UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~June 30, ~~2016~~2017

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

For the transition period from ___ to ___

Commission File Number: 001-37527

XCEL BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware		0076-0307819
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		~~(I.R.S. Employer~~ Identification No.)

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

(347) 727-2474

(Issuer's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~November 4, 2016,~~August 7, 2017, there were ~~18,680,560~~18,471,001 shares of common stock, $.001 par value per share, of the issuer outstanding.

XCEL BRANDS, INC.

INDEX

		Page

PART I	–FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Balance Sheets	3

	Unaudited Condensed Consolidated Statements of Operations	4

	Unaudited Condensed Consolidated Statements of Cash Flows	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2118

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3126

Item 4.	Controls and Procedures	3126

PART II	–OTHER INFORMATION	3227

Item 1.	Legal Proceedings	3227

Item 1A.	Risk Factors	3227

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3227

Item 3.	Defaults Upon Senior Securities	3227

Item 4.	Mine Safety Disclosures	3228

Item 55.	Other ~~information~~Information	3228

Item 66.	Exhibits	3328

	Signatures	3428

PART 1. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Xcel Brands, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

September 30, 2016 December 31, 2015
(Unaudited) (Note 1)
Assets
Current Assets:
Cash and cash equivalents $ 15,158 $ 16,860
Accounts receivable, net 8,804 7,594
Prepaid expenses and other current assets 455 655
Total current assets 24,417 25,109
Property and equipment, net 2,456 871
Trademarks and other intangibles, net 111,502 112,323
Goodwill 12,371 12,371
Restricted cash 1,509 1,109
Other assets 282 343
      Total non-current assets 128,120 127,017
Total Assets $ 152,537 $ 152,126

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities $ 4,678 $ 3,372
Deferred revenue 12 597
Current portion of long-term debt 5,302 8,918
Current portion of long-term debt, contingent obligations - 250
Total current liabilities 9,992 13,137
Long-Term Liabilities:
Long-term debt, less current portion 31,094 31,860
Deferred tax liabilities, net 6,746 6,749
Other long-term liabilities 2,074 297
Total long-term liabilities 39,914 38,906
Total Liabilities 49,906 52,043

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 35,000,000 shares authorized at September 30, 2016 and December 31, 2015, and 18,680,560 and 18,434,634 issued and outstanding at September 30, 2016 and December 31, 2015, respectively 19 18
Paid-in capital 96,563 93,999
Retained earnings 6,049 6,066
Total Stockholders' Equity 102,631 100,083

Total Liabilities and Stockholders' Equity $ 152,537 $ 152,126
June 30, 2017 December 31, 2016
(Unaudited) (Note 1)
Assets
Current Assets:
Cash and cash equivalents $ 7,621 $ 14,127
Accounts receivable, net 8,748 6,969
Prepaid expenses and other current assets 876 807
Total current assets 17,245 21,903
Property and equipment, net 2,520 2,600
Trademarks and other intangibles, net 110,673 111,220
Goodwill 12,371 12,371
Restricted cash 1,509 1,509
Other assets 1,505 1,517
Total non-current assets 128,578 129,217
Total Assets $ 145,823 $ 151,120

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities $ 1,054 $ 1,523
Accrued payroll 1,261 2,185
Deferred revenue 73 234
Current portion of long-term debt 3,943 6,427
Current portion of long-term debt, contingent obligations 100 -
Total current liabilities 6,431 10,369
Long-Term Liabilities:
Long-term debt, less current portion 22,019 25,495
Deferred tax liabilities, net 7,914 6,901
Other long-term liabilities 2,472 2,181
Total long-term liabilities 32,405 34,577
Total Liabilities 38,836 44,946

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 35,000,000 shares authorized at June 30, 2017 and December 31, 2016, and 18,471,001 and 18,644,982 issued and outstanding at June 30, 2017 and December 31, 2016, respectively 18 19
Paid-in capital 98,354 97,354
Retained earnings 8,615 8,801
Total Stockholders' Equity 106,987 106,174

Total Liabilities and Stockholders' Equity $ 145,823 $ 151,120

See Notes to Unaudited Condensed Consolidated Financial Statements.

3

Xcel Brands, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2016 2015 2016 2015
Revenues
   Net licensing revenue $ 8,311 $ 7,289 $ 25,748 $ 20,082
   Net e-commerce sales 20 47 91 166
      Total revenues 8,331 7,336 25,839 20,248
   Cost of goods sold 41 51 147 131
      Gross profit 8,290 7,285 25,692 20,117

Operating expenses
   Salaries, benefits and employment taxes 4,054 3,463 12,481 9,639
   Other design and marketing costs 779 669 2,439 1,761
   Other selling, general and administrative expenses 1,145 961 4,439 2,482
   Stock-based compensation 1,089 1,292 3,754 3,413
   Depreciation and amortization 387 373 1,172 953
      Total operating expenses 7,454 6,758 24,285 18,248

Other expenses (income)
   Gain on reduction of contingent obligation - - - (3,000 )
   Loss on extinguishment of debt - - - 1,371
      Total other income, net - - - (1,629 )

Operating income 836 527 1,407 3,498

Interest and finance expense
   Interest expense - term debt 340 304 1,003 925
   Other interest and finance charges 122 128 424 451
      Total interest and finance expense 462 432 1,427 1,376

Income (loss) from continuing operations before income taxes 374 95 (20 ) 2,122

Income tax provision (benefit) 256 51 (3 ) 35

Income (loss) from continuing operations 118 44 (17 ) 2,087

Loss from discontinued operations, net - (14 ) - (281 )

Net income (loss) $ 118 $ 30 $ (17 ) $ 1,806

Basic and diluted net income (loss) per share:
Continuing operations $ 0.01 $ 0.00 $ (0.00 ) $ 0.14
Discontinued operations, net - (0.00 ) - (0.02 )
Net income (loss) $ 0.01 $ 0.00 $ (0.00 ) $ 0.12

Diluted net income (loss) per share:
Continuing operations $ 0.01 $ 0.00 $ (0.00 ) $ 0.13
Discontinued operations, net - (0.00 ) - (0.02 )
Net income (loss) $ 0.01 $ 0.00 $ (0.00 ) $ 0.11

Basic weighted average common shares outstanding 18,692,775 17,187,272 18,608,034 15,380,609
Diluted weighted average common shares outstanding 19,068,011 18,278,182 18,608,034 16,471,519
For the Three Months
Ended June 30, For the Six Months
Ended June 30,
2017 2016 2017 2016

Net revenues $ 8,370 $ 9,112 $ 16,800 $ 17,473

Operating costs and expenses
Salaries, benefits and employment taxes 4,360 4,217 8,727 8,427
Other design and marketing costs 645 831 1,516 1,660
Other selling, general and administrative expenses 1,134 2,020 2,414 3,365
Stock-based compensation 723 1,453 1,806 2,665
Depreciation and amortization 390 359 784 785
Total operating costs and expenses 7,252 8,880 15,247 16,902

Operating income 1,118 232 1,553 571

Interest and finance expense
Interest expense - term debt 304 352 632 663
Other interest and finance charges 44 178 94 302
Total interest and finance expense 348 530 726 965

Income (loss) before income taxes 770 (298 ) 827 (394 )

Income tax provision (benefit) 557 (208 ) 1,013 (259 )

Net income (loss) $ 213 $ (90 ) $ (186 ) $ (135 )

Basic net income (loss) per share $ 0.01 $ (0.00 ) $ (0.01 ) $ (0.01 )

Diluted net income (loss) per share $ 0.01 $ (0.00 ) $ (0.01 ) $ (0.01 )

Basic weighted average common shares outstanding 18,449,210 18,671,648 18,561,453 18,565,198
Diluted weighted average common shares outstanding 18,813,044 18,671,648 18,561,453 18,565,198

See Notes to Unaudited Condensed Consolidated Financial Statements.

4

Xcel Brands, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

For the Nine Months Ended
September 30,
2016 2015

Cash flows from operating activities
   Net (loss) income $ (17 ) $ 1,806
   Adjustments to reconcile net (loss) income to net cash
   provided by operating activities:
      Loss from discontinued operations, net - 281
      Depreciation and amortization expense 1,172 953
      Amortization of deferred finance costs 140 116
      Stock-based compensation 3,754 3,413
      Recovery of allowance for doubtful accounts - (21 )
      Amortization of note discount 236 333
      Deferred income tax benefit (3 ) (5 )
      Tax benefit from vested stock grants and exercised options - (83 )
      Non-cash property exit charge 648 -
      Gain on reduction of contingent obligation - (3,000 )
      Loss on extinguishment of debt - 1,371
   Changes in operating assets and liabilities:
      Accounts receivable (1,210 ) (3,829 )
      Prepaid expenses and other assets 199 (141 )
      Accounts payable, accrued expenses and other current liabilities 1,306 (1,040 )
      Deferred revenue (585 ) 415
      Other liabilities 1,129 718
Net cash provided by operating activities from continuing operations 6,769 1,287

Net cash provided by operating activities from discontinued operations, net - 104
Net cash provided by operating activities 6,769 1,391

Cash flows from investing activities
     Cash consideration for asset acquisition of the H Halston Brand - (14 )
     Cash consideration for asset acquisition of the C Wonder Brand - (3,586 )
     Cost to acquire additional intangible assets (26 ) -
     Purchase of property and equipment (1,911 ) (94 )
     Restricted cash for security deposits (400 ) (1,112 )
Net cash used in investing activities (2,337 ) (4,806 )

Cash flows from financing activities
    Proceeds from issuance of common stock, net of direct costs - 16,107
    Proceeds from exercise of stock options and warrants 20 65
    Tax benefit from vested stock grants and exercised options - 83
    Shares repurchased including vested restricted stock in exchange for
    withholding taxes (1,210 ) (711 )
    Payment of deferred finance costs (69 ) (10 )
    Payment of long-term debt (4,625 ) (2,256 )
    Payment of QVC Earn-Out obligation (250 ) -
    Payment of installment obligations related to the acquisition of the Ripka Brand - (2,190 )
Net cash (used in) provided by financing activities (6,134 ) 11,088

Net (decrease) increase in cash and cash equivalents (1,702 ) 7,673

Cash and cash equivalents, beginning of period 16,860 8,531

Cash and cash equivalents, end of period $ 15,158 $ 16,204

Supplemental disclosure of non-cash activities:
  Issuance of common stock in connection with C Wonder Brand acquisition $ - $ 9,000
  Contingent obligation related to acquisition of the C Wonder Brand $ - $ 2,850
  Issuance of common stock as payment for a portion of the Ripka Seller Notes $ - $ 5,400
  Issuance of common stock as payment for a portion of the QVC Earn-Out $ - $ 2,515

Supplemental disclosure of cash flow information:
  Cash paid during the period for income taxes $ 168 $ 447
  Cash paid during the period for interest $ 909 $ 855
For the Six Months Ended June 30,
2017 2016

Cash flows from operating activities
Net loss $ (186 ) $ (135 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense 784 785
Amortization of deferred finance costs 99 94
Stock-based compensation 1,806 2,665
Amortization of note discount 19 158
Deferred income tax 1,013 (259 )
Non-cash property exit charge - 648
Changes in operating assets and liabilities:
Accounts receivable (1,779 ) (2,484 )
Prepaid expenses and other assets (67 ) 92
Accounts payable, accrued expenses and other current liabilities (1,394 ) 449
Deferred revenue (161 ) (558 )
Other liabilities 290 875
Net cash provided by operating activities 424 2,330

Cash flows from investing activities
Cost to acquire intangible assets (18 ) -
Purchase of property and equipment (140 ) (1,718 )
Net cash used in investing activities (158 ) (1,718 )

Cash flows from financing activities
Proceeds from exercise of stock options - 20
Shares repurchased including vested restricted stock in exchange for withholding taxes (806 ) (302 )
Payment of deferred finance costs (7 ) (69 )
Payment of long-term debt (5,959 ) (3,000 )
Payment of QVC earn-out obligation - (250 )
Net cash used in financing activities (6,772 ) (3,601 )

Net decrease in cash and cash equivalents (6,506 ) (2,989 )

Cash, cash equivalents, and restricted cash at beginning of period 15,636 17,969

Cash, cash equivalents, and restricted cash at end of period $ 9,130 $ 14,980

Reconciliation to amounts on condensed consolidated balance sheets:
Cash and cash equivalents $ 7,621 $ 13,471
Restricted cash 1,509 1,509
Total cash, cash equivalents, and restricted cash $ 9,130 $ 14,980

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 144 $ 118
Cash paid during the period for interest $ 677 $ 560

See Notes to Unaudited Condensed Consolidated Financial Statements.

5
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~

XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)
1. Nature of Operations, Background, and Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2016 (which has been derived from audited financial statements) and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position, and cash flows of Xcel Brands, Inc. (“Xcel”) and its subsidiaries (the “Company”). The results of operations for the interim periods presented herein are not necessarily indicative of the results for the entire fiscal year or for any future interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, as filed with the SEC on March ~~17, 2016.~~24, 2017.

The Company is a media and brand management ~~and media~~ company engaged in the design, production, licensing, marketing, and direct to consumer sales of branded apparel, footwear, accessories, jewelry, home goods, and other consumer products, and the acquisition of dynamic consumer lifestyle brands. Currently, the Company’s brand portfolio consists of the Isaac Mizrahi brand (the "Isaac Mizrahi Brand"), the Judith Ripka brand (the “Ripka Brand”), the H by Halston and H Halston brands (collectively, the “H Halston Brands”), the C Wonder brand (the “C Wonder Brand”), and the Highline Collective brand. ~~The Company also managed and designed the Liz Claiborne New York brand (“LCNY Brand”) through July 31, 2016.~~

The Company licenses its brands to third parties, provides certain design, production, and marketing services, and generates ~~royalty~~licensing, design, and service fee revenues through ~~licensing~~contractual arrangements and other agreements with manufacturers and retailers. These activities include licensing its own brands for promotion and distribution through a ~~ubiquitous-channel~~ubiquitous retail sales strategy, which encompasses distribution through interactive television, the internet, and traditional brick-and-mortar retail channels.

~~In December 2014, the Company decided to close its retail stores. Accordingly, the Company’s retail operations are treated and presented as discontinued operations (see Note 8).~~
Certain reclassifications have been made to the prior period unaudited condensed consolidated financial statements to conform to the current period ~~presentation.~~presentation, including:
· Presentation of e-commerce gross margin within total net revenues on the condensed consolidated statements of operations. Of the $36,000 of costs previously presented as cost of goods sold for the three months ended June 30, 2016, $4,000 has been reclassified to net revenues, and $32,000 has been reclassified to other selling, general and administrative expenses. Of the $106,000 of costs previously presented as cost of goods sold for the six months ended June 30, 2016, $35,000 has been reclassified to net revenues, and $71,000 has been reclassified to other selling, general and administrative expenses.
· Presentation of restricted cash on the condensed consolidated statements of cash flows, as a result of the early adoption of Accounting Standards Update No. 2016-18 in the fourth quarter of 2016.

