SEQUENTIAL BRANDS GROUP, INC. - FORM 10-Q/A

Attached files

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EX-31.2 - SEQUENTIAL BRANDS GROUP, INC.	v193754_ex31-2.htm
EX-32.1 - SEQUENTIAL BRANDS GROUP, INC.	v193754_ex32-1.htm
EX-31.1 - SEQUENTIAL BRANDS GROUP, INC.	v193754_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

x	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 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 (§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 ¨

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	¨ (Do not check if smaller reporting company)	Smaller reporting company x

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 May 14, 2009, the issuer had 36,002,563 shares of common stock, par value $.001 per share, issued and outstanding.

Explanatory Note

We are filing this Amended Quarterly report on Form 10-Q/A to our Quarterly Report on Form 10-Q for the three months ended March 31, 2009 and 2008 (the “Original Filing”) to amend and restate our unaudited consolidated financial statements and related disclosures for the three months ended March 31, 2009 and 2008, as discussed in Note 14 to the accompanying restated unaudited consolidated financial statements. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on May 15, 2009.

Background of the Restatement

On August 3, 2010, the Company announced that an accounting review by its management and Board of Directors, with the assistance of its independent accounting consultant, had revealed that its interpretation of certain of its operating agreements of its limited liability company subsidiaries and the accounting treatment pertaining to noncontrolling interest as it related to these subsidiaries was incorrect and not in accordance with the provisions of Statement of Financial Accounting Standard No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”) and superseded by ASC 810-10-65, adopted by the Company on January 1, 2009. SFAS 160 provides that losses allocable to noncontrolling interest in a subsidiary may exceed the non-controlling member’s interest in the subsidiary’s equity. The excess, and any further losses allocable to the noncontrolling interest, shall be allocated to the non-controlling member’s interest even if that allocation results in a deficit noncontrolling interest balance. Prior to the adoption of SFAS 160, ARB 51 prohibited the allocation of losses to noncontrolling interest if that allocation resulted in a deficit noncontrolling interest balance. Although the provisions of SFAS 160 provided for the allocation of losses to noncontrolling interest in excess of the related subsidiary’s noncontrolling interest member account, the Company did not allocate losses to certain of its limited liability company members during the year ended December 31, 2009 and the three months ended March 31, 2010.

As a result of the Company’s review of the accounting treatment of its limited liability companies, the Company also determined that its accounting for contingent priority cash distributions due to a member of one of its subsidiaries was also incorrectly accounted for in its financial statements. Contingent priority cash distributions were incorrectly recorded as decreases in income or increases in losses attributable to common shareholders. The Company determined that the correct accounting treatment of these contingent priority cash distributions is to record these amounts to the extent of positive equity and income of the subsidiary and per the terms of the operating agreement. This change in accounting treatment resulted in a restatement of retained earnings and noncontrolling interest on the Company’s balance sheet, and income or loss attributable to common stockholders on the Company’s statements of operations for the years ended December 31, 2008 and 2009 and the three month period ended March 31, 2010.

As a result of these errors, the Company announced that the previously issued audited consolidated financial statements as of and for the years ended December 31, 2008 and 2009 in the Company’s Forms 10-K, and the unaudited consolidated financial statements for the three month periods ended March 31, 2010, 2009 and 2008, June 30 2009 and 2008 and September 30, 2009 and 2008, in the Company’s Forms 10-Q for those respective periods should no longer be relied upon (collectively, the “Affected Periods”). This restatement reflects the appropriate current period correction for the quarter ended March 31, 2009.

This Form 10-Q/A amends and restates Item 1 of Part I, “Financial Statements”, Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 4T of Part I, “Controls and Procedures,” of the Original Filing, in each case, solely as a result of, and to reflect, the restatement. Pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain the currently-dated certifications from the Company’s principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s principal executive officer and principal financial officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.

For the convenience of the reader, this Quarterly Report on Form 10-Q/A sets forth the Original Filing in its entirety. Other than as described above and to correct typographical errors contained therein, none of the other disclosures in the Original Filing have been amended or updated. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events that occurred or facts that became known to the Company after the filing of the Original Filing, and such forward-looking statements should be read in their historical context. Accordingly, this Quarterly Report on Form 10-Q/A should be read in conjunction with the Company's filings with the Securities and Exchange Commission filed subsequent to the Original Filing.

PEOPLE’S LIBERATION, INC.

INDEX TO FORM 10-Q/A

		Page

PART I	FINANCIAL INFORMATION	5

Item 1.	Financial Statements	5

	Consolidated Balance Sheets as of March 31, 2009 (unaudited)
	and December 31, 2008	5

	Consolidated Statements of Operations (unaudited) for the three
	months ended March 31, 2009 and March 31, 2008	6

	Consolidated Statements of Cash Flows (unaudited) for the
	three months ended March 31, 2009 and March 31, 2008	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4T.	Controls and Procedures	35

PART II	OTHER INFORMATION	36

Item 1A.	Risk Factors	36

Item 6.	Exhibits	37

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

PEOPLE’S LIBERATION, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2009 (As Restated)			December 31, 2008 (As Restated)
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	2,642,367		$	1,888,718
Due from factor		140,695			-
Accounts receivable, net of allowance for doubtful accounts		416,433			1,307,922
Inventories		4,146,542			4,925,438
Prepaid expenses and other current assets		155,073			247,672
Total current assets		7,501,110			8,369,750
Property and equipment, net of accumulated depreciation and amortization		866,473			837,351
Trademarks, net of accumulated amortization		568,583			600,609
Intangible asset		428,572			428,572
Other assets		479,781			444,266
Total assets	$	9,844,519		$	10,680,548

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	3,302,225		$	3,801,080
Due to factor		-			170,369
Customer deposits		2,000,000			1,000,000
Due to member		653,105			427,623
Income taxes payable		24,164			17,789
Total current liabilities		5,979,494			5,416,861

Stockholders’ equity:
Common stock, $0.001 par value, 150,000,000 shares authorized; 36,002,563 shares issued and outstanding at March 31, 2009 and December 31, 2008		36,002			36,002
Additional paid-in capital		7,997,132			7,951,960
Accumulated deficit		(5,821,640	)		(5,022,858	)
Total stockholders’ equity		2,211,494			2,965,104

Noncontrolling interest		1,653,531			2,298,583
Total equity		3,865,025			5,263,687
Total liabilities and stockholders’ equity	$	9,844,519		$	10,680,548

See Notes to Consolidated Financial Statements.

