What changed in this filing

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Item 1. Financial Statements

2021-08-13 compared with 2021-05-17 · 277 added, 171 removed, 311 unchanged (59% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

March 31, 2021

June 30, 2021

December 31, 2020

13 unchanged sentences

Accrued payroll

Acquisition consideration payable

Current portion of operating lease obligation

4 unchanged sentences

Long-term debt, less current portion

Contingent obligation

Contingent obligations

Deferred tax liabilities, net

4 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 19,262,529 and 19,260,862 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,530,855 and 19,260,862 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Paid-in capital

10 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Net licensing revenue

3 unchanged sentences

Other selling, general and administrative expenses

Costs in connection with potential acquisitions

Recovery of costs in connection with potential acquisitions

Stock-based compensation

Depreciation and amortization

Government assistance - Paycheck Protection Program

Asset impairment charges

Total operating costs and expenses

Operating loss

Interest expense and other finance charges

Interest and finance expense

Interest expense - term loan debt

Other interest and finance charges (income), net

Loss on extinguishment of debt

Total interest and finance expense

Loss before income taxes

Income tax benefit

Income tax (benefit) provision

Net loss attributable to noncontrolling interest

19 unchanged sentences

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

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

Balance as of December 31, 2020

2 unchanged sentences

Balance as of March 31, 2021

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 consultants in connection with restricted stock grants

Shares issued to directors in connection with restricted stock grants

Shares issued on exercise of stock options, net

Balance as of June 30, 2021

See Notes to Unaudited Condensed Consolidated Financial Statements.

3 unchanged sentences

(in thousands)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash flows from operating activities

1 unchanged sentence

Depreciation and amortization expense

Asset impairment charges

Amortization of deferred finance costs

1 unchanged sentence

Allowance for doubtful accounts

Loss on extinguishment of debt (non-cash portion)

Deferred income tax benefit

7 unchanged sentences

Cash flows from investing activities

Cash consideration for acquisition of Lori Goldstein assets

Purchase of other intangible assets

Purchase of property and equipment

1 unchanged sentence

Cash flows from financing activities

Proceeds from exercise of stock options

Shares repurchased including vested restricted stock in exchange for withholding taxes

Net cash used in financing activities

Net decrease in cash, cash equivalents, and restricted cash

Proceeds from revolving loan debt

Proceeds from long-term debt

Payment of deferred finance costs

Payment of long-term debt

Payment of breakage fees associated with extinguishment of long-term debt

Net cash provided by (used in) financing activities

Net (decrease) increase 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:

Consideration payable to seller of Lori Goldstein assets

Contingent obligation related to acquisition of Lori Goldstein assets at fair value

Liability for equity-based bonuses

Amount due from noncontrolling interest for capital contribution

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

June 30, 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.

Certain reclassifications have been made to prior year comparable period financial statements to conform to classifications used in the current year – specifically, the classification and aggregation / disaggregation of certain types of operating costs and expenses, and the disaggregation of the components of interest and finance expense.

These reclassifications had no impact on total operating costs and expenses, total interest and finance expense, net loss, stockholders’ equity, or cash flows as previously reported.

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.

Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the LOGO by Lori Goldstein 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.

11 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

June 30, 2021

Acquisition of LOGO by Lori Goldstein Brand

On March 30, 2021, the Company and its wholly owned subsidiary, Gold Licensing, LLC, entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Lori Goldstein, Ltd.

(the “Seller”) and Lori Goldstein (“Shareholder”), pursuant to which the Company agreed to acquire, and the Seller and Shareholder agreed to sell, certain assets of the Seller, including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto.

On April 1, 2021 (the “Closing Date”), the Company completed the acquisition of the assets specified in the Asset Purchase Agreement.

Pursuant to the Asset Purchase Agreement, on the Closing Date, the Company delivered $ 1.6 million in cash consideration to the Seller.

In addition, the Company was required to deliver $ 2.0 million in cash consideration to the Seller on the earlier of (i) the Company’s receipt of the first royalty payment from QVC, Inc.

in respect of the acquired assets, or (ii) July 29, 2021.

This payment was made in July 2021.