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, ~~2015.~~2016.

Recent Accounting Pronouncements

In ~~March 2016,~~May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. ~~2016-09, “Improvements to Employee Share-Based Payment Accounting”~~2017-09,Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU ~~2016-09”~~2017-09”). ASU ~~2016-09 requires that all excess tax benefits and tax deficiencies be recognized~~2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ~~the income statement as discrete tax items in the interim period in which they occur, clarifies that employee taxes paid when an employer withholds shares for tax purposes~~Topic 718. An entity should be presented on the statement of cash flows as a financing activity, and changes the presentation of excess tax benefits on the statement of cash flows from a financing activity to an operating activity. ASU 2016-09 also provides for a policy election to either estimate the number of awards expected to vest (as per current GAAP) or account for forfeitures when they occur. This new accounting guidance is effective for public companies for fiscal years beginning after December 15, 2016 (i.e., calendar years beginning on January 1, 2017), including interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the ~~impact that~~effects of a modification unless all the ~~adoption of ASU 2016-09 will have on~~following conditions are met: (i) the ~~Company’s consolidated financial statements.~~
6
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
In April 2016, the FASB issued Accounting Standards Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), and in May 2016, the FASB issued Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). These Accounting Standards Updates contain amendments that provide additional guidance, clarification, and practical expedients related to ASU No. 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”), which was issued by the FASB in May 2014. ASU 2016-10 amends certain aspectsfair value of the ~~guidance in ASU 2014-09 related to identifying performance obligations~~modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and ~~applying~~(iii) the ~~new revenue guidance to licensing transactions. ASU 2016-12 addresses topics~~classification of ~~collectability, presentation~~the modified award as an equity instrument or a liability instrument is the same as the classification of ~~sales tax collected from customers, non-cash consideration, contract modifications and completed contracts at transition, and transition disclosures. The Company will incorporate~~ the guidance contained in ASU 2016-10 and ASU 2016-12 into its overall evaluation and adoption of ASU 2014-09, which collectively will be effective for fiscal years beginning after December 15, 2017 and interim periods therein. The Companyoriginal award immediately before the original award is ~~currently evaluating the impact that the adoption of these ASUs will have on the Company’s consolidated financial statements.~~
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance and clarification regarding the presentation and classification on the Statement of Cash Flows for eight specific cash flow issues, including:
· ~~debt prepayment and extinguishment costs,~~
· ~~settlement of zero-coupon (or insignificant coupon interest rate) debt instruments,~~
· ~~contingent consideration payments made after a business combination,~~
· ~~proceeds from settlement of insurance claims,~~
· ~~proceeds from settlement of corporate-owned life insurance policies,~~
· ~~distributions received from equity method investees,~~
· ~~beneficial interests in securitization transactions, and~~
· ~~separately identifiable cash flows / application of predominance principle.~~
modified. This new accounting guidance is effective for public companies for fiscal years beginning after December 15, 2017 (i.e., calendar years beginning on January 1, 2018), including interim periods within those fiscal years. ~~Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable.~~ Early adoption is permitted ~~provided all~~in any interim or annual period. The amendments ~~are adopted~~ in ASU 2017-09 should be applied prospectively to an award modified on or after the ~~same period.~~adoption date. The Company is currently evaluating the impact that the adoption of ASU ~~2016-15~~2017-09 will have on ~~its~~the Company’s consolidated financial statements.
6
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)
In May 2014, FASB issued ASU No. 2014-09,Revenue from Contracts with Customers(“ASU 2014-09”), requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. This new revenue standard may be applied retrospectively to each prior period presented, or retrospectively with the cumulative effect recognized as of the date of adoption. In August 2015, FASB issued ASU No. 2015-14,Revenue from Contracts with Customers– Deferral of the Effective Date (“ASU 2015-14”), which defers implementation of ASU 2014-09 by one year. Under such deferral, the adoption of ASU 2014-09 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted, but not before our original effective date of January 1, 2017. Our evaluation of the impact of the adoption of ASU 2014-09 on our consolidated financial statements is ongoing and our implementation efforts have included the identification of revenue within the scope of the guidance and the evaluation of applicable revenue contracts. Currently, based on our preliminary analyses, we do not expect the adoption of ASU 2014-09 to result in material differences from the Company’s current revenue recognition policies; however, our analyses are not final. The Company recognizes revenue continuously over time as it satisfies its continuous obligation of granting access to its licensed intellectual properties. Revenue, depending on the contract, is recognized ratably over each contract year as the performance occurs based on the greater of the guaranteed minimum payments, sales-based payments, or performance based payments, with each contract year treated as separate from the other years.

2. Trademarks, Goodwill and Other Intangibles

Trademarks and other intangibles, net consist of the following:

September 30, 2016 June 30, 2017
($ in thousands) Weighted-Average Amortization Period

Gross Carrying Amount

Accumulated
Amortization

Net Carrying
Amount
Weighted-
Average
Amortization
Period Gross Carrying
Amount
Accumulated
Amortization

Net Carrying
Amount

Trademarks (indefinite-lived) n/a $ 96,676 $ - $ 96,676 n/a $ 96,694 $ - $ 96,694
Trademarks (definite-lived) 15 years 15,463 1,201 14,262 15 years 15,463 1,973 13,490
Licensing agreements 4 years 2,000 2,000 - 4 years 2,000 2,000 -
Non-compete agreement 7 years 562 140 422 7 years 562 201 361
Copyrights and other intellectual property 10 years 190 48 142 10 years 190 62 128
Total $ 114,891 $ 3,389 $ 111,502 $ 114,909 $ 4,236 $ 110,673

December 31, 2015 December 31, 2016
($ in thousands) Weighted-Average Amortization Period

Gross Carrying Amount

Accumulated
Amortization

Net Carrying
Amount
Weighted-
Average
Amortization
Period Gross Carrying
Amount
Accumulated
Amortization

Net Carrying
Amount

Trademarks (indefinite-lived) n/a $ 96,676 $ - $ 96,676 n/a $ 96,676 $ - $ 96,676
Trademarks (definite-lived) 15 years 15,437 429 15,008 15 years 15,463 1,459 14,004
Licensing agreements 4 years 2,000 2,000 - 4 years 2,000 2,000 -
Non-compete agreement 7 years 562 80 482 7 years 562 160 402
Copyrights and other intellectual property 10 years 190 33 157 10 years 190 52 138
Total $ 114,865 $ 2,542 $ 112,323 $ 114,891 $ 3,671 $ 111,220

Amortization expense for intangible assets was approximately $282,000 for each of the quarters ended June 30, 2017 (the “Current Quarter”) and June 30, 2016 (the “Prior Year Quarter”). Amortization expense for intangible assets for the quarter ended September 30, 2016 (the “Current Quarter”) and the quarter ended September 30, 2015 (the “Prior Year Quarter”) was $282,000 and $211,000, respectively. Amortization expense for intangible assets for the ninesix months ended ~~September~~June 30, ~~2016~~2017 (“Current ~~Nine~~Six Months”) and the ~~nine~~six months ended ~~September~~June 30, ~~2015~~2017 (the “Prior Year ~~Nine~~Six Months”) was ~~$847,000~~approximately $565,000 and ~~$525,000,~~$564,000, respectively.

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

7
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
The Company has $12.371 million of goodwill related to the 2011 acquisition of the Isaac Mizrahi business. There was no change in goodwill during the Current ~~Nine~~Six Months.
7
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

3. Significant Contracts

QVC Agreements

Under the Company’s agreements with QVC, QVC is required to pay the Company fees based primarily on a percentage of its net sales of Isaac Mizrahi, Ripka, H Halston, and C Wonder branded merchandise. QVC royalty revenue represents a significant portion of the Company’s total revenues. ~~Revenues~~Net revenues from QVC totaled ~~$7.00~~$6.78 million and ~~$6.30~~$7.72 million for the Current Quarter and Prior Year Quarter, respectively, representing approximately ~~84%~~81% and 85% of the Company’s net revenues, respectively. Net revenues from QVC totaled $14.01 million and $14.95 million for the Current Six Months and the Prior Year Six Months, respectively, representing approximately 83% and 86% of the Company’s total revenues, respectively. Revenues from QVC totaled $22.14 million and $17.78 million for the Current Nine Months and the Prior Year Nine Months, respectively, representing approximately 86% and 88% of the Company’s totalnet revenues, respectively. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Company had receivables from QVC of ~~$7.27~~$6.83 million and ~~$6.40~~$5.89 million, respectively, representing approximately ~~83%~~78% and ~~84%~~85% of the Company’s total receivables, respectively. ~~Total receivables include $0.29 million~~
On April 28, 2017, the Company and ~~$1.18 million of earned revenue that had been accrued but not billed as of September 30, 2016~~QVC entered into an amendment to terminate the C Wonder QVC Agreement effective May 1, 2017 and ~~December~~commence a sell-off period. During the sell-off period, QVC remains obligated to pay royalties to the Company through January 31, ~~2015, respectively.~~2018, and QVC retains exclusive rights with respect to C Wonder branded products for interactive television, excluding certain permitted international entities, through May 1, 2018.

4. Debt

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

($ in thousands) September 30,
2016 December 31,
2015 June 30,
2017 December 31,
2016
Xcel Term Loan $ 26,125 $ - $ 20,000 $ 25,250
IM Term Loan - 11,375
JR Term Loan - 7,875
H Term Loan - 10,000
Unamortized deferred finance costs related to term loans (485 ) (493 )
Unamortized deferred finance costs related to term loan (429 ) (509 )
IM Seller Note 3,627 4,918 2,918 3,627
Ripka Seller Notes 495 469 523 504
Contingent obligation - IM Seller - 250
Contingent obligation - JR Seller 3,784 3,784 200 200
Contingent obligation - CW Seller 2,850 2,850 2,850 2,850
Total 36,396 41,028 26,062 31,922
Current portion (i) 5,302 9,168 4,043 6,427
Long-term debt $ 31,094 $ 31,860 $ 22,019 $ 25,495

(i) The current portion of long-term debt as of ~~September~~June 30, ~~2016~~2017 consists of (a) ~~$3.875~~$2.5 million related to the Xcel Term Loan, ~~and~~ (b) ~~$1.427~~$1.443 million related to the IM Seller ~~Note.~~Note, and (c) $100 thousand related to the Ripka Earn-Out.

Xcel Term Loan

On February 26, 2016, Xcel and its wholly owned subsidiaries, IM Brands, LLC, JR Licensing, LLC, H Licensing, LLC, C Wonder Licensing, LLC, Xcel Design Group, LLC, IMNY Retail Management, LLC, and IMNY E-Store, USA, LLC (each a “Guarantor” and collectively, the “Guarantors”), as Guarantors, entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with Bank Hapoalim B.M. (“BHI”), as agent (the “Agent”), and the financial institutions party thereto as lenders (the “Lenders”). The Loan Agreement amended and restated the IM Term Loan, the JR Term Loan, and the H Term Loan. Pursuant to the Loan Agreement, Xcel assumed the obligations of each of IM Brands, LLC, JR Licensing, LLC, and H Licensing, LLC under the respective term loans with BHI in the aggregate principal amount of $27,875,000 (the loan under the Loan Agreement is referred to as the “Xcel Term Loan”). Management assessed and determined that this amendment represented a debt modification and, accordingly, no gain or loss was recorded.

8
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)
On February 24, 2017, Xcel and BHI amended the terms of the Loan Agreement (the “Amended Loan Agreement”). Under this amendment, principal payments for the year ending December 31, 2017 were increased by a total of $1,000,000, principal payments for the year ending December 31, 2021 were decreased by $1,000,000, and the minimum EBITDA (as defined in the Amended Loan Agreement) requirement for the year ended December 31, 2016 was eliminated. There were no changes to the total principal balance, interest rate, maturity date, or other terms of the Loan Agreement. Management assessed and determined that this amendment represented a debt modification and, accordingly, no gain or loss was recorded.
On June 15, 2017, Xcel and BHI entered into a second amendment to the Amended Loan Agreement. Under this amendment, principal payments for the year ending December 31, 2017 were increased by a total of $750,000, principal payments for the year ending December 31, 2021 were decreased by $750,000, the minimum EBITDA (as defined in the Second Amendment to the Amended Loan Agreement) requirement for the year ending December 31, 2017 was changed from $9,000,000 to $7,000,000, and the minimum EBITDA requirements for the years ending December 31, 2018 and 2019 were changed from $9,000,000 to $8,000,000. There were no changes to the total principal balance, interest rate, maturity date, or other terms of the Loan Agreement. Management assessed and determined that this amendment represented a debt modification and, accordingly, no gain or loss was recorded.
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~

The Xcel Term Loan matures on January 1, 2021. Principal on the Xcel Term Loan is payable in quarterly installments on each of January 1, April 1, July 1 and October 1. ~~The~~As of June 30, 2017, the aggregate remaining scheduled annual principal payments ~~are~~under the Second Amendment to the Amended Loan Agreement were as follows:

($ in thousands)

Year Ending December 31,
Amount of
Principal
Payment Amount of
Principal
Payment
2016 (October 1 through December 31) $ 875
2017 4,000
2017 (July 1 through December 31) $ 500
2018 4,000 4,000
2019 4,000 4,000
2020 4,000 4,000
2021 9,250 7,500
Total $ 26,125 $ 20,000
Commencing with the fiscal year ending December 31, 2017, the Company is required to repay a portion of the Xcel Term Loan in an amount equal to 10% of the excess cash flow for the fiscal year; provided that no early termination fee shall be payable with respect to any such payment (the “Excess Cash Flow Principal Payment”). Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash interest and principal and taxes paid or payable during such period, and (iii) all dividends declared and paid during such period to equity holders of any credit party treated as a disregarded entity for tax purposes. As of June 30, 2017, the estimated Excess Cash Flow Principal Payment provision of the Xcel Term Loan does not result in any additional repayment during the year ending December 31, 2017.

Under the Amendment to the Loan Agreement, the Company has the right to prepay the Xcel Term Loan, provided that any prepayment of less than all of the outstanding balance shall be applied to the remaining amounts due in inverse order of maturity. If the Xcel Term Loan is prepaid on or prior to the third anniversary of the closing date (including as a result of an event of default), the Company shall pay an early termination fee ~~as follows: an amount~~ equal to the principal amount outstanding under the Xcel Term Loan on the date of prepayment, multiplied by: (i) two percent (2.00%) if the Xcel Term Loan is prepaid on or after the closing date and on or before the second anniversary of the closing date; ~~and~~or (ii) one percent (1.00%) if the Xcel Term Loan is prepaid after the second anniversary of the closing date and on or before the third anniversary of the closing date.

