What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-23 compared with 2021-11-15 · 178 added, 380 removed, 240 unchanged (70% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

September 30, 2021

March 31, 2022

December 31, 2021

1 unchanged sentence

Cash and cash equivalents

Accounts receivable, net of allowances of $ 1,284 and $ 1,151 , respectively

Accounts receivable, net of allowance of $ 1,090

Prepaid expenses and other current assets

5 unchanged sentences

Restricted cash

Deferred tax assets, net

Total non-current assets

Liabilities and Equity

Liabilities and Stockholders' Equity

Current Liabilities:

6 unchanged sentences

Long-term portion of operating lease obligations

Long-term debt, less current portion

Long-term debt, net, less current portion

Contingent obligations

Deferred tax liabilities, net

Other long-term liabilities

2 unchanged sentences

Commitments and Contingencies

Stockholders' Equity:

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 19,541,921 and 19,260,862 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,571,119 shares issued and outstanding at March 31, 2022 and December 31, 2021

Paid-in capital

3 unchanged sentences

Noncontrolling interest

Total Liabilities and Equity

See Notes to Unaudited Condensed Consolidated Financial Statements.

Total Stockholders' Equity

Total Liabilities and Stockholders' Equity

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Xcel Brands, Inc.

3 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Net licensing revenue

Cost of goods sold (sales)

Cost of goods sold

Operating costs and expenses

3 unchanged sentences

Depreciation and amortization

Government assistance - Paycheck Protection Program and other

Asset impairment charges

Total operating costs and expenses

3 unchanged sentences

Other interest and finance charges (income), net

Loss on extinguishment of debt

Total interest and finance expense

3 unchanged sentences

Net loss attributable to Xcel Brands, Inc.

Loss per share attributable to Xcel Brands, Inc.

common stockholders:

Loss per common share attributable to Xcel Brands, Inc.

stockholders:

Basic and diluted net loss per share

1 unchanged sentence

Basic and diluted weighted average common shares outstanding

See Notes to Unaudited Condensed Consolidated Financial Statements.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Xcel Brands, Inc.

and Subsidiaries

Unaudited Condensed Consolidated Statements of Equity

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

2 unchanged sentences

Balance as of December 31, 2020

Shares issued to employees related to stock grants for bonus payments

Shares repurchased from employees in exchange for withholding taxes

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 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

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

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, 2021

Compensation expense related to stock options and restricted stock

Shares issued on exercise of stock options, net

Balance as of March 31, 2022

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.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Xcel Brands, Inc.

2 unchanged sentences

(in thousands)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Cash flows from operating activities

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

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization expense

Asset impairment charges

Amortization of deferred finance costs included in interest expense

1 unchanged sentence

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:

Accounts receivable

Prepaid expenses and other assets

Accounts payable, accrued expenses and other current liabilities

Cash paid in excess of rent expense

Other liabilities

Net cash (used in) provided by operating activities

Prepaid expenses and other current and non-current assets

Accounts payable, accrued expenses, accrued payroll and other current liabilities

Lease-related assets and liabilities

Net cash used in operating activities

Cash flows from investing activities

Cash consideration for acquisition of Lori Goldstein assets

Net proceeds from sale of assets

Purchase of other intangible assets

Purchase of property and equipment

1 unchanged sentence

Cash flows from financing activities

Proceeds from exercise of stock options

Shares repurchased including vested restricted stock in exchange for withholding taxes

Cash contribution from non-controlling interest

Proceeds from revolving loan debt

Proceeds from long-term debt

Payment of deferred finance costs

Payment of long-term debt

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

Net cash provided by (used in) financing activities

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

Net cash used in financing activities

Net decrease in cash, cash equivalents, and restricted cash

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

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

Reconciliation to amounts on consolidated balance sheets:

Reconciliation to amounts on condensed consolidated balance sheets:

Cash and cash equivalents

2 unchanged sentences

Supplemental disclosure of non-cash activities:

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 and other equity-based payments

2 unchanged sentences

Cash paid during the period for income taxes

See Notes to Unaudited Condensed Consolidated Financial Statements.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

March 31, 2022

Nature of Operations, Background, and Basis of Presentation

6 unchanged sentences

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on April 15, 2022.

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

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

Certain reclassifications have been made to prior year comparable period financial statements to conform to classifications used in the current year – specifically, the disaggregation of the components of interest and finance expense.

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

The Company is a media and consumer products company engaged in the design, production, marketing, live streaming, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, fine jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands.

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

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

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

the Company 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).

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

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

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

Recently Adopted Accounting Pronouncements

On January 1, 2021, the Company adopted Accounting Standards Update ("ASU") No.

