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85000

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2424000

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5809944

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17944000

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5809944

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1000000

5570000

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401000

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0.001

17904000

9831000

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76000

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64954000

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5810444

0.001

1323000

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2718000

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2895000

1537000

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Q1 XELB XCEL BRANDS, INC. false Smaller Reporting Company 2012 10-Q 2012-03-31 0001083220 --12-31

<div style="FONT: 10pt Times New Roman, Times, Serif"> 5.         Stockholders’ Equity   2011 Equity Incentive Plan   The Company’s 2011 Equity Incentive Plan (the “Plan”) is designed and utilized to enable the Company to offer its employees, officers, directors, consultants and others whose past, present and/or potential contributions to the Company have been, are or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 2,500,000 shares of common stock are eligible for issuance under the Plan. The Plan provides for the grant of any or all of the following types of awards: stock options, restricted stock, deferred stock, stock appreciation rights and other stock-based awards. The Plan is administered by the Board, or, at the Board's discretion, a committee of the Board. On October 17, 2011, the Company issued to the board 250,000 options.   33.33% vest immediately, 33.34% vest on the first anniversary of the grant and the 33.34% vest on the second anniversary of the grant.  On October 21, 2011 the Company issued to employees (non-management) 17,125 stock options and 17,125 restricted stock grants. The employee stock options and restricted stock grants vest 50% on the first anniversary of the grant and 50% vest on the second anniversary of the grant.     Management Warrants   As of the Acquisition Date, the Company issued to management warrants to purchase 463,750 shares of common stock. The warrants are exercisable in whole or in part, at an exercise price of $5.00 per share (“Exercise Price”).  The warrants consist of (1) immediately exercisable warrants to purchase 363,750 shares of common stock, beginning on the date of issuance and ending of the tenth anniversary of the Closing Date and (2) 100,000 shares issuable upon exercise of warrants subject to 2-year, even vesting from the Acquisition Date and ending of the tenth anniversary of the Acquisition Date.  Upon the expiration of the Warrant exercise period, the Warrants will expire and become void and worthless.   Licensee Warrants   As part of the terms and conditions of a certain license agreement effective October 1, 2011, we issued Warrants to purchase 75,000 shares of common stock to a licensee.  The Warrants are exercisable in whole or in part, at an exercise price of $5.50 per share (“Exercise Price”).  The Warrants may be exercised at any time upon the election of the holder, beginning on January 23, 2012, the date of issuance, and ending of the fifth anniversary of the date of issuance.   Upon the expiration of the Warrant exercise period, the Warrants will expire and become void and worthless.   Stock Options   The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate.   The fair value for these options and warrants for all years was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td style="WIDTH: 77%">Expected Volatility</td> <td style="TEXT-ALIGN: right; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 20%">35-42</td> <td style="WIDTH: 1%">%</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td>Expected Dividend Yield</td> <td style="TEXT-ALIGN: right"> </td> <td> </td> <td style="TEXT-ALIGN: right">0</td> <td>%</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td>Expected Life (Term)</td> <td style="TEXT-ALIGN: right"> </td> <td style="TEXT-ALIGN: right" colspan="2" nowrap="nowrap">3 – 5.75 years</td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td>Risk-Free Interest Rate</td> <td style="TEXT-ALIGN: right"> </td> <td> </td> <td style="TEXT-ALIGN: right">0.42% - 0.98</td> <td>%</td> </tr> </table>   The options that the Company granted under its plans expire at various times, either five, seven or ten years from the date of grant, depending on the particular grant.   Options   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="FONT-WEIGHT: bold" nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td colspan="2" nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Weighted-Average</td> <td nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Options</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Exercise Price</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td colspan="2"> </td> <td> </td> <td> </td> <td colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 70%">Outstanding at December 31, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 12%">267,701</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">6.56</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Granted</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Canceled</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Exercised</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Expired/Forfeited</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> (500</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">)</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 5.00</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt">Outstanding at March 31, 2012</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 267,201</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 6.56</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt">Exercisable at March 31, 2012</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 83,076</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 10.02</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   Compensation expense related to stock option grants for the Current Quarter was $10,000.  