PEOPLE’S LIBERATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended March 31, (As Restated)
	2009			2008

Net sales	$	7,530,078		$	6,916,639
Cost of goods sold		4,176,153			3,484,416
Gross profit		3,353,925			3,432,223

Selling, design and production		2,793,273			1,948,960
General and administrative		1,944,396			1,106,629

Total operating expenses		4,737,669			3,055,589

(Loss) income from operations		(1,383,744	)		376,634

Interest expense, net		44,090			21,251

(Loss) income before income taxes		(1,427,834	)		355,383

Provision for income taxes		16,000			8,400

Net (loss) income		(1,443,834	)		346,983

Noncontrolling interest in subsidiaries’ earnings		(645,052	)		-

Net (loss) income attributable to common stockholders	$	(798,782	)	$	346,983

Basic and diluted (loss) income per common share	$	(0.02	)	$	0.01

Basic weighted average common shares outstanding		36,002,563			36,002,563
Diluted weighted average common shares outstanding		36,002,563			36,070,901

See Notes to Consolidated Financial Statements.

PEOPLE’S LIBERATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended March 31,
	2009			2008
Cash flows from operating activities:
Net (loss) income		(1,443,834	)		346,983
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		75,499			57,886
Allowance for doubtful accounts		5,000			1,000
Warrants issued for services		-			6,700
Stock based compensation		45,172			43,831
Impairment of long-lived asset		69,270			-
Loss on disposal of fixed asset		1,099			-
Changes in operating assets and liabilities:
Receivables		575,425			130,887
Inventories		778,896			62,944
Refundable income taxes		-			11,500
Prepaid expenses and other current assets		92,599			93,474
Prepaid design fees		-			(781,818	)
Other assets		(35,515	)		200,000
Accounts payable and accrued expenses		(498,855	)		195,471
Customer deposits		1,000,000			-
Due to member		225,482			-
Income taxes payable		6,375			7,118
Net cash flows provided by operating activities		896,613			375,976

Cash flows from investing activities:
Acquisition of trademarks		(48,550	)		(29,948	)
Acquisition of property and equipment		(94,414	)		(389,554	)
Net cash flows used in investing activities		(142,964	)		(419,502	)

Net increase (decrease) in cash and cash equivalents		753,649			(43,526	)
Cash and cash equivalents, beginning of period		1,888,718			362,505
Cash and cash equivalents, end of period	$	2,642,367		$	318,979

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	44,191		$	21,251
Income taxes paid		12,025			1,450
Income taxes received		-			(11,668	)

See Notes to Consolidated Financial Statements.

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, as restated, included in the Company’s Form 10-K/A 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. 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”). William Rast Europe Holdings, LLC (“William Rast Europe”), a Delaware limited liability company, was formed on March 11, 2009 and is a wholly-owned subsidiary of William Rast Sourcing.

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. 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.

William Rast Sourcing, LLC (“William Rast Sourcing”) and William Rast Licensing, LLC (“William Rast Licensing”) are owned 50% by Bella Rose and 50% by William Rast Enterprises, LLC (“WRE”), an entity owned in part by Justin Timberlake. William Rast Retail, LLC (“William Rast Retail”), a wholly-owned subsidiary of William Rast Sourcing, was formed to operate the Company’s William Rast retail stores. Beginning October 1, 2006, William Rast Sourcing and William Rast Licensing are consolidated under Bella Rose.

Prior to January 1, 2009, because WRE did not have basis in the capital of William Rast Sourcing and William Rast Licensing, losses were not allocated to WRE in accordance with Accounting Research Bulletin 51. Instead, all losses were recognized by Bella Rose in consolidation.

In accordance with the provisions of Statement of Financial Accounting Standard No. 160, Noncontrolling interest in Consolidated Financial Statements – an amendment of ARB No. 51, superseded by ASC 810-10-65 (“SFAS 160”) adopted by the Company on January 1, 2009, the Company allocates profits and losses to each of the members of William Rast Sourcing and William Rast Licensing in accordance with the amended and restated limited liability company operating agreements for such entities, which became effective as of January 1, 2007 (the “Operating Agreements”). The Operating Agreements provide that losses are allocated to the members of William Rast Sourcing and William Rast Licensing based on their respective percentage interests in such entities and profits are allocated to the members based on their percentage interests to the extent that the member was previously allocated losses. To the extent each member has positive equity in William Rast Sourcing and William Rast Licensing, profits will be allocated consistent with the cash distribution terms described below.

Subject to certain limitations included in the Operating Agreements, cash distributions are to be made to the members of William Rast Sourcing and William Rast Licensing in the following manner:

first to each member in accordance with each member’s respective percentage interest to enable the members to make timely tax payments which shall be treated as advances of, and be offset against, the distributions described below;

second to WRE in an amount equal to 6% of applicable sales for each calendar quarter with respect to William Rast Sourcing and 3% of applicable sales for each calendar quarter with respect to William Rast Licensing, which are referred to hereafter as contingent priority cash distributions;

third to Bella Rose until the aggregate amount distributed to Bella Rose equals the contingent priority cash distributions made to WRE; and

thereafter, in accordance with the members’ respective percentage interests.

