What changed in this filing

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Item 1. Financial Statements

2024-05-20 compared with 2023-11-20 · 294 added, 341 removed, 207 unchanged (75% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

September 30, 2023

March 31, 2024

December 31, 2023

1 unchanged sentence

Cash and cash equivalents

Accounts receivable, net

Accounts receivable, net of allowances for credit losses of $ 75 at March 31, 2024 and December 31, 2023

Prepaid expenses and other current assets

4 unchanged sentences

Trademarks and other intangibles, net

Equity method investment

Deferred tax assets, net

Equity method investment in IM Topco, LLC

Total non-current assets

3 unchanged sentences

Deferred revenue

Accrued payroll

Accrued income taxes payable

Current portion of operating lease obligations

Current portion of contingent obligations

Current portion of long-term debt

Current portion of contingent obligation

Total current liabilities

Long-Term Liabilities:

Long-term portion of operating lease obligations

Deferred revenue

Long-term portion of contingent obligations

Long-term portion of operating lease obligations

Long-term debt, net, less current portion

Long-term portion of contingent obligation

Other long-term liabilities

Total long-term liabilities

3 unchanged sentences

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

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

Common stock, $ .001 par value, 50,000,000 shares authorized, and 23,452,117 and 19,795,053 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

4 unchanged sentences

Total direct operating costs and expenses

Operating loss before other operating costs and expenses (income)

Other operating costs and expenses (income)

Operating loss before other operating costs and expenses

Other operating costs and expenses

Depreciation and amortization

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

Operating (loss) income

Asset impairment charges

Loss from equity method investments

Operating loss

Interest and finance (income) expense

1 unchanged sentence

Other interest and finance charges (income), net

Loss on early extinguishment of debt

Total interest and finance (income) expense

(Loss) income before income taxes

Income tax (benefit) provision

Net (loss) income

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

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

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

Net loss attributable to Xcel Brands, Inc.

Loss per common share attributable to Xcel Brands, Inc.

stockholders:

Basic net (loss) income per share

Diluted net (loss) income per share

Basic and diluted net loss per share

Weighted average number of common shares outstanding:

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

Basic and diluted weighted average common shares outstanding

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

7 unchanged sentences

Compensation expense related to stock options and restricted stock

Balance as of March 31, 2022

Compensation expense related to stock options and restricted stock

Shares issued to executive related to stock grants for bonus payments

Shares repurchased from executive in exchange for withholding taxes

Shares issued to consultant in connection with stock grant

Shares issued to directors in connection with restricted stock grants

Shares issued to consultant in connection with Isaac Mizrahi sale transaction

Shares issued to key employee in connection with stock grant

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

Net income (loss)

Balance as of June 30, 2022

Compensation expense related to stock options and restricted stock

Balance as of September 30, 2022

Balance as of March 31, 2023

Balance as of December 31, 2023

Compensation expense related to stock options and restricted stock

Contra-revenue related to warrants held by licensee

Shares issued to consultant in connection with stock grant

Shares issued in connection with public offering and private placement transactions, net of transaction costs

Balance as of March 31, 2024

Compensation expense related to stock options and restricted stock

Shares issued to consultant in connection with stock grant

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

Balance as of June 30, 2023

Compensation expense related to stock options and restricted stock

Contra-revenue related to warrants granted to licensee

Shares issued to directors in connection with restricted stock grants

Shares issued to employee in connection with stock grant

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

Balance as of September 30, 2023

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3 unchanged sentences

(in thousands)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Cash flows from operating activities

Net (loss) income

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

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

Depreciation and amortization expense

2 unchanged sentences

Stock-based compensation and cost of licensee warrants

Provision for doubtful accounts

Restructuring of certain contractual arrangements

Undistributed proportional share of net loss of equity method investee

Loss on early extinguishment of debt

Deferred income tax provision

Gain on sale of majority interest in Isaac Mizrahi brand

Gain on sale of limited partner ownership interest

Gain on settlement of lease liability

Undistributed proportional share of net loss of equity method investees

Changes in operating assets and liabilities:

