What changed in this filing

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Item 1. Financial Statements

2021-11-15 compared with 2021-08-13 · 198 added, 166 removed, 422 unchanged (46% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

June 30, 2021

September 30, 2021

December 31, 2020

4 unchanged sentences

Total current assets

Non-current Assets:

Property and equipment, net

7 unchanged sentences

Accrued payroll

Acquisition consideration payable

Current portion of operating lease obligation

Current portion of operating lease obligations

Current portion of long-term debt

1 unchanged sentence

Long-Term Liabilities:

Long-term portion of operating lease obligation

Long-term portion of operating lease obligations

Long-term debt, less current portion

6 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 19,530,855 and 19,260,862 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,541,921 and 19,260,862 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Paid-in capital

10 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

3 unchanged sentences

Other selling, general and administrative expenses

Recovery of costs in connection with potential acquisitions

Stock-based compensation

Depreciation and amortization

Government assistance - Paycheck Protection Program

Government assistance - Paycheck Protection Program and other

Asset impairment charges

7 unchanged sentences

Loss before income taxes

Income tax (benefit) provision

Income tax benefit

Net loss attributable to noncontrolling interest

2 unchanged sentences

common stockholders:

Basic net loss per share

Diluted net loss per share

Basic and diluted net loss per share

Weighted average number of common shares outstanding:

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

Basic and diluted weighted average common shares outstanding

See Notes to Unaudited Condensed Consolidated Financial Statements.

1 unchanged sentence

and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Unaudited Condensed Consolidated Statements of Equity

(in thousands, except share data)

2 unchanged sentences

Balance as of December 31, 2019

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

Shares issued to employees related to stock grants for bonus payments

Shares repurchased from employees in exchange for withholding taxes

Compensation expense in connection with stock options and restricted stock

Compensation expense related to 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

Compensation expense related to stock options and restricted stock

Shares issued to employees related to restricted stock grants

Shares repurchased from employees in exchange for withholding taxes

1 unchanged sentence

Balance as of June 30, 2020

Compensation expense related to stock options and restricted stock

Balance as of September 30, 2020

Balance as of December 31, 2020

Compensation expense in connection with stock options and restricted stock

Compensation expense related to stock options and restricted stock

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 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

Compensation expense related to stock options and restricted stock

Shares issued to executive related to stock grants for bonus payments

Shares issued to consultants related to restricted stock grants

Shares issued to directors related to restricted stock grants

Shares issued on exercise of stock options

Balance as of June 30, 2021

Compensation expense related to stock options and restricted stock

Shares issued to consultants related to restricted stock grants

Shares issued on exercise of stock options

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

Balance as of September 30, 2021

See Notes to Unaudited Condensed Consolidated Financial Statements.

3 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities

2 unchanged sentences

Asset impairment charges

Amortization of deferred finance costs

Amortization of deferred finance costs included in interest expense

Stock-based compensation

Allowance for doubtful accounts

Provision for doubtful accounts

Loss on extinguishment of debt (non-cash portion)

Deferred income tax benefit

Net gain on sale of assets

Changes in operating assets and liabilities:

7 unchanged sentences

Cash consideration for acquisition of Lori Goldstein assets

Net proceeds from sale of assets

Purchase of other intangible assets

4 unchanged sentences

Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Proceeds from revolving loan debt

12 unchanged sentences

Supplemental disclosure of non-cash activities:

Consideration payable to seller of Lori Goldstein assets

Operating lease right-of-use assets

Operating lease obligations

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

Liability for equity-based bonuses and other equity-based payments

Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes

Cash paid during the period for interest

Cash paid during the period for income taxes

See Notes to Unaudited Condensed Consolidated Financial Statements.

2 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

Nature of Operations, Background, and Basis of Presentation

11 unchanged sentences

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

the Company consolidates Longaberger Licensing, LLC and recognizes noncontrolling interest for the remaining ownership interest held by a third party.

The Company acquired the LOGO by Lori Goldstein brand, and the various labels under the brand, on April 1, 2021 (see Note 2).

