What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-04-23 compared with 2020-04-14 · 517 added, 505 removed, 623 unchanged (62% of the section changed)

4 unchanged sentences

and Subsidiaries

Opinion on the Consolidated Financial Statements

Opinion on the Financial Statements

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

and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’

equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements).

and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

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

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

These consolidated financial statements are the responsibility of the Company’s management.

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

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

2 unchanged sentences

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting.

Accordingly, we express no such opinion.

3 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases .

The Company adopted the new lease standard using the transition method provided in Accounting Standards Update (ASU) No.

2018-11 such that prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 840, Leases .

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgements.

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

Tradename Impairment Testing

As disclosed in Note 2 to the consolidated financial statements, indefinite-lived tradenames are tested for impairment annually in the fourth quarter of each year unless an interim test is required due to the presence of indictors that the tradenames may be impaired.

The Company uses the income approach using a discounted cash flow model to value the indefinite-lived tradename, comparing its fair value to carrying value to determine impairment.

If the carrying value of

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

Finite-lived tradenames are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

The Company uses the income approach using an undiscounted cash flow model to assess the recoverability of the finite-lived tradename, comparing its undiscounted cash flows to its carrying value.

If the carrying value exceeds undiscounted cash flows, the Company will use a discounted cash flow model to determine the fair value, and an impairment loss is recognized if the carrying amount of finite-lived intangible asset exceeds fair value.

As of December 31, 2020, the Company had one indefinite-lived tradename (Isaac Mizrahi Brand) with a carrying value of $44,500,000.

As of December 31, 2019, the Company had two indefinite-lived tradenames (Isaac Mizrahi Brand and Ripka Brand) with a carrying value of $62,900,000.

As of December 31, 2020, the Company had four finite-lived tradenames (Ripka Brand, Halston Brand, C Wonder Brand and Longaberger Brand) with an aggregate carrying value of $48,748,000.

As of December 31, 2019, the Company had three finite-lived tradenames (Halston Brand, C Wonder Brand and Longaberger Brand) with an aggregate carrying value of $47,780,000.

We identified the Company’s tradename impairment testing as a critical audit matter.

Auditing the Company’s tradename impairment testing was complex and subjective due to the significant estimation required to determine the forecasted cash flows used in the Company’s testing.

Specifically, the forecasted cash flows are sensitive to significant assumptions such as revenue growth rates, including the terminal growth rates, margins, expenses, and discount rates, all of which are affected by expected future market or economic conditions, including the effects of the global pandemic.

In addition, our audit effort involved the use of professionals within our firm with specialized skill and knowledge in valuation methods and models.

The primary procedures we performed to address this critical audit matter included the following.

● We obtained an understanding of and evaluated the Company’s process to estimate future cashflows, including methods, data, and significant assumptions used in developing the discounted cashflow analysis as well as the completeness and accuracy of the underlying data used by the Company in its analyses.

● We evaluated the reasonableness of the Company’s forecasted revenues, operating results, and cash flows by comparing those forecasts to the underlying business strategies and growth plans, including existing license arrangements.

In addition, we performed a sensitivity analysis related to the key inputs to forecasted cash flows, including revenue growth rates, margins, and discount rates, to evaluate whether the changes in the assumptions would result in a material change in fair value of the tradenames.

● We evaluated management’s ability to estimate future cash flows by comparing the Company’s historical forecasted sales, operating results, and cash flow forecasts to actual results.

We also considered management's ability to estimate license renewals by examining historical renewal rates.

● With the assistance of our firm’s valuation professionals, we evaluated the reasonableness of the Company’s discounted cash flow models, including the terminal value and discount rates assumptions.

Going Concern

As disclosed in Note 10 to the consolidated financial statements, in March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, negatively and materially impacting the Company’s financial results and liquidity.

Specifically, licensing and wholesale revenues decreased primarily due to lower customer sales by its licensees and wholesale customers as a result of government-ordered retail store closures as well as

an overall slowdown in economic activity related to the COVID-19 pandemic.

This resulted in significant uncertainty surrounding the potential impact on the Company’s future results of operations and cash flows.

We identified the evaluation of whether the Company has the ability to continue as a going concern due to liquidity impacted by COVID-19 as a critical audit matter.

Auditing management’s going concern analysis was complex and highly subjective due to the significant estimation required to forecast future operations and cash flows that are affected by expected future market conditions, including the effects of global pandemic.

The primary procedures we performed to address this critical audit matter included the following.

● We obtained an understanding of and tested the company’s process to identify events and circumstances that would raise substantial doubt about the Company’s ability to continue as a going concern and process to estimate future cashflows, including methods, data, and significant assumptions used in developing the future cashflows, as well as the completeness and accuracy of the underlying data used by the Company in its analyses.

● We evaluated the reasonableness of the following significant assumptions made by management, including:

o The Company’s forecasted revenues and cash flows by comparing those forecasts to the underlying business strategies and growth plans, including existing license arrangements;

o Management’s ability to estimate future cash flows, including forecasted revenues, by comparing the Company’s historical cash flow forecasts to actual results.

We also considered management's ability to estimate license renewals by examining historical renewal rates.;

o We performed a sensitivity analysis related to the key inputs to forecasted cash flows, including revenue growth rates and cost saving measures, to evaluate the impact of COVID-19 on the Company’s future cash flows and how the Company’s strategy mitigates the impact

/s/ CohnReznick LLP

We have served as the Company’s auditors since 2012.

New York, New York

8 unchanged sentences

Cash and cash equivalents

Accounts receivable, net

Accounts receivable, net of allowances of $1,151 and $155, respectively

Prepaid expenses and other current assets

9 unchanged sentences

Accrued payroll

Current portion of accrued rent liability

Current portion of operating lease obligation

Current portion of long-term debt

Current portion of long-term debt, contingent obligations

Total current liabilities

Long-Term Liabilities:

Long-term portion of accrued rent liability

Long-term portion of operating lease obligation

7 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 at December 31, 2019 and 2018, respectively, and 18,866,417 and 18,138,616 shares issued and outstanding at December 31, 2019 and 2018, respectively

Common stock, $.001 par value, 50,000,000 shares authorized, and 19,260,862 and 18,866,417 shares issued and outstanding at December 31, 2020 and 2019, respectively

Paid-in capital

16 unchanged sentences

Other selling, general and administrative expenses

Costs in connection with potential acquisition

Facilities exit charge

(Recovery of) costs in connection with potential acquisitions

Stock-based compensation

Depreciation and amortization

Intangible asset impairment

Government assistance - Paycheck Protection Program and other

Asset impairment charges

Total operating costs and expenses

Gain on reduction of contingent obligation

Total other income

Operating (loss) income

Operating loss

Interest and finance expense

Interest expense - term debt

Other interest and finance charges

Interest expense and other finance charges

Loss on extinguishment of debt

Total interest and finance expense

(Loss) income before income taxes

Income tax (benefit) provision

Net (loss) income

Net (loss) income attributable to noncontrolling interest

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

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

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

Net loss attributable to Xcel Brands, Inc.

Loss per share attributable to Xcel Brands, Inc.

common stockholders:

Basic net (loss) income per share:

Diluted net (loss) income per share:

Basic net loss per share:

Diluted net loss per share:

Weighted average number of common shares outstanding:

4 unchanged sentences

and Subsidiaries

Consolidated Statements of Stockholders’

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

2 unchanged sentences

Balance as of January 1, 2019

Shares issued to employees, directors and others in connection with restricted stock grants, net of forfeitures

Compensation expense in connection with stock options and restricted stock

Shares repurchased including vested restricted stock in exchange for withholding taxes

Net income for the year ended December 31, 2018

Balance as of December 31, 2018

Issuance of common stock in connection with the acquisition of Halston Heritage

6 unchanged sentences

Balance as of December 31, 2019

Compensation expense in connection with stock options and restricted stock

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

Shares issued to other employees in connection with stock grants

Shares repurchased from employees in exchange for withholding taxes

Additional investment in Longaberger Licensing, LLC by non-controlling interest

Net loss for the year ended December 31, 2020

Balance as of December 31, 2020

See Notes to Consolidated Financial Statements.

5 unchanged sentences

Cash flows from operating activities

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization expense

Intangible asset impairment

Asset impairment charges

Amortization of deferred finance costs

3 unchanged sentences

Loss on extinguishment of debt

Deferred income tax (benefit) provision

Deferred income tax benefit

Net gain on sale of assets

Gain on reduction of contingent obligation

8 unchanged sentences

Cash consideration for acquisition of Halston Heritage assets

Net proceeds from sale of assets

Investment in Longaberger Licensing, LLC

3 unchanged sentences

Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Payment of deferred finance costs

1 unchanged sentence

Payment of long-term debt

Net cash provided by (used in) financing activities

Net decrease in cash, cash equivalents, and restricted cash

Net cash (used in) provided by financing activities

Net increase (decrease) in cash, cash equivalents, and restricted cash

Cash, cash equivalents, and restricted cash at beginning of period

23 unchanged sentences

Xcel Brands, Inc.

(“Xcel”

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

The Company has developed a design, production, and supply chain capability driven by its proprietary integrated technology platform.

Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brand (the "Isaac Mizrahi Brand"), the Judith Ripka brand (the "Ripka Brand"), the Halston brands (the "Halston Brands"), the C Wonder brand (the "C Wonder Brand"), and other proprietary brands.

The Company also manages the Longaberger brand (the “Longaberger Brand”) through its 50% ownership interest in Longaberger Licensing, LLC.

The Company licenses its brands to third parties, provides certain design, production, marketing, and distribution services, and generates licensing and design fee revenues through contractual arrangements with manufacturers and retailers.

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

Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the Judith Ripka brands (the "Ripka Brand"), the Halston brands (the "Halston Brand"), the C Wonder brands (the "C Wonder Brand"), and other proprietary brands.

The Company also manages the Longaberger brand (the “Longaberger Brand”) through its 50% ownership interest in Longaberger Licensing, LLC.

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

This includes licensing its own brands for promotion and distribution through a ubiquitous-channel retail sales strategy, which includes distribution through interactive television, the internet, and traditional brick-and-mortar retail channels.

In January 2018, the Company launched its jewelry wholesale and e-commerce operations and in November 2018, launched its apparel wholesale operations.

The revenues related to these operations are presented separately from the Company’s licensing activities as "Net sales" and "Cost of goods sold (sales)" in the Consolidated Statements of Operations.

The Company’s wholesale and e-commerce operations are presented as "Net sales"

and "Cost of goods sold (sales)"

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

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Xcel, its wholly owned subsidiaries, and entities in which Xcel has a controlling financial interest as of and for the years ended December 31, 2019 (the "Current Year") and 2018 (the "Prior Year").

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

GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”).

The consolidated financial statements include the accounts of Xcel, its wholly owned subsidiaries, and entities in which Xcel has a controlling financial interest as of and for the years ended December 31, 2020 (the "Current Year") and 2019 (the "Prior Year").

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

GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”).

All significant intercompany accounts and transactions have been eliminated in consolidation.

9 unchanged sentences

● Useful lives of trademarks;

● Assumptions used in the valuation of intangible assets, including cash flow estimates for impairment analysis;

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Assumptions used in the valuation of intangible assets, including cash flow estimates for impairment analysis;

● Black-Scholes option pricing model assumptions for stock option values;

Performance-based stock option expense recognition;

● Incremental borrowing rate;

2 unchanged sentences

Reclassifications

Certain reclassifications have been made to Prior Year financial statements to conform to classifications used in the Current Year, including (i) the separate presentation on the balance sheet of current and long-term lease-related liabilities (previously included within accounts payable, accrued expenses other current liabilities, and other long-term liabilities, respectively) and (ii) the inclusion of deferred revenue within accounts payable, accrued expenses and other current liabilities on the balance sheet.

These reclassifications had no impact on net income, stockholders’

equity, or cash flows as previously reported.

Certain reclassifications have been made to Prior Year financial statements to conform to classifications used in the Current Year – specifically, the aggregation of interest expense with other finance charges, the latter of which was not material in Current Year or Prior Year.

This reclassification had no impact on net income, stockholders’ equity, or cash flows as previously reported.

Cash and Cash Equivalents

2 unchanged sentences

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

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

As of December 31, 2019 and 2018, the Company had $10.6 million and $11.0 million, respectively, of accounts receivable, net of allowances for doubtful accounts of approximately $0.2 million at December 31, 2019 and 2018.

