PART 1. FINANCIAL INFORMATION


~~ITEM 1.~~	~~FINANCIAL STATEMENTS~~

ITEM 1. FINANCIAL STATEMENTS

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	June 30, 2020		December 31, 2019
	(Unaudited)		(Note 1)
Assets
Current Assets:
Cash and cash equivalents	$	5,461	$	4,641
Accounts receivable, net		6,543		10,622
Inventory		866		899
Prepaid expenses and other current assets		1,775		1,404
Total current assets		14,645		17,566
Property and equipment, net		3,866		3,666
Operating lease right-of-use assets		8,569		9,250
Trademarks and other intangibles, net		108,815		111,095
Restricted cash		1,109		1,109
Other assets		494		505
Total non-current assets		122,853		125,625

Total Assets	$	137,498	$	143,191

Liabilities and Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	2,722	$	4,391
Accrued payroll		527		1,444
Current portion of operating lease obligation		1,873		1,752
Current portion of long-term debt		2,900		2,250
Total current liabilities		8,022		9,837
Long-Term Liabilities:
Long-term portion of operating lease obligation		8,789		9,773
Long-term debt, less current portion		15,231		16,571
Contingent obligation		900		900
Deferred tax liabilities, net		7,310		7,434
Other long-term liabilities		224		224
Total long-term liabilities		32,454		34,902
Total Liabilities		40,476		44,739

Commitments and Contingencies

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 19,231,040 and 18,866,417 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		19		19
Paid-in capital		102,180		101,736
Accumulated deficit		(5,764)		(3,659)
Total Xcel Brands, Inc. stockholders' equity		96,435		98,096
Noncontrolling interest		587		356
Total Equity		97,022		98,452

Total Liabilities and Equity	$	137,498	$	143,191

June 30, 2019 December 31, 2018
(Unaudited) (Note 1)
Assets

Current Assets:

Cash and cash equivalents $ 6,271
$ 8,837
Accounts receivable, net 8,866
11,010
Inventory 875
1,988
Prepaid expenses and other current assets 1,374
2,040
Total current assets 17,386
23,875
Property and equipment, net 3,414
3,202
Operating lease right-of-use assets 9,913
—
Trademarks and other intangibles, net 118,176
108,989
Restricted cash 1,109
1,482
Other assets 769
511
Total non-current assets 133,381
114,184
Total Assets $ 150,767
$ 138,059

Liabilities and Stockholders' Equity

Current Liabilities:

Accounts payable, accrued expenses and other current liabilities $ 2,651
$ 4,868
Accrued payroll 872
2,011
Deferred revenue 284
272
Current portion of accrued rent liability —
690
Current portion of operating lease obligation 1,711
—
Current portion of long-term debt 4,500
5,325
Current portion of long-term debt, contingent obligations —
2,950
Total current liabilities 10,018
16,116
Long-Term Liabilities:
Long-term portion of accrued rent liability —
2,202
Long-term portion of operating lease obligation 10,662
—
Long-term debt, less current portion 17,180
11,300
Deferred tax liabilities, net 9,282
8,139
Other long-term liabilities 224
420
Total long-term liabilities 37,348
22,061
Total Liabilities 47,366
38,177

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 at June 30, 2019 and December 31, 2018, respectively, and 18,976,394 and 18,138,616 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively 19
18
Paid-in capital 101,636
100,097
Retained earnings (accumulated deficit) 1,746
(233 )
Total Stockholders' Equity 103,401
99,882
Total Liabilities and Stockholders' Equity $ 150,767
$ 138,059

See Notes to Unaudited Condensed Consolidated Financial Statements.

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				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Revenues
Net licensing revenue	$	4,501	$	6,803	$	10,142	$	14,666
Net sales		549		2,335		4,435		4,773
Net revenue		5,050		9,138		14,577		19,439
Cost of goods sold (sales)		253		1,767		2,653		3,599
Gross profit		4,797		7,371		11,924		15,840

Operating costs and expenses
Salaries, benefits and employment taxes		2,882		3,848		6,830		7,993
Other design and marketing costs		638		797		1,630		1,555
Other selling, general and administrative expenses		1,627		1,173		3,364		2,763
Stock-based compensation		488		135		731		482
Depreciation and amortization		1,329		1,000		2,632		1,948
Government assistance - Paycheck Protection Program		(1,640)		—		(1,640)		—
Property and equipment impairment		82		—		82		—
Total operating costs and expenses		5,406		6,953		13,629		14,741

Other income
Gain on reduction of contingent obligation		—		2,850		—		2,850
Total other income		—		2,850		—		2,850

Operating (loss) income		(609)		3,268		(1,705)		3,949

Interest and finance expense
Interest expense and other finance charges		299		348		593		638
Loss on extinguishment of debt		—		—		—		189
Total interest and finance expense		299		348		593		827

(Loss) income before income taxes		(908)		2,920		(2,298)		3,122

Income tax provision (benefit)		428		1,068		(124)		1,143

Net (loss) income		(1,336)		1,852		(2,174)		1,979
Less: Net loss attributable to noncontrolling interest		(36)		—		(69)		—
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(1,300)	$	1,852	$	(2,105)	$	1,979

(Loss) earnings per share attributable to Xcel Brands, Inc. common stockholders:
Basic net (loss) income per share:	$	(0.07)	$	0.10	$	(0.11)	$	0.11
Diluted net (loss) income per share:	$	(0.07)	$	0.10	$	(0.11)	$	0.11
Weighted average number of common shares outstanding:
Basic weighted average common shares outstanding		19,132,244		18,976,394		19,001,321		18,770,378
Diluted weighted average common shares outstanding		19,132,244		18,977,051		19,001,321		18,771,053

For the Three Months Ended
June 30, For the Six Months Ended
June 30,
2019 2018 2019 2018
Revenues
Net licensing revenue $ 6,803
$ 8,141
$ 14,666
$ 16,622
Net sales 2,335
346
4,773
631
Net revenue 9,138
8,487
19,439
17,253
Cost of goods sold (sales) 1,767
229
3,599
409
Gross profit 7,371
8,258
15,840
16,844

Operating costs and expenses

Salaries, benefits and employment taxes 3,848
4,121
7,993
8,546
Other design and marketing costs 797
817
1,555
1,555
Other selling, general and administrative expenses 1,173
1,117
2,763
2,410
Stock-based compensation 135
461
482
968
Depreciation and amortization 1,000
456
1,948
867
Total operating costs and expenses 6,953
6,972
14,741
14,346

Other Income
Gain on reduction of contingent obligation 2,850

—

2,850

—
Total other income 2,850

—

2,850

—

Operating income 3,268
1,286
3,949
2,498

Interest and finance expense

Interest expense - term debt 326
234
590
482
Other interest and finance charges 22
32
48
70
Loss on extinguishment of debt —

—

189

—
Total interest and finance expense 348
266
827
552

Income before income taxes 2,920
1,020
3,122
1,946

Income tax provision 1,068
1,133
1,143
1,559

Net income (loss) $ 1,852
$ (113 ) $ 1,979
$ 387

Basic net income (loss) per share: $ 0.10
$ (0.01 ) $ 0.11
$ 0.02

Diluted net income (loss) per share: $ 0.10
$ (0.01 ) $ 0.11
$ 0.02

Basic weighted average common shares outstanding 18,976,394
18,314,775
18,770,378
18,324,130
Diluted weighted average common shares outstanding 18,977,051
18,314,775
18,771,053
18,700,911

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

(in thousands, except share data)


	Xcel Brands, Inc. Stockholders
						Retained
	Common Stock					Earnings
	Number of			Paid-In		(Accumulated		Noncontrolling		Total
	Shares	Amount		Capital		Deficit)		Interest		Equity
Balance as of December 31, 2018	18,138,616	$	18	$	100,097	$	(233)	$	—	$	99,882

Issuance of common stock in connection with the acquisition of Halston Heritage	777,778		1		1,057		—		—		1,058

Compensation expense in connection with stock options and restricted stock	—		—		347		—		—		347

Net income	—		—		—		127		—		127

Balance as of March 31, 2019	18,916,394		19		101,501		(106)		—		101,414

Compensation expense in connection with stock options and restricted stock	—		—		135		—		—		135

Shares issued to employees in connection with restricted stock grants	60,000		—		—		—		—		—

Net income	—		—		—		1,852		—		1,852

Balance as of June 30, 2019	18,976,394	$	19	$	101,636	$	1,746	$	—	$	103,401

Balance as of December 31, 2019	18,866,417	$	19	$	101,736	$	(3,659)	$	356	$	98,452

Compensation expense in connection with stock options and restricted stock	—		—		91		—		—		91

Shares issued to executive in connection with stock grants for bonus payments	336,700		—		220		—		—		220

Shares repurchased from executive in exchange for withholding taxes	(155,556)		—		(102)		—		—		(102)

Net loss	—		—		—		(805)		(33)		(838)

Balance as of March 31, 2020	19,047,561		19		101,945		(4,464)		323		97,823

Compensation expense in connection with stock options and restricted stock	—		—		55		—		—		55

Shares issued to employees in connection with stock grants	270,728		—		265		—		—		265

Shares repurchased from employees in exchange for withholding taxes	(87,249)		—		(85)		—		—		(85)

Additional investment in Longaberger Licensing, LLC by non-controlling interest holder	—		—		—		—		300		300

Net loss	—		—		—		(1,300)		(36)		(1,336)

Balance as of June 30, 2020	19,231,040	$	19	$	102,180	$	(5,764)	$	587	$	97,022

Common Stock
Number of Shares Amount Paid-In Capital Retained Earnings (Accumulated Deficit) Total Stockholders' Equity
Balance as of December 31, 2017 18,318,961
$ 18
$ 98,997
$ (1,321 ) $ 97,694

Compensation expense in connection with stock options and restricted stock —
—
507
—
507

Issuance of shares for accrued stock liability 91,826
—
281
—
281

Shares repurchased including vested restricted stock in exchange for withholding taxes (43,638 ) —
(90 ) —
(90 )

Net income —
—
—
500
500

Balance as of March 31, 2018 18,367,149
18
99,695
(821 ) 98,892

Compensation expense in connection with stock options and restricted stock —
—
461
—
461

Issuance of shares for accrued stock liability 13,594
—
64
—
64

Shares issued to employees in connection with restricted stock grants, net of forfeitures 67,052
—
—
—
—

Shares repurchased including vested restricted stock in exchange for withholding taxes (181,593 ) —
(612 ) —
(612 )

Net loss —
—
—
(113 ) (113 )

Balance as of June 30, 2018 18,266,202
$ 18
$ 99,608
$ (934 ) $ 98,692

Balance as of December 31, 2018 18,138,616
$ 18
$ 100,097
$ (233 ) $ 99,882

Issuance of common stock in connection with the acquisition of Halston Heritage 777,778
1
1,057
—
1,058

Compensation expense in connection with stock options and restricted stock —
—
347
—
347

Net income —
—
—
127
127

Balance as of March 31, 2019 18,916,394
19
101,501
(106 ) 101,414

Compensation expense in connection with stock options and restricted stock —
—
135
—
135

Shares issued to employees in connection with restricted stock grants 60,000
—
—
—
—

Net income —
—
—
1,852
1,852

Balance as of June 30, 2019 18,976,394
$ 19
$ 101,636
$ 1,746
$ 103,401

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	For the Six Months Ended June 30,
	2020		2019
Cash flows from operating activities
Net (loss) income	$	(2,174)	$	1,979
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense		2,632		1,948
Property and equipment impairment		82		—
Amortization of deferred finance costs		50		79
Stock-based compensation		731		482
Amortization of note discount		—		16
Allowance for doubtful accounts		683		(144)
Loss on extinguishment of debt		—		189
Deferred income tax (benefit) provision		(124)		1,143
Gain on reduction of contingent obligation		—		(2,850)
Changes in operating assets and liabilities:
Accounts receivable		3,396		2,289
Inventory		33		1,113
Prepaid expenses and other assets		(59)		(293)
Accounts payable, accrued expenses and other current liabilities		(2,688)		(3,532)
Cash paid in excess of rent expense		(181)		(244)
Other liabilities		—		(196)
Net cash provided by operating activities		2,381		1,979

Cash flows from investing activities
Cash consideration for acquisition of Halston Heritage assets		—		(8,830)
Purchase of property and equipment		(634)		(557)
Net cash used in investing activities		(634)		(9,387)

Cash flows from financing activities
Shares repurchased including vested restricted stock in exchange for withholding taxes		(187)		—
Payment of deferred finance costs		—		(289)
Proceeds from long-term debt		10		7,500
Payment of long-term debt		(750)		(2,742)
Net cash (used in) provided by financing activities		(927)		4,469

Net increase (decrease) in cash, cash equivalents, and restricted cash		820		(2,939)

Cash, cash equivalents, and restricted cash at beginning of period		5,750		10,319

Cash, cash equivalents, and restricted cash at end of period	$	6,570	$	7,380

Reconciliation to amounts on consolidated balance sheets:
Cash and cash equivalents	$	5,461	$	6,271
Restricted cash		1,109		1,109
Total cash, cash equivalents, and restricted cash	$	6,570	$	7,380

Supplemental disclosure of non-cash activities:
Operating lease right-of-use asset	$	—	$	10,409
Operating lease obligation	$	—	$	13,210
Accrued rent offset to operating lease right-of-use assets	$	—	$	2,801
Settlement of seller note through offset to receivable	$	—	$	600
Settlement of contingent obligation through offset to note receivable	$	—	$	100
Issuance of common stock in connection with Halston Heritage assets acquisition	$	—	$	1,058
Contingent obligation related to acquisition of Halston Heritage assets at fair value	$	—	$	900
Liability for equity-based bonuses	$	100	$	—
Amount due from non-controlling interest for capital contribution	$	300	$	—

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	47	$	18
Cash paid during the period for interest	$	811	$	784

For the Six Months Ended June 30,
2019 2018
Cash flows from operating activities

Net income $ 1,979
$ 387
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 1,948
867
Amortization of deferred finance costs 79
87
Stock-based compensation 482
968
Amortization of note discount 16
20
Allowance for doubtful accounts (144 ) —
Loss on extinguishment of debt 189
—
Deferred income tax provision 1,143
1,559
Gain on reduction of contingent obligation (2,850 ) —

Changes in operating assets and liabilities:
Accounts receivable 2,289
(1,544 )
Inventory 1,113
(789 )
Prepaid expenses and other assets (293 ) (48 )
Accounts payable, accrued expenses and other current liabilities (3,544 ) 529
Deferred revenue 12
6
Cash paid in excess of rent expense (244 ) —
Other liabilities (196 ) (80 )
Net cash provided by operating activities 1,979
1,962

Cash flows from investing activities
Cash consideration for acquisition of Halston Heritage assets (8,830 ) —
Purchase of property and equipment (557 ) (1,077 )
Net cash used in investing activities (9,387 ) (1,077 )

Cash flows from financing activities
Shares repurchased including vested restricted stock in exchange for
withholding taxes —
(702 )
Payment of deferred finance costs (289 ) —
Proceeds from long-term debt 7,500
—
Payment of long-term debt (2,742 ) (2,725 )
Net cash provided by (used in) financing activities 4,469
(3,427 )

Net decrease in cash, cash equivalents, and restricted cash (2,939 ) (2,542 )

Cash, cash equivalents, and restricted cash at beginning of period 10,319
11,694

Cash, cash equivalents, and restricted cash at end of period $ 7,380
$ 9,152

Reconciliation to amounts on consolidated balance sheets:
Cash and cash equivalents $ 6,271
$ 7,643
Restricted cash 1,109
1,509
Total cash, cash equivalents, and restricted cash $ 7,380
$ 9,152

Supplemental disclosure of non-cash activities:
Operating lease right-of-use asset $ 10,414
$ —
Operating lease obligation $ 13,215
$ —
Accrued rent offset to operating lease right-of-use assets $ 2,801
$ —
Settlement of seller note through offset to receivable $ 600
$ —
Settlement of contingent obligation through offset to note receivable $ 100
$ 100

Issuance of common stock in connection with Halston Heritage assets acquisition $ 1,058
$ —
Contingent obligation related to acquisition of Halston Heritage assets at fair value $ 900
$ —
Liability for equity-based bonuses $ —
$ (345 )

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 18
$ 182
Cash paid during the period for interest $ 784
$ 512

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

~~(Unaudited)~~


1.	~~Nature of Operations, Background, and Basis of Presentation~~

1. Nature of Operations, Background, and Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, ~~2018~~2019 (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, ~~2018,~~2019, as filed with the SEC on April ~~1, 2019.~~

14, 2020.