William Rast Sourcing and William Rast Licensing have accumulated losses totaling approximately $4.7 million from inception (October 1, 2006) through March 31, 2009. As of March 31, 2009, approximately $537,000 of these losses have been allocated to WRE, the noncontrolling interest member of William Rast Sourcing and William Rast Licensing. Unpaid accumulated contingent priority cash distributions to WRE amounted to approximately $1.6 million and $1.3 million as of March 31, 2009 and December 31, 2008, respectively. If and when the contingent priority cash distributions are paid to WRE, such distributions will be accounted for as decreases in noncontrolling interest in the consolidated balance sheet of the Company. Profit and loss allocations made to WRE are recorded as increases or decreases in noncontrolling interest in the consolidated statements of operations of the Company.

The adoption of SFAS 160 by the Company on January 1, 2009 requires proforma financial information to be disclosed in the Company’s most recent interim financial statements. Unaudited proforma consolidated results of operations for the three months ended March 31, 2009 is presented as if losses were not attributed to the noncontrolling interest as follows:

Consolidated Statement of Operations Three Months Ended March 31, 2009 (condensed)	As Reported			Proforma

Net loss	$	(1,443,834	)	$	(1,443,834	)

Noncontrolling interest in subsidiaries’ earnings	$	(645,052	)	$	(108,250	)

Net (loss) income attributable to common shareholders	$	(798,782	)	$	(1,335,584	)

Basic and diluted income per common share	$	(0.02	)	$	(0.04	)

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™ 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.

William Rast Sourcing is the sole member of William Rast Europe, an entity formed in March 2009 to distribute William Rast apparel and accessories in Europe. There currently is no significant activity in this newly formed entity.

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, Neiman Marcus and Fred Segal. The Company also markets and sells J. Lindeberg branded collection and golf apparel through its retail store in New York City and 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 directly and through distributors 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. In addition, the Company’s William Rast lifestyle collection is being developed and designed in collaboration with Paris68.

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™ 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. Sales to Charlotte Russe under the terms of this agreement are expected to begin shipping in June 2009.

The Company is headquartered in Los Angeles, California, maintains showrooms in New York, Los Angeles and Atlanta, and has sales representatives in Dallas, Texas, and Orlando, Florida.

3.	Recently Adopted Accounting Pronouncements

Effective January 1, 2009, the Company adopted the provisions of SFAS 141(R), “Business Combinations (revised 2007)” (SFAS 141(R)). SFAS 141(R) retains the underlying concepts of SFAS 141, “Business Combinations” (SFAS 141) in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but changes the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all of business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes” (SFAS 109) such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R).

The assets and liabilities of acquired businesses are recorded at fair value at the date of acquisition under the acquisition method. The final purchase price allocation of all acquired businesses is subject to the completion of the valuation of certain assets and liabilities, as well as plans for consolidation of facilities, relocation or reduction of employees and other restructuring activities. For acquisitions subject to SFAS 141(R), during the measurement period, the Company will recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period shall not exceed one year from the acquisition date. Further, any associated restructuring activities will be expensed in future periods and not recorded through purchase accounting as previously done under SFAS 141. There was no significant impact from the effects of the SFAS 141(R) changes on the Company’s acquisition activity in the first three months of 2009.

Effective January 1, 2009, the Company adopted the provisions of SFAS 160. Certain provisions of this statement 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 (loss) income to be recast to include net (loss) income 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 the December 31, 2008 balance sheet.

4.	Earnings Per Share

The Company computes and presents earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “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 2,531,000 shares of common stock at exercise prices ranging from $0.30 to $1.25 per share were outstanding as of March 31, 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 3,415,000 shares of common stock at exercise prices ranging from $0.50 to $2.00 per share and stock options representing 1,876,000 shares of common stock at exercise prices ranging from $0.46 to $1.25 per share were outstanding as of March 31, 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.

The following is a reconciliation of the numerators and denominators of the basic and diluted (loss) income per share computations:

Three months ended March 31, 2009	(Loss) Income			Shares		Per Share
(As Restated)
Basic loss per share:
Loss attributable to common stockholders	$	(798,782	)		36,002,563	$	(0.02	)

Effect of Dilutive Securities:
Options		-			-		-
Warrants		-			-		-
Loss attributable to common stockholders	$	(798,782	)		36,002,563	$	(0.02	)

Three months ended March 31, 2008
(As Restated)
Basic income per share:
Income attributable to common stockholders	$	346,983	36,002,563	$	0.01

Effect of Dilutive Securities:
Options		-	56,800		-
Warrants		-	11,538		-
Income attributable to common stockholders	$	346,983	36,070,901	$	0.01

5.	Due from (to) Factor

Due from (to) factor is summarized as follows:

	March 31,			December 31,
	2009			2008
Outstanding receivables:
Without recourse	$	3,853,281		$	3,423,524
With recourse		854,408			692,155
		4,707,689			4,115,679
Advances		(3,956,647	)		(3,520,281	)
Open credits		(610,347	)		(765,767	)
	$	140,695		$	(170,369	)

6.	Inventories

Inventories are summarized as follows:

	March 31,		December 31,
	2009		2008

Piece goods and trim	$	1,082,600	$	1,564,727
Work in process		153,588		418,710
Finished goods		2,910,354		2,942,001
	$	4,146,542	$	4,925,438

7.	Charlotte Russe Distribution Agreement and Customer Deposits

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™ 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™ 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 are expected to begin shipping in June 2009.