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

As of December 31, 2020 and 2019, the Company had $8.9 million and $10.6 million, respectively, of accounts receivable, net of allowances for doubtful accounts of $1.2 million and $0.2 million, respectively.

The Company recognized bad debt expense of $1.1 million for the Current Year and a recovery of $(0.1) million for the Prior Year.

Included within these amounts, the Current Year reflects $1.0 million of bad debt expense related to the bankruptcy of several retail customers due to the novel coronavirus disease pandemic.

The total allowance of $1.0 million against such customers’ outstanding receivable balances of $1.2 million at December 31, 2020 represents management’s best estimate of collectibility, based on information currently available.

There is no earned revenue that has been accrued but not billed as of December 31, 2020 and 2019.

13 unchanged sentences

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

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

As a result of the bankruptcy of Lord & Taylor in the Current Year, the Company recognized a $0.1 million impairment related to certain furniture and fixture assets physically located in Lord & Taylor’s stores.

Trademarks and Other Intangible Assets

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles - Goodwill and Other.”

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

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

Indefinite-Lived Intangible Assets

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

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

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

4 unchanged sentences

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

The Company performed its annual impairment testing as described above for the year ended December 31, 2020, and concluded that there was no impairment of its indefinite-lived intangible assets.

As a result of performing its annual impairment testing as described above for the year ended December 31, 2019, the Company recorded a $6.2 million impairment related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct-to-consumer model.

No other impairment charges were recorded for the years ended December 31, 2019 and 2018.

No other impairment charges were recorded for the year ended December 31, 2019.

Finite-Lived Intangible Assets

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

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

No impairment charges were recorded related to finite-lived intangible assets for the years ended December 31, 2019 and 2018.

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

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

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

The Company’s finite-lived intangible assets are amortized over their estimated useful lives of four (4) to eighteen (18) years.

Restricted Cash

Restricted cash was $1.1 million and $1.5 million as of December 31, 2019 and 2018, respectively.

The inputs utilized in the

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Restricted cash at both December 31, 2019 and 2018 included $1.1 million of cash deposited with Bank Hapoalim B.M.

(“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of the Company’s current corporate office and operating facility at 1333 Broadway, New York City.

Restricted cash at December 31, 2018 also included $0.4 million of cash held as a security deposit for the sublease of the Company’s former corporate offices by the Company to a third-party subtenant.

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

As a result of performing its annual impairment testing as described above for the year ended December 31, 2020, the Company recorded a $13.0 million impairment related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the novel coronavirus disease pandemic.

No other impairment charges were recorded for the year ended December 31, 2020.

No impairment charges were recorded related to finite-lived intangible assets for the year ended December 31, 2019.

The Company’s finite-lived intangible assets are amortized over their estimated useful lives of seven (7) to eighteen (18) years.

Restricted Cash

Restricted cash was $1.1 million as of December 31, 2020 and 2019, respectively.

This balance consisted of $1.1 million of cash deposited with Bank Hapoalim B.M.

(“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of the Company’s current corporate office and operating facility at 1333 Broadway, New York City.

Investment in Unconsolidated Affiliate

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

This investment is accounted for in accordance with Accounting Standards Update (“ASU”) No.

2016‑01, "Financial Instruments –

Overall (Subtopic 825‑10):

"Recognition and Measurement of Financial Assets and Financial Liabilities," and is included within other assets on the Company’s consolidated balance sheets at December 31, 2019 and 2018.

This investment is accounted for in accordance with Accounting Standards Update (“ASU”) No.

2016-01, "Financial Instruments – Overall (Subtopic 825-10):

"Recognition and Measurement of Financial Assets and Financial Liabilities,"

and is included within other assets on the Company’s consolidated balance sheets at December 31, 2020 and 2019.

As of December 31, 2020 and 2019, the carrying value of this investment was $0.1 million.

3 unchanged sentences

This note receivable bore interest at 5.1%, was due and payable in full on April 1, 2019, and was fully collateralized by various assets of the employee in which the Company had been granted a security interest.

The note receivable was recorded at amortized cost, and was included within other assets on the Company’s consolidated balance sheet at December 31, 2018 with net carrying value of $0.9 million.

The note receivable was satisfied on March 31, 2019, and as of December 31, 2019, there were no amounts remaining outstanding under the note.

5 unchanged sentences

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

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

The Company recorded contingent obligations in connection with the acquisition of the Judith Ripka Trademarks in 2014, the C Wonder Trademarks in 2015, and the Halston Heritage Trademarks in 2019.

See Note 6 for additional information related to contingent obligations.

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

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

The Company recorded contingent obligations in connection with the acquisition of the Judith Ripka Trademarks in 2014, the C Wonder Trademarks in 2015, and the Halston Heritage Trademarks in 2019.

See Note 6 and Note 10 for additional information related to contingent obligations.

Revenue Recognition

The Company applies the guidance in ASC Topic 606, “Revenue from Contracts with Customers”

to recognize revenue.

The Company applies the guidance in ASC Topic 606, “Revenue from Contracts with Customers” to recognize revenue.

The Company recognizes revenue continuously over time as it satisfies its continuous obligation of granting access to its licensed intellectual properties, which are deemed symbolic intellectual properties under the applicable revenue accounting guidance.

1 unchanged sentence

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

There were no such differences that would have a material impact on the Company’s consolidated balance sheets at December 31, 2019 and 2018.

There were no such differences that would have a material impact on the Company’s consolidated balance sheets at December 31, 2020 and 2019.

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

More specifically, the Company separately identifies:

Contracts for which, based on experience, royalties are expected to exceed any applicable minimum guaranteed payments, and to which an output-based measure of progress based on the “right to invoice”

practical expedient is applied because the royalties due for each period correlate directly with the value to the customer of the Company’s performance in each period (this approach is identified as “View A”

by the FASB Revenue Recognition Transition Resource Group, “TRG”);

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

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

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

The Company does not typically perform by transferring goods or services to customers before the customer pays consideration or before payment is due, thus the amounts of contract assets as defined by ASC 606-10-45-3 were not material as of December 31, 2020 and 2019.

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

The Company typically does not receive consideration in advance of performance and, consequently, amounts of contract liabilities as defined by ASC 606-10-45-2 were not material as of December 31, 2020 and 2019.

The Company does not disclose the amount attributable to unsatisfied or partially satisfied performance obligations for variable revenue contracts (identified under “View A”

above) in accordance with the optional exemption allowed under ASC 606.

The Company did not have any revenue recognized in the reporting period from performance obligations satisfied, or partially satisfied, in previous periods.

Remaining minimum guaranteed payments for active contracts as of December 31, 2019 are expected to be recognized ratably in accordance with View C over the remaining term of each contract based on the passage of time and through December 2023.

The Company earns design fees for serving as a buying agent for apparel under private labels for retailers.

As a buying agent, the Company utilizes its expertise and relationships with manufacturers to facilitate the production of private label apparel to customer specifications.

The Company’s design fee revenue also includes fees charged for its design and product development services provided to certain suppliers.

The Company satisfies its performance obligation to its customers by performing the services in buyer agency agreements and thereby earning its design fee at the point in time when the

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

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

customer’s freight forwarder takes control of the goods.

The Company satisfies its performance obligation with the suppliers and earns its design fee from the factory at the point in time when the customer’s freight forwarder takes control of the goods.

The Company did not have any revenue recognized in the reporting period from performance obligations satisfied, or partially satisfied, in previous periods.

Remaining minimum guaranteed payments for active contracts as of December 31, 2020 are expected to be recognized ratably in accordance with View C over the remaining term of each contract based on the passage of time and through December 2023.

Wholesale Sales

2 unchanged sentences

Direct to Consumer Sales

The Company’s revenue associated with its e-commerce jewelry is recognized at a point in time when product is shipped to the customer.

The Company’s revenue associated with its e-commerce businesses is recognized at a point in time when product is shipped to the customer.

Advertising Costs

All costs associated with production for the Company’s advertising, marketing, and promotion are expensed during the periods when the activities take place.

All other advertising costs, such as print and online media, are expensed when the advertisement occurs.

The Company incurred $0.9 million in advertising and marketing costs for the year ended December 31, 2019 and $0.3 million for the year ended December 31, 2018.

As of and for the year ended December 31, 2018, total rental payments under operating leases that include scheduled payment increases and rent holidays were amortized on a straight-line basis over the term of the lease.

Landlord allowances were amortized on a straight-line basis from the date of possession through the end of the lease term as a reduction of rent expense.

As of January 1, 2019, the Company adopted the new lease accounting guidance prescribed by ASU No.

Refer to “Recently Adopted Accounting Pronouncements”

below for a description of the Company’s accounting policies relative to leases as of and for the year ended December 31, 2019 under this new guidance.

The Company incurred $0.9 million in advertising and marketing costs for each of the years ended December 31, 2020 and December 31, 2019.

The Company determines if an arrangement is a lease at inception.

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 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 net income on a straight-line basis over the lease terms.

As the Company’s leases typically do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

For real estate leases of office space, the Company accounts for the lease and non-lease components as a single lease component.

Variable lease payments that do not depend on an index or rate (such as real estate taxes and building insurance and lessee’s shares thereof), if any, are excluded from lease payments at lease commencement date for initial measurement.

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

Lease expense for operating lease payments related to office leases is recognized on a straight-line basis over the lease term.

Lease expense for operating lease payments related to retail leases is recognized on a straight-line basis over the period of operation, as this is representative of the pattern in which benefit is derived from the lease.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation,”

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

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

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

The valuation determined by the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables.

These variables include, but are not limited to, expected stock price volatility over the terms of the awards, and actual and projected employee stock option exercise behaviors.

2 unchanged sentences

The Company utilizes the simplified method to determine the expected life of the options and warrants due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns.

The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Restricted stock awards are valued using the fair value of the Company’s stock at the date of grant.

The Company accounts for non-employee awards in accordance with ASU 2018-07, “Compensation –

Stock Compensation (Topic 718) –

Improvements to Nonemployee Share-Based Payment Accounting.”

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

The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

Restricted stock awards are valued using the fair value of the Company’s stock at the date of grant.

The Company accounts for non-employee awards in accordance with ASU 2018-07, “Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting.” Such awards are measured at the grant date fair value of the equity instruments to be issued, and the Company recognizes compensation cost for grants to non-employees on a straight-line basis over the period of the grant.

The Company accounts for forfeitures as a reduction of compensation cost in the period when such forfeitures occur.

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

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

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

5 unchanged sentences

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

ASC Topic 820, “Fair Value Measurements and Disclosures,”

defines fair value and establishes a framework for measuring fair value under U.S.

The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date.

In connection with measuring the fair value of the Company’s assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).

Fair Value of Financial Instruments

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

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

The carrying value of the Xcel Term Loan (as defined in Note 6) approximates fair value because the fixed interest rate approximates current market rates and in the instances it does not, the impact is not material.

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

The fair value of the Company’s cost method investment does not have a readily determinable

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

The fair value of the Company’s financial assets and liabilities reflects management’s

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

fair value and in accordance with ASC 820‑10‑35‑59, the investment is valued at cost, less impairment, plus or minus observable price changes of an identical or similar investment of the same issuer.

estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date.

Fair Value of Financial Instruments

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

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

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

Concentrations of Credit Risk

1 unchanged sentence

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

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

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

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

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

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

Concentration of credit risk with respect to the promissory note receivable previously held by the Company was mitigated as it was fully collateralized by various assets in which the Company had been granted a security interest.

Earnings Per Share

3 unchanged sentences

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018‑13, “Fair Value Measurement (Topic 820):

Disclosure Framework –

Changes to the Disclosure Requirements for Fair Value Measurement.”

This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.”

This guidance is effective for public companies for fiscal years beginning after December 15, 2019, with early adoption permitted.

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

In December 2019, the FASB issued ASU No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.”

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

2019-12, “Income Taxes (Topic 740):

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

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

This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

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

Recently Adopted Accounting Pronouncements

The Company adopted ASU No.

2016-02, “Leases,”

effective January 1, 2019, by applying the new guidance under the additional and alternative transition method allowed by ASU No.

2018-11, “Leases (Topic 842):

Targeted Improvements.”

The core principle of this standard is that an entity should recognize on its balance sheet assets and liabilities arising from a lease.

In accordance with that principle, the new lease accounting guidance requires that a lessee recognize a liability to make future lease payments (the lease liability) and a right-of-use (“ROU”) asset representing its right to use the underlying leased asset for the lease term.

As of January 1, 2019, the adoption resulted in the recognition of operating lease right-of-use ("ROU") assets of approximately $10.4 million, lease liabilities of approximately $13.2 million, and a decrease of approximately $2.8 million in accrued rent.