2 unchanged sentences

Deferred revenue

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

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

Lease-related assets and liabilities

Other liabilities

Other long-term liabilities

Net cash used in operating activities

Cash flows from investing activities

Net proceeds from sale of majority interest in Isaac Mizrahi brand

Net proceeds from sale of assets

Purchase of property and equipment

Net cash provided by investing activities

Net cash used in investing activities

Cash flows from financing activities

Proceeds from exercise of stock options

Shares repurchased including vested restricted stock in exchange for withholding taxes

Payment of long-term debt

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

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosure of non-cash activities:

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

Proceeds from public offering and private placement transactions, net of transaction costs

Net cash 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 (reported in other non-current assets)

Total cash, cash equivalents, and restricted cash

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

March 31, 2024

Nature of Operations, Background, and Basis of Presentation

3 unchanged sentences

In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position, and cash flows of Xcel Brands, Inc.

and its subsidiaries (the “Company” or "Xcel").

The results of operations for the interim periods presented herein are not necessarily indicative of the results for the entire fiscal year or for any future interim periods.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on April 19, 2024.

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.

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

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.

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

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

● The Company manages the Longaberger Brand through its 50 % ownership interest in Longaberger Licensing, LLC;

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

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

On May 31, 2022, the Company sold to a third party a majority interest in a newly-created subsidiary that was formed to hold the Isaac Mizrahi Brand trademarks, but retained a noncontrolling interest in the brand through a 30 % ownership interest in IM Topco, LLC, and continues to contribute to the operations of the brand through a service agreement (see Note 11 for additional details).

● The Company holds a noncontrolling interest in the Isaac Mizrahi Brand through its 30 % ownership interest in IM Topco, LLC;

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

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

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

March 31, 2024

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

The Company’s former wholesale and direct-to-consumer operations were presented as "Net sales" and "Cost of goods sold" in the condensed consolidated statements of operations, separately from the Company’s licensing revenues.

Liquidity and Management’s Plans

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

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

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent obligations payable in common stock) of approximately $ 2.9 million as of September 30, 2023.

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

The Company incurred a net loss attributable to Company stockholders of approximately $ 6.3 million during the three months ended March 31, 2024 (which included non-cash expenses of approximately $ 4.6 million), and had an accumulated deficit of approximately $ 60.1 million as of March 31, 2024.

Net cash used in operating activities was approximately $ 2.6 million for the three months ended March 31, 2024.

The Company had working capital (current assets less current liabilities, excluding the current portions of lease obligations, deferred revenue, and any contingent obligations payable in common stock) of approximately $ 2.1 million as of March 31, 2024.

The Company’s unrestricted cash and cash equivalents were approximately $ 1.6 million as of March 31, 2024.

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

Management has implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting the business from a wholesale/licensing hybrid model into a “licensing-plus” business model.

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

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

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

For apparel, similar transactions have been executed.

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

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

In the second quarter of 2023, the Company entered into a new master license agreement for the Halston Brand, covering men’s, women’s, and children’s apparel, fashion accessories, and other product categories, with an industry-leading wholesale apparel company for distribution through department stores, e-commerce, and other retailers (see Note 4).

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

The transition of these operating businesses was substantially completed by the end of the second quarter of 2023.

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.

To affect this transition, the Company entered into various new licensing agreements and joint venture arrangements with best-in-class business partners.

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

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

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

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

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

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

As of December 31, 2023, the Company had 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.

Also during the year ended December 31, 2023, the Company entered into a new term loan agreement in the amount of $ 5 million, which provided the Company with additional liquidity.

Further, in March 2024, the Company issued new shares of common stock for net proceeds of approximately $ 1.9 million, which provided the Company with additional liquidity.

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

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of March 31, 2024, have been alleviated.

Investments in Unconsolidated Affiliates and Variable Interest Entities

Investment in IM Topco, LLC

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

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

Recently Adopted Accounting Pronouncements

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

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

Measurement of Credit Losses on Financial Instruments"

(as amended by ASU No.

2018-19 in November 2018, ASU No.

2019-05 in May 2019, ASU No.

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

2020-02 in February 2020, and ASU No.

