UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



xQUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES

EXCHANGE ACT OF 1934



FOR THE QUARTERLY PERIOD ENDED JUNE 30,
2012



COMMISSION FILE NUMBER : 0-21419



XCEL BRANDS, INC.

(Exact Name of Registrant as Specified in
Its Charter)



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



475 Tenth Ave, 4th Floor

New York, NY 10018

(Address of Principal Executive Offices)

(347)-727-2474

(Issuer's Telephone Number, Including Area
Code)



Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ̈Nox



Indicate
by check mark whether the registrant has submitted electronically and posted on its Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files) YesxNo ̈



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a small reporting company.



|Large accelerated filer ̈ | Accelerated filer ̈      
|------------------------ | ------------------------
|                         |                         
|Non- accelerated filer ̈  | Small reporting companyx



Indicate
by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈Nox



As of August 14, 2012, 7,517,387 shares of common stock, $.001
par value per share, of the issuer were outstanding.











XCEL BRANDS, INC.



INDEX



|         |                                                                                       |  | Page
|-------- | ------------------------------------------------------------------------------------- |  | ----
|         |                                                                                       |  |     
|PART I.  | FINANCIAL INFORMATION                                                                 |  |     
|         |                                                                                       |  |     
|Item 1.  | Financial Statements (Unaudited)                                                      |  |     
|         |                                                                                       |  |     
|         | Condensed Consolidated Balance Sheets                                                 |  | 3   
|         |                                                                                       |  |     
|         | Condensed Consolidated Statements of Operations                                       |  | 4   
|         |                                                                                       |  |     
|         | Condensed Consolidated Statements of Cash Flow                                        |  | 5   
|         |                                                                                       |  |     
|         | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|         |                                                                                       |  |     
|Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|         |                                                                                       |  |     
|Item 3.  | Controls and Procedures                                                               |  | 22  
|         |                                                                                       |  |     
|PART II. | OTHER INFORMATION                                                                     |  |     
|         |                                                                                       |  |     
|Item 1.  | Legal Proceedings                                                                     |  | 23  
|         |                                                                                       |  |     
|Item 1B. | Risk Factors                                                                          |  | 23  
|         |                                                                                       |  |     
|Item 5.  | Exhibits                                                                              |  | 23  
|         |                                                                                       |  |     
|         | Signatures                                                                            |  | 23  



2







Xcel Brands, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets



|                                                                                                                                                                     |  | June 30, 2012 |            |   | December 31, 2011 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | -
|                                                                                                                                                                     |  | (Unaudited)   |            |   |                   |  
|Assets                                                                                                                                                               |  |               |            |   |                   |  
|Current Assets:                                                                                                                                                      |  |               |            |   |                   |  
|Cash and cash equivalents                                                                                                                                            |  | $             | 3,663,000  |   |                   | $
|Restricted cash                                                                                                                                                      |  |               | -          |   |                   |  
|Accounts receivable                                                                                                                                                  |  |               | 2,674,000  |   |                   |  
|Prepaid expenses                                                                                                                                                     |  |               | 236,000    |   |                   |  
|Other current assets                                                                                                                                                 |  |               | 79,000     |   |                   |  
|Total current  assets                                                                                                                                                |  |               | 6,652,000  |   |                   |  
|Property and equipment:                                                                                                                                              |  |               |            |   |                   |  
|Leasehold improvements, furniture & equipment                                                                                                                        |  |               | 1,489,000  |   |                   |  
|Less: accumulated  depreciation                                                                                                                                      |  |               | 235,000    |   |                   |  
|Total property and equipment                                                                                                                                         |  |               | 1,254,000  |   |                   |  
|Other Assets:                                                                                                                                                        |  |               |            |   |                   |  
|Trademarks, goodwill and other intangibles, net                                                                                                                      |  |               | 57,197,000 |   |                   |  
|Deferred finance costs, net                                                                                                                                          |  |               | 506,000    |   |                   |  
|Deposits                                                                                                                                                             |  |               | 185,000    |   |                   |  
|Total other assets                                                                                                                                                   |  |               | 57,888,000 |   |                   |  
|Total Assets                                                                                                                                                         |  | $             | 65,794,000 |   |                   | $
|                                                                                                                                                                     |  |               |            |   |                   |  
|Liabilities and Stockholders' Equity                                                                                                                                 |  |               |            |   |                   |  
|Current Liabilities                                                                                                                                                  |  |               |            |   |                   |  
|Accounts payable and accrued expenses                                                                                                                                |  | $             | 944,000    |   |                   | $
|Deferred royalty payments, net of long term portion                                                                                                                  |  |               | 366,000    |   |                   |  
|Other current liabilities                                                                                                                                            |  |               | 128,000    |   |                   |  
|Current portion of  long term debt                                                                                                                                   |  |               | 847,000    |   |                   |  
|Total current liabilities                                                                                                                                            |  |               | 2,285,000  |   |                   |  
|Long Term Liabilities:                                                                                                                                               |  |               |            |   |                   |  
|Term loan, net of short term portion                                                                                                                                 |  |               | 11,786,000 |   |                   |  
|Seller note                                                                                                                                                          |  |               | 6,030,000  |   |                   |  
|Installment debt obligation, net of short term portion                                                                                                               |  |               | 1,002,000  |   |                   |  
|Contingent  obligations - due to seller                                                                                                                              |  |               | 17,765,000 |   |                   |  
|Deferred tax liability                                                                                                                                               |  |               | 9,748,000  |   |                   |  
|Other long term liabilities, less current portion                                                                                                                    |  |               | 365,000    |   |                   |  
|Total long term liabilities                                                                                                                                          |  |               | 46,696,000 |   |                   |  
|Total Liabilities                                                                                                                                                    |  |               | 48,981,000 |   |                   |  
|                                                                                                                                                                     |  |               |            |   |                   |  
|Stockholders' Equity:                                                                                                                                                |  |               |            |   |                   |  
|Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding                                                                           |  |               | -          |   |                   |  
|Common stock, $.001 par value, 25,000,000 shares authorized, 7,517,387 and
    5,810,444 issued and outstanding at June 30, 2012 and December 31, 2011, respectively |  |               | 7,000      |   |                   |  
|Paid in capital                                                                                                                                                      |  |               | 19,290,000 |   |                   |  
|Accumulated deficit                                                                                                                                                  |  |               | (2,484,000 | ) |                   |  
|Total stockholders' equity                                                                                                                                           |  |               | 16,813,000 |   |                   |  
|                                                                                                                                                                     |  |               |            |   |                   |  
|Total Liabilities and Stockholders' Equity                                                                                                                           |  | $             | 65,794,000 |   |                   | $



See Notes to Condensed Consolidated Interim
Financial Statements



3







Xcel Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of
Operations

(Unaudited)



|                                                      |  | For the Three Months Ended June 30, |            |   | For the Six Months Ended June 30, |  
|----------------------------------------------------- |  | ----------------------------------- | ---------- | - | --------------------------------- | -
|                                                      |  | 2012                                |            |   | 2011                              |  
|                                                      |  | Successor                           |            |   | Predecessor                       |  
|                                                      |  |                                     |            |   |                                   |  
|Licensing revenue                                     |  | $                                   | 2,507,000  |   |                                   | $
|Design and service fee income                         |  |                                     | 368,000    |   |                                   |  
|Total revenues                                        |  |                                     | 2,875,000  |   |                                   |  
|Direct licensing costs                                |  |                                     | 51,000     |   |                                   |  
|Net licensing  and service fee revenue                |  |                                     | 2,824,000  |   |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Expenses                                              |  |                                     |            |   |                                   |  
|Design and marketing costs                            |  |                                     | 1,183,000  |   |                                   |  
|General and administrative expenses                   |  |                                     | 828,000    |   |                                   |  
|Stock based compensation                              |  |                                     | 1,408,000  |   |                                   |  
|Depreciation and amortization                         |  |                                     | 215,000    |   |                                   |  
|Total expenses                                        |  |                                     | 3,634,000  |   |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Operating income (loss)                               |  |                                     | (810,000   | ) |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Interest and finance costs                            |  |                                     |            |   |                                   |  
|Interest expenses - debt                              |  |                                     | 286,000    |   |                                   |  
|Other interest and finance charges                    |  |                                     | 259,000    |   |                                   |  
|Total interest and finance costs                      |  |                                     | 545,000    |   |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Income (loss) before income taxes                     |  |                                     | (1,355,000 | ) |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Provision (benefit) for income taxes                  |  |                                     | (1,000     | ) |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Net (loss) income                                     |  | $                                   | (1,354,000 | ) |                                   | $
|                                                      |  |                                     |            |   |                                   |  
|Earnings (loss) per share:                            |  |                                     |            |   |                                   |  
|Basic and diluted                                     |  | $                                   | (0.19      | ) |                                   |  
|                                                      |  |                                     |            |   |                                   |  
|Weighted average number of common shares outstanding: |  |                                     |            |   |                                   |  
|Basic & diluted                                       |  |                                     | 6,981,216  |   |                                   |  