In addition to the consideration described above, the Seller is eligible to earn additional consideration of up to $ 12.5 million (the “Lori Goldstein Earn-Out”), which would be payable, in cash, within 45 days after the end of each applicable calendar year during the six calendar year period commencing 2021 in an amount equal to 75 % percent of the Royalty Contribution (as defined in the Asset Purchase Agreement) for such calendar year.

The Company recorded a contingent obligation of $ 6.6 million related to the Lori Goldstein Earn-Out, based on the difference between the fair value of the acquired assets of the LOGO by Lori Goldstein brand and the total consideration paid, in accordance with the guidance in Accounting Standards Codification (“ASC”) Subtopic 805-50.

The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase.

The following represents the aggregate purchase price of $ 10.3 million:

($ in thousands)

Cash paid at closing

Cash consideration payable

Total direct initial consideration

Direct transaction expenses

Contingent obligation (Lori Goldstein Earn-Out)

Total consideration

The aggregate purchase price has been allocated entirely to the trademarks of the brand.

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

The Lori Goldstein trademarks are being amortized on a straight-line basis over their expected useful life of four years .

Upon the consummation of the acquisition of the LOGO by Lori Goldstein brand as 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.

These bonuses were subsequently paid in May 2021.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

Additionally, concurrent with the acquisition, the Company also entered into a 10-year employment agreement with the Shareholder to serve as the LOGO by Lori Goldstein 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.

Further, 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.

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

March 31, 2021

June 30, 2021

Gross Carrying

3 unchanged sentences

Trademarks (finite-lived)

Other intellectual property

9 unchanged sentences

Amortization expense for intangible assets was approximately $ 1.55 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").

Amortization expense for intangible assets was approximately $ 2.46 million for the six-month period ended June 30, 2021 (the “current six months”) and was approximately $ 2.28 million for the six-month period ended June 30, 2020 (the “prior year six months”).

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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

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

($ in thousands)

Year Ending December 31,

2021 (July 1 through December 31)

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.

● Revenues from the QVC Agreements totaled $ 5.45 million and $ 4.04 million for the current and prior year quarter, respectively, representing approximately 51 % and 81 % of the Company’s total net revenues for the current and prior year quarter, respectively.

● Revenues from the QVC Agreements totaled $ 9.19 million and $ 8.74 million for the current and prior year six months, respectively, representing approximately 50 % and 60 % of the Company’s total net revenues for the current and prior year six months, respectively.

● As of June 30, 2021 and December 31, 2020, the Company had receivables from Qurate of $ 5.61 million and $ 4.46 million, respectively, representing approximately 53 % and 50 % of the Company’s total accounts receivable, respectively.

Allowance for Doubtful Accounts

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 June 30, 2021 and December 31, 2020, respectively.

The Company recognized bad debt expense of $ 0 and $ 472,000 for the current quarter and prior year quarter, respectively, and recognized bad debt expense of $ 132,000 and $ 683,000 for the current six months and prior year six months, respectively.

The bad debt expense amounts for the current six months, prior year quarter, and prior year six months include $ 132,000 , $ 472,000 , and $ 586,000 , 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 $ 1.1 million against such customers’ outstanding receivable balances of $ 1.5 million at June 30, 2021 represents management’s best estimate of collectibility, based on information currently available.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

Allowance for Doubtful Accounts

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 approximately 1 to 8 years.

June 30, 2021

The Company has operating leases for its current office, former office, and a 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 approximately 8 months and 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.

7 unchanged sentences

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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

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

For the current and prior year six months, lease expense included in selling, general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations was approximately $ 0.8 million.

As of June 30, 2021, the weighted average remaining operating lease term was approximately 6.0 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 $ 0.7 million in the current quarter, $ 1.3 million in the current six months, $ 0.1 million in the prior year quarter, and $ 0.7 million in the prior year six months.