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

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

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

Equity Method Investment

IM Topco, LLC

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

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

The Company recognized a net pre-tax gain from the transaction of $ 20.6 million, which is classified within “other operating costs and expense (income)” in the condensed consolidated statements of operations for the nine months ended September 30, 2022.

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

March 31, 2024

The Company accounts for its 30 % interest in the ongoing operations of IM Topco as other operating costs and expenses under the equity method of accounting.

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

2 unchanged sentences

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

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

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

Based on these distribution provisions, the Company recognized an equity method loss of $ 0.52 million related to its investment in IM Topco for each of the three-month periods ended March 31, 2024 and 2023.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

As such, Xcel recognized no cash-based earnings for both 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 Xcel’s share of amortization expense.

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

Summarized financial information for IM Topco for the three months ended March 31, 2024 and 2023 is as follows:

For the three months ended

For the nine months ended

September 30,

($ 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 September 30, 2022.

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

Loss from continuing operations

Refer to Notes 10, 11, and 12 for other information regarding the Company’s ongoing relationship with IM Topco.

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 condensed consolidated balance sheets.

The Company accounts for its 30 % interest in the operations of ORME as a component of other operating costs and expenses under the equity method of accounting.

The Company’s proportional share of the operating results of ORME for the three months ended March 31, 2024 was a loss of approximately $ 0.02 million.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2024

Longaberger Licensing, LLC Variable Interest Entity

Since 2019, Xcel has been party to a limited liability company 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;

however, based on an analysis of the contractual terms and rights contained in the LLC agreement and related agreements, the Company has previously determined that under the applicable accounting standards, LL is a variable interest entity and the Company has effective control over LL.

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.

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

September 30, 2023

March 31, 2024

Gross Carrying

7 unchanged sentences

Copyrights and other intellectual property

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

Amortization expense for intangible assets was approximately $ 1.53 million for the three-month period ended March 31, 2024 (the "current quarter") and approximately $ 1.54 million for the three-month period ended March 31, 2023 (the "prior year quarter").

Significant Contracts and Concentrations

Halston Master License

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

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

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

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

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

The balance of the deferred revenue contract liabilities will be recognized ratably as revenue over the next 5.25 years .

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

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

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

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

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

Qurate Agreements

3 unchanged sentences

Net licensing revenue from the Qurate Agreements totaled $ 1.61 million and $ 1.52 million for the current quarter and prior year quarter, respectively, representing approximately 59 % and 25 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

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

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

● As of September 30, 2023 and December 31, 2022, the Company had receivables from Qurate of $ 1.6 million and $ 0.9 million, respectively, representing approximately 34 % and 17 % of the Company’s total net accounts receivable, respectively.

Accounts Receivable

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

Such allowances were approximately $ 0.02 million and $ 0.00 as of September 30, 2023 and December 31, 2022, respectively.

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

($ in thousands)

Balance at December 31, 2022

Credit loss expense (1)

Balance at September 30, 2023

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

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

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

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

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

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

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

Also, as of September 30, 2023 and December 31, 2022, approximately $ 0.33 million and $ 1.65 million, respectively, of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the third quarter of 2022, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit.

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

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

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

March 31, 2024

As of March 31, 2024 and December 31, 2023, the Company had receivables from Qurate of $ 1.3 million and $ 1.5 million, respectively, representing approximately 37 % and 43 % of the Company’s total net accounts receivable, respectively.

Halston Master License

On May 15, 2023, the Company, through its wholly owned 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 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 $ 4.2 million and $ 4.4 million of deferred revenue contract liabilities on its condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023, respectively.

As of December 31, 2023, $ 0.9 million of the contract liability balance was classified as a current liability and approximately $ 3.5 million was classified as a long-term liability.

As of March 31, 2024, $ 0.9 million of the contract liability balance was classified as a current liability and approximately $ 3.3 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 4.13 years .

Net licensing revenue recognized from the Halston Master License was $ 0.6 million for the current quarter, representing approximately 30 % of the Company’s total net revenue for the current quarter.

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.

Lease expense (net of sublease income) included in selling, general and administrative expenses on the Company’s condensed consolidated statements of operations was approximately $ 0.2 million and $ 0.4 million for the current quarter and prior year quarter, respectively.

