Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - Heelys, Inc. | Financial_Report.xls |
| EX-31.2 - EXHIBIT 31.2 - Heelys, Inc. | ex31_2.htm |
| EX-32.1 - EXHIBIT 32.1 - Heelys, Inc. | ex32_1.htm |
| EX-31.1 - EXHIBIT 31.1 - Heelys, Inc. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2011
or
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from to
Commission File Number 001-33182
HEELYS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2880496
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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3200 Belmeade Drive, Suite 100
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||
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Carrollton, Texas
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75006
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(Address of principal executive offices)
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(Zip Code)
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(214) 390-1831
(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 o
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 x No o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class of common stock
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Outstanding as of November 3, 2011
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Par value $0.001 per share
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27,571,052
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Part I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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3
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4
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5
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6
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Item 2.
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12
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Item 4.
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23
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PART II. OTHER INFORMATION
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Item 1.
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23
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Item 1A.
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24
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Item 2.
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24
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Item 5.
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24
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Item 6.
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24
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25
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As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Heelys” refer to Heelys, Inc., a Delaware corporation, and its direct and indirect subsidiaries.
Part I – FINANCIAL INFORMATION
(In thousands, except share data)
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September 30,
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December 31,
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|||||||
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2011
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2010
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ASSETS
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||||||||
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CURRENT ASSETS:
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||||||||
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Cash and cash equivalents
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$ | 23,149 | $ | 35,320 | ||||
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Investments
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39,458 | 32,299 | ||||||
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Accounts receivable, net of allowances of $322 and $237, respectively
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3,722 | 3,135 | ||||||
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Inventories
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9,715 | 6,810 | ||||||
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Prepaid expenses and other current assets
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946 | 689 | ||||||
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Income tax receivable
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242 | - | ||||||
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Deferred income taxes
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8 | 8 | ||||||
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Total current assets
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77,240 | 78,261 | ||||||
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PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,145 and $1,906, respectively
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650 | 798 | ||||||
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PATENTS AND TRADEMARKS, net of accumulated amortization of $1,455 and $1,355, respectively
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331 | 372 | ||||||
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INTANGIBLE ASSETS, net of accumulated amortization of $1,141 and $891, respectively
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474 | 689 | ||||||
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GOODWILL
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1,609 | 1,568 | ||||||
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DEFERRED INCOME TAXES
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156 | 126 | ||||||
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TOTAL ASSETS
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$ | 80,460 | $ | 81,814 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
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Accounts payable
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$ | 1,794 | $ | 1,089 | ||||
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Accrued liabilities
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2,954 | 1,661 | ||||||
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Income taxes payable
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86 | 506 | ||||||
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Deferred income taxes
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17 | 18 | ||||||
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Total current liabilities
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4,851 | 3,274 | ||||||
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LONG TERM LIABILITIES:
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Income taxes payable
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659 | 547 | ||||||
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Deferred income taxes
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18 | 2 | ||||||
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Other long term liabilities
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246 | 219 | ||||||
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TOTAL LIABILITIES
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5,774 | 4,042 | ||||||
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COMMITMENTS AND CONTINGENCIES (Note 8)
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STOCKHOLDERS' EQUITY:
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||||||||
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Common stock, $0.001 par value, 75,000,000 shares authorized; 27,571,052 shares issued and outstanding as of September 30, 2011 and December 31, 2010
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28 | 28 | ||||||
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Additional paid-in capital
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65,989 | 65,691 | ||||||
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Retained earnings
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8,921 | 12,541 | ||||||
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Accumulated other comprehensive loss
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(252 | ) | (488 | ) | ||||
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Total stockholders' equity
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74,686 | 77,772 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$ | 80,460 | $ | 81,814 | ||||
See notes to condensed consolidated financial statements.
(In thousands, except share data)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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|||||||||||||||
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2011
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2010
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2011
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2010
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NET SALES
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$ | 6,624 | $ | 8,248 | $ | 21,069 | $ | 23,704 | ||||||||
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COST OF SALES
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4,186 | 4,972 | 11,712 | 13,530 | ||||||||||||
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GROSS PROFIT
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2,438 | 3,276 | 9,357 | 10,174 | ||||||||||||
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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Selling and marketing
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1,826 | 1,026 | 5,388 | 3,859 | ||||||||||||
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General and administrative
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2,557 | 2,435 | 8,085 | 7,604 | ||||||||||||
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Total selling, general and administrative expenses
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4,383 | 3,461 | 13,473 | 11,463 | ||||||||||||
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LOSS FROM OPERATIONS
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(1,945 | ) | (185 | ) | (4,116 | ) | (1,289 | ) | ||||||||
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OTHER (INCOME) EXPENSE
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Interest (income) expense, net
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(55 | ) | (107 | ) | (217 | ) | (287 | ) | ||||||||
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Other income
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(396 | ) | (32 | ) | (405 | ) | (809 | ) | ||||||||
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Exchange (gain) loss, net
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(115 | ) | (127 | ) | (119 | ) | 140 | |||||||||
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Total other (income) expense, net
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(566 | ) | (266 | ) | (741 | ) | (956 | ) | ||||||||
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INCOME (LOSS) BEFORE INCOME TAXES
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(1,379 | ) | 81 | (3,375 | ) | (333 | ) | |||||||||
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INCOME TAX EXPENSE
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85 | 150 | 245 | 445 | ||||||||||||
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NET LOSS
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$ | (1,464 | ) | $ | (69 | ) | $ | (3,620 | ) | $ | (778 | ) | ||||
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LOSS PER SHARE:
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Basic and diluted
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$ | (0.05 | ) | $ | (0.00 | ) | $ | (0.13 | ) | $ | (0.03 | ) | ||||
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WEIGHTED AVERAGE SHARES OUTSTANDING:
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||||||||||||||||
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Basic and diluted
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27,571 | 27,571 | 27,571 | 27,571 | ||||||||||||
See notes to condensed consolidated financial statements.
(In thousands)
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Nine Months Ended
September 30,
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||||||||
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2011
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2010
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OPERATING ACTIVITIES:
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Net Loss
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$ | (3,620 | ) | $ | (778 | ) | ||
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Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
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Depreciation and amortization
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575 | 588 | ||||||
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Accretion (amortization) of premium (discount) on investments, net
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482 | 367 | ||||||
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Accrued interest income
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(174 | ) | (242 | ) | ||||
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Deferred income taxes
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(11 | ) | 75 | |||||
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Stock-based compensation
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296 | 319 | ||||||
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Unrealized exchange (gain) loss, net
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(104 | ) | (137 | ) | ||||
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Loss on disposal of property and equipment
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- | 4 | ||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(531 | ) | 1,404 | |||||
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Inventories
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(2,682 | ) | (1,999 | ) | ||||
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Prepaid expenses and other current assets
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(42 | ) | (451 | ) | ||||
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Accounts payable
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687 | (23 | ) | |||||
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Accrued liabilities
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1,431 | (324 | ) | |||||
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Income taxes payable/receivable
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(585 | ) | 1,582 | |||||
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Net cash (used in) provided by operating activities
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(4,278 | ) | 385 | |||||
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INVESTING ACTIVITIES:
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Purchases of investments
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(40,686 | ) | (26,682 | ) | ||||
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Proceeds from maturities of investments
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33,045 | 20,200 | ||||||
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Purchases of equipment
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(105 | ) | (117 | ) | ||||
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Increase in patents and trademarks
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(59 | ) | (133 | ) | ||||
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Net cash used in investing activities
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(7,805 | ) | (6,732 | ) | ||||
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FINANCING ACTIVITIES:
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||||||||
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Payment for previously acquired goodwill and intangible assets
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(143 | ) | (462 | ) | ||||
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Net cash used in financing activities
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(143 | ) | (462 | ) | ||||
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
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55 | 125 | ||||||
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NET DECREASE IN CASH AND CASH EQUIVALENTS
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(12,171 | ) | (6,684 | ) | ||||
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CASH AND CASH EQUIVALENTS, beginning of period
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35,320 | 39,370 | ||||||
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CASH AND CASH EQUIVALENTS, end of period
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$ | 23,149 | $ | 32,686 | ||||
See notes to condensed consolidated financial statements.