10 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

Acquisition of LOGO by Lori Goldstein Brand

12 unchanged sentences

Cash paid at closing

Cash consideration payable

Cash paid subsequent to closing

Total direct initial consideration

5 unchanged sentences

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.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

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.

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.

2 unchanged sentences

Trademarks and other intangibles, net consist of the following:

June 30, 2021

September 30, 2021

Gross Carrying

14 unchanged sentences

Copyrights and other intellectual property

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”).

Amortization expense for intangible assets was approximately $ 1.56 million for the three-month period ended September 30, 2021 (the "current quarter") and was approximately $ 1.14 million for the three-month period ended September 30, 2020 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 4.02 million for the nine-month period ended September 30, 2021 (the “current nine months”) and was approximately $ 3.42 million for the nine-month period ended September 30, 2020 (the “prior year nine 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.

2 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

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

1 unchanged sentence

Year Ending December 31,

2021 (July 1 through December 31)

Significant Contracts

2021 (October 1 through December 31)

Significant Contracts and Concentrations

QVC Agreements

2 unchanged sentences

● Revenues from the QVC Agreements totaled $ 6.05 million and $ 4.70 million for the current and prior year quarter, respectively, representing approximately 54 % and 64 % 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.

● Revenues from the QVC Agreements totaled $ 15.24 million and $ 13.44 million for the current and prior year nine months, respectively, representing approximately 51 % and 61 % of the Company’s total net revenues for the current and prior year nine months, respectively.

● As of September 30, 2021 and December 31, 2020, the Company had receivables from Qurate of $ 6.19 million and $ 4.46 million, respectively, representing approximately 57 % 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.

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

The Company recognized bad debt expense of $ 0 and $ 371,000 for the current quarter and prior year quarter, respectively, and recognized bad debt expense of $ 132,000 and $ 1,054,000 for the current nine months and prior year nine months, respectively.

The bad debt expense amounts for the current nine months, prior year quarter, and prior year nine months include $ 132,000 , $ 385,000 , and $ 971,000 , 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 September 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

June 30, 2021

September 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 .

The Company’s real estate leases have remaining lease terms of between 5 months and 7.25 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.

1 unchanged sentence

Operating leases are recorded in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities on the Company’s condensed consolidated balance sheets.

The Company does not recognize lease liabilities and ROU assets for lease terms of 12 months or less, but recognizes such lease payments in net income on a straight-line basis over the lease terms.

The Company does not recognize lease liabilities and ROU assets for lease terms of 12 months or less, but recognizes such lease payments in operations on a straight-line basis over the lease terms.

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

3 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.

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:

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 approximately $ 1.2 million.

As of September 30, 2021, the weighted average remaining operating lease term was approximately 5.9 years and the weighted average discount rate for operating leases was 8.64 %.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 0.4 million in the current quarter, $ 1.7 million in the current nine months, $ 0.6 million in the prior year quarter, and $ 1.2 million in the prior year nine months.

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

($ in thousands)

2021 (July 1 through December 31)

2021 (October 1 through December 31)

Total lease payments

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

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

September 30,

($ in thousands)

4 unchanged sentences

Long-term debt

(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;

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

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

10 unchanged sentences

(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 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.

The Loan Agreement also provided that the Lenders make available 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, as defined.

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

2 unchanged sentences

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

the Company also paid approximately $ 0.6 million

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

September 30, 2021

of various legal and other fees in connection with the execution of the Loan Agreement.

These fees and costs totaling approximately $ 1.2 million have been deferred on the condensed consolidated balance sheet as of September 30, 2021 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.

2 unchanged sentences

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:

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

($ in thousands)

Year Ending December 31,

2021 (July 1 to December 31)

2021 (October 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.

4 unchanged sentences

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.

Xcel is not obligated to pay a prepayment premium if the Term Loans are 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 BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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).

September 30, 2021

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, 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.

2 unchanged sentences

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.

