Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2009
[_] Transition Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________.
Commission file number 0-16075
PEOPLE'S LIBERATION, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 86-0449546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1212 S. FLOWER STREET, 5TH FLOOR
LOS ANGELES, CA 90015
(Address of principal executive offices) (Zip Code)
(213) 745-2123
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [_] No [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of November 16, 2009, the issuer had 36,002,563 shares of common
stock, par value $.001 per share, issued and outstanding.
PEOPLE'S LIBERATION, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION...............................................3
Item 1. Financial Statements................................................3
Consolidated Balance Sheets as of September 30, 2009 (unaudited)
and December 31, 2008...............................................3
Consolidated Statements of Operations (unaudited) for the three
and nine months ended September 30, 2009 and September 30, 2008.....4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 2009 and September 30, 2008.........5
Notes to Consolidated Financial Statements (unaudited)..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........40
Item 4T. Controls and Procedures............................................41
PART II OTHER INFORMATION..................................................41
Item 1 Legal Proceedings..................................................41
Item 1A. Risk Factors.......................................................43
Item 6. Exhibits...........................................................45
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEOPLE'S LIBERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2009 2008
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ........................................... $ 1,281,694 $ 1,888,718
Restricted cash ..................................................... 167,000 --
Due from factor ..................................................... 1,533,919 --
Accounts receivable, net of allowance for doubtful accounts ......... 358,899 1,307,922
Inventories ......................................................... 2,908,865 4,925,438
Prepaid expenses and other current assets ........................... 430,049 247,672
------------ ------------
Total current assets .............................................. 6,680,426 8,369,750
Property and equipment, net of accumulated depreciation and amortization 1,102,004 837,351
Trademarks, net of accumulated amortization ............................ 612,000 600,609
Intangible asset ....................................................... 428,572 428,572
Other assets ........................................................... 467,881 444,266
------------ ------------
Total assets ........................................................... $ 9,290,883 $ 10,680,548
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses ............................... $ 3,251,181 $ 3,801,080
Due to factor ....................................................... -- 170,369
Customer deposits ................................................... -- 1,000,000
Due to member ....................................................... 451,918 427,623
Income taxes payable ................................................ -- 17,789
------------ ------------
Total current liabilities ......................................... 3,703,099 5,416,861
------------ ------------
Stockholders' equity:
Common stock, $0.001 par value, 150,000,000 shares authorized;
36,002,563 shares issued and outstanding at September 30, 2009
and December 31, 2008 ............................................. 36,002 36,002
Additional paid-in capital .......................................... 8,070,657 7,951,960
Accumulated deficit ................................................. (6,862,855) (6,349,151)
------------ ------------
Total stockholders' equity ....................................... 1,243,804 1,638,811
------------ ------------
Noncontrolling interest ................................................ 4,343,980 3,624,876
------------ ------------
Total equity ..................................................... 5,587,784 5,263,687
------------ ------------
Total liabilities and stockholders' equity ............................. $ 9,290,883 $ 10,680,548
============ ============
See Notes to Consolidated Financial Statements.
3
PEOPLE'S LIBERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine months Ended
September 30, September 30,
--------------------------- ----------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
Net sales ........................................... $ 11,005,915 $ 10,982,733 $ 28,485,857 $ 24,645,117
Cost of goods sold .................................. 5,456,478 5,599,914 14,847,292 12,654,649
------------ ------------ ------------ ------------
Gross profit ........................................ 5,549,437 5,382,819 13,638,565 11,990,468
------------ ------------ ------------ ------------
Selling, design and production expenses ............. 2,659,481 4,283,382 7,703,663 8,192,660
General and administrative expenses ................. 1,970,929 1,955,528 5,539,017 4,388,657
------------ ------------ ------------ ------------
Total operating expenses ........................... 4,630,410 6,238,910 13,242,680 12,581,317
------------ ------------ ------------ ------------
Income (loss) from operations ....................... 919,027 (856,091) 395,885 (590,849)
------------ ------------ ------------ ------------
Interest expense, net ............................... 59,653 45,115 160,505 89,523
Other income ........................................ -- (10,160) -- (16,272)
------------ ------------ ------------ ------------
Total other expense ............................... 59,653 34,955 160,505 73,251
------------ ------------ ------------ ------------
Income (loss) before income taxes and noncontrolling
interest in subsidiaries' earnings .................. 859,374 (891,046) 235,380 (664,100)
------------ ------------ ------------ ------------
Provision for income taxes .......................... 8,190 6,000 29,980 20,190
------------ ------------ ------------ ------------
Net income (loss) ................................... 851,184 (897,046) 205,400 (684,290)
------------ ------------ ------------ ------------
Noncontrolling interest in subsidiaries' earnings ... 262,065 562,805 719,104 1,169,958
------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders ........................................ $ 589,119 $ (1,459,851) $ (513,704) $ (1,854,248)
============ ============ ============ ============
Basic and diluted income (loss) per common share .... $ 0.02 $ (0.04) $ (0.01) $ (0.05)
Basic weighted average common shares outstanding .... 36,002,563 36,002,563 36,002,563 36,002,563
Diluted weighted average common shares outstanding .. 36,080,371 36,002,563 36,002,563 36,002,563
See Notes to Consolidated Financial Statements.
4
PEOPLE'S LIBERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
----------------------------
2009 2008
------------ ------------
Cash flows from operating activities:
Net income (loss) .................................................. $ 205,400 $ (684,290)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization ................................... 253,887 204,330
Allowance for doubtful accounts ................................. (27,700) 77,000
Warrants issued for services .................................... -- 6,700
Stock based compensation ........................................ 118,697 133,166
Impairment of long-lived asset .................................. 69,270 --
Loss on disposal of fixed asset ................................. 4,141 --
Changes in operating assets and liabilities:
Receivables ................................................... (977,915) 545,991
Inventories ................................................... 2,016,573 941,504
Refundable income taxes ....................................... -- 11,500
Prepaid expenses and other current assets ..................... (182,377) 67,313
Prepaid design fees ........................................... -- (1,321,772)
Other assets .................................................. (23,615) 205,894
Accounts payable and accrued expenses ......................... (531,025) 1,289,432
Customer deposits ............................................. (1,000,000) --
Due to member ................................................. 24,295 21,832
Income taxes payable .......................................... (36,662) 2,136
------------ ------------
Net cash flows (used in) provided by operating activities ... (87,031) 1,500,736
------------ ------------
Cash flows from investing activities:
Increase in restricted cash ........................................ (167,000) --
Acquisition of retail store ........................................ (100,000) --
Acquisition of trademarks .......................................... (113,191) (207,328)
Acquisition of property and equipment .............................. (139,802) (557,810)
------------ ------------
Net cash flows used in investing activities ..................... (519,993) (765,138)
------------ ------------
Cash flows from financing activities:
Capital investment received from minority interest member .......... -- 20,000
------------ ------------
Net (decrease) increase in cash and cash equivalents ................. (607,024) 755,598
Cash and cash equivalents, beginning of period ....................... 1,888,718 362,505
------------ ------------
Cash and cash equivalents, end of period ............................. $ 1,281,694 $ 1,118,103
============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest ........................................................... $ 161,287 $ 89,523
Income taxes paid .................................................. 67,021 18,222
Income taxes received .............................................. -- (11,668)
Non-cash investing activity:
Acquisition of retail store:
Cancellation of trade receivables ............................ (250,350) --
Fair value of property and equipment acquired ................ 350,350 --
Net assets and liabilities received in acquisition of subsidiary:
Receivables ................................................... -- 726,191
Inventory ..................................................... -- 1,491,369
Property and equipment ........................................ -- 50,000
Deposits ...................................................... -- 385,140
Due to member ................................................. -- (385,140)
Minority interest, net of cash received from member ............. -- (2,267,560)
See Notes to Consolidated Financial Statements.
5
PEOPLE'S LIBERATION, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRESENTATION OF INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in accordance with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
accompanying unaudited consolidated financial statements reflect all normal
recurring adjustments that, in the opinion of the management of People's
Liberation, Inc. (the "Company") and subsidiaries are considered necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
included in the Company's Form 10-K for the year ended December 31, 2008.
2. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
People's Liberation, Inc. is the parent holding company of Versatile
Entertainment, Inc. ("Versatile"), a California corporation established in April
of 2001, and Bella Rose, LLC ("Bella Rose"), a California limited liability
company established in May 2005, both of which were consolidated on November 22,
2005 and became wholly-owned subsidiaries of the Company on the effective date
of the Company's exchange transaction. William Rast Sourcing, LLC ("William Rast
Sourcing") and William Rast Licensing, LLC ("William Rast Licensing"), both
California limited liability companies, were formed effective October 1, 2006
and are owned 50% by Bella Rose and 50% by William Rast Enterprises, LLC
("WRE"), an entity owned in part by Justin Timberlake. William Rast Europe
Holdings, LLC, a Delaware limited liability company, was formed on March 11,
2009 and is a wholly-owned subsidiary of William Rast Sourcing. William Rast
Europe B.V. was formed on June 30, 2009 and is a wholly-owned subsidiary of
William Rast Europe Holdings, LLC. William Rast Europe Holdings, LLC and William
Rast Europe B.V. (collectively "William Rast Europe") were formed to market and
sell William Rast apparel and accessories in Europe. William Rast Retail, LLC
("William Rast Retail"), a California limited liability company, was formed on
August 26, 2009 and is a wholly-owned subsidiary of William Rast Sourcing.
William Rast Retail was formed to operate the Company's William Rast retail
stores. J. Lindeberg USA, LLC ("J. Lindeberg USA"), a California limited
liability company, was formed effective July 1, 2008 and is owned 50% by Bella
Rose and 50% by J. Lindeberg USA Corp., a New York corporation and an entity
owned by J. Lindeberg AB, a Swedish corporation (collectively "Lindeberg
Sweden"). J. Lindeberg USA Retail, LLC ("J. Lindeberg Retail"), a California
limited liability company, was formed on August 21, 2009 and is a wholly-owned
subsidiary of J. Lindeberg USA. J. Lindeberg Retail was formed to operate the
Company's J. Lindeberg retail stores.
People's Liberation, Inc. was incorporated in the State of Delaware on
December 29, 1982 under the name Philco Financial Management Corp. The Company
had three wholly owned subsidiaries, Global Medical Technologies, Inc., an
Arizona corporation, which was operating ("Global Medical"), and Century Pacific
Fidelity Corporation and Century Pacific Investment Management Corporation, both
of which were inactive and without assets or debts.
On January 31, 2005, the Company contributed all of the shares of
common stock of its wholly-owned, inactive subsidiaries, Century Pacific
Fidelity Corp. and Century Pacific Investment Management Corporation, to Global
Medical. In February 2005, the Company distributed all of the outstanding shares
of common stock of Global Medical on a pro rata basis to its stockholders.
6
Following the distribution, Global Medical continued to operate its medical
equipment reconditioning business as an independent company. After this
distribution, the Company existed as a "shell company" under the name of Century
Pacific Financial Corporation with nominal assets whose sole business was to
identify, evaluate and investigate various companies to acquire or with which to
merge.
On November 22, 2005, the Company acquired all of the outstanding
voting securities of Bella Rose and Versatile, each of which became its
wholly-owned subsidiaries. The Company issued to the Bella Rose members and the
Versatile stockholders an aggregate of 2,460,106.34 shares of its series A
convertible preferred stock, which subsequently converted into 26,595,751 shares
of common stock on January 5, 2006 on a post reverse stock split basis. The
exchange transaction was accounted for as a reverse merger (recapitalization)
with Versatile and Bella Rose deemed to be the accounting acquirer, and the
Company the legal acquirer.
Effective on January 5, 2006, the Company changed its corporate name
from Century Pacific Financial Corporation to People's Liberation, Inc.,
completed a 1-for-9.25 reverse split of its common stock, adopted its 2005 Stock
Incentive Plan, and its series A convertible preferred stock converted into
common stock. Following the conversion of the Series A convertible preferred
stock, the reverse stock split on January 5, 2006, and the subsequent issuance
of shares to preserve round lot holders, 34,371,134 shares of common stock were
outstanding. All share and per share information included in the accompanying
consolidated financial statements reflects the effects of the reverse stock
split.
Bella Rose commenced operations of its William Rast clothing line in
May 2005. Bella Rose began shipping products under the William Rast brand name
in the fourth quarter of 2005. Under an apparel brand agreement with WRE, Bella
Rose had the exclusive rights to manufacture clothing and accessories under the
William Rast trade name. Under long-form definitive agreements entered into
effective October 1, 2006, which superseded the apparel brand agreement, two new
entities were formed, William Rast Sourcing and William Rast Licensing. All
assets and liabilities of the Bella Rose business were transferred to William
Rast Sourcing effective October 1, 2006. William Rast Sourcing has the exclusive
rights to manufacture clothing with the William Rast brand name. The William
Rast trademarks were transferred to William Rast Licensing effective October 1,
2006 and William Rast Licensing has the exclusive rights to promote and license
the William Rast brand.