The adoption of the new lease accounting guidance did not have an impact on

The adoption of this new guidance in 2021 will not have any significant impact on the Company’s results of operations, cash flows, and financial condition.

In June 2016, the FASB issued ASU No.

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

Measurement of Credit Losses on Financial Instruments,"

which was subsequently amended in November 2018 through ASU No.

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

In November 2019, the FASB issued ASU No.

2019-10, which, among other things, deferred the application of the new guidance on credit losses for smaller reporting

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

the Company’s consolidated statement of operations, and had no impact on cash provided by or used in operating, financing, or investing activities in the Company's consolidated statement of cash flows.

companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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

Recently Adopted Accounting Pronouncements

The Company adopted ASU No.

2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” effective January 1, 2020.

This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance did not have any impact on the Company’s results of operations, cash flows, and financial condition.

The Company adopted ASU No.

2016-02, “Leases,” effective January 1, 2019, by applying the new guidance under the additional and alternative transition method allowed by ASU No.

2018-11, “Leases (Topic 842):

Targeted Improvements.” As of January 1, 2019, the adoption resulted in the recognition of operating lease right-of-use ("ROU") assets of approximately $10.4 million, lease liabilities of approximately $13.2 million, and a decrease of approximately $2.8 million in accrued rent.

The adoption of the new lease accounting guidance did not have an impact on the Company’s consolidated statement of operations, and had no impact on cash provided by or used in operating, financing, or investing activities in the Company's consolidated statement of cash flows.

The Company elected the available practical expedients under ASC 842-10-15-37 (thereby not separating lease components from non-lease components and instead accounting for all components as a single lease component) and ASC 842-10-65-1 (thereby, among other things, not reassessing lease classification), and implemented changes to its processes and methodologies related to leases to enable the preparation of financial information upon adoption and to allow for the correct identification, classification, and measurement of leases in accordance with the new guidance going forward.

The Company determines if an arrangement is a lease at inception.

Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The Company may use the implicit rate when readily determinable.

Operating lease ROU assets also include scheduled lease payments made and initial direct costs, and exclude lease incentives and accrued rent.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

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

For real estate leases of office space, the Company accounts for the lease and non-lease components as a single lease component.

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

For leases with a term of 12 months or less, the Company does not recognize lease liabilities and ROU assets, but recognizes the lease payments in net income on a straight-line basis over the respective lease terms.

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

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

Acquisition of Halston Heritage Trademarks

On February 11, 2019 (the “Closing Date”), the Company and its wholly owned subsidiary, H Heritage Licensing, LLC, entered into an asset purchase agreement (the "Heritage Asset Purchase Agreement") with the H Company IP, LLC (the "Seller" or "HIP") and its parent, House of Halston LLC ("HOH"), pursuant to which the Company acquired certain assets of HIP, including the "Halston", "Halston Heritage", and "Roy Frowick" trademarks (collectively, the "Halston Heritage Trademarks") and other intellectual property rights relating thereto.

or "HIP") and its parent, House of Halston LLC ("HOH"), pursuant to which the Company acquired certain assets of HIP, including the "Halston", "Halston Heritage", and "Roy Frowick"

trademarks (collectively, the "Halston Heritage Trademarks") and other intellectual property rights relating thereto.

Benjamin Malka, who was a director of the Company, is a 25% equity holder of HOH and former Chief Executive Officer of HOH.

Pursuant to the Heritage Asset Purchase Agreement, at closing, the Company delivered in escrow for HIP or its designees (collectively, the “Sellers”) an aggregate of $8.4 million in cash and 777,778 shares of the Company’s common stock valued at $1.1 million (the “Xcel Shares”), subject to a voting agreement and a lock-up agreement relating to the Xcel Shares and a consent and waiver agreement each in form satisfactory to Xcel within three months from the date of the Heritage Asset Purchase Agreement.

Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.

In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, 2022 based on Excess Net Royalties.

“Excess Net Royalties” during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) is equal to (a) the positive amount, if any, of the Net Royalties as calculated for such Royalty Target Year, less the greater of (i) One Million Five Hundred Thousand Dollars ($1.5 million), or (ii) the maximum Net Royalties for any previous Royalty Target Year.

“Applicable Percentage” means (a) 50% of the first $10.0 million of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0 million and up to $15.0 million and (c) 0% of aggregate Excess Net Royalties during the

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, 2022 based on Excess Net Royalties.

“Excess Net Royalties”

during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) is equal to (a) the positive amount, if any, of the Net Royalties as calculated for such Royalty Target Year, less the greater of (i) One Million Five Hundred Thousand Dollars ($1.5 million), or (ii) the maximum Net Royalties for any previous Royalty Target Year.

“Applicable Percentage”

means (a) 50% of the first $10.0 million of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0 million and up to $15.0 million and (c) 0% of aggregate Excess Net Royalties during the Earn-Out Period in excess of $15.0 million.

The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”);

provided, however, that if the number of Earn-Out Shares, when combined with the number of Xcel Shares issued at the Closing Date, will exceed 4.99% of the aggregate number of shares of Xcel common stock outstanding as of the Closing Date (calculated in accordance with Nasdaq Rule 5635(a)) (the “Xcel Share Limit”), then Xcel may, in its sole and unfettered discretion, elect to (x) pay cash for the Earn-Out Value attributable to the Earn-Out Shares that would exceed the Xcel Share Limit;

Earn-Out Period in excess of $15.0 million.

The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”);

(y) solicit stockholder approval for the issuance of Earn-Out Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, issue such Earn-Out Shares to HIP;

6 unchanged sentences

Total acquisition price

The Halston Heritage Trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s consolidated statements of operations.

The Halston Heritage Trademarks and archives are amortized on a straight-line basis over their expected useful lives of eighteen and seven years, respectively.

7 unchanged sentences

Consolidation of Longaberger Licensing, LLC Variable Interest Entity and Acquisition of Longaberger Trademarks

On November 12, 2019, the Company entered into a limited liability company agreement (the “LLC Agreement”) with a subsidiary of Hilco Global for Longaberger Licensing, LLC (“LL”).

Hilco Global became the sole Class A Member of LL, and Xcel became the sole Class B Member of LL.

1 unchanged sentence

Simultaneously on November 12, 2019, Longaberger Licensing, LLC completed the acquisition of the Longaberger trademarks and other intellectual property rights relating thereto from the trustee for the Longaberger Company.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

purchase price for such assets was $750,000.

The total purchase price for such assets was $750,000.

No other assets or liabilities were acquired as part of this transaction, and the acquisition was accounted for as an asset purchase.

2 unchanged sentences

Upon consolidation, the Company recognized $750,000 of intangible assets and a noncontrolling interest of $375,000.

The Longaberger trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s consolidated statements of operations.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

The Longaberger trademarks have been determined by management to have a finite useful life, and accordingly, amortization is recorded in the Company’s consolidated statements of operations.

The Longaberger trademarks are amortized on a straight-line basis over their expected useful life of fifteen (15) years.

During the Current Year, Hilco Global and Xcel each contributed $300,000 to LL in order to fund LL’s working capital requirements, which resulted in an increase of $300,000 to the carrying value of Hilco Global’s non-controlling interest.

Trademarks and Other Intangibles

13 unchanged sentences

Trademarks (finite-lived)

Other intellectual property

Copyrights and other intellectual property

As of December 31, 2019, the Company recorded a non-cash impairment charge of $6.2 million related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct to consumer model.

During the year ended December 31, 2020, the Company recorded a non-cash impairment charge of $13.0 million related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the novel coronavirus disease pandemic.

During the year ended December 31, 2019, the Company recorded a non-cash impairment charge of $6.2 million related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct-to-consumer model.

No other intangible asset impairment charges were recorded for the years ended December 31, 2020 and 2019.

Amortization expense for intangible assets for the years ended December 31, 2020 and 2019 was approximately $4.6 million and $3.2 million, respectively.

The trademarks of the Isaac Mizrahi Brand and the Ripka Brand have been determined to have indefinite useful lives and accordingly, no amortization has been recorded for those intangible assets.

Effective January 1, 2019, and in consideration of the acquisition of the Halston and Halston Heritage trademarks in February 2019, the Company determined that the Halston brand, inclusive of all of its trademarks, including H Halston, and H by Halston, has a finite life of eighteen (18) years, and began amortizing those assets on a straight-line basis accordingly.

Prior to January 1, 2019, the H Halston and H by Halston assets were considered indefinite-lived assets.

Effective January 1, 2020, the Company determined that the Ripka Brand, inclusive of all its trademarks, has a finite life of 15 years, and is amortized on a straight-line basis accordingly.

Prior to January 1, 2020, the Ripka Brand trademarks were considered indefinite-lived assets.

The trademarks of the Isaac Mizrahi Brand have been determined to have indefinite useful lives and accordingly, no amortization has been recorded for those intangible assets.

XCEL BRANDS, INC.

7 unchanged sentences

QVC Agreements

Through its wholly owned subsidiaries, the Company has direct-to-retail license agreements with QVC, pursuant to which the Company designs, and QVC sources and sells, various products under the IsaacMizrahiLIVE brand, the Judith Ripka brand, and the H by Halston brand.

These agreements include, respectively, the IM QVC Agreement, the Ripka QVC Agreement, and the H QVC Agreement (collectively, the “QVC Agreements”).

QVC owns the rights to all designs produced under the QVC Agreements, and the QVC Agreements include the sale of products across various categories through QVC’s television media and related internet sites.

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

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

These agreements include, respectively, the IM QVC Agreement, the Ripka QVC Agreement, the H QVC Agreement, and the Longaberger QVC Agreement (collectively, the “QVC Agreements”).

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

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

The QVC Agreements include automatic renewal periods as detailed below unless terminated by either party.

11 unchanged sentences

three-year period

On March 31, 2020, the Ripka QVC Agreement was automatically renewed, as per the terms of the agreement, through March 31, 2021.

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

Under the IM QVC Agreement, IM Brands has also granted to QVC and its affiliates, during the same period, exclusive, worldwide rights to promote third-party vendor co-branded products that, in addition to bearing and being marketed in connection with the trademarks and logos of such third-party vendors, also bear or are marketed in connection with the IsaacMizrahiLIVE trademark and related logo.

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

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

Longaberger QVC Agreement

October 31, 2021

two-year period

November 2019

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

Under the IM QVC Agreement, IM Brands has also granted to Qurate and its affiliates, during the same period, exclusive, worldwide rights to promote third-party vendor co-branded products that, in addition to bearing and being marketed in connection with the trademarks and logos of such third-party vendors, also bear or are marketed in connection with the IsaacMizrahiLIVE trademark and related logo.

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

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 QVC Agreements, excluding freight, shipping and handling charges, customer returns, and sales, use, or other taxes.

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

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

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

Net revenue from QVC totaled $22.21 million and $25.63 million for the Current Year and Prior Year, respectively, representing approximately 53% and 72% of the Company’s total revenues, respectively.

As of December 31, 2019 and 2018, the Company had receivables from QVC of $4.33 million and $5.68 million, representing approximately 41% and 52% of the Company’s accounts receivable, respectively.

The December 31, 2019 and 2018 QVC receivables did not include any earned revenue accrued but not yet billed as of the respective balance sheet dates.

Net revenue from Qurate totaled $17.61 million and $22.24 million for the Current Year and Prior Year, respectively, representing approximately 60% and 53% of the Company’s total revenues, respectively.

As of December 31, 2020 and 2019, the Company had receivables from Qurate of $4.46 million and $4.36 million, representing approximately 50% and 41% of the Company’s accounts receivable, respectively.

The December 31, 2020 and 2019 Qurate receivables did not include any earned revenue accrued but not yet billed as of the respective balance sheet dates.

Debt and Other Long-term Liabilities

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

($ in thousands)

Xcel Term Loan

Term loan debt

Unamortized deferred finance costs related to term loan

IM Seller Note

Ripka Seller Note

Contingent obligation –

Current portion of long-term debt (i), (ii)

Current portion of long-term debt

Long-term debt

The current portion of long-term debt presented on the consolidated balance sheet at December 31, 2019 consists of $2.25 million related to the Xcel Term Loan.

The current portion of long-term debt presented on the consolidated balance sheet at December 31, 2018 includes (a) $4.0 million related to the Xcel Term Loan, (b) $0.74 million related to the IM Seller Note, (c) $2.95 million related to contingent obligations, and (d) 0.58 million related to the Ripka Seller Note.