In consideration for the exclusive rights granted to Charlotte Russe under the Agreement, Charlotte Russe has 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. Total advance payments received from Charlotte Russe as of March 31, 2009 amounted to $2 million. Advance payments will be 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.

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™ 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™ branded apparel, and provide for the factory-direct purchase by the Company of J. Lindeberg™ 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™ 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.

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 proforma financial information to be disclosed in the Company’s most recent interim financial statements. Unaudited proforma consolidated results of operations for the three months ended March 31, 2008, as though J. Lindeberg USA had been acquired as of January 1, 2008, are as follows:

	Three Months Ended
	March 31,
	2008

Net sales	$	9,352,798
Net income	$	97,275
Basis and diluted income per share	$	0.00

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 March 31, 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.

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 three months ended March 31, 2009 and 2008, the Company did not grant any options and no options or warrants were exercised. Options to purchase 1,607,542 and 1,003,999 shares were exercisable as of March 31, 2009 and 2008, respectively. Total stock based compensation expense for the three months ended March 31, 2009 and 2008 was approximately $45,000 and $44,000, respectively. The compensation expense recognized during the three months ended March 31, 2009 and 2008 did not change basic and diluted income or loss per share reported in the Company’s 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. During the year ended December 31, 2008, the Company did 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 period. The weighted-average assumptions the Company used as inputs to the Black-Scholes pricing model for options granted during the year ended December 31, 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 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 months ended March 31, 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. SFAS 123(R) 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 months ended March 31, 2009 and 2008, the Company did not have sufficient historical data to calculate the expected forfeiture rate and as such, the Company is recognizing forfeitures as they occur.

Options awarded to non-employees are charged to expense when the services are performed and benefit is received as provided by EITF 96-18.

For the three months ended March 31, 2009 and 2008, total stock-based compensation expense included in the consolidated statements of operations was $45,172 and $43,831, charged to the following expense categories:

	Three months ended March 31, 2009		Three months ended March 31, 2008
Selling, design and production	$	6,277	$	8,950
General and administrative		38,895		34,881
Total stock-based compensation	$	45,172	$	43,831

The following table summarizes the activity in the Plan:

	Number of Shares			Weighted Average 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		-			-
Exercised		-			-
Forfeited		(185,000	)		0.89

Options outstanding – March 31, 2009		2,531,000		$	0.62

Additional information relating to stock options and warrants outstanding and exercisable at March 31, 2009, summarized by exercise price, is as follows:

		Outstanding Weighted Average						Exercisable Weighted Average
				Life		Exercise				Exercise
Exercise Price Per Share		Shares		(years)		Price		Shares		Price
$ 0.30	(options)		90,000		9.3	$	0.30		67,500	$	0.30
$ 0.31	(options)		48,000		8.3	$	0.31		48,000	$	0.31
$ 0.38	(options)		265,000		8.4	$	0.38		199,215	$	0.38
$ 0.40	(options)		450,000		9.3	$	0.40		62,500	$	0.40
$ 0.40	(warrants)		150,000		3.7	$	0.40		150,000	$	0.40
$ 0.46	(options)		415,000		8.3	$	0.46		400,625	$	0.46
$ 0.50	(options)		709,000		8.7	$	0.50		361,494	$	0.50
$ 0.50	(warrants)		290,000		3.7	$	0.50		290,000	$	0.50
$ 1.25	(options)		554,000		7.4	$	1.25		468,208	$	1.25
$ 1.25	(warrants)		625,000		1.7	$	1.25		625,000	$	1.25
$ 2.00	(warrants)		2,500,000		1.7	$	2.00		2,500,000	$	2.00

			6,096,000		4.6	$	1.24		5,172,542	$	1.37

A summary of the changes in the Company’s unvested stock options is as follows:

	Number of Shares			Weighted Average Grant Date 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		-			-
Vested		(68,407	)		(0.11	)
Forfeited		(185,000	)		(0.34	)

Unvested stock options – March 31, 2009		923,458		$	0.23

As of March 31, 2009, there were 1,607,542 of vested stock options. As of March 31, 2009, there was approximately $178,000 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 three years. The aggregate intrinsic value of stock options outstanding was zero at March 31, 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 months ended March 31, 2009 and 2008, the deferred tax effect related to nonqualified stock options is not material.

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 vests over the 9-month term of the service contract. The warrant was valued at $6,700 using the Black-Scholes option pricing model.

10.	Consulting Agreement

Effective April 1, 2009, the Company entered into a consulting agreement with Innovative Brand Solutions LLC, an entity owned by one of the Company’s directors, Susan White. The agreement provides that Susan White, through Innovative Brand Solutions, LLC, will provide marketing and branding services on behalf of the Company and receive a monthly payment of $10,000 for a period of one year ending April 1, 2010.

11.	Customer and Supplier Concentrations

During the three months ended March 31, 2009 and 2008, one customer comprised greater than 10% of the Company’s sales. Sales to this customer amounted to 32.9% and 28.5% of net sales for the three months ended March 31, 2009 and 2008, respectively. At March 31, 2009 and 2008, the majority of receivables due from this customer are sold to the factor and are included in the due from factor balance.

During the three months ended March 31, 2009, two suppliers comprised greater than 10% of the Company’s purchases. Purchases from these suppliers amounted to 13.7% and 18.1% for the three months ended March 31, 2009. During the three months ended March 31, 2008, four suppliers comprised greater than 10% of the Company’s purchases. Purchases from these suppliers amounted to 11.4%, 11.7%, 17.9% and 18.0% for the three months ended March 31, 2008. At March 31, 2009 and 2008, accounts payable and accrued expenses included an aggregate of approximately $199,000 and $589,000, respectively, due to these vendors.