There was no compensation expense prior to the Successor period. An additional amount of $45,000 is expected to be expensed evenly over a period of 19-months.   Warrants   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td colspan="2" nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Weighted-Average</td> <td nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Warrants</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Exercise Price</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td colspan="2"> </td> <td> </td> <td> </td> <td colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 70%">Outstanding at December 31, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 12%">1,219,543</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">1.95</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Granted</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">75,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">5.50</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Canceled</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Exercised</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Expired/Forfeited</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> -</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> -</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt">Outstanding at March 31, 2012</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 1,294,543</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 2.16</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt">Exercisable at March 31, 2012</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 1,194,543</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 1.92</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   The Company values warrants issued to non-employees at the commitment date at the fair market value of the instruments issued, a measure which is more readily available than the fair market value of services rendered, using the Black-Scholes model. The fair market value of the instruments issued is expensed over the vesting period with the exception of warrants issued to the Company’s licensee, whereby these warrants reduce license revenue recognized by the Company related to such licensee over the initial 5-year term of the licensee agreement. The stock based compensation recorded for the Current Quarter is $11,000. An additional amount of $73,000 is expected to be expensed evenly over a period of 19 months. In addition, licensing revenues were reduced by $1,000 relating to the license warrants for the Current Quarter. An additional amount of $21,000 is expected to off-set license revenues evenly over a period of 54-months. There was no compensation expense or reduction of licensed revenues prior to the Successor period.   Restricted Stock   Compensation cost for restricted stock is measured as the excess, if any, of the market price of the Company’s stock at the date the common stock is issued over the amount the employee must pay to acquire the stock (which is generally zero). The compensation cost, net of projected forfeitures, is recognized over the period between the issue date and the date any restrictions lapse, with compensation cost for grants with a graded vesting schedule recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The restrictions do not affect voting and dividend rights.   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt"> </td> <td style="FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: center; FONT-SIZE: 10pt" colspan="2"> Restricted</td> <td style="FONT-SIZE: 10pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-SIZE: 10pt" colspan="2">Shares</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt"> </td> <td style="FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 84%; FONT-SIZE: 10pt">Outstanding at December 31, 2011</td> <td style="WIDTH: 2%; FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-SIZE: 10pt">  </td> <td style="TEXT-ALIGN: right; WIDTH: 12%; FONT-SIZE: 10pt"> 17,125</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-SIZE: 10pt">  </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt">Granted</td> <td style="FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">-</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt">Canceled</td> <td style="FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">-</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt">Vested</td> <td style="FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">-</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> Expired/Forfeited</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; FONT-SIZE: 10pt">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; FONT-SIZE: 10pt"> (500</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> )</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt; FONT-SIZE: 10pt">Outstanding at March 31, 2012</td> <td style="PADDING-BOTTOM: 2.5pt; FONT-SIZE: 10pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; FONT-SIZE: 10pt">  </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; FONT-SIZE: 10pt"> 16,625</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; FONT-SIZE: 10pt">  </td> </tr> </table>   Compensation expense related to restricted stock grants for the Current Quarter is $7,000. There was no compensation expense prior to the Successor period. An additional amount of $44,000 is expected to be expensed evenly over a period of 19-months.   Shares Available Under the Company’s 2011 Equity Incentive Plan   At March 31, 2012, there were 2,216,750 common shares available for issuance under the Company’s 2011 Equity Incentive Plan.   Shares Reserved for Issuance   At March 31, 2012, there were 3,778,494 common shares reserved for issuance pursuant to warrants, stock options and availability for issuance under the Company’s 2011 Equity Incentive Plan. See Note 7 Subsequent Events.   Dividends   The Company has not paid any dividends to date. </div>

