XCel Brands, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS ​ Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2022 December 31, 2021 ​ ​ (Unaudited) ​ (Note 1) Assets ​ ​ Current Assets: ​ ​ Cash and cash equivalents ​ $ 3,063 ​ $ 4,483 Accounts receivable, net of allowance of $ 1,090 ​ 8,676 ​ 7,640 Inventory ​ 3,941 ​ 3,375 Prepaid expenses and other current assets ​ 1,480 ​ 1,681 Total current assets ​ 17,160 ​ 17,179 Non-current Assets: ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 2,293 ​ 2,549 Operating lease right-of-use assets ​ ​ 6,097 ​ ​ 6,314 Trademarks and other intangibles, net ​ 96,775 ​ 98,304 Restricted cash ​ 608 ​ 739 Deferred tax assets, net ​ ​ 141 ​ ​ 141 Other assets ​ 635 ​ 555 Total non-current assets ​ 106,549 ​ 108,602 ​ ​ ​ ​ ​ ​ ​ Total Assets ​ $ 123,709 ​ $ 125,781 ​ ​ ​ ​ ​ ​ ​ Liabilities and Stockholders' Equity ​ ​ Current Liabilities: ​ ​ Accounts payable, accrued expenses and other current liabilities ​ $ 7,855 ​ $ 6,233 Accrued payroll ​ 1,563 ​ 577 Current portion of operating lease obligations ​ ​ 1,045 ​ ​ 1,207 Current portion of long-term debt ​ 2,500 ​ 2,500 Total current liabilities ​ 12,963 ​ 10,517 Long-Term Liabilities: ​ ​ Long-term portion of operating lease obligations ​ ​ 6,963 ​ ​ 7,252 Long-term debt, net, less current portion ​ 24,998 ​ 25,531 Contingent obligations ​ ​ 7,539 ​ ​ 7,539 Other long-term liabilities ​ 13 ​ — Total long-term liabilities ​ 39,513 ​ 40,322 Total Liabilities ​ 52,476 ​ 50,839 ​ ​ ​ ​ ​ ​ ​ 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 19,571,119 shares issued and outstanding at March 31, 2022 and December 31, 2021 ​ 20 ​ 20 Paid-in capital ​ 103,069 ​ 103,039 Accumulated deficit ​ ( 32,266 ) ​ ( 28,779 ) Total Xcel Brands, Inc. stockholders' equity ​ 70,823 ​ 74,280 Noncontrolling interest ​ ​ 410 ​ ​ 662 Total Stockholders' Equity ​ 71,233 ​ 74,942 ​ ​ ​ ​ ​ ​ ​ Total Liabilities and Stockholders' Equity ​ $ 123,709 ​ $ 125,781 ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ 3 Table of Contents Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Operations (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ ​ ​ March 31, ​ ​ 2022 2021 ​ Revenues ​ ​ ​ ​ Net licensing revenue ​ $ 5,961 ​ $ 4,307 ​ Net sales ​ 2,786 ​ 3,502 ​ Net revenue ​ 8,747 ​ 7,809 ​ Cost of goods sold ​ 1,680 ​ 1,835 ​ Gross profit ​ 7,067 ​ 5,974 ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs and expenses ​ ​ ​ Salaries, benefits and employment taxes ​ 4,853 ​ 4,052 ​ Other selling, general and administrative expenses ​ 3,392 ​ 3,038 ​ Stock-based compensation ​ 32 ​ 160 ​ Depreciation and amortization ​ 1,820 ​ 1,210 ​ Total operating costs and expenses ​ 10,097 ​ 8,460 ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating loss ​ ( 3,030 ) ​ ( 2,486 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest and finance expense ​ ​ ​ Interest expense - term loan debt ​ 708 ​ 276 ​ Other interest and finance charges (income), net ​ 1 ​ 4 ​ Total interest and finance expense ​ 709 ​ 280 ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss before income taxes ​ ( 3,739 ) ​ ( 2,766 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Income tax benefit ​ — ​ ( 138 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ ​ ( 3,739 ) ​ ​ ( 2,628 ) ​ Less: Net loss attributable to noncontrolling interest ​ ​ ( 252 ) ​ ​ ( 81 ) ​ Net loss attributable to Xcel Brands, Inc. stockholders ​ $ ( 3,487 ) ​ $ ( 2,547 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss per common share attributable to Xcel Brands, Inc. stockholders: ​ ​ ​ Basic and diluted net loss per share ​ $ ( 0.18 ) ​ $ ( 0.13 ) ​ Weighted average number of common shares outstanding: ​ ​ ​ Basic and diluted weighted average common shares outstanding ​ 19,571,119 ​ 19,261,436 ​ ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ 4 Table of Contents ​ Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Xcel Brands, Inc. Stockholders ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of ​ ​ ​ ​ Paid-In ​ Accumulated ​ Noncontrolling ​ ​ Total ​ Shares Amount Capital Deficit Interest ​ ​ Equity Balance as of December 31, 2020 19,260,862 ​ $ 19 ​ $ 102,324 ​ $ ( 16,595 ) ​ $ 507 ​ ​ $ 86,255 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 169 ​ ​ — ​ ​ — ​ ​ ​ 169 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares issued