Prior Xcel Term Loan

and collectively, the “Guarantors”), as Guarantors, entered into an amended and restated loan and security agreement (the “Loan Agreement”) with Bank Hapoalim B.M.

Term Loan Debt

On February 26, 2016, the Company and its wholly owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, IMNY Retail Management, LLC, and IMNY E-Store, USA, LLC (each a “Guarantor” and collectively, the “Guarantors”), as Guarantors, entered into an amended and restated loan and security agreement with Bank Hapoalim B.M.

as agent, and the financial institutions party thereto as lenders.

The Loan Agreement amended and restated the previous IM Term Loan, JR Term Loan, and H Term Loan.

Pursuant to the Loan Agreement, Xcel assumed the obligations of each of IM Brands, LLC, JR Licensing, LLC, and H Licensing, LLC under the respective term loans with BHI in the aggregate principal amount of $27.9 million (the loan under the Loan Agreement is referred to as the “Xcel Term Loan”).

The Xcel Term Loan was due to mature on January 1, 2021.

Principal on the Xcel Term Loan was payable in quarterly installments on each of January 1, April 1, July 1 and October 1.

The Xcel Term Loan was amended in February 2017 and again in June 2017.

Under these amendments, principal payments for the year ended December 31, 2017 were increased by a total of $0.8 million, principal payments for the year ended December 31, 2019 were increased by a total of $1.0 million, and principal payments for the year ending December 31,

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

2021 were decreased by $1.8 million.

In addition, the minimum EBITDA (as defined in the Loan Agreement) requirement for the year ended December 31, 2017 was changed from $9.0 million to $7.0 million, and the minimum EBITDA requirements for the years ended December 31, 2018 and 2019 were changed from $9.0 million to $8.0 million, respectively.

There were no changes to the total principal balance, interest rate, maturity date, or other terms of the Loan Agreement.

Management assessed and determined that these amendments represented debt modifications and, accordingly, no gain or loss was recorded.

Second Amended and Restated Xcel Term Loan

On February 11, 2019, concurrent with the Closing Date of the acquisition of the Halston Heritage Brands (see Note 3), the Company entered into an amended loan agreement with BHI (the “Second Amended and Restated Loan and Security Agreement”), which amended and restated the Prior Xcel Term Loan.

Immediately prior to February 11, 2019, the aggregate principal amount of the Prior Xcel Term loan was $14.5 million.

On February 11, 2019, concurrent with the Closing Date of the acquisition of the Halston Heritage Brands (see Note 3), the Company entered into an amended loan agreement with BHI (the “Loan Agreement”), which amended and restated the prior term loan.

Immediately prior to February 11, 2019, the aggregate principal amount of the prior term loan was $14.5 million.

Pursuant to the Loan Agreement, the Lenders have extended to Xcel an additional term loan in the amount of $7.5 million, such that, as of February 11, 2019, the aggregate outstanding balance of all the term loans extended by BHI to Xcel was $22.0 million, which amount has been divided under the Loan Agreement into two term loans:

(1) a term loan in the amount of $7.3 million (“Term Loan A”) and (2) a term loan in the amount of $14.7 million (“Term Loan B”

and, together with Term Loan A, the “Term Loans”).

(1) a term loan in the amount of $7.3 million (“Term Loan A”) and (2) a term loan in the amount of $14.7 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”).

The proceeds of the additional term loan were used to finance the Halston Heritage Brands acquisition described in Note 3.

The terms and conditions of the Second Amended and Restated Xcel Term Loan resulted in significantly different debt service payment requirements, compared with the Prior Xcel Term Loan, including an increase of $7.5 million in the principal balance, and related changes to the timing and amount of principal payments, as well as changes in the interest rate.

The terms and conditions of the Loan Agreement resulted in significantly different debt service payment requirements, compared with the prior term loan, including an increase of $7.5 million in the principal balance, and related changes to the timing and amount of principal payments, as well as changes in the interest rate.

Management assessed and determined that this amendment resulted in an extinguishment of debt and recognized a loss of $0.2 million (consisting of unamortized deferred finance costs) during the year ended December 31, 2019.

The Second Amended and Restated Loan and Security Agreement also contemplates that BHI, or their affiliates (collectively, the “Lenders”) can provide to Xcel a revolving loan facility and a letter of credit facility, the terms of each of which shall be agreed to by Xcel and the Lenders.

Amounts advanced under the revolving loan facility (the “Revolving Loans”) will be used for the purpose of consummating acquisitions by Xcel or its subsidiaries that are or become parties to the Second Amended and Restated Loan and Security Agreement.

Xcel will have the right to convert Revolving Loans to incremental term loans (the “Incremental Term Loans”) in minimum amounts of $5.0 million.

The Loan Agreement also allows that BHI and any other lender party to the Loan Agreement (collectively, the “Lenders”) can provide to Xcel a revolving loan facility and a letter of credit facility, the terms of each of which shall be agreed to by Xcel and the Lenders.

Xcel will have the right to convert Revolving Loans to incremental term loans (the “Incremental Term Loans”) in minimum amounts of $5.0 million.

The Company has not drawn down any funds under either the revolving loan facility or letter of credit facility.

The Term Loans mature on December 31, 2023, Incremental Term Loans shall mature on the date set forth in the applicable term note, and Revolving Loans and the letter of credit facility shall mature on such date as agreed upon by Xcel and the Lenders.

Any letter of credit issued under Second Amended and Restated Loan and Security Agreement shall terminate no later than one year following the date of issuance thereof.

On April 13, 2020, the Company further amended its Second Amended and Restated Loan and Security Agreement with BHI.

Under this amendment, the quarterly installment payment due March 31, 2020 was deferred, and the amounts of the quarterly installment payments due throughout the remainder of 2020 were reduced, while the amount of principal to be repaid through variable payments based on excess cash flow was increased.

In addition, there were multiple changes and waivers to the various financial covenants.

Further, this amendment permits Xcel to incur unsecured debt through the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and excludes any associated PPP debt and debt service from the covenant calculations.

There were no changes to the total principal balance, interest rate, or maturity date.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Principal on the Xcel Term Loan, as amended, is payable in fixed installments as follows:

On April 13, 2020, the Company and BHI amended the Loan Agreement.

In addition, there were multiple changes and waivers to the various financial covenants.

Further, this amendment permitted Xcel to incur unsecured debt through the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and excludes any associated PPP debt and debt service from the covenant calculations.

See Note 7 for details regarding the Company’s accounting for the PPP.

There were no changes to the total principal balance, interest rate, or maturity date.

On August 18, 2020, the Company and BHI further amended its Loan Agreement.

Under this amendment, the amounts of the quarterly installment payments due throughout 2021 were reduced, and the amount of principal to be repaid through variable payments based on excess cash flow was increased.

In addition, there were multiple changes and waivers to the various financial covenants.

There were no changes to the total principal balance, interest rate, or maturity date.

Management assessed and determined that the Current Year amendments represented debt modifications and, accordingly, no gain or loss was recorded.

In connection with the Current Year amendments, the Company incurred fees to or on behalf of BHI of approximately $27,000;

these fees, along with deferred finance costs related to financing transactions that took place in prior years, have been deferred on the consolidated balance sheets as a reduction to the carrying value of the term loan debt, and are being amortized to interest expense over the term of the Loan Agreement using the effective interest method.

Any letter of credit issued under Loan Agreement shall terminate no later than one year following the date of issuance thereof.

The remaining principal balance of the Term Loans, as amended, outstanding at December 31, 2020 is payable in fixed installments as set forth in the following table, plus the variable payments as described below:

($ in thousands)

Installment Payment Dates

June 30, 2020, September 30, 2020, and December 31, 2020

March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021

April 30, 2021

March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022

March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023

In addition to the fixed installments outlined above, commencing with the fiscal quarter ended March 31, 2021, the Company is required to repay a portion of the Xcel Term Loan in an amount equal to 50% of the excess cash flow for the fiscal quarter, provided that no early termination fee shall be payable with respect to any such payment.

In addition to the fixed installments outlined above, commencing with the fiscal quarter ending March 31, 2021, the Company is required to repay a portion of the Term Loans in an amount equal to 50% of the excess cash flow for the fiscal quarter, provided that no early termination fee shall be payable with respect to any such payment.

Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash principal paid or payable during such period, and (iii) all dividends declared and paid (or which could have been declared and paid) during such period to equity holders of any credit party treated as a disregarded entity for tax purposes.

To the extent that the cumulative amount of such variable repayments made is less than $4.45 million as of March 31, 2022, any such shortfall must be repaid at that date.

Thus, the aggregate remaining annual principal payments under the Xcel Term Loan are as follows:

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Thus, the aggregate remaining annual principal payments under the Term Loans at December 31, 2020 were as follows:

($ in thousands)

Year Ending December 31,

Xcel has the right to prepay the Term Loans, Incremental Term Loans, Revolving Loans, and obligations with respect to letters of credit and accrued and unpaid interest thereon and to terminate the Lenders’

obligations to make Revolving Loans and issue letters of credit, provided that any prepayment of less than all of the outstanding balances of the Term Loans and Incremental Term Loans shall be applied to the remaining amounts due in inverse order of maturity.

provided that any prepayment of less than all of the outstanding balances of the Term Loans and Incremental Term Loans shall be applied to the remaining amounts due in inverse order of maturity.

If any Term Loan or any Incremental Term Loan is prepaid on or prior to the third anniversary of the Closing Date (including as a result of an event of default), Xcel shall pay an early termination fee as follows:

5 unchanged sentences

or (v) zero percent (0.00%) if any Term Loan or any Incremental Term Loan is prepaid after the third anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Notwithstanding the above, Xcel may make a voluntary prepayment of up to $0.75 million without any early termination fees, after any PPP loan proceeds have been received by the Company.

Any such prepayment would be applied against the April 30, 2021 fixed installment payment and would be excluded from the computation of excess cash flows.

Xcel’s obligations under the Xcel Term Loan are guaranteed by and secured by all of the assets of Xcel and its wholly owned subsidiaries, as well as any subsidiary formed or acquired that becomes a credit party to the Xcel Term Loan agreement (the “Guarantors”) and, subject to certain limitations contained in Xcel Term Loan, equity interests of the Guarantors.

Xcel’s obligations under the Loan Agreement are guaranteed by and secured by all of the assets of Xcel and its wholly owned subsidiaries, as well as any subsidiary formed or acquired that becomes a credit party to the Term Loans (the “Guarantors”) and, subject to certain limitations contained in the Term Loans, equity interests of the Guarantors.

Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration will be paid other than by cash of Xcel or by the issuance of equity interest of Xcel.

The Amended Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of the Company (on a consolidated basis with the Guarantors under the Second Amended and Restated Loan and Security Agreement):

The Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of the Company (on a consolidated basis with the Guarantors under the Loan Agreement):

● net worth of at least $90.0 million at the end of each fiscal quarter;

liquid assets of at least $3.25 million through the earlier of December 31, 2020 or such time as any PPP loan proceeds are received by the Company, at least $4.0 million through December 31, 2020 provided that PPP loan proceeds have been received by the Company, and at least $5.0 million thereafter;

EBITDA shall not be less than $6.8 million for the fiscal year ended December 31, 2019, $5.0 million for the twelve fiscal month period ending March 31, 2020, and $4.8 million for the twelve fiscal month period ending June 30, 2020;

● liquid assets of at least $3.0 million through December 31, 2020, at least $2.5 million for the fiscal quarters ending March 31, 2021 through September 30, 2021, at least $3.0 million for the fiscal quarter ending December 31, 2021, and at least $5.0 million thereafter;

● the fixed charge coverage ratio for the twelve fiscal month period ending at the end of each fiscal quarter shall not be less than the ratio set forth below:

1 unchanged sentence

Fixed Charge Coverage Ratio

September 30, 2020

December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and thereafter

capital expenditures (excluding any capitalized compensation costs) shall not exceed $1.7 million for the fiscal year ended December 31, 2018;

$0.7 million for the fiscal year ended December 31, 2019;

$1.6 million for the fiscal year ending December 31, 2020, and $0.7 million for any fiscal year beginning after December 31, 2020;

December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021

March 31, 2022, and thereafter

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

● capital expenditures (excluding any capitalized compensation costs) shall not exceed $1.6 million for the fiscal year ending December 31, 2020, and $0.7 million for any fiscal year beginning after December 31, 2020;

● the leverage ratio for the twelve fiscal month period ending at the end of each fiscal period set forth below shall not exceed the ratio set forth below:

2 unchanged sentences

December 31, 2020

March 31, 2021

June 30, 2021

1 unchanged sentence

December 31, 2021

March 31, 2021, June 30, 2021 and September 30, 2021

December 31, 2021 and each Fiscal Quarter end thereafter

The Company was in compliance with all applicable covenants under the Amended and Restated Loan and Security Agreement as of and for the fiscal year ended December 31, 2019.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

In connection with the February 11, 2019 refinancing transaction, the Company incurred fees to or on behalf of BHI of approximately $0.3 million during the year ended December 31, 2019.