During the three months ended March 31, 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 three months ended March 31, 2009 amounted to approximately $1.2 million. Included in Due to Member as of March 31, 2009 is approximately $268,000 due to J. Lindeberg AB for product purchases.

12.	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 March 31, 2009, total factor receivables approximated $4.7 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 March 31, 2009.

The Company is subject to certain legal proceedings and claims arising in connection with its business. In the opinion of management, 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.

13.	New Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 161 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 SFAS No. 133 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. SFAS No. 161 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.

In May 2008, the FASB issued SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 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.

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.

14.	Restatement of Financial Statements

The Company has reviewed its accounting treatment of its limited liability companies as it relates to noncontrolling interest in subsidiaries’ earnings. As a result of this review, management has determined that its accounting for noncontrolling interest as it related to certain or its subsidiaries was incorrect and not in accordance with the provisions of Statement of Financial Accounting Standard No. 160, Noncontrolling interest in Consolidated Financial Statements – an amendment to ARB No. 51, superseded by ASC 810-10-65 (the “Standard”), adopted by the Company on January 1, 2009. The Standard provides that losses allocable to noncontrolling interest in a subsidiary may exceed its interest in the subsidiary’s equity. The excess, and any further losses allocable to the noncontrolling interest, shall be allocated to its interest even if that allocation results in a deficit noncontrolling interest balance. Prior to the adoption of the Standard, ARB 51 prohibited the allocation of losses to noncontrolling interest if that allocation resulted in a deficit noncontrolling interest balance. Although the provisions of certain of the Company’s operating agreements provide for losses to be allocated to each member, and the provisions of the Standard provide that the allocation of losses to noncontrolling interest may be in excess of the related subsidiary’s noncontrolling interest member account, the Company did not properly allocate losses to certain of its limited liability company members during the year ended December 31, 2009 and the three months ended March 31, 2010.

As a result of the Company’s review of the accounting treatment of its limited liability companies, the Company also determined that its accounting for contingent priority cash distributions due to a member of one of its subsidiaries was incorrectly accounted for in its financial statements. Contingent priority cash distributions were incorrectly recorded as decreases in income or increases in losses attributable to common shareholders. The Company determined that the correct accounting treatment of these contingent priority cash distributions is to record these amounts only to the extent of positive equity and income of the subsidiary and per the terms of the operating agreement. This change in accounting treatment resulted in a restatement of accumulated deficit and noncontrolling interest on the Company’s balance sheet, and noncontrolling interest and income or loss attributable to common shareholders on the Company’s statements of operations for the years ended December 31, 2008 and 2009 and the three month period ended March 31, 2010.

The description of our accounting policy for noncontrolling interests in Note 2 has also been revised.

As first reported, the Company’s financial statements for the fiscal year ended December 31, 2009 and for the three month period ended March 31, 2010, do not reflect the attribution of losses to noncontrolling interest in accordance with the Standard, which became effective on January 1, 2009. The Company’s financial statements, as first reported, also provided for contingent priority cash distributions as decreases in income or increases in losses attributable to common shareholders on the Company’s statements of operations. The restated financial statements for the fiscal years ended December 31, 2008 and 2009 and for the three month period ended March 31, 2010 reflect:

the restated income or loss attributable to common shareholders, in the calculation of earnings per share;

restated accumulated deficit and noncontrolling interest on the balance sheet and restated noncontrolling interest and income or loss allocable to common shareholders on the statement of operations that was previously reported with the incorrect allocation of profits and losses attributable to noncontrolling interest; and

restated noncontrolling interest on the balance sheet and restated noncontrolling interest and income or loss allocable to common shareholders on the statement of operations that was previously reported as decreases in income or increases in losses attributable to common shareholders and increases in noncontrolling interest on the balance sheet.

For the periods presented in this Form 10-Q/A for the three months ended March 31, 2009 and 2008, these changes resulted in a decrease in loss per share attributable to common shareholders for the three months ended March 31, 2009 to $(0.02) from the previously reported $(0.05), and an increase in income per share attributable to common shareholders for the three months ended March 31, 2008 to $0.01 and from the previously reported $0.00.

The cumulative effect of restating noncontrolling interest on the March 31, 2009 balance sheet presented in this Form 10-Q/A was a decrease in the accumulated deficit of $2.2 million and a decrease in noncontrolling interest of $2.2 million on the Company’s balance sheet. The cumulative effect of restating noncontrolling interest on the December 31, 2008 balance sheet presented in this Form 10-Q/A was a decrease in the accumulated deficit of $1.3 million and a decrease in noncontrolling interest of $1.3 million on the Company’s balance sheet. The restatement has no impact on total assets, total liabilities, net loss or cash flows as of March 31, 2009 and December 31, 2008. The restatement effects reported earnings for the three and six months ended June 30, 2009, the three and nine months ended September 2009, the year ended December 31, 2009, and the three months ended March 31, 2010, but has no effect on future periods. A summary of the effects of the restatement as of March 31, 2009 and December 31, 2008 and for the three months ended March31, 2009 and 2008 are as follows:

Consolidated Balance Sheet March 31, 2009 (condensed)	As Previously Reported			As Restated
Assets

Total assets	$	9,844,519		$	9,844,519

Liabilities and Stockholders’ Equity

Total liabilities	$	5,979,494		$	5,979,494

Stockholders’ equity:

Common stock		36,002			36,002
Additional paid-in capital		7,997,132			7,997,132
Accumulated deficit		(7,978,578	)		(5,821,640	)
Total stockholders’		54,556			2,211,494

Noncontrolling interest		3,810,469			1,653,531
Total equity		3,865,025			3,865,025
Total liabilities and stockholders’ equity	$	9,844,519		$	9,844,519

Consolidated Balance Sheet December 31, 2008 (condensed)	As Previously Reported			As Restated
Assets