<div style="FONT: 10pt Times New Roman, Times, Serif"> 4.  Debt   The Company’s net carrying amount of debt is comprised of the following:   <table style="WIDTH: 90%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">March 31, 2012</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 70%">Term Note</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">12,402,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">12,344,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Seller Note</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">5,896,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">5,765,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Installment debt obligation</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,148,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,158,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Contingent obligation – due to seller</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">17,765,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">17,765,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Other liabilities</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 27,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 26,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-LEFT: 0.25in">Total</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">37,238,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">37,058,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Current portion</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 427,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 44,000</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">Total long term liabilities</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 36,811,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 37,014,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   Term Loan   On September 29, 2011, IM Brands, a wholly-owned subsidiary of the Company, entered into a five year senior secured facility (the “Loan”) with Midmarket Capital Partners, LLC (“MidMarket”) and Noteholders in the aggregate principal amount of $13,500,000. The Loan is secured by all of the assets of IM Brands, LLC and the Company’s membership interests in IM Brands, LLC.     The principal amount of the Loan is payable quarterly as follows:  0% until January 5, 2013, 2.5% on January 5, 2013 through October 5, 2013; 3.75% on January 5, 2014 through October 5, 2014; 6.25% on January 5, 2015 through October 5, 2015; 12.5% on January 5, 2016 through the maturity date, which is the date that is 5 years after the closing date.   Annual principal obligations are as follows:   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Year Ending December 31,</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 77%">2013</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 20%">1,350,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2014</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">2,025,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2015</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">3,375,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">2016</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 6,750,000</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">Total</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 13,500,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>    The interest rate on the loan is a fixed rate of 8.5%, payable in cash.   Optional Prepayment.  IM Brands may prepay the Loan in whole or in part in increments of $500,000, provided that IM Brands pay the following premiums in connection with the prepayment:   <table style="WIDTH: 60%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <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"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Applicable Premium</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 85%">First year following the Closing</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 12%">3</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">%</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Second year following the Closing</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">2</td> <td style="TEXT-ALIGN: left">%</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Third year following the Closing</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1</td> <td style="TEXT-ALIGN: left">%</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Fourth year following the Closing</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">0</td> <td style="TEXT-ALIGN: left">%</td> </tr> </table>   Mandatory Prepayments.   IM Brands is required to prepay the Loan under the following conditions:  (1) if certain indebtedness is incurred by the Company; (2) if IM Brands undertakes certain asset sales or sales of capital stock, with limited exceptions; or (3) if there is a payment of the benefits of a life insurance policy for Isaac Mizrahi held by the Company.   Excess Cash Flow Sweep.   In addition to the Mandatory Prepayments described above, if for any fiscal year ending on or subsequent to December 31, 2012, there is excess cash flow (as defined in the Loan agreements) for such year, then on the payment date following the end of such year, IM Brands is required to make a principal payment on the Loan equal to the lesser of (i) 50% of the excess cash flow or (ii) the positive result of the unencumbered cash and cash equivalents of the Company minus the greater of (x) the Excess Liquidity required to be maintained by IM Brands and (y) $3,000,000. For the period ended March 31, 2012, there was no Excess Cash Flow Sweep payment due.   Lender Warrants. At the closing of the Loan, the Company issued to the Noteholders seven year warrants (the “Lender Warrants”) to purchase 364,428 shares of the Common Stock, representing 5% of the Common Stock outstanding as of the Closing Date on a fully diluted basis.  The warrants have an exercise price of $0.01 and contain a cashless exercise provision.  The Company granted to the holders of the Lender Warrants piggy-back registration rights with respect to the shares of Common Stock issuable upon exercise of the Lender Warrants.  The carrying value of the Term Loan has been reduced by the market value of the warrants, equal to $3.33 per share.  The Company used the black scholes method to determine valuation.  