Quarterly Report (10-q)

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Table of Contents

Z:cons_bridge2022DataClient_DTSXCel Brands, Inc202209302022110220221103BackupZ:cons_bridge2022DataClient_DTSXCel Brands, Inc202209302022110220221103Backup

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from ___ to ___

Commission File Number: 001-37527

XCEL BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware		76-0307819
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

	1333 Broadway, 10th Floor, New York, NY 10018
	(Address of Principal Executive Offices)

(347) 727-2474

(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	XELB	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 8, 2022, there were 19,624,860 shares of common stock, $.001 par value per share, of the issuer outstanding.

Table of Contents

XCEL BRANDS, INC.

INDEX

	a
		Page

PART I - FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Balance Sheets	3

	Unaudited Condensed Consolidated Statements of Operations	4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity	5

	Unaudited Condensed Consolidated Statements of Cash Flows	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION		33

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	33

Item 6.	Exhibits	34

	Signatures	34

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	September 30, 2022		December 31, 2021
	(Unaudited)		(Note 1)
Assets
Current Assets:
Cash and cash equivalents	$	8,407	$	4,483
Accounts receivable, net of allowances of $1,263 and $1,090, respectively		6,720		7,640
Inventory		3,884		3,375
Prepaid expenses and other current assets		1,752		1,681
Total current assets		20,763		17,179
Non-current Assets:
Property and equipment, net		1,948		2,549
Operating lease right-of-use assets		5,650		6,314
Trademarks and other intangibles, net		49,200		98,304
Equity method investment		19,520		—
Restricted cash		—		739
Deferred tax assets, net		—		141
Other assets		146		555
Total non-current assets		76,464		108,602

Total Assets	$	97,227	$	125,781

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	3,959	$	6,169
Accrued income taxes payable		1,326		64
Accrued payroll		228		577
Current portion of operating lease obligations		1,331		1,207
Current portion of long-term debt		—		2,500
Current portion of contingent obligations		2,478		—
Total current liabilities		9,322		10,517
Long-Term Liabilities:
Long-term portion of operating lease obligations		6,157		7,252
Long-term debt, net, less current portion		—		25,531
Long-term portion of contingent obligations		5,061		7,539
Deferred tax liabilities, net		223		—
Total long-term liabilities		11,441		40,322
Total Liabilities		20,763		50,839

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $.001 par value, 50,000,000 shares authorized, and 19,624,860 and 19,571,119 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		20		20
Paid-in capital		103,541		103,039
Accumulated deficit		(26,818)		(28,779)
Total Xcel Brands, Inc. stockholders' equity		76,743		74,280
Noncontrolling interest		(279)		662
Total Stockholders' Equity		76,464		74,942

Total Liabilities and Stockholders' Equity	$	97,227	$	125,781

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenues
Net licensing revenue	$	2,166	$	6,854	$	13,302	$	17,385
Net sales		2,335		4,407		8,413		12,449
Net revenue		4,501		11,261		21,715		29,834
Cost of goods sold		1,465		2,865		5,715		7,763
Gross profit		3,036		8,396		16,000		22,071

Operating costs and expenses
Salaries, benefits and employment taxes		3,301		4,185		13,390		12,286
Other selling, general and administrative expenses		3,567		3,463		10,762		9,591
Stock-based compensation		51		163		568		754
Depreciation and amortization		1,815		1,891		5,447		4,949
Total operating costs and expenses		8,734		9,702		30,167		27,580

Other (expense) income
Gain on sale of majority interest in Isaac Mizrahi brand		—		—		20,608		—
Loss from equity method investment		(277)		—		(277)		—
Total other (expense) income		(277)		—		20,331		—

Operating (loss) income		(5,975)		(1,306)		6,164		(5,509)

Interest and finance (income) expense
Interest expense - term loan debt		—		565		1,187		1,363
Other interest and finance (income) charges, net		(6)		23		(6)		127
Loss on early extinguishment of debt		—		—		2,324		821
Total interest and finance (income) expense		(6)		588		3,505		2,311