These fees have been deferred on the consolidated balance sheets as a reduction to the carrying value of the Xcel Term Loan, and are being amortized to interest expense over the term of the Term Loan using the effective interest method.

The current effective interest rate on the Second Amended and Restated Loan and Security Agreement is equal to approximately 6.65%.

March 31, 2022 and each Fiscal Quarter end thereafter

The Company was in compliance with all applicable covenants under the Loan Agreement as of and for the fiscal year ended December 31, 2020.

In connection with the February 11, 2019 refinancing transaction and subsequent amendments, the Company incurred fees to or on behalf of BHI of approximately $0.3 million during the Prior Year and $0.03 million during the Current Year.

These fees have been deferred on the consolidated balance sheets as a reduction to the carrying value of the Term Loans, and are being amortized to interest expense over the term of the Term Loans using the effective interest method.

The effective interest rate on the Loan Agreement was approximately 6.6% and 6.7% for the Current Year and Prior Year, respectively.

Interest on Term Loan A accrues at a fixed rate of 5.1% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made.

1 unchanged sentence

Interest on the Revolving Loans will accrue at either the Base Rate or LIBOR, as elected by Xcel, plus a margin to be agreed to by Xcel and the Lenders and will be payable on the first day of each month.

Base Rate is defined in the Xcel Term Loan agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York.

Base Rate is defined in the Loan Agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York.

Interest on the Incremental Term Loans will accrue at rates to be agreed to by Xcel and the Lenders and will be payable on each day on which the scheduled principal payments under the applicable note are required to be made.

For the Current Year and Prior Year, the Company incurred interest expense of approximately $1.1 million and $1.2 million, respectively, related to term loan debt.

On April 14, 2021, the Company and its wholly owned subsidiaries entered into a new loan and security agreement with BHI and First Eagle Alternative Credit, LLC (“FEAC”), which resulted in the extinguishment of the term loan debt which existed as of December 31, 2020.

See Note 13 for additional details.

IM Seller Note

On September 29, 2011, as part of the consideration for the purchase of the Isaac Mizrahi Business, the Company issued to IM Ready-Made, LLC a promissory note in the principal amount of $7.4 million (as amended, the “IM Seller Note”).

The stated interest rate of the IM Seller Note was 0.25% per annum.

Management determined that this rate was below the Company’s expected borrowing rate, which was then estimated at 9.25% per annum.

Therefore, the Company discounted the IM Seller Note by $1.7 million using a 9.0% imputed annual interest rate, resulting in an initial value of $5.6 million.

In addition, on September 29, 2011, the Company prepaid $0.1 million of interest on the IM Seller Note.

The imputed interest amount was amortized over the term of the IM Seller Note and recorded as other interest and finance expense on the Company’s consolidated statements of operations.

On December 24, 2013, the IM Seller Note was amended to (1) revise the maturity date to September 30, 2016, (2) revise the date to which the maturity date may be extended to September 30, 2018, (3) provide the Company with a prepayment right with its common stock, subject to remitting in cash certain required cash payments and a minimum common stock price of $4.50 per share, and (4) require interim scheduled payments.

The amendment included a partial repayment of $1.5 million of principal.

On September 19, 2016, the IM Seller Note was further amended and restated to (1) revise the maturity date to March 31, 2019, (2) require six semi-annual principal and interest installment payments of $0.8 million, commencing on September 30, 2016 and ending on March 31, 2019, (3) revise the stated interest rate to 2.236% per annum, (4) allow for optional prepayments at any time at the Company’s discretion without premium or penalty, and (5) require that all payments of principal and interest be made in cash.

Management assessed and determined that this amendment represented a debt modification and, accordingly, no gain or loss was recorded.

On March 31, 2019, the Company paid the final installment of $750,000 under the IM Seller Note, and no amounts remain outstanding under the IM Seller Note as of December 31, 2019.

For the years ended December 31, 2019 and 2018, the Company incurred interest expense of approximately $4,000 and $33,000, respectively under the IM Seller Note, which consisted solely of amortization of the discount on the IM Seller Note.

On September 29, 2011, as part of the consideration for the purchase of the Isaac Mizrahi business, the Company issued to IM Ready-Made, LLC a promissory note in the principal amount of $7.4 million (the “IM Seller Note”).

The IM Seller Note was subsequently amended in 2013 and 2016.

On March 31, 2019, the Company paid the final installment of $750,000 under the IM Seller Note, and no amounts remained outstanding under the IM Seller Note as of December 31, 2019.

For the year ended December 31, 2019, the Company incurred interest expense of approximately $4,000 under the IM Seller Note, which consisted solely of amortization of the discount on the IM Seller Note.

XCEL BRANDS, INC.

3 unchanged sentences

Ripka Seller Notes

As of December 31, 2018, the Company had a note payable of approximately $0.58 million relating to the acquisition of the Judith Ripka assets (the "Ripka Seller Note").

Separately, the Company held a promissory note receivable due from the sellers of the Judith Ripka assets (the "Ripka Sellers") with a maturity date of March 31, 2019.

As of January 1, 2019, the Company had a note payable of approximately $0.58 million relating to the acquisition of the Judith Ripka assets (the "Ripka Seller Note").

Separately, the Company held a promissory note receivable due from the sellers of the Judith Ripka assets (the "Ripka Sellers") with a maturity date of March 31, 2019.

On March 31, 2019, the Company agreed to net its note receivable due from the Ripka Sellers of approximately $0.9 million against the Ripka Seller Note of $0.6 million and the remaining Ripka Earn-Out of $0.1 million (see below).

As of December 31, 2019, there were no amounts remaining outstanding under the Ripka Seller Note.

For the years ended December 31, 2019 and 2018, the Company incurred interest expense of approximately $16,000 and $41,000, respectively, which consisted solely of amortization of the discount on the Ripka Seller Notes.

Contingent Obligation –

JR Seller (Ripka Earn-Out)

In connection with the asset purchase of the Ripka Brand in 2014, the Company agreed to pay the sellers of the Ripka brand additional consideration of up to $5.0 million in aggregate (the “Ripka Earn-Out”), payable in cash or shares of the Company’s common stock based on the fair value of the Company’s common stock at the time of payment, and with a floor of $7.00 per share, based on the Ripka Brand achieving in excess of $1.0 million of net royalty income (excluding revenues generated by interactive television sales) during each of the 12‑month periods ending on October 1, 2016, 2017 and 2018, less the sum of all earn-out payments for any prior earn-out period.

The Ripka Earn-Out was recorded at a value of $3.8 million based on the difference between the fair value of the acquired assets of the Ripka Brand at the acquisition date and the total consideration paid.

In accordance with ASC Topic 480, the Ripka Earn-Out obligation was classified as a liability in the accompanying consolidated balance sheets because of the variable number of shares payable under the agreement.

On December 21, 2016, the Company entered into an agreement with the sellers of the Ripka Brand which amended the terms of the Ripka Earn-Out, such that the maximum amount of earn-out consideration was reduced to $0.4 million, of which $0.2 million was payable in cash upon execution of the amendment, and $0.1 million was payable in cash on each of May 15, 2018 and 2019.

The payment of the remaining future payments of $0.2 million under the Ripka Earn-Out was contingent upon the Ripka Brand achieving at least $6.0 million of net royalty income from QVC during each of the 12‑month periods ending on March 31, 2018 and 2019.

On May 15, 2018 the Company settled the $0.1 million earn-out due by reducing the principal amount owed by Judith Ripka to the Company under a promissory note receivable.

As of December 31, 2018, the remaining balance of the Ripka Earn-Out was $0.1 million.

On March 31, 2019, the Company satisfied the remaining Ripka Earn-Out balance of $0.1 million by off-setting the amount against the aforementioned promissory note receivable.

As of December 31, 2019, there were no amounts remaining outstanding under the Ripka Earn-Out.

Contingent Obligation –

CW Seller (C Wonder Earn-Out)

In connection with the asset purchase of the C Wonder Brand, the Company agreed to pay the seller additional consideration, which would be payable, if at all, in cash or shares of common stock of the Company, at the Company’s sole discretion, after June 30, 2019, with a value based on the royalties related directly to the assets the Company acquired pursuant to the purchase agreement.

The value of the earn-out was to be calculated as the positive amount, if any, of (i) two times (A) the maximum net royalties as calculated for any single twelve month period commencing on July 1 and ending on June 30 between the closing date and June 30, 2019 (each, a “Royalty Target Year”) less (B) $4.0 million, plus (ii) two times the maximum royalty determined based on a percentage of retail and wholesale sales of C Wonder branded products by the Company as calculated for any single Royalty Target Year.

The C Wonder Earn-Out of $2.85 million, which was

For the year ended December 31, 2019, the Company incurred interest expense of approximately $16,000, which consisted solely of amortization of the discount on the Ripka Seller Note.

Other Long-term Liabilities

Other long-term liabilities consist of the Company’s obligation to a subtenant for its security deposit under a sublease arrangement, which was $0.2 million as of both December 31, 2020 and 2019.

Government assistance

Paycheck Protection Program (PPP)

On April 20, 2020, the Company executed a promissory note (the “Promissory Note”) with Bank of America, N.A., which provided for an unsecured loan in the amount of $1.806 million, pursuant to the PPP under the CARES Act.

The loan has a two-year term and bears interest at a fixed rate of 1.0% per annum.

Monthly principal and interest payments are deferred for six months after the date of disbursement.

The loan may be prepaid at any time prior to maturity with no prepayment penalties.

The Promissory Note contains events of default and other provisions customary for a loan of this type.

The loan was funded on April 23, 2020.

The PPP also provides that this loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act, and later amended by the Paycheck Protection Program Flexibility Act (the "Flexibility Act") signed into law on June 5, 2020.

Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.

While management believes that it is probable that the loan will be forgiven in full, no definite assurance can be provided that forgiveness for any portion of the loan will be obtained.

Management's determination that full forgiveness is probable is based on qualification under the Flexibility Act.

Management evaluated the legal and contractual terms associated with the loan, and concluded that, although the legal form of the loan is debt, it represents in substance a government grant that is expected to be forgiven.

Given the lack of definitive authoritative guidance under GAAP for accounting for government grants, the Company analogized to accounting guidance under International Accounting Standard No.

20, “Accounting for Government Grants and Disclosure of Government Assistance.” Under such guidance, once it is probable that the conditions attached to the assistance will be met, the earnings impact of government grants is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.

Accordingly, the Company recognized $1.806 million as a reduction to operating expenses in the Current Year.

No interest expense related to the loan has been recorded in the Company’s consolidated financial statements.

Economic Incentive Disaster Loan (EIDL)

Concurrently with the PPP loan, in May 2020 the Company also received a $10,000 Economic Incentive Disaster Loan (“EIDL”) Advance through the U.S.

Small Business Administration.

The EIDL Advance represents a grant that does not

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

calculated at the asset acquisition date, was recorded in the current portion of long-term debt in the accompanying consolidated balance sheet as of December 31, 2018.

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

The final Royalty Target Year ended on June 30, 2019, and the seller ultimately did not earn any additional consideration based on the formula set forth above.

As such, during the year ended December 31, 2019, the Company recorded a $2.85 million gain on the reduction of contingent obligations in the accompanying consolidated statements of operations.

As of December 31, 2019, there were no amounts remaining under the C Wonder Earn-Out.

Other Long-Term Liabilities

Other long-term liabilities consist of the Company’s obligations to subtenants for security deposits under sublease arrangements, which were $0.2 million and $0.4 million as of December 31, 2019 and 2018, respectively.

Stockholders’

have to be repaid, and as such, the Company has recognized $10,000 as a reduction to operating expenses in the Current Year.

In total between the PPP and EIDL, the Company recognized $1,816,000 as a reduction to operating expenses in the Current Year.

Stockholders’ Equity

The Company has authority to issue up to 51,000,000 shares, consisting of 50,000,000 shares of common stock and 1,000,000 shares of preferred stock.

