0001083220 xelb:AdamDweckMember 2011-07-03 2011-08-02 0001083220 xelb:SellerNoteMember 2011-09-29 0001083220 xelb:EarthboundLlcMember 2011-09-29 0001083220 xelb:MidmarketCapitalPartnersLlcMember us-gaap:LoansPayableMember 2011-09-29 0001083220 xelb:SellerNoteMember 2011-09-01 2011-09-29 0001083220 2012-01-01 2012-03-31 0001083220 xelb:JonestexasincMember 2012-01-01 2012-03-31 0001083220 xelb:AdamDweckMember 2012-01-01 2012-03-31 0001083220 us-gaap:StockOptionsMember 2012-01-01 2012-03-31 0001083220 xelb:EarthboundLlcMember 2012-01-01 2012-03-31 0001083220 xelb:ToddSlaterMember 2012-01-01 2012-03-31 0001083220 us-gaap:RestrictedStockMember 2012-01-01 2012-03-31 0001083220 xelb:LicenseeWarrantsMember 2012-01-01 2012-03-31 0001083220 xelb:IMReadyMadeLLCMember 2012-01-01 2012-03-31 0001083220 xelb:RoyaltyAgreementWithQVCMember 2012-01-01 2012-03-31 0001083220 xelb:RoyaltyagreementwithlcnyMember 2012-01-01 2012-03-31 0001083220 us-gaap:WarrantMember 2012-01-01 2012-03-31 0001083220 us-gaap:StockOptionMember 2012-01-01 2012-03-31 0001083220 xelb:EquityIncentivePlan2011Member 2012-03-19 2012-04-17 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonExecutiveEmployeesMember 2012-03-19 2012-04-17 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonExecutiveEmployeesMember 2012-05-01 2012-05-31 0001083220 us-gaap:ManagementMember xelb:EquityIncentivePlan2011Member 2012-05-02 2012-06-01 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonManagementDirectorsMember 2012-05-02 2012-06-01 0001083220 xelb:ToddSlaterMember 2012-06-11 2012-07-10 0001083220 xelb:EquityIncentivePlan2011Member 2012-11-15 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonExecutiveEmployeesMember 2012-11-15 0001083220 xelb:NonManagementDirectorsMember xelb:EquityIncentivePlan2011Member 2012-11-01 2012-11-15 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonExecutiveEmployeesMember 2012-11-01 2012-11-15 0001083220 xelb:EquityIncentivePlan2011Member us-gaap:ManagementMember 2012-11-01 2012-11-15 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonManagementDirectorsMember 2012-12-02 0001083220 xelb:JonestexasincMember 2012-01-01 2012-12-31 0001083220 2012-12-31 0001083220 xelb:EarnOutObligationMember 2012-12-31 0001083220 xelb:EquityIncentivePlan2011Member xelb:May152013Member 2013-03-31 0001083220 xelb:EquityIncentivePlan2011Member xelb:May152014Member 2013-03-31 0001083220 xelb:RoyaltyAgreementWithQVCMember 2012-12-31 0001083220 xelb:RoyaltyagreementwithlcnyMember 2012-12-31 0001083220 2013-01-01 2013-03-31 0001083220 xelb:JonestexasincMember 2013-01-01 2013-03-31 0001083220 xelb:AdamDweckMember 2013-01-01 2013-03-31 0001083220 us-gaap:RestrictedStockMember 2013-01-01 2013-03-31 0001083220 us-gaap:WarrantMember 2013-01-01 2013-03-31 0001083220 us-gaap:StockOptionsMember 2013-01-01 2013-03-31 0001083220 xelb:ToddSlaterMember 2013-01-01 2013-03-31 0001083220 us-gaap:MinimumMember 2013-01-01 2013-03-31 0001083220 us-gaap:MaximumMember 2013-01-01 2013-03-31 0001083220 xelb:LicenseeWarrantsMember 2013-01-01 2013-03-31 0001083220 xelb:IMReadyMadeLLCMember 2013-01-01 2013-03-31 0001083220 xelb:EquityIncentivePlan2011Member xelb:NonExecutiveEmployeesMember 2013-01-01 2013-03-31 0001083220 xelb:ThirdRoyaltyTargetPeriodMember 2013-01-01 2013-03-31 0001083220 xelb:FourthRoyaltyTargetPeriodMember 2013-01-01 2013-03-31 0001083220 xelb:SecondRoyaltyTargetPeriodMember 2013-01-01 2013-03-31 0001083220 xelb:QVCIncMember 2013-01-01 2013-03-31 0001083220 xelb:PriorToSeptember292013Member 2013-01-01 2013-03-31 0001083220 xelb:PriorToSeptember292014Member 2013-01-01 2013-03-31 0001083220 xelb:OnOrAfterSeptember292014Member 2013-01-01 2013-03-31 0001083220 xelb:Applicable76UpTo80Member 2013-01-01 2013-03-31 0001083220 xelb:Applicable80UpTo90Member 2013-01-01 2013-03-31 0001083220 xelb:Applicable90UpTo95Member 2013-01-01 2013-03-31 0001083220 xelb:Applicable95UpTo100Member 2013-01-01 2013-03-31 0001083220 xelb:Applicable100OrGreaterMember 2013-01-01 2013-03-31 0001083220 xelb:ApplicableLessThan76Member 2013-01-01 2013-03-31 0001083220 xelb:RoyaltyAgreementWithQVCMember 2013-01-01 2013-03-31 0001083220 xelb:RoyaltyagreementwithlcnyMember 2013-01-01 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember xelb:April12013Member 2013-01-01 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember xelb:March312014Member 2013-01-01 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember xelb:March312015Member 2013-01-01 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember xelb:May12013Member 2013-01-01 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember 2013-01-01 2013-03-31 0001083220 us-gaap:SubsequentEventMember 2013-01-01 2013-03-31 0001083220 us-gaap:StockOptionMember 2013-01-01 2013-03-31 0001083220 xelb:EquityIncentivePlan2011Member us-gaap:ManagementMember 2013-01-01 2013-03-31 0001083220 2013-03-31 0001083220 us-gaap:WarrantMember 2013-03-31 0001083220 xelb:EquityIncentivePlan2011Member 2013-03-31 0001083220 us-gaap:StockOptionsMember 2013-03-31 0001083220 us-gaap:RestrictedStockMember 2013-03-31 0001083220 us-gaap:LoansPayableMember 2013-03-31 0001083220 xelb:EarnOutObligationMember 2013-03-31 0001083220 xelb:QVCIncMember 2013-03-31 0001083220 xelb:RoyaltyAgreementWithQVCMember 2013-03-31 0001083220 xelb:RoyaltyagreementwithlcnyMember 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember xelb:September302013Member 2013-03-31 0001083220 us-gaap:SubsequentEventMember us-gaap:RestrictedStockMember xelb:EvenlyOverTwoYearsMember 2013-03-31 0001083220 2011-12-31 0001083220 2012-03-31 0001083220 us-gaap:RestrictedStockMember 2012-12-31 0001083220 us-gaap:WarrantMember 2012-12-31 xbrli:shares iso4217:USD iso4217:USDxbrli:shares xbrli:pure XCel Brands, Inc. 0001083220 --12-31 Smaller Reporting Company xelb 7339979 10-Q false 2013-03-31 2013 Q1 3929000 3730000 2718000 2946000 3428000 3314000 329000 307000 7686000 7351000 1516000 1567000 403000 489000 1113000 1078000 45835000 45704000 12371000 12371000 450000 420000 349000 323000 59005000 58818000 67804000 67247000 1421000 928000 221000 205000 144000 210000 1350000 1519000 3136000 2862000 6306000 6449000 29046000 28748000 10177000 10127000 480000 467000 39703000 39342000 42839000 42204000 0 0 7000 7000 21966000 22031000 2992000 3005000 24965000 25043000 67804000 67247000 0.001 0.001 1000000 1000000 0 0 0 0 0.001 0.001 25000000 25000000 7339979 7339979 7339979 7339979 2628000 2972000 286000 285000 2914000 3257000 34000 69000 2880000 3188000 154000 198000 209000 217000 2192000 2649000 688000 539000 286000 276000 257000 242000 543000 518000 145000 21000 -17000 8000 162000 13000 0.03 0.00 0.02 0.00 5810180 7339979 6553777 7922529 209000 217000 31000 30000 28000 65000 0 1000 131000 143000 58000 59000 -22000 -50000 233000 -113000 17000 -48000 -32000 -487000 -99000 -29000 73000 70000 289000 193000 44000 51000 -175000 0 -175000 0 -44000 -51000 2000 0 4000 3000 11000 0 -17000 -341000 228000 -199000 23000 0 155000 316000 286000 364428 <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 3%;"><font style="font: 10pt times new roman, times, serif;"><b>1.</b></font></td> <td style="text-align: justify; width: 94%;"><font style="font: 10pt times new roman, times, serif;"><b>NATURE OF OPERATIONS, BACKGROUND AND BASIS OF PRESENTATION </b></font></td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Xcel Brands, Inc., (&#8220;Xcel&#8221;, the "Company", &#8220;we&#8221;, &#8220;us&#8221;, or &#8220;our&#8221;), all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. The Condensed Consolidated Balance Sheet as of December 31, 2012 has been derived from audited consolidated financial statements. Operating results for the three months ended March 31, 2013 (the &#8220;Current Quarter&#8221;) are not necessarily indicative of the results that may be expected for a full fiscal year.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company engages in the design, licensing, and marketing of the Isaac Mizrahi Brand and certain rights of the Liz Claiborne New York Brand (&#8220;LCNY&#8221;) with a focus on a variety of product categories.&#160;&#160;The Company operates in a &#8220;working capital light&#8221; business model, licensing the Isaac Mizrahi Brand and LCNY through its wholly-owned subsidiary IM Brands, LLC (&#8220;IM Brands&#8221;) and generating royalty and design and service fee revenues through licensing and other agreements with wholesale manufacturers, sourcing and design companies, and retailers. On September 29, 2011 (the Closing Date&#8221;), the Company acquired the Isaac Mizrahi Brand, certain rights to the LCNY Brand and related assets and assumed liabilities (the &#8220;Isaac Mizrahi Business&#8221;).</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">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, 2012 (&#8220;2012&#8221;).</p> <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 3%;"></td> <td style="width: 3%;"><font style="font: 10pt times new roman, times, serif;"><b>2.</b></font></td> <td style="width: 94%;"><font style="font: 10pt times new roman, times, serif;"><b>SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</b></font></td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Trademarks, Goodwill and Other Intangible Assets</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company follows Financial Accounting Standards Board (&#8220;FASB&#8221;) Accounting Standard Codification (&#8220;ASC&#8221;) for Intangibles, Goodwill and Other (&#8220;ASC Topic 350&#8221;). Under this standard, goodwill and indefinite lived assets are not amortized. The Company&#8217;s definite lived intangible assets are amortized over their estimated useful lives. No triggering events or indicators of impairment were noted in the Current Quarter.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Under this standard, the Company annually has the option to first assess qualitatively whether it is more likely than not that there is an impairment. The Company completed its annual quantitative assessment of trademarks, goodwill and other intangibles at December 31, 2012 and determined that no impairment charges were required.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Contingent Obligations</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Management analyzes and quantifies the expected earn-out payments over the applicable pay-out period.&#160; Management assesses no less frequently than each reporting period the status of contingent obligations and any expected changes in the fair market value of such contingent obligations. &#160;Any change in the expected obligation will result in expense or income recognized in the period in which it is determined fair market value of the carrying value has changed. There was no change in the contingent obligation for the three months ended March 31, 2013.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Use of Estimates</u></p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Fair Valu</u>e</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Subtopic 820-10 outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. We have contingent obligations that are required to be measured at fair value on a recurring basis. Our contingent obligations were measured using inputs from Level 3 of the fair value hierarchy, which states:</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Level 3 &#8211; unobservable inputs that reflect our assumptions that market participants would use in pricing assets or liabilities based on the best information available. The Company&#8217;s earn-out obligation (See Note 5) is based upon future net royalty revenues.