(Unaudited)
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Business Description — The Company designs, markets and distributes innovative, action sports-inspired products primarily under the HEELYS brand targeted to the youth market. The primary product, HEELYS-wheeled footwear, is patented, dual-purpose footwear that incorporates a stealth, removable wheel in the heel. HEELYS are distributed directly to retail stores in the United States and certain other countries, and through international wholesale distributors.
The Company initially incorporated as Heeling, Inc. in Nevada in 2000. The Company was reincorporated in Delaware in August 2006 and changed its name to Heelys, Inc. Through its general and limited partner interests, Heelys, Inc. owns 100% of Heeling Sports Limited, a Texas limited partnership, which was formed in May 2000.
In February 2008, the Company formed Heeling Sports EMEA SPRL, a Belgian corporation and indirect wholly-owned subsidiary of the Company, with offices in Brussels, and branch offices in Germany and France, primarily to manage the Company's European operations. In February 2011, the Company formed Heeling Sports Japan K.K., a Japanese corporation and indirect wholly-owned subsidiary of the Company, with offices in Tokyo, to manage its operations in Japan and to take over distribution in that country effective March 1, 2011.
Basis Of Presentation — Unaudited Condensed Interim Consolidated Financial Information — In the opinion of management, all adjustments necessary for a fair presentation of results of operations for the periods presented have been included in the accompanying unaudited condensed consolidated financial statements of the Company. Such adjustments consist of normal recurring items. The accompanying financial statements have been prepared in accordance with the instructions to Form 10-Q and include the information and notes required by those instructions. The unaudited condensed consolidated balance sheet data as of December 31, 2010 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Accordingly, the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2010.
2. CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original maturity dates of three months or less when purchased. Cash equivalents at September 30, 2011 and December 31, 2010 consist of an investment in the Fidelity Money Market Fund of $8.6 million and $18.9 million, respectively. Investments in the Fidelity Money Market Fund are valued using observable inputs.
3. CONCENTRATION OF RISK
The Company maintains substantially all of its cash and cash equivalents in financial institutions in amounts that exceed U.S. federally insured limits or in international jurisdictions where either insurance is not provided or in amounts that exceed amounts guaranteed by the local government or other governmental agencies. Investments in the Fidelity Money Market Fund are not insured. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk.
The Company invests a portion of its cash in fully insured certificates of deposit and in debt instruments of corporations and municipalities with strong credit ratings.
The Company considers its concentration risk related to accounts receivable to be mitigated by the Company’s credit policy, the significance of outstanding balances owed by each individual customer at any point in time and the geographic dispersion of these customers.
The Company outsources all of its manufacturing to a small number of independent manufacturers. Establishing replacement sources could require significant additional time and expense.
4. LOSS PER SHARE
Basic loss per common share is calculated by dividing net loss available to common stockholders for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the effects of potentially dilutive securities that could share in the loss of the Company. A reconciliation of the numerator and denominator used in the calculation of basic and diluted loss per share is as follows (in thousands):
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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|||||||||||||||
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2011
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2010
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2011
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2010
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Numerator— net loss available to common stockholders
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$ | (1,464 | ) | $ | (69 | ) | $ | (3,620 | ) | $ | (778 | ) | ||||
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Denominator:
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Weighted average common stock outstanding for basic loss per share
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27,571 | 27,571 | 27,571 | 27,571 | ||||||||||||
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Effect of dilutive securities:
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Stock options
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– | – | – | – | ||||||||||||
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Restricted stock units
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– | – | – | – | ||||||||||||
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Adjusted weighted average common stock and assumed conversions for diluted loss per share
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27,571 | 27,571 | 27,571 | 27,571 | ||||||||||||
Stock options to purchase approximately 1.5 million shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2011, and stock options to purchase approximately 1.6 million shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2010, because the effect of their inclusion would be anti-dilutive. Restricted stock units convertible into approximately 780,000 and 599,000 shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2011, respectively, because the effect of their inclusion would have been anti-dilutive. Restricted stock units convertible into approximately 32,000 shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2010, because the effect of their inclusion would have been anti-dilutive. Restricted stock units were not awarded prior to August 2010.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to make the presentation of items within other comprehensive income (“OCI”) more prominent. The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders’ equity. This new standard is effective for the Company beginning January 1, 2012, with early adoption permitted. The adoption of this new standard may change the order in which certain financial statements are presented and provide additional detail in those financial statements when applicable, but will not have any other impact on the Company’s financial statements.
In September 2011, FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amends current guidance to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Under this amendment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. This pronouncement is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect the adoption of this new pronouncement to have a material effect on its consolidated financial statements.
6. INVESTMENTS
Investments consist of the following:
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As of September 30, 2011
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Gross
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Gross
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Aggregate
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|||||||||||||||
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Amortized
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Unrealized
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Unrealized
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Fair
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||||||||||||||
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Cost
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Gains
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Losses(1a)
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Value(2)
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Maturities
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(In thousands, except table notes)
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Current held-to-maturity securities
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Certificate of deposit(3)
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$
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500
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$
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-
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$
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-
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$
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500
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Nov-2011
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||||||||
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Commercial paper
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13,392
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1
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(1
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)
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13,392
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Oct-2011 thru Dec-2011
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Corporate bonds
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11,983
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-
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(49
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)
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11,934
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Dec-2011 thru Sep-2012
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Municipal bonds
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13,583
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-
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(24
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)
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13,559
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Mar-2012 thru Aug-2012
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Total Current held-to-maturity securities
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$
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39,458
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$
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1
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$
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(74
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)
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$
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39,385
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As of December 31, 2010
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Gross
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Gross
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Aggregate
|
|||||||||||||||
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Amortized
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Unrealized
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Unrealized
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Fair
|
||||||||||||||
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Cost
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Gains
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Losses(1a)
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Value(2)
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Maturities
|
|||||||||||||
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(In thousands, except table notes)
|
|||||||||||||||||
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Current held-to-maturity securities
|
|||||||||||||||||
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Certificate of deposit(3)
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$
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500
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$
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-
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$
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-
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$
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500
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May-2011
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||||||||
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Commercial paper
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12,462
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3
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(4
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)
|
12,461
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Jan-2011 thru Oct-2011
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|||||||||||
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Corporate bonds
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13,302
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15
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(14
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)
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13,303
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Jan-2011 thru Nov-2011
|
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Municipal bonds
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6,035
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-
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(11
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)
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6,024
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Jun-2011 thru Nov-2011
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|||||||||||
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Total Current held-to-maturity securities
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$
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32,299
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$
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18
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$
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(29
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)
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$
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32,288
|
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(1a)
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No investments outstanding as of September 30, 2011 have had continuous unrealized loss positions longer than 12 months. All investments that matured during the nine months ended September 30, 2011 matured at their full face amounts.
