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Item 7. Management’s Discussion and Analysis

2022-04-15 compared with 2021-04-23 · 207 added, 213 removed, 176 unchanged (70% of the section changed)

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Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning factors that are beyond our control.

Xcel Brands is a media and consumer products company engaged in the design, production, marketing, wholesale 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.

Xcel Brands 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.

The Company’s brands have generated over $3 billion in retail sales via live streaming in interactive television and digital channels alone.

Xcel was founded in 2011 with a vision to reimagine shopping, entertainment, and social media as one thing.

Xcel owns the Isaac Mizrahi, Halston, Judith Ripka, C Wonder, and Longaberger brands, pioneering a ubiquitous sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, brick-and-mortar retail,wholesale and e-commerce channels.

Xcel owns the Isaac Mizrahi, LOGO by Lori Goldstein, Judith Ripka, Halston, C Wonder, and Longaberger brands, pioneering a true omni-channel sales strategy which includes the promotion and sale of products under its brands through interactive television, digital live-stream shopping, brick-and-mortar retail,wholesale, and e-commerce channels.

To grow our brands, we are focused on the following primary strategies:

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Additionally, we believe we can acquire additional brands into our platform in order to leverage our operating infrastructure, marketing capabilities, and distribution network.

Summary of Critical Accounting Policies

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Critical accounting policies are those that are the most important to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective, and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements, our most critical accounting policies, discussed below, pertain to revenue recognition, trademarks and other intangible assets, stock-based compensation, fair value of contingent obligations, and income taxes.

Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

While our significant accounting policies and estimates are described in more detail in the notes to our consolidated financial statements, our most critical accounting policies and estimates, discussed below, pertain to revenue recognition, trademarks and other intangible assets, leases, and income taxes.

These include but are not limited to the estimation of the useful lives of our trademarks, the estimation of the future cash flows related to our trademarks, and the estimation of our incremental borrowing rate (for purposes of accounting for leases).

In applying such policies, we must use some amounts that are based upon our informed judgments and best estimates.

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Revenue Recognition

In connection with our licensing model, we follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606-10-55-65, by which we recognize revenue at the later of when (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied (in whole or in part).

In connection with our licensing model, we follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606-10-55-65, by which we recognize net licensing revenue at the later of when (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied (in whole or in part).

More specifically, we separately identify:

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

(ii) Contracts for which revenue is recognized based on minimum guaranteed payments using an appropriate measure of progress, in which minimum guaranteed payments are straight-lined over the term of the contract and recognized ratably based on the passage of time, and to which the royalty recognition constraint to the sales-based

royalties in excess of minimum guaranteed is applied and such sales-based royalties are recognized to distinct period only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG).

only when the minimum guaranteed is exceeded on a cumulative basis (this approach is identified as “View C” by the TRG).

Wholesale Sales

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We recognize revenue when performance obligations identified under the terms of contracts with our customers are satisfied, which occurs upon the transfer of control of the merchandise in accordance with the contractual terms and conditions of the sale.

Shipping to customers is accounted for as a fulfillment activity and is recorded within other selling, general and administrative expenses.

Direct to Consumer Sales

Our revenue associated with our e-commerce jewelry operations and the Longaberger brand is recognized at a point in time when product is shipped to the customer.

Shipping to customers is accounted for as a fulfillment activity and is recorded within other selling, general and administrative expenses.

Revenue associated with our fine jewelry brick-and-mortar retail store is recognized at the point of sale.

Trademarks and Other Intangible Assets

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Our finite-lived intangible assets are amortized over their estimated useful lives.

We perform our annual quantitative analysis of indefinite-lived intangible assets as of December 31 each year.

As a result of performing our annual impairment testing of indefinite-lived intangible assets for the year ended December 31, 2019, we recorded a $6.2 million impairment charge related to the Ripka Brand trademarks, driven by the timing of the continued transition from a licensing model to a wholesale and direct-to-consumer model.

Effective January 1, 2020, we determined that the Ripka Brand, inclusive of all its trademarks, has a finite life of 15 years, and began to amortize these trademarks on a straight-line basis accordingly.

We estimate the useful lives of our intangible assets based principally on our expected use and strategic plans for each asset, our own historical experience with similar assets, and our expectations related to demand, competition, and other economic factors.

We perform our annual quantitative analysis of our indefinite-lived intangible asset as of December 31 each year.

There were no impairment charges recorded for our indefinite-lived intangible asset for the years ended December 31, 2021 and 2020.

During the year ended December 31, 2020, delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the Ripka Brand, primarily as a result of the novel coronavirus disease pandemic, indicated that the carrying value of the Ripka Brand trademarks may not be recoverable.

Therefore, we performed an impairment test of finite-lived intangible assets, and as a result, recorded a $13.0 million impairment charge related to the Ripka Brand trademarks.

Therefore, we performed an impairment test of the related finite-lived intangible assets, and as a result, recorded a $13.0 million impairment charge related to the Ripka Brand trademarks.

No other impairment charges were recorded for intangible assets for the years ended December 31, 2021 and 2020.

Indefinite-Lived Intangibles

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

Indefinite-Lived Intangible Asset

We test our indefinite-lived intangible asset for recovery in accordance with ASC 820-10-55-3F, which states that the income approach (“Income Approach”) converts future amounts (for example, cash flows) into a single current (that is, discounted) amount.

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

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

We also re-evaluate on an annual basis whether events and circumstances continue to support an indefinite useful life.

Finite-Lived Intangibles

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

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

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

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

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

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

We determine if an arrangement is a lease at inception.

At commencement of a lease, we recognize an operating lease right-of-use (“ROU”) asset, representing our right to use the underlying leased asset for the lease term, and a lease liability, representing our obligation to make future lease payments, based on the present value of the remaining lease payments over the lease term.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

We determine if an arrangement is a lease at the inception of the arrangement.