2011 Equity Incentive Plan

The Company’s 2011 Equity Incentive Plan, as amended and restated (the “Plan”), is designed and utilized to enable the Company to provide its employees, officers, directors, consultants and others whose past, present and/or potential contributions to the Company have been, are or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company.

A total of 13,000,000 shares of common stock are eligible for issuance under the Plan.

1 unchanged sentence

stock options, restricted stock, deferred stock, stock appreciation rights, and other stock-based awards.

The Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board.

Stock Options

Options granted under the Plan expire at various times –

either five, seven, or ten years from the date of grant, depending on the particular grant.

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

Options granted under the Plan expire at various times – either five, seven, or ten years from the date of grant, depending on the particular grant.

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

Outstanding at January 1, 2020

3 unchanged sentences

Current Year stock option grants were as follows:

On January 1, 2020, the Company granted options to purchase 5,000 shares of common stock to a board observer.

The exercise price of the options is $4.00 per share, and 50% of the options vest on each of January 1, 2021 and January 1, 2022.

On January 31, 2020, the Company granted options to purchase 75,000 shares of common stock to a consultant.

The exercise price of the options is $1.57 per share, and all options vested immediately on the date of grant.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

On February 28, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee.

The exercise price is $1.40 per share, and the vesting of such options is dependent upon the Company achieving certain 12-month sales targets through December 31, 2021.

On March 13, 2020, the Company granted options to purchase 50,000 shares of common stock to a certain key employee.

The exercise price of the options is $5.50 per share, and all options vested immediately on the date of grant.

On March 31, 2020, the Company granted options to purchase 50,000 shares of common stock to an employee.

The exercise price of the options is $0.61 per share, and one-third of the options shall vest on each of March 31, 2021, March 31, 2021, and March 31, 2022.

On April 1, 2020, the Company granted options to purchase an aggregate of 200,000 shares of common stock to non-management directors.

The exercise price of the options is $0.50 per share, and 50% of the options shall vest on each of April 1, 2021 and April 1, 2022.

On April 15, 2020, the Company granted options to purchase 13,500 shares of common stock to a consultant.

The exercise price of the options is $3.00 per share.

One-third of the options vested on each of June 30, 2020, September 30, 2020, and December 31, 2020.

On August 21, 2020, the Company granted options to purchase 22,750 shares of common stock to a consultant.

The exercise price of the options is $1.00 per share, and all options vested on December 31, 2020.

On September 28, 2020, the Company granted options to purchase 15,000 shares of common stock to an employee.

The exercise price of the options is $0.71 per share, and one-third of the options shall vest on each of September 28, 2021, September 28, 2022, and September 28, 2023.

On December 21, 2020, the Company granted options to purchase an aggregate of 50,000 shares of common stock to two employees.

The exercise price of the options is $1.09 per share, and 50% of the options shall vest on each of December 21, 2021 and December 21, 2022.

Prior Year stock option grants were as follows:

On January 1, 2019, the Company granted options to purchase 250,000 shares of common stock to a certain key employee.

The exercise price is $3.00 per share, and the vesting of such options is dependent upon the Company achieving certain 12-month sales targets through December 31, 2021.

As of December 31, 2020, 100,000 of these options have vested.

On February 27, 2019, the Company granted options to purchase 2,578,947 shares of common stock to Robert W.

D’Loren, the Company’s Chief Executive Officer.

The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices").

D’Loren, the Company’s Chief Executive Officer.

The vesting of 736,842 shares occur if the Target Prices are equal to or greater than $3.00 per share;

6 unchanged sentences

On February 27, 2019, the Company granted options to purchase 552,632 shares of common stock to James F.

Haran, the Company’s Chief Financial Officer.

The vesting of 157,895 shares occur if the Target Prices are equal to or greater than $3.00 per share;

134,211 shares vest if the Target Price is equal to or greater than $5.00 per share;

110,526 shares vest if the Target Price is equal to or greater than $7.00 per share;

110,526 shares vest if the Target Price

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

is equal to or greater than $7.00 per share;

86,842 shares vest if the Target Price is equal to or greater than $9.00 per share;

3 unchanged sentences

On February 27, 2019, the Company granted options to purchase 368,421 shares of common stock to Seth Burroughs, an officer of the Company.

The vesting of 105,263 shares occur if the Target Prices are equal to or greater than $3.00 per share;

10 unchanged sentences

On April 1, 2019, the Company granted options to purchase an aggregate of 150,000 shares of common stock to non-management directors.

The exercise price of the options is $1.70 per share, and 50% of the options shall vest on each of April 1, 2020 and April 1, 2021.

The exercise price of the options is $1.70 per share, and 50% of the options vest on each of April 1, 2020 and April 1, 2021.

On April 15, 2019, the Company granted options to purchase an aggregate of 24,000 shares of common stock to certain employees.

The exercise price of the options is $1.40 per share, and 50% of the options shall vest on each of April 15, 2020 and April 15, 2021.

The exercise price of the options is $1.40 per share, and 50% of the options vest on each of April 15, 2020 and April 15, 2021.

On May 1, 2019, the Company granted options to purchase 10,000 shares of common stock to an employee.

The exercise price of the options is $1.38 per share, and 50% of the options shall vest on each of May 1, 2020 and May 1, 2021.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

The exercise price of the options is $1.38 per share, and 50% of the options vest on each of May 1, 2020 and May 1, 2021.

On September 1, 2019, the Company granted options to purchase 15,000 shares of common stock to an employee.

The exercise price of the options is $1.59 per share, and one-third of the options shall vest on each of September 1, 2020, September 1, 2021, and September 1, 2022.

The exercise price of the options is $1.59 per share, and one-third of the options vest on each of September 1, 2020, September 1, 2021, and September 1, 2022.

On October 1, 2019, the Company granted options to purchase 100,000 shares of common stock to an employee.

The exercise price of the options is $1.77 per share, and one-third of the options shall vest on each of October 1, 2020, October 1, 2021, and October 1, 2022.

The exercise price of the options is $1.77 per share, and one-third of the options vest on each of October 1, 2020, October 1, 2021, and October 1, 2022.

On October 31, 2019, the Company granted options to purchase 10,000 shares of common stock to an employee.

The exercise price of the options is $1.72 per share, and one-third of the options shall vest on each of October 31, 2020, October 31, 2021, and October 31, 2022.

Prior Year stock option grants were as follows:

On March 30, 2018, the Company granted options to purchase an aggregate of 50,000 shares of common stock to a certain key employee.

The exercise price of the options is $5.50 per share, and all options vested immediately on the date of grant.

On April 2, 2018, the Company granted options to purchase an aggregate of 150,000 shares of common stock to non-management directors.

The exercise price of the options is $3.00 per share, and 50% of the options vest on each of April 2, 2019 and April 2, 2020.

On October 15, 2018, the Company granted options to purchase an aggregate of 15,000 shares of common stock to a certain key employee.

The exercise price of the options is $1.72 per share, and one-third of the options vest on each of October 31, 2020, October 31, 2021, and October 31, 2022.

On November 21, 2018, the Company granted options to purchase an aggregate of 35,000 shares of common stock to a certain key employee.

The exercise price of the options is $2.25 per share, and 50% of the options vest on each of September 30, 2019 and September 30, 2020.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

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

1 unchanged sentence

Expected Volatility

20.69 –

20.91 –

24.26 – 28.79

20.69 – 26.21

Expected Dividend Yield

1 unchanged sentence

Risk-Free Interest Rate

1.51 –

2.33 –

Compensation expense related to stock options for the Current Year and Prior Year was approximately $0.2 million and $0.5 million, respectively.

Total unrecognized compensation expense related to unvested stock options at December 31, 2020 amounts to approximately $0.2 million and is expected to be recognized over a weighted average period of 1.06 years.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

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

Balance at January 1, 2020

1 unchanged sentence

Balance at December 31, 2020

Warrants granted by the Company expire at various times –

either five, seven, or ten years from the date of grant, depending on the particular grant.

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

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

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

Outstanding and exercisable at January 1, 2020

1 unchanged sentence

Outstanding and exercisable at December 31, 2020

The Company did not grant any warrants to purchase shares of common stock during the Current Year.

On July 18, 2019, the Company granted warrants to purchase an aggregate of 115,000 shares of common stock.

The exercise price of the warrants is $3.17 per share, and one-third of the options vested on each of July 25, 2019, August 24, 2019, and September 23, 2019.

The Company did not grant any warrants to purchase shares of common stock during the Prior Year.

Compensation expense related to warrants was approximately $14,000 in the Current Year.

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

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Restricted Stock

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

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

Compensation expense related to warrants was approximately $14,000 in the Prior Year.

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

Outstanding at January 1, 2020

1 unchanged sentence

Outstanding at December 31, 2020

Current Year restricted stock grants were as follows:

On March 30, 2020, the Company issued 336,700 shares of common stock to a member of senior management as payment for a performance bonus earned in the Prior Year.

These shares vested immediately.

The Company recognized compensation expense of approximately $0.2 million in the Prior Year to accrue for this performance bonus.

The Company also recognized approximately $0.3 million of compensation expense in the Current Year related to similar senior management bonuses payable in common stock in 2021.

On May 20, 2020, the Company issued an aggregate of 270,728 shares of common stock to various employees.

These shares vested immediately.

The Company recognized approximately $0.3 million of compensation expense in the Current Year related to this grant.

On December 24, 2020, the Company issued an aggregate of 32,300 shares of common stock to various employees.

These shares vested immediately.

The Company recognized approximately $0.04 million of compensation expense in the Current Year related to this grant.

Prior Year stock award grants were as follows:

On February 27, 2019, the Company entered into a two-year employment agreement with a key employee, which includes a performance stock bonus of up to $90,000 for each of the years ended December 31, 2019 and 2020.

The performance stock bonus is earned upon the Company achieving certain sales targets.

On April 1, 2019, the Company issued an aggregate of 60,000 shares of stock to certain non-management directors, which will vest evenly over two years, whereby 50% shall vest on April 1, 2020, and 50% shall vest on April 1, 2021.

Prior Year restricted stock grants were as follows:

On March 14, 2018, the Company issued an aggregate of 90,209 shares of stock to certain non-executive employees, which vested immediately.

On April 1, 2019, the Company issued an aggregate of 60,000 shares of stock to certain non-management directors, which vest evenly over two years, whereby 50% vested on April 1, 2020, and 50% shall vest on April 1, 2021.

On April 3, 2018, the Company issued an aggregate of 25,599 shares of stock to certain non-executive employees, which vested immediately.

On May 31, 2018, the Company issued an aggregate of 1,664 shares of stock to certain non-executive employees, which vested immediately.

On June 5, 2018, the Company issued of 7,000 shares of stock to a consultant, which vested immediately.

On October 15, 2018, the Company issued 10,000 shares of stock to a consultant, which vested immediately.

On October 15, 2018, the Company issued 8,334 shares of stock to a consultant, which vested immediately.

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

Compensation expense related to restricted stock grants for the Current Year and Prior Year was approximately $0.5 million and $0.7 million, respectively.

Total unrecognized compensation expense related to unvested restricted stock grants

Total compensation expense related to stock awards for the Current Year and Prior Year (inclusive of the amounts detailed above) was approximately $0.6 million and $0.5 million, respectively.

Total unrecognized compensation expense related to unvested restricted stock grants at December 31, 2020 amounts to $0.01 million and is expected to be recognized over a weighted average period of 0.25 years.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

at December 31, 2019 amounts to $0.1 million and is expected to be recognized over a weighted average period of 1.07 years.

The following table provides information with respect to restricted stock purchased and retired by the Company during the Current Year and Prior Year:

Fair value of

March 30, 2020 (i)

May 20, 2020 (i)

December 24, 2020 (i)

September 30, 2019 (i)

2 unchanged sentences

December 31, 2019 (i)

March 31, 2018 (i)

April 30, 2018 (i)

May 31, 2018 (i)

November 30, 2018 (i)

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

All of the shares of restricted stock in the preceding table were originally granted to employees and directors as restricted stock pursuant to the Plan.

Shares Available Under the Company’s 2011 Equity Incentive Plan

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

All of the shares of restricted stock in the preceding table were originally granted to employees and directors as restricted stock awards pursuant to the Plan.

Shares Available Under the Company’s 2011 Equity Incentive Plan

At December 31, 2020, there were 1,549,598 shares of common stock available for issuance under the Plan.

2 unchanged sentences

The Company has not paid any dividends to date.