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

1333 Broadway

The Company has an operating lease for offices located at 1333 Broadway, 10th floor, New York, New York, which commenced on March 1, 2016 and expires on October 30, 2027 .

The average annual fixed rent over the term of this lease is approximately $ 1.3 million per year, and the lease requires the Company to pay additional rents related to increases in certain taxes and other costs on the property.

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

As of September 30, 2023, the Company’s real estate lease has a remaining lease term of approximately 4.08 years, and the lease liability is measured using a discount rate of 6.25 %.

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

Cash paid for amounts included in the measurement of operating lease liabilities was approximately $ 0.4 million in both the current quarter and prior year quarter, approximately $ 1.2 million in the current nine months, and approximately $ 1.3 million in the prior year nine months.

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

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

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

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

Under the settlement agreement, the Company paid $ 0.18 million to the lessor during the nine months ended September 30, 2023.

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

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

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

March 31, 2024

On January 26, 2024, the Company (as sublessor) entered into an agreement for the sublease of the offices located at 1333 Broadway to a third-party subtenant through October 30, 2027.

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

As a result of entering into the sublease, the Company recognized a non-cash impairment charge of approximately $ 1.9 million effective February 29, 2024 (which was determined to be the date of a fundamental change to the use of the 1333 Broadway premises) related to the right-of-use asset.

Also in connection with entering into the sublease, the Company recognized a non-cash impairment charge of approximately $ 0.4 million during the current quarter related to leasehold improvement assets at this location.

As of March 31, 2024, the Company’s lease of 1333 Broadway has a remaining lease term of approximately 3.58 years, and the lease liability recorded on the Company’s condensed consolidated balance sheet is measured using a discount rate of 6.25 %.

550 Seventh Avenue

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 expires in April 2031.

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

As of March 31, 2024, no right-of-use asset or lease liability was recorded in the Company’s condensed consolidated balance sheet related to this lease, as the lease had not yet commenced.

Future Lease Obligations

As of March 31, 2024, the maturities of lease obligations were as follows:

(in thousands)

2023 (October 1 through December 31)

2024 (April 1 through December 31)

Total lease payments

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Non-current portion of lease liabilities

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

($ in thousands)

Term loan debt

Unamortized deferred finance costs related to term loan debt

Current portion of debt

Long-term debt

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

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

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

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

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

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

March 31, 2024

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 $ 0.3 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 this term 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 March 31, 2024, the aggregate remaining principal payments under the term loan were as follows:

($ in thousands)

Year Ending December 31,

2024 (April 1 through December 31)

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

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

Interest on the term loan is payable on the first day of each calendar month.

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.

The fair value of this swap agreement was immaterial as of March 31, 2024 and December 31, 2023.

For the current quarter, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.15 million, reflecting an effective interest rate of approximately 11.6 %.

The term loan agreement also contains customary covenants, including reporting requirements, trademark preservation, and certain financial covenants including annual guaranteed minimum royalty ratio, annual fixed charge coverage ratio,

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2024

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.

Stockholders’ Equity

Public Offering and Private Placement Transactions

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 3,284,422 shares of the Company’s common stock at a price to the public of $ 0.65 per share.

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 $ 1.7 million.

Upon closing of the Offering, the Company issued the Representative certain warrants to purchase up to 182,952 shares of common stock (the “Representative’s Warrants”) as compensation, which amount was offset against the proceeds received.

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.

In connection with 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 $ 0.3 million.

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

The aggregate number of shares of common stock issued from the Offering and the Private Placement was 3,579,064 shares and the total net proceeds received was approximately $ 1.9 million.

Equity Incentive Plans

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Stock-based Compensation

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

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

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

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

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

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

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

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

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

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

For stock option awards for which vesting is contingent upon the achievement of certain performance targets, the timing and amount of compensation expense

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

the accompanying condensed consolidated statements of operations.

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

Approximately $ 0.57 million of the prior year nine months expense was recorded as operating costs, and approximately $ 0.10 million was recorded as part of other operating costs and expenses (income).

March 31, 2024

recognized is based upon the Company’s projections and estimates of the relevant performance metric(s) until the time the performance obligation is satisfied.