As of June 30, 2021, the maturities of lease liabilities were as follows:

($ in thousands)

2021 (July 1 through December 31)

Total lease payments

2 unchanged sentences

Non-current portion of lease liabilities

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

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

1 unchanged sentence

Term loan debt

Unamortized deferred finance costs related to term loan

Current portion of long-term debt (i)

Unamortized deferred finance costs related to term loan debt

Revolving loan debt

Current portion of debt (i)

Long-term debt

(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:

(i) The current portion of debt as of June 30, 2021 consists of $ 2.5 million of term loan debt and $ 1.5 million of revolving loan debt;

the current portion of debt as of December 31, 2020 is related solely to term loan debt.

Previous Term Loan Debt

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

(“BHI”), which amended and restated a prior term loan with BHI, 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 into two term loans:

(1) a term loan in the amount of $ 7.3 million and (2) a term loan in the amount of $ 14.7 million.

Such loan agreement was subsequently amended on April 13, 2020 and again on August 18, 2020;

such amendments changed the timing and amount of quarterly installment payments, but did not change the total principal balance, interest rate, or maturity date.

These amendments during 2020 were accounted for as debt modifications and, accordingly, no gain or loss was recorded.

Current Term Loan Debt

On April 14, 2021 (the “Loan Closing Date”), Xcel, as Borrower, and its wholly-owned subsidiaries (each a “Guarantor” and collectively, the “Guarantors”), entered into a Loan and Security Agreement (the “Loan Agreement”) with BHI as administrative agent and collateral agent, FEAC Agent, LLC (“FEAC”) as co-collateral agent, and the financial institutions party thereto as lenders (the “Lenders”).

Pursuant to the Loan Agreement, the Lenders made two term loans:

(1) a term loan in the amount of $ 10.0 million (“Term Loan A”) and (2) a term loan in the amount of $ 15.0 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”).

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.

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

The Loan Agreement also contemplates that the Lenders will provide to Xcel a revolving loan facility in an amount up to $ 4.0 million on a discretionary basis, but not to exceed 85 % of the amount of eligible accounts receivable.

Xcel shall have the right to request the Lenders to make incremental term loans (the “Incremental Term Loans”) of up to $ 25.0 million.

Management assessed and determined that this new agreement resulted in an extinguishment of the previous term loan debt, and accordingly recognized a loss of approximately $ 0.8 million (consisting of $ 0.1 million of unamortized deferred finance costs and $ 0.7 million of breakage fees owed to the old lender under the terms of the previous debt agreement) during the current quarter.

Approximately $ 367,000 of such aforementioned breakage fees were paid at time of extinguishment, with the remaining $ 367,000 of such fees payable in three equal payments on each of May 1, 2022, 2023, and 2024.

Upon entering into the Loan Agreement, Xcel paid a 2.5 % closing fee in the amount of $ 0.625 million to the administrative agent for the benefit of each Lender having a term loan commitment;

the Company also paid approximately $ 0.5 million of various legal and other fees in connection with the execution of the Loan Agreement.

These fees and costs totaling

XCEL BRANDS, INC.

1 unchanged sentence

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.

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.

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

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.

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 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;

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 the Xcel Term Loan shall terminate no later than one year following the date of issuance thereof.

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:

June 30, 2021

approximately $ 1.1 million have been deferred on the condensed consolidated balance sheet as a reduction of 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 Term Loans mature on April 14, 2025, Incremental Term Loans shall mature on the date set forth in the applicable term note, and Revolving Loans mature on April 14, 2022 or such later date as agreed upon by Xcel and the Lenders.

Principal on the Term Loans is payable in 16 quarterly installments of $ 625,000 on each of March 31, June 30, September 30, and December 31 of each year, commencing on June 30, 2021 and ending on March 31, 2025, with a final payment of $ 15.0 million on the maturity date of April 14, 2025.

An amount equal to eighty percent ( 80 %) of each quarterly principal installment payment shall be applied to the Term Loan A and the remaining twenty percent ( 20 %) of each such quarterly principal installment shall be applied to the Term Loan B until the outstanding principal balance of Term Loan A is paid in full.

Thereafter, one hundred percent ( 100 %) of each such quarterly principal installment shall be applied to the Term Loan B.

The aggregate remaining annual scheduled principal payments under the Term Loans at June 30, 2021 were as follows:

($ in thousands)

Installment Payment Dates

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

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.

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.