9
~~Commencing with the fiscal year ending December 31, 2017, the Company is required~~
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to repay a portion of the Xcel Term Loan in an amount equal to 10% of the excess cash flow for the fiscal year; provided that no early termination fee shall be payable with respect to any such payment. Excess cash flow means, for any period, cash flow from operations (before certain permitted distributions) less (i) capital expenditures not made through the incurrence of indebtedness, (ii) all cash interest and principal and taxes paid or payable during such period, and (iii) all dividends declared and paid during such period to equity holders of any credit party treated as a disregarded entity for tax purposes.Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

Xcel’s obligations under the Amended Loan Agreement are guaranteed by the Guarantors and secured by all of the assets of Xcel and the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the Amended Loan Agreement) and, subject to certain limitations contained in the Amended Loan Agreement, equity interests of the Guarantors (as well as any subsidiary formed or acquired that becomes a credit party to the Amended Loan Agreement).

The Amended Loan Agreement contains customary covenants, including reporting requirements, trademark preservation, and the following financial covenants of the Company (on a consolidated basis with the Guarantors and any subsidiaries subsequently formed or acquired that become a credit party under the Amended Loan Agreement):

· net worth (as defined in the Amended Loan Agreement) of at least $90,000,000 at the end of each fiscal quarter ending on June 30 and December 31 of each fiscal year;
· liquid assets of at least $5,000,000, until such time as the ratio of indebtedness to EBITDA (as defined in the Amended Loan Agreement) is less than 1.00 to 1.00 and, in which event, liquid assets must be at least $3,000,000;
· a fixed charge ratio of at least 1.20 to 1.00 for each fiscal quarter ended June 30 and December 31 for the twelve fiscal month period ending on such date;
· capital expenditures shall not exceed (i) $2,650,000 for the year ~~ending~~ended December 31, 2016 and (ii) $700,000 for any fiscal year thereafter; and
· EBITDA (as defined in the Amended Loan Agreement) of ~~$9,500,000~~not less than $7,000,000 for the fiscal year ending December 31, ~~2016;~~2017, not less than $8,000,000 for the fiscal years ending December 31, 2018 and 2019, and not less of $9,000,000 for ~~each~~the following fiscal ~~year thereafter.~~years.

The Company was in compliance with all applicable covenants as of ~~September~~June 30, ~~2016.~~
9
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
In connection with the refinancing of its term loan debt, the Company paid $116,000 of fees to or on behalf of BHI. These fees, along with $466,000 of remaining unamortized deferred finance costs related to the previous term loan debt, have been deferred on the condensed consolidated balance sheet as a reduction to the carrying value of the Xcel Term Loan, and are being amortized to interest expense over the term of the Xcel Term Loan using the interest method.2017.

Interest on the Xcel Term Loan accrues at a fixed rate of 5.1% per annum and is payable on each day on which the scheduled principal payments are required to be made. For the Current Quarter and Prior Year Quarter, the Company incurred interest expense on its senior term loan debt with BHI of ~~$340,000~~approximately $287,000 and ~~$304,000, respectively, related to the Xcel Term Loan.~~$348,000, respectively. For the Current ~~Nine~~Six Months and Prior Year ~~Nine~~Six Months, the Company incurred interest expense on its senior term loan debt with BHI of ~~$1,003,000~~approximately $596,000 and ~~$918,000, respectively, related to the Xcel Term Loan.~~$663,000, respectively.

IM Seller Note

On September 29, 2011, as part of the consideration for the purchase of the Isaac Mizrahi Business, the Company issued to IM Ready-Made, LLC (“IM Ready”) a promissory note in the principal amount of $7,377,000 (as amended, the “IM Seller Note”). The stated interest rate of the IM Seller Note was 0.25% per annum. Management determined that this rate was below the Company’s expected borrowing rate, which was then estimated at 9.25% per annum. Therefore, the Company discounted the IM Seller Note by $1,740,000 using a 9.0% imputed annual interest rate, resulting in an initial value of $5,637,000. In addition, on September 29, 2011, the Company prepaid $123,000 of interest on the IM Seller Note. The imputed interest amount was amortized over the term of the IM Seller Note and recorded as other interest and finance expense on the Company’s condensed consolidated statements of operations.

On December 24, 2013, the IM Seller Note was amended to (1) revise the maturity date to September 30, 2016, (2) revise the date to which the maturity date may be extended to September 30, 2018, (3) provide the Company with a prepayment right with its common stock, subject to remitting in cash certain required cash payments and a minimum common stock price of $4.50 per share, and (4) require interim scheduled payments.

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

10
~~The Company paid the scheduled semi-annual installment payment~~
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)
As of ~~$750,000 on September~~June 30, ~~2016. The~~2017, the aggregate remaining annual principal payments under the IM Seller Note ~~are~~were as follows:

($ in thousands)

Year Ending December 31,

Amount of
Principal
Payment

Amount of
Principal
Payment

2016 (October 1 through December 31) $ -
2017 1,427
2017 (July 1 through December 31) $ 717
2018 1,459 1,459
2019 741 742
Total $ 3,627 $ 2,918

For the Current Quarter, ~~and~~the Company incurred interest expense of $16,000 under the IM Seller Note. For the Prior Year Quarter, the Company incurred interest expense of ~~$70,000 and $79,000, respectively,~~$69,000, which ~~includes~~consisted solely of amortization of the discount on the IM Seller ~~Note of $70,000 and $74,000, respectively.~~Note. For the Current ~~Nine Months and the Prior Year Nine~~Six Months, the Company incurred interest expense of ~~$210,000 and $237,000, respectively,~~$36,000 under the IM Seller Note. For the Prior Year Six Months, the Company incurred interest expense of $140,000 under the IM Seller Note, which ~~includes~~consisted solely of amortization of the discount on the IM Seller ~~Note of $210,000 and $223,000, respectively.~~Note.

10
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
Ripka Seller Notes

~~On April 3, 2014, as part~~As of June 30, 2017, the ~~consideration for~~remaining discounted balance, non-interest bearing note relating to the ~~purchase~~acquisition of the Ripka Brand ~~JR Licensing issued to Ripka promissory notes in the aggregate principal amount of $6,000,000~~ (the “Ripka Seller Notes”). The Ripka Seller Notes have a term of five years from the date of issuance, are payable in cash or shares of the Company’s common stock valued at the time of payment, at the Company’s option, and with a floor price of $7.00 per share if paid in stock, with Ripka having certain rights to extend the maturity of the Ripka Seller Notes in the event the Company’s stock is trading at a price of less than $7.00 per share. On February 20, 2015, a portion of the Ripka Seller Notes was ~~amended and satisfied.~~
Management determined that the Company’s expected borrowing rate was estimated to be 7.33% per annum and, therefore, discounted the Ripka Seller Notes by $1,835,000 using a 7.33% imputed annual interest rate, resulting in an initial value of $4,165,000. The imputed interest amount is being amortized over the term of the Ripka Seller Notes and recorded as other interest and finance expense on the Company’s condensed consolidated statements of operations.
On February 20, 2015, the Company agreed to cancel Ripka Seller Notes in the principal amount of $3.0 million and execute in its place: (i) a $2.4 million principal amount promissory note issued in the name of Ripka (the “$2,400,000 Seller Note”) and (ii) a$523,000. An aggregate $600,000 principal amount promissory note issued in the name of Ripka (the “$600,000 Seller Note”), each with substantially the same terms as the Ripka Seller Notes; provided, however, that the Company and Ms. Ripka agreed that, upon Ripka’s assignment of the $600,000 Seller Note to a permitted assignee, the principal payments under the $600,000 Seller Note shall accelerate to be payable in eight equal quarterly installments of $75,000 with the first payment due on March 31, 2015 and with the final principal payment payable on December 31, 2016. As of the date of the filing of this Quarterly Report on Form 10-Q, the $600,000 Seller Note has not been assigned. The $2,400,000 Seller Note was assigned by Ripka to Judith Ripka Creations, Inc. and then assigned by Judith Ripka Creations, Inc. to Thai Jewelry Manufacturer Co. LTD. (“Thai Jewelry”).
On February 20, 2015, the Company entered into a release letter (the “Release Letter”) with Thai Jewelry, pursuant to which the Company agreed to issue to Thai Jewelry an aggregate of 266,667 shares of the Company’s common stock in exchange for the cancellation of the $2,400,000 Seller Note. On March 25, 2015, the Company issued the shares of common stock pursuant to the Release Letter. The carrying value, net of the discount at the time of the redemption of the $2.4 million Ripka Seller Notes was $1.79 million and, as a result, the Company recorded a loss on the early extinguishment of debt of $0.61 million during the Prior Year Nine Months, which is included in the accompanying condensed consolidated statements of operations.
~~On April 21, 2015, the Company satisfied an additional $3.00 million~~ principal amount of the Ripka Seller Notes ~~by issuing 333,334 shares of the Company’s common stock. The carrying value, net of the discount~~is due at the time of the redemption of the $3.00 million Ripka Seller Notes was $2.24 million and, as a result, the Company recorded a loss on the early extinguishment of debt of $0.76 million, and when combined with the loss recorded on February 20, 2015, totals a $1.37 million loss on the early extinguishment of debt which is included in the accompanying Prior Year Nine Months condensed consolidated statements of operations.maturity (March 31, 2019).

For both the Current Quarter and Prior Year Quarter, the Company incurred interest expense of approximately $9,000 ~~and $8,000, respectively,~~under the Ripka Seller Notes, which ~~consists~~consisted solely of amortization of the discount on the Ripka Seller Notes. For the Current ~~Nine~~Six Months and the Prior Year ~~Nine~~Six Months, the Company incurred interest expense of ~~$26,000~~approximately $19,000 and ~~$96,000,~~$17,000, respectively, under the Ripka Seller Notes, which consists solely of amortization of the discount on the Ripka Seller Notes.
11
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~

~~Contingent Obligation – IM Seller (QVC Earn-Out)~~
The Company was obligated to pay IM Ready $2.76 million, payable in cash or common stock, at the Company’s option, contingent upon IM Brands receiving aggregate net royalty income of at least $2.5 million from QVC in the twelve-month period ended September 30, 2015 with the number of shares of such stock based upon the greater of (x) $4.50 per share, and (y) the average stock price for the last twenty business days prior to the time of such issuance. The $2.5 million in net royalty income from QVC for the twelve-month period ended September 30, 2015 was met and, therefore, the Company issued IM Ready 290,473 shares of common stock, valued at $2.51 million as of September 30, 2015 and made a $0.25 million payment in cash in January 2016 to satisfy this obligation.
Contingent Obligation – JR Seller (Ripka Earn-Out)

In connection with the purchase of the Ripka Brand, the Company agreed to pay the sellers of the Ripka Brand additional consideration of up to $5 million in aggregate (the “Ripka Earn-Out”), payable in cash or shares of the Company’s common stock based on the fair market value of the Company’s common stock at the time of payment, and with a floor of $7.00 per share, based on the Ripka Brand achieving in excess of $1 million of net royalty income during each of the 12-month periods ending on October 1, 2016, 2017 and 2018, less the sum of all earn-out payments for any prior earn-out period. Net royalty income does not include any revenues generated by interactive television sales or any revenue accelerated as a result of a termination of any license agreement. The Ripka Earn-Out of $3.78 million iswas recorded ~~in the accompanying condensed consolidated balance sheets~~ based on the difference between the fair value of the acquired assets of the Ripka Brand at the acquisition date and the total consideration paid. ~~In accordance~~
On December 21, 2016, the Company entered into an agreement with ~~ASC Topic 480,~~the sellers of the Ripka Brand which amended the terms of the Ripka Earn-Out, ~~obligation~~such that the maximum amount of earn-out consideration was reduced to $375,000, of which $175,000 was payable in cash upon execution of the amendment, and $100,000 is ~~classified~~payable in cash on each of May 15, 2018 and 2019. The payment of the remaining future payments of $200,000 under the earn-out is contingent upon the Ripka Brand achieving at least $6,000,000 of net royalty income from QVC during each of the 12-month periods ending on March 31, 2018 and 2019. The remaining expected value (which approximates fair value) of the Ripka Earn-Out of $0.20 million is recorded as ~~a liability~~long-term debt in the accompanying condensed consolidated balance sheets, ~~because~~ of which $0.10 million is presented in the ~~variable number~~current portion of ~~shares payable under the agreement.~~ long-term debt.
11
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

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

In connection with the purchase of the C Wonder Brand, the Company agreed to pay the seller additional consideration (the “C Wonder Earn-Out”), which would be payable, if at all, in cash or shares of common stock of the Company, at the Company’s sole discretion, after June 30, 2019, with a value based on the royalties related directly to the assets the Company acquired pursuant to the purchase agreement. The value of the earn-out shall be calculated as the positive amount, if any, of (i) two times (A) the maximum net royalties as calculated for any single twelve month period commencing on July 1 and ending on June 30 between the closing date and June 30, 2019 (each, a “Royalty Target Year”) less (B) $4,000,000, plus (ii) two times the maximum royalty determined based on a percentage of retail and wholesale sales of C Wonder branded products by the Company as calculated for any single Royalty Target Year. The C Wonder Earn-Out of $2.85 million is recorded in the accompanying condensed consolidated balance sheets based on the probability of the C Wonder Brand achieving certain net royalty income targets within the earn-out periods and then calculating the present value of the weighted average payment amount. In accordance with ~~ASC~~Accounting Standards Codification Topic 480, the C Wonder Earn-Out obligation is classified as a liability in the accompanying condensed consolidated balance sheets because of the variable number of shares payable under the agreement.

As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, total contingent obligations were ~~$6.63 million and $6.88 million, respectively.~~$3.05 million.

12
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
5. Stockholders’ Equity

2011 Equity Incentive Plan

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

Effective September 13, 2016, the Plan was amended to (a) increase the number of shares of common stock reserved and available for distribution under the Plan from 8,000,000 to 13,000,000, and (b) increase the maximum number of shares of common stock with respect to which options or restricted stock may be granted to any participant from 5,000,000 to 10,000,000.
The fair value of options and warrants is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The risk-free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, ~~the~~and expected life is based on the estimated average of the life of options and warrants using the simplified ~~method, and forfeitures are estimated on the date of grant based on certain historical data.~~method. The Company utilizes the simplified method to determine the expected life of the options and warrants due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

~~Forfeitures~~Restricted stock awards are ~~required to be estimated~~valued using the fair value of the Company’s stock at the ~~time~~date of ~~grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.~~grant.

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

Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur.
12
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)
Stock Options

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

On ~~March~~January 1, ~~2016,~~2017, the Company granted options to purchase an aggregate of ~~100,000~~150,000 shares of common stock to a ~~member of management.~~certain key employee. The exercise price of the options is ~~$7.00~~$5.50 per share, and one-third of the options will vest on each of ~~December 31, 2016, December 31, 2017,~~January 1, 2018, January 1, 2019, and ~~March 31, 2018.~~January 1, 2020.