The amount of the original loan discount is $1,214,000, resulting in an initial net loan balance of $12,286,000.  The Term Loan balance as of March 31, 2012 is $12,402,000.   Financial Covenants.  So long as the Loan remains unpaid or unsatisfied, IM Brands shall not, and shall not permit any of its subsidiaries to, directly or indirectly:   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">1.</td> <td style="TEXT-ALIGN: justify">Minimum Liquidity ..  Permit Excess Liquidity to be less than the amount set forth below during each applicable period set forth below:</td> </tr> </table>   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid" nowrap="nowrap"> Fiscal Quarter</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: justify" colspan="2" nowrap="nowrap">Excess Liquidity</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 82%">September 29, 2011 through December 31, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 15%">1,500,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>January 1, 2012 through March 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">1,750,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>April 1, 2012 through June 30, 2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">2,250,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>July 1, 2012 through September 30, 2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">2,750,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>October 1, 2012 through June 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">3,000,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>July 1, 2013 through September 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">3,250,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>October 1, 2013 through March 31, 2014</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">3,500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>April 1, 2014 through June 30, 2014</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">3,750,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>July 1, 2014 and thereafter</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">4,000,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">2.</td> <td style="TEXT-ALIGN: justify">Capital Expenditures ..  Permit the aggregate amount of Capital Expenditures to exceed $400,000 (whether or not financed) per year.</td> </tr> </table>   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">3.</td> <td style="TEXT-ALIGN: justify">Consolidated Fixed Charge Coverage Ratio .  Permit the Consolidated Fixed Charge Coverage Ratio as of the end of each of the fiscal quarters ending on the dates (or for the periods) set forth for the period of four fiscal quarters ending on such dates (or for the periods) below to be less than the ratio set forth below opposite such period:</td> </tr> </table>   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; WIDTH: 82%" nowrap="nowrap"> Trailing Four Fiscal Quarters Ending</td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%" nowrap="nowrap">  </td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; WIDTH: 15%"> Minimum Fixed Charge Coverage Ratio </td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">September 30, 2012 and December 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">1.90 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">March 31, 2013 and June 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">1.60 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014 and September 30, 2014</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">1.50 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">December 31, 2014 and March 31, 2015</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">1.30 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">June 30, 2015 and thereafter</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">1.15 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">4.</td> <td style="TEXT-ALIGN: justify">Consolidated Total Leverage Ratio .  Permit the Consolidated Total Leverage Ratio as of the end of each of the fiscal quarters ending on the dates (or for the periods) set forth for the period of four fiscal quarters ending on such dates (or for  the periods) below to be greater than the ratio set forth below opposite such period:</td> </tr> </table>   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; WIDTH: 82%"> Trailing Four Fiscal Quarters Ending</td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 15%"> Maximum Consolidated Leverage Ratio </td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%">  </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">September 30, 2012 and December 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">3.50 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">March 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">3.30 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">June 30, 2013 and September 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">3.00 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">December 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">2.75 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">March 31, 2014</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">2.25 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">June 30, 2014 and thereafter</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: left">2.00 to 1.00</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">5.</td> <td style="TEXT-ALIGN: justify">Minimum Consolidated EBITDA ..  Permit Consolidated EBITDA as of the end of each of the fiscal quarters ending on the dates set forth for the period of four fiscal quarters ending on such dates below to be less than the amount set forth opposite such quarter in the table below; provided that for the fiscal quarters ended on December 31, 2011, March 31, 2012 and June 30, 2012, such periods shall be one fiscal quarter, two fiscal quarters and three fiscal quarters, respectively:</td> </tr> </table>   <table style="WIDTH: 60%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: justify" nowrap="nowrap">Fiscal Quarter</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: justify" colspan="2" nowrap="nowrap">Consolidated EBITDA</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; WIDTH: 82%">December 31, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 15%">250,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">March 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">1,250,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">June 30, 2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">2,500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">September 30, 2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">4,000,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">December 31, 2012 and March 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">4,250,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">June 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">4,500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">September 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">4,750,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">December 31, 2013 and thereafter</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">5,000,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">6.