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

Year Ending December 31,

2021 (July 1 to December 31)

Xcel shall have the right upon 30 days ’ prior written notice to (i) terminate the Revolving Loan facility and repay all Revolving Loans and accrued and unpaid interest thereon and (ii) prepay all or any portion of the Term Loans or Incremental Term Loans and accrued and unpaid interest thereon, provided that any prepayment of the Term Loans shall be applied first to prepay the Term Loan A in full, second to prepay the Term Loan B, and third to the Incremental Term Loans in accordance with the terms agreed to by Xcel, the Lenders, and the administrative agent.

If any Term Loan is prepaid in whole or in part on or prior to the third anniversary of the Loan Closing Date (including as a result of an event of default), Xcel shall pay a prepayment premium as follows:

an amount equal to the principal amount of the Term Loan prepaid multiplied by:

(i) the greater of three percent ( 3.00 %) and the Lost Yield Revenue (as defined below) if such prepayment occurs on or before the first anniversary of the Loan Closing Date;

(ii) two percent ( 2.00 %) if such prepayment occurs at any time after the first anniversary of the Loan Closing Date and on or prior to the second anniversary of the Loan Closing Date;

and (iii) one percent ( 1.00 %) if such prepayment occurs at any time after the second anniversary of the Loan Closing Date on or prior to the third anniversary of the Loan Closing Date.

Xcel is not obligated to pay a prepayment premium if the Term Loans prepaid after the third anniversary of the Loan Closing Date.

“Lost Yield Revenue” means, with respect to any payment of Term Loans at any time on or prior to the first anniversary of the Loan Closing Date (excluding regularly scheduled amortization payments), the amount of interest (including interest at the Default Rate to the extent the Default Rate is being charged under the Loan Agreement) that would have accrued on the repaid Term Loans during the first 12 months of the term of the Loan Agreement minus the portion of such interest on such Term Loans that actually has been paid.

Xcel’s obligations under the Loan Agreement are guaranteed by the Guarantors and secured by all of the assets of Xcel and the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the Loan Agreement) and,

XCEL BRANDS, INC.

1 unchanged sentence

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,

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:

an amount equal to the principal amount of the Term Loan or Incremental Term Loan, as applicable, being prepaid, multiplied by:

(i) two percent (2.00%) if any of Term Loan B or any Incremental Term Loan is prepaid on or before the second anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable;

(ii) one percent (1.00%) if any of Term Loan A is prepaid on or before the second anniversary of the Closing Date;

(iii) one percent (1.00%) if any of Term Loan B or any Incremental Term Loan is prepaid after the second anniversary of the later of the Closing Date or such Incremental Term Loan was made, as applicable, but on or before the third anniversary of such date;

(iv) one-half of one percent (0.50%) if any of Term Loan A is prepaid after the second anniversary of the Closing Date, but on or before the third anniversary of such date;

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’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.

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.

Interest on Term Loan B accrues at a fixed rate of 6.25% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made.

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.

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 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;

June 30, 2021

subject to certain limitations contained in the Loan Agreement, equity interests of the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the Loan Agreement).

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

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

On August 12, 2021, the Company, BHI, FEAC, and the Lenders amended the Loan Agreement entered into on April 14, 2021.

Under this amendment, the EBITDA financial covenant for the three months ended June 30, 2021 was eliminated, and the financial covenants related to EBITDA, fixed charge coverage ratio, and leverage ratio were lowered for the remainder of 2021 and for the 12 months ending March 31, 2022.

Additionally, the maximum amount available under the revolving loan facility was reduced from $ 4.0 million to $ 1.5 million until the Company demonstrates compliance with the amended financial covenants for the applicable periods ending December 31, 2021.