Beginning October 1, 2006, William Rast Sourcing and William Rast
Licensing are consolidated under Bella Rose. Until WRE has a basis in the
capital of William Rast Sourcing and William Rast Licensing, losses will not be
allocated to WRE. Instead, all losses will be recognized by Bella Rose in
consolidation. Subsequently, if profits are generated by William Rast Sourcing
and William Rast Licensing, then profits will not be allocated to WRE until
previously unrecognized noncontrolling interest losses are fully recouped by
Bella Rose. Minimum profit allocations to WRE will be accounted for as a
noncontrolling interest in the consolidated financial statements of the Company.
Effective July 1, 2008, Bella Rose and Lindeberg Sweden entered into an
operating agreement and other related agreements for J. Lindeberg USA. Pursuant
to the agreements, J. Lindeberg USA has the rights to source, market, and
distribute J. Lindeberg(R) branded apparel in the United States on an exclusive
basis. The agreements provide that Bella Rose and Lindeberg Sweden each hold a
50% interest in J. Lindeberg USA with the business of J. Lindeberg USA being
operated by Bella Rose. Bella Rose has management control over J. Lindeberg USA
and therefore, beginning July 1, 2008, the operations of J. Lindeberg USA are
included in the consolidated financial statements of the Company. Profit and
loss allocations to Lindeberg Sweden are recorded as a noncontrolling interest
in the consolidated financial statements of the Company.
7
William Rast Sourcing is the sole member of William Rast Europe
Holdings, an entity formed in March 2009 to distribute William Rast apparel and
accessories in Europe through its wholly-owned subsidiary, William Rast Europe
B.V.
NATURE OF OPERATIONS
The Company markets and sells high-end casual apparel under the brand
names "People's Liberation," "William Rast" and, in the United States, "J.
Lindeberg," through Versatile and Bella Rose, its wholly owned subsidiaries, and
through Bella Rose's 50% owned subsidiaries, William Rast Sourcing, William Rast
Licensing and J. Lindeberg USA. The majority of the merchandise the companies
offer consists of premium denim, knits, wovens, golf wear and outerwear for men
and women. In the United States, William Rast Sourcing and J. Lindeberg USA
distribute their merchandise to boutiques, specialty stores and better
department stores, such as Nordstrom, Bloomingdales, Saks Fifth Avenue and
Neiman Marcus, and online at williamrast.com, jlindeberg.com and Zappos.com. The
Company also markets and sells J. Lindeberg branded collection and golf apparel
through its retail stores in New York City and Los Angeles, and sells J.
Lindeberg golf wear to green grass golf stores and boutiques in the United
States. Internationally, in select countries, William Rast Sourcing sells its
products to better department stores and boutiques throughout the world.
The Company commenced its William Rast clothing line in May 2005. The
Company's William Rast clothing line is a collaboration with Justin Timberlake
and his childhood friend, Trace Ayala.
The Company began distributing J. Lindeberg branded apparel products in
the United States on an exclusive basis beginning July 2008 in collaboration
with Lindeberg Sweden. In addition to being sold in the United States through J.
Lindeberg USA, J. Lindeberg branded high-end men's fashion and premium golf
apparel is marketed and sold by Lindeberg Sweden worldwide.
The Company commenced its People's Liberation business in July 2004. On
December 16, 2008, the Company entered into an agreement with Charlotte Russe
Holding, Inc. and its wholly-owned subsidiary, Charlotte Russe Merchandising,
Inc. (collectively, "Charlotte Russe"), pursuant to which the Company's
wholly-owned subsidiary, Versatile, agreed to exclusively sell to Charlotte
Russe, in North America and Central America, People's Liberation(R) branded
apparel, apparel accessories, eyewear, jewelry, watches, cosmetics and
fragrances, and to provide Charlotte Russe with marketing and branding support
for People's Liberation branded apparel and apparel accessories. The Company
ceased to sell People's Liberation branded merchandise in North America and
Central America to parties other than Charlotte Russe effective April 30, 2009.
The Company will continue to market and sell People's Liberation branded
merchandise internationally, with the exception of Central America. Product
sales to Charlotte Russe under the terms of this agreement began shipping in
June 2009. The Company is in litigation with Charlotte Russe in relation to the
agreement. See Note 7 below for further information relating to the Company's
agreement with Charlotte Russe and the pending litigation.
The Company is headquartered in Los Angeles, California, and maintains
showrooms in New York, Los Angeles and Atlanta, and has sales representatives in
Dallas, Texas, and Chicago, Illinois.
8
3. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2009, the Company adopted the provisions of
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 805, "Business Combinations." This pronouncement provides new
guidance that changes the accounting treatment of contingent assets and
liabilities in business combinations under previous topic guidance and is
effective for contingent assets or liabilities acquired in business combinations
for which the acquisition date is on or after the first annual reporting period
beginning on or after December 15, 2008. The adoption of this pronouncement did
not have a material effect on the Company's consolidated financial statements
currently, but its effects will depend on the nature of future acquisitions
completed by the Company, if any.
Effective January 1, 2009, the Company adopted the provisions of a
pronouncement issued in December 2007 on what is now codified as FASB ASC Topics
805, BUSINESS COMBINATIONS, and 810, CONSOLIDATION. Certain provisions of this
pronouncement are required to be adopted retrospectively for all periods
presented. Such provisions include a requirement that the carrying value of
noncontrolling interests (previously referred to as minority interests) be
removed from the mezzanine section of the balance sheet and reclassified as
equity; and consolidated net income or loss to be recast to include net income
or loss attributable to the noncontrolling interest. As a result of this
adoption, the Company reclassified noncontrolling interests in the amount of
$2.3 million from the mezzanine section to equity in its December 31, 2008
balance sheet.
In April 2009, the FASB issued ASC Topic 320-10-35, INVESTMENT - DEBT
AND EQUITY SECURITIES, OVERALL, SUBSEQUENT MEASUREMENT, which amends existing
guidance for determining whether impairment is other-than-temporary (OTTI) for
debt securities. The pronouncement requires an entity to assess whether it
intends to sell, or it is more likely than not that it will be required to sell
a security in an unrealized loss position before recovery of its amortized cost
basis. If either of these criteria is met, the entire difference between
amortized cost and fair value is recognized in earnings. For securities that do
not meet the aforementioned criteria, the amount of impairment recognized in
earnings is limited to the amount related to credit losses, while impairment
related to other factors is recognized in other comprehensive income.
Additionally, the pronouncement expands and increases the frequency of existing
disclosures about other-than-temporary impairments for debt and equity
securities. This pronouncement is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. The adoption of this pronouncement on April 1, 2009
did not have a material impact on the Company's results of operations or
financial position.
In April 2009, the FASB issued ASC Topic 820-10-65-4, TRANSITION
RELATED TO FASB STAFF POSITION FAS 157-4 DETERMINING FAIR VALUE WHEN THE VOLUME
AND LEVEL OF ACTIVITY FOR THE ASSET AND LIABILITY HAVE SIGNIFICANTLY DECREASED
AND IDENTIFYING TRANSACTIONS THAT ARE NOT ORDERLY. This pronouncement emphasizes
that even if there has been a significant decrease in the volume and level of
activity, the objective of a fair value measurement remains the same. Fair value
is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants. The pronouncement provides a
number of factors to consider when evaluating whether there has been a
significant decrease in the volume and level of activity for an asset or
liability in relation to normal market activity. In addition, when transactions
or quoted prices are not considered orderly, adjustments to those prices based
on the weight of available information may be needed to determine the
appropriate fair value. The pronouncement also requires increased disclosures.
This pronouncement is effective for interim and annual reporting periods ending
9
after June 15, 2009, and will be applied prospectively. Early adoption is
permitted for periods ending after March 15, 2009. The adoption of this
pronouncement on July 1, 2009 did not have a material impact on the Company's
results of operations or financial position.
In April 2009, the FASB issued ASC 825-10-65-1, TRANSITION RELATED TO
FSP FAS 107-1 AND APB 28-1, INTERIM DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS. This pronouncement requires disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
that were previously only required in annual financial statements. This
pronouncement is effective for interim reporting periods ending after June 15,
2009. The adoption of this pronouncement on July 1, 2009 did not have a material
impact on the Company's results of operations or financial position.
In May 2009, the FASB issued a pronouncement on what is now codified as
FASB ASC Topic 855, SUBSEQUENT EVENTS. This pronouncement establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued. FASB ASC Topic 855 provides guidance on the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. ASC Topic 855
is effective for interim or annual periods ending after June 15, 2009, and will
be applied prospectively. Notes 7 and 11 set forth the Company's evaluation of
the events that occurred after September 30, 2009 and through November 16, 2009,
the date these interim financial statements as of and for the three and nine
month periods ended September 30, 2009 were issued.
4. EARNINGS PER SHARE
The Company computes and presents earnings per share in accordance with
ASC Topic 260, "EARNINGS PER SHARE". Basic earnings per share are computed based
upon the weighted average number of common shares outstanding during the period.
Warrants representing 3,565,000 shares of common stock at exercise
prices ranging from $0.40 to $2.00 per share and stock options representing
2,521,000 shares of common stock at exercise prices ranging from $0.30 to $1.25
per share were outstanding for the three months of September 30, 2009, but were
excluded from the average number of common shares outstanding in the calculation
of earnings per share because the effect of inclusion would be anti-dilutive.
Warrants representing 3,565,000 shares of common stock at exercise
prices ranging from $0.40 to $2.00 per share and stock options representing
2,900,000 shares of common stock at exercise prices ranging from $0.20 to $1.25
per share were outstanding for the nine months of September 30, 2009, but were
excluded from the average number of common shares outstanding in the calculation
of earnings per share because the effect of inclusion would be anti-dilutive.
Warrants representing 3,565,000 shares of common stock at exercise
prices ranging from $0.40 to $2.00 per share and stock options representing
2,751,000 shares of common stock at exercise prices ranging from $0.30 to $1.25
per share were outstanding for the three and nine months of September 30, 2008,
but were excluded from the average number of common shares outstanding in the
calculation of earnings per share because the effect of inclusion would be
anti-dilutive.
10
The following is a reconciliation of the numerators and denominators of
the basic and diluted income (loss) per share computations:
INCOME (LOSS) SHARES PER SHARE
------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER 30, 2009
-------------------------------------
Basic income per share:
Income attributable to common stockholders $ 589,119 36,002,563 $ 0.02
Effect of Dilutive Securities:
Options .................................. -- 77,808 --
Warrants ................................. -- -- --
------------- ------------- -------------
Income attributable to common stockholders $ 589,119 36,080,371 $ 0.02
============= ============= =============
THREE MONTHS ENDED SEPTEMBER 30, 2008
-------------------------------------
Basic loss per share:
Loss attributable to common stockholders . $ (1,459,851) 36,002,563 $ (0.04)
Effect of Dilutive Securities:
Options .................................. -- -- --
Warrants ................................. -- -- --
------------- ------------- -------------
Loss attributable to common stockholders . $ (1,459,851) 36,002,563 $ (0.04)
============= ============= =============
NINE MONTHS ENDED SEPTEMBER 30, 2009
------------------------------------
Basic loss per share:
Loss attributable to common stockholders . $ (513,704) 36,002,563 $ (0.01)
Effect of Dilutive Securities:
Options .................................. -- -- --
Warrants ................................. -- -- --
------------- ------------- -------------
Loss attributable to common stockholders . $ (513,704) 36,002,563 $ (0.01)
============= ============= =============
NINE MONTHS ENDED SEPTEMBER 30, 2008
------------------------------------
Basic loss per share:
Loss attributable to common stockholders . $ (1,854,248) 36,002,563 $ (0.05)
Effect of Dilutive Securities:
Options .................................. -- -- --
Warrants ................................. -- -- --
------------- ------------- -------------
Loss attributable to common stockholders . $ (1,854,248) 36,002,563 $ (0.05)
============= ============= =============
11
5. DUE FROM (TO) FACTOR
Due from (to) factor is summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2009 2008
------------ ------------
Outstanding receivables:
Without recourse ........................... $ 3,994,304 $ 3,423,524
With recourse .............................. 1,321,527 692,155
------------ ------------
5,315,831 4,115,679
Advances ..................................... (3,078,497) (3,520,281)
Open credits ................................. (703,415) (765,767)
------------ ------------
$ 1,533,919 $ (170,369)
============ ============
6. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2009 2008
------------ ------------
Piece goods and trim ......................... $ 138,837 $ 1,564,727
Work in process .............................. 40,414 418,710
Finished goods ............................... 2,729,614 2,942,001
------------ ------------
$ 2,908,865 $ 4,925,438
============ ============
7. CHARLOTTE RUSSE DISTRIBUTION AGREEMENT AND LITIGATION (SUBSEQUENT
EVENT)
DISTRIBUTION AGREEMENT
On December 16, 2008, the Company entered into an agreement (the
"AGREEMENT") with Charlotte Russe, pursuant to which the Company's wholly-owned
subsidiary, Versatile, agreed to exclusively sell to Charlotte Russe, in North
America and Central America, People's Liberation(R) branded apparel, apparel
accessories, eyewear, jewelry, watches, cosmetics and fragrances, and to provide
Charlotte Russe with marketing and branding support for People's Liberation
branded apparel and apparel accessories.
Pursuant to the Agreement, the Company will continue to design, source,
sample, fit and deliver an assortment of finished goods selected by Charlotte
Russe and sell such merchandise to Charlotte Russe at wholesale prices.
