the Current Year with respect to this warrant.

There was no compensation expense related to other warrants recognized in the Current Year or Prior Year.

The Company has not paid any dividends to date.

8 unchanged sentences

Basic net loss per share

Diluted net loss per share

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

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

Stock options

Diluted net per share

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

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

Year Ended December 31,

Stock options

Commitments and Contingencies

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

The Company is party to operating leases for real estate, and for certain equipment with a term of 12 months or less.

The Company is currently not a party to any finance leases.

1 unchanged sentence

As of December 31, 2023, the weighted average remaining lease term was 3.83 years and the weighted average discount rate was 6.25 %.

The Company leases office space under an operating lease agreement related to the Company’s main headquarters located in New York City.

As of December 31, 2023, the Company leased approximately 29,600 square feet of office space at 1333 Broadway, 10th floor, New York, New York for its corporate offices and operations facility.

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

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

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

This lease shall expire on January 31, 2029;

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

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

The Company had an operating lease for its former corporate offices and operations facility, which was subleased to a third-party subtenant through February 27, 2022 , and the Company's lease of this office space expired by its terms on February 28, 2022 .

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

The Company previously leased approximately 1,300 square feet of retail space for its former retail store location in Westchester, New York, which was closed in the Prior Year.

In the Current Year, the Company successfully negotiated a settlement with the lessor resulting in the termination of this lease, and recognized a gain related to the settlement of $ 0.4 million within other operating costs and expenses (income) in the consolidated statement of operations.

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

The Company also previously leased certain office space in New York, New York, which was subleased to a third-party subtenant through February 27, 2022 , and the Company's lease of this office space expired by its terms on February 28, 2022 .

For the years ended December 31, 2023 and 2022, total lease expense included in selling, general and administrative expenses on the Company's consolidated statements of operations was approximately $ 1.6 million for both periods.

The Company’s total lease costs for the years ended December 31, 2023 and 2022 were comprised of the following:

5 unchanged sentences

Total lease cost

Cash paid for amounts included in the measurement of operating lease liabilities was $ 1.7 million and $ 2.0 million in the Current Year and Prior Year, respectively.

Cash received from subleasing was $ 0.1 million and $ 0.7 million in the Current Year and Prior Year, respectively.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

Cash paid for amounts included in the measurement of operating lease liabilities was $ 1.6 million and $ 1.7 million in the Current Year and Prior Year, respectively.

Cash received from subleasing in the Prior Year was $ 0.1 million.

As of December 31, 2023, the maturities of lease liabilities were as follows:

(in thousands)

Thereafter (through 2028)

Total lease payments

13 unchanged sentences

Contingent Obligation – Halston Heritage Earn-Out

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

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

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

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

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

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

The final royalty target year for the Halston Heritage Earn-Out ended on December 31, 2022, and the seller ultimately did not earn any additional consideration based on the formula set forth in the related asset purchase agreement.

As such, during the Prior Year, the Company recorded a $ 0.9 million gain on the reduction of contingent obligations in the accompanying consolidated statement of operations.

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

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

statement of operations.

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

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks (see Note 3 for additional information), the Company agreed to pay the seller additional cash consideration of up to $ 12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

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

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

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

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

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 ASC Subtopic 805-50.

As of December 31, 2022, based on the performance of the Lori Goldstein brand to date, approximately $ 0.2 million of additional consideration was earned by the seller, and thus $ 0.2 million of the balance was recorded as a current liability and $ 6.4 million was recorded as a long-term liability.

The $ 0.2 million of additional consideration was paid to the seller during the Current Year.

Based on the performance of the Lori Goldstein through December 31, 2023, approximately $ 1.0 million of incremental additional consideration was earned by the seller, which will be paid out in 2024.

Accordingly, as of December 31, 2023, $ 1.0 million of the remaining balance was recorded as a current liability and $ 5.4 million was recorded as a long-term liability.

Contingent Obligation – Isaac Mizrahi Transaction

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 3 for additional information), the Company has agreed with WHP that, in the event that IM Topco receives less than $ 13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from the Company up to $ 16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP.

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 3), the Company agreed with WHP that, in the event that IM Topco receives less than $ 13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP would be entitled to receive from Xcel up to $ 16 million, less all amounts of net cash flow distributed to WHP on an accumulated basis, as an adjustment to the purchase price previously paid by WHP.

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

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

In November 2023, this agreement was amended such that the purchase price adjustment provision was waived until the measurement period ending March 31, 2024.

No amount has been recorded in the accompanying consolidated balance sheets related to this contingent obligation.

The purchase price adjustment provision was subsequently further amended in April 2024 (see Note 12 for details).