(Loss) income before income taxes		(5,969)		(1,894)		2,659		(7,820)

Income tax (benefit) provision		(1,539)		(535)		1,639		(2,019)

Net (loss) income		(4,430)		(1,359)		1,020		(5,801)
Net loss attributable to noncontrolling interest		(388)		(223)		(941)		(560)
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(4,042)	$	(1,136)	$	1,961	$	(5,241)

(Loss) earnings per common share attributable to Xcel Brands, Inc. stockholders:
Basic net (loss) income per share	$	(0.21)	$	(0.06)	$	0.10	$	(0.27)
Diluted net (loss) income per share	$	(0.21)	$	(0.06)	$	0.10	$	(0.27)
Weighted average number of common shares outstanding:
Basic weighted average common shares outstanding		19,624,860		19,541,774		19,624,604		19,418,469
Diluted weighted average common shares outstanding		19,624,860		19,541,774		19,752,339		19,418,469

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)


	Xcel Brands, Inc. Stockholders
	Common Stock
	Number of			Paid-In		Accumulated		Noncontrolling		Total
	Shares	Amount		Capital		Deficit		Interest		Equity
Balance as of December 31, 2020	19,260,862	$	19	$	102,324	$	(16,595)	$	507	$	86,255

Compensation expense related to stock options and restricted stock	—		—		169		—		—		169

Shares issued on exercise of stock options, net	1,667		—		—		—		—		—

Net loss	—		—		—		(2,547)		(81)		(2,628)

Balance as of March 31, 2021	19,262,529		19		102,493		(19,142)		426		83,796

Compensation expense related to stock options and restricted stock	—		—		52		—		—		52

Shares issued to executive related to stock grants for bonus payments	181,179		1		282		—		—		283

Shares issued to consultant in connection with stock grant	14,045		—		25		—		—		25

Shares issued to directors in connection with restricted stock grants	50,000		—		—		—		—		—

Shares issued on exercise of stock options, net	23,102		—		—		—		—		—

Net loss	—		—		—		(1,558)		(256)		(1,814)

Balance as of June 30, 2021	19,530,855		20		102,852		(20,700)		170		82,342

Compensation expense related to stock options and restricted stock	—		—		59		—		—		59

Shares issued to consultant in connection with stock grant	9,399		—		25		—		—		25

Shares issued on exercise of stock options	1,667		—		—		—		—		—

Additional investment in Longaberger Licensing, LLC by non-controlling interest holder	—		—		—		—		1,000		1,000

Net loss	—		—		—		(1,136)		(223)		(1,359)

Balance as of September 30, 2021	19,541,921	$	20	$	102,936	$	(21,836)	$	947	$	82,067

Balance as of December 31, 2021	19,571,119	$	20	$	103,039	$	(28,779)	$	662	$	74,942

Compensation expense related to stock options and restricted stock	—		—		30		—		—		30

Net loss	—		—		—		(3,487)		(252)		(3,739)

Balance as of March 31, 2022	19,571,119		20		103,069		(32,266)		410		71,233

Compensation expense related to stock options and restricted stock	—		—		402		—		—		402

Shares issued to executive related to stock grants for bonus payments	178,727		—		281		—		—		281

Shares repurchased from executive in exchange for withholding taxes	(53,882)		—		(85)		—		—		(85)

Shares issued to consultant in connection with stock grant	20,064		—		33		—		—		33

Shares issued to directors in connection with restricted stock grants	50,000		—		—		—		—		—

Shares issued to consultant in connection with sale transaction (see Note 2 and Note 8)	65,275		—		97		—		—		97

Shares issued to key employee in connection with stock grant	33,557		—		50		—		—		50

Shares repurchased from key employee in exchange for withholding taxes related to vesting of restricted shares	(240,000)		—		(357)		—		—		(357)