See Notes to Condensed Consolidated Interim
Financial Statements



4







Xcel Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of
Cash Flows

(Unaudited)



|                                                                                         |  | For the Six Months Ended June 30, |           
|---------------------------------------------------------------------------------------- |  | --------------------------------- | ----------
|                                                                                         |  | Successor                         |           
|                                                                                         |  |                                   |           
|Cash flows from operating activities                                                     |  |                                   |           
|Net income (loss)                                                                        |  | $                                 | (1,192,000
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                   |           
|Depreciation and amortization expense                                                    |  |                                   | 424,000   
|Amortization of deferred finance costs                                                   |  |                                   | 62,000    
|Stock-based compensation                                                                 |  |                                   | 1,436,000 
|Amortization of seller note discount                                                     |  |                                   | 264,000   
|Amortization of senior note discount                                                     |  |                                   | 117,000   
|Deferred income tax provision                                                            |  |                                   | (82,000   
|Changes in operating assets and liabilities:                                             |  |                                   |           
|Accounts receivable                                                                      |  |                                   | (483,000  
|Prepaid expenses                                                                         |  |                                   | 95,000    
|Other assets                                                                             |  |                                   | 6,000     
|Accounts payable  and accrued expenses                                                   |  |                                   | 88,000    
|Royalty advances                                                                         |  |                                   | 184,000   
|Other liabilities                                                                        |  |                                   | 106,000   
|Net cash provided by operating activities                                                |  |                                   | 1,025,000 
|                                                                                         |  |                                   |           
|Cash flows from investing activities                                                     |  |                                   |           
|Purchase of property and equipment                                                       |  |                                   | (91,000   
|Increase in long term security deposit                                                   |  |                                   | (175,000  
|Reduction of restricted cash                                                             |  |                                   | 175,000   
|Net cash used in investing activities                                                    |  |                                   | (91,000   
|                                                                                         |  |                                   |           
|Cash flows from financing activities                                                     |  |                                   |           
|Member distributions                                                                     |  |                                   | -         
|Proceeds from issuance of common stock                                                   |  |                                   | -         
|Payment of expenses related to equity & recapitalization                                 |  |                                   | (3,000    
|Reduction deferred finance costs                                                         |  |                                   | 22,000    
|Repayment of lease obligation                                                            |  |                                   | (8,000    
|Net cash provided by (used in) financing activities#                                     |  |                                   | 11,000    
|                                                                                         |  |                                   |           
|Net increase (decrease) in cash#                                                         |  |                                   | 945,000   
|                                                                                         |  |                                   |           
|Cash and cash equivalents, beginning of period #                                         |  |                                   | 2,718,000 
|                                                                                         |  |                                   |           
|Cash and cash equivalents, end of period #                                               |  | $                                 | 3,663,000 
|                                                                                         |  |                                   |           
|Supplemental disclosure of non-cash information                                          |  |                                   |           
|Warrants issued to Licensee                                                              |  | $                                 | 23,000    
|                                                                                         |  |                                   |           
|Forfeiture of employee stock grants                                                      |  | $                                 | (2,000    
|                                                                                         |  |                                   |           
|Supplemental disclosure of cash flow information,                                        |  |                                   |           
|Cash paid during the period for income taxes                                             |  | $                                 | 62,000    
|Cash paid during the period for interest                                                 |  | $                                 | 606,000   



See Notes to Condensed Consolidated Interim
Financial Statements



5







XCEL BRANDS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Interim Financial Statements



| | 1. | NATURE OF OPERATIONS, BACKGROUND, BASIS OF PRESENTATION AND REVERSE ACQUISITION
| | -- | -------------------------------------------------------------------------------



The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management
of Xcel Brands, Inc., (“Xcel”, the "Company", “we”, “us”, or “our”),
all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the three months (“Current Quarter”) and six months (“Current Six Months”) ended
June 30, 2012 are not necessarily indicative of the results that may be expected for a full fiscal year.



On September 29, 2011 (the “Acquisition
Date”), the Company, formerly known as Net Fabrics Holdings, Inc. merged with Xcel Brands, Inc (“Old XCel”) and
acquired from IM Ready-Made, LLC (“IM Ready”) certain assets and assumed certain obligations (the “Isaac Mizrah”) whereby the Isaac Mizrahi Business was deemed to be the Predecessor of the Company for financial
statement presentation purposes. Accordingly, the accompanying financial statements designate periods preceding the Acquisition
Date as relating to the Predecessor and all references to periods on and after September 29, 2011 shall be referred to as Successor.



For further information,
refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2011 (“2011”).



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



Principles of Consolidation



The consolidated financial statements include
the accounts of Xcel Brands, Inc. and its wholly owned subsidiaries. All material inter-company accounts and transactions have
been eliminated in consolidation.



Presentation of Predecessor Financial
Statements



The financial statements covered by the
Predecessor have been prepared for the purpose of complying with the rules and regulations of the U.S. Securities and Exchange
Commission. The Isaac Mizrahi Business was not a separate legal entity, thus the financial statements are not necessarily indicative
of the results of operations that would have occurred if the Isaac Mizrahi Business had been operated as a separate legal entity.



All of the allocations and estimates in
the accompanying Predecessor financial statements are based on assumptions that IM Ready and Xcel management (collectively “management”)
believe are reasonable, and reasonably approximate the historical costs that the Isaac Mizrahi Business would have incurred as
a separate entity. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would
have resulted if the Isaac Mizrahi Business had been operated as a separate entity. The allocation of expenses were made to comply
with the guidance provided by Staff Accounting Bulletin Topic 1B1, “Allocation of Expenses and Related Disclosure in Financial
Statements of Subsidiaries, Divisions or Lesser Business Components of another Entity”.



Use of Estimates



The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates.



Fair Value of Financial Instruments



The carrying amounts of the Company’s
assets and liabilities approximate their fair value presented in the accompanying Consolidated Balance Sheets, due to their short
maturities.



Trademarks, Goodwill and Other Intangible Assets



Goodwill represents the excess of cost
over the fair value of net assets of businesses acquired. The Company accounts for goodwill under the guidance of the Accounting
Standards Codification (“ASC”) Topic 350 – “Intangibles: Goodwill and Other”. Goodwill and other
intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment, at least annually, in accordance with this guidance. This guidance also requires that intangible
assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment.



6







In accordance with the guidance of ASC
Topic 350, long-lived assets, such as property and equipment and purchased intangible assets subject to amortization are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.



Contingent Obligations



Management will analyze and quantify the
expected earn-out payments over the applicable pay-out period.  Management will assess no less frequently than each reporting
period the status of contingent obligations and any expected changes in the fair market value of such contingent obligations.  Any
change in the expected obligation will result in an expense or income recognized in the period in which it is determined fair market
value of the carrying value has changed. There was no change in the contingent obligation for the six months ended June 30, 2012.



Income Taxes



Income tax expense
consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income
taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted
rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.



ASC Topic 740
clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Tax positions shall
initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination
by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that
has a probability of fifty percent (50%) or greater of being realized upon ultimate settlement with the tax authority, assuming
full knowledge of the position and all relevant facts.



Significant Contracts



QVC Agreement



In connection with the Company’s
agreement with QVC, Inc. (“QVC”) QVC is required to pay royalties based primarily on a percentage of QVC's net sales
of Isaac Mizrahi branded merchandise. QVC royalty revenue represents a significant portion of the Company’s total revenues.
Royalties from QVC totaled $1,900,000 and $1,650,000 for the Current Quarter and for the three months ended June 30, 2011 (the
“Prior Year Quarter”), respectively, representing 66% and 57% of the Company’s total revenues, respectively.
Royalties from QVC totaled $3,800,000 and $3,300,000 for the Current Six Months and for the six months ended June 30, 2011 (the
“Prior Six Months”), respectively, representing 66% and 57% of the Company’s total revenues, respectively. As of June
30, 2012, the Company had a receivable from QVC in the amount of $1,900,000, representing 71% of the Company’s receivables.
As of June 30, 2011, the Predecessor had a receivable from QVC in the amount of $1,650,000 representing 75% of the Predecessor’s
receivables.