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Income Taxes</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Income tax expense consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Tax positions shall initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a probability of fifty percent (50%) or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company has no unrecognized tax benefits as of March 31, 2013 and December 31, 2012. The Company&#8217;s U.S. Federal and state and local income tax returns are closed prior to fiscal year 2009 and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">If applicable, the Company would recognize interest and penalties associated with tax matters as part of the income tax provision, and include accrued interest and penalties with accrued expenses in the condensed consolidated balance sheets.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Revenue Recognition</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred and services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. The Company has two primary types of revenues: (i) royalties based on the sale of products by its licensees or other contractual partners, and (ii) design and service fees based on services provided. Revenues from royalties are recognized when earned, which include guaranteed minimum royalties, if any, and additional revenues based on a percentage of defined sales by our licensees or other contractual partners for each period. Royalties exceeding the guaranteed minimum amounts are recognized as revenue during the period that corresponds to the licensees&#8217; or partners&#8217; sales.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Design and service fees are recorded and recognized in accordance with the terms and conditions of each service contract, including the Company meeting its obligations and providing the relevant services under each contract.&#160; Generally, we record on a straight line basis, each base fee as stated in each service agreement for the covered period and, if applicable, we&#160;recognize additional payments received that relate to a future period as deferred revenue, until service is provided or revenue is otherwise earned.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Accounts Receivable</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Accounts receivable represent amounts that are due to the Company by its licensees and other operating account debtors in the normal course of business. As of March 31, 2013 the Company has $3,314,000 of accounts receivables, net of allowance for doubtful accounts of $26,000. As of December 31, 2012 the Company had $3,428,000 of accounts receivable, net of allowance for doubtful accounts of $25,000. The accounts receivable balance includes $590,000 and $699,000 of earned revenue that has been accrued but not billed as of March 31, 2013 and December 31, 2012, respectively.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Stock-Based Compensation</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company accounts for stock-based compensation in accordance with ASC Topic 718 - Stock Compensation, by recognizing the fair value of stock-based compensation in the unaudited condensed consolidated statements of operations. Stock-based compensation can include stock options and restricted stock grants.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Stock Options - The fair value of the Company&#8217;s stock option awards are estimated using the Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award.</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Restricted Stock - Compensation cost for restricted stock is measured using the fair value of the Company&#8217;s common stock at the date the common stock is granted. The compensation cost is recognized over the period between the grant date and the date any restrictions lapse. For stock-based awards that vest based on performance conditions (e.g. achievement of certain milestones), expense is recognized when it is probable that the condition will be met.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of stock compensation is amortized over the service period of the awards.</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Earnings per Share</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options, warrants and restricted stock outstanding were exercised into common stock.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Segment Reporting</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company operates in one segment.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Recently Issued Accounting Standards</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company&#8217;s condensed consolidated financial statements.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>3. Trademarks, Goodwill and Other Intangibles</b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">Trademarks and other intangibles, net consist of the following:</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 85%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">March 31, 2013</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">December 31, 2012</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 62%;">Trademarks</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 16%;">44,500,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 16%;">44,500,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">Licensing agreements</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">2,000,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">2,000,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">Accumulated amortization, licensing agreements</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">(796,000</td> <td style="text-align: left; padding-bottom: 1pt;">)</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">(665,000</td> <td style="text-align: left; padding-bottom: 1pt;">)</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 2.5pt;">Net carrying amount</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">45,704,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">45,835,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Amortization expense for intangible assets for the Current Quarter and the quarter ended March 31, 2012 (the &#8220;Prior Year Quarter&#8221;) was $131,000 and $132,000, respectively. The trademarks of the Isaac Mizrahi Brand and related goodwill have been determined to have an indefinite useful life and accordingly, consistent with ASC Topic 350, no amortization has been recorded in the Company's unaudited consolidated statement of operations.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company has $12,371,000 of goodwill that represents the excess of the purchase price over the fair value of net assets acquired accounted for under the acquisition method of accounting relating to the acquisition of the Isaac Mizrahi Business. There was no change in goodwill during the Current Quarter.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>5.&#160; Debt</b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company&#8217;s net carrying amount of debt is&#160;comprised of the following:</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 90%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">March 31,<br />2013</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">December 31,<br />2012</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; width: 66%;">Term Loan</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 14%;">12,301,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 14%;">12,579,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">Seller Note</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">6,449,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">6,306,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">Contingent obligation &#8211; Seller</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">11,466,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">11,466,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">Other long term liabilities</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">51,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">45,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-left: 0.25in;">Total</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">30,267,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">30,396,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">Current portion</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">1,519,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">1,350,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 2.5pt;">Total long term liabilities</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">28,748,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">29,046,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i><u>Term Loan</u></i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On September 29, 2011, IM Brands, a wholly-owned subsidiary of the Company, entered into a five-year senior secured facility (the &#8220;Loan&#8221;) with MidMarket Capital Partners, LLC (&#8220;MidMarket&#8221;) and Noteholders in the aggregate principal amount of $13,500,000.&#160;The Loan is secured by all of the assets of IM Brands and the Company&#8217;s membership interests in IM Brands.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The principal amount of the Loan is payable quarterly as follows:&#160;&#160;2.5% on January 5, 2013 through October 5, 2013; 3.75% on January 5, 2014 through October 5, 2014; 6.25% on January 5, 2015 through October 5, 2015; 12.5% on January 5, 2016 through the maturity date, which is the date that is 5 years after the closing date.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Annual remaining principal obligations are as follows:</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 70%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Year&#160;Ending&#160;December&#160;31,</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 77%;">2013 (Period from April 1, 2013 to December 31, 2013)</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 20%;">1,013,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">2014</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">2,025,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">2015</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">3,375,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">2016</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">6,750,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Total</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">13,163,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The interest rate on the loan is a fixed rate of 8.5%, payable in cash.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>Optional Prepayment</i>.