|
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(1b)
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One of the Company’s investments (a municipal bond), outstanding as of December 31, 2010, had been in an unrealized loss position (fair value less than book value) since its acquisition in December 2009. The Company considered the facts and circumstances of this investment, including the severity of the unrealized loss ($9,000 at December 31, 2010), the credit quality rating (A+ Moody’s rating) and length of time to maturity (investment matured July 1, 2011), and determined that no adjustment was necessary to recognize that loss. This investment matured at its full face amount. No other investments, outstanding as of December 31, 2010, had continuous unrealized loss positions longer than 12 months. All investments that matured during the nine months ended September 30, 2011 matured at their full face amounts.
|
|
(2)
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Aggregate fair values for commercial paper and bonds were determined using a third-party pricing service. This third-party pricing service uses the market approach to value these investments (Level 2 fair value hierarchy).
|
|
(3)
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In May 2010 the Company purchased a $500,000 certificate deposit as collateral for a revolving credit facility that the Company entered into with a local bank for the purpose of issuing letters of credit to secure payment to one of its foreign manufacturers. The revolving credit facility was no longer required and was closed, and the certificate of deposit matured, during the second quarter of 2011. A certificate of deposit in the same amount of $500,000 was subsequently purchased.
|
All investments as of September 30, 2011 and as of December 31, 2010 are classified as held-to-maturity since the Company has the intent and ability to hold these investments to maturity. Investments in debt securities (commercial paper, municipal bonds and corporate bonds) are reported at cost, adjusted for premiums and discounts that are recognized in interest income, using a method that approximates the effective interest method, over the period to maturity. The Company considers as current assets those investments which will mature in the next 12 months. The remaining investments are considered non-current.
Accrued liabilities consisted of the following (in thousands):
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Professional fees
|
$ | 114 | $ | 91 | ||||
|
Payments due - termination of distributorship agreements
|
95 | 217 | ||||||
|
Accrued taxes payable
|
99 | 89 | ||||||
|
Customer credits and prepayments
|
345 | 242 | ||||||
|
Payroll and payroll related costs
|
655 | 320 | ||||||
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Inventory and related costs
|
920 | 150 | ||||||
|
Commissions
|
282 | 185 | ||||||
|
Insurance
|
150 | 160 | ||||||
|
Other
|
294 | 207 | ||||||
|
Total accrued liabilities
|
$ | 2,954 | $ | 1,661 | ||||
Customer credits include amounts due to customers in excess of amounts owed to the Company, including estimated credits due to customers for estimated returns and co-op advertising and marketing allowances.
8. COMMITMENTS AND CONTINGENCIES
Purchase Commitments — The Company had open purchase commitments of $5.1 million at September 30, 2011 for the purchase of inventory.
Revolving Credit Facility — In June 2010, the Company entered into a $500,000 revolving credit facility with a local bank for the purpose of issuing letters of credit to secure payment to one of its foreign manufacturers. The revolving credit facility was no longer required and was closed during the second quarter of 2011.
Legal Proceedings — Due to the nature of the Company's products, from time to time the Company has to defend against personal injury and product liability claims arising out of personal injuries that allegedly are suffered using the Company's products. To date, none of these claims has had a material adverse effect on the Company. The Company is also engaged in various claims and legal proceedings relating to intellectual property matters, especially in connection with enforcing the Company's intellectual property rights against the various third parties importing and selling knockoff products domestically and internationally. Often, such legal proceedings result in counterclaims against the Company that the Company must defend. The Company believes that none of the pending personal injury, product liability or intellectual property legal matters will have a material adverse effect upon the Company's financial position, cash flows or results of operations. Litigation settlement payments related to intellectual property legal matters (whether received by the Company or paid by the Company) are reported as other income (expense) in the Company’s consolidated statements of operations. Legal fees related to intellectual property matters and associated enforcement are included in general and administrative expenses.
9. INCOME TAXES
The statute of limitations remains open for the Company’s consolidated federal income tax returns for the tax years ended December 31, 2006 forward. For income tax returns filed in Belgium, Germany and France, the statute of limitations remains open for the tax years ended December 31, 2008 forward. State statutes are open for various years, depending on the jurisdiction. The Company’s federal income tax return for the tax year ended December 31, 2007 is currently being reviewed by the Internal Revenue Service. The Company does not expect this review to result in any material changes to that return.
The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company has received an assessment for interest and/or penalties, interest has been classified in the financial statements as interest expense and penalties as general and administrative expense.
The Company recognized income tax expense of $245,000 for the nine months ended September 30, 2011, representing an effective income tax rate of (7.3)%, compared to income tax expense of $445,000 for the nine months ended September 30, 2010, representing an effective income tax rate of (133.6)%. The effective rate differs from the statutory federal rate of 35% primarily due to domestic operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%, as well as for certain other items, such as state and local taxes and non-deductible expenses. While the Company did not record the benefit of domestic losses for the current period, profits and losses in its European operations resulted in income tax expense of $245,000 for the nine months ended September 30, 2011. The Company operates in multiple jurisdictions and its business is impacted by seasonality which causes variability in the consolidated effective tax rate during the year. The Company continually reviews its assertion regarding its valuation allowance, which includes an analysis of multiple factors, including projections, reversal of deferred tax liabilities, and tax planning strategies.
As of September 30, 2011, there have been no material changes in the Company’s gross unrecognized tax benefits or accrued interest and penalties. All unrecognized tax benefits have been classified as other long-term liabilities. The Company classifies interest and penalties related to unrecognized tax benefits as interest expense and general and administrative expense, respectively.
10. STOCKHOLDERS’ EQUITY
Total stockholders’ equity decreased $3.1 million to $74.7 million at September 30, 2011, from $77.8 million at December 31, 2010. Additional paid-in-capital increased as a result of the recognition of stock-based compensation expense. Retained earnings decreased solely as a result of the net loss recognized for the nine months ended September 30, 2011. Changes in accumulated other comprehensive loss are the result of translating the foreign currency financial statements of Heeling Sports EMEA SPRL and Heeling Sports Japan K.K., as of and for the nine months ended September 30, 2011, into U.S. dollars.
11. COMPREHENSIVE LOSS
Comprehensive loss for the three months and nine months ended September 30, 2011 and 2010 was as follows (in thousands):
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Net loss
|
$ | (1,464 | ) | $ | (69 | ) | $ | (3,620 | ) | $ | (778 | ) | ||||
|
Gain (loss) on foreign currency translation
|
(290 | ) | 593 | 236 | (212 | ) | ||||||||||
|
Comprehensive loss
|
$ | (1,754 | ) | $ | 524 | $ | (3,384 | ) | $ | (990 | ) | |||||
12. SEGMENT REPORTING
Operating results are assessed based on geographic areas to make decisions about necessary resources and in assessing performance. Consequently, based on the nature of the financial information that is received by the Chief Executive Officer as chief operating decision maker, the Company has two reportable segments for financial statement purposes. Each segment derives revenue primarily from the sale of HEELYS-wheeled footwear.
