What changed in this filing

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Item 1. Financial Statements

2021-05-17 compared with 2020-11-13 · 201 added, 311 removed, 281 unchanged (65% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

September 30, 2020

March 31, 2021

December 31, 2020

26 unchanged sentences

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

Common stock, $.001 par value, 50,000,000 shares authorized, and 19,231,040 and 18,866,417 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Common stock, $.001 par value, 50,000,000 shares authorized, and 19,262,529 and 19,260,862 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

Paid-in capital

10 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

2 unchanged sentences

Salaries, benefits and employment taxes

Other design and marketing costs

Other selling, general and administrative expenses

(Recovery of) costs in connection with potential acquisition

Costs in connection with potential acquisitions

Stock-based compensation

Depreciation and amortization

Government assistance - Paycheck Protection Program and other

Property and equipment impairment

Total operating costs and expenses

Operating (loss) income

Interest and finance expense

Operating loss

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

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

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

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

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:

9 unchanged sentences

Balance as of December 31, 2019

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

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

Shares repurchased from employees in exchange for withholding taxes

Compensation expense in connection with stock options and restricted stock

Balance as of March 31, 2020

Compensation expense in connection with stock options and restricted stock

Shares issued to employees in connection with restricted stock grants

Balance as of June 30, 2019

Compensation expense in connection with stock options and restricted stock

Shares repurchased including vested restricted stock in exchange for withholding taxes

Balance as of September 30, 2019

Balance as of December 31, 2020

Compensation expense in connection with stock options and restricted stock

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

Shares repurchased from executive in exchange for withholding taxes

Shares issued on exercise of stock options, net

Balance as of March 31, 2021

Compensation expense in connection with stock options and restricted stock

Shares issued to 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 holder

Balance as of June 30, 2020

Compensation expense in connection with stock options and restricted stock

Balance as of September 30, 2020

See Notes to Unaudited Condensed Consolidated Financial Statements.

3 unchanged sentences

(in thousands)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Cash flows from operating activities

Net (loss) income

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

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

Depreciation and amortization expense

Property and equipment impairment

Amortization of deferred finance costs

Stock-based compensation

Amortization of note discount

Allowance for doubtful accounts

Loss on extinguishment of debt

Deferred income tax (benefit) provision

Net gain on sale of assets

Gain on reduction of contingent obligation

Deferred income tax benefit

Changes in operating assets and liabilities:

4 unchanged sentences

Other liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Cash flows from investing activities

Cash consideration for acquisition of Halston Heritage assets

Net proceeds from sale of assets

Purchase of property and equipment

2 unchanged sentences

Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Payment of deferred finance costs

Proceeds from long-term debt

Payment of long-term debt

Net cash (used in) provided by financing activities

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

Net cash used in financing activities

Net decrease in cash, cash equivalents, and restricted cash

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

5 unchanged sentences

Supplemental disclosure of non-cash activities:

Operating lease right-of-use asset

Operating lease obligation

Accrued rent offset to operating lease right-of-use assets

Settlement of seller note through offset to receivable

Settlement of contingent obligation through offset to note receivable

Issuance of common stock in connection with Halston Heritage assets acquisition

Contingent obligation related to acquisition of Halston Heritage assets at fair value

Liability for equity-based bonuses

6 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

March 31, 2021

Nature of Operations, Background, and Basis of Presentation

6 unchanged sentences

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on April 23, 2021.

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.

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 Brands"), 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 fees.

The Company and its licensees distribute through a ubiquitous-channel retail sales strategy, which includes distribution through interactive television, the internet, and traditional brick-and-mortar retail channels.

The Company acquired the LOGO by Lori Goldstein brand, and the various labels under the brand, on April 1, 2021 (see Note 12).

The Company designs, produces, markets, and distributes products, licenses its brands to third parties, and generates licensing revenues.

The Company and its licensees distribute through an omni-channel retail sales strategy, which includes distribution through interactive television, digital live-stream shopping, brick-and-mortar retail, wholesale, and e-commerce channels to be everywhere its customers shop.

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Update ("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.

On January 1, 2021, the Company adopted Accounting Standards Update ("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.

