SEC Filing | Xcel Brands, Inc.

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Table of Contents

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 June 30, 2023

☐ 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 August 9, 2023, there were 19,707,956 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	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION		31

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

	Signatures	32

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)


	June 30, 2023		December 31, 2022
	(Unaudited)		(Note 1)
Assets
Current Assets:
Cash and cash equivalents	$	3,507	$	4,608
Accounts receivable, net		6,878		5,110
Inventory		798		2,845
Prepaid expenses and other current assets		554		1,457
Total current assets		11,737		14,020
Non-current Assets:
Property and equipment, net		916		1,418
Operating lease right-of-use assets		4,946		5,420
Trademarks and other intangibles, net		44,590		47,665
Equity method investment		18,165		19,195
Deferred tax assets, net		1,107		1,107
Other assets		25		110
Total non-current assets		69,749		74,915

Total Assets	$	81,486	$	88,935

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	2,750	$	3,870
Deferred revenue		922		88
Accrued income taxes payable		555		568
Accrued payroll		154		416
Current portion of operating lease obligations		1,219		1,376
Current portion of contingent obligations		1,400		243
Total current liabilities		7,000		6,561
Long-Term Liabilities:
Long-term portion of operating lease obligations		4,660		5,839
Deferred revenue		4,207		—
Long-term portion of contingent obligations		4,996		6,396
Total long-term liabilities		13,863		12,235
Total Liabilities		20,863		18,796

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 19,700,656 and 19,624,860 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		20		20
Paid-in capital		103,715		103,592
Accumulated deficit		(41,908)		(32,797)
Total Xcel Brands, Inc. stockholders' equity		61,827		70,815
Noncontrolling interest		(1,204)		(676)
Total Stockholders' Equity		60,623		70,139

Total Liabilities and Stockholders' Equity	$	81,486	$	88,935

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 Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Revenues
Net licensing revenue	$	2,428	$	5,175	$	4,650	$	11,136
Net sales		4,353		3,292		8,181		6,078
Net revenue		6,781		8,467		12,831		17,214
Cost of goods sold		3,800		2,570		6,493		4,250
Gross profit		2,981		5,897		6,338		12,964

Direct operating costs and expenses
Salaries, benefits and employment taxes		2,241		5,236		5,706		10,089
Other selling, general and administrative expenses		2,943		4,288		6,436		7,712
Total direct operating costs and expenses		5,184		9,524		12,142		17,801

Operating loss before other operating costs and expenses (income)		(2,203)		(3,627)		(5,804)		(4,837)

Other operating costs and expenses (income)
Depreciation and amortization		1,786		1,812		3,583		3,632
Gain on sale of majority interest in Isaac Mizrahi brand		—		(20,608)		—		(20,608)
Loss from equity method investment		515		—		1,030		—
Gain on sale of limited partner ownership interest		(351)		—		(351)		—
Gain on settlement of lease liability		(445)		—		(445)		—

Operating (loss) income		(3,708)		15,169		(9,621)		12,139

Interest and finance (income) expense
Interest expense - term loan debt		—		479		—		1,187
Other interest and finance charges, net		(7)		(1)		18		—
Loss on early extinguishment of debt		—		2,324		—		2,324
Total interest and finance (income) expense		(7)		2,802		18		3,511

(Loss) income before income taxes		(3,701)		12,367		(9,639)		8,628

Income tax (benefit) provision		—		3,178		—		3,178

Net (loss) income		(3,701)		9,189		(9,639)		5,450
Net loss attributable to noncontrolling interest		(233)		(301)		(528)		(553)
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(3,468)	$	9,490	$	(9,111)	$	6,003

(Loss) earnings per common share attributable to Xcel Brands, Inc. stockholders:
Basic net (loss) income per share	$	(0.18)	$	0.48	$	(0.46)	$	0.31
Diluted net (loss) income per share	$	(0.18)	$	0.48	$	(0.46)	$	0.30
Weighted average number of common shares outstanding:
Basic weighted average common shares outstanding		19,735,500		19,677,243		19,684,630		19,624,474
Diluted weighted average common shares outstanding		19,735,500		19,814,448		19,684,630		19,756,775

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, 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 Isaac Mizrahi sale transaction	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


Balance as of December 31, 2022	19,624,860	$	20	$	103,592	$	(32,797)	$	(676)	$	70,139

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

Shares issued to consultant in connection with stock grant	8,334		—		6		—		—		6

Net loss	—		—		—		(5,643)		(295)		(5,938)

Balance as of March 31, 2023	19,633,194		20		103,649		(38,440)		(971)		64,258

Compensation expense related to stock options and restricted stock	—		—		27		—		—		27