</td> <td style="TEXT-ALIGN: justify">Dividend Restrictions ..  Permit any cash dividends or any other equity distributions.</td> </tr> </table>   <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 19pt"></td> <td style="WIDTH: 19pt">7.</td> <td style="TEXT-ALIGN: justify">Restricted Cash Payments ..  Permit any cash payments for the Seller Note or any contingent earn-out obligations.</td> </tr> </table>   As of March 31, 2012, the Company and IM Brands, LLC were in full compliance with all of the covenants under the Loan.   Seller Note   Pursuant to the Purchase Agreement, at the closing, the Company delivered to IM Ready a promissory note (the “Seller Note”) in the principal amount of $7,377,000.  The stated interest rate of the Seller Note is 0.25%.  Management has determined that this rate is below the Company’s expected borrowing rate, which is 9.25%.  Therefore, the Company has discounted the Seller Note by $1,740,000 using a 9.0%, imputed annual interest rate, resulting in a current value of $5,637,000.  In addition, the Company pre-paid $123,000 of interest on the Seller Note on the Closing Date.  The Seller Note balance at March 31, 2012 is $5,896,000.   The Seller Note initially matures three years from the Closing Date (the “Maturity Date”) subject to extension as described below (the date to which the maturity date of the Seller Note is extended is referred to as the “Subsequent Maturity Date”).  We have the right to pay the Seller Note at the Maturity Date in cash or, subject to the following conditions, in shares of Common Stock.  If we elect to repay the outstanding principal amount of the Seller Note on the Maturity Date by issuing shares of Common Stock, the number of shares issuable will be obtained by dividing the principal amount of the Seller Note then outstanding by the greater of (i) the fair market value of the Common Stock on the Maturity Date and (ii) $4.50 subject to certain adjustments; provided, however, that if the fair market value of the Common Stock is less than $4.50 as adjusted, IM Ready will have the option to extend the maturity of the Seller Note to the Subsequent Maturity Date. If the maturity date of the Seller Note is so extended, IM Ready will have the option to convert the Seller Note into Common Shares based on the greater of (i) the fair market value of the Common Stock on the Subsequent Maturity Date and (ii) $4.50, subject to certain adjustments. If the maturity date of the Seller Note is extended, we will also have the option to repay the outstanding principal amount of the Seller Note on the Subsequent Maturity Date in cash or by issuing the number of shares of Common Stock obtained by dividing the principal amount of the Note outstanding on the Subsequent Maturity Date by the fair market value of the Common Stock on the Maturity Date.  In addition, at any time the Seller Note is outstanding, we have the right to convert the Note, in whole or in part, into the number of shares of Common Stock obtained by dividing the principal amount to be converted by the fair market value of the Common Stock at the time of the conversion, so long as the fair market value of our Common Stock is at least $4.50.    Long Term Installment Obligations   Prior to the Acquisition Date, Earthbound had certain rights and provided certain services to IM Ready related to the Isaac Mizrahi Business. Effective as of the Acquisition Date, IM Ready and Earthbound entered into the Services Agreement pursuant to which Earthbound provided transitional services to IM Ready prior to the closing of the Merger and for which Earthbound received from IM Ready $600,000 in cash on the Closing Date and IM Ready agreed to pay to Earthbound an additional payment of $1,500,000 (the “Future Payment”), with such amount payable over the next five years. The Company assumed the obligations related to the Future Payment from IM Ready upon its acquisition of the Isaac Mizrahi Business. The five-year obligation is non-interest bearing and the Company has discounted the amount of the installment obligation by a 9.25% imputed annual interest rate, resulting in an initial value of $1,132,000. The balance of the Installment Obligation at March 31, 2012 is $1,148,000.   Payments are due quarterly beginning March 2012.  Annual remaining payments are as follows:   <table style="WIDTH: 60%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Year Ending December 31,</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 72%">2012</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 25%">113,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">325,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2014</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">325,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2015</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">350,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">2016</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 350,000</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">Total</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 1,463,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   Capitalized Lease Obligations   The Company assumed the obligations from the Seller under an equipment lease through February 2013.  The net discounted payments of the lease obligations are in excess of 90% of the fair market value (FMV) of the equipment.  The Company has capitalized the discounted lease payments by its imputed interest rate of 9.25%. The capital lease obligation balance at March 31, 2012 is $16,000. </div>