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

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

March 31, 2021

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

September 30, 2020

March 31, 2021

Gross Carrying

13 unchanged sentences

Copyrights and other intellectual property

Amortization expense for intangible assets was approximately $1.14 million for the three-month period ended September 30, 2020 (the "current quarter") and was approximately $0.83 million for the three-month period ended September 30, 2019 (the "prior year quarter").

Amortization expense for intangible assets was approximately $3.42 million for the nine-month period ended September 30, 2020 (the “current nine months”) and was approximately $2.43 million for the nine-month period ended September 30, 2019 (the “prior year nine months”).

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.

Amortization expense for intangible assets was approximately $0.91 million for the three-month period ended March 31, 2021 (the "current quarter") and was approximately $1.14 million for the three-month period ended March 31, 2020 (the "prior year quarter").

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

Significant Contracts

QVC Agreements

Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the QVC Agreements, Qurate is required to pay the Company fees based primarily on a percentage of its net sales of Isaac Mizrahi, Ripka, and Longaberger branded merchandise.

Qurate royalty revenue represents a significant portion of the Company’s total revenues.

● Revenues from the QVC Agreements totaled $3.79 million and $4.69 million for the current and prior year quarter, respectively, representing approximately 49% of the Company’s total net revenues for both the current and prior year quarter.

● As of March 31, 2021 and December 31, 2020, the Company had receivables from Qurate of $3.84 million and $4.46 million, respectively, representing approximately 44% and 50% of the Company’s total accounts receivable, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

Significant Contracts

QVC Agreements

Under the Company’s agreements with QVC, QVC is required to pay the Company fees based primarily on a percentage of its net sales of Isaac Mizrahi, Ripka, and H Halston branded merchandise.

QVC royalty revenue represents a significant portion of the Company’s total revenues.

● Total revenues from QVC totaled $4.70 million and $5.16 million for the current and prior year quarter, respectively, representing approximately 64% and 47% of the Company’s total net revenues for the current and prior year quarter, respectively.

● Total revenues from QVC totaled $13.44 million and $17.96 million for the current and prior year nine months, respectively, representing approximately 61% and 59% of the Company’s total net revenues for the current and prior year nine months, respectively.

● As of September 30, 2020 and December 31, 2019, the Company had receivables from QVC of $4.72 million and $5.30 million, respectively, representing approximately 58% and 50% of the Company’s total receivables, respectively.

March 31, 2021

Allowance for Doubtful Accounts

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $1,163,000 and $155,000 as of September 30, 2020 and December 31, 2019, respectively.

The Company recognized bad debt expense of $371,000 and $0 for the current quarter and prior year quarter, respectively, and recognized bad debt expense of $1,054,000 and a recovery of $(144,000) for the current nine months and prior year nine months, respectively.

Included within these amounts, the current quarter and current nine months reflect $385,000 and $971,000, respectively, of bad debt expense related to the bankruptcy of several retail customers due to the novel coronavirus disease pandemic.

The total allowance of $971,000 against such customers’ outstanding receivable balances of $1.21 million at September 30, 2020 represents management’s best estimate of collectibility, based on information currently available.

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $1,284,000 and $1,151,000 as of March 31, 2021 and December 31, 2020, respectively.

The Company recognized bad debt expense of $132,000 and $211,000 for the current quarter and prior year quarter, respectively.

Included within these amounts, the current quarter and prior year quarter reflect $132,000 and $114,000, respectively, of bad debt expense related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic.

The total allowance of $1.10 million against such customers’ outstanding receivable balances of $1.21 million at March 31, 2021 represents management’s best estimate of collectibility, based on information currently available.

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’s real estate leases have remaining lease terms of between 1 to 8 years.

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

Under GAAP, a lessee is generally required to recognize a liability for its obligation 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.

4 unchanged sentences

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

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

As of March 31, 2021, the weighted average remaining operating lease term was approximately 6.2 years and the weighted average discount rate for operating leases was 6.25%.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.5 million and $0.4 million in the current quarter and prior year quarter, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

that the Company will exercise that option.

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.

For the current and prior year quarter, lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was $0.4 million.

For the current and prior year nine months, lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was $1.2 million.