Charlotte Russe has the exclusive right to market, distribute, and sell People's
Liberation branded merchandise purchased from the Company in North America and
Central America through Charlotte Russe(R) branded retail stores and related
distribution channels, including outlet locations and direct-to-consumer sales.
The Company ceased to sell People's Liberation branded merchandise in such
territories to parties other than Charlotte Russe effective April 30, 2009. The
Company will continue to market and sell its People's Liberation branded
merchandise internationally, with the exception of Central America. Product
sales to Charlotte Russe under the terms of this agreement began shipping in
June 2009.
12
In consideration for the exclusive rights granted to Charlotte Russe
under the Agreement, Charlotte Russe agreed to purchase from the Company a
minimum amount of People's Liberation branded merchandise during each contract
year. The aggregate minimum purchase obligation for the period from inception of
the Agreement through the end of its initial term on December 31, 2012 is $65
million. The amount of the minimum purchase obligation varies by contract year,
and may be less than or greater than $65 million if the Agreement is terminated
prior to expiration of the initial term or is renewed for one or more additional
renewal periods.
Included in customer deposits as of December 31, 2008, is a $1 million
payment received from Charlotte Russe in December 2008 upon execution of the
Agreement. Advance payments are applied against future minimum purchase
requirements for the related contract year of the Agreement.
The initial term of the Agreement expires on December 31, 2012, and may
be extended by Charlotte Russe for two additional one-year renewal periods with
minimum purchase requirements of an aggregate of $65 million during such
two-year period. Charlotte Russe may elect to terminate the Agreement early by
delivering written notice to the Company at any time between January 1, 2011 and
June 30, 2011, in which event the Agreement shall terminate, at Charlotte
Russe's election, on either (i) July 1, 2011 with the payment of an early
termination fee, or (ii) December 31, 2011.
In addition to its minimum purchase obligations, if Charlotte Russe
elects to renew the Agreement beyond the initial term, then commencing January
1, 2013, Charlotte Russe will pay the Company a royalty equal to a negotiated
percentage of the amount by which actual wholesale sales of merchandise for a
contract year exceed the minimum purchase obligation for such contract year.
LITIGATION - SUBSEQUENT EVENT
On October 27, 2009, the Company filed a complaint for damages and
equitable relief against Charlotte Russe in the Superior Court of the State of
California, County of Los Angeles, Central District (Versatile Entertainment,
Inc. v. Charlotte Russe Merchandising, Inc., BC424674) (the "Charlotte Russe
Action"). On that same day, the Company also filed suit against Advent
International Corporation and certain of its subsidiaries, and David Mussafer
and Jenny J. Ming (collectively, the "Advent Defendants") in the Superior Court
of the State of California, County of Los Angeles, Central District (Versatile
Entertainment, Inc. v. Advent International Corporation, BC424675) (the "Advent
Action"). Advent International Corporation, through its subsidiaries, acquired
Charlotte Russe in October 2009. The complaints relate to the Company's
Agreement with Charlotte Russe described above.
On October 26, 2009, we received a letter from Charlotte Russe
purportedly terminating the Agreement as a result of the Company's alleged
fraudulent inducement of Charlotte Russe to enter into the Agreement as well as
the Company's alleged subsequent material breaches of the Agreement. The Company
believes the allegations in the letter are demonstrably false and that the
termination of the Agreement by Charlotte Russe was improper, constituting a
material breach of the Agreement by Charlotte Russe for which the Company is
entitled to damages. Additionally, the Company asserts that before acquiring
Charlotte Russe, Advent International Corporation and certain of its
subsidiaries and management, including David Mussafer and Jenny J. Ming,
evaluated Charlotte Russe's ongoing business and contractual relations, and
decided that they would wrongfully attempt to avoid the contractual obligations
under the Agreement by asserting fabricated breaches of contract against the
Company, thus intentionally interfering with the Company's contract with
Charlotte Russe.
13
The Company's complaint in the Charlotte Russe Action includes four
causes of action, including one for declaratory relief in which it seeks
declarations that (i) by Charlotte Russe's efforts to wrongfully terminate the
Agreement and their sale of People's Liberation brand goods at "close-out"
prices, they have breached the express terms of the Agreement; (ii) the
Agreement is in full force and effect notwithstanding Charlotte Russe's
purported termination thereof; (iii) Charlotte Russe is required to perform its
obligations under the Agreement and that no performance obligation has been
excused; (iv) the Company's actions, including those alleged acts complained of
in Charlotte Russe's October 26 letter, do not constitute material breaches of
the Agreement; and (v) the express terms of the Agreement require Charlotte
Russe to indemnify, hold harmless and defend the Company from any future or
additional damages or costs incurred by the Company as a result of Charlotte
Russe's breach of the Agreement and as a result of the Company's lawsuit.
In the Charlotte Russe Action, the Company has also asserted claims
for:
o breach of contract by Charlotte Russe for, among other things,
wrongfully terminating the Agreement and for selling People's
Liberation branded apparel at "close-out" prices;
o fraudulent misrepresentation relating to the misrepresentation
and concealment of certain material facts from the Company,
including making false representations about their ability and
intent to promote People's Liberation branded products for
sale in their stores, their ability to perform their
obligations under the Agreement, their discounting of People's
Liberation branded apparel in violation of the Agreement and
the facts underlying their purported termination of the
Agreement; and
o negligent misrepresentation relating to the misrepresentation
and concealment of certain material facts from the Company,
including making false representations about their ability and
intent to promote People's Liberation branded products for
sale in their stores, their ability to perform their
obligations under the Agreement, their discounting of People's
Liberation branded apparel in violation of the Agreement and
the facts underlying their purported termination of the
Agreement.
The Company is seeking compensatory damages of no less than
$59,000,000, punitive damages, preliminary and permanent injunctions enjoining
Charlotte Russe and the other defendants from engaging in acts which diminish
the value of the People's Liberation brand, and an award of attorneys' fees and
costs incurred in relation to each cause of action.
In the Advent Action, the Company asserts one cause of action for
intentional interference with contract, for which the Company is seeking
compensatory damages of no less than $59,000,000, punitive damages, as well as
an award of attorney's fees and costs incurred in relation to the action.
On October 28, 2009, Charlotte Russe Holding, Inc. and Charlotte Russe
Merchandising, Inc. served a complaint against People's Liberation, Inc. and
Versatile Entertainment, Inc., which complaint was filed in the Superior Court
of the State of California, County of Los Angeles, Central District (CHARLOTTE
RUSSE HOLDING, INC. VS. VERSATILE ENTERTAINMENT, INC., BC424734). In its
complaint, Charlotte Russe has asserted claims for:
o rescission of the Agreement based on fraudulent
misrepresentations made by the Company to induce Charlotte
Russe to enter into the Agreement;
14
o fraud based on fraudulent misrepresentations made by the
Company to induce Charlotte Russe to enter into and continue
to perform its obligations under the Agreement; and
o breach of contract by the Company for, among other things, (i)
permitting other retailers to sell People's Liberation branded
products in Charlotte Russe's exclusive territory; (ii)
failing to provide the services under the Agreement; (iii)
failing to maintain the promised quality of the products; (iv)
failing to price the products in accord with the Agreement;
and (v) failing to deliver all products in the time required
under the Agreement.
Charlotte Russe is seeking restitution of all consideration paid to the
Company under the Agreement, compensatory and punitive damages, and an award of
attorneys' fees and costs incurred in relation to each cause of action.
The Company intends to vigorously pursue the Charlotte Russe Action and
the Advent Action and to vigorously defend any actions brought forth by
Charlotte Russe. Although the purported termination of the Company's exclusive
distribution agreement by Charlotte Russe will have a significant impact on
Company's subsidiary that holds the People's Liberation brand business,
Versatile Entertainment, management believes it does not affect the ability of
the Company as a whole to continue as a going concern because of the continued
operations and expected sales, cash flows and results of operations from its
other subsidiaries, William Rast Sourcing and J. Lindeberg USA.
8. J. LINDEBERG USA, LLC AND DUE TO MEMBER
Effective July 1, 2008, the Company, through its wholly-owned
subsidiary, Bella Rose, and Lindeberg Sweden entered into an operating agreement
and other related agreements for the Company's newly formed subsidiary, J.
Lindeberg USA. Pursuant to the agreements, J. Lindeberg USA will source, market,
and distribute J. Lindeberg(R) branded apparel in the United States on an
exclusive basis. The agreements provide that the Company and Lindeberg Sweden
each hold a 50% interest in J. Lindeberg USA with the business of J. Lindeberg
USA being operated by the Company. Under the terms of the agreements, Lindeberg
Sweden was required to contribute to J. Lindeberg USA $20,000 in cash as well as
certain assets consisting primarily of accounts receivable and inventory. The
Company was required to contribute to J. Lindeberg USA $20,000 in cash and will
be required to contribute up to a maximum of $1.5 million in working capital or
related guaranties through December 2010. The agreements also provide that
Lindeberg Sweden will, among other things, make available to J. Lindeberg USA
for purchase all new collections of J. Lindeberg(R) branded apparel, and provide
for the factory-direct purchase by the Company of J. Lindeberg(R) branded
apparel on terms no less favorable to the Company than terms received by
Lindeberg Sweden or its affiliates for the same or substantially the same
merchandise. In addition, the agreements provide for a license from Lindeberg
Sweden to J. Lindeberg USA of the J. Lindeberg(R) mark and other related marks
for use in the United States on an exclusive basis for a period of 25 years. The
operating agreement provides that J. Lindeberg AB has the option to purchase the
Company's share of J. Lindeberg USA at a negotiated purchase price as outlined
in the agreement.
15
The following table summarizes the estimated fair values of the assets
and liabilities contributed on July 1, 2008 to J. Lindeberg USA. Member
contribution receivable represents in-transit inventory contributed to J.
Lindeberg USA by Lindeberg Sweden in July 2008.
Current assets:
Cash .......................................................... $ 40,000
Accounts receivable ........................................... 726,191
Inventory ..................................................... 488,700
Member contribution receivable ................................ 1,002,669
Property and equipment ........................................ 50,000
Deposits ...................................................... 385,140
----------
Total assets contributed .................................... 2,692,700
----------
Current liabilities:
Due to member ................................................. 385,140
----------
Total liabilities assumed ................................... 385,140
----------
Net assets contributed .................................... $2,307,560
==========
This transaction is an acquisition of a business and accounting
standards require pro-forma financial information to be disclosed in the
Company's most recent interim financial statements. Unaudited proforma
consolidated results of operations for the three and nine months ended September
30, 2008, as though J. Lindeberg USA had been acquired as of January 1, 2008,
are as follows:
NINE MONTHS
ENDED
SEPTEMBER 30,
2008
------------
Net sales .............................................. $ 28,944,034
Net loss ............................................... $ (2,068,113)
Basis and diluted Loss per share ....................... $ (0.06)
The pro-forma consolidated results are not necessarily indicative of
the operating results that would have been achieved had the transaction been in
effect as of the beginning of the period presented and should not be construed
as being representative of future operating results.
Due to member as of September 30, 2009 and December 31, 2008 represents
amounts payable to J. Lindeberg AB related to finished good purchases and the
New York retail store and showroom deposits.
9. STOCK BASED COMPENSATION
On January 5, 2006, the Company adopted its 2005 Stock Incentive Plan
(the "Plan"), which authorized the granting of a variety of stock-based
incentive awards. The Plan is administered by the Board of Directors, or a
committee appointed by the Board of Directors, which determines the recipients
and terms of the awards granted. The Plan provides for a total of 5,500,000
shares of common stock to be reserved for issuance under the Plan.
16
The Company recognizes stock-based compensation costs on a
straight-line basis over the vesting period of each award, which is generally
between one to four years.
During the nine months ended September 30, 2009, the Company granted
394,000 options to directors, employee and an officer at an exercise price of
$0.20. There were no options granted during the three months ended September 30,
2009. During the three and nine months ended September 30, 2008, the Company
granted 400,000 and 690,000 options to directors, officers and employees at
exercise prices ranging from $0.30 to $0.50. No options or warrants were
exercised during the three and nine month periods ended September 30, 2009 and
2008. Options to purchase 2,075,242 and 1,353,430 shares were exercisable as of
September 30, 2009 and 2008, respectively. Total stock based compensation
expense for the three and nine months ended September 30, 2009 was approximately
$32,000 and $119,000, respectively. Total stock based compensation expense for
the three and nine months ended September 30, 2008 was approximately $44,000 and
$133,000, respectively. The compensation expense recognized during the three and
nine months ended September 30, 2009 and 2008 did not change basic and diluted
income (loss) per share reported in the Company's consolidated statements of
operations.
