What changed in this filing

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Item 1. Financial Statements

2024-12-20 compared with 2024-08-14 · 255 added, 188 removed, 407 unchanged (52% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

June 30, 2024

September 30, 2024

December 31, 2023

1 unchanged sentence

Cash and cash equivalents

Accounts receivable, net of allowances for credit losses of $ 30 and $ 75 at June 30, 2024 and December 31, 2023, respectively

Accounts receivable, net of allowances for credit losses of $ 30 and $ 75 at September 30, 2024 and December 31, 2023, respectively

Prepaid expenses and other current assets

4 unchanged sentences

Trademarks and other intangibles, net

Equity method investments

Equity method investments, net

Total non-current assets

6 unchanged sentences

Current portion of long-term debt

Current portion of contingent obligation

Current portion of contingent obligations

Total current liabilities

10 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 23,492,117 and 19,795,053 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 23,581,290 and 19,795,053 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

9 unchanged sentences

Loss from equity method investments

Reduction in equity ownership of IM TopCo, LLC

Gain on divestiture of Lori Goldstein Brand

1 unchanged sentence

Gain on settlement of lease liability

Operating income (loss)

Operating loss

Interest and finance expense (income), net

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

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

Net loss attributable to Xcel Brands, Inc.

Earnings (loss) per common share attributable to Xcel Brands, Inc.

21 unchanged sentences

Balance as of June 30, 2023

Compensation expense related to stock options and restricted stock

Contra-revenue related to warrants held by 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

Balance as of December 31, 2023

9 unchanged sentences

Balance as of June 30, 2024

Compensation expense related to stock options and restricted stock

Contra-revenue related to warrants granted to licensee

Shares issued to employee in connection with stock grant

Shares issued to executives for pro rata portion of base salaries, net of withholding taxes

Balance as of September 30, 2024

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities

5 unchanged sentences

Provision for (recovery of) credit losses

Restructuring of certain contractual arrangements

Undistributed proportional share of net loss of equity method investees

Change in contingent obligation related to equity method investee

Gain on divestiture of Lori Goldstein brand

14 unchanged sentences

Cash flows from financing activities

Proceeds from exercise of stock options

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

Shares repurchased including vested restricted stock in exchange for withholding taxes

Payment of long-term debt

17 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

September 30, 2024

Nature of Operations, Background, and Basis of Presentation

21 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

September 30, 2024

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

2 unchanged sentences

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.

The only net sales and cost of goods sold recognized for the three and six months ended June 30, 2024 were related to the final sale of certain residual jewelry inventories;

as of June 30, 2024, the Company has no remaining jewelry inventory.

The Company’s remaining inventory as of June 30, 2024 all relates to the Longaberger Brand, and the Company plans to sell off this remaining inventory by December 31, 2024.

The only net sales and cost of goods sold recognized for the nine months ended September 30, 2024 were (i) the final sale of certain residual jewelry inventories during the three months ended June 30, 2024 and (ii) the sale of all remaining inventory related to the Longaberger Brand during the three months ended September 30, 2024.

As of September 30, 2024, the Company has no remaining inventory.

Liquidity and Management’s Plans

The Company incurred a net loss attributable to Company stockholders of approximately $ 6.1 million during the six months ended June 30, 2024 (which included non-cash expenses of approximately $ 7.7 million), and had an accumulated deficit of approximately $ 59.9 million as of June 30, 2024.

Net cash used in operating activities was approximately $ 2.9 million for the six months ended June 30, 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 $ 1.1 million as of June 30, 2024.

The Company’s unrestricted cash and cash equivalents were approximately $ 0.9 million as of June 30, 2024.

The Company incurred a net loss attributable to Company stockholders of approximately $ 15.3 million during the nine months ended September 30, 2024 (which included non-cash expenses of approximately $ 15.8 million and a $ 3.80 million non-cash gain on the divestiture of the Lori Goldstein Brand), and had an accumulated deficit of approximately $ 69.2 million as of September 30, 2024.

Net cash used in operating activities was approximately $ 3.3 million for the nine months ended September 30, 2024, of which $ 2.6 million of the cash used in operating activities was attributable to the three months ended March 31, 2024.

The Company had unrestricted cash and cash equivalents of approximately $ 0.2 million as of September 30, 2024, and a working capital deficit (current assets less current liabilities, excluding the current portions of lease obligations, deferred revenue, and any contingent obligations payable in shares) of approximately $( 0.4 ) million as of September 30, 2024.

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

However, in December 2024, the Company entered into a new term loan agreement for an aggregate amount of $ 10 million, which provides the Company with approximately $ 3.5 million of additional liquidity after repayment of the previous term loan (see Note 13 for additional details).

In connection with the new term loan debt, Company’s working capital increased by approximately $ 4.5 million subsequent to September 30, 2024.

