Contract

by XCel Brands, Inc.
May 29th, 2012

85000 -423000 944688 1000 231000 -5329000 -422000 58074000 560000 1787000 5896000 1058000 -1130000 17765000 2424000 65227000 6000 46620000 115000 411000 5809944 1000000 5863000 27000 336000 2946000 0.001 17944000 9809000 1443000 153000 834000 65227000 16820000 5809944 0.001 1290000 427000 25000000 48407000 157000 185000 12065000 57329000 2946000 373000 -2985000 5686000 1768000 4677000 1500000 6346000 6346000 3049000 3236000 1422000 46000 2743000 1302000 1137000 4677000 -7355000 1441000 12032000 -7355000 -1292000 5810444 6000 17904000 58061000 591000 1491000 5765000 1114000 -1292000 17765000 2191000 64954000 6000 175000 46845000 66000 503000 5810444 1000000 5570000 26000 401000 2718000 0.001 17904000 9831000 1399000 76000 878000 64954000 16618000 5810444 0.001 1323000 44000 25000000 48336000 85000 9000 12344000 57461000 2147000 183000 8729000 4381000 2332000 -2270000 4348000 2786000 -220000 213000 4173000 8729000 211000 211000 4348000 175000 185000 1384000 -2147000 32000 2147000 175000 -76000 2000 8997000 -2872000 9796000 4949000 8746000 -17000 4849000 3143000 1042000 523000 4627000 2000 9796000 283000 76000 283000 1500000 4847000 222000 -327000 1523000 -8997000 8997000 222000 1136000 65000 2895000 1537000 1175000 -762000 1358000 925000 -399000 229000 1304000 2895000 70000 70000 2895000 1358000 54000 39000 542000 -1136000 XELB XCEL BRANDS, INC. false Smaller Reporting Company S-1 2012-03-31 0001083220 <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: 19pt"></td> <td style="WIDTH: 28pt">7.</td> <td>Subsequent Events</td> </tr> </table>   On April 17, 2012, the Compensation Committee of Xcel Brands, Inc. (the “Company”), granted to the following executive officers and directors (the “Executive Grantees”) of the Company the number of shares of restricted Common Stock of the Company (the “Restricted Stock”) set forth opposite each person’s name:   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif; MARGIN-LEFT: 45pt" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" nowrap="nowrap">Name</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Number of Shares of Restricted Stock</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 67%">Robert W. D’Loren</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 30%">700,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">James F. Haran</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">150,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Seth Burroughs</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">100,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Marisa Gardini</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">75,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Joseph Falco</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">75,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>   The vesting date of the Restricted Stock granted to Mr. D’Loren, Mr. Haran, Mr. Burroughs and Ms. Gardini is November 15, 2012, provided, however, that each such Executive Grantee may extend the vesting date by six-month increments in his or her sole discretion. The vesting date of the Restricted Stock granted to Mr. Falco is May 15, 2014, provided, however, that Mr. Falco may extend the vesting date by six-month increments in his sole discretion.   Also, on April 17, 2012, the Compensation Committee granted 50,000 shares of Restricted Stock and options to purchase an aggregate of 75,000 shares of Common Stock (the “Options”) to four non-executive employees (the “Non-Executive Grantees”) 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.     In addition, on May 1, 2012 Management granted options to purchase an aggregate of 31,500 shares of Common Stock (the “Employee Options”) to twenty-two non-executive employees (the “Employee Grantees”) 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.   The grants by the Company of Restricted Stock, Options and Employee Options were made pursuant to the Company’s 2011 Equity Incentive Plan (the “Plan”) and as such, no consideration was paid therefor by either, the Executive Grantees, the Non-Executive Grantees or Employee Grantees. Each grant of Restricted Stock, Options and Employee Options was made pursuant to a Restricted Stock Award Agreement or an Option Agreement, respectively, in each case entered into by and between the Company and the respective grantee. A summary of the material terms of the Plan is incorporated here by reference to the Company’s Annual Report on Form 10-K, filed with the Securities & Exchange Commission on March 30, 2012. </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> <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">1.</td> <td style="TEXT-ALIGN: justify">NATURE OF OPERATIONS, BACKGROUND, BASIS OF PRESENTATION AND REVERSE ACQUISITION</td> </tr> </table>   The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of Xcel Brands, Inc., (Xcel, the "Company", “we”, “us”, or “our”), all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 (“Current Quarter”) are not necessarily indicative of the results that may be expected for a full fiscal year.   On September 29, 2011 (the “Acquisition Date”), the Company acquired from IM Ready-Made, LLC certain assets and assumed certain obligations (the “Isaac Mizrahi Isaac Mizrahi Business’) whereby the Isaac Mizrahi Business was deemed to be the Predecessor of the Company for financial statement presentation purposes. Accordingly, the accompanying financial statements designate periods preceding the Acquisition Date as relating to the Predecessor and all references to periods on and after September 29, 2011 shall be referred to as Successor.   For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (“2011”). </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: 19pt"></td> <td style="WIDTH: 28pt">6.</td> <td>Related Party Transactions</td> </tr> </table>   Todd Slater   On August 12, 2011, Old XCel entered into a one year agreement which was amended on October 4, 2011, with Todd Slater, who was appointed as a director of the Company commencing on October 17, 2011, for services related to the Company’s licensing strategy and introduction of potential licensees. During the term of the agreement or during the year following the expiration of the term of the agreement, if the Company enters into a license or distribution agreement with a licensee introduced by Mr. Slater, Mr. Slater will receive a commission equal to fifteen percent (15%) of all net royalties received by the Company during the first term of such agreement, payable within thirty days of receipt of the net royalties.  Mr. Slater earned $8,283 in fees for the Current Quarter.   Licensing Agent Agreement   On August 2, 2011, Old XCel entered into a licensing agent agreement with Adam Dweck (“AD”) who is an Executive Vice President of Earthbound pursuant to which AD is entitled to a five percent (5%) commission on any royalties we receive under any new license agreements that he procures for us during the initial term of such license agreements. We are obligated to grant to AD 5-year warrants to purchase 12,500 shares of common stock at an exercise price of $5.00 per share, subject to the AD generating $0.5 million of accumulated royalties and an additional 5-year warrants to purchase 12,500 shares of common stock at an exercise price of $5.00 per share, subject to the AD generating $1.0 million of accumulated royalties. Additionally, AD shall be entitled to receive 5-year warrants to purchase 25,000 shares of common stock priced at the fair market value at the time of issuance, subject to AD generating $2.0 million of accumulated royalties. AD is the son of Jack Dweck, who is a 10% shareholder of the Company and has been granted observer rights related to the Company’s meetings of its board of directors. AD earned $2,555 in fees for the Current Quarter. Through March 31, 2012, AD has not earned any warrants.   Jones Texas, LLC   Ed Jones, a principal shareholder and chief executive officer of Jones Texas, LLC was appointed to the Company’s board of directors following the Merger, which appointment became effective on October 17, 2011. Jones Texas, LLC procured a license for the Company which the Company agreed to remit 15% of the license revenues for the initial term of the license. Jones Texas, LLC earned $750 in fees for the Current Quarter.   IM Ready-Made, LLC   The Company and IM Ready-Made, LLC had transactions between each other relating to the transitions of the Isaac Mizrahi Business from IM ready to the Company. In addition, IM Ready received payments in the 4th quarter 2011 and 1st quarter 2012 that related to periods after the Predecessor period. As of March 31, 2012 IM Ready owes the Company approximately $157,000 which is recorded in the ‘other current assets’ in the condensed balance sheet. IM Ready has agreed to reimburse the Company in full by October 1, 2012, including paying interest to the Company beginning April 1, 2012 at a rate equal to the Seller Note interest rate of 0.26%. </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 175000 23000 316000 <div style="FONT: 10pt Times New Roman, Times, Serif"> 6.  