Additionally, the maximum amount available under the revolving loan facility was reduced from $ 4.0 million to $ 1.5 million until the Company meets or exceeds certain financial targets as set forth in the amendment.

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

On September 29, 2021, the Company, BHI, FEAC, and the Lenders amended the Loan Agreement entered into on April 14, 2021.

Under this amendment, the maximum amount available under the revolving loan facility was changed to $ 2.5 million for the period from September 29, 2021 to November 15, 2021, and $ 1.5 million thereafter until the Company meets or exceeds certain financial targets as set forth in the amendment.

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

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

Under this amendment, certain financial covenants were modified or eliminated for certain time periods.

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:

5 unchanged sentences

April 1, 2021 to March 31, 2022

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

July 1, 2021 to June 30, 2022

October 1, 2021 to September 30, 2022

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

1 unchanged sentence

● 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

June 30, 2021

September 30, 2021

● a fixed charge coverage ratio of not less than (a) 1.00 to 1.00 for the nine month period ending on December 31, 2021, (b) 1.00 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, (b) 5.30 to 1.00 for the fiscal quarter ending March 31, 2022, and (c) 4.00 to 1.00 for each fiscal quarter ending on and after June 30, 2022;

● a loan to value ratio not exceeding 50 % .

The Company was in compliance with all applicable covenants as of September 30, 2021, inclusive of the aforementioned amendment executed on November 12, 2021.

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.

5 unchanged sentences

For the current and prior year quarter, the Company incurred interest expense related to term loan debt of approximately $ 565,000 and $ 303,000 , 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 .

For the current nine months and prior year nine months, the Company incurred interest expense related to term loan debt of approximately $ 1,363,000 and $ 926,000 , respectively.

The effective interest rate related to term loan debt was approximately 9.6 % and 8.4 % for the current quarter and current nine months, respectively, and was approximately 6.6 % for both the prior year quarter and prior year nine months.

On June 24, 2021, Xcel borrowed $ 1.5 million under the aforementioned revolving loan facility, and on September 30, 2021, Xcel borrowed $ 998,000 under the aforementioned revolving loan facility.

The Company incurred related interest expense for the current quarter and current nine months of approximately $ 18,000 and $ 19,000 , respectively.

Government Assistance

1 unchanged sentence

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 had a two-year term and bore interest at a fixed rate of 1.0 % per annum, and monthly principal and interest payments were deferred for six months after the date of disbursement.

The Promissory Note contained 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.

The PPP also provides that such a 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 is 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.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

Management evaluated the legal and contractual terms associated with the loan, and concluded that, although the legal form of the loan was debt, it represented in substance a government grant that was 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.

Accordingly, the Company recognized approximately $ 166,000 and $ 1,806,000 as a reduction to operating expenses in the prior year quarter and prior year nine months, respectively.

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

On September 29, 2021, the U.S.

Small Business Administration, as authorized by the CARES Act, remitted payment of $ 1,806,000 to Bank of America, N.A.

for full forgiveness of the Company’s Promissory Note under the PPP.

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 recognized $ 10,000 as a reduction to operating expenses in the prior quarter and prior year nine months.

In total for both the PPP and EIDL, the Company recognized approximately $ 176,000 and $ 1,816,000 as a reduction to operating expenses in the prior year quarter and prior year nine months, respectively.

Stockholders’ Equity

11 unchanged sentences

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.

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

estimate future exercise patterns.

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

4 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.

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:

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

Outstanding at January 1, 2021

1 unchanged sentence

( 1,771,070 )

Outstanding at June 30, 2021, and expected to vest

Exercisable at June 30, 2021

Outstanding at September 30, 2021, and expected to vest

Exercisable at September 30, 2021

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

2 unchanged sentences

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.

On July 1, 2021, the Company granted options to purchase an aggregate of 20,000 shares of common stock to a member of management.

The exercise price of the options is $ 2.76 per share, and 50 % of the options vest on each of June 1, 2022 and June 1, 2023.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 48,000 and $ 45,000 , respectively.