Shares issued to consultant in connection with stock grant	58,334		—		39		—		—		39

Shares issued on exercise of stock options, net of shares surrendered for cashless exercises	9,128		—		—		—		—		—

Net loss	—		—		—		(3,468)		(233)		(3,701)

Balance as of June 30, 2023	19,700,656	$	20	$	103,715	$	(41,908)	$	(1,204)	$	60,623

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 Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net (loss) income	$	(9,639)	$	5,450
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization expense		3,583		3,632
Asset impairment charges		100		—
Amortization of deferred finance costs included in interest expense		—		156
Stock-based compensation		122		517
Provision for doubtful accounts		—		90
Undistributed proportional share of net loss of equity method investee		1,030		—
Loss on early extinguishment of debt		—		2,324
Deferred income tax provision		—		1,384
Gain on sale of majority interest in Isaac Mizrahi brand		—		(20,608)
Gain on sale of limited partner ownership interest		(351)		—
Gain on settlement of lease liability		(445)		—
Changes in operating assets and liabilities:
Accounts receivable		(1,768)		(1,741)
Inventory		2,047		(100)
Prepaid expenses and other current and non-current assets		863		8
Deferred revenue		5,041		347
Accounts payable, accrued expenses, accrued payroll, accrued income taxes payable, and other current liabilities		(1,637)		205
Lease-related assets and liabilities		(417)		(159)
Other liabilities		—		(224)
Net cash used in operating activities		(1,471)		(8,719)

Cash flows from investing activities
Net proceeds from sale of majority interest in Isaac Mizrahi brand		—		45,408
Net proceeds from sale of assets		451		—
Purchase of property and equipment		(81)		(85)
Net cash provided by investing activities		370		45,323

Cash flows from financing activities
Shares repurchased including vested restricted stock in exchange for withholding taxes		—		(442)
Payment of long-term debt		—		(29,000)
Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt		—		(1,511)
Net cash used in financing activities		—		(30,953)

Net (decrease) increase in cash and cash equivalents		(1,101)		5,651

Cash and cash equivalents at beginning of period		4,608		5,222

Cash and cash equivalents at end of period	$	3,507	$	10,873

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	—	$	1,032
Cash paid during the period for income taxes	$	16	$	—

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

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

The accompanying condensed consolidated balance sheet as of December 31, 2022 (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, 2022, as filed with the SEC on April 17, 2023.

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 manages the Q Optix business through its 50% ownership interest in Q Optix, LLC; the Company consolidates Q Optix, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party.

●

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

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

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

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

Liquidity and Management’s Plans

The Company incurred a net loss attributable to Company stockholders of approximately $3.5 million and $9.1 million during the three and six months ended June 30, 2023, respectively (which included net non-cash expenses of approximately $1.7 million and $4.0 million, respectively), and had an accumulated deficit of approximately $41.9 million as of June 30, 2023. Net cash used in operating activities was approximately $1.5 million for the six months ended June 30, 2023. The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent obligations payable in common stock) of approximately $6.0 million as of June 30, 2023. The Company’s cash and cash equivalents were approximately $3.5 million as of June 30, 2023. The aforementioned factors raise uncertainties about the Company’s ability to continue as a going concern.

Management implemented a plan to mitigate an expected shortfall of capital and to support future operations by shifting the business from a wholesale/licensing hybrid model into a “licensing-plus” business model. In the first quarter of 2023, the Company began to restructure its business operations by entering into new licensing agreements and joint venture arrangements with best-in-class business partners. The Company entered into a new interactive television licensing agreement with America’s Collectibles Network, Inc. d/b/a Jewelry Television (“JTV”) for the Ripka Brand, and a separate license with JTV for the Ripka Brand’s e-commerce business. For apparel, similar transactions have recently been executed. In conjunction with the launch of the C Wonder Brand on HSN, the Company licensed the wholesale operations related to the brand to One Jeanswear Group, LLC (“OJG”); this new license with OJG also includes certain other new celebrity brands that the Company plans to develop and launch in 2023 and beyond. For the Halston Brand, on May 15, 2023, the Company entered into a new master license agreement for men’s, women’s, and children’s apparel, fashion accessories, and other product categories with an industry-leading wholesale apparel company for distribution through department stores, e-commerce, and other retailers (see Note 4). This new master license for the Halston Brand provides for an upfront cash payment and royalties, including certain guaranteed minimum royalties to the Company, includes significant annual minimum net sales requirements, and has a twenty-five-year term (consisting of an initial five-year period, followed by a twenty-year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term.