on exercise of stock options, net ​ 1,667 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 2,547 ) ​ ​ ( 81 ) ​ ​ ( 2,628 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of March 31, 2021 19,262,529 ​ $ 19 ​ $ 102,493 ​ $ ( 19,142 ) ​ $ 426 ​ ​ $ 83,796 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of December 31, 2021 19,571,119 ​ $ 20 ​ $ 103,039 ​ $ ( 28,779 ) ​ $ 662 ​ ​ $ 74,942 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation expense related to stock options and restricted stock ​ — ​ ​ — ​ ​ 30 ​ ​ — ​ ​ — ​ ​ ​ 30 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ ( 3,487 ) ​ ​ ( 252 ) ​ ​ ( 3,739 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance as of March 31, 2022 19,571,119 ​ $ 20 ​ $ 103,069 ​ $ ( 32,266 ) ​ $ 410 ​ ​ $ 71,233 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ 5 Table of Contents ​ Xcel Brands, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended March 31, ​ 2022 2021 Cash flows from operating activities ​ ​ Net loss ​ $ ( 3,739 ) ​ $ ( 2,628 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ Depreciation and amortization expense ​ 1,820 ​ 1,210 Amortization of deferred finance costs included in interest expense ​ 91 ​ 20 Stock-based compensation ​ 32 ​ 160 Provision for doubtful accounts ​ ​ — ​ ​ 132 Deferred income tax benefit ​ — ​ ( 138 ) Changes in operating assets and liabilities: ​ ​ ​ ​ Accounts receivable ​ ( 1,036 ) ​ ( 377 ) Inventory ​ ( 566 ) ​ ( 1,569 ) Prepaid expenses and other current and non-current assets ​ 15 ​ ( 222 ) Accounts payable, accrued expenses, accrued payroll and other current liabilities ​ 2,620 ​ 1,819 Lease-related assets and liabilities ​ ​ ( 128 ) ​ ​ ( 100 ) Net cash used in operating activities ​ ( 891 ) ​ ( 1,693 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities ​ ​ Purchase of property and equipment ​ ( 35 ) ​ ( 295 ) Net cash used in investing activities ​ ( 35 ) ​ ( 295 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities ​ ​ Payment of long-term debt ​ ( 625 ) ​ — Net cash used in financing activities ​ ( 625 ) ​ — ​ ​ ​ ​ ​ ​ ​ Net decrease in cash, cash equivalents, and restricted cash ​ ( 1,551 ) ​ ( 1,988 ) ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents, and restricted cash at beginning of period ​ ​ 5,222 ​ ​ 6,066 ​ ​ ​ ​ ​ ​ ​ Cash, cash equivalents, and restricted cash at end of period ​ $ 3,671 ​ $ 4,078 ​ ​ ​ ​ ​ ​ ​ Reconciliation to amounts on condensed consolidated balance sheets: ​ ​ Cash and cash equivalents ​ $ 3,063 ​ $ 2,969 Restricted cash ​ 608 ​ 1,109 Total cash, cash equivalents, and restricted cash ​ $ 3,671 ​ $ 4,078 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of non-cash activities: ​ ​ ​ ​ ​ ​ Liability for equity-based bonuses and other equity-based payments ​ $ 2 ​ $ ( 9 ) ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ Cash paid during the period for interest ​ $ 623 ​ $ 236 Cash paid during the period for income taxes ​ $ — ​ $ 15 ​ ​ See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. ​ ​ 6 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 1. Nature of Operations, Background, and Basis of Presentation The accompanying condensed consolidated balance sheet as of December 31, 2021 (which has been derived from audited financial statements) and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position, and cash flows of Xcel Brands, Inc. and its subsidiaries (the “Company” or "Xcel"). The results of operations for the interim periods presented herein are not necessarily indicative of the results for the entire fiscal year or for any future interim periods. 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 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 “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 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. 