&#160;&#160;IM Brands may prepay the Loan in whole or in part in increments of $500,000, provided that IM Brands pay the following premiums in connection with the prepayment:</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 65%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="border-bottom: black 1pt solid; text-align: justify;" nowrap="nowrap">Period</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Applicable&#160;Premium</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 83%;">Prior to September 29, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 14%;">2</td> <td style="text-align: left; width: 1%;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Prior to September 29, 2014</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">1</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>On or After September 29, 2014</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">0</td> <td style="text-align: left;">%</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>Mandatory Prepayments.&#160;&#160;</i> IM Brands is required to prepay the Loan under the following conditions:&#160;&#160;(1) if certain indebtedness is incurred by the Company; (2) if IM Brands undertakes certain asset sales or sales of capital stock, with limited exceptions; or (3) if there is a payment of the benefits of a life insurance policy for Isaac Mizrahi held by the Company.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>Excess Cash Flow Sweep.&#160;&#160;</i> In addition to the Mandatory Prepayments described above, if for any fiscal year ending on or subsequent to December 31, 2012, there is excess cash flow (as defined in the Loan agreements) for such year, then on the payment date following the end of such year, IM Brands is required to make a principal payment on the Loan equal to the lesser of (i) 50% of the excess cash flow or (ii) the positive result of the unencumbered cash and cash equivalents of the Company minus the greater of (x) the Excess Liquidity required to be maintained by IM Brands and (y) $3,000,000. For the period ended March 31, 2013, there was no Excess Cash Flow Sweep payment due.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>Lender Warrants.</i> On September 29, 2011, the Company issued warrants to purchase 364,428 shares of the Company&#8217;s Common Stock, valued at $1,214,000 (the &#8220;Loan Discount&#8221;) to the Noteholders of the Loan. The Company used the Black-Scholes method to determine the value of the Loan Discount and discounted the carrying value of the Loan by this amount, resulting in an initial net loan balance of $12,286,000. The Loan Discount is being amortized over the term of Loan and recorded as other interest and finance charges on the Company&#8217;s Unaudited Condensed Consolidated Statements of Operations. &#160;The Loan balance as of March 31, 2013 and December 31, 2012 was $12,301,000 and $12,579,000, net of debt discount of $862,000 and $ 921,000, respectively.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>Financial Covenants</i>. The Company is required to maintain minimum EBITDA, fixed charge ratio, and liquidity covenants, a maximum leverage ratio covenant and other non-monetary covenants, including reporting requirements and trademark preservation in accordance with the terms and conditions of the Loan. As of March 31, 2013, the Company and IM Brands were in full compliance with all of the covenants under the Loan.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i><u>Seller Note</u></i></b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">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 (the &#8220;Seller&#8221;) a promissory note (the &#8220;Seller Note&#8221;) in the principal amount of $7,377,000.&#160;&#160;The stated interest rate of the Seller Note is 0.25%.&#160;&#160;Management has determined that this rate was below the Company&#8217;s expected borrowing rate, which was estimated at 9.25%.&#160;&#160;Therefore, the Company discounted the Seller Note by $1,740,000 using a 9.0% imputed annual interest rate, resulting in an initial value of $5,637,000.&#160;&#160;Also on September 29, 2011, the Company prepaid $123,000 of interest on the Seller Note. &#160;The imputed interest amount is being amortized over the term of the Seller Note and recorded as other interest expense on the Company&#8217;s Unaudited Condensed Consolidated Statements of Operations.&#160;The Seller Note balance at March 31, 2013 and December 31, 2012 was $6,449,000 and $6,306,000, net of debt discount of $928,000 and $1,071,000, respectively.</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Seller Note initially matures three years from the Closing Date (the &#8220;Seller Maturity Date&#8221;) subject to extension as described below (the date to which the maturity date of the Seller Note is extended is referred to as the &#8220;Subsequent Seller Maturity Date&#8221;).&#160;&#160;The Company has the right to pay the Seller Note at the Seller Maturity Date in cash or, subject to the following conditions, in shares of Common Stock.&#160;&#160;If the Company elects to repay the outstanding principal amount of the Seller Note on the Seller Maturity Date by issuing shares of Common Stock, the number of shares issuable will be obtained by dividing the principal amount of the Seller Note then outstanding by the greater of (i) the fair market value of the Common Stock on the Seller Maturity Date and (ii) $4.50 subject to certain adjustments; provided, however, that if the fair market value of the Common Stock is less than $4.50 as adjusted, the Seller will have the option to extend the maturity of the Seller Note to the Subsequent Seller Maturity Date. If the maturity date of the Seller Note is so extended, the Seller will have the option to convert the Seller Note into Common Shares based on the greater of (i) the fair market value of the Common Stock on the Subsequent Seller Maturity Date and (ii) $4.50, subject to certain adjustments.&#160;If the maturity date of the Seller Note is extended, we will also have the option to repay the outstanding principal amount of the Seller Note on the Subsequent Seller Maturity Date in cash or by issuing the number of shares of Common Stock obtained by dividing the principal amount of the Note outstanding on the Subsequent Seller Maturity Date by the fair market value of the Common Stock on the Seller Maturity Date.&#160;&#160;In addition, at any time the Seller Note is outstanding, the Company has the right to convert the Note, in whole or in part, into the number of shares of Common Stock obtained by dividing the principal amount to be converted by the fair market value of the Common Stock at the time of the conversion, so long as the fair market value of our Common Stock is at least $4.50.&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Contingent Obligations</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Earn-out obligation</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Seller is eligible to earn additional consideration for the sale of the Isaac Mizrahi Business contingent upon the Isaac Mizrahi Brand achieving net royalty income targets set forth below during the twelve month periods ending September 30, 2013, 2014 and 2015.&#160;The Seller was eligible to earn additional consideration for the fiscal year ended September 30, 2012, but did not meet the minimum net royalty income target. This consideration is payable with shares of Common Stock by the greater of (i) the fair market value of the Common Stock for the average stock price for the last twenty days in such period and (ii) $4.50 up to $7,500,000 (the &#8220;Earn-Out Value&#8221;). &#160;The Seller will receive a percentage of the Earn-Out Value based upon the percentage of the actual net royalty income of the Isaac Mizrahi Business to the royalty target as set forth below. The fair value of the percentage of the Earn-Out Value was based primarily on projected future net royalty income related to the Isaac Mizrahi Brand (the &#8220;Earn-Out Obligation&#8221;). Any future change in the Earn-Out Obligation will result in an expense or income in the period in which it is determined that the fair market value of the carrying value has changed.&#160; The royalty targets and percentage of the potential Earn-Out Value are as follows:</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 95%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="padding-bottom: 1pt; font-weight: bold;">ROYALTY&#160;TARGET&#160;PERIODS</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> <td style="text-align: center; padding-bottom: 1pt; font-weight: bold;" colspan="2">ROYALTY <br />TARGET</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> <td style="text-align: center; padding-bottom: 1pt; font-weight: bold;" colspan="2">EARN-OUT <br />VALUE</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Second Royalty Target Period (October 1, 2012 to September 30, 2013)</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">20,000,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">7,500,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Third Royalty Target Period (October 1, 2013 to September 30, 2014)</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">22,000,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">7,500,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Fourth Royalty Target Period (October 1, 2014 to September 30, 2015)</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">24,000,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">7,500,000</td> <td style="text-align: left;">&#160;</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 80%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap">APPLICABLE <br />PERCENTAGE</td> <td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap">&#160;</td> <td style="text-align: center; padding-bottom: 1pt; font-weight: bold;" colspan="2" nowrap="nowrap">%&#160;OF&#160;EARN-OUT <br />VALUE&#160;EARNED</td> <td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; width: 79%;">Less than 76%</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 18%;">0</td> <td style="text-align: left; width: 1%;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">76% up to 80%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">40</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">80% up to 90%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">70</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">90% up to 95%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">80</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">95% up to 100%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">90</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">100% or greater</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">100</td> <td style="text-align: left;">%</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">In accordance with ASC Topic 480 "Distinguishing Liabilities from Equity", the Earn-Out Obligation is treated as a liability in the accompanying Condensed Consolidated Balance Sheets because of the variable number of shares payable under the agreement. The Earn-Out Obligation fair value at March 31, 2013 and December 31, 2012 was $8.7 million for each year and recorded as long term liabilities on the Company&#8217;s Condensed Consolidated Balance Sheets. There was no expense or income recognized for the Current Quarter or the Prior Year Quarter.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>QVC Earn-out</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company is required to pay the Seller $2.766 million, payable in cash or Common Stock, at the Company&#8217;s option, contingent upon the Company receiving aggregate net royalty income of at least $2.5 million from QVC for the Isaac Mizrahi Brand in the twelve-month period ending September 30, 2015 with such stock based upon the greater of (x)&#160;$4.50 per share, and (y)&#160;the average stock price for the last twenty days prior to the time of such issuance (the &#8220;QVC Earn-Out&#8217;). The current term of the QVC Agreement runs through September 30, 2015.