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 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 2022.

In addition, during the first six months of 2024, management took actions which further reduced direct operating expenses to a run rate of approximately $ 12.5 million per annum, and going forward beginning in the third quarter of 2024, will reduce operating expenses to a run rate of approximately $ 10 million per annum, due to the elimination of expenses related to the Lori Goldstein Brand and reduction of executive cash compensation.

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.

During the six months ended June 30, 2024, the Company issued new shares of common stock for net proceeds of approximately $ 1.9 million, which provided the Company with additional liquidity.

Additionally, the Company entered into a divestiture transaction which relieved the Company of its contractual obligations to make future cash payments of approximately $ 1.0 million, and also relieved the Company of a potential future contingent obligation to make future cash payments of up to $ 11.3 million.

These restructuring initiatives included entering into various new licensing agreements and joint venture arrangements with best-in-class business partners, and reducing the Company’s payroll, overhead, and other operating costs by approximately $ 15 million on an annualized basis when compared to 2022.

During the first nine months of 2024, management took further actions to optimize its cost structure and manage its liquidity, including entering into a divestiture transaction (see Note 3 for details) which eliminated certain operating and compensation expenses, relieved the Company of its contractual obligations to make future cash payments of approximately $ 1 million, and relieved the Company of a potential future contingent obligation to make future cash payments of up to approximately $ 11 million.

As of the third quarter of 2024, the Company has reduced its direct operating expenses to a current run rate of approximately $ 11 million per annum.

Also during the first nine months of 2024, the Company issued new shares of common stock for net proceeds of approximately $ 2 million.

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of June 30, 2024, have been alleviated.

September 30, 2024

and uncertainties with respect to the Company’s ability to continue as a going concern as of September 30, 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.

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.

On May 31, 2022, Xcel sold 70 % of the membership interests of IM Topco, LLC (“IM Topco”), a former subsidiary which holds the trademarks and other intellectual property rights relating to the Isaac Mizrahi Brand, to a subsidiary of WHP Global (“WHP”), a private equity-backed brand management and licensing company.

The Company accounts for its 30 % retained interest in the ongoing operations of IM Topco as a component of 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:

3 unchanged sentences

Further, on April 12, 2024, the Company, WHP, and IM Topco entered into an amendment of the business venture agreement, such that 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 $ 1,000,000 .

Based on these distribution provisions, the Company recognized an equity method loss related to its investment in IM Topco of $ 0.52 million for each of the three-month periods ended June 30, 2024 and 2023, and $ 1.03 million for each of the six-month periods ended June 30, 2024 and 2023.

Based on these distribution provisions, the Company recognized an equity method loss related to its investment in IM Topco of $ 0.52 million for each of the three-month periods ended September 30, 2024 and 2023, and $ 1.55 million for each of the nine-month periods ended September 30, 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.

1 unchanged sentence

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.

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

Summarized financial information for IM Topco for the three and nine months ended September 30, 2024 and 2023 is as follows:

For the three months ended

For the nine months ended

September 30,

($ in thousands)

Loss from continuing operations

Purchase Price Adjustment:

In accordance with the May 31, 2022 membership interest purchase agreement, as amended, WHP (as buyer) may be entitled to receive from Xcel 12.5 % of the total outstanding equity interests of IM Topco if, during

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

Summarized financial information for IM Topco for the three and six months ended June 30, 2024 and 2023 is as follows:

For the three months ended

For the six months ended

($ in thousands)

(Loss) income from continuing operations

Net (loss) income

September 30, 2024

the twelve-month period ending March 31, 2025, IM Topco receives less than $ 13.5 million in aggregate royalties (the “Purchase Price Adjustment”).

Based on current trends and projections of IM Topco’s revenues, the Company estimates that there is high likelihood that IM Topco’s revenues will be less than the required minimum and the Company will be obligated to transfer the required membership interests to WHP in accordance with the Purchase Price Adjustment.

The Company has recorded a contingent obligation of approximately $ 6.3 million as a reduction to the carrying value of the equity method investment as of September 30, 2024, based on the expected March 31, 2025 value of the potential transferred membership interest.

Refer to Note 11 and Note 12 for additional information regarding the Company’s ongoing relationship with IM Topco.

1 unchanged sentence

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 was $ 0.09 million and $ 0.15 million as of June 30, 2024 and December 31, 2023, respectively, and is included within other assets in the Company’s condensed consolidated balance sheets.

The carrying value of this investment was $ 0.01 million and $ 0.15 million as of September 30, 2024 and December 31, 2023, respectively.

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 and six months ended June 30, 2024 was a loss of approximately $ 0.04 million and $ 0.06 million, respectively.

The Company’s proportional share of the operating results of ORME for the three and nine months ended September 30, 2024 was a loss of approximately $ 0.08 million and $ 0.14 million, respectively.