Total assets	$	10,680,548		$	10,680,548

Liabilities and Stockholders’ Equity

Total liabilities	$	5,416,861		$	5,416,861

Stockholders’ equity:

Common stock		36,002			36,002
Additional paid-in capital		7,951,960			7,951,960
Accumulated deficit		(6,349,151	)		(5,022,858	)
Total stockholders’ equity		1,638,811			2,965,104

Noncontrolling interest		3,624,876			2,298,583
Total equity		5,263,687			5,263,687
Total liabilities and stockholders’ equity	$	10,680,548		$	10,680,548

Consolidated Statement of Operations Three Months Ended March 31, 2009 (condensed)	As Previously Reported			As Restated

Net loss	$	(1,443,834	)	$	(1,443,834	)

Noncontrolling interest in subsidiaries’ earnings	$	185,593		$	(645,052	)

Net (loss) income attributable to common shareholders	$	(1,629,427	)	$	(798,782	)

Basic and diluted income per common share	$	(0.05	)	$	(0.02	)

Consolidated Statement of Operations Three Months Ended March 31, 2008 (condensed)	As Previously Reported		As Restated

Net income (loss)	$	346,983	$	346,983

Noncontrolling interest in subsidiaries’ earnings	$	284,648	$	-

Net income attributable to common shareholders	$	62,335	$	346,983

Basic and diluted income per common share	$	0.00	$	0.01

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this Form 10-Q, as amended, 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, as amended.

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 months ended March 31, 2009 and the three months ended March 31, 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, including those 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, as amended,.

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, Neiman Marcus and Fred Segal. We also market and sell J. Lindeberg branded collection and golf apparel through our retail store in New York City 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. In addition, our William Rast lifestyle collection is being developed and designed in collaboration with Paris68.

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™ 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 are expected to begin shipping in June 2009.

We are headquartered in Los Angeles, California, maintain showrooms in New York, Los Angeles and Atlanta, and have sales representatives in Dallas, Texas, and Orlando, Florida.

International Distribution

Our William Rast branded apparel products are 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.

In March 2009, we formed a new entity, William Rast Europe Holdings, LLC. We anticipate that this new entity, or its affiliates, will operate the European portion of our business and will manage our distributor and agency relationships in the future.

Manufacturing and Supply

We use third party contract manufacturers to produce our People’s Liberation and William Rast denim finished goods from facilities located primarily in Los Angeles, California. For the majority of our denim products, we purchase fabric and trim from suppliers who deliver these components directly to us to be cut, sewn, washed and finished by our contract manufacturers. For the majority of our knits and other non-denim products, we source these goods from international suppliers. As our product offerings increase, we intend to expand the number of contract manufacturers we use, both domestically and internationally, to perform some or all of the manufacturing processes required to produce finished products. 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 source our People’s Liberation denim and knit products sold to Charlotte Russe under our exclusive distribution agreement from international suppliers of full package goods. Additionally, we are beginning to source denim for William Rast from international suppliers of full package goods.

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. 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. William Rast Europe Holdings, LLC (“William Rast Europe”), a Delaware limited liability company, was formed on March 11, 2009 and is a wholly-owned subsidiary of William Rast Sourcing. There currently is no significant activity in this newly formed entity.

Recent Developments

On December 16, 2008, we entered into an agreement with Charlotte Russe pursuant to which we agreed to exclusively sell to Charlotte Russe Holding, Inc. and its wholly-owned subsidiary, Charlotte Russe Merchandising, Inc. (collectively, “Charlotte Russe”), in North America and Central America, People’s Liberation™ 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 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 us in North America and Central America through Charlotte Russe™ branded retail stores and related distribution channels, including outlet locations and direct-to-consumer sales. We ceased to sell People’s Liberation branded merchandise in such territories 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 are expected to begin shipping in June 2009.

In consideration for the exclusive rights granted to Charlotte Russe under the Agreement, Charlotte Russe has agreed to purchase from us 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.

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.

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.

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.

Noncontrolling Interest. Profit and loss allocations to noncontrolling interest members of our subsidiaries are recorded as increases and decreases in noncontrolling interest in our consolidated financial statements. Cash distributions, if any, made to a noncontrolling interest member of any of our subsidiaries are accounted for as decreases in noncontrolling interest in the consolidated balance sheet of the Company. To the extent the priority distributions are made, it would reduce the income allocable to the controlling interest.

Recent Accounting Pronouncements

See Note 13 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.

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 Ended March 31, 2009			Three Months Ended March 31, 2008

Net sales		100.0	%		100.0	%
Cost of goods sold		55.5			50.4
Gross profit		44.5			49.6
Selling, design and production expenses		37.1			28.2
General and administrative expenses		25.8			16.0
Operating (loss) income		(18.4	)%		5.4	%

Comparison of three months ended March 31, 2009 and three months ended March 31, 2008

Net Sales

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Percent Change

Net Sales	$	7,530,078	$	6,916,639		8.9	%

The increase in net sales for the three months ended March 31, 2009 was due primarily to the commencement in July 2008 of wholesale and retail sales of our new apparel line, J. Lindeberg, and a slight increase in sales volume of our William Rast apparel line, offset by a decrease in sales volume of our People’s Liberation product line. We began distributing J. Lindeberg brand products in the United States on an exclusive basis beginning July 2008. We anticipate that the addition of this new product line will have a positive impact on our future sales. The decrease in People’s Liberation sales was due primarily to our transition to an exclusive distributor relationship with Charlotte Russe, as discussed above, pursuant to which our People’s Liberation product line will be marketed and sold through a different distribution channel then that of our existing Peolple’s Liberation customers. As a result of this transition, we experienced order cancellations from our existing customers and we eliminated our production of available-to-sell goods, which resulted in a decrease in net sales during the quarter ended March 31, 2009. Product sales to Charlotte Russe under the terms of our agreement are expected to begin in June 2009.