At commencement of a lease (i.e., the date on which the lessor makes the underlying asset available for use), we recognize an operating lease right-of-use (“ROU”) asset, representing our right to use the underlying leased asset for the lease term, and a lease liability, representing our obligation to make future lease payments, based on the present value of the remaining lease payments over the lease term.

As generally our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

We may use the implicit rate when readily determinable.

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

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

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

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

For real estate leases, we account for the lease and non-lease components as a single lease component.

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Recently Issued Accounting Pronouncements

In December 2019, the FASB issued Accounting Standards Update (“ASU”) No.

2019-12, “Income Taxes (Topic 740):

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

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

This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15,

2020, with early adoption permitted.

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

In June 2016, the FASB issued ASU No.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

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

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We are currently evaluating the new guidance to determine the impact the adoption of this guidance will have on our results of operations, cash flows, and financial condition.

In November 2021, the FASB issued ASU No.

2021-10, “Government Assistance (Topic 823):

Disclosures by Business Entities about Government Assistance.” This ASU will require certain financial statement disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.

This guidance is effective for financial statements issued for annual periods beginning after December 15, 2021.

As this ASU only affects financial statement disclosures, the adoption of this guidance will not have any impact on our results of operations, cash flows, or financial condition.

Recently Adopted Accounting Pronouncements

We adopted ASU No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes” effective January 1, 2021.

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

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

The adoption of this new guidance did not have any impact on our results of operations, cash flows, or financial condition.

We adopted ASU No.

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

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

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

We adopted ASU No.

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

2018-11, “Leases (Topic 842):

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

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

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

Summary of Operating Results

The consolidated financial statements and related notes included elsewhere in this Form 10-K are as of or for the year ended December 31, 2021 (the “Current Year”), and the year ended December 31, 2020 (the “Prior Year”).

Current Year net revenue decreased approximately $12.3 million to $29.4 million from $41.7 million for the Prior Year.

Net licensing revenue decreased by $6.2 million in the Current Year to approximately $20.2 million, compared with $26.4 million in the Prior Year.

This decline was primarily driven by a combination of (i) lower customer sales by our licensees as a result of government-ordered retail store closures as well as an overall slowdown in economic activity related to the COVID-19 pandemic, (ii) a $3.0 million reduction in guaranteed minimum revenues from one of our existing licensing arrangements upon renewal effective January 1, 2020, and (iii) a $1.7 million reduction in revenues from another one of our existing licensing arrangements changing from guaranteed minimum amounts to sales-based royalties effective April 1, 2019.

Net product sales decreased by approximately $6.1 million in the Current Year to $9.2 million, compared with approximately $15.3 million in the Prior Year.

The decline in net product sales was primarily driven by lower sales as a result of government-ordered retail store closures as well as an overall slowdown in economic activity related to the COVID-19 pandemic following the outbreak of the pandemic, partially offset by volume growth in our apparel wholesale business in the first quarter of 2020.

Current Year net revenue increased approximately $8.5 million to $37.9 million from $29.4 million for the Prior Year.

Net licensing revenue increased by $1.6 million in the Current Year to approximately $21.8 million, compared with approximately $20.2 million in the Prior Year.

This increase in licensing revenue was primarily attributable to the acquisition of the Lori Goldstein brand on April 1, 2021, as well as continued revenue growth under licensing agreements for the Isaac Mizrahi brand, partially offset by a decline in licensing revenue related to the transition of the H Halston brand to a wholesale supply model.

Net sales increased by $6.9 million in the Current Year to $16.1 million, compared with $9.2 million in the Prior Year.

Net sales of jewelry – primarily through wholesale distribution, and to a lesser extent through e-commerce and brick-and-mortar retail – comprised nearly half of the overall increase in net product sales.

Sales of Longaberger branded products through e-commerce, social commerce, and livestreaming grew by over 270% year-over-year.

In addition, wholesale apparel sales contributed significantly to the year-over-year increase in net product sales, as retail sales were severely negatively impacted in the Prior Year period during the initial outbreak of the COVID-19 pandemic.

Cost of Goods Sold

Current Year cost of goods sold was $5.5 million, compared with $10.3 million for the Prior Year.

This decrease was due to lower overall volume of wholesale and e-commerce sales in the Current Year.

Gross profit (net revenue less cost of goods sold) decreased approximately $7.4 million to $24.1 million from $31.5 million in the Prior Year, primarily driven by the aforementioned decline in net licensing revenue.

Gross profit margin from product sales increased from 33% in the Prior Year to 41% in the Current Year as a result of achieving greater efficiencies in our wholesale business operations.

Total gross profit margin was 75% in the Prior Year and 81% in the Current Year;

this increase was the result of the aforementioned increase in gross profit margins for product sales as well as the proportional shift of revenue mix towards licensing revenues in the Current Year.

Current Year cost of goods sold was $10.7 million, compared with $5.5 million for the Prior Year due to the higher volumes of product sales in the Current Year.

Gross profit (net revenue less cost of goods sold) increased approximately $3.3 million to $27.3 million from $24.0 million in the Prior Year, driven by the combination of the aforementioned increases in both net licensing revenue and net product sales.

Gross profit margin from product sales (net sales less cost of goods sold, divided by net sales) declined from approximately 41% in the Prior Year to approximately 34% in the Current Year, primarily due to increased freight costs and other supply costs to source products.

Operating Costs and Expenses

Operating costs and expenses increased approximately $3.5 million from $36.9 million in the Prior Year to $40.4 million in the Current Year.

This increase was primarily due to a $13.0 million non-cash impairment charge recorded in the Current Year related to the Ripka Brand trademarks, driven by delays and uncertainty in implementing the brick-and-mortar retail store strategy for a portion of the brand, primarily as a result of the COVID-19 pandemic, compared with a similar $6.2 million non-cash impairment charge recorded in the Prior Year related to the Ripka Brand trademarks, which was driven by the timing of the transition from a licensing model to a wholesale and direct-to-consumer model.