Net income (loss)	—		—		—		9,490		(301)		9,189

Balance as of June 30, 2022	19,624,860	$	20	$	103,490	$	(22,776)	$	109	$	80,843

Compensation expense related to stock options and restricted stock	—		—		51		—		—		51

Net loss	—		—		—		(4,042)		(388)		(4,430)

Balance as of September 30, 2022	19,624,860	$	20	$	103,541	$	(26,818)	$	(279)	$	76,464

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	For the Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities
Net income (loss)	$	1,020	$	(5,801)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense		5,447		4,949
Amortization of deferred finance costs included in interest expense		156		211
Stock-based compensation		568		754
Provision for doubtful accounts		173		132
Undistributed proportional share of net income of equity method investee		277		—
Loss on early extinguishment of debt		2,324		821
Deferred income tax provision (benefit)		363		(2,019)
Gain on sale of majority interest in Isaac Mizrahi brand		(20,608)		—
Changes in operating assets and liabilities:
Accounts receivable		747		(2,192)
Inventory		(509)		(2,214)
Prepaid expenses and other current and non-current assets		235		(620)
Accounts payable, accrued expenses, accrued payroll, accrued income taxes payable, and other current liabilities		(796)		572
Lease-related assets and liabilities		(202)		(122)
Other liabilities		(224)		—
Net cash used in operating activities		(11,029)		(5,529)

Cash flows from investing activities
Net proceeds from sale of majority interest in Isaac Mizrahi brand		45,408		—
Cash consideration for acquisition of Lori Goldstein assets		—		(3,661)
Purchase of other intangible assets		—		(39)
Purchase of property and equipment		(241)		(1,049)
Net cash provided by (used in) investing activities		45,167		(4,749)

Cash flows from financing activities
Proceeds from exercise of stock options		—		5
Shares repurchased including vested restricted stock in exchange for withholding taxes		(442)		—
Cash contribution from non-controlling interest		—		1,000
Proceeds from revolving loan debt		—		2,498
Proceeds from long-term debt		—		25,000
Payment of deferred finance costs		—		(1,204)
Payment of long-term debt		(29,000)		(18,000)
Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt		(1,511)		(367)
Net cash (used in) provided by financing activities		(30,953)		8,932

Net increase (decrease) in cash, cash equivalents, and restricted cash		3,185		(1,346)

Cash, cash equivalents, and restricted cash at beginning of period		5,222		6,066

Cash, cash equivalents, and restricted cash at end of period	$	8,407	$	4,720

Reconciliation to amounts on condensed consolidated balance sheets:
Cash and cash equivalents	$	8,407	$	3,981
Restricted cash		—		739
Total cash, cash equivalents, and restricted cash	$	8,407	$	4,720

Supplemental disclosure of non-cash activities:
Operating lease right-of-use assets	$	—	$	(722)
Operating lease obligations	$	—	$	(722)
Contingent obligation related to acquisition of Lori Goldstein assets at fair value	$	—	$	6,639
Liability for equity-based bonuses and other equity-based payments	$	(283)	$	140

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	1,032	$	1,346
Cash paid during the period for income taxes	$	—	$	18

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

1. Nature of Operations, Background, and Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2021 (which has been derived from audited financial statements) and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows.

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, 2021, as filed with the SEC on April 15, 2022.

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 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 participate in the operations of the business; the Company accounts for its interest in IM Topco, LLC using the equity method of accounting. See Note 2 for additional details.

The Company designs, produces, markets, and distributes products, licenses its brands to third parties, and generates licensing revenues through contractual arrangements with manufacturers and retailers. The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels to be everywhere its customers shop.

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

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

Liquidity

The Company had a net (loss) income of approximately $(4.0) million and $1.9 million during the three and nine months ended September 30, 2022, respectively, and had an accumulated deficit of approximately $26.8 million as of September 30, 2022. 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 $13.7 million as of September 30, 2022. The Company’s cash and cash equivalents were approximately $8.4 million as of September 30, 2022. In conjunction with the sale of the majority interest in the Isaac Mizrahi Brand (as described in Note 2) on May 31, 2022, the Company used a portion of the proceeds to extinguish all of its term loan debt, which had a balance of approximately $28.4 million. Management expects that existing cash and operating cash flows will be adequate to meet the Company’s operating and capital expenditure needs for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q.