As of September 30, 2020, the weighted average remaining operating lease term was 6.4 years and the weighted average discount rate for operating leases was 6.25%.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.6 million in both the current quarter and prior year quarter, $1.2 million in the current nine months, and $1.8 million in the prior year nine months.

As of September 30, 2020, the maturities of lease liabilities were as follows:

March 31, 2021

As of March 31, 2021, the maturities of lease liabilities were as follows:

($ in thousands)

Remainder of 2020

Total lease payments

2 unchanged sentences

Non-current portion of lease liabilities

In Note 12 of the Company’s Form 10-Q for the quarterly period ended June 30, 2020, the Company had previously disclosed (as a subsequent event) that it had entered into an assignment and assumption agreement with the landlord and subtenant at its former office location at 475 Tenth Avenue, New York, NY.

However, this agreement was later voided during the current quarter, and ultimately was not consummated.

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

September 30,

($ in thousands)

Xcel Term Loan

Term loan debt

Unamortized deferred finance costs related to term loan

Current portion of long-term debt

Current portion of long-term debt (i)

Long-term debt

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

Xcel Term Loan

On February 11, 2019, the Company entered into an amended loan agreement with Bank Hapoalim B.M.

(“BHI”), 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.

Pursuant to the Xcel Term Loan agreement, the Lenders 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 was divided under the Xcel Term Loan agreement into two term loans:

(i) The current portion of long-term debt as of March 31, 2021 is based upon the payment terms specified in the new loan and security agreement entered into on April 14, 2021, which resulted in the extinguishment of the term loan debt that existed as of March 31, 2021.

See Note 12 for further details.

Term Loan Debt

On February 11, 2019, the Company entered into an amended loan agreement (the “Loan Agreement”) with Bank Hapoalim B.M.

(“BHI”), which amended and restated the prior term loan, 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 was divided under the Xcel Term 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”).

The terms and conditions of the Xcel Term Loan resulted in significantly different debt service payment requirements compared with the prior term debt with BHI.

Management assessed and determined that this amendment resulted in a loss on extinguishment of debt and recognized a loss of $0.2 million (consisting of unamortized deferred finance costs) during the prior year quarter.

Upon entering into the Xcel Term Loan, Xcel paid an upfront fee in the amount of $0.09 million to BHI.

The Xcel Term Loan also allows that BHI and any other lender party to the Xcel Term Loan (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 Xcel Term Loan.

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.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

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

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.

2 unchanged sentences

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

On August 18, 2020, the Company further amended its Second Amended and Restated Loan and Security Agreement with BHI.

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

1 unchanged sentence

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

Management assessed and determined that the 2020 amendments represented debt modifications and, accordingly, no gain or loss was recorded.

In connection with the 2020 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 condensed 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.

The Term Loans mature on December 31, 2023;

2 unchanged sentences

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

The remaining principal balance of the Xcel Term Loan, as amended, outstanding at September 30, 2020 is payable in fixed installments as set forth in the following table, plus the variable payments as described below:

On March 31, 2021, concurrent with the negotiations to enter into a new loan and security agreement (see Note 12), the Company and BHI entered into a waiver and consent to the Loan Agreement, which deferred the principal payment due March 31, 2021 until May 1, 2021.

The remaining principal balance of the Term Loans outstanding as of March 31, 2021 is payable in fixed installments as set forth in the following table, plus the variable payments as described below:

($ in thousands)

Installment Payment Dates

December 31, 2020

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

May 1, 2021, June 30, 2021, September 30, 2021, and December 31, 2021

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

3 unchanged sentences

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 scheduled principal payments under the Xcel Term Loan are as follows:

No such payments based on excess cash flow were made for the quarter ended March 31, 2021.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

Thus, the aggregate remaining annual scheduled principal payments under the Term Loans at March 31, 2021 were as follows:

($ in thousands)

Year Ending December 31,

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.

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.

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 Unaudited Condensed Consolidated Financial Statements

September 30, 2020

Notwithstanding the above, Xcel may make a voluntary prepayment of up to $0.75 million without any early termination fees.

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 the 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.

4 unchanged sentences

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.