LC Agreement



In connection with the Company’s
agreement with Liz Claiborne, Inc. (“LC”) (the “LCNY Agreement”) LC is required to pay the Company royalties
based primarily on a percentage of royalties LC receives from QVC under a separate license agreement between LC and QVC. Revenues
from the LCNY Agreement totaled $375,000 and $200,000 for the Current Quarter and the Prior Year Quarter, respectively, representing
13% and 7% of the Company’s total revenues. Revenues from the LCNY Agreement totaled $750,000 and $400,000 for the Current
Six Months and the Prior Six Months, respectively, representing 13% and 7% of the Company’s total revenues. As of June 30,
2012, the Company had a receivable from LC in the amount of $753,000, representing 28% of the Company’s receivables. As of
June 30, 2011, the Predecessor had a receivable from LC in the amount of $208,000 representing 11% of the Predecessor’s receivables.



LC/QVC Design fees



In connection with the Company’s
design agreement with QVC for the term of the LCNY Agreement (the “Design Agreement”), QVC is required to pay certain
design fees to the Company related to the Liz Claiborne New York brand.  Revenues from the Design Agreement totaled approximately
$275,000 and $275,000 for the Current Quarter and the Prior Year Quarter, respectively, representing 10% and 10% of the Company’s
total revenues. Revenues from the Design Agreement totaled approximately $550,000 and $550,000 for the Current Six Months and the
Prior Six Months, respectively, representing 9% and 10% of the Company’s total revenues.



7







Revenue Recognition



The Company recognizes revenue when persuasive
evidence of a sale arrangement exists, delivery has occurred and services have been rendered, the sales price is fixed and determinable,
and collectability is reasonably assured. The Company has two primary types of revenues: (i) royalties based on the sale of products
by its licensees or other contractual partners, and (ii) service fees based on services provided. Revenues from royalties are recognized
when earned, which includes guaranteed minimum royalties, if any, and additional revenues based on a percentage of defined sales
by our licensees or other contractual partners for each period. Royalties exceeding the guaranteed minimum amounts are recognized
as income during the period that corresponds to the licensee’s or partner’s sales.



Design and service fees are recorded and
recognized in accordance with the terms and conditions of each service contract, including the Company meeting its obligations
and providing the relevant services under each contract.  Generally, we record on a straight line basis each base fee as stated
in each service agreement for the covered period and, if applicable, we recognize additional payments received that relate
to a future period as deferred revenue, until service is provided or revenue is otherwise earned.



Stock Based Compensation



The Company accounts for stock-based compensation
in accordance with ASC Topic 718 by recognizing the fair value of stock-based compensation in the consolidated statement of operations.  The
fair value of the Company’s stock option awards are estimated using a Black-Scholes option valuation model. This model requires
the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each
award. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be
forfeited during the vesting period. The fair value of the Company’s stock grant awards is valued at the current value of
the stock at the time of the grant. The fair value of stock-based awards is amortized over the vesting period of each respective
award.  For stock-based awards that vest based on performance conditions (e.g. achievement of certain milestones), expense
is recognized when it is probable that the condition will be met.



Earnings per Share



Basic earnings per share includes no dilution
and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of restricted stock-based
awards and common shares issuable upon exercise of stock options and warrants. The difference between basic and diluted weighted-average
common shares results from the assumption that all dilutive stock options outstanding were exercised and all convertible notes
have been converted into common stock.



As of June 30, 2012, of the total potentially
dilutive shares related to stock options and warrants, 921,251 were anti-dilutive and not included in the computation of diluted
shares outstanding. For the three months and six months ended June 30, 2012, basic and diluted weighted average shares are the
same. There are no comparative results for the prior year quarter.



Recently Issued Accounting Standards



Management does not believe that any recently
issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s
consolidated financial statements.



8







3. Trademarks, Goodwill and Other Intangibles



Trademarks, goodwill and other intangibles, net consist of the
following:



|                           |  |           |            |  | June 30, 2012 |   |            | December 31, 2011 | 
|-------------------------- |  | --------- | ---------- |  | ------------- | - | ---------- | ----------------- | 
|                           |  |           |            |  | (Unaudited)   |   |            |                   | 
|                           |  | Estimated |            |  | Gross         |   |            |                   | 
|                           |  | Lives in  |            |  | Carrying      |   |            | Accumulated       | 
|                           |  | Years     |            |  | Amount        |   |            | Amortization      | 
|                           |  |           |            |  |               |   |            |                   | 
|Indefinite life trademarks |  |           | Indefinite |  |               | $ | 44,500,000 |                   | 
|Goodwill                   |  |           | Indefinite |  |               |   | 11,096,000 |                   | 
|Licensing agreements       |  |           | 4          |  |               |   | 2,000,000  |                   | 
|                           |  |           |            |  |               | $ | 57,596,000 |                   | 



Amortization expense for intangible assets
for the Current Quarter and the Current Six Months was $132,000 and $264,000, respectively. The trademarks of Isaac Mizrahi and
related goodwill have been determined to have an indefinite useful life and accordingly, consistent with ASC Topic 350, no amortization
has been recorded in the Company's unaudited consolidated statement of operations. Instead, each of these intangible assets are
tested for impairment, at least annually, on an individual basis as separate single units of accounting, with any related impairment
charge recorded to the statement of operations at the time of determining such impairment.  Similarly, consistent with ASC
360, there was no impairment of the indefinite-lived trademarks.



4.  Debt



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



|                                      |  | June 30,    |            |  | December 31, |  
|------------------------------------- |  | ----------- | ---------- |  | ------------ | -
|                                      |  | 2012        |            |  | 2011         |  
|                                      |  | (Unaudited) |            |  |              |  
|Term Note                             |  | $           | 12,461,000 |  |              | $
|Seller Note                           |  |             | 6,030,000  |  |              |  
|Installment debt obligation           |  |             | 1,174,000  |  |              |  
|Contingent obligation – due to Seller |  |             | 17,765,000 |  |              |  
|Other liabilities                     |  |             | 365,000    |  |              |  
|Total                                 |  |             | 37,795,000 |  |              |  
|Current portion                       |  |             | 847,000    |  |              |  
|Total long term liabilities           |  | $           | 36,948,000 |  |              | $



Term Loan



On September 29, 2011, IM Brands, LLC a
wholly-owned subsidiary of the Company (“IM Brands”), entered into a five year senior secured facility (the “Loan”)
with Midmarket Capital Partners, LLC (“MidMarket”) and Noteholders in the aggregate principal amount of $13,500,000. The
Loan is secured by all of the assets of IM Brands and the Company’s membership interests in IM Brands.



The principal amount of the Loan is payable
quarterly as follows:  0% until January 5, 2013, 2.5% on January 5, 2013 through October 5, 2013; 3.75% on January 5,
2014 through October 5, 2014; 6.25% on January 5, 2015 through October 5, 2015; 12.5% on January 5, 2016 through the maturity date,
which is the date that is 5 years after the closing date.



Annual principal obligations are as follows:



|      |  |   | Year Ending December 31, | 
|----- |  | - | ------------------------ | 
|2012  |  | $ | -                        | 
|2013  |  |   | 1,350,000                | 
|2014  |  |   | 2,025,000                | 
|2015  |  |   | 3,375,000                | 
|2016  |  |   | 6,750,000                | 
|Total |  | $ | 13,500,000               | 



The interest rate on the loan is a fixed
rate of 8.5%, payable in cash.



9







Optional Prepayment.  IM
Brands may prepay the Loan in whole or in part in increments of $500,000, provided that IM Brands pay the following premiums in
connection with the prepayment:



|Period                            |  | Applicable Premium |  
|--------------------------------- |  | ------------------ | -
|First year following the Closing  |  |                    | 3
|Second year following the Closing |  |                    | 2
|Third year following the Closing  |  |                    | 1
|Fourth year following the Closing |  |                    | 0



Mandatory Prepayments.
IM Brands is required to prepay the Loan under the following conditions:  (1) if certain indebtedness is incurred by
the Company; (2) if IM Brands undertakes certain asset sales or sales of capital stock, with limited exceptions; or (3) if there
is a payment of the benefits of a life insurance policy for Isaac Mizrahi held by the Company.