Stockholders’ Equity   The Merger   On September 29, 2011, NetFabrics entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) pursuant to which a subsidiary of NetFabrics was merged with and into XCel, with XCel surviving as a wholly-owned subsidiary of the Company (the “Merger”). Pursuant to the Merger, the Company exchanged all of its outstanding common stock for shares of NetFabrics and issued an aggregate 944,668 shares of Common Stock for each share of the common stock outstanding at the effective time of the Merger.   Also in connection with the Merger and related transactions, as more fully described herein, the Company issued (i) 2,759,000 shares of Common Stock to IM Ready, and 944,688 shares of Common Stock to Earthbound, both in satisfaction of Old XCel’s obligations under an asset purchase agreement with IM Ready and (ii) 47,132 shares of Common Stock to Mr. Stephen J. Cole-Hatchard or his designees, a then-current director of the Company for his continued service as a director of the Company until new directors were appointed to the board of directors of the Company, which appointments were effective on October 17, 2011 and at which point Mr. Cole-Hatchard resigned from the Company’s board of directors.   On September 28, 2011, NetFabrics filed an amendment to its certificate of incorporation and affected a 1 for 520.5479607 reverse stock split such that holders of its Common Stock prior to the Merger held a total of 186,811 shares of Common Stock and options and warrants to purchase 1,064 shares of Common Stock immediately prior to the Merger.  After giving effect to the Merger, the Offering, the Loan and the transactions related thereto (all as defined and described herein), there were 5,743,319 shares of common stock issued and outstanding as of the Closing Date.  All numbers of shares of Common Stock referenced herein are on a post-split basis.   Additionally, 20,000 of the shares of Common Stock held by Beaufort Ventures, PLC, a principal stockholder of the Company prior to the Merger, are being held in escrow until such time as final determination is made by the Internal Revenue Service of certain Company tax liabilities.  As additional consideration for the Merger, Old XCel paid $125,000 at the Closing to the then-current counsel of NetFabrics in order to extinguish certain remaining liabilities of the Company immediately preceding the Merger.   Private Placement   Simultaneously with the closing of the Merger, and pursuant to a Subscription Agreement (the “Subscription Agreement”) between the Company and certain accredited investors (the “Investors”) named in the Subscription Agreement, we completed an offering (the “Offering”), raising proceeds of $4,305,000, through the sale of 8.61 units (each, a “Unit,” and collectively, the “Units”), each Unit consisting of One Hundred Thousand (100,000) shares of Common Stock and a Warrant to purchase Fifty Thousand (50,000) shares of Common Stock, at an exercise price of $0.01 per share (the “Warrants” and together with the Common Stock the “Securities”) at a price of $500,000 per Unit.  Certain executive officers and their affiliates purchased 4.25 Units in the Offering on the same terms and conditions as other Investors (the “Insider Participation”).   The Warrants may be exercised at any time upon the election of the holder, beginning on the date of issuance and ending on September 29, 2016. If, one (1) year from the date of issuance there is no effective registration statement registering the shares of Common Stock underlying the Warrants, the Warrants will be exercisable on a cashless basis. The exercise price and number of shares of Common Stock to be received upon the exercise of Warrants are subject to adjustment upon the occurrence of certain events, such as stock splits, stock dividends or our recapitalization.  In the event of our liquidation, dissolution or winding up, the holders of Warrants will not be entitled to participate in the distribution of our assets.  Holders of Warrants do not have voting, pre-emptive, subscription or other rights of stockholders in respect of the Warrants, nor shall holders thereof be entitled to receive dividends.     In connection with the Offering, we issued to the placement agent, for placement agent services and as nominal consideration, five-year warrants (the “Agent Warrants”) to purchase 9,800 shares of Common Stock, exercisable at any time at a price equal to $5.50 per share, valued at approximately $3,000.   Registration Requirements   We have agreed to register the shares of the Common Stock and 100% of the Warrant Shares issued in connection with the Offering, on a registration statement to be filed with the Commission (the “Registration Statement”) within sixty (60) days after the final closing of the Offering (the “Filing Date”) and keep the Registration Statement effective until the earlier of (i) September 29, 2012 or (ii) until all Registrable Securities covered by such Registration Statement have been sold, or may be sold without volume or manner-of-sale restrictions pursuant to Rule 144, without the requirement for the Company to be in compliance with the current public information requirement under Rule 144.   The Agent Warrants have registration rights similar to the registration rights afforded to the Investors.   The Company agreed to include up to 1,200,000 of the shares of Common Stock issuable to IM Ready on the Closing Date in the Registration Statement.   The Company has granted to certain of the executive officers pursuant to their individual employment agreements piggy-back registration rights with respect to the shares of Common Stock issuable upon exercise of the executive warrants.  These individuals have, however, agreed not to include such shares in the Registration Statement.   The Company granted to the holders of the Lender Warrants (as defined herein) piggy-back registration rights with respect to the shares of Common Stock issuable upon exercise of the Lender Warrants and the share issuable upon exercise of the Lender Warrants will be included in the Registration Statement.   2011 Equity Incentive Plan   As of the Closing Date, the Company assumed the 2011 Equity Incentive Plan (the “Plan”) of Old XCel as approved by Old XCel’s board of directors and stockholders. The purpose of the Plan is 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 will be 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 2nd 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 2nd anniversary of the grant.    Management Warrants   As of the Closing 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 Closing Date and ending of the tenth anniversary of the Closing Date.  Upon the expiration of the Warrant exercise period, the Warrants will expire and become void and worthless. The stock based compensation recorded for the period September 29, 2011 to December 31, 2011 is $324,000.     Investor Warrants   As part of the Offering, we issued Warrants to purchase 430,500 shares of common stock to investors in the Offering.  The Warrants are exercisable in whole or in part, at an exercise price of $0.01 per share (“Exercise Price”).  The Warrants may be exercised at any time upon the election of the holder, beginning on the date of issuance and ending of the fifth anniversary of the Closing Date.  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. Because 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%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 86%">Expected Volatility</td> <td style="WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 11%">35-42</td> <td style="WIDTH: 1%">%</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Expected Dividend Yield</td> <td> </td> <td> </td> <td style="TEXT-ALIGN: right">0</td> <td>%</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Expected Life (Term)</td> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" nowrap="nowrap">3 – 5.75 years</td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Risk-Free Interest Rate</td> <td> </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="TEXT-ALIGN: center; FONT-WEIGHT: bold" 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"> Weighted-Average</td> <td nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Options</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Exercise Price</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 74%">Outstanding at September 28, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 10%">576</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: 10%">728.77</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">267,125</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">5.00</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 December 31, 2011</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"> 267,701</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 December 31, 2011</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 period from September 29, 2011 to December 31, 2011 was $43,000.     