The Company is a media and consumer products company engaged in the design, production, marketing, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands. ~~Xcel was founded by Robert W. D'Loren in 2011 with a vision to reimagine shopping, entertainment, and social as one.~~ The Company ~~owns~~has developed a design, production, and ~~manages~~supply chain capability driven by its proprietary integrated technology platform. Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the Judith Ripka brands (the "Ripka Brand"), the Halston brands ~~("Halston Brand"~~(the "Halston Brands"), the C Wonder brands (the "C Wonder Brand"), and other proprietary brands. The Company also manages the ~~Highline Collective~~Longaberger brand ~~pioneering~~(“the Longaberger Brand”) through its 50% ownership interest in Longaberger Licensing, LLC. The Company designs, produces, markets, and distributes products, and in certain cases, licenses its brands to third parties, and generates licensing fees. The Company and its licensees distribute through a ~~ubiquitous~~ubiquitous-channel retail sales strategy, which includes ~~the promotion and sales of products under its brands~~distribution through interactive television, the internet, and traditional brick-and-mortar retail ~~and e-commerce~~ channels. Headquartered in New York City, Xcel is led by an executive team with significant production, merchandising, design, marketing, retailing and licensing experience, and a proven track record of success in elevating branded consumer product companies. With an experienced team of professionals focused on design, production, and digital marketing, Xcel maintains control of product quality and promotion across all of its product categories and distribution channels.

~~Reclassifications~~

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net income, stockholders’ equity, or cash flows as previously reported.

Recently Adopted Accounting Pronouncements

The Company adopted ~~ASU 2016-02~~Accounting Standards Update ("ASU") No. 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” effective January 1, ~~2019, by applying~~2020. This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The adoption of this new guidance ~~under the additional and alternative transition method allowed by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. The standard had a material~~did not have any impact on the Company’s ~~unaudited condensed consolidated balance sheet but did not have an impact on the Company’s unaudited condensed consolidated statement~~results of operations. As of January 1, 2019, the adoption resulted in the recognition of operating lease right-of-use ("ROU") assets of approximately $10.4 million, lease liabilities of approximately $13.2 million,operations, cash flows, and ~~a decrease of approximately $2.8 million in accrued rent.~~financial condition.

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

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

~~(Unaudited)~~

The adoption of the standard related to leases had no impact on cash from or used in operating, financing, or investing activities in the Company's unaudited condensed consolidated statements of cash flows.

~~The Company determines if an arrangement is a lease at inception. Operating leases are included in ROU assets~~

2. Trademarks and ~~operating lease liabilities (current and non-current) in the Company’s unaudited condensed consolidated balance sheets.~~

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company may use the implicit rate when readily determinable. Operating lease ROU assets also include scheduled lease payments made and initial direct costs, and exclude lease incentives and accrued rent. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

~~For real estate leases of office space, the Company accounts for the lease and non-lease components as a single lease component.~~

Variable lease payments that do not depend on an index or rate (such as real estate taxes and building insurance and lessee’s shares thereof), if any, are excluded from lease payments at lease commencement date for initial measurement. Subsequent to initial measurement, these variable payments are recognized when the event determining the amount of variable consideration to be paid occurs.

For leases with a term of 12 months or less, the Company does not recognize lease liabilities and ROU assets, but recognizes the lease payments in net income on a straight-line basis over the respective lease terms.

~~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.~~

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~


2.	~~Trademarks and Other Intangibles~~

Other Intangibles

Trademarks and other intangibles, net consist of the following:


	Weighted
	Average	June 30, 2020
	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		34,613		5,714		28,899
Trademarks (finite-lived)	18 years		38,194		3,129		35,065
Other intellectual property	7 years		762		482		280
Copyrights and other intellectual property	10 years		190		119		71
Total		$	118,259	$	9,444	$	108,815


	Weighted
	Average	December 31, 2019
	Amortization	Gross Carrying		Accumulated		Net Carrying
($ in thousands)	Period	Amount		Amortization		Amount
Trademarks (indefinite-lived)	n/a	$	62,900	$	—	$	62,900
Trademarks (finite-lived)	15 years		16,213		4,560		11,653
Trademarks (finite-lived)	18 years		38,194		2,067		36,127
Other intellectual property	7 years		762		428		334
Copyrights and other intellectual property	10 years		190		109		81
Total		$	118,259	$	7,164	$	111,095

($ in thousands)

Weighted
Average
Amortization
Period
June 30, 2019

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount
Trademarks (indefinite-lived) n/a $ 69,100
$ —
$ 69,100
Trademarks (finite-lived) 15 years 15,463
4,036
11,427
Trademarks (finite-lived) 18 years 37,994
1,007
36,987
Other intellectual property 7 years 762
373
389
Copyrights and other intellectual property 10 years 190
100
90
Customer list 5 years 200
17
183
Total $ 123,709
$ 5,533
$ 118,176

($ in thousands)
Weighted
Average
Amortization
Period
December 31, 2018

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount
Trademarks (indefinite-lived) n/a $ 96,707
$ —
$ 96,707
Trademarks (finite-lived) 15 years 15,463
3,521
11,942
Other intellectual property 7 years 561
321
240
Copyrights and other intellectual property 10 years 190
90
100
Total $ 112,921
$ 3,932
$ 108,989

Amortization expense for intangible assets was approximately $1.14 million for the three-month period ended June 30, 2020 (the "current quarter") and was approximately $0.83 million for the three-month period ended ~~ended~~ June 30, 2019 ~~(the "current quarter") and was approximately $0.28 million for the three-month period ended June 30, 2018~~ (the "prior year quarter"). Amortization expense for intangible assets was approximately $2.28 million for the six-month period ended June 30, 2020 (the “current six months”) and was approximately $1.60 million for the six-month period ended June 30, 2019 (the ~~"current six months") and was approximately $0.57 million for the six-month period ended June 30, 2018 (the "prior~~“prior year six ~~months"~~months”).

Effective January 1, 2020, the Company determined that the Ripka Brand, inclusive of all its trademarks, has a finite life of 15 years, and is amortized on a straight-line basis accordingly. Prior to January 1, 2020, the Ripka Brand trademarks were considered indefinite-lived assets.

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

Effective January 1, 2019, and in consideration of the acquisition of the Halston and Halston Heritage trademarks in February 2019, the Company has determined that the Halston brand, inclusive of all of its trademarks, including H Halston, and H by Halston, have a finite life of 18 years, and are amortized on a straight-line basis accordingly. Prior to January 1, 2019, the H Halston and H by Halston assets were considered indefinite-lived assets.

~~3. Acquisition of Halston Heritage Trademarks~~

On February 11, 2019 (the "Closing Date"), the Company and its wholly owned subsidiary, H Heritage Licensing, LLC, entered into an asset purchase agreement (the "Heritage Asset Purchase Agreement") with the H Company IP, LLC (the "Seller" or "HIP"), and its parent House of Halston LLC ("HOH"), pursuant to which the Company acquired certain assets of HIP, including the "Halston", "Halston Heritage", and "Roy Frowick" trademarks (collectively, the "Halston Heritage Trademarks") and other intellectual property rights relating thereto. Benjamin Malka, a director of the Company, is a 25% equity holder of HOH, and former Chief Executive Officer of HOH.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

~~(Unaudited)~~

Pursuant to the Agreement, at closing, the Company delivered in escrow for HIP or its designees (collectively the “Sellers”) an aggregate of $8.4 million in cash and 777,778 shares of the Company’s common stock valued at $1.1 million (the “Xcel Shares”), subject to a voting agreement and a lock-up agreement relating to the Xcel Shares and a consent and waiver agreement each in form satisfactory to Xcel within three months from the date of the Agreement. Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.

In addition to the closing consideration, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, 2022 based on Excess Net Royalties. “Excess Net Royalties” during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) is equal to (a) the positive amount, if any, of the Net Royalties as calculated for such Royalty Target Year, less the greater of (i) One Million Five Hundred Thousand Dollars ($1.5 million), or (ii) the maximum Net Royalties for any previous Royalty Target Year. “Applicable Percentage” means (a) 50% of the first $10.0 million of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0 million and up to $15.0 million, and (c) 0% of aggregate Excess Net Royalties during the Earn-Out Period in excess of $15.0 million. The Earn-Out Consideration shall be payable in common stock of Xcel (the “Earn-Out Shares”); provided, however, that if the number of Earn-Out Shares, when combined with the number of Xcel Shares issued at the closing, will exceed 4.99% of the aggregate number of shares of Xcel common stock outstanding as of the Closing Date (calculated in accordance with Nasdaq Rule 5635(a)) (the “Xcel Share Limit”), then Xcel may, in its sole and unfettered discretion, elect to (x) pay cash for the Earn-Out Value attributable to the Earn-Out Shares that would exceed the Xcel Share Limit; (y) solicit stockholder approval for the issuance of Earn-Out Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, issue such Earn-Out Shares to HIP; or (z) solicit stockholder approval for the issuance of shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, pay the applicable Earn-Out Consideration with a combination of cash and Earn-Out Shares.

The Halston Heritage Trademark acquisition was accounted for as an asset purchase. The aggregate purchase price has been allocated to the following assets based on the fair value of the assets on the date of acquisition:

($ in thousands)
Allocated to:
Trademarks $ 10,388
Halston archives 200
Customer lists 200
Total acquisition price $ 10,788

The Halston Heritage 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 Halston Heritage Trademarks, archives, and customer lists are amortized on a straight-line basis over their expected useful lives of eighteen, seven, and five years, respectively.

~~The following represents the aggregate purchase price of $10.8 million:~~

($ in thousands, except share amounts)
Cash $ 8,350
Fair value of Common Stock issued (777,778 shares) 1,058
Total direct initial consideration 9,408
Direct transaction expenses 480
Contingent obligation 900
Total consideration $ 10,788

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

As more fully described in Note 6, concurrent with the acquisition of the Halston Heritage Trademarks, the Company entered into an amended loan agreement with BHI (the “Second Amended and Restated Loan and Security Agreement” or the "Xcel Term Loan"). The Xcel Term Loan amended and restated the existing Bank Hapoalim B.M. ("BHI") term loan (the "Amended Loan Agreement" or the "Prior Term Loan"). Immediately prior to the Closing Date, the aggregate principal amount of the Prior Term Loan was $14.5 million. Pursuant to the Xcel Term Loan, the Lenders have extended to Xcel an additional term loan in the amount of $7.5 million, such that, as of the Closing Date, the aggregate outstanding balance of all the Xcel Term Loan was $22.0 million, which amount has been divided into two term loans: (1) a term loan in the amount of $7.3 million, Term Loan A, and (2) a term loan in the amount of $14.7 million, Term Loan B. The proceeds of the additional term loan extended on the Closing Date were used to finance a portion of the Halston Heritage Trademark acquisition described above.


4.	~~Significant Contracts~~

3. Significant Contracts

QVC Agreements

Under the Company’s agreements with QVC, QVC is required to pay the Company fees based primarily on a percentage of its net sales of Isaac Mizrahi, Ripka, and H Halston branded merchandise. QVC royalty revenue represents a significant portion of the Company’s total revenues.

●

Total revenues from QVC totaled $4.04 million and $5.94 ~~million and $6.69~~ million for the current and prior year quarter, respectively, representing approximately 81% and 65% of the Company’s total net revenues for the current and prior year quarter, respectively.

●

Total revenues from QVC totaled $8.74 million and $12.77 million for the current and prior year six months, respectively, representing approximately 60% and 66% of the Company’s total net revenues for the current and prior year six months, respectively.

●

As of June 30, 2020 and December 31, 2019, the Company had receivables from QVC of $3.94 million and $4.33 million, respectively, representing approximately 60% and 41% of the Company’s total receivables, respectively.

4. Allowance for Doubtful Accounts

Accounts receivable are presented on the Company’s condensed consolidated balance sheets net of allowances of $793,000 and $155,000 as of June 30, 2020 and December 31, 2019, respectively. The Company recognized bad debt expense of $472,000 and $0 for the current quarter and prior year quarter, respectively, ~~representing approximately 65%~~ and ~~79%~~recognized bad debt expense of ~~the Company’s total revenues~~$683,000 and $(144,000) for the current ~~and prior year quarter, respectively.~~

~~Total revenues from QVC totaled $12.77 million and $13.48 million for the current~~six months and prior year six months, ~~respectively, representing approximately 66% and 78% of the Company’s total revenues for~~respectively.

Included within these amounts, the current quarter and ~~prior year~~current six months ~~respectively.~~

Asreflect $472,000 and $586,000, respectively, of bad debt expense related to the bankruptcy of a large retail customer due to the novel coronavirus disease pandemic. The total allowance of $586,000 against such customer’s outstanding receivable balance of $1,172,000 million at June 30, ~~2019, and December 31, 2018, the Company had receivables from QVC~~2020 represents management’s best estimate of ~~$5.98 million and $5.68 million, respectively, representing approximately 67% and 52% of the Company’s total receivables, respectively.~~

collectibility, based on information currently available.

5. Leases

The Company has operating leases for its current office, former office, and certain equipment with a term of 12 months or less. The ~~Company's~~Company’s office leases have remaining lease terms of approximately 2 years to 98 years.

Under GAAP, a lessee is generally required to recognize a liability for its obligation to make future lease payments (the lease liability) and a right-of-use (“ROU”) asset representing its right to use the underlying leased asset for the lease term. The Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities on the Company’s condensed consolidated balance sheets. The Company does not recognize lease liabilities and ROU assets for lease terms of 12 months or less, but recognizes such lease payments in net income on a straight-line basis over the lease terms. The Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities on the Company's condensed consolidated balance sheets.

~~ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease.~~

Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ~~The Company may use the implicit rate when readily determinable.~~ Lease terms may include options to extend or terminate the lease when it is reasonably certain

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

that the Company will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

For the current and prior year quarter, lease expense included in selling, general and administrative expenses on the ~~Company's~~Company’s unaudited condensed consolidated statements of operations was $0.4 million. For the current and prior year six months, lease expense included in selling, general and administrative expenses on the ~~Company's~~Company’s unaudited condensed consolidated statements of operations was $0.8 million.

As of June 30, ~~2019,~~2020, the ~~weighted-average~~weighted average remaining operating lease term was ~~7.8~~6.4 years and the ~~weighted-average~~weighted average discount rate for operating leases was 6.3%.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.6 million in the prior year quarter, $0.6 million in the current six months, and $1.2 million in the prior year six months. No such cash payments for operating lease liabilities were made during the current quarter, and ~~current six months ended~~the $0.6 million amount of such payments due to lessors are recorded as accounts payable in the Company’s unaudited condensed consolidated balance sheet at June 30, ~~2019 was $0.6 million and $1.2 million, respectively.~~

2020. The Company intends to settle or otherwise satisfy such obligations in subsequent periods.

As of June 30, ~~2019,~~2020, the maturities of lease liabilities, excluding the aforementioned amounts reflected as accounts payable, were as follows:


($ in thousands)
Remainder of 2020	$	1,212
2021		2,577
2022		1,732
2023		1,552
2024		1,552
After 2024		4,398
Total lease payments		13,023
Less: Discount		2,361
Present value of lease liabilities		10,662
Current portion of lease liabilities		1,873
Non-current portion of lease liabilities	$	8,789

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

($ in thousands) Operating Leases
Remainder of 2019 $ 1,224
2020 2,423
2021 2,577
2022 1,732
2023 1,552
After 2023 5,950
Total lease payments 15,458
Less: Discount 3,085
Present value of lease liabilities 12,373
Current portion of lease liabilities 1,711
Non-current portion of lease liabilities $ 10,662


6.	~~Debt and Contingent Obligations~~

6. Debt

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


	June 30,		December 31,
($ in thousands)	2020		2019
Xcel Term Loan	$	18,250	$	19,000
Unamortized deferred finance costs related to term loan		(129)		(179)
Economic Injury Disaster Loan		10		—
Total		18,131		18,821
Current portion of long-term debt		2,900		2,250
Long-term debt	$	15,231	$	16,571

($ in thousands) June 30,
2019 December 31,
2018
Xcel Term Loan $ 21,000
$ 15,500
Unamortized deferred finance costs related to term loan (220 ) (200 )
IM Seller Note —
742
Ripka Seller Note —
583
Contingent obligation - HH Seller 900
—
Contingent obligation - JR Seller —
100
Contingent obligation - CW Seller —
2,850
Total 21,680
19,575
Current portion of long-term debt (i), (ii) 4,500
8,275
Long-term debt $ 17,180
$ 11,300

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)


~~(i)~~	~~The current portion of long-term debt as of June 30, 2019 consists of $4.50 million related to the Xcel Term Loan.~~


~~(ii)~~	The current portion of long-term debt presented on the Condensed Consolidated Balance Sheet at December 31, 2018 includes (a) $4.0 million related to the Prior Term Loan, (b) $0.74 million related to the IM Seller Note, (c) $2.95 million related to Contingent Obligations, and (d) $0.58 million related to the Ripka Seller Note.