The transition of these operating businesses was substantially completed as of June 30, 2023. Management believes that this evolution of the Company’s operating model will provide the Company with significant cost savings and allow the Company to reduce and better manage its exposure to operating risks. As of June 30, 2023, the Company has reduced payroll costs by approximately $6 million and operating expenses by approximately $7 million, on an annualized basis when compared to the corresponding periods in the prior year.

Based on these recent events and changes in the Company’s business model, management expects to generate adequate cash flows to meet the Company’s operating and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q, and therefore, such conditions and uncertainties with respect to the Company’s ability to continue as a going concern as of June 30, 2023, have been alleviated.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

Recently Adopted Accounting Pronouncements

The Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (as amended by ASU No. 2018-19 in November 2018, ASU No. 2019-05 in May 2019, ASU No. 2019-10 and 2019-11 in November 2019, ASU No. 2020-02 in February 2020, and ASU No. 2022-02 in March 2022) effective January 1, 2023. This ASU requires entities to estimate lifetime expected credit losses for financial instruments, including trade and other receivables, which will result in earlier recognition of credit losses. The adoption of this new guidance did not have a significant impact on the Company’s results of operations, cash flows, or financial condition.

2. Equity Method Investment

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 purchase price paid by WHP to the Company at the closing of the transaction consisted of $46.2 million in cash. The Company incurred approximately $0.9 million of expenses directly related to this transaction, including legal fees and agent fees, of which $0.1 million of the agent fees were paid through the issuance of 65,275 shares of the Company’s common stock, which were recognized as a reduction to the gain from the transaction. The Company recognized a net pre-tax gain from the transaction of $20.6 million, which is classified within “other expense (income), including non-cash expenses” in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.

The Company accounts for its 30% interest in the ongoing operations of IM Topco as other expense (income) 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:

(i)

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

(ii)

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

(iii)

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

Based on these distribution provisions, the Company recognized an equity method loss of $0.52 million and $1.03 million related to its investment for the three and six months ended June 30, 2023, respectively. The Company did not recognize any equity income or loss related to its investment for the three and six months ended June 30, 2022.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

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


	For the three		For the six
	months ended		months ended
	June 30,		June 30,
($ in thousands)	2023			2023
Revenues	$	3,573	$	6,919
Gross profit		3,573		6,919
Income from continuing operations		206		113
Net income		206		113

3. Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:


	Weighted
	Average	June 30, 2023
	Amortization	Gross Carrying		Accumulated		Net Carrying
($ in thousands)	Period	Amount		Amortization		Amount
Trademarks (finite-lived)	15 years		68,880		24,391		44,489
Copyrights and other intellectual property	8 years		429		328		101
Total		$	69,309	$	24,719	$	44,590


	Weighted
	Average	December 31, 2022
	Amortization	Gross Carrying		Accumulated		Net Carrying
($ in thousands)	Period	Amount		Amortization		Amount
Trademarks (finite-lived)	15 years		68,880		21,346		47,534
Copyrights and other intellectual property	8 years		429		298		131
Total		$	69,309	$	21,644	$	47,665

Amortization expense for intangible assets was approximately $1.54 million for both the three-month period ended June 30, 2023 (the "current quarter") and the three-month period ended June 30, 2022 (the "prior year quarter").

Amortization expense for intangible assets was approximately $3.07 million for both the six-month period ended June 30, 2023 (the "current six months") and the six-month period ended June 30, 2022 (the "prior year six months").

4. Significant Contracts and Concentrations

Halston Master License

On May 15, 2023, the Company, through its subsidiaries, H Halston, LLC and H Heritage Licensing, LLC (collectively, the “Licensor”), entered into a master license agreement relating to the Halston Brand (the “Halston Master License”) with an industry-leading wholesale apparel company, for men’s and women’s apparel, men’s and women’s fashion accessories, children’s apparel and accessories, home, airline amenity and amenity kits, and such other product categories as mutually agreed upon. The Halston Master License provides for an upfront cash payment and royalties payable to the Company, including certain guaranteed minimum royalties, includes significant annual minimum net sales requirements, and has a twenty-five-year term (consisting of an initial five-year period, followed by a twenty-year period), subject to the licensee’s right to terminate with at least 120 days’ notice prior to the end of each five-year period during the term. The licensee has

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

an option to purchase the Halston Brand for $5.0 million at the end of the twenty-five-year term, which right may be accelerated under certain conditions associated with an uncured material breach of the Halston Master License in accordance with the terms of the Halston Master License. The Licensor granted to the licensee a security interest in the Halston trademarks to secure the Licensor’s obligations under the Halston Master License, including to honor the obligations under the purchase option. In connection with the Halston Master License, the Company issued to the licensee a ten-year warrant to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share, which vest based upon certain annual royalty targets being satisfied.