Excess Cash Flow Sweep.
In addition to the Mandatory Prepayments described above, if for any fiscal year ending on or subsequent to December 31, 2012,
there is excess cash flow (as defined in the Loan agreements) for such year, then on the payment date following the end of such
year, IM Brands is required to make a principal payment on the Loan equal to the lesser of (i) 50% of the excess cash flow or (ii)
the positive result of the unencumbered cash and cash equivalents of the Company minus the greater of (x) the Excess Liquidity
required to be maintained by IM Brands and (y) $3,000,000. For the period ended June 30, 2012, there was no Excess Cash Flow Sweep
payment due.



Lender Warrants. At the closing
of the Loan, the Company issued to the Noteholders seven year warrants (the “Lender Warrants”) to purchase 364,428
shares of the Common Stock, representing 5% of the Common Stock outstanding as of the Closing Date on a fully diluted basis.  The
warrants have an exercise price of $0.01 and contain a cashless exercise provision.  The Company granted to the holders
of the Lender Warrants piggy-back registration rights with respect to the shares of Common Stock issuable upon exercise of the
Lender Warrants.  The carrying value of the Term Loan has been reduced by the market value of the warrants, equal to
$3.33 per share.  The Company used the black scholes method to determine valuation.  The amount of the original
loan discount is $1,214,000, resulting in an initial net loan balance of $12,286,000.  The Term Loan balance as of June 30,
2012 is $12,461,000.



Financial Covenants .  So
long as the Loan remains unpaid or unsatisfied, IM Brands shall not, and shall not permit any of its subsidiaries to, directly
or indirectly:



| | 1. | Minimum Liquidity .  Permit Excess Liquidity to be less than the amount set forth below during each applicable
period set forth below:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------



|Fiscal Quarter                               |  | Excess Liquidity |          
|-------------------------------------------- |  | ---------------- | ---------
|September 29, 2011 through December 31, 2011 |  | $                | 1,500,000
|January 1, 2012 through March 31, 2012       |  | $                | 1,750,000
|April 1, 2012 through June 30, 2012          |  | $                | 2,250,000
|July 1, 2012 through September 30, 2012      |  | $                | 2,750,000
|October 1, 2012 through June 30, 2013        |  | $                | 3,000,000
|July 1, 2013 through September 30, 2013      |  | $                | 3,250,000
|October 1, 2013 through March 31, 2014       |  | $                | 3,500,000
|April 1, 2014 through June 30, 2014          |  | $                | 3,750,000
|July 1, 2014 and thereafter                  |  | $                | 4,000,000



| | 2. | Capital Expenditures .  Permit the aggregate amount of Capital Expenditures to exceed $400,000 (whether or
not financed) per year.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | 3. | Consolidated Fixed Charge Coverage Ratio .  Permit the Consolidated Fixed Charge Coverage Ratio as of the
end of each of the fiscal quarters ending on the dates (or for the periods) set forth for the period of four fiscal quarters ending
on such dates (or for the periods) below to be less than the ratio set forth below opposite such period:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                            |  |  | Minimum Fixed Charge | 
|------------------------------------------------------------------------------------------- |  |  | -------------------- | 
|Trailing Four Fiscal Quarters Ending                                                        |  |  | Coverage Ratio       | 
|September 30, 2012 and December 31, 2012                                                    |  |  | 1.90 to 1.00         | 
|March 31, 2013 and June 30, 2013                                                            |  |  | 1.60 to 1.00         | 
|September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014 and September 30, 2014 |  |  | 1.50 to 1.00         | 
|December 31, 2014 and March 31, 2015                                                        |  |  | 1.30 to 1.00         | 
|June 30, 2015 and thereafter                                                                |  |  | 1.15 to 1.00         | 



10







| | 4. | Consolidated Total Leverage Ratio .  Permit the Consolidated Total Leverage Ratio as of the end of each of
the fiscal quarters ending on the dates (or for the periods) set forth for the period of four fiscal quarters ending on such dates
(or for  the periods) below to be greater than the ratio set forth below opposite such period:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                         |  |  | Maximum        | 
|---------------------------------------- |  |  | -------------- | 
|                                         |  |  | Consolidated   | 
|Trailing Four Fiscal Quarters Ending     |  |  | Leverage Ratio | 
|September 30, 2012 and December 31, 2012 |  |  | 3.50 to 1.00   | 
|March 31, 2013                           |  |  | 3.30 to 1.00   | 
|June 30, 2013 and September 30, 2013     |  |  | 3.00 to 1.00   | 
|December 31, 2013                        |  |  | 2.75 to 1.00   | 
|March 31, 2014                           |  |  | 2.25 to 1.00   | 
|June 30, 2014 and thereafter             |  |  | 2.00 to 1.00   | 



| | 5. | Minimum Consolidated EBITDA .  Permit Consolidated EBITDA as of the end of each of the fiscal quarters ending
on the dates set forth for the period of four fiscal quarters ending on such dates below to be less than the amount set forth opposite
such quarter in the table below; provided that for the fiscal quarters ended on December 31, 2011, March 31, 2012 and June
30, 2012, such periods shall be one fiscal quarter, two fiscal quarters and three fiscal quarters, respectively:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Fiscal Quarter                       |  | Consolidated EBITDA |          
|------------------------------------ |  | ------------------- | ---------
|December 31, 2011                    |  | $                   | 250,000  
|March 31, 2012                       |  | $                   | 1,250,000
|June 30, 2012                        |  | $                   | 2,500,000
|September 30, 2012                   |  | $                   | 4,000,000
|December 31, 2012 and March 31, 2013 |  | $                   | 4,250,000
|June 30, 2013                        |  | $                   | 4,500,000
|September 30, 2013                   |  | $                   | 4,750,000
|December 31, 2013 and thereafter     |  | $                   | 5,000,000



| | 6. | Dividend Restrictions .  Permit any cash dividends or any other equity distributions.
| | -- | -------------------------------------------------------------------------------------



| | 7. | Restricted Cash Payments .  Permit any cash payments for the Seller Note or any contingent earn-out obligations.
| | -- | ----------------------------------------------------------------------------------------------------------------



As of June 30, 2012, the Company and IM Brands, LLC were in
full compliance with all of the covenants under the Loan.



Seller Note



Pursuant to the Purchase Agreement, at
the closing, the Company delivered to IM Ready a promissory note (the “Seller Note”) in the principal amount of $7,377,000.  The
stated interest rate of the Seller Note is 0.25%.  Management has determined that this rate is below the Company’s
expected borrowing rate, which is 9.25%.  Therefore, the Company has discounted the Seller Note by $1,740,000 using a
9.0%, imputed annual interest rate, resulting in a current value of $5,637,000.  In addition, the Company pre-paid $123,000
of interest on the Seller Note on the Closing Date.  The Seller Note balance at June 30, 2012 is $6,030,000.



The Seller Note initially matures three
years from the Closing Date (the “Maturity Date”) subject to extension as described below (the date to which the maturity
date of the Seller Note is extended is referred to as the “Subsequent Maturity Date”).  We have the right
to pay the Seller Note at the Maturity Date in cash or, subject to the following conditions, in shares of Common Stock.  If
we elect to repay the outstanding principal amount of the Seller Note on the Maturity Date by issuing shares of Common Stock, the
number of shares issuable will be obtained by dividing the principal amount of the Seller Note then outstanding by the greater
of (i) the fair market value of the Common Stock on the Maturity Date and (ii) $4.50 subject to certain adjustments; provided,
however, that if the fair market value of the Common Stock is less than $4.50 as adjusted, IM Ready will have the option to extend
the maturity of the Seller Note to the Subsequent Maturity Date. If the maturity date of the Seller Note is so extended, IM Ready
will have the option to convert the Seller Note into Common Shares based on the greater of (i) the fair market value of the Common
Stock on the Subsequent Maturity Date and (ii) $4.50, subject to certain adjustments. If the maturity date of the Seller Note
is extended, we will also have the option to repay the outstanding principal amount of the Seller Note on the Subsequent Maturity
Date in cash or by issuing the number of shares of Common Stock obtained by dividing the principal amount of the Note outstanding
on the Subsequent Maturity Date by the fair market value of the Common Stock on the Maturity Date.  In addition, at any
time the Seller Note is outstanding, we have the right to convert the Note, in whole or in part, into the number of shares of Common
Stock obtained by dividing the principal amount to be converted by the fair market value of the Common Stock at the time of the
conversion, so long as the fair market value of our Common Stock is at least $4.50.