Xcel Term Loan

On February 11, 2019, the Company entered into an amended loan agreement with Bank Hapoalim B.M. (“BHI”), which amended and restated the prior Xcel Term Loan. Immediately prior to February 11, 2019, the aggregate principal amount of the ~~Prior~~prior Xcel Term Loan was $14.5 million. Pursuant to the Xcel Term Loan agreement, the Lenders ~~have~~ extended to Xcel an additional term loan ~~proceeds~~ in the amount of $7.5 million, such that, as of February 11, 2019, the aggregate outstanding balance of all the term loans extended by BHI to Xcel ~~under the Xcel Term Loan~~ was $22.0 million, which amount ~~has been~~was divided under the Xcel Term Loan agreement into two term loans: (1) a term loan in the amount of $7.3 million (“Term Loan A”) and (2) a term loan in the amount of $14.7 million (“Term Loan B” and, together with Term Loan A, the “Term Loans”). ~~The proceeds of the additional term loan were used to finance the Halston Heritage Brands acquisition described in Note 3.~~

The terms and conditions of the Xcel Term Loan resulted in significantly different debt service payment requirements compared with the prior term debt with ~~BHI, which included an increase of $7.5 million in the principal balance, and related changes to the timing and amount of principal payments, as well as changes in the interest rate.~~BHI. Management assessed and determined that this

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

amendment resulted in a loss on extinguishment of debt and recognized a loss of $0.2 million (consisting of unamortized deferred finance costs) during the ~~six-month period ended June 30, 2019.~~prior year quarter. Upon entering into the Xcel Term Loan, Xcel paid an upfront fee in the amount of $0.09 million to BHI.

The Xcel Term Loan also allows that BHI and any other lender party to the Xcel Term Loan (collectively, the “Lenders”) can provide to Xcel a revolving loan facility and a letter of credit facility, the terms of each of which shall be agreed to by Xcel and the Lenders. Amounts advanced under the revolving loan facility (the “Revolving Loans”) will be used for the purpose of consummating acquisitions by Xcel or its subsidiaries that are or become parties to the Xcel Term Loan. Xcel will have the right to convert Revolving Loans to incremental term loans (the “Incremental Term Loans”) in minimum amounts of $5.0 million. The Company has not drawn down any funds under either the revolving loan facility or letter of credit facility.

On April 13, 2020, the Company amended its Second Amended and Restated Loan and Security Agreement with BHI. Under this amendment, the quarterly installment payment due March 31, 2020 was deferred, and the amounts of the quarterly installment payments due throughout the remainder of 2020 were reduced, while the amount of principal to be repaid through variable payments based on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. Further, this amendment permitted Xcel to incur unsecured debt through the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and excludes any associated PPP debt and debt service from the covenant calculations. There were no changes to the total principal balance, interest rate, or maturity date.

On August 18, 2020, the Company further amended its Second Amended and Restated Loan and Security Agreement with BHI. Under this amendment, the amounts of the quarterly installment payments due throughout 2021 were reduced, and the amount of principal to be repaid through variable payments based on excess cash flow was increased. In addition, there were multiple changes and waivers to the various financial covenants. There were no changes to the total principal balance, interest rate, or maturity date.

The Term Loans mature on December 31, 2023; Incremental Term Loans shall mature on the date set forth in the applicable term note; and Revolving Loans and the letter of credit facility shall mature on such date as agreed upon by Xcel and the Lenders. Any letter of credit issued under Xcel Term Loan shall terminate no later than one year following the date of issuance thereof.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

~~Principal on~~

The remaining principal balance of the Xcel Term Loan, Aas amended, outstanding at June 30, 2020 is payable in ~~quarterly~~fixed installments ~~on each~~as set forth in the following table, plus the variable payments as described below:


($ in thousands)
Installment Payment Dates	Amount
September 30, 2020 and December 31, 2020	$	750

March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021	$	700

March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022	$	1,125

March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023	$	1,250

In addition to the fixed installments outlined above, commencing with the fiscal quarter ended March 31, 2021, the Company is required to repay a portion of the Xcel Term Loan in an amount equal to 50% of the excess cash flow for the fiscal quarter, provided that no early termination fee shall be payable with respect to any such payment. Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash principal paid or payable during such period, and (iii) all dividends declared and paid (or which could have been declared and paid) during such period to equity holders of any credit party treated as a disregarded entity for tax purposes. To the extent that the cumulative amount of such variable repayments made is less than $4.45 million as of March 31, ~~June 30, September 30, and December 31 as follows~~:

($ in thousands)
Period Amount
June 30, 2019 – September 30, 2020 $ 1,000

December 31, 2020 $ 1,250

~~Principal on~~2022, any such shortfall must be repaid at that date.

Thus, the aggregate remaining annual scheduled principal payments under the Xcel Term Loan ~~B is payable in quarterly installments on each of March 31, June 30, September 30, and December 31~~are as follows:


	Amount of
($ in thousands)	Principal
Year Ending December 31,	Payment
2020	$	1,500
2021		2,800
2022		8,950
2023		5,000
Total	$	18,250

($ in thousands)
Period Amount
March 31, 2020 – September 30, 2020 $ 250

March 31, 2021 – December 31, 2022 $ 1,125

March 31, 2023 – December 31, 2023 $ 1,250

Xcel has the right to prepay the Term Loans, Incremental Term Loans, Revolving Loans, and obligations with respect to letters of credit and accrued and unpaid interest thereon and to terminate the Lenders’ obligations to make Revolving Loans and issue letters of credit; provided that any prepayment of less than all of the outstanding balances of the Term Loans and Incremental Term Loans shall be applied to the remaining amounts due in inverse order of maturity.

If any Term Loan or any Incremental Term Loan is prepaid on or prior to the third anniversary of the Closing Date (including as a result of an event of default), Xcel shall pay an early termination fee as follows: an amount equal to the principal amount of the Term Loan or Incremental Term Loan, as applicable, being prepaid, multiplied by: (i) two percent (2.00%) if any of Term Loan B or any Incremental Term Loan is prepaid on or before the second anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable; (ii) one percent (1.00%) if any of Term Loan A is prepaid on or before the second anniversary of the Closing Date; (iii) one percent (1.00%) if any of Term Loan B or any Incremental Term Loan is prepaid after the second anniversary of the later of the Closing Date or such Incremental Term Loan was made, as applicable, but on or before the third anniversary of such date; (iv) ~~one half~~one-half of one percent (0.50%) if any of Term Loan A is prepaid after the second anniversary of the Closing Date, but on or before the third anniversary of such date; or (v) zero percent (0.00%), if any Term Loan or any

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

Incremental Term Loan is prepaid after the third anniversary of the later of the Closing Date or the date such Incremental Term Loan was made, as applicable.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

Notwithstanding the above, Xcel ~~is required~~may make a voluntary prepayment of up to ~~repay a portion~~$0.75 million without any early termination fees. Any such prepayment would be applied against the April 30, 2021 fixed installment payment and would be excluded from the computation of ~~the Xcel Term Loan in amount equal to 10% of the~~ excess cash flow for the fiscal year; provided that no early termination fee shall be payable with respect to any such payment. Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash principal paid or payable during such period, and (iii) all dividends declared and paid (or which could have been declared and paid) during such period to equity holders of any credit party treated as a disregarded entity for tax purposes.

flows.

Xcel’s obligations under the Xcel Term Loan are guaranteed by and secured by all of the assets of Xcel and its ~~wholly-owned~~wholly owned subsidiaries, as well as any subsidiary formed or acquired that becomes a credit party to the Xcel Term Loan agreement (the “Guarantors”) and, subject to certain limitations contained in Xcel Term Loan, equity interests of the Guarantors.

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 by the issuance of equity interest of Xcel.

Interest on Term Loan A accrues at a fixed rate of 5.1% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on Term Loan B accrues at a fixed rate of 6.25% per annum and is payable on each day on which the scheduled principal payments on Term Loans are required to be made. Interest on the Revolving Loans will accrue at either the Base Rate or LIBOR, as elected by Xcel, plus a margin to be agreed to by Xcel and the Lenders and will be payable on the first day of each month. Base Rate is defined in the Xcel Term Loan agreement as the greater of (a) BHI’s stated prime rate or (b) 2.00% per annum plus the overnight federal funds rate published by the Federal Reserve Bank of New York. Interest on the Incremental Term Loans will accrue at rates to be agreed to by Xcel and the Lenders and will be payable on each day on which the scheduled principal payments under the applicable note are required to be made.

The Xcel Term Loan contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of Xcel (on a consolidated basis with Xcel and the Guarantors under the Second Amended and Restated Loan and Security Agreement):

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

~~liquid assets of at least $5.0 million at all times;~~

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

●

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

●

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

●

EBITDA shall not be less than $5.0 million for the twelve fiscal month period ended March 31, 2020, $4.8 million for the twelve fiscal month period ending June 30, 2020, and $5.0 million for the twelve month fiscal period ending September 30, 2020;

●

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



Fiscal Quarter End		Fixed Charge Coverage Ratio
~~December 31, 2019, March 31, 2020, June 30, 2020, September 30, 2020~~	~~1.05 to 1.00~~
December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021		1.25 to 1.00
March 31, 2022, and thereafter		1.10 to 1.00

●

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

~~capital expenditures shall not exceed $1.7 million for fiscal year December 31, 2018~~

~~capital expenditures shall not exceed $0.7 million for any fiscal year beginning after December 31, 2018; and~~

~~the leverage ratio for the twelve-fiscal month period ending at the end~~

Table of ~~each fiscal period set forth below shall not exceed the ratio below:~~

Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

●

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


Fiscal Period		Maximum Leverage Ratio
~~December 31, 2018~~	~~2.90 to 1.00~~
~~December 31, 2019, March 31, 2020,~~ June 30, 2020 ~~and~~		4.25 to 1.00
September 30, 2020	~~2.40~~	4.00 to 1.00
December 31, 2020		3.50 to 1.00
March 31, 2021		3.15 to 1.00
June 30, 2021 ~~and~~		3.00 to 1.00
September 30, 2021	~~1.70~~	2.75 to 1.00
December 31, 2021		2.50 to 1.00
March 31, 2022 and each Fiscal Quarter end thereafter		1.50 to 1.00

The Company was in compliance with all applicable covenants as of June 30, ~~2019.~~

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

2020.

For the current and prior year quarter, the Company incurred aggregate interest expense ~~on its Prior Term Debt and Xcel Term Loan~~related to term loan debt of approximately ~~$326,000~~$285,000 and ~~$226,000,~~$326,000, respectively. For the current six months and prior year six months, the Company incurred aggregate interest expense ~~on its Prior Term Debt and Xcel Term Loan~~related to term loan debt of approximately $572,000 and $586,000, ~~and $462,000,~~ respectively.

~~IM Seller Note~~

On September 19, 2016, the Company’s note payable to the sellers of the Isaac Mizrahi business (the “IM Seller Note") was further amended and restated to (1) revise the maturity date to March 31, 2019, (2) require six semi-annual principal and interest installment payments of $750,000, commencing on June 30, 2017 and ending on March 31, 2019, (3) revise the stated The effective interest rate related to ~~2.236% per annum, (4) allow~~term loan debt was approximately 6.6% for optional prepayments at any time at the Company’s discretion without premium or penalty, and (5) require that all payments of principal and interest be made in cash. Management assessed and determined that this amendment represented a debt modification and, accordingly, no gain or loss was recorded.

~~On March 31, 2019, the Company paid the final installment of~~ ~~$750,000~~ ~~under the IM Seller Note.~~

~~For~~ the current ~~and prior year~~ quarter ~~the Company incurred interest expense of approximately $0~~ and ~~$8,000, respectively, under the IM Seller Note. For the~~ current six months, and ~~prior year six months,~~approximately 6.8% for the ~~Company incurred interest expense of approximately $4,000~~ ~~and $20,000, respectively, under the IM Seller Note.~~

~~Ripka Seller Note~~

As of December 31, 2018, the Company had a note payable of approximately $0.58 million relating to the acquisition of the Judith Ripka assets (the "Ripka Seller Note"). Separately, the Company held a promissory note receivable due from the sellers of the Judith Ripka assets (the "Ripka Sellers") with a maturity date of March 31, 2019. On March 31, 2019, the Company agreed to net its note receivable due from the Ripka Sellers of approximately $0.9 million against the Ripka Seller Note of $0.6 million and the remaining Ripka Earn-Out of $0.1 million (see below). As of June 30, 2019, the balance of the Ripka Seller Note was $0.

~~For the current and~~ prior year quarter the Company incurred interest expense of approximately $0 and $10,000, respectively, under the Ripka Seller Note, which consisted solely of amortization of the discount on the Ripka Seller Note. For the current six months and prior year six ~~months,~~months.

PPP Loan

On April 20, 2020, the Company ~~incurred~~executed a promissory note (the “Promissory Note”) with Bank of America, N.A., which provides for an unsecured loan in the amount of $1.806 million (the “PPP Loan”), pursuant to the PPP under the CARES Act. The PPP Loan has a two-year term and bears interest ~~expense~~at a fixed rate of ~~approximately $10,000~~1.0% per annum. Monthly principal and ~~$20,000, respectively.~~

~~Contingent Obligation - JR Seller (Ripka Earn-Out)~~

interest payments are deferred for six months after the date of disbursement. The ~~Ripka Earn-Out~~PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. The PPP Loan was ~~contingent upon~~funded on April 23, 2020.

The PPP also provides that the ~~Ripka Brand achieving at least $6,000,000~~PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act, and later amended by the Paycheck Protection Program Flexibility Act (the "Flexibility Act") signed into law on June 5, 2020. Such forgiveness will be determined, subject to limitations, based on the use of ~~net royalty income from QVC during each~~loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. While management believes that it is probable that the PPP Loan will be forgiven in full, no definite assurance can be provided that forgiveness for any portion of the ~~12-month periods ending~~PPP Loan will be obtained. Management's determination that full forgiveness is probable is based on ~~March 31, 2018~~qualification under the Flexibility Act.

Management evaluated the legal and ~~2019,~~contractual terms associated with the PPP Loan, and ~~was payable~~concluded that, although the legal form of the PPP Loan is debt, the PPP Loan represents in ~~equal cash payments on each~~substance a government grant that is expected to be forgiven. Given the lack of ~~May 15, 2018 and 2019. The Ripka Brand achieved the above-indicated threshold of net royalty income from QVC during the 12-month period ended March 31, 2018, and on May 15, 2018,~~definitive authoritative guidance under GAAP for accounting for government grants, the Company ~~settled~~analogized to accounting guidance under International Accounting Standard 20, “Accounting for Government Grants and Disclosure of Government Assistance.” Under such guidance, once it is probable that the ~~$100,000 earnout due by reducing the principal amount owed by Judith Ripka~~conditions attached to the ~~Company under~~assistance will be met, the earnings impact of government grants is recorded on a ~~promissory note. As of December 31, 2018,~~systematic basis over the ~~balance of~~periods in which the ~~Ripka Earn-Out was $0.1 million. On March 31, 2019,~~entity recognizes as expenses the related costs for which the grants are intended to compensate. Accordingly, the Company ~~satisfied~~recognized approximately $1,640,000 as a reduction to operating expenses in the current quarter. The remaining ~~Ripka Earn-Out balance~~amount of ~~$0.1 million by off-setting the amount against the promissory note receivable. As~~$166,000 as of June 30, ~~2019, the balance of the Ripka Earn-Outwas $0.~~

~~Contingent Obligations - CW Seller (C Wonder Earn-Out)~~

In connection with the purchase of the C Wonder Brand, the Company agreed to pay the seller additional consideration (the “C Wonder Earn-Out”), which would be payable, if at all, in cash or shares of common stock of the Company, at the Company’s sole discretion, after June 30, 2019, with a value based on the royalties related directly to the assets the Company acquired pursuant to the purchase agreement. The value of the earn-out was calculated as the positive amount, if any, of (i) two times (A) the maximum net royalties as calculated for any single 12-month period commencing on July 1 and ending on June 30 between the closing date and June 30, 2019 (each, a “Royalty Target Year”) less (B) $4,000,000, plus (ii) two times the maximum royalty determined based on a percentage of retail and wholesale sales of C Wonder branded products by the Company as calculated for any single Royalty Target Year. The C Wonder Earn-Out of $2.85 million was recorded in the current portion of long-term debt in the accompanying condensed consolidated balance sheet as of December 31, 2018.