Longaberger Licensing, LLC Variable Interest Entity

10 unchanged sentences

● The LG Parties waived their rights with respect to certain contingent consideration amounts that had been previously earned by the LG Parties (under the terms of the April 1, 2021 purchase of the assets by Xcel), and terminated their rights to any future earn-out payments.

● The Company retained the right to all royalties and fee income for net sales from licensees related to the Lori Goldstein Brand through the closing date.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

● The Company retained the right to all royalties and fee income for net sales from licensees related to the Lori Goldstein Brand through the closing date.

September 30, 2024

● The Company’s May 2, 2024 termination of the employment agreement and consulting agreement with the LG Parties was withdrawn and stayed until the closing date.

5 unchanged sentences

The remaining unamortized net book value of the Lori Goldstein intangible assets immediately prior to the sale was approximately $ 1.93 million, and the Company also incurred approximately $ 0.35 million of legal fees in connection with this transaction.

As such, the Company recorded a net non-cash gain on the divestiture of the Lori Goldstein Brand of approximately $ 3.80 million for the three and six months ended June 30, 2024.

Accordingly, the Company recorded a net non-cash gain on the divestiture of the Lori Goldstein Brand of approximately $ 3.80 million for the nine months ended September 30, 2024.

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

June 30, 2024

September 30, 2024

Gross Carrying

7 unchanged sentences

Copyrights and other intellectual property

Amortization expense for intangible assets was approximately $ 1.52 million for the three-month period ended June 30, 2024 (the "current quarter") and approximately $ 1.54 million for the three-month period ended June 30, 2023 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 3.06 million for the six-month period ended June 30, 2024 (the "current six months") and approximately $ 3.07 million for the six-month period ended June 30, 2023 (the "prior year six months").

Amortization expense for intangible assets was approximately $ 0.89 million for the three-month period ended September 30, 2024 (the "current quarter") and approximately $ 1.53 million for the three-month period ended September 30, 2023 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 3.95 million for the nine-month period ended September 30, 2024 (the "current nine months") and approximately $ 4.60 million for the nine-month period ended September 30, 2023 (the "prior year nine months").

On June 30, 2024, the Company sold certain trademarks with a net book value of approximately $ 1.93 million (gross carrying amount of $ 10.30 million and accumulated amortization of approximately $ 8.37 million) related to the Lori Goldstein Brand (see Note 3 for additional details).

2 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

September 30, 2024

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

($ in thousands)

Year Ending December 31,

2024 (October 1 through December 31)

Thereafter (through 2036)

Significant Contracts and Concentrations

4 unchanged sentences

Net licensing revenue from the Qurate Agreements totaled $ 0.26 million and $ 1.51 million for the current quarter and prior year quarter, respectively, representing approximately 14 % and 57 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

Net licensing revenue from the Qurate Agreements totaled $ 3.01 million and $ 3.28 million for the current six months and prior year six months, respectively, representing approximately 59 % and 26 % of the Company’s total net revenue for the current six months and prior year six months, respectively.

As of June 30, 2024 and December 31, 2023, the Company had receivables from Qurate of $ 0.77 million and $ 1.5 million, respectively, representing approximately 25 % and 43 % of the Company’s total net accounts receivable, respectively.

Due to the divestiture of the Lori Goldstein Brand on June 30, 2024 (see Note 3 for details), the Company’s total net revenue, as well as the relative proportional share of total net revenue and total accounts receivable attributable to the Qurate Agreements, will decrease in future periods;

Net licensing revenue from the Qurate Agreements totaled $ 3.27 million and $ 4.80 million for the current nine months and prior year nine months, respectively, representing approximately 46 % and 31 % of the Company’s total net revenue for the current nine months and prior year nine months, respectively.

As of September 30, 2024 and December 31, 2023, the Company had receivables from Qurate of $ 0.27 million and $ 1.3 million, respectively, representing approximately 9 % and 37 % of the Company’s total net accounts receivable, respectively.

Due to the divestiture of the Lori Goldstein Brand on June 30, 2024 (see Note 3 for details), the Company’s total net revenue and accounts receivable, as well as the relative proportional share of total net revenue and total accounts receivable attributable to the Qurate Agreements, have decreased;

however, due to the Company’s other brands, management expects that Qurate will remain a significant licensee.

1 unchanged sentence

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 $ 4.0 million and $ 4.4 million of deferred revenue contract liabilities on its condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively.

As of December 31, 2023, approximately $ 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.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

As of June 30, 2024, approximately $ 0.9 million of the contract liability balance was classified as a current liability and approximately $ 3.1 million was classified as a long-term liability.

September 30, 2024

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 in accordance with the terms of the Halston Master License.

As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $ 3.8 million and $ 4.4 million of deferred revenue contract liabilities on its condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023, respectively.