11







Long Term Installment Obligations



Prior to the Acquisition Date, Earthbound,
LLC (“Earthbound”) had certain rights and provided certain services to IM Ready related to the Isaac Mizrahi Business.
Effective as of the Acquisition Date, IM Ready and Earthbound entered into the Services Agreement pursuant to which Earthbound
provided transitional services to IM Ready prior to the Acquisition Date and for which Earthbound received from IM Ready $600,000
in cash on the Acquisition Date and IM Ready agreed to pay to Earthbound an additional payment of $1,500,000 (the “Future
Payment”), with such amount payable over the next five years. The Company assumed the obligations related to the Future Payment
from IM Ready upon its acquisition of the Isaac Mizrahi Business. The five-year obligation is non-interest bearing and the
Company has discounted the amount of the installment obligation by a 9.25% imputed annual interest rate, resulting in an initial
value of $1,132,000. The balance of the Installment Obligation at June 30, 2012 is $1,174,000.



Payments are due quarterly beginning March
2012.  Annual remaining payments are as follows:



|      |  | Year Ending December 31, |          
|----- |  | ------------------------ | ---------
|2012  |  | $                        | 113,000  
|2013  |  |                          | 325,000  
|2014  |  |                          | 325,000  
|2015  |  |                          | 350,000  
|2016  |  |                          | 350,000  
|Total |  | $                        | 1,463,000



Capitalized Lease Obligations



The Company assumed the obligations from
the Seller under an equipment lease through February 2013.  The net discounted payments of the lease obligations are
in excess of 90% of the fair market value (FMV) of the equipment.  The Company has capitalized the discounted lease payments
by its imputed interest rate of 9.25%. The capital lease obligation balance at June 30, 2012 is $12,000.



5.          
Stockholders’ Equity



2011 Equity Incentive Plan



The Company’s 2011 Equity Incentive
Plan (the “Plan”) is designed and utilized to enable the Company to offer 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 2,500,000 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 Board,
or, at the Board's discretion, a committee of the Board. On October 17, 2011, the Company issued to the board 250,000 options.  
33.33% vest immediately, 33.33% vest on the first anniversary of the grant and the 33.34% vest on the second anniversary of the
grant.  On October 21, 2011 the Company issued to employees (non-management) 17,125 stock options and 17,125 restricted
stock grants. The employee stock options and restricted stock grants vest 50% on the first anniversary of the grant and 50% vest
on the second anniversary of the grant.



On April 17, 2012, the Company issued to management an aggregate
of 1,100,000 restricted stock grants. The vesting date of 1,025,000 shares of restricted stock is November 15, 2012, provided,
however, that each such grantee may extend the vesting date by six-month increments in his or her sole discretion. The vesting
date of 37,500 shares of restricted stock is May 15, 2013, provided however, the executive may extend the vesting date by six-month
increments in his sole discretion. The vesting date of 37,500 shares of restricted stock is May 15, 2014, provided however, the
executive may extend the vesting date by six-month increments in his sole discretion.



Also, on April 17, 2012, the Company granted 50,000 shares of
restricted stock to a non-executive employee. The vesting date of the 50,000 shares of restricted stock is November 15, 2012, provided
however, the employee may extend the vesting date by six-month increments in her sole discretion.



On May 1, 2012, the Company granted options to purchase an aggregate
of 105,500 shares of Common Stock (the “Options”) to non-executive employees of the Company. The exercise price per
share of the Options is $3.00 per share, and 50% of the Options will vest on each of the first and second anniversaries of the
grant date.



On June 1, 2012, the Company issued to non-management directors
138,335 restricted stock grants. The vesting date of 138,335 shares of restricted stock is December 1, 2012, provided, however,
that each such grantee may extend the vesting date by six-month increments in his sole discretion.



On June 1, 2012, the Company issued to management 242,775 restricted
stock grants. The vesting date of 242,775 shares of restricted stock is December 1, 2012, provided, however, that each such grantee
may extend the vesting date by six-month increments in his sole discretion.



Also, on June 1, 2012, the Company granted 13,833 shares of
restricted stock to a non-executive employee. The vesting date of the 13,833 shares of restricted stock is December 1, 2012, provided
however, the employee may extend the vesting date by six-month increments in her sole discretion.



12







Licensee Warrants



As part of the terms and conditions of
a certain license agreement effective October 1, 2011, we issued warrants to purchase 75,000 shares of common stock to a licensee.  The
Warrants are exercisable in whole or in part, at an exercise price of $5.50 per share (“Exercise Price”).  The
Warrants may be exercised at any time upon the election of the holder, beginning on January 23, 2012, the date of issuance, and
ending of the fifth anniversary of the date of issuance.   Upon the expiration of the Warrant exercise period, the Warrants
will expire and become void and worthless.



Stock Options



The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.
The Company's employee stock options have characteristics significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value estimate.



The fair value for these options and warrants
for all years was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average
assumptions:





|Expected Volatility     |  |  | 35-42          | %
|----------------------- |  |  | -------------- | -
|Expected Dividend Yield |  |  | 0              | %
|Expected Life (Term)    |  |  | 3 – 5.75 years |  
|Risk-Free Interest Rate |  |  | 0.42% - 0.98   | %



The options that the Company granted
under its plans expire at various times, either five, seven or ten years from the date of grant, depending on the particular
grant.



Options



|                                 |  |         |         |   | Weighted-Average |  
|-------------------------------- |  | ------- | ------- | - | ---------------- | -
|                                 |  | Options |         |   | Exercise Price   |  
|                                 |  |         |         |   |                  |  
|Outstanding at December 31, 2011 |  |         | 267,701 |   |                  | $
|Granted                          |  |         | 105,500 |   |                  |  
|Canceled                         |  |         | -       |   |                  |  
|Exercised                        |  |         | -       |   |                  |  
|Expired/Forfeited                |  |         | (500    | ) |                  |  
|Outstanding at June 30, 2012     |  |         | 372,701 |   |                  | $
|Exercisable at June 30, 2012     |  |         | 83,076  |   |                  | $



Compensation expense related to stock option
grants for the Current Quarter and the Current Six Months was $18,000 and $29,000, respectively.  There was no compensation
expense prior to the Successor period. An additional amount of $148,000 is expected to be expensed over a period of 22-months.



13







Warrants



|                                 |  |          |           |   | Weighted-Average |  
|-------------------------------- |  | -------- | --------- | - | ---------------- | -
|                                 |  | Warrants |           |   | Exercise Price   |  
|                                 |  |          |           |   |                  |  
|Outstanding at December 31, 2011 |  |          | 1,219,543 |   |                  | $
|Granted                          |  |          | 75,000    |   |                  |  
|Canceled                         |  |          | -         |   |                  |  
|Exercised                        |  |          | (162,500  | ) |                  |  
|Expired/Forfeited                |  |          | -         |   |                  |  
|Outstanding at June 30, 2012     |  |          | 1,132,043 |   |                  | $
|Exercisable at June 30, 2012     |  |          | 1,032,043 |   |                  | $



The Company values warrants issued to non-employees
at the commitment date at the fair market value of the instruments issued, a measure which is more readily available than the fair
market value of services rendered, using the Black-Scholes model. The fair market value of the instruments issued is expensed over
the vesting period with the exception of warrants issued to the Company’s licensee, whereby these warrants reduce license
revenue recognized by the Company related to such licensee over the initial 5-year term of the licensee agreement. The stock based
compensation recorded for the Current Quarter and the Current Six Months is $11,000 and $22,000, respectively. An additional amount
of $55,000 is expected to be expensed evenly over a period of 15 months. In addition, licensing revenues were reduced for the Current
Quarter and the Current Six Months by $1,000 and $2,000, respectively. An additional amount of $20,000 is expected to off-set license
revenues evenly over a period of 51-months. There was no compensation expense or reduction of licensed revenues prior to the Successor
period.



The Company issued warrants to purchase
430,500 shares of common stock to investors as part of an equity offering in a private placement on September 29, 2011 (see the
Company’s 8-K/A filed with the Securities and Exchange Commission on January 12, 2012 for details). Each warrant provides
the holder with the right to purchase one share of common stock for $.01 per share. During the three months ended June 30, 2012,
162,500 shares were exercised. As of June 30, 2012 there were warrants to purchase 218,000 shares of common stock outstanding,
which expire on September 29, 2016.