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. Liquidity 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. Management 7 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 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. ​ 2. Trademarks and Other Intangibles Trademarks and other intangibles, net consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ Average March 31, 2022 ​ Amortization ​ Gross Carrying ​ Accumulated ​ Net Carrying ($ in thousands) ​ Period ​ Amount ​ Amortization ​ Amount Trademarks (indefinite-lived) n/a ​ $ 44,500 ​ $ — ​ $ 44,500 Trademarks (finite-lived) 15 years ​ 68,880 ​ 16,782 ​ 52,098 Copyrights and other intellectual property 8 years ​ 429 ​ 252 ​ 177 Total ​ ​ ​ $ 113,809 ​ $ 17,034 ​ $ 96,775 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ Average December 31, 2021 ​ Amortization Gross Carrying ​ Accumulated ​ Net Carrying ($ in thousands) ​ Period ​ Amount ​ Amortization ​ Amount Trademarks (indefinite-lived) n/a ​ $ 44,500 ​ $ — ​ $ 44,500 Trademarks (finite-lived) 15 years ​ 68,880 ​ 15,268 ​ 53,612 Non-compete agreement 7 years ​ 562 ​ 562 ​ — Copyrights and other intellectual property 8 years ​ 429 ​ 237 ​ 192 Total ​ $ 114,371 ​ $ 16,067 ​ $ 98,304 ​ 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. ​ ​ 3. 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. 8 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 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. ​ 4. Allowance for Doubtful Accounts 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. 5. Leases 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. 9 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) As of March 31, 2022, the maturities of lease obligations were as follows: ​ ​ ​ ​ ​ ($ in thousands) ​ ​ 2022 (April 1 through December 31) ​ $ 1,132 2023 ​ ​ 1,711 2024 ​ 1,711 2025 ​ 1,711 2026 ​ 1,710 Thereafter (through 2028) ​ 1,610 Total lease payments ​ ​ 9,585 Less: Discount ​ ​ 1,577 Present value of lease liabilities ​ ​ 8,008 Current portion of lease liabilities ​ ​ 1,045 Non-current portion of lease liabilities ​ $ 6,963 ​ ​ ​ ​ ​ ​ 6. Debt The Company’s net carrying amount of debt was comprised of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ ($ in thousands) 2022 2021 ​ Term loan debt ​ $ 28,375 ​ $ 29,000 ​ Unamortized deferred finance costs related to term loan debt ​ ( 877 ) ​ ( 969 ) ​ Total ​ 27,498 ​ 28,031 ​ Current portion of debt ​ 2,500 ​ 2,500 ​ Long-term debt ​ $ 24,998 ​ $ 25,531 ​ ​ Current 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 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 10 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 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: ​ ​ ​ ​ ​ ​ ​ Amount of ($ in thousands) Principal Year Ending December 31, Payment 2022 (April 1 through December 31) ​ $ 1,875 2023 ​ 2,500 2024 ​ ​ 2,500 2025 ​ ​ 21,500 Total ​ $ 28,375 ​ 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; ​ 11 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) ● minimum revenues as set forth below; ​ ​ ​ ​ ​ Fiscal Period Minimum Revenue April 1, 2021 - December 31, 2021 ​ $ 16,445,000 For the trailing twelve month period ending March 31, 2022 ​ $ 23,500,000 For the trailing twelve month period ending June 30, 2022 ​ $ 24,491,000 For the trailing twelve month periods ending September 30, 2022 and each fiscal quarter end thereafter ​ $ 25,000,000 ​ ● 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”); and ● 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. ​ 7. Stockholders’ Equity 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 (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. 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. ​ 12 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) Stock-based Compensation 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. Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur. 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. 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 A summary of the Company’s stock options activity for the current quarter is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ Weighted ​ Remaining ​ ​ ​ ​ ​ ​ ​ Average ​ Contractual ​ Aggregate ​ ​ Number of ​ Exercise ​ Life ​ Intrinsic ​ Options Price (in Years) Value Outstanding at January 1, 2022 5,630,970 ​ $ 2.25 5.46 ​ $ — Granted — ​ — ​ Canceled — ​ — ​ Exercised — ​ — ​ Expired/Forfeited ( 364,310 ) ​ 3.61 ​ Outstanding at March 31, 2022, and expected to vest 5,266,660 ​ $ 2.16 5.52 ​ $ — Exercisable at March 31, 2022 1,495,826 ​ $ 3.32 1.93 ​ $ — ​ 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. 