Legal Proceedings

From time to time, the Company becomes involved in legal claims and litigation in the ordinary course of business.

In the opinion of management, based on consultations with legal counsel, the disposition of litigation currently pending against the Company is unlikely to have, individually or in the aggregate, a materially adverse effect on the Company’s business, financial position, results of operations, or cash flows.

In the opinion of management, based on consultations with legal counsel, the disposition of litigation pending against the Company as of December 31, 2023 is unlikely to have, individually or in the aggregate, a materially adverse effect on the Company’s business, financial position, results of operations, or cash flows.

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

Other Matters

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

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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

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

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

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

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

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

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

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

Coronavirus Pandemic

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

and the world.

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

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

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

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

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

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

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

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

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

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

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

See Note 12 for information related to certain legal matters which arose subsequent to December 31, 2023.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2023 and 2022

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

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

Years Ended December 31,

4 unchanged sentences

Total deferred

Total benefit

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

Total provision (benefit)

The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate reflected in the income tax provision (benefit) shown in the consolidated statements of operations is as follows:

Years Ended December 31,

5 unchanged sentences

Life insurance

Change in tax rate

Other permanent differences

Income tax benefit

Change in valuation allowance

Income tax (provision) benefit

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

6 unchanged sentences

Basis difference arising from discounted note payable

Foreign tax credit

Charitable contribution carryover

2 unchanged sentences

Total deferred tax assets

Valuation allowance

Total deferred tax assets, net of valuation allowance

Deferred tax liabilities

2 unchanged sentences

Net deferred tax assets

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

As of December 31, 2023 and 2022, the Company had approximately $ 28.6 million and $ 10.9 million, respectively, of federal net operating loss carryforwards ("NOLs") available to offset future taxable income.

The NOL as of December 31, 2017 of $ 0.3 million has an expiration period through 2037.

3 unchanged sentences

The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.

During the Current Year, the Company recognized a valuation allowance in order to reduce deferred tax assets to the amount expected to be realized.

The change in the valuation allowance from December 31, 2022 to December 31, 2023 was approximately $ 6.5 million.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Related Party Transactions

IM Topco, LLC

As described in Note 3, the Company holds a noncontrolling interest in IM Topco, which is accounted for under the equity method of accounting.

Services Agreement

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.

In November 2023, the services agreement was amended such that the Company agreed to provide IM Topco with a $ 600,000 reduction of future service fees over the next eighteen months, beginning on July 1, 2023.

For the year ended December 31, 2023, the Company recognized service fee income related to this agreement of $ 150,000 .

License Agreement

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 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 year ended December 31, 2023, the estimated amount of such shortfall was approximately $ 325,000 , which the Company recognized as royalty expense in the consolidated statements of operations.

In exchange, Xcel agreed to make additional royalty payments to IM Topco totaling $ 450,000 the next 11 months.

As a result of this amendment, the Company recognized a $ 450,000 increase to the carrying value basis of its equity method investment in IM Topco and a corresponding increase in current liabilities.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Isaac Mizrahi

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

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

Isaac Mizrahi is a principal stockholder and former employee of the Company.

Employment Agreement

On February 24, 2020, the Company entered into an employment agreement with Mr.

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

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

13 unchanged sentences

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

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

Also on May 31, 2022, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr.

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

Laugh Club Services Agreement

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

9 unchanged sentences

December 31, 2023 and 2022

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

Also on May 31, 2022, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr.

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

On December 4, 2023, the Company acquired a 30 % equity ownership interest in ORME, a short-form video and social commerce marketplace that is planned to launch in 2024, for a purchase price of $ 150,000 .

ORME licenses the technology utilized by its marketplace from KonnectBio Inc., in which Robert W.

D’Loren, the Company’s Chairman of the Board, Chief Executive Officer, and President, owns an approximate 20 % noncontrolling interest.

Subsequent Events

Leasing Transactions

Effective February 29, 2024, the Company entered into an operating lease for new corporate offices located at 550 Seventh Avenue, 11th floor, New York, New York.

This lease commenced in April 2024 and shall expire seven years from the commencement date in 2031.

The average annual lease cost over the term of this lease is approximately $ 0.5 million per year.

On January 26, 2024, the Company, as lessor, entered into a lease agreement for the sublease of its former corporate offices and operations facility located at 1333 Broadway, 10th floor, New York, New York to a third-party subtenant through October 30, 2027.

The average annual fixed rent over the term of this sublease is approximately $ 0.8 million per year.

As a result of entering into this sublease, the Company recognized an impairment charge of approximately $ 2.1 million related to the right-of-use asset.

The loss recognition will coincide with the departure date.