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

Under the applicable accounting guidance, the Company was required to carry such contingent liability balance on its consolidated balance sheet until the measurement period of the earn-out expired and all related contingencies had been resolved. The final Royalty Target Year ended on June 30, 2019, and the seller ultimately did not earn any additional consideration based on the formula set forth above. As such, during the current quarter, the Company recorded a $2.85 million gain on the reduction of contingent obligations in the accompanying condensed consolidated statements of operations. As of June 30, 2019, the balance of the C Wonder Earn-Out was $0.

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

In connection with the February 11, 2019 purchase of the Halston Heritage Trademarks from HIP, the Company agreed to pay HIP additional consideration (the “Halston Heritage Earn-Out”) (see Note 3). The Halston Heritage Earn-Out of $0.9 million2020 is recorded as ~~long-term debt at June 30, 2019 in the accompanying condensed consolidated balance sheet, based on the difference between the fair value of the acquired assets of the Halston Heritage Trademarks~~a deferred credit within accounts payable, accrued expense and ~~the total consideration paid. In accordance with ASC Topic 480, the Halston Heritage Earn-Out obligation is treated as a liability~~other current liabilities in the accompanying condensed consolidated balance sheets, ~~because~~and will be recognized

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

as a reduction to operating expenses in the ~~variable number~~quarter ending September 30, 2020. No interest expense related to the PPP Loan has been recorded in the Company’s unaudited condensed consolidated financial statements.

Economic Injury Disaster Loan

On May 4, 2020, the Company received a $10,000 loan through the U.S. Small Business Administration’s disaster assistance program. This loan has a thirty-year term and bears interest at a fixed rate of ~~shares payable under the agreement.~~


7.	~~Stockholders’ Equity~~

3.75% per annum.

7.Stockholders’ Equity

2011 Equity Incentive Plan

The Company’s 2011 Equity Incentive Plan, as amended and restated (the “Plan”), is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 13,000,000 shares of common stock are eligible for issuance under the Plan. The Plan provides for the grant of any or all of the following types of awards: stock options, restricted stock, deferred stock, stock appreciation rights, and other stock-based awards. The Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board.

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

The fair value of options and warrants is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The risk-free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, and expected life is based on the estimated average of the life of options and warrants using the simplified method. The Company utilizes the simplified method to determine the expected life of the options and warrants due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

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

The Company accounts for non-employee awards in accordance with ASU 2018-07, “Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment ~~Accounting”.~~Accounting.” Such awards are measured at the grant-date fair value of the equity instruments to be issued, and the Company recognizes compensation ~~expense~~cost for ~~such awards is recognized in~~grants to non-employees on a straight-line basis over the ~~same~~ period ~~as if cash had been paid for~~of the ~~related goods or services rendered.~~

grant.

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

until the time the performance obligation is satisfied.

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

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

~~(Unaudited)~~

Stock Options

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

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


				Weighted
				Average
		Weighted		Remaining
		Average		Contractual	Aggregate
	Number of	Exercise		Life	Intrinsic
	Options	Price		(in Years)	Value
Outstanding at January 1, 2020	7,222,625	$	3.33	5.82	$	—
Granted	443,500		1.47
Canceled	—		—
Exercised	—		—
Expired/Forfeited	(126,000)		1.81
Outstanding at June 30, 2020, and expected to vest	7,540,125	$	3.32	5.31	$	—
Exercisable at June 30, 2020	2,939,625	$	5.04	1.62	$	—

On January 1, ~~2019,~~2020, the Company granted options to purchase ~~250,000~~5,000 shares of stock to a board observer. The exercise price of the options is $4.00 per share, and 50% of the options vest on each of January 1, 2021 and January 1, 2022.

On January 31, 2020, the Company granted options to purchase 75,000 shares of stock to a consultant. The exercise price of the options is $1.57 per share, and all options vested immediately on the date of grant.

On February 28, 2020, the Company granted options to purchase 50,000 shares of common stock to ~~a certain key~~an employee. The exercise price is ~~$3.00~~$1.40 per share, and the vesting of such options is dependent upon the Company achieving certain 12-month sales targets through December 31, 2021.

On ~~February 27, 2019,~~March 13, 2020, the Company granted options to purchase 2,578,947 shares of common stock to Robert D’Loren, the Company’s Chief Executive Officer. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 736,842 shares occur if the Target Prices are equal to or greater than $3.00 per share; 626,316 shares vest if the Target Price is equal to or greater than $5.00 per share; 515,789 shares vest if the Target Price is equal to or greater than $7.00 per share; 405,263 shares vest if the Target Price is equal to or greater than $9.00 per share; and 294,737 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of June 30, 2019, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.

On February 27, 2019, the Company granted options to purchase 552,632 shares of common stock to James Haran, the Company’s Chief Financial Officer. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 157,895 shares occur if the Target Prices are equal to or greater than $3.00 per share; 134,211 shares vest if the Target Price is equal to or greater than $5.00 per share; 110,526 shares vest if the Target Price is equal to or greater than $7.00 per share; 86,842 shares vest if the Target Price is equal to or greater than $9.00 per share; and 63,158 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of June 30, 2019, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.

On February 27, 2019, the Company granted options to purchase 368,421 shares of common stock to Seth Burroughs, an officer of the Company. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 105,263 shares occur if the Target Prices are equal to or greater than $3.00 per share; 89,474 shares vest if the Target Price is equal to or greater than $5.00 per share; 73,684 shares vest if the Target Price is equal to or greater than $7.00 per share; 57,895 shares vest if the Target Price is equal to or greater than $9.00; and 42,105 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of June 30, 2019, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.

On March 13, 2019, the Company granted options to purchase an aggregate of 154,000 shares of common stock to various employees. The exercise price of the options is $1.73 per share, and all options vested immediately on the date of grant.

~~On March 15, 2019, the Company granted options to purchase an aggregate of~~ 50,000 shares of common stock to a certain key employee. The exercise price of the options is $5.50 per share, and all options vested immediately on the date of grant.

On ~~April 1, 2019,~~March 31, 2020, the Company granted options to purchase an aggregate of 150,000 shares of common stock to non-management directors. The exercise price of the options is $1.70 per share, and 50% of the options vest on each of April 1, 2020 and April 1, 2021.

On April 15, 2019, the Company granted options to purchase an aggregate of 24,000 shares of common stock to certain employees. The exercise price of the options is $1.40 per share, and 50% of the options vest on each of April 15, 2020 and April 15, 2021.

~~On May 1, 2019, the Company granted options to purchase an aggregate of 10,000~~50,000 shares of common stock to an employee. The exercise price of the options ~~if $1.38~~is $0.61 per share, and one-third of the options shall vest on each of March 31, 2021, March 31, 2021, and March 31, 2022.

On April 1, 2020, the Company granted options to purchase an aggregate of 200,000 shares of commons stock to non-management directors. The exercise price of the options is $0.50 per share, and 50% of the options shall vest on each of ~~May~~April 1, 2021 and April 1, 2022.

On April 15, 2020, the Company granted options to purchase 13,500 shares of common stock to a consultant. The exercise price of the options is $3.00 per share. One-third of the options vested on June 30, 2020, and ~~May 1, 2021.~~

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

~~Table~~shall vest on each of ~~Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June~~September 30, ~~2019~~

~~(Unaudited)~~

Number of
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life
(in Years)

Aggregate
Intrinsic
Value
Outstanding at January 1, 2019 3,257,875
$ 5.44
3.19 $ —
Granted 4,138,000
1.84

Canceled —
—

Exercised —
—

Expired/Forfeited (194,250 ) 5.29

Outstanding at June 30, 2019, and expected to vest 7,201,625
$ 3.38
6.28 $ —
Exercisable at June 30, 2019 2,620,125
$ 5.23
2.35 $ —

2020 and December 31, 2020.

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately ~~$73,000~~$45,000 and ~~$268,000,~~$73,000, respectively. Compensation expense related to stock options for the current six months and prior year six months was approximately $113,000 and $316,000, ~~and $548,000,~~ respectively.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

Total unrecognized compensation expense related to unvested stock options at June 30, ~~2019~~2020 amounts to approximately ~~$449,000~~$250,000 and is expected to be recognized over a weighted average period of approximately ~~2.14 years~~1.50 years.

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


		Weighted
		Average
	Number of	Grant Date
	Options	Fair Value
Balance at January 1, 2020	4,551,500	$	0.18
Granted	443,500		0.13
Vested	(279,500)		0.68
Forfeited or Canceled	(115,000)		0.34
Balance at June 30, 2020	4,600,500	$	0.14

Number of
Options

Weighted
Average
Grant Date
Fair Value
Balance at January 1, 2019 1,481,079
$ 1.23
Granted 4,138,000
0.02
Vested (969,914 ) 1.06
Forfeited or Canceled (67,665 ) 0.99
Balance at June 30, 2019 4,581,500
$ 0.18

Warrants

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

A summary of the Company’s warrants activity for the current six months 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, 2020	579,815	$	4.63	2.32	$	—
Granted	—		—
Canceled	—		—
Exercised	—		—
Expired/Forfeited	—		—
Outstanding and exercisable at June 30, 2020	579,815	$	4.63	1.81	$	—

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

Number of
Warrants

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life
(in Years)

Aggregate
Intrinsic
Value
Outstanding and exercisable at January 1, 2019 1,214,815
$ 9.32
1.66 $ —
Granted —
—

Canceled —
—

Exercised —
—

Expired/Forfeited —
—

Outstanding and exercisable at June 30, 2019 1,214,815
$ 9.32
1.16 $ —

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

~~(Unaudited)~~

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

Stock Awards

On February 27, 2019, the Company entered into a two-year employment agreement with a key employee which includes a performance stock bonus of up to $90,000 for each of the years ended December 31, 2019 and 2020. The performance stock bonus is earned upon the Company achieving certain sales targets.

On April 1, 2019, the Company issued an aggregate of 60,000 shares of stock to certain non-management directors, which will vest evenly over two years, whereby 50% shall vest on April 1, 2020, and 50% shall vest on April 1, 2021.

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


		Weighted
	Number of	Average
	Restricted	Grant Date
	Shares	Fair Value
Outstanding at January 1, 2020	1,230,623	$	4.33
Granted	607,428		0.80
Canceled	—		—
Vested	(1,057,218)		2.47
Expired/Forfeited	—		—
Outstanding at June 30, 2020	780,833	$	4.09

Number of
Restricted
Shares

Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2019 1,460,210
$ 4.82
Granted 60,000
1.70
Canceled —
—
Vested (41,000 ) 6.54
Expired/Forfeited —
—
Outstanding at June 30, 2019 1,479,210
$ 4.65

On March 30, 2020, the Company issued 336,700 shares of stock to a member of senior management as payment for a performance bonus earned in 2019. These shares vested immediately.

On May 20, 2020, the Company issued an aggregate of 270,728 shares of stock to its employees. These shares vested immediately. The Company recognized approximately $265,000 of compensation expense in the current quarter and current six months related to this grant.

Compensation expense related to restricted stock grants for the current and prior year quarter was approximately ~~$62,000~~$10,000 and ~~$193,000,~~$104,000, respectively. Compensation expense related to restricted stock grants for the current six months and prior year six months was approximately $33,000 and $166,000, ~~and $420,000,~~ respectively.

Total unrecognized compensation expense related to unvested restricted stock grants at June 30, ~~2019~~2020 amounts to approximately ~~$191,000~~$32,000 and is expected to be recognized over a weighted average period of approximately ~~1.22~~0.75 years.

The Company also recognized approximately $168,000 and $320,000 of compensation expense in the current quarter and current six months related to certain senior management bonuses payable in stock in 2021.

Shares Available Under the Company’s 2011 Equity Incentive Plan

As of June 30, ~~2019,~~2020, there were ~~1,810,199~~1,218,670 shares of common stock available for issuance under the Plan.

~~Table of Contents~~

~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~

Shares Reserved for Issuance

As of June 30, ~~2019,~~2020, there were ~~10,226,639~~9,338,610 shares of common stock reserved for issuance pursuant to unexercised warrants and stock options, or available for issuance under the Plan.

Dividends

The Company has not paid any dividends to date.

Table of Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)


8.	~~Earnings Per Share~~

8. Earnings Per Share

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2020	2019	2020	2019
Basic	19,132,244	18,976,394	19,001,321	18,770,378
Effect of exercise of warrants	—	657	—	675
Diluted	19,132,244	18,977,051	19,001,321	18,771,053

Three Months Ended
June 30, Six Months Ended June 30,
2019 2018 2019
2018
Basic 18,976,394
18,314,775
18,770,378

18,324,130
Effect of exercise of warrants 657
—
675

364,070
Effect of exercise of stock options —
—
—

12,711
Diluted 18,977,051
18,314,775
18,771,053

18,700,911

As a result of the net loss presented for the current quarter and current six months, the Company calculated diluted earnings per share using basic weighted average shares outstanding for such period, as utilizing diluted shares would be anti-dilutive to loss per share.

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2020	2019	2020	2019
Stock options and warrants	8,119,940	8,408,386	8,119,940	7,124,005

Three Months Ended
June 30, Six Months Ended June 30,
2019 2018 2019
2018
Stock options and warrants 8,408,386
5,195,410
7,124,005

4,664,917


9.	~~Income Tax~~

9. Income Tax

The effective income tax rate for the current quarter and the prior year quarter was approximately ~~37%~~-49% and ~~111%~~37%, respectively, resulting in an income tax (benefit) provision of $0.43 million and $1.07 million, ~~and $1.13 million,~~ respectively.

The effective income tax rate for the current six months and ~~the~~ prior year six months was approximately ~~37%~~5% and ~~80%~~37%, respectively, resulting in an income tax (benefit) provision of $(0.12) million and $1.14 million, ~~and $1.56 million,~~ respectively.

For the current quarter, the federal statutory rate differed from the effective tax rate primarily due to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effective rate by approximately 41%. The effective tax rate was also attributable to state taxes and recurring permanent differences, which decreased the effective tax rate by approximately 2% and 27%, respectively. The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act; this item increased the effective rate by approximately 3%.

For the prior year quarter, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately ~~9.00%~~9% and ~~6.00%~~6%, respectively.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

approximately 8%, respectively. The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act; this item increased the effective rate by approximately 4%.

For the prior year six months, the federal statutory rate differed from the effective tax rate primarily due to state taxes and recurring permanent differences, which increased the effective tax rate by approximately ~~9.00%~~9% and ~~6.00%~~6%, respectively.

On March 27, 2020, the ~~prior year periods,~~CARES Act was enacted and signed into law. The CARES Act includes certain provisions impacting businesses’ income taxes related to 2018, 2019, and 2020. Some of the ~~effective~~significant tax ~~rate was primarily attributable~~law changes are to increase the ~~tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item~~limitation on deductible business interest expense for ~~tax purposes. This item increased the effective rate by 56%~~2019 and 2020, allow for the ~~prior year quarter and 32%~~five-year carryback of net operating losses for 2018-2020, suspend the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020, provide for the ~~prior year six months.~~acceleration of depreciation expense from 2018 and forward on qualified improvement property, and accelerate the ability to claim refunds of AMT credit carryforwards. The ~~effective~~Company is required to recognize the effect of tax ~~rate~~law changes on its financial statements in the period in which the law was ~~also attributable~~enacted. At this time, the Company may avail itself of the ability to ~~recurring permanent differences. Based on the amount~~carry back net operating losses generated in 2018 and 2019 tax years for five years, resulting in an estimated income statement benefit of ~~income before income taxes compared to the recurring permanent differences, the effective rate increased by 14% for the prior year quarter~~$98,000 and ~~by 31% for the prior year six months.~~tax refund receivable of $203,000.