The fair value of options is estimated on the date of grant using the
Black-Scholes option pricing model. The valuation determined by the
Black-Scholes pricing model is affected by the Company's stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, expected stock price volatility over
the term of the awards, and actual and projected employee stock option exercise
behaviors. Stock price volatility is estimated based on a peer group of public
companies and expected term is estimated using the "safe harbor" provisions
provided in SAB 107. Under SAB 110, the safe harbor provisions provided by SAB
107 were extended beyond December 31, 2007 for companies that did not have
sufficient historical data to calculate the expected term of their related
options. The Company does not have sufficient historical data to calculate
expected term and the safe harbor provisions of SAB 107 were used to calculate
expected term for options granted during the periods. The weighted-average
assumptions the Company used as inputs to the Black-Scholes pricing model for
options granted during the nine months ended September 30, 2009 included a
dividend yield of zero, a risk-free interest rate of 2.5%, expected term of 4.0
years and an expected volatility of 85%. The weighted-average assumptions the
Company used as inputs to the Black-Scholes pricing model for options granted
during the three months ended September 30, 2008 included a dividend yield of
zero, a risk-free interest rate of 3.0%, expected term of 3.9 years and an
expected volatility of 58%. The weighted-average assumptions the Company used as
inputs to the Black-Scholes pricing model for options granted during the nine
months ended September 30, 2008 included a dividend yield of zero, a risk-free
interest rate of 2.9%, expected term of 3.7 years and an expected volatility of
58%.
For stock-based awards issued to officers, employees and directors,
stock-based compensation is attributed to expense using the straight-line single
option method. Stock-based compensation expense recognized in the Statement of
Operations for the three and nine months ended September 30, 2009 and 2008 is
included in selling, design and production expense and general and
administrative expense, and is based on awards ultimately expected to vest. ASC
Topic 718 requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those
estimates. For the three and nine months ended September 30, 2009, the Company
used historical data to calculate the expected forfeiture rate. For the three
and nine months ended September 30, 2008, the Company did not have sufficient
historical data to calculate the expected forfeiture rate and as such, the
Company recognized forfeitures as they occurred.
Options awarded to non-employees are charged to expense when the
services are performed and benefit is received as provided by FASB ASC Topic
505-50.
17
For the nine months ended September 30, 2009 and 2008, total
stock-based compensation expense included in the consolidated statements of
operations was $118,697 and $133,166, charged to the following expense
categories:
Nine Months Ended
September 30,
---------------------------
2009 2008
------------ ------------
Selling, design and production ................... $ 16,875 $ 19,188
General and administrative ....................... 101,822 113,978
------------ ------------
Total stock-based compensation ................. $ 118,697 $ 133,166
============ ============
The following table summarizes the activity in the Plan:
Weighted
Number of Average
Shares Exercise Price
-------------- --------------
Options outstanding - January 1, 2008 ....... 2,416,000 $ 0.72
Granted ................................ 690,000 0.41
Exercised .............................. -- --
Forfeited .............................. (390,000) 0.79
--------------
Options outstanding - December 31, 2008 ..... 2,716,000 0.64
Granted ................................ 394,000 0.20
Exercised .............................. -- --
Forfeited .............................. (210,000) 0.82
--------------
Options outstanding - September 30, 2009 .... 2,900,000 $ 0.56
==============
18
Additional information relating to stock options and warrants
outstanding and exercisable at September 30, 2009, summarized by exercise price,
is as follows:
Exercisable
Outstanding Weighted Average Weighted Average
-------------------------------------------- -----------------------------
Life Exercise Exercise
Exercise Price Per Share Shares (years) Price Shares Price
----------------------------- ----------- ----------- ------------- ------------ -------------
$ 0.20 (options) 379,000 9.8 $ 0.20 36,000 $ 0.20
$ 0.30 (options) 90,000 8.8 $ 0.30 90,000 $ 0.30
$ 0.31 (options) 48,000 7.8 $ 0.31 48,000 $ 0.31
$ 0.38 (options) 265,000 7.9 $ 0.38 252,776 $ 0.38
$ 0.40 (options) 450,000 8.8 $ 0.40 252,775 $ 0.40
$ 0.40 (warrants) 150,000 3.2 $ 0.40 150,000 $ 0.40
$ 0.46 (options) 415,000 7.8 $ 0.46 415,000 $ 0.46
$ 0.50 (options) 699,000 8.2 $ 0.50 485,233 $ 0.50
$ 0.50 (warrants) 290,000 3.2 $ 0.50 290,000 $ 0.50
$ 1.25 (options) 554,000 6.9 $ 1.25 495,458 $ 1.25
$ 1.25 (warrants) 625,000 1.2 $ 1.25 625,000 $ 1.25
$ 2.00 (warrants) 2,500,000 1.2 $ 2.00 2,500,000 $ 2.00
----------- ------------
6,465,000 4.4 $ 1.18 5,640,242 $ 1.29
=========== ============
A summary of the changes in the Company's unvested stock options is as
follows:
Weighted
Average
Number of Grant Date
Shares Fair Value
-------------- --------------
Unvested stock options - January 1, 2008 ............ 1,443,667 $ 0.32
Granted ........................................ 690,000 0.15
Vested ......................................... (566,802) (0.27)
Forfeited ...................................... (390,000) (0.32)
--------------
Unvested stock options - December 31, 2008 .......... 1,176,865 0.24
Granted ........................................ 394,000 0.03
Vested ......................................... (536,107) (0.20)
Forfeited ...................................... (210,000) (0.30)
--------------
Unvested stock options - September 30, 2009 ......... 824,758 $ 0.15
==============
As of September 30, 2009, there were 2,075,242 of vested stock options.
As of September 30, 2009, there was approximately $114,000 of total unrecognized
compensation expense related to share-based compensation arrangements granted
under the Plan. The cost is expected to be recognized on a weighted-average
basis over the next four years. The aggregate intrinsic value of stock options
outstanding was zero at September 30, 2009 as the market value of the options
was lower than the exercise value.
The Company has recorded a 100% valuation allowance on its deferred tax
asset related to net operating loss carryforwards. As a result, the stock-based
compensation has not been tax effected on the consolidated statement of
operations. For the three and nine months ended September 30, 2009 and 2008, the
deferred tax effect related to nonqualified stock options is not material.
19
On March 19, 2008, the Company issued a warrant to purchase 40,000
shares of its common stock to a consulting firm for services. The warrant has an
exercise price of $0.50, a five-year term and vested over the 9-month term of
the service contract. The warrant was valued at $6,700 using the Black-Scholes
option pricing model.
10. J. LINDEBERG RETAIL STORE ASSET PURCHASE
Effective May 13, 2009, the Company purchased certain assets related to
the operation of a J. Lindeberg retail store in Los Angeles, California, from an
unrelated party. The asset purchase agreement provided for the payment of
$100,000 in cash upon closing and cancellation of approximately $250,000 of
trade accounts receivable due from the seller. The asset purchase agreement also
provided that the Company acquire certain leasehold improvements, furniture and
fixtures, and computer and store equipment. On May 18, 2009, the Company entered
into a new lease agreement for the store space that expires in January 2015.
11. RETAIL STORES AND SUBSEQUENT EVENTS
In November 2009, the Company entered into two new lease agreements for
a William Rast retail store and a J. Lindeberg retail store, both to be located
in Miami, Florida. The leases have seven-year terms expiring in May 2017. The
stores are expected to open in the first half of 2010.
During the third quarter of 2009 and through November 16, 2009, the
Company entered into five retail store leases as follows:
BRAND LOCATION ESTIMATED OPENING DATE
----------------------- -------------------------- ----------------------
William Rast Miami, Florida June 2010
J. Lindeberg Miami, Florida April 2010
William Rast Century City, California November 2009
William Rast San Jose, California November 2009
William Rast Outlet Cabazon, California November 2009
As of September 30, 2009, the Company had the following additional
retail store locations:
BRAND LOCATION OPEN DATE
----------------------- -------------------------- ----------------------
J. Lindeberg Los Angeles, California May 2009
J. Lindeberg New York, New York July 2008
As of November 16, 2009, the date these interim financial statements
were issued, management has evaluated the two new lease agreements entered into
in November 2009 and has determined that there is no material financial impact,
other than future contractual obligations for these operating leases as listed
below, on the financial statements as of and for the three and nine month
periods ended September 30, 2009.
20
Future annual minimum payments due under the leases are summarized as
follows:
YEARS ENDING DECEMBER 31,
2009 (three months)............................ $ -
2010........................................... 293,398
2011........................................... 444,499
2012........................................... 450,407
2013........................................... 457,226
2014........................................... 464,175
Thereafter..................................... 1,109,461
-----------
$ 3,219,166
===========
12. CUSTOMER AND SUPPLIER CONCENTRATIONS
During the nine months ended September 30, 2009, two customers
comprised greater than 10% of the Company's sales. Sales to these customers
amounted to 23.0% and 19.9% of net sales for the nine months ended September 30,
2009. During the nine months ended September 30, 2008, one customer comprised
greater than 10% of the Company's sales. Sales to this customer amounted to
29.3% of net sales for the nine months ended September 30, 2008. At September
30, 2009 and 2008, the majority of receivables due from these customers was sold
to the factor and are included in the due from factor balance.
During the nine months ended September 30, 2009, three suppliers
comprised greater than 10% of the Company's purchases. Purchases from these
suppliers amounted to 30.1%, 21.3% and 12.0% for the nine months ended September
30, 2009. During the nine months ended September 30, 2008, three suppliers
comprised greater than 10% of the Company's purchases. Purchases from these
suppliers amounted to 13.1%, 10.9% and 10.6% for the nine months ended September
30, 2008. At September 30, 2009 and 2008, accounts payable and accrued expenses
included an aggregate of approximately $669,000 and $232,000, respectively, due
to these vendors.
During the nine months ended September 30, 2009, the Company purchased
substantially all of its J. Lindeberg brand products from J. Lindeberg AB in
Sweden. Total purchases from J. Lindeberg AB for the nine months ended September
30, 2009 amounted to approximately $2.1 million. Total purchases for the nine
months ended September 30, 2008 amounted to approximately $527,000. Included in
Due to Member as of September 30, 2009 is approximately $67,000 due to J.
Lindeberg AB for product purchases.
13. OFF BALANCE SHEET RISK AND CONTINGENCIES
Financial instruments that potentially subject the Company to
off-balance sheet risk consist of factored accounts receivable. The Company
sells the majority of its trade accounts receivable to a factor and is
contingently liable to the factor for merchandise disputes and other customer
claims. At September 30, 2009, total factor receivables approximated $5.3
million. The factor also issues letters of credit and vendor guarantees on the
Company's behalf. There were no outstanding letters of credit or vendor
guarantees as of September 30, 2009. Ledger debt (payables to suppliers that use
the same factor as the Company) amounted to approximately $547,000 at September
30, 2009.
21
The Company is subject to certain legal proceedings and claims arising
in connection with its business. In the opinion of management, with the
exception of the Charlotte Russe legal action described in Note 7, there are
currently no claims that will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Pursuant to the operating agreement the Company entered into with J.
Lindeberg USA Corp and J. Lindeberg AB, the Company contributed $20,000 in cash
to its 50% owned subsidiary, J. Lindeberg USA, LLC, and will be required to
contribute up to a maximum of $1.5 million in working capital or related
guaranties through December 2010. At this point in time, the cash amount in
excess of $20,000 that the Company will be required to contribute to J.
Lindeberg USA, LLC, if any, is uncertain. The Company's J. Lindeberg USA, LLC,
factoring agreements provide for corporate guaranties from its related entities,
People's Liberation, Inc., Bella Rose, LLC, and Versatile Entertainment, Inc.
In accordance with the bylaws of the Company, officers and directors
are indemnified for certain events or occurrences arising as a result of the
officer or director's serving in such capacity. The term of the indemnification
period is for the lifetime of the officer or director. The maximum potential
amount of future payments the Company could be required to make under the
indemnification provisions of its bylaws is unlimited. At this time, the Company
believes the estimated fair value of the indemnification provisions of its
bylaws is minimal and therefore, the Company has not recorded any related
liabilities.
In addition to the indemnification required in our articles of
incorporation and bylaws, we have entered into indemnity agreements with each of
our current officers, directors and a key employee. These agreements provide for
the indemnification of our directors, officers and key employee for all
reasonable expenses and liabilities incurred in connection with any action or
proceeding brought against them by reason of the fact that they are or were our
agents. We believe these indemnification provisions and agreements are necessary
to attract and retain qualified directors, officers and employees.
The Company enters into indemnification provisions under its agreements
in the normal course of business, typically with suppliers, customers,
distributors and landlords. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities or, in
some cases, as a result of the indemnified party's activities under the
agreement. These indemnification provisions often include indemnifications
relating to representations made by the Company with regard to intellectual
property rights. These indemnification provisions generally survive termination
of the underlying agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification provisions is
unlimited. The Company has not incurred material costs to defend lawsuits or
settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has not recorded any related liabilities.
14. NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued ASC 815-10-50, DISCLOSURES ABOUT
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. ASC 815-10-50 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under ASC 815 and its related interpretations,
(c) how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows and (d) encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. ASC 815-10-50 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The adoption of this pronouncement did not have a
material impact on the Company's consolidated financial statements.
22
In May 2008, the FASB issued ASC Topic 105 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. ASC 105 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). The Statement is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, THE MEANING OF PRESENT FAIRLY IN CONFORMITY WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. The adoption of this pronouncement did not have a
material impact on the Company's consolidated financial statements.