Warrants   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap">  </td> <td nowrap="nowrap"> </td> <td nowrap="nowrap"> </td> <td style="TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Weighted-Average</td> <td nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Warrants</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Exercise Price</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 74%">Outstanding at September 28, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 10%">1,065</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">0.52</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">1,268,478</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1.88</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">50,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">0.01</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 December 31, 2011</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"> 1,219,543</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"> 1.95</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 December 31, 2011</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"> 1,169,543</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"> 1.61</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>    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. The stock based compensation recorded for the period September 29, 2011 to December 31, 2011 is $324,000.   Restricted Stock   Compensation cost for restricted stock is measured as the excess, if any, of the market price of the Company’s stock at the date the common stock is issued over the amount the employee must pay to acquire the stock (which is generally zero). The compensation cost, net of projected forfeitures, is recognized over the period between the issue date and the date any restrictions lapse, with compensation cost for grants with a graded vesting schedule recognized using the treasury method. The restrictions do not affect voting and dividend rights.   <table style="WIDTH: 100%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Restricted Shares</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Weighted-Average Exercise Price</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: right" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Outstanding at September 28, 2011</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="WIDTH: 74%">Granted</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 10%">17,125</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: 10%">3.34</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </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>Vested</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 December 31, 2011</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"> 17,125</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"> 3.34</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   On October 21, 2011, the Company issued to employees (non-management) 17,125 restricted stock grants. The restricted stock granted to employees vests as follows: (i) 50% on the first anniversary of the grant, and (ii) 50% on the 2nd anniversary of the grant. The stock based compensation recorded for the period September 29, 2011 to December 31, 2011 is $5,000.    Shares Available Under the Company’s 2011 Equity Incentive Plan   At December 31, 2011 there were 2,215,750 common shares available for issuance under the Company’s 2011 Equity Incentive Plan.   Shares Reserved for Issuance   At December 31, 2011 there were 3,702,994 common shares reserved for issuance pursuant to warrants, stock options and availability for issuance under the Company’s 2011 Equity Incentive Plan   Dividends   The Company has not paid any dividends to date. </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 7. Commitments and Contingencies   Leases   We lease our current facility under an operating lease expiring on February 28, 2016. The future minimum non-cancelable lease payments are as follows:   <table style="WIDTH: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Lease Payments</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 87%">Year ending December 31, 2012</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">532,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Year ending December 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">555,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Year ending December 31, 2014</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">584,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Year ending December 31, 2015</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">601,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Year ending December 31, 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"> 102,000</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; PADDING-LEFT: 8.65pt"> Total future minimum lease payments</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"> 2,374,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   The lease requires the Company to pay additional rents by virtue of increases in the base taxes and other costs on the property. Additional rents have not been material. Total rent expense was $145,000 for the period September 29, 2011 to December 31, 2011 (the Successor period). Rent expense for the period January 1, 2011 to September 28, 2011 and the year ended December 31, 2010 (the Predecessor periods) is $436,000 and $525,000, respectively.   The Company has contracts with certain executives and key employees. The future minimum payments under these contracts are:   <table style="WIDTH: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">Employment Contract Payments</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 87%">Year ending December 31, 2012</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,156,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Year ending December 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">2,505,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Year ending December 31, 2014</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"> 2,008,000</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; PADDING-LEFT: 8.65pt"> Total future minimum lease payments</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 6,669,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table> </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 5.  Debt   The Company’s net carrying amount of debt is comprised of the following:   <table style="WIDTH: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Successor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Predecessor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">December 31, 2010</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 70%">Term Note</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">12,344,000</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%">-</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">5,765,000</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">Installment debt obligation</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,158,000</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 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">-</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 long term liabilities, less 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"> 26,000</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"> -</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-LEFT: 0.12in">Total</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">37,058,000</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">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"> 44,000</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"> -</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"> 37,014,000</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"> -</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 Company paid a closing fee of $405,000 to MidMarket, which was equal to three percent (3%) of the committed amount.   The principal amount of the Loan is payable quarterly as follows:  0% until January 5, 2013, 2.5% on January 5, 2013 through October 5, 2013; 3.75% on January 5, 2014 through October 5, 2014; 6.25% on January 5, 2015 through October 5, 2015; 12.5% on January 5, 2016 through the maturity date, which is the date that is 5 years after the closing date.   Annual principal obligations are as follows:   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center"> Year Ending December 31</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="TEXT-ALIGN: center; PADDING-BOTTOM: 1pt" colspan="2"> ,</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">2012</td> <td> </td> <td style="TEXT-ALIGN: left">$</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: 82%">2013</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 15%">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="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: 50%; 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"> 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: 82%">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: 15%">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 December 31, 2011, 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 December 31, 2011 is $12,344,000.   Financial Covenants.  So long as the Loan remains unpaid or unsatisfied, IM Brands shall not, and shall not permit any of its subsidiaries to, directly or indirectly:   <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">1.</td> <td>Minimum Liquidity .  Permit Excess Liquidity to be less than the amount set forth below during each applicable period set forth below:</td> </tr> </table>   <table style="WIDTH: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid">Fiscal Quarter</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Excess Liquidity</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 82%">September 29, 2011 through December 31, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</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="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">2.