Gross Profit

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Percent Change

Gross Profit	$	3,353,925	$	3,432,223		(2.3	)%

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, freight, duty and overhead expenses. Overhead expenses primarily consist of third party warehouse and shipping costs. Our gross margin decreased to 44.5% for the three months ended March 31, 2009 from 49.6% for the three months ended March 31, 2008. The decrease in gross profit as a percentage of net sales was due to increased off-price sales, including off price sales of our People’s Liberation product line as we prepared to cease selling People’s Liberation branded merchandise in North and Central America effective April 30, 2009, pursuant to the terms of our exclusive distribution agreement with Charlotte Russe.

Selling, Design and Production Expenses

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Percent Change

Selling, design and production expenses	$	2,793,273	$	1,948,960		43.3	%

Selling, design and production expense for the three months ended March 31, 2009 and 2008 primarily related to tradeshow, salaries, design fee payments, advertising, marketing and promotion, samples, travel and showroom expenses. As a percentage of net sales, selling, design and production expense increased to 37.1% for the three months ended March 31, 2009 compared to 28.2% for the three months ended March 31, 2008. The increase in selling, design and production expense for the three months ended March 31, 2009 is attributable to our increased promotion and marketing of our William Rast brand, including our William Rast fashion show which took place during the first quarter of 2009. We also incurred additional design fees for our William Rast apparel line, including our William Rast apparel collection designed by Paris68, and increased sample costs related to our new J. Lindeberg apparel line.

General and Administrative Expenses

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Percent Change

General and administrative expenses	$	1,944,396	$	1,106,629		75.7	%

General and administrative expenses for the three months ended March 31, 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 to 25.8% for the three months ended March 31, 2009 from 16.0% for three months ended March 31, 2008. The increase in general and administrative expenses during the three months ended March 31, 2009 was due primarily to a net increase in administrative salaries, rent related to our J. Lindeberg retail store and showroom in New York City, increased professional fees, 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 additional employees related to our J. Lindeberg acquisition in the third quarter of 2008, offset by a 10% salary reduction which took effect February 1, 2009 in response to worsening economic conditions.

Interest Expense, net

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Percent Change

Interest Expense, net	$	44,090	$	21,251		107.5	%

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 $4.0 million and $1.4 million at March 31, 2009 and 2008, respectively. The increase in interest expense is due to increased borrowings under our factoring arrangements during the three months ended March 31, 2009 compared with the three months ended March 31, 2008.

Provision for Income Tax

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Percent Change

Provision for Income Tax	$	16,000	$	8,400		90.5	%

The provision for income taxes for the three months ended March 31, 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, William Rast Sourcing, LLC and J. Lindeberg USA, LLC. A provision for Federal income taxes has not been recorded for the three months ended March 31, 2009, as we had a net loss during the quarter. A provision for Federal income taxes was not recorded for the three months ended March 31, 2008, as any tax liabilities generated from net income would be offset by the Company’s net operating loss carryforwards. As of March 31, 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 $4.5 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 (Loss) Income

	Three Months Ended March 31, 2009			Three Months Ended March 31, 2008		Percent Change

Net (loss) income	$	(1,443,834	)	$	346,983		*
* Not meaningful

The increase in net loss during the three months ended March 31, 2009 compared to net income during the three months ended March 31, 2008 is due primarily to increased operating expenses incurred during the quarter. Increased sales during the three months ended March 31, 2009 were offset by decreased gross margin during the quarter, as discussed above.

Noncontrolling Interest

	Three Months Ended March 31, 2009			Three Months Ended March 31, 2008		Percent Change

Noncontrolling interest	$	(645,052	)	$	-		*
* Not meaningful

Noncontrolling interest recorded for the three months ended March 31, 2009 represents loss allocations to William Rast Enterprises, a member of William Rast Sourcing and William Rast Licensing, and J. Lindeberg USA Corp., a member of J. Lindeberg USA, LLC. Beginning January 1, 2009, losses from William Rast Sourcing and William Rast Licensing are allocated in accordance with each member’s percentage interest and profits will be allocated to the members based on their percentage interests to the extent that the member was previously allocated losses. These allocations to William Rast Enterprises are recorded as a noncontrolling interest in the consolidated financial statements. The increase in noncontrolling interest recorded for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was due to the allocation of losses to William Rast Enterprises during the three months ended March 31, 2009, due to the adoption of a new accounting standard that took effect beginning January 1, 2009. There was no allocation of losses to William Rast Enterprises during the three months ended March 31, 2008.

Net (Loss) Income Attributable to Common Stockholders

	Three Months Ended March 31, 2009			Three Months Ended March 31, 2008		Percent Change

Net (loss) income attributable to common stockholders	$	(798,782	)	$	346,983		*
* Not meaningful

The increase in net loss attributable to common stockholders during the three months ended March 31, 2009 compared to net income attributable to common stockholders during the three months ended March 31, 2008 is due primarily to increased operating expenses incurred during the quarter, offset by increased noncontrolling interest recorded during the three months ended March 31, 2009. Increased sales during the three months ended March 31, 2009 were offset by decreased gross margin during the quarter, as discussed above.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of approximately $2.6 million, working capital of approximately $1.5 million, and approximately $1.2 million of availability from our factor. As of March 31, 2009, advances from our factor totaled approximately $4.0 million. As of March 31, 2008, we had cash and cash equivalents of approximately $319,000, a working capital balance of approximately $4.6 million, and approximately $2.8 million of availability from our factor. As of March 31, 2008, advances from our factor totaled approximately $1.4 million.