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

Total expense recognized for all forms of stock-based compensation was approximately $ 0.13 million and $ 0.06 million for the current quarter and prior year quarter, respectively.

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

Stock Options

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

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

Outstanding at January 1, 2024

Expired/Forfeited

Outstanding at September 30, 2023, and expected to vest

Exercisable at September 30, 2023

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

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

Outstanding at March 31, 2024, and expected to vest

Exercisable at March 31, 2024

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

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

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

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

Total unrecognized compensation expense related to unvested stock options at March 31, 2024 was approximately $ 0.05 million and is expected to be recognized over a weighted average period of approximately 0.97 years.

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

Balance at January 1, 2024

Forfeited or Canceled

Balance at September 30, 2023

Balance at March 31, 2024

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

Outstanding and exercisable at January 1, 2023

Expired/Forfeited

Outstanding at September 30, 2023

Exercisable at September 30, 2023

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

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

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

March 31, 2024

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

Outstanding at January 1, 2024

Expired/Forfeited

Outstanding at September 30, 2023

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

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

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

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.

Outstanding at March 31, 2024

On January 12, 2024, the Company issued 78,000 shares of common stock to a consultant, which shares vested immediately.

Compensation expense related to stock awards was approximately $ 0.11 million for the current quarter and approximately $ 0.03 million for the prior year quarter.

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

Total unrecognized compensation expense related to unvested restricted stock grants at March 31, 2024 was approximately $ 0.04 million and is expected to be recognized over a weighted average period of approximately 0.96 years.

Restricted Stock Units

There were no restricted stock units outstanding as of September 30, 2023 and December 31, 2022, and no restricted stock units have been issued since the inception of the 2021 Plan.

There were no restricted stock units outstanding as of March 31, 2024 and December 31, 2023, and no restricted stock units have been issued since the inception of the 2021 Plan.

Shares Available Under the Company’s Equity Incentive Plans

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

At March 31, 2024, there were 3,025,941 shares of common stock available for future award grants under the 2021 Plan.

Shares Reserved for Issuance

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

As of March 31, 2024, there were 8,031,046 shares of common stock reserved for issuance, including 4,511,755 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 3,025,941 shares available for issuance under the 2021 Plan.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2024

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

Outstanding and exercisable at January 1, 2024

Expired/Forfeited

Outstanding at March 31, 2024

Exercisable at March 31, 2024

Warrants issued during the current quarter were related to the March 19, 2024 Offering (see “Public Offering and Private Placement Transactions” above for details).

There was no compensation expense recognized during the current quarter related to these warrants.

In connection with the entrance into the Halston Master License (see Note 4), 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 quarter was approximately $ 0.01 million.

As of March 31, 2024, no portion of this warrant had vested.

Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury stock method.

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

Diluted EPS reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants, using the treasury stock method.

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

The following table is a reconciliation of the numerator and denominator of the basic and diluted net (loss) income per share computations for the three and nine months ended September 30, 2023 and 2022:

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2024

The following table is a reconciliation of the numerator and denominator of the basic and diluted net loss per share computations for the three months ended March 31, 2024 and 2023:

Three Months Ended

Nine Months Ended

September 30,

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

Net loss attributable to Xcel Brands, Inc.

stockholders (in thousands)

3 unchanged sentences

Diluted weighted average number of shares outstanding

Basic net (loss) income per share

Diluted net (loss) income per share

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

Basic net loss per share

Diluted net loss per share

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

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

Three Months Ended

Nine Months Ended

September 30,

Stock options

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

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

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

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

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2024

Related Party Transactions

IM Topco, LLC

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

As described in Note 2, the Company holds a noncontrolling interest in IM Topco, which is accounted for under the equity method of accounting.

Service 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.

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

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

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.

The Company recognized service fee income related to this agreement of $ 37,500 and $ 75,000 for the current quarter and prior year quarter, respectively.

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

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 prior year quarter, the estimated amount of such shortfall was approximately $ 60,000 , which the Company recognized as royalty expense in the condensed consolidated statements of operations.

In November 2023, the Company, WHP, and IM Topco entered into an amendment of the May 27, 2022 membership purchase agreement, under which Xcel agreed to make additional royalty payments to IM Topco totaling $ 450,000 over 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.