2. Acquisitions and Divestitures

Sale of Majority Interest in Isaac Mizrahi Brand

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 purchase price paid by WHP to the Company at the closing of the transaction in exchange for the 70% membership interest in IM Topco consisted of $46.2 million in cash. Pursuant to the purchase agreement, the Company will also be entitled to receive an “earn-out” payment in the amount of $2.0 million if, during the period from January 1, 2023 through December 31, 2023, (i) IM Topco receives Net Royalty Revenue (as defined in the purchase agreement) in an amount equal to or greater than $17.5 million and (ii) IM Topco generates EBITDA (as defined in the purchase agreement) in an amount equal to or greater than $11.8 million. Additionally, in the event that IM Topco receives less than $13.347 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on the third anniversary of the closing, WHP will be entitled to receive from the Company up to $16 million, less all amounts of net cash flow distributed to WHP for such period, as an adjustment to the purchase price, payable in either cash or equity interests in IM Topco held by the Company.

In connection with the aforementioned purchase agreement, on May 31, 2022, the Company and WHP entered into an Amended and Restated Limited Liability Company Agreement of IM Topco (the “Business Venture Agreement”) governing the operation of IM Topco as a partnership between the Company and WHP following the closing. Pursuant to the Business Venture Agreement, IM Topco is managed by a single Manager appointed by the vote of a majority-in-interest of IM Topco’s members, and WHP serves as the sole Manager of IM Topco. The Business Venture Agreement contains customary provisions for the governance of a partnership, including with respect to decision making, access to information, restrictions on transfer of interests, and covenants. Pursuant to the Business Venture Agreement, IM Topco’s Net Cash Flow (as defined in the agreement) shall be distributed to the members during each fiscal year no less than once per fiscal quarter, as follows:

(i)

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

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

(ii)

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

(iii)

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

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

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

●

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

●

The Company entered into a license agreement with IM Topco, pursuant to which IM Topco granted the Company a license to use certain Isaac Mizrahi trademarks on and in connection with the design, manufacture, distribution, sale, and promotion of women’s sportswear products in the United States and Canada during the term of the agreement, in exchange for the payment of royalties in connection therewith. The initial term of this agreement ends December 31, 2026, and provides guaranteed royalties of $0.4 million per year to IM Topco.

●

The Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 4) was assigned to IM Topco as of May 31, 2022.

●

The Company’s employment agreement with Mr. Mizrahi and the Company’s services agreement with Laugh Club (see Note 10) were transferred to IM Topco. In addition, all 522,500 unvested shares of restricted stock of the Company held by Mr. Mizrahi (for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of such shares being surrendered for cancellation in satisfaction of withholding tax obligations. In addition, the Company issued 33,557 additional shares of common stock of the Company (valued at $50,000) to Mr. Mizrahi, which vested immediately, and made a $100,000 cash payment to Mr. Mizrahi.

Management assessed and evaluated the ownership structure and other terms of the May 27, 2022 membership purchase agreement and Business Venture Agreement, as well as considered the Company’s continuing involvement with the Isaac Mizrahi Brand through the aforementioned services agreement and licensing agreement, and concluded that (i) IM Topco is not a Variable Interest Entity under Accounting Standards Codification (“ASC”) Topic 810, and (ii) the Company has significant influence over, but does not control, IM Topco. As such, on May 31, 2022, the Company de-recognized the carrying amount of the Isaac Mizrahi Brand trademarks of $44.5 million and recognized the fair value of its retained interest in IM Topco of approximately $19.8 million as an equity method investment on the accompanying condensed consolidated balance sheet. The fair value of the Company’s retained interest was determined by applying the Company’s ownership percentage to the implied enterprise value of IM Topco, which was calculated based on the price paid by WHP for the 70% controlling interest, as the May 31, 2022 sale transaction was considered an arms-length transaction between knowledgeable market participants and the most relevant and reasonable indication of value to utilize. The inputs and assumptions for this nonrecurring fair value measurement are classified as Level 3 within the fair value hierarchy defined in ASC Topic 820.