In June 2009, the FASB issued ASC Topic 860-20, "SALE OF FINANCIAL
ASSETS, SFSA 166." ASC 860-20 is intended to improve the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial statements regarding transfers of
financial assets, including the effects of a transfer on its financial position,
financial performance, and cash flows, and the transferor's continuing
involvement, if any, in the transferred financial assets. This statement must be
applied as of the beginning of the Company's first annual reporting period that
begins after November 15, 2009. The Company does not expect the adoption of ASC
860-20 to have a material impact on its results of operations, financial
condition or cash flows.
In June 2009, the FASB issued ASC Topic 810-10, "AMENDMENTS TO FASB
INTERPRETATION NO. 46(R)." The pronouncement is intended to (1) address the
effects on certain provisions of FASB Interpretation No. 46 (revised December
2003), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES," as a result of the
elimination of the qualifying special-purpose entity concept in ASC 860-20, and
(2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity. This statement
must be applied as of the beginning of the Company's first annual reporting
period that begins after November 15, 2009. The Company does not expect the
adoption of ASC 810-10FAS 167 to have a material impact on its results of
operations, financial condition or cash flows.
In June 2009, the FASB issued ASC Topic 105-10, "THE FASB ACCOUNTING
STANDARDS CODIFICATION AND THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES," The pronouncement will become the source of authoritative U.S.
generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of Federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature ,not included in the
Codification will become non-authoritative. This statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of FAS 168 did not have a material impact on
the Company's results of operations, financial condition or cash flows.
Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the United States Securities and Exchange Commission did not or
are not believed to have a material impact on the Company's present or future
consolidated financial statements.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-Q is intended to update the
information contained in our Annual Report on Form 10-K for the year ended
December 31, 2008 and presumes that readers have access to, and will have read,
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information contained in such Form 10-K. The following
discussion and analysis also should be read together with our consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this Form 10-Q.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF PEOPLE'S LIBERATION, INC. FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2009 AND 2008. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THOSE FACTORS SET
FORTH IN "RISK FACTORS" CONTAINED IN ITEM 1A OF EACH OF OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008 AND THIS QUARTERLY REPORT ON FORM
10-Q.
OVERVIEW
We design, market and sell high-end casual apparel under the brand
names "People's Liberation," "William Rast" and, in the United States, "J.
Lindeberg." The majority of the merchandise we offer consists of premium denim,
knits, wovens, golf wear and outerwear for men and women. In the United States,
we distribute our merchandise to better specialty stores, boutiques and
department stores, such as Nordstrom, Bloomingdales, Saks Fifth Avenue and
Neiman Marcus, and online at williamrast.com, jlindeberg.com and Zappos.com. We
also market and sell J. Lindeberg branded collection and golf apparel through
our retail stores in New York City and Los Angeles, and J. Lindeberg golf wear
to green grass golf stores and boutiques in the United States. Internationally,
in select countries, we sell our William Rast branded apparel products directly
and through distributors to better department stores and boutiques throughout
the world.
We commenced our William Rast clothing line in May 2005. Our William
Rast clothing line is a collaboration with Justin Timberlake and his childhood
friend, Trace Ayala.
We began distributing J. Lindeberg branded apparel products in the
United States on an exclusive basis beginning July 2008 in collaboration with J.
Lindeberg AB in Sweden. In addition to being sold in the United States through
our subsidiary, J. Lindeberg USA, LLC, J. Lindeberg branded high-end men's
fashion and premium golf apparel is marketed and sold by J. Lindeberg AB
worldwide.
We commenced our People's Liberation business in July 2004. On December
16, 2008, we entered into an agreement with Charlotte Russe pursuant to which we
agreed to exclusively sell to Charlotte Russe, in North America and Central
America, People's Liberation(R) branded apparel, apparel accessories, eyewear,
jewelry, watches, cosmetics and fragrances, and to provide Charlotte Russe with
marketing and branding support for People's Liberation branded apparel and
apparel accessories. We ceased to sell People's Liberation branded merchandise
in North America and Central America to parties other than Charlotte Russe
effective April 30, 2009. We will continue to market and sell People's
Liberation branded merchandise internationally, with the exception of Central
America. Product sales to Charlotte Russe under the terms of this agreement
began shipping in June 2009. We are in litigation with Charlotte Russe in
relation to our distribution agreement. See the discussion under Note 7 to the
financial statements as well as the discussion below under the heading "Recent
Developments" for further information relating to our distribution agreement
with Charlotte Russe and the pending litigation.
24
We are headquartered in Los Angeles, California, maintain showrooms in
New York, Los Angeles and Atlanta, and have sales representatives in Dallas,
Texas, and Chicago, Illinois.
INTERNATIONAL DISTRIBUTION
On June 30, 2009, we formed a new entity, William Rast Europe B.V., a
wholly-owned subsidiary of William Rast Europe Holdings, LLC. We began shipping
directly to European customers in the third quarter of 2009. We anticipate that
this new entity will operate the European portion of our William Rast business
and will manage our distributor and agency relationships in the future.
Our William Rast branded apparel products are also sold internationally
in select countries directly and through distributors to better department
stores and boutiques. Our distributors purchase products at a discount for
resale in their respective territories and market, sell, warehouse and ship
William Rast branded apparel products at their expense. We anticipate growing
our international distribution channels across new territories.
MANUFACTURING AND SUPPLY
We use third party contract manufacturers and full package suppliers to
produce our William Rast denim finished goods from facilities located primarily
in Mexico and Los Angeles, California. For the majority of our William Rast
knits and other non-denim products, we source these goods from international
suppliers primarily in Asia. We source our People's Liberation denim products
sold to Charlotte Russe under our exclusive distribution agreement from
international suppliers of full package goods primarily located in Mexico. We
source our People's Liberation knit products sold to Charlotte Russe from
international suppliers of full package goods located primarily in Asia and
India. We currently purchase all of our J. Lindeberg branded apparel products
from J. Lindeberg AB, the beneficial owner of 50% of our subsidiary, J.
Lindeberg USA, LLC. We intend to continue our transition to international
suppliers of full package denim finished goods which will enable us to remain
competitive and improve margins.
STRUCTURE OF OPERATIONS
Our wholly-owned subsidiary Versatile Entertainment, Inc. conducts our
People's Liberation brand business. Our William Rast brand business is conducted
through our wholly-owned subsidiary Bella Rose, LLC. William Rast Sourcing, LLC
and William Rast Licensing, LLC are consolidated under Bella Rose and are each
owned 50% by Bella Rose and 50% by William Rast Enterprises, LLC, an entity
owned in part by Justin Timberlake. William Rast Europe Holdings, LLC, a
Delaware limited liability company, was formed on March 11, 2009 and is a
wholly-owned subsidiary of William Rast Sourcing. Our William Rast European
business is conducted through William Rast Europe Holdings and its wholly-owned
subsidiary, William Rast Europe B.V. Our J. Lindeberg brand business is
conducted through Bella Rose. J. Lindeberg USA, LLC is consolidated under Bella
Rose and is owned 50% by Bella Rose and 50% by J. Lindeberg USA, Corp. an entity
owned by J. Lindeberg AB, a Swedish corporation.
25
RECENT DEVELOPMENTS
CHARLOTTE RUSSE LITIGATION
As discussed under Note 7 to the Consolidated Financial Statements, we
are in litigation with Charlotte Russe and its affiliates in relation to our
exclusive distribution agreement, which Charlotte Russe purported to terminate
on October 26, 2009. We derived a significant portion of our revenues and
operating cash flow from the sale of People's Liberation branded merchandise
pursuant to this distribution agreement. In the first year of the contract, we
received approximately $5.5 million through September 30, 2009 as required by
the distribution agreement and we are owed $59.5 million in guaranteed minimum
payments over the remainder of the term of the distribution agreement, which
amount may be reduced if Charlotte Russe elects to terminate the distribution
agreement early, beginning July 2011 with an early termination fee. We believe
that as a result of Charlotte Russe's purported termination of the distribution
agreement, Charlotte Russe will cease to make their contractually obligated
payments to us, which will significantly decrease our net sales and cash flows
from operations of the People's Liberation business, and may adversely impact
our results of operations to the extent that we are not able to successfully
mitigate the impact of Charlotte Russe's actions by implementing cost cutting
measures in our People's Liberation branded merchandise business. We also
believe our results of operations and financial condition could be negatively
impacted if we are unable to reach a settlement in a manner acceptable to us or
the ensuing litigation, which is currently in its early stage, is not resolved
in a manner favorable to us. Additionally, we may incur significant legal fees
in our litigation with Charlotte Russe, and unless the cases are settled, we
will continue to incur additional legal fees in increasing amounts as the cases
move toward trial.
Although the purported termination of our exclusive distribution
agreement by Charlotte Russe will have a significant impact on our subsidiary
that holds the People's Liberation brand business, Versatile Entertainment, we
believe it does not affect our ability as a whole to continue as a going concern
because of the continued operations and expected sales, cash flows and results
of operations from our other subsidiaries, William Rast Sourcing and J.
Lindeberg USA.
OTHER DEVELOPMENTS
In November 2009, we launched our retail expansion plan for our William
Rast brand with the opening of two new full-price retail stores at the Westfield
Century City Shopping Mall in Los Angeles, California, and the Westfield Valley
Fair Shopping Mall in San Jose, California. Additionally, we opened our first
outlet store at the Desert Hills Premium Outlets in Cabazon, California. These
store openings are part of our retail expansion plan which includes the roll-out
approximately forty retail stores in major metropolitan locations over the next
several years. We believe that the retail stores will enhance our net sales and
gross profit and the outlet store will allow us to sell our overstock or slow
moving items at higher profit margins.
To further our retail expansion plan, in November 2009 we entered into
two new leases for a William Rast retail store and a J. Lindeberg retail store,
both to be located in Miami, Florida. The leases have seven-year terms expiring
in May 2017. The stores are expected to open in the first half of 2010.
In June and July of 2009, we held three major launch events for the
international expansion of our William Rast brand. The events were in three
European cities; London, Paris and Berlin. The London event was held at
Selfridges, and included the installation of in-store pop up shops in the men's
and women's departments, a fashion show and an in-store appearance by Justin
Timberlake and Trace Ayala. The Paris event was held at Collette and included
the dedication of an entire window to the William Rast brand. At Bread and
Butter in Berlin, we presented our new William Rast Spring-Summer `10
collection, as well as a newly expanded denim offering that included a selection
of more accessibly priced styles and washes.
26
Effective May 13, 2009, we purchased certain assets related to the
operation of a J. Lindeberg retail store in Los Angeles, California, from an
unrelated party. The asset purchase agreement provided for the payment of
$100,000 in cash upon closing and cancellation of approximately $250,000 of
trade accounts receivable due from the seller. The asset purchase agreement also
provided that we acquire certain leasehold improvements, furniture and fixtures,
and computer and store equipment. On May 18, 2009, we entered into a new lease
agreement for the store space that expires in January 2015.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to our valuation of inventories and our allowance for uncollectible
house accounts receivable, recourse factored accounts receivable and
chargebacks. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
INVENTORIES. Inventories are evaluated on a continual basis and reserve
adjustments, if any, are made based on management's estimate of future sales
value of specific inventory items. Reserve adjustments are made for the
difference between the cost of the inventory and the estimated market value, if
lower, and charged to operations in the period in which the facts that give rise
to the adjustments become known. Inventories, consisting of piece goods and
trim, work-in-process and finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
ACCOUNTS RECEIVABLE. Factored accounts receivable balances with
recourse, chargeback and other receivables are evaluated on a continual basis
and allowances are provided for potentially uncollectible accounts based on
management's estimate of the collectability of customer accounts. Factored
accounts receivable without recourse are also evaluated on a continual basis and
allowances are provided for anticipated returns, discounts and chargebacks based
on management's estimate of the collectability of customer accounts and
historical return, discount and other chargeback rates. If the financial
condition of a customer were to deteriorate, resulting in an impairment of its
ability to make payments, an additional allowance may be required. Allowance
adjustments are charged to operations in the period in which the facts that give
rise to the adjustments become known.
INTANGIBLE ASSETS. Intangible assets are evaluated on a continual basis
and impairment adjustments are made based on management's reassessment of the
useful lives related to intangible assets with definite useful lives. Intangible
assets with indefinite lives are evaluated on a continual basis and impairment
adjustments are made based on management's comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. Impairment adjustments are made for the difference between the carrying
value of the intangible asset and the estimated valuation and charged to
operations in the period in which the facts that give rise to the adjustments
become known.
27
REVENUE RECOGNITION. Wholesale revenue is recognized when merchandise
is shipped to a customer, at which point title transfers to the customer, and
when collection is reasonably assured. Customers are not given extended terms or
dating or return rights without proper prior authorization. Revenue is recorded
net of estimated returns, charge backs and markdowns based upon management's
estimates and historical experience. Website revenue is recognized when
merchandise is shipped to a customer and when collection is reasonably assured.
Retail revenue is recognized on the date of purchase from our retail stores.
DEFERRED TAX ASSETS. We may record a valuation allowance to reduce our
deferred tax assets to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. If we determine that we may not realize all or part of our deferred
tax assets in the future, we will make an adjustment to the carrying value of
the deferred tax asset, which would be reflected as an income tax expense.
Conversely, if we determine that we will realize a deferred tax asset, which
currently has a valuation allowance, we would be required to reverse the
valuation allowance, which would be reflected as an income tax benefit.