No amounts were paid to IM Topco during the current quarter, and as of March 31, 2024, the remaining payments due totaled $ 375,000 .

Financing Transactions

Public Offering and Private Placement Transactions

In connection with the Offering of 3,284,422 shares of the Company’s common stock at a price to the public of $ 0.65 per share which was consummated on March 19, 2024 (see Note 7 for additional details), 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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

December 31, 2026, and provided guaranteed minimum royalties to IM Topco of $ 400,000 per year.

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

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

March 31, 2024

32,500 shares, respectively, at $ 0.65 per share, the same price at which the shares were sold to other purchasers in the Offering.

In connection with the Offering, on March 14, 2024, the Company entered into subscription agreements with each of Mr.

DiSanto, and Mr.

Burroughs 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 $ 0.3 million.

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

Commitments and Contingencies

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, 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.

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

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

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

Contingent Obligation – Lori Goldstein Earn-Out

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The Lori Goldstein Earn-Out was initially recorded as a liability of $ 6.6 million, based on the difference between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid, in accordance with the guidance in 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 by the seller to date, and this amount was paid to the seller during the current nine months.

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

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

Contingent Obligation – Isaac Mizrahi Transaction

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

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

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

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

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

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

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

Legal Proceedings

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 this $ 0.2 million of additional consideration was paid to the seller during 2023.

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.

During the current quarter, the Company paid approximately $ 0.3 million of the $ 1.0 million earned, and as of March 31, 2024, $ 0.7 million of the remaining balance was recorded as a current liability and $ 5.4 million was recorded as a long-term liability.

Legal Matters

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.

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

Subsequent Events

Restructuring of Certain Contractual Arrangements

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

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

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

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

IDB Term Loan and Interest Rate Swap

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

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

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

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

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

The Term Loan matures on October 19, 2028.

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

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

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

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

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

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2023

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

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

Longaberger Brand E-Commerce Agreement

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

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

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

Amendments Related to IM Topco

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

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

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

March 31, 2024

With the exception of the matter described in detail below, 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.

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 Asset Purchase Agreement dated March 31, 2021 (the “Asset Purchase Agreement”) by and among Gold Licensing LLC (“Gold” and, together with Xcel, the ”Xcel Parties”), a subsidiary of the Company, and Lori Goldstein and Lori Goldstein, Ltd.

(“LG Ltd” and, together with Lori Goldstein, the “LG Parties”) for failure to pay $ 963,642 earned in 2023 in accordance with the earn-out provisions 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 the alleged breaches described below, the Company was not willing to pay this amount at such time.

The Company subsequently paid approximately $ 241,000 of the earn-out payment.

On May 2, 2024, the Xcel Parties made a written demand for arbitration and commenced an arbitration proceeding against the LG Parties for, among other things, alleged breaches of the Asset Purchase Agreement and alleged breaches of Ms.

Goldstein’s employment agreement with the Company.

The Company is seeking compensatory damages and consequential damages.

Additionally, on May 2, 2024, the Company terminated the employment agreement and the consulting agreement between the Company and LG Ltd.

The parties are negotiating to resolve all outstanding disputes and, if an agreement is reached, it may include, among other things, a disposition of the Lori Goldstein brands and related assets to LG Ltd.

By agreement between the Company and Ms.

Goldstein, while negotiations continue, Ms.

Goldstein is continuing to comply with her material obligations to QVC.

There can be no assurance that these disputes will be resolved in a manner favorable to the Company or at all.

As of the filing date of this Quarterly Report on Form 10-Q, there have been no definitive agreements or terms agreed to by the parties, and it is not certain when or if an agreement will be executed.

Subsequent Events

On April 12, 2024, the Company, WHP, and IM Topco entered into amendments of the May 27, 2022 (and as subsequently amended) membership purchase agreement and the related 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 by October 10, 2024 under the second amendment (which totaled $ 375,000 as of December 31, 2023 and March 31, 2024).

In April 2024, Xcel paid $ 100,000 of this amount to WHP.

● 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.

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

What changed 10-Q

Item 1. Financial Statements