We are currently evaluating various financing strategies to be used to expand our business and fund future growth. 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 under our current operating strategy. We anticipate that the advance payments we will receive under our distribution agreement with Charlotte Russe should be adequate to fund our working capital shortages, if any. The aggregate minimum purchase obligation under our distribution agreement with Charlotte Russe 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 distribution agreement is terminated prior to expiration of the initial term or is renewed for one or more additional renewal periods.

We are subject to a contractual agreement that may require us to contribute cash to 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. Notwithstanding the foregoing, we currently do not have any material commitments for capital expenditures.

The extent of our future capital requirements will depend on many factors, including our results of operations. If our cash from operations is less than anticipated or 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, we may need to raise additional debt or equity financing within the next twelve months. 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 three months ended March 31, 2009 and 2008 are summarized in the following table:

	Three Months Ended March 31,
Activity:	2009			2008
Operating activities	$	896,613		$	375,976
Investing activities		(142,964	)		(419,502	)
Net increase (decrease) in cash	$	753,649		$	( 43,526	)

Operating Activities

Net cash provided by operating activities was approximately $897,000 and $376,000 for the three months ended March 31, 2009 and 2008. Although we experienced a net loss of $1.4 million during the three months ended March 31, 2009, cash provided from operating activities was positive primarily as a result of decreased receivables and inventories, the receipt of a $1 million additional deposit during the quarter from Charlotte Russe pursuant to our distribution agreement, offset by decreased accounts payable and accrued expenses. Cash provided by operating activities for the three months ended March 31, 2008 resulted primarily from decreased receivables, inventories, prepaid expenses and other assets, and increased accounts payable and accrued expenses, offset by increased prepaid design fees. As of March 31, 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 $781,818 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 and the parties are currently negotiating the terms of a new design consulting arrangement. The new design consulting arrangement will provide for a reduction in the fees paid for services and a reduction in the percentage of royalty payments due under the prior agreement.

Investing Activities

Net cash used in investing activities was approximately $143,000 and $420,000 for the three months ended March 31, 2009 and 2008, respectively. Net cash used in investing activities for the three months ended March 31, 2009 consisted of an increase in capital expenditures primarily for leasehold improvements and furniture and fixtures for the relocation of our corporate offices and trademark costs. Net cash used in investing activities for the three months ended March 31, 2008 consisted of an increase in capital expenditures primarily for furniture and fixtures and trademark costs.

Financing Activities

There were no financing activities during the three months ended March 31, 2009 and 2008.

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 March 31, 2009 and 2008, total factored accounts receivable included in due from factor amounted to approximately $4,708,000 and $3,466,000, respectively. Outstanding advances as of March 31, 2009 and 2008 amounted to approximately $3,957,000 and $1,419,000, respectively, and are included in the due from factor balance.

Contractual Obligations and Off-Balance Sheet Arrangements

The following summarizes our contractual obligations at March 31, 2009 and the effects such obligations are expected to have on liquidity and cash flows in future periods:

	Payments Due by Period
			Less than		1-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Operating leases	$	2,655,248	$	1,137, 616	$	1,500,856	$	16,776	$	-
Consulting agreements		314,000		314,000		-		-		-
Total	$	2,969,248	$	1,451,616	$	1,500,856	$	16,776	$	-

Effective December 1, 2008, the design services agreement with Paris68 LLC was terminated and the parties are currently negotiating the terms of a new design consulting agreement. We currently have a verbal agreement with Paris68 LLC which provides for the payment of design fees at a rate of $97,000 per month in addition to travel and other expenses incurred by the design team.

At March 31, 2009, approximately $150,000 of the Company’s cash is held under a lease line as collateral to secure one of the Company’s lease agreements.

At March 31, 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 March 31, 2009 and 2008.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not required.

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 March 31, 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 March 31, 2009.

As was initially reported, management was satisfied that its disclosure controls and procedures were effective and that no significant changes in its internal control over financial reporting had occurred. Subsequent to such evaluations, upon review of material contractual agreements, it was determined that allocations and distributions as set forth in certain of our agreements were not being properly accounted for in our consolidated financial statements. After our review, management has determined that its accounting for noncontrolling interest as it related to certain or our subsidiaries was incorrect. As a result of management’s determination, the Board of Directors decided to revise the accounting treatment related to noncontrolling interest and to restate our financial statements for the fiscal years ended December 31, 2008 and 2009, and three months ended March 31, 2010, as described elsewhere in this report.

In light of the restatement, management and Crowe Horwath LLP, our independent registered public accountants, concluded that a material weakness existed in our internal control over financial reporting. As a result, management has now concluded that our disclosure controls and procedures were not effective as of March 31, 2009. Subsequent to March 31, 2009, we remedied this material weakness by changing our policies and procedures with regards to the application of the requirements of new accounting standards as they relate to our existing material contracts. With the assistance of outside accounting consultants, our Chief Financial Officer will review new accounting pronouncements that are adopted by the Company and will determine their impact on the way the requirements of new accounting standards are applied to our existing material contracts.

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 first quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1A.

Risk Factors

Cautionary Statements and Risk Factors

This Quarterly Report on Form 10-Q, as amended, 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. There have been no material changes to such risk factors during the three months ended March 31, 2009.

Item 6.

Exhibits

The following exhibits are filed as part of this report:

Exhibit Number		Exhibit Title

10.1		Independent Consulting Agreement entered into by and between People’s Liberation, Inc. and Susan White effective April 1, 2009. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 10-Q filed May 15, 2009.

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.

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: August 16, 2010		/s/ Darryn Barber
	By:	Darryn Barber
	Its:	Chief Financial Officer and President
		(Principal Financial and
		Accounting Officer)

Attached files

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