13 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) A summary of the Company’s non-vested stock options activity for the current quarter is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ Average ​ ​ Number of ​ Grant Date ​ Options Fair Value Balance at January 1, 2022 3,873,334 ​ $ 0.07 Granted — ​ — Vested ( 102,500 ) ​ ​ 1.24 Forfeited or Canceled — ​ — Balance at March 31, 2022 3,770,834 ​ $ 0.03 ​ Warrants A summary of the Company’s warrants activity for the current quarter is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ Weighted ​ Remaining ​ ​ ​ ​ ​ ​ Average Contractual ​ Aggregate ​ ​ Number of ​ Exercise Life ​ Intrinsic ​ Warrants Price (in Years) Value Outstanding and exercisable at January 1, 2022 116,065 ​ $ 3.15 2.57 ​ $ — Granted — ​ — ​ ​ Canceled — ​ — ​ ​ Exercised — ​ — ​ ​ Expired/Forfeited — ​ — ​ ​ Outstanding and exercisable at March 31, 2022 116,065 ​ $ 3.15 2.32 ​ $ — ​ No compensation expense related to warrants was recognized in the current quarter or prior year quarter. Stock Awards A summary of the Company’s restricted stock activity for the current quarter is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ Number of ​ Average ​ ​ Restricted ​ Grant Date ​ Shares Fair Value Outstanding at January 1, 2022 815,833 ​ $ 4.00 Granted — ​ — Canceled — ​ — Vested — ​ — Expired/Forfeited — ​ — Outstanding at March 31, 2022 815,833 ​ $ 4.00 ​ 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. 14 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 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 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. 8. 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 ​ ​ ​ March 31, ​ ​ 2022 2021 ​ Stock options ​ 5,266,660 ​ 5,900,765 ​ Warrants ​ 116,065 ​ 579,815 ​ Total ​ 5,382,725 6,480,580 ​ ​ 9. Income Tax 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 %. ​ 15 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 10. Related Party Transactions Isaac Mizrahi On February 24, 2020, the Company entered into an employment agreement with Isaac Mizrahi, a principal stockholder of the Company, for Mr. Mizrahi to continue to serve as Chief Design Officer of the Isaac Mizrahi Brand. The term of the employment agreement expires on December 31, 2022, subject to earlier termination, and may be extended, at the Company’s option, for two successive one-year terms (each, a “Renewal Period”). Mr. 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 Qurate’s QVC channel. Mr. Mizrahi shall be eligible to receive an annual cash bonus (the “Bonus”) up to an amount equal to $ 2.5 million less base salary for 2020 and $ 3.0 million less base salary for 2021, 2022, and any year during the Renewal Period. The Bonus shall consist of the DRT Revenue, Bonus, the Brick-and-Mortar Bonus, the Endorsement Bonus and the Monday Bonus, if any, as determined in accordance with the following: ● “DRT Bonus” means for any calendar year an amount equal to 10 % of the aggregate net revenue related to sales of Isaac Mizrahi Brand products through direct response television. The DRT Revenue Bonus shall be reduced by the amount of the Monday Bonus. ● “Brick-and-Mortar Bonus” means for any calendar year an amount equal to 10 % of the net revenues from sales of products under the Isaac Mizrahi Brand, excluding DRT revenue and endorsement revenues. ● “Endorsement Bonus” means for any calendar year an amount equal to 40 % of revenues derived from projects undertaken by the Company with one or more third parties solely for Mr. Mizrahi to endorse the third party’s products through the use of Mr. Mizrahi’s name, likeness, and/or image, and neither the Company nor Mr. Mizrahi provides licensing or design. ● “Monday Bonus” means $ 10,000 for each appearance by Mr. Mizrahi on the QVC channel on Mondays (subject to certain expectations) up to a maximum of 40 such appearances in a calendar year. Mr. Mizrahi is required to devote his full business time and attention to the business and affairs of the Company and its subsidiaries; however, Mr. Mizrahi is the principal of IM Ready-Made, LLC and Laugh Club, Inc. (“Laugh Club”), and accordingly, he may undertake promotional activities related thereto (including the promotion of his name, image, and likeness) through television, video, and other media (and retain any compensation he receives for such activities) (referred to as “Retained Media Rights”) so long as such activities (i) do not utilize the IM trademarks, (ii) do not have a mutually negative impact upon or materially conflict with Mr. Mizrahi’s duties under the employment agreement, or (iii) are consented to by the Company. The Company believes that it benefits from Mr. Mizrahi’s independent promotional activities by increased brand awareness of IM Brands and the IM trademarks. Severance . If Mr. Mizrahi’s employment is terminated by the Company without “cause,” or if Mr. Mizrahi resigns with “good reason,” then Mr. Mizrahi will be entitled to receive his unpaid base salary and cash bonuses through the termination date and an amount equal to his base salary in effect on the termination date for the longer of six months and the remainder of the then-current term, but in no event exceeding 18 months. If Mr. Mizrahi’s employment is terminated by the Company without “cause” or if Mr. Mizrahi resigns with “good reason” within six months following a change of control (as defined in the employment agreement), Mr. Mizrahi shall be eligible to receive a lump-sum payment equal to two times the sum of (i) his base salary (at an average rate that would have been in effect for such two-year period following termination) plus (ii) the bonus paid or due to Mr. Mizrahi in the year prior to the change in control. 16 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) Non-Competition and Non-Solicitation . During the term of Mr. Mizrahi’s employment by the Company and for a one-year period after the termination of such employment (unless his employment was terminated without “cause” or was terminated by him for “good reason”), Mr. Mizrahi may not permit his name to be used by or to participate in any business or enterprise (other than the mere passive ownership of not more than 3 % of the outstanding stock of any class of a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market) that engages or proposes to engage in the Company’s business anywhere in the world other than the Company and its subsidiaries. Also during his employment and for a one-year period after the termination of such employment, Mr. Mizrahi may not, directly or indirectly, solicit, induce, or attempt to induce any customer, supplier, licensee, or other business relation of the Company or any of its subsidiaries to cease doing business with the Company or any or its subsidiaries; or solicit, induce, or attempt to induce any person who is, or was during the then-most recent 12-month period, a corporate officer, general manager, or other employee of the Company or any of its subsidiaries, to terminate such employee’s employment with the Company or any of its subsidiaries; or hire any such person unless such person’s employment was terminated by the Company or any of its subsidiaries; or in any way interfere with the relationship between any such customer, supplier, licensee, employee, or business relation and the Company or any of its subsidiaries. On February 24, 2020, the Company entered into a services agreement with Laugh Club, an entity wholly-owned by Mr. Mizrahi, pursuant to which Laugh Club shall provide services to Mr. Mizrahi necessary for Mr. Mizrahi to perform his services pursuant to the employment agreement. The Company will pay Laugh Club an annual fee of $ 0.72 million for such services. 11. Commitments and Contingencies Contingent Obligation – Halston Heritage Earn-Out In connection with the February 11, 2019 purchase of the Halston Heritage trademarks from H Company IP, LLC (“HIP”), the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) of up to an aggregate of $ 6.0 million, based on royalties earned through December 31, 2022. The Halston Heritage Earn-Out of $ 0.9 million is recorded as a long-term liability at March 31, 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, 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. ​ 17 Table of Contents XCEL BRANDS, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements March 31, 2022 (Unaudited) 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 In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, which continues to circulate throughout the U.S. and the world. COVID-19 has had an unprecedented impact on the U.S. and global economy as national, state, and local governments continue to react to and attempt to manage this ongoing public health crisis. The impacts of the ongoing COVID-19 pandemic are broad reaching and 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. ​ ​ ​ ​ 18 Table of Contents