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XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

~~(Unaudited)~~

The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. The income tax effects of changes in tax laws are recognized in the period when enacted. The Act provides for numerous significant tax law changes and modifications with varying effective dates, which include reducing the U.S. federal corporate income tax rate from a maximum of 35% to 21%, creating a territorial tax system (with a one-time mandatory repatriation tax on previously deferred foreign earnings), broadening the tax base, and allowing for immediate capital expensing of certain qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.

In response to the enactment of the Act in late 2017, the U. S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment. As of December 31, 2018, the Company finalized its accounting for the income tax effects of the Act and had no change to its original estimates.

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~~XCEL BRANDS, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~June 30, 2019~~

~~(Unaudited)~~


~~10.~~	~~Related Party Transactions~~

10. Related Party Transactions

Benjamin Malka

Concurrent with the acquisition of the H Halston Brand on December 22, 2014, the Company and The H Company IP, LLC (“HIP”) entered into a license agreement (the “HIP License Agreement”), which was subsequently amended September 1, 2015.

Benjamin Malka was a director of the Company from June 2014 through September 2019. Mr. Malka is also a 25% equity holder of ~~HIP’s parent company,~~ House of Halston LLC (“HOH”), and is the former Chief Executive Officer of HOH.

~~Through October 26, 2018,~~ HOH is the parent company of the H Company IP, LLC (“HIP”).

On February 11, 2019, the Company ~~was negotiating proposed new arrangements~~ and ~~operated under those terms as~~its wholly owned subsidiary, H Heritage Licensing, LLC, entered into an ~~at-will license as set forth below:~~

~~The~~asset purchase agreement (the "Heritage Asset Purchase Agreement") with HIP ~~Trademark Usage~~ and ~~Royalty Participation~~HOH, pursuant to which the Company acquired certain assets of HIP, including the "Halston," "Halston Heritage," and "Roy Frowick" trademarks (collectively, the "Halston Heritage Trademarks") and other intellectual property rights relating thereto.

Pursuant to the Heritage Asset Purchase Agreement, ~~had~~at closing, the Company delivered in escrow for HIP or its designees (collectively, the “Sellers”) an ~~initial term that expired on~~aggregate of $8.4 million in cash and 777,778 shares of the Company’s common stock valued at $1.1 million (the “Xcel Shares”), subject to a voting agreement and a lock-up agreement relating to the Xcel Shares and a consent and waiver agreement each in form satisfactory to Xcel within three months from the date of the Heritage Asset Purchase Agreement. Such agreements were executed and delivered to Xcel, and the Xcel Shares were issued and delivered to the Sellers.

In addition to the closing considerations, HIP is eligible to earn up to an aggregate of $6.0 million (the “Earn-Out Value”) through December 31, ~~2020 unless sooner terminated~~2022 based on Excess Net Royalties. “Excess Net Royalties” during any calendar year for 2019 through 2022 (each, a “Royalty Target Year”) is equal to (a) the positive amount, if any, of the Net Royalties as calculated for such Royalty Target Year, less the greater of (i) One Million Five Hundred Thousand Dollars ($1.5 million), or ~~renewed, and Xcel shall pay to HIP: (i)~~(ii) the maximum Net Royalties for any previous Royalty Target Year. “Applicable Percentage” means (a) 50% of the first $10.0 million of Excess Net Royalties during the Earn-Out Period, (b) 20% of aggregate Excess Net Royalties during the Earn-Out Period greater than $10.0 million and up to $15.0 million and (c) 0% of aggregate Excess Net Royalties during the Earn-Out Period in excess ~~H Halston Royalty paid to~~of $15.0 million. The Earn-Out Consideration shall be payable in common stock of Xcel ~~under~~(the “Earn-Out Shares”); provided, however, that if the ~~DRT Licenses and any other third party licenses that~~number of Earn-Out Shares, when combined with the number of Xcel ~~may enter into; (ii)25%~~Shares issued at the Closing Date, will exceed 4.99% of the excess developed brand royalty paid to Xcel for the Highline Collective Brand under the DRT Licenses, and 20% of the excess developed brand royalty paid to Xcel for any subsequent developed brand under the DRT Licenses, and (iii) 10% of the excess private label brand royalty paid to Xcel under the DRT Licenses and during the first term only of the DRT Licenses. Additionally, Xcel has the right, but not the obligation, at any time after January 31, 2023, to terminate the obligations under points (ii) and (iii) above by paying to HIP an amount equal to four times the sum of the developed brand credits and private label credits for the contract year ending on January 31, 2023 (the "Buy Out Payment''). The Buy-Out Payment was payable by Xcel and at Xcel's sole discretion either (a) in cash, or (b) in aaggregate number of ~~common~~ shares of Xcel ~~calculated based~~common stock outstanding as of the Closing Date (calculated in accordance with Nasdaq Rule 5635(a)) (the “Xcel Share Limit”), then Xcel may, in its sole and unfettered discretion, elect to (x) pay cash for the Earn-Out Value attributable to the Earn-Out Shares that would exceed the Xcel Share Limit; (y) solicit stockholder approval for the issuance of Earn-Out Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, issue such Earn-Out Shares to HIP; or (z) solicit stockholder approval for the issuance of Shares in excess of the Xcel Share Limit in accordance with Nasdaq Rule 5635(a)(2) and, if such stockholder approval is obtained, pay the applicable Earn-Out Consideration with a combination of cash and Earn-Out Shares.

Robert W. D’Loren

Jennifer D’Loren is the wife of Robert W. D’Loren, the Company’s Chief Executive Officer and Chairman of the Board, and is employed by the Company. Mrs. D’Loren brings vast experience in project management and implementation of financial IT solutions. During the past two years, Mrs. D’Loren has worked on the ~~amount~~implementation of the ~~Buy-Out Payment divided by the average closing price for common shares~~Company’s ERP system. Mrs. D’Loren received compensation of ~~Xcel on a national exchange for the preceding five trading days, subject to a minimum price for common shares of Xcel of $7.00 per common share.~~

~~A license~~$33,000 and supply agreement with the Halston Operating Company, LLC (“HOC”), a subsidiary of HOH, with an initial term ending on January 31, 2022, subject to renewal. Under the HOC at-will license and supply agreement, HOC shall provide licensed products for sale to pre-approved retailers, including HBC and Dillard’s, and was also responsible for overseeing the visual merchandising and in-store retail environments for such approved retailers, as well as for training and oversight of any retail staff responsible for selling the licensed products within HBC and Dillard’s, as reasonably agreed upon between HOC and HBC and Dillard’s. The HOC at-will license and supply agreement provides for, among other things, design fees of $1.2 million for the period from July 1, 2017 through December 31, 2018, subsequent design fees of $2.4 million for the contractual yearly periods ending on January 31, 2019, and on December 31, 2020, 2021, and 2022, respectively, and sales-based royalties on the categories of products licensed under the agreement and the contractual year of payment.

Effective October 26, 2018, the Company and HOH terminated the HIP License Agreement including all amendments, and the HIP Sublicense Agreement. In addition, the at-will license was terminated and no longer in effect as of October 26, 2018.

~~Under the at-will license, the Company recorded approximately $0 and $0.70 million of revenue from HOC~~$44,000 for the current quarter and ~~the~~ prior year quarter, respectively. ~~The Company recorded approximately $0~~Mrs. D’Loren received compensation of $70,000 and ~~$1.30 million of revenue from HOC~~$83,000 for the current six months and prior year six months, respectively. ~~The Company had a receivable balance~~

Table of ~~$0 and $1.5 million due from HOC as of~~ Contents

XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, ~~2019~~2020

(Unaudited)

11. Commitments and ~~December 31, 2018, respectively.~~

OnContingencies

Contingent Obligation

In connection with the February 11, 2019 ~~(the "Closing Date"), the Company and its wholly owned subsidiary, H Heritage Licensing, LLC, completed the acquisition~~purchase of the Halston Heritage ~~Trademarks.~~Trademarks from 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 June 30, 2020 and December 31, 2019 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.

Coronavirus Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic, which continues to spread throughout the U.S. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis.

The impacts of the current COVID-19 pandemic are broad reaching and are having an impact on the Company’s licensing and wholesale businesses. The COVID-19 pandemic is impacting the Company’s supply chain as most of the Company’s products are manufactured in China, Thailand, and other places around the world affected by this event. Temporary factory closures and the pace of workers returning to work have impacted contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner. The outbreak is also impacting distribution and logistics providers' ability to operate in the normal course of business. Further, the pandemic has resulted in a sudden and continuing decrease in sales for many of the Company’s products, resulting in order cancellations.

Due to the COVID-19 outbreak, there is significant uncertainty surrounding the potential 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.

12. Subsequent Events

On August 6, 2020, the Company entered into an assignment and assumption agreement with the landlord and subtenant at its former office location at 475 Tenth Avenue, New York, NY. Under the terms of this agreement, in exchange for certain consideration totaling approximately $887,000, the landlord agreed to release the Company from all future obligations under the lease effective as of August 1, 2020, and all of the Company’s rights, title, and interest in and to the lease at 475 Tenth Avenue was assigned to the current subtenant in place.

Table of ~~Halston Heritage Trademarks".~~Contents


~~ITEM 2.~~	~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this report are forward-looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks are detailed in the Risk Section of our Form 10-K for the fiscal year ended December 31, ~~2018.~~2019. The words “believe,” “anticipate,” “expect,” “continue,” “estimate,” “appear,” “suggest,” “goal,” “potential,” “predicts,” “seek,” “will,” “confident,” “project,” “provide,” “plan,” “likely,” “future,” “ongoing,” “intend,” “may,” “should,” “would,” “could,” “guidance,” and similar expressions identify forward-looking statements.

Overview

Xcel Brands, Inc. (“Xcel,” the “Company,” “we,” “us,” or “our”) is a media and consumer products company engaged in the design, production, marketing, wholesale distribution, and direct-to-consumer sales of branded apparel, footwear, accessories, jewelry, home goods and other consumer products, and the acquisition of dynamic consumer lifestyle brands. Xcel was founded by Robert W. ~~D'Loren~~D’Loren in 2011 with a vision to reimagine shopping, entertainment, and social as one. The Company owns and manages the Isaac Mizrahi brands (the "Isaac Mizrahi Brand"), the Judith Ripka brands (the "Ripka Brand"), the Halston brands ("Halston Brand"), and the C Wonder brands (the "C Wonder ~~Brand"~~Brand”),. The Company also owns and manages the ~~Highline Collective~~Longaberger brand ~~pioneering~~(the “Longaberger Brand”) through its controlling interest in Longaberger Licensing, LLC. The Company and its licensees distribute through a ubiquitous channel retail sales strategy which includes ~~the promotion and sales of products under its brands~~distribution through interactive television, ~~internet,~~the Internet and e-commerce, and traditional brick-and-mortar retail ~~and e-commerce~~ channels. Headquartered in New York City, Xcel is led by an executive team with significant production, merchandising, design, marketing, retailing, and licensing experience, and a proven track record of success in elevating branded consumer product companies. With an experienced team of professionals focused on design, production, and digital marketing, Xcel maintains control of product quality and promotion across all of its product categories and distribution channels.

~~We continue to expand our wholesale and direct-to-consumer businesses.~~

Our objective is to build a diversified portfolio of lifestyle consumer brands through organic growth and the strategic acquisition of new brands. To grow our brands, we are focused on following primary strategies:

●

distribution and/or licensing of our brands for sale through interactive television (i.e. QVC, The Shopping Channel) whereby we design, manage production, merchandise the shows, and manage the on-air talent;

●

licensing our brands to manufacturers and retailers for promotion and distribution through e-commerce, social commerce, and traditional brick-and-mortar retail channels whereby we provide certain design services and, in certain cases, manage supply and merchandising;

●

wholesale distribution of our brands to retailers that sell to the end consumer;

●

distribution of our brands through our e-commerce sites directly to the end consumer; and

●

quickly integrate additional consumer brands into our operating platform and leverage our design, production, and marketing capabilities, and distribution relationships.

~~distribution of our brands to retailers that sell to the end consumer (wholesale);~~

~~distribution of our brands through our e-commerce site directly to the end consumer;~~

~~licensing our brands for distribution through interactive television (i.e. QVC, The Shopping Channel) whereby we design, manage production, merchandise the shows, and manage the on-air talent;~~

~~quickly integrate additional brands into our platform and leverage our design, production and marketing capabilities, and distribution relationships.~~

We believe that ~~we offer~~Xcel offers a unique value proposition to our retail and direct-to-consumer customers, and our licensees for the following reasons:

●

our management team, including our officers’ and directors’ experience in, and relationships within the industry;

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~~our management team, including our officers’ and directors’ experience in, and relationships within the industry;~~

●

our design, production, sales, marketing, and supply chain and integrated technology platform that enables us to design and distribute trend-right product; and

●

our significant media and internet presence and distribution.

~~our fast-to-market supply chain and integrated technology platform enables us to design and distribute trend-right product; and~~

~~our operating strategy, significant media and internet presence, and distribution network.~~

We believe that our strategy distinguishes us from other ~~consumer product wholesale companies and~~ brand management companies that rely primarily on their licensees for design, production, and distribution, and enables us to leverage the media reach of our interactive television partners, including through television, digital, and social media, to drive sales of products under our brands across multiple distribution channels.

~~Our vision is intended to reimagine shopping, entertainment, and social as one.~~ By leveraging digital and social media content across all distribution channels, we seek to drive consumer engagement and generate retail sales across our brands. Our strong

relationships with leading retailers and interactive television companies and cable networks enable us to reach consumers in over ~~400~~380 million homes worldwide and hundreds of millions of social media followers.

We believe our ~~ubiquitous sales strategy~~design, production and supply chain platform provides significant competitive advantages compared with traditional wholesale apparel companies that design, manufacture, and distribute products. We focus on our core competencies of design, integrated technologies, ~~fast-to-market~~design, production and supply chain platform, marketing, and brand development. We believe that we offer a 360-degree solution to our retail partners that addresses many of the challenges facing the retail industry today. We believe our platform is highly scalable. Additionally, we believe we can quickly integrate additional brands into our platform in order to leverage our design, production, and marketing capabilities, and distribution network.

Summary of Operating Results

Three months ended June 30, ~~2019~~2020 (the “current quarter”) compared with the three months ended June 30, ~~2018~~2019 (the “prior year quarter”)

Revenues

Current quarter net revenue ~~increased~~decreased approximately ~~$0.6~~$4.0 million to ~~$9.1~~$5.1 million from ~~$8.5~~$9.1 million for the prior year quarter.

Our jewelry wholesale and e-commerce sales and apparel wholesale sales contributed approximately $2.3 million to net revenue in the current quarter, compared with $0.3 million in the prior year quarter. This increase in sales was primarily attributable to the launch of our apparel wholesale business in November 2018, as well as growth in our Judith Ripka Fine Jewelry e-commerce business.

Net licensing revenue decreased by approximately ~~$(1.3)~~$2.3 million in the current quarter to ~~$6.8~~$4.5 million, compared with ~~$8.1~~$6.8 million in the prior year quarter. This decline was primarily driven by ~~(i)~~lower sales by our licensees as a result of government-ordered retail store closures as well as an overall slowdown in economic activity related to the COVID-19 pandemic. The decline was also partially attributable, to a lesser extent, to a reduction in guaranteed minimum revenues from one of our existing licensing arrangements ~~normalizing after changing from guaranteed minimum amounts~~upon renewal effective January 1, 2020.

Net product sales decreased by approximately $1.8 million in the current quarter to ~~sales-based royalties effective April 1, 2019, and (ii)~~$0.5 million, compared with $2.3 million in the prior year quarter. Similar to net licensing revenue, the decline in net product sales was primarily driven by lower sales as a ~~decrease~~result of government-ordered retail store closures as well as an overall slowdown in ~~design and service fees in our department store business attributable~~economic activity related to the ~~transition from a licensing model to a wholesale model.~~

COVID-19 pandemic.

Cost of Goods Sold

Current quarter cost of goods sold was ~~$1.8~~$0.3 million, compared with ~~$0.2~~$1.8 million for the prior year quarter due to ~~higher~~lower volume of wholesale and e-commerce sales in the current quarter.