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

● net worth as defined in the loan agreements of at least $90.0 million at the end of each fiscal quarter;

● 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;

● EBITDA shall not be less than $5.0 million for the twelve month fiscal period ending September 30, 2020;

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

● liquid assets of 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

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

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

March 31, 2022, and thereafter

● 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;

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

● capital expenditures (excluding any capitalized compensation costs) shall not exceed $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 below:

1 unchanged sentence

Maximum Leverage Ratio

September 30, 2020

December 31, 2020

March 31, 2021

3 unchanged sentences

March 31, 2022 and each Fiscal Quarter end thereafter

The Company was in compliance with all applicable covenants as of September 30, 2020.

For the current and prior year quarter, the Company incurred aggregate interest expense related to term loan debt of approximately $256,000 and $288,000, respectively.

For the current nine months and prior year nine months, the Company incurred aggregate interest expense related to term loan debt of approximately $854,000 and $903,000, respectively.

The effective interest rate related to term loan debt was approximately 6.6% for the current quarter and current nine months, approximately 6.7% for the prior year quarter, and approximately 6.8% for the prior year nine months.

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 provides 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 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 approximately $166,000 and $1,806,000 as a reduction to operating expenses in the current quarter and current nine months, respectively.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

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 have to be repaid, and as such, the Company has recognized $10,000 as a reduction to operating expenses in the current quarter and current nine months.

In total, the Company recognized approximately $176,000 and $1,816,000 as a reduction to operating expenses in the current quarter and current nine months, respectively.

The effective interest rate related to term loan debt was approximately 6.6% for the current quarter and prior year quarter.

Subsequent to March 31, 2021, the Company and its wholly-owned subsidiaries entered into a new loan and security agreement, which resulted in the extinguishment of the term loan debt that existed as of March 31, 2021.

See Note 12 for further details.

Stockholders’ Equity

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

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 Accounting Standards Codification 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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

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

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The risk-free rate is based on the U.S.

Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, and expected life is based on the estimated average of the life of options and warrants using the simplified method.

Treasury rate for the expected life at the time of grant, volatility is based on the long-term implied volatilities of the Company’s stock, and expected life is based on the estimated average of the life of options and warrants using the simplified method.

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.

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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.

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.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

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 options activity for the current nine months is as follows:

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

Outstanding at January 1, 2021

Expired/Forfeited

Outstanding at September 30, 2020, and expected to vest

Exercisable at September 30, 2020

On January 1, 2020, the Company granted options to purchase 5,000 shares of 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 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.

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.

Outstanding at March 31, 2021, and expected to vest

Exercisable at March 31, 2021

On March 15, 2021, the Company granted options to purchase an aggregate of 365,390 shares of common stock to various employees.

The exercise price of the options is $1.86 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 commons 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 June 30, 2020, and one-third of the options shall vest on each of 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 shall vest on December 31, 2020.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $158,000 and $68,000, respectively.

Total unrecognized compensation expense related to unvested stock options at March 31, 2021 amounts to approximately $119,000 and is expected to be recognized over a weighted average period of approximately 0.85 years.

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $45,000 and $66,000, respectively.

Compensation expense related to stock options for the current nine months and prior year nine months was approximately $158,000 and $382,000, respectively.

Total unrecognized compensation expense related to unvested stock options at September 30, 2020 amounts to approximately $204,000 and is expected to be recognized over a weighted average period of approximately 1.24 years.

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

March 31, 2021

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

Balance at January 1, 2021

Forfeited or Canceled

Balance at September 30, 2020

Balance at March 31, 2021

Warrants expire at various times - either five or ten years from the date of grant, depending on the particular grant.

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

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

Outstanding and exercisable at January 1, 2021

Expired/Forfeited

Outstanding and exercisable at September 30, 2020

No compensation expense related to warrants was recognized in the current quarter, current nine months, prior year quarter, or prior year nine months.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

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

Outstanding and exercisable at March 31, 2021

No compensation expense related to warrants was recognized in the current quarter or prior year quarter.

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

Outstanding at January 1, 2021

Expired/Forfeited

Outstanding at September 30, 2020

On March 30, 2020, the Company issued 336,700 shares of stock to a member of senior management as payment for a performance bonus earned in 2019.

These shares vested immediately.