Also contributing to the increase was a $1.6 million increase in depreciation and amortization expense, primarily due to the change in estimated life for the Judith Ripka trademarks as of January 1, 2020, and $1.0 million of bad debt expense recognized in the Current Year related to the bankruptcy of several retail customers due to the COVID-19 pandemic.

These increases in operating costs and expenses were partially offset by various cost reduction actions taken by management during the Current Year in response to the COVID-19 pandemic, including temporary reductions of employee compensation from April to December of 2020 and cutting non-essential costs, as well as government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $1.8 million as a reduction to Current Year operating costs and expenses.

Additionally, there were $1.3 million of costs incurred in the Prior Year in connection with a potential acquisition, which ultimately was not consummated;

approximately $0.2 million of these costs were recovered or reimbursed in the Current Year.

During the Current Year, we recognized a $0.05 million net gain on the sale of certain assets related to the Longaberger brand.

During the Prior Year, we recognized a $2.85 million gain on the reduction of contingent obligations related to the 2015 acquisition of the C Wonder Brand.

As part of that acquisition, the seller was eligible to earn additional consideration based on future royalties related to the C Wonder Brand exceeding certain thresholds, and we recorded a liability for the potential future payment of such consideration.

The final earn-out period ended on June 30, 2019, and the seller ultimately did not earn any additional consideration under the terms of the purchase agreement.

Operating costs and expenses decreased approximately $0.6 million from $40.4 million in the Prior Year to $39.8 million in the Current Year.

This decrease in operating costs and expenses was mainly driven by lower non-cash impairment charges of $13.1 million recorded in the Prior Year (primarily related to the Ripka Brand trademarks) compared with $1.4 million in the Current Year (related to our brick-and-mortar fine jewelry retail store, which we subsequently closed in 2022).

This decrease was partially offset by the combination of (i) a $4.5 million increase in selling, general and administrative expenses, which was primarily attributable to increased marketing, advertising and public relations expenses, and higher warehouse and logistics costs, partially offset by lower bad debt expense;

(ii) a $3.5 million increase in salaries, benefits and employment taxes, which was primarily attributable to the combination of post-COVID normalized salary costs and costs associated with the Lori Goldstein brand;

and (iii) the Prior Year benefit of government assistance received through the Paycheck Protection Program in 2020, for which the Company recognized $1.8 million as a reduction to Prior Year operating costs and expenses.

Also significantly offsetting the aforementioned decrease in operating costs and expenses was a $1.3 million increase in depreciation and amortization expense, primarily related to the Lori Goldstein brand trademarks acquired on April 1, 2021.

During the Prior Year, we recognized a $0.05 million net gain on the sale of certain assets related to the Longaberger brand.

Interest and Finance Expense

Interest and finance expense for the Current Year was $3.6 million, compared with $1.2 million for the Prior Year.

This decrease is primarily attributable to the fact that the Prior Year includes a $0.2 million loss on extinguishment of debt as a result of the February 11, 2019 term loan amendment, with no such comparable extinguishment loss in the current Year.

The remainder of the decrease is largely due to a lower outstanding principal balance on our term loan resulting from regular debt service payments.

Income Tax (Benefit) Provision

The effective income tax rate for the Current Year was approximately 25.9% resulting in a $4.5 million income tax benefit.

During the Current Year, the effective tax rate was impacted by the vesting of restricted shares of common stock.

The excess tax deficiencies were treated as a discrete item in the determination of the tax provision as required by ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” decreasing the effective rate by approximately 1.9%.

The effective tax rate was also impacted by recurring permanent differences, which, based on the amount of income before income taxes compared to the permanent differences, increased the effective rate in 2020 by approximately 4.0%.

This increase of approximately $2.4 million was primarily attributable to $1.5 million of losses on the extinguishment of debt recognized in the Current Year as a result of the new term loan financing agreements entered into on April 14, 2021 and December 30, 2021.

The increase in interest and finance expense was also partially attributable to the fact that the new term loan agreements entered into during the Current Year resulted in a higher outstanding principal balance at a higher interest rate as compared with the previous loan agreement.

Income Tax Benefit

The effective income tax benefit rate for the Current Year was approximately 19.3% resulting in a $3.1 million income tax benefit.

During the Current Year, the effective tax rate was impacted by the impact of stock-based compensation, which decreased the effective rate by approximately 5.6%.

The effective tax rate was also impacted by recurring permanent differences;

the largest such recurring permanent differences were state and local tax provisions, which increased the effective rate in 2021 by approximately 4.6%, and disallowed excess compensation, which decreased the effective rate in 2021 by approximately 0.7%.

Also impacting the effective rate for 2020 was the addback impact of the Paycheck Protection Program, which increased the effective rate by approximately 2.2%.

The effective income tax rate for the Prior Year was approximately 15.8% resulting in a $0.6 million income tax benefit.

The effective income tax benefit rate for the Prior Year was approximately 25.9% resulting in a $4.5 million income tax benefit.

During the Prior Year, the effective tax rate was impacted by the vesting of restricted shares of common stock.

The excess tax deficiencies were treated as a discrete item in the determination of the tax provision, and decreased the

effective rate by approximately 1.9%.

The largest such recurring permanent differences were state and local tax provisions, which increased the effective rate in 2019 by approximately 7.4%, and was largely offset by the effect of disallowed excess compensation, which decreased the effective rate in 2019 by approximately 5.1%.

The largest such recurring permanent differences were state and local tax provisions, which increased the effective rate in 2020 by approximately 4.5%, and disallowed excess compensation, which decreased the effective rate in 2020 by approximately 0.5%.

Also impacting the effective rate for 2020 was the addback impact of the Paycheck Protection Program, which increased the effective rate by approximately 2.2%.

We had a net loss of approximately $13.0 million for the Current Year, compared with a net loss of approximately $13.1 million for the Prior Year, as a result of the factors discussed above.