&#160;&#160;Management has determined that it is probable that the $2.5 million in net royalty income from QVC will be met.&#160;In accordance with ASC Topic 480 "Distinguishing Liabilities from Equity", the QVC Earn-Out obligation is treated as a liability in the accompanying Condensed Consolidated Balance Sheets because of the variable number of shares payable under the agreement<font style="color: red;">. </font>Management will assess no less frequently than&#160;each reporting period&#160;the status of this contingent obligation.&#160;&#160;Any change in the expected obligation will result in an expense or income in the period in which it is determined fair market value has changed.&#160;&#160;</p> <p style="text-indent: 45pt; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Earn-Out Obligation of $8.7 million and the QVC Earn-Out of $2.766 million, which combined is equal to $11.466 million and represents the total contingent obligation to the Seller as of March 31, 2013 and December 31, 2012 is reported as long term debt on the Company&#8217;s Condensed Consolidated Balance Sheets.&#160;</p> <p style="text-indent: -28pt; margin: 0pt 0px 0pt 47pt; font: 10pt times new roman, times, serif;"><b>6.</b> &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; <b>Stockholders&#8217; Equity</b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>&#160;</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>2011 Equity Incentive Plan</i></b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company&#8217;s 2011 Equity Incentive Plan, as amended and restated (the &#8220;Plan&#8221;) is designed and utilized to enable the Company to offer its employees, officers, directors, consultants and others whose past, present and/or potential contributions to the Company have been, are or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 5,000,000 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 Board, or, at the Board's discretion, a committee of the Board.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On April 17, 2012, the Company issued to management an aggregate of 1,100,000 shares of restricted stock. The vesting date of 1,025,000 shares of restricted stock was November 15, 2012, provided, however, that each such grantee has the right to extend the vesting date by six-month increments in his or her sole discretion, prior to the date the restrictions would lapse. The vesting date of 37,500 shares of restricted stock is May 15, 2013, provided however, the executive has the right to extend the vesting date by six-month increments in his sole discretion, prior to the date the restrictions would lapse. The vesting date of 37,500 shares of restricted stock is May 15, 2014, provided however, the executive has the right to extend the vesting date by six-month increments in his sole discretion, prior to the date the restrictions would lapse. As of March 31, 2013, restrictions on 509,488 shares have lapsed. On November 15, 2012, the Company repurchased 209,623 shares upon vesting of restricted stock in satisfying the grantees tax withholding obligation.</p> <p style="text-align: justify; text-indent: 45pt; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Also, on April 17, 2012, the Company issued 50,000 shares of restricted stock to a non-executive employee. The vesting date of the 50,000 shares of restricted stock was November 15, 2012, provided however, the employee has the right to extend the vesting date by nine-month increments in her sole discretion, prior to the date the restrictions would lapse. As of March 31, 2013, restrictions on 24,916 shares have lapsed. On November 15, 2012 the Company repurchased 8,540 shares upon vesting of restricted stock in satisfying the grantees tax withholding obligation.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On May 1, 2012, the Company granted options to purchase an aggregate of 105,500 shares of Common Stock to non-executive employees of the Company. The exercise price per share of the options is $3.00 per share, and 50% of the options will vest on each of the first and second anniversaries of the grant date. Of these awards, 26,750 options were forfeited, and reverted to, and are eligible for re-grant under the Plan.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On June 1, 2012, the Company issued to non-management directors 138,335 shares of restricted stock. The vesting date of 138,335 shares of restricted stock was December 1, 2012, provided, however, that each such grantee has the right to extend the vesting date by six-month increments in his sole discretion, prior to the date the restrictions would lapse. As of March 31, 2013, restrictions on 53,995 shares have lapsed. On November 15, 2012 the Company repurchased 18,870 shares on vesting of restricted stock in satisfying the grantees tax withholding obligation.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On June 1, 2012, the Company issued to management 242,775 shares of restricted stock. The vesting date of 242,775 shares of restricted stock was December 1, 2012, provided, however, that each such grantee has the right to extend the vesting date by six-month increments in his sole discretion, prior to the date the restrictions would lapse. As of March 31, 2013, none of these shares have vested.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Stock Options</i></b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The fair value for all options and warrants was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">Expected Volatility (i)</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;"><font style="font: 10pt times new roman, times, serif;">35-42</font></td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; width: 85%;">Expected Dividend Yield</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">0</td> <td style="text-align: left; width: 1%;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">Expected Life (Term) (ii)</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;"><font style="font: 10pt times new roman, times, serif;">3 &#8211; 5.75 years</font></td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">Risk-Free Interest Rate</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;"><font style="font: 10pt times new roman, times, serif;">0.42% - 0.98</font></td> <td style="text-align: left;">%</td> </tr> </table> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The options that&#160;the Company&#160;granted under&#160;its plans expire at various times, either five, seven or ten years from the date of grant, depending on the particular grant.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 0.25in;"></td> <td style="width: 0.5in;">(i)</td> <td>Due to the Company&#8217;s limited trading activity, the Company used the average volatility of similar companies in its industry.</td> </tr> </table> <table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 0.25in;"></td> <td style="width: 0.5in;">(ii)</td> <td>Due to the Company&#8217;s limited history, the expected life of options was calculated using the &#8216;simplified method&#8217; in accordance with Staff accounting bulletin (&#8220;SAB&#8221;) Topic 14.02 in accordance with SAB no. 110.</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b></b></p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.3in; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Options</i></b></p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table style="width: 94%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td colspan="2" nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Weighted-Average</td> <td nowrap="nowrap">&#160;</td> </tr> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Options</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Exercise&#160;Price</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Outstanding at January 1, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">345,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">4.54</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Granted</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Canceled</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Exercised</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 1pt;">Expired/Forfeited</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Outstanding at March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;"></td> <td style="border-bottom: black 2.5pt double; text-align: right;">345,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">4.54</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Exercisable at&#160;March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">174,858</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">5.00</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="font: 10pt times new roman, times, serif;">Compensation expense related to stock option grants for the Current Quarter and the Prior Year Quarter was $20,000 and $10,000, respectively and is reported as stock-based compensation under operating expenses in the Unaudited Condensed Consolidated Statements of Operations.&#160;&#160; An additional amount of $64,000 is expected to be expensed over a period of 13 months</font> <font style="font: 10pt times new roman, times, serif;">from April 1, 2013 through April 30, 2014.</font></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">The preceding table does not include options to purchase 576 shares of Common Stock for $728 per share issued under the Company&#8217;s former equity plan. The Company does not expect to issue any equity awards under this plan.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Warrants</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>&#160;</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">A summary of the Company&#8217;s warrants for the Current Quarter is as follows:</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>&#160;</b></p> <table style="width: 94%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td colspan="2" nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Weighted-Average</td> <td nowrap="nowrap">&#160;</td> </tr> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Warrants</td> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Exercise&#160;Price</td> <td nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Outstanding at January 1, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">1,132,043</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">2.47</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Granted</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Canceled</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Exercised</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 1pt;">Expired/Forfeited</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Outstanding at March 31, 2013 and expected to vest.