Valuation allowance adjustments are made in the period in which the facts that
give rise to the adjustments become known.
INCOME TAXES. The Company files U.S. Federal tax returns, multiple U.S.
state and state franchise tax returns. For U.S. Federal tax purposes, all
periods subsequent to December 31, 2005 are subject to examination by the U.S.
Internal Revenue Service ("IRS"). The Company believes that its income tax
filing positions and deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material change. Therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FASB
ASC Topic 740 INCOME TAXES. In addition, the Company does not anticipate that
the total amount of unrecognized tax benefit related to any particular tax
position will change significantly within the next twelve months. The Company's
policy for recording interest and penalties, if any, associated with IRS audits
is to record such items as a component of income taxes.
STOCK BASED COMPENSATION. Stock-based compensation expense is
recognized based on awards ultimately expected to vest on a straight-line
prorated basis. The fair value of options is estimated on the date of grant
using the Black-Scholes option pricing model. The valuation determined by the
Black-Scholes pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to our expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors. Stock price volatility was estimated based on a peer group
of public companies and the expected term was estimated using the "safe harbor"
provisions provided in SAB 107 and SAB 110.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 14 to Notes to Consolidated Financial Statements for a full
description of recent accounting pronouncements including the respective
expected dates of adoption and effects on results of operations and financial
condition.
28
RESULTS OF OPERATIONS
The following table presents consolidated statement of operations data
for each of the periods indicated as a percentage of revenues.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2009 2008 2009 2008
-------- -------- -------- --------
Net sales ................................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ....................... 49.6 51.0 52.1 51.4
-------- -------- -------- --------
Gross profit ............................. 50.4 49.0 47.9 48.6
Selling, design and production expenses .. 24.2 39.0 27.1 33.2
General and administrative expenses ...... 17.9 17.8 19.4 17.8
-------- -------- -------- --------
Operating income (loss) .................. 8.3% (7.8)% 1.4% (2.4)%
======== ======== ======== ========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2009 AND THREE MONTHS
ENDED SEPTEMBER 30, 2008
NET SALES
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Net Sales........................ $ 11,005,915 $ 10,982,733 0.2%
The increase in net sales for the three months ended September 30, 2009
was due primarily to increased sales of People's Liberation branded apparel to
Charlotte Russe pursuant to our exclusive distribution agreement. We began
shipping goods to Charlotte Russe under the terms of our distribution agreement
in June 2009. As a result of Charlotte Russe's purported termination of the
agreement, we believe that Charlotte Russe will cease to purchase People's
Liberation branded merchandise from us, which will significantly decrease our
net sales of the brand for the remainder of 2009 and beyond. Due to current
macro economic conditions, we experienced a decline in wholesale sales of our
William Rast apparel line in the United States during the third quarter of 2009.
We also experienced a decline in wholesale sales of our J. Lindeberg product
line in the third quarter of 2009. This decline was offset by increased J.
Lindeberg retail sales due primarily to sales in our newly-acquired retail store
in Los Angeles, California.
29
GROSS PROFIT
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Gross Profit .................... $ 5,549,437 $ 5,382,819 3.1%
Gross profit consists of net sales less cost of goods sold. Cost of
goods sold includes expenses primarily related to inventory purchases and
contract labor, duty, freight and overhead expenses. Overhead expenses primarily
consist of warehouse and shipping salaries and expenses. As a percentage of net
sales, our gross margin increased to 50.4% for the three months ended September
30, 2009 from 49.0% for the three months ended September 30, 2008. The increase
in gross profit as a percentage of net sales was due to a change in our product
line mix during the quarter and a shift in manufacturing of denim products from
contract manufacturers in Los Angeles to less costly full package suppliers in
Mexico.
SELLING, DESIGN AND PRODUCTION EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Selling, design and production
expenses ..................... $ 2,659,481 $ 4,283,382 (37.9)%
Selling, design and production expenses for the three months ended
September 30, 2009 and 2008 primarily related to tradeshow, salaries and
commissions, design fee payments, advertising, marketing and promotion, samples,
travel and showroom expenses. As a percentage of net sales, selling, design and
production expenses decreased to 24.2% for the three months ended September 30,
2009 compared to 39.0% for the three months ended September 30, 2008. The
decrease in selling, design and production expenses for the three months ended
September 30, 2009 is primarily attributable to decreased design and sample
costs related to our restructured design services agreement with Paris68 and
decreased promotion and marketing costs. Effective December 1, 2008, our design
services agreement with Paris68 was terminated and the parties to the services
agreement negotiated the terms of a restructured design consulting arrangement.
The restructured design consulting arrangement provides for a reduction in the
fees paid for services, a reduction in sample costs and the elimination of
royalty payments due under the prior agreement. In the third quarter of 2008, we
launched a viral marketing campaign and held a fashion show to promote our
William Rast brand. These costs were not incurred during the third quarter of
2009, which further accounts for the decrease in selling, design and production
expense during the quarter. As discussed above, we are currently subject to
litigation in relation to our agreement with Charlotte Russe. As a result of the
litigation, we anticipate a reduction of our selling, design and production
expenses related to direct expenses of our People's Liberation brand.
30
GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
General and administrative
expenses ..................... $ 1,970,929 $ 1,955,528 0.8%
General and administrative expenses for the three months ended
September 30, 2009 and 2008 primarily related to salaries, professional fees,
facility costs, travel and entertainment, depreciation and amortization expense,
and other general corporate expenses. As a percentage of net sales, general and
administrative expenses increased slightly to 17.9% for the three months ended
September 30, 2009 from 17.8% for three months ended September 30, 2008. The
increase in general and administrative expenses during the three months ended
September 30, 2009 was due primarily to a net increase in administrative
salaries and rent related to our newly acquired J. Lindeberg retail store in Los
Angeles and our new administrative office and warehouse facilities, offset by
decreased professional fees. The net increase in administrative salaries was due
to the hiring of additional employees related to our J. Lindeberg retail store
acquisition in the second quarter of 2009 and other administrative positions,
offset by a 10% salary reduction which took effect February 1, 2009 in response
to worsening economic conditions. In the third quarter of 2008, we incurred
nonrecurring professional fees related to the audit of the historical financial
statements of our newly acquired J. Lindeberg business. As discussed above, we
are currently subject to litigation in relation to our agreement with Charlotte
Russe. As a result of the litigation, we anticipate a reduction of our general
and administrative expenses related to direct expenses of our People's
Liberation brand.
INTEREST EXPENSE
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Interest Expense................. $ 59,653 $ 45,115 32.2%
Under our factoring arrangements, we may borrow up to 85% on our
factored accounts receivable and 50% on our eligible inventories. Maximum
borrowings under our People's Liberation and William Rast inventory facility are
not to exceed $1.3 million of eligible inventory. Maximum borrowings, including
borrowings related to factored accounts receivable and inventory, related to our
J. Lindeberg facility are not to exceed $1.5 million. Outstanding borrowings
under our factoring arrangements amounted to approximately $3.1 million and $3.6
million at September 30, 2009 and 2008, respectively. The increase in interest
expense is due to the increased borrowing under our factoring arrangements
during the three months ended September 30, 2009.
31
PROVISION FOR INCOME TAX
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Provision for Income Tax......... $ 8,190 $ 6,000 36.5%
The provision for income taxes for the three months ended September 30,
2009 and 2008 represents the minimum tax payments due for state and local
purposes, including gross receipts tax on sales generated by our limited
liability companies. A provision for Federal income taxes was not recorded for
the three months ended September 30, 2009, as any tax liabilities generated from
net income would be offset by the Company's net operating loss carryforwards. A
provision for Federal income taxes has not been recorded for the three months
ended September 30, 2008, as we had a net loss during the quarter. As of
September 30, 2009, a valuation allowance has been provided for our deferred
income tax assets related to net operating loss carryforwards, bad debt and
other reserves. As of December 31, 2008, total net operating losses available to
carry forward to future periods amounted to approximately $4.6 million. At this
time, we cannot determine that it is more likely than not that we will realize
the future income tax benefits related to our net operating losses and other
deferred tax assets.
NET INCOME (LOSS)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Net income (loss)................ $ 851,184 $ (897,046) *
* Not meaningful
Our net income earned during the three months ended September 30, 2009
compared to our net loss for the three months ended September 30, 2008 was due
primarily to increased gross margin and decreased operating expenses, as
discussed above.
NONCONTROLLING INTEREST
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Noncontrolling interest.......... $ 262,065 $ 562,805 (53.4)%
Noncontrolling interest recorded for the three months ended September
30, 2009 and 2008 represents minimum distributions accrued for the calendar
quarters ended September 30, 2009 and 2008 due to William Rast Enterprises, a
member of William Rast Sourcing, and income or loss allocations due to J.
Lindeberg USA Corp., a member of J. Lindeberg USA, LLC. In accordance with the
related operating agreements, as amended, William Rast Sourcing and William Rast
Licensing are to pay its member, William Rast Enterprises, a minimum quarterly
minority interest distribution of 6% and 3%, respectively, of applicable net
sales generated by William Rast Sourcing and William Rast Licensing during the
quarterly periods. Beginning July 1, 2008, the operations of J. Lindeberg USA,
LLC are included in our consolidated financial statements. Profit and loss
allocations to our member, J. Lindeberg USA Corp., are recorded as
noncontrolling interest in our consolidated financial statements.
32
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Net income (loss) attributable to
common stockholders........... $ 589,119 $ (1,459,851) *
* Not meaningful
Our net income attributable to common stockholders earned during the
three months ended September 30, 2009 compared to our net loss for the three
months ended September 30, 2008 is due primarily to increased gross margin and
decreased operating expenses and noncontrolling interest incurred during the
three months ended September 30, 2009, as discussed above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2009 AND NINE MONTHS
ENDED SEPTEMBER 30, 2008
NET SALES
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Net Sales........................ $ 28,485,857 $ 24,645,117 15.6%
The increase in net sales for the nine months ended September 30, 2009
was due primarily to increased sales of People's Liberation branded apparel due
to our exclusive distributor relationship with Charlotte Russe, as discussed
above. We began shipping goods to Charlotte Russe under the terms of our
agreement in June 2009. As a result of Charlotte Russe's purported termination
of the agreement, we believe that Charlotte Russe will cease to purchase
People's Liberation branded merchandise from us, which will significantly
decrease net sales of the brand for the remainder of 2009 and beyond.
The increase in net sales for the nine months ended September 30, 2009
was also due to the commencement of wholesale and retail sales of our new
apparel line, J. Lindeberg, including our newly acquired retail store in Los
Angeles, California. We began distributing J. Lindeberg brand products in the
United States on an exclusive basis beginning July 2008. Due to current macro
economic conditions, we experienced a decline in wholesale sales of our William
Rast apparel line in the United States during the nine months ended September
30, 2009.
33
GROSS PROFIT
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Gross Profit..................... $ 13,638,565 $ 11,990,468 13.7%
As a percentage of net sales, our gross margin decreased to 47.9% for
the nine months ended September 30, 2009 from 48.6% for the nine months ended
September 30, 2008. The decrease in gross profit as a percentage of net sales
was due to a net increase in off-price sales of our William Rast brand in the
first quarter of 2009, offset by decreased off-price sales of our People's
Liberation product line. The decrease in gross profit as a percentage of net
sales was also offset by increased retail sales of our J. Lindeberg product line
at higher gross margins.
SELLING, DESIGN AND PRODUCTION EXPENSES
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Selling, design and
production expenses........... $ 7,703,663 $ 8,192,660 (6.0)%
As a percentage of net sales, selling, design and production expenses
decreased to 27.1% for the nine months ended September 30, 2009 compared to
33.2% for the nine months ended September 30, 2008. The decrease in selling,
design and production expenses for the nine months ended September 30, 2009 is
attributable to decreased design and sample costs related to our restructured
design services agreement with Paris68 and decreased promotion and marketing
costs. Effective December 1, 2008, our design services agreement with Paris68
was terminated and the parties to the services agreement negotiated the terms of
a restructured design consulting arrangement. The restructured design consulting
arrangement provides for a reduction in the fees paid for services, a reduction
in sample costs and the elimination of royalty payments due under the prior
agreement. In the third quarter of 2008, we launched a viral marketing campaign
to promote our William Rast brand. This cost was not incurred during the nine
months ended September 30, 2009, which further accounts for the decrease in
selling, design and production expense during the period. The decrease in
selling, design and production expenses for the nine months ended September 30,
2009 was offset by increased sales and retail salaries and commissions related
to our J. Lindeberg acquisition which took place during the second quarter of
2008. As discussed above, we are currently subject to litigation in relation to
our agreement with Charlotte Russe. As a result of the litigation, we anticipate
a reduction of our selling, design and production expenses related to direct
expenses of our People's Liberation brand.