On March 31, 2016, the Company granted options to purchase an aggregate of 1,671,500 shares of common stock to certain executives, non-executive management, and employees. The exercise price of the options is $5.80 per share, and one-third of the options will vest on each of March 31,January 24, 2017, ~~March 31, 2018, and March 31, 2019.~~
~~On March 31, 2016,~~ the Company granted options to purchase an aggregate of 500,000 shares of common stock to a certain ~~key employees. The exercise price for 100,000 of these options is $5.80 per share, and such options will vest on January 1, 2017.~~executive. The exercise price of the ~~remaining 400,000~~ options is ~~$7.50~~$5.00 per share, and one-fifth of the ~~vesting~~options will vest on each of ~~such options is dependent upon the achievement of certain royalty income targets.~~January 1, 2018, January 1, 2019, January 1, 2020, January 1, 2021, and January 1, 2022.
13
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~

On March 31, ~~2016,~~2017, the Company granted options to purchase an aggregate of 150,000 shares of common stock to non-management directors. The exercise price of the options is ~~$5.80~~$2.70 per share, and 50% of the options will vest on each of March 31, ~~2017~~2018 and March 31, ~~2018.~~2019.

On ~~August 11, 2016,~~May 31, 2017, the Company granted options to purchase an aggregate of ~~25,000~~15,000 shares of common stock to a ~~newly appointed non-management director.~~certain key employee. The exercise price of the options is ~~$5.15~~$2.60 per share, and ~~50%~~one-third of the options will vest on each of ~~August~~May 31, ~~2017~~2018, May 31, 2019, and ~~August~~May 31, ~~2018.~~2020.

The fair values of the options granted during the Current ~~Nine~~Six Months were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

Expected Volatility ~~33.25~~ 33.69 – ~~34.85~~35.20 %
Expected Dividend Yield 0 %
Expected Life (Term) 3.25 – ~~5.32~~5.42 years
Risk-Free Interest Rate ~~0.91~~ 1.52 – ~~1.21~~2.02 %

A summary of the Company’s stock options activity for the Current ~~Nine~~Six Months is as follows:

Number of
Options Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life
(in Years) Aggregate
Intrinsic
Value Number of
Options Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life
(in Years) Aggregate
Intrinsic
Value
Outstanding at January 1, 2016 379,500 $ 5.50 1.71 $ 1,174,000
Outstanding at January 1, 2017 2,436,000 $ 5.98 4.38 $ -
Granted 2,446,500 6.12 815,000 4.62
Canceled - - - -
Exercised (13,000 ) 3.08 - -
Expired/Forfeited (36,000 ) 5.22 (93,000 ) 5.02
Outstanding at September 30, 2016, and expected to vest 2,777,000 $ 6.06 4.34 $ -
Exercisable at September 30, 2016 354,000 $ 5.58 0.83 $ -
Outstanding at June 30, 2017, and expected to vest 3,158,000 $ 5.66 4.54 $ -
Exercisable at June 30, 2017 811,670 $ 6.01 3.61 $ -

Compensation expense related to stock options for the Current Quarter and the Prior Year Quarter was approximately ~~$296,000~~$272,000 and ~~$17,000,~~$329,000, respectively. Compensation expense related to stock ~~option grants~~options for the Current ~~Nine~~Six Months and the Prior Year ~~Nine~~Six Months was ~~$644,000~~approximately $574,000 and ~~$50,000,~~$349,000, respectively. Total unrecognized compensation expense related to unvested stock options at ~~September~~June 30, ~~2016~~2017 amounts to ~~$2,899,000~~approximately $2,515,000 and is expected to be recognized over a weighted average period of ~~2.88~~2.48 years.
13
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

The following table summarizes the Company’s stock option activity for non-vested options for the Current ~~Nine~~Six Months:
Number of
Options Weighted
Average
Grant Date
Fair Value
Balance at January 1, 2016 47,500 $ 1.43
Granted 2,446,500 1.44
Vested (42,500 ) 1.42
Forfeited or Canceled (28,500 ) 1.49
Balance at September 30, 2016 2,423,000 $ 1.44

Number of
Options Weighted
Average
Grant Date
Fair Value
Balance at January 1, 2017 2,294,667 $ 1.39
Granted 815,000 1.07
Vested (670,337 ) 1.49
Forfeited or Canceled (93,000 ) 1.01
Balance at June 30, 2017 2,346,330 $ 1.32
14
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
Warrants

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

A summary of the Company’s warrants activity for the Current ~~Nine~~Six Months is as follows:

Number of
Warrants Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life
(in Years) Aggregate
Intrinsic
Value Number of
Warrants Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life
(in Years) Aggregate
Intrinsic
Value
Outstanding and exercisable at January 1, 2016 2,219,543 $ 6.07 3.23 $ 3,168,000
Outstanding and exercisable at January 1, 2017 1,966,743 $ 6.76 2.81 $ -
Granted - - - -
Canceled - - - -
Exercised (218,000 ) 0.01 - -
Expired/Forfeited (34,800 ) 5.14 (75,000 ) (5.50 )
Outstanding and exercisable at September 30, 2016 1,966,743 $ 6.76 3.06 $ -
Outstanding and exercisable at June 30, 2017 1,891,743 $ 6.81 2.42 $ -

No compensation expense was recognized in the Current ~~Nine~~Six Months or Prior Year ~~Nine~~Six Months related to warrants.

Restricted Stock

On ~~March~~January 31, ~~2016,~~2017, the Company issued ~~to a key employee 17,242 shares of restricted stock. The~~50,000 shares of restricted stock to a consulting firm whose controlling shareholder is a director of the Company. Of the 50,000 shares of restricted stock granted, 25,000 shares vested ~~over six months.~~immediately and 25,000 shares shall vest on January 31, 2018. On June 18, 2017, the Company issued an additional 28,334 shares of restricted stock to the same consulting firm, of which 14,167 shares vested immediately on the same day and 14,167 shares shall vest on January 31, 2018. See Note 8, Related Party Transactions, for additional information.

On March 31, ~~2016, the Company issued to a member of management 50,000 shares of restricted stock. The shares of restricted stock vest evenly over 4 years, whereby 25% shall vest on each of March 31,~~ 2017, ~~March 31, 2018, March 31, 2019, and March 31, 2020.~~
On March 31, 2016, the Company issued to certain executives an aggregate of 150,001 shares of restricted stock. The shares of restricted stock vest evenly over three years, whereby one-third shall vest on each of March 31, 2017, March 31, 2018, and March 31, 2019.
~~On March 31, 2016,~~ the Company issued to non-management directors an aggregate of 48,000 shares of restricted stock. The shares of restricted stock will vest evenly over two years, whereby 50% shall vest on March 31, ~~2017~~2018 and 50% shall vest on March 31, ~~2018.~~
On August 11, 2016, the Company issued to a newly appointed non-management director an aggregate of 8,000 shares of restricted stock. The shares of restricted stock will vest evenly over two years, whereby 50% shall vest on August 31, 2017 and 50% shall vest on August 31, 2018.2019.

Notwithstanding the foregoing, each executive and director grantee may extend the first anniversary of all or a portion of the restricted stock by six months and, thereafter one or more times may further extend such date with respect to all or a portion of the restricted stock until the next following ~~September 30th~~date six months or ~~March 31st, as the case may be,~~twelve months hence, by providing written notice of such election to extend such date with respect to all or a portion of the restricted stock prior to such date.

1514
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

A summary of the Company’s restricted stock activity for the Current ~~Nine~~Six Months is as follows:

Number of
Restricted
Shares Weighted
Average
Grant Date
Fair Value Number of
Restricted
Shares Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2016 3,530,485 $ 4.95
Outstanding at January 1, 2017 3,171,685 $ 5.12
Granted 273,243 5.78 126,334 3.18
Canceled - - - -
Vested (539,900 ) 4.44 (768,431 ) 4.20
Expired/Forfeited (12,275 ) 8.66 (1,000 ) 9.00
Outstanding at September 30, 2016 3,251,553 $ 5.09
Outstanding at June 30, 2017 2,528,588 $ 5.29

Compensation expense related to restricted stock grants for the Current Quarter and Prior Year Quarter was ~~$793,000~~approximately $451,000 and ~~$1,275,000,~~$1,124,000, respectively. Compensation expense related to restricted stock grants for the Current ~~Nine~~Six Months and Prior Year ~~Nine~~Six Months was ~~$3,110,000~~approximately $1,232,000 and ~~$3,363,000,~~$2,316,000, respectively.
Total unrecognized compensation expense related to unvested restricted stock grants at ~~September~~June 30, ~~2016~~2017 amounts to ~~$2,819,000~~approximately $1,169,000 and is expected to be recognized over a weighted average period of ~~1.56~~1.65 years.

Shares Available Under the Company’s 2011 Equity Incentive Plan

At ~~September~~June 30, ~~2016,~~2017, there were ~~5,743,263~~5,579,822 shares of common stock available for issuance under the Plan.

Shares Reserved for Issuance

At ~~September~~June 30, ~~2016,~~2017, there were ~~10,487,006~~10,629,565 shares of common stock reserved for issuance pursuant to unexercised warrants and stock options, or available for issuance under the Plan.

Dividends

The Company has not paid any dividends to date.
16
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~

6. Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period, including stock options and warrants, using the treasury stock method. Diluted EPS excludes all potentially dilutive shares of common stock if their effect is anti-dilutive.

~~Shares used in calculating basic and diluted income (loss) per share are as follows:~~

Three Months Ended
June 30,

Six Months Ended
June 30,

2017 2016 2017 2016
Basic 18,449,210 18,671,648 18,561,453 18,565,198
Effect of exercise of warrants 363,834 - - -
Effect of exercise of stock options - - - -
Diluted 18,813,044 18,671,648 18,561,453 18,565,198

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Basic 18,692,775 17,187,272 18,608,034 15,380,609
Effect of exercise of warrants 369,288 962,292 - 962,292
Effect of exercise of stock options 5,948 128,618 - 128,618
Diluted 19,068,011 18,278,182 18,608,034 16,471,519
15
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

As a result of the net loss ~~from continuing operations~~ presented for the ~~nine months ended September 30, 2016,~~Current Year Six Months, Prior Year Quarter and Prior Year Six Months, the Company calculated diluted earnings per share using basic weighted-average shares outstanding for those periods, as utilizing diluted shares would be anti-dilutive to loss per share.

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Stock options and warrants 3,338,000 750,000 4,743,743 750,000

Three Months Ended
June 30,

Six Months Ended
June 30,

2017 2016 2017 2016
Stock options and warrants 4,684,250 4,966,043 5,049,743 4,966,043

7. Income Tax

The effective income tax rate for the Current Quarter and the Prior Year Quarter ~~from continuing operations~~ was approximately ~~68%~~72% and ~~54%~~70%, respectively, resulting in ~~a $256,000~~an income tax provision (benefit) of $557,000 and ~~a $51,000 income tax provision,~~$(208,000), respectively.

The effective income tax rate for the Current ~~Nine~~Six Months and the Prior Year ~~Nine~~Six Months was approximately ~~15%~~122% and 2%66%, respectively, resulting in ~~a $3,000 income tax benefit and a $35,000~~an income tax provision (benefit) of $1,013,000 and $(259,000), respectively.
In the Current Quarter, the effective tax rate was primarily attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes. This item increased the effective rate by 7% for the Current Quarter and 57% for the Current Six Months, respectively. The effective tax rate was also attributable to recurring permanent differences. Based on the amount of income before income taxes compared to the recurring permanent differences, the effective rate increased approximately by 31% for both the Current Quarter and Current Six Months.

During the ~~Current~~Prior Year Quarter and the ~~Current Nine~~Prior Year Six Months, the respective effective tax rates were attributable to recurring permanent differences. Based on the amount of ~~income/(loss)~~loss from continuing operations before income taxes compared to the permanent differences, the effective rate increased by ~~27%~~29% and ~~decreased by 26% for the Current Quarter and the Current Nine Months, respectively.~~
For the Prior Year Nine Months, the Company recorded a $3.00 million gain on the reduction of contingent obligations related to the acquisition of the Isaac Mizrahi Brand, partially offset by recurring permanent differences. This gain was not subject to tax and was therefore treated as a discrete item (permanent difference) occurring in the Prior Year Nine Months. Based on the amount of income from continuing operations before income taxes compared to the permanent differences, the effective rate increased by 13% and decreased by 39%25% for the Prior Year Quarter and the Prior Year ~~Nine~~Six Months, respectively.
17
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~

8. ~~Discontinued Operations~~
Discontinued operations represent the net sales and expenses related to the Company’s retail operations, which were discontinued in December 2014. A summary of the results of discontinued operations for the Current Quarter, Prior Year Quarter, Current Nine Months, and Prior Year Nine Months is as follows (in thousands, except share and per share data):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Net sales $ - $ - $ - $ 287
Cost of sales - - - (221 )
Operating expenses - (1 ) - (267 )
Loss from disposal of discontinued operations - (32 ) - (273 )
Income tax benefit - 19 - 193
Loss from discontinued operations, net $ - $ (14 ) $ - $ (281 )

Loss per share from discontinued operations, net:
Basic $ - $ (0.00 ) $ - $ (0.02 )
Diluted $ - $ (0.00 ) $ - $ (0.02 )

Weighted average shares outstanding:
Basic 18,692,775 17,187,272 18,608,034 15,380,609
Diluted 19,068,011 18,278,182 18,608,034 16,471,519
~~Assets and liabilities of discontinued operations were not material as of September 30, 2016 and December 31, 2015.~~
9. Related Party Transactions

~~Licensing Agent Agreement~~
On August 2, 2011, the Company entered into a licensing agent agreement with Adam Dweck, son of Jack Dweck, a former director of the Company, pursuant to which he is entitled to a five percent commission on any royalties the Company receives under any new license agreements that he procures for the Company for the initial term of such license agreements. Adam Dweck earned approximately $0 and $0 in fees for the Current Quarter and Prior Year Quarter, respectively, and earned approximately $1,000 and $11,000 in fees for the Current Nine Months and Prior Year Nine Months, respectively.
~~Todd Slater~~
On September 29, 2011, the Company entered into an agreement, which was amended on October 4, 2011 and on July 10, 2012, with Todd Slater, who was a director of the Company from October 17, 2011 through August 9, 2016, for services related to the Company’s licensing strategy and introduction to potential licensees. In July 2012, the Company made a one-time payment to Mr. Slater of $163,000 in connection with the amendment. The Company incurred direct licensing costs with Mr. Slater from amortization of the one-time payment for the Prior Year Quarter and Prior Year Nine Months of $16,000 and $32,000, respectively.
18
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
Benjamin Malka

~~The~~Concurrent with the acquisition of the H Halston Brand on December 22, 2014, the Company entered into a license agreement with The H Company IP, LLC (“HIP”) ~~on December 22, 2014,~~, which was subsequently amended September 1, 2015. Benjamin Malka, a director of the Company, is a 25% equity holder of HIP’s parent company, House of Halston LLC (“HOH”), and Chief Executive Officer of HOH. The HIP license agreement provides for royalty payments including guaranteed minimum royalties to be paid to the Company during the initial term that expires on December 31, 2019.