2019‑12, “Income Taxes (Topic 740):

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

Acquisition of LOGO by Lori Goldstein Brand

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

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

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

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

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

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

This payment was made in July 2021.

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

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

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

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

($ in thousands)

Cash paid at closing

Cash paid subsequent to closing

Total direct initial consideration

Direct transaction expenses

Contingent obligation (Lori Goldstein Earn-Out)

Total consideration

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

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

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

Upon the consummation of the acquisition of the LOGO by Lori Goldstein brand as described above, the Company incurred cash bonuses totaling $ 175,000 to certain members of the Company’s senior management (including $ 100,000 to the Chief Executive Officer, and $ 25,000 each to the Chief Financial Officer, President and Chief Operating Officer, and

The Company’s wholesale and direct-to-consumer operations are presented as "Net sales"

and "Cost of goods sold"

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

The Company incurred a net loss of approximately $ 3.7 million during the three months ended March 31, 2022, and had an accumulated deficit of approximately $ 32.3 million as of March 31, 2022.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations) of approximately $ 5.2 million as of March 31, 2022.

The Company’s cash and cash equivalents were approximately $ 3.1 million as of March 31, 2022.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

Further, the Company concurrently entered into a consulting agreement with the Seller to provide creative advice and consultation, for a fee of $ 0.6 million per annum through December 31, 2021 and $ 0.8 million per annum thereafter.

March 31, 2022

expects that existing cash and operating cash flows will be adequate to meet the Company’s operating needs, term debt service obligations, and capital expenditure needs, for at least the twelve months subsequent to the filing date of this Quarterly Report on Form 10-Q.

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

September 30, 2021

March 31, 2022

Gross Carrying

2 unchanged sentences

Trademarks (finite-lived)

Other intellectual property

Copyrights and other intellectual property

4 unchanged sentences

Trademarks (finite-lived)

Other intellectual property

Non-compete agreement

Copyrights and other intellectual property

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”).

Amortization expense for intangible assets was approximately $ 1.53 million for the three-month period ended March 31, 2022 (the "current quarter") and was approximately $ 0.91 million for the three-month period ended March 31, 2021 (the "prior year quarter").

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

Significant Contracts and Concentrations

Qurate Agreements

Under the Company’s agreements with Qurate Retail Group (“Qurate”), collectively referred to as the Qurate Agreements, Qurate is obligated to make payments to the Company on a quarterly basis, based primarily upon a percentage of net retail sales of Isaac Mizrahi, Judith Ripka, Lori Goldstein, and Longaberger branded merchandise.

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

Net licensing revenue from the Qurate Agreements represents a significant portion of the Company’s total net revenue.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

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

($ in thousands)

Year Ending December 31,

2021 (October 1 through December 31)

Significant Contracts and Concentrations

QVC Agreements

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

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

● 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 $ 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.

March 31, 2022

Net licensing revenue from the Qurate Agreements totaled $ 5.01 million and $ 3.79 million for the current quarter and prior year quarter, respectively, representing approximately 57 % and 49 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

As of March 31, 2022 and December 31, 2021, the Company had receivables from Qurate of $ 5.04 million and $ 3.51 million, respectively, representing approximately 58 % and 46 % of the Company’s total net 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 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.

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $ 1.09 million as of March 31, 2022 and December 31, 2021.

The Company recognized bad debt expense of $ 0.13 million in the prior year quarter, but did no t recognize any bad debt expense in the current quarter.

The prior year quarter bad debt expense was related to the bankruptcy of and economic impact on certain retail customers due to the COVID-19 pandemic.

The allowance of approximately $ 1.1 million against such customers’ outstanding receivable balances of $ 1.4 million at both December 31, 2021 and March 31, 2022 represents management’s best estimate of collectibility, based on the most recent information available at the respective balance sheet dates.

The Company has an operating lease for its corporate offices and operations facility, as well as certain equipment with a term of 12 months or less.

The Company also has an operating lease for its former retail store location, which was closed in the current quarter.

The Company is currently in the process of negotiating the termination of this lease.

The Company previously had an operating lease for its former office location, which it subleased to a third-party subtenant through February 27, 2022, and the Company’s lease of this office space expired by its terms on February 28, 2022.

As of March 31, 2022, the Company’s real estate leases have remaining lease terms of 5 – 7 years , with a weighted average remaining lease term of approximately 5.7 years and a weighted average discount rate of 6.25 %.

The Company generally recognizes a right-of-use (“ROU”) asset, representing its right to use the underlying leased asset for the lease term, and a liability for its obligation to make future lease payments (the lease liability) at commencement date (the date on which the lessor makes the underlying asset available for use) based on the present value of lease payments over the lease term.