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 June 30, 2021

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

Compensation expense related to stock options for the current nine months and prior year nine months was approximately $ 246,000 and $ 158,000 , respectively.

Total unrecognized compensation expense related to unvested stock options at September 30, 2021 amounts to approximately $ 125,000 and is expected to be recognized over a weighted average period of approximately 1.16 years.

XCEL BRANDS, INC.

1 unchanged sentence

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:

September 30, 2021

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

Balance at January 1, 2021

Forfeited or Canceled

Balance at September 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 nine months is as follows:

Outstanding and exercisable at January 1, 2021

Expired/Forfeited

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 and exercisable at September 30, 2021

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

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

Outstanding at January 1, 2021

Expired/Forfeited

Outstanding at June 30, 2021

Outstanding at September 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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

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

On July 1, 2021, the Company issued 9,399 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 $ 11,000 , 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.

Compensation expense related to restricted stock grants for the current nine months and prior year nine months was approximately $ 84,000 and $ 44,000 , respectively.

Total unrecognized compensation expense related to unvested restricted stock grants at September 30, 2021 amounts to approximately $ 72,000 and is expected to be recognized over a weighted average period of approximately 1.50 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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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.

The Company also recognized approximately $ 46,000 and $ 400,000 of compensation expense in the current quarter and current nine months, respectively, related to similar senior management bonuses payable in common stock in 2022.

The Company also recognized approximately $ 32,000 of compensation expense in the current quarter and current nine months to accrue for a contractual payment to an employee that will be paid in shares in the fourth quarter of 2021.

Shares Available Under the Company’s 2011 Equity Incentive Plan

As of June 30, 2021, there were 2,611,155 shares of common stock available for issuance under the Plan.

As of September 30, 2021, there were 2,636,969 shares of common stock available for issuance under the Plan.

Shares Reserved for Issuance

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.

As of September 30, 2021, there were 8,563,979 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

Nine Months Ended

September 30,

Effect of exercise of warrants

Effect of exercise of stock options

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

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.

1 unchanged sentence

Three Months Ended

Six 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 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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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 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 income tax benefit rate for the current quarter and the prior year quarter was approximately 28 % and 25 %, respectively, resulting in an income tax benefit of $ 0.54 million and $ 0.15 million, respectively.

The effective income tax benefit rate for the current nine months and prior year nine months was approximately 26 % and 10 %, respectively, resulting in an income tax benefit of $ 2.02 million and $ 0.27 million, respectively.

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

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 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 current nine 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 2 %.

For the prior year 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 effective rate by approximately 5 %.

The effective rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 6 % and decreased the effective tax rate by approximately 3 %, respectively.

Related Party Transactions

5 unchanged sentences

D’Loren received compensation of $ 11,000 and $ 29,000 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.

D’Loren received compensation of $ 32,000 and $ 99,000 for the current nine months and prior year nine months, respectively.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

Isaac Mizrahi

8 unchanged sentences

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.

21 unchanged sentences

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.

Mizrahi may not permit his name to be used by or to participate in any business

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

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.

8 unchanged sentences

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

Commitments and Contingencies

1 unchanged sentence

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.

The Halston Heritage Earn-Out of $ 0.9 million is recorded as a long-term liability at September 30, 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.

1 unchanged sentence

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.

The Lori Goldstein Earn-Out of $ 6.6 million is recorded as a long-term liability at September 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

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

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

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

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

and the world.

COVID-19 has had an unprecedented impact on the U.S.

and global economy as national, state, and local governments continue to react to and attempt to manage this ongoing public health crisis.

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

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

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

The 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.

Temporary factory

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

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 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 nine 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.

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.

On November 12, 2021, the Company, BHI, FEAC, and the Lenders amended the Loan Agreement that was entered into on April 14, 2021 and had been amended on August 12, 2021 and September 29, 2021.

Under the November 2021 amendment, certain financial covenants were modified or eliminated for certain time periods.

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

Refer to Note 7 for further details.

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