As of December 31, 2023, approximately $ 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 September 30, 2024, approximately $ 0.9 million of the contract liability balance was classified as a current liability and approximately $ 2.9 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 4.25 years.

Net licensing revenue recognized from the Halston Master License was $ 0.65 million and $ 1.29 million for the current quarter and current six months, respectively, representing approximately 22 % and 25 % of the Company’s total net revenue for the current quarter and current six months, respectively.

Net licensing revenue recognized from the Halston Master License was $ 0.64 million for both the current quarter and prior year quarter, representing approximately 33 % and 25 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

Net licensing revenue recognized from the Halston Master License was $ 1.93 million and $ 0.98 million for the current nine months and prior year nine months, respectively, representing approximately 27 % and 6 % of the Company’s total net revenue for the current nine months and prior year nine months, respectively.

JTV / America’s Collectibles Network, Inc.

The Company has a license agreement with America’s Collectibles Network, Inc.

(d/b/a JTV) (“JTV”) that obligates JTV to pay the Company royalties based on product sales of Judith Ripka Brand merchandise.

In addition, the Company has outstanding receivables from prior product sales of fine jewelry made to JTV.

As of September 30, 2024 and December 31, 2023, the Company had receivables from JTV of $ 1.31 million and $ 1.37 million, respectively, representing approximately 45 % and 40 % of the Company’s total net accounts receivable, respectively.

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 of approximately $ 0.2 and $ 0.3 million for the current quarter and current six months, respectively) included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $ 0.2 million for the current quarter, approximately $ 0.4 million for the prior year quarter, approximately $ 0.4 million for the current six months, and approximately $ 0.8 million for the prior year six months.

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

As of June 30, 2024, the Company’s real estate leases have a weighted-average remaining lease term of approximately 4.97 years, and the lease liabilities are measured using a weighted-average discount rate of 7.71 %.

Lease expense (net of sublease income of approximately $ 0.2 and $ 0.5 million for the current quarter and current nine months, respectively) included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $ 0.3 million for the current quarter, approximately $ 0.4 million for the prior year quarter, approximately $ 0.7 million for the current nine months, and approximately $ 1.2 million for the 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, and approximately $ 1.2 million in both the current nine months and prior year nine months.

As of September 30, 2024, the Company’s real estate leases have a weighted-average remaining lease term of approximately 4.82 years, and the lease liabilities are measured using a weighted-average discount rate of 7.78 %.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

1333 Broadway Lease

3 unchanged sentences

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 first quarter of 2024 related to leasehold improvement assets at this location.

During the current quarter, the Company revised its estimates of future cash flows related to the 1333 Broadway premises (primarily as a result of new information) and accordingly recognized additional impairment charges related to this lease of approximately $ 1.2 million.

A portion of the impairment charges recorded in the current quarter were related to an understatement of the asset impairment charge reported for the first quarter of 2024;

see Note 13 for additional information.

As of June 30, 2024, the Company’s lease of 1333 Broadway has a remaining lease term of approximately 3.33 years.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

As a result of entering into the sublease, the Company recognized non-cash impairment charges of approximately $ 3.1 million during the current nine months 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 nine months related to leasehold improvement assets at this location.

As of September 30, 2024, the Company’s lease of 1333 Broadway has a remaining lease term of approximately 3.08 years.

550 Seventh Avenue Lease

4 unchanged sentences

the discount rate used for the measurement of this right-of-use asset and lease liability was based on the Company’s incremental borrowing rate of 9.60 %.

As of June 30, 2024, the Company’s lease of 550 Seventh Avenue has a remaining minimum lease term of approximately 7.83 years.

As of September 30, 2024, the Company’s lease of 550 Seventh Avenue has a remaining minimum lease term of approximately 7.58 years.

Future Lease Obligations

As of June 30, 2024, the maturities of future lease obligations were as follows:

As of September 30, 2024, the maturities of future lease obligations were as follows:

(in thousands)

2024 (July 1 through December 31)

2024 (October 1 through December 31)

Total lease payments

2 unchanged sentences

Non-current portion of lease liabilities

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

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

September 30,

($ in thousands)

7 unchanged sentences

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

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.

4 unchanged sentences

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

As of June 30, 2024, the aggregate remaining principal payments under the term loan were as follows:

As of September 30, 2024, the aggregate remaining principal payments under the term loan were as follows:

($ in thousands)

Year Ending December 31,

2024 (July 1 through December 31)

2024 (October 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.

Government Securities Business Days prior to the first day of each calendar

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

month) plus 4.25 % per annum.

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

1 unchanged sentence

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 June 30, 2024 and December 31, 2023.

For the current quarter and current six months, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.14 million and $ 0.29 million, respectively, reflecting an effective interest rate of approximately 11.6 %.

The fair value of this swap agreement was immaterial as of September 30, 2024 and December 31, 2023.