~~Current quarter gross~~ Gross profit ~~(which includes~~(net revenue less cost of goods sold) decreased approximately ~~$(0.9)~~$2.7 million to $4.7 million from $7.4 million ~~from $8.3 million for~~in the prior year ~~quarter. This decrease was~~quarter, primarily ~~attributable to~~driven by the ~~decrease~~aforementioned decline in net licensing revenue.

Total gross profit margin increased from 81% in the prior year quarter to 95% in the current quarter, reflecting the proportional shift of revenue ~~partially offset by an increase~~mix towards licensing revenues in ~~net~~the current quarter. Gross profit margin from product ~~sales.~~sales increased from 24% in the prior year quarter to 54% in the current quarter as a result of achieving greater efficiencies and economies of scale.

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Operating Costs and Expenses

Operating costs and expenses ~~were~~decreased approximately $1.6 million from $7.0 million ~~for the current quarter and~~in the prior year quarter to $5.4 million in the current quarter. ~~There~~This reduction was primarily due to government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $1.6 million as a ~~$0.6 million decrease~~reduction to current quarter expenses. Lower operating costs were also partially attributable to various cost reduction actions taken by management in ~~salaries~~response to the COVID-19 pandemic, including temporary reductions of employee compensation and ~~stock-based compensation, largely offset by an increase~~cutting non-essential costs. Partially offsetting these decreases in operating costs and expenses was higher depreciation and amortization expense, ~~of our intangible assets~~primarily due to the change in estimated life for the ~~previously owned Halston trademarks from indefinite lived-assets~~Judith Ripka trademarks. The current quarter also includes $0.5 million of bad debt expense related to the bankruptcy of a ~~finite lived-assets, and~~large retail customer due to the ~~acquisition~~COVID-19 pandemic. The total allowance of ~~the Halston and Halston Heritage trademarks, also determined to be finite-lived assets.~~

$0.6 million against such customer’s outstanding receivable balance of $1.2 million at June 30, 2020 represents management’s best estimate of collectibility, based on information currently available.

Other Income

During the ~~current~~prior year quarter, we recognized a $2.9 million gain on the reduction of contingent obligations related to the 2015 acquisition of the C Wonder Brand. As part of that acquisition, the seller was eligible to earn additional consideration based on future royalties related to the C Wonder Brand exceeding certain thresholds, and we recorded a liability for the potential future payment of such consideration. The final earn-out period ended on June 30, 2019, and the seller ultimately did not earn any additional consideration under the terms of the purchase agreement.

Interest and Finance Expense

Interest and finance expense for the current quarter was ~~$0.35~~$0.30 million, compared with ~~$0.27~~$0.35 million for the prior year quarter. ~~This increase~~The decrease from the prior year quarter is primarily attributable to ~~the February 11, 2019~~principal payments made on term loan ~~amendment, which resulted~~debt, resulting in a ~~higher~~lower outstanding principal balance as compared with the prior year ~~quarter, as well as a higher interest rate than under the previous term loan.~~

quarter.

Income Tax (Benefit) Provision

The effective income tax rate for the current quarter and the prior year quarter was approximately ~~37%~~-49% and ~~111%~~37%, respectively, resulting in an income tax provision of $0.43 million and $1.07 million, ~~and $1.13 million,~~ respectively.

~~For the prior year quarter, the effective tax rate was primarily attributable to the tax impact from the vesting~~

Net (Loss) Income

We had a net loss of ~~restricted shares of common stock, which was treated as a discrete item for tax purposes. This item increased the effective rate by 56%~~$(1.34) million for the ~~prior year quarter. The effective tax rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 13% and 21%, respectively.~~

~~Net Income (Loss)~~

~~We had~~current quarter, compared with net income of $1.85 million for the ~~current quarter, compared with a net loss of $(0.11) million for the~~ prior year quarter.

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

We had non-GAAP net income of approximately ~~$1.0~~$1.2 million, or ~~$0.05~~$0.06 per diluted share (“non-GAAP diluted EPS”), for the current quarter and ~~$1.7~~$1.0 million, or ~~$0.09~~$0.05 per diluted share, for the prior year quarter. Non-GAAP net income is a non-GAAP unaudited term, which we define as net income (loss), exclusive of amortization of trademarks, stock-based compensation, non-cash interest and finance expense from discounted debt related to acquired assets, loss on extinguishment of debt, gain on reduction of contingent obligations, costs in connection with potential acquisitions, certain

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adjustments to allowances for doubtful accounts, asset impairments, and deferred income taxes. Non-GAAP net income and non-GAAP diluted EPS measures do not include the tax effect of the aforementioned adjusting items, due to the nature of these items and the Company’s tax strategy. Prior to 2019, the Company did not adjust non-GAAP net income and non-GAAP EPS for the amortization of ~~trademarks.~~

trademarks or costs in connection with potential acquisitions.

We had Adjusted EBITDA of ~~$1.6~~$1.7 million for the current quarter, compared with Adjusted EBITDA of ~~$2.2~~$1.6 million for the prior year quarter. Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net income (loss) before ~~stock-based compensation,~~depreciation and amortization, interest and finance ~~expense,~~expenses (including loss on extinguishment of debt, ~~gain on reduction of contingent obligation,~~if any), income taxes, other state and local franchise taxes, stock-based compensation, gain on reduction of contingent obligations, costs in connection with potential acquisitions, asset impairments, and ~~depreciation and amortization.~~

certain adjustments to allowances for doubtful accounts.

Management uses non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the ~~Company's~~Company’s results of operations. Management believes non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because these measures adjust for certain costs and other events that management believes are not representative of our core business operating results, and thus these non-GAAP measures provide supplemental information to assist investors in evaluating the Company’s financial results.

The Company has incurred certain costs which it could have eliminated but elected not to do so in light of government assistance received through the Paycheck Protection Program under the CARES Act (the “PPP Benefit”), which represents a cash benefit directly related to the Company’s operating expenses incurred. Accordingly, the PPP Benefit is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA. Adjusted EBITDA is the measure used to calculate compliance with the EBITDA covenant under the Xcel Term Loan.

Non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA should not be considered in isolation or as alternatives to net income, earnings per share, or any other measure of financial performance calculated and presented in accordance with GAAP. Given that non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are financial measures not deemed to be in accordance with GAAP and are susceptible to varying calculations, our non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in our industry, because other companies may calculate non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA in a different manner than we calculate these measures.

In evaluating non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA, you should be aware that in the future we may or may not incur expenses similar to some of the adjustments in this report. Our presentation of non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.

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


	Three Months Ended
	June 30,
($ in thousands)	2020		2019
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(1,300)	$	1,852
Amortization of trademarks		1,108		786
Stock-based compensation		488		135
Costs in connection with potential acquisition		(101)		—
Certain adjustments to allowances for doubtful accounts		472		—
Property and equipment impairment		82		—
Gain on reduction of contingent obligation		—		(2,850)
Deferred income tax provision		428		1,068
Non-GAAP net income	$	1,177	$	991

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($ in thousands) Three Months Ended
June 30,
2019 2018
Net income (loss) $ 1,852
$ (113 )
Amortization of trademarks 786
257
Non-cash interest and finance expense —
10
Stock-based compensation 135
461
Loss on extinguishment of debt —
—
Gain on reduction of contingent obligation (2,850 ) —
Deferred income tax provision 1,068
1,133
Non-GAAP net income $ 991
$ 1,748

The following table is a reconciliation of diluted (loss) earnings ~~(loss)~~ per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:


	Three Months Ended
	June 30,
	2020		2019
Diluted (loss) earnings per share	$	(0.07)	$	0.10
Amortization of trademarks		0.06		0.04
Stock-based compensation		0.03		0.01
Costs in connection with potential acquisition		(0.01)		—
Certain adjustments to allowances for doubtful accounts		0.02		—
Property and equipment impairment		0.01		—
Gain on reduction of contingent obligation		—		(0.15)
Deferred income tax provision		0.02		0.05
Non-GAAP diluted EPS	$	0.06	$	0.05
Non-GAAP weighted average diluted shares		19,192,353		18,977,051

Three Months Ended
June 30,
2019 2018
Diluted earnings (loss) per share $ 0.10
$ (0.01 )
Amortization of trademarks 0.04
0.01
Non-cash interest and finance expense —
—
Stock-based compensation 0.01
0.03
Loss on extinguishment of debt —
—
Gain on reduction of contingent obligation (0.15 ) —
Deferred income tax provision 0.05
0.06
Non-GAAP diluted EPS $ 0.05
$ 0.09
Non-GAAP weighted average diluted shares 18,977,051
18,680,926

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


	Three Months Ended
	June 30,
($ in thousands)	2020		2019
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(1,300)	$	1,852
Depreciation and amortization		1,329		1,000
Interest and finance expense		299		348
Income tax provision		428		1,068
State and local franchise taxes		45		83
Stock-based compensation		488		135
Costs in connection with potential acquisition		(101)		—
Certain adjustments to allowances for doubtful accounts		472		—
Property and equipment impairment		82		—
Gain on reduction of contingent obligation		—		(2,850)
Adjusted EBITDA	$	1,742	$	1,636

($ in thousands) Three Months Ended
June 30,
2019 2018
Net income (loss) $ 1,852
$ (113 )
Depreciation and amortization 1,000
456
Interest and finance expense 348
266
Income tax provision 1,068
1,133
State and local franchise taxes 83
14
Stock-based compensation 135
461
Loss on extinguishment of debt —
—
Gain on reduction of contingent obligation (2,850 ) —
Adjusted EBITDA $ 1,636
$ 2,217

Both non-GAAP net income and Adjusted EBITDA for the current quarter include certain adjustments to net (loss) income including allowances for doubtful accounts for account debtors that have filed for bankruptcy protection triggered by the impact of COVID-19. In addition, net loss for the current quarter includes $1.6 million of PPP Benefit, which was recognized as a reduction to current quarter expenses for which the program was intended to compensate. As such, this amount is included in net (loss) income in accordance with GAAP. The expense reduction from the PPP is not considered a reconciling item for purposes of the computation of non-GAAP net income and Adjusted EBITDA due to the fact that the PPP Benefit represents a cash benefit and is directly related to the Company’s operating expenses incurred. Such treatment is also consistent with the calculation of EBITDA for financial covenant compliance purposes under the Xcel Term Loan.

Six months ended June 30, ~~2019~~2020 (the “current six months”) compared with the six months ended June 30, ~~2018~~2019 (the “prior year six months”)

Revenues

Current six months net revenue ~~increased~~decreased approximately ~~$2.1~~$4.8 million to ~~$19.4~~$14.6 million from ~~$17.3~~$19.4 million for the prior year six months.

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Our jewelry wholesale and e-commerce sales and apparel wholesale sales contributed approximately $4.8 million to net revenue in the current six months, compared with $0.6 million in the prior year six months. This increase in sales was primarily attributable to the launch of our apparel wholesale business in November 2018, as well as growth in our Judith Ripka Fine Jewelry e-commerce business.

Net licensing revenue decreased by approximately ~~$(1.9)~~$4.6 million in the current six months to ~~$14.7~~$10.1 million, compared with ~~$16.6~~$14.7 million in the prior year six months. This decline was primarily driven by a combination of (i) lower customer sales by our licensees as a result of government-ordered retail store closures as well as an overall slowdown in economic activity related to the COVID-19 pandemic, (ii) revenues from one of our existing licensing arrangements ~~normalizing after~~ changing from guaranteed minimum amounts to sales-based royalties effective April 1, 2019, and ~~(ii)~~(iii) a ~~decrease~~reduction in ~~design and service fees~~guaranteed minimum revenues from another of our existing licensing arrangements upon renewal effective January 1, 2020.

Net product sales decreased by approximately $0.3 million in the current six months to $4.4 million, compared with approximately $4.7 million in the prior year six months. The decline in net product sales was primarily driven by lower sales as a result of government-ordered retail store closures as well as an overall slowdown in economic activity during the related to the COVID-19 pandemic during the second quarter of 2020, partially offset by volume growth in our ~~department store~~apparel wholesale business ~~attributable to~~in the ~~transition from a licensing model to a wholesale model.~~

first quarter of 2020.

Cost of Goods Sold

Current six months cost of goods sold was ~~$3.6~~$2.7 million, compared with ~~$0.4~~$3.6 million for the prior year six months due to ~~higher~~lower overall volume of wholesale and e-commerce sales in the current six months.

~~Current six months gross~~ Gross profit ~~(which includes~~(net revenue less cost of goods sold) decreased approximately ~~$(1.0)~~$4.0 million to ~~$15.8~~$11.8 million from ~~$16.8 million for the prior year six months. This decrease was primarily attributable to the decrease in net licensing revenue, partially offset by an increase in net margin from product sales.~~

~~Operating Costs and Expenses~~

~~Operating costs and expenses increased approximately $0.4 million to $14.7 million for the current six months from approximately $14.3~~$15.8 million in the prior year six months, primarily driven by the aforementioned decline in net licensing revenue.

Total gross profit margin was 81% in the prior year six months and 82% in the current six months, essentially flat. Gross profit margin from product sales increased from 25% in the prior year six months to 40% in the current six months as a result of achieving greater efficiencies and economies of scale in our wholesale business operations.

Operating Costs and Expenses

Operating costs and expenses decreased approximately $1.1 million from $14.7 million in the prior year six months to $13.6 million in the current six months. This ~~increase~~reduction was primarily ~~attributable~~due to ~~an increase~~government assistance received through the Paycheck Protection Program under the CARES Act, for which the Company recognized $1.6 million as a reduction to current six months expenses, as well as various cost reduction actions taken by management in response to the COVID-19 pandemic, including temporary reductions of employee compensation and cutting non-essential costs. Partially offsetting these reductions was higher depreciation and amortization expense, ~~of our intangible assets,~~primarily due to the change in estimated life for the ~~previously owned Halston trademarks from indefinite lived-assets~~Judith Ripka trademarks. The current six months also includes $0.6 million of bad debt expense related to the bankruptcy of a ~~finite lived-assets, and~~large retail customer due to the ~~acquisition~~COVID-19 pandemic. The total allowance of ~~the Halston and Halston Heritage trademarks, also determined to be finite-lived assets. Increased operating costs were largely offset by reductions in salaries and stock-based compensation.~~

Other Income

During the ~~current~~prior year six months, we recognized a $2.9 million gain on the reduction of contingent obligations related to the 2015 acquisition of the C Wonder Brand. As part of that acquisition, the seller was eligible to earn additional consideration based on future royalties related to the C Wonder Brand exceeding certain thresholds, and we recorded a liability for the potential future payment of such consideration. The final earn-out period ended on June 30, 2019, and the seller ultimately did not earn any additional consideration under the terms of the purchase agreement.

Interest and Finance Expense

Interest and finance expense for the current six months was ~~$0.83~~$0.59 million, compared with ~~$0.55~~$0.83 million for the prior year six months. This ~~increase~~decrease is primarily attributable to the ~~February 11, 2019 term loan amendment, which resulted in (i)~~fact that the prior year six months includes a $0.19 million loss on extinguishment of debt ~~(consisting~~as a result of ~~unamortized deferred finance costs), (ii) a higher outstanding principal balance as compared~~the February 11, 2019 term loan amendment, with no such comparable extinguishment loss in the ~~prior year period, and (iii) a higher interest rate than under the previous term loan.~~current six months.

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Income Tax (Benefit) Provision

The effective income tax rate for the current six months and the prior year six months was approximately ~~37%~~5% and ~~111%~~37%, respectively, resulting in an income tax (benefit) provision of $(0.12) million and $1.14 million, ~~and $1.56 million,~~ respectively.

For the current six months, the federal statutory rate differed from the effective tax rate primarily due to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes and decreased the effect rate by approximately 16%. The effective rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by approximately 5% and decreased the effective tax rate by approximately 8%, respectively. The effective tax rate was also affected by the tax impact of a potential federal net operating loss carryback due to the CARES Act; this item increased the effective rate by approximately 4%.

For the prior year six months, the effective tax rate was primarily attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes. This item increased the effective rate by 32% for prior year six months. The effective tax rate was also attributable to state taxes and recurring permanent differences, which increased the effective tax rate by 13% and 14%, respectively.

Net (Loss) Income

We had a net ~~income~~loss of ~~$1.98~~$(2.17) million for the current six months, compared with net income of ~~$0.39~~$1.98 million for the prior year six months.