</td> <td>Capital Expenditures .  Permit the aggregate amount of Capital Expenditures to exceed $400,000 (whether or not financed) per year.</td> </tr> </table>     <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">3.</td> <td>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: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif; MARGIN-LEFT: 0.15in" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; WIDTH: 69%"> Trailing Four Fiscal Quarters Ending</td> <td style="WIDTH: 2%" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; PADDING-BOTTOM: 1pt; WIDTH: 29%" nowrap="nowrap"> Minimum Fixed Charge Coverage Ratio </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">September 30, 2012 and December 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: justify">1.90 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">March 31, 2013 and June 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: justify">1.60 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <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: justify">1.50 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">December 31, 2014 and March 31, 2015</td> <td> </td> <td style="TEXT-ALIGN: justify">1.30 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">June 30, 2015 and thereafter</td> <td> </td> <td style="TEXT-ALIGN: justify">1.15 to 1.00</td> </tr> </table>   <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">4.</td> <td>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: 80%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif; MARGIN-LEFT: 0.15in" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; WIDTH: 69%"> Trailing Four Fiscal Quarters Ending</td> <td style="WIDTH: 2%" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; WIDTH: 29%" nowrap="nowrap"> Maximum Consolidated Leverage Ratio </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">September 30, 2012 and December 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: justify">3.50 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">March 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: justify">3.30 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">June 30, 2013 and September 30, 2013</td> <td> </td> <td style="TEXT-ALIGN: justify">3.00 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">December 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: justify">2.75 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">March 31, 2014</td> <td> </td> <td style="TEXT-ALIGN: justify">2.25 to 1.00</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: top"> <td style="TEXT-ALIGN: justify">June 30, 2014 and thereafter</td> <td> </td> <td style="TEXT-ALIGN: justify">2.00 to 1.00</td> </tr> </table>   <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">5.</td> <td>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: 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">Fiscal Quarter</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Consolidated EBITDA</td> <td style="PADDING-BOTTOM: 1pt"> </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="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">6.</td> <td>Dividend Restrictions .  Permit any cash dividends or any other equity distributions.</td> </tr> </table>   <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">7.</td> <td>Restricted Cash Payments .  Permit any cash payments for the Seller Note or any contingent earn-out obligations.</td> </tr> </table>   As of December 31, 2011, 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 December 31, 2011 is $5,765,000.   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   As described in Note 3 herein, prior to the Merger and related transactions, Earthbound had certain rights and provided certain services to IM Ready related to the Isaac Mizrahi Business. Effective as of the Closing 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 December 31, 2011 is $1,158,000.   Payments are due quarterly beginning March 2012.  Annual payments are as follows:   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap"> </td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap"> Year Ending December 31,</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 82%">2012</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 15%">150,000</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="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"> 1,500,000</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 December 31, 2011 is $20,000. </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 10. Subsequent Events   None. </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Principles of Consolidation   The consolidated financial statements include the accounts of Xcel Brands, Inc. and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the SEC’s accounting rules under Regulation S-X. 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 ("Licensing Business") is not a separate legal entity, thus the financial statements are not necessarily indicative of the results of operations that would have occurred if the Licensing Business had been operated as a separate legal entity. IM Ready’s net investment in the Licensing Business (“Parent’s Equity in Unit”) is shown in lieu of stockholders’ equity in the financial statements.   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 Licensing 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 Licensing 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.   Cash and cash equivalents   The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.   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.   Property and Equipment   Furniture and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, generally three (3) to seven (7) years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the leases. Betterments and improvements are capitalized, while repairs and maintenance are expensed as incurred.   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 by the amount by which the carrying amount of the asset exceeds the fair value of the asset.   Deferred Finance Costs   Costs incurred in connection with debt offerings are deferred and amortized as interest expense over the term of the related debt using the effective interest method. The amortization expense is included in interest expense in the consolidated statements of operations.   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. 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.    Income Taxes   Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.   ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Tax positions shall initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a probability of fifty percent (50%) or greater of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.   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 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 is related to a future period as deferred revenue, until service is provided or revenue is earned.   Concentrations of Credit Risk   Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, and accounts receivable. We limit our credit risk with respect to cash by maintaining cash balances with quality financial institutions. At December 31, 2011, our cash and cash equivalents exceeded FDIC limits. Concentrations of credit risk with respect to accounts receivable are minimal due to the limited amount of outstanding receivables and due to the nature of our royalty revenues. Generally, we do not require collateral or other security to support accounts receivables.   Significant Contracts   QVC Agreement   In connection with the acquisition of the Isaac Mizrahi Business, the Company acquired a direct-to-retail license agreement with QVC that was entered into in January 2009 and amended and restated on September 29, 2011 in connection with the acquisition (as amended, the “QVC Agreement”). Pursuant to the QVC Agreement, the Company designs, and QVC sources and sells, various products under the “IsaacMizrahiLIVE” brand.  The IsaacMizrahiLIVE licensing program launched on QVC in 2010, and includes the sale of products across various categories including apparel, footwear, handbags, accessories, kitchen, soft home, and food through QVC’s television media and related Internet sites primarily in the United States. The initial term of the QVC Agreement continues through September 30, 2015, and renews automatically for successive one-year periods unless terminated by either party. Under the QVC Agreement, QVC has agreed to pay royalties based primarily on a percentage of QVC's net sales of Isaac Mizrahi branded merchandise. Royalty revenues from QVC totaled approximately $1,936,000 for the period from September 29, 2011 to December 31, 2011 (the Successor period), representing 67% of the Company’s total revenues. Royalty revenues from QVC totaledapproximately $5,436,000 and $4,492,000 for the period from January 1, 2011 to September 28, 2011, and the year ending December 31, 2010, respectively (the Predecessor periods) , which represents 62% and 46% of total revenues for the Isaac Mizrahi Business, respectively. As of December 31, 2011, the Company had a receivable from QVC in the amount of $1,900,000, representing 87% of the Company’s receivables. As of September 28, 2011 and December 31, 2010, the Predecessor had a receivable from QVC in the amount of $1,650,000 and $1,650,000 representing 85% and 93% of the Predecessor’s receivables, respectively.    