On September 1, 2015, the Company entered into a license agreement with Lord and Taylor, LLC (the “L&T License”) and simultaneously amended the H Halston License Agreement eliminating HIP’s minimum guaranteed royalty obligations, provided the L&T License is in effect. In addition, the Company entered into a sublicense agreement with HIP obligating the Company to pay HIP a ~~royalty participation~~ fee on an annual basis the greater of (i) 50% of royalties received under the L&T License from H Halston products or (ii) guaranteed minimum royalties. ~~Guaranteed~~Provided that Lord & Taylor, LLC is paying the Company at least $1,000,000 per quarter under the L&T License, the remaining contractually required guaranteed minimum royalties are equal to ~~$0.25 million for the seventeen months ending January 31, 2017, and~~ $0.75 million, $0.75 million, $1.5 million, and $1.75 million for the twelve months ending January 31, 2018, 2019, 2020, and 2021, respectively. Cumulative fees paid to HIP by the Company or on the Company’s behalf through June 30, 2017 were $0.19 million.
16
XCEL BRANDS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

The Company ~~incurred~~recorded $0 and $28,000 of HIP fees (as a ~~$28,000 and $15,000 royalty participation fee with HIP~~reduction to net revenue) for the Current ~~Year~~ Quarter and the Prior Year Quarter, respectively. The Company ~~incurred~~recorded approximately $9,000 and $62,000 of HIP fees (as a ~~$91,000 and $15,000 royalty participation fee with HIP~~reduction to net revenue) for the Current ~~Nine~~Six Months and the Prior Year ~~Nine~~Six Months, respectively. In June 2017, the Company had a prepaid balance of $0.2 million to HIP to be applied against future fees due to HIP, which is recorded as a prepaid in current assets as of June 30, 2017.

HOH has also entered into an arrangement with another licensee of the Company to supply Halston-branded apparel for the subsequent sale of such product to end customers. Under the Company’s separate pre-existing licensing agreements in place with the aforementioned other licensee and with HIP as described above, the Company earns royalties on the sales of such Halston-branded products.

Edward Jones, III

~~On May 14, 2015,~~During the Current Six Months and ~~amended on June 24, 2015, the Company entered into a consulting agreement with~~Prior Year Six Months, Edward Jones, ~~Texas, Inc., ("JT Inc.") whose controlling shareholder is Edward Jones,~~III, a director of the ~~Company. The agreement, as amended, provided for fees payable to JT Inc. up to $75,000 for consulting services related to due diligence on the C Wonder brand prior to acquisition. The~~ Company, ~~paid fees to JT Inc. of $62,500 and $75,000 during the Prior Year Quarter and Prior Year Nine Months.~~
~~During the Current Nine Months, Edward Jones~~ performed consulting services for and received compensation from a certain licensee of the ~~Company (the “Licensee”).~~Company. Under the terms of the Company’s agreement with this certain licensee, the ~~Licensee, the Licensee~~licensee may supply the Company’s branded products to ~~our~~the Company’s other licensees. Under the terms of the Company’s separate pre-existing agreements with other licensees, the Company would earn royalties on the sales of such branded products sold to end customers. ~~To date,~~
On January 31, 2017, the Company ~~has not earned or received any fees or revenues related~~entered into a two-year consulting agreement (the “QTR Consulting Agreement”) with Jones Texas, Inc. (“JTI”), whose controlling shareholder is Edward Jones, III, a director of the Company, pursuant to which JTI shall cause Mr. Jones to provide consulting services in connection with the Company’s short-lead production platform fashion program and other projects. Pursuant to the QTR Consulting Agreement, the Company issued an aggregate of 50,000 shares of common stock to JTI, of which 25,000 shares vested immediately, and 25,000 shares shall vest on January 31, 2018; however, up to 25,000 shares of common stock are subject to forfeiture if the Company’s business with suppliers of women’s apparel is materially diminished, as defined in the QTR Consulting Agreement. On June 18, 2017, based upon meeting certain performance targets relating to the Company’s ~~agreement with the Licensee, but may earn or receive such amounts~~short-lead production platform business as provided in the ~~future.~~January 31, 2017 QTR Consulting Agreement, the Company issued an additional 28,334 shares of common stock to JTI, of which 14,167 shares vested immediately, resulting in the recognition of compensation expense of $79,000, and the remaining 14,167 shares shall vest on January 31, 2018. The Company also paid JTI a cash consulting fee of $75,000 on January 30, 2017 and an additional cash consulting fee of $75,000 on April 28, 2017 relating to other projects. As of June 30, 2017, there was no additional compensation owed to JTI.

19
~~XCEL BRANDS, INC. AND SUBSIDIARIES~~
~~Notes to Unaudited Condensed Consolidated Financial Statements~~
~~September 30, 2016~~
~~(Unaudited)~~
~~10.~~9. Facility Exit Costs

In June 2016, the Company relocated its corporate offices and operations from 475 Tenth Avenue in New York City to 1333 Broadway in New York City. In connection with the exit from its former office location, the Company recognized a liability at the exit and cease-use date for the remaining lease obligation associated with 475 Tenth Avenue, based on the remaining contractual lease payments less estimated sublease rentals, discounted to present value using a credit-adjusted risk-free rate.
The Company recorded a net non-cash charge of approximately $648,000 associated with the recognition of this liability. The Company also incurred certain cash costs of approximately $15,000 related to the exit from its former office space, and incurred a loss of approximately $7,000 associated with the sale of certain equipment. These amounts, totaling approximately $670,000, were recorded as other selling, general and administrative expensesliability in the ~~accompanying unaudited condensed consolidated statements~~second quarter of ~~operations for nine months ended September 30,~~ 2016.
During the Current Quarter, the Company made net cash payments related to 475 Tenth Avenue of $166,000, and recorded $6,000 of accretion expense related to the exit cost liability as other selling, general and administrative expenses.

The remaining balance of the exit cost liability related to the former office space was approximately ~~$780,000~~$713,000 as of ~~September~~June 30, ~~2016,~~2017, of which ~~$149,000~~$160,000 was recorded in other current liabilities and ~~$631,000~~$553,000 was recorded in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. The balance of this liability will be paid out over a period of approximately 5 years, through February 2022.

A summary of the activity related to the exit cost liability for the Current ~~Nine~~Six Months is as follows:

($ in thousands)
Balance as of January 1, 2016 $ -
Non-cash costs incurred and charged to expense 648
Transfers of previously-recognized deferred balance sheet amounts related to lease 333
Cash payments, net (207 )
Accretion 6
Balance as of September 30, 2016 $ 780
($ in thousands)
Balance as of January 1, 2017 $ 783
Cash payments, net (56 )
Adjustment to liability (revision to estimated cash flows) (25 )
Accretion 11
Balance as of June 30, 2017 $ 713

~~11.~~ ~~Subsequent Events~~

On October 31, 2016, the Company granted options to purchase an aggregate of 150,000 shares of common stock to three independent directors. The exercise price of the options is $5.00 per share, and 50% of the options will vest on each of October 31, 2017 and October 31, 2018. The options will expire on October 31, 2021.
2017

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

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.The statements that are not historical facts contained in this report are forward-looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks are detailed in the Risk Section of our Form 10-K for the fiscal year ended December 31, ~~2015.~~2016. The words “believe,” “anticipate,” “expect,” “continue,” “estimate,” “appear,” “suggest,” “goal,” “potential,” “predicts,” “seek,” “will,” “confident,” “project,” “provide,” “plan,” “likely,” “future,” “ongoing,” “intend,” “may,” “should,” “would,” “could,” “guidance,” and similar expressions identify forward-looking statements.

Overview

Xcel Brands, Inc. (“Xcel,” the “Company,” “we,” ~~“us”~~“us,” or “our”) is a media and brand management ~~and media~~ company engaged in the design, production, licensing, marketing, and direct to consumer sales of branded apparel, footwear, accessories, jewelry, home goods, and other consumer products, and the acquisition of dynamic consumer lifestyle brands. Currently, our brand portfolio consists of the Isaac Mizrahi, Judith Ripka, H Halston, C Wonder, and ~~the~~ Highline Collective brands. We also managed and designed the Liz Claiborne New York brand (“LCNY ~~Brand”~~brand”) through July 31, 2016. Going forward, ~~our~~we intend to focus ~~shall be~~ on our wholly owned brands.

Our objective is to build a diversified portfolio of lifestyle consumer brands through organic growth and the strategic acquisition of new brands. To achieve growth under our brands, we are focused on two primary licensing and design activities:
· licensing our brands for distribution through interactive television (i.e. QVC, ~~and~~ The Shopping Channel); and
· licensing our brands to manufacturers and retailers for promotion and distribution through e-commerce, social commerce, and traditional brick-and-mortar retail channels.

We believe that Xcel offers a unique value proposition to its licensees and customers for the following reasons:
· our management team, including our officers’ and directors’ historical track records and relationships within the industry;
· our brand management platform, which has a strong focus on design, production oversight, marketing, and social media; ~~and~~
· our operating strategy of licensing brands with significant media presence and driving sales through our ubiquitous-channel retail sales strategy across interactive television, internet, and traditional retail ~~channels.~~channels; and
· our ability to provide certain retail licensees with vertical production capabilities.

We license our brands to third parties, provide certain design, production, and marketing services, and generate ~~royalty~~licensing, design, and service fee revenues through ~~licensing and other agreements~~contractual arrangements with manufacturers and retailers. This includes licensing our own brands for promotion and distribution through a ubiquitous-channel retail sales strategy, which includes distribution through interactive television, the internet, and traditional brick-and-mortar retail channels. We believe that this strategy distinguishes us from other brand management companies that rely primarily on their licensees for design, production, and distribution, and enables us to leverage the media reach of our interactive television partners, including through television, digital, and social media, to drive sales of products under our brands across distribution channels.

Our vision is intended to reimagine shopping, entertainment, and social as one. By leveraging digital and social media content across all distribution channels, we seek to drive customer (follower) engagement and generate retail sales across our brands. Our strong relationships with leading retailers and interactive television companies ~~such as QVC and The Shopping Channel,~~ enable us to reach consumers in over ~~350~~360 million homes worldwide.
18

We believe our “virtual vertical” production platform provides significant competitive advantages compared with traditional wholesale apparel companies that design, manufacture, and distribute products. We remain focused on our core competencies of licensing, production, design, marketing, and brand development, while outsourcing manufacturing and the related inventory ownership to best-in-class partners. We believe that we offer 360 degrees of service for a comprehensive solution for our retail partners that addresses many of the challenges facing the retail industry today. We believe our platform is highly scalable due to our business model’s low overhead and working capital requirements, coupled with minimum guaranteed income levels through our multi-year licensing contracts. Additionally, we believe we can quickly integrate additional brands into our platform ~~in order to leverage~~leveraging our design, production oversight, and marketing capabilities and retail and licensee relationships.

We opened a full-price store and an outlet store under the Isaac Mizrahi brand in 2013 and 2014, respectively. In December 2014, we decided to close our retail stores. Accordingly, our retail operations have been classified as discontinued operations for all periods presented.
Our e-commerce operations, which were previously reported as a component of retail operations, are reported as a component of our licensing business. E-commerce operations are in the process of being phased out.
Summary of Operating Results

The three months ended ~~September~~June 30, ~~2016~~2017 (the “Current Quarter”) compared with the three months ended ~~September~~June 30, ~~2015~~2016 (the “Prior Year Quarter”)

~~Total~~Net Revenues
Current Quarter ~~total~~net revenues ~~increased~~decreased approximately ~~$0.99~~$0.74 million to ~~$8.33~~$8.37 million from ~~$7.34~~$9.11 million in the Prior Year Quarter. This ~~increase was attributable to increases in net licensing revenues of approximately $1.02 million, partially offset by declines in net e-commerce sales of $0.03 million.~~
~~The increase in net licensing revenues for the Current Quarter as compared with the Prior Year Quarter~~decrease was primarily due to the combination of (i) ~~higher~~lower revenues from our interactive television ~~business~~agreements of approximately ~~$1.13~~$0.52 million primarily driven by ~~acquisitions made~~the termination and transition of the C Wonder Brand from QVC, which included the sell-off period in ~~late 2014 and 2015,~~the Current Quarter and (ii) ~~increased~~lower revenues ~~recognized from new strategic license agreements entered into in 2015 and 2016~~ of approximately ~~$0.31 million. These increases were partially offset by a decrease in revenue of approximately $0.42~~$0.39 million associated with the management and design of the LCNY brand ~~for~~(for which our contract ended in July ~~2016.~~
~~The decline in net e-commerce sales~~2016). These decreases were partially offset mainly by higher revenues from ~~the Prior Year Quarter is the result~~our wholesale and department store business of ~~management’s decision to phase out of e-commerce.~~
~~Gross Profit~~
~~Gross profit for the Current Quarter was $8.29~~approximately $0.17 million, ~~compared with $7.29 million for the Prior Year Quarter. The~~primarily driven by an increase in ~~gross profit was primarily attributable to~~ the ~~increase~~number of retail store our brands are sold in, ~~net licensing revenues described above.~~including the launch at Dillard’s this year, and expanding into more product categories for our short-lead production platform in our department store business.

Operating Costs and Expenses
Operating costs and expenses ~~totaled $7.45~~decreased $1.63 million to $7.25 million for the Current Quarter ~~compared with $6.76~~from $8.88 million ~~for~~in the Prior Year Quarter. ~~The increase~~This decrease was primarily attributable to (i) a decrease in other selling, general and administrative expenses of approximately ~~$0.69~~$0.89 million, ~~was~~which in the Prior Year Quarter were primarily ~~due~~affected by non-recurring charges incurred in connection with the exit from our former leased office facilities, (ii) a net decrease in total compensation, including stock-based compensation, of approximately $0.59 million, as the Company switched from awards of restricted stock to ~~an increase~~stock options, and (iii) a decrease in ~~salaries, benefits~~other design and ~~employment taxes, largely driven by increased staffing~~marketing costs of approximately $0.19 million primarily attributable to ~~support ongoing growth~~start-up expenses in the Prior Year Quarter for our short-lead production platform in our ~~brand portfolio, as well as the scaling of our operations and infrastructure to support the ongoing growth of our~~department store business.

Interest and Finance Expense
Interest and finance expense for the Current Quarter ~~increased~~decreased by approximately ~~$0.03~~$0.18 million to ~~$0.46~~$0.35 million, compared with ~~$0.43~~$0.53 million in the Prior Year Quarter. This ~~increase~~decrease was ~~primarily due to the higher~~attributable to: (i) lower interest ~~rate~~expense of $0.06 million on our term debt ~~following~~due to a lower principal balance, (ii) lower loan modification fees of $0.06 million compared to the ~~February 2016 refinancing (the~~Prior Year Quarter in connection with the amendments to our term debt, and (ii) lower interest recognized on the IM Seller Note of $0.05 million (attributable to a reduced imputed rate from 9.0% in the Prior Year Quarter to an interest rate ~~was converted~~of 2.2%) resulting from ~~a variable rate~~the amendment of ~~approximately 4.1% to a fixed rate of 5.1%).~~the IM Seller Note in September 2016.