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

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

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

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 both the current quarter and prior year quarter.

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

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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 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.

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

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 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.

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

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

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

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

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:

March 31, 2022

As of March 31, 2022, the maturities of lease obligations were as follows:

($ in thousands)

2021 (October 1 through December 31)

2022 (April 1 through December 31)

Thereafter (through 2028)

Total lease payments

2 unchanged sentences

Non-current portion of lease liabilities

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

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

September 30,

($ in thousands)

1 unchanged sentence

Unamortized deferred finance costs related to term loan debt

Revolving loan debt

Current portion of debt (i)

Current portion of debt

Long-term 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.

Previous Term Loan Debt

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

(“BHI”), which amended and restated a prior term loan with BHI, such that, as of February 11, 2019, the aggregate outstanding balance of all the term loans extended by BHI to Xcel was $ 22.0 million, which amount was divided into two term loans:

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

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

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

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

Current Term Loan Debt

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

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

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

The Loan Agreement also 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.

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

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

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

the Company also paid approximately $ 0.6 million

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 Agent, LLC (“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., previous 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 of the Incremental Term Loans.

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 $ 0.97 million, net of accumulated amortization, have been deferred on the accompanying condensed consolidated balance sheets as a reduction of the carrying value of the New

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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

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

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

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

March 31, 2022

Term Loan, and are being 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 March 31, 2022 were as follows:

($ in thousands)

Year Ending 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.

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

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

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

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

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

Xcel is not obligated to pay a prepayment premium if the Term Loans 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.

2022 (April 1 through December 31)

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 (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 New 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;

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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

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

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

Additionally, the maximum amount available under the revolving loan facility was reduced from $ 4.0 million to $ 1.5 million until the Company 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:

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

March 31, 2022

● minimum revenues as set forth below;

Fiscal Period

Minimum EBITDA

April 1, 2021 to September 30, 2021

April 1, 2021 to December 31, 2021

April 1, 2021 to March 31, 2022

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

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

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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

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

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

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

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

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

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

Paycheck Protection Program (“PPP”)

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

The loan 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 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.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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

Accordingly, the Company recognized approximately $ 166,000 and $ 1,806,000 as a reduction to operating expenses in the 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.

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 as of March 31, 2022.

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 quarter and prior year quarter, the Company incurred interest expense (including both interest paid in cash and the amortization of deferred finance costs) related to term loan debt of approximately $ 0.71 million and $ 0.28 million, respectively.

The effective interest rate related to term loan debt was approximately 9.8 % and 6.6 % for the current quarter and prior year quarter, respectively.

Stockholders’ Equity

2011 Equity Incentive Plan

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

Equity Incentive Plans

The Company’s 2021 Equity Incentive Plan (the “2021 Plan”) is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company.

A total of 4,000,000 shares of common stock are eligible for issuance under the 2021 Plan.

The 2021 Plan provides for the grant of any or all of the following types of awards:

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

stock options (incentive or non-qualified), restricted stock, restricted stock units, performance awards, or cash awards.

The 2021 Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board.

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

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

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

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

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

Treasury rate for the expected life at the time of grant, volatility is based on the 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

In addition, stock-based awards (including options, warrants, and restricted stock) previously granted under the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) remain outstanding and shares of common stock may be issued to satisfy options or warrants previously granted under the 2011 Plan, although no new awards may be granted under the 2011 Plan.

XCEL BRANDS, INC.

1 unchanged sentence

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.

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

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

March 31, 2022

Stock-based Compensation

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

Expense for such awards is recognized only to the extent that the achievement of the specified performance target(s) has been met or is considered probable.

Total expense recognized in the current quarter and prior year quarter for all forms of stock-based compensation was approximately $ 0.03 million and $ 0.16 million, respectively.

Of the current quarter expense amount, approximately $ 0.01 million related to employees and approximately $ 0.02 million related to directors and consultants.

Of the prior year quarter expense amount, approximately $ 0.14 million related to employees and approximately $ 0.02 million related to directors and consultants.

Stock Options

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

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

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

Outstanding at January 1, 2022

Expired/Forfeited

( 1,771,070 )

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.

The exercise price of the options is $ 1.86 per share, and all options vested immediately on the date of grant.

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

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

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 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.

Outstanding at March 31, 2022, and expected to vest

Exercisable at March 31, 2022

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 0.02 million and $ 0.16 million, respectively.