Non-GAAP Net Income, Non-GAAP Diluted EPS and Adjusted EBITDA

We had non-GAAP net income of $1.8 million or $0.10 per share (“non-GAAP diluted EPS”) based on 19,152,569 weighted average shares outstanding for the Current Year, compared with non-GAAP net income of $4.8 million, or $0.25 per share based on 18,858,379 weighted average shares outstanding for the Prior Year.

We had a non-GAAP net loss of $6.2 million or $(0.32) per share (“non-GAAP diluted EPS”) based on 19,455,987 weighted average shares outstanding for the Current Year, compared with non-GAAP net income of $1.8 million, or $0.10 per share based on 19,152,569 weighted average shares outstanding for the Prior Year.

Non-GAAP net income is a non-GAAP unaudited term, which we define as net income (loss) attributable to Xcel Brands, Inc.

stockholders, exclusive of amortization of trademarks, stock-based compensation, non-cash interest and finance expense from discounted debt related to acquired assets, loss on extinguishment of debt, gain on sales of assets, gain on reduction of contingent obligations, costs (recoveries) in connection with potential acquisitions, certain adjustments to allowances for doubtful accounts related to debtors that have filed for bankruptcy protection triggered by the impact of COVID-19, asset impairments, and deferred income taxes.

stockholders, exclusive of amortization of trademarks, stock-based compensation, loss on extinguishment of debt, gain on sales of assets, costs (recoveries) in connection with potential acquisitions, certain adjustments to the provision for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic, asset impairments, and deferred income taxes.

Non-GAAP net income and non-GAAP diluted EPS measures do not include the tax effect of the aforementioned adjusting items, due to the nature of these items and the Company’s tax strategy.

We had Adjusted EBITDA of $4.1 million for the Current Year, compared with Adjusted EBITDA of approximately $7.1 million for the Prior Year.

We had Adjusted EBITDA of approximately $(2.5) million for the Current Year, compared with Adjusted EBITDA of approximately $4.1 million for the Prior Year.

Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net income (loss) attributable to Xcel Brands, Inc.

stockholders before depreciation and amortization, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on reduction of contingent obligations, gain on sale of assets, costs (recoveries) in connection with potential acquisitions, asset impairments, and certain adjustments to allowances for doubtful accounts related to debtors that have filed for bankruptcy protection triggered by the impact of COVID-19.

stockholders before depreciation and amortization, interest and finance expenses (including loss on extinguishment of debt, if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on sale of assets, costs (recoveries) in connection with potential acquisitions, asset impairments, and certain adjustments to the provision for doubtful accounts related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic.

Management uses non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the Company’s results of operations.

Management believes non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus these non-GAAP measures provide

supplemental information to assist investors in evaluating the Company’s financial results.

The Company has incurred certain costs which it could have eliminated but elected not to do so in light of government assistance received through the Paycheck Protection Program under the CARES Act (the “PPP Benefit”), which represents a cash benefit directly related to the Company’s operating expenses incurred.

The Company incurred certain costs in the Prior Year which it could have eliminated but elected not to do so in light of government assistance received through the Paycheck Protection Program under the CARES Act (the “PPP Benefit”), which represents a cash benefit directly related to the Company’s operating expenses incurred.

Accordingly, the PPP Benefit is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA.

Adjusted EBITDA is the measure used to calculate compliance with the EBITDA covenant under our term loan agreement with BHI.

Adjusted EBITDA is the measure used to calculate compliance with the EBITDA covenant under our term loan agreement.

Non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP.

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In evaluating non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA, you should be aware that in the future we may or may not incur expenses similar to some of the adjustments in this report.

Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any unusual or non-recurring items.

Our presentation of non-GAAP

net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any unusual or non-recurring items.

When evaluating our performance, you should consider non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.

The following table is a reconciliation of net loss (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net income:

The following table is a reconciliation of net loss attributable to Xcel Brands, Inc.

stockholders (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP net (loss) income:

Year Ended December 31,

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Net loss attributable to Xcel Brands, Inc.

Intangible asset impairments

Asset impairments

Amortization of trademarks

Non-cash interest and finance expense

Stock-based compensation

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(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Gain on reduction of contingent obligation

Deferred income tax benefit

Non-GAAP net income

Non-GAAP net (loss) income

The following table is a reconciliation of diluted (loss) earnings per share to non-GAAP diluted EPS:

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Diluted loss per share attributable to Xcel Brands, Inc.

Intangible asset impairments

Asset impairments

Amortization of trademarks

Non-cash interest and finance expense

Stock-based compensation

Loss on extinguishment of debt

(Recovery of) costs in connection with potential acquisitions

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

(Recovery of) costs in connection with potential acquisition

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Gain on reduction of contingent obligation

Deferred income tax (benefit) provision

Deferred income tax benefit

Non-GAAP diluted EPS

6 unchanged sentences

Non-GAAP diluted weighted average shares outstanding

The following table is a reconciliation of net loss (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:

As a result of the non-GAAP net loss for the Current Year, the non-GAAP diluted weighted average shares outstanding for the Current Year excludes the effect of exercising warrants and stock options, as such effect would be anti-dilutive.

The following table is a reconciliation of net loss attributable to Xcel Brands, Inc.

stockholders (our most directly comparable financial measure presented in accordance with GAAP) to Adjusted EBITDA:

Year Ended December 31,

1 unchanged sentence

Net loss attributable to Xcel Brands, Inc.

Intangible asset impairments

Asset impairments

Depreciation and amortization

4 unchanged sentences

(Recovery of) costs in connection with potential acquisition

Certain adjustments to allowances for doubtful accounts

Property and equipment impairment

Certain adjustments to provision for doubtful accounts

Gain on sale of assets

Gain on reduction of contingent obligation

Adjusted EBITDA

1 unchanged sentence

As of December 31, 2021 and 2020, our cash and cash equivalents were $4.5 million and $5.0 million, respectively.

Restricted cash at December 31, 2020 and 2019 consisted of $1.1 million of cash deposited with Bank Hapoalim B.M.

(“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facility.