Income Tax Provision (Benefit)
The effective income tax rate for the Current Quarter was approximately ~~68%~~72% resulting in a ~~$0.26~~$0.56 million income tax provision. During the Current Quarter, the effective tax rate was primarily attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes. This item increased the effective rate by 7%. The effective tax rate was also attributable to recurring permanent differences. Based on the amount of income ~~from continuing operations~~ before income taxes compared to the recurring permanent differences, the effective rate increased by ~~27%~~31%.
The effective income tax rate for the Prior Year Quarter was approximately ~~54%~~70% which resulted in a ~~$0.05~~$0.21 million income tax ~~provision. For~~benefit. During the Prior Year Quarter, the effective tax rate was attributable to recurring permanent differences. Based on the amount of ~~income from continuing operations~~loss before income taxes compared to the permanent differences, the effective rate ~~decreased~~increased by ~~13%~~29%.

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~~Discontinued Operations~~
The loss from discontinued operations, net of $0.01 million in the Prior Year Quarter was related to our retail operations and was primarily attributable to wind down costs associated with the closing of our retail stores. As these wind down and closure activities were essentially completed by the end of 2015, we had no such costs reported as discontinued operations in the Current Quarter.

Net Income (Loss)
The Company had net income of ~~$0.12~~$0.21 million for the Current Quarter, compared ~~with~~to a net ~~income~~loss of ~~$0.03~~$0.09 million for the Prior Year Quarter.
Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
~~The Company~~We had non-GAAP net income of ~~$1.29~~$1.50 million, or ~~$0.07~~$0.08 per diluted share (“non-GAAP diluted EPS”) for the Current Quarter, compared with non-GAAP net income of ~~$1.42~~$1.91 million, or non-GAAP diluted EPS of ~~$0.08~~$0.10 for the Prior Year Quarter. Non-GAAP net income is a non-GAAP unaudited term, which we define as net income (loss), exclusive of stock-based compensation, non-cash interest expense from discounted debt related to acquired assets, loss on extinguishment of debt, gain on the reduction of contingent obligations, ~~(if any), loss on extinguishment of debt (if any),~~ non-recurring facility exit charges, certain discrete tax items related to vesting or exercise of stock-based awards, and net income or loss from discontinued operations. Non-GAAP net income and non-GAAP diluted EPS measures do not include the tax effect of the aforementioned adjusting items, due to the nature of these items and the Company’s tax strategy.

~~The Company~~We had Adjusted EBITDA of ~~$2.34~~$2.26 million for the Current Quarter, compared with Adjusted EBITDA of ~~$2.22~~$2.74 million for the Prior Year Quarter. Adjusted EBITDA is a non-GAAP unaudited measure, which we define as net income (loss) before stock-based compensation, interest expense and other financing costs, ~~(including gain (loss)~~loss on extinguishment of ~~debt),~~debt, gain on the reduction of contingent obligations, income taxes, other state and local franchise taxes, depreciation and amortization, ~~gain on the reduction of contingent obligations,~~ non-recurring facility exit charges, and net income or loss from discontinued operations.

Management uses non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to identify business trends relating to the Company's results of operations. Management believes ~~Non-GAAP~~non-GAAP net income, non-GAAP diluted EPS, and Adjusted EBITDA are also useful because they provide supplemental information to assist investors in evaluating the Company’s financial results.

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

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

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

Three Months Ended June 30,
($ in thousands) 2017 2016
Net income (loss) $ 213 $ (90 )
Non-cash interest and finance expense 10 80
Stock-based compensation 723 1,453
Non-recurring facility exit charges - 670
Deferred income tax provision 557 (208 )
Non-GAAP net income $ 1,503 $ 1,905
Three Months Ended September 30,
($ in thousands) 2016 2015
Net income $ 118 $ 30
Non-cash interest and finance expense 78 84
Stock-based compensation 1,089 1,292
Loss from discontinued operations, net - 14
Non-GAAP net income $ 1,285 $ 1,420
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The following table is a reconciliation of diluted earnings (loss) per share (our most directly comparable financial measure presented in accordance with GAAP) to non-GAAP diluted EPS:

Three Months Ended September 30, Three Months Ended June 30,
2016 2015 2017 2016
Diluted earnings per share $ 0.01 $ 0.00
Diluted earnings (loss) per share $ 0.01 $ (0.00 )
Non-cash interest and finance expense - 0.01 0.00 0.00
Stock-based compensation 0.06 0.07 0.04 0.08
Loss from discontinued operations, net - -
Non-recurring facility exit charges - 0.03
Deferred income tax provision 0.03 (0.01 )
Non-GAAP diluted EPS $ 0.07 $ 0.08 $ 0.08 $ 0.10
Non-GAAP weighted average diluted shares 19,068,011 18,278,182 18,813,044 19,388,557

The following table is a reconciliation of basic weighted average shares outstanding (presented in accordance with GAAP) to non-GAAP weighted average diluted shares:

Three Months Ended September 30, Three Months Ended June 30,
2016 2015 2017 2016
Basic weighted average shares 18,692,775 17,187,272 18,449,210 18,671,648
Effect of exercising warrants 369,288 962,292 363,834 673,995
Effect of exercising stock options 5,948 128,618 - 42,914
Non-GAAP weighted average diluted shares 19,068,011 18,278,182 18,813,044 19,388,557

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

Three Months Ended September 30, Three Months Ended June 30,
($ in thousands) 2016 2015 2017 2016
Net income $ 118 $ 30
Net income (loss) $ 213 $ (90 )
Depreciation and amortization 387 373 390 359
Interest and finance expense 462 432 348 530
Income tax provision 256 51
Income tax provision (benefit) 557 (208 )
State and local franchise taxes 26 27 27 24
Stock-based compensation 1,089 1,292 723 1,453
Loss from discontinued operations, net - 14
Non-recurring facility exit charges - 670
Adjusted EBITDA $ 2,338 $ 2,219 $ 2,258 $ 2,738

The ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 (the “Current ~~Nine~~Six Months”) compared with the ~~nine~~six months ended ~~September~~June 30, ~~2015~~2016 (the “Prior Year ~~Nine~~Six Months”)

~~Total~~Net Revenues
Current ~~Nine~~Six Months ~~total~~net revenues ~~increased~~decreased approximately ~~$5.59~~$0.67 million to ~~$25.84~~$16.80 million from ~~$20.25~~$17.47 million in the Prior Year ~~Nine~~Six Months. This ~~increase was attributable to increases in net licensing revenues of approximately $5.67 million, partially offset by declines in net e-commerce sales of $0.08 million.~~
~~The increase in net licensing revenues for the Current Nine Months as compared with the Prior Year Nine Months~~decrease was primarily due to ~~(i) higher~~lower revenues ~~from our interactive television business~~ of approximately ~~$5.20~~$0.92 million driven by acquisitions made in late 2014 and 2015, and (ii) increased revenues recognized from new strategic license agreements entered into in 2015 and 2016 of approximately $1.35 million. These increases were partially offset by a decrease in revenue of approximately $0.88 associated with the management and design of the LCNY brand ~~for~~(for which our contract ended in July ~~2016.~~2016), partially offset by higher revenues from our wholesale and department store business of approximately $0.22 million, primarily driven by an increase in the number of retail stores our brands are sold in, including the launch at Dillard’s this year, and expanding into more product categories for our short-lead production platform in our department store business.

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~~The decline in net e-commerce sales from the Prior Year Nine Months is the result of management’s decision to phase out of e-commerce.~~

~~Gross Profit~~Operating Costs and Expenses
~~Gross profit~~Operating expenses were $15.25 million for the Current ~~Nine~~Six Months, ~~was $25.69 million,~~ compared with ~~$20.12~~$16.90 million for the Prior Year ~~Nine~~Six Months. The ~~increase in gross profit was primarily attributable to the increase in net licensing revenues described above.~~
~~Operating Expenses~~
~~Operating expenses totaled $24.29 million for the Current Nine Months, compared with $18.25 million for the Prior Year Nine Months. The increase~~decrease of approximately ~~$6.04~~$1.65 million was primarily related to an increase in compensation-related expenses (including stock-based compensation) of approximately $3.18 million, an increase in design and marketing costs of approximately $0.68 million, and an increasei) a decrease in other selling, general and administrative expenses of approximately ~~$1.96~~$0.95 million, which ~~included~~in the Prior Year Six Months were primarily affected by non-recurring charges ~~of $0.67 million~~ incurred ~~in the Current Nine Months~~ in connection with the exit from our former leased office ~~facilities. These increases~~facilities, (ii) a $0.56 million decrease in expenses were the result of increased staffing and scaling of our operations and infrastructure in order to support (i) the C Wonder Brand, which we acquired in July 2015 and which began selling on QVC in March 2016, (ii) the development and operation of our quick-time-response or short lead time “virtual vertical” production platform,total compensation, including stock-based compensation, and (iii) ~~launch~~a decrease in other design and ~~related ramp-up of the IMNYC Isaac Mizrahi, H Halston, and Highline Collective brands at Lord & Taylor and Hudson’s Bay department stores in April 2016.~~
~~The increase in depreciation and amortization expense~~marketing costs of approximately ~~$0.22~~$0.14 million ~~was~~ primarily ~~related~~attributable to the amortization of the C Wonder trademarks acquired in July 2015, partially offset by certain other intangible assets becoming fully amortized in 2015 (see Note 2 in the Unaudited Condensed Consolidated Financial Statements).
~~Other Expenses (Income)~~
Total other income, net of $1.63 million for the Prior Year Nine Months was comprised of a $3.00 million gain on the reduction of contingent obligations, partially offset by a $1.37 million loss on extinguishment of debt.
~~The gain on the reduction of contingent obligations~~start-up expenses in the Prior Year ~~Nine~~Six Months ~~was a result of the Company reducing the fair value of its contingent obligation on its earn-out obligation to the seller of the Isaac Mizrahi Brand.~~for our short-lead production platform in our department store business.

The loss on extinguishment of debt in the Prior Year Nine Months was a result of the Company satisfying $5.40 million principal amount of Ripka Seller Notes by issuing 600,001 shares of our common stock in March and April 2015. The carrying value, net of the discount, of the Ripka Seller Notes at the redemption date was $4.03 million, resulting in a loss of $1.37 million.
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Interest and Finance Expense
Interest and finance expense for the Current ~~Nine~~Six Months ~~increased~~decreased by approximately ~~$0.05~~$0.24 million to ~~$1.43~~$0.73 million, compared with ~~$1.38~~$0.97 million in the Prior Year ~~Nine~~Six Months. This ~~increase~~decrease was attributable primarily ~~due~~to: (i) lower interest recognized on the IM Seller Note of $0.10 million (attributable to a reduced imputed rate from 9.0% in the ~~higher~~Prior Year Six Months to an interest rate of 2.2%) resulting from the amendment of the IM Seller Note in September 2016, (ii) lower interest expense of $0.07 million on our term debt ~~following the February 2016 refinancing (as the term debt interest rate was converted from a variable rate of approximately 4.1%~~due to a ~~fixed rate~~lower principal balance, and (iii) lower loan modification fees of ~~5.1%) and fees associated~~$0.05 million compared to the Prior Year Six Months in connection with the ~~refinancing, largely offset by lower interest expense following the satisfaction of $5.40 million principal amount of the Ripka Seller Notes in March 2015 and April 2015.~~amendments to our term debt.

Income Tax Provision (Benefit) ~~Provision~~
The effective income tax rate for the Current ~~Nine~~Six Months was approximately ~~15%~~122% resulting in a ~~$0.003~~$1.01 million income tax provision. During the Current Six Months, the effective tax rate was primarily attributable to the tax impact from the vesting of restricted shares of common stock, which was treated as a discrete item for tax purposes. This item increased the effective rate by 57%. The effective tax rate was also attributable to recurring permanent differences. Based on the amount of income before income taxes compared to the recurring permanent differences, the effective rate increased by 31%.
The effective income tax rate for the Prior Year Six Months was approximately 66% resulting in a $0.26 million income tax benefit. During the ~~Current Nine~~Prior Year Six Months, the effective tax rate was attributable to recurring permanent differences. Based on the amount of loss from continuing operations before income taxes compared to the permanent differences, the effective rate ~~decreased~~increased by ~~26%~~25%.
The effective income tax rate for the Prior Year Nine Months was approximately 2% which resulted in a $0.04 million income tax provision. For the Prior Year Nine Months, the Company recorded a $3.00 million gain on the reduction of contingent obligations related to the acquisition of the Isaac Mizrahi Brand, partially offset by recurring permanent differences. This gain was not subject to tax and was therefore treated as a discrete item (permanent difference) occurring in the Prior Year Nine Months. Based on the amount of income from continuing operations before income taxes compared to the permanent differences, the effective rate decreased by 39%.

~~Discontinued Operations~~
The loss from discontinued operations, net of $0.28 million in the Prior Year Nine Months was related to our retail operations and was primarily attributable to compensation expense, other general and administrative expenses, and wind down costs associated with the closing of our retail stores, partially offset by an income tax benefit of $0.19 million. As these wind down and closure activities were essentially completed by the end of 2015, we had no such costs reported as discontinued operations in the Current Nine Months.
Net (Loss) ~~Income~~
The Company had a net loss of ~~$0.02~~$0.19 million for the Current ~~Nine~~Six Months, compared with net ~~income~~loss of ~~$1.81~~$0.14 million for the Prior Year ~~Nine~~Six Months.

Non-GAAP Net Income, Non-GAAP Diluted EPS, and Adjusted EBITDA
The Company had non-GAAP net income of ~~$4.64~~$2.65 million, or ~~$0.24~~$0.14 per diluted share for the Current ~~Nine~~Six Months, compared with non-GAAP net income of ~~$4.20~~$3.10 million, or non-GAAP diluted EPS of ~~$0.26~~$0.16 for the Prior Year ~~Nine~~Six Months. The Company had Adjusted EBITDA of ~~$7.08~~$4.20 million for the Current ~~Nine~~Six Months, compared with Adjusted EBITDA of ~~$6.32~~$4.74 million for the Prior Year ~~Nine~~Six Months.