|
Three Months Ended September 30, 2011
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Domestic
|
International
|
Unallocated
|
Consolidated
|
|||||||||||||
|
Net Sales
|
$ | 2,297 | $ | 4,327 | $ | - | $ | 6,624 | ||||||||
|
Cost of Sales
|
1,485 | 2,701 | - | 4,186 | ||||||||||||
|
Gross Profit
|
812 | 1,626 | - | 2,438 | ||||||||||||
|
Selling, General and Administrative Expenses
|
1,939 | 2,172 | 272 | 4,383 | ||||||||||||
|
Income (Loss) from Operations
|
(1,127 | ) | (546 | ) | (272 | ) | (1,945 | ) | ||||||||
|
Other (Income) Expense, net
|
(389 | ) | (130 | ) | (47 | ) | (566 | ) | ||||||||
|
Income (Loss) before Income Taxes
|
$ | (738 | ) | $ | (416 | ) | $ | (225 | ) | $ | (1,379 | ) | ||||
|
Three Months Ended September 30, 2010
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Domestic
|
International
|
Unallocated
|
Consolidated
|
|||||||||||||
|
Net Sales
|
$ | 1,305 | $ | 6,943 | $ | - | $ | 8,248 | ||||||||
|
Cost of Sales
|
809 | 4,163 | - | 4,972 | ||||||||||||
|
Gross Profit
|
496 | 2,780 | - | 3,276 | ||||||||||||
|
Selling, General and Administrative Expenses
|
1,579 | 1,667 | 215 | 3,461 | ||||||||||||
|
Income (Loss) from Operations
|
(1,083 | ) | 1,113 | (215 | ) | (185 | ) | |||||||||
|
Other (Income) Expense, net
|
(53 | ) | (129 | ) | (84 | ) | (266 | ) | ||||||||
|
Income (Loss) before Income Taxes
|
$ | (1,030 | ) | $ | 1,242 | $ | (131 | ) | $ | 81 | ||||||
|
Nine Months Ended September 30, 2011
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Domestic
|
International
|
Unallocated
|
Consolidated
|
|||||||||||||
|
Net Sales
|
$ | 6,699 | $ | 14,370 | $ | - | $ | 21,069 | ||||||||
|
Cost of Sales
|
4,067 | 7,645 | - | 11,712 | ||||||||||||
|
Gross Profit
|
2,632 | 6,725 | - | 9,357 | ||||||||||||
|
Selling, General and Administrative Expenses
|
5,361 | 7,330 | 782 | 13,473 | ||||||||||||
|
Income (Loss) from Operations
|
(2,729 | ) | (605 | ) | (782 | ) | (4,116 | ) | ||||||||
|
Other (Income) Expense, net
|
(420 | ) | (127 | ) | (194 | ) | (741 | ) | ||||||||
|
Income (Loss) before Income Taxes
|
$ | (2,309 | ) | $ | (478 | ) | $ | (588 | ) | $ | (3,375 | ) | ||||
|
Nine Months Ended September 30, 2010
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Domestic
|
International
|
Unallocated
|
Consolidated
|
|||||||||||||
|
Net Sales
|
$ | 5,452 | $ | 18,252 | $ | - | $ | 23,704 | ||||||||
|
Cost of Sales
|
3,641 | 9,889 | - | 13,530 | ||||||||||||
|
Gross Profit
|
1,811 | 8,363 | - | 10,174 | ||||||||||||
|
Selling, General and Administrative Expenses
|
5,245 | 5,545 | 673 | 11,463 | ||||||||||||
|
Income (Loss) from Operations
|
(3,434 | ) | 2,818 | (673 | ) | (1,289 | ) | |||||||||
|
Other (Income) Expense, net
|
(881 | ) | 144 | (219 | ) | (956 | ) | |||||||||
|
Income (Loss) before Income Taxes
|
$ | (2,553 | ) | $ | 2,674 | $ | (454 | ) | $ | (333 | ) | |||||
Other income attributed to domestic operations includes interest income earned on cash (including cash equivalents) and investments, as well as other income primarily attributable to settlements of patent and trademark litigation. Litigation settlement payments related to intellectual property legal matters (whether received by the Company or paid by the Company) are attributed to either domestic or international operations as appropriate. Legal fees related to intellectual property matters and associated enforcement are included in general and administrative expenses and are attributed to either domestic or international operations as appropriate.
Other income (expense), net, attributed to international operations is primarily gains (losses) generated by transactions denominated in a currency different from the functional currency of the Company’s Belgian and Japanese subsidiaries.
Although the Company’s international operations benefit from centrally managed costs, such as compensation of the Company’s executive officers, product development efforts and operating related insurance coverage, these costs have not been allocated to the international operations and are fully attributed to domestic operations.
Unallocated items, included in the tables above, include professional fees incurred at the consolidated level, including fees for tax, accounting and other consulting and professional services that are not directly attributed to operating either the domestic or international business, fees paid to members of the Company's board of directors, premiums for directors' and officers' insurance, other miscellaneous costs directly attributable to operating as a public company, as well as interest income earned on monies and investments held at the Heelys, Inc. entity level.
Sales in the Company’s Italian market accounted for 19% and 23% of consolidated net sales for the three and nine months ended September 30, 2011, respectively. Sales in the French market accounted for 15% and 18% of consolidated net sales for the three and nine months ended September 30, 2011, respectively; and in the German market 7% and 9%, respectively. For the three and nine months ended September 30, 2010, sales in the Company’s Italian market accounted for 7% and 7% of consolidated net sales, respectively; in the French market 18% and 22%, respectively; and in the German market 10% and 15%, respectively. No other country, other than the United States, accounted for 10% or more of the Company’s consolidated net sales for the three and nine months ended September 30, 2011 and 2010.
Customers of the Company consist of retail stores in the United States and certain other countries, and international wholesale distributors. The customers, individually or considered as a group under common ownership, which accounted for greater than 10% of net sales during the periods reflected, were as follows:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||
|
2011
|
2010
|
2011
|
2010
|
||||
|
Oxylane Group
|
11%
|
10%
|
13%
|
13%
|
|||
|
Privee AG Corporation
|
-
|
34%
|
-
|
23%
|
|||
Oxylane Group is a French sporting goods retail chain operating under the name Decathlon.
Privee AG Corporation (“Privee AG”) was the Company's independent distributor in Japan. On November 25, 2010, the Company notified Privee AG that it would not be renewing its distributor agreement. On February 28, 2011, the Company’s distributor agreement with Privee AG terminated. In February 2011, the Company formed Heeling Sports Japan, K.K., a Japanese corporation and indirect wholly-owned subsidiary, to manage its operations and to take over distribution in Japan effective March 1, 2011.
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as modified and supplemented by Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarterly Periods ended March 31, 2011 and June 30, 2011 and similar discussions in our other Securities and Exchange Commission filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the information in this report and in our other filings with the Securities and Exchange Commission, before deciding to purchase, hold or sell our securities. We do not have any intention or obligation to update forward-looking statements included in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by law. In addition, the following discussion should be read in conjunction with the information presented in our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
Business Overview
We are a designer, marketer and distributor of innovative, action sports-inspired products primarily under the HEELYS brand targeted to the youth market. Our primary product, HEELYS-wheeled footwear, is patented, dual-purpose footwear that incorporates a stealth, removable wheel in the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to rolling by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. We believe our distinctive product offering and our HEELYS brand is synonymous with a popular lifestyle activity. For the nine months ended September 30, 2011 and 2010, approximately 99% of our net sales was derived from the sale of HEELYS-wheeled footwear. The remainder of our net sales was derived from the sale of our Nano™ inline footboard (2011 only) and branded accessories, such as replacement wheels. In Europe, during the third quarter of 2011, we began to distribute other brands besides HEELYS. These brands include Airbak backpacks, Tony Hawk skateboards and Blazer Pro scooters and accessories.