For the current quarter and current 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 $ 0.13 million and $ 0.42 million, respectively, 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, 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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

Stockholders’ Equity

14 unchanged sentences

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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

Equity Incentive Plans

7 unchanged sentences

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

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 $ 0.15 million and $ 0.05 million for the current quarter and prior year quarter, respectively.

Total expense recognized for all forms of stock-based compensation in the current six months and prior year six months was approximately $ 0.17 million and $ 0.12 million, respectively.

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

Of the current quarter expense amount, approximately $ 0.11 million related to employees and approximately $ 0.04 million related to directors and consultants.

Of the prior year quarter expense amount, the majority of the expense was related to directors and consultants.

Total expense recognized for all forms of stock-based compensation in the current nine months and prior year nine months was approximately $ 0.32 million and $ 0.17 million, respectively.

Of the current nine months expense amount, approximately $ 0.11 million related to employees and approximately $ 0.21 million related to directors and consultants.

Of the prior year nine months expense amount, approximately $ 0.02 million related to employees and approximately $ 0.15 million related to directors and consultants.

Stock Options

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

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

Outstanding at January 1, 2024

Expired/Forfeited

Outstanding at June 30, 2024, and expected to vest

Exercisable at June 30, 2024

Outstanding at September 30, 2024, and expected to vest

Exercisable at September 30, 2024

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

On April 3, 2024, the Company granted options to purchase an aggregate of 100,000 shares of common stock to non-management directors.

1 unchanged sentence

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

Compensation expense related to stock options for the current six months and the prior year six months was approximately $ 0.03 million and $ 0.05 million, respectively.

Total unrecognized compensation expense related to unvested stock options at June 30, 2024 was approximately $ 0.08 million and is expected to be recognized over a weighted average period of approximately 1.28 years.

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

Compensation expense related to stock options for the current nine months and the prior year nine months was approximately $ 0.06 million and $ 0.07 million, respectively.

Total unrecognized compensation expense related to unvested stock options at September 30, 2024 was approximately $ 0.06 million and is expected to be recognized over a weighted average period of approximately 1.07 years.

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

Balance at January 1, 2024

Forfeited or Canceled

Balance at June 30, 2024

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

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

Balance at September 30, 2024

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

Outstanding at January 1, 2024

Expired/Forfeited

Outstanding at June 30, 2024

Outstanding at September 30, 2024

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

On April 3, 2024, the Company issued an aggregate of 40,000 shares of common stock to non-management directors, of which 50 % shall vest on April 3, 2025, and 50 % shall vest on April 3, 2026.

On July 30, 2024, the Company entered into amendments to the employment agreements dated February 27, 2019 with each of Robert W.

D’Loren, its Chairman of the Board, Chief Executive Officer and President, and Seth Burroughs, its Executive Vice President of Business Development.

Pursuant to each amendment, the Company agreed with the respective executive officer that commencing July 16, 2024 and ending December 31, 2025, the executive officer shall accept and the Company shall pay for each month 40 % of such executive officer’s pro rata portion of Base Salary (as defined in the respective employment agreement) for each such month through the issuance of shares of the Company’s common stock.

The shares of common stock will be issued on the last day of each month, and the number of shares issuable for a month to Mr.

D’Loren and Mr.

Burroughs shall be determined by dividing 40 % of executive officer’s pro-rated Base Salary for such month by the closing sale price of the Company’s common stock on the last trading day of such month.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

D’Loren and Mr.

Burroughs are permitted to pay the withholding tax through the exchange of a portion of the shares.

As a result of these amendments, the Company issued an aggregate of 74,488 shares of common stock (which vested immediately) to executives for the current quarter and current nine months.

Also, on August 2, 2024, the Company issued 14,685 shares of common stock to a member of management, which vested immediately.

Compensation expense related to stock awards was approximately $ 0.13 million for the current quarter and approximately $ 0.03 million for the prior year quarter.

Compensation expense related to stock awards was approximately $ 0.13 million for the current six months and approximately $ 0.08 million for the prior year six months.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, 2024 was approximately $ 0.06 million and is expected to be recognized over a weighted average period of approximately 1.27 years.

Compensation expense related to stock awards was approximately $ 0.26 million for the current nine months and approximately $ 0.10 million for the prior year nine months.

Total unrecognized compensation expense related to unvested restricted stock grants at September 30, 2024 was approximately $ 0.04 million and is expected to be recognized over a weighted average period of approximately 1.08 years.

Restricted Stock Units

There were no restricted stock units outstanding as of June 30, 2024 and December 31, 2023, and no restricted stock units have been issued since the inception of the 2021 Plan.

There were no restricted stock units outstanding as of September 30, 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

At June 30, 2024, there were 2,945,291 shares of common stock available for future award grants under the 2021 Plan.