34
GENERAL AND ADMINISTRATIVE EXPENSES
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
General and administrative
expenses ..................... $ 5,539,017 $ 4,388,657 26.2%
As a percentage of net sales, general and administrative expenses
increased to 19.4% for the nine months ended September 30, 2009 from 17.8% for
nine months ended September 30, 2008. The increase in general and administrative
expenses during the nine months ended September 30, 2009 was due primarily to a
net increase in administrative salaries and rent related to our J. Lindeberg
retail stores and showroom in New York City, increased rent for our new
administrative office and warehouse facilities and impairment charges related to
one of our trademarks we are no longer using. The net increase in administrative
salaries was due to the hiring of our Vice President of Branding and Licensing
during the second quarter of 2008 and the hiring of additional employees related
to our J. Lindeberg acquisition in the third quarter of 2008 and our J.
Lindeberg retail store acquisition in May 2009, offset by a 10% salary reduction
which took effect February 1, 2009 in response to worsening economic conditions.
In the third quarter of 2008, we incurred nonrecurring professional fees related
to the audit of the historical financial statements of our newly acquired J.
Lindeberg business. As discussed above, we are currently subject to litigation
in relation to our agreement with Charlotte Russe. As a result of the
litigation, we anticipate a reduction of our general and administrative expenses
related to direct expenses of our People's Liberation brand.
INTEREST EXPENSE
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Interest Expense................. $ 160,505 $ 89,523 79.3%
Under our factoring arrangements, we may borrow up to 85% on our
factored accounts receivable and 50% on our eligible inventories. Maximum
borrowings under our People's Liberation and William Rast inventory facility are
not to exceed $1.3 million of eligible inventory. Maximum borrowings, including
borrowings related to factored accounts receivable and inventory, related to our
J. Lindeberg facility are not to exceed $1.5 million. Outstanding borrowings
under our factoring arrangements amounted to approximately $3.1 million and $3.6
million at September 30, 2009 and 2008, respectively. The increase in interest
expense is due to the increased borrowing under our factoring arrangements
during the nine months ended September 30, 2009.
PROVISION FOR INCOME TAX
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Provision for Income Tax......... $ 29,980 $ 20,190 48.5%
35
The provision for income taxes for the nine months ended September 30,
2009 and 2008 represents the minimum tax payments due for state and local
purposes, including gross receipts tax on sales generated by our limited
liability companies. A provision for Federal income taxes was not recorded for
the nine months ended September 30, 2009, as any tax liabilities generated from
net income would be offset by the Company's net operating loss carryforwards. A
provision for Federal income taxes has not been recorded for the nine months
ended September 30, 2008, as we had a net loss during the period. As of
September 30, 2009, a valuation allowance has been provided for our deferred
income tax assets related to net operating loss carryforwards, bad debt and
other reserves. As of December 31, 2008, total net operating losses available to
carry forward to future periods amounted to approximately $4.6 million. At this
time, we cannot determine that it is more likely than not that we will realize
the future income tax benefits related to our net operating losses and other
deferred tax assets.
NET INCOME (LOSS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Net income (loss)................ $ 205,400 $ (684,290) *
* Not meaningful
Our net income earned during the nine months ended September 30, 2009
compared to our net loss for the nine months ended September 30, 2008 was due
primarily to increased net sales and gross margin, offset by increased operating
expenses, as discussed above.
NONCONTROLLING INTEREST
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Noncontrolling Interest.......... $ 719,104 $ 1,169,958 (38.5)%
Noncontrolling interest recorded for the nine months ended September
30, 2009 represents minimum distributions accrued for the calendar quarters
ended September 30, 2009 due to William Rast Enterprises, a member of William
Rast Sourcing, and income or loss allocations due to J. Lindeberg USA, Corp., a
member of J. Lindeberg USA, LLC. In accordance with the related operating
agreements, as amended, William Rast Sourcing and William Rast Licensing are to
pay its member, William Rast Enterprises, a minimum quarterly minority interest
distribution of 6% and 3%, respectively, of applicable net sales generated by
William Rast Sourcing and William Rast Licensing during the quarterly periods.
Beginning July 1, 2008, the operations of J. Lindeberg USA, LLC are included in
our consolidated financial statements. Profit and loss allocations to our
member, J. Lindeberg USA, Corp., are recorded as noncontrolling interest in our
consolidated financial statements.
36
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- PERCENT
2009 2008 CHANGE
------------ ------------ ------------
Net loss attributable to
common stockholders........... $ (513,704) $ (1,854,248) (72.3)%
The decrease in net loss attributable to common stockholders during the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008 is due primarily to increased net sales and gross margin and decreased
noncontrolling interest, offset by increased operating expenses incurred during
the nine months ended September 30, 2009, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, we had cash and cash equivalents of
approximately $1.3 million, working capital of approximately $3.0 million, and
approximately $1.6 million of availability from our factor. As of September 30,
2009, advances from our factor totaled approximately $3.1 million. As of
September 30, 2008, we had cash and cash equivalents of approximately $1.1
million, a working capital balance of approximately $4.3 million, and
approximately $2.3 million of availability from our factor. As of September 30,
2008, advances from our factor totaled approximately $3.6 million.
We are in litigation with Charlotte Russe and its affiliates in
relation to our exclusive distribution agreement, which Charlotte Russe
purported to terminate on October 26, 2009. We derived a significant portion of
our revenues and operating cash flow from the sale of People's Liberation
branded merchandise pursuant to the distribution agreement. In the first year of
the contract, we received approximately $5.5 million through September 30, 2009
as required by the distribution agreement and we are owed $59.5 million in
guaranteed minimum payments over the remainder of the term of the distribution
agreement, which amount may be reduced if Charlotte Russe elects to terminate
the agreement early, beginning July 2011 with an early termination fee. We
believe that as a result of Charlotte Russe's purported termination of the
distribution agreement, Charlotte Russe will cease to make their contractually
obligated payments to us, which will significantly decrease our cash flows from
operations of our People's Liberation business. We are attempting to mitigate
the impact of Charlotte Russe's actions by implementing cost cutting measures in
our People's Liberation branded merchandise business. We also believe our
results of operations and financial condition could be negatively impacted if we
are unable to reach a settlement with Charlotte Russe in a manner acceptable to
us or the ensuing litigation, which is currently in its early stage, is not
resolved in a manner favorable to us. Additionally, we may incur significant
legal fees in our litigation with Charlotte Russe, and unless the cases are
settled, we will continue to incur additional legal fees in increasing amounts
as the cases move toward trial.
In November 2009, we launched our retail expansion plan for our William
Rast brand with the opening of two new full-price retail stores at the Westfield
Century City Shopping Mall in Los Angeles, California, and the Westfield Valley
Fair Shopping Mall in San Jose, California. Additionally, we opened our first
outlet store at the Desert Hills Premium Outlets in Cabazon, California, and we
anticipate opening two additional full price retail stores in Miami Florida in
the first half of 2010. These store openings are part of our retail expansion
plan which includes the roll-out of approximately forty retail stores in major
metropolitan locations over the next several years. The costs associated with
our store openings have been immaterial to date and have been financed primarily
through cash flow from operations, as well as through tenant improvements
received from landlords at the various locations. In an effort to reduce the
capital required to open future locations, we will attempt to continue to
negotiate landlord concessions.
37
We are subject to a contractual agreement that may require us to
contribute cash to our subsidiary, J. Lindeberg USA, LLC. Pursuant to the
operating agreement we entered into with J. Lindeberg USA Corp and J. Lindeberg
AB, we contributed $20,000 in cash to our 50% owned subsidiary, J. Lindeberg
USA, LLC, and will be required to contribute up to a maximum of $1.5 million in
working capital or related guaranties through December 2010. Our J. Lindeberg
USA, LLC, factoring agreements currently provide for corporate guaranties from
our related entities, People's Liberation, Inc., Bella Rose, LLC, and Versatile
Entertainment, Inc. At this point in time, the cash amount in excess of $20,000
that we may be required to contribute to J. Lindeberg USA, LLC, if any, is
uncertain and our future cash position may be adversely impacted.
We are currently evaluating various financing strategies to be used to
expand our business and fund future growth, including the opening of our new
retail stores. We believe that our existing cash and cash equivalents and
anticipated cash flows from our operating activities and pursuant to our
factoring arrangements, including availability under our inventory facilities,
should be sufficient to fund our minimum working capital and capital expenditure
needs for the next twelve months. The extent of our future capital requirements
will depend on many factors, including our results of operations and our ability
to mitigate the impact of Charlotte Russe's purported termination of our
exclusive distribution agreement through cost cutting measures. We may also need
to raise additional capital if our working capital requirements or capital
expenditures are greater than we expect, or if we expand our business by
acquiring or investing in additional brands. There can be no assurance that
additional debt or equity financing will be available on acceptable terms or at
all.
CASH FLOWS
We currently satisfy our working capital requirements primarily through
borrowings from our factor and cash flows generated from operations. Cash flows
from operating and investing activities for the nine months ended September 30,
2009 and 2008 are summarized in the following table:
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
ACTIVITY: 2009 2008
----------------------------------------- ----------- -----------
Operating activities .................... $ (87,031) $ 1,500,736
Investing activities .................... (519,993) (765,138)
Financing activities .................... -- 20,000
----------- -----------
Net (decrease) increase ................. $ (607,024) $ 755,598
=========== ===========
38
OPERATING ACTIVITIES
Net cash used in operating activities for the nine months ended
September 30, 2009 was approximately $87,000. Net cash provided by operating
activities was approximately $1,501,000 for the nine months ended September 30,
2008. Although we experienced net income of approximately $205,000 during the
nine months ended September 30, 2009, we had negative cash flows from operating
activities as a result of a reduction in customer deposits, increased
receivables and decreased accounts payable and accrued expenses, offset by
decreased inventories during the period. For the nine months ended September 30,
2008, although we had a net loss during the period, we had positive cash flows
from operations resulting primarily from increased accounts payable and accrued
expenses, and decreased receivables and inventories, offset by increased prepaid
design fees. As of September 30, 2008, prepaid design fees related to the
Company's William Rast men's and women's ready-to-wear product line designed by
Paris68 amounted to approximately $1.3 million and represented design fee
payments made in accordance with the terms of a design services agreement
entered into effective November 15, 2007 with Paris68, LLC. Effective December
1, 2008, the design services agreement was terminated. The parties to the
services agreement have negotiated the terms of a restructured design consulting
arrangement. The restructured design consulting arrangement provides for a
reduction in the fees paid for services and the elimination of royalty payments
due under the prior agreement.
INVESTING ACTIVITIES
Net cash used in investing activities was approximately $520,000 and
$765,000 for the nine months ended September 30, 2009 and 2008, respectively.
Net cash used in investing activities for the nine months ended September 30,
2009 consisted of an increase in restricted cash held under lease lines as
collateral to secure two lease agreements, an increase in capital expenditures
primarily for leasehold improvements and furniture and fixtures for the
relocation of our corporate offices, trademark costs and cash paid in the
acquisition of a J. Lindeberg retail store. Effective May 13, 2009, we purchased
certain assets related to the operation of a J. Lindeberg retail store in Los
Angeles, California, from an unrelated party. The asset purchase agreement
provided for the payment of $100,000 in cash upon closing and cancellation of
approximately $250,000 of trade accounts receivable due from the seller. The
asset purchase agreement also provided that we acquire certain leasehold
improvements, furniture and fixtures, and computer and store equipment. Net cash
used in investing activities for the nine months ended September 30, 2008
consisted of an increase in capital expenditures related to furniture and
fixtures and trademark costs.
FINANCING ACTIVITIES
There were no financing activities during the nine months ended
September 30, 2009. Net cash provided by financing activities for the nine
months ended September 30, 2008 reflects the capital investment of $20,000
received from J. Lindeberg AB. Effective July 1, 2008, approximately $2.2
million of net assets were received into our newly formed subsidiary, J.
Lindeberg USA, LLC, in addition to $40,000 cash received from its members. The
statement of cash flows for the nine months ended September 30, 2008 presents
the affects of this non-cash financing transaction on our operating assets and
liabilities.
39
FACTORING AGREEMENTS
Pursuant to the terms of our factoring agreements, the factor purchases
our eligible accounts receivable and assumes the credit risk with respect to
those accounts for which the factor has given its prior approval. If the factor
does not assume the credit risk for a receivable, the collection risk associated
with the receivable remains with us. We pay a fixed commission rate and may
borrow up to 85% of eligible accounts receivable and 50% of our eligible
inventory. Maximum borrowings under our People's Liberation and William Rast
inventory facility are not to exceed $1.3 million of eligible inventory. Maximum
borrowings, including borrowings related to factored accounts receivable and
inventory, related to our J. Lindeberg facility are not to exceed $1.5 million.
Interest is charged at prime plus 1%. As of September 30, 2009 and 2008, total
factored accounts receivable included in due from factor amounted to
approximately $5.3 million and $6.1 million, respectively. Outstanding advances
as of September 30, 2009 and 2008 amounted to approximately $3.1 million and
$3.6 million, respectively, and are included in the due from factor balance.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following summarizes our contractual obligations at September 30,
2009 and the effects such obligations are expected to have on liquidity and cash
flows in future periods:
Payments Due by Period
-----------------------------------------------------
Contractual Less than 1-3 4-5 After
Obligations Total 1 Year Years Years 5 Years
--------------------- ----------- ----------- ----------- ----------- -----------
Operating leases .... $13,332,033 $ 2,081,862 $ 4,848,095 $ 2,481,698 $ 3,920,378
Consulting agreements 240,000 240,000 -- -- --
----------- ----------- ----------- ----------- -----------
Total ........... $13,572,033 $ 2,321,862 $ 4,848,095 $ 2,481,698 $ 3,920,378
=========== =========== =========== =========== ===========
At September 30, 2009, approximately $167,000 of the Company's cash is
held under lease lines as collateral to secure two of the Company's lease
agreements.