We were initially incorporated as Heeling, Inc. in Nevada in 2000. In August 2006, we reincorporated in Delaware and changed our name to Heelys, Inc. Through our general and limited partner interests, we own 100% of Heeling Sports Limited, a Texas limited partnership, which was formed in May 2000. In February 2008, we formed Heeling Sports EMEA SPRL, a Belgian corporation and indirect wholly-owned subsidiary, with offices in Brussels, primarily to manage our operations in Europe, the Middle East and Africa. In February 2011, we formed Heeling Sports Japan, K.K., a Japanese corporation and indirect wholly-owned subsidiary, with offices in Tokyo, to manage our operations in Japan and to take over the distribution of our products in that country effective March 1, 2011.
Financial Overview — Third Quarter of 2011
Domestic sales increased $992,000, or 76.0%, for the three months ended September 30, 2011, when compared to the same period last year, primarily as a result of increased sales of our HEELYS-wheeled footwear resulting from expanded placement from the same period last year in existing and new retail outlets.
International sales decreased $2.6 million, or 37.7%, for the three months ended September 30, 2011, when compared to the same period last year. The decline was primarily the result of reduced sales in Japan resulting from the transition from our prior distributor and the impact of the March 2011 earthquake and related tsunami, nuclear and other disasters in the region, and continued declines in sales in France and Germany, offset by significant sales increases in Italy and Russia.
Gross profit margin on domestic sales decreased to 35.4% for the three months ended September 30, 2011, from 38.0% for the three months ended September 30, 2010. The decrease in gross profit percentage from the same quarter in the prior year was primarily the result of discounted sales of remaining quantities of boys footwear purchased from our former distributor in Japan and damaged product in Europe that was deemed unsellable and destroyed during the quarter.
Cash and cash equivalents and investments decreased $5.0 million, to $62.6 million, as of September 30, 2011. The reduction in cash and cash equivalents was primarily the result of the loss from operations for the nine months ended September 30, 2011, inventory purchased from our former Japanese distributor as part of our termination agreement, inventory purchased to support business operations and timing in the collection of receivables.
New Product Developments
Each season we update our lines to reflect current customer preferences as to style, colors and designs. For Spring 2012, we plan on introducing five new HX2™ designs including the Bolt™ and the Blossom™, both featuring LED lights that are activated by user movement as well as the Dart™ that has a wrap around Velcro “H” upper.
We are also introducing ten new and refreshed Heelys designs including the Rocker™ and Harmony™, canvas shoes for girls with screen printed and embroidered designs and images, the Dreamer™ with 3D logo and glitter ink, and the Fade™ for boys with a “fading away” checkered logo pattern.
We are also addressing the ongoing, damaging global problem we face with knockoffs. In order to protect our brand in markets and channels where we either do not own or have not registered our intellectual property or where enforcement is difficult, we are introducing a new brand designed to incorporate the safety and quality of the existing Heelys wheel system at a price that is competitive with infringing products. Another benefit of this brand is the chance to work with i) retailers who want to carry the product, but have chosen to sell knockoffs of Heelys branded shoes to meet their customers’ price requirements, ii) current retailers in markets who face knockoffs every day, and iii) retailers whose customers do not shop our current retailers’ stores.
This new brand, Sidewalk Sports™, will feature both single and two-wheeled models that use our current bracket/wheel configuration with lower cost materials and basic designs, allowing them to retail for roughly half of our current prices. By Spring 2012, we plan on offering our single-wheel model in Japan, a market where we have no patent protection on our one-wheeled shoe, and are actively working to place it in additional markets as soon as possible. In the U.S., the two-wheel version will be sold exclusively through a discount retailer for Holiday 2011. This exclusive offering gives the Company an opportunity to test the validity of the brand in a discount retail outlet with a concentration of store locations in urban areas in the Midwest and Northeast United States, two areas of the country where Heelys’ core brand placement is the smallest.
Because these shoes use lower cost materials, have simpler styling elements, do not prominently display the Heelys logo and will not be offered in stores that are actively cross-shopped by current Heelys customers, we do not believe that Sidewalk Sports™ will have a material impact on our “core” Heelys branded shoes. Sidewalk Sports™ will be sold exclusively in a discount retailer’s stores in the fourth quarter of 2011, with plans to expand the offering of this product, both domestically and internationally, in 2012.
Results of Operations
Net Sales
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Net Sales (in thousands)
|
||||||||||||||||
|
Domestic
|
$ | 2,297 | $ | 1,305 | $ | 6,699 | $ | 5,452 | ||||||||
|
International
|
4,327 | 6,943 | 14,370 | 18,252 | ||||||||||||
|
Consolidated
|
$ | 6,624 | $ | 8,248 | $ | 21,069 | $ | 23,704 | ||||||||
|
Net Sales (as % of Consolidated Net Sales)
|
||||||||||||||||
|
Domestic
|
34.7 | % | 15.8 | % | 31.8 | % | 23.0 | % | ||||||||
|
International
|
65.3 | % | 84.2 | % | 68.2 | % | 77.0 | % | ||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Pairs Sold
|
||||||||||||||||
|
Domestic
|
93,000 | 47,000 | 260,000 | 215,000 | ||||||||||||
|
International
|
128,000 | 237,000 | 388,000 | 568,000 | ||||||||||||
|
Consolidated
|
221,000 | 284,000 | 648,000 | 783,000 | ||||||||||||
Domestically, our net sales increased $992,000 and $1.2 million, or 76.0% and 22.9%, from $1.3 million and $5.5 million for the three and nine months ended September 30, 2010, respectively, to $2.3 million and $6.7 million for the three and nine months ended September 30, 2011, respectively. These increases were primarily the result of increased unit sales of our HEELYS-wheeled footwear resulting from expanded placement from the same period last year in existing and new retail outlets. During the three months ended March 31, 2010, we sold 17,000 pairs of certain older styles of our wheeled-footwear at a reduced price per pair, to a discount retailer in an effort to reduce our excess inventories. During the three months ended September 30, 2011, we sold 9,500 pairs of certain older styles of our HEELYS-wheeled footwear at a reduced price per pair to one of our customers also to reduce our excess inventories. These sales are reported in the pairs sold during the period, and, because we sold these products at a reduced price, our net sales were less than if we had sold these products at full price.
Internationally, our net sales decreased $2.6 million, or 37.7%, to $4.3 million for the three months ended September 30, 2011, from $6.9 million for the three months ended September 30, 2010, and decreased $3.9 million, or 21.3%, to $14.4 million for the nine months ended September 30, 2011, from $18.3 million for the nine months ended September 30, 2010. This decrease was primarily the result of lower unit sales of our HEELYS-wheeled footwear. Unit sales to independent distributors in our European, Middle East and African markets (“EMEA”) increased 3,000 pairs, from 32,000 pairs during the three months ended September 30, 2010, to 35,000 pairs during the three months ended September 30, 2011, and increased 28,000 pairs, from 80,000 pairs during the nine months ended September 30, 2010, to 108,000 pairs during the nine months ended September 30, 2011. These increases were primarily due to increased sales to our independent distributor in Russia and the United Kingdom.