LCNY Agreement   In connection with the acquisition of the Isaac Mizrahi Business, the Company assumed and entered into an amended and restated agreement (the “LCNY Agreement”) with Liz Claiborne, Inc. (“LC”) dated September 29, 2011.  Pursuant to the LCNY Agreement, the Company provides design services to LC for the “Liz Claiborne New York” brand, which is sold exclusively through QVC. The initial term of the LCNY Agreement continues through July 31, 2013. Under the LC Agreement, LC has agreed to pay the Company royalties based primarily on a percentage of royalties LC receives from QVC under a separate license agreement between LC and QVC. Revenues under the LCNY Agreement totaled approximately $383,000 for the period from September 29, 2011 to December 31, 2011, representing 13% of the Company’s total revenues. Revenues from the LCNY Agreement (and a previous design agreement with LC) totaled approximately $2,455,000 and $2,723,000 for the periods from January 1, 2011 to September 28, 2011, and the year ending December 31, 2010, respectively, representing 28% and 28% of total revenues for the Isaac Mizrahi Business, respectively. The revenues during the Predecessor period includes amortized revenue of $1,748,000 and $2,347,000 for the periods from January 1, 2011 to September 28, 2011 and the year ended December 31, 2010, respectively that relates to a one-time fee of $9,000,000 that the Predecessor received from LC in 2009, which was recorded as a deferred royalty payment (other liabilities) on the balance sheet in the financial statements of the Predecessor. This amount was being amortized by the Predecessor on a straight line basis over the life of the LCNY Agreement. Following its acquisition of the Isaac Mizrahi Business, the Company is not receiving the benefits of the one-time payment and has not recorded any deferred royalty payment as a result of the one-time payment.   LC/QVC Design fees   In connection with the Transactions, the Company also assumed an agreement with QVC whereby the Company will receive an annual design fee from QVC for the term of the LCNY Agreement (the “Design Agreement”), which fee is intended to cover certain design expenses of the Company related to the Liz Claiborne New York brand.  Revenues from the Design Agreement totaled approximately $282,000for the period from September 29, 2011 to December 31, 2011, or 10% of the Company’s total revenues. Revenues from the Design Agreement totaled approximately $818,000 and $1,100,000 for the periods from January 1, 2011 to September 28, 2011 and the year ended December 31, 2010, respectively, representing 9% and 11% of total revenues for the Isaac Mizrahi Business, respectively.   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.   Restricted Stock   Compensation cost for restricted stock is measured using the market price of the Company’s common stock at the date the common stock is granted. The compensation cost is recognized over the period between the issue date and the date any restrictions lapse.    Earnings per Share   Basic earnings per share excludes dilution and is computed by dividing net income (or loss) 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.   As of December 31, 2011, 267,701 shares issuable upon exercise of options and 473,550 shares issuable upon exercise of warrants were excluded from the calculation of earnings per share because they were anti-dilutive.   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"> 11. Unaudited Quarterly Results   Unaudited interim consolidated financial information 2011 and 2010 is summarized as follows:   <table style="WIDTH: 90%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="10">Predecessor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="6">Successor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> Year Ended December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">First Quarter</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">Second Quarter</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">Period July 1, 2011 to Sept. 28, 2011</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">Period Sept. 29, 2011 to Sept. 30, 2011</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">Fourth Quarter</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </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; WIDTH: 35%">Net licensing & design revenues</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,895,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,894,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,940,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">47,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,599,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Operating income (loss)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,358,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,480,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,510,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(803,000</td> <td style="TEXT-ALIGN: left">)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">290,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Net Income (loss)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,304,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,421,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,448,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(804,000</td> <td style="TEXT-ALIGN: left">)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(65,000</td> <td style="TEXT-ALIGN: left">)</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td> </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> <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> <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">Basic and dilutive earnings per share (1)</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> <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">(0.14</td> <td style="TEXT-ALIGN: left">)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(0.01</td> <td style="TEXT-ALIGN: left">)</td> </tr> </table>   <table style="BACKGROUND-COLOR: white; WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 24px"> </td> <td style="WIDTH: 24px">(1)</td> <td>Quarterly earnings per share amounts may not add to full year amounts due to rounding</td> </tr> </table>   <table style="WIDTH: 95%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="14">Predecessor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> The Year Ended December 31, 2010</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2" nowrap="nowrap">First Quarter</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">Second Quarter</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">Third Quarter</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">Fourth Quarter</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </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; WIDTH: 48%">Licensing and other revenue</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,102,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">1,420,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">3,207,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">3,067,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Operating income</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,054,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">263,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,855,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,674,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Net income</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,012,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">252,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,776,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,584,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table> </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 4. 