Restricted Stock



Compensation cost
for restricted stock is measured as the excess, if any, of the market price of the Company’s stock at the date the common
stock is issued over the amount the employee must pay to acquire the stock (which is generally zero). The compensation cost, net
of projected forfeitures, is recognized over the period between the issue date and the date any restrictions lapse, with compensation
cost for grants with a graded vesting schedule recognized on a straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in substance, multiple awards. The restrictions do not affect voting and dividend
rights.



|                                 |  | Restricted |          
|-------------------------------- |  | ---------- | ---------
|                                 |  | Shares     |          
|                                 |  |            |          
|Outstanding at December 31, 2011 |  |            | 17,125   
|Granted                          |  |            | 1,544,943
|Canceled                         |  |            | -        
|Vested                           |  |            | -        
|Expired/Forfeited                |  |            | (500     
|Outstanding at June 30, 2012     |  |            | 1,561,568







Compensation expense related to restricted stock grants for the Current Quarter and Current Six Months was $1,379,000 and $1,386,000,
respectively. There was no compensation expense prior to the Successor period. An additional amount of $3,320,000 is  is recorded as  unamortized restricted stock and netted against additional paid in capital on the balance sheet of
which  $3,129,000 is expected to be expensed the remainder of this year and an additional
amount of $171,000 is expected to be expensed by May 15, 2014.

Shares Available Under the Company’s
2011 Equity Incentive Plan



At June 30, 2012, there were 566,307 shares
of common stock available for issuance under the Company’s 2011 Equity Incentive Plan (the “Plan”).



14







Shares Reserved for Issuance



At June 30, 2012, there were 2,071,051
shares of common stock reserved for issuance under the Plan and outstanding warrants and stock options not covered under the Plan.



Dividends



The Company has not paid any dividends to date.



| | 6. | Related Party Transactions
| | -- | --------------------------



Todd Slater



On August 12, 2011, Old XCel entered into a one year agreement
which was amended on October 4, 2011, with Todd Slater, who was appointed as a director of the Company commencing on October 17,
2011, for services related to the Company’s licensing strategy and introduction of potential licensees. During the term
of the agreement or during the year following the expiration of the term of the agreement, if the Company enters into a license
or distribution agreement with a licensee introduced by Mr. Slater, Mr. Slater will receive a commission equal to fifteen percent
(15%) of all net royalties received by the Company during the first term of such agreement, payable within thirty days of receipt
of the net royalties.  Mr. Slater earned $10,599 and $18,133 in fees for the Current Quarter and Current Six Months,
respectively. (See Note 7 Subsequent Events).



Licensing Agent Agreement



On August 2, 2011, Old XCel entered into a licensing agent agreement
with Adam Dweck (“AD”) who is an Executive Vice President of Earthbound pursuant to which AD is entitled to a five
percent (5%) commission on any royalties we receive under any new license agreements that he procures for us during the initial
term of such license agreements. We are obligated to grant to AD 5-year warrants to purchase 12,500 shares of common stock at an
exercise price of $5.00 per share, subject to the AD generating $0.5 million of accumulated royalties and an additional 5-year
warrants to purchase 12,500 shares of common stock at an exercise price of $5.00 per share, subject to the AD generating $1.0 million
of accumulated royalties. Additionally, AD shall be entitled to receive 5-year warrants to purchase 25,000 shares of common stock
priced at the fair market value at the time of issuance, subject to AD generating $2.0 million of accumulated royalties. AD is
the son of Jack Dweck, who is a 10% shareholder of the Company and has been granted observer rights related to the Company’s
meetings of its board of directors. AD earned $2,586 and $5,142 in fees for the Current Quarter and Current Six Months, respectively.
Through June 30, 2012, AD has not earned any warrants.



Jones Texas, LLC



Ed Jones, a principal shareholder and chief executive officer
of Jones Texas, LLC was appointed to the Company’s board of directors following the Acquisition Date, which appointment became
effective on October 17, 2011. Jones Texas, LLC procured a license for the Company which the Company agreed to remit 15% of the
license revenues for the initial term of the license. Jones Texas, LLC earned $750 and $1,500 in fees for the Current Quarter and
Current Six Months, respectively.



IM Ready-Made, LLC



The Company and IM Ready-Made, LLC had transactions between
each other relating to the transitions of the Isaac Mizrahi Business from IM Ready to the Company. In addition, IM Ready received
payments in the 4 th quarter 2011 and 1 st quarter 2012 that related to periods after the Predecessor period.
As of June 30, 2012 IM Ready owes the Company approximately $79,000 which is recorded in ‘other current assets’ on
the condensed balance sheet. IM Ready has agreed to reimburse the Company in full by October 1, 2012, including paying interest
to the Company beginning from April 1, 2012 at a rate equal to the Seller Note interest rate of 0.26% per annum.



| | 7. | Subsequent Events
| | -- | -----------------



On July 10, 2012, XCel Brands, Inc. (the
“Company”) and Todd Slater (“TS”), a director of the Company, entered into an amendment (the “Amendment”)
to the agreement between the Company and TS related to the introduction of potential licensees by TS to the Company dated August
12, 2011 and amended on October 4, 2011. Pursuant to the Amendment, the Company agreed to pay to Mr. Slater $163,000 as payment
in full for (i) the cancellation of all amounts which are or may otherwise become due or payable to Mr. Slater under the terms
of the agreement for licensees already introduced to the Company by TS and which TS was entitled to fifteen percent (15%) of the
revenues from such licensees under the agreement, and (ii) the assignment to the Company of all such amounts payable directly to
Mr. Slater pursuant to such license agreements.



15







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 Risk Section of this Form 10-K. The words “believe”, “anticipate,” “expect”, “confident”,
“project”, “provide”, “plan”, “likely”, “future”, “ongoing”,
“intend”, “may”, “should”, “would”, “could”,  “guidance”
and similar expressions identify forward-looking statements.



Overview



On September 29, 2011 (the “Closing
Date”), the Company merged with Xcel Brands, Inc (“Old XCel”) and acquired the Isaac Mizrahi Business (collectively,
the “Transaction”). The Company engages in the design, licensing, and marketing of the Isaac Mizrahi brand with a focus
on a variety of product categories featuring the Isaac Mizrahi Brand.  The Company operates in a “working capital
light” business model, licensing the Isaac Mizrahi Brands through its wholly-owned subsidiary IM Brands and generating royalty
and design revenues through licensing and other agreements with wholesale manufacturers, sourcing and design companies, and retailers.
Prior to our acquisition of the Isaac Mizrahi Business, the business was a division of IM Ready-Made, LLC (“IM Ready”).



Summary of Critical Accounting Policies



Several of our
accounting policies involve management judgments and estimates that could be significant. The policies with the greatest potential
effect on our consolidated results of operations and financial position include the estimate of contingent obligations to IM Ready,
based on our revenue performance. Due to our licensing model, we do not have any inventory risk and have reduced our operating
risks, and can reasonably forecast revenues and plan expenditures based upon guaranteed royalty minimums and sales projections
provided by our retail licensees.



The preparation
of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any
adjustments when necessary.



In connection
with our licensing model, we have entered into various trademark license agreements that provide revenues based on minimum royalties
and additional revenues based on a percentage of defined sales. Minimum royalty revenue is recognized on a straight-line basis
over each period, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income
during the period corresponding to the licensee's sales.



Impairment losses
are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets carrying amount.
Impairment losses are measured by comparing the fair value of the assets to their carrying amount.  For the Current Quarter
there was no impairment present for these long-lived assets.



The Company accounts for stock-based compensation
in accordance with ASC Topic 718 by recognizing the fair value of stock-based compensation in the consolidated statement of operations.  The
fair value of the Company’s stock option awards are estimated using a Black-Scholes option valuation model. This model requires
the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each
award. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be
forfeited during the vesting period. The fair value of stock-based awards is amortized over the vesting period of the awards.  For
stock-based awards that vest based on performance conditions (e.g. achievement of certain milestones), expense is recognized when
it is probable that the condition will be met.



Income tax expense
is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes
are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates
in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.



ASC Topic 740 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial statements. Tax positions shall initially be recognized
in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities.
Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a probability of
fifty percent (50%) or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the
position and all relevant facts.



16







Summary of operating results



The consolidated financial statements and
related notes included elsewhere in this Form 10-Q are as of, or for, one of two periods, (i) the Company (the “Successor”)
that consists of the period April 1, 2012 through June 30, 2012 (the “Current Quarter”) and the period January 1, 2012
through June 30, 2012 (the “Current Six Months”) or (individually or collectively the “Successor Period”)
and of the Isaac Mizrahi Business (the “Predecessor”) for the period April 1, 2011 through June 30, 2011 and the period
January 1, 2011 through June 30, 2011 (the individually or collectively the “Predecessor Period”).