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

The Company’s financial covenants under the Loan Agreement, as amended, are as follows:

● minimum EBITDA at the end of specified fiscal periods as set forth below;

Fiscal Period

Minimum EBITDA

April 1, 2021 to September 30, 2021

April 1, 2021 to December 31, 2021

April 1, 2021 to March 31, 2022

For the trailing twelve month periods ending June 30, 2022 and September 30, 2022

For the trailing twelve month periods ending December 31, 2022, March 31, 2023, June 30, 2023, and September 30, 2023

For the trailing twelve month periods ending December 31, 2023, March 31, 2024, June 30, 2024, September 30, 2024, December 31, 2024, and March 31, 2025

● liquid assets of at least 4.0 million at all times;

● a fixed charge coverage ratio of not less than (a) 1.05 to 1.00 for the nine month period ending on December 31, 2021, (b) 1.20 to 1.00 for the twelve fiscal month period ending March 31, 2022, and (c) 1.25 to 1.00 for the twelve fiscal month period ending at the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2022;

● a leverage ratio for the twelve fiscal month period ending at the end of each fiscal quarter not exceeding (a) 6.75 to 1.00 for the fiscal quarter ending December 31, 2021 and (b) 4.00 to 1.00 for each fiscal quarter ending on and after March 31, 2022;

● a loan to value ratio not exceeding 50 % .

The Company was in compliance with all applicable covenants as of June 30, 2021.

XCEL BRANDS, INC.

1 unchanged sentence

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:

Fiscal Quarter End

Fixed Charge Coverage Ratio

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 $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:

Fiscal Period

Maximum Leverage Ratio

March 31, 2021

June 30, 2021

September 30, 2021

December 31, 2021

March 31, 2022 and each Fiscal Quarter end thereafter

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.

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.

Interest on the Term Loan A will accrue at LIBOR plus 4.0 % per annum, interest on the Term Loan B will accrue at LIBOR plus 8.0 % per annum, and interest on the Revolving Loans will accrue at either the Base Rate plus 1.5 % per annum or LIBOR plus 3.75 %, as elected by Xcel.

Interest on the Loans is payable on the last business day of each calendar month.

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.

LIBOR is defined in the Loan Agreement as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to one month as published by ICE Benchmark Administration Limited or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) on such date of determination or (b) 1.0 % per annum.

Interest on the Incremental Term Loans will accrue at rates and will be paid on dates to be agreed to by Xcel and the Lenders.

For the current and prior year quarter, the Company incurred interest expense related to term loan debt of approximately $ 522,000 and $ 310,000 , respectively.

For the current six months and prior year six months, the Company incurred interest expense related to term loan debt of approximately $ 798,000 and $ 623,000 , respectively.

The effective interest rate related to term loan debt was approximately 9.0 % and 7.8 % for the current quarter and current six months, respectively, and was approximately 6.6 % for both the prior year quarter and prior year six months.

On June 24, 2021, Xcel borrowed $ 1.5 million under the aforementioned revolving loan facility, and incurred related interest expense for the current quarter of approximately $ 1,000 .

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 Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“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 $ 1.640 million as a reduction to operating expenses in the prior year quarter and prior year six months.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

Stockholders’ Equity

6 unchanged sentences

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.

10 unchanged sentences

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 quarter is as follows:

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

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

Outstanding at January 1, 2021

Expired/Forfeited

Outstanding at March 31, 2021, and expected to vest

Exercisable at March 31, 2021

( 1,721,070 )

Outstanding at June 30, 2021, and expected to vest

Exercisable at June 30, 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 April 1, 2021, the Company granted options to purchase an aggregate of 125,000 shares of common stock to non-management directors.

The exercise price of the options is $ 1.93 per share, and 50 % of the options vest on each of April 1, 2022 and April 1, 2023.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 40,000 and $ 45,000 , 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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

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

Compensation expense related to stock options for the current six months and prior year six months was approximately $ 198,000 and $ 113,000 , respectively.

Total unrecognized compensation expense related to unvested stock options at June 30, 2021 amounts to approximately $ 151,000 and is expected to be recognized over a weighted average period of approximately 1.15 years.

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

Balance at January 1, 2021

Forfeited or Canceled

Balance at March 31, 2021

Balance at June 30, 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 quarter is as follows:

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

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

Outstanding and exercisable at January 1, 2021

Expired/Forfeited

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 and exercisable at June 30, 2021

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

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

Outstanding at January 1, 2021

Expired/Forfeited

Outstanding at March 31, 2021

Outstanding at June 30, 2021

On April 1, 2021, the Company issued an aggregate of 50,000 shares of stock to non-management directors, which vest evenly over two years , whereby 50 % shall vest on April 1, 2022, and 50 % shall vest on April 1, 2023.