Earnings Per Share

Shares used in calculating basic and diluted earnings per share are as follows:

Effect of exercise of warrants

Effect of exercise of stock options

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Earnings Per Share

Shares used in calculating basic and diluted earnings per share are as follows:

Year Ended December 31,

Effect of exercise of warrants

As a result of the net loss presented for the Current Year, the Company calculated diluted earnings per share using basic weighted-average shares outstanding for such period, as utilizing diluted shares would be anti-dilutive to loss per share

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

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

Year Ended December 31,

Stock options and warrants

Commitments and Contingencies

The Company has operating leases for its current office, former office, and certain equipment with a term of 12 months or less.

The Company has operating leases for its current office, former office, and a planned retail store location, as well as certain equipment with a term of 12 months or less.

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

The Company's office leases have remaining lease terms of 2 years to 8 years.

The Company's real estate leases have remaining lease terms between approximately 1 year to 8 years.

As of December 31, 2020, the weighted average remaining lease term was 6.3 years and the weighted average discount rate was 6.25%.

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

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

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

1 unchanged sentence

The Company has deposited this amount with BHI as collateral for the letter of credit and recorded the amount as restricted cash in the consolidated balance sheets as of December 31, 2020 and December 31, 2019.

The Company also leases office space under an operating lease agreement at another location in New York City, representing the Company’s former corporate offices and operations facility.

● The Company also leases office space under an operating lease agreement at another location in New York City, representing the Company’s former corporate offices and operations facility.

This lease shall expire on February 28, 2022.

1 unchanged sentence

The aforementioned office leases require the Company to pay additional rents related to increases in certain taxes and other costs on the properties.

The Company also leases approximately 1,300 square feet of retail space for a planned future retail store location in Westchester, New York.

For the years ended December 31, 2020 and 2019, total lease expense included in selling, general and administrative expenses on the Company's consolidated statements of operations was approximately $1.5 million and $1.6 million, respectively.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

The Company’s total lease cost for the year ended December 31, 2019 was comprised of the following:

The Company’s total lease costs for the years ended December 31, 2020 and 2019 were comprised of the following:

($ in thousands)

4 unchanged sentences

Total lease cost

Cash paid for amounts included in the measurement of operating lease liabilities in the Current Year was $2.4 million, and cash received from subleasing was $0.3 million.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Cash paid for amounts included in the measurement of operating lease liabilities was $1.9 million and $2.4 million in the Current Year and Prior Year, respectively.

Cash received from subleasing was $0.7 million and $0.3 million in the Current Year and Prior Year, respectively.

As of December 31, 2020, the maturities of lease liabilities were as follows:

10 unchanged sentences

Total future minimum employment contract payments

In addition to the employment contract payments stated above, the Company’s employment contracts with certain executives and key employees contain performance-based bonus provisions.

These provisions include bonuses based on the Company achieving revenues in excess of established targets and/or on operating results.

Certain of the employment agreements contain severance and/or change in control provisions.

Aggregate potential severance compensation amounted to approximately $7.8 million at December 31, 2019.

Aggregate potential severance compensation amounted to approximately $8.1 million as of December 31, 2020.

Contingent Obligation – HH Seller (Halston Heritage Earn-Out)

In connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from HIP, the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to an aggregate of $6.0 million, based on royalties earned through December 31, 2022 (see Note 3).

The Halston Heritage Earn-Out of $0.9 million is recorded as a long-term liability as of December 31, 2019 in the accompanying consolidated balance sheets, based on the difference between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

In accordance with ASC Topic 480, the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying consolidated balance sheets because of the variable number of shares payable under the agreement.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Contingent Obligation –

HH Seller (Halston Heritage Earn-Out)

Contingent Obligation – CW Seller (C Wonder Earn-Out)

In connection with the asset purchase of the C Wonder Brand in 2015, the Company agreed to pay the seller additional consideration, which would be payable, if at all, in cash or shares of common stock of the Company, at the Company’s sole discretion, after June 30, 2019.

The seller ultimately did not earn any additional consideration based on the criteria and terms set forth in the asset purchase agreement.

As such, during the year ended December 31, 2019, the Company recorded a $2.85 million gain on the reduction of contingent obligations in the accompanying consolidated statements of operations.

As of December 31, 2019, there were no amounts remaining under the C Wonder Earn-Out.

Contingent Obligation – JR Seller (Ripka Earn-Out)

In connection with the asset purchase of the Ripka Brand in 2014, the Company agreed to pay the sellers of the Ripka Brand certain additional consideration.

As of January 1, 2019, the remaining balance of the Ripka Earn-Out was $0.1 million.

On March 31, 2019, the Company satisfied the remaining Ripka Earn-Out balance of $0.1 million by off-setting the amount against the aforementioned promissory note receivable.

As of December 31, 2019, there were no amounts remaining outstanding under the Ripka Earn-Out.

Coronavirus Pandemic

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

COVID-19 is having an unprecedented impact on the U.S.

economy as federal, state, and local governments react to this public health crisis.

The impacts of the current COVID-19 pandemic are broad reaching and are having an impact on the Company’s licensing and wholesale businesses.

The COVID-19 pandemic is impacting the Company’s supply chain as most of the Company’s products are manufactured in China, Thailand, and other places around the world affected by this event.

Temporary factory closures and the pace of workers returning to work have impacted contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner.

The outbreak is also impacting distribution and logistics providers' ability to operate in the normal course of business.

Further, the pandemic has resulted in a sudden and continuing decrease in sales for many of the Company’s products, resulting in order cancellations, and a decrease in accounts receivable collections, as the Company recorded approximately $1 million of additional allowance for doubtful accounts for the year ended December 31, 2020 for retailers that have filed for bankruptcy.

Due to the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company’s future results of operations and cash flows.

Continued impacts of the pandemic could materially adversely affect the Company’s near-term and long-term revenues, earnings, liquidity, and cash flows as the Company’s customers and/or licensees may request temporary relief, delay, or not make scheduled payments.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

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

1 unchanged sentence

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

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

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

5 unchanged sentences

Total deferred

Total (benefit) provision

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

Total benefit

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

Years Ended December 31,

4 unchanged sentences

Foreign tax credits

Federal true-ups

Life insurance

Net operating loss carryback

Paycheck Protection Program addback

Other permanent differences

Income tax (benefit) provision

Income tax benefit

XCEL BRANDS, INC.

18 unchanged sentences

Net deferred tax liabilities

As of December 31, 2019 and 2018, the Company had approximately $4.0 million and $1.6 million, respectively, of federal net operating loss carryforwards ("NOLs") available to offset future taxable income.

The NOL as of December 31, 2017 of $0.8 million has an expiration period from 2036 through 2037.

As of December 31, 2020 and 2019, the Company had approximately $10.1 million and $4.0 million, respectively, of federal net operating loss carryforwards ("NOLs") available to offset future taxable income.

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

The NOL generated during tax years beginning after December 31, 2017 of $9.8 million has an indefinite life and does not expire.

On March 27, 2020, the CARES Act was enacted and signed into law.

The CARES Act includes certain provisions impacting businesses’ income taxes related to 2018, 2019, and 2020.

Some of the significant tax law changes are to increase the limitation on deductible business interest expense for 2019 and 2020, allow for the five-year carryback of net operating losses for 2018-2020, suspend the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020, provide for the acceleration of depreciation expense from 2018 and forward on qualified improvement property, and accelerate the ability to claim refunds of AMT credit carryforwards.

The Company is required to recognize the effect of tax law changes on its financial statements in the period in which the law was enacted.

At this time, the Company may avail itself of the ability to carry back net operating losses generated in 2018 and 2019 tax years for five years, which would result in an estimated income statement benefit of $0.1 million and tax refund receivable of $0.2 million.

As of December 31, 2020 and 2019, management does not believe the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its consolidated financial statements.

1 unchanged sentence

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

Related Party Transactions

Benjamin Malka

Concurrent with the acquisition of the H Halston Brand on December 22, 2014, the Company and The H Company IP, LLC (“HIP”) entered into a license agreement (the “HIP License Agreement”), which was subsequently amended September 1, 2015.

Benjamin Malka, who was a director of the Company from June 2014 through September 2019, is a 25% equity holder of HIP’s parent company, House of Halston LLC (“HOH”), and Chief Executive Officer of HOH.

The HIP license agreement provides for royalty payments including guaranteed minimum royalties to be paid to the Company during the initial term that expired on December 31, 2019.

On September 1, 2015, the Company entered into a license agreement with Lord and Taylor, LLC (the “L&T License”) and simultaneously amended the HIP License Agreement eliminating HIP’s minimum guaranteed royalty obligations, provided the L&T License is in effect.

In addition, the Company entered into a sublicense agreement with HIP (the “HIP Sublicense Agreement”), obligating the Company to pay HIP a fee on an annual basis the greater of (i) 50% of royalties received under the L&T License from H Halston products or (ii) guaranteed minimum royalties.

Provided that Lord & Taylor, LLC is paying the Company at least $1.0 million per quarter under the L&T License, the remaining contractually required guaranteed minimum royalties are equal to $0.75 million, $0.75 million, $1.5 million, and $1.75 million for the twelve months ending January 31, 2018, 2019, 2020, and 2021, respectively.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

On December 12, 2016, the Company entered into a license agreement for the H Halston Brand with Dillard’s Inc and affiliates (the “Dillard’s License”, and together with the L&T License, the “DRT Licenses”).

HOH has also entered into an arrangement with another licensee of the Company to supply Halston-branded apparel for the subsequent sale of such product to end customers.

Under the Company’s separate pre-existing licensing agreements in place with the aforementioned other licensee and with HIP as described above, the Company earns royalties on the sales of such Halston-branded products.

Through October 26, 2018, the Company operated under the following terms as an at-will license:

The HIP Trademark Usage and Royalty Participation Agreement, had an initial term that expired on December 31, 2020 unless sooner terminated or renewed, and we shall pay to HIP:

(i) 50% of the excess H Halston Royalty paid to us under the DRT Licenses and any other third party licenses that we may enter into;

(ii) 25% of the excess developed brand royalty paid to us for the Highline Collective Brand under the DRT Licenses, and 20% of the excess developed brand royalty paid to us for any subsequent developed brand under the DRT Licenses, and (iii) 10% of the excess private label brand royalty paid to us under the DRT Licenses and during the first term only of the DRT Licenses.

Additionally, we have the right, but not the obligation, at any time after January 31, 2023, to terminate the obligations under points (ii) and (iii) above by paying to HIP an amount equal to four times the sum of the developed brand credits and private label credits for the contract year ending on January 31, 2023 (the "Buy Out Payment’’).

The Buy-Out Payment was payable by us and at our sole discretion either (a) in cash, or (b) in a number of common shares of Xcel calculated based on the amount of the Buy-Out Payment divided by the average closing price for common shares of Xcel on a national exchange for the preceding five trading days, subject to a minimum price for common shares of Xcel of $7.00 per common share.

A license and supply agreement with the Halston Operating Company, LLC (“HOC”), a subsidiary of HOH, with an initial term ending on January 31, 2022, subject to renewal.

Under the HOC at-will license and supply agreement, HOC shall provide licensed products for sale to pre-approved retailers, including HBC and Dillard’s, and was also responsible for overseeing the visual merchandising and in-store retail environments for such approved retailers, as well as for training and oversight of any retail staff responsible for selling the licensed products within HBC and Dillard’s, as reasonably agreed upon between HOC and HBC and Dillard’s.

The HOC at-will license and supply agreement provides for, among other things, design fees of $1.2 million for the period from July 1, 2017 through December 31, 2018, subsequent design fees of $2.4 million for the contractual yearly periods ending on January 31, 2019, and on December 31, 2020, 2021, and 2022, respectively, and sales-based royalties on the categories of products licensed under the agreement and the contractual year of payment.

Effective October 26, 2018, the Company terminated the HIP License Agreement including all amendments and the HIP Sublicense Agreement.

In addition, the at-will license has been terminated and is no longer in effect.

In addition, the Company and HOC entered into an arrangement whereby HOC pays the Company a license fee for branded products related to categories not included in the HOC license and supply agreement.

For the years ended December 31, 2019 and 2018, the Company had recorded approximately $0.0 and $2.0 million of revenue from HOC, respectively.

As of December 31, 2018, the Company had a receivable balance of approximately $1.5 million due from HOC, which was collected in 2019.

D’Loren

Jennifer D’Loren is the wife of Robert W.

D’Loren, the Company’s Chief Executive Officer and Chairman of the Board, and is employed by the Company.

D’Loren brings vast experience in project management and implementation of financial IT solutions.