Restricted cash at December 31, 2021 and 2020 consisted of $0.7 million and $1.1 million, respectively, of cash deposited as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facility.

Our principal capital requirements have been to fund working capital needs, acquire new brands, and to a lesser extent, capital expenditures.

Notwithstanding our recent investments in our ERP system, our business operating model generally does not require material capital expenditures, and as of December 31, 2020, we have no significant commitments for future capital expenditures.

Notwithstanding our recent investments in our ERP system and our brick-and-mortal retail store, our business operating model generally does not require material capital expenditures, and as of December 31, 2021, we have no significant commitments for future capital expenditures.

Material cash requirements from known contractual and other obligations are discussed under “Obligations and Commitments” below.

1 unchanged sentence

We believe that cash from future operations, including growth opportunities and future business development, as well as currently available cash, will be sufficient to satisfy our anticipated long-term operating needs, including our debt service requirements and making necessary investments in our infrastructure and technology, for the foreseeable future beyond the next twelve months.

Changes in Working Capital

Our working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent liabilities payable in common stock) was $7.9 million and $9.5 million as of December 31, 2020 and 2019, respectively.

This decrease in working capital was primarily due to lower accounts receivable at December 31, 2020 as a result of the combination of lower sales during the Current Year and increased allowances for doubtful accounts.

Working Capital

Commentary on components of our cash flows for the Current Year compared with the Prior Year is set forth below.

Working capital as of December 31, 2020 included $8.9 million of accounts receivable;

substantially all of this balance was collected subsequent to year-end.

Operating Activities

Net cash provided by operating activities was approximately $3.2 million and $3.5 million in the Current Year and Prior Year, respectively.

The Current Year’s cash provided by operating activities was primarily attributable to the combination of the net loss of $(13.1) million plus non-cash expenses of approximately $16.2 million, and a net change in operating assets and liabilities of approximately $0.1 million.

The net loss of $(13.1) million includes $1.8 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to Current Year expenses for which the program was intended to compensate.

Net cash (used in) provided by operating activities was approximately $(6.6) million and $3.2 million in the Current Year and Prior Year, respectively.

The Current Year’s cash used in operating activities was primarily attributable to the combination of the net loss of $(13.0) million plus non-cash expenses of approximately $7.7 million, and a net change in operating assets and liabilities of approximately $(1.2) million.

Non-cash net expenses were primarily comprised of $6.8 million of depreciation and amortization, $1.4 million of asset impairment charges, $0.3 million of amortization of deferred finance costs, a $1.5

million loss on extinguishment of debt, $0.7 million of stock-based compensation, and $(3.2) million of deferred income tax benefit.

The net change in operating assets and liabilities notably included a decrease in accounts receivable of $1.1 million, an increase in inventory of $(2.2) million, an increase in prepaid expenses and other assets of $(0.8) million, and an increase in accounts payable, accrued expenses and other current liabilities of $1.2 million.

The changes in accounts receivable and payable were primarily related to the timing of collections and payments, while the change in inventory is primarily related to expected increases in wholesales, including our drop-ship programs, and an increase in our direct-to-consumer businesses.

The Prior Year’s cash provided by operating activities was primarily attributable to the combination of the net loss of $(13.1) million plus non-cash expenses of approximately $16.2 million, and a net change in operating assets and liabilities of approximately $0.1 million.

The net loss of $(13.1) million included $1.8 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to Current Year expenses for which the program was intended to compensate.

Non-cash net expenses were primarily comprised of a $13.0 million intangible asset impairment charge, $5.5 million of depreciation and amortization, $1.0 million of bad debt expense, $0.9 million of stock-based compensation, and $(4.4) million of deferred income tax benefit.

The net change in operating assets and liabilities includes a decrease in accounts receivable of $0.7 million, an increase in inventory of $(0.3) million, a decrease in prepaid expenses and other assets of $0.6 million, and a decrease in accounts payable, accrued expenses and other current liabilities of $(0.5) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.4) million.

The Prior Year’s cash provided by operating activities was primarily attributable to the combination of the net loss of $(3.4) million plus non-cash expenses of approximately $7.8 million, partially offset by a net change in operating assets and liabilities of approximately $(0.9) million.

Non-cash net expenses mainly consisted of a $6.2 million intangible asset impairment charge, $3.9 million of depreciation and amortization, $1.0 million of stock-based compensation, $(0.7) million of deferred income tax benefit, $(2.9) million of gain on reduction of contingent obligations, and $0.2 million of

loss on extinguishment of debt.

The net change in operating assets and liabilities includes a decrease in accounts receivable of $0.4 million, a decrease in inventory of $1.1 million, and a decrease in accounts payable, accrued expenses and other current liabilities of $(1.7) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.4) million.

The net change in operating assets and liabilities included a decrease in accounts receivable of $0.7 million, an increase in inventory of $(0.3) million, a decrease in prepaid expenses and other assets of $0.6 million, and a decrease in accounts payable, accrued expenses and other current liabilities of $(0.5) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.4) million.

Investing Activities

Net cash used in investing activities for the Current Year was approximately $0.7 million, compared with $10.3 million in the Prior Year.

Cash used in investing activities for the Current Year was primarily attributable to capital expenditures, a substantial portion of which relates to the implementation of our ERP system.

Cash used in investing activities in the Prior Year was primarily related to $8.8 million in cash consideration paid to acquire the Halston Heritage Brands, as well as capital expenditures of $1.1 million predominantly related to implementation of our ERP system.

Net cash used in investing activities for the Current Year was approximately $4.8 million, which was primarily attributable to the acquisition of the Lori Goldstein brand on April 1, 2021, and, to a lesser extent, to capital expenditures relating to the fit-out and furnishing of our new Judith Ripka fine jewelry retail store.

Net cash used in investing activities for the Prior Year was approximately $0.7 million, primarily attributable to capital expenditures, a substantial portion of which related to the implementation of our ERP system.