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

We had non-GAAP net income of approximately ~~$2.5~~$1.4 million, or ~~$0.13~~$0.07 per diluted share (“non-GAAP diluted EPS”), for the current six months and ~~$3.4~~$2.5 million, or ~~$0.18~~$0.13 per diluted share, for the prior year six months. We had Adjusted EBITDA of ~~$3.7~~$2.5 million for the current six months, compared with Adjusted EBITDA of ~~$4.4~~$3.7 million for the prior year six months.

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


	Six Months Ended
	June 30,
($ in thousands)	2020		2019
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(2,105)	$	1,979
Amortization of trademarks		2,216		1,523
Non-cash interest and finance expense		—		16
Stock-based compensation		731		482
Loss on extinguishment of debt		—		189
Costs in connection with potential acquisition		(21)		—
Certain adjustments to allowances for doubtful accounts		586		—
Property and equipment impairment		82		—
Gain on reduction of contingent obligation		—		(2,850)
Deferred income tax (benefit) provision		(124)		1,143
Non-GAAP net income	$	1,365	$	2,482

($ in thousands) Six Months Ended
June 30,
2019 2018
Net income $ 1,979
$ 387
Amortization of trademarks 1,523
515
Non-cash interest and finance expense 16
20
Stock-based compensation 482
968
Loss on extinguishment of debt 189
—
Gain on reduction of contingent obligation (2,850 ) —
Deferred income tax provision 1,143
1,559
Non-GAAP net income $ 2,482
$ 3,449

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The following table is a reconciliation of diluted (loss) earnings per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:


	Six Months Ended
	June 30,
	2020		2019
Diluted (loss) earnings per share	$	(0.11)	$	0.11
Amortization of trademarks		0.11		0.08
Non-cash interest and finance expense		—		—
Stock-based compensation		0.04		0.02
Loss on extinguishment of debt		—		0.01
Costs in connection with potential acquisition		—		—
Certain adjustments to allowances for doubtful accounts		0.03		—
Property and equipment impairment		0.01		—
Gain on reduction of contingent obligation		—		(0.15)
Deferred income tax (benefit) provision		(0.01)		0.06
Non-GAAP diluted EPS	$	0.07	$	0.13
Non-GAAP weighted average diluted shares		19,001,842		18,771,053

Six Months Ended
June 30,
2019 2018
Diluted earnings per share $ 0.11
$ 0.02
Amortization of trademarks 0.08
0.03
Non-cash interest and finance expense —
—
Stock-based compensation 0.02
0.05
Loss on extinguishment of debt 0.01
—
Gain on reduction of contingent obligation (0.15 ) —
Deferred income tax provision 0.06
0.08
Non-GAAP diluted EPS $ 0.13
$ 0.18
Non-GAAP weighted average diluted shares 18,771,053
18,700,911

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


	Six Months Ended
	June 30,
($ in thousands)	2020		2019
Net (loss) income attributable to Xcel Brands, Inc. stockholders	$	(2,105)	$	1,979
Depreciation and amortization		2,632		1,948
Interest and finance expense		593		827
Income tax (benefit) provision		(124)		1,143
State and local franchise taxes		83		121
Stock-based compensation		731		482
Costs in connection with potential acquisition		(21)		—
Certain adjustments to allowances for doubtful accounts		586		—
Property and equipment impairment		82		—
Gain on reduction of contingent obligation		—		(2,850)
Adjusted EBITDA	$	2,457	$	3,650

($ in thousands) Six Months Ended
June 30,
2019 2018
Net income $ 1,979
$ 387
Depreciation and amortization 1,948
867
Interest and finance expense 638
552
Income tax provision 1,143
1,559
State and local franchise taxes 121
47
Stock-based compensation 482
968
Loss on extinguishment of debt 189
—
Gain on reduction of contingent obligation (2,850 ) —
Adjusted EBITDA $ 3,650
$ 4,380

Both non-GAAP net income and Adjusted EBITDA for the current six months include certain adjustment to net (loss) income including allowances for doubtful accounts for account debtors that have filed for bankruptcy protection triggered by the impact of COVID-19. In addition, net loss for the current six months includes $1.6 million of government assistance received through the Paycheck Protection Program under the CARES Act, which was recognized as a reduction to current six months expenses for which the program was intended to compensate. As such, the PPP Benefit is included in net (loss) income in accordance with GAAP. Such treatment is also consistent with the calculation of EBITDA for financial covenant compliance purposes under the Xcel Term Loan.

Liquidity and Capital Resources

Liquidity

Our principal capital requirements have been to fund working capital needs, acquire new brands, and to a lesser extent, capital expenditures. AtAs of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, our cash and cash equivalents were ~~$6.3~~$5.5 million and ~~$8.8~~$4.6 million, respectively.

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Restricted cash at June 30, 2020 and at December 31, 2019 consisted of $1.11 million of cash deposited with Bank Hapoalim B.M. (“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facilities. Restricted cash at December 31, 2018 consisted of (i) $1.11$1.1 million of cash deposited with BHI as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating ~~facilities,~~facility.

On April 23, 2020, we received $1.8 million from Bank of America through the PPP. We used the proceeds primarily to pay for payroll costs, and ~~(ii) $0.40 million~~we believe it is probable that the loan will be forgiven under the terms of ~~cash held as a security deposit for~~ the ~~sublease of our former corporate offices by us to a third-party subtenant.~~

PPP.

We expect that existing cash and operating cash flows will be adequate to meet our 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.

Our contingent obligation related to the Halston Heritage Brand (see Note 3 and Note 6 in the Unaudited Condensed Consolidated Financial Statements) is generally required to be paid in shares, subject to certain limitations. Payment of this obligation in stock would not affect our liquidity.

Changes in Working Capital

Our working capital (current assets less current liabilities, excluding the current portion of operating lease obligations and any contingent obligations payable in common stock) was ~~$9.1~~$8.5 million and ~~$10.7~~$9.5 million as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Working capital decreased by approximately ~~$1.6~~$1.0 million during the first six months of ~~2019~~2020 primarily due to ~~cash used~~the increase in the ~~acquisition~~current portion of ~~the Halston Heritage trademarks (see Note 3 in the Unaudited Condensed Consolidated Financial Statements).~~

long-term debt.

Commentary on the components of our cash flows for the current six months as compared with the prior year six months is set forth below.

Operating Activities

Net cash provided by operating activities was approximately ~~$1.98~~$2.38 million in the current six months, compared with ~~net cash provided by operating activities of~~ approximately ~~$1.96~~$1.98 million in the prior year six months.

The current six months cash provided by operating activities was primarily attributable to the combination of the net loss of $(2.17) million plus non-cash expenses of approximately $4.05 million and the net change in operating assets and liabilities of approximately $0.50 million. The net loss of $(2.17) million includes $1.64 million of government assistance received through the PPP under the CARES Act, which was recognized as a reduction to current six months expenses for which the program was intended to compensate. Non-cash net expenses were primarily comprised of $2.63 million of depreciation and amortization, $0.73 million of stock-based compensation, $0.68 million of bad debt expense, and deferred income tax benefit of $(0.12) million. The net change in operating assets and liabilities includes a decrease in accounts receivable of $3.40 million and a decrease in accounts payable, accrued expenses and other current liabilities of $(2.71) million, and cash paid in excess of rent expense of $(0.18) million. The net change in accounts receivable is attributable to a combination of the timing of collections, and lower revenues recognized as a result of the COVID-19 pandemic. The net change in accounts payable, accrued expenses and other current liabilities is due to timing of payments, as well as actions taken by management in response to the COVID-19 pandemic to conserve cash.

The prior year six months cash provided by operating activities was primarily attributable to the combination of net income of $1.98 million plus non-cash expenses of approximately $0.86 million ~~partially offset by a~~and net change in operating assets and liabilities of approximately $(0.86) million. Non-cash net expenses ~~were~~ primarily ~~comprised~~consisted of $0.48 million of stock-based compensation, $1.95 million of depreciation and amortization, loss on extinguishment of debt of $0.19 million, deferred income tax provision

of $1.14 million, and gain on reduction of contingent obligations of $(2.85) million. The net change from operating assets and liabilities ~~includes~~included a decrease in accounts receivable of $2.29 million, a decrease in inventory of approximately $1.11 million, an increase in prepaid expenses and other assets of $(0.29) million, a decrease in accounts payable, accrued expenses and other current liabilities of $(3.54) million, and a decrease in other liabilities of $(0.20) million, all of which are primarily due to timing of collections and payments, and cash paid in excess of rent expense of $(0.24) million.

The prior year six months cash provided by operating activities was primarily attributable to the combination of net income of $0.39 million plus non-cash expenses of approximately $3.5 million and net change in operating assets and liabilities of approximately $(1.93) million. Non-cash net expenses mainly consisted of $1.56 million of deferred income tax provision, $0.97 million of stock-based compensation, $0.87 million of depreciation and amortization, and non-cash interest and other finance costs of $0.11 million. The net change in operating assets and liabilities included a net increase in accounts receivable of $(1.54) million, an increase in accounts payable, accrued expenses and other current liabilities of $0.53 million, all primarily due to timing of collections and payments, an increase in inventory attributable to our jewelry wholesale and e-commerce operations of approximately $(0.79) million, and a decrease in other liabilities of $(0.08) million attributable to accrued rent.

Investing Activities

Net cash used in investing activities for the current six months was approximately ~~$(9.4)~~$0.63 million, compared with approximately ~~$(1.1)~~$9.4 million in the prior year ~~quarter.~~six months. Cash used in investing activities for in the current six months was

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primarily attributable to capital expenditures, a substantial portion of which relates to the implementation of our ERP system, while cash used in investing activities for the prior year six months was primarily related to cash consideration paid to acquire the Halston Heritage Brands. ~~Cash~~

Financing Activities

Net cash used in ~~investing activities for in the prior year quarter was primarily attributable to capital expenditures.~~

~~Financing Activities~~

~~Net cash provided by (used in)~~ financing activities for the current six months was approximately ~~$4.5~~$(0.93) million, and was primarily attributable to payments made on long-term debt obligations of $(0.75) million, and $(0.19) million of shares repurchased related to vested restricted stock in exchange for withholding taxes.

Net cash provided by financing activities for the prior year six months was approximately $4.5 million, primarily attributable to proceeds received from long-term debt of $7.5 million, partially offset by payments made on long-term debt obligations of ~~$(2.0)~~$(2.74) million, ~~the final payment on the IM Seller Note obligation of $(0.74),~~ and payment of $(0.29) million of deferred finance costs.

Net cash (used in) financing activities for the prior year six months was approximately $(3.43) million, primarily attributable to payments on our senior term debt obligation of $(2.0) million, payment on our IM Seller Note obligation of approximately $(0.73) million, and shares repurchased related to vested restricted stock in exchange for withholding taxes of $(0.70) million.

Other Factors

We continue to seek to expand and diversify the types of licensed products being produced under our brands. We plan to continue to diversify the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer, consumer, or market sector within each of our brands. The Mizrahi brand, Halston brand, and C Wonder brand have a core business in fashion apparel and accessories. The Ripka brand ~~historically has been focused~~is a fine jewelry business, and the Longaberger brand focuses on ~~fine jewelry,~~home good products, which we believe helps diversify our industry focus while at the same time complements ~~expands on,~~our business operations and ~~grows our overall business relationship with QVC.~~

relationships.

We ~~continue to expand our Judith Ripka Fine Jewelry wholesale and e-commerce business, and in November 2018, we~~have transitioned our department store business from a licensing model to a wholesale ~~model.~~model, and continue to work towards expanding our Judith Ripka Fine Jewelry wholesale and e-commerce business. Our strategy is to manage our working capital needs by utilizing back-to-back sales and purchase orders and minimizing inventory risk. This change should, on a long-term basis, increase our ~~total and net~~ revenues as compared to the licensing model.

We expect to develop a core licensing business for the Longaberger brand, in addition to a direct-to-consumer business.

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

~~Our success, however, will still remain largely dependent~~

However, the impacts of the current COVID-19 pandemic are broad reaching and are having an impact on our licensing and wholesale businesses. The COVID-19 pandemic is impacting our supply chain as most of our 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 our contract manufacturers’ ability to ~~build~~source certain raw materials and ~~maintain our brands’ awareness~~to produce finished goods in a timely manner. The pandemic is also impacting distribution and ~~contract with and retain key licensees and retail relationships, as well as both our and our licensees’~~logistics providers' ability to accurately predict upcoming fashion and design trends within our respective customer bases and fulfill the product requirements of their particular retail channels within the global marketplace. Unanticipated changes in consumer fashion preferences and purchasing patterns, slowdownsoperate in the ~~U.S. economy, changes~~normal course of business. In addition, COVID-19 has resulted in a sudden and continuing decrease in sales for many of our products, resulting in order cancellations. Further, the ~~prices~~pandemic has affected the financial health of ~~supplies, consolidation~~certain of ~~retail establishments,~~our customers, and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, from which we had an aggregate of $1,172,000 of accounts receivable due at June 30, 2020. As a result, we have recognized an allowance for doubtful accounts of $586,000 for the six months ended June 30, 2020, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility. Financial impacts associated with the COVID-19 pandemic include, but are not limited to, lower net sales, adjustments to allowances for doubtful accounts due to customer bankruptcy or other inability to pay their amounts due to vendors, the delay of inventory production and fulfillment, potentially further impacting net sales, and potential incremental costs associated with mitigating the effects of the pandemic, including increased freight and logistics costs and other ~~factors noted~~expenses. The impact of the COVID-19 pandemic is expected to continue to have an adverse effect on our operating results, which could result in ~~“Risk Factors” could adversely affect~~ our ~~licensees’ ability~~inability to ~~meet and/~~comply with certain debt covenants and require BHI to waive compliance with, or ~~exceed their contractual commitments~~agree to usamend, any such covenant to avoid a default. The COVID-19 pandemic is ongoing, and ~~thereby adversely affect~~its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, and actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast

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any effects on our ~~future operating results.~~

results for the remainder of 2020. However, as of the date of this filing, we expect our results for 2020 and potentially 2021 to be significantly affected.

Effects of Inflation

We do not believe that the relatively moderate rates of inflation experienced over the past two years in the United States, where we primarily compete, have had a significant effect on revenues or profitability. If there were an adverse change in the rate of inflation by less than 10%, the expected effect on net income and cash flows would be immaterial.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, or liquidity.

Critical Accounting Policies

The preparation of our unaudited condensed consolidated financial statements in conformity with GAAP requires management to exercise judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry, and current and expected economic conditions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Because the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.

Please refer to our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on April ~~1, 2019,~~14, 2020, for a discussion of our critical accounting policies. Additionally, as described more fully in Note 1 and Note 5 of the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q, we adopted a new accounting standard on January 1, 2019 related to leases, which included the election of certain accounting policies and practical expedients under this new standard. During the three and six months ended June 30, ~~2019,~~2020, there were no ~~other~~ material changes to our accounting policies.


~~ITEM 3.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.


~~ITEM 4.~~	~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, ~~2019,~~2020, the end of the period covered by this report. Based on, and as of the date of such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, ~~2019~~2020 such that the information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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B. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:

There have not been any significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


~~ITEM 1.~~	~~LEGAL PROCEEDINGS~~

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, from time to time we become involved in legal claims and litigation. In the opinion of management, based on consultations with legal counsel, the disposition of litigation currently pending against us is unlikely to have, individually or in the aggregate, a materially adverse effect on our business, financial position, or results of operations.


~~ITEM 1A.~~	~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

In addition to the Risk Factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, set forth below are certain factors which could affect our financial condition and operating results. We operate in a highly competitive industry that involves numerous known and unknown risks and uncertainties that could impact our operations. The risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our financial condition and/or operating results.

Our failure to meet the continued listing requirements of the Nasdaq Global Market could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common stock and our ability to access the capital markets.

On August 6, 2020, we, received a letter from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) notifying us that the minimum bid price per share for our common stock fell below $1.00 for a period of 30 consecutive business days. Therefore, the Company did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules.

The letter also states that pursuant to Nasdaq Listing Rules 5810(c)(3)(A), we will be provided 180 calendar days to regain compliance with the minimum bid price requirement, or until February 2, 2021.