Related Party Transactions

Benjamin Malka

Benjamin Malka was a director of the Company from June 2014 through September 2019.

Malka is also a 25% equity holder of HOH, and is the former Chief Executive Officer of HOH.

HOH is the parent company of HIP.

On February 11, 2019, pursuant to the Heritage Asset Purchase Agreement and the acquisition of the Halston Heritage Trademarks (see Note 3), the Company delivered in escrow for HIP or its designees an aggregate of $8.4 million in cash and 777,778 shares of the Company’s common stock valued at $1.1 million, subject to a voting agreement and a lock-up agreement relating to such shares and a consent and waiver agreement each in form satisfactory to Xcel within three months from the date of the Heritage Asset Purchase Agreement.

Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.

In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, 2022 based on Excess Net Royalties.

The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”);

or (z) solicit stockholder approval for the issuance of Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, pay the applicable Earn-Out Consideration with a combination of cash and Earn-Out Shares.

Hilco Trading, LLC

Hilco Trading, LLC ("Hilco") directly and indirectly owns greater than 5% of the Company's common stock, and its affiliate Hilco Global owns 50% of the equity of Longaberger Licensing, LLC.

During the year ended December 31, 2020, the Company sold certain apparel products to an affiliate of Hilco, and recognized $0.15 million of revenue from this transaction.

Additionally, during the year ended December 31, 2020, the Company sold certain intangible assets of Longaberger Licensing, LLC to a third party;

an affiliate of Hilco earned and was paid a commission of $0.05 million related to the sale of these assets.

Jennifer D’Loren is the wife of Robert W.

D’Loren, the Company’s Chief Executive Officer and Chairman of the Board, and is employed by the Company.

D’Loren brings vast experience in project management and implementation of financial IT solutions.

During the past two years, Mrs.

D’Loren has worked on the implementation of the Company’s ERP system.

D’Loren received compensation of $.17 million and $0.08 million for the years ended December 31, 2019 and 2018, respectively.

D’Loren has worked on the implementation of the Company’s ERP system.

D’Loren received compensation of $0.14 million and $0.17 million for the years ended December 31, 2020 and 2019, respectively.

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

Subsequent Events

Isaac Mizrahi’s Employment Agreement

Isaac Mizrahi

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

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

The term of the employment agreement expires on December 31, 2022, subject to earlier termination, and may be extended, at the Company’s option for two successive one-year terms (each, a “Renewal Period”).

Mizrahi’s base salary shall be $1,800,000, $2,000,000 and $2,100,000 per annum during the term of the agreement and $2,250,000 and $2,400,000 during 2023 and 2024 if the term is extended, in each case, subject to adjustment in the event Mr.

Mizrahi does not make a specified number of appearances on QVC.

Mizrahi shall be eligible to receive an annual cash bonus (the “bonus”) up to an amount equal to $2,500,000 less base salary for 2020 and $3,000,000 less base salary for 2021, 2022 and any year during the Renewal Period.

The Bonus shall consist of the DRT Revenue, Bonus, the Bricks and Mortar Bonus, the Endorsement Bonus and the Monday Bonus, if any, as determined in accordance with the below:

“DRT Bonus”

means for any calendar year an amount equal to 10% of the aggregate net revenue related to sales of Isaac Mizrahi brand products through direct response television.

The term of the employment agreement expires on December 31, 2022, subject to earlier termination, and may be extended, at the Company’s option, for two successive one-year terms (each, a “Renewal Period”).

Mizrahi’s base salary shall be $1.8 million, $2.0 million, and $2.1 million per annum during the term of the agreement and $2.25 million and $2.4 million during 2023 and 2024 if the term is extended, in each case, subject to adjustment in the event Mr.

Mizrahi does not make a specified number of appearances on the QVC channel.

Mizrahi shall be eligible to receive an annual cash bonus (the “Bonus”) up to an amount equal to $2.5 million less base salary for 2020 and $3.0 million less base salary for 2021, 2022, and any year during the Renewal Period.

The Bonus shall consist of the DRT Revenue, Bonus, the Brick-and-Mortar Bonus, the Endorsement Bonus and the Monday Bonus, if any, as determined in accordance with the below:

● “DRT Bonus” means for any calendar year an amount equal to 10% of the aggregate net revenue related to sales of Isaac Mizrahi Brand products through direct response television.

The DRT Revenue Bonus shall be reduced by the amount of the Monday Bonus.

“Bricks-and-Mortar Bonus”

means for any calendar year an amount equal to 10% of the net revenues from sales of products under the Isaac Mizrahi brand but excluding DRT revenue and endorsement revenues.

“Endorsement Bonus”

means for any calendar year an amount equal to 40% of revenues derived from projects undertaken by the Company with one or more third parties solely for Mr.

Mizrahi to endorse the third party’s products through the use of Mr.

Mizrahi’s name, likeness and/or image and neither the Company nor Mr.

● “Brick-and-Mortar Bonus” means for any calendar year an amount equal to 10% of the net revenues from sales of products under the Isaac Mizrahi Brand, excluding DRT revenue and endorsement revenues.

● “Endorsement Bonus” means for any calendar year an amount equal to 40% of revenues derived from projects undertaken by the Company with one or more third parties solely for Mr.

Mizrahi to endorse the third party’s products through the use of Mr.

Mizrahi’s name, likeness, and/or image, and neither the Company nor Mr.

Mizrahi provides licensing or design.

“Monday Bonus”

means $10,000 for each appearance by Mr.

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

● “Monday Bonus” means $10,000 for each appearance by Mr.

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

Mizrahi is required to devote his full business time and attention to the business and affairs of the Company and its subsidiaries;

Mizrahi is the principal of IM Ready-Made, LLC and Laugh Club, Inc.

(“Laugh Club”), and accordingly, he may undertake promotional activities related thereto (including the promotion of his name, image, and likeness) through television, video, and other media (and retain any compensation he receives for such activities) (referred to as “Retained Media Rights”) so long as such activities (i) do not utilize the IM Trademarks, (ii) do not have a mutually negative impact upon or materially conflict with Mr.

Mizrahi’s duties under the employment agreement, or (iii) are consented to by the Company.

The Company believes that it benefits from Mr.

Mizrahi’s independent promotional activities by increased brand awareness of IM Brands and the IM Trademarks.

Mizrahi’s employment is terminated by us without “cause”, or if Mr.

Mizrahi resigns with “good reason”, then Mr.

Mizrahi’s independent promotional activities by increased brand awareness of IM Brands and the IM Trademarks.

Mizrahi’s employment is terminated by the Company without “cause,” or if Mr.

Mizrahi resigns with “good reason,” then Mr.

Mizrahi will be entitled to receive his unpaid base salary and cash bonuses through the termination date and an amount equal to his base salary in effect on the termination date for the longer of six months and the remainder of the then-current term, but in no event exceeding 18 months.

Mizrahi’s employment is terminated by us without cause or if Mr.

Mizrahi resigns with good reason, in each case within six months following a change of control (as defined in the employment agreement), Mr.

Mizrahi’s employment is terminated by the Company without “cause” or if Mr.

Mizrahi resigns with “good reason,” within six months following a change of control (as defined in the employment agreement), Mr.

Mizrahi shall be eligible to receive a lump-sum payment equal to two times the sum of (i) his base salary (at an average rate that would have been in effect for such two year period following termination) plus (ii) the bonus paid or due to Mr.

2 unchanged sentences

During the term of his employment by the Company and for a one-year period after the termination of such employment (unless Mr.

Mizrahi’s employment was terminated without cause or was terminated by him for good reason), Mr.

Mizrahi’s employment was terminated without “cause” or was terminated by him for “good reason”), Mr.

Mizrahi may not permit his name to be used by or to participate in any business or enterprise (other than the mere passive ownership of not more than 3% of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages

XCEL BRANDS, INC.

2 unchanged sentences

December 31, 2020 and 2019

held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages, or proposes to engage in the Company’s business anywhere in the world other than the Company and its subsidiaries.

or proposes to engage in the Company’s business anywhere in the world other than the Company and its subsidiaries.

Also during his employment and for a one-year period after the termination of such employment, Mr.

Mizrahi may not, directly or indirectly, solicit, induce, or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any or its subsidiaries;

or solicit, induce or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment wit the company or any of its subsidiaries;

or hire any such person unless such person’s employment was terminated by the company or any of its subsidiaries;

or solicit, induce, or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager, or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries;

or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries;

or in any way interfere with the relationship between any such customer, supplier, licensee, employee, or business relation and the Company or any of its subsidiaries.

3 unchanged sentences

Mizrahi to perform his services pursuant to the employment agreement.

The Company will pay Laugh Club an annual fee of $720,000 for such services.

Xcel Term Loan Amendment

On April 13, 2020, the Company further amended its Second Amended and Restated Loan and Security Agreement with BHI.

In addition, there were multiple changes and waivers to the various financial covenants.

Further, this amendment permits Xcel to incur unsecured debt through the PPP under the CARES Act, and excludes any associated PPP debt and debt service from the covenant calculations.

There were no changes to the total principal balance, interest rate, or maturity date.

See Note 6, “Debt and Other Long-term Liabilities,”

for additional information.

Coronavirus Pandemic

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

COVID-19 is having an unprecedented impact on the U.S.

economy as federal, state, and local governments react to this public health crisis.

Due to the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company’s results of operations and cash flows.

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into law.

Certain provisions of the CARES Act impact the 2019 income tax provision computations of the Company and will be reflected in the first quarter of 2020, or the period of enactment.

The CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020.

The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income.

This modification has no impact on the Company since the interest expense is not projected to be limited.

Additionally, the CARES Act contains a technical correction to the Tax Cuts and Jobs Act with respect to the recovery period of qualified improvement property.

Previously, qualified improvement property was depreciated as 39-year building property, but the technical correction in the CARES Act adjusts this to a 15-year depreciable life, which meets the requirements for the additional first-year 100% bonus depreciation deduction under Section 168(k).

The Company will evaluate and conclude on the desired tax position for this class of depreciable property prior to filing the 2019 federal tax return.

It is expected that the change in the depreciable life of qualified improvement property will result in an increase in the Company's net operating losses on a tax basis, although an exact amount has not been determined at this time.

The CARES Act did not have any impact on the Company's 2019 consolidated financial statements.

The Company will pay Laugh Club an annual fee of $0.72 million for such services.

Subsequent Events

Acquisition of Lori Goldstein Brand

On April 1, 2021, the Company and its wholly-owned subsidiary, Gold Licensing, LLC, acquired the “Lori Goldstein” trademarks and other intellectual property rights related thereto, from Lori Goldstein, Ltd.

(the “Seller”), in exchange for initial cash consideration of $3.6 million, plus additional cash earn-out consideration of up to $12.5 million based on the future performance of the brand.

Concurrent with the acquisition, the Company also entered into a 10-year employment agreement with the shareholder of the Seller to serve as brand’s Chief Creative Officer and Spokesperson, with a base salary rate of $1.2 million per annum, and the opportunity to earn additional incentives based on the future net royalties related to the brand.

Additionally, the Company concurrently entered into a consulting agreement with the Seller to provide creative advice and consultation, for a fee of 0.8 million per annum.

Upon the consummation of the acquisition of the Lori Goldstein Brand described above, the Company incurred cash bonuses totaling $175,000 to certain members of the Company’s senior management (including $100,000 to the Chief Executive Officer, and $25,000 each to the Chief Financial Officer, President and Chief Operating Officer, and Executive Vice President of Business Development and Treasury), such bonuses having been approved by the Board of Directors on March 18, 2021.

Debt Refinancing Transaction

On April 14, 2021, the Company and its wholly owned subsidiaries entered into a new loan and security agreement with BHI and FEAC, which resulted in the extinguishment of the term loan debt that existed as of December 31, 2020.

Under this transaction, the Company’s term loan debt obligation increased to $25.0 million, payable in 16 equal quarterly installments of $625,000, commencing June 30, 2021 and ending on March 31, 2025, with a final payment of $15.0 million payable on the maturity date of April 14, 2025.

The new term loan debt bears interest at a weighted average rate of LIBOR plus 6.2% per annum.

In addition, the facility provides for up to $25 million of future acquisition financing, subject to lender approval on a deal-by-deal basis.

The Company’s obligations under the new loan and security agreement are secured by all of the assets of the Company and, subject to certain limitations, equity interests of the Company’s wholly owned subsidiaries.

The new loan and security agreement contains customary covenants, including reporting requirements, trademark preservation, and financial covenants.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data