The increase in pairs sold to independent distributors in our EMEA markets was offset by a decrease in unit sales to independent distributors in our non-EMEA markets, which decreased 120,000 pairs, to 14,000 pairs during the three months ended September 30, 2011, from 134,000 pairs during the three months September 30, 2010, and decreased 226,000 pairs, to 21,000 pairs during the nine months ended September 30, 2011, from 247,000 pairs during the nine months ended September 30, 2010. These decreases in pairs sold in our non-EMEA markets is primarily the result of the non-renewal of our distributor agreement with our independent distributor in Japan. We took over direct distribution in the Japanese market effective March 1, 2011. During the three months ended March 31, 2011, we did not sell any product to our former distributor in Japan. During the nine months ended September 30, 2011, approximately 25,000 pairs were sold direct in the Japanese market. The decrease in sales in the Japanese market is due to the transition from distribution through an independent distributor to direct distribution and the impact of the recent earthquake and tsunami-related events in Japan, which resulted in business disruptions during the period. We believe that the March 2011 earthquake in Japan, and related tsunami, nuclear and other disasters in the region will continue to impact consumer buying behavior with reduced discretionary spending and purchases of non-essential items. Unit sales in our German and French market decreased 25,000 pairs, or 43.9%, to 32,000 pairs during the three months ended September 30, 2011, from 57,000 pairs during the three months ended September 30, 2010, and decreased 79,000 pairs, or 38.7%, to 125,000 pairs during the nine months ended September 30, 2011, from 204,000 pairs during the nine months ended September 30, 2010. We believe the decrease in unit sales in both our German and French markets is primarily due to retailers being more cautious when placing orders to minimize their inventory levels and inventory related risks resulting from a decrease in consumer demand, which we believe is due to market competition from other wheeled products such as coaster boards. The decreases in pairs sold in our German and French markets were offset by an increase in unit sales in our Italian market, which increased 15,000 pairs, from 13,000 pairs during the three months ending September 30, 2010, to 28,000 pairs during the three months ended September 30, 2011, and increased 69,000 pairs, from 37,000 pairs during the nine months ended September 30, 2010, to 106,000 pairs during the nine months ended September 30, 2011. The increase in pairs sold in the Italian market is attributable to market expansion. We also experienced lower average sales prices in our French market, primarily due to sales of our two-wheeled footwear which we began selling in this market in late 2010. The two-wheeled footwear is sold at lower price points, primarily due to the younger age target of the end consumer, than our traditional one-wheeled footwear.
Gross Profit
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Gross Profit (in thousands)
|
||||||||||||||||
|
Domestic
|
$ | 812 | $ | 496 | $ | 2,632 | $ | 1,811 | ||||||||
|
International
|
1,626 | 2,780 | 6,725 | 8,363 | ||||||||||||
|
Consolidated
|
$ | 2,438 | $ | 3,276 | $ | 9,357 | $ | 10,174 | ||||||||
|
Gross Profit (%)
|
||||||||||||||||
|
Domestic
|
35.4 | % | 38.0 | % | 39.3 | % | 33.2 | % | ||||||||
|
International
|
37.6 | % | 40.0 | % | 46.8 | % | 45.8 | % | ||||||||
|
Consolidated
|
36.8 | % | 39.7 | % | 44.4 | % | 42.9 | % | ||||||||
Gross profit margin on domestic sales decreased to 35.4% for the three months ended September 30, 2011, from 38.0% for the three months ended September 30, 2010, but increased from 33.2% for the nine months ended September 30, 2010, to 39.3% for the nine months ended September 30, 2011. The decrease in gross profit margin for the three months ended September 30, 2011 is primarily the result of the sale of certain of our slow moving and older inventory styles at lower margins in order to reduce our excess inventories. Additionally, we earn lower margins on certain of our newer inventory styles, including our two-wheeled footwear, which has a higher manufacturing cost but does not command higher wholesale prices because it is primarily sold to younger consumers who grow out of footwear more quickly and therefore command lower retail pricing. Lower gross profit margins for the nine months ended September 30, 2010, is primarily the result of the sale of certain older styles of our wheeled-footwear at a reduced price per pair during the three months ended March 31, 2010, to a discount retailer in an effort to reduce our excess inventories.
Internationally, gross profit margin decreased to 37.6% for the three months ended September 30, 2011, from 40.0% for the three months ended September 30, 2010. For the nine months ended September 30, 2011 and 2010, gross profit margins were consistent at 46.8% and 45.8%, respectively. Fluctuations in the exchange rate between the U.S. dollar (“USD”) and the Euro impacts our inventory cost. We pay for our inventory in USD and sell to customers in our German, French and Italian markets in Euro. During the three months ended March 31, 2011, and to a lesser degree during the three months ended June 30, 2011 and the three months ended September 30, 2011, we sold inventory in these markets that we had purchased in 2010 when the exchange rate (USD to Euro) was higher, which resulted in a higher inventory value and lower margins on those sales. We sell to our independent distributors in USD. Historically, fulfillment of sales to independent distributors is direct from the manufacturer with the purchase of inventory and sale occurring virtually simultaneously and therefore the translated Euro value of the purchase of the inventory in USD and the Euro value of the sale in USD moves together and margins are maintained. However, during the three and nine months ended September 30, 2011, we fulfilled some distributor sales from our warehouse in Belgium with inventory that we had purchased in 2010 when the exchange rate (USD to Euro) was higher, which resulted in higher inventory value than if that inventory had been purchased during the current year. So, while the USD value of these sales to distributors remained the same, the Euro value decreased, which resulted in lower margins on those sales. Additionally, we saw lower average sales prices in our Italian market resulting from changes in customer mix, with greater sales to larger customers who benefit from discount programs. During the three months ended September 30, 2011, we incurred approximately $80,000 to destroy damaged and older inventory items and sold certain of our slow moving and older inventory styles in our Japanese market at lower margins in order to reduce our excess inventories. Additionally, in late 2010 we began selling our two-wheeled footwear in the French market. This product has a higher manufacturing cost and sells at lower price points than our traditional one-wheeled footwear, resulting in lower gross profit margins on these sales.
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Selling & Marketing (in thousands)
|
||||||||||||||||
|
Domestic
|
$ | 872 | $ | 403 | $ | 1,852 | $ | 1,342 | ||||||||
|
International
|
954 | 623 | 3,536 | 2,517 | ||||||||||||
|
Consolidated
|
$ | 1,826 | $ | 1,026 | $ | 5,388 | $ | 3,859 | ||||||||
Domestically, selling and marketing expense, excluding commissions and payroll and payroll related expenses, increased $425,000, from $132,000 for the three months ended September 30, 2010, to $557,000 for the three months ended September 30, 2011, and increased $400,000, from $478,000 for the nine months ended September 30, 2010, to $878,000 for the nine months ended September 30, 2011. These increases were primarily in consumer marketing and advertising and related costs, which increased $400,000 and $347,000, from $17,000 and $202,000 for the three and nine months ended September 30, 2010, respectively, to $417,000 and $549,000 for the three and nine months ended September 30, 2011, respectively, primarily due to an internet video campaign during the third quarter of 2011 and the production of a television commercial.
Internationally, selling and marketing expense, excluding commissions and payroll and payroll related expenses, increased $128,000 and $218,000, from $200,000 and $1.2 million for the three and nine months ended September 30, 2010, respectively, to $328,000 and $1.4 million for the three months and nine months ended September 30, 2011, respectively. Of these increases, $108,000 and $233,000 are attributable to our office in Japan which we opened during the first quarter of 2011. Consumer advertising and related costs (including event marketing) increased $94,000 and $148,000, from $63,000 and $808,000 for the three and nine months ended September 30, 2010, respectively, to $157,000 and $956,000 for the three and nine months ended September 30, 2011, respectively. The increase in consumer advertising and related costs for the three and nine months ended September 30, 2011, when compared to the same periods in the prior year, is primarily attributable to our Japanese operations and includes approximately $55,000 for a marketing event for one of our Japanese customers during the third quarter.