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 style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6">(Successor)</td> <td style="PADDING-BOTTOM: 1pt; BORDER-RIGHT: black 1pt solid">  </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6">(Predecessor)</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6">December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt; BORDER-RIGHT: black 1pt solid">  </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6">December 31, 2010</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td> </td> <td style="TEXT-ALIGN: center">Estimated</td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Gross</td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td style="BORDER-RIGHT: black 1pt solid"> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Gross</td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td> </td> <td style="TEXT-ALIGN: center">Lives in</td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Carrying</td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Accumulated</td> <td style="BORDER-RIGHT: black 1pt solid"> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Carrying</td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2">Accumulated</td> <td> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center"> Years</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Amount</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Amortization</td> <td style="PADDING-BOTTOM: 1pt; BORDER-RIGHT: black 1pt solid">  </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Amount</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="2">Amortization</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center"> </td> <td> </td> <td style="TEXT-ALIGN: center"> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td style="BORDER-RIGHT: black 1pt solid"> </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; WIDTH: 35%">Indefinite life trademarks and copyrights</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: center; WIDTH: 12%">Indefinite</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">44,500,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">-</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; BORDER-RIGHT: black 1pt solid">  </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">-</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">-</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Goodwill</td> <td> </td> <td style="TEXT-ALIGN: center">Indefinite</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; BORDER-RIGHT: black 1pt solid">  </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="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Licensing agreements</td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="TEXT-ALIGN: center; PADDING-BOTTOM: 1pt">4</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; BORDER-RIGHT: black 1pt solid">  </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"> </td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="TEXT-ALIGN: center; 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"> 57,596,000</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"> 135,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; BORDER-RIGHT: black 1pt solid">  </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"> </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"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> </td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   The following table presents amortization expense for Licensing Agreements over the remaining useful life:   <table style="WIDTH: 90%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" nowrap="nowrap">Year Ending</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Carrying Value</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Amortization Expense</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 70%">December 31, 2011</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">1,865,000</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%">135,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>December 31, 2012</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,336,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">529,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>December 31, 2013</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">807,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">529,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>December 31, 2014</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">278,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">529,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>December 31, 2015</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">278,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>     On September 29, 2011, the Company completed a transaction in which it acquired substantially all of the licensing rights to the Isaac Mizrahi brands and trademarks from IM Ready-Made, LLC.  See Note 3, “Acquisition of the Isaac Mizrahi Business” for further details of this transaction.   Amortization expense for intangible assets for the period from September 29, 2011 to December 31, 2011 is $135,000. Amortization expense for the Predecessor Periods is nil. The trademarks of Isaac Mizrahi 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 consolidated statement of operations. </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 1. NATURE OF OPERATIONS, BACKGROUND, BASIS OF PRESENTATION AND REVERSE ACQUISITION   Xcel Brands, Inc. ("XCel", “we”, “our” or the "Company") engages in the design, licensing, and marketing of the Isaac Mizrahi brand with a focus on a variety of product categories featuring the IM Trademarks.   On September 29, 2011, NetFabric Holdings, Inc. (NetFabrics), a public “Shell Company”, entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) pursuant to which a subsidiary of NetFabrics was merged with and into XCel, with XCel surviving as a wholly-owned subsidiary of the Company (the “Merger”). This resulted in the owners of XCel (the "accounting acquirer") having actual or effective operating control of the Company after the transaction, with the shareholders of NetFabrics (the "legal acquirer") continuing only as passive investors. No goodwill was recognized since Net Fabrics was a Shell Company.   Also on September 29, 2011, the Company acquired the Isaac Mizrahi Business (the “Transaction”) (see Note 3). The Transaction was accounted for as a business combination, whereby the purchase price paid to effect the Transaction was allocated to record acquired assets and assumed liabilities at their fair value as of the acquisition date.   As XCel had limited operations prior to the Transaction, the Isaac Mizrahi Business was deemed to be the Predecessor of the Company for financial statement presentation purposes. Accordingly, the accompanying financial statements designate periods preceding the Transaction as relating to the Predecessor and all references to periods after September 29, 2011 (Transaction date) shall be referred to as Successor. </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 8. Income taxes   The Company accounts for income taxes in accordance with ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company's business. See below in this Note 8 for information relating to the Predecessor.   Due to operating losses incurred, the Successor has no current income tax provision for the period from September 29, 2011 to December 31, 2011 The Predecessor entity, as further discussed below, was subject to State and local unincorporated business income taxes. The income tax provision (benefit) consists of the following:       <table style="WIDTH: 80%; 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: center; FONT-STYLE: italic"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Successor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6">Predecessor</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" 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">Period September 29, 2011 to December 31, 2011</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">Period January 1, 2011 to September 28, 2011</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">Year Ended December 31, 2010</td> <td style="PADDING-BOTTOM: 1pt" nowrap="nowrap"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="FONT-WEIGHT: bold; TEXT-DECORATION: underline"> Current:</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> <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>Federal</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">$</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</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; WIDTH: 55%">State and local</td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; WIDTH: 1%">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 12%"> -</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%">  </td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; WIDTH: 1%">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 12%"> 175,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%">  </td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; WIDTH: 1%">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 12%"> 222,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%">  </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Total current</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"> 175,000</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"> 222,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td> </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> <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="FONT-WEIGHT: bold; TEXT-DECORATION: underline"> Deferred:</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> <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>Federal</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(178,000</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">-</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">State and local</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"> (12,000</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"> -</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: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Total deferred</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"> (190,000</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"> -</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> </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> <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: 