The Company recognized compensation expense of $220,000 in 2019 ($168,000 in the prior year quarter and prior year nine months) to accrue for this performance bonus.

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

These shares vested immediately.

The Company recognized approximately $265,000 of compensation expense in the current nine months related to this grant.

Outstanding at March 31, 2021

Compensation expense related to restricted stock grants for the current and prior year quarter was approximately $10,000 and $23,000, respectively.

Compensation expense related to restricted stock grants for the current nine months and prior year nine months was approximately $44,000 and $213,000, respectively.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, 2020 amounts to approximately $21,000 and is expected to be recognized over a weighted average period of approximately 0.50 years.

The Company also recognized approximately $ (7,000) and $313,000 of compensation expense in the current quarter and current nine months related to certain senior management bonuses payable in stock in 2021.

Shares Available Under the Company’s 2011 Equity Incentive Plan

As of September 30, 2020, there were 1,254,920 shares of common stock available for issuance under the Plan.

Shares Reserved for Issuance

As of September 30, 2020, there were 9,338,610 shares of common stock reserved for issuance pursuant to unexercised warrants and stock options, or available for issuance under the Plan.

The Company has not paid any dividends to date.

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

March 31, 2021

There was no remaining unrecognized compensation expense related to unvested restricted stock grants at March 31, 2021.

Additionally, during the current quarter, the Company recognized a reduction to compensation expense of approximately $(8,000) related to certain senior management bonuses earned and accrued as liabilities in 2020, which will be paid in a variable number of shares in 2021.

Shares Available Under the Company’s 2011 Equity Incentive Plan

As of March 31, 2021, there were 2,826,541 shares of common stock available for issuance under the Plan.

Shares Reserved for Issuance

As of March 31, 2021, there were 9,307,121 shares of common stock reserved for issuance pursuant to unexercised warrants and stock options, or available for issuance under the Plan.

The Company has not paid any dividends to date.

Earnings Per Share

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Three Months Ended

Nine Months Ended

September 30,

Effect of exercise of warrants

As a result of the net loss presented for the current quarter, prior year quarter, and current nine months, 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.

Effect of exercise of stock options

As a result of the net loss presented for the current quarter and prior year quarter, 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 diluted EPS excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

Three Months Ended

Nine Months Ended

September 30,

Stock options and warrants

The effective income tax rate for the current quarter and the prior year quarter was approximately 25% and 333%, respectively, resulting in an income tax (benefit) provision of $(0.15) million and $0.14 million, respectively.

The effective income tax rate for the current nine months and prior year nine months was approximately 10% and 40%, respectively, resulting in an income tax (benefit) provision of $(0.27) million and $1.28 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 12% and 18%, respectively, partially offset by the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effective rate by approximately 26%.

The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act;

this item increased the effective rate by approximately 3%.

For the prior year quarter, the effective tax rate was primarily attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes;

this item increased the effective rate by approximately 291%.

The federal statutory rate also differed from the effective tax rate due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 8% and 12%, respectively.

For the current nine months, the federal statutory rate differed from the effective tax rate primarily due to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effect rate by approximately 5%.

The effective rate was also attributable to state taxes and recurring permanent

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

differences, which increased the effective tax rate by approximately 6% and decreased the effective tax rate by approximately 3%, respectively.

For the prior year nine months, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 9% and 9%, respectively.

The effective tax rate was also partially attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes;

this item increased the effective rate by approximately 4%.

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 $98,000 and tax refund receivable of $203,000.

March 31, 2021

The effective income tax rate for the current quarter and the prior year quarter was approximately 5% and 40%, respectively, resulting in an income tax benefit provision of $0.14 million and $0.55 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, which decreased the effective tax rate by approximately 17%, partially offset by state taxes, which increased the effective tax rate by approximately 1%.

For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 8% and 4%, respectively.

The effective tax rate was also attributable to the tax impact of a potential federal net operating loss carryback due to the CARES Act.

This item increased the effective rate by 7%.

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 House of Halston LLC (“HOH”), and is the former Chief Executive Officer of HOH.

HOH is the parent company of the H Company IP, LLC (“HIP”).