As a result of the upfront cash payment and guaranteed minimum royalties discussed above, the Company has recognized $4.89 million of deferred revenue contract liabilities on its condensed consolidated balance sheet as of June 30, 2023 related to this contract, of which $0.89 million was classified as a current liability and $4.00 million was classified as a long-term liability. The balance of the deferred revenue contract liabilities will be recognized ratably as revenue over the next 5.5 years. Net licensing revenue recognized from the Halston Master License was $0.33 million for the current quarter and current six months.

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 certain specified branded merchandise. 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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Net licensing revenue from the Qurate Agreements totaled $1.76 million and $4.05 million for the current quarter and prior year quarter, respectively, representing approximately 26% and 48% of the Company’s total net revenue for the current quarter and prior year quarter, respectively. The prior year quarter included revenues from Qurate Agreement related to the Isaac Mizrahi Brand; such agreement was assigned to IM Topco on May 31, 2022.

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Net licensing revenue from the Qurate Agreements totaled $3.28 million and $9.06 million for the current six months and prior year six months, respectively, representing approximately 26% and 53% of the Company’s total net revenue for the current quarter and prior year quarter, respectively. The prior year six months included revenues from Qurate Agreement related to the Isaac Mizrahi Brand; such agreement was assigned to IM Topco on May 31, 2022.

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As of June 30, 2023 and December 31, 2022, the Company had receivables from Qurate of $1.6 million and $0.9 million, respectively, representing approximately 23% and 17% of the Company’s total net accounts receivable, respectively.

5. Accounts Receivable

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances for credit losses. Such allowances were approximately $0.0 million as of both June 30, 2023 and December 31, 2022. The Company did not recognize any credit loss expense in the current quarter or current six months. There were no significant write-offs or recoveries in the current quarter or current six months.

Credit loss expense recognized in the prior year quarter and prior year six months was $0.09 million.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

The allowance for credit losses is determined based upon a variety of judgments and factors. Factors considered in determining the allowance include historical collection, write-off experience, and management's assessment of collectibility from customers, including current conditions, reasonable forecasts, and expectations of future collectibility and collection efforts. Management continuously assesses the collectibility of receivables and adjusts estimates based on actual experience and future expectations based on economic indicators. Management also monitors the aging analysis of receivables to determine if there are changes in the collections of accounts receivable. Receivable balances are written-off against the allowance for credit losses when such balances are deemed to be uncollectible.

Also, as of June 30, 2023 and December 31, 2022, approximately $1.18 million and $1.65 million, respectively, of the Company's outstanding receivables were assigned to a third-party agent pursuant to a services agreement entered into during the third quarter of 2022, under which the Company assigned, for purposes of collection only, the right to collect certain specified receivables on the Company's behalf and solely for the Company's benefit. Under such agreement, the Company retains ownership of such assigned receivables, and receives payment from the agent (less certain fees charged by the agent) upon the agent's collection of the receivables from customers. During the current quarter and current six months, the Company paid approximately $0.02 million and $0.07 million in fees to the agent under the aforementioned services agreement.

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. As of June 30, 2023, the Company’s real estate lease has a remaining lease term of approximately 4.3 years, and the lease liability is measured using a discount rate of 6.25%.

Lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $0.4 million for both the current quarter and prior year quarter, approximately $0.8 million for the current six months, and approximately $0.7 million for the prior year six months.

Cash paid for amounts included in the measurement of operating lease liabilities was approximately $0.4 million in both the current quarter and prior year quarter, approximately $0.8 million in the current six months, and approximately $1.0 million in the prior year six months.

Also, the Company was previously a party to an operating lease for its former retail store location, which was closed in 2022. During the three months ended June 30, 2023, the Company successfully negotiated a settlement with the lessor resulting in the termination of this lease. Under the settlement agreement, the Company paid $0.07 million to the lessor in May 2023, and agreed to make two subsequent payments of approximately $0.11 million each to the lessor on or before July 31, 2023 and October 31, 2023. The Company recognized a liability of $0.23 million for these remaining payments as part of “accounts payable, accrued expenses and other current liabilities” on the condensed consolidated balance sheet as of June 30, 2023. The Company recognized a gain of $0.44 million from this settlement transaction, which is classified within “other expense (income), including non-cash expenses” in the condensed consolidated statements of operations for the three and six months ended June 30, 2023.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2023

(Unaudited)

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


($ in thousands)
2023 (July 1 through December 31)	$	776
2024		1,552
2025		1,552
2026		1,552
2027		1,294
Thereafter		-
Total lease payments		6,726
Less: Discount		847