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-

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

tax gain from the transaction of $20.6 million, which is classified as other income in the condensed consolidated statements of operations for the nine months ended September 30, 2022.

In addition to the amounts described above, the Company’s Board of Directors awarded cash bonuses totaling approximately $1.0 million to certain members of the Company’s senior management, consisting of bonuses of $770,000 to Robert D’Loren, $115,000 to Jim Haran, and $130,000 to Seth Burroughs. These bonuses are included in Salaries, benefits and employment taxes in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2022.

The Company accounts for its interest in the ongoing operations of IM Topco as other income under the equity method of accounting. The Company recognized an equity method loss of $0.28 million related to its investment for the three and nine months ended September 30, 2022, based on the aforementioned distribution provisions set forth in the Business Venture Agreement.

Summarized financial information for IM Topco is as follows:


	For the three		For the nine
	months ended		months ended
	September 30,		September 30,
($ in thousands)	2022			2022 ⁽¹⁾
Revenues	$	4,185	$	5,479
Gross profit		4,185		5,479
Income from continuing operations		928		1,118
Net income		928		1,118

(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.

Acquisition of LOGO by Lori Goldstein Brand

On April 1, 2021, the Company acquired certain assets of Lori Goldstein, Ltd. (the "Seller"), including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto. Pursuant to the asset purchase agreement related to this transaction, the Company delivered $1.6 million in cash consideration to the Seller at closing, and was obligated to subsequently deliver an additional $2.0 million in cash to the Seller, which was paid in July 2021.

In addition to the consideration described above, the Seller is eligible to earn additional consideration of up to $12.5 million (the “Lori Goldstein Earn-Out”), which would be payable, in cash, within 45 days after the end of each applicable calendar year during the six calendar year period commencing 2021 in an amount equal to 75% percent of the Royalty Contribution (as defined in the related asset purchase agreement) for such calendar year. The Company recorded a contingent obligation of $6.6 million related to the Lori Goldstein Earn-Out, based on the difference between the fair value of the acquired assets of the LOGO by Lori Goldstein brand and the total consideration paid, in accordance with the guidance in ASC Subtopic 805-50. To date, no consideration under the terms of the Lori Goldstein Earn-Out has been payable or paid to the Seller.

The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase, and the aggregate purchase price of $10.3 million was allocated entirely to the trademarks of the brand. Such trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s condensed consolidated statements of operations. The Lori Goldstein trademarks are being amortized on a straight-line basis over their expected useful life of four years.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

3. Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:


	Weighted
	Average	September 30, 2022
	Amortization	Gross Carrying		Accumulated		Net Carrying
($ in thousands)	Period	Amount		Amortization		Amount
Trademarks (finite-lived)	15 years		68,880		19,827		49,053
Copyrights and other intellectual property	8 years		429		282		147
Total		$	69,309	$	20,109	$	49,200


	Weighted
	Average	December 31, 2021
	Amortization	Gross Carrying		Accumulated		Net Carrying
($ in thousands)	Period	Amount		Amortization		Amount
Trademarks (indefinite-lived)	n/a	$	44,500	$	—	$	44,500
Trademarks (finite-lived)	15 years		68,880		15,268		53,612
Non-compete agreement	7 years		562		562		—
Copyrights and other intellectual property	8 years		429		237		192
Total		$	114,371	$	16,067	$	98,304

Amortization expense for intangible assets was approximately $1.53 million for the three-month period ended September 30, 2022 (the "current quarter") and was approximately $1.56 million for the three-month period ended September 30, 2021 (the "prior year quarter").

Amortization expense for intangible assets was approximately $4.60 million for the nine-month period ended September 30, 2022 (the "current nine months") and was approximately $4.02 million for the nine-month period ended September 30, 2021 (the "prior year nine months").