2.5pt">Total provision (benefit)</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"> (190,000</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"> 175,000</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"> 222,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   The reconciliation of income tax computed at the Federal and state statutory rate to loss before taxes are as follows:   <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="TEXT-ALIGN: center"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Successor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="PADDING-BOTTOM: 1pt"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center" colspan="6">Predecessor</td> <td style="PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: center" 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">Period September 29, 2011 to December 31, 2011</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">Period January 1, 2011 to September 28, 2011</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">Year Ended December 31, 2010</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: 61%">Federal statutory income tax rate</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 10%">(34.0</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: 10%">-</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: 10%">-</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">State and local, net of federal tax</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(2.5</td> <td style="TEXT-ALIGN: left">)%</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">4.0</td> <td style="TEXT-ALIGN: left">%</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">4.0</td> <td style="TEXT-ALIGN: left">%</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Non deductible stock compensation</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">14.9</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"> </td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Miscellaneous difference</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"> 3.7</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> <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"> 0.5</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: 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"> (17.9</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"> 4.0</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"> 4.5</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">%</td> </tr> </table>   The significant components of net deferred tax assets of the Company consist of the following:    <table style="WIDTH: 80%; 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: center"> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Successor</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold"> </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" nowrap="nowrap">Deferred tax assets</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: 87%">Federal state and local net operating loss carryforwards</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">310,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Stock based compensation</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">135,000</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">Accrued compensation and other</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"> 18,000</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: 1pt">Total deferred tax assets</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"> 463,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td> </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; FONT-WEIGHT: bold; TEXT-DECORATION: underline"> Deferred tax liability</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">Property and equipment</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">13,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Basis difference arising from discounted note payable</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">590,000</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">Basis difference arising from intangible assets of acquisition</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"> 9,691,000</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: 1pt">Total deferred tax 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"> 10,294,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Net deferred tax 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"> 9,831,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> </td> </tr> </table>   The Successor has available at December 31, 2011 approximately $310,000 of unused net operating loss carryforwards that may be applied against future taxable income, which begin to expire in 2031. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carry forwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to a cumulative ownership change of more than 50%, as defined, over a three year period. The amount of such limitation, if any, has not been determined.     IM Ready-Made, LLC is a limited liability company, and treated as a partnership for income tax reporting purposes.  The Internal Revenue Code (“IRC”) provides that any income or loss is passed through to the members for federal and state income tax purposes.  Accordingly, neither IM Ready-Made, LLC nor its unincorporated Licensing Business division (the Predecessor) has provided for federal or state income taxes.  IM Ready-Made, LLC is subject to New York City unincorporated business taxes.  The Predecessor has provided for these taxes with an effective tax rate of approximately 4% </div> <div style="FONT: 10pt Times New Roman, Times, Serif"> 3. Acquisition of the Isaac Mizrahi Business   On May 19, 2011, Xcel Brands, Inc. entered into an asset purchase agreement, as amended (the “Purchase Agreement”), with IM Ready-Made, LLC (“IM Ready”), Isaac Mizrahi and Marisa Gardini, pursuant to which the Buyers acquired certain assets of IM Ready, including (i) the “Isaac Mizrahi” brands (including the trademarks and brands “Isaac Mizrahi New York”, “Isaac Mizrahi”, “IsaacMizrahiLIVE” and “M”) (collectively, the “IM Trademarks”), (ii) the license agreements between IM Ready and certain third parties related to the IM Trademarks including the QVC Agreement (together with the IM Trademarks, the “Isaac Mizrahi Business”), (iii) design agreements with Liz Claiborne (the LCNY Agreement) and QVC (the Design Agreement) to design the “Liz Claiborne New York” brand for sale exclusively at QVC, (iv) computers, design software, and assumption of the operating lease and the related leasehold improvements related to the licensing and design of the IM Trademarks and the design of the Liz Claiborne New York brand and (v) proprietary designs and design process, trade dress, trade names, personal names, images and likenesses, product configuration, corporate names, logos, insignias and slogans and Internet domain names, Internet websites, and URL’s Internet and phone applications and systems.  The parties consummated the asset purchase contemplated by the Purchase Agreement on September 29, 2011.   Pursuant to an agreement between IM Ready and Earthbound, LLC (“Earthbound”), a design and licensing company (the “Earthbound Agreement”), Earthbound had certain rights related to the IM Trademarks and provided certain design services for IM Ready.  In connection with the consummation of the acquisition by the Company of the Isaac Mizrahi Business, XCel and Earthbound entered into a contribution agreement (the “Contribution Agreement”) pursuant to which, on the Closing Date, Earthbound contributed to the Company (i) the Earthbound Agreement and (ii) certain assets relating to the operation of the Isaac Mizrahi Business in exchange for 944,688 shares of Common Stock and also purchased one (1) Unit in the Offering (as defined in Note 6 below).  The closing of the acquisition of the Isaac Mizrahi Business and Earthbound Assets occurred in conjunction with the consummation of the Merger, after which the Company terminated the Earthbound Agreement. Earthbound contributed to the Company, the Earthbound Agreement and certain assets in exchange for 944,688 shares of the Company’s Common Stock valued at $3,155,000 based on the Effective Share Purchase Price.   Pursuant to the Purchase Agreement, at the closing, the Buyers delivered (i) to IM Ready (a) $9,674,000 in cash, (b) a promissory note (the “Seller Note”) in the principal amount of $7,377,000 and (c) 2,759,000 shares of common stock of the Company (the “IM Ready Stock Consideration”), and (ii) to an escrow agent $500,000 that the escrow agent agreed pay to IM Ready upon resolution of certain obligations of IM Ready and Mizrahi (together, the “Closing Consideration”).  The Company also pre-paid $123,000 of interest on the Note on the Closing Date and agreed to include up to 1,200,000 of the shares of the IM Ready Stock Consideration in the registration statement which the Company has agreed to file to register for resale of the Shares and Warrant Shares of the Investors (the “Registration Statement”).  The Company does not have a penalty provision relating to the registration of these shares.    XCel was deemed to be the accounting acquirer of the Isaac Mizrahi Business based on various qualitative and quantitative factors including:   <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: 36pt"></td> <td style="WIDTH: 18.05pt">a.