At September 30, 2024, there were 2,900,118 shares of common stock available for future award grants under the 2021 Plan.

Shares Reserved for Issuance

As of June 30, 2024, there were 7,837,116 shares of common stock reserved for issuance under the Company’s Equity Incentive Plans, including 4,357,825 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 534,000 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 2,945,291 shares available for issuance under the 2021 Plan.

As of June 30, 2024, there were also 1,182,952 shares of common stock reserved for issuance that were unrelated to the Company’s Equity Incentive Plans, including 1,000,000 shares reserved pursuant to unexercised warrants related to the Halston Master License (as described below) and 182,952 shares reserved pursuant to unexercised Representative’s Warrants related to the March 19, 2024 Offering (as described above).

As of September 30, 2024, there were 7,625,103 shares of common stock reserved for issuance under the Company’s Equity Incentive Plans, including 4,234,985 shares reserved pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, 490,000 shares reserved pursuant to unexercised stock options granted under the 2021 Plan, and 2,900,118 shares available for issuance under the 2021 Plan.

As of September 30, 2024, there were also 1,182,952 shares of common stock reserved for issuance that were unrelated to the Company’s Equity Incentive Plans, including 1,000,000 shares reserved pursuant to unexercised warrants related to the Halston Master License (as described below) and 182,952 shares reserved pursuant to unexercised Representative’s Warrants related to the March 19, 2024 Offering (as described above).

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

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

September 30, 2024

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

Outstanding and exercisable at January 1, 2024

Expired/Forfeited

Outstanding at June 30, 2024

Exercisable at June 30, 2024

Warrants issued during the current six months 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 six months related to these warrants.

Outstanding at September 30, 2024

Exercisable at September 30, 2024

Warrants issued during the current nine months 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 nine months related to these warrants.

In connection with the entrance into the Halston Master License (see Note 5), 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 and current six months was approximately $ 0.01 million and $ 0.02 million, respectively.

As of June 30, 2024, no portion of this warrant had vested.

The amount of contra-revenue recognized related to this warrant during the current quarter and prior year quarter was approximately $ 0.01 million in each period.

The amount of contra-revenue recognized related to this warrant during the current nine months and prior year nine months was approximately $ 0.03 million and $ 0.02 million, respectively.

As of September 30, 2024, no portion of this warrant had vested.

Excluding the contra-revenue recognized with respect to the Halston Master License warrant, there was no compensation expense related to warrants recognized in any of the periods presented.

6 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

The following table is a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computations for the three and six months ended June 30, 2024 and 2023:

September 30, 2024

The following table is a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computations for the three and nine months ended September 30, 2024 and 2023:

Three Months Ended

Six Months Ended

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

Nine Months Ended

September 30,

Net loss attributable to Xcel Brands, Inc.

stockholders (in thousands)

5 unchanged sentences

Diluted net income (loss) per share

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

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

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

Three Months Ended

Six Months Ended

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 % for both periods, resulting in an income tax provision (benefit) of $ 0 for both periods.

The effective tax rate differed from the federal statutory rate due to the recording of a valuation allowance against the provision (benefit) and any deferred tax assets or liabilities that would have otherwise been recognized, as it was considered not more likely than not that any net operating losses generated during each period will be utilized in future periods.

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

The effective tax rate differed from the federal statutory rate due to the recording of a valuation allowance against the provision (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.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

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

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

The effective tax rate differed from the federal statutory 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.

September 30, 2024

Related Party Transactions

2 unchanged sentences

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 six months ended June 30, 2023, the Company recognized service fee income related to this agreement of $ 75,000 and $ 150,000 , respectively, which is included within net licensing revenue in the condensed consolidated statements of operations.

On May 31, 2022, the Company entered into a services agreement with IM Topco, pursuant to which the Company agreed to 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 $ 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.

In April 2024, the services agreement was further amended to set the service fees at $ 150,000 per year beginning with the fiscal year ending December 31, 2024.

In addition under the April 2024 amendment, IM Topco is required to prepay the service fees for the year ending December 31, 2025 at specified dates during 2024.

For the three and six months ended June 30, 2024, the Company recognized service fee income related to this agreement of $ 37,500 and $ 75,000 , respectively, which is included within net licensing revenue in the condensed consolidated statements of operations.

In addition, under the April 2024 amendment, IM Topco is required to prepay the service fees for the year ending December 31, 2025;

as of September 30, 2024, IM Topco has prepaid $ 62,500 of such service fees.

In accordance with the terms of this services agreement (as amended), the Company recognized service fee income of $ 0 and $ 150,000 for the three and nine months ended September 30, 2023, respectively, and service fee income of $ 37,500 and $ 112,500 for the three and nine months ended September 30, 2024, respectively.

Such service fee income is reflected within net licensing revenue in the condensed consolidated statements of operations.