During the current nine months, the Company sold its $44.5 million of indefinite-lived trademarks related to the Isaac Mizrahi Brand; see Note 2 for details. Also during the current nine months, the Company retired its intangible asset for a non-compete agreement related to the Halston Brand, as such intangible asset had reached the end of its estimated useful life and had become fully amortized.

4. Significant Contracts and Concentrations

Qurate Agreements

Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of net retail sales of Lori Goldstein, Judith Ripka, and Longaberger branded merchandise. The Company was also previously a party to a similar agreement with Qurate related to the Isaac Mizrahi Brand through May 31, 2022; see Note 2 for details. Net retail sales are defined as the aggregate amount of all revenue generated through the sale of the specified branded products by Qurate and its subsidiaries under the Qurate Agreements, net of customer returns, and excluding freight, shipping and handling charges, and sales, use, or other taxes. Net licensing revenue from the Qurate Agreements represents a significant portion of the Company’s total net revenue.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

●

Net licensing revenue from the Qurate Agreements totaled $1.40 million and $6.05 million for the current quarter and prior year quarter, respectively, representing approximately 31% and 54% of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

●

Net licensing revenue from the Qurate Agreements totaled $10.47 million and $15.24 million for the current nine months and prior year nine months, respectively, representing approximately 48% and 51% of the Company’s total net revenue for the current nine months and prior year nine months, respectively.

●

As of September 30, 2022 and December 31, 2021, the Company had receivables from Qurate of $1.45 million and $3.51 million, respectively, representing approximately 22% and 46% of the Company’s total net accounts receivable, respectively.

5. Accounts Receivable

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $1.26 and $1.09 million as of September 30, 2022 and December 31, 2021, respectively. The Company recognized bad debt expense of $0.08 million in the current quarter, $0.17 million in the current nine months, and $0.13 million in the prior year nine months, but did not recognize any bad debt expense in the prior year quarter.

As of September 30, 2022, approximately $1.62 million of the Company's outstanding receivables were assigned to a third party agent pursuant to a services agreement entered into during the current quarter, 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 $0.04 million in fees to the agent under the aforementioned services agreement.

6. Leases

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

The Company also has an operating lease for its former retail store location, which was closed in the first quarter of 2022; the Company is currently in the process of negotiating the termination of this lease.

The Company previously had an operating lease for its former office location, which it subleased to a third-party subtenant through February 27, 2022, and the Company’s lease of this office space expired by its terms on February 28, 2022.

As of September 30, 2022, the Company’s real estate leases have remaining lease terms of 5 – 6 years, with a weighted average remaining lease term of approximately 5.2 years and a weighted average discount rate of 6.25%.

The Company generally recognizes a right-of-use (“ROU”) asset, representing its right to use the underlying leased asset for the lease term, and a liability for its obligation to make future lease payments (the lease liability) at commencement date (the date on which the lessor makes the underlying asset available for use) based on the present value of lease payments over the lease term. The Company does not recognize ROU assets and lease liabilities for lease terms of 12 months or less, but recognizes such lease payments in operations on a straight-line basis over the lease terms.

Lease expense for operating lease payments is generally recognized on a straight-line basis over the lease term. The Company recognizes income from subleases (in which the Company is the sublessor) on a straight-line basis over the term

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

of the sublease, as a reduction to lease expense. Lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $0.4 million for both the current quarter and prior year quarter, approximately $1.2 million for the prior year nine months, and approximately $1.0 million for the current nine months.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.4 million in the current quarter and prior year quarter, $1.3 million in the current nine months, and $1.7 million in the prior year nine months.

As of September 30, 2022, the maturities of lease obligations were as follows:


($ in thousands)
2022 (October 1 through December 31)	$	547
2023		1,711
2024		1,711
2025		1,711
2026		1,710
Thereafter (through 2028)		1,610
Total lease payments

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XELB

Xcel Brands Inc