</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;"></td> <td style="border-bottom: black 2.5pt double; text-align: right;">1,132,043</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">2.47</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Exercisable at&#160;March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">1,082,043</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">2.35</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Compensation expense related to warrants for the Current Quarter and the Prior Year Quarter was $11,000 and $11,000, respectively, and is reported as stock-based compensation under operating expenses in the Unaudited Condensed Consolidated Statements of Operations.&#160;&#160;An additional amount of $22,000 is expected to be expensed over a period of 6 months from April 1, 2013 through September 30, 2013.&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company values other warrants issued to non-employees at the commitment date at the fair market value of the instruments issued, a measure which is more readily available than the fair market value of services rendered, using the Black-Scholes model. The fair market value of the instruments issued is expensed over the vesting period.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company issued to a licensee warrants to purchase 75,000 shares of common stock with an exercise price of $5.50 per share and a term of 5-years. Compensation expense related to warrants in connection with the licensing agreement is amortized over the 5-year initial term of the license agreement and is recorded as a discount to licensing revenues. The stock-based licensing revenue-discount for the Current Quarter and the Prior Year Quarter was $1,000 and $1,000, respectively.&#160;&#160;An additional amount of $16,000 is expected to be amortized over a period of 42 months from April 1, 2013 through September 30, 2016.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Restricted Stock</i></b></p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Compensation cost for restricted stock is measured using the fair value of the Company&#8217;s common stock at the date the common stock is granted.<font style="background-color: white;"> The compensation cost, net of projected forfeitures, is recognized over the period between the grant date and the date any restrictions lapse, with compensation cost for grants with a graded vesting schedule recognized using the treasury method. The restrictions do not affect voting and dividend rights.</font></p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="background-color: white;">&#160;</font></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">A summary of the Company&#8217;s restricted stock for the Current Quarter is as follows:</p> <p style="text-align: justify; background-color: white; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>&#160;</b></p> <p style="text-align: justify; background-color: white; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table align="center" style="width: 88%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Restricted<br />Shares</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Weighted-Average<br />Grant Date Fair <br />value</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Outstanding at January 1, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">964,607</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">3.00</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Granted</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Canceled</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Vested</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 1pt;">Expired/Forfeited</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Outstanding at March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">964,607</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">3.00</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="text-align: justify; background-color: white; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; background-color: white; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Compensation expense related to restricted stock grants for the Current Quarter and Prior Year Quarter was $35,000 and $7,000, respectively, and is reported as stock-based compensation under operating expenses in the Unaudited Condensed Consolidated Statements of Operations.&#160; An additional amount of $135,000 is expected to be expensed over a period of 13 months from April 1, 2013 through April 30, 2014.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Shares Available Under the Company&#8217;s 2011 Equity Incentive Plan</i></b></p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>&#160;</i></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">At March 31, 2013, there were 3,330,840 common shares available for issuance under the Company&#8217;s 2011 Equity Incentive Plan. See Note 10 Subsequent Events.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Shares Reserved for Issuance</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">At March 31, 2013, there were 4,808,459 common shares reserved for issuance pursuant to warrants, stock options and availability for issuance under the Company&#8217;s 2011 Equity Incentive Plan. See Note 10 Subsequent Events.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>&#160;</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Dividends</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company has not paid any dividends to date.</p> <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 3%;"></td> <td style="width: 5%;"><font style="font: 10pt times new roman, times, serif;"><b>8.</b></font></td> <td style="width: 92%;"><font style="font: 10pt times new roman, times, serif;"><b>Income taxes</b></font></td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company&#8217;s effective income tax rate for the Current Quarter and the Prior Year Quarter was approximately 40% and (11)%, respectively. The Prior Year Quarters effective tax rate has been adjusted by a tax benefit from the effect of a state and local rate allocation change resulting in a (50)% adjustment to the effective tax rate by virtue of applying the rate differential to the opening net deferred tax liability.</p> <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 3%;"></td> <td style="width: 5%;"><font style="font: 10pt times new roman, times, serif;"><b>9.</b></font></td> <td style="width: 92%;"><font style="font: 10pt times new roman, times, serif;"><b>Related Party Transactions</b></font></td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>Todd Slater</b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On August 12, 2011, Old XCel entered into a one-year agreement which was amended on October 4, 2011, with Todd Slater, who was appointed as a director of the Company commencing on October 17, 2011, for services related to the Company&#8217;s licensing strategy and introduction of potential licensees.&#160;During the term of the agreement or during the year following the expiration of the term of the agreement, if the Company enters into a license or distribution agreement with a licensee introduced by Mr. Slater, Mr. Slater was entitled to receive a commission equal to fifteen percent (15%) of all net royalties received by the Company during the first term of such agreement, payable within thirty days of receipt of the net royalties.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On July 10, 2012, the Company and Mr. Slater, entered into an amendment (the &#8220;Amendment&#8221;) to the agreement. Pursuant to the Amendment, the Company paid to Mr. Slater $163,000 as payment in full for (i) the cancellation of all amounts which are or may otherwise become due or payable to Mr. Slater under the terms of the agreement for licensees already introduced to the Company by Mr. Slater and which Mr. Slater was entitled to fifteen percent (15%) of the revenues from such licensees under the agreement, and (ii) the assignment to the Company of all such amounts payable directly to Mr. Slater pursuant to such license agreements. The Company has capitalized this payment and amortizes the expense in accordance with the revenue earned from the respective licensing agreements on which this payment was based upon.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company incurred direct licensing costs with Mr. Slater from amortization of the one-time payment stated above and fees paid for the Current Quarter and the Prior Year Quarter of $11,000 and $8,000, respectively.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>Licensing Agent Agreement</b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">On August 2, 2011, Old XCel entered into a licensing agent agreement with Adam Dweck (&#8220;AD&#8221;) who is an Executive Vice President of Earthbound, LLC (&#8220;Earthbound&#8221;) and the son of Jack Dweck, who is a principal of Earthbound and is on the Company&#8217;s board of directors, pursuant to which he is entitled to a five percent (5%) commission on any royalties we receive under any new license agreements that he procures for us during the initial term of such license agreements. AD earned $3,000 in fees for each of the Current Quarter and Prior Year Quarter.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>Jones Texas, Inc.</b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Edward Jones, III, a principal shareholder and chief executive officer of Jones Texas, Inc. (&#8220;JT&#8221;) is on the Company&#8217;s board of directors. The Company and JT entered into a consulting agreement on March 28, 2012 whereby JT shall pursue and introduce licensing opportunities for the Company. JT procured a license for the Company during 2012 which the Company agreed to remit 15% of the license revenues for the initial term of the license. JT earned $3,000 and $0 in fees for the Current Quarter and Prior Year Quarter, respectively.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>Earthbound, LLC</b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><font style="font-family: times new roman, times, serif;">As part of the consideration for the acquisition of the Isaac Mizrahi Business, the Company assumed a $1.5 million non-interest obligation owed to Earthbound, payable over five years commencing on September 29, 2011. Jeff Cohen is a principal owner of Earthbound and was a director of the Company through December 2012. Jack Dweck, a current board member of the Company, is also a principal owner of Earthbound. The Company made a $37,500 payment in the Prior Year Quarter, of which $27,000 was recorded as interest expense. </font>The Company extinguished this debt on November 21, 2012.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>IM Ready-Made, LLC</b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company and the Seller had balances owed between the companies relating to the transition of the Isaac Mizrahi Business and certain payments assigned to the Seller by QVC under the QVC Agreement. As of March 31, 2013 the Company owed the Seller $61,000 and as of March 31, 2012 the Seller owed the Company $157,000. The Company did not earn any revenue or incur any expenses with IM Ready-Made, LLC since the Closing Date.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Fair Valu</u>e</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Subtopic 820-10 outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. We have contingent obligations that are required to be measured at fair value on a recurring basis. Our contingent obligations were measured using inputs from Level 3 of the fair value hierarchy, which states:</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Level 3 &#8211; unobservable inputs that reflect our assumptions that market participants would use in pricing assets or liabilities based on the best information available. The Company&#8217;s earn-out obligation (See Note 5) is based upon future net royalty revenues.