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

Six Months Ended June 30,
($ in thousands) 2017 2016
Net loss $ (186 ) $ (135 )
Non-cash interest and finance expense 19 158
Stock-based compensation 1,806 2,665
Non-recurring facility exit charges - 670
Deferred income tax provision 1,013 (259 )
Non-GAAP net income $ 2,652 $ 3,099

Nine Months Ended September 30,
($ in thousands) 2016 2015
Net (loss) income $ (17 ) $ 1,806
Non-cash interest and finance expense 236 330
Stock-based compensation 3,754 3,413
Loss on extinguishment of debt - 1,371
Gain on reduction of contingent obligations - (3,000 )
Non-recurring facility exit charges 670 -
Loss from discontinued operations, net - 281
Non-GAAP net income $ 4,643 $ 4,201
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The following table is a reconciliation of diluted ~~(loss) earnings~~loss per share to non-GAAP diluted EPS:

Nine Months Ended September 30, Six Months Ended June 30,
2016 2015 2017 2016
Diluted (loss) earnings per share $ (0.00 ) $ 0.11
Diluted loss per share $ (0.01 ) $ (0.01 )
Non-cash interest and finance expense 0.01 0.02 0.00 0.01
Stock-based compensation 0.20 0.21 0.10 0.14
Loss on extinguishment of debt - 0.08
Gain on reduction of contingent obligations (0.18 )
Non-recurring facility exit charges 0.03 - - 0.03
Loss from discontinued operations, net - 0.02
Deferred income tax provision 0.05 (0.01 )
Non-GAAP diluted EPS $ 0.24 $ 0.26 $ 0.14 $ 0.16
Non-GAAP weighted average diluted shares 19,071,332 16,471,519 18,925,978 19,268,245

The following table is a reconciliation of basic weighted average shares to non-GAAP weighted average diluted shares:

Nine Months Ended September 30, Six Months Ended June 30,
2016 2015 2017 2016
Basic weighted average shares 18,608,034 15,380,609 18,561,453 18,565,198
Effect of exercising warrants 435,298 962,292 364,197 663,270
Effect of exercising stock options 28,000 128,618 328 39,777
Non-GAAP weighted average diluted shares 19,071,332 16,471,519 18,925,978 19,268,245

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

Nine Months Ended September 30,
($ in thousands) 2016 2015
Net (loss) income $ (17 ) $ 1,806
Depreciation and amortization 1,172 953
Interest and finance expense 1,427 1,376
Income tax (benefit) provision (3 ) 35
State and local franchise taxes 75 83
Stock-based compensation 3,754 3,413
Loss on extinguishment of debt - 1,371
Gain on reduction of contingent obligations - (3,000 )
Non-recurring facility exit charges 670 -
Loss from discontinued operations, net - 281
Adjusted EBITDA $ 7,078 $ 6,318
Six Months Ended June 30,
($ in thousands) 2017 2016
Net loss $ (186 ) $ (135 )
Depreciation and amortization 784 785
Interest and finance expense 726 965
Income tax provision (benefit) 1,013 (259 )
State and local franchise taxes 56 49
Stock-based compensation 1,806 2,665
Non-recurring facility exit charges - 670
Adjusted EBITDA $ 4,199 $ 4,740

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Liquidity and Capital Resources

Liquidity

Our principal capital requirements have been to fund working capital needs, acquire new brands, and to a lesser extent, capital expenditures. At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, our ~~unrestricted~~ cash and cash equivalents were ~~$15.16~~$7.62 million and ~~$16.86~~$14.13 million, respectively.
Restricted cash at June 30, 2017 and December 31, 2016 consisted of (i) $1.11 million of cash deposited with Bank Hapoalim B.M. (“BHI”) as collateral for an irrevocable standby letter of credit associated with the lease of our current corporate office and operating facilities at 1333 Broadway, New York City, and (ii) $0.40 million of cash held as a security deposit for the sublease of our former corporate offices at 475 Tenth Avenue, New York City by us to a third-party subtenant.
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We expect that existing cash and operating cash flows will be adequate to meet our operating needs, debt service obligations (including debt service under the Amendment to the Loan Agreement), and capital expenditure needs, for at least the twelve months subsequent to ~~September 30, 2016.~~ the filing date of this Quarterly Report on Form 10-Q. We front-loaded our 2017 Term Loan principal payments whereby we paid down $5.3 million in the Current Six Months, while $0.5 million will be paid during the next six months of 2017.
We are dependent on our licensees for ~~most~~substantially all of our revenues, and there is no assurance that the licensees will perform as projected.
Our business operating model ~~generally~~ does not require significant capital expenditures.

Our contingent ~~obligations~~obligation related to the C Wonder Brand (see Note 4, Debt in the Unaudited Condensed Consolidated Financial Statements) ~~are~~is payable in stock or cash, at the Company’s discretion. Payment of ~~these obligations~~this obligation in stock would not affect our liquidity.

Changes in Working Capital

~~At September 30, 2016 and December 31, 2015, our adjusted~~Our working capital (current assets less current ~~liabilities, excluding current contingent obligations and seller notes payable in stock (see Note 4, Debt in the Unaudited Condensed Consolidated Financial Statements))~~liabilities) was ~~$14.43~~$10.81 million and ~~$16.14~~$11.53 million as of June 30, 2017, and December 31, 2016, respectively. Commentary on the components of our cash flows ~~used in continuing operations~~ for the Current ~~Nine~~Six Months as compared with the Prior Year ~~Nine~~Six Months is set forth below.

Operating Activities

Net cash provided by operating activities ~~from continuing operations~~ was approximately ~~$6.77~~$0.42 million in the Current ~~Nine~~Six Months, compared with net cash provided by operating activities ~~from continuing operations~~ of approximately ~~$1.29~~$2.33 million in the Prior Year ~~Nine~~Six Months.

The Current ~~Nine~~Six Months cash provided by operating activities was primarily attributable to the combination of a net loss of $(0.19) million and non-cash expenses of approximately $3.72 million, partially offset by the net change in operating assets and liabilities of approximately $(3.11) million. Non-cash expenses mainly consisted of $1.81 million of stock-based compensation, $1.01 million of deferred income tax provision, $0.78 million of depreciation and amortization, and $0.12 million of amortization of debt discount and deferred finance costs. The net change in operating assets and liabilities includes a net increase in accounts receivable of $1.78 million, and a decrease in accounts payable, accrued expenses and other current liabilities of $1.39 million, primarily attributable to bonus payouts and overall timing of payments.
The Prior Year Six Months’ cash provided by operating activities was due to the combination of a net loss of ~~$(0.02) million, non-cash expenses of $5.95~~$(0.14) million and the net change in operating assets and liabilities of ~~$0.84~~$(1.63) million, partially offset by non-cash expenses of $4.10 million. Non-cash expenses mainly consisted of ~~$3.75~~$2.67 million of stock-based compensation, ~~$1.17~~$0.79 million of depreciation and amortization, ~~$0.38~~$0.25 million of amortization of debt discount and deferred finance costs, and a non-cash charge of $0.65 million related to the exit from our former leased office ~~facilities.~~facilities, partially offset by $(0.26) million of deferred income tax benefit. The net change in operating assets and liabilities includes an increase in accounts payable, accrued expenses and other current liabilities of $1.31 million, largely due to withholding taxes payable related to shares surrendered for taxes on vested stock awards; and an increase in other liabilities of $1.13 million related to the lease of our new corporate offices and operations facility, and the sublease of our former offices; partially offset byincluded an increase in accounts receivable of ~~$1.21~~$2.48 million primarily attributable to ~~the~~ increase in revenues.
The Prior Year Nine Months’ cash provided by operating activities was comprised of net income of $1.81 million, non-cash expenses of $3.08 million, and a net loss from discontinued operations, net of $0.28 million, partially offset by the change in operating assets and liabilities of $(3.88) million. Non-cash expenses mainly consisted of $3.41 million of stock-based compensation, $1.37 million of loss from the extinguishment of debt, $0.95 million of depreciation and amortization, $(3.0) million of gain from the reduction of contingent obligations, $(0.09) million deferred income tax benefit, and $0.45 million of amortization of debt discount and deferred finance costs. The $(3.88) million change in operating assets and liabilities includes an increase of $3.83 million of accounts receivable primarily related to timing of collections from QVC, including $1.47 million of earned revenue that had been accrued but not billed as of September 30, 2015.
~~Net cash provided by operating activities from discontinued operations in the Prior Year Nine Months was $0.10 million.~~
Investing Activities

Net cash used in investing activities for the Current ~~Nine~~Six Months was approximately ~~$2.34~~$0.16 million, compared with approximately ~~$4.81~~$1.72 million in the Prior Year ~~Nine Months.~~
~~The Current Nine Months’ net cash~~Six months. Cash used in investing activities for both the Current Six Months and Prior Year Six Months was primarily attributable to ~~$1.91 million of~~ capital expenditures, ~~associated with leasehold improvements, furniture and fixtures, and equipment for~~which were higher in the Prior Year Six Months due to the build-out of our ~~new~~current corporate offices and operations facility ~~and $0.40 million of restricted cash related~~(which we relocated to ~~the security deposit of the subtenant at our former office facilities.~~
~~The Prior Year Nine Months’ net cash used~~ in investing activities was primarily attributable to restricted cash of $1.11 million for a security deposit on the lease for our new office space, cash consideration paid for the acquisition of the C Wonder Brand of $3.59 million, and capital expenditures of $0.09 million.June 2016).

Financing Activities

Net cash used in financing activities for the Current ~~Nine~~Six Months was approximately ~~$6.13~~$6.77 million, ~~compared with net cash provided by investing activities~~primarily attributable to payments on our senior term debt obligation of $5.25 million, payment on our IM Seller Note obligation of $0.71 million, and shares repurchased related to vested restricted stock in exchange for ~~the Prior Year Nine Months~~withholding taxes of ~~approximately $11.09~~$0.80 million.
24

Net cash used in financing activities for the ~~Current Nine~~Prior Year Six Months was approximately $3.60 million, primarily attributable to payments on our senior term debt obligations of ~~$3.13~~$2.25 million, payment on our IM Seller Note obligation of ~~$1.50~~$0.75 million, payment of the QVC Earn-Out obligation of $0.25 million, shares repurchased ~~including~~related to vested restricted stock in exchange for withholding taxes of ~~$1.21~~$0.30 million, and payment of deferred finance costs of $0.07 million.

Net cash provided by financing activities for the Prior Year Nine Months was primarily attributable to the net proceeds from the issuance of our common stock of $16.11 million, partially offset by repayments on our long-term debt of $2.26 million, payment on our installment obligation related to the Ripka Brand of $2.19 million, and $0.71 million of repurchased shares of restricted stock that had vested.
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Other Factors

We continue to seek to expand and diversify the types of licensed products being produced under our brands. We plan to continue to diversify the distribution channels within which licensed products are sold, in an effort to reduce dependence on any particular retailer, consumer, or market sector within each of our brands. The Mizrahi brand, H Halston brand, and C Wonder brand have a core business in fashion apparel and accessories. The Ripka brand historically has been focused on fine jewelry, which we believe helps diversify our industry focus while at the same time complements, expands on, and grows our overall business relationship with QVC. ~~As of July 31, 2016,~~
In May 2017, we ~~no longer manage~~entered into a mutual agreement with QVC to terminate our interactive television license agreement for the C Wonder brand, under which QVC will remain obligated to pay royalties to us through January 2018, and ~~design~~QVC will retain exclusive rights with respect to C Wonder branded products for interactive television, excluding certain permitted international entities, through May 2018. We are pursuing new distribution channels and licensing partners, and intend to enter into new contractual agreements for the ~~Liz Claiborne New York~~C Wonder brand.
In April 2016, we brought the IMNYC Isaac Mizrahi, H Halston, and Highline Collective brands to Lord & Taylor and Hudson’s Bay department stores through our ~~quick-time-response direct-to-retail~~short-lead production platform, “virtual vertical”. We launched the H Halston brand at Dillard’s department stores through our short-lead production platform in March 2017, and plan to ~~do the same with the C Wonder Limited~~launch certain products under our IMNYC Isaac brand ~~next year.~~at Dillard’s retail stores in September. We also intend to seek new opportunities, including expansion through interactive television, our “virtual vertical” production platform, additional domestic and international licensing arrangements, and acquiring additional brands.
Our success, however, will still remain largely dependent on our ability to build and maintain our brands’ awareness and contract with and retain key licensees, as well as our licensees’ ability to accurately predict upcoming fashion and design 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 and purchasing patterns, slowdowns in the U.S. economy, changes in the prices of supplies, consolidation of retail establishments, and other factors noted in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 as filed with the SEC 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 10%, the expected effect on net income and cash flows would be immaterial.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, or liquidity.
25

Critical Accounting Policies

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

Please refer to our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, filed with the SEC on March ~~17, 2016,~~24, 2017, for a discussion of our critical accounting policies. During the ~~three and nine~~Six months ended ~~September~~June 30, ~~2016,~~2017, there were no material changes to these policies.

30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of ~~September~~June 30, ~~2016,~~2017, the end of the period covered by this report. Based on, and as of the date of such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~September~~June 30, ~~2016~~2017 such that the information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

B. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:

There have not been any significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended ~~September~~June 30, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We operate in a highly competitive industry that involves numerous known and unknown risks and uncertainties that could impact our operations. The risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of unregistered or registered securities during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.
During the three months ended March 31, 2017, pursuant to a consulting agreement, we issued 50,000 shares of common stock to Jones Texas, Inc., of which Edward Jones, III, a director of our Company, is the controlling shareholder. On June 18, 2017, we issued an additional 28,334 shares of common stock to Jones Texas, Inc., pursuant to the same consulting agreement. The issuances were not considered a “public offering” as defined in Section 4(a)(2) of the Securities Act due to the insubstantial number of persons involved, size of the offering, manner of the offering, and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, Jones Texas, Inc. had the necessary investment intent as required by Section 4(a)(2) because it agreed to receive share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the issuances of these shares met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act for these transactions.