We can regain compliance if, at any time during the Tolling Period or such 180-day period, the closing bid price of our common stock is at least $1.00 for a minimum period of 10 consecutive business days. If by February 2, 2021, we do not regain compliance with the Nasdaq Listing Rules, we may be eligible for additional time to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(ii). To qualify, we would need to submit a transfer application and a $5,000 application fee. We would also need to provide written notice to Nasdaq of our intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. As part of its review process, the Nasdaq staff will make a determination of whether it believes we will be able to cure this deficiency. Should the Nasdaq staff conclude that we will not be able to cure the deficiency, or should we determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that our shares of common stock will be subject to delisting.

If we do not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our shares of common stock will be subject to delisting from the Nasdaq Global Select Market. At such time, we may appeal the delisting determination to a hearings panel.

We intend to monitor our common stock closing bid price between now and February 2, 2021, and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary. There

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can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.

The COVID-19 pandemic is having a material adverse impact on our business, operating results, and financial condition.

A pandemic or outbreak of disease or similar public health threat, such as the COVID-19 pandemic, or fear of such an event, could have a material adverse impact on our business, operating results, and financial condition. The current COVID-19 pandemic has caused a disruption to our business, beginning in March 2020. The impacts of the current COVID-19 pandemic are broad reaching and are having an impact on our licensing and wholesale businesses. The COVID-19 pandemic is impacting our supply chain as most of our 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 our contract manufacturers’ ability to source certain raw materials and to produce finished goods in a timely manner. The pandemic is also impacting distribution and logistics providers' ability to operate in the normal course of business. In addition, COVID-19 has resulted in a sudden and continuing decrease in sales for many of our products, resulting in order cancellations. Further, the pandemic has affected the financial health of certain of our customers, and the bankruptcy of certain other customers, including Lord & Taylor and Le Tote, from which we had an aggregate of $1,172,000 of accounts receivable due at June 30, 2020. As a result, we have recognized an allowance for doubtful accounts of $586,000 for the six months ended June 30, 2020, and may be required to make additional adjustments for doubtful accounts which would increase our operating expenses in future periods and negatively impact our operating results, and could result in our failure to meet financial covenants under our credit facility. Financial impacts associated with the COVID-19 pandemic include, but are not limited to, lower net sales, adjustments to allowances for doubtful accounts due to customer bankruptcy or other inability to pay their amounts due to vendors, the delay of inventory production and fulfillment, potentially further impacting net sales, and potential incremental costs associated with mitigating the effects of the pandemic, including increased freight and logistics costs and other expenses. We expect that the impact the COVID-19 pandemic may have on our operating results could result in our inability to comply with certain debt covenants and require BHI to waive compliance with, or agree to amend, any such covenant to avoid a default. The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, and actions that would be taken by governmental authorities to contain the pandemic or to treat its impact, makes it difficult to forecast any effects on our 2020 results. However, as of the date of this filing, we expect our results for 2020 and potentially 2021 to be significantly affected.

We may not be entitled to forgiveness of our recently received Paycheck Protection Program loan, and our application for the Paycheck Protection Program loan could in the future be determined to have been impermissible or could result in damage to our reputation.

We received an unsecured loan in the amount of $1,805,856 (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained.

In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the PPP of the CARES Act. The certification described above did not contain any objective criteria and is subject to interpretation. However, on April 23, 2020, the U.S. Small Business Administration (“SBA”) issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the PPP has resulted in significant

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media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we or any company that we may acquire in the future which received a loan under the PPP, are later determined to have violated any of the laws or governmental regulations that apply to us or such acquiree in connection with the PPP Loan or another loan under the PPP, respectively, such as the False Claims Act, or it is otherwise determined that we or such acquiree were ineligible to receive the PPP Loan or such other loan under the PPP, respectively, we or such acquiree may be subject to penalties, including significant civil, criminal and administrative penalties, and could be required to repay the PPP Loan or such other loan under the PPP, respectively, in its entirety. In addition, our receipt of the PPP Loan or any company that we may acquire in the future which received a loan under the PPP may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.


~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of unregistered or registered securities during the three and six months ended June 30, ~~2019.~~

2020.


~~ITEM 3.~~	~~DEFAULTS UPON SENIOR SECURITIES~~

~~None.~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


~~ITEM 5.~~	~~OTHER INFORMATION~~

ITEM 5. OTHER INFORMATION

None.


~~ITEM 6.~~	~~EXHIBITS~~

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)

31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)

32.1 Section 1350 Certification (CEO)

32.2 Section 1350 Certification (CFO)

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

~~SIGNATURES~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date: August ~~12, 2019~~19, 2020	By:	/s/ Robert W. D’Loren
		Name: Robert W. D’Loren
		Title: Chairman and Chief Executive Officer

	By:	/s/ James Haran
		Name: James Haran
		Title: Chief Financial Officer and Vice President

Delaware		76-0307819

~~Delaware~~		~~76-0307819~~
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	XELB	NASDAQ Global Market



Large accelerated filer ☐¨	Accelerated filer ☐¨
Non-accelerated filer ☒x	Smaller reporting company ☒x
	Emerging growth company ☐¨



		~~Page~~ a
		Page

PART I - FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Balance Sheets	3

	Unaudited Condensed Consolidated Statements of Operations	4

	Unaudited Condensed Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity	5

	Unaudited Condensed Consolidated Statements of Cash Flows	7 6

	Notes to Unaudited Condensed Consolidated Financial Statements	9 7

Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	25 23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II - OTHER INFORMATION		34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34 36

Item 3.	Defaults Upon Senior Securities	34 36

Item 4.	Mine Safety Disclosures	34 36

Item 5.	Other Information	34 36

Item 6.	Exhibits	35 36

	Signatures	36 37



	ý	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~



	¨	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~



	1333 Broadway, 10th Floor, New York, NY 10018
	(Address of Principal Executive Offices)



	June 30, 2019		December 31, 2018
	(Unaudited)		(Note 1)
Assets
Current Assets:
Cash and cash equivalents	$	6,271	$	8,837
Accounts receivable, net	8,866		11,010
Inventory	875		1,988
Prepaid expenses and other current assets	1,374		2,040
Total current assets	17,386		23,875
Property and equipment, net	3,414		3,202
Operating lease right-of-use assets	9,913		—
Trademarks and other intangibles, net	118,176		108,989
Restricted cash	1,109		1,482
Other assets	769		511
Total non-current assets	133,381		114,184
Total Assets	$	150,767	$	138,059

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	2,651	$	4,868
Accrued payroll	872		2,011
Deferred revenue	284		272
Current portion of accrued rent liability	—		690
Current portion of operating lease obligation	1,711		—
Current portion of long-term debt	4,500		5,325
Current portion of long-term debt, contingent obligations	—		2,950
Total current liabilities	10,018		16,116
Long-Term Liabilities:
Long-term portion of accrued rent liability	—		2,202
Long-term portion of operating lease obligation	10,662		—
Long-term debt, less current portion	17,180		11,300
Deferred tax liabilities, net	9,282		8,139
Other long-term liabilities	224		420
Total long-term liabilities	37,348		22,061
Total Liabilities	47,366		38,177

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 at June 30, 2019 and December 31, 2018, respectively, and 18,976,394 and 18,138,616 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	19		18
Paid-in capital	101,636		100,097
Retained earnings (accumulated deficit)	1,746		(233		)
Total Stockholders' Equity	103,401		99,882
Total Liabilities and Stockholders' Equity	$	150,767	$	138,059



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2019		2018			2019		2018
Revenues
Net licensing revenue	$	6,803	$	8,141		$	14,666	$	16,622
Net sales	2,335		346			4,773		631
Net revenue	9,138		8,487			19,439		17,253
Cost of goods sold (sales)	1,767		229			3,599		409
Gross profit	7,371		8,258			15,840		16,844

Operating costs and expenses
Salaries, benefits and employment taxes	3,848		4,121			7,993		8,546
Other design and marketing costs	797		817			1,555		1,555
Other selling, general and administrative expenses	1,173		1,117			2,763		2,410
Stock-based compensation	135		461			482		968
Depreciation and amortization	1,000		456			1,948		867
Total operating costs and expenses	6,953		6,972			14,741		14,346

Other Income
Gain on reduction of contingent obligation	2,850		—			2,850		—
Total other income	2,850		—			2,850		—

Operating income	3,268		1,286			3,949		2,498

Interest and finance expense
Interest expense - term debt	326		234			590		482
Other interest and finance charges	22		32			48		70
Loss on extinguishment of debt	—		—			189		—
Total interest and finance expense	348		266			827		552

Income before income taxes	2,920		1,020			3,122		1,946

Income tax provision	1,068		1,133			1,143		1,559

Net income (loss)	$	1,852	$	(113	)	$	1,979	$	387

Basic net income (loss) per share:	$	0.10	$	(0.01	)	$	0.11	$	0.02

Diluted net income (loss) per share:	$	0.10	$	(0.01	)	$	0.11	$	0.02

Basic weighted average common shares outstanding	18,976,394		18,314,775			18,770,378		18,324,130
Diluted weighted average common shares outstanding	18,977,051		18,314,775			18,771,053		18,700,911



	Common Stock
	Number of Shares		Amount		Paid-In Capital			Retained Earnings (Accumulated Deficit)			Total Stockholders' Equity
Balance as of December 31, 2017	18,318,961		$	18	$	98,997		$	(1,321	)	$	97,694

Compensation expense in connection with stock options and restricted stock	—		—		507			—			507

Issuance of shares for accrued stock liability	91,826		—		281			—			281

Shares repurchased including vested restricted stock in exchange for withholding taxes	(43,638	)	—		(90		)	—			(90		)

Net income	—		—		—			500			500

Balance as of March 31, 2018	18,367,149		18		99,695			(821		)	98,892

Compensation expense in connection with stock options and restricted stock	—		—		461			—			461

Issuance of shares for accrued stock liability	13,594		—		64			—			64

Shares issued to employees in connection with restricted stock grants, net of forfeitures	67,052		—		—			—			—

Shares repurchased including vested restricted stock in exchange for withholding taxes	(181,593	)	—		(612		)	—			(612		)

Net loss	—		—		—			(113		)	(113		)

Balance as of June 30, 2018	18,266,202		$	18	$	99,608		$	(934	)	$	98,692

Balance as of December 31, 2018	18,138,616		$	18	$	100,097		$	(233	)	$	99,882

Issuance of common stock in connection with the acquisition of Halston Heritage	777,778		1		1,057			—			1,058

Compensation expense in connection with stock options and restricted stock	—		—		347			—			347

Net income	—		—		—			127			127

Balance as of March 31, 2019	18,916,394		19		101,501			(106		)	101,414



	For the Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net income	$	1,979		$	387
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,948			867
Amortization of deferred finance costs	79			87
Stock-based compensation	482			968
Amortization of note discount	16			20
Allowance for doubtful accounts	(144		)	—
Loss on extinguishment of debt	189			—
Deferred income tax provision	1,143			1,559
Gain on reduction of contingent obligation	(2,850		)	—

Changes in operating assets and liabilities:
Accounts receivable	2,289			(1,544		)
Inventory	1,113			(789		)
Prepaid expenses and other assets	(293		)	(48		)
Accounts payable, accrued expenses and other current liabilities	(3,544		)	529
Deferred revenue	12			6
Cash paid in excess of rent expense	(244		)	—
Other liabilities	(196		)	(80		)
Net cash provided by operating activities	1,979			1,962

Cash flows from investing activities
Cash consideration for acquisition of Halston Heritage assets	(8,830		)	—
Purchase of property and equipment	(557		)	(1,077		)
Net cash used in investing activities	(9,387		)	(1,077		)

Cash flows from financing activities
Shares repurchased including vested restricted stock in exchange for
withholding taxes	—			(702		)
Payment of deferred finance costs	(289		)	—
Proceeds from long-term debt	7,500			—
Payment of long-term debt	(2,742		)	(2,725		)
Net cash provided by (used in) financing activities	4,469			(3,427		)

Net decrease in cash, cash equivalents, and restricted cash	(2,939		)	(2,542		)

Cash, cash equivalents, and restricted cash at beginning of period	10,319			11,694

Cash, cash equivalents, and restricted cash at end of period	$	7,380		$	9,152

Reconciliation to amounts on consolidated balance sheets:
Cash and cash equivalents	$	6,271		$	7,643
Restricted cash	1,109			1,509
Total cash, cash equivalents, and restricted cash	$	7,380		$	9,152

Supplemental disclosure of non-cash activities:
Operating lease right-of-use asset	$	10,414		$	—
Operating lease obligation	$	13,215		$	—
Accrued rent offset to operating lease right-of-use assets	$	2,801		$	—
Settlement of seller note through offset to receivable	$	600		$	—
Settlement of contingent obligation through offset to note receivable	$	100		$	100



($ in thousands)	Weighted Average Amortization Period	June 30, 2019
($ in thousands)	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Trademarks (indefinite-lived)	n/a	$	69,100	$	—	$	69,100
Trademarks (finite-lived)	15 years	15,463		4,036		11,427
Trademarks (finite-lived)	18 years	37,994		1,007		36,987
Other intellectual property	7 years	762		373		389
Copyrights and other intellectual property	10 years	190		100		90
Customer list	5 years	200		17		183
Total		$	123,709	$	5,533	$	118,176



($ in thousands)
Allocated to:
Trademarks	$	10,388
Halston archives	200
Customer lists	200
Total acquisition price	$	10,788



($ in thousands, except share amounts)
Cash	$	8,350
Fair value of Common Stock issued (777,778 shares)	1,058
Total direct initial consideration	9,408
Direct transaction expenses	480
Contingent obligation	900
Total consideration	$	10,788



($ in thousands)	Operating Leases
Remainder of 2019	$	1,224
2020	2,423
2021	2,577
2022	1,732
2023	1,552
After 2023	5,950
Total lease payments	15,458
Less: Discount	3,085
Present value of lease liabilities	12,373
Current portion of lease liabilities	1,711
Non-current portion of lease liabilities	$	10,662



($ in thousands)	June 30, 2019			December 31, 2018
Xcel Term Loan	$	21,000		$	15,500
Unamortized deferred finance costs related to term loan	(220		)	(200		)
IM Seller Note	—			742
Ripka Seller Note	—			583
Contingent obligation - HH Seller	900			—
Contingent obligation - JR Seller	—			100
Contingent obligation - CW Seller	—			2,850
Total	21,680			19,575
Current portion of long-term debt (i), (ii)	4,500			8,275
Long-term debt	$	17,180		$	11,300



($ in thousands)
Period	Amount
June 30, 2019 – September 30, 2020	$	1,000

December 31, 2020	$	1,250



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2019	3,257,875		$	5.44	3.19	$	—
Granted	4,138,000		1.84
Canceled	—		—
Exercised	—		—
Expired/Forfeited	(194,250	)	5.29
Outstanding at June 30, 2019, and expected to vest	7,201,625		$	3.38	6.28	$	—
Exercisable at June 30, 2019	2,620,125		$	5.23	2.35	$	—



	Number of Options		Weighted Average Grant Date Fair Value
Balance at January 1, 2019	1,481,079		$	1.23
Granted	4,138,000		0.02
Vested	(969,914	)	1.06
Forfeited or Canceled	(67,665	)	0.99
Balance at June 30, 2019	4,581,500		$	0.18



	Number of Warrants	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding and exercisable at January 1, 2019	1,214,815	$	9.32	1.66	$	—
Granted	—	—
Canceled	—	—
Exercised	—	—
Expired/Forfeited	—	—
Outstanding and exercisable at June 30, 2019	1,214,815	$	9.32	1.16	$	—



	Number of Restricted Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	1,460,210		$	4.82
Granted	60,000		1.70
Canceled	—		—
Vested	(41,000	)	6.54
Expired/Forfeited	—		—
Outstanding at June 30, 2019	1,479,210		$	4.65



	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Basic	18,976,394	18,314,775	18,770,378	18,324,130
Effect of exercise of warrants	657	—	675	364,070
Effect of exercise of stock options	—	—	—	12,711
Diluted	18,977,051	18,314,775	18,771,053	18,700,911



($ in thousands)	Six Months Ended June 30,
($ in thousands)	2019			2018
Net income	$	1,979		$	387
Amortization of trademarks	1,523			515
Non-cash interest and finance expense	16			20
Stock-based compensation	482			968
Loss on extinguishment of debt	189			—
Gain on reduction of contingent obligation	(2,850		)	—
Deferred income tax provision	1,143			1,559
Non-GAAP net income	$	2,482		$	3,449