Financing Activities

Net cash used in financing activities for the Current Year was approximately $(2.2) million, and was primarily attributable to payments made on long-term debt obligations of $(2.3) million, cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $0.3 million, and $(0.2) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Net cash provided by financing activities for the Prior Year was approximately $2.3 million, and was primarily attributable to proceeds received from long-term debt of $7.5 million, partially offset by payments made on our senior term debt obligation of $(4.0) million, the final payment on the IM Seller Note obligation of $(0.7) million, and payment of $(0.3) million of deferred finance costs.

Net cash provided by financing activities for the Current Year was approximately $10.5 million, and was primarily attributable to a net increase in debt obligations of $13.5 million, due to debt refinancing transactions entered into on April 14, 2021 and December 30, 2021, as well as cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $1.0 million.

These sources of cash were partially offset by deferred finance costs and other fees paid in connection with the aforementioned debt refinancing transactions of $(2.7) million, and principal payments made on term loan debt of $(1.3) million during the year.

Net cash used in financing activities for the Prior Year was approximately $(2.2) million, and was primarily attributable to payments made on long-term debt obligations of $(2.3) million, cash contributions received from the non-controlling interest holder in Longaberger Licensing, LLC of $0.3 million, and $(0.2) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Obligations and Commitments

Term Loan Debt

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

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

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

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

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

Term Loan Debt and Revolving 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.

Under that amended loan agreement, the aggregate amount 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.

These two term loans bore interest at a fixed rate of 5.1% and 6.25% per annum, respectively.

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.

April 2021 Term Loan Debt

On April 14, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries 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.

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 proceeds of the additional term loan were used to finance the Halston Heritage Brands acquisition.

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

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

The 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.

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

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

On April 13, 2020, the Company 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.

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

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

($ in thousands)

Installment Payment Dates

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

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

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

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

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.

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 $0.82 million (consisting of $0.09 million of unamortized deferred finance costs and $0.73 million of breakage fees owed to the old lender under the terms of the previous debt agreement) during the Current Year.

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 $0.6 million of various legal and other fees in connection with the execution of the Loan Agreement.

These fees and costs totaling approximately $1.2 million were deferred on the Company’s balance sheet as a reduction of the carrying value of the Term Loans, to be subsequently amortized to interest expense over the term of the Term Loans using the effective interest method.

The Term Loans were to mature on April 14, 2025, with principal 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.

The Company made the required principal payments on June 30, 2021 and September 30, 2021 (totaling $1.25 million) as scheduled.

Interest on Term Loan A accrued at LIBOR plus 4.0% per annum, and interest on the Term Loan B accrued at LIBOR plus 8.0% per annum.

Interest on the Loans was paid on the last business day of each calendar month.

Base Rate was 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 was 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.

The Loan Agreement also contained customary covenants, including reporting requirements, trademark preservation, and financial covenants (on a consolidated basis with Xcel and its wholly-owned subsidiaries).

The Company, BHI, FEAC, and the lenders subsequently amended the Loan Agreement multiple times during 2021 – on August 12, 2021, September 29, 2021, and November 12, 2021.

While these amendments modified financial covenants and/or adjusted the maximum amount available under the revolving loan facility, there were no changes made to the total principal balance, interest rate, maturity date, or any other terms of the Loan Agreement.

Also, under the terms of the April 2021 Loan Agreement, the lenders made a revolving loan facility available to Xcel.

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

We repaid the outstanding balance in full on December 30, 2021.

The revolving loan facility bore interest at a rate of 4.75% per annum, and we incurred related interest expense of

approximately $0.05 million for the Current Year.

As of December 31, 2021, we no longer had access to a revolving loan facility under the terms of the new loan agreement entered into on December 30, 2021 (as described below).

December 2021 Term Loan Debt

On December 30, 2021, Xcel, as Borrower, and its wholly-owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, Judith Ripka Fine Jewelry, LLC, H Heritage Licensing, LLC, Xcel-CT MFG, LLC and Gold Licensing, LLC, as Guarantors (each a “Guarantor” and collectively, the “Guarantors”), entered into a Loan and Security Agreement (the “New Loan Agreement”) with FEAC, as lead arranger and as administrative agent and collateral agent for the lenders party to the New Loan Agreement, and the financial institutions party thereto as lenders (the “Lenders”).

Pursuant to the New Loan Agreement, the Lenders made a term loan in the aggregate amount of $29.0 million (the “New Term Loan”).

The proceeds of the New Term Loan were used for the purpose of refinancing existing indebtedness (i.e., the April 2021 Term Loan debt), to pay fees, costs, and expenses incurred in connection with entering into the New Loan Agreement, and for working capital purposes.

The New Loan Agreement also provides that Xcel may request the Lenders make incremental term loans of up to $25.0 million (the “Incremental Term Loans”).

The terms and conditions of the Incremental Term Loans will be agreed in an amendment to the New Loan Agreement prior to the funding by the Incremental Term Loans.

Management assessed and determined that the New Loan Agreement resulted in an extinguishment of the April 2021 Term Loan debt, and accordingly recognized a loss of approximately $0.74 million (consisting of $0.92 million of unamortized deferred finance costs and $(0.18) of net fees owed to BHI less refunds of certain costs related to the April 2021 Term Loan debt) during the Current Year.

Upon entering into the New Loan Agreement, Xcel paid a 1.75% closing fee to FEAC for the benefit of the Lenders;

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

These fees and costs totaling approximately $1.0 million have been deferred on the Company’s balance sheet as of December 31, 2021 as a reduction of the carrying value of the New Term Loan, to be subsequently amortized to interest expense over the term of the New Term Loan using the effective interest method.

The New Term Loan matures on April 14, 2025.

Principal on the New Term Loan is payable in quarterly installments of $625,000 on each of March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2022 and ending on March 31, 2025, with a final payment of $20,875,000 on the maturity date of April 14, 2025.

Thus, the aggregate remaining annual principal payments under the New Term Loan at December 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.