<div style="FONT: 10pt Times New Roman, Times, Serif"> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in">2.</td> <td>SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</td> </tr> </table>   Principles of Consolidation   The consolidated financial statements include the accounts of Xcel Brands, Inc. and its wholly owned subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation.   Presentation of Predecessor Financial Statements   The financial statements covered by the Predecessor have been prepared for the purpose of complying with the rules and regulations of the U.S. Securities and Exchange Commission. The Isaac Mizrahi Business was not a separate legal entity, thus the financial statements are not necessarily indicative of the results of operations that would have occurred if the Isaac Mizrahi Business had been operated as a separate legal entity.   All of the allocations and estimates in the accompanying Predecessor financial statements are based on assumptions that IM Ready and Xcel management (collectively “management”) believe are reasonable, and reasonably approximate the historical costs that the Isaac Mizrahi Business would have incurred as a separate entity. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the Isaac Mizrahi Business had been operated as a separate entity. The allocation of expenses were made to comply with the guidance provided by Staff Accounting Bulletin Topic 1B1, “Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of another Entity”   Use of Estimates   The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates.   Fair Value of Financial Instruments   The carrying amounts of the Company’s assets and liabilities approximate their fair value presented in the accompanying Consolidated Balance Sheets, due to their short maturities.    Trademarks, Goodwill and Other Intangible Assets   Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. The Company accounts for goodwill under the guidance of the Accounting Standards Codification (“ASC”) Topic 350 – “Intangibles: Goodwill and Other”. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment, at least annually, in accordance with this guidance. This guidance also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.   In accordance with the guidance of ASC Topic 350, long-lived assets, such as property and equipment and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.   Contingent Obligations   Management will analyze and quantify the expected earn-out payments over the applicable pay-out period.  Management will assess no less frequently than each reporting period the status of contingent obligations and any expected changes in the fair market value of such contingent obligations.  Any change in the expected obligation will result in an expense or income recognized in the period in which it is determined fair market value of the carrying value has changed. There was no change in the contingent obligation for the three months ended March 31, 2012.   Income Taxes   Income tax expense consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.   ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Tax positions shall initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a probability of fifty percent (50%) or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.   Significant Contracts   QVC Agreement   In connection with the Company’s agreement with QVC, Inc. (“QVC”) QVC is required to pay royalties based primarily on a percentage of QVC's net sales of Isaac Mizrahi branded merchandise. QVC royalty revenue represents a significant portion of the Company’s total revenues. Royalties from QVC totaled $1,900,000 and $1,650,000 for the Current Quarter and the Prior year Quarter, respectively, representing 65% and 63% of the Company’s total revenues, respectively. As of March 31, 2012, the Company had a receivable from QVC in the amount of $1,900,000, representing 78% of the Company’s receivables. As of March 31, 2011, the Predecessor had a receivable from QVC in the amount of $1,650,000 representing 90% of the Predecessor’s receivables.   LC Agreement   In connection with the Company’s agreement with Liz Claiborne, Inc. (“LC”) (the LC Agreement”) LC is required to pay the Company royalties based primarily on a percentage of royalties LC receives from QVC under a separate license agreement between LC and QVC (the “LC Agreement”). Revenues from the LC Agreement totaled $375,000 and $200,000 for the Current Quarter and the Prior Year Quarter, respectively, representing 13% and 7% of the Company’s total revenues. As of March 31, 2012, the Company had a receivable from LC in the amount of $569,000, representing 22% of the Company’s receivables. As of March 31, 2011, the Predecessor had a receivable from LC in the amount of $183,000 representing 10% of the Predecessor’s receivables.   LC/QVC Design fees   In connection with the Company’s design agreement with QVC for the term of the LCNY Agreement (the “Design Agreement”), QVC is required to provide certain design fees of the Company related to the Liz Claiborne New York brand.  Revenues from the Design Agreement totaled approximately $275,000 and $275,000 for the Current Quarter and the Prior Year Quarter, respectively, representing 9% and 9% of the Company’s total revenues.   Revenue Recognition   The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred and services have been rendered, the sales price is fixed and determinable, and collectability is reasonable 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 service fees based on services provided. Revenues from royalties are recognized when earned, which includes guaranteed minimum royalties, if any, and additional revenues based on a percentage of defined sales by our licensees or other contractual partners for each period. Royalties exceeding the guaranteed minimum amounts are recognized as income during the period that corresponds to the licensee’s or partner’s sales.   Design service fees are recorded and recognized in accordance with the terms and conditions of each design fee contract, including the Company meeting its obligations and providing the relevant services under each contract.  Generally, we record on a straight line basis each base fee as stated in each design fee service agreement for the covered period and, if applicable, we recognize additional payments received that relate to a future period as deferred revenue, until service is provided or revenue is othewise earned.   Stock Based Compensation   The Company accounts for stock-based compensation in accordance with ASC Topic 718 by recognizing the fair value of stock-based compensation in the consolidated statement of operations.  The fair value of the Company’s stock option awards are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of stock-based awards is amortized over the vesting period of the awards.  For stock-based awards that vest based on performance conditions (e.g. achievement of certain milestones), expense is recognized when it is probable that the condition will be met.   Earnings per Share   Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of restricted stock-based awards and common shares issuable upon exercise of stock options and warrants. The difference between basic and diluted weighted-average common shares results from the assumption that all dilutive stock options outstanding were exercised and all convertible notes have been converted into common stock.   As of March 31, 2012, of the total potentially dilutive shares related to restricted stock-based awards, stock options and warrants, 741,251 were anti-dilutive and not included in the computation of diluted shares outstanding. There are no comparative results for the prior year quarter.   A reconciliation of weighted average shares used in calculating basic and diluted earnings per share follows:   <table style="WIDTH: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">For the Three Months Ended March 31, 2012</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 77%">Basic</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 20%">5,810,180</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Effect of warrants and options</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 745,993</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt">Diluted</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 6,556,173</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   Recently Issued Accounting Standards   Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s consolidated financial statements. </div>