February 29, 2024 has been determined to be the date of a fundamental change to the use of the 1333 Broadway premises.

Public Offering and Private Placement

On March 15, 2024, the Company entered into an underwriting agreement with Craig-Hallum Capital Group LLC (the “Representative”), as the representative of the underwriters, relating to a firm commitment underwritten public offering (the “Offering”) of 3,284,421 shares of the Company’s common stock at a price to the public of $ 0.65 per share.

In connection with the Offering, Robert W.

D’Loren, Chairman and Chief Executive Officer of the Company;

an affiliate of Mark DiSanto, a director of the Company;

and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company, purchased 146,250 , 146,250 , and 32,500 shares of common stock, respectively.

The closing of the Offering occurred on March 19, 2024.

The net proceeds to the Company from the sale of the shares, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the Company, were approximately $ 1,735,000 .

Upon closing of the Offering, the Company issued the Representative certain warrants to purchase up to 178,953 shares of common stock (the “Representative’s Warrants”) as compensation.

The Representative’s Warrants will be exercisable at a per share exercise price of $ 0.8125 .

The Representative’s Warrants are exercisable, in whole or in part, during the four and one-half-year period commencing 180 days from the commencement of sales of the shares of common stock in the Offering.

On March 14, 2024, the Company entered into subscription agreements with each of Robert W.

D’Loren, Chairman and Chief Executive Officer of the Company;

an affiliate of Mark DiSanto, a director of the Company;

and Seth Burroughs, Executive Vice President of Business Development and Treasury of the Company to purchase 132,589 , 132,589 , and 29,464 shares, respectively (collectively, the “Private Placement Shares”), at a price of $ 0.98 per Private Placement Share.

The total number of Private Placement Shares purchased was 294,642 .

Net proceeds after payment of agent fees to the Representative were approximately $ 265,000 .

The purchase of the Private Placement Shares closed concurrently with the Offering.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

The aggregate number of shares of common stock issued from the Offering and the Private Placement was 3,579,063 shares and the total net proceeds received was approximately $ 2,000,000 .

On April 12, 2024, the Company, WHP, and IM Topco entered into amendments of the May 27, 2022 membership purchase agreement and the Business Venture Agreement.

Under these amendments, the parties agreed to the following:

● The purchase price adjustment provision within the membership purchase agreement was waived until the measurement period ending September 30, 2025.

● If IM Topco royalties are less than $ 13.5 million for the twelve-month period ending March 31, 2025 or less than $ 18.0 million for the year ending December 31, 2025, Xcel shall transfer equity interests in IM Topco to WHP equal to 12.5 % of the total outstanding equity interests of IM Topco, such that Xcel’s ownership interest in IM Topco would decrease from 30 % to 17.5 % , and WHP’s ownership interest in IM Topco would increase from 70 % to 82.5 % .

In addition, Xcel shall be obligated to make such transfer to WHP if Xcel fails to make certain payments owed to IM Topco under the second amendment (which totaled $ 375,000 as of December 31, 2023).

● On and after January 1, 2026, WHP shall receive 50 % of the Net Cash Flow which would otherwise be payable to Xcel, until WHP has received an aggregate amount of additional Net Cash Flow equal to $ 1.0 million.

Legal Matters

On February 16, 2024, counsel to Lori Goldstein, a brand spokesperson for the Company, advised the Company that the Company was in material breach of the March 31, 2021 asset purchase agreement for failure to pay $ 963,642 earned in 2023 in accordance with the provisions of the Lori Goldstein Earn-Out (as described in Note 9) under the terms of the agreement.

The Company does not dispute the amount of the Lori Goldstein Earn-Out that was achieved in 2023, and advised Ms.

Goldstein that due to Ms.

Goldstein’s failure to make all of the QVC appearances as required by her employment agreement, the Company was not willing to pay the amount due in a lump sum, but instead would make the payment in four quarterly installments.

Failure to amicably resolve this dispute could adversely affect the Company’s cash flows and the availability of Ms.

Goldstein’s services.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

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

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

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

Prior to September 30, 2021, the Company did not consult with Marcum regarding (1) the application of accounting principles to a specified transactions, (2) the type of audit opinion that might be rendered on the Company’s financial statements, (3) written or oral advice was provided that would be an important factor considered by the Company in reaching a decision as to an accounting, auditing, or financial reporting issues, or (4) any matter that was the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.

The Company’s Audit Committee of the Board of Directors participated in and approved the decision to change our independent registered public accounting firm.

There were no disagreements with the Company’s auditors which would require disclosure under Item 304(b) of Regulation S-K.

There were no disagreements with our auditors which would require disclosure under Item 304(b) of Regulation S-K.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data