Notwithstanding the above, Xcel may make a voluntary prepayment of up to $0.75 million without any early termination fees, and any such prepayment would be excluded from the computation of excess cash flows.

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 Loan Agreement (the “Guarantors”) and, subject to certain limitations contained in Term Loans, equity interests of the Guarantors.

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

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

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

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

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

Fiscal Quarter End

Fixed Charge Coverage Ratio

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

March 31, 2022, and thereafter

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

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

Xcel has the right upon thirty (30) days prior written notice to prepay all or any portion of the New Term Loan or Incremental Term Loans and accrued and unpaid interest thereon;

provided that any prepayment shall be applied first to prepay the New Term Loan in full and second to the Incremental Term Loans.

If the New Term Loan is prepaid in whole or in part on or prior to the second anniversary of the 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 New Term Loan prepaid multiplied by:

(i) five percent (5.00%) if such prepayment occurs on or before the first anniversary of the closing date;

(ii) two percent (2.00%) if such prepayment occurs at any time after the first anniversary

of the closing date and on or prior to the second anniversary of the closing date;

and (iii) one percent (1.00%) if such prepayment occurs at any time after the second anniversary of the closing date.

Xcel’s obligations under the New 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 New Loan Agreement, equity interests of the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the New Loan Agreement).

Xcel also granted the Lenders a right of first offer to finance any acquisition for which the consideration therefore 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 New Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of Xcel (on a consolidated basis with the Guarantors and any subsidiaries subsequently formed or acquired that become a credit party under the Loan Agreement):

● liquid assets of at least (i) $2.5 million during the first fiscal month of each fiscal quarter if cash payments from revenue licenses during the immediately succeeding 30 days are expected to be at least $4.0 million, and (ii) $3.0 million at all other times;

● a fixed charge coverage ratio of not less than 1.00 to 1.00 for the fiscal quarter ending September 30, 2022, and for the twelve fiscal month period ending at the end of each fiscal quarter commencing with the fiscal quarter ending December 31, 2022;

● a loan to value ratio not to exceed 50% at all times;

● minimum revenues as set forth below:

Fiscal Period

Maximum Leverage Ratio

December 31, 2020

March 31, 2021

June 30, 2021

September 30, 2021

December 31, 2021

March 31, 2022 and each Fiscal Quarter end thereafter

Minimum Revenue

April 1, 2021 - December 31, 2021

For the trailing twelve month period ending March 31, 2022

For the trailing twelve month period ending June 30, 2022

For the trailing twelve month periods ending September 30, 2022

and each fiscal quarter end thereafter

● the sum of (i) the eligible inventory plus (ii) eligible cash on hand to the extent not used to satisfy the Minimum Accounts Amount (as defined below) plus (iii) the eligible accounts to the extent not used to satisfy the Minimum Accounts Amount (as defined below) of at least $1.25 million at all times (“Minimum Inventory Amount”), and the sum of (i) the eligible accounts plus (ii) eligible cash on hand to the extent not used to satisfy the Minimum Inventory Amount of at least $1.5 million at all times (“Minimum Accounts Amount”);

● Adjusted EBITDA of at least $2.0 million for the 6 fiscal month period ending June 30, 2022.

The Company was in compliance with all applicable covenants under the Loan Agreement as of and for the fiscal year ended December 31, 2021.

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

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

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

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

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 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.

Interest on the New Term Loan accrues at “LIBOR” plus 7.5% per annum, and is payable on the last business day of each calendar month.

“LIBOR” is defined in the New Loan Agreement as the greater of (a) the rate of interest per annum for deposits in dollars for an interest period equal to three months as published by Bloomberg or a comparable or successor quoting service at approximately 11:00 a.m.

(London time) two business days prior to the last business day of each calendar month and (b) 1.0% per annum.

For the Current Year and Prior Year, the Company incurred interest expense of approximately $1.9 million and $1.2 million, respectively, related to term loan debt.

On April 14, 2021, we entered into a loan and security agreement with BHI, FEAC Agent LLC, and the financial institutions party thereto (the “2021 Loan Agreement”).

We used a portion of the proceeds from the 2021 Loan Agreement to repay the $16.75 million outstanding balance under the previous Loan Agreement, resulting in the extinguishment of the term loan debt that existed as of December 31, 2020.

Under 2021 Loan Agreement, the Company’s debt obligations 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 debt under the 2021 Loan Agreement bears interest at a weighted average rate of LIBOR plus 6.2% per annum.

In addition, the 2021 Loan Agreement provides for up to $25 million of future acquisition financing, subject to lender approval on a deal-by-deal basis.

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

In connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from HIP, the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to $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 as of December 31, 2020 and 2019 in the accompanying consolidated balance sheets, based on the difference between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

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

The effective interest rate related to term loan debt was approximately 8.7% and 6.7% for the Current Year and Prior Year, respectively.

Contingent Obligations – Halston Heritage Earn-Out

In connection with the February 11, 2019 purchase of the Halston Heritage trademarks from the H Company IP, LLC (“HIP”), the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to $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 as of December 31, 2021 and 2020 in the accompanying consolidated balance sheets, based on the difference at the date of acquisition between the fair value of the acquired assets of the Halston Heritage Trademarks and the total consideration paid.

The Halston Heritage Earn-Out is generally required to be paid in shares of our common stock, subject to certain limitations.

Payment of this obligation in stock would not affect our liquidity.

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 purchase of the Lori Goldstein trademarks (see Note 3 of the financial statements 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 December 31, 2021 in the accompanying consolidated balance sheet, based on the difference at the date of acquisition between the fair value of the acquired assets of the Lori Goldstein brand and the total consideration paid.

Real Estate Leases

As described in Item 2 of this Annual Report on Form 10-K, we have real estate leases for our current office, former office, and a planned retail store location, with remaining lease terms between approximately one year to eight years.

Future payments under these leases are expected to be approximately $2.7 million for the year ending December 31, 2021, $1.7 million for each year ending December 31, 2022 – 2025, and $3.3 million thereafter.