Commissions on domestic sales increased $47,000 and $46,000, or 71.2% and 18.1%, from $66,000 and $254,000 for the three and nine months ended September 30, 2010, respectively, to $113,000 and $300,000 for the three and nine months ended September 30, 2011, respectively, as a result of the increase in domestic sales. Internationally, commissions increased $102,000 and $521,000, or 51.5% and 82.4%, from $198,000 and $632,000 for the three and nine months ended September 30, 2010, respectively, to $300,000 and $1.1 million for the three and nine months ended September 30, 2011, respectively, primarily due to increased sales in the Italian market where we sell directly to retailers through an independent agent who is paid commissions on those sales. Commission expense is impacted by increases and decreases in sales as well as changes in product and customer mix due to differing commission rates paid on those sales.
Payroll and payroll related costs attributable to our domestic operations decreased $4,000, to $202,000 for the three months ended September 30, 2011, from $206,000 for the three months ended September 30, 2010, and increased $65,000, from $610,000 for the nine months ended September 30, 2010, to $675,000 for the nine months ended September 30, 2011.
For our international operations, payroll and payroll related costs increased $101,000 and $279,000, from $225,000 and $726,000 for the three and nine months ended September 30, 2010, respectively, to $326,000 and $1.0 million for the three and nine months ended September 30, 2011, respectively. The increase in payroll and payroll related costs for our international operations is primarily as a result of the opening of our Japanese subsidiary during the first quarter of 2011.
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
General & Administrative (in thousands)
|
||||||||||||||||
|
Domestic
|
$ | 1,067 | $ | 1,177 | $ | 3,509 | $ | 3,904 | ||||||||
|
International
|
1,218 | 1,043 | 3,794 | 3,027 | ||||||||||||
|
Unallocated
|
272 | 215 | 782 | 673 | ||||||||||||
|
Consolidated
|
$ | 2,557 | $ | 2,435 | $ | 8,085 | $ | 7,604 | ||||||||
Consolidated general and administrative expenses, excluding unallocated costs, increased $65,000 and $372,000, from $2.2 million and $6.9 million for the three and nine months ended September 30, 2010, respectively, to $2.3 million and $7.3 million for the three and nine months ended September 30, 2011, respectively.
Consolidated shipping and handling costs increased $117,000 and $411,000, from $447,000 and $1.4 million for the three and nine months ended September 30, 2010, respectively, to $564,000 and $1.8 million for the three and nine months ended September 30, 2011. Shipping and handling costs attributable to our EMEA operations accounted for $29,000 and $206,000 of the increases for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in the prior year, primarily a result of an increase in shipments out of our warehouse in Belgium to fulfill sales to retailers in our Italian market. Inventory handling related costs directly attributable to the opening of our Japan operations, including order fulfillment, accounted for $85,000 and $173,000 of the increases for the three and nine months ended September 30, 2011, respectively.
Legal and other fees related to our intellectual property and associated enforcement efforts decreased $145,000 and $591,000, to $137,000 and $417,000 for the three and nine months ended September 30, 2011, respectively, from $282,000 and $1.0 million for the three and nine months ended September 30, 2010, respectively. These decreases are a combination of differing enforcement actions during the periods and an overall cost containment effort by management.
Consolidated payroll and payroll related costs, excluding those employees whose payroll and related costs are included in shipping and handling costs, increased $12,000 and $52,000, from $792,000 and $2.5 million for the three and nine months ended September 30, 2010, respectively, to $804,000 and $2.6 million for the three and nine months ended September 30, 2011, respectively. Payroll and payroll related costs attributed to our domestic employees decreased $20,000 and $87,000, to $498,000 and $1.7 million for the three and nine months ended September 30, 2011, from $518,000 and $1.8 million for the three and nine months ended September 30, 2010. Payroll and payroll related costs attributed to our EMEA operations decreased $17,000, to $258,000 for the three months ended September 30, 2011, from $275,000 for the three months ended September 30, 2010, and increased $39,000, from $753,000 for the nine months ended September 30, 2010, to $792,000 for the nine months ended September 30, 2011. Payroll and payroll related costs attributed to our Japan operations were $47,000 and $100,000 for the three and nine months ended September 30, 2011, respectively.
Unallocated costs are those costs that are directly attributable to operating as a public company, as well as professional fees incurred at the consolidated level, including fees for tax, accounting and other consulting and professional services.
Other (Income) Expense, net
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Other (Income) Expense (in thousands)
|
||||||||||||||||
|
Interest (income) expense, net
|
$ | (55 | ) | $ | (107 | ) | $ | (217 | ) | $ | (287 | ) | ||||
|
Other income
|
(396 | ) | (32 | ) | (405 | ) | (809 | ) | ||||||||
|
Exchange (gain) loss, net
|
(115 | ) | (127 | ) | (119 | ) | 140 | |||||||||
|
Consolidated
|
$ | (566 | ) | $ | (266 | ) | $ | (741 | ) | $ | (956 | ) | ||||
The decrease in interest income (expense), net is primarily the result of a decrease in interest income of $43,000 and $58,000, to $63,000 and $243,000 for the three and nine months ended September 30, 2011, from $106,000 and $301,000 for the three and nine months ended September 30, 2010.
Other income is the result of settlements of patent and trademark litigation. Litigation settlement payments related to intellectual property legal matters (whether received by the Company or paid by the Company) are reported as other income (expense). During the second quarter of 2010, we settled a potential patent and trademark lawsuit, in the Company’s favor, in the amount of $750,000. During the third quarter of 2011, we settled another potential patent and trademark lawsuit, in the Company’s favor, in the amount of $375,000. Legal fees related to intellectual property matters and associated enforcement are included in general and administrative expenses. All settlements during the three and nine months ended September 30, 2011 and 2010 were settled in the Company’s favor.
Gains/losses resulting from foreign currency transactions are mainly attributable to intercompany loans due to our U.S. entity from our Belgian and Japanese entities which must be repaid in USD.
Income Taxes
We recognized income tax expense of $85,000 and $245,000 for the three and nine months ended September 30, 2011, representing an effective income tax rate of (6.2)% and (7.3)%, respectively, compared to income tax expense of $150,000 and $445,000 for the three and nine months ended September 30, 2010, representing an effective income tax rate of 185.2% and (133.6)%, respectively. Our effective rate differs from the statutory federal rate of 35% primarily due to domestic operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%, as well as for certain other items, such as state and local taxes and non-deductible expenses. While we did not record the benefit of domestic losses for the current period, profits and losses in our European operations resulted in income tax expense of $85,000 and $245,000 for the three and nine months ended September 30, 2011. We operate in multiple jurisdictions and our business is impacted by seasonality which causes variability in the consolidated effective tax rate during the year. We continually review our assertion regarding the valuation allowance, which includes an analysis of multiple factors, including projections, reversal of deferred tax liabilities and tax planning strategies.
Liquidity and Capital Resources
Our primary cash need is for working capital, which we generally fund with cash flows from operating activities, and may be impacted by fluctuations in demand for our products, investments in our infrastructure and expenditures on marketing and advertising. At September 30, 2011, we had a total of $23.1 million in cash and cash equivalents and $39.5 million in investments. Our investments will mature during the next 12 months and include investments in certificates of deposit ($500,000) and debt securities ($39.0 million).