</td> <td style="TEXT-ALIGN: justify">Management of XCel accounts for substantially all of the management of the combined entities. The CEO, CFO, COO and Secretary all continue in the combined entity.</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: 36pt"></td> <td style="WIDTH: 18.05pt">b.</td> <td style="TEXT-ALIGN: justify">Seven members compose the board of directors. All members were selected by XCel, including one director who was a principal of IM Ready and director who was a principal of Earthbound.</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: 36pt"></td> <td style="WIDTH: 18.05pt">c.</td> <td style="TEXT-ALIGN: justify">IM Ready granted a proxy to the Company’s board of directors to vote its stock in accordance with the recommendation of the board of directors and Robert D’Loren, who was Chairman of the board of directors of XCel and has been designated by the Company’s board of directors to exercise such proxy.</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: 36pt"></td> <td style="WIDTH: 18.05pt">d.</td> <td style="TEXT-ALIGN: justify">XCel management as a group makes up the largest minority voting group. There is no majority stockholder.</td> </tr> </table>   The Company accounts for purchase of the Isaac Mizrahi Business using the acquisition method of accounting.  In accordance with ASC 805, Business Combinations, the total purchase consideration is allocated to certain net tangible and identifiable intangible assets acquired, and liabilities assumed, based on their estimated fair values as of September 29, 2011.   The purchase price for the acquisition is being allocated as follows:   Components of purchase price:   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif; MARGIN-LEFT: 1.3in" cellspacing="0" cellpadding="0"> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 82%">Cash paid at closing</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 15%">9,674,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Cash deposited with escrow agent</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>3,703,688 shares of common stock of the Company valued at $3.34 per share</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">12,370,000</td> <td style="TEXT-ALIGN: left"> </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">7,377,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Seller Note discount (See Note 5, Debt)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">(1,740,000</td> <td style="TEXT-ALIGN: left">)</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Contingent obligations – Due to Seller</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">17,766,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Long term installment obligation (Earthbound) (See Note 5, Debt)</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,132,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Seller Licensee obligation assumed and paid at closing</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"> 1,500,000</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; PADDING-LEFT: 9pt; FONT-WEIGHT: bold">Total purchase price</td> <td style="PADDING-BOTTOM: 2.5pt"> </td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 48,579,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   Preliminary allocation of purchase price:   <table style="WIDTH: 70%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif; MARGIN-LEFT: 1.3in" cellspacing="0" cellpadding="0"> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 82%">Trademark and other related intangible assets</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 15%">57,596,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Property, furniture and equipment</td> <td> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">1,233,000</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">Deferred tax liability</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"> (10,250,000</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; PADDING-LEFT: 9pt; FONT-WEIGHT: bold"> Total assets acquired</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"> 48,579,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> </td> </tr> </table>   Intangible assets were valued using an independent valuation firm. The trademarks we acquired are considered to have an indefinite life and are not subject to amortization. Value allocated to contracts is amortized on a straight line basis over the estimated remaining life of the contracts.    In addition to the Closing Consideration and the escrowed funds, IM Ready will be eligible to earn additional shares of Common Stock with a value of up to $7,500,000 (the “Earn-Out Value”) each year for four consecutive years after the Closing Date, with the number of shares to be issued based upon the greater of (i) $4.50 and (ii) average stock price for the last twenty days in such period and with such earn-out payment contingent upon the Isaac Mizrahi Business achieving the “Net Royalty Income” targets set forth below during those years.  The Earn-Out Value is payable solely in stock.  In accordance with ASC Topic 480 "Distinguishing Liabilities from Equity", the earn-out obligation is treated as a liability in the accompanying consolidated balance sheet because of the variable number of shares payable under the agreement. Under the Purchase Agreement, “Net Royalty Income” means booked revenue for the Isaac Mizrahi Business, less the sum of advertising royalties, commissions paid to third parties, payments under royalty sharing or participation agreements, and international withholding (solely to the extent the Buyers are unable to claim a federal tax credit with respect to such international withholding) and other transfer taxes, in each case to the extent related to such booked revenue, calculated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”); provided, however, that, (i) Net Royalty Income shall not include any deferred revenues recognized during the period for which Net Royalty Income is being calculated for which the Buyers have not received the related payment, and (ii) in the event of the termination of a license agreement with respect to the Isaac Mizrahi Business, the calculation of Net Royalty Income shall not include any revenue accelerated as a result of termination for which termination the Buyers have not received the related payment. The earn-out value was valued at $15,000,000 at the acquisition date of the Isaac Mizrahi Business (the “Earn-Out Obligation”). This amount was based on projected royalties during the Royalty Target Periods and the aggregate amount of earn-out consideration due for each Royalty Target Period. Any change in the expected obligation will result in an expense or income in the period in which it is determined fair market value of the carrying value has changed.  The Royalty Targets and percentage of the potential earn-out value are as follows:   <table style="WIDTH: 90%; BORDER-COLLAPSE: collapse; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0" align="center"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" nowrap="nowrap">ROYALTY TARGET PERIODS</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">ROYALTY TARGET</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">EARN-OUT   VALUE</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> <td> </td> <td style="TEXT-ALIGN: center" colspan="2"> </td> <td> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 68%">First Royalty Target Period</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">16,000,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">7,500,000</td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Second Royalty Target Period</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">20,000,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">7,500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Third Royalty Target Period</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">22,000,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">7,500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Fourth Royalty Target Period</td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">24,000,000</td> <td style="TEXT-ALIGN: left"> </td> <td> </td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">7,500,000</td> <td style="TEXT-ALIGN: left"> </td> </tr> </table>   IM Ready 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.   <table style="WIDTH: 80%; 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; FONT-WEIGHT: bold" nowrap="nowrap">APPLICABLE PERCENTAGE</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">% OF EARN-OUT VALUE EARNED</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap">  </td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 82%">Less than 76%</td> <td style="WIDTH: 1%"> </td> <td style="TEXT-ALIGN: left; WIDTH: 1%"> </td> <td style="TEXT-ALIGN: right; WIDTH: 15%">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> </td> <td style="TEXT-ALIGN: left"> </td> <td style="TEXT-ALIGN: right">40</td> <td style="TEXT-ALIGN: left">%</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">80% up to 90%</td> <td> </td> <td style="TEXT-ALIGN: left"> </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% u

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