License Agreement

1 unchanged sentence

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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

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

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

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

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.

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.

Royalties received by IM Topco from the third party agreement are expected to exceed the guaranteed royalties that IM Topco would have received under the Mary 31, 2022 agreement for the year ending December 31, 2024.

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

During the current quarter and current six months, the Company paid $ 100,000 to IM Topco.

As of June 30, 2024, the remaining payments due totaled $ 275,000 , which is reflected within accounts payable, accrued expenses and other current liabilities in the condensed consolidated balance sheets.

During the current quarter and current nine months, the Company paid $ 137,500 and $ 237,500 to IM Topco.

As of September 30, 2024, the remaining payments due totaled $ 137,500 , which will be paid during the three months ending December 31, 2024 and are

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

reflected within accounts payable, accrued expenses and other current liabilities in the condensed consolidated balance sheets.

Financing Transactions

10 unchanged sentences

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

Debt Refinancing

In connection with the December 2024 refinancing of the Company’s term loan debt, IPX Capital, LLC (“IPX”), a company controlled by Mr.

D’Loren, made a $ 250,000 advance to one of the Company’s subsidiaries, of which $ 200,000 was repaid to IPX upon the closing of the debt refinancing transaction.

Additionally, IPX purchased a 12.5 % undivided, last-out, subordinated participation interest in a portion of the new term loan debt for a purchase price of $ 500,000 , and received a pro rata share of warrants received by the Term B Lenders to purchase shares of the Company’s common stock.

See Note 13 for additional details.

In October 2024, in connection with a required increase to a standby letter of credit associated with the Company’s real estate lease for offices located at 1333 Broadway, Mr.

D’Loren provided a personal guarantee to the financial institution providing such letter of credit, in order to satisfy a portion of the associated collateral requirements for the letter of credit.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

adjustment to the purchase price previously paid by WHP.

September 30, 2024

Commitments and Contingencies

Contingent Obligation – Isaac Mizrahi Transaction

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

2 unchanged sentences

This amendment also provided that 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, under the amendment, 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 amended license agreement (see Note 11).

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

Prior to the current quarter, no amount was recorded on the Company’s consolidated balance sheets related to this contingent obligation.

During the current quarter, management concluded that, based on current trends in and projections of IM Topco’s royalty revenues, the Company would likely be required to make such transfer of equity interests to WHP after March 31, 2025.

As such, the Company estimated and recorded a contingent obligation of $ 6.3 million as a reduction to the carrying value of the equity method investment in the accompanying condensed consolidated balance sheet as of September 30, 2024, and recognized a corresponding non-cash charge in the condensed consolidated statements of operations for the current quarter and current nine months (see Note 2 for additional details).

Contingent Obligation – Lori Goldstein Earn-Out

4 unchanged sentences

During the first quarter of 2024, the Company paid approximately $ 0.3 million of the $ 1.0 million earned.

During the current quarter, as a result of the divestiture of the Lori Goldstein Brand (as described in Note 3), the seller waived their rights with respect to the Lori Goldstein Earn-Out amounts that had been previously earned and had not yet been paid, and terminated their rights to any future payments under the Lori Goldstein Earn-Out.

As a result, the Company de-recognized approximately $ 1.03 million of accrued Lori Goldstein Earn-Out payments and the remaining balance of approximately $ 5.05 million of contingent obligations recorded on the Company’s balance sheet.

As of June 30, 2024, there were no liability amounts remaining on the Company’s balance sheet related to the Lori Goldstein Earn-Out.

During the current nine months, as a result of the divestiture of the Lori Goldstein Brand (as described in Note 3), the seller waived their rights with respect to the Lori Goldstein Earn-Out amounts that had been previously earned and had not yet been paid, and terminated their rights to any future payments under the Lori Goldstein Earn-Out.

As a result, the Company de-recognized approximately $ 1.03 million of accrued Lori Goldstein Earn-Out payments and the remaining

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2024

balance of approximately $ 5.05 million of contingent obligations recorded on the Company’s balance sheet.

As of September 30, 2024, there are no liability amounts remaining on the Company’s balance sheet related to the Lori Goldstein Earn-Out.

Legal Matters

2 unchanged sentences

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.

Subsequent Events

Debt Refinancing

On December 12, 2024, the Company and certain of its subsidiaries entered into a new loan and security agreement with FEAC Agent, LLC, as administrative agent and collateral agent, FEF Distributors, LLC, as lead arranger, and Restore Capital, LLC, as agent for certain lenders, pursuant to which the lenders made term loans to the Company and agreed to make additional term loans to the Company upon the satisfaction of a condition precedent described in the loan agreement .