The three
months ended June 30, 2012 compared to the three months ended June 30, 2011 pro-forma.



The Current Quarter
results are compared with the Predecessor Period of April 1, 2011 through June 30, 2011 on an unaudited pro-forma basis (the “Prior
Year Quarter”), as presented in the table below.



Xcel Brands, Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations and Pro-forma Statements of Operations of the Predecessor



|                                                      |  | Successor |            |   | Predecessor |  
|----------------------------------------------------- |  | --------- | ---------- | - | ----------- | -
|                                                      |  |           |            |   | Pro-forma   |  
|                                                      |  | Three     |            |   | Three       |  
|                                                      |  | Months    |            |   | Months      |  
|                                                      |  | ended     |            |   | ended       |  
|                                                      |  | June 30,  |            |   | June 30,    |  
|                                                      |  | 2012      |            |   | 2011        |  
|                                                      |  |           |            |   |             |  
|Licensing revenues                                    |  | $         | 2,507,000  |   |             | $
|Design and service fee income                         |  |           | 368,000    |   |             |  
|Total revenues                                        |  |           | 2,875,000  |   |             |  
|Direct licensing costs                                |  |           | 51,000     |   |             |  
|Net licensing & design revenues                       |  |           | 2,824,000  |   |             |  
|                                                      |  |           |            |   |             |  
|Expenses:                                             |  |           |            |   |             |  
|Design and marketing                                  |  |           | 1,183,000  |   |             |  
|General and administrative                            |  |           | 828,000    |   |             |  
|Depreciation and amortization                         |  |           | 215,000    |   |             |  
|Stock based compensation                              |  |           | 1,408,000  |   |             |  
|Total expenses                                        |  |           | 3,634,000  |   |             |  
|                                                      |  |           |            |   |             |  
|Operating income (loss)                               |  |           | (810,000   | ) |             |  
|                                                      |  |           |            |   |             |  
|Finance costs                                         |  |           |            |   |             |  
|Interest expenses – term debt                         |  |           | 286,000    |   |             |  
|Other interest and finance costs                      |  |           | 259,000    |   |             |  
|Total finance costs                                   |  |           | 545,000    |   |             |  
|                                                      |  |           |            |   |             |  
|Net income (loss) before income tax provision         |  |           | (1,355,000 | ) |             |  
|                                                      |  |           |            |   |             |  
|Income tax provision (benefit)                        |  |           | (1,000     | ) |             |  
|                                                      |  |           |            |   |             |  
|Net income (loss)                                     |  | $         | (1,354,000 | ) |             | $
|                                                      |  |           |            |   |             |  
|Earnings per Share                                    |  |           |            |   |             |  
|Basic                                                 |  | $         | (0.19      | ) |             | $
|Diluted                                               |  | $         | (0.19      | ) |             | $
|                                                      |  |           |            |   |             |  
|Weighted average number of common shares outstanding: |  |           |            |   |             |  
|Basic                                                 |  |           | 6,981,216  |   |             |  
|Diluted                                               |  |           | 6,981,216  |   |             |  



17







[1] This adjustment assumes the Company
amortized intangible assets since January 1, 2011.

[2] This adjustment is designed to state
interest expense and other finance costs as if acquisition of the Isaac Mizrahi Business and related financing occurred January
1, 2011.

[3] Income tax expense is adjusted to reflect
an effective 38% income tax rate.

[4] The weighted average number of basic
common shares presented on a pro-forma basis for the Prior Year Quarter is equal to the number of shares that were outstanding
immediately after the acquisition of the Isaac Mizrahi Business.

[5] The weighted average number of common
shares, on a diluted basis presented on a pro-forma basis for the Prior Year Quarter is equal to the number of shares that were
outstanding immediately after the acquisition of the Isaac Mizrahi Business plus options and warrants that could be exercised into
additional common shares measured at immediately after the acquisition of the Isaac Mizrahi Business.



18







Net Licensing and Service Fee Revenue. Total revenues
for the Current Quarter remained flat at $2.9 million compared to the Prior Year Quarter.  Revenues of $587,000 recognized
in the Prior Year Quarter from amortization of a one-time payment received by the Predecessor prior to 2011 not recognized by the
Successor was off-set by increases in our QVC business and Liz Claiborne business in aggregate of $250,000, an increase from new
license agreements of $227,000 and an increase in design and service fee income of $93,000. The Company incurred direct licensing
costs of $51,000 during the Current Quarter whereby the Predecessor did not incur these costs in the Prior Year Quarter. The net
result was a decrease in net licensing and service fee revenue by $70,000.



Operating Expenses. Operating expense totaled $3,634,000
in the Current Quarter compared to $1,546,000 in the Prior Year Quarter. The increase of approximately $2,088,000 was primarily
driven by (i) an increase in general and administrative expenses of $407,000 mostly relating to executive management salaries and
costs associated with being public, (ii) stock based compensation expense of $1,408,000 and (iii) an increase in design and marketing
expenses of $260,000 mostly relating to costs associated with new license agreements.



Operating Income
(loss). Operating income (loss) for the Current Quarter was ($810,000) compared to $1,348,000 for the Prior Year Quarter. This
decrease in our operating income (loss) was primarily the result of the increase in operating expenses as noted above.



Interest and Finance Costs. Interest
and finance costs remained even for the Current Quarter compared to the Prior Year Quarter, although on an actual basis the Predecessor
had no interest or other finance costs.



Provision for income taxes. Income taxes were lower for
the Current Quarter compared to the Prior Year Quarter by $307,000.  The Current Quarter income tax provision (benefit) is
inclusive of a deferred tax benefit of $60,000 resulting in an effective tax rate of (0%), whereas the Prior Year Quarter has an
effective tax rate of 38%.  The primary differences is the Current Quarter’s net income (loss) before income taxes is
$1,774,000 lower than the Prior Year Quarter and the current deferred tax benefit has been reduced from the effect of a state and
local rate allocation change resulting in a 38% adjustment to the effective tax rate by virtue of applying the rate differential
to the opening net deferred tax liability. This adjustment off-sets the deferred tax benefit resulting in a 0% effective tax rate
for the Current Quarter. The change in the Company’s state and local tax rate is based on the change in estimate of allocations
between different taxing jurisdictions.



Net Income (loss) . Our net income (loss) was $(1,354,000)
in the Current Quarter, compared to net income of $498,000 in the Prior Year Quarter, as a result of the factors discussed above.



19







The six
months ended June 30, 2012 compared to the six months ended June 30, 2011 pro-forma.



The Current Six
Months results are compared with the Predecessor Period of January 1, 2011 through June 30, 2011 on an unaudited pro-forma basis
(the “Prior Six Months”), as presented in the table below.



Xcel Brands, Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations and Pro-forma Statements of Operations of the Predecessor



|                                                      |  | Successor |            |   | Predecessor |  
|----------------------------------------------------- |  | --------- | ---------- | - | ----------- | -
|                                                      |  |           |            |   | Pro-forma   |  
|                                                      |  | Six       |            |   | Six         |  
|                                                      |  | Months    |            |   | Months      |  
|                                                      |  | ended     |            |   | ended       |  
|                                                      |  | June 30,  |            |   | June 30,    |  
|                                                      |  | 2012      |            |   | 2011        |  
|                                                      |  |           |            |   |             |  
|Licensing revenues                                    |  | $         | 5,135,000  |   |             | $
|Design and service fee income                         |  |           | 654,000    |   |             |  
|Total revenues                                        |  |           | 5,789,000  |   |             |  
|Direct licensing costs                                |  |           | 85,000     |   |             |  
|Net licensing & design revenues                       |  |           | 5,704,000  |   |             |  
|                                                      |  |           |            |   |             |  
|Expenses:                                             |  |           |            |   |             |  
|Design and marketing                                  |  |           | 2,216,000  |   |             |  
|General and administrative                            |  |           | 1,750,000  |   |             |  
|Depreciation and amortization                         |  |           | 424,000    |   |             |  
|Stock based compensation                              |  |           | 1,436,000  |   |             |  
|Total expenses                                        |  |           | 5,826,000  |   |             |  
|                                                      |  |           |            |   |             |  
|Operating income (loss)                               |  |           | (122,000   | ) |             |  
|                                                      |  |           |            |   |             |  
|Finance costs                                         |  |           |            |   |             |  
|Interest expenses – term debt                         |  |           | 572,000    |   |             |  
|Other interest and finance costs                      |  |           | 516,000    |   |             |  
|Total finance costs                                   |  |           | 1,088,000  |   |             |  
|                                                      |  |           |            |   |             |  
|Net income (loss) before income tax provision         |  |           | (1,210,000 | ) |             |  
|                                                      |  |           |            |   |             |  
|Income tax provision (benefit)                        |  |           | (18,000    | ) |             |  
|                                                      |  |           |            |   |             |  
|Net income (loss)                                     |  | $         | (1,192,000 | ) |             | $
|                                                      |  |           |            |   |             |  
|Earnings per Share                                    |  |           |            |   |             |  
|Basic                                                 |  | $         | (0.19      | ) |             | $
|Diluted                                               |  | $         | (0.19      | ) |             | $
|                                                      |  |           |            |   |             |  
|Weighted average number of common shares outstanding: |  |           |            |   |             |  
|Basic                                                 |  |           | 6,395,698  |   |             |  
|Diluted                                               |  |           | 6,395,698  |   |             |  



[1] This adjustment assumes the Company
amortized intangible assets since January 1, 2011.