On February 11, 2019, the Company and its wholly owned subsidiary, H Heritage Licensing, LLC, entered into an asset purchase agreement (the "Heritage Asset Purchase Agreement") with HIP and 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.

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 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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

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;

(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;

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 current quarter, the Company sold certain apparel products to an affiliate of Hilco, and recognized $151,000 of revenue from this transaction.

Additionally, during the current quarter, 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 $46,000 related to the sale of these assets.

Jennifer D’Loren is the wife of Robert W.

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D’Loren received compensation of $10,000 and $37,000 for the current quarter and prior year quarter, respectively.

D’Loren received compensation of $99,000 and $125,000 for the current nine months and prior year nine months, respectively.

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 $1.8 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.

● “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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

● “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 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 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.

Mizrahi in the year prior to the change in control.

Non-Competition and Non-Solicitation .

During the term of Mr.

Mizrahi’s employment by the Company and for a one-year period after the termination of such employment (unless his 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 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 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.

On February 24, 2020, the Company entered into a services agreement with Laugh Club, an entity wholly-owned by Mr.

Mizrahi, pursuant to which Laugh Club shall provide services to Mr.

Mizrahi necessary for Mr.

Mizrahi to perform his services pursuant to the employment agreement.

The Company will pay Laugh Club an annual fee of $0.72 million for such services.

Commitments and Contingencies

Contingent Obligation

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.

The Halston Heritage Earn-Out of $0.9 million is recorded as a long-term liability at September 30, 2020 and December 31, 2019 in the accompanying condensed 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 connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from H Company IP, LLC (“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.

The Halston Heritage Earn-Out of $0.9 million is recorded as a long-term liability at March 31, 2021 and December 31, 2020 in the accompanying condensed consolidated balance

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

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 Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity,” the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying condensed consolidated balance sheets because of the variable number of shares payable under the agreement.

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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

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, and approximately $0.1 million for the current quarter, 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.

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 $1.6 million, an additional $2.0 million of cash consideration payable upon the earlier of (i) the Company’s receipt of the first royalty payment from QVC with respect to the acquired trademarks or (ii) July 29, 2021, 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 the brand’s Chief Creative Officer and Spokesperson, with a base salary of $0.9 million per annum through December 31, 2021 and $1.2 million per annum thereafter, 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 $0.6 million per annum through December 31, 2021 and $0.8 million per annum thereafter.

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 success-related bonuses having been approved by the Board of Directors on March 18, 2021.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020

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 nine months ended September 30, 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.

Compliance with Listing Rules

On August 6, 2020, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) notifying Xcel that the minimum bid price per share for its common stock fell below $1.00 for a period of 30 consecutive business days.

Therefore, the Company did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules.

The letter also states that pursuant to Nasdaq Listing Rules 5810(c)(3)(A), the Company will be provided 180 calendar days to regain compliance with the minimum bid price requirement, or until February 2, 2021.

Xcel can regain compliance if, at any time during the Tolling Period or such 180-day period, the closing bid price of its common stock is at least $1.00 for a minimum period of 10 consecutive business days.

If by February 2, 2021, the Company does not regain compliance with the Nasdaq Listing Rules, it may be eligible for additional time to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(ii).

To qualify, Xcel would need to submit a transfer application and a $5,000 application fee.

The Company would also need to provide written notice to Nasdaq of its intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary.

As part of its review process, the Nasdaq staff will make a determination of whether it believes the Company will be able to cure this deficiency.

Should the Nasdaq staff conclude that Xcel will not be able to cure the deficiency, or should management determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that the Company’s shares of common stock will be subject to delisting.

If the Company does not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that Xcel’s shares of common stock will be subject to delisting from the Nasdaq Global Select Market.

At such time, the Company may appeal the delisting determination to a hearings panel.

Management intends to monitor the Company’s common stock closing bid price between now and February 2, 2021, and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary.

There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.

March 31, 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 First Eagle Alternative Credit, LLC (“FEAC”), which resulted in the extinguishment of the term loan debt that existed as of March 31, 2021.

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 $25.0 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.

The Company paid an upfront fee of $625,000 to the lenders in connection with this transaction.

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

What changed 10-Q

Item 1. Financial Statements