At September 30, 2009 and 2008, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
Factored accounts receivable may subject us to off-balance sheet risk.
We sell the majority of our trade accounts receivable to a factor and are
contingently liable to the factor for merchandise disputes, other customer
claims and invoices that are not credit approved by the factor. From time to
time, our factor also issues letters of credit and vendor guarantees on our
behalf. There were no outstanding letters of credit or vendor guarantees as of
September 30, 2009 and 2008. Ledger debt (payables to suppliers that use the
same factor as the Company) amounted to approximately $547,000 at September 30,
2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
40
ITEM 4T. CONTROLS AND PROCEDURES.
EVALUATION OF CONTROLS AND PROCEDURES
Members of the our management, including our Chief Executive Officer,
Colin Dyne, and Chief Financial Officer and President, Darryn Barber, have
evaluated the effectiveness of our disclosure controls and procedures, as
defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of September
30, 2009, the end of the period covered by this report. Based upon that
evaluation, Messrs. Dyne and Barber concluded that our disclosure controls and
procedures were effective as of September 30, 2009.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
or in other factors identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the
third quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 27, 2009, People's Liberation, Inc. and our wholly-owned
subsidiary, Versatile Entertainment, Inc., filed a complaint for damages and
equitable relief against Charlotte Russe Holding, Inc. and its wholly-owned
subsidiary, Charlotte Russe Merchandising, Inc. (collectively, "CHARLOTTE
RUSSE") in the Superior Court of the State of California, County of Los Angeles,
Central District (VERSATILE ENTERTAINMENT, INC. V. CHARLOTTE RUSSE
MERCHANDISING, INC., BC424674) (the "CHARLOTTE RUSSE ACTION"). On that same day,
we also filed suit against Advent International Corporation and certain of its
subsidiaries, and David Mussafer and Jenny J. Ming (collectively, the "ADVENT
DEFENDANTS") in the Superior Court of the State of California, County of Los
Angeles, Central District (VERSATILE ENTERTAINMENT, INC. V. ADVENT INTERNATIONAL
CORPORATION, BC424675) (the "ADVENT ACTION"). Advent International Corporation,
through its subsidiaries, acquired Charlotte Russe in October 2009.
The complaints relate to our December 2008 distribution agreement with
Charlotte Russe (the "AGREEMENT"), pursuant to which we agreed to exclusively
sell to Charlotte Russe in North America and Central America, People's
Liberation(R) branded apparel, apparel accessories, eyewear, jewelry, watches,
cosmetics and fragrances, and to provide Charlotte Russe with marketing and
branding support for People's Liberation branded apparel and apparel
accessories. In consideration for the exclusive rights granted to Charlotte
Russe under the Agreement, Charlotte Russe agreed to purchase from us a minimum
of $65 million of People's Liberation branded merchandise during the initial
term of the Agreement. The amount of the minimum purchase obligation varies by
contract year, and may be less than or greater than $65 million if the Agreement
is terminated prior to expiration of the initial term or is renewed for one or
more additional renewal periods. The Agreement provides that Charlotte Russe can
elect to terminate the Agreement early by delivering written notice to us at any
time between January 1, 2011 and June 30, 2011, in which event the Agreement
shall terminate, at Charlotte Russe's election, on either (i) July 1, 2011 with
the payment of an early termination fee, or (ii) December 31, 2011.
On October 26, 2009, we received a letter from Charlotte Russe
purportedly terminating the Agreement as a result of our alleged fraudulent
inducement of Charlotte Russe to enter into the Agreement as well as our alleged
subsequent material breaches of the Agreement. We believe the allegations in the
letter are demonstrably false and that the termination of the Agreement by
41
Charlotte Russe was improper, constituting a material breach of the Agreement by
Charlotte Russe for which we are entitled to damages. Additionally, we assert
that before acquiring Charlotte Russe, Advent International Corporation and
certain of its subsidiaries and management, including David Mussafer and Jenny
J. Ming, evaluated Charlotte Russe's ongoing business and contractual relations,
and decided that they would wrongfully attempt to avoid the contractual
obligations under the Agreement by asserting fabricated breaches of contract
against us, thus intentionally interfering with our contract with Charlotte
Russe.
Our complaint in the Charlotte Russe Action includes four causes of
action, including one for declaratory relief in which we seek declarations that
(i) by Charlotte Russe's efforts to wrongfully terminate the Agreement and their
sale of People's Liberation brand goods at "close-out" prices, they have
breached the express terms of the Agreement; (ii) the Agreement is in full force
and effect notwithstanding Charlotte Russe's purported termination thereof;
(iii) Charlotte Russe is required to perform its obligations under the Agreement
and that no performance obligation has been excused; (iv) our actions, including
those alleged acts complained of in Charlotte Russe's October 26 letter, do not
constitute material breaches of the Agreement; and (v) the express terms of the
Agreement require Charlotte Russe to indemnify, hold harmless and defend us from
any future or additional damages or costs incurred by us as a result of
Charlotte Russe's breach of the Agreement and as a result of our lawsuit.
In the Charlotte Russe Action, we have also asserted claims for:
o breach of contract by Charlotte Russe for, among other things,
wrongfully terminating the Agreement and for selling People's
Liberation branded apparel at "close-out" prices;
o fraudulent misrepresentation relating to the misrepresentation
and concealment of certain material facts from us, including
making false representations about their ability and intent to
promote People's Liberation branded products for sale in their
stores, their ability to perform their obligations under the
Agreement, their discounting of People's Liberation branded
apparel in violation of the Agreement and the facts underlying
their purported termination of the Agreement; and
o negligent misrepresentation relating to the misrepresentation
and concealment of certain material facts from us, including
making false representations about their ability and intent to
promote People's Liberation branded products for sale in their
stores, their ability to perform their obligations under the
Agreement, their discounting of People's Liberation branded
apparel in violation of the Agreement and the facts underlying
their purported termination of the Agreement.
We are seeking compensatory damages of no less than $59,000,000,
punitive damages, preliminary and permanent injunctions enjoining Charlotte
Russe and the other defendants from engaging in acts which diminish the value of
the People's Liberation brand, and an award of attorneys' fees and costs
incurred in relation to each cause of action.
In the Advent Action, we assert one cause of action for intentional
interference with contract, for which we are seeking compensatory damages of no
less than $59,000,000, punitive damages, as well as an award of attorney's fees
and costs incurred in relation to the action.
On October 28, 2009, Charlotte Russe Holding, Inc. and Charlotte Russe
Merchandising, Inc. served a complaint against People's Liberation, Inc. and
Versatile Entertainment, Inc., which complaint was filed in the Superior Court
of the State of California, County of Los Angeles, Central District (CHARLOTTE
RUSSE HOLDING, INC. VS. VERSATILE ENTERTAINMENT, INC., BC424734). In its
complaint, Charlotte Russe has asserted claims for:
42
o rescission of the Agreement based on fraudulent
misrepresentations made by us to induce Charlotte Russe to
enter into the Agreement;
o fraud based on fraudulent misrepresentations made by us to
induce Charlotte Russe to enter into and continue to perform
its obligations under the Agreement; and
o breach of contract by us for, among other things, (i)
permitting other retailers to sell People's Liberation branded
products in Charlotte Russe's exclusive territory; (ii)
failing to provide the services under the Agreement; (iii)
failing to maintain the promised quality of the products; (iv)
failing to price the products in accord with the Agreement;
and (v) failing to deliver all products in the time required
under the Agreement.
Charlotte Russe is seeking restitution of all consideration paid to us
under the Agreement, compensatory and punitive damages, and an award of
attorneys' fees and costs incurred in relation to each cause of action.
We intend to vigorously pursue the Charlotte Russe Action and the
Advent Action and to vigorously defend any actions brought forth by Charlotte
Russe.
ITEM 1A. RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements,
which are subject to a variety of risks and uncertainties. Other actual results
could differ materially from those anticipated in those forward-looking
statements as a result of various factors, including those set forth in our
Annual Report on Form 10-K for the year ended December 31, 2008. Other than as
described below, there have been no material changes to such risk factors during
the nine months ended September 30, 2009.
OUR GROWTH AND OPERATING RESULTS COULD BE MATERIALLY, ADVERSELY AFFECTED IF WE
ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING OUR RIGHTS
UNDER OUR AGREEMENT WITH CHARLOTTE RUSSE.
We are in litigation with Charlotte Russe and its affiliates in
relation to our exclusive distribution agreement, which Charlotte Russe
purported to terminate on October 26, 2009. We have filed an action against
Charlotte Russe in the Superior Court of the State of California, County of Los
Angeles, Central District (VERSATILE ENTERTAINMENT, INC. V. CHARLOTTE RUSSE
MERCHANDISING, Inc., BC424674) seeking a declaratory judgment that the
termination was invalid and alleging other causes of action, including breach of
contract by Charlotte Russe. We also filed an action against Advent
International Corporation and certain of its subsidiaries, and David Mussafer
and Jenny J. Ming in the Superior Court of the State of California, County of
Los Angeles, Central District (VERSATILE ENTERTAINMENT, INC. V. ADVENT
INTERNATIONAL CORPORATION, BC424675) asserting one cause of action for
intentional interference with a contract. Advent International Corporation,
through its subsidiaries, acquired Charlotte Russe in October 2009. Charlotte
Russe has served a complaint against us in the Superior Court of the State of
California, County of Los Angeles, Central District (CHARLOTTE RUSSE HOLDING,
INC. VS. VERSATILE ENTERTAINMENT, INC., BC424734) asserting claims for
rescission of the distribution agreement, fraud and breach of contract.
We derived a significant portion of our revenues and operating cash
flow from the sale of People's Liberation branded merchandise pursuant to the
distribution agreement. In the first year of the contract, we received
approximately $5.5 million through September 30, 2009 as required by the
distribution agreement and we are owed $59.5 million in guaranteed minimum
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payments over the remainder of the term of the agreement, which amount may be
reduced if Charlotte Russe elects to terminate the agreement early, beginning
July 2011 with an early termination fee. We believe that as a result of
Charlotte Russe's purported termination of the distribution agreement, Charlotte
Russe will cease to make their contractually obligated payments to us, which
will significantly decrease our net sales and cash flows from operations of our
People's Liberation business, and may adversely impact our results of operations
to the extent that we are not able to successfully mitigate the impact of
Charlotte Russe's actions by implementing cost cutting measures in our People's
Liberation branded merchandise business. We also believe our results of
operations and financial condition could be negatively impacted if we are unable
to reach a settlement in a manner acceptable to us or the ensuing litigation,
which is currently in its early stage, is not resolved in a manner favorable to
us. Additionally, we may incur significant legal fees in our litigation with
Charlotte Russe, and unless the cases are settled, we will continue to incur
additional legal fees in increasing amounts as the cases move toward trial.
CHARLOTTE RUSSE'S SALE OF PEOPLE'S LIBERATION BRANDED MERCHANDISE AT STEEPLY
DISCOUNTED PRICES MAY RESULT IN SIGNIFICANT AND IRREPARABLE DAMAGE AND
DIMINUTION OF THE PEOPLE'S LIBERATION BRAND AND TRADEMARK.
Charlotte Russe has advised us that they intend to institute markdowns
and promotions on all People's Liberation branded merchandise in their
possession and we have been informed that Charlotte Russe has already begun to
sell People's Liberation branded merchandise at "close-out" prices. The actions
taken by Charlotte Russe may result in significant and irreparable damage and
diminution of the People's Liberation brand and trademark, which will limit our
ability to market and promote the brand going forward.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.
We may not be able to fund our future growth or react to competitive
pressures if we lack sufficient funds. We are currently evaluating various
financing strategies to be used to expand our business and fund future growth,
including the opening of new retail stores. We believe that our existing cash
and cash equivalents and anticipated cash flows from our operating activities
and pursuant to our factoring arrangements, including availability under our
inventory facilities, should be sufficient to fund our minimum working capital
and capital expenditure needs for the next twelve months. The extent of our
future capital requirements will depend on many factors, including our results
of operations and our ability to mitigate the impact of Charlotte Russe's
purported termination of our exclusive distribution agreement through cost
cutting measures. We may also need to raise additional capital if our working
capital requirements or capital expenditures are greater than we expect, or if
we expand our business by acquiring or investing in additional brands. There can
be no assurance that additional debt or equity financing will be available on
acceptable terms or at all. In addition, any additional funding may result in
significant dilution to existing shareholders. If adequate funds are not
available, we may be required to curtail our operations or obtain funds through
collaborative partners that may require us to release material rights to our
products.
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ITEM 6. EXHIBITS
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------- -----------------------------------------------------------------
31.1 Certification of Principal Executive Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PEOPLE'S LIBERATION, INC.
Date: November 16, 2009 /s/ Darryn Barber
--------------------------------------------
By: Darryn Barber
Its: Chief Financial Officer and President
(Principal Financial and Accounting Officer)
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