The term loans under the loan agreement are as follows:

(1) a term loan in the amount of $ 3.95 million (“Term Loan A”) was made on the closing date, (2) a term loan in the amount of $ 4.0 million (“Term Loan B”) was made on the closing date, and (3) a term loan in the amount of $ 2.05 million (“Delayed Draw Term Loan”;

Term Loan A, Term Loan B and Delayed Draw Term Loan are referred to as “Term Loans”) which will be made upon the satisfaction of a condition precedent described in the loan agreement.

The proceeds from Term Loan A and Term Loan B were used to repay the remaining balance of the Company’s October 2023 term loan with IDB, as well as to pay fees, costs, and expenses incurred in connection with entering into the new loan agreement, and the balance may be used for working capital purposes.

The proceeds from the Delayed Draw Term Loan will be deposited in a bank account to satisfy a liquidity covenant in the loan agreement.

Principal amounts on Term Loans are payable on a pro rata basis in quarterly installments of $ 250,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on March 31, 2026, with the unpaid balance due at the maturity date of December 12, 2028.

Interest on Term Loans accrues at an annual rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York for an interest period equal to three months, subject to a 2.0 % floor, plus (i) 8.5 % for Term Loan A and Delayed Draw Term Loan and (ii) 13.5 % for Term Loan B.

Interest on amounts outstanding under the Term Loans accrues daily and is payable at the end of each calendar month.

The Term Loans are guaranteed by certain direct and indirect subsidiaries of the Company, and are secured by all of the asset of the Company and such subsidiaries.

The loan agreement contains various customary financial covenants and reporting requirements, as specified and defined in the loan agreement.

In connection with the loan agreement, the Company issued warrants to purchase an aggregate of 1,456,667 shares of the Company’s common stock.

These warrants have an exercise price of $ 0.6315 per share, are immediately exercisable, and expire on December 12, 2034.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2024

Correction of an Error

During the review of the Company’s condensed consolidated financial statements for the three and six months ended June 30, 2024, the Company identified an error in the calculation of previously recorded asset impairment charges.

This error resulted in an understatement of the asset impairment charges reported for the three months ended March 31, 2024.

Based on management’s evaluation of SEC Staff Accounting Bulletins Nos.

99 and 108 and interpretations therewith, the Company concluded that the aforementioned error was not material to the Company’s previously filed condensed consolidated financial statements for the three months ended March 31, 2024.

This is further supported by the fact that this error is of a non-cash nature, does not impact the Company’s non-GAAP measures of operating performance (non-GAAP Net Income and Adjusted EBITDA), and would not likely have materially impacted a reasonable investor’s opinion of the Company’s financial condition and results of operations.

Because the correction of this error was not deemed to be material to the results for the three months ended March 31, 2024, and does not represent an out-of-period error for the six-month period ended June 30, 2024, the Company recorded the correction as an out-of-period adjustment in the three-month period ended June 30, 2024.

Refer to the table below for details of the correction:

Condensed Consolidated Statements of Operations:

For the Three Months Ended

June 30, 2024

(in thousands, except per share data)

Before Adjustment

Asset impairment charges

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

Earnings (loss) per common share attributable to Xcel Brands, Inc.

stockholders - basic and diluted

Subsequent Events

On July 30, 2024, the Company entered into amendments to the employment agreements dated February 27, 2019 with each of Robert W.

D’Loren, its Chairman of the Board, Chief Executive Officer and President, and Seth Burroughs, its Executive Vice President of Business Development.

The shares of common stock will be issued on the last day of each month, and the number of shares issuable for a month to Mr.

September 30, 2024

Further, IPX Capital, LLC, a company controlled by Mr.

D’Loren, purchased a 12.5 % undivided, last-out, subordinated participation interest in Term Loan B for a purchase price of $ 500,000 ;

IPX also received 153,333 of the aforementioned warrants, which is the pro rata share of the Term B Lenders’ warrants that were issued by the Company.

Also, in October 2024, IPX made a $ 250,000 non-interest-bearing advance to one of the Company’s subsidiaries, of which $ 200,000 was repaid to IPX upon the closing of the December 12, 2024 debt refinancing transaction.

Shares Issued to Executives

On October 31, 2024, the Company issued an aggregate of 27,311 shares of common stock to executives, in accordance with the terms of the amended employment agreements with Mr.

D’Loren and Mr.

Burroughs (see Note 8 for details).

On November 30, 2024, the Company issued an aggregate of 31,372 shares of common stock to executives, in accordance with the terms of the amended employment agreements with Mr.

D’Loren and Mr.

Burroughs are permitted to pay the withholding tax through the exchange of a portion of the shares.

Burroughs (see Note 8 for details).

In October 2024, in connection with a required increase to a standby letter of credit associated with the Company’s real estate lease for offices located at 1333 Broadway, Mr.

D’Loren provided a personal guarantee to the financial institution providing such letter of credit, in order to satisfy a portion of the associated collateral requirements for the letter of credit.

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