On April 26, 2021, the Company issued 14,045 shares of stock to a consultant, which vested immediately.

Compensation expense related to restricted stock grants for the current and prior year quarter was approximately $ 37,000 and $ 10,000 , respectively.

Compensation expense related to restricted stock grants for the current six months and prior year six months was approximately $ 47,000 and $ 33,000 , respectively.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, 2021 amounts to approximately $ 84,000 and is expected to be recognized over a weighted average period of approximately 1.75 years.

Additionally, on May 7, 2021, the Company issued 181,179 shares of stock to a member of senior management as payment for a performance bonus earned in 2020.

These shares vested immediately.

The Company had previously recognized compensation expense of approximately $ 291,000 in 2020 to accrue for this performance bonus, and recognized a reduction to compensation expense of approximately $( 8,000 ) during the current six months related to this bonus.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

June 30, 2021

The Company also recognized approximately $ 354,000 of compensation expense in the current quarter and current six months related to similar senior management bonuses payable in common stock in 2022.

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.

As of June 30, 2021, there were 2,611,155 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.

As of June 30, 2021, there were 9,038,795 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.

4 unchanged sentences

Three Months Ended

Six Months Ended

Effect of exercise of warrants

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.

As a result of the net loss for all periods presented, 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

Six Months Ended

Stock options and warrants

The effective income tax rate for the current quarter and the prior year quarter was approximately 43 % and - 49 %, respectively, resulting in an income tax (benefit) provision of $( 1.35 ) million and $ 0.43 million, respectively.

The effective income tax rate for the current six months and prior year six months was approximately 25 % and 5 %, respectively, resulting in an income tax (benefit) of $( 1.48 ) million and $( 0.12 ) million, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

June 30, 2021

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences and state taxes, which increased the effective tax rate by approximately 15 % and 7 %, respectively.

For the prior year quarter, 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 effective rate by approximately 41 %.

The effective tax rate was also attributable to state taxes and recurring permanent differences, which decreased the effective tax rate by approximately 2 % and 27 %, 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%.

this item increased the effective rate by approximately 3 %.

For the current six months, the federal statutory rate differed from the effective tax rate primarily due to state taxes, which increased the effective tax rate by approximately 7 %, partially offset by the impact of recurring permanent differences, which decreased the effective tax rate by approximately 3 %.

For the prior year six 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 16 %.

The effective rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 5 % and decreased the effective tax rate by approximately 8 %, respectively.

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 4 %.

Related Party Transactions

5 unchanged sentences

D’Loren received compensation of $ 11,000 and $ 33,000 for the current quarter and prior year quarter, respectively.

D’Loren received compensation of $ 21,000 and $ 70,000 for the current six months and prior year six months, respectively.

Isaac Mizrahi

5 unchanged sentences

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:

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 following:

● “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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

● “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.

3 unchanged sentences

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.

27 unchanged sentences

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 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.

1 unchanged sentence

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.

June 30, 2021

Commitments and Contingencies

Contingent Obligation – Halston Heritage Earn-Out

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 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, “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.

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 acquisition of the Lori Goldstein trademarks (see Note 2 for additional information), the Company agreed to pay the Seller additional cash consideration of up to $ 12.5 million, based on royalties earned during the six calendar year period commencing in 2021.

The Lori Goldstein Earn-Out of $ 6.6 million is recorded as a long-term liability at June 30, 2021 in the accompanying condensed consolidated balance sheet, based on the difference between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid, in accordance with the guidance in ASC Subtopic 805-50.

Coronavirus Pandemic

1 unchanged sentence

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

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

economy as federal, state, and local governments react to this ongoing 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.

1 unchanged sentence

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, 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.

The pandemic 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, and approximately $ 0.1 million for the current six months, for retailers that have filed for bankruptcy.

Due to the ongoing COVID-19 pandemic, there is significant uncertainty surrounding the 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

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.

June 30, 2021

Subsequent Events

Amendment to Term Loans

On August 12, 2021, the Company, BHI, FEAC, and the Lenders amended the Loan Agreement entered into on April 14, 2021.

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

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