The Company has an investment policy, the purpose of which is to establish sound investment guidelines for the ongoing management of the Company’s excess cash and investments. The policy provides guidelines on, among other things, investment term limitations, permitted investments, credit quality, single issuer concentration and corporate debt sector concentrations. In all categories of investments, emphasis is placed on securities of high quality subject to the following quality limitations at the time of investment:
|
·
|
U.S. Treasury and other U.S. Federal Agencies, debentures or mortgages;
|
|
|
·
|
$1 net asset value money market mutual funds governed by SEC Rule 2a-7;
|
|
|
·
|
Commercial Paper (minimum A-1/P-1/F-10); Corporate Notes (minimum A or better); and
|
|
|
·
|
Municipal Debt (short-term: minimum A-1/P-1 or equivalent; long term: A or better).
|
Cash used in operating activities for the nine months ended September 30, 2011 was $4.3 million, compared to cash provided of $385,000 for the same period last year. The increase in inventories is primarily the result of inventory we purchased during the first quarter of 2011 from Privee AG, our former independent distributor in Japan, which is being used to fulfill sales in our Japanese market, as well as increases in inventories in the United States, Belgium and Japan for the upcoming holiday season. The increases in accounts payable and accrued liabilities are primarily due to inventory purchases. During the third quarter of 2011, we settled a potential patent and trademark lawsuit, in the Company’s favor, in the amount of $375,000. The full amount of the settlement was received during the third quarter of 2011.
Net cash provided by operating activities for the nine months ended September 30, 2010, was primarily due to the collection of a $2.9 million income tax refund and a reduction in accounts receivable of $1.4 million due to timing as well as reduced sales. These amounts were partially offset by an increase of $2.0 million in inventories in anticipation of the holiday selling season, as well as the payment of $1.2 million for the settlement of an outstanding state tax liability. Additionally, during the second quarter of 2010, we settled a potential patent and trademark lawsuit, in the Company’s favor, in the amount of $750,000. The full amount of the settlement was received during the second quarter of 2010.
Our cash flows from changes in operating assets/liabilities are subject to seasonality.
As of September 30, 2011, we have open purchase commitments of $5.1 million for the purchase of inventory. These commitments are expected to be settled during the fourth quarter of 2011 ($4.6 million) and the first quarter of 2012 ($500,000).
Net cash used in investing activities for the nine months ended September 30, 2011 and 2010, is primarily the result of investment activity of our excess cash.
Cash used in financing activities for the nine months ended September 30, 2011, as well as for the nine months ended September 30, 2010, was for payments of previously acquired goodwill and intangibles associated with the termination of agreements with our former independent distributors in the German and French markets in 2008. As of September 30, 2011, we have outstanding liabilities of $225,000 due to our former independent distributor in the German market, $95,000 of which are recorded as current liabilities and are expected to be settled during the next 12 months. All liabilities due to our former independent distributor in the French market have been settled.
We believe our cash flows from operating activities, together with the cash on hand (including cash equivalents) and investments, will be sufficient to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.
Contractual Obligations and Commercial Commitments
There were no material changes in our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010 and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011.
Seasonality
Similar to other vendors of footwear products, sales of our products are subject to seasonality. There are three major buying seasons in footwear: spring/summer, back-to-school and holiday. We offer two primary lines: spring/summer and a combined back-to-school/holiday line. A few new styles will typically be added for the holiday season. Shipments for spring/summer take place during the first quarter and early weeks of the second quarter; shipments for back-to-school generally begin in June and finish in late August; and shipments for the holiday season begin in October and finish in early December. Historically, we have experienced greater revenues in the second half of the year than those in the first half due to a concentration of shopping around the back-to-school and holiday seasons.
Vulnerability Due to Customer Concentration / Geographical Concentration
Oxylane Group accounted for 11% and 13% of our net sales for the three and nine months ended September 30, 2011, respectively; and 10% and 13% of our net sales for the three and nine months ended September 30, 2010, respectively.
Privee AG accounted for 34% and 23% of our net sales for the three and nine months ended September 30, 2010, respectively. Privee AG was the Company's independent distributor in Japan. On November 25, 2010, the Company notified Privee AG that it would not be renewing its distributor agreement. On February 28, 2011, the Company’s distributor agreement with Privee AG terminated. In February 2011, we formed Heeling Sports Japan, K.K., a Japanese corporation and indirect wholly-owned subsidiary, to manage our operations and to take over distribution of our products in Japan effective March 1, 2011. There were no sales to Privee AG during the three months ended March 31, 2011.
No other retail customer or independent distributor accounted for 10% or more of our net sales for the three and nine months ended September 30, 2011 and 2010.
Sales in our Italian market accounted for 19% and 23% of consolidated net sales for the three and nine months ended September 30, 2011, respectively. Sales in our French market accounted for 15% and 18% of consolidated net sales for the three and nine months ended September 30, 2011, respectively; and in our German market 7% and 9%, respectively. For the three and nine months ended September 30, 2010, our Italian market accounted for 7% and 7% of our net sales, respectively; our French market accounted for 18% and 22%, respectively; and our German market accounted for 10% and 15%, respectively. No other country, other than the United States, accounted for 10% or more of our net sales for the three and nine months ended September 30, 2011 and 2010.
We anticipate that our net sales may remain concentrated for the foreseeable future. If any of our significant retail customers or independent distributors decreases its purchases of our products or stops purchasing our products, or if we are unable to efficiently take over distribution of our products in Japan, our net sales and results of operations could be adversely affected.
Recent Accounting Pronouncements
See Note 5 to our condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Evaluation of Disclosure Controls and Procedures. Management has conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a—15(e) and 15d—15(e) of the Securities Exchange Act of 1934) as of September 30, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2011 were effective.
Inherent Limitations on Effectiveness of Controls. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control deficiencies and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the third quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Due to the nature of the Company’s products, from time to time the Company has to defend against personal injury and product liability claims arising out of personal injuries that allegedly are suffered using the Company’s products. To date, none of these claims has had a material adverse effect on the Company. The Company is also engaged in various claims and legal proceedings relating to intellectual property matters, especially in connection with enforcing the Company’s intellectual property rights against the various third parties importing and selling knockoff products domestically and internationally. Often, such legal proceedings result in counterclaims against the Company that the Company must defend. The Company believes that none of the pending personal injury, product liability or intellectual property legal matters will have a material adverse effect upon the Company’s financial position, cash flows or results of operations.
Except with respect to the risk factor modifications disclosed in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011, there were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and/or results of operations.
Unregistered Sales of Equity Securities
During the period covered by this Quarterly Report on Form 10-Q, we did not sell or issue any unregistered equity securities.
Initial Public Offering of Our Common Stock and Use of Proceeds
During the period covered by this Quarterly Report on Form 10-Q, we did not use any additional proceeds from our initial public offering completed on December 13, 2006.
Not applicable.
|
Exhibit No.
|
Description
|
|
|
31.1
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 by Thomas C. Hansen, Chief Executive Officer.†
|
|
|
31.2
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 by Craig D. Storey, Chief Financial Officer.†
|
|
|
32.1
|
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.†
|
|
|
101.INS
|
Instance Document †
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document †
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document †
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document †
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document †
|
|
|
†
|
Filed herewith.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
HEELYS, INC.
|
||
|
Date: November 10, 2011
|
By:
|
/s/ Thomas C. Hansen
|
|
Thomas C. Hansen
|
||
|
Chief Executive Officer (Principal Executive Officer)
|
||
|
HEELYS, INC.
|
||
|
Date: November 10, 2011
|
By:
|
/s/ Craig D. Storey
|
|
Craig D. Storey
|
||
|
Chief Financial Officer (Principal Accounting Officer)
|
||
INDEX TO EXHIBITS
|
Exhibit No.
|
Description
|
|
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 by Thomas C. Hansen, Chief Executive Officer.†
|
||
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 by Craig D. Storey, Chief Financial Officer.†
|
||
|
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.†
|
||
|
101.INS
|
Instance Document †
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document †
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document †
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document †
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document †
|
|
|
†
|
Filed herewith.
|
Page 26 of 26