[2] This adjustment is designed to state
interest expense and other finance costs as if acquisition of the Isaac Mizrahi Business and related financing occurred January
1, 2011.

[3] Income tax expense is adjusted to reflect
an effective 38% income tax rate.



20







[4] The weighted average number of basic
common shares presented on a pro-forma basis for the Prior Six Months is equal to the number of shares that were outstanding immediately
after the acquisition of the Isaac Mizrahi Business.

[5] The weighted average number of common
shares, on a diluted basis presented on a pro-forma basis for the Prior Six Months is equal to the number of shares that were outstanding
immediately after the acquisition of the Isaac Mizrahi Business plus options and warrants that could be exercised into additional
common shares measured  immediately after the acquisition of the Isaac Mizrahi Business.



Net Licensing and Other Revenue. Total revenues for the
Current Six Months remained flat at $5.8 million compared to the Prior Six Months.  Revenues of $1,174,000 recognized in the
Prior Six Months from amortization of a one-time payment received by the Predecessor prior to 2011 not recognized by the Successor
was off-set by increases in our QVC business and Liz Claiborne business in aggregate of $500,000, an increase from new license
agreements of $573,000 and an increase in design and service fee income of $103,000. The Company incurred direct licensing costs
of $85,000 during the Current Six Months whereby the Predecessor did not incur these costs in the Prior Six Months. The net result
was a decrease in net licensing and service fee revenue by $85,000.



Operating Expenses. Operating expense totaled $5,826,000
in the Current Six Months compared to $3,215,000 in the Prior Six Months. The increase of approximately $2,611,000 was primarily
driven by (i) an increase in general and administrative expenses of $787,000 mostly relating to executive management salaries and
costs associated with being public, (ii) stock based compensation expense of $1,436,000 and (iii) an increase in design and marketing
expenses of $368,000 mostly relating to costs associated with new license agreements.



Operating Income
(loss). Operating income (loss) for the Current Six Months was ($122,000) compared to $2,574,000 for the Prior Year Six Months.
This decrease in our operating income was primarily the result of the increase in operating expenses as noted above.



Interest and Finance Costs. Interest
and finance costs remained even for the Current Six Months compared to the Prior Year Six Months, although on an actual basis the
Predecessor had no interest or other finance costs.



Provision for income taxes. Income taxes were lower for
the Current Six Months compared to the Prior Six Months by $585,000.  The Current Six Months income tax provision (benefit)
is inclusive of a deferred tax benefit of $82,000 resulting in an effective tax rate of (1.5%), whereas the Prior Six Months has
an effective tax rate of 38%.  The primary differences is the Current Quarter’s net income (loss) before income taxes
is $2,697,000 lower than the Prior Six Months and the current deferred tax benefit has been reduced from the effect of a state
and local rate allocation change resulting in a 35% adjustment to the effective tax rate by virtue of applying the rate differential
to the opening net deferred tax liability. This 35% adjustment together with an additional adjustment of 1.5% for permanent differences
off-sets the deferred tax benefit resulting in a 1.5% effective tax rate for the Current Six Months. The change in the Company’s
state and local tax rate is based on the change in estimate of allocations between different taxing jurisdictions.



Net Income(loss). Our net income (loss) was ($1,192,000)
in the Current Six Months, compared to net income of $920,000 in the Prior Six Months, as a result of the factors discussed above.



Liquidity and Capital Resources



Liquidity



Our principal capital requirements have
been to fund working capital needs, and to a lesser extent, capital expenditures. At June 30, 2012 our unrestricted cash and cash
equivalents totaled $3,663,000.



Our term loan facility requires us to repay current interest
quarterly at 8.5% per annum. Principal payments are not required until 2013.



We expect that existing cash and operating
cash flows will be adequate to meet our operating needs, debt service obligations and capital expenditure needs for the next twelve
months.  We are dependent on our licensees for all of our revenues, and there is no assurance that the licensees will perform
as projected.



We also believe that cash from future operations
as well as currently available cash will be sufficient to satisfy our anticipated working capital requirements for the foreseeable
future, including the debt service of the $13.5 million loan and making necessary upgrades to our infrastructure and technology.







21







Our business model does not require significant
capital expenditures, nor does it require us to advance expenses such as inventory.  Although we are limited to $400,000 per
year in capital expenditures under the loan agreement, we estimate that capital expenditures for the next twelve months will be
less than this amount, including for upgrading technology and equipment and fixture needs and making necessary improvements to
our leased premises.  Therefore, we do not believe that this covenant will restrict its expected operations.



The Predecessor
- Prior to September 29, 2011 including the Prior Year Quarter, cash flow requirements for the Isaac Mizrahi Business were funded
by IM Ready, and cash management functions were not performed at the Isaac Mizrahi Business level. The Isaac Mizrahi Business did
not maintain a separate cash account and it is not possible to determine the cash flows directly attributable to the Isaac Mizrahi
Business.



Operating Activities



Net cash provided by operating activities
for the Current Quarter increased by approximately $1 million.  This increase in net cash for the Current Quarter was primarily
due to Current Six Month net loss of $1,192,000 and off-set by adjustments for non-cash items of $2,221,000. These adjustments
consist of stock based compensation of $1,436,000, non-cash interest and other finance costs of $443,000, depreciation and amortization
of $424,000, less deferred income tax provision of $82,000. The net change in operating assets and liabilities was ($4,000). There
were no comparable results for the prior period.



Investing Activities



Net cash used in investing activities was
$91,000 for the Current Quarter.   The Company reduced restricted cash by $175,000 by depositing this sum into a refundable
security deposit with our landlord. The Company purchased equipment and fixtures of $91,000.   There were no comparable
results for the prior period.



Financing Activities



Net cash provided by financing activities
was $27,000 for the Current Quarter.   The Company received a refund of $22,000 for finance costs.  The Company
made principal payments of $8,000 under its capital lease obligations and had a net increase of $16,000 in installment obligations.
The Company incurred expenses related to equity and recapitalization of $3,000. There were no comparable results for the prior
period.



Other Factors



We continue to
seek to expand and diversify the types of licensed products being produced under  the Isaac Mizrahi brand, as well as diversify
the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer,
consumer or market sector. The success of our company, however, will still remain largely dependent on our ability to build and
maintain brand awareness and contract with and retain key licensees and on our licensees’ ability to accurately predict upcoming
fashion trends within their respective customer bases and fulfill the product requirements of their particular retail channels
within the global marketplace. Unanticipated changes in consumer fashion preferences, slowdowns in the U.S. economy, changes in
the prices of supplies, consolidation of retail establishments, and other factors noted in “Risk Factors,” could adversely
affect our licensees’ ability to meet and/or exceed their contractual commitments to us and thereby adversely affect our
future operating results.



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 8%, the expected effect on net income 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.



ITEM 3. CONTROLS AND PROCEDURES



A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:



Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported, within the time period specified in
the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports filed under the Exchange Act are accumulated and communicated to
management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate,
to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of our management, including our CEO and CFO, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon and as of June 30, 2012, the date of that evaluation,
the CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed
in the reports we file and submit under the Exchange Act are recorded, processed, summarized and reported as and when required.



22







B. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:



There were no changes in our internal controls
over financial reporting during the most recent fiscal quarter 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



None



ITEM 1A. Risk Factors



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 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December
31, 2011 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.



ITEM 5. EXHIBITS



(a) Exhibits:



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)



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 14, 2012 | 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



23