As described in Item 2 of this Annual Report on Form 10-K, as of December 31, 2021 we had real estate leases for our current office, former office, and a retail store location, with remaining lease terms between approximately two months to seven years.

We recorded an impairment charge related to the right-of-use asset for the retail store as of December 31, 2021, subsequently closed the retail store in 2022, and are currently in the process of negotiating the termination of the retail store lease;

however, the lease liability for the retail store remains on our consolidated balance sheet as a liability and is included in the future payment obligations set forth below.

Future payments under our real estate leases are expected to be approximately $1.7 million for the year ending December 31, 2022, $1.7 million for each of the years ending December 31, 2023 – 2026, and $2.0 million thereafter.

Employment Contracts

We have entered into contracts with certain executives and key employees.

The future minimum payments under these contracts are expected to be approximately $6.7 million, of which approximately $4.6 million is expected to be paid in 2021 and approximately $2.1 million is expected to be paid in 2022.

The future minimum payments under these contracts is expected to be approximately $2.4 million and is expected to be paid in 2022.

Other Factors

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We plan to continue to diversify the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer, consumer, or market sector within each of our brands.

The Mizrahi brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories.

The Mizrahi brand, Lori Goldstein brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories.

The Ripka brand is a fine jewelry business, and the Longaberger brand focuses on home good products, which we believe helps diversify our industry focus while at the same time complements our business operations and relationships.

We continue to work towards expanding our wholesale and e-commerce businesses, and complement these operations with our licensing business, including interactive television, and leveraging our wholesale customers with our brick-and-mortar licensees.

Our current strategy is to manage our working capital needs by minimizing inventory risk.

We continue to work towards expanding our wholesale and e-commerce businesses, and complement these operations with our licensing business.

In addition, we continue to seek new opportunities, including expansion through interactive television, our design, production and supply chain platform, additional domestic and international licensing arrangements, and acquiring additional brands.

In November 2019, we acquired an ownership interest in the Longaberger brand through a joint venture, and launched the brand on the QVC channel that same month.

We are also actively pursuing the potential acquisition of other brands and business operations which we believe are synergistic to our existing portfolio of brands and our operating platform, and are complementary to our overall strategy.

However, the impacts of the current COVID-19 pandemic are broad reaching and are having an impact on our licensing and wholesale businesses.

In April 2021, we acquired the Lori Goldstein brand, which is currently available and sold to consumers through Qurate’s QVC channel.

However, the impacts of the ongoing COVID-19 pandemic are broad reaching and are having an impact on our licensing and wholesale businesses.

This global pandemic is impacting our supply chain, and temporary factory closures and the pace of workers returning to work have impacted our contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner.

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In addition, COVID-19 has resulted in a sudden and continuing decrease in sales for many of our products, resulting in order cancellations.

Further, the global pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, Stein Mart, and Century 21, from which we had an aggregate of $1.21 million of accounts receivable due at December 31, 2020.

As a result, we have recognized an allowance for doubtful accounts of $0.97 million for the year ended December 31, 2020, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility.

Further, the global pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, Stein Mart, and Century 21, from which we had an aggregate of approximately $1.4 million of accounts receivable due at December 31, 2021.

As a result, we have recognized an allowance for doubtful accounts of approximately $1.1 million as of December 31, 2021, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility.

Financial impacts associated with the COVID-19 pandemic include, but are not limited to, lower net sales, adjustments to allowances for doubtful accounts due to customer bankruptcy or other inability to pay their amounts due to vendors, the delay of inventory production and fulfillment, potentially further impacting net sales, and potential incremental costs associated with mitigating the effects of the pandemic, including increased freight and logistics costs and other expenses.

The impact of the COVID-19 pandemic is expected to continue to have an adverse effect on our operating results, which could result in our inability to comply with certain debt covenants and require BHI to waive compliance with, or agree to amend, any such covenant to avoid a default.

The impact of the COVID-19 pandemic is expected to continue to have an adverse effect on our operating results, which could result in our inability to comply with certain debt covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default.

The COVID-19 global pandemic is ongoing, and its dynamic nature, including uncertainties relating to the severity and duration of the pandemic, as well as actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our 2022 results.

However, as of the date of this filing, we expect our results for some portion of 2021 to be significantly affected.

Our success, however, will still remain largely dependent on our ability to build and maintain our brands’ awareness and continue to attract wholesale and direct-to-consumer customers, and contract with and retain key licensees, as well as our and our licensees’ ability to accurately predict upcoming fashion and design trends within their respective customer bases and fulfill the product requirements of the particular retail channels within the global marketplace.

However, as of the date of this filing, we expect our results for some portion of 2022 to be affected.

In addition, the global shipping industry is currently experiencing challenges related to port delays and tight availability for carriers and containers.

This situation has negatively impacted our supply chain partners, including third party manufacturers, logistics providers, and other vendors, as well as the supply chains of our licensees, and has resulted in increased cost of supply and freight costs for us and our licensees.

Such higher costs are currently expected to continue for at least some portion of 2022.

Our long-term success, however, will still remain largely dependent on our ability to build and maintain our brands’ awareness and continue to attract wholesale and direct-to-consumer customers, and contract with and retain key licensees, as well as our and our licensees’ ability to accurately predict upcoming fashion and design trends within their respective customer bases and fulfill the product requirements of the particular retail channels within the global marketplace.

Unanticipated changes in consumer fashion preferences and purchasing patterns, slowdowns in the U.S.

economy, changes in the prices of

supplies, consolidation of retail establishments, and other factors noted in “Risk Factors” could adversely affect our licensees’ ability to meet and/or exceed their contractual commitments to us and thereby adversely affect our future operating results.

economy, changes in the prices of supplies, consolidation of retail establishments, and other factors noted in “Risk Factors” could adversely affect our licensees’ ability to meet and/or exceed their contractual commitments to us and thereby adversely affect our future operating results.

Off-Balance Sheet Arrangements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis