What changed in this filing

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Item 1. Financial Statements

2022-08-15 compared with 2022-05-23 · 290 added, 160 removed, 258 unchanged (64% of the section changed)

4 unchanged sentences

(in thousands, except share and per share data)

March 31, 2022

June 30, 2022

December 31, 2021

1 unchanged sentence

Cash and cash equivalents

Accounts receivable, net of allowance of $ 1,090

Accounts receivable, net of allowances of $ 1,180 and $ 1,090 , respectively

Prepaid expenses and other current assets

4 unchanged sentences

Trademarks and other intangibles, net

Equity method investment

Restricted cash

4 unchanged sentences

Accounts payable, accrued expenses and other current liabilities

Accrued income taxes payable

Accrued payroll

1 unchanged sentence

Current portion of long-term debt

Current portion of contingent obligations

Total current liabilities

2 unchanged sentences

Long-term debt, net, less current portion

Contingent obligations

Other long-term liabilities

Long-term portion of contingent obligations

Deferred tax liabilities, net

Total long-term liabilities

3 unchanged sentences

Preferred stock, $ .001 par value, 1,000,000 shares authorized, none issued and outstanding

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

Common stock, $ .001 par value, 50,000,000 shares authorized, and 19,624,860 and 19,571,119 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Paid-in capital

11 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Net licensing revenue

6 unchanged sentences

Total operating costs and expenses

Operating loss

Gain on sale of majority interest in Isaac Mizrahi brand

Total other income

Operating income (loss)

Interest and finance expense

1 unchanged sentence

Other interest and finance charges (income), net

Loss on early extinguishment of debt

Total interest and finance expense

Loss before income taxes

Income tax benefit

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

Net loss attributable to noncontrolling interest

Net loss attributable to Xcel Brands, Inc.

Loss per common share attributable to Xcel Brands, Inc.

Net income (loss) attributable to Xcel Brands, Inc.

Earnings (loss) per common share attributable to Xcel Brands, Inc.

stockholders:

Basic and diluted net loss per share

Basic net income (loss) per share

Diluted net income (loss) per share

Weighted average number of common shares outstanding:

Basic and diluted weighted average common shares outstanding

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

9 unchanged sentences

Balance as of March 31, 2021

Compensation expense related to stock options and restricted stock

Shares issued to executive related to stock grants for bonus payments

Shares issued to consultant in connection with stock grant

Shares issued to directors in connection with restricted stock grants

Shares issued on exercise of stock options, net

Balance as of June 30, 2021

Balance as of December 31, 2021

1 unchanged sentence

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 repurchased from executive in exchange for withholding taxes

Shares issued to consultant in connection with stock grant

Shares issued to directors in connection with restricted stock grants

Shares issued to consultant in connection with sale transaction (see Note 2 and Note 8)

Shares issued to key employee in connection with stock grant

Shares repurchased from key employee in exchange for withholding taxes related to vesting of restricted shares

Net income (loss)

Balance as of June 30, 2022

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3 unchanged sentences

(in thousands)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash flows from operating activities

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

Net income (loss)

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

Depreciation and amortization expense

2 unchanged sentences

Provision for doubtful accounts

Deferred income tax benefit

Loss on early extinguishment of debt

Deferred income tax provision (benefit)

Gain on sale of majority interest in Isaac Mizrahi brand

Changes in operating assets and liabilities:

1 unchanged sentence

Prepaid expenses and other current and non-current assets

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

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

Lease-related assets and liabilities

Other liabilities

Net cash used in operating activities

Cash flows from investing activities

Net proceeds from sale of majority interest in Isaac Mizrahi brand

Cash consideration for acquisition of Lori Goldstein assets

Purchase of other intangible assets

Purchase of property and equipment

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities

Proceeds from exercise of stock options

Shares repurchased including vested restricted stock in exchange for withholding taxes

Proceeds from revolving loan debt

Proceeds from long-term debt

Payment of deferred finance costs

Payment of long-term debt

Net cash used in financing activities

Net decrease in cash, cash equivalents, and restricted cash

Payment of prepayment, breakage and other fees associated with early extinguishment of long-term debt

Net cash (used in) provided by financing activities

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

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

5 unchanged sentences

Supplemental disclosure of non-cash activities:

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

Consideration payable to seller of Lori Goldstein assets

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

Liability for equity-based bonuses

Supplemental disclosure of cash flow information:

5 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

June 30, 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 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;

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

● The Lori Goldstein Brand, Halston Brand, Ripka Brand, and C Wonder Brand are wholly owned by the Company.

● The Company manages 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 wholly owned and managed the Isaac Mizrahi Brand through May 31, 2022.

On May 31, 2022, the Company sold to a third party a majority interest in a newly-created subsidiary that was formed to hold the Isaac Mizrahi Brand trademarks, but retained a noncontrolling interest in the brand through a 30 % ownership interest in IM Topco, LLC and continues to participate in the operations of the business;

the Company accounts for its interest in IM Topco, LLC using the equity method of accounting.

See Note 2 for additional details.

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.

3 unchanged sentences

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

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.

June 30, 2022

The Company had net income of approximately $ 9.5 million and $ 6.0 million during the three and six months ended June 30, 2022, respectively, and had an accumulated deficit of approximately $ 22.8 million as of June 30, 2022.

The Company had working capital (current assets less current liabilities, excluding the current portion of lease obligations and any contingent obligations payable in common stock) of approximately $ 16.9 million as of June 30, 2022.

The Company’s cash and cash equivalents were approximately $ 10.9 million as of June 30, 2022.

In conjunction with the sale of the majority interest in the Isaac Mizrahi Brand (as described in Note 2), the Company used a portion of the proceeds to extinguish all of its term loan debt, which had a balance of approximately $ 28.4 million.

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

Acquisitions and Divestitures

Sale of Majority Interest in Isaac Mizrahi Brand

On May 27, 2022, Xcel (along with IM Topco, LLC (“IM Topco”) and IM Brands, LLC (“IMB”), both wholly owned subsidiaries of the Company) and IM WHP, LLC (“WHP”), a subsidiary of WHP Global, a private equity-backed brand management and licensing company, entered into a membership purchase agreement.

Pursuant to this agreement, on May 31, 2022, (i) the Company contributed assets owned by IMB, including the Isaac Mizrahi Brand trademarks and other intellectual property rights relating thereto into IM Topco, and (ii) the Company sold 70 % of the membership interests of IM Topco to WHP.

The purchase price paid by WHP to the Company at the closing of the transaction in exchange for the 70 % membership interest in IM Topco consisted of $ 46.2 million in cash.

Pursuant to the purchase agreement, the Company will also be entitled to receive an “earn-out” payment in the amount of $ 2.0 million if, during the period from January 1, 2023 through December 31, 2023, (i) IM Topco receives Net Royalty Revenue (as defined in the purchase agreement) in an amount equal to or greater than $ 17.5 million and (ii) IM Topco generates EBITDA (as defined in the purchase agreement) in an amount equal to or greater than $ 11.8 million.

Additionally, in the event that IM Topco receives less than $ 13.347 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on the third anniversary of the closing, WHP will be entitled to receive from the Company up to $ 16 million, less all amounts of net cash flow distributed to WHP for such period, as an adjustment to the purchase price, payable in either cash or equity interests in IM Topco held by the Company.

In connection with the aforementioned purchase agreement, on May 31, 2022, the Company and WHP entered into an Amended and Restated Limited Liability Company Agreement of IM Topco (the “Business Venture Agreement”) governing the operation of IM Topco as a partnership between the Company and WHP following the closing.

Pursuant to the Business Venture Agreement, IM Topco is managed by a single Manager appointed by the vote of a majority-in-interest of IM Topco’s members, and WHP serves as the sole Manager of IM Topco.

The Business Venture Agreement contains customary provisions for the governance of a partnership, including with respect to decision making, access to information, restrictions on transfer of interests, and covenants.

Pursuant to the Business Venture Agreement, IM Topco’s Net Cash Flow (as defined in the agreement) shall be distributed to the members during each fiscal year no less than once per fiscal quarter, as follows:

(i) first, 100 % to WHP, until WHP has received an aggregate amount during such fiscal year equal to $ 8,852,000 ;

(ii) second, 100 % to Xcel, until Xcel has received an aggregate amount during such fiscal year equal to $ 1,316,200 ;

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

(iii) thereafter, in proportion to the members’ respective percentage interests.

The amounts described in (i) and (ii) above are subject to adjustment in certain circumstances as set forth in the Business Venture Agreement.

The Company also entered into a number of other related agreements on May 31, 2022 in connection with the transaction, as described below:

● The Company entered into a services agreement with IM Topco, pursuant to which the Company will provide certain design and support services (including assistance with the operations of the interactive television business and related talent support) to IM Topco in exchange for payments of $ 0.3 million per fiscal year.

● The Company entered into a license agreement with IM Topco, pursuant to which IM Topco granted the Company a license to use certain Isaac Mizrahi trademarks on and in connection with the design, manufacture, distribution, sale, and promotion of women’s sportswear products in the United States and Canada during the term of the agreement, in exchange for the payment of royalties in connection therewith.

The initial term of this agreement ends December 31, 2026, and provides guaranteed royalties of $ 0.4 million per year to IM Topco.

● The Company’s licensing agreement with Qurate Retail Group related to the Isaac Mizrahi Brand (see Note 4) was assigned to IM Topco as of May 31, 2022.

● The Company’s employment agreement with Mr.

Mizrahi and the Company’s services agreement with Laugh Club (see Note 10) were transferred to IM Topco.

In addition, all 522,500 unvested shares of restricted stock of the Company held by Mr.

Mizrahi (for which all stock-based compensation expense had been previously recognized in prior periods) were immediately vested, with 240,000 of such shares being surrendered for cancellation in satisfaction of withholding tax obligations.

In addition, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr.

Mizrahi, which vested immediately, and made a $ 100,000 cash payment to Mr.

Management assessed and evaluated the ownership structure and other terms of the May 27, 2022 membership purchase agreement and Business Venture Agreement, as well as considered the Company’s continuing involvement with the Isaac Mizrahi Brand through the aforementioned services agreement and licensing agreement, and concluded that (i) IM Topco is not a Variable Interest Entity under Accounting Standards Codification (“ASC”) Topic 810, and (ii) the Company has significant influence over, but does not control, IM Topco.

As such, on May 31, 2022, the Company de-recognized the carrying amount of the Isaac Mizrahi Brand trademarks of $ 44.5 million and recognized the fair value of its retained interest in IM Topco of approximately $ 19.8 million as an equity method investment on the accompanying condensed consolidated balance sheet.

The fair value of the of the Company’s retained interest was determined by applying the Company’s ownership percentage to the implied enterprise value of IM Topco, which was calculated based on the price paid by WHP for the 70 % controlling interest, as the May 31, 2022 sale transaction was considered an arms-length transaction between knowledgeable market participants and the most relevant and reasonable indication of value to utilize.

The inputs and assumptions for this nonrecurring fair value measurement are classified as Level 3 within the fair value hierarchy defined in ASC Topic 810.

The Company incurred approximately $ 0.9 million of expenses directly related to this transaction, including legal fees and agent fees, of which $ 0.1 million of the agent fees were paid through the issuance of 65,275 shares of the Company’s common stock, which were recognized as a reduction to the gain from the transaction.

The Company recognized a net pre-tax gain from the transaction of $ 20.6 million, which is classified as other income in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

The Company accounts for its interest in the ongoing operations of IM Topco as other income under the equity method of accounting.

The Company did not recognize any equity income related to its investment for the three and six months ended June 30, 2022, due to the aforementioned distribution provisions set forth in the Business Venture Agreement.

In addition to the amounts described above, the Company’s Board of Directors awarded cash bonuses totaling approximately $ 1.0 million to certain members of the Company’s senior management, consisting of bonuses of $ 770,000 to Robert D’Loren, $ 115,000 to Jim Haran, and $ 130,000 to Seth Burroughs.

These bonuses are included in Salaries, benefits and employment taxes in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2022.

Acquisition of LOGO by Lori Goldstein Brand

On April 1, 2021, the Company acquired certain assets of Lori Goldstein, Ltd.

(the "Seller"), including the “LOGO by Lori Goldstein” trademark and other intellectual property rights relating thereto.

Pursuant to the asset purchase agreement related to this transaction, the Company delivered $ 1.6 million in cash consideration to the Seller at closing, and was obligated to subsequently deliver an additional $ 2.0 million in cash to the Seller, which was paid 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 related 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 ASC Subtopic 805-50.

To date, no consideration under the terms of the Lori Goldstein Earn-Out has been payable or paid to the Seller.

The LOGO by Lori Goldstein brand acquisition was accounted for as an asset purchase, and the aggregate purchase price of $ 10.3 million was 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 .

Trademarks and Other Intangibles

Trademarks and other intangibles, net consist of the following:

March 31, 2022

June 30, 2022

Gross Carrying

($ in thousands)

Trademarks (indefinite-lived)

Trademarks (finite-lived)

Copyrights and other intellectual property

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

December 31, 2021

5 unchanged sentences

Copyrights and other intellectual property

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.

Amortization expense for intangible assets was approximately $ 1.54 million for the three-month period ended June 30, 2022 (the "current quarter") and was approximately $ 1.55 million for the three-month period ended June 30, 2021 (the "prior year quarter").

Amortization expense for intangible assets was approximately $ 3.07 million for the six-month period ended June 30, 2022 (the "current six months") and was approximately $ 2.46 million for the six-month period ended June 30, 2021 (the "prior year six months").

During the current quarter, the Company sold its $ 44.5 million of indefinite-lived trademarks related to the Isaac Mizrahi Brand;

see Note 2 for details.

During the current six months, the Company retired its intangible asset for a non-compete agreement related to the Halston Brand, as such intangible asset had reached the end of its estimated useful life and had become fully amortized.

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.

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 Lori Goldstein, Judith Ripka, and Longaberger branded merchandise.

The Company was also previously a party to a similar agreement with Qurate related to the Isaac Mizrahi Brand through May 31, 2022;

see Note 2 for details.

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.

● Net licensing revenue from the Qurate Agreements totaled $ 4.05 million and $ 5.45 million for the current quarter and prior year quarter, respectively, representing approximately 48 % and 51 % of the Company’s total net revenue for the current quarter and prior year quarter, respectively.

● Net licensing revenue from the Qurate Agreements totaled $ 9.06 million and $ 9.19 million for the current six months and prior year six months, respectively, representing approximately 53 % and 50 % of the Company’s total net revenue for the current six months and prior year six months, respectively.

● As of June 30, 2022 and December 31, 2021, the Company had receivables from Qurate of $ 4.15 million and $ 3.51 million, respectively, representing approximately 45 % and 46 % of the Company’s total net accounts receivable, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

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.

June 30, 2022

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.

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $ 1.18 and $ 1.09 million as of June 30, 2022 and December 31, 2021, respectively.

The Company recognized bad debt expense of $ 0.09 million in the current quarter and current six months, and $ 0.13 million in the prior year six months, but did no t recognize any bad debt expense in the prior year quarter.

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 also has an operating lease for its former retail store location, which was closed in the first quarter of 2022;

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 %.

As of June 30, 2022, the Company’s real estate leases have remaining lease terms of 5 – 7 years , with a weighted average remaining lease term of approximately 5.4 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.

2 unchanged sentences

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.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 0.4 million in the current quarter, $ 0.7 million in the prior year quarter, $ 1.0 million in the current six months, and $ 1.3 million in the prior year six months.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

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

June 30, 2022

As of June 30, 2022, the maturities of lease obligations were as follows:

($ in thousands)

11 unchanged sentences

Long-term debt

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

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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,

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;

On May 31, 2022, the Company used $ 30.1 million of the proceeds received from the transaction related to the Isaac Mizrahi Brand (see Note 2) to repay all amounts outstanding under the December 30, 2021 term loan agreement with First Eagle Alternative Credit Agent, LLC (“FEAC”), consisting of $ 28.4 million in principal amount, a $ 1.4 million prepayment fee, and approximately $ 0.3 million in interest and related expenses.

As a result, the Company recognized a loss on early extinguishment of debt of approximately $ 2.3 million during the current quarter and current six months, consisting of approximately $ 1.4 million of debt prepayment premium, the immediate write-off of approximately $ 0.8 million of unamortized deferred finance costs, and approximately $ 0.1 million of other costs.

Term Loan Debt (through May 31, 2022)

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 “Loan Agreement”) with FEAC, as lead arranger and as administrative agent and collateral agent for the lenders party to the Loan Agreement, and the financial institutions party thereto as lenders (the “Lenders”).

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

The proceeds of the Term Loan were used for the purpose of refinancing existing

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

● minimum revenues as set forth below;

Fiscal Period

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.

June 30, 2022

indebtedness (i.e., previous term loan debt), to pay fees, costs, and expenses incurred in connection with entering into the Loan Agreement, and for working capital purposes.

Upon entering into the 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 Loan Agreement.

These fees and costs totaling approximately $ 0.97 million were deferred on the Company’s balance sheet as of December 31, 2021 as a reduction of the carrying value of the Term Loan, and commencing in 2022 were being amortized to interest expense over the term of the Term Loan using the effective interest method.

The New Term Loan was to mature on April 14, 2025.

Principal on the New Term Loan was 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 due on the maturity date of April 14, 2025.

Under the Loan Agreement, Xcel had the right upon thirty (30) days prior written notice to prepay all or any portion of the Term Loan and accrued and unpaid interest thereon.

Based on the terms of the Loan Agreement, when the Term Loan was repaid in full on May 31, 2022, Xcel was required to pay a prepayment premium of five percent ( 5.00 %), which amounted to approximately $ 1.4 million.

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 $ 0.48 million and $ 0.52 million, respectively.

The effective interest rate related to term loan debt was approximately 9.8 % and 9.0 % for the current quarter and prior year quarter, respectively.

For the current six months and prior year six months, 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 $ 1.19 million and $ 0.80 million, respectively.

The effective interest rate related to term loan debt was approximately 9.8 % and 7.8 % for the current quarter and prior year quarter, respectively.

Stockholders’ Equity

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Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

June 30, 2022

Stock-based Compensation

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Of the current quarter expense amount, approximately $ 0.39 million related to employees and approximately $ 0.19 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.

Approximately $ 0.48 million of the current quarter expense was recorded as operating costs, and approximately $ 0.10 million was recorded as a reduction to other income.

Of the prior year quarter expense amount, all of which was recorded as operating costs in the accompanying condensed consolidated statements of operations, approximately $ 0.38 million related to employees and approximately $ 0.05 million related to directors and consultants.

Total expense recognized in the current six months and prior year six months for all forms of stock-based compensation was approximately $ 0.61 million and $ 0.59 million, respectively.

Of the current six months expense amount, approximately $ 0.40 million related to employees and approximately $ 0.21 million related to directors and consultants.

Approximately $ 0.51 million of the current six months expense was recorded as operating costs, and approximately $ 0.10 million was recorded as a reduction to other income.

Of the prior year six months expense amount, approximately $ 0.52 million related to employees and approximately $ 0.07 million related to directors and consultants.

Stock Options

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

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

Outstanding at January 1, 2022

Expired/Forfeited

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.

Outstanding at June 30, 2022, and expected to vest

Exercisable at June 30, 2022

On April 20, 2022, the Company granted options to purchase an aggregate of 380,850 shares of common stock to various employees.

The exercise price of the options is $ 1.62 per share, and all options vested immediately on the date of grant.

On April 20, 2022 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 $ 1.62 per share, and 50 % of the options vest on each of April 20, 2023 and April 20, 2024.

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

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

June 30, 2022

On April 26, 2022, the Company granted options to purchase an aggregate of 100,000 shares of common stock to a consultant.

The exercise price of the options is $ 1.58 per share, and all options vested immediately on the date of grant.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $ 0.38 million and $ 0.04 million, respectively.

Compensation expense related to stock options for the current six months and the prior year six months was approximately $ 0.40 million and $ 0.20 million, respectively.

Total unrecognized compensation expense related to unvested stock options at June 30, 2022 was approximately $ 0.15 million and is expected to be recognized over a weighted average period of approximately 1.49 years.

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

Balance at January 1, 2022

Forfeited or Canceled

Balance at March 31, 2022

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

Balance at June 30, 2022

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

Outstanding and exercisable at January 1, 2022

Expired/Forfeited

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 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.

Outstanding and exercisable at June 30, 2022

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

XCEL BRANDS, INC.

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Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

June 30, 2022

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

Outstanding at January 1, 2022

Expired/Forfeited

Outstanding at June 30, 2022

On April 20, 2022, the Company issued an aggregate of 50,000 shares of common stock to non-management directors, which vest evenly over two years , of which 50 % shall vest on April 20, 2023, and 50 % shall vest on April 20, 2024.

On April 20, 2022, the Company issued 20,064 shares of common stock to a consultant, which vested immediately.

On May 31, 2022, the Company issued 65,275 shares of common stock to a consultant in connection with the transaction related to the Isaac Mizrahi Brand (see Note 2);

these shares vested immediately.

On May 31, 2022, the Company issued 33,557 shares of common stock to a key employee, which vested immediately.

Additionally, on April 20, 2022, the Company issued 178,727 shares of common stock to a member of senior management as payment for a performance bonus earned in 2021.

These shares vested immediately.

The Company had previously recognized compensation expense of approximately $ 0.28 million in 2021 to accrue for this performance bonus.

Compensation expense related to stock awards was approximately $ 0.20 million for the current quarter and approximately $ 0.39 million for the prior year quarter.

Compensation expense related to stock awards was approximately $ 0.21 million for the current six months and approximately $ 0.39 million for the prior year six months.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, 2022 was approximately $ 0.11 million and is expected to be recognized over a weighted average period of approximately 1.45 years.

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.

As of June 30, 2022, there were 3,140,909 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.

As of June 30, 2022, there were 9,038,864 shares of common stock reserved for issuance, including 5,897,955 shares reserved for issuance pursuant to unexercised warrants and stock options, and 3,140,909 shares available for award grants under the 2021 Plan.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

Earnings (Loss) Per Share

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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 following table is a reconciliation of the numerator and denominator of the basic and diluted net income (loss) per share computations for the three and six months ended June 30, 2022:

Three Months Ended

Six Months Ended

Net income (loss) attributable to Xcel Brands, Inc.

stockholders (in thousands)

Basic weighted average number of shares outstanding

Effect of warrants

Effect of stock options

Diluted weighted average number of shares outstanding

Basic net income (loss) per share

Diluted net income (loss) per share

As a result of the net loss for the prior year quarter and prior year six months, the Company calculated diluted EPS using basic weighted average shares outstanding for such periods, 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

Six Months Ended

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 %.

The estimated annual effective income tax rate for the current quarter and the prior year quarter was approximately 25 % and 43 %, respectively, resulting in an income tax provision (benefit) of $ 3.18 million and $( 1.35 ) million, respectively.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

June 30, 2022

The estimated annual effective income tax rate for the current six months and the prior year six months was approximately 35 % and 25 %, respectively, resulting in an income tax provision (benefit) of $ 3.18 million and $( 1.48 ) million, respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 10 %, partially offset by the reversal of a valuation allowance that was previously recorded in the first quarter of 2022, which decreased the effective tax rate by approximately 6 %.

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

For the current six months, the federal statutory rate differed from the effective tax rate primarily due to recurring permanent differences, state taxes, and the discrete treatment of stock compensation shortfall, which increased the effective tax rate by approximately 14 %.

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

Related Party Transactions

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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”).

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.

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.

This employment agreement remained in effect through May 31, 2022.

On May 31, 2022, this agreement was transferred to IM Topco as part of the transaction in which the Company sold a majority interest in the Isaac Mizrahi Brand trademarks to a third party (see Note 2 for details).