<div style="FONT: 10pt Times New Roman, Times, Serif"> 3. Trademarks, Goodwill and Other Intangibles   Trademarks, goodwill and other intangibles, net consist of the following:   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap">  </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6" nowrap="nowrap">March 31, 2012</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6" nowrap="nowrap">December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Estimated</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Gross</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap">  </td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Gross</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap">  </td> <td nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Lives in</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Carrying</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Accumulated</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Carrying</td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Accumulated</td> <td nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Years</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Amount</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Amortization</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Amount</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Amortization</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Indefinite life trademarks</td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Indefinite</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">44,500,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">44,500,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Goodwill</td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Indefinite</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">11,096,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">11,096,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Licensing agreements</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="TEXT-ALIGN: center; PADDING-BOTTOM: 1pt" colspan="2"> 4</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 2,000,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 267,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 2,000,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 135,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 40%"> </td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: center; PADDING-BOTTOM: 2.5pt; WIDTH: 1%">  </td> <td style="TEXT-ALIGN: center; PADDING-BOTTOM: 2.5pt; WIDTH: 9%">  </td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%">  </td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 9%"> 57,596,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%">  </td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 9%"> 267,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%">  </td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 9%"> 57,596,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%">  </td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 9%"> 135,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%">  </td> </tr> </table>   Amortization expense for intangible assets for the Current Quarter was $132,000. The trademarks of Isaac Mizrahi and related goodwill have been determined to have an indefinite useful life and accordingly, consistent with ASC Topic 350, no amortization has been recorded in the Company's unaudited consolidated statement of operations. Instead, each of these intangible assets are tested for impairment, at least annually, on an individual basis as separate single units of accounting, with any related impairment charge recorded to the statement of operations at the time of determining such impairment.  Similarly, consistent with ASC 360, there was no impairment of the indefinite-lived trademarks. </div>

-2000

73000

-44000

233000

2880000

2192000

4000

289000

34000

131000

257000

-99000

145000

28000

0.02

1033000

-56000

11000

-32000

-22000

-175000

162000

-543000

2903000

28000

209000

2000

58000

44000

0.03

209000

2914000

688000

-17000

228000

5810180

11000

286000

922000

6556173

-17000

31000

73000

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