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Accounts Receivable</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Accounts receivable represent amounts that are due to the Company by its licensees and other operating account debtors in the normal course of business. As of March 31, 2013 the Company has $3,314,000 of accounts receivables, net of allowance for doubtful accounts of $26,000. As of December 31, 2012 the Company had $3,428,000 of accounts receivable, net of allowance for doubtful accounts of $25,000. The accounts receivable balance includes $590,000 and $699,000 of earned revenue that has been accrued but not billed as of March 31, 2013 and December 31, 2012, respectively.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Trademarks, Goodwill and Other Intangible Assets</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company follows Financial Accounting Standards Board (&#8220;FASB&#8221;) Accounting Standard Codification (&#8220;ASC&#8221;) for Intangibles, Goodwill and Other (&#8220;ASC Topic 350&#8221;). Under this standard, goodwill and indefinite lived assets are not amortized. The Company&#8217;s definite lived intangible assets are amortized over their estimated useful lives. No triggering events or indicators of impairment were noted in the Current Quarter.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Under this standard, the Company annually has the option to first assess qualitatively whether it is more likely than not that there is an impairment. The Company completed its annual quantitative assessment of trademarks, goodwill and other intangibles at December 31, 2012 and determined that no impairment charges were required.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Contingent Obligations</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Management analyzes and quantifies the expected earn-out payments over the applicable pay-out period.&#160; Management assesses no less frequently than each reporting period the status of contingent obligations and any expected changes in the fair market value of such contingent obligations. &#160;Any change in the expected obligation will result in expense or income recognized in the period in which it is determined fair market value of the carrying value has changed. There was no change in the contingent obligation for the three months ended March 31, 2013.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Income Taxes</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Income tax expense consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Tax positions shall initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a probability of fifty percent (50%) or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company has no unrecognized tax benefits as of March 31, 2013 and December 31, 2012. The Company&#8217;s U.S. Federal and state and local income tax returns are closed prior to fiscal year 2009 and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; background-color: white; margin: 0pt 0px; font: 10pt times new roman, times, serif;">If applicable, the Company would recognize interest and penalties associated with tax matters as part of the income tax provision, and include accrued interest and penalties with accrued expenses in the condensed consolidated balance sheets.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Revenue Recognition</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred and services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. The Company has two primary types of revenues: (i) royalties based on the sale of products by its licensees or other contractual partners, and (ii) design and service fees based on services provided. Revenues from royalties are recognized when earned, which include guaranteed minimum royalties, if any, and additional revenues based on a percentage of defined sales by our licensees or other contractual partners for each period. Royalties exceeding the guaranteed minimum amounts are recognized as revenue during the period that corresponds to the licensees&#8217; or partners&#8217; sales.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Design and service fees are recorded and recognized in accordance with the terms and conditions of each service contract, including the Company meeting its obligations and providing the relevant services under each contract.&#160; Generally, we record on a straight line basis, each base fee as stated in each service agreement for the covered period and, if applicable, we&#160;recognize additional payments received that relate to a future period as deferred revenue, until service is provided or revenue is otherwise earned.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Stock-Based Compensation</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company accounts for stock-based compensation in accordance with ASC Topic 718 - Stock Compensation, by recognizing the fair value of stock-based compensation in the unaudited condensed consolidated statements of operations. Stock-based compensation can include stock options and restricted stock grants.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Stock Options - The fair value of the Company&#8217;s stock option awards are estimated using the Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award.</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Restricted Stock - Compensation cost for restricted stock is measured using the fair value of the Company&#8217;s common stock at the date the common stock is granted. The compensation cost is recognized over the period between the grant date and the date any restrictions lapse. For stock-based awards that vest based on performance conditions (e.g. achievement of certain milestones), expense is recognized when it is probable that the condition will be met.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of stock compensation is amortized over the service period of the awards.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Earnings per Share</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options, warrants and restricted stock outstanding were exercised into common stock.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Segment Reporting</u></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company operates in one segment.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Recently Issued Accounting Standards</u></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company&#8217;s condensed consolidated financial statements.</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">Trademarks and other intangibles, net consist of the following:</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 85%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">March 31, 2013</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">December 31, 2012</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 62%;">Trademarks</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 16%;">44,500,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 16%;">44,500,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">Licensing agreements</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">2,000,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">2,000,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">Accumulated amortization, licensing agreements</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">(796,000</td> <td style="text-align: left; padding-bottom: 1pt;">)</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">(665,000</td> <td style="text-align: left; padding-bottom: 1pt;">)</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 2.5pt;">Net carrying amount</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">45,704,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">45,835,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company&#8217;s net carrying amount of debt is&#160;comprised of the following:</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 90%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">March 31,<br />2013</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">December 31,<br />2012</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; width: 66%;">Term Loan</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 14%;">12,301,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 14%;">12,579,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">Seller Note</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">6,449,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">6,306,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">Contingent obligation &#8211; Seller</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">11,466,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">11,466,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">Other long term liabilities</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">51,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">45,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-left: 0.25in;">Total</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">30,267,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">30,396,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">Current portion</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">1,519,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">1,350,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 2.5pt;">Total long term liabilities</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">28,748,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">29,046,000</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">Annual remaining principal obligations are as follows:</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 70%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Year&#160;Ending&#160;December&#160;31,</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 77%;">2013 (Period from April 1, 2013 to December 31, 2013)</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 20%;">1,013,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">2014</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">2,025,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">2015</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">3,375,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; padding-bottom: 1pt;">2016</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">6,750,000</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Total</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">13,163,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><i>Optional Prepayment</i>.