Total unrecognized compensation expense related to unvested stock options at March 31, 2022 amounts to approximately $ 0.07 million and is expected to be recognized over a weighted average period of approximately 1.07 years.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021

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

March 31, 2022

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

Balance at January 1, 2022

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:

Balance at March 31, 2022

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

Outstanding and exercisable at January 1, 2022

Expired/Forfeited

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 and exercisable at March 31, 2022

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

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

Outstanding at January 1, 2022

Expired/Forfeited

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.

Outstanding at March 31, 2022

Compensation expense related to restricted stock grants was approximately $ 0.10 million for the current quarter and prior year quarter.

Total unrecognized compensation expense related to unvested restricted stock grants at March 31, 2022 amounts to approximately $ 0.05 million and is expected to be recognized over a weighted average period of approximately 1.00 years.

XCEL BRANDS, INC.

1 unchanged sentence

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 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 nine months related to this bonus.

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

March 31, 2022

Shares Available Under the Company’s Equity Incentive Plans

As of March 31, 2022, there were 4,000,000 shares of common stock available for award grants under the 2021 Plan.

Shares Reserved for Issuance

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.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.

As of March 31, 2022, there were 9,382,725 shares of common stock reserved for issuance, including 5,382,725 shares reserved for issuance pursuant to unexercised warrants and stock options previously granted under the 2011 Plan, and 4,000,000 shares available for issuance under the 2021 Plan.

Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury stock method.

Diluted EPS excludes all potentially dilutive shares of common stock if their effect is anti-dilutive.

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

The computation of basic and diluted earnings (loss) per share excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

Three Months Ended

Nine Months Ended

September 30,

Effect of exercise of warrants

Effect of exercise of stock options

Stock options

The estimated annual effective income tax benefit rate for the current quarter and the prior year quarter was approximately 0 % and 5 %, respectively, resulting in an income tax benefit of $ 0 and $ 0.14 million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to the recording of a valuation allowance against the current period loss.

Since it is not more likely than not that the current period loss will be utilized, the Company recorded the valuation allowance.

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

XCEL BRANDS, INC.

1 unchanged sentence

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.

The computation of diluted EPS excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

Three Months Ended

Nine Months Ended

September 30,

Stock options and warrants

The effective income tax 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.

March 31, 2022

Related Party Transactions

Jennifer D’Loren is the wife of Robert W.

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

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

During the past two years , Mrs.

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

D’Loren received compensation of $ 11,000 and $ 29,000 for the current quarter and prior year quarter, 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

3 unchanged sentences

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

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

Mizrahi does not make a specified number of appearances on Qurate’s QVC channel.

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

22 unchanged sentences

Mizrahi in the year prior to the change in control.

Non-Competition and Non-Solicitation .

During the term of Mr.

Mizrahi’s employment by the Company and for a one-year period after the termination of such employment (unless his employment was terminated without “cause” or was terminated by him for “good reason”), Mr.

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

XCEL BRANDS, INC.

1 unchanged sentence

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.

March 31, 2022

Non-Competition and Non-Solicitation .

During the term of Mr.

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

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

11 unchanged sentences

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 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.

The Halston Heritage Earn-Out of $ 0.9 million is recorded as a long-term liability at March 31, 2022 and December 31, 2021 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 Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity,” the Halston Heritage Earn-Out obligation is treated as a liability in the accompanying condensed consolidated balance sheets because of the variable number of shares payable under the agreement.

Contingent Obligation – Lori Goldstein Earn-Out

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

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

In connection with the April 1, 2021 acquisition of the Lori Goldstein trademarks, the Company agreed to pay the seller additional cash consideration (the “Lori Goldstein Earn-Out”) of up to an aggregate of $ 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 March 31, 2022 and December 31, 2021 in the accompanying condensed consolidated balance sheets, 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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

Legal Proceedings

From time to time, the Company becomes involved in legal claims and litigation in the ordinary course of business.

In the opinion of management, based on consultations with legal counsel, the disposition of litigation currently pending against the Company is unlikely to have, individually or in the aggregate, a materially adverse effect on the Company’s business, financial position, results of operations, or cash flows.

The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.

Coronavirus Pandemic

3 unchanged sentences

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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

The COVID-19 pandemic has impacted 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 has also impacted distribution and logistics providers' ability to operate in the normal course of business.

Further, the initial onset of the pandemic in 2020 resulted in a sudden decrease in sales for many of the Company’s products, from which the Company has yet to fully recover.

This resulted in order cancellations and a decrease in accounts receivable collections, as the Company recorded additional allowances for doubtful accounts of approximately $ 1 million and $ 0.1 million for the years ended December 31, 2020 and 2021, respectively, related to retailers that filed for bankruptcy.

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

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

Subsequent Events

Amendment to Term Loans

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