The following table provides information with respect to shares of common stock we repurchased during the ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2017:

Period Total Number of Shares
Purchased Average
Price per
Share Total Number of Shares Purchased as
Part of a Publicly Announced
Plan or Program Total Number of Shares
Purchased Average
Price per
Share Total Number of Shares
Purchased as
Part of a Publicly Announced
Plan or Program
March 1, 2016 to March 31, 2016 (i) 52,000 5.80 -
September 1, 2016 to September 30, 2016 (i) 182,100 4.99 -
March 1, 2017 to March 31, 2017 (i) 294,540 $ 2.70 -
May 1, 2017 to May 31, 2017 (i) 4,775 2.30 -
Total 234,100 $ 5.17 - 299,315 $ 2.69 -

(i) The shares were exchanged from employees and directors in connection with the income tax withholding obligations on behalf of such employees and directors from the vesting of restricted stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

27
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.
ITEM 6. EXHIBITS

The following exhibits are filed herewith:

31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)
32.1 Section 1350 Certification (CEO)
32.2 Section 1350 Certification (CFO)
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

33
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: ~~November 14, 2016~~August 10, 2017 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

3428

	September 30, 2016		December 31, 2015
	(Unaudited)		(Note 1)
Assets
Current Assets:
Cash and cash equivalents	$	15,158	$	16,860
Accounts receivable, net		8,804		7,594
Prepaid expenses and other current assets		455		655
Total current assets		24,417		25,109
Property and equipment, net		2,456		871
Trademarks and other intangibles, net		111,502		112,323
Goodwill		12,371		12,371
Restricted cash		1,509		1,109
Other assets		282		343
Total non-current assets		128,120		127,017
Total Assets	$	152,537	$	152,126

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	4,678	$	3,372
Deferred revenue		12		597
Current portion of long-term debt		5,302		8,918
Current portion of long-term debt, contingent obligations		-		250
Total current liabilities		9,992		13,137
Long-Term Liabilities:
Long-term debt, less current portion		31,094		31,860
Deferred tax liabilities, net		6,746		6,749
Other long-term liabilities		2,074		297
Total long-term liabilities		39,914		38,906
Total Liabilities		49,906		52,043

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding		-		-
Common stock, $.001 par value, 35,000,000 shares authorized at September 30, 2016 and December 31, 2015, and 18,680,560 and 18,434,634 issued and outstanding at September 30, 2016 and December 31, 2015, respectively		19		18
Paid-in capital		96,563		93,999
Retained earnings		6,049		6,066
Total Stockholders' Equity		102,631		100,083

Total Liabilities and Stockholders' Equity	$	152,537	$	152,126

	June 30, 2017		December 31, 2016
	(Unaudited)		(Note 1)
Assets
Current Assets:
Cash and cash equivalents	$	7,621	$	14,127
Accounts receivable, net		8,748		6,969
Prepaid expenses and other current assets		876		807
Total current assets		17,245		21,903
Property and equipment, net		2,520		2,600
Trademarks and other intangibles, net		110,673		111,220
Goodwill		12,371		12,371
Restricted cash		1,509		1,509
Other assets		1,505		1,517
Total non-current assets		128,578		129,217
Total Assets	$	145,823	$	151,120

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	1,054	$	1,523
Accrued payroll		1,261		2,185
Deferred revenue		73		234
Current portion of long-term debt		3,943		6,427
Current portion of long-term debt, contingent obligations		100		-
Total current liabilities		6,431		10,369
Long-Term Liabilities:
Long-term debt, less current portion		22,019		25,495
Deferred tax liabilities, net		7,914		6,901
Other long-term liabilities		2,472		2,181
Total long-term liabilities		32,405		34,577
Total Liabilities		38,836		44,946

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding		-		-
Common stock, $.001 par value, 35,000,000 shares authorized at June 30, 2017 and December 31, 2016, and 18,471,001 and 18,644,982 issued and outstanding at June 30, 2017 and December 31, 2016, respectively		18		19
Paid-in capital		98,354		97,354
Retained earnings		8,615		8,801
Total Stockholders' Equity		106,987		106,174

Total Liabilities and Stockholders' Equity	$	145,823	$	151,120

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016			2015
Revenues
Net licensing revenue	$	8,311	$	7,289		$	25,748		$	20,082
Net e-commerce sales		20		47			91			166
Total revenues		8,331		7,336			25,839			20,248
Cost of goods sold		41		51			147			131
Gross profit		8,290		7,285			25,692			20,117

Operating expenses
Salaries, benefits and employment taxes		4,054		3,463			12,481			9,639
Other design and marketing costs		779		669			2,439			1,761
Other selling, general and administrative expenses		1,145		961			4,439			2,482
Stock-based compensation		1,089		1,292			3,754			3,413
Depreciation and amortization		387		373			1,172			953
Total operating expenses		7,454		6,758			24,285			18,248

Other expenses (income)
Gain on reduction of contingent obligation		-		-			-			(3,000	)
Loss on extinguishment of debt		-		-			-			1,371
Total other income, net		-		-			-			(1,629	)

Operating income		836		527			1,407			3,498

Interest and finance expense
Interest expense - term debt		340		304			1,003			925
Other interest and finance charges		122		128			424			451
Total interest and finance expense		462		432			1,427			1,376

Income (loss) from continuing operations before income taxes		374		95			(20	)		2,122

Income tax provision (benefit)		256		51			(3	)		35

Income (loss) from continuing operations		118		44			(17	)		2,087

Loss from discontinued operations, net		-		(14	)		-			(281	)

Net income (loss)	$	118	$	30		$	(17	)	$	1,806

Basic and diluted net income (loss) per share:
Continuing operations	$	0.01	$	0.00		$	(0.00	)	$	0.14
Discontinued operations, net		-		(0.00	)		-			(0.02	)
Net income (loss)	$	0.01	$	0.00		$	(0.00	)	$	0.12

Diluted net income (loss) per share:
Continuing operations	$	0.01	$	0.00		$	(0.00	)	$	0.13
Discontinued operations, net		-		(0.00	)		-			(0.02	)
Net income (loss)	$	0.01	$	0.00		$	(0.00	)	$	0.11

Basic weighted average common shares outstanding		18,692,775		17,187,272			18,608,034			15,380,609
Diluted weighted average common shares outstanding		19,068,011		18,278,182			18,608,034			16,471,519

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2017		2016			2017			2016

Net revenues	$	8,370	$	9,112		$	16,800		$	17,473

Operating costs and expenses
Salaries, benefits and employment taxes		4,360		4,217			8,727			8,427
Other design and marketing costs		645		831			1,516			1,660
Other selling, general and administrative expenses		1,134		2,020			2,414			3,365
Stock-based compensation		723		1,453			1,806			2,665
Depreciation and amortization		390		359			784			785
Total operating costs and expenses		7,252		8,880			15,247			16,902

Operating income		1,118		232			1,553			571

Interest and finance expense
Interest expense - term debt		304		352			632			663
Other interest and finance charges		44		178			94			302
Total interest and finance expense		348		530			726			965

Income (loss) before income taxes		770		(298	)		827			(394	)

Income tax provision (benefit)		557		(208	)		1,013			(259	)

Net income (loss)	$	213	$	(90	)	$	(186	)	$	(135	)

Basic net income (loss) per share	$	0.01	$	(0.00	)	$	(0.01	)	$	(0.01	)

Diluted net income (loss) per share	$	0.01	$	(0.00	)	$	(0.01	)	$	(0.01	)

Basic weighted average common shares outstanding		18,449,210		18,671,648			18,561,453			18,565,198
Diluted weighted average common shares outstanding		18,813,044		18,671,648			18,561,453			18,565,198

	For the Six Months Ended June 30,
	2017			2016

Cash flows from operating activities
Net loss	$	(186	)	$	(135	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense		784			785
Amortization of deferred finance costs		99			94
Stock-based compensation		1,806			2,665
Amortization of note discount		19			158
Deferred income tax		1,013			(259	)
Non-cash property exit charge		-			648
Changes in operating assets and liabilities:
Accounts receivable		(1,779	)		(2,484	)
Prepaid expenses and other assets		(67	)		92
Accounts payable, accrued expenses and other current liabilities		(1,394	)		449
Deferred revenue		(161	)		(558	)
Other liabilities		290			875
Net cash provided by operating activities		424			2,330

Cash flows from investing activities
Cost to acquire intangible assets		(18	)		-
Purchase of property and equipment		(140	)		(1,718	)
Net cash used in investing activities		(158	)		(1,718	)

Cash flows from financing activities
Proceeds from exercise of stock options		-			20
Shares repurchased including vested restricted stock in exchange for withholding taxes		(806	)		(302	)
Payment of deferred finance costs		(7	)		(69	)
Payment of long-term debt		(5,959	)		(3,000	)
Payment of QVC earn-out obligation		-			(250	)
Net cash used in financing activities		(6,772	)		(3,601	)

Net decrease in cash and cash equivalents		(6,506	)		(2,989	)

Cash, cash equivalents, and restricted cash at beginning of period		15,636			17,969

Cash, cash equivalents, and restricted cash at end of period	$	9,130		$	14,980

Reconciliation to amounts on condensed consolidated balance sheets:
Cash and cash equivalents	$	7,621		$	13,471
Restricted cash		1,509			1,509
Total cash, cash equivalents, and restricted cash	$	9,130		$	14,980

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	144		$	118
Cash paid during the period for interest	$	677		$	560

		September 30, 2016							June 30, 2017
($ in thousands)	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted- Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Trademarks (indefinite-lived)	n/a	$	96,676	$	-	$	96,676	n/a	$	96,694	$	-	$	96,694
Trademarks (definite-lived)	15 years		15,463		1,201		14,262	15 years		15,463		1,973		13,490
Licensing agreements	4 years		2,000		2,000		-	4 years		2,000		2,000		-
Non-compete agreement	7 years		562		140		422	7 years		562		201		361
Copyrights and other intellectual property	10 years		190		48		142	10 years		190		62		128
Total		$	114,891	$	3,389	$	111,502		$	114,909	$	4,236	$	110,673

($ in thousands)	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
Xcel Term Loan	$	26,125		$	-		$	20,000		$	25,250
IM Term Loan		-			11,375
JR Term Loan		-			7,875
H Term Loan		-			10,000
Unamortized deferred finance costs related to term loans		(485	)		(493	)
Unamortized deferred finance costs related to term loan								(429	)		(509	)
IM Seller Note		3,627			4,918			2,918			3,627
Ripka Seller Notes		495			469			523			504
Contingent obligation - IM Seller		-			250
Contingent obligation - JR Seller		3,784			3,784			200			200
Contingent obligation - CW Seller		2,850			2,850			2,850			2,850
Total		36,396			41,028			26,062			31,922
Current portion (i)		5,302			9,168			4,043			6,427
Long-term debt	$	31,094		$	31,860		$	22,019		$	25,495

($ in thousands) Year Ending December 31,	Amount of Principal Payment		Amount of Principal Payment
2016 (October 1 through December 31)	$	875
2017		4,000
2017 (July 1 through December 31)			$	500
2018		4,000		4,000
2019		4,000		4,000
2020		4,000		4,000
2021		9,250		7,500
Total	$	26,125	$	20,000

Expected Volatility	~~33.25~~	33.69 – ~~34.85~~35.20	%
Expected Dividend Yield		0	%
Expected Life (Term)		3.25 – ~~5.32~~5.42 years
Risk-Free Interest Rate	~~0.91~~	1.52 – ~~1.21~~2.02	%

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value		Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2016		379,500		$	5.50		1.71	$	1,174,000
Outstanding at January 1, 2017											2,436,000		$	5.98		4.38	$	-
Granted		2,446,500			6.12						815,000			4.62
Canceled		-			-						-			-
Exercised		(13,000	)		3.08						-			-
Expired/Forfeited		(36,000	)		5.22						(93,000	)		5.02
Outstanding at September 30, 2016, and expected to vest		2,777,000		$	6.06		4.34	$	-
Exercisable at September 30, 2016		354,000		$	5.58		0.83	$	-
Outstanding at June 30, 2017, and expected to vest											3,158,000		$	5.66		4.54	$	-
Exercisable at June 30, 2017											811,670		$	6.01		3.61	$	-

	Number of Options			Weighted Average Grant Date Fair Value
Balance at January 1, 2016		47,500		$	1.43
Granted		2,446,500			1.44
Vested		(42,500	)		1.42
Forfeited or Canceled		(28,500	)		1.49
Balance at September 30, 2016		2,423,000		$	1.44

	Number of Options			Weighted Average Grant Date Fair Value
Balance at January 1, 2017		2,294,667		$	1.39
Granted		815,000			1.07
Vested		(670,337	)		1.49
Forfeited or Canceled		(93,000	)		1.01
Balance at June 30, 2017		2,346,330		$	1.32

	Number of Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value		Number of Warrants			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value
Outstanding and exercisable at January 1, 2016		2,219,543		$	6.07		3.23	$	3,168,000
Outstanding and exercisable at January 1, 2017											1,966,743		$	6.76			2.81	$	-
Granted		-			-						-			-
Canceled		-			-						-			-
Exercised		(218,000	)		0.01						-			-
Expired/Forfeited		(34,800	)		5.14						(75,000	)		(5.50	)
Outstanding and exercisable at September 30, 2016		1,966,743		$	6.76		3.06	$	-
Outstanding and exercisable at June 30, 2017											1,891,743		$	6.81			2.42	$	-

	Number of Restricted Shares			Weighted Average Grant Date Fair Value		Number of Restricted Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016		3,530,485		$	4.95
Outstanding at January 1, 2017							3,171,685		$	5.12
Granted		273,243			5.78		126,334			3.18
Canceled		-			-		-			-
Vested		(539,900	)		4.44		(768,431	)		4.20
Expired/Forfeited		(12,275	)		8.66		(1,000	)		9.00
Outstanding at September 30, 2016		3,251,553		$	5.09
Outstanding at June 30, 2017							2,528,588		$	5.29

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Basic		18,449,210		18,671,648		18,561,453		18,565,198
Effect of exercise of warrants		363,834		-		-		-
Effect of exercise of stock options		-		-		-		-
Diluted		18,813,044		18,671,648		18,561,453		18,565,198

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Basic		18,692,775		17,187,272		18,608,034		15,380,609
Effect of exercise of warrants		369,288		962,292		-		962,292
Effect of exercise of stock options		5,948		128,618		-		128,618
Diluted		19,068,011		18,278,182		18,608,034		16,471,519

($ in thousands)
Balance as of January 1, 2016	$	-
Non-cash costs incurred and charged to expense		648
Transfers of previously-recognized deferred balance sheet amounts related to lease		333
Cash payments, net		(207	)
Accretion		6
Balance as of September 30, 2016	$	780

($ in thousands)
Balance as of January 1, 2017	$	783
Cash payments, net		(56	)
Adjustment to liability (revision to estimated cash flows)		(25	)
Accretion		11
Balance as of June 30, 2017	$	713

	Three Months Ended June 30,
($ in thousands)	2017		2016
Net income (loss)	$	213	$	(90	)
Non-cash interest and finance expense		10		80
Stock-based compensation		723		1,453
Non-recurring facility exit charges		-		670
Deferred income tax provision		557		(208	)
Non-GAAP net income	$	1,503	$	1,905

	Three Months Ended September 30,
($ in thousands)	2016		2015
Net income	$	118	$	30
Non-cash interest and finance expense		78		84
Stock-based compensation		1,089		1,292
Loss from discontinued operations, net		-		14
Non-GAAP net income	$	1,285	$	1,420

	Six Months Ended June 30,
($ in thousands)	2017			2016
Net loss	$	(186	)	$	(135	)
Non-cash interest and finance expense		19			158
Stock-based compensation		1,806			2,665
Non-recurring facility exit charges		-			670
Deferred income tax provision		1,013			(259	)
Non-GAAP net income	$	2,652		$	3,099

	Nine Months Ended September 30,
($ in thousands)	2016			2015
Net (loss) income	$	(17	)	$	1,806
Non-cash interest and finance expense		236			330
Stock-based compensation		3,754			3,413
Loss on extinguishment of debt		-			1,371
Gain on reduction of contingent obligations		-			(3,000	)
Non-recurring facility exit charges		670			-
Loss from discontinued operations, net		-			281
Non-GAAP net income	$	4,643		$	4,201

Period	Total Number of Shares Purchased		Average Price per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program		Total Number of Shares Purchased		Average Price per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program
March 1, 2016 to March 31, 2016 (i)		52,000		5.80		-
September 1, 2016 to September 30, 2016 (i)		182,100		4.99		-
March 1, 2017 to March 31, 2017 (i)								294,540	$	2.70		-
May 1, 2017 to May 31, 2017 (i)								4,775		2.30		-
Total		234,100	$	5.17		-		299,315	$	2.69		-

Date: ~~November 14, 2016~~August 10, 2017	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