&#160;&#160;IM Brands may prepay the Loan in whole or in part in increments of $500,000, provided that IM Brands pay the following premiums in connection with the prepayment:</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 65%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="border-bottom: black 1pt solid; text-align: justify;" nowrap="nowrap">Period</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Applicable&#160;Premium</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 83%;">Prior to September 29, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 14%;">2</td> <td style="text-align: left; width: 1%;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Prior to September 29, 2014</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">1</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>On or After September 29, 2014</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">0</td> <td style="text-align: left;">%</td> </tr> </table> <div><font size="2" style="font-family:times new roman,times">The royalty targets and percentage of the potential Earn-Out Value are as follows:</font></div> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 95%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="padding-bottom: 1pt; font-weight: bold;">ROYALTY&#160;TARGET&#160;PERIODS</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> <td style="text-align: center; padding-bottom: 1pt; font-weight: bold;" colspan="2">ROYALTY <br />TARGET</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> <td style="text-align: center; padding-bottom: 1pt; font-weight: bold;" colspan="2">EARN-OUT <br />VALUE</td> <td style="padding-bottom: 1pt; font-weight: bold;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Second Royalty Target Period (October 1, 2012 to September 30, 2013)</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">20,000,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">7,500,000</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Third Royalty Target Period (October 1, 2013 to September 30, 2014)</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">22,000,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">7,500,000</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Fourth Royalty Target Period (October 1, 2014 to September 30, 2015)</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">24,000,000</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">$</td> <td style="text-align: right;">7,500,000</td> <td style="text-align: left;">&#160;</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table align="center" style="width: 80%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap">APPLICABLE <br />PERCENTAGE</td> <td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap">&#160;</td> <td style="text-align: center; padding-bottom: 1pt; font-weight: bold;" colspan="2" nowrap="nowrap">%&#160;OF&#160;EARN-OUT <br />VALUE&#160;EARNED</td> <td style="padding-bottom: 1pt; font-weight: bold;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left; width: 79%;">Less than 76%</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 18%;">0</td> <td style="text-align: left; width: 1%;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">76% up to 80%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">40</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">80% up to 90%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">70</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">90% up to 95%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">80</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">95% up to 100%</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">90</td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">100% or greater</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">100</td> <td style="text-align: left;">%</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The fair value for all options and warrants was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">Expected Volatility (i)</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;"><font style="font: 10pt times new roman, times, serif;">35-42</font></td> <td style="text-align: left;">%</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left; width: 85%;">Expected Dividend Yield</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">0</td> <td style="text-align: left; width: 1%;">%</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: left;">Expected Life (Term) (ii)</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;"><font style="font: 10pt times new roman, times, serif;">3 &#8211; 5.75 years</font></td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: left;">Risk-Free Interest Rate</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;"><font style="font: 10pt times new roman, times, serif;">0.42% - 0.98</font></td> <td style="text-align: left;">%</td> </tr> </table> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The options that&#160;the Company&#160;granted under&#160;its plans expire at various times, either five, seven or ten years from the date of grant, depending on the particular grant.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 0.25in;"></td> <td style="width: 0.5in;">(i)</td> <td>Due to the Company&#8217;s limited trading activity, the Company used the average volatility of similar companies in its industry.</td> </tr> </table> <table style="margin-top: 0pt; width: 100%; font: 10pt times new roman, times, serif; margin-bottom: 0pt;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 0.25in;"></td> <td style="width: 0.5in;">(ii)</td> <td>Due to the Company&#8217;s limited history, the expected life of options was calculated using the &#8216;simplified method&#8217; in accordance with Staff accounting bulletin (&#8220;SAB&#8221;) Topic 14.02 in accordance with SAB no. 110.</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>Options</i></b></p> <p style="text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <table style="width: 94%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td colspan="2" nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Weighted-Average</td> <td nowrap="nowrap">&#160;</td> </tr> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Options</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Exercise&#160;Price</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Outstanding at January 1, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">345,000</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">4.54</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Granted</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Canceled</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Exercised</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 1pt;">Expired/Forfeited</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Outstanding at March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;"></td> <td style="border-bottom: black 2.5pt double; text-align: right;">345,000</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">4.54</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Exercisable at&#160;March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">174,858</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">5.00</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">A summary of the Company&#8217;s warrants for the Current Quarter is as follows:</p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>&#160;</b></p> <table style="width: 94%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td colspan="2" nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Weighted-Average</td> <td nowrap="nowrap">&#160;</td> </tr> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Warrants</td> <td nowrap="nowrap">&#160;</td> <td nowrap="nowrap">&#160;</td> <td style="text-align: center;" colspan="2" nowrap="nowrap">Exercise&#160;Price</td> <td nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Outstanding at January 1, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">1,132,043</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">2.47</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Granted</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Canceled</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Exercised</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 1pt;">Expired/Forfeited</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Outstanding at March 31, 2013 and expected to vest.</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;"></td> <td style="border-bottom: black 2.5pt double; text-align: right;">1,132,043</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">2.47</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Exercisable at&#160;March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">1,082,043</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">2.35</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <div><font style="font-family: times new roman,times;" size="2"><font style="font-family: times new roman,times;" size="2"></font></font> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">A summary of the Company&#8217;s restricted stock for the Current Quarter is as follows:</p> <b>&#160;</b></div> <table align="center" style="width: 88%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Restricted<br />Shares</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2" nowrap="nowrap">Weighted-Average<br />Grant Date Fair <br />value</td> <td style="padding-bottom: 1pt;" nowrap="nowrap">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="width: 70%;">Outstanding at January 1, 2013</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 12%;">964,607</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">$</td> <td style="text-align: right; width: 12%;">3.00</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Granted</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td>Canceled</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td>Vested</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">-</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="padding-bottom: 1pt;">Expired/Forfeited</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="padding-bottom: 2.5pt;">Outstanding at March 31, 2013</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">964,607</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">$</td> <td style="border-bottom: black 2.5pt double; text-align: right;">3.00</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">A reconciliation of shares used in calculating basic and diluted earnings per share follows:</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table style="width: 70%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="text-align: justify;">&#160;</td> <td>&#160;</td> <td style="text-align: center;" colspan="6">Three Months ended March 31,</td> <td>&#160;</td> </tr> <tr style="vertical-align: bottom;"> <td style="text-align: justify;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2">2013</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2">2012</td> <td style="padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: justify; width: 58%;">Basic</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 18%;">7,339,979</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 18%;">5,810,180</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: justify;">Effect of exercise of warrants</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">582,075</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">743,597</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: justify; padding-bottom: 1pt;">Effect of exercise of options</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">475</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: justify; padding-bottom: 2.5pt;">Diluted</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">7,922,529</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">6,553,777</td> </tr> </table> 1900000 375000 1992000 500000 0.65 0.13 0.61 0.15 1901000 699000 1901000 1090000 25000 26000 0.55 0.20 0.57 0.33 0.50 44500000 44500000 2000000 2000000 665000 796000 45835000 45704000 132000 131000 12371000 22000000 24000000 20000000 7500000 7500000 7500000 0.40 0.70 0.80 0.90 1.00 0.00 2766000 2500000 stock based upon the greater of (x) $4.50 per share, and (y) the average stock price for the last twenty days prior to the time of such issuance (the "QVC Earn-Out'). The current term of the QVC Agreement runs through September 30, 2015. 