The term of the employment agreement with Mr.

Mizrahi was to expire on December 31, 2022, subject to earlier termination or extension.

Mizrahi’s annual base salary was $ 1.8 million, $ 2.0 million, and $ 2.1 million per annum during the term of the agreement, subject to adjustment in the event Mr.

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

Mizrahi was 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 and 2022, consisting 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 Revenue 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.

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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.

Mizrahi is required to devote his full business time and attention to the business and affairs of the Company and its subsidiaries;

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.

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.

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.

XCEL BRANDS, INC.

1 unchanged sentence

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

Non-Competition and Non-Solicitation .

During the term of Mr.

June 30, 2022

● “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.

The employment agreement also included severance provisions.

In the event Mr.

Mizrahi’s employment was terminated by the Company without “cause,” or if Mr.

Mizrahi resigned with “good reason,” then Mr.

Mizrahi would have been 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.

Additionally, 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.

5 unchanged sentences

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.

On February 24, 2020, the Company also entered into a services agreement with Laugh Club, an entity wholly-owned by Mr.

Mizrahi, pursuant to which Laugh Club provided 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.

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

This services agreement remained in effect through May 31, 2022.

In addition, on May 31, 2022, all 522,500 unvested shares of restricted stock of the Company held by Mr.

Also on May 31, 2022, the Company issued 33,557 additional shares of common stock of the Company (valued at $ 50,000 ) to Mr.

Mizrahi, which vested immediately, and made a $ 100,000 cash payment to Mr.

IM Topco, LLC

The Company holds a noncontrolling interest in IM Topco, which is accounted for under the equity method of accounting.

On May 31, 2022, the Company entered into a license agreement with IM Topco, pursuant to which IM Topco granted the Company a license to use certain Isaac Mizrahi trademarks on and in connection with the design, manufacture, distribution, sale, and promotion of women’s sportswear products in the United States and Canada during the term of the agreement, in exchange for the payment of royalties in connection therewith.

The initial term of this agreement ends December 31, 2026, and provides guaranteed royalties to IM Topco of $ 400,000 per year.

For the three and six months ended June 30, 2022, the Company recognized royalty expense related to this agreement of $ 31,000 .

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

Commitments and Contingencies

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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.

The Halston Heritage Earn-Out of $ 0.9 million is recorded as a current liability at June 30, 2022 and as a long-term liability at 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.

Management estimates that it is highly unlikely the Company will owe any of this contingent obligation at December 31, 2022.

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

Contingent Obligation – Lori Goldstein Earn-Out

In connection with the April 1, 2021 acquisition of the Lori Goldstein trademarks, 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

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

At June 30, 2022, $ 1.9 million of the balance is recorded as a current liability and $ 4.7 million is recorded as a long-term liability;

at December 31, 2021, the entire balance was recorded as a long-term liability.

Contingent Obligation – Isaac Mizrahi Transaction

In connection with the May 31, 2022 transaction related to the sale of a majority interest in the Isaac Mizrahi Brand (see Note 2), the Company has agreed with WHP that, in the event that IM Topco receives less than $ 13.3 million in aggregate royalties for any four consecutive calendar quarters over a three-year period ending on May 31, 2025, WHP will be entitled to receive from the Company up to $ 16 million, less all amounts of net cash flow distributed to WHP for such period, as an adjustment to the purchase price previously paid by WHP.

Such amount would be payable by the Company in either cash or equity interests in IM Topco held by the Company.

No amount has been recorded in the accompanying condensed consolidated balance sheets related to this contingent obligation, and management believes the likelihood of any such payment is remote.

Legal Proceedings

2 unchanged sentences

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.

XCEL BRANDS, INC.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2022

Coronavirus Pandemic

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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.

COVID-19 (including actions taken by national, state, and local governments in response to COVID-19) has had an unprecedented impact on the U.S.

and global economy.

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

3 unchanged sentences

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.

The initial onset of the pandemic resulted in order cancellations and a decrease in accounts receivable collections, and 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.

1 unchanged sentence

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