11466000 11466000 12579000 12301000 11466000 11466000 30396000 30267000 13163000 29046000 28748000 1013000 2025000 3375000 6750000 0.02 0.01 0.00 October 1, 2013 to September 30, 2014 October 1, 2014 to September 30, 2015 October 1, 2012 to September 30, 2013 7377000 The principal amount of the Loan is payable quarterly as follows: 2.5% on January 5, 2013 through October 5, 2013; 3.75% on January 5, 2014 through October 5, 2014; 6.25% on January 5, 2015 through October 5, 2015; 12.5% on January 5, 2016 through the maturity date, which is the date that is 5 years after the closing date. 0.085 500000 3000000 0.0025 1740000 0.0900 0.0925 5637000 123000 (i) the fair market value of the Common Stock on the Seller Maturity Date and (ii) $4.50 subject to certain adjustments; provided, however, that if the fair market value of the Common Stock is less than $4.50 as adjusted, the Seller will have the option to extend the maturity of the Seller Note to the Subsequent Seller Maturity Date. If the maturity date of the Seller Note is so extended, the Seller will have the option to convert the Seller Note into Common Shares based on the greater of (i) the fair market value of the Common Stock on the Subsequent Seller Maturity Date and (ii) $4.50, subject to certain adjustments. If the maturity date of the Seller Note is extended, we will also have the option to repay the outstanding principal amount of the Seller Note on the Subsequent Seller Maturity Date in cash or by issuing the number of shares of Common Stock obtained by dividing the principal amount of the Note outstanding on the Subsequent Seller Maturity Date by the fair market value of the Common Stock on the Seller Maturity Date. In addition, at any time the Seller Note is outstanding, we have the right to convert the Note, in whole or in part, into the number of shares of Common Stock obtained by dividing the principal amount to be converted by the fair market value of the Common Stock at the time of the conversion, so long as the fair market value of our Common Stock is at least $4.50. 2015-09-30 0.35 0.42 0.00 P3Y P5Y9M 0.0042 0.0098 345000 345000 0 0 0 0 174858 4.54 4.54 0 0 0 0 5.00 1132043 1132043 0 0 0 0 1082043 2.47 2.47 0 0 0 0 2.35 964607 964607 0 0 0 0 3.00 3.00 0 0 0 0 18870 8540 209623 10000 7000 11000 35000 11000 20000 5000000 1100000 50000 242775 138335 26750 4808459 1025000 50000 242775 138335 37500 37500 53995 24916 509488 3.00 0.50 0.50 105500 3330840 5.5 P5Y 1000 1000 16000 75000 743597 0 582075 475 -0.50 -0.11 0.40 0.05 0.15 0.15 157000 163000 61000 0 3000 8000 3000 3000 11000 37500 27000 1500000 575000 604000 0 338000 1226000 1565000 699000 590000 <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b>4.&#160; Significant Contracts</b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>QVC Agreement</i></b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>&#160;</i></b></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">In connection with the Company&#8217;s agreement with QVC, Inc. (&#8220;QVC&#8221;), QVC is required to pay fees based primarily on a percentage of its net sales of Isaac Mizrahi branded merchandise. QVC royalty revenue represents a significant portion of the Company&#8217;s total revenues. Royalties from QVC totaled $1,992,000 and $1,900,000 for the Current Quarter and the Prior Year Quarter, respectively, representing 61% and 65% of the Company&#8217;s total revenues, respectively. As of March 31, 2013 and December 31, 2012, the Company had a receivable from QVC for each period in the amount of $1,901,000, representing 57% and 55% of the Company&#8217;s receivables, respectively.</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><b><i>LCNY Agreement</i></b></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">In connection with the Company&#8217;s agreement with Fifth &amp; Pacific Companies, Inc. (formerly Liz Claiborne, Inc.) (&#8220;FNP&#8221;) (the &#8220;LCNY Agreement&#8221;) FNP is required to pay the Company royalties based primarily on a percentage of royalties FNP receives from QVC under a separate license agreement between FNP and QVC. Revenues from the LCNY Agreement totaled $500,000 and $375,000 for the Current Quarter and the Prior Year Quarter, respectively, representing 15% and 13% of the Company&#8217;s total revenues, respectively. As of March 31, 2013 and December 31, 2012, the Company had a receivable from FNP in the amount of $1,090,000 and $699,000, representing 33% and 20% of the Company&#8217;s receivables, respectively.</p> 45000 51000 64000 135000 22000 <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 5%;"><font style="font: 10pt times new roman, times, serif;"><b>10.</b></font></td> <td style="width: 92%;"><font style="font: 10pt times new roman, times, serif;"><b>Subsequent Events</b></font></td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; text-indent: 45pt; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The Company granted to executive officers, non-executive employees of the Company and directors of the Company an aggregate of 1,370,000 shares of restricted common stock of the Company with a grant date of April 1, 2013.</p> <p style="text-indent: 45pt; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;">The vesting date of 1,075,000 shares is September 30, 2013 and the 295,000 remaining shares of Restricted Stock will vest evenly over 2 years, whereby 50% shall vest on March 31, 2014 and 50% shall vest on March 31, 2015.</p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;">In addition, the Company granted to non-executive employees of the Company 30,000 shares of restricted common stock of the Company with a grant date of May 1, 2013.</p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;"></p> <p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;">The estimated fair value of the aggregate 1,400,000 shares of Restricted Stock is $6,300,000 based on an estimate of $4.50 per share. The Company expects to expense $5,152,000 during 2013. The remaining expense is expected to be recognized over a period of 16 months from January 1, 2014 through April 30, 2015.</p> 0.50 0.50 The Company expects to expense $5,152,000 during 2013. The remaining expense is expected to be recognized over a period of 16 months from January 1, 2014 through April 30, 2015. Due to the Company's limited trading activity, the Company used the average volatility of companies in its industry. Due to the Company's limited history, the expected life of options was calculated using the simplified method' in accordance Staff accounting bulletin ("SAB") Topic 14.02 in accordance with SAB no. 110. 0001083220us-gaap:ManagementMemberxelb:EquityIncentivePlan2011Member2012-12-31 0001083220xelb:NonManagementDirectorsMemberxelb:EquityIncentivePlan2011Member2013-01-012013-03-31 0001083220xelb:January52013ThroughOctober52013Memberus-gaap:LoansPayableMember2013-03-31 0001083220xelb:January52014ThroughOctober52014Memberus-gaap:LoansPayableMember2013-03-31 0001083220xelb:January52015ThroughOctober52015Memberus-gaap:LoansPayableMember2013-03-31 0001083220xelb:January52016ThroughMaturityDateMemberus-gaap:LoansPayableMember2013-03-31 0001083220xelb:IMReadyMadeLLCMember2013-01-012013-03-31 0.50 0001083220xelb:LenderWarrantsMember2011-09-012011-09-29 7500000 2766000 4.50 1214000 <table style="width: 100%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 3%;"></td> <td style="width: 5%;"><font style="font: 10pt times new roman, times, serif;"><b>7.</b></font></td> <td style="width: 92%;"><font style="font: 10pt times new roman, times, serif;"><b>Earnings Per Share</b></font></td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of restricted stock-based awards and&#160;common shares issuable upon exercise of stock options and warrants. The difference between basic and diluted weighted-average common shares, results from the assumption that all dilutive stock options and warrants outstanding were exercised and have been converted into common stock.&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">A reconciliation of shares used in calculating basic and diluted earnings per share follows:</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"></p> <table style="width: 70%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: bottom;"> <td style="text-align: justify;">&#160;</td> <td>&#160;</td> <td style="text-align: center;" colspan="6">Three Months ended March 31,</td> <td>&#160;</td> </tr> <tr style="vertical-align: bottom;"> <td style="text-align: justify;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2">2013</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: center;" colspan="2">2012</td> <td style="padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: justify; width: 58%;">Basic</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 18%;">7,339,979</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="width: 1%;">&#160;</td> <td style="text-align: left; width: 1%;">&#160;</td> <td style="text-align: right; width: 18%;">5,810,180</td> <td style="text-align: left; width: 1%;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: justify;">Effect of exercise of warrants</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">582,075</td> <td style="text-align: left;">&#160;</td> <td>&#160;</td> <td style="text-align: left;">&#160;</td> <td style="text-align: right;">743,597</td> <td style="text-align: left;">&#160;</td> </tr> <tr style="background-color: #ccffcc; vertical-align: bottom;"> <td style="text-align: justify; padding-bottom: 1pt;">Effect of exercise of options</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">475</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> <td style="padding-bottom: 1pt;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: left;">&#160;</td> <td style="border-bottom: black 1pt solid; text-align: right;">-</td> <td style="text-align: left; padding-bottom: 1pt;">&#160;</td> </tr> <tr style="background-color: white; vertical-align: bottom;"> <td style="text-align: justify; padding-bottom: 2.5pt;">Diluted</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">7,922,529</td> <td style="text-align: left; padding-bottom: 2.5pt;">&#160;</td> <td style="padding-bottom: 2.5pt;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: left;">&#160;</td> <td style="border-bottom: black 2.5pt double; text-align: right;">6,553,777</td> </tr> </table> <p style="margin: 0pt 0px; font: 10pt times new roman, times, serif;"><u>Use of Estimates</u></p> <p style="text-align: justify; text-indent: 0.5in; margin: 0pt 0px; font: 10pt times new roman, times, serif;">&#160;</p> <p style="text-align: justify; margin: 0pt 0px; font: 10pt times new roman, times, serif;">The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates.</p> 576 728 1400000 6300000 4.50 1370000 30000 1075000 295000 0.0250 0.1250 0.0625 0.0375 862000 00010832202012-01-012012-12-31 921000 0001083220xelb:SellerNoteMember2013-01-012013-03-31